Go west: Yes or no?

WITH PROFIT MARGINS OF LOW-COST MANUFACTURERS IN SOUTHERN CHINA MELTING THERE HAS BEEN MEDIA COVERAGE ABOUT COMPANIES MOVING WEST. CHINA FOCUS EXPLORES WHAT THE WEST REALLY HAS TO OFFER.

 

It may seem that the hype about companies moving west just started late last year, but that is not entirely true. In 1999, seeing that China’s western provinces were significantly lagging behind the coastal regions in the east, the central government in Beijing developed a strategic approach to the problem, the so-called "Go west" policy. It was aimed at investing large amounts of money in modern infrastructure and development projects in order to attract domestic and foreign investments to the central and western provinces of the country. Goal of the initiative was to help boost the economy, create jobs and improve the standard of living in the 12 provinces and autonomous regions (plus the Chongqing municipality) making up the area.

 

And it seems to be working. In the first two months of 2008 alone, the foreign investment poured into China’s west amounted to a total of USD 1.4 billion and more than 250 foreign companies received approval to invest in the region. The importance of these figures is significant considering that a quarter of the country’s population lives in the western half of the country and is effectively missing out on its fair share of the modernisation that has been built up in eastern China over the last 20 years. In order to maintain stability in the country and improve the general standard of living, China is trying to bring that prosperity to the west.

 

Glorious west: Reasons to move

Of course, a company’s drive to move west is most likely not based on the desire to lift the living standards of the Chinese people. Instead, business parameters play the decisive role. Soaring raw material prices (with double-digit increases in industries such as steel, copper or glass), export tax rebate cuts and rising labour cost have vaporised the already razor-thin margins of many Chinese suppliers and low-cost manufacturers in the Pearl River Delta (PRD). These affected companies have to think about alternatives and the move to western fields could be the solution to some of their problems. The lower cost of labour and consequently a lower overhead might just be enough to bring the struggling companies back on track. Additionally, some of the western or central regions also offer incentives such as tax breaks to attract business investments.

 

Many of the foreign companies that are moving west or are already established there don’t do it because of cheaper labour or lower rent. Instead they are going after specific skills or opportunities. Ask Intel, Siemens, IBM or Microsoft why they operate in Chengdu in Sichuan province. One of the factors they will mention is the high number of skilled engineers coming out of the cluster of the city’s 40 universities. Those universities and institutes were originally placed in the western provinces by the central government to prevent them from being attacked by foreign powers. Today, they pay off for foreign companies in need of a large pool of qualified employees.

 

But there are more reasons for going west. Companies in need of land for expansions might be pleasantly surprised with what China’s west has to offer. The region can still shine with low land prices and large open spaces for factories welcoming small or medium-sized investments. The exact opposite can be said of the coastal provinces in the east where most economic development zones are full and only consider large investments. Other companies might be moving west to benefit from a central production hub that is located closer to their target markets in Southwest Asia and, thus, grants faster access to countries such as Vietnam or India. Special niche industries such as farm machinery manufacturers are also located in the west as they need to have service centers and sales people within the close reach of their customers.

 

Why not to do it

Even if those reasons sound compelling, there are also drawbacks that need to be considered before moving west. Infrastructural problems and a general underdevelopment in terms of know-how and education are tough challenges that the western provinces have to face.

Additionally, many of the provinces in Western China are landlocked. That means the only way to get goods from or to the factories is by road or air. This drives up logistics costs especially if a company is just shipping them back east to a port where they are forwarded onto ships for worldwide distribution. Another general challenge is the lack of skilled labour in the west and a rising demand for an adaption of salary levels to the standards of Eastern China. If more companies go west, some of the millions of migrant workers might follow and consider going back. However, according to a recent article in the Washington Post, a lot of migrant workers in Guangdong get multiple job offers within the same day of quitting their old job. It is at least questionable if they will come back, when the job market is so attractive to them in the eastern provinces.

 

 

Companies should only consider moving west if it makes sense in their particular industry or for their specific business set-up. If there is a considerable amount of skilled labour in their province of choice or if the cost of land is low enough to offset the logistics or employee training costs, a move could bring higher return.

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