U.S. firms look to China’s West for growth

U .S. businesses are increasingly looking to China’s western hinterlands as the future source of growth and profits, with Ford, Wal-Mart and other companies planning major investment and expansions in cities such as this sprawling metropolis of 32 million people.

U.S. firms look to China’s West for growth

With prosperous east coast cities such as Shanghai becoming saturated and too expensive, and growing concerns about a property “bubble,” many firms see boundless potential in so-called second- and third-tier cities such as this one on the Yangtze River. Rising incomes are creating a new consumer class, but the region lags far behind in the number of cars, appliances, luxury brands and Western fast-food meals sold.

“The growth is in the tier-two and tier-three cities, which are inland,” said Joseph R. Hinrichs, chairman and chief executive of Ford China. “The fundamentals of demand and economic growth are there.” Pointing to places such as Wuhan, Chengdu and Chongqing, he added, “There are many cities that people don’t even know.”

Ed Chan, president and chief executive of Wal-Mart China, said at a recent conference in Chongqing that his company has plans “to build out our retail footprint in this part of China.”

Official, centralized statistics on U.S. and foreign firms venturing west are not available, and some moves are in the planning stages. In Sichuan province, for example, there are 1,171 registered U.S. companies, although there is no accounting for their size or whether they are joint ventures with Chinese firms.

When the American Chamber of Commerce China issued its annual “white paper” on business in China this year, it included for the first time separate sections on the business environment in Chongqing and Chengdu — opportunities as well as challenges.

“As China’s thriving economy remains in the global spotlight, an increasing number of enterprises are shifting operations to the southwest, where they are finding an increasingly dynamic business environment,” the Chamber white paper said. But it added that the region was hampered by a lack of infrastructure, including international schools, and a shortage of trained local talent.

Catering to new wealth

The central government in Beijing has been pushing western China as a place to invest, promoting its vast natural resources, huge population centers and growing network of gleaming new airports and highways. The west here is defined as the dozen provinces and autonomous regions beginning with Chongqing and Chengdu and stretching to Xinjiang and Tibet.

Encouraging investment in the hinterlands is a way to increase employment — and ease social tensions — in a region that has long felt left behind as China’s richer coastal cities and the capital, Beijing, have enjoyed three decades of double-digit growth. The effort seems to be paying off. Foreign investment in western China surged 55.8 percent in the first four months of this year, compared with just over 23 percent in the east, according to China’s Commerce Ministry.

Ford illustrates the push west. The company lags behind foreign carmakers who came earlier to China and sells just five brands here, capturing 2.6 percent of the passenger vehicle market. But with its local joint venture partner, Chang’an Ford Mazda Automobile, Ford has two plants in Chongqing and plans for three more, including a state-of-the-art engine facility that had its official groundbreaking in June.

Ford is coming in big, with ambitious plans to introduce 15 all-new vehicles specifically for the China market in the coming years. Many of those will be smaller and cheaper, specifically tailored to consumers in this part of China who are just now tasting the benefits of new wealth and will be looking to buy their first vehicles.

Hinrichs acknowledges that “it’s a bit of catch-up.” But he sees the Chinese car market boom only continuing. Cities such as Beijing, Shanghai and others on the coast might already feel as though they are choked with cars. But nationwide, the car ownership ratio is relatively low, he said, with 45 people out of 1,000 of driving age having their own car. In the United States, the ratio is closer to 1 to 1. And most of those non-owners in China are out west.

“China’s the big dog,” Hinrichs said. “There’s no question that by the end of this decade, a billion people in China will reach the threshold where they can buy a car and are of driving age.”

And how to sell Ford’s headquarters in Dearborn, Mich., on investing so heavily in Chongqing, a city that most people outside China have never heard of? “We start with the 32 million people,” he said.

Increasing competition

Western Chinese cities seem to be in an intense competition to promote themselves — particularly Chongqing and Chengdu, the capital of neighboring Sichuan province.

Chongqing in mid-June hosted an international business conference touting its 465-square-mile Liangjiang New Area as a future center for car manufacturing, high-tech and defense-related industries. Modeled after Shanghai’s Pudong New Area and a similar investment zone in Tianjin, near Beijing, the site hopes to lure investors with preferential policies, including sharply reduced corporate taxes.

“Chongqing is building itself into the economic center for the upper Yangtze River area,” Mayor Huang Qifan said. The city went from $1 billion in foreign investment in 2007 to $6.3 billion in 2010, he said, and is expanding its airport, adding a new runway and an additional terminal.

Both Chongqing and Chengdu are pitching themselves to investors as the gateway city to western China. Meanwhile Pudong, Tianjin, Shenzhen in the south, and pretty much every major Chinese city is similarly promoting special economic zones, export processing zones and new business districts looking for foreign investment.

Chongqing has some natural advantages, such as its huge population. If it were a country, it would rank just below Canada in population, with about the same number of people as Morocco. But the competition creates what some have called a fractured marketplace, with provinces and cities all competing with one another for the same spoils.

“The move from coastal China to western China will [work] if it’s all linked up, physically, electronically and through information and capital,” said Stephen S. Roach, formerly Morgan Stanley’s chief economist and chairman of Morgan Stanley Asia, who now teaches at Yale University. “China is a very fragmented system, and it has been for thousands of years.”

“Everybody’s got their own story, their own program, their own dream,” Roach said after hearing Chongqing’s pitch as the hub of the west. “You hear the story everywhere. But you know not everyone is going to be able to create their own autonomous, vibrant economy.”

The Washington Post

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