CQ_WTC.jpgRising
labour costs and overheating property markets in China's big coastal
cities are causing more foreign firms to favour second-tier cities
whose names are still largely known outside of China.

That's the conclusion of this
article on Asiared, a Spanish-language website, which describes how
cities like Hangzhou, Tianjin, Chengdu, Nanjing, Dalian and Wuhan are
attracting more and more foreign direct investment (FDI).

The
rise of Chongqing (pictured above) in south-central China has been
particularly dramatic. In the last four years, more transport
infrastructure has been constructed in Chongqing than in the previous
century.

By GDP, Chongqing is already bigger than European
countries like Slovenia or Croacia, and its metropolitan area, with 31m
inhabitants, is second only to Tokyo in size.

Consultants like McKinsey now advise foreign businesses to consider China's second-tier second cities over the better-known coastal metropolises of Shanghai, Shenzhen, Guangzhou and Beijing.

Not
only are labour costs lower — by up to 20% or 30% — but property is
more plentiful in these second-tier cities and big improvements in
infrastructures have helped dispel the frontier-town image.

Many multinationals in the IT, telecoms and transport sectors have already made the move.

For
example, Hangzhou is now home to General Motors, Merck, Motorola,
Bosch, Siemens, Panasonic and Toshiba. In Chengdu you can find Intel,
Sony, UPS and Sanyo.

Chongqing is teeming with multinationals including Nokia, ABB, Ericsson, Honda, Suzuki, Isuzu, Yamaha, Mobil, BP and Samsung.

Sometimes,
the firms have had little choice about their destination. Ford was
coerced to set up in Chongqing even though the US company favoured
Shanghai. Citroen was told to go to Wuhan, but the location has not
proved to be a lasting problem as Wuhan is now home to many suppliers
of Citroen.

The trend for western firms to set up shop inland is
likely to gather more momentum, argues Klaus Koehler MD of HK-based
consultancy Klako Group. He says:

China is clearly concerned to reduce the economic imbalance opening up between its first and second-tier cities.”

He
believes these concerns are likely to lead to more policy changes
designed to redress the balance and reduce the incentives that
first-tier cities have used to attract FDI so effectively.

One
of the consequences of China's huge success in attracting FDI is that
the property prices has shot up in first-tier cities like Beijing and
Shanghai. MR Koehler says:

Nowadays
it is very difficult to get good quality industrial space in Shanghai,
either because the industrial parks are full or because prices are too
high. This lack of availability and high pricing has forced many
companies to look to other locations beyond Shanghai.”

This
creates particular problems for the SMEs, which have arrived late to
the China fiesta. Many have only recently given serious consideration
to the impact that China will have on their business.

Despite
their size and lack of resources, SMEs realise that they have no choice
but to be in China — often because their largest customers are already
there. But now they must give a lot more thought to the choice of
location and a second-tier city may be more appropriate.

Of
course, the second-tier cities do have disadvantages. Disposal incomes
are lower which limits opportunities in the consumer market — although
that has not stopped Carrefour's plans to open 22 stores in second-tier
cities.

A bigger problem for foreign firms, perhaps, is finding
qualified and experienced employees, particularly ones who can speak
good English. These cities also have no foreign schools for children of
the foreign managers.

For those who can't tell Chongqing from Chengdu, Klako Group has published a report
on China's second-tier cities with useful facts on each one. For the
brave, it also mentions China's third-tier cities, which are catching
up rapidly but where foreigners will need a good dose of pioneer spirit.

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