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2011-02-23 | All chapters

Inland interchange

Chongqing municipality bets on its position as a hub for the country's west

In September 2007, two ambitious business graduates from Grant MacEwan University flew from Canada to China to look for work. Adam McWhirter went to Chongqing, a mountainous city in Southwest China, while his classmate chose Beijing, the capital of the world's leading emerging economy. McWhirter is now a well-connected Chongqing representative of the European Union Chamber of Commerce in China (EUCCC). The managing partner of Maxxelli Real Estate is also running a multi-million yuan company in the inland city. His former classmate is still teaching English in Beijing.

"I came here for the opportunities and the opportunities in Chongqing never end," McWhirter says.

For him, what can be done in first-tier cities such as Beijing, Shanghai, Shenzhen and Guangzhou, have already been done.

"No matter what you do, as long as you are ambitious, you can take off in Chongqing. Because things are changing so fast here," he says.

Chongqing will be one of the world's fastest-growing cities this decade as it sits in one of the country's most important new regions, interior China, and offers a healthy alternative to coastal megacities, which suffer from rising costs and labor shortages, according to a Forbes forecast in October 2010.

As the only municipality in western China, Chongqing, with a population of 32 million and a size similar to Austria, has attracted increasing interests from international investors. Figures from the EUCCC show that their members in Chongqing and neighboring Chengdu, capital of Sichuan province, have grown from 85 to about 120 in 2010, after witnessing similar growth the previous year.

Shikha Tiwari, director of UK trade and investment in Chongqing, has also seen an increasing number of British investors coming to the city in the past two years.

"Around 35 to 40 British companies have opened their branches in Chongqing, including eight major ones which established their business in the past two years," she says, adding that the total value of British investment in Chongqing is about 2 billion yuan (223 million euros).

"A lot of companies have moved to the west due to the rising cost of doing business in costal cities such as Shanghai, Guangzhou and Shenzhen. More British companies are becoming aware of the opportunities Chongqing has to offer. They know that the earlier they get here, the less competition they will have to face," Tiwari says.

For many years, coastal cities enjoyed an advantage in drawing investment and outsourcing orders due to their proximity to overseas markets. But as the cost of labor and raw material continues to rise, the inland municipality of Chongqing has emerged as the next destination for manufacturing and outsourcing, out of which notebook PC manufacturing has grabbed the most attention.

Chongqing mayor Huang Qifan has long dreamed of building the city into the largest PC manufacturer in Asia with an annual production capacity of 100 million units by the end of 2015, after realizing that the city's long-established automobile and motorcycle manufacturing industry will not offer enough support to maintain rapid increase in the city's economic growth.

Despite being far from well-developed coastal cities, the inland city's annual GDP growth has exceeded 14 percent on average in the past five years, surpassing the overall rise in China, which is about 11 percent.

"Chongqing is entering a new phase of economic development which requires an upgrade in its industry structures," says Mu Huaping, director of the Chongqing Economic and Information Technology Commission.

About 40 percent of Chongqing's total industrial output value is generated from the automobile and motorcycle manufacturing industry, he says.

"And a booming economy cannot rely on one solo industry, which is too dangerous for the development of a city from a long-term view," he says.

Compared with its coastal counterparts, Chongqing's cost of labor as well as water, electricity and natural gas is nearly 30 percent lower.

Moreover, western China has a larger working population to draw from, compared with those of provinces in the east and south. The neighboring six provinces of Chongqing, with a population of 300 million, are home to many migrant workers in China.

The central government also offers a 10 percent tax reduction for companies operating in certain western areas.

Chongqing's advantages have lured many big names in the IT industry. Hewlett-Packard (HP) and Acer, the world's largest and second-largest PC producers, have moved their operations to Chongqing or announced plans to build a manufacturing center in the city.

Zhang Bing, vice-president of the park, says the success of manufacturers in eastern and southern China lies in its cheap labor and duty-free policies.

"However, more companies are finding it difficult to survive, due to rising labor and energy costs," he says, adding that it is a matter of time before those companies head west.

Chongqing Xiyong Comprehensive Bonded Zone, the largest duty-free zone in the inland area which is included in the 37-sq-km park, passed the central government's standards in November 2010 and has started operations since.

About 1 million units of PC have been exported from the duty-free zone to overseas markets since the first one rolled off the production line in January 2010.

According to the recently announced Chongqing government's 12th Five-Year Plan (2011-2015), the area will grow its IT industry into a 1-trillion-yuan operation by 2015, accounting for 40 percent of the city's total industry size of 2.5 trillion yuan.

As part of efforts to boost the city's transportation and logistics sectors, a second airport runway stretching 3,600 meters started operations in December 2010, making Chongqing's Jiangbei (International) Airport the only inland airport with two runways and two terminals. The construction of a third runway will break ground this year - the 3,800-meter long runway will be able to accommodate an Airbus 380.

A direct air cargo service between Chongqing and the Belgian city of Liege was also launched in September 2010 and the move is expected to help build closer ties between the fast-growing high-tech production center of Chongqing and the important electronics consumer market in Europe.

But starting an industry from scratch has its own problems, particularly in the supply chain.

"The transition period is the most difficult," says Frank Chien, manager of Inventec Chongqing Company, a Taiwan-based manufacturer, which expanded its manufacturing center from Shanghai to Chongqing in 2010.

"The cost of production is $4 per unit, higher than those produced in our Shanghai base, as 95 percent of our material needs to be transported from the east," he says.

There are about 3,000 raw material suppliers in the Kunshan comprehensive bonded zone, in coastal Jiangsu province, supporting an annual production capacity of 70 million PCs. The number of raw material suppliers is less than 200 in Chongqing.

"We still have a long way to go before we hit our goal of an annual production capacity of 100 million PCs by 2015," says Zhang Bing.

Analysts in IT industry say the supply chain will not be a problem in another two to three years as more companies from the coastal cities head to the west due to growing consumption power and the huge market there.

Wang Jiping, research manager of IDC China computing system, says the next consumer market for PCs will be in western China. The annual growth of western China's demand for PCs will reach 21 percent by 2014, he says, thanks to rising incomes.

Chongqing's special status as a municipality, which is headed by the central government directly, is another selling point for winning over investors.

"There are fewer layers of government to get to, therefore the system is less bureaucratic and government departments are easier to access," says Shikha Tiwari.

"Time is money and businesses like quick decisions and certainty. No one wants to do business in an environment where governments frequently change their minds, leading to uncertainties," Tiwari says.

Chongqing authorities are also known for their aggressiveness and decisiveness in business.

Last year, 177 corrupt officials were sacked during a crackdown on mafia-style gangs in Chongqing. The crackdown, which was launched in 2009, led to at least 920 arrests and 1,335 prosecutions.

Chongqing separated from Sichuan province in 1997 and has much to catch up with Chengdu, Sichuan's provincial capital, in terms of living conditions for foreigners. For example, there is still no direct flight from Chongqing to European countries.

But many believe that Chongqing's development will be swift with its special status as the only municipality in the west and the powerhouse enhancing the overall development of the western regions.

Chongqing's Liangjiang New Area was ratified in May 2010, making it the third zone after Shanghai Pudong and Tianjin Binhai to offer preferential policies for land, finance, taxation, investment and trade.

"For me, I have no plans to go home. There are more opportunities in the city," Adam McWhirter says.

"Beijing, Shanghai and other first-tier cities have already had their 'foreign invasions'."