An investors guide to Dalian

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By Adam Livermore

DALIAN, Sept. 26 – Dalian is a city attracting a great deal of attention right now. Particularly newsworthy is the US$2.5 billion investment by Intel in a new semiconductor plant, and the expansion of the High-Tech Zone – Dalian is set to become the Bangalore of China. Major multinationals are spearheading the charge to take advantage of a large pool of skilled labor and excellent IT infrastructure. Growth in the service sector is happening with less fanfare, but at a similar high pace. This is evidenced by the arrival in Dalian of multinational real estate brokers (for example CBRE, Savills and DTZ), relocation specialists for expats (Santa Fe) and a proliferation of new five star hotels.

Yet in the minds of many western businesspeople Dalian remains a rather obscure Chinese provincial backwater. In fact, Dalian is nothing of the sort – it is an exceptional city for several reasons. In this series of articles I aim to introduce Dalian to the wider business community and explain why, if you are a provider of high-value added products or services, it should factor in your strategic visions for the future.

Part 1 – An overview of Dalian

The first thing that should be understood about Dalian is its location. Perched on the top lip of the Bohai Gulf (which provides sea access to northern China), its location has historically been important for both military and commercial reasons. In terms of international trade, the majority of products manufactured or processed in Liaoning, Jilin or Heilongjiang provinces (the traditional industrial heartland of the north with a combined population of over 100 million) are exported through Dalian. Domestically, a large amount of energy resources such as coal and oil are sourced from the northern provinces, flowing through Dalian on their way south by ship to power the energy-sapping factories in Zhejiang and Guangdong. Its proximity to Korea and Japan has ensured that a large amount of the trade with these countries involves Dalian in some way or another. It is not difficult to find fluent Japanese and Korean speakers in Dalian, especially among the huge ethnic-Korean population.

The second thing to note about Dalian is its size. Although the population of Dalian is estimated to be around 6 million, this definition includes a large chunk of southern Liaoning province. Wafangdian, Pulandian, Jinzhou and Zhuanghe are large cities in their own right with around 3.5 million inhabitants between them – they are up to an hour’s drive through countryside out of Dalian city, but are still defined as part of Dalian. The urban population of Dalian city is around 2 million, and it pales in comparison to its northern neighbor Shenyang, which has an urban population of above 7 million. In addition, the location of Dalian on a relatively narrow peninsula limits its potential to expand outwards. Land is already in short supply.

As costs rise in Dalian for land and labor, low value-added operations are moving out into the interior of Liaoning Province or even further away. Replacing them are higher value-added businesses. A particularly active sector is the automobile spare parts industry – the cities of Changchun (Jilin province) and Shenyang form the heart of the Chinese automobile industry, and many joint ventures between Chinese and foreign vehicle manufacturers are based in this corridor. Dalian port has developed a specialized terminal for the import/export of vehicles, and has become an attractive destination for many of the high-end component manufacturers.

The final thing to note about Dalian is its diversity. It is a tourist city, very clean and regularly voted the city with the best living environment in China. The port, one of the five largest in China, gives the city an international flavor. Most of the universities are congregated to the south of the city, and it is no coincidence that this area was chosen as the site of the high-tech park. General Electric based a large portion of their global back office here in Dalian before spinning it off as Genpact, and the company has thrived in the city in recent years. Other major international ITO and BPO operations are run by HP, Dell, Accenture and Oracle.

To the north, the city’s development zone has attracted considerable foreign investment in the sphere of relatively light industry, particularly pumps, automobile parts, pharmaceuticals and various kinds of processing for export. The arrival of Intel is transforming the landscape again, not necessarily to the benefit of existing operations some of whom are struggling to hold on to their best managers. This is a short-term phenomenon though, and the presence of the IT giant should bring far more positives than negatives to the city.

Dalian is expanding organically, and it will also benefit as Northeast China continues its regeneration. The port continues to expand its capacity. There is a new international airport planned in Jinzhou to cope with the expected rise in capacity. A new Harbin – Changchun – Shenyang – Dalian high-speed passenger railway line is under construction (anticipated completion 2013). This will not only make travel by rail between the major cities of the northeast a viable option, perhaps more importantly it will free up the existing rail network to concentrate on delivering freight to the ports of Dalian and Yingkou.

Investors should note that there is another factor at play in this concentration of investment in the region – Commerce Minister Bo Xilai is a local and used to be the mayor of Dalian. Liaoning is very much his powerbase, and as one of the most powerful men in the Chinese government he has played a major role in raising the profile of the area.

The next article in the series will focus on the Development Zone and some of its constituent parts – the Export Processing Zone, the Free Trade Zone and the Bonded Logistics Zone.

For business advisory services, assistance establishing, structuring or operating a business and contract drafting in Northeast China, please contact Adam Livermore in the Dalian office of Dezan Shira & Associates at dalian@dezshira.com, tel. [411] 8255 9061.

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