FDI in second tier cities: investors flock to Chongqing

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Several international companies have recently set up shop in Chongqing as more and more foreign investors look to China’s western second tier cities. With the rising costs of land, labor, energy and other inputs to manufacturing making the coastal regions less attractive to companies looking for places to park their factories, the inland second and third tier cities have become an attractive alternative, whether for export production or, increasingly, to sell domestic B2B or B2C consumers.

Rieter Holding AG, a Swiss based industrial automotive supplier, has set up a new facility in western China called Rieter Automotive Chongqing Sound-Proof Parts. The new manufacturing facility in Chongqing represents a further step in China for Rieter.  According to the announcement, the 9,000 square meter plant is located close to OEM facilities, including Ford, Volvo and Mazda, and will be fully operational by mid-year with an initial workforce of around 70.  The facility will produce thermal management packages and acoustic parts.

Additionally, the U.S. manufacturer Honeywell International has moved into Chongqing, opening a new global engineering center in the southwestern Chinese city.  The new center, Honeywell (China) Advanced Solutions, is the first of its kind in China and will offer solutions for a wide range of industries.

Xihua reported:

China is a very important market for Honeywell, and Chongqing has fast become an emerging technology hub that offers Honeywell access to highly skilled technical talent, announced Honeywell Chairman and CEO Dave Cote at the opening ceremony.

Honeywell is confident that Chongqing is the right location for our new facility and will quickly become a leader in driving innovation and continued growth for Honeywell globally, he added.

Honeywell Process Solutions, which delivers automation technologies and solutions for a wide range of industries including refining, oil and gas, pulp and paper, mining, minerals and metals, bulk and batch chemicals, pharmaceuticals and power generation, will be the primary business in the new facility, company officials have said.

Honeywell International is a 33 billion U.S. dollar, diversified technology and manufacturing corporation, serving customers worldwide with a wide array of products and services.

Based in Morris Township, New Jersey, Honeywell’s shares are traded on the New York, London and Chicago Stock Exchanges. It is one of 30 companies that comprise the Dow Jones Industrial Average and is also a component of the Standard & Poor’s 500 Index.

The company began operation in China in 1935 and has established 21 joint ventures and wholly-owned subsidiaries across 13 cities.

Second tier cities, long the media flavor of the month, continue to be the focus of intense interest. As All Roads Lead to China points out, the future of China lies in the development of 2nd and 3rd tier cities in China. The blog goes on to list some very relevant information including a Jones Lang Lasalle profile of Chongqing.

Jones Lange Lasalle’s Chongqing Profile and logistics report – a one two punch of reports that have done a good job of presenting enough information for me to ask for a meeting (their intention I am sure).

The U.K. trade Office has also put out a nice highlevel update of the Sichuan province (DOC)

China Briefing also looked at second tier cities in June, 2006. We reported that it was clear that these cities are going to the most exciting and interesting destination for FDI in the next few years, and increasingly battlegrounds for competition amongst Chinese and foreign brands for their residents’ RMB. Meanwhile, the first-tier cities will become more oriented to service industries, with manufacturing moving to the second and third-tier cities. This is already happening to some extent in Shanghai and Beijing.

Jones Lang Lasalle also noted that “Chinese cities hoping to attract MNCs with manufacturing plants, R&D facilities or other types of investment that will boost the local economy are not merely competing with other countries and regions such as India, Brazil and Eastern Europe, but face tough competition from one another”. Cities may need to become increasingly focused on serving specific niches and less on trying to offer all things to all investors.

Some retailers are already moving into the third tier cities (and even fourth and fifth tier cities, though what exactly constitutes a fifth tier city remains to be determined). Such cities are typically an upwardly mobile prefecture-level city, relatively undeveloped, but with signs of increasing affluence. Wal-Mart, for example, opened its 55th China store in Wuhu, Anhui, a city with a 2.2m population, and its 56th in Yueyang, Hunan, 5m population. For the mass-market, low priced goods that the U.S. giant sells – and its fairly undemanding staffing needs – such moves are probably safe. It would not necessarily be the case for more sophisticated shops.

But the trend is obvious – these cities are where much foreign investment will go in the medium term. Although in many the amounts remain small, the FDI numbers are rising across the board. By, say, 2050, when the urbanization rate reaches 75 percent, the old China trader’s dream of being able to sell to every Chinese citizen may well almost be realized.

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