Investors guide to the Dalian Development Zone

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By Adam Livermore

DALIAN, Oct. 1 – Located further up the peninsula from the city center of Dalian, the development zone has turned into a major metropolis in its own right with a population of around 350,000. Normally it takes about 45 minutes to make the drive from the development zone to the Dalian city center, so although the road is lined with factories and shipbuilding docks, the development zone can be considered to be a separate metropolis. Indeed the main weakness of the zone is its poor transportation links with the city center. A light railway exists but trains only run every 10 -15 minutes and the service finishes quite early at night. There are only a couple of major road links between the two metropolises, and bottlenecks tend to form at the entrance to tunnels on the route. A major crash on one of the roads can paralyze traffic for hours during rush-hour. A ferry service has been suggested as one means of alleviating this problem, and longer-term plans are to include a 20km tunnel under the bay, but the transformation of the development zone into a fully-fledged city would seem to offer the best hope of improving the quality of life for expats working in the area – the commute into central Dalian is only going to get worse over the coming years.

The Dalian Development Zone has thrived due to the tax benefits and other incentives offered to the companies that have established there. As of 2008 these benefits will no longer be offered, and the companies that presently enjoy preferential treatment will see the benefits gradually phased out. However the development zone will still be an attractive place to invest for several reasons:

  1. the infrastructure has been designed to attract light manufacturing and processing companies
  2. there is a large labor pool available consisting of both white collar and blue collar workers
  3. ancillary services like international banks and human resource agencies are already present there
  4. there are procedural benefits for companies in the bonded free trade zone, export processing zone and bonded logistics zone that can save time and money relating to customs and VAT procedures
  5. the environment is good and getting better; nice serviced apartments are available, five star hotels are currently under design and there are nice beaches and parks close by – there is even a very popular Starbucks in the Dalian Development Zone, which is usually a precursor to the arrival of considerable amounts of foreign investment

Most of the investment so far has come from Japanese and Korean companies. It seems this wave is coming to an end because most of the large companies from Japan and Korea that should be based in Dalian are already here and producing. The next wave crashing in is coming from “western” companies. Some of the larger operations are:

Thyssen Krupp –the German manufacturing conglomerate has entered into a JV with Chinese giant Anshan Steel for a hot-dip coated steel sheet processing plant. Initially established in 2003, the project was expanded in 2006 through an additional investment of US$150 million.

Pacifica – this is a large Australian company that produces auto parts for many of the world’s leading automakers. In Dalian they have invested around US$60 million in a plant producing brake parts for several Japanese and American manufacturers. They are currently expanding the capacity of their plant by constructing another foundry on adjacent land.

RHI Refractories – Located right next to Pacifica is RHI Technologies, a German company that is the worldwide leader in the field of refractive technology. This is essentially the production of material to build furnaces, which is the basis for much heavy industry. Liaoning Province is one of the few places in the world with abundant reserves of magnesite, a key mineral in the production of these refractories. Transported down from the northern end of the province and processed in the modern Dalian plant, the products are exported through Dalian port.

It is no coincidence that a lot of German companies are based in the Development Zone. They are generally manufacturing high added-value products which need input from highly skilled Chinese and foreign professionals. These companies can afford the investment required to buy land, which is becoming increasingly expensive. These kind of investments require large commitments from investors, and it is a sign of their confidence in Dalian that existing projects are being expanded.

However these operations are all rather modest when compared with Intel’s current US$2.5 billion project. An open secret for months prior to the official announcement in March 2007, groundbreaking has already commenced on the 160,000sqm plant and completion is anticipated in 2010. From the professional way the Intel people have approached the project up to now I am confident they will meet their schedule. The plant is situated out towards the northern edge of the zone, and it is not far from the sea because large amounts of seawater will be used in the wafer fabrication facility.

Specific operational advantages are available in the parts of the development zone known as the export processing zone, the Dalian Bonded Logistics Park and the Dayaowan Bonded Port area. Together the area is known as the Free Trade Zone (FTZ). Established in 1992, it now covers an area of 64 square kilometers. There are over 800 foreign enterprises already operating within the zone. Most of the companies are involved with importing and processing goods for re-export and in some cases domestic sale as well. A few advantages of being located in the free trade zone are as follows:

  1. goods consignments from abroad are merely registered with customs, but are not considered to have entered China until the manufactured/processed finished products are transported out of the zone by road or rail, therefore, the portion of finished goods re-exported is not liable for any customs duty of tax in China – for VAT and customs purposes the FTZ is considered to be “outside” of China – even for products transported into China, import taxes and customs duty are calculated only based on the value of the imported raw materials and not on the finished product. In addition to the cost saving for companies carrying out operations in the zone there is also less bureaucratic involvement from the customs and government officials
  2. trading, processing, warehousing and distribution may be carried out by one business entity – this is often not permitted in other areas of China
  3. imported products may be exhibited in the FTZ without incurring any taxes
  4. bonded and non-bonded goods can be stored indefinitely in the FTZ

In addition, further specialized services are available in the bonded logistics park and Dayaowan Bonded Port to meet the needs of certain investors. The concept is to make Dayaowan Port an international hub for shipping and logistics companies rather than the regional hub that it is right now. Together the bonded port and bonded logistics park will allow freight carriers to unload goods at the docks, separating and repackaging them as necessary before sending the goods elsewhere in China or abroad. Some additional processing may also be carried out on the goods using materials brought in from outside the bonded area. Goods brought into this area from outside of mainland China will not be charged import or customs duties, while goods arriving from inside mainland China will become admissible for VAT rebates. A large amount of time and money is currently being spent on upgrading both the hardware and software in the port and logistic zones to make it among the most efficient in the country.

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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