Where to relocate in China depends on what factors influence an enterprise’s decision to relocate as well as the enterprises’ specific needs. There is no one-fits-all solution for all enterprises.
But in practice, certain places are more likely to be selected when businesses consider to relocate.
Free trade zones
Free trade zones (FTZs) are a specific type of special economic zone (SEZ) where authorities can experiment with pro-business regulations. FTZs in China benefit from a number of incentives, such as relaxed investment restrictions, reduced tax rates, and expedited administrative procedures, among others.
China’s first FTZ – the Shanghai Pilot FTZ – was launched in 2013. In 2015, China announced the Fujian, Guangdong, and Tianjin FTZs.
China announced seven more FTZs in 2016 – in Chongqing, Liaoning, Henan, Hubei, Shaanxi, Sichuan, and Zhejiang – to bring the total to 11.
And in 2018, China launched its 12th FTZ in Hainan, an island province that will allow the government to test reforms on a wider scale than other FTZs.
Each FTZ is also designed to promote specific industries, allowing investors to benefit from cluster effects:
- Shanghai FTZ focuses on financial services, advance services, and pharmaceuticals;
- Sichuan FTZ focuses on trade related services, advanced manufacturing, and medical services; and
- Hainan FTZ, which is newly established, will focus on tourism, modern services (such as value added telecom, insurance, construction, medical service, education, and creative culture), and advanced technology (such as new energy vehicles manufacturing, seed industry, and the internet).
Enterprises engaging in relevant sectors should consider taking advantage of preferential policies located in each zone.
Industrial parks and zones
Enterprises choosing to relocate may look into specific industrial parks and zones because preferential policies are often offered to develop certain industries through the park itself.
To attract investors, authorities are usually willing to provide incentives and customized services.
Preferential policies provided by the industrial park are usually case-by-case and not searchable on the internet. Enterprises looking for suitable industrial parks are advised to seek professional assistance from those who know the profile of each industrial park very well and who have established relationships with the authorities in charge.
Industrial clusters are attractive to many enterprises, especially those in manufacturing sectors. An industrial cluster is an interconnected system of like-minded businesses in a geographically centralized location. They share industry characteristics and benefit from collective growth.
Clusters look to create an environment with clear communication that allows them to bridge operational gaps and create a more efficient ecosystem for design, production, and distribution.
An effective industrial cluster does not begin with product development, but leverages local resources, educational institutions, and complimentary services. A well-established cluster offers a business network that is an easily navigable system for suppliers, buyers, and R&D facilities.
The authorities support many such clusters in the country. China has established various industrial clusters; the top 10 cater to automotive, machinery and equipment manufacturing, electronics, shipbuilding, nonferrous metals, petrochemical, new energy, and new material.
The automotive industry serves as an example. Many automotive manufacturing enterprises have ties or are located in one of the six automobile clusters.
Over the past several years, manufacturing has steadily crept inland as companies seek not only to lower their costs, but also to take advantage of government incentive programs aimed at
developing central and western provinces.
China started to prioritize increasing foreign direct investment (FDI) into central and western China as early as 2000.
But in early 2017, the State Council released a guideline, Circular on Several Measures on Expanding the Opening to and Active Use of Foreign Investment (“the Circular”), outlining how the central government planned to increase FDI into central and western provinces.
The Circular grants local governments in these regions greater autonomy to offer local incentives and adopt local preferential policies.
Take Chongqing as an example. In addition to its comparatively low operational costs, well-established infrastructure, and pool of skilled labor, Chongqing’s preferential policies are one of the most appealing among the central and western provinces.
In order to develop its electronic information industry, electronic manufacturing industry, as well as other emerging industries such as high-end equipment manufacturing, new materials manufacturing, and new energy industry, Chongqing authorities offer tax incentives, land and real estate benefits, foreign exchange management and credit, import and export assistance, and visa perks to businesses.
Many leading multinational enterprises, including Hewlett-Packard, Foxconn, Inventec, Acer, IBM, Honeywell, CISCO, and HP have set up their businesses in Chongqing. In June 2017, Ford made headlines when it announced that it would base its new production center in Chongqing Liangjiang New Area instead of Mexico, the originally planned destination.
Areas with less regulatory scrutiny
Industries characterized by high levels of pollution face stringent environment impact inspections, and often seek to relocate to areas with less strict regulatory guidelines.
Generally speaking, environmental inspections in urban, developed, and coastal areas are more stringent in comparison to rural, underdeveloped, or inland areas. The chemical industry serves as a good example.
Originally, most businesses in the chemical industry were located in coastal cities. Later, when environment protection was prioritized by the government, the industry first moved to industry zones surrounding cites or in rural areas close to cities.
After authorities increased the depth of environmental inspections, the industry began moving to even more remote areas, such as in central and western China.
China plus one
‘China plus one’ is an international business strategy that consists of expanding part of a company’s operations in China to lower cost countries in Asia (such as Bangladesh or India) or ASEAN countries (such as Vietnam or Indonesia). For enterprises that do not want to give up on their China business, but feel the pain of increased costs or the US-China trade war, the China plus one strategy is attractive.
Most businesses want to stay engaged in China’s market, rather than leave it completely.
For example, according to the American Chamber of Commerce in South China, more than one third of the companies in their most recent survey see Southeast Asian countries as their first choice for relocating manufacturing lines, but most respondents maintain that the expansion of the Chinese market is one of the most important remedies for their current challenges.
Companies do not leave China under this strategy, but instead move low value-add, low tech, and more labor-intensive activities out of China to ASEAN, which is formed by 10 high growth countries with a population of 600 million people.
Among all ASEAN countries, Vietnam and Indonesia are top destinations for businesses using this strategy.
Vietnam is in excellent position in terms of physical infrastructure, as well as the less tangible infrastructure of free trade and trade facilitation agreements to integrate seamlessly into a China
based supply chain. Indonesia has a very weak infrastructure base and lower supply chain development, but it boasts of having the largest market size and GDP among ASEAN countries, as well as a young and dynamic workforce.
Meanwhile, India offers businesspeople a different proposition all together, with its large, young labor force, increasingly competitive business environment, and massive unified market.
How to select the most suitable location
Enterprises may find some directions overlap with each other. For example, Chongqing can not only be categorized as an FTZ, but also an inland province, as well as a province with attractive industrial parks.
However, it doesn’t mean Chongqing is the best option for all enterprises seeking to relocate. Whether a site is suitable or not depends on many factors. Below, we share some tips based on experience.
Metrics for search:
- Cost metrics – Real estate (such as rental or purchasing cost or site and building amenities), utilities (water, gas, or power), labor costs (including social insurance);
- Supply chain – Number of upstream and downstream enterprises, number of competitors;
- Connectivity – Major infrastructure, transport options, ease of access to customers and suppliers;
- Workforce – Availability of skilled workers, labor productivity;
- Legal environment – Industry permit or certifications, special requirements on targeted industries; and
- Incentives – Tax, financial supports, visa.
Analyzing your shortlist
Enterprises need to conduct an in-depth analysis of their search findings, and chose the most suitable options based on the business priorities and goals set at the beginning.
At this stage, some quantitative tools, such as a table to weigh all the metrics based on the significance, can be really helpful when the decision maker is flooded by the data gathered and has difficulty to make any evaluations.
Enterprises are also advised to seek professional services for at least this step, to take advantage of the insight of independent advisers.
Due diligence for property options
After collating information based on the search metrics, a business will likely get several potential options.
The final step is to conduct a due diligence check on the shortlisted properties or preferred destination. This is particularly important for businesses entering a new region.
For example, an industrial park might have wonderful promotion brochures for marketing, but the infrastructure or the facilities are nothing like those printed on paper. The property option might not have the proper landowner certifications. In worst-case scenarios, the incentives promised by the authority-in-charge might not be in compliance with national policies.
Given these risks, a due diligence check in advance is not a simple procedural step, but serves as necessary and important measures to save investors from potential troubles.
China Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in Dalian, Beijing, Shanghai, Guangzhou, Shenzhen, and Hong Kong. Readers may write firstname.lastname@example.org for more support on doing business in China.