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High Tech Site Selection: Tapping Into China's Technology Trends

High-tech growth sectors include telecom, electronics, and transportation. But government influence may steer investors' location preferences.

Oct/Nov 06
"They are making a millionaire a day over there." So says Henry Wong, founder and managing director of Diamond TechVentures LLP, a Silicon Valley-based investment operation.

The "over there" to which Wong refers is China, an entrepreneurial frontier he says is waiting for the next John D. Rockefeller or Donald Trump to come in and make a Chinese fortune. Making strategic investments in China is the focus of Diamond TechVentures.

China's landscape seems ripe for technology operations and investments of many kinds. Take mobile phones as an example. China now leads the world in mobile phone manufacturing, consumption, and subscriber base. The country's Ministry of Information Industry estimates that more than 300 million mobile phones were made there last year, up 30 percent over the previous year. Chinese buyers acquired about 85 million units last year. The subscriber base of mobile phone users in China is now more than 400 million and is growing by millions of users every month.

Not surprisingly, the world's biggest names in mobile-phone manufacturing have major operations there. Motorola, Samsung, and Sanyo are among those making millions of cell phones in China. And they're not just making the phones there, but also designing key elements of the technology, from chips and modules to software. They're creating phones to meet the latest standards, including China's homegrown TD-SCDMA standard for mobile phone access. Operations in and near Tianjin have helped make the North China Bohai Rim a new global mobile phone hub.

And mobile phones are just the beginning. Tony Zhang, chairperson and cofounder of the Asia-American Chamber of Commerce in the Boston area, sees all kinds of Chinese opportunities for technology companies: a wide range of electronic equipment is in demand in the domestic market there, and various kinds of testing equipment; industrial production equipment is highly sought, as is technology to improve oil and coal production; and medical devices are in high demand.

"Domestic sales of consumer electronics are booming," says Fariborz Ghadar, Ph.D., director of the Center for Global Business Studies at Pennsylvania State University's Smeal College of Business. And then there is the transportation sector, which offers countless opportunities for high-tech suppliers. "Right now the number of cars per person is low," he says, "but the auto industry is booming like crazy."

It's not just cars and trucks, but also airplanes. In a speech last June, David McCormick, U.S. Department of Commerce Undersecretary for Industry and Security, pointed out that China plans to build 100 new airports in the next decade "to bind the country together in the absence of comprehensive road and rail connections. This strategy requires, I'm told, hundreds of jets in the coming years."

Of course, China also offers countless opportunities to Western companies whose competitive situations require offshoring some operations. While low-end manufacturing or assembly has in the past been the traditional kind of activity sent overseas, Chinese operations today produce higher-end manufactured products and are increasingly venturing into such areas as software application development. "People hear of offshoring software to Canada and to India," says Wong. "Now they're offshoring software to China."

Brisk economic activity has translated into stunning growth numbers in China - statistics that underscore the burgeoning opportunities in the domestic market. "China has been growing very rapidly in recent years, between 7.5 and 10.5 percent," says Ghadar. "It's roughly three times the rate that the U.S. has been growing."

But Chinese leaders are well aware that the pace of growth can have downsides, and many experts believe the country must harness its innovative capacity in ways that are more equitable and efficient. Those gathered at the World Economic Forum's China Business Summit in September discussed the risks of unbridled industrial growth, including environmental problems and the migration of Chinese citizens from poorer, more rural western China toward the bustling cities along the eastern coast. The government hopes that the Chinese economy in 2010 will be twice what it was in 2000, yet it also would like to trim per-capita energy consumption by a fifth.

Zhang Xiaoqiang, vice chairman of the National Development and Reform Commission of the People's Republic of China, took up the topic in one of the summit's addresses: "We have to switch from our previous industrial-development mode, from consuming large amounts of natural resources to a development mode based on science and technology as well as innovation."

Planning for Growth
Western companies planning operations in China will find widely competing influences when it comes to finding the right location. On one hand, there is the normal inclination to go where the action already is, where the clusters of similar economic activity can be found. Technology companies, for example, are likely to seek locations in or near the country's shimmering coastal cities.

Among the most attractive is Shanghai, which Wong calls "the Paris of the East, the Manhattan of China. Every VC I know wants to start in Shanghai."

"Technology companies have a strong bias to be in the coastal region," Ghadar agrees. "If you're Microsoft setting up a research center, you can go wherever you want and chances are that'll be Shanghai."

Zhang adds that "in terms of talent, Beijing is a very good location."

But foreign companies also should pay close attention to the places where China's central government wants to encourage development. It's no secret that China is shaped by strong central planning, and companies seeking Chinese locations often find that the government will make it worth their while to consider roads less traveled.

The country's special economic zones, or SEZs, help the government steer development to places that need it most. They help China counter the natural economic forces that have caused some eastern parts of the country to nearly overheat, luring fortune-seeking companies and residents alike, and causing inflation in property and labor costs.

The city of Shenzhen offers an example of how China's SEZs can change the landscape. It used to be a small fishing village with a population in the hundreds. In 1980, the government declared it an SEZ, according to Chinese diplomat Song Deheng, who told the story in a June speech on China's SEZs. In 10 years, it was a medium-sized city, with a gross domestic product of $2 billion. By 2002, the population had hit 10 million, and its GDP had reached $44 billion.

China steers development in much the same way that Western governmental entities do. "You name it they've got it - tax benefits, no tax on profits, free land," says Wong. Just like their Western counterparts, Chinese officials know that generous treatment of entrepreneurial companies pays dividends to the community. "When you are successful, you hire people," says Wong. "The return is payroll taxes and prosperity for the city. It's great urban planning."

What's important to recognize now is that China's development strategy adapts as the years pass. As one area heats up - or at least enjoys development that is deemed to be sufficient - the government turns the spotlight to a new area. And it has the luxury of having lots of land and citizens eagerly waiting to enjoy the benefits of Western investment.

"People have been talking about the bubble in China - that it's going to crash and burn," Wong says. "What's the next after China? The answer is western China."

The western reaches of the country have not shared in the explosive growth of recent years, says Ghadar, with the bulk of the country's growth taking place in the eastern regions near the coastline. "If China is growing in aggregate 10 percent, the coastal region may be growing 20 to 30 percent a year," he says. Not surprising, then, "the Chinese now have a policy of encouraging manufacturing to go inland. If you want to be in China, that's where they're encouraging you to go."

There are some very strong reasons to check out locations farther from the established, modern cities near the coast. "I just came back from Xian and they claim to have the lowest high-tech wages and lowest office space rental per square meter," says Wong. Some locations to the west are said to enjoy labor and business costs that are half what they are in Shanghai.

"It's best to be where the central government wants development," says Robert Howard, senior vice president of the California Industrial City Development Corp. His company is creating a massive development in Zhengzhou called California Industrial City.

"The city of Zhengzhou has about seven million people," he says. "Zhengzhou is the provincial capital of the Henan province, the most populous province in the world, with a population that exceeds 100 million people. We're within a six-hour drive of a population that exceeds the United States, 360 million people." That, he says, makes the development a prime place to serve the domestic Chinese market. Also appealing to many North American companies, he says, is the development's Western connection. "It's Western-financed, with Western investors and a Western management team. We will have a staff in China to facilitate all of their needs. We handle all of the paperwork. You have zero contact with the government."

Beyond the locations listed above - Shanghai, Tianjin, Beijing, Xian, Shenzhen, and Zhengzhou - there are plenty of other attractive places in China to locate a Western technology business, these observers say. Zhang, for example, mentions Guangdong province, Qingdao, Zhanjiang, Fujian province, and the west-central China destination of Chongqing, a significant commercial capital.

Wong also cites Chongqing as an area likely to see significant ongoing development, and also expects major development in Hefei, a targeted city in the Anhui province. Other areas of growth include the Hainan province and the Pudong area near Shanghai.

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