China’s Balancing Act: Moving Inland For Sustainable Development

Foreign Investors Look To China’s Underserved Interior For New Opportunities For Expansion, Tapping Vast Potential

China's coastal east has benefitted most from the country's 30 years of dramatic growth. But the inland west may be catching up (albeit slowly)

China's coastal east has benefitted most from the country's 30 years of dramatic growth. But the inland west may be catching up (albeit slowly)

The images that many in the world conjure up when thinking of 21st century China are a mixed bag of glittering metropolises (concentrated in the coastal east) and ancient sites like the Great Wall and Forbidden City. But these two extremes really don’t paint an accurate picture of the country as a whole, which is both vast and by-and-large underdeveloped. Although the Chinese government has worked to improve infrastructure and build up the country’s inland areas through the ongoing “Go West” campaign and stimulus spending, many smaller urban areas in China remain untapped resources for domestic and foreign investors looking to build their brands or expand their current operations in China.

This week, the Global Supply Chain Council looks at several areas in China  likely to become prime targets for foreign investment, as inland regions are further developed and median incomes grow. According to their findings, areas like the Midwest and even the restive Northwest are “blank slates” with real long-term potential:

Xinjiang, China’s largest autonomous region and a former key stop on the ancient Silk Road, has once again become a choice of investment in recent years despite simmering ethnic instability.

The giant French retailer Carrefour Group pioneered the trend, becoming the first multinational company in the region when it opened one of its supermarkets in Urumqi in 2004. Even as the region recovers from a recent ethnic clash on July 5, government newspaper People’s Daily reported that Jean Luc Lhuillier, vice-president of Carrefour China, said the group plans to invest more in Xinjiang.

The growing local spending power has also attracted high end retailers. Hong Kong-based luxury department store Maison Mode made its debut in the region last year, opening a location in Urumqi packed with glamorous brands such as Cartier, Giorgio Armani and Gucci.

Li Sheng, professor of logistics management at Chengdu-based Southwestern University of Finance and Economics (SWUFE), said the rise of Xinjiang is not a surprise given its special background. “I think people living there are more open-minded than people in other inland areas because of their different ethics, different cultures and the closeness to the West geographically,” he said, adding they are easily influenced by western spending habits, which retailers can use to their advantage. He said Coca-Cola’s recent opening of a new plant was nothing unexpected. “How costly and time-consuming must it be to deliver drinks to local stores from factories hundreds of miles away?” he said.

In contrast with Sichuan’s struggles, longtime rival Chongqing has seen its water transportation along the Yangtze River develop into a growing advantage since last December’s approval of the first free trade zone in inland China.

Already some companies are planning a move to the Lianglucuntan FTZ whose first stage construction began in June and will be completed in six months. Ant Logistics, the leading privately owned 3PL in the region, plans to move its headquarters from Chengdu to Chongqing by the end of this year, basing its offices in the FTZ. “More than 60 percent of regional products go through Chongqing as it has the biggest port in the region, so it makes sense for us to move there,” said Zhen Qibin, Ant’s logistics manager. Zhen believes the FTZ will attract more heavy industry clients like steel and chemical materials producers in the future.

Facing their up-coming competition, Ant’s Zhen said advanced management doesn’t necessarily mean successful business. “It’s good that they will
bring western management here, which could help us improve our service, but they have to get themselves localized at first,” he said, pointing to gaps in business practices between first-tier cities and inland cities as possible stumbling blocks. “These gaps won’t disappear overnight,” he said.

This isn’t the only challenge to companies making the push into new territory. Before companies jump on the bandwagon, they should think long and hard about moving inland to find cheaper labor. The lack of a favorable business environment may prove to be a challenge difficult to overcome. “There is nothing worse than setting up a plant far away from suppliers,” noted Wu Di, a professor of supply chain management at Shanghai Jiao Tong University.

The shortage of local senior talent is another issue. “Chances are that companies would have to relocate all these technicians and senior managers from other places, and it costs money,” Wu Di reasoned. While Coca-Cola has senior managers in the Urumqi factory deployed through its business partner – the state-run China National Cereals, Oils and Foodstuffs Corporation (COFCO), though in the future, we want to hire from the local area,” Wang Lei said.

If these inland challenges can be affectively addressed, China will close much of the distance holding back its great promise.

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