MAKING IT IN CENTRAL CHINA
At the core of China’s success is manufacturing; and if one area has traditionally been the country’s factory district, it is the south-east province of Guangdong, especially with items produced in a high volume, such as textiles, toys and plastics. Ever since the early 90s, migrant workers from all over China have flocked to the province in search of work, turning its two largest cities, Shenzhen and Guangzhou, into urban sprawls. The province has benefited from its proximity to the coast and early preferential treatment from the government, but demographics are making it lose some of its edge in favour of China’s other provinces.

The problem is that Guangdong simply isn’t as cheap as it used to be. Over the last few years, the provincial minimum wage has seen a number of increases. As of 1 April this year, it increased by as much as 17.8%, ensuring full-time workers a monthly salary of up to €77 (CNY860) a month. Compare this to five years ago, when a worker was only guaranteed to earn two-thirds of this amount, and it is possible to see why factory owners are complaining about higher costs. Also, as affluence rises in the inland provinces, less people are prepared to leave their home and take up the unattractive life of a migrant worker. This means that some factories in Guangdong have been finding it difficult to find enough people – an unthinkable situation a decade ago.

As a result, manufacturers are starting to look inland to find cheaper labour. “You will find pretty much the same wages within one province. To find something cheaper you have to go to the next one along,” says Ho. Central China in particular is going to benefit from this kind of shift; in the first three quarters of 2007, the six central provinces received €7.29bn of foreign investment. On top of the lower wages, it is still close enough to the coast to make it economical to transport goods there, and these areas are not built up enough to experience the frequent power shortages that have plagued the eastern regions

Ho highlights neighbouring Jiangxi province as one such place undergoing this kind of change. Cross the border from Guangdong to Jiangxi and you are in the city of Ganzhou. It is already a good size, at one and a half million people, but its real draw is the minimum wage – only €43 a month, cheaper than Guangdong five years ago. Hiring people in the provincial capital, Nanchang, is only marginally more expensive. Famous as the place where the People’s Liberation Army came into being, Nanchang lies along the China’s important north-south and east-west railway lines.

Another inland province that is already benefiting from the increased cost of manufacturing on the coast is Anhui, a six-hour drive to the west of Shanghai. With Shanghai’s neighbouring provinces, Zhejiang and Jiangsu, already considered by many to be too expensive for labour, manufacturers are moving inland to the next province. This is exactly what multinational Unilever did. It built its first factory in Shanghai in 1986, but after being stung by rising costs the decision was made to move into Anhui’s capital, Hefei. Its new factory opened in 2003, cutting costs by 30%, and will soon become its largest plant in Asia.

CLIMBING THE LADDER
This does not mean that all manufacturing is going inland – a batch of cities are exploiting their locations and heritage to capture the investment overflow and scale the technological ladder.

As Shanghai is becoming a pan-Asian services hub, manufacturing is being squeezed out and nearby cities, such as Hangzhou and Suzhou, are picking up the business of high-value industries. Both cities have historical associations with sophistication: Marco Polo declared Hangzhou to be the finest city in the world and Suzhou has long been a centre of the silk industry.

In just one of Suzhou’s high-tech business parks, Philips manufactures precision tools, Sony makes circuit boards, and Fujitsu conducts research and development. Good governance and the proximity to a major economic centre all help with the adoption of high-tech industries, but what really helps is having an educated workforce: Hangzhou and Suzhou have 36 and 13 institutions of higher education respectively.

A strong educational base can help a city take its manufacturing upmarket, even if it is too far from an economic centre to absorb its excess industry. Chengdu, the capital of the province of Sichuan, is one such city. With 35 universities, the local government has been successful in attracting foreign investment in the IT and financial sectors, especially in outsourcing. This is important because geography is not in its favour. “Chengdu is too far from a major sea port, so it has historically not been realistic to make something and put it on a truck to be exported. Goods for export need to be high-value goods, like microchips, that can be sent off by plane,” says Brubaker.

Liquid Capital Group is one company that has been attracted by what Chengdu can offer. When it came to establishing operations in China, with a focus on developing software for global businesses, the financial services outfit, which has its headquarters in London, chose Chengdu because of the local workforce.

“When we were evaluating which city was the most suitable place to establish our first office in China, we found that Chengdu was outstanding due to its low staff turnover rate,” says Zhengxing Jiang, head of technology at Liquid Capital in Chengdu. In Shanghai and Beijing, fast-growing businesses, and a shortage of talented individuals, has created a candidate’s market making it difficult for companies to find and retain qualified people. By locating in Chengdu, Jiang believes that Liquid Capital has avoided this thorny issue.