Location, location, location

In his ongoing series for Splash looking at how to conduct business in China, Charlie Du Cane, the head of Clipper (Hong Kong) discusses where is best to set up in the People’s Republic.

To me the ideal Chinese city looks like Shanghai, is run by Hong Kong, and is populated by Beijing.
Having worked in all three cities, I have reflected a lot on this issue both personally, and in terms of locating businesses.

Personally I found the relaxed charm of Beijing, and the breadth of what one can experience there intoxicating, but have found Hong Kong to be the most sustainable, enabling one to be Chinese from Monday to Friday, and British at the weekend.

Hong Kong is open both legally and in terms of currency, is efficient as a place of business, but suffers from being quite removed from the mainland both geographically and psychologically. Beijing is a great place to build the ‘political’ connections that are sometimes necessary to conduct business in China, is the headquarters of a lot of the SOEs, but is a difficult sell to expat managers, especially in terms of pollution and language. Shanghai falls somewhere in the middle, it is a well run city, good to do business in, and is well set up for expats, but it suffers from many of the restrictions one comes across in Chinese business and life.

So where to set up?

First off the answer may well be none of the above. For example if you are building a joint venture with a factory in a small town in Liaoning, then one should focus on that location, possibly with a representative office in Shenyang, the provincial capital, to handle all the regulatory issues that will arise.

Secondly, the answer maybe obvious because there is a hub of activity related to your business already in that city. For example, if one is looking at software programming or the broader tech sector, Hangzhou or Shenzhen are obvious choices.

Thirdly you may be of a scale that the business needs presences all over the country. Carrefour has stores in almost every province, HSBC is doing retail banking in many cities, and has been doing micro finance in Xinjiang, and Maersk has its agents in every port. However, this article is not really focused on those kind of businesses, as very few large global corporations have not years ago entered the Chinese market.

There are still medium size businesses entering the Chinese market, and need to make hard decisions on how to allocate scarce resources. Especially if your main function in China is to sell a particular product or service, you will find that nowhere is perfect, as there are centers of commercial activity spread all over the country. The biggest five cities in China are collectively far smaller than Greater London is on its own when compared to their respective countries. In my first three years working in China, my office was located in Shanghai but my biggest customer was in Kunming, a three-hour flight to the southwest.

In answering the question where one should locate in China it is important to answer the following questions:

1) How much political capital do you need to build? I will return to the politics of Chinese business in a separate post but the rule of thumb here is that the more assets you have on shore, the longer your cycle to maturity is, the more involved with SOEs you are, the more political your business is. The more political your business is the greater the case for being in Beijing is. Contrarily a good example of an entirely un-political business, is the sale of most basic shipping services, where the assets are obviously offshore, and it’s quite a mature well established game for international shipping companies to be involved in.

2) What are your human resource needs? Many aboriginal Shanghainese complain that they are now a small minority in there own city. Many factors feed into that, but two that are relevant here are the constant inflow of young graduates from across the county, and, far less significantly, the now large and well established expat community. In this era of wanting locally hired expats and internationally experienced locals, the depth of the pool is simply bigger in Shanghai than anywhere else on the mainland.

3) How important is having a view of China to the work you are doing? Some industries are now dominated by Chinese consumption – commodities and shipping being two examples of a growing list. Shanghai is a city full of foreigners who think they are in China, and Chinese who think they are somewhere international and frankly none of them are quite correct. It’s not a good place to understand the rest of China from. In 2008 on the day that one department store made its greatest sales ever in Shanghai, I remember meeting an Australian man who had just been shutting down the recently bankrupt Woolworth’s factories in Jiangsu, and had nearly been lynched by rioting workers and had had an armed escort back to Shanghai.

To wrap this up what this shows is that there is no one clear answer to where to locate in China, but that if one understands what the business is trying to do there, and what it needs to achieve that, the answer will likely be obvious.