Going Regional

European companies are being encouraged to explore business opportunities beyond traditional chinese centers of commerce by tapping into advantages and potential of lower-tier cities

European businesses are being urged to explore opportunities in China's regional cities, as competition in Beijing, Shanghai and Guangzhou becomes more intense. A recent report by the China-Britain Business Council and United Kingdom Trade & Investment highlights key sectors where British firms might find opportunities in China's second- and third-tier cities.

The findings of the research have been presented to companies across the UK in a series of "Regional City Roadshows'" that will, it is hoped, inspire businesses to look beyond China's traditional centers of commerce.

"We have seen a lot of people concentrating their efforts on Beijing, Shanghai and Guangzhou and not getting very far," says Stewart Ferguson, head of research at the China-Britain Business Council. "The number of competitors in those cities is outstanding, so if you are someone new to the market with no experience or reputation, it can be hard to make your case."

Ferguson is instead encouraging businesses to think about China differently, focusing efforts on a region that is most suited to their particular enterprise.

"We want companies to think about China more strategically, just as they would do if they were looking at the European market. If you start to look at China on a province-by-province basis, you can capture an area that meets your requirements, whether that is a high population, above average wealth or good infrastructure. It is a much more efficient way of thinking."

This provincial approach has paid dividends for John McLean, chairman and co-founder of investment company Albany Capital. The company's China spin-off, Albany China, has built a strong presence in northern China in recent years by focusing efforts on Shandong province.

"We focused on northern China and Shandong province for no more reason than we got to know the area. A region like Shandong has a high population, but it is also relatively underdeveloped compared to Beijing or Shanghai," says McLean.

"In a regional city it is important to have the right contacts and support. We are lucky because the China-British Business Council are particularly active in Qingdao. But we also have local expertise in a number of different fields. The network we've built up since we've been in China is very important."

One of Albany China's key investments has been in China Food Co, which produces consumer food and animal feed products and has operations in Shandong. McLean found that his company was in a position to offer the type of international investment Chinese firms in regional cities often struggle to source.

"China Food Co was having problems finding investment from within China. On top of investment we also offered international expertise, contacts and experience. It can give them more credibility within China to have a foreign investor."

Shandong has proved a popular first-step out of the major hubs for many firms. Last year the China-British Business Council released a report detailing opportunities in the province, praising the breadth of opportunity available, the low cost of land and resources and the so-called first-mover advantage for international companies willing to venture to the province.

Even in the relatively poor city of Rizhao, Shandong, Ferguson highlights the success story of a British firm who set up a design center off the beaten track.

"Rizhao is an area of the world that is not known for being particularly wealthy and it is not known for having much infrastructure, but this company had an introduction with the local government and found that the city had a design college that was very relevant to the design work they wanted to do.

"It meant that by going completely off the beaten track they actually resolved an issue that a lot of companies would have struggled with in some of the bigger cities."

With 274 cities in China having a population in excess of 1 million, the breadth of opportunity for companies in regional cities is staggering, but this is not to say that doing business outside of the major economic hubs is without its challenges.

"The normal train of thought is that the smaller cities might have a lack of talent in the workforce," says Ferguson. "In general the people with the greatest talent are drawn to the major cities because of the wages."

One way around this problem is to find a regional city in close proximity to an established hub. In recent years Ningbo in Zhejiang province has experienced rapid growth, helped in part by its location just 200 km from Shanghai.

"In 2005 we opened a production facility in Ningbo alongside some partners," says Tom Goldberg, chairman of AWI Group, a company that manufactures and erects steel buildings. "As a regional producer, our costs are cheaper than in the main cities.

"Being in Ningbo allows us to focus on Zhejiang as a handy place to manufacture and export, while maintaining an office in nearby Shanghai for the contacts to multinational clients."

Chris Lowsley, China business adviser at UK Trade & Investment, argues that the greatest challenge of doing business in a regional city is finding suitable partners.

"Chinese businesses in regional cities might not have the experience of dealing with Western companies," Lowsley says. "In some of the regional cities, there is little collective experience of dealing with Western firms and that is why companies need to do their homework very carefully. They really need to check that they can communicate effectively with potential partners."

The difficulty of communicating with businesses and local administrations in cities that might not have a history of dealing with Western companies is stressed in the report by the China-British Business Council and UK Trade & Investment. The report outlines the experiences of transport planning consultancy Colin Buchanan in regional cities such as Changzhou in Jiangsu province.

"At last count there were 23 cities in China developing metro systems, which is an important source of work for a company like ours," says Chris Morley, Colin Buchanan's China general manager, in the report.

Morley overcomes the problems many foreign companies face in regional cities by taking a local approach to business in places where there may not be much experience trading with Western companies.

"By having a local office we are able to pitch as being local with international experience. A local presence with local staff, even a representative office, or regular visits from the UK make you visible and show that you are committed to working with people.

"Localization has allowed us to compete on cost and to have good communication with clients and stakeholders. Without a local office our level of development would have been extremely difficult," Morley says.

"Face time with clients is important. Never underestimate that relationships are key to business, repeat business and the building of a sustainable relationship with clients."

Noting the importance of building strong relationships in successful business in China is nothing new, but Ferguson at the China-British Business Council believes that companies brave enough to explore opportunities in the regional cities might have an easier time making the right connections.

"Focusing not only your business efforts but also your political connections on a specific region means you only need to foster political relations with one set of local governments, instead of multiple sets of governments."

One such company that has enjoyed success by taking this approach is The Peel Group, an infrastructure, transport and real estate company also mentioned in the report.

"To date, we have had the most success in promoting ourselves to companies in second- and third-tier cities rather than the major centers of Beijing or Shanghai," says Naomi Peck, marketing and project manager at The Peel Group.

"Our message is better accepted by enthusiastic companies outside the traditional major cities. These companies are generally owned by wealthy individuals who have the support and encouragement from their local governments.

"They want to expand overseas but may be unfamiliar with what that entails. We offer a partnership with these companies. This extends to market research and business introductions. It does not cost us much more to go that extra step to offer advice and information tailored to individual companies. We have found it important to become a 'useful partner' to our clients."

Building long-term partnerships is not only key to success in the regional cities, it can also open doors that would otherwise remain closed.

"There are often different types of opportunity in regional cities, particularly to do with developing infrastructure locally," says Lowsley at UK Trade & Investment. "Only this morning I had an inquiry from Chongqing, which although not a regional city is still outside of the usual places UK companies thinks of going on their first trip to China.

"But actually this is one of the key automotive centers in China and the company is looking for a partner to produce automotive parts. That can be very attractive to a Chinese company that has the resources and wants to acquire the technology.

"The partnerships that can develop are an example of the sort of thing that can happen in some of these areas that companies do not necessarily think of going to straight away."

Stories such as these also show the potential scope for European companies to expand across China's regional cities, something that many businesses are still to appreciate.

"I think the whole point of this is to say that China is growing so rapidly it would be silly not to include all these cities in the process of deciding where is best for your business," Lowsley says.

"We are trying to help companies, even those already established in China, to say: even though we are happy in Shanghai, there is a hell of a lot happening out there in these other cities."

For China Daily

(China Daily 06/15/2012 page16)