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BUSINESS & TECH

Doing Business in China: After Beijing and Shanghai, Where’s the Next Hot Spot for China Shop Keepers?

By Doug Young

(Beijing) – The saying goes that “All roads lead to Rome,” though a good substitution would be “Beijing and Shanghai” when choosing where to set up shop in China.

Choosing locations for a new business in China is a bit like driving off a cliff for foreigners. Shanghai seems to top most people’s list these days, followed closely by Beijing, though that distance appears to be growing. But after that it’s pretty much a desert out there, albeit one populated by hundreds of millions of residents in China’s many second- and third-tier cities. That may be changing, some observers say, though strong alternatives will still take some time to emerge.

Obviously you can’t simplify too much, but the Shanghai-Beijing one-two punch comes up pretty frequently whenever you talk about anything involving foreigners living and working in China. A survey last year by the official China Daily ranked Shanghai at No. 1 and Beijing at No. 2, followed by Hangzhou, Shenzhen and Tianjin in the next three places.

That leads nicely into one of the bigger themes I discovered when polling people on the topic of where to set up shop, namely that the “Big Three” Internet names of Baidu, Alibaba and Tencent, collectively known as the BAT, are playing a huge role in shaping China’s urban landscape of the future. Internet junkies will know that Baidu is based in Beijing, which doesn’t really make a huge difference due to the city’s longtime status as a top place to do business.

But Tencent is based in Shenzhen and Alibaba in Hangzhou, where ecosystems of companies have begun to emerge that feed off the two giants’ high-tech prowess in social networking and e-commerce, respectively. It probably also helps that Shenzhen is just across the border from Hong Kong, making weekend retreats and logistical issues easier to solve. Likewise, Hangzhou is less than an hour away by high-speed rail from the increasingly global city of Shanghai.

Other cities that are increasingly making the grade for their business climate and livability include the southern metropolis of Xiamen, historically known as Amoy, and the northeast city of Qingdao, known for its historic ties with Germany and as the home of Tsingtao Beer.

Deep Talent Pools

But returning to the original subject, there are really few alternatives right now that can come close to matching Beijing and Shanghai for the kinds of things that foreign businesspeople need when opening China shops. Chief among those is the local talent pool, since both cities tend to be magnets for the best and brightest the country has to offer.

As a former faculty at one of Shanghai’s top schools, I can say with confidence that the big majority of my students chose the university as much for its location as for the quality of its education. That fact has become even more important since graduates of the city’s universities can now quickly become eligible for highly-coveted local residence permits under a recently introduced point system.

By comparison, local and foreign talent are much rarer commodities anywhere else. A Chinese friend relocated a year ago from Shanghai to the city of Danyang, about 45 minutes away by train, and would constantly fret about the lack of qualified local people for his team selling electric vans made by his new employer. One worker he inherited had been there for more than a year without making a single sale, he told me. That might be sound hard to believe in a big Western city, but apparently the socialist-era “Iron Rice Bowl” is still alive and well outside Beijing and Shanghai.

That brings us back to the Beijing versus Shanghai debate, and which is more suitable for whom. The answer is surprisingly simple: If your sector is heavily regulated or involves other government oversight or high-tech, especially the internet or other media, then Beijing is for you. For everything else, including services and consumer goods, Shanghai is your answer.

One of my contacts noted that Shanghai increasingly sets the trends for everything from fashion to food, making it an ideal springboard to roll out new concepts and products to the rest of the country. If you can make it there, you can make it anywhere, or so it seems, as China’s commercial capital moves aggressively towards reclaiming its old name of “Paris of the East.”

We should close by pointing out that not all businesses are the same, and that big cities aren’t always the only answer for foreigners. The most obvious exception to the Beijing-Shanghai rule is manufacturers. When it comes to making products, China is truly one of the world’s undisputed champions and thus talent abounds just about everywhere.

That explains why foreign manufacturers are pretty widely dispersed throughout China, explained one of my contacts. With so much talent around, bigger issues for manufacturers become things like the location of their business partners and suppliers, availability of infrastructure and also government incentives. Just like in the West, local governments in China are often willing to offer tax breaks, cheap land and other incentives to get foreigners to set up shop in their district.

When all is said and done, there’s really no substitute for Shanghai or Beijing, and I suspect the center of gravity will increasingly shift to the former as the country’s business environment matures and government connections become less important. At the same time, the BAT cities of Hangzhou and Shenzhen could be ones to watch, and might provide some interesting and lower-cost, less-congested alternatives for entrepreneurial foreigners looking to build foundations on some of China’s most promising cities of tomorrow.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com.

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