Six Considerations for Business Locations in China

By Richard Hoffmann, ECOVIS Beijing

Over the past three decades the economic growth of China has seen the rise and expansion of cities all across the country. Some cities grew faster than others in terms of economic development, transportation systems as well as their historical and cultural significance. Cities like Beijing and Shanghai as well as Guangzhou and Shenzhen are therefore known as First-Tier Cities and continue to attract the majority share of domestic and foreign investment. However, businessmen and women from all over the world increasingly realize that city tier rankings alone do not promise success in China.

Six Considerations for the right Investment Location in China

Second-Tier Cities such as Tianjin, Suzhou, Chengdu and Hangzhou have also grown impressively and managed to optimize their political and legal frameworks to facilitate greater investment. But even those less well known Third-Tier Cities like Dandong, Foshan, Shantou and Wuxi have populations in the millions and present promising business opportunities in China. Besides the respective tier of a city it has become more important for businessmen and women to take the following six points into consideration when deciding on the right location to make an investment in China: local infrastructure, local talent supply, cost structures, strategic industry clusters, special project requirements and governmental relocation policies.

First of all, local infrastructure must be taken into consideration because the location must be easily accessible for employees, customers, transportation vehicles and all other stakeholders interested in visiting the site. They may arrive by airplane, railway and automobile or ship which means that an integrated transportation network of airports, railway stations, highways and shipping terminals is of high importance. Secondly, all companies depend on local talent supply for the high quality personnel necessary to manage, manufacture and distribute according to company standards. The presence of academic facilities such as schools and universities is important for the supply of qualified employees whereas a social infrastructure including parks and promenades are important to retain the personnel in the long run. Thirdly, another major consideration when deciding on the right location is the local cost structure. Lowering costs allows for greater profit margins and higher cash reserves to compensate for the financial risk of every investment. Fixed costs such as rent and electricity as well as variable costs such as salaries and the price of raw material will vary between regions. However, investors should be careful when offered special deals from local investment bureaus as these may turn out to be unofficial and therefore result in non-compliance and penalties at a later stage.

In order to further reduce transportation costs, strategic industry clusters must be sought during the location search. For companies in the B2B sector, convenient access to suppliers as well as customers is therefore of high importance. Industry clusters may also foster healthy relationships to regular contacts along the value chain which could in return allow for favourable business deals. Over time, many development zones across China have developed specific clusters of which each investor must assess the strategic fit. This especially applies to those unique investments that entail special project requirements in form of rare services or manufacturing processes usually outsourced. The subcontracted supplier would ideally be located in the vicinity of the investment location. This consideration usually applies not to the city itself but rather to the precise location within the city or development zone. But no matter what decisions the investors make regarding the above five points, local government representatives may still enforce investment relocation policies. This is particularly important to note as central authorities are increasingly recognizing the inequality between the East and the West of China and are, in line with the 12th Five-Year-Plan, pushing for greater investment in the less developed cities of Western China.

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These above six considerations for choosing the right investment location are in no particular order and their weight may vary with regard to the respective project. In some instances the investor may freely decide how to fine tune these six considerations in order to find the most appropriate location for independent processing, assembling or manufacturing. In other cases the investor may be in a position in which only a few of the six considerations can be freely considered because the investment solely depends on the location of the customer. Whether the investor is seeking to simply outsource its manufacturing to China or whether it plans follow its customers and localize within China, strategic decisions with regard to the above six considerations must be made in advance. ECOVIS Beijing therefore works closely together with its partners in China to develop entrance strategies mainly for European small and medium-sized enterprises. Together, we can help you find the most appropriate location for your endeavours in China and ensure a smooth set-up of your company at the chosen location.

We help Chinese companies as well as European companies in their internationalization process. Our company is the trusted tax and legal advisor for several embassies as well as official institutions in China and specializes in mid-sized international companies. Moreover, ECOVIS was awarded and recognised as the No. 1 auditing firm for mid-sized companies in Germany in 2013. If you’re interested in finding out more about our tax and legal services, don’t hesitate to sign up to our newsletter, give us a call (+86 10-65616609 ext. 811/806) or contact us by e-mail (beijing@ecovis.com).