Location does matter.

In recent years, Finnish companies have established their companies in China mainly in Shanghai. However, there has been increasing amount of discussions on the opportunities in tier 2 and 3 cities. I’d say one must do its homework before entering anywhere in China.

All the big players operate in Shanghai and it is the most westernized city in whole China. However, the developed city has its price. Shanghai is by far the most expensive city in China and the land is vastly utilized. For example, the office rents are even less than third of Shanghai’s prices in surrounding provinces Jiangsu and Zhejiang and manufacturing facility costs almost half cheaper. Shanghai might be the New York of China, but there are other attractive locations in China too. When considering where to locate in China, first thing to consider is whether the main operations are focused on a) selling, b) sourcing or c) manufacturing/outsourcing. One might do them all.

a) Focus on selling

Who are your clients and where do they locate? If your clients are the headquarters of globally recognized companies and you deal directly with them, sure you need to be in Shanghai and invest in developing and maintaining the relationships. However, if you are selling consumer goods, IT services, machinery or other products of which clients locate all over China or in certain areas (such as forestry and agriculture sectors in North-East), save your money and choose other location than Shanghai. Firstly, for Finnish companies that are rather small in Chinese scale it is easier to find clients outside of tier 1 cities (e.g. Shanghai, Beijing, Guangzhou) where both local and foreign companies are already competing severely. You should remember that “small” tier 2 and 3 cities in China have easily much more than 5 million habitants and they are less competed markets than tier 1 cities. Secondly, if your clients locate in relatively remote locations, they do appreciate your proximity to their operations.  Let it be North, West or South China.

b) Focus on sourcing

What do you buy and where do your major suppliers locate?  As distribution and logistics become to more critical role in sourcing one should consider the infrastructure of surrounding areas, proximity to the suppliers and exporting ports as well as overall costs of operations. Development zones, which are established by the government with an aim to promote industrial and economic development, are attractive options for sourcing companies. They offer good infrastructure and transportation access, preferential policies, support and participation of government, autonomy, support services as well as resources. However, the variety of development zones from district level up to national level is notable and requires a careful study on suitable options.

c) Focus on manufacturing/outsourcing

Where do your suppliers locate and where do you find the staff? Again, the development zones are attractive option as they, among above mentioned things, also offer relatively inexpensive land and facilities and operate as hubs of technology, learning and innovation. Most development zones are located close to universities and therefore have an access to local talents. The competition over foreign companies between different development zones is hard and all kinds of benefits are provided. One must compare different options very carefully. The benefits that the zones offer you now, might not exist after three or five years. Therefore, when making the contract, the future terms must be negotiated right in the beginning in order to avoid unexpected and unwanted changes in the conditions.

I did not mention the labor costs. They do not count as much as they used to. If you wish to choose a competitive management team and other key persons, you probably end up paying them the same amount of money everywhere. It is the focus of your business and other costs that should determine where to locate your operations.

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