Movement away from Shanghai as costs increase and regional manufacturing decentralizes. Shanghai moves towards a regional infrastructure services hub supporting surrounding provincial manufacturing.
There are two big stories to watch in the YRD this year and beyond – the growth and consolidation of Shanghai as an urban centre and logistics and service hub, and the increasing competitiveness of the regional cities.
Shanghai itself is forecast to grow at a rate of 600,000 people, and 100,000 cars a year up to 2010. The structure of the city will change, with some 1m people being moved out to one of the nine new towns being created in the suburbs. New infrastructure is being constructed to handle the increased volume and new patterns of commuter travel. The downside of all this is of course increased costs, and land and labour costs go up.
In terms of moving goods not people, 2006 is a key year – the first phase of the Yangshan Deep Water Port opens, linked to the city by a new 33km bridge across the sea. Many shipping lines have already moved there. When the port is complete, by around 2010, the city expects it to become the busiest in the world, ahead of Singapore and Hong Kong. New rail links for goods traffic around the city and out
to Jiangsu and Zhejiang will improve freight flow, as well.
The hardware is the easy bit however – what about the “software”, - human resources ? Roads and buildings can be built quickly in China, but developing truly international skill sets takes a lot longer. Many local university or education programs are still not well really focused on training candidates to international standards, the competition for the limited pool or truly experienced candidates is very high, and retaining good people is expensive. Local staff still have weaknesses with planning, innovation, and organisational complexity.
Equally, educating your customers in the local market about the values and benefits of service remains a challenge. Most of the potential market for services within Shanghai is still primarily among the MNCs, and while consumers are growing increasingly mature within China, local companies are still focused almost exclusively on price as opposed to the quality or value of services.
In addition, structural weaknesses remain in the economy. Apart from the hardy perennials of IP theft and government limitations and restrictions, contract law remains weak, and there are a lack of enforced standards in many industries. If you are competing for government business, you may find procurement processes can be very unclear with in many cases an “uneven playing field”. You will find all these issues beyond Shanghai. On the other hand, we are finding that foreign investors in the manufacturing sector are increasingly moving out to places like Nanjing, Ningbo, Hefei and Hangzhou, as well as the second tier cities, to find more competitive costs. Why pay US$200/sq m in Waigaoqiao when you can pay US$30/sq m in Nanjing or US$22/sq m in Ningbo ? Land and labour are becoming increasingly expensive, and Shanghai’s development zones are approaching capacity. Government support for small projects is more difficult to obtain, and the authorities are also focusing more on high-tech and research industries, and attracting RHQs.
To support your supply chain, there are concentrations of good local companies in a wide range of sectors – although there are still some gaps in provision. Labour costs are lower of course and skills are improving – for example around RMB700/month for a manual worker in Hangzhou compared to RMB800-1200 in Shanghai, or RMB1500-2000 for a manager in Hefei compared to RMB5000 in Shanghai. These cities are also perfectly acceptable places to live, with small but growing expat communities and increasingly sophisticated services like schools and hospitals. There are however, very few experienced international quality professional services firms, with most services still being provided from Shanghai.
