Push and pull

The internal factors (?push?) driving investors to second-tier cities include :

• a need to drive down the price for land, labour, energy and other elements of manufacturing costs ? why pay US$200/sq m in Shanghai when you can pay US$30 in Nanjing or US$15 in Dalian ? Shanghai?s rising costs, in particular, have driven many investors to seek better locations up the Yangtze
• saturation in some retail and service markets in the first-tier cities, and the corresponding immaturity of such markets in the second-tier, providing new opportunities
• for manufacturing suppliers, the fact that many of the large foreign manufacturers are already in these cities forces their suppliers either to move with them or lose out to domestic competition

The external factors attracting investors to second-tier cities include :

• government policy, such as the ?Go West? campaign and the strategy to revitalize the northeast
• for those selling products or services to the domestic consumer, rising personal incomes and sophistication in these cities (in 2005, real per capita disposable income for urban households was up 9.6%, while the equivalent for rural households rose 6.2%)
• recent WTO-related changes to regulations have lifted most restrictions on the retail and distribution industries, and increasing urbanization means consumers are easier to reach through various advertising media
• improved facilities such development zones and transport links ? there are a lot of high-speed rail links and new airports going in – and expat facilities such as hotels, schools and hospitals (and as you will see from our sister site www.chinaexpat.com, more expat websites with information and news)
• road access will be significantly improved with the country?s mileage to rise from 1.9m km in 2005 to 2.3m km in 2010 ? this will connect all provincial capitals and cities with at least 500,000 population. In coastal provinces, people will be able to reach good roads within half an hour, while in central China it will be within one hour and in the west, two hours

Some interesting trends emerged from the Jones Lang Lasalle study. They found second-tier cities have a narrower range of industries ? notably, a high presence of professional service firms indicates a city is first-tier, while the absence of this type shows it city is second- or third-tier. In addition, the ?first movers? to emerging cities are IT/telecoms, logistics/transport and manufacturing. This makes sense ? you need infrastructure in place before more sophisticated activities can follow. But it is notable, looking at some of the investments recently announced that while there are quite a few manufacturers, service industries are notable ? banks/ financial services, supermarkets, even healthcare providers.

Another recent study, Emerging Trends in Global Mobility : Perspectives on China, by Cendant Mobility, emphasized that second-tier cities are ?becoming increasingly popular destinations for every type of [expat] assignment?. They note that ?while cities like Chengdu, Dalian, Tianjin, Qingdao, Shenyang and Chongqing are currently regarded as active assignment locations by only a small minority of companies, all are expected to grow significantly over the next few years?.

To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
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