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Hon Hai's New Hinterland Base


Hon Hai's New Hinterland Base

Source:Kuo-Tai Liu

As Taiwanese manufacturers seek out new bases in China's interior, Zhengzhou is becoming a surprise favorite. A major transportation hub for central China, Zhengzhou is now attracting the likes of Foxconn and Synnex.



Hon Hai's New Hinterland Base

By Benjamin Chiang
From CommonWealth Magazine (vol. 459 )

Braving the hot afternoon sun, Henan Province governor Guo Gengmao stood eagerly waiting on the tarmac of Zhengzhou Xinzheng International Airport on the outskirts of Zhengzhou on June 20. Flanked by more than a dozen government officials, Guo was preparing to meet an important secret visitor.

When a private business jet, all white with a red band, taxied to a halt, Guo immediately welcomed its passenger with a broad smile. This special VIP was none other than Terry Gou, founder and CEO of electronics behemoth Hon Hai Group (which also goes by the brand Foxconn). With police escorts clearing the way, the party arrived at their destination, a large expanse of vacant land east of Zhenxin Road, within less than ten minutes. Terry Gou, whose business empire boasts annual revenue of NT$2.63 trillion, could be seen smiling and nodding approvingly as he listened to the officials' explanations of the city government's plans for the area.

The planned Foxconn industrial park in Zhengzhou will cover 10 square kilometers, about 39 times bigger than Daan Forest Park in Taipei. "This is Foxconn's Zhengzhou industrial park. The Zhengzhou Municipal Government will first help Foxconn build a school, a hospital and employee housing," says one of the city officials in the governor's entourage with pride. In the future 500,000 people are to live and work in this new town.

Among 100 cities and areas in China surveyed by the Taiwan Electrical and Electronic Manufacturers Association (TEEMA) in 2010 with regard to their investment environment and investment risks, Zhengzhou ranked only 58th. So why did Foxconn pick Zhengzhou as its top choice for a new manufacturing base?

The main reason is that the city is a hub for railway and road transportation in all directions and that Henan Province is China's most populous province, with 100 million residents.

For those who want to get in on the "go west" craze for developing China's interior, population and transportation are the strongest selling points. Over the past year Synnex president Evans Tu has also toured prospective new sites in central and western China. After two visits to Zhengzhou, he decided to set up logistics centers in both Zhengzhou and Chongqing.

Railways and Freeways Open Up China's Hinterland

The Chinese government is presently devoting massive resources to developing central and western China. The goal is to use railways and highways to connect the scattered towns and cities in the country's interior into a giant urban agglomeration.

Once there is convenient transportation, the flow of people and goods will naturally increase rapidly. The region centering on Zhengzhou, for instance, represents an economy of 60 million people. Linked through high-speed railways and freeways, Zhengzhou will become part of a city belt that stretches across six provinces and include more than a dozen prefecture-level cities, including Xuchang, Xinxiang, Luoyang, and Nanyang.

With Foxconn sitting in the heart of Henan Province, the company can take advantage of Zhengzhou's transportation links to northern, central and western China. Zhengzhou is located where the north-south railway line from Beijing to Guangzhou crosses the east-west railway line from the port of Lianyungang in Jiangsu to Lanzhou in Gansu. Once export-oriented Foxconn switches to mainly supplying China's domestic market, it can directly ship its goods by train or truck, which will drastically cut shipping costs.

The main reason China's interior has become so attractive for manufacturers is that China has been constantly upgrading and integrating the railway network that connects its landlocked west with Central Asia and Eastern Europe.

Manufacturers that move west do not have short-term cost-cutting in mind. "Costs will not come down a lot by moving inland. What we have in mind first of all is our competitiveness in China's domestic market and in the Europe/Asia market," says Inventek chairman Richard Lee.

Lee predicts that once rail and air freight links have opened up from China to Europe via Central Asia, the domestic markets of Central Asia/Eastern Europe and China will become linked together.

The overland intercontinental silk road is much more efficient than ocean-going trade routes. Shipping goods by sea from Shanghai to the Netherlands takes 35 days, whereas rail transport from Chongqing to Rotterdam takes only 13 days, cutting shipping time by two thirds.

Big Manufacturers Bring Back Migrant Workers

Foxconn is one of the largest private employers in China. When Foxconn granted a wage increase at its Chinese factories, it caused a chain reaction, as companies across China felt compelled to follow suit.

As soon as Foxconn had arrived in Zhengzhou, the company announced that it was planning to hire more than 300,000 workers. As a result local companies find it difficult to fill vacancies or new jobs. "The Henan provincial government is demanding that each municipal government help Foxconn find several thousand employees," a Zhengzhou City official reveals.

Zhengzhou Yihui Food Co. Ltd., which is located less than two kilometers from the new Foxconn plant, originally had three production lines. But while the order books are full, the company boss says with a wry smile of resignation that it won't be possible this year to make any money. "Our employees have all been snatched away by Foxconn," he laments.

This large-scale relocation of manufacturing bases to the north and west from their previous coastal bases is not merely creating jobs in second- and third-tier cities in central and western China. "It's also causing a return of migrant workers who previously moved from China's hinterland to work in the coastal areas. Domestic demand in central and western China will rise rapidly, immediately causing a multiplier effect for purchasing power," Evans Tu concludes.

If workers return, or no longer leave their homes to work in coastal cities in the first place, purchasing power will also stay in China's interior provinces.

Foxconn's arrival in Henan Province has already led to an across-the-board wage hike for some 8 million workers in Zhengzhou. While these wage increases make the export-oriented manufacturing industry miserable, companies that are tapping domestic demand can't help beaming with joy.

In the third quarter of this year, wages in Zhengzhou rose 21 percent. Chen Xi, president of Zhengzhou Sanquan Foods, China's largest producer of frozen foods, is happy about the rising incomes. "When wages go up, private consumption also increases," Chen points out.

Once the people in China's hinterland have money, they will first buy cars and homes. In Zhengzhou, when someone buys a Toyota Corolla and pays for it in full, they still must wait two months to drive it home. "If you want to get your hands on your car a month earlier, you'll have to give the car dealer a cash gift of 5,000 renminbi," reveals Yu-shun Lin, general manager of the Zhengzhou outlet of electronics and computer vendor Buynow.

Department stores are also doing brisk business. Aden Tsai, general manager of the Taiwanese-owned Dennis Department Store Group, came to Henan Province some 13 years ago. He reckons that rising incomes will benefit the retail industry. "Zhengzhou's GDP growth rate has never been less than 8 percent, so if our sales grew less than 10 percent per year, it would mean that we have not grown," he asserts.

The corporate rush to invest in inner China has also stimulated the local real estate market, pushing up property prices. Homes that were put on sale in the newly developed Zhengdong New District "were sold out within one day. They were so sought-after that there was no room for negotiating prices," recalls Huang Dongsheng, general manager for the greater Pingdingshan area at Central China Real Estate Limited.

Prices for property in the Central Business District (CBD) at the core of Zhengzhou New District, a 3.45 square kilometer mixed-use urban development on the site of the old Zhengzhou airport, have skyrocketed. When property there came on the market a year ago, the square-meter price stood at 2,000 renminbi. Today, the price has soared to 15,000 renminbi.

A Boost for Rural Consumption

The relocation of manufacturing jobs to China's interior has also led to a dramatic rise in consumer power in the countryside.

Previously, a young man had to present the family of his bride-to-be with a TV set, a washing machine and a refrigerator before he could expect to be accepted. "Now the bride will demand a computer as a betrothal gift," notes Ken Liu, manager for the Henan Business Region at Taiwanese electronics maker BenQ. In the rural villages "face" is of utter importance, so brides insist on getting a computer with the largest available monitor for display in a prominent spot in the living room, Liu points out.

Gongyi, a small village of less than 3,000 people outside Zhengzhou, boasts more than 300 sedans. Every Lunar New Year the neighbors proudly parade their luxury Mercedes-Benzes and BMWs. "Every family has a relative working in Beijing or Shanghai. When they return for the Lunar New Year, they compare who drives the most expensive car, flaunting their wealth back home," one local sales agent points out.

Intensive and Extensive Market Cultivation

Beguiled by the seemingly boundless potential of China's hinterland market, Taiwanese business persons can easily fall into the trap of over-expansion.

Due to their geographical scope and high population, China's interior provinces must be treated like whole countries. Companies must not spread themselves too thin. "First you need to select a few cities to gain a foothold in before you spread out across an entire province to get hold of its market," suggests Aden Tsai of the Dennis Department Store Group.

Operating costs in central and western China are very high, far higher than most Taiwanese entrepreneurs imagine. South Korean consumer electronics giant Samsung spent more than 30,000 renminbi on the interior decoration of just one outlet in Zhengzhou. Zhang Ruihe, president of Internet cafe electronics supplier Hui Zhi Cheng, notes, "Samsung has more than 200 stores in Henan Province selling computer displays. You can splash out millions of renminbi on marketing, and it's immediately gone down the drain."

Doing business in China's hinterland market requires not only extensive cultivation, but intensive cultivation too. "In central and western China, execution is crucial," Buynow's Yu-shun Lin points out. Buynow owns 20 home electronics hypermarts in China. In order to strengthen the management of each individual store, a special "one page management" system has been developed for store general managers. When a general manager starts his workday, his computer screen will greet him with the latest stats on a dozen management benchmarks, such as customer traffic, number of outlets, occupancy, bills payable and bills receivable.

The system also automatically updates the number of people entering and exiting the store every minute, and at the same time analyzes customer density. Twice a week student workers tour electronics stores in the neighborhood to observe customer flows and close rates, which serve as reference for the Buynow general headquarters in Shanghai and individual stores when fine-tuning marketing strategies.

Cost-cutting cannot be the only consideration when manufacturers and vendors relocate or expand to China's hinterland. Going west also provides an opportunity for taking advantage of domestic demand in the interior provinces to transform and move up the value chain.

Translated from the Chinese by Susanne Ganz