Guest Post: Bill Dodson on Doing Business in Chongqing A Wild Ride

Our last guest post, by Helen Wang was a pretty popular one, and it may have started a trendas we now welcome Bill Dodson, author of China Inside Out: 10 Irreversible Trends Reshaping China and its Relationship with the World (link here for the books blog). Bill brings some practical insights for those who follow the policy and go west to exciting places like Chongqing. There are clearly opportunities to be found, but also risks to be avoided

Doing Business in Chongqing: A Wild Ride

Foxconn and Hewlett Packards announcement in 2009 that they were setting up export manufacturing facilities in Chongqing over the next few years brings up the question of the viability of smaller businesses doing business in Chinas Wild West. The tragic suicides at Foxconn in early 2010 and escalating salaries accelerated Foxconns plans to relocate operations to Chinas interior. While a South Korean associate and I were working in the mountainous region of Chongqing investigating its investment environment, he wryly described the citys business climate as having 21st-century hardware and 19th-century software. Chongqing has been the focal point for the Chinese governments Go West program to develop the interiors infrastructure, especially roadways and railways.

Western companies all know central and northeast China hold great promise as a colossal consumer base, as well as a possible refuge from the increasing costs of doing business along the coast. Indeed, many say the interior of China is like Shanghai was ten or fifteen years ago. So, though the Central Government may be plowing billions of yuan into developing the infrastructure of provinces like Chongqing and in connecting remote locations through rail and roadway arteries, the interior is still a long way from becoming a viable, wholesale investment! target for any but the largest foreign companies.

Great hidden costs lay in store for potential investors like: government corruption; changeable policies; inflated costs of production inputs; a lack of skilled labor and experienced management; and affordable salary levels high enough to attract Chinese nationals from the east coast.

John, a friend with whom Id worked on a project in Kunshan, near Shanghai, spent two years building an export factory in Chongqing for a mid-sized American company. John explained to me, The township where the factory is located ran out of its allotment of natural gas half-way into the year. Cheap supplies of natural gas was the ONLY reason the company had put the operation there. Its even in the contract that the company will receive supplies of natural gas without interruption. So when the local government told me, So sorry, no more gas for you, I was angry. One of the Vice Mayors of the township offered that if my company gave him 2 million RMB the local government would look the other way while I hooked up to the gas supplies in the next town over.

After tense negotiations the provincial government opened local supplies of natural gas to the project, without extra monies paid out. Notwithstanding the local contract, the national government eventually raised natural gas prices 40% to respond to increased demand throughout the country, nullifying any cost savings the export operation expected to gain by putting its operation inland.

Johns greatest challenge, though, was resource constraints. Components and parts for machines and facilities have been difficult to come by out here, John said. He conjectured, Ford must have all their parts imported, because I cant find what I need here.

Another constraint was supervisory: If you consider it took me four times the resources I had planned to build my Kunshan operation; it is taking me ten times more in Chongqing. There just arent very many engin! eering s upervisors, construction supervisors, safety inspectors and the like out here that know what quality work is and can watch over construction and engineering teams that know even less.

Hiring qualified staff has been another of Johns investment demons. All of my staff are either locals who already live here or who wanted to return home. Theyre young, in their twenties, early thirties, with little experience. I have no intention of staying on past my three-year contract, so I have to find a replacement now; a local, trustworthy, with experience, someone I can train. Its not going to be easy, John told me.

So though domestic consumer markets and possibilities as an export base make Chongqing enticing as an investment location, small- and mid-sized foreign investors need to make sure they have deep pockets and great reserves of patience and perseverance to succeed in Chinas most dynamic region. The rewards, however, will be worth the wild ride.

The article was adapted (with permission) from the authors book, China Inside Out: 10 Irreversible Trends Reshaping China and its Relationship with the World, published January 2011 by John Wiley & Sons.