China's Second-tier Cities are Worth a Second Look
Mark Graham

April 1, 2008

Although they receive less attention than Shanghai and Beijing, China's second-tier cities offer tremendous opportunities for smart and resourceful U.S. businesses.



Most reports on the China economic success story tend to focus on its eastern-seaboard cities, in particular sophisticated Shanghai and booming Beijing, where double-digit growth has become the annual norm.

But away from the coastal regions, in the less-glamorous second-tier cities, a frantic expansion pace also prevails, fueling a consumer boom in which the buyers are increasingly knowledgeable and discerning.

The second-tier place names have little resonance outside China and, in most cases, are not particularly blessed with charm or a stock of historical treasures. Cities such as Wuhan, Dalian, Chengdu, Chongqing, Harbin and Nanjing are increasingly targeted by foreign investors – and exporters – as urban centers with huge growth potential. Figures from the U.S. Embassy in China paint a bright picture of these up-and-coming cities, estimating that they are growing at an average rate of 11 percent annually and, between them, account for 53 percent of the nation's imports and 19 percent of its total output.

Barry Friedman, minister counselor for commercial affairs at the U.S. Embassy in Beijing, says that he has no doubt that China's second-tier cities will continue to grow at a faster rate than the rest of the country. "The Chinese government wants to close the disparity in income and development in the country," says Friedman. To that end, they're investing heavily in transportation and other infrastructure in these second-tier cities.

Huge though these secondary cities are – Chongqing's urban sprawl is estimated to be home to more than 30 million people – they account for only 8 percent of China's staggering population of 1.3 billion. Many people in China are still mired in poverty, living in the countryside and eking out a humble living in the fields. Yet a significant and increasingly affluent minority live in the industrial areas surrounding the major cities.

Multiple growth drivers
Shanghai, the nation's main port and financial center, lies at the estuary of the Yangtze River, which flows west to east across China and divides the north from the south. Along the urban course of the mighty river, electronics and clothing factories abound, shipping their goods downstream and overland to Shanghai, where they are loaded onto container ships and planes bound for the United States, Europe and the Middle East.

The booming factory business has created a generation of newly wealthy citizens in the major cities close to the Yangtze. One of the beneficiaries is the city of Hangzhou, once famed only for its beautiful lake but now known for its array of designer clothing stores and Mercedes-Benz limos that are a match for its near neighbor, Shanghai. Likewise, Nanjing and Wuhan are both riding the tidal wave of rapid expansion further inland.

"There's a natural wave of manufacturing moving inland as prices for labor and land rise in coastal areas," says Jason Kindopp, director of the Asia practice at Eurasia Group, a consulting firm based in New York.

Vast opportunities
Other wealth is being created by a different set of dynamics. The northeast region of the nation, saddled with aging, rusting state factories, has lagged behind the rest of the country in economic growth, its plants out of step with modern needs and wants. Local government chiefs are keen to rectify this situation and are prepared to offer incentives to investors for the chance to reach the more than 100 million inhabitants living in the region, broadly described as Manchuria.

The opportunities here for exporters are vast. To cite just one example, Shenyang, the capital of Liaoning province, boasts some 40 different industrial sectors, including nonferrous metals, chemicals, automobiles and aircraft.

At the other end of the country, in the far-western provinces of Gansu, Qinghai and Xinjiang, the national government is eager to lure light industrial investment that will help its generally poor residents catch up with China's full-steam-ahead eastern region. The U.S. Embassy's Friedman recommends that businesses interested in working with cities in these regions perform a self-audit to see if they are "China-ready." This includes looking at the company's international experience, checking one's commitment to hiring staff with China experience and knowing exactly who in China they'll be dealing with. "Having a strong partner like UPS can help with logistics and customs," adds Friedman.

The Wild East
Forward-looking investors are even examining prospects in China's third-tier cities and beyond. But with reward comes the risk of investing in an economy where the rules can be opaque, especially when further away from the seats of power in Beijing and Shanghai. The old saying, "The hills are high and the emperor is far away" still has validity.

Clearly, opportunities abound in contemporary China, whether you're considering cities that are first-, second- or third-tier. "China is still pretty early on in its industrialization," says the Eurasia Group's Kindopp. "There's still a lot of room for growth."

Interested in exporting to China? The U.S. Commercial Service has offices and trade centers in 19 different Chinese cities and is ready to help.

This article, which was written by Mark Graham who is a freelance business writer based in Hong Kong, was originally published under the headline "Worth a second look" in the Summer 2007 print edition of Compass (www.compass.ups.com). This quarterly publication, which is published by UPS (www.ups.com), is sent to its customers.

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