Pillar of the West

A leader in China’s western development faces tough challenges

by David Lammie

Chongqing’s rise to prominence can be traced back to the middle of the twentieth century. From 1937 to 1945, when Japanese troops occupied Nanjing, Jiangsu (China’s capital at the time), the mountainous city of Chongqing was regarded as a safe haven and chosen as the capital of the Guomindang government. Despite heavy bombing by the Japanese, Chongqing’s population tripled during World War II and many important institutions and industries were relocated there, laying the foundations for the city’s industrial power base. China’s future paramount leader, Deng Xiaoping, was the city’s first mayor after the People’s Republic of China was founded in 1949.

Today, Chongqing is the most important industrial and commercial city in southwestern China. It covers 82,400 sq km—more than Beijing, Shanghai, and Tianjin combined—and has a population of 32 million, though only 6.6 million live in the city proper. Between 2002 and 2007, Chongqing’s economy grew 12.6 percent annually, hitting ¥411.2 billion ($60.2 billion) in 2007. Foreign trade expanded 36 percent in 2007 to reach $7.4 billion, of which exports comprised $4.51 billion.

Manufacturing base

Chongqing’s strength lies in heavy industry and a growing multinational corporation (MNC) presence, which has developed rapidly in recent years. Many military factories, set up after 1949 for strategic security, have been converted to civilian use. Attracted by lower costs, a number of prominent domestic appliance manufacturers whose production was previously concentrated in coastal provinces—including Haier Co., Ltd., Midea Group, and TCL International Electrical Co., Ltd.—have recently set up operations there. Government-designated “pillar” sectors, which include the auto, chemical, and pharmaceutical industries, are being consolidated and stripped of old state-owned enterprise functions, such as providing housing and schools for employees. Major export items include motorcycles, autos, auto parts, chemicals, pharmaceuticals, agricultural products, and light industrial goods.

• Autos Chongqing is China’s third-largest center of motor vehicle production and the largest for motorcycles. In 2007, it had an annual output capacity of 1 million automobiles and 8.6 million motorcycles. Chongqing-based ChangAn Automobile Group Co., Ltd. is China’s largest producer of minivans and its fourth-biggest automaker. In 2007, the group sold 857,700 vehicles, 23 percent more than in 2006, and its revenues jumped 30 percent to ¥58.1 billion ($8.5 billion). ChangAn also has important joint ventures with Ford Motor Co. and Suzuki Motor Corp. ChangAn Ford Mazda Automobile Co., Ltd., which has an annual capacity of 250,000 units, makes several car models, including the Ford Mondeo sedan, Ford Focus compact hatchback, Ford S-MAX sports utility vehicle, and Mazda 3 and Volvo S40 compact sedans. (The company prefers to assemble Ford models from Europe, rather than the United States, because their fuel economy and safety performance are more closely aligned to Chinese requirements.) In 2005, Cummins Inc. established a joint venture with Chongqing Automotive Engine Plant, which makes diesel engines for a variety of industrial applications. It employed roughly 1,420 workers and produced 12,000 engines in 2007. In August 2008, Fiat Automobiles SpA announced it would build a new engine plant in the municipality with an annual capacity of 100,000 units.

• Heavy industry Chongqing is home to China’s largest aluminum processing plant, operated by Southwest Aluminum Industry Group Co., Ltd. Completed in 2005, the facility has an annual capacity of 300,000 tons of high-grade aluminum and aluminum alloy products. ABB Chongqing Transformer Co., Ltd., a joint venture between ABB Ltd. and Chongqing Transformer Works, supplies large substations, power plants, and hydropower stations to China and overseas. It is ABB’s largest transformer plant worldwide.
• Chemicals The local chemicals sector is founded on extensive supplies of natural gas. Yangtze River Acetyls Co., a joint venture between China Petroleum & Chemical Corp. and BP plc, is the largest acetic acid plant in China. Its current annual capacity of 350,000 tons is set to rise to 1 million tons when construction of a new, ¥3.5 billion ($513 million) plant is completed.
• Banking and finance Chongqing is home to more than 300 financial institutions. ABN AMRO Bank N.V., Allied Commercial Bank, Bank of East Asia, Ltd., Bank of Nova Scotia, HSBC Holdings plc, and Standard Chartered Bank all have Chongqing branch offices. Great Eastern Life Insurance Co. Ltd., Liberty Mutual Insurance Co., and Metropolitan Life Insurance Co. all have a presence in the city. Boston-based Liberty Mutual has its China headquarters in Chongqing and was one of the first foreign insurers to establish a presence in western China when it opened a property and accident insurance branch in the city in 2004. It began selling car insurance the following year.
• Retail Carrefour Group and Wal-Mart Stores, Inc. each have three stores in Chongqing. Metro Group of Germany has opened the largest supermarket in western China in the city’s downtown area, along with membership shopping centers in the Chongqing Economic and Technological Development Zone.

Logistics hub

Cost and complexity of transporting freight are probably the biggest challenges facing manufacturers in Chongqing. A 2007 study conducted by Dezan Shira & Associates, a China-based business advisory and tax practice, found that the land and labor costs of establishing an export-oriented manufacturing business in a wealthy coastal city, such as Shanghai, were 40-60 percent higher than in the interior. Yet the cost advantages for inland cities can be outweighed by the difficulties of transporting components and finished products to and from coastal ports.

New investment initiatives, however, are beginning to remove transport barriers. Construction of the Three Gorges Dam has slashed river journey times between the city and Shanghai. A nonstop container service on the 2,500 km route currently takes as little as five days. Deeper water levels in the reservoir also yield benefits. Companies such as Yangtze River Acetyls can operate bigger vessels to and from the city, reducing costs.

Located further upstream than any other significant port on the Yangzi, Chongqing has a huge catchment area and is today the major transshipment point for outbound freight originating in the Southwest. Anticipating a surge in throughput as a result of shorter river journey times to the coast, Chongqing will invest ¥15 billion ($2.2 billion) in river port expansion and is building the most modern container terminal on the upper Yangzi. On November 25, 2008, the PRC State Council approved Chongqing’s application to give Cuntan Harbor bonded port status.

In addition, the municipal government intends to improve its railway infrastructure. It plans to spend ¥13.8 billion ($2 billion) on railways to connect Chongqing’s major Yangzi port terminals. Chongqing’s railfreight container station will be enlarged to include a container logistics park that will be able to handle 810,000 twenty-foot equivalent units and 1.4 million tons of express cargo each year by 2015. The Shanghai-Wuhan-Chongqing-Chengdu high-speed railway is expected to begin operating in 2012. When the entire project is completed, the travel time between Chongqing and Shanghai will be more than halved, to about 10 hours. Construction of a high-speed rail line between Chongqing and Lanzhou, capital of Gansu, started in September 2008.

Infrastructure within the city has improved as well. Opened in 2005, Chongqing’s monorail system consists of 13.5 km of track and 14 stations. It is China’s first straddletype monorail and has a capacity of some 200 million passenger journeys a year.

Chongqing has also earmarked significant funds to improve the road network. The city currently has a 75 km ring road, and existing expressways connect Chongqing with Guizhou and the Sichuan cities of Chengdu, Linshui, Suining, and Wusheng. In the five years following 2006, the local government has pledged to spend ¥44 billion ($6.4 billion) on road construction and improvements to ensure that all villages have paved access to highways at the county and municipal levels. A total of 2,000 km of expressways and 6,000 km of highways linking the city with other key centers will be built. Eventually, the city will have two ring roads—the 75 km road and a second 186 km peripheral expressway—and eight radial expressways will link Chongqing with major cities in Sichuan, Guizhou, and Hubei. More than 20 bridges span the Yangzi and Jialing rivers in Chongqing, and several more are scheduled to be built across the Yangzi by 2010.

Chongqing is set to become western China’s largest civil aviation hub and plans to build a network of four airports across the municipality. With a current capacity of 7 million passengers annually, Chongqing Jiangbei International Airport is undergoing a third phase of expansion that is expected to raise its capacity to 25 million passengers a year. The municipal government also plans to increase its air cargo capacity fivefold by 2010.

Business environment

At the end of 2007, Chongqing was home to 4,451 foreign-invested enterprises (FIEs), with cumulative investment of $19.8 billion. The city had 93 Global Fortune 500 enterprises and its utilized foreign investment jumped 56 percent to $1.09 billion in 2007.

Like other inland cities, however, Chongqing has been unable to keep up with the booming coastal areas in terms of economic development. As a result of weak supply chains and a lack of skilled workers, investment and income levels remain well below those of major coastal cities, such as Shanghai and Tianjin. As an established industrial center, Chongqing has a growing base of companies able to supply new investors. The efficiency of these local suppliers can fall below the expectations of foreign firms, however, and certain components can be hard to find.

Chongqing also faces stiff competition from neighboring cities, especially Chengdu, the capital of Sichuan. Until 1997, Chongqing remained somewhat in the shadow of its local rival. As the provincial capital, Chengdu received more attention and greater investment in fixed assets, such as transport infrastructure. It also attracted much greater foreign investment, and many MNCs regarded Chengdu as the natural home for establishing regional operations in southwestern China (see the CBR, November-December 2008, China’s Newest Market). To this day, Chengdu boasts more FIEs, especially in the high-tech sector, though in October 2008 Chongqing secured what will be its largest foreign high-tech investment when Hewlett Packard Co. announced it would build a computer plant by 2010 to make desktop computers and laptops.

Despite investment in transportation infrastructure, Chongqing’s lengthy and unpredictable supply chains present serious difficulties for manufacturers. Power supply has long been a problem. Though the local government has invested heavily in the construction of power sources and urban power grids, and the region is rich in hydropower resources, low water levels caused by drought and increasing demand often lead to power restrictions. According to a Reuters report, Chongqing joined more than a dozen Chinese provinces to ration power in July, as declining coal stocks curbed electricity generation while hot weather boosted demand. Dependency on coal has polluted the air and generated health concerns. The precipitous hills that surround the city exacerbate this problem—acid rain, winter smog, and summertime humidity can make Chongqing an uncomfortable place to live in.

In addition to supply chain, power, and pollution problems, investors often cite several other shortcomings that make establishing an FIE in Chongqing difficult. These include high levels of corruption, shifting government policies, and few professionals with Western experience. And though factory labor tends to be relatively inexpensive and plentiful, skilled staff are harder to find and can be difficult to lure away from Beijing or Shanghai. There are fewer accounting, consulting, engineering, insurance, and legal professionals than in the big coastal cities, and fewer still who have experience working with MNCs, making these services more costly in Chongqing. Relocation often requires paying a premium in terms of salary and benefits.

In good hands

The task of addressing these challenges falls to Chongqing’s Chinese Communist Party Secretary Bo Xilai. Most foreign observers believe he has the right experience, political authority, and international profile to turn things around (see A Leader in China’s Western Development). His presence should also reassure foreign investors who remember his time as mayor of Dalian, Liaoning, in the 1990s, when the coastal city enjoyed a period of phenomenal growth and a marked improvement in its physical environment. According to a Western consultant who has recently worked in southwestern China, Bo’s main tasks will be to develop public infrastructure, simplify investment procedures, enforce the labor law, and, perhaps most important, balance environmental concerns with development.

During 2008, city officials made a series of trips to foreign countries and coastal cities to promote investment in Chongqing. It is too soon to say whether these trips have been successful, and the much-needed improvements and reforms that have been initiated will still take several years to bear fruit. Initial signs are promising, however, and a number of MNC executives have explored the city as an investment option. But to what extent their interest will be converted into firm investment commitments in the future remains to be seen, especially against the backdrop of a global economic downturn.

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A Leader in China’s Western Development

The city of Chongqing was removed from Sichuan Province in 1997 to become the first non-coastal municipality under the direct control of the central government, a move that made the city the focus of national efforts to develop its western regions under the “Great Western Development Strategy.” (The Great Western Development Strategy, launched in 2000, aims to promote growth in western and central China to reduce wealth disparities between inland areas and coastal provinces through massive spending on infrastructure and tax incentives to attract investment.) Local officials hope that rising land and labor costs in the coastal regions, coupled with improved transport connections to the interior, will persuade foreign manufacturers to consider Chongqing a viable investment destination.

Two developments in 2007 underline the city’s importance in national affairs. In June, Chongqing and Chengdu were selected by the PRC State Council as pilot cities to deliver coordinated urban and rural planning. Spearheading a national program, the two cities have been given a relatively free rein to design and implement policies that promote social and economic cohesion. Then, in November, Bo Xilai, former Minister of Commerce and political heavyweight, was appointed the city’s Chinese Communist Party Secretary.

Chongqing has also become the center for coordinating the resettlement of residents from the Three Gorges Dam project. More than 1 million people have been forced to move because of rising water levels along the Yangzi River due to the dam’s construction, and another 4 million will be encouraged to resettle under Chongqing’s 2007-20 Urban and Rural Development Plan.

—David Lammie

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David Lammie is a director of Yangzte Business Services Ltd., publisher of Yangtze Transport 2008, and organizer of the Yangtze Business Network Conference in Shanghai.