Shenzhen and the PRD: An Analysis for Business Locations
Shenzhen and the PRD: An Analysis for Business Locations
Shenzhen and the PRD: an Analysis on Business Location in South China
Despite the challenges of starting a business in China, data from a recent business survey from Moore Stephens in cooperation with 1421 Consulting Group suggests that the Pearl River Delta (PRD) and specifically Shenzhen is a location where at least three quarters of Benelux companies see an increase in revenue and profits. It is especially surprising how Benelux companies in general are concerned with the economic levelling of China whereas Benelux companies in the South of China are more focused on increasing labor costs. But before we dive into the results of the business survey, let’s have a closer look at the Pearl River Data. A region which is known for both its beauty and the thriving business.
The PRD is located in China’s Southern region, with a population of 30.2 million people across 9 cities, all within 56.000 km2, roughly the size of Croatia. The region lies in proximity to Hong Kong and contains 3 Special Economic Zones (SEZ). For 25 years, this region has experienced leading GDP growth in the PRC thanks to its manufacturing and technology industries, earning the region the title of “The World’s Factory.” That wristwatch or headphones you have on, or the phone, tablet, or computer you are reading this article on has all likely been manufactured in the PRD.
In numbers, the PRD’s GDP equaled 663 billion euro in 2016, roughly that of the Dutch or Swiss’ GDP. Guangzhou contributed 275 billion euro nominal GDP, and Shenzhen contributed 251 billion euro nominal GDP. While many products and software are coming out of these cities, competition is rising within China from Jiangsu Province and from ASEAN abroad. So what keeps this region in China able to operate so competitively in today’s market? Being further from the Beijing’s stern rules on business helps. Its close location to Hong Kong for international trade, its liberalized trade model put into place by Deng Xiaoping and the Free Trade Zone (FTZ) and SEZs have given businesses, both domestic and foreign, economic advantages when it comes to manufacturing and conducting trade.
Free Trade Zones and Special Economic Zones
Out of this economic and trading arrangement we want to emphasize the importance the FTZ (link to article on FTZs) and SEZs have on companies operating in the PRD. The advantages of the Guangdong FTZ in this region include the custom clearances: the declaration after goods entry ode, collective declaration, and centralized tax payments. Another advantage is the shipping arrangement between domestic ports for foreign ships. Lastly, goods delivered within the zone do not have duty paid yet. The PRD includes three SEZs: Nansha, Guangzhou (manufacturing, shipping, leisure, and tourism); Hengqin, Zhuhai (cooperation with Macau); and Qianhai (finance, taxation, and telecommunications). The advantages for SEZs varies per zone, but if a company is in a focused industry in the zone, then the enterprise tax can be lowered and the Individual Income Tax (IIT) for foreign experts can be lowered as well. It’s from the FTZ and SEZs that Western companies have been able to report growth in South China.
When we take what we know about the Pearl River Delta and focus on the results of the business survey, we see the enormous potential and the reason why the PRD is possibly the most successful location for Benelux companies.
Let’s quantify the growth for Benelux Companies in South China and compare that to the other Benelux Companies in China. In the PRD, 73% of Western companies reported year-on-year increases in revenue. Only 7% of the companies reported a decrease in revenue. Compared to the report from all companies across China, only 60% reported a year-on-year increase in revenue, and 15% reported a decrease in revenue (figure 1). Even though the lower EBIT margins and lessened optimism about business compared to years previous to 2016 seemed to loom against many Western companies, Benelux Companies in the PRD saw a general better year in business (figure 2). Positive drivers for the companies in South China included increased turnover/economies of scale and increased process based efficiency (figure 3). While 53% of companies in the PRD reported that their strategic reason for operating in China is to provide goods and services to the Chinese market, 36% of these company’s strategic reasons were to produce goods in China but sell them abroad versus only 16% for the overall average (figure 4). What the data suggested is that when companies try to get something from Chinese markets, they tend to lose.
Percentage of Revenue from Customers in China
Figure 2. Source: Moore Stephens, Sino Benelux Business Survey 2017 Presentation
Positive Drivers in 2016
Figure 3. Source: Moore Stephens, Sino Benelux Business Survey 2017 Presentation
Figure 4. Source: South China Position Paper 2016, EU Chamber China
For Benelux companies overall, the issue of the Chinese economic slowdown worried many, with 44% of these companies voicing this as their main concern, followed by rising labor costs. However, 34% of companies in South China are mainly concerned with rising labor costs, followed by the Chinese and global economic slowdowns (figure 5). Because business is growing in places like Shenzhen and Guangzhou and there are plenty of laborers to fill in jobs, companies are facing the issue of the cost of labor. When hundreds of workers are asking for the same wage increase, then companies are challenged with keeping their workers happy and paid. Similarly, for companies that pay salaries, the costs of these salaries are also a concern as the costs continue to increase.
Main Issues/Negative Drivers in 2016
Figure 5. Source: Moore Stephens, Sino Benelux Business Survey 2017 Presentation
Along with these concerns, competition from outside of China is on the rise, hinting at potential opportunities for established PRD businesses and for businesses not yet in Asia. The cost of labor and cost of salaries are making ASEAN countries an attractive location for Benelux Companies to move to. Yet, when Benelux Companies were asked if they would move their Chinese activities to other Asian countries, only 23% of companies said yes.
So why are the other 77% of businesses choosing to remain in China? What we should ask is what do companies in places like Shenzhen, Guangzhou, Dongguan, and other cities see in this region that the ones leaving do not? The answer: Benelux companies are focused on the key sectors and opportunities in the PRD. In Shenzhen, for example, the rising middle class, the manufacturing infrastructure, research and development, high tech expansion, and the urban mega hub are creating key sectors and opportunities for companies already in the city and for incoming companies.
Shenzhen is a city with a relative young history; it was created in 1979 as a trial for an open market in China. This trial was very successful and China has adopted the model while Shenzhen has grown tremendously. This growth has attracted people from all around China. An estimated 10% of the population is originally Shenzhenese, the other 90% hail from other cities in China. This is why Mandarin is spoken in this area, even though in Guangzhou and Hong Kong Cantonese is the spoken language. The middle class in Shenzhen is a new generation of Chinese spenders with a growing wealth and disposable income. The goods and services being offered by foreign companies are items the middle class wants to spend their money on. Research and development, as well as high tech expansion in Shenzhen are experiencing major investments from private companies in China. These investments are being put towards making technologies faster and more efficiency, rather than concentrating on creativity and innovation. However, from these improvements to technology speed and efficiency, Chinese and foreign start up companies have been able to make these technologies more innovative and creative to market to consumers in China and around the world. Research and development, and high tech expansion have transformed manufacturing in Shenzhen and surrounding area into an advanced manufacturing cluster. The urban mega hub is the source of workers in this manufacturing cluster. With a population of over 11.9 million citizens, many Chinese people are a part of the fast manufacturing process or part of the technology building process. This means prototypes are being manufactured and adjusted quickly, allowing final products to be put on the market faster than most countries. In Shenzhen alone, the key sectors in technology and manufacturing are creating many opportunities for foreign companies and attracting many new companies.
While many opportunities are there for the taking in China, many foreign companies still view places like Shenzhen and the PRD as a challenging market to penetrate. Fierce competition from local companies, protection of intellectual property, and a lack of knowledge and risky decisions diminish the strength of foreign companies. So before a company decides to jump into the great Chinese economy, we want to stress the important intricacies of FTZ and SEZs, challenges, and growth potential for companies that are entailed in places like Shenzhen and the PRD. With consulting advice, careful planning, and an understanding of the PRD and the cities within the region, it is possible for a Benelux Company to become successful in this region filled with opportunities, and maintain a strong presence in the Chinese economy.
What happened in the year 1421?
From 1421 to 1423, during the Ming Dynasty of China under Emperor Zhu Di (朱棣) the fleets of Admiral Zheng He (鄭和), commanded by the Chinese captains, discovered Australia, New Zealand, the Americas, Antarctica, the Northeast Passage; and circumnavigated Greenland.
Due to this endeavour we can conclude that “1421 is the year that the Chinese discover the world”.