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High-tech Companies Go West

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The first made-in-Chongqing Hewlett-Packard notebook PC rolled off the assembly line on Jan 26, with its shiny orange metallic cover and two logos representing the municipality in Southwest China and the US-headquartered company.

That PC is the first of 24 million that HP plans to produce from the southwestern city of Chongqing, out of the 65 million it will produce worldwide by 2012.

Previously, the world's largest high-tech company used to produce all its notebooks in China's coastal Shanghai hub, but the company decided to move some of its operations to this mountain city.

HP's go-west move is no exception. Foxconn Technology Group, Quanta Corporation, Inventec Corporation, three high-tech product manufacturers, are also planning to open factories in Chongqing's Xiyong Micro-electronic Industrial Park, where HP is located.

The park, founded in 2005, has seen an increasing number of companies either moving or opening branches in Chongqing from the well-developed eastern and southern China. From 2005 to 2008, investments in the park reached US$1 billion, but in the past 18 months or so about US$3 billion have come in.

Zhu Jiang, the park's deputy director, said the success of manufacturers in eastern and southern China lies in cheap labor and duty-free policies.

"However, more and more companies are finding it difficult to survive, due to rising labor and energy costs," he said, pointing out it is only a matter of time before those companies head west.

The 37-square-kilometer park, which includes the Chongqing Xiyong Comprehensive Bonded Zone, the largest duty-free zone in the inland, is only partially completed.

The smell of paint, the construction noise and the busy traffic suggest a boom in the development of the western region of Chongqing is approaching.

The Chongqing government plans to turn Xiyong into western China's silicon valley, with an annual production of 80 million notebook PCs, generating US$80 billion in exports and imports by 2015.

But moving factories from China's east and south has its own problems, particularly in the supply chain.

"The transition period is the most difficult," said Frank Chien, manager of Inventec, a Taiwan-based manufacturer.

Inventec's plant is due to start operations later this month and is expected to produce about 500,000 notebook PCs by the end of this year, Chien said.

"But the cost of production is $4 per unit, higher than those produced in our Shanghai base, as 95 percent of our material needs to be transported from the east," he said.

Earlier this year, the Chongqing government said it will grow its IT industry into a 1 trillion yuan ($149 billion) operation by 2015, accounting for 40 percent of the city's total industry size of 2.5 trillion yuan.

But that ambition cannot change the city's relatively weak foundation in the IT field and the fact more than 90 percent of raw-material suppliers of PC manufacturers are in the Yangtze and Pearl river deltas, said CCID Consulting, a Beijing consulting company.

Inventec wants to change that and has a goal to buy 70 percent of raw materials locally by the end of next year.

The company said it gives preference to suppliers with factories in Chongqing.

"The tricky problem is that only a full-developed supply chain can draw big manufacturers " Chien said. "But if there are no big manufacturers here, there won't be enough demand to persuade supply-chain companies to move here."

However, Hu Xiaopeng, deputy manager of CCID Consulting's PC industry research center, said supply chain problems will not stop companies from moving west.

He estimated the supply weakness will be overcome in two to three years as rising labor costs in coastal cities force more companies move to the west.

In Chongqing, the minimum wage hasn't been raised since 2008 and ranges from 560 to 680 yuan a month, while in Guangdong the minimum wage was raised in May and ranges between 920 and 1,030 yuan a month.

Moreover, western China has a larger population pool to draw from, compared with provinces in the east and south. The neighboring six provinces of Chongqing, with a population of 300 million, are home to many migrant workers.

In addition to cheaper labor, the cost of running a factory in the west is lower than in the east and south. For example, in Chongqing electricity costs 0.55 yuan a kWh; in Shenzhen in southern China, it is 0.88 yuan a kWh.

Also, the central government offers a 10 percent tax reduction to companies operating in certain western areas.

Apart from these advantages, recent analysis by an IT research company of IDC China shows that the go-west movement may focus on the long term. China produces one-third of the world's computers, with 27.6 percent going to the domestic market last year, jumping from 20.4 percent in 2008, CCID Consulting said.

Wang Jiping, research manager of IDC China computing system, said no one should underestimate the consumption power of the west. "The next consumer market of PC will be in western China."

The annual growth of western China's demand for PCs will reach 21 percent by 2014, he said, thanks to further development and rising incomes.

Dell Inc, another multinational IT company, announced in September that it will open a second China operations center in Chengdu, Sichuan province in Southwest China, with manufacturing, sales and services, in addition to its flagship center in Xiamen, East China.

A recent survey by the American Chamber of Commerce in Shanghai shows that 28 percent of all multinational corporations that responded to its questions are considering relocating or expanding some operations from the south and east of China, up from 17 percent in 2008.

Brenda Foster, president of the American Chamber of Commerce in Shanghai, said: "We are seeing a trend of such moves among multinational corporations in order to better respond to rising costs and labor availability challenges."

(China Daily November 6, 2010)

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