Snapshot Sichuan

Multilateral Investment Guarantee Agency

International Finance Corporation —

China Project Development Facility

March 2006

Benchmarking FDI Competitiveness in China's Sichuan Province

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Snapshot SichuanBenchmarking FDI Competitiveness

in China's Sichuan Province

March 2006

The Multilateral Investment Guarantee Agency International Finance Corporation – China Project

Development Facility

The World Bank Group

Copyright © 2006World Bank Group/MIGA1818 H Street, NWWashington, DC 20433

All rights reservedManufactured in the United States of AmericaMarch 2006

Available online at www.ipanet.net/snapshot_sichuan

For more information, contact:MIGA Operations1818 H Street, NWWashington, DC 20433t. 202.458.2076 f. 202.522.2650www.miga.org

The material in this publication is copyrighted.Requests for permission to reproduce portionsof it should be sent to MIGA Operations at theabove mentioned address.

The Multilateral Investment Guarantee Agency (MIGA) of the World Bank Group was established in 1988 to promote the flow of private foreign investment to developing member countries. MIGA offers political risk insurance coverage to eligible investors for qualified investments in developing member countries. MIGA also offers technical assistance programs to develop and implement effective strategies for attracting and retaining foreign direct investment. This hands-on technical assistance focuses on three primary areas: dissemination of information on investment opportunities and business operating conditions in developing member countries through online services; capacity building of the organizations and institutions involved in the promotion of foreign investment; and, investment facilitation activities supporting the efforts of developing countries to identify and attract investment.

The China Project Development Facility (CPDF) is a multi-donor facility managed by the International Finance Corporation (IFC) of the World Bank Group. It is co-funded by the IFC and the governments of the United Kingdom, Australia and Switzerland. Established in 2002, IFC-CPDF operates from Chengdu in Sichuan province. Its objective is to support the development of private sector/small and medium-sized enterprises (SMEs) in the interior region of China, with initial focus on Sichuan province. The IFC-CPDF pursues this objective by: strengthening the business-enabling environment to promote investment; facilitating SMEs’ access to finance and business services; and, enhancing the social responsibility and envi-ronmental awareness of local businesses.

Research for the Sichuan benchmarking study was conducted in the field by the Sichuan Enterprise Survey Organization (ESO), under the technical support of Tractus-Asia Limited, a consulting company subcontracted by The Services Group, one of MIGA’s principal contractors for the global Enterprise Benchmarking Program. The ESO, an independent organization, was created to provide sampling and survey services to both government and private sector companies and is administered by Sichuan’s Provincial Statistics Bureau.

snapshot sichuan �

Snapshot SichuanBenchmarking FDI Competitiveness

in China's Sichuan Province

Foreign Direct Investment Costs and Conditions for the Chemical, Electronics, Food and Beverage Processing, Machinery and Machine Building and Pharmaceutical

and Traditional Medicine Industries in Ten Municipalities

March 2006

Fourth in a Series of Sector Analyses

snapshot sichuan� �

The Multilateral Investment Guarantee Agency is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, site selection, or other professional advice or services, and shall not be responsible for any loss sus-tained by any person who relies on this publication as a substitute for such profes-sional advice or services. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

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Table of Contents

chapter i: study overview and Key Findings 1Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Study Context and Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Key Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

chapter ii: the investment climate and Fdi 13FDI in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15FDI in Western China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Sichuan’s Investment Climate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17FDI in Sichuan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Cross-Sectoral SWOT Analysis of the Province . . . . . . . . . . . . . . . . . . . . . . . . 19Cost Comparisons: Sichuan versus Cities in China’s Coastal Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

chapter iii: Findings by industry sector 25Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34Food and Beverage Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41Machinery and Machine Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48Pharmaceuticals and Traditional Chinese Medicine . . . . . . . . . . . . . . . . . . . . 55

chapter iv: comparative costs at a glance 63Labor Costs by Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65Utility Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70Real Estate Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71Sea Freight Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

chapter v: Findings by municipality 73Chengdu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75Deyang . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79Leshan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82Luzhou . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85Mianyang . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88Nanchong . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92Panzhihua . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95Suining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98Yibin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101Zigong . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

appendices 1091. Acronyms and Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1112. Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1123. Data Organization, Definitions and Sources . . . . . . . . . . . . . . . . . . . . . . 1184. Tables of Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133

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L�st of F�gures

chapter i: study overview and Key FindingsFigure 1: Location of Municipalities Studied in Sichuan Province . . . . . . . . . 4Figure 2: Phases of Research Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Figure 3: Operating Costs versus Conditions in Pharmaceuticals/TCM . . . . . 7

chapter ii: the investment climate and FdiFigure 4: Investment in Sichuan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

chapter iii: Findings by industry sectorFigure 5: Origin of FDI in the Surveyed Chemical Industry . . . . . . . . . . . . . . 28Figure 6: Comparison of Operating Costs in the Chemical Industry . . . . . . . 28Figure 7: Comparison of Weighted Operating Conditions in the Chemical Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29Figure 8: Operating Costs versus Conditions in the Chemical Industry . . . . 31Figure 9: Origin of FDI in the Surveyed Electronics Industry . . . . . . . . . . . . 35Figure 10: Comparison of Operating Costs in the Electronics Industry . . . . 36Figure 11: Comparison of Weighted Operating Conditions in the Electronics Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37Figure 12: Operating Costs versus Conditions in the Electronics Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38Figure 13: Origin of FDI in the Surveyed Food and Beverage Processing Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42Figure 14: Comparison of Operating Costs in the Food/Beverage Processing Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43Figure 15: Comparison of Weighted Operating Conditions in Food/Beverage Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43Figure 16: Operating Costs versus Conditions in the Food/Beverage Processing Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45Figure 17: Origin of FDI in the Surveyed Machinery/Machine Building Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49Figure 18: Comparison of Operating Costs in the Machinery/ Machine Building Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50Figure 19: Comparison of Weighted Operating Conditions in Machinery/Machine Building. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51Figure 20: Operating Costs versus Conditions in Machinery/ Machine Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52Figure 21: Origin of FDI in the Surveyed Pharmaceutical/TCM Industry . . . 56Figure 22: Comparison of Operating Costs in the Pharmaceutical and TCM Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57Figure 23: Comparison of Weighted Operating Conditions in Pharmaceuticals/TCM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57Figure 24: Operating Costs versus Conditions in Pharmaceuticals/TCM . . . 59

chapter iv: comparative costs at a glanceLabor Costs – Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65Figure 25: Unskilled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65Figure 26: Skilled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65Figure 27: Technical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

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Figure 28: Professional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65Figure 29: Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65Figure 30: Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Labor Costs – Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66Figure 31: Unskilled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66Figure 32: Skilled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66Figure 33: Technical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66Figure 34: Professional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66Figure 35: Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66Figure 36: Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

Labor Costs – Food and Beverage Processing . . . . . . . . . . . . . . . . . . . . . . . . 67Figure 37: Unskilled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67Figure 38: Skilled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67Figure 39: Technical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67Figure 40: Professional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67Figure 41: Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67Figure 42: Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

Labor – Machinery and Machine Building . . . . . . . . . . . . . . . . . . . . . . . . . . . 68Figure 43: Unskilled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68Figure 44: Skilled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68Figure 45: Technical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68Figure 46: Professional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68Figure 47: Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68Figure 48: Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Labor Costs – Pharmaceuticals and Traditional Chinese Medicine . . . . . . . . 69Figure 49: Unskilled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69Figure 50: Skilled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69Figure 51: Technical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69Figure 52: Professional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69Figure 53: Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69Figure 54: Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Utility Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70Figure 55: Electricity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70Figure 56: Natural Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70Figure 57: Water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Real Estate Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71Figure 58: Land Usage Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71Figure 59: Building Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71Figure 60: Office Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71Figure 61: Warehouse Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71Figure 62: Factory Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71Figure 63: Office Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

Sea Freight Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72Figure 64: Standard Container to Rotterdam . . . . . . . . . . . . . . . . . . . . . . . . . 72Figure 65: Standard Container to New York . . . . . . . . . . . . . . . . . . . . . . . . . . 72Figure 66: Standard Container to Yokohama . . . . . . . . . . . . . . . . . . . . . . . . . 72

appendicesFigure 2-1: The Cost/Quality Matrix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

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L�st of Tables

chaptersTable 1: Profile of Surveyed Companies by Industry . . . . . . . . . . . . . . . . . . . . . 9Table 2: Cumulative FDI in China’s Three Regions, 2003 . . . . . . . . . . . . . . . 16Table 3: GDP by Sector, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Table 4: Sichuan’s Average Labor Cost Savings in Electronics and Food/Beverage Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Table 5: Critical Site Selection Factors for the Chemical Industry . . . . . . . . . 30Table 6: Critical Site Selection Factors for the Electronics Industry . . . . . . . . 37Table 7: Critical Site Selection Factors for the Food and Beverage Processing Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44Table 8: Critical Site Selection Factors for the Machinery and Machine Building Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51Table 9: Critical Site Selection Factors for the Pharmaceutical/ TCM Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58Table 10: Ownership of Firms Interviewed in Chengdu . . . . . . . . . . . . . . . . . 76Table 11: Ownership of Firms Interviewed in Deyang . . . . . . . . . . . . . . . . . . 80Table 12: Ownership of Firms Interviewed in Leshan . . . . . . . . . . . . . . . . . . . 83Table 13: Ownership of Firms Interviewed in Luzhou . . . . . . . . . . . . . . . . . . 86Table 14: Ownership of Firms Interviewed in Mianyang . . . . . . . . . . . . . . . . 89Table 15: Ownership of Firms Interviewed in Nanchong . . . . . . . . . . . . . . . . 93Table 16: Ownership of Firms Interviewed in Panzhihua . . . . . . . . . . . . . . . . 96Table 17: Ownership of Firms Interviewed in Suining . . . . . . . . . . . . . . . . . . 99Table 18: Ownership of Firms Interviewed in Yibin . . . . . . . . . . . . . . . . . . . 102Table 19: Ownership of Firms Interviewed in Zigong . . . . . . . . . . . . . . . . . . 105

appendicesTable 2-1: Site Selection Factors Used in the MIGA EBP Model . . . . . . . . . 112Table 2-2: Ownership of Companies Surveyed . . . . . . . . . . . . . . . . . . . . . . . 114Table 2-3: Site Selection Factor Weighting by Industry . . . . . . . . . . . . . . . . . 115Table 4-1: Labor Costs (gross annual salary in US$) – Chemicals. . . . . . . . 133Table 4-2: Labor Costs (gross annual salary in US$) – Electronics . . . . . . . 133Table 4-3: Labor Costs (gross annual salary in US$) – Food and Beverage Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134Table 4-4: Labor Costs (gross annual salary in US$) – Machinery and Machine Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134Table 4-5: Labor Costs (gross annual salary in US$) – Pharmaceuticals and Traditional Chinese Medicine . . . . . . . . . . . . . . . . . 134Table 4-6: General Business Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . 135Table 4-7: Local Potential to Recruit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136Table 4-8: Access to Input and Output Markets . . . . . . . . . . . . . . . . . . . . . . 136Table 4-9: Flexibility of Human Resource Regulations . . . . . . . . . . . . . . . . . 139Table 4-10: Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139Table 4-11: Real Estate Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141Table 4-12: Quality of Living Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141Table 4-13: Real Estate Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142Table 4-14: Property Lease Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142Table 4-15: Utility Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143Table 4-16: International Sea Freight Rates . . . . . . . . . . . . . . . . . . . . . . . . . . 143Table 4-17: International Air Freight Rates . . . . . . . . . . . . . . . . . . . . . . . . . . 144

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Chapter I

Study Overview and Key Findings

As part of MIGA’s global Enterprise Benchmarking Program (EBP), a study

was conducted in the southwestern Chinese province of Sichuan among five

industries to compare the operating costs and conditions for investors located

in 10 municipalities. This report summarizes the study’s findings, which reveal

a “snapshot” of each industry within Sichuan from the unique perspective of

the sample group of existing investors. The first chapter highlights the study’s

context and objectives, methodology, key findings related to Sichuan in general

and each subject industry, and implications for future benchmarking studies.

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Introduction

Few countries can rival China’s progress in its attraction of foreign direct investment (FDI) during the past two decades. In both the pace of growth and the magnitude of investment, China has established an unparalleled position as “the factory to the world” and is expected to remain there for at least the next two decades. Yet the less obvious trend behind China’s inflows of FDI, which amounted to more than US$500 billion in all industry sectors through 2003, is that foreign investors have in large measure confined their interest to the region along China’s coast. This geographic concentration of investment has contributed to increasing economic and social disparities between the coastal and other provinces. Beginning in 1999, the Chinese government initiated efforts to promote investment in the central and western regions as part of a larger development strategy.

This report summarizes the findings of a study that analyzed the operating envi-ronment for investors in five industries in Sichuan, a large province of 87 million people in southwestern China that is centrally located within a regional market of 204 million people. The study, the result of the Sichuan Enterprise Benchmarking Program (EBP), follows the location benchmarking approach commonly used by foreign investors to evaluate alternative global sites. As an analytical tool, location benchmarking enables an investing company to reduce its options to a short-list of locations best suited to the requirements of the investment project. Investment promotion intermediaries (IPIs) also increasingly use benchmarking analysis to better understand their locations’ competitiveness for FDI and to develop key mar-keting messages to attract inward investment.

The Sichuan EBP, a pilot program, was developed to assist the Sichuan Investment Promotion Bureau (SIPB) and its municipal bureaus in understanding their locations’ comparative advantages for attracting investment in the chemical, elec-tronics, food and beverage processing, machinery and machine building, and phar-maceutical and traditional Chinese medicine (TCM) industries. Ten municipalities within Sichuan were evaluated in each of the five subject industries, based on the actual costs and operating conditions of existing investors with facilities in these municipalities. The study’s subject municipalities were: Chengdu, Deyang, Leshan, Luzhou, Mianyang, Nanchong, Panzhihua, Suining, Yibin and Zigong.

Study Context and Objectives

The study was a collaborative effort between the Multilateral Investment Guarantee Agency (MIGA) of the World Bank Group and the China Project Development Facility (CPDF), a multi-donor advisory facility for small and medium-sized enter-prises (SMEs) operated by the International Finance Corporation (IFC), also of the World Bank Group. Over the past two years, MIGA has worked closely with the CPDF in providing technical assistance to SIPB, an IPI responsible for promoting both foreign and domestic investment in Sichuan. The CPDF was established in Chengdu, the capital of Sichuan, to promote the growth of the private sector, partic-ularly small and medium-sized enterprises in the province, and the economic devel-opment of western China at large. The CPDF has actively supported private sector development, particularly among SMEs, by providing a range of technical assistance to local financial institutions, business service providers and government agencies.

The Sichuan study is the fourth in a series, and the first conducted at the provincial level, under MIGA’s global Enterprise Benchmarking Program, which is designed to assist IPIs in developing countries in their efforts to attract FDI. In recent years, the focus of many IPIs in developing countries has clearly shifted from facilitating investments to proactively promoting specific location opportunities to targeted

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industries and prospects. MIGA’s EBP recognizes that this changing IPI orien-tation brings commensurate requirements in terms of comparable information to help position and market locations as “products.” The EBP aims to address this need with a tool that systematically compares countries around the world, by industry sector, and measures their potential to attract FDI. In addition to the study in Sichuan, EBP studies have been conducted in South East Asia, Afghanistan, and the Western Balkans, work is nearing completion on a 10-country study in Africa, and a study is soon to begin in the Caribbean/Central America.

The SIPB was interested in using benchmarking analysis to support the devel-opment of a provincial investment promotion strategy and promotional efforts at the sub-provincial level. Thus, the dual objective of the Sichuan EBP was to understand Sichuan’s comparative advantages as a location for investment in targeted industries, principally by demonstrating which of the province’s munici-palities best met the critical location requirements of inward investment in these industries. In this regard, understanding the strengths and weaknesses of each subject municipality was fundamental to the study’s outcome. As outlined below, the Sichuan EBP was to deliver on several specific components, many with asso-ciated outputs integral in the development of SIPB’s investment promotion strategy, capacity and process:

Source: MIGA, World Bank Group.

For the purposes of the Sichuan study, the term “municipality” was used to describe an administrative unit within Sichuan province. However, the surveyed munic-ipalities range in size from 5,000 to 20,000 square kilometers, which is a land area of approximately five times the size of Hong Kong to one the size of Israel.

Figure 1: Location of Municipalities Studied in Sichuan Province

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• To conduct a pilot provincial competitive benchmarking program in Sichuan province that would serve as a template for future studies;

• To compare the operating costs and conditions associated with the selected industries in 10 municipalities in order to identify industries where the muni-cipalities hold a strong competitive position, relative to competing locations, which could then be incorporated into local and provincial inward investment promotion strategy and marketing efforts;

• To use SWOT analysis to identify each municipality’s strengths, weaknesses, opportunities and threats as a destination for inward investment in the selected industries;

• To identify the municipalities’ comparative advantages and make recom-mendations for improving the investment climate and attractiveness of each municipality for inward investment promotion, which can assist an IPI in developing sector-specific key selling messages to attract inward investment;

• To identify key policy areas that need improvement and should, therefore, be the focus of the IPI’s policy advocacy efforts, and;

• To develop expertise within the SIPB, survey teams and other participants through their involvement in the execution of the work program and through targeted capacity building so that lessons learned are institutionalized.

Methodology

MIGA’s EBP methodology aims to capture a “snapshot” of an industry in one location at a static point in time, from the unique perspective of the investor. Part of this snapshot reflects objective, quantitative operating costs; another portion is based on investors’ perceptions of qualitative operating conditions. Perceptions of operating conditions, while subjective, are formed by the actual experiences of the investor and can significantly influence the investment location decision. For example, gov-ernment plans may exist for a complete overhaul of a nation’s power grid, but if an investor conducted site selection analysis before reforms were announced or implemented, the perception of unreliable electricity transmission will influence the investor’s decision-making. Similarly, government officials may believe that they have reformed customs operations to improve efficiency, but if potential investors hear of frequent shipment delays due to slow import clearance times, then these actual operating conditions are the reality reflected in the study’s snapshot.

Phases and Sequence

The Sichuan EBP was conducted in three main phases over the course of several months beginning in late 2004. (See Figure 2.) In collecting information regarding operating conditions and motivations for investment, the Sichuan study relied mostly on first-hand information obtained through company interviews. This was due to the difficulty of finding reliable and comparable municipality-specific data through desktop research sources. The research team conducted a total of 250 company interviews with foreign and local investors in the five subject industries. Among the surveyed companies, 36% were foreign-owned and 64% were Chinese-owned. (Although each of the sectors is widely represented in Sichuan, foreign investors have a limited presence outside the capital city of Chengdu.) The primary data col-lected from company interviews using a standard questionnaire was supplemented with secondary data obtained from provincial, national and international sources.

Phase One – Desktop Level Research. Desktop research was conducted to collect data on four categories of critical site selection factors, including infrastructure, real estate, access to markets and the general business environment, using web-based services and published sources.

Phase Two – Field Research. During the fieldwork stage, firm-level data was col-lected from investing companies that were operating in the subject sectors and had

The study’s methodology is designed to

capture a “snapshot” of an industry in

one location at a static point in time,

from the unique perspective of the

investor.

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located in the municipalities participating in the study. Specifically, this phase was designed to both determine each surveyed company’s reasons for having made its investment, and to receive feedback from the investors regarding their expe-riences operating in each municipality and its ability to meet their requirements in terms of costs and operating conditions. These personal interviews also provided an opportunity to identify planned future investments in the province and their likely locations, and to identify and understand the key drivers behind these investments.

Phase Three – Findings. Once the data for each municipality was compiled, the municipalities’ costs and conditions were benchmarked against each other. Through a process of ranking, weighting and aggregating of the data, two com-posite scores were assigned to each municipality – one for costs and the other for conditions. When charted on matrices, the composite scores indicate each location’s relative competitiveness in each industry among the surveyed group of municipalities, and the trade-offs the interviewed investors perceive between cost and quality considerations in their decisions to locate in a particular munici-pality. (See Figure 3.) In addition, a SWOT (strengths, weaknesses, opportunities, threats) analysis based on the composite scores was conducted for each industry and each municipality.

Interpretation of Findings

Because the results of the Sichuan study are predicated in the characteristics and preferences of the surveyed investors in the study’s subject industries, the “snapshot” reflected in the results is unique to that particular group of investors. The study’s methodology employed two mechanisms – a hypothetical project model and factor weighting – to ensure that the study’s data inputs would deliver comparable findings that mirrored the surveyed investors’ motivations in choosing their locations. For the cost factors, the comparison of locations was based on the major annual operating costs associated with a typical project in each subject industry. The parameters of this hypothetical project, such as the wages of employees in various skill categories and the volume of utilities consumed, were derived from the average operating parameters of the Sichuan-based companies interviewed for the study.

The factor weighting process also helped ensure that the municipalities were evaluated against the unique requirements of each industry. In interpreting the study’s findings, weighting was applied to each condition factor based on its relative importance in the location decisions of the surveyed investors, as reported during the company interviews. As might be expected, the weighting of factors significantly impacted the study’s overall conclusions regarding the municipalities’ relative competitiveness in each given industry. For this reason, the study’s findings are indicative, rather than absolute in their conclusions, since factor influence is a highly subjective determination based on the individual company objectives and preferences of the sample group.

An aggregation of the weightings for all costs, and again for all condition factors, provides insight into the general orientation of the surveyed investors. Investors in four of the five subject sectors weighted condition factors as more influential than costs in their decisions to locate in Sichuan’s municipalities. In the electronics industry, investors equally rated the importance of costs and conditions. In the other four industries, the average weighting for the aggregated condition factors ranged from 52 to 57% of the total influence on the decision to locate. The ratio of costs to conditions in factor influence in Sichuan underscores the individualized nature of location benchmarking analysis.

Figure 2: Phases of Research Methodology

Desktop Level Research –Phase I

Identify SourcesCompile Data

Enter Data into Model

Field Research –Phase II

Interviews with Foreign InvestorsFine-tune Costs and Conditions

Compile ResultsEnter Data into Model

Interpretation of ResultsFindings –Phase III

Normalize DataBenchmarking Analysis

SWOT AnalysisReport Results

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Key Findings

The Province

Sichuan, a large, mountainous province bisected by the Yangtze River, is known as “the land of abundance” for its rich agricultural resources. The province is also endowed with 132 types of identified mineral resources, natural gas reserves and the highest exploitable hydropower potential in China. A developed transportation system includes roads and highways, navigable inland waterways and airports connecting most of Sichuan with China’s other provinces and international markets. Sichuan’s 68 insti-tutions of higher learning support a strong educational infrastructure reflected in an estimated professional and technical labor force of about 2.5 million with a 2-year or longer, full-time advanced education. Sichuan is developing rapidly and leads the rest of western China in committed FDI, although the province lags behind the coastal areas in gross domestic product (GDP), industrial output in the five subject sectors, and in FDI inflow. Domestic investment is seven times greater than FDI in Sichuan. In 2003, most FDI was committed to the manufacturing sector, and originated primarily from Asia – Hong Kong, Taiwan, Japan and Singapore – and the United States. (Hong Kong was the source of 47% of Sichuan’s total FDI in 2003.)

The study concluded that Sichuan is well positioned to increase its share of foreign investment. The interviewed investors reported that the province provides a large

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50

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Operating cost index(average = 100)

125150175200

Chengdu

Mianyang

Deyang

Luzhou

Suining

Nanchong

Leshan

Panzhihua

Zigong

Yibin

Figure 3: Operating Costs versus Conditions in Pharmaceuticals/TCM

Each municipality’s composite scores were charted on matrices, illustrating its relative position against the mean index score of 100 for costs (on the horizontal axis) and conditions (on the vertical axis). In this scattergram, the cluster at right indicates broad similarity in the cost and quality profiles of seven municipalities in meeting the requirements of firms in pharmaceuticals and TCM. Investors use this sort of analysis to weigh the trade-offs between costs and quality for any given location, but generally they are most interested in those locations that fall in the upper right quadrant, reflecting high-quality operating conditions at a relatively lower cost.

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and attractive market as a result of its size and strategic location in western China, a region with a population of 285 million, about as large as the United States. Although Sichuan is far removed from the main centers of economic activity in China’s coastal provinces and international markets, the findings suggest that this inherent geographic disadvantage can be overcome with further government investment in transportation infrastructure, increased air cargo capacity in Chengdu, and the establishment of inland customs points in each of the province’s municipalities.

The findings also suggest that Sichuan presents investors with a viable alternative to China’s coastal provinces as an attractive, low-cost investment location. Low operating cost was reported as a main reason for investment in the province. Based on a comparative analysis of two industries, the average cost of labor for Sichuan was found to be significantly lower than for a comparator group of cities comprised of Beijing, Guangzhou and Shanghai in the coastal region, and the interior city of Wuhan. The presence of a large number of nationally ranked universities, technical schools and research institutes, matriculating more than 43,000 graduates per year, provides a large pool of fresh technical staff. Most interviewees reported that the province has a sufficiently large and available skilled and unskilled workforce, although managers and professionals were viewed as relatively more difficult to recruit and retain. Real estate costs also were found to be much more competitive in Sichuan than in the comparator group including the coastal cities.

In addition to limited access to China’s coastal provinces and international markets, the study cited several weaknesses that could hinder attraction of investment in Sichuan if not addressed. These include an underdeveloped rail transportation infrastructure and services, insufficient reliability of electrical power, a limited expa-triate infrastructure, and a lack of awareness among foreign investors of Sichuan as a location alternative.

The Industries

The industries chosen as subjects of the Sichuan study are considered important for the economic development of the province. Each of these five industries – chemicals, electronics, food and beverage processing, machinery and machine building, and pharmaceuticals and traditional Chinese medicine – has estab-lished a significant presence in Sichuan and manufactures a diversified range of products. Robust clusters of manufacturers and suppliers, often specific to sub-sectors within each industry, are already in place. However, as highlighted in the sector profiles below, municipalities that are not currently leaders in these sectors are frequently evident in the study’s findings of the most competitive locations, indicating the potential for expansion of these industries within Sichuan beyond their current centers of activity.

Chemicals. Domestic and international investors in a wide range of chemical industry sub-sectors have been attracted to Sichuan by the presence of numerous universities, several of which are nationally ranked and offer chemical and chemical engineering programs, and by the availability of petroleum and natural gas and mineral resources. Sichuan leads the country in its reserves of vanadium, titanium, calcium, mirabilite, fluorite, natural gas and iron sulfides. These strengths, coupled with the availability of skilled labor and relatively more ability to recruit white-collar workers, make Sichuan an attractive destination for investment in high value-added specialty and fine chemicals manufacturing and research and development (R&D) related to these industry sub-sectors. Among perceived weaknesses, some respondents cited access to financing in this capital-intensive industry, and many reported that raw materials were highly priced, despite their ready availability.

The municipalities of Luzhou, Zigong and Deyang have well-established chemical industry clusters in Sichuan province. The interviewed chemical companies rated

The findings suggest that Sichuan

presents investors with a viable

alternative to China’s coastal provinces

as an attractive, low-cost investment

location.

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Deyang, Leshan and Yibin as attractive locations for investment in terms of operating conditions. In this industry, utility costs account for the greatest per-centage of total operating costs and are very similar across Sichuan, so the dif-ferentiating cost factors among the municipalities were labor and land lease costs. Panzhihua was rated the lowest cost location for the chemical industry in terms of overall operating costs. Based on the study’s analysis, Deyang offers operating conditions best suited to the requirements of a typical chemicals operation at the lowest cost structure among the surveyed municipalities. Respondents highly rated Deyang’s infrastructure, particularly the access to transport by rail and road, as well as its sufficient availability of land. In addition, Deyang’s proximity to Chengdu presents access to a significant local market. Yibin and Leshan provide nearly the same quality of conditions as Deyang at slightly higher costs.

Electronics. Sichuan is emerging as an important center for the electronics industry in western China. Among the five subject industries, the highest average investment was in electronics. Chengdu, Mianyang and Deyang form an industrial belt where most of the electronics and machine industries in Sichuan are con-centrated, and Chengdu leads the province in electronics investment. Among electronics investors, Chengdu is considered a significant market for their products and the gateway to other western Chinese provinces. Within Sichuan, several nationally ranked research institutes and institutions for higher learning offer technical programs in electronics, providing a ready pool of highly skilled graduates, although electronics firms reported the lowest availability of labor for all employee levels and cited difficulties recruiting and retaining managers. The province has attracted large microelectronics companies, and these investments can be leveraged to attract other manufacturers in allied and supporting industries. However, it will be critical to enforce the protection of intellectual property rights (IPR) in order to continue growth in microelectronics, which is a highly knowledge-intensive sub-sector. Survey respondents cited other areas for improvement, including electricity generation, in order to eliminate seasonal power shortages, and access to technology-intensive components and equipment.

Labor constitutes the primary operating cost for electronics firms in Sichuan. Although relatively higher in labor and land usage rights costs than the other

Table 1: Profile of Surveyed Companies by Industry

Che

mic

als

Elec

tron

ics

Food

Pro

cess

ing

Mac

hine

ry/

Mac

hine

Bui

ldin

g

Phar

mac

eutic

als/

Trad

ition

al

Med

icin

e

Average Number of Employees 432 294 571 353 249

Average Investment (US$, millions)

13.6 23.3 12.9 8.4 4.9

Average Sales (US$, millions)

23.5 40.6 22.7 16.2 5.4

Ave. Floor Size of Facility (m2) 42,174 13,260 29,176 29,461 13,926

Average Exports (% of sales)

12.4 11.6 17.5 10.9 14.7

Imported Raw Materials (%) 4.7 18.4 3.3 2.7 4.8

Imported Components (%) 1.5 6.4 1.3 7.4 0.2

Imported Equipment and/or Chemicals (%)

8.7 23.0 24.3 14.0 3.5

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municipalities, Chengdu has well-developed infrastructure, and availability of sup-pliers and technical labor. The study found the municipalities’ operating costs largely similar, with the exception of those in Chengdu, where most of the com-panies with the largest facilities are located. In some municipalities, such as Suining, costs were found to be up to 35% lower than in the other municipalities, and in Chengdu, costs were reportedly almost 75% higher. The study concluded that Mianyang, Deyang, Leshan and Yibin offer a proposition best suited to the requirements of a typical electronics operation, based on both costs and operating conditions. Both Mianyang and Deyang encompass a sizeable local market. Yibin and Leshan, although they are relatively distant from Sichuan’s principal markets, offer accessible transport via rail, river and road.

Food and beverage processing. Sichuan, one of China’s key provinces in agricultural production, has an ideal combination of costs and operating conditions to attract FDI in this industry. An abundant supply of local raw materials and the high quality of water in the province are important input factors that favor food and beverage production. Sichuan enjoys a temperate climate and ample rainfall. In addition, an available, large pool of unskilled labor is a critical resource that has attracted this labor-intensive industry, which employs the highest average number of workers among the five subject industries. Luzhou and Yibin are already traditional bases for alcoholic beverage production,1 as are Suining and Yibin for meat processing. Among the interviewed companies, 60% reported that all their sales were domestic, and the vast majority of respondents ranked access to markets – including western China – and suppliers as the most important factor influencing their site selection. Development and enforcement of international health and hygiene standards in food processing are considered critical for international acceptance of food products from Sichuan. Moreover, Sichuan’s farming techniques lag behind other provinces in modern agricultural technology, and are seen as an area for improvement.

Labor constitutes the primary operating cost for Sichuan-based firms in food and beverage processing, followed by real estate (land usage rights and building leases). The study’s findings suggest that Zigong and Luzhou have the most favorable operating cost profiles in this industry among several similar profiles, based on the parameters of a hypothetical firm. The study concluded that Leshan, Deyang and Yibin offer both costs and operating conditions well suited to the requirements of investors in the food and beverage processing industry. All three municipalities benefit from proximity to raw materials. Deyang, with its close proximity to Chengdu, also has a large local market without the relatively high operating costs of Chengdu. Leshan and Yibin both have reliable transport by rail and by river, and respondents in Yibin also reported high satisfaction with road transport. Both Yibin and Leshan have a high-quality water supply, especially important for the food and beverage processing industry.

Machinery and machine building. Sichuan lies at the center of southwestern China – a strategic location to tap a growing market for the automobile industry. The province has already attracted a significant number of local and foreign investors in automotive and component manufacturing; half of the interviewed companies were in automotive-related production. Sichuan also has well-developed aerospace and mining industries that present attractive markets for producers of aerospace components, mining machinery and related parts. Traditionally, Deyang has been the hub of Sichuan’s machinery industry, and its heavy-machine building cluster supplies China’s nuclear power and large hydropower stations. The municipality of Panzhihua, a major producer of steel in China, can benefit from this industry’s demand in Sichuan. Numerous technical education programs and the avail-ability of skilled workers support growth and further investment in machinery and

1 While this report contains certain historical references and data relating to alcoholic beverage and tobacco products, the World Bank Group does not support or promote investment in these particular sectors.

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machine building. Among companies interviewed, technical and skilled workers comprised more than 82% of the workforce, and these companies reported the highest average salaries at all skill levels of any subject industry. An area cited for improvement was the quality of precision machinery manufactured locally, which was not perceived to be up to international standards.

The study found operating costs in the municipalities were broadly similar, with the exception of those in Chengdu, which were significantly higher due to relatively more expensive labor and real estate. The study concluded that Yibin, Mianyang and Leshan offer both costs and operating conditions best suited to the requirements of firms in Sichuan’s machinery and machine building industry. Yibin was con-sidered the best location in delivering the highest quality of operating conditions at the lowest cost. Survey respondents were highly satisfied with Yibin’s proximity to inputs, suppliers and cluster networks, as well as its relatively strong domestic market access. Moreover, Yibin is perceived to have strong infrastructures for air, river, and rail transport, given it has the second largest airport in the province, one of the largest river ports on the Yangtze, and rail connections to Chongqing, Chengdu, Neijiang, and Kunming.

Pharmaceuticals and traditional Chinese medicine. The strong combination of key human resource talent and the historical cultivation of medicinal herbs and plants has helped establish Sichuan as a traditionally important center of activity in pharmaceuticals and TCM. Sales revenues in this industry in Sichuan ranked ninth among provinces in China. Abundant medicinal plant-based ingredients are readily available for traditional Chinese medicine manufacturing, and China is a global supplier of basic chemicals that are used in the manufacture of active pharma-ceutical ingredients. Local universities and research institutions, including many that are nationally ranked and offer chemical and biomedical programs, provide a fertile recruiting environment. Interviewed companies expressed satisfaction with their ability to recruit and retain skilled and unskilled workers; in fact, 77% of respondents said they were satisfied with the available pool of skilled labor. However, respondents reported difficulties in attracting and retaining managers and professional employees. Other reported weaknesses included: China’s under-developed IPR protection and enforcement, which are considered key to the inter-national competitiveness of pharmaceutical companies, the lack of standardized measurement for TCM’s efficacy and safety, and the unreliable power supply.

The study concluded that seven municipalities – Deyang, Mianyang, Leshan, Suining, Yibin, Panzhihua, and Luzhou – offer similar cost and quality profiles for companies in this industry. The costs of facilities, office rental and land usage rights are the major operating costs in pharmaceuticals and TCM. Among the municipalities, costs were not very differentiated, with the exceptions of Chengdu, which the study found has the highest land lease costs, and Nanchong, which has the highest building and office lease costs. In terms of operating conditions, respondents considered Mianyang, Deyang, Suining, Leshan and Yibin the most attractive locations. The study concluded that Deyang has both operating con-ditions and a cost proposition best suited to the requirements of pharmaceutical/TCM companies in Sichuan. Deyang offers an available and competent labor pool with sufficient language skills, as well as a large local market, given its proximity to Chengdu. Deyang also has good access to raw materials and suppliers, strong rail infrastructures and a high-quality water supply.

Implications

In many regions of the developing world, investment promotion activity is being conducted at the sub-national level, a practice that is likely to spread and intensify in the next few years. As a pilot program for sub-national enterprise benchmarking,

Municipalities that are not currently the

hubs of sector activity were frequently

considered the most competitive

locations by the interviewed investors,

indicating the potential for expansion

of these industries within Sichuan.

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the Sichuan EBP has broad implications for future studies in western China and other developing regions. Specifically, the Sichuan study’s design and methodology offer a template for provincial governments in western China, like that of Sichuan, as they seek to develop investment promotion programs and competitive posi-tioning for their provinces as locations for investment. Similarly, the provincial EBP model helps IPIs, at both the national and sub-national levels, to differentiate their locations for potential investors in terms of sector-specific operating costs and conditions. Under EBP’s umbrella methodology, the results of all studies are largely comparable by industry sector on a global, regional, national and sub-national basis.

It should be noted that the implementation of the study revealed the difficulties inherent in benchmarking at a municipal level. Some locations were host to very few foreign investors, and thus some interviews were conducted with domestic firms. In addition, certain conditions (e.g., investment incentives) are broadly equivalent even at a national level, across municipalities. Likewise, certain costs are fixed across the province and local level data reveals little in terms of competi-tiveness. For this reason, it is suggested that future sub-national benchmarking studies compare key municipalities in selected provinces across the country for the industries of interest, rather than concentrating solely on one province.

For potential investors, the Sichuan study sheds light on the operating environment of a lesser-known candidate among globally competitive locations. This “insider’s perspective” is not intended to replace the investor’s project-specific evaluation in reducing a long-list of location alternatives to a short-list of finalists. However, the study’s results may be useful in providing the necessary information to place Sichuan province in an active consideration set not to be overlooked in future site selection, particularly for foreign investors interested in locations in China.

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Chapter II

The Investment Climate and FDI

This chapter provides context on the investment climate in China, western China

and Sichuan province. It presents background on China’s FDI inflows and the

Chinese government’s development strategy, as well as highlights of Sichuan’s

environment and its attraction of FDI. In addition, the province’s position as a

viable alternative to China’s coastal locations and its cost competitiveness are

detailed in a cross-sectoral SWOT analysis of Sichuan’s strengths, weaknesses,

opportunities and threats related to attracting and retaining FDI. This analysis

is followed by a discussion comparing average one-time and operating costs

for Sichuan’s municipalities to those of a comparator group of cities – Beijing,

Guangzhou, and Shanghai along the coast, and the interior city of Wuhan.

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FDI in China

FDI into China continued to rise during 2004. Utilized FDI (defined by the Chinese government as the amount actually invested during the year) into China in 2004 surged to a record high of almost US$61 billion, 13.3% over 2003.

The manufacturing industry receives the greatest proportion of China’s FDI, and the total amount of FDI in manufacturing continues to increase. In recent years, however, the ratio of manufacturing to services-related FDI has decreased, due to the rapid growth of FDI in the service industries.

In the 1980s, FDI in China was mostly concentrated in labor-intensive industries. Investors shifted to capital-intensive industries in the early 1990s and then to technology-intensive industries in recent years. China’s manufacturing tech-nologies continue to leap-frog those of other nations as Chinese manufacturers place priority on purchasing the “newest” and “best” technologies. This priority, coupled with China’s low-cost labor, has helped to position China as “the factory of the world” for at least the next two decades. Over the next decade, China’s wholesale and retail sectors are expected to attract the most in investment, followed by heavy and light manufacturing.

After two decades of pursuing high-tech investment, China is now home to dozens of multinational R&D centers. China is beginning to compete with India as the technology hub of developing Asia. Many multinational corporations (MNCs) have made major investments in R&D to gain additional tax incentives and to tap into a low-cost base of well-educated research talent.

FDI in Western China

The remarkable pace of FDI flows into China is expected to continue for the fore-seeable future. However, despite the magnitude of these investments, FDI in China is still extremely polarized on a geographic basis, and the disparities between the coastal region and the central and western regions are deepening.

At the end of 2003, China’s western region had attracted only 5.5% of China’s cumulative contracted FDI. The actual utilized foreign investment was even less. At US$24 billion, western China’s FDI represented just 4.8% of China’s cumulative actual utilized FDI, in sharp contrast to 82% of the projects, and 86.3% of actual utilized FDI received by the coastal region. (See Table 2.)

The concentration of FDI in the coastal region has traditionally been the result of heavy investment from neighboring regions such as Hong Kong, Macao and Taiwan. The southern coastal provinces have received most of the investment from these regions, while in recent years the northern coastal provinces have seen an increase of FDI from industrialized countries. The heavy concentration of FDI in the coastal provinces leads to a geographic aggravation of economic and social disparities with the less-developed central and western provinces.

Historically, FDI into China’s coastal provinces has been mostly export-driven. Only recently has FDI shifted toward serving the domestic Chinese market. Foreign investors are finding that investing in the coastal provinces is becoming less attractive as these areas develop, and competition for land and human resources drives up prices. When foreign companies are seeking to identify the most cost-effective locations for their manufacturing facilities, western provinces are ending up on their “short lists,” precisely because these locations offer competitive one-time investment and on-going operating cost advantages over the more developed, and now more expensive, coastal locations. Central and western locations are also

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attractive from the perspective of offering a centralized point from which to dis-tribute finished products throughout China.

In order to modernize all of China and narrow the economic development gap between the coastal provinces and the central and western regions, China imple-mented two important strategies to develop and encourage investment in these areas: the “Central Region Rising Strategy” and “West Region Development Strategy.”

• Central Region Rising Strategy and West Region Development Strategy: The central government initiated its “Central Region Rising Strategy” and “West Region Development Strategy” in 1999 to promote investment in selected provinces as part of its development of the central and western areas of China. The provinces and autonomous regions covered by these strategies include: Guangxi, Heilongjiang, Jilin, Inner Mongolia, Gansu, Xinjiang, Shanxi, Ningxia, Qinghai, Henan, Shaanxi, Anhui, Hubei, Chongqing, Sichuan, Xizang, Jiangxi, Hunan, Guizhou and Yunnan. In order to implement the strategy, the State Bureau of Taxation was authorized to provide the following incentives for foreign invested enterprises (FIEs) locating in the selected provinces:

• Corporate income tax rate reduction: FIEs located anywhere in the selected central and western provinces that have received provincial Tax Bureau approval, and are engaged in an “encouraged” industry as defined by the Ministry of Commerce’s Catalogue for the Guidance of Industries for Foreign Investment, enjoy a reduced corporate income tax rate of 15% for an additional three years (years 6 to 8) after the expiration of the Standard Corporate Income Tax Incentive.

• Import duty and VAT exemptions: FIEs engaged in “encouraged” industries may import equipment for their own uses, as well as selected accessories and spare parts, free of import duties and value added tax (VAT). FIEs not listed as “encouraged” industries, but meeting the Catalogue of Advantaged Industries for Foreign Investment in Mid-West China can also enjoy the pref-erential policy in these provinces.

• Western Region Development Strategy – “Go West”: In the year 2000, the central government implemented a new investment promotion strategy often referred to as “Go West.” This policy was developed specifically to promote investment in China’s western provinces, including: Inner Mongolia, Gansu, Xinjiang, Ningxia, Qinghai, Shaanxi, Chongqing, Sichuan, Xizang, Guangxi, Guizhou, and Yunnan. Within these provinces, preferential corporate tax incentives are offered in order to attract both foreign and domestic investment. The State

Table 2: Cumulative FDI in China’s Three Regions, 2003 (US$ billions)

RegionNumber of

Projects%

Contracted Foreign

Investment%

Utilized Foreign

Investment%

Coastal 381,527 82.0 819.1 86.8 432.6 86.3

Central 52,424 11.3 71.2 7.5 44.8 8.9

Western 31,326 6.7 52.8 5.5 24.1 4.8

Total 465,277 100.0 943.1 100.0 501.5 100.0

Source: Information Consulting Centre, MOFCOM.

Note: China’s “Coastal” provinces and regions include Beijing, Tianjin, Hebei, Liaoning, Shanghai, Jiangsu, Zhejiang, Fujian, Shandong, Guangdong and Hainan. “Central” provinces are Shanxi, Jilin, Heilongjiang, Anhui, Jiangxi, Henan, Hubei and Hunan. “Western” provinces and regions include Inner Mongolia, Guangxi, Sichuan, Chongqing, Guizhou, Yunnan, Shaanxi, Gansu, Qinghai, Ningxia, Xinjiang and Xizang.

snapshot sichuan 17

Bureau of Taxation was authorized to provide the following incentives to both FIEs and domestic firms locating in the selected provinces:

• Corporate income tax rate: FIEs and domestic companies located anywhere in the selected western provinces and engaged in an “encouraged” industry as defined by the Ministry of Commerce’s Catalogue for the Guidance of Industries for Foreign Investment, may enjoy a preferential corporate income tax rate of 15%. This policy will remain in effect until 2010.

Sichuan’s Investment Climate

Located in southwest China, Sichuan is bisected by the Yangtze River and is sur-rounded by the provinces of Yunnan, Guizhou, Shaanxi, Gansu, Qinghai and Xizang, and the municipality of Chongqing. Sichuan is known as “the land of abundance” because of its rich agricultural resources. In 2003, Sichuan’s agricultural output ranked third in China behind Henan and Shandong provinces, respectively. Of China’s total agricultural output of 430.7 million tons in 2003, 33.3 million tons, or nearly 8%, was produced in Sichuan province. Sichuan is also a center of China’s tourism industry, hosting some 10 million visitors, primarily domestic, per year. The tourism industry contributes 10% of Sichuan’s provincial GDP.

Over 132 types of exploitable mineral resources have been identified in Sichuan, and the province leads China in reserves of vanadium, titanium, calcium, mira-bilite, fluorite and iron. Sichuan is also an important producer of natural gas.

Rivers in Sichuan, fed by ice-melt from the Qinghai-Xizang plateau, are a source of hydropower for a huge west-to-east electricity transmission project. The central government has been working to develop electric power resources in the western region in preparation for this project, and has issued a series of preferential taxation and investment policies to support the construction of power projects in western China. Sichuan’s hydropower reserve is 150 million kilowatts (kW), the highest in China, and its exploitable hydropower potential is over 100 million kilowatts.

Sichuan is a large, mountainous province, yet it has a reasonably extensive trans-portation system, including primary and secondary roads and limited access highways, navigable inland waterways, and airports interconnecting major cities in Sichuan with China’s other provinces and international markets. However, some cities, such as Panzhihua in southernmost Sichuan, have not been connected to the provincial or national highway system and remain difficult to access. The lack of appropriate transportation infrastructure has hampered the growth of some areas in Sichuan.

Although developing rapidly, Sichuan still lags behind China’s industrially developed coastal areas. This disparity is illustrated in Table 3, which compares Sichuan’s GDP and industrial output of the five industries evaluated in this study to those of Jiangsu province, neighboring Shanghai. In 2003, Sichuan’s GDP was 44% of Jiangsu’s GDP, and its industrial output was 19% of that of Jiangsu. The only industry in which pro-duction in Sichuan nearly matched that of Jiangsu was in processed foods. In 2003, processed food output in Sichuan reached US$2.24 billion, comparable to Jiangsu’s US$2.4 billion in the same industry.

Sichuan’s educational infrastructure is extensive. It has 68 institutions of higher education including general and specialist universities, colleges and technical schools and over 288 vocational schools. There are 10 medical schools and 13 universities specializing in chemical fields. Sichuan University is ranked twelfth nationwide by the ”China Universities Assessment of 2005” and seventh for pharmaceutical sciences. This strong educational foundation is reflected in an estimated professional and technical labor force of about 2.5 million with a

SICHUAN AT A GLANCE

Area 484,000 km2

Population 87 million

Capital Chengdu

GDP (2004) US$66 billion

GDP Growth Rate

11%

GDP per Capita

US$920

Climate Mild and humid, subtropical

Principal Industries

Machine building, electronics, auto-motive, metallurgy, iron and steel, chemicals, building materials, food pro-cessing, silk and leather, pharmaceu-ticals and traditional Chinese medicine

Source: Sichuan Investment Promotion Bureau.

snapshot sichuan18

0

1000

2000

3000

4000

5000

6000

7000

1998 1999 2000 2001 2002 2003 2004

Investment from other parts ofmainland China

Foreign direct investment

Figure 4: Investment in Sichuan (US$ millions)

Source: Sichuan Investment Promotion Bureau.

two-year or longer full-time advanced education, accounting for 27% of nearly 9 million employees in industry and service sectors,7 about 3% higher than China’s average.

Sichuan has 19 Economic Development Zones (EDZs). EDZs are designated geo-graphic areas in which industrial investments are “encouraged” and within which investment incentives are provided by the central government.

Within the province are three national-level Economic and Technological Development Zones (ETDZs), two Hi-Tech Industrial Development Zones (HIDZs) and an Export Processing Zone (EPZ), which is located within the Chengdu HIDZ. The State Council has approved all these national-level zones, allowing them to offer the highest level of corporate tax and other non-tax incentives to foreign direct investors. Within the 10 surveyed municipalities, there are an additional six provincial-level EDZs, as well as 10 local-level EDZs, which offer less attractive investment incentives.

FDI in Sichuan

Sichuan leads the rest of western China in committed FDI. Over 6,500 foreign firms have invested in Sichuan, including 73 Fortune 500 companies. In 2003, Sichuan’s actual utilized foreign direct investment reached US$580 million. However, Sichuan lags significantly when compared with the coastal provinces. FDI inflow in Sichuan represented only 1% of China’s total FDI of US$53.5 billion in 2003. Investment inflow from other parts of mainland China into Sichuan province outstrips FDI in the province by seven times, and the differential is increasing. (See Figure 4.)

Most FDI in Sichuan is committed in the manufacturing sector, followed by real estate and construction. In 2003, foreign investment in manufacturing accounted for 68% of total FDI. Real estate and construction accounted for 13% and 7%, respectively. Investment in infrastructure such as electricity, gas and water distri-bution accounted for 5% of investment. Investment in services, though still a rela-tively small proportion, is gaining momentum.

Table 3: GDP by Sector, 2003 (US$ billions)

Chi

na

Sich

uan

Jiang

su

GDP 1,416.1 65.9 150.5

Industrial added value

507.1 14.1 56.4

GDP – Processed foods2 35.4 2.2 2.4

GDP – Chemicals3 62.6 1.3 8.6

GDP – Machinery4 90.8 2.0 11.6

GDP – Pharmaceuticals5 12.4 0.6 1.3

GDP – Electronics6 47.4 1.0 8.1

Source: Sichuan Provincial Statistics Bureau.

2 Processing of agricultural products, food and beverages.3 Production and processing of petroleum and other hydrocarbon fuels, inorganic and organic chemicals, man-made fibers, rubber and plastics.4 Manufacturing of general and specialized machinery, transportation and electrical equipment.5 Production of pharmaceutical products.6 Communications, computers and other electronics, measuring devices and office equipment.7 2004 Economic Census of China.

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Investment by Asian countries and regions has tended to dominate Sichuan’s FDI landscape. In 2003, Hong Kong was the source of 47% of Sichuan’s FDI, Taiwan accounted for 17%, and Japan and Singapore accounted for 4% each. The United States is the only Western country accounting for a significant percentage (13%) of FDI in the province.

Cross-Sectoral SWOT Analysis of the Province

The size of Sichuan’s provincial market and location in western China, its abundance of mineral and agricultural resources, the availability and reasonable cost of labor, and the education and industrial infrastructure make the province an attractive location for a number of key industry sectors. Sichuan is well positioned to market itself as a viable alternative to China’s coastal provinces as an attractive low-cost investment location.

While Sichuan’s operating environment can be considered favorable in many cost and condition factors of interest to investors, there are improvements that would enhance its attractiveness as a location and facilitate increased FDI. Most foreign investors prefer to establish manufacturing operations in economic development zones where land usage rights and land use regulations are well defined and oper-ational risks can be managed more effectively. However, many EDZs in Sichuan do not have sufficient land properly zoned for construction use and with usage rights transferred to state use, which allows the transfer of land to private investors. Additionally, although the province itself provides a large and attractive market in western China, Sichuan is far removed from the main centers of economic activity in China’s coastal provinces and international markets. Superior transportation infrastructure access and reliability, particularly for rail, to the coastal provinces is key to offsetting the disadvantage of distance from these major markets and deserves significant government attention.

Strengths

Western China Market Access: Sichuan, with a population of 87 million, lies at the center of the southwestern China market of more than 204 million people, within the larger western China market of 285 million people. Sichuan's GDP per capita is US$920 and is growing more than 11% annually.8

Low Costs: Companies invested in Sichuan can benefit from both the low one-time and on-going operating costs. According to an analysis of the electronics and food processing industries, average labor costs in Sichuan are significantly lower across all skill categories than those in a comparator group of cities comprised of Beijing, Guangzhou, and Shanghai (in the coastal region) and Wuhan (in the central region).

Mineral and Water Resources: Sichuan possesses over 132 types of exploitable mineral resources, and ranks first in China in the production of eight minerals including vanadium and titanium. Twenty-eight other mineral resources in Sichuan rank in the nation’s top three in terms of production volume. The chemical industry, especially in chlor-alkali and synthetic soda ash, is supported by rich rock salt reserves. Other abundant mineral resources include coal, natural gas, limestone, phosphate, crude oil, copper, dolomite, clay, kaolin and marble. In addition to its abundant supply, Sichuan’s water is high quality, providing good sources of process water for the food and beverage industry.

8 Sichuan Statistical Yearbook 2004; Official Announcements.

snapshot sichuan20

Agricultural Resources: Sichuan province is known as “the land of abundance” for its substantial agricultural output. Sichuan is a major producer of fruits, grains, vegetables, oil seeds, medicinal herbs and plants and tea that can be used as raw materials in the food processing industry. Sichuan is also China’s most important province in terms of pork production, providing one-third of the pork that is traded across China.

Preferential “Go West” Investment Incentives: Preferential corporate income tax incentives enhance the financial attractiveness of western China, already a low cost location. FIEs in “encouraged” industries can enjoy a 15% corporate income tax rate until 2010, exemption of value added tax on imported machinery and refunds of corporate tax when profits are reinvested.

Educational Institutions: Sichuan has 68 institutions of higher education matric-ulating more than 43,000 graduates annually. Many of these schools are highly ranked nationally, particularly for their programs related to the pharmaceutical and fine and specialty chemical industries.

Abundant Unskilled Labor: Sichuan has a sizeable and low-cost labor pool from which China’s large coastal cities import much of their unskilled labor. In 2000, 27% of the migrant labor in China’s coastal provinces originated in Sichuan. Companies interviewed cited the availability of low-cost unskilled labor as one of their key reasons for investing in Sichuan.

Low Wage Inflation and Turnover: Wage inflation and turnover rates, particularly for cities outside of Chengdu, are up to 50% lower than in cities in China’s booming coastal provinces.

Weaknesses

Limited Coastal Province and International Market Access: Although the Chinese central government has invested heavily in expanding Sichuan’s transportation infrastructure, accessibility remains limited, especially to coastal provinces and international destinations by road, rail, air and inland waterway. Sichuan is one of the key gateways to western China and an ideal, centralized location for accessing western Chinese markets, yet the province is over 1,700 kilometers from the principal international gateway ports of Zhangjiagang, Changshu, Zhenjiang, Nanjing, and Shanghai on the Yangtze River. This means increased costs and lengthened inbound and outbound supply chains for manufacturers. The direct express rail cargo service to Shanghai still requires six days of transit time. Trucking goods requires at least five days, while barges require over 15 days to traverse the 2,350 kilometers from Leshan port in eastern Sichuan to Shanghai. Some of the province’s main secondary cities, such as Leshan, Luzhou, Nanchong, Zigong and Suining, do not have convenient access to airports, although domestic con-nections to China’s main commercial centers are extensive.

Quality of Rail Transportation Infrastructure and Services: In addition to a shortage of rolling stock, the quality of rail services is still low. Rail services remain largely a state monopoly and do not have the know-how to provide efficient and reliable logistics services to enterprises in the province. To avoid this situation, companies in the province must resort to truck transportation, even though it is more expensive and cumbersome than rail.

Lack of Awareness among Foreign Investors: In the process of attracting foreign investment, it is critical to have sufficient name recognition among investors to warrant their interest in collecting more information and in visiting the province to look at potential sites. Because Sichuan is not well known, foreign investors rarely place the province on their initial “long-lists” of potential investment locations,

snapshot sichuan 21

making it difficult for Sichuan to advance to their final rounds when “short-lists” of finalists are seriously evaluated.

Limited Expatriate Infrastructure: Sichuan has few international-standard schools, medical facilities, shopping centers and traditional recreational oppor-tunities for expatriate investors. Some expatriates commented that they could not find a good international school for their children, even in Chengdu. While boardroom executives may not consider a location’s quality of life a driving factor in their site decisions, international operational managers responsible for evaluating short-listed site locations typically have a disproportionate influence on the selection of the finalist sites, often based on expatriate quality of life considerations.

Electrical Power Reliability: Sichuan had excess power supply due to its rich avail-ability of hydropower generation and potential until 2003. However, the shortage of power supply that first appeared in the coastal areas has gradually spread to Sichuan since then, a result of inadequate estimates of long-term demand for power and thus insufficient investment in power from 1998-2002. In general, the power shortage in the province now is not as severe as in most other provinces, but during the winter season (from October to February), the shortage is rather significant.

Managerial Talent Is Difficult to Recruit and Retain: Experienced professional and managerial staff, and the best and brightest graduates from Sichuan’s educational institutions, are attracted to the coastal provinces by the higher wages and job opportunities offered by companies in these areas.

Preferential Treatment for Foreign and State-Owned Enterprises: Many respondents commented that local government had given unjustified, preferential treatment to foreign and state-owned enterprises (SOEs). According to the survey, SOEs usually showed satisfaction with government services, while private com-panies often complained of an unfair playing field. Respondent complaints related to the perceived unfair distribution of electric power to state-owned and other large companies, and the lack of implementation of promised government incentives for private companies.

Government Commitment: Some respondents noted that local governments could not always keep their commitments on preferential treatment after investors had made their investments.

Opportunities

Continued High Growth in China: Since 1979, China has led the list of countries with the highest growth rates in GDP, encouraging investor confidence. China still provides a rare combination of some of the world’s lowest manufacturing costs and one of the largest, highest growth domestic markets in the world. Within China, the western provinces including Sichuan are growing even faster than the average. Sichuan should be able to take advantage of China’s premier status as the FDI destination of choice to capture some of this Chinese-bound investment.

Preferred Alternative Location to Coastal Provinces: As wages and costs rise in the coastal provinces, Sichuan is well positioned to become a more attractive des-tination for nearly all manufacturing investment, particularly for high value-added manufactured products that can be transported by air and do not require just-in-time (JIT) supply chains.

Mineral Extraction and Processing Industries: Processing and manufacturing industries utilizing minerals can exploit Sichuan’s 132 types of mineral resources.

snapshot sichuan22

Sichuan leads China in reserves of vanadium, titanium, calcium, mirabilite, fluorite and iron. Other natural resources, such as coal, natural gas, limestone, phosphate, crude oil, copper, dolomite, clay, kaolin and marble, are also abundant in Sichuan.

Pharmaceutical/Traditional Medicine and Fine Chemical Industries: Pharmaceuti- cal and fine chemical manufacturers can leverage Sichuan’s highly rated, chemical-related educational institutions, as well as the province’s mineral resources. Sichuan’s base of traditional medicine manufacturers can capitalize on a global trend toward holistic and/or alternative medicine.

Food and Beverage Processing: Sichuan is a significant producer of agricultural outputs, including many varieties of fruits (such as peaches, loquats, oranges, grapefruit, and kiwi fruit), grains, vegetables, oil seeds, and teas. In 2004, Sichuan’s total grain production was 33.3 million tons, ranking third in China, and meat pro-duction was 8.6 million tons. This large agricultural base and Sichuan’s high-quality and plentiful water supply are favorable to the food and beverage processing industry.

Microelectronics and Precision Machinery: Microelectronics, precision machinery and components can be shipped via air to domestic and foreign markets, making Sichuan’s far inland location less of a disadvantage.

Threats

Slow-Down in Global and Chinese Economies: A sustained, global economic downturn dampening FDI inflows into China would have a disproportionate effect on investment in Sichuan. Global economic growth reached 3.8% in 2004, the fastest rate in four years, but global economic momentum has peaked. Developing countries’ gains are vulnerable to risks associated with adjustments to ballooning global imbalances, especially the US$666 billion current account deficit of the United States.

Insufficient Investment in Transportation Infrastructure: If the central government does not continue to invest in improving the transportation infrastructure (air, rail, highway and water), Sichuan’s attractiveness as a destination for FDI could suffer. While there are 10 airports in Sichuan, including Chengdu’s international airport, some of the main secondary cities, such as Leshan, Nanchong, Zigong and Suining, do not have convenient access to airports. Moreover, in some parts of the province, for instance, Luzhou, rail services are inadequate. Interviewees noted that even where there is access to rail, frequently an insufficient supply of rail cars fails to meet their transport needs. Sichuan has three inland water ports, Leshan, Yibin and Luzhou, but waterway transport within Sichuan is also limited; it is often not possible to ship cargo to Shanghai by river in winter due to seasonal low water levels. The highway system within Sichuan also needs to be improved; municipalities such as Panzhihua have no highway access at all. More importantly, a highway connected to central provinces in China (for instance, Hubei) is needed to improve inter-province land transportation.

Standardized Corporate Income Tax Rate and Expiration of “Go West” Incentives: China’s central government has announced that in order to fulfill its World Trade Organization (WTO) commitments, it is considering a standardized corporate income tax rate of 24% and no preferential investment incentives such as “Go West.” These incentive policies are needed in the short-term to offset some of the disadvantages of investing in Sichuan. Elimination of these incentives will reduce the attractiveness of Sichuan as a destination for FDI.

Increasing Competitiveness of Coastal Provinces: Despite the higher labor costs and land constraints in the coastal provinces, these provinces are an attractive

snapshot sichuan 23

choice for foreign investors in China. The rapid influx of investment into these provinces has allowed a large clustering effect, which is not present in Sichuan. The lack of agglomeration in industry clusters in Sichuan threatens the province’s competitiveness against the coastal provinces, which have a higher concentration of buyers and supporting industry suppliers.

Improving Attractiveness of India for FDI: India’s improving competitiveness as a low-cost manufacturing destination may draw investment away from China’s western provinces as costs rise on the coast. In the basic economic determinants of inward FDI, China is better positioned than India. China’s total and per capita GDP are higher, making it more attractive for market-seeking FDI. Its higher overall literacy and education rates suggest that its labor is more skilled, making it more attractive to efficiency-seeking investors. However, India may have an advantage in technical manpower, particularly in information technology (IT). Also, India’s workforce is more proficient in English language skills, which is attractive to foreign investors. If India’s mac-roeconomic and policy reforms continue and the Indian government remains committed to the objective of attracting FDI, India’s attractiveness as a desti-nation for FDI could equal that of China.

Insufficient Investment in Electric Generating Capacity: Electricity demand from other regions of China continues to outstrip supply, preventing Sichuan from achieving a balance between local electricity generating output and con-sumption. This imbalance contributes to seasonal power shortages, brownouts and blackouts.

Competition from Chongqing: From 2000 to 2005, budgeted infrastructure spending for Chongqing has totaled US$60 billion, an average rate of US$1 billion per month, raising Chongqing’s profile as a key competitor for investment in western China.

Cost Comparisons: Sichuan versus Cities in China’s Coastal Region

A comparative snapshot of one-time and operating costs in Sichuan’s munici-palities against a comparator group of key Chinese cities – Beijing, Guangzhou, Shanghai on the coast, and the interior city of Wuhan – was developed as part of this study’s analysis. The significant differences in several individual cost cat-egories for labor, real estate and utilities in the electronics and food/beverage processing industries help illustrate Sichuan’s current competitiveness for FDI within China, which is widely considered a dominant, if not the world’s leading competitor for global manufacturing FDI. (Cost data for the comparator cities of Beijing, Guangzhou, Shanghai and Wuhan is appended to selected tables pre-sented in Chapter IV: Comparative Costs at a Glance.)

The overall cost of labor was found to be significantly lower in Sichuan’s munici-palities than in the comparator group for both electronics and food/beverage pro-cessing. (See Table 4.) However, it is important to note the wide range between municipalities in each group of cities. For example, Sichuan’s average in elec-tronics was often driven higher by Chengdu’s costs, and the comparator city average was consistently decreased by relatively low costs in Wuhan (the interior city), which was within the mid- to upper-range among Sichuan’s municipalities. In both industries, the difference between these averages increased with the skill level of the labor category, as shown in Table 4. The analysis indicates that Shanghai is the highest labor cost location of the four comparator cities in electronics. In food

Sichuan’s average labor costs in two

sectors – electronics and food/beverage

processing – were found to be 32 to

67% less than those of a comparator

group of cities comprised of Beijing,

Guangzhou, Shanghai and Wuhan.

snapshot sichuan 25

Chapter III

Findings by Industry Sector

The study focused on five industry sectors in Sichuan province that were

considered potentially strong candidates for increased FDI. This chapter presents

the study’s findings for each sector. The findings for each sector include: an

overview of the industry in Sichuan based on company interviews; comparisons

of operating costs and conditions by municipality; and, an analysis of the sector’s

strengths, weaknesses, opportunities and threats in attracting increased FDI. The

subject sectors are presented in alphabetical order as follows:

1. Chemicals

2. Electronics

3. Food and Beverage Processing

4. Machinery and Machine Building

5. Pharmaceuticals and Traditional Medicine

snapshot sichuan26

snapshot sichuan 27

1. Chemicals

Sichuan’s universities, several of which have specialized chemical and chemical engineering programs, and the availability of petroleum and natural gas and mineral resources have attracted domestic and international investors in a diverse range of chemical industry sub-sectors. These strengths, coupled with the avail-ability of skilled labor and relatively more ability to recruit white-collar workers, especially professionals and technicians, make Sichuan an attractive destination for investment in high value-added specialty and fine chemical manufacturing and related R&D. Perceived weaknesses cited by respondents include: access to financing and highly priced raw materials, despite their ready availability.

Industry Overview

This section provides a summary of Sichuan’s chemical industry based on dis-cussions with firms interviewed for this study.

Operations: Among the companies interviewed, most were local companies from the municipalities participating in the study; only 8.9% were fully foreign owned. These companies reported an average of 432 employees, ranging from 8 to 6,990. The annual sales of these companies averaged more than US$23 million, ranging from US$6,000 to US$350 million. The average investment was US$13.6 million, with a range of US$12,300 to US$162 million. The average floor space was 42,174 square meters and the largest facility had a floor space of over 400,000 square meters.

Products Manufactured and Markets Served: Chemical companies surveyed in the province reported an extremely diversified range of products. These companies included: industrial gas suppliers; manufacturers of basic chemicals such as chlor-alkali, ammonia, phosphates and amines; producers of industrial alcohol, resins, commercial explosives and paints; and manufacturers of consumer products such as detergents. The average export ratio was 12% of total sales. One company reported 100% of its earnings from exports, while six companies reported more than 50%. A majority of the interviewed companies derived 100% of their sales from the domestic market. The interviewed companies also reported serving a wide sphere of international markets, citing India, the European Union (EU), South East Asia, the Middle East, Japan, South Africa, Iran and Egypt as their destinations for exports.

Material and Capital Inputs: Most raw materials were sourced locally and companies on average reported just 4.7% of their raw materials were imported. Component imports on average were about 1.5%. Equipment imports were approximately 8.7%, with two companies reporting 100% of their equipment had been imported.

Reasons for Investment: Among the surveyed group, twenty-two companies weighted operating conditions higher than cost factors in their motivation for investment, resulting in an average weight of 52.2% for operating conditions. Availability of raw materials, proximity to markets and suppliers, and availability of good infrastructure were the main reasons that companies gave for choosing their locations.

Personnel: The reported availability of labor across each of the skill categories is similar to that of the other surveyed industries, and in some cases, relatively better. Fifty-five of the 56 interviewed companies considered the pool of unskilled labor sufficient. When asked about the availability of skilled and technical labor, 41 companies considered the pool sufficient for skilled labor, as did 36 companies

CHEMICAL INDUSTRY SURVEY PROFILE

Companies Interviewed

56

Average Investment Characteristics

Ownership

– 46.4% from the municipality

– 19.6% foreign JVs

– 10.7% Chinese JVs

– 8.9% WOFEs– 5.4% Chinese

companies from other provinces

– 8.9% Sichuan companies

Investment Size US$13,617,330

Factory Floor Space

42,174 m2

Number of Employees

432

Sales US$23,491,625

Export Ratio (% of sales)

12.4%

snapshot sichuan24

and beverage processing, Shanghai was found to have the highest labor costs in the unskilled, skilled and technical categories, and Guangzhou the highest in pro-fessional and management costs.

The analysis also found significantly more competitive costs in Sichuan relative to the comparator group for real estate and utilities. In real estate, average land usage rights costs were found to be 41% lower in Sichuan, and average building and office lease costs were found to be 78% and 88% lower in Sichuan, respectively. Average utility costs, including electricity, gas and water usage, were all found to be lower in Sichuan, particularly gas costs, which averaged 53% lower in Sichuan than in the comparator group of cities.

Table 4 summarizes the average labor cost savings of Sichuan over the comparator group in two subject industries, electronics and food/beverage processing, for five skill categories. In both industries, the analysis suggests that Sichuan on average is a lower labor-cost location in all categories, and in most cases, is significantly more cost effective than the comparator group, which includes the four cities of Beijing, Guangzhou, Shanghai and Wuhan for purposes of this analysis. According to this analysis, the average cost savings in Sichuan increases commensurate with the skill level of the labor category; at the highest skill levels, the average cost difference is greatest. (For values associated with this summary, please refer to Chapter IV: Comparative Costs at a Glance.)

Table 4: Sichuan’s Average Labor Cost Savings in Electronics and Food/Beverage Processing

(10 Sichuan Municipalities vs. 4 Comparator Cities – Beijing, Guangzhou, Shanghai and Wuhan)

Electronics

Labor Category % Savings

Unskilled 39

Skilled 46

Technical 59

Professional 61

Management 65

Food/Beverage Processing

Labor Category % Savings

Unskilled 32

Skilled 34

Technical 51

Professional 65

Management 67

Sources: For Sichuan data: Sichuan bench-marking study, 2006; for comparator city data: investor companies, Chinese Labor Bureau, Hewitt Associates, Manpower, ChinaHR, local recruitment companies, Hubei FIE Association, Wuhan East Lake High Tech Zone, Guangzhou ETDZ Survey, 44 EDZs in four comparator cities, CB Richard Ellis, Tractus database.

snapshot sichuan28

for technical labor. Although the availability of managerial and professional labor was reported to be limited, with only 15 companies and 24 companies reporting a sufficient supply of managerial and professional candidates, respectively, the study’s findings indicate relatively more availability in chemicals than in the other four subject industries. The study found that the chemical industry has the second highest average labor costs across the municipalities surveyed for all skill cate-gories. Mandarin and local Sichuan dialects were cited as the principal languages spoken in the factories, although a few companies reported using English or Japanese as a second language.

Incentives for Investors: For the interviewed companies, incentives varied between municipalities and within a municipality from company to company. Some companies received the Standard Corporate Income Tax incentive available to FIEs, while others received no tax incentive. (The Standard Corporate Income Tax is zero tax for the first three years and a 50% reduction for the following two years from the day of profit making.) Some companies also were eligible for exemptions on import duties. Under the West China Development scheme, some companies qualified for a corporate tax reduction to 15%.

Comparisons of Operating Costs and Conditions by Municipality

This section presents comparisons of the individual municipalities’ costs and con-ditions for investors in the chemical industry. Figure 6, shown immediately below, compares the total annual operating costs (including four major cost items) for the same hypothetical project located in each of the municipalities. Figure 7 compares the municipalities’ scores for operating conditions, weighted to reflect their relative influence in chemical investors’ location decisions. Table 5 summarizes critical cat-egories of location factors for investors in the chemical industry. Finally, Figure 8, a scattergram, plots the municipalities’ overall scores for both costs and conditions to determine those locations considered most favorable for the chemical industry from a cost and quality perspective. These comparisons provide a representative outcome of an evaluation for a typical chemical investment in Sichuan. However, because each investment project is unique in its requirements, strategy and the investor’s preferences, the findings presented here should be viewed as illustrative, rather than absolute, in their conclusions.

Figure 5: Origin of FDI in the Surveyed Chemical Industry

Germany 12%

Singapore 6%

Hong Kong 23%

Sudan 6%Thailand 6%

Austria 6%

Japan 12%

Canada 6%

US 23%

Figure 6: Comparison of Operating Costs in the Chemical Industry

12,000,000 UtilityBuilding and office lease/rentalLand leaseLabor

10,000,000

Total annual operating costs(USD)

8,000,000

6,000,000

4,000,000

2,000,000

0Chengdu Mianyang Deyang Luzhou Suining Nanchong Leshan Panzhihua Zigong Yibin

snapshot sichuan 29

MIGA’s EBP methodology enables comparison of locations based on the major annual operating costs associated with a typical project, or model, in each subject industry. The parameters of this hypothetical firm, such as the wages of employees in various skill categories and the volume of utilities consumed, are derived from the average operating parameters of Sichuan-based companies interviewed for the study. Overall operating costs are an aggregation of the costs for utilities, building or office lease, land lease and labor.

In the chemical industry, utility costs account for the greatest percentage of total operating costs. Although utility costs across Sichuan are very similar, the survey revealed that utility costs in Leshan are slightly higher than in the other munici-palities. The differentiating cost factors are labor and land lease costs. Figure 6 shows that labor and land lease costs are the highest in Chengdu. Panzhihua and Deyang are rated the lowest cost locations for the chemical industry in terms of overall operating costs, based on the parameters of a hypothetical firm.

Figure 7 compares seven categories of operating conditions for chemical man-ufacturers in the 10 Sichuan municipalities. Based on the interviewees’ stated motivations in selecting company locations, the operating condition factors were weighted to reflect their relative importance to investors in the chemical industry. The vertical axis measures each municipality’s operating conditions index score, which can range from 1 to 200 (the higher the score, the more favorable the operating conditions). For more information about industry-specific location factors and weighting, see Table 5: Critical Site Selection Factors for the Chemical Industry, and Appendix 2, Table 2-3: Site Selection Factor Weighting by Industry.

In terms of operating conditions, investors rated Deyang, Leshan and Yibin as the best locations for chemical companies. (See Figure 7.) Among all the Sichuan munici-palities surveyed, Yibin has the highest score for operating conditions in the chemical industry. Yibin scored particularly high in access to input and output markets, with its proximity to raw materials and existing suppliers or cluster networks, as well as in the sufficiently large size of its local market. Leshan scored significantly lower in access to input and output markets, but scored higher than Yibin in the availability of land and industrial buildings. Deyang also scored well as a location for chemical

Figure 7: Comparison of Weighted Operating Conditions in the Chemical Industry

0

20

40

60

80

100

120

Chengdu

Mianyang

Deyang

Luzhou

Suining

Nanchong

Leshan

Panzhihua

Zigong

Yibin

Living environmentReal estateInfrastructureFlexibility of labor & regulationsAccess to input and output marketsLocal potential to recruit skilled staffGeneral business environment

snapshot sichuan30

companies due to its comparatively strong infrastructures, in particular the access to transport by rail and road, as well as the high quality of the water supply and waste treatment facilities. Respondents from the chemical industry also highly rated Deyang’s quality of life, in particular its low cost of living and safety.

Yibin and Chengdu scored the highest in market access. Chengdu, although it scored highly for market access, particularly in the size of its local market, was rated poorly on real estate market conditions given its low availability of land, reducing its overall score. Chengdu’s infrastructures were also ranked lower than those of most of the other municipalities, although Chengdu received excellent scores for its international access and air shipment, given the presence of the only international airport in the province.

Table 5 summarizes the five most critical categories of site selection factors by municipality based on responses from companies in the chemical industry inter-viewed for the study. The categories are listed in each column by their degree of importance in the interviewed investors’ site selection decisions.

Figure 8 marries the costs and weighted operating conditions in the chemical industry for each of the surveyed municipalities. The scattergram illustrates each municipality’s relative position according to standard deviations from the mean index score of 100. Costs are often reflected in the quality of operating conditions. Investors aim to find those locations where high-quality operating conditions can be purchased for relatively less than in other locations under evaluation. In this regard, municipalities that fall in or near the upper right quadrant of the scat-tergram are considered most attractive on an index combining cost and quality considerations.

Based on the combined scores presented in the scattergram, Deyang offers operating conditions best suited to the requirements of a typical chemical operation at the lowest cost among the surveyed municipalities. Respondents highly rated Deyang’s infrastructure, particularly transport by rail and road, and they considered

Table 5: Critical Site Selection Factors for the Chemical Industry

Chengdu Mianyang Deyang Luzhou Suining Nanchong Leshan Panzhihua Zigong Yibin

Cost of utilities

Access to markets and supplies

Access to markets and supplies

Cost of real estate

Access to markets and supplies

Access to markets and supplies

Infrastructure Access to markets and supplies

Access to markets and supplies

Infrastructure

Access to markets and supplies

Infrastructure Cost of real estate

Cost of utilities

General business environment

Cost of water and power

Wage levels Cost of trans-portation

Infrastructure Real estate

General business environment

Real estate Cost of utilities

Access to markets and supplies

Cost of transportation

Cost of transpor-tation

Access to markets and supplies

Cost of utilities

Cost of water and power

Access to markets and supplies

Infrastructure Local potential to recruit staff

General business environment

Wage levels Infrastructure Tax incentives

Cost of real estate

Cost of real estate

General business environment

Cost of utilities

Local potential to recruit staff

General business environment

Wage levels Local potential to recruit staff

Cost of water and power

Wage levels Cost of trans-portation

General business environment

Cost of trans-portation

Cost of real estate

snapshot sichuan 31

the availability of land sufficient. Deyang also scored well in the flexibility of labor and regulations, particularly in its low labor turnover rate. In addition, Deyang’s proximity to Chengdu presents access to a significant local market. Yibin and Leshan provide nearly the same conditions as Deyang at slightly higher costs.

Chemical Industry SWOT Analysis

Sichuan province was analyzed for its strengths, weaknesses, opportunities and threats in attracting and retaining investment in each of the five subject sectors. The SWOT analysis for the chemical industry is summarized below.

Strengths

Specialized Educational Institutions: Sichuan has 68 institutes of higher edu-cation matriculating more than 43,000 graduates annually. Many of these schools are highly ranked nationally, particularly for the pharmaceutical and fine and spe-cialty chemical industries.

Ability to Recruit White Collar Employees: Of the five industries studied, respondents from the chemical industry expressed the most satisfaction with Sichuan’s ability to provide appropriate talent for managerial, professional and technical positions. Interviewed companies rated the ability to recruit and retain appropriate managerial staff an average score of 3.1 out of a possible high score of 5. Professional staff received an average score of 3.4, and technical staff received 3.8.

Availability of Skilled Labor: Among respondents, 73% reported satisfaction with the availability of skilled labor in Sichuan, given the highly specific nature of the chemical industry.

Figure 8: Operating Costs versus Conditions in the Chemical Industry

200

150

100

Qua

lity

inde

x(a

vera

ge =

100

)

50

00255075100

Operating cost index(average = 100)

125150175200

Chengdu

Mianyang

Deyang

Luzhou

Suining

Nanchong

Leshan

Panzhihua

Zigong

Yibin

snapshot sichuan32

Access to Raw Materials: The respondents in the chemical industry were extremely satisfied with the availability of raw materials in Sichuan. Only 4.7% of raw materials used in Sichuan’s chemical industry are imported. In particular, Sichuan possesses an abundant and high-quality water supply, which is essential for many chemical manufacturing processes. Companies in seven out of 10 munic-ipalities reported zero days of water shortage.

Availability of Local Equipment: Only 8.7% of equipment and 1.5% of com-ponents used in the chemical industry are imported.

Weaknesses

Shortage of Capital: Given that the chemical industry is very capital intensive, it is not surprising that 11 out of 46 respondents reported that they were lacking sufficient capital for their businesses. One respondent noted that “currently, the shortage of capital limits the development of enterprises.”

High Price of Raw Materials: Many respondents complained of the high price of raw materials in Sichuan despite their ready availability. One respondent stated that his company’s “production ability is not strong, because the price of raw materials rises and the competition is tough.”

Distance to Market: Eleven out of 46 respondents complained of bad transpor-tation infrastructures or high transportation costs. Moreover, Sichuan is situated in the western region far from China’s coastal industrial belt, where the majority of specialty and bulk chemical processing facilities are located.

Opportunities

Opportunity to Promote FDI in Chemicals: Only 8.9% of the companies surveyed were wholly owned foreign enterprises (WOFEs). Therefore, significant oppor-tunity exists for increased foreign investment in this industry. Potential sectors for development include:

Petrochemicals: The Sichuan basin is a major source of natural gas and the search for petroleum in this region has intensified in recent years, although without clear results as yet.

Salt-based Chemicals (Chlor-Alkali): Sichuan’s abundant rock salt and water resources are advantageous to the chlor-alkali industry.

Electro-Chemicals: Abundant hydropower potential makes Sichuan an ideal location for the electrochemical industry, which requires large quantities of elec-tricity that could be supplied from local hydropower plants.

Fine and Specialty Chemicals: Fine and specialty chemicals have a high value to weight and volume ratio,9 making them amenable to manufacture in locations distant from their principal markets or with specific demand in western China.

Chemical Research and Development: Sichuan’s many educational insti-tutions, particularly those with nationally ranked pharmaceuticals and chemistry departments provide a local source for skilled talent needed for chemical industry R&D. For instance, Sichuan University’s College of Chemistry and its Hi-Tech Chemical R&D Centre are nationally renowned.

9 Transportation costs may be considered a less critical factor for a product with a high value relative to its weight and volume.

snapshot sichuan 33

Agri-Chemical Industry: Given the abundance of agricultural land and natural resources in Sichuan, there is much opportunity to expand the agri-chemical industry, including R&D. Steps already taken to promote the industry include the successful annual West China Agricultural Fair, which attracts proactive US com-panies with much needed agricultural technology. In 2002, 650 project contracts were signed at the fair for a total investment value of US$1.63 billion.

Threats

Power Shortage: Sichuan had excess power supply due to its rich availability of hydropower generation and potential until 2003. However, the shortage of power supply that first appeared in the coastal areas has gradually spread to Sichuan since then, a result of inadequate estimates of long-term demand for power and thus insufficient investment in power in 1998–2002. In general, the power shortage in the province now is not as severe as in most other provinces, but during the winter season (from October to February), the shortage is rather significant.

Continued Poor Intellectual Property Protection: Enforcement of laws and regu-lations ensuring the protection of IPR is deficient in China. Continued compara-tively poor IPR protection may place China and Sichuan at a disadvantage to other countries in attracting high value-added manufacturing. This issue particularly affects the chemical industry, especially the highest value-added pharmaceutical subsector.

Rising Competition from Other Provinces: Sichuan lags behind many other provinces in China in the attraction of FDI. This study suggests this lag may be due in large measure to the inferiority of infrastructures in Sichuan relative to other Chinese provinces. The lack of attention to the weaknesses iterated above will cause Sichuan to lose potential investments to its competitors. The weaknesses that are particularly pertinent to the chemical industry are the much needed facili-tation of capital and support for financial infrastructures.

snapshot sichuan34

2. Electronics

Sichuan is an important industry hub for electronics in western China. Among the five industries surveyed in the province, the highest average investment was in elec-tronics. Within the region, research institutes and institutions for higher learning offering technical programs in electronics are located in Hi-Tech Districts, pro-viding an ample pool of highly skilled graduates. The province has attracted large microelectronics companies, such as Intel with its US$375 million semiconductor assembly and testing plant, the largest single investment in Sichuan’s electronics industry. A recently announced second plant is expected to bring the total Intel investment in Sichuan up to US$450 million. These types of investments can be leveraged to help attract other electronics firms in allied and supporting industries. However, it will be critical for the government to enforce the protection of intel-lectual property rights in order to attract key investors in this highly knowledge-intensive industry.

Industry Overview

This section provides a summary of Sichuan’s electronics industry based on dis-cussions with firms interviewed for this study.

Operations: Companies operating in the electronics industry in Sichuan range from small, locally owned companies to large, wholly owned multinational man-ufacturers. Among the surveyed group, electronics manufacturers range in size from very small firms with eight employees to very large companies employing over 3,000, with an average size of 294 employees. Commensurate with the size of the firms, the value of investment ranged from less than US$100,000 to US$375 million. The size of manufacturing facilities ranged from just over 200 square meters to over 100,000 square meters. Interviewed companies reported annual sales from US$650,000 to over US$1.3 billion.

Products Manufactured and Markets Served: Electronics manufacturers reported an extremely diversified product range, from printed circuit boards (PCBs), con-densers, microprocessors, test and measurement equipment and fiber optic cables to compounds such as manganese-zinc ferrite oxides used for coating electronic components. A majority of these products are made for domestic consumption. Only two out of 44 companies reported that they derive more than 75% of their sales from exports, and only four companies reported that exports account for more than 50% of their sales. The reported range of exports as a percentage of sales varied widely, with an average export earnings ratio of near 12%. Export markets cited by the surveyed companies included: Japan, the US, the United Kingdom, Thailand, Taiwan, India, Singapore, Pakistan and Nepal.

Material and Capital Inputs: Material and capital inputs used by the electronics industries are readily available in China and the overall import percentage of these items is low. Primary and basic raw materials, such as steel, copper, aluminum, resins and silica gel, are sourced locally. Only six out of 44 companies reported importing more than 50% of their raw materials and the average import value was 18%. Basic electronic components were also widely available locally and most companies said they source these inputs domestically. Among the surveyed group, the average import value for components was only 6%. Two companies reported importing more than 50% of their components, which are primarily high-value and technology intensive, such as integrated circuits (ICs); polycrystalline silicon, for making integrated circuit wafers; fluoro-plastics and silicon wafers. Ten companies reported importing more than 50% of their chemicals and equipment, and the average import value of chemicals and equipment was about 23%.

ELECTRONICS INDUSTRY SURVEY PROFILE

Companies Interviewed

44

Average Investment Characteristics

Ownership

– 38.6% from the municipality

– 31.8% foreign JVs

– 9.1% Chinese JVs

– 6.8% WOFEs– 6.8% Chinese

companies from other provinces

– 6.8% Sichuan companies

Investment Size US$23,271,042

Factory Floor Space

13,260 m2

Number of Employees

294

Sales US$40,639,356

Exports (% of sales)

11.6%

snapshot sichuan 35

Reasons for Investment: The primary reason companies cited for investing in Sichuan was access to the local market, followed by low utility costs. Respondents ranked costs and operating conditions as equally important. One company weighted the operating conditions in Sichuan as its sole motivation for investment.

Personnel: Companies rated the availability of both unskilled and skilled labor in Sichuan very high; 43 out of 44 companies reported a large pool of qualified unskilled workers, and 31 companies reported a large pool of qualified skilled labor. However, the surveyed companies said there was a shortage of profes-sional and managerial talent; fewer than 10 companies found a sufficient pool of qualified professionals and managers in the province. Sichuan, like most other western and central provinces in China, suffers from a “brain drain” of highly skilled workers migrating to the coastal provinces where wages are up to 50% higher. The surveyed companies said the primary languages used in their workplaces in Sichuan are Mandarin and the Sichuan dialect, with the exception of one large multinational that requires its staff to use English for all intra-company communications.

Incentives for Investors: The interviewed companies reported varying situations in the investment incentives they had received. Those companies in “encouraged” industries or whose products qualified for Hi-Tech status, or that had invested in one of the EDZs, received the Standard Corporate Income Tax exemption for the first three years of profitability and a 50% reduction for the following two years. Those companies not invested in an “encouraged” industry or outside of estab-lished EDZs were not eligible for these incentives. Similarly, exemptions from import duties on equipment and raw materials ranged from 100% exemption for “encouraged” and qualified Hi-Tech industries to no exemption for companies located outside the established EDZs, not in “encouraged” industries or manufac-turing products that did not qualify for Hi-Tech status.

Comparisons of Operating Costs and Conditions by Municipality

This section presents comparisons of the individual municipalities’ costs and con-ditions for investors in the electronics industry. Figure 10 compares the total annual operating costs (including four major cost items) for the same hypothetical project located in each of the municipalities. Figure 11 compares the municipalities’ scores for operating conditions, weighted to reflect their relative influence in electronics investors’ location decisions. Table 6 summarizes critical categories of location factors for investors in the electronics industry. Finally, Figure 12, a scattergram, plots the municipalities’ overall scores for both costs and conditions to determine those locations considered most favorable for the electronics industry from a cost and quality perspective. These comparisons provide a representative outcome of an evaluation for a typical electronics investment in Sichuan. However, because each investment project is unique in its requirements, strategy and the investor’s preferences, the findings presented here should be viewed as illustrative, rather than absolute, in their conclusions.

MIGA’s EBP methodology enables comparison of locations based on the major annual operating costs associated with a typical project, or model, in each subject industry. The parameters of this hypothetical firm, such as the wages of employees in various skill categories and the volume of utilities consumed, are derived from the average operating parameters of Sichuan-based companies interviewed for the study. Overall operating costs are an aggregation of the costs for utilities, building or office lease, land lease and labor.

Figure 9: Origin of FDI in the Surveyed Electronics Industry

Hong Kong 20%

US 32%

Other 13%

Germany 7%

France 7%

Sweden 7%

Japan 7%Taiwan 7%

snapshot sichuan36

As shown in Figure 10, labor constitutes the primary operating cost for firms in the electronics sector in Sichuan. With the exception of Chengdu, where labor and land usage rights costs are the highest among the surveyed municipalities and where most of the companies with the largest facilities are located, the major cost com-ponents for the electronics industry are largely similar across the other nine subject municipalities. The data indicates that Suining is the overall lowest cost location for the electronics industry, due primarily to its relatively lower labor costs.

Figure 11 compares seven categories of operating conditions for electronics man-ufacturers in the 10 Sichuan municipalities. Based on the interviewees’ stated motivations in selecting company locations, the operating condition factors were weighted to reflect their relative importance to investors in electronics. The vertical axis measures each municipality’s operating conditions index score, which can range from 1 to 200 (the higher the score, the more favorable the operating conditions). For more information about industry-specific location factors and weighting, see Table 6: Critical Site Selection Factors for the Electronics Industry, and Appendix 2, Table 2-3: Site Selection Factor Weighting by Industry.

Electronics manufacturers rated the operating conditions in Chengdu, Mianyang, Deyang, Leshan and Yibin best suited to the requirements of an electronics operation. Mianyang’s operating conditions were rated higher than the other leading municipalities, based on its comparatively better market access and real estate availability. Specifically, investors gave high scores to Mianyang’s avail-ability of land and superior proximity to input markets, as well as the ample size of Mianyang’s local market. Among investors in the electronics industry, Chengdu is considered a significant market for their products and is also considered the gateway to other western China provinces. However, the relatively low availability of real estate in Chengdu, specifically land and industrial buildings, has pulled its overall score lower than Mianyang. Nearby Deyang also scores well on its market access, probably based on its geographic proximity to Chengdu, as well as its location on the main arterial highway linking Sichuan with neighboring Shaanxi and Yunnan provinces. Leshan scored well in the real estate and infrastructure categories, pulling up its overall score. However, it scored very poorly on access to input and output markets, particularly in its distance from suppliers and shortage of existing suppliers and cluster networks in electronics. Yibin is also an attractive location for electronics manufacturers due to its high scores in real estate and access to input and output markets. Investors were extremely satisfied with Yibin’s availability of land and industrial buildings, as well as the access to air shipments,

Figure 10: Comparison of Operating Costs in the Electronics Industry

3,500,000

3,000,000

UtilityBuilding and office lease/rentalLand leaseLabor

2,500,000

Total annual operating costs(USD)

2,000,000

1,500,000

1,000,000

500,000

0Chengdu Mianyang Deyang Luzhou Suining Nanchong Leshan Panzhihua Zigong Yibin

snapshot sichuan 37

given that the second largest airport in Sichuan is located in Yibin. Respondents also highly ranked the quality of Yibin’s transport via river and road.

Table 6 summarizes the five most critical categories of site selection factors by municipality based on responses from companies in the electronics industry inter-viewed for the study. The categories are listed in each column by their degree of importance in the interviewed investors’ site selection decisions.

Figure 12 on the next page marries the costs and weighted operating conditions in the electronics industry for each of the surveyed municipalities. The scattergram illustrates each municipality’s relative position according to standard deviations from the mean index score of 100. Costs are often reflected in the quality of operating conditions. Investors aim to find those locations where high-quality

Figure 11: Comparison of Weighted Operating Conditions in the Electronics Industry

0

20

40

60

80

100

140

120

Chengdu

Mianyang

Deyang

Luzhou

Suining

Nanchong

Leshan

Panzhihua

Zigong

Yibin

Living environmentReal estateInfrastructureFlexibility of labor & regulationsAccess to input and output marketsLocal potential to recruit skilled staffGeneral business environment

Table 6: Critical Site Selection Factors for the Electronics Industry

Chengdu Mianyang Deyang Luzhou Suining Nanchong Leshan Panzhihua Zigong Yibin

Local

potential to

recruit staff

Access to

markets and

supplies

General

business

environment

Access to

markets and

supplies

Access to

markets and

supplies

Access to

markets and

supplies

Cost of

utilities

Access to

markets and

supplies

Infrastructure Cost of

utilities

Wage levels Cost of

transportation

Cost of

utilities

Cost of real

estate

Cost of

transportation

Cost of

utilities

Infrastructure Infrastructure Access to

markets and

supplies

Access to

markets and

supplies

Access to

markets and

supplies

Wage levels Local

potential to

recruit staff

Cost of

utilities

Cost of

utilities

Cost of real

estate

General

business

environment

Wage levels General

business

environment

Infrastructure

Infrastructure Local

potential to

recruit staff

Access to

markets and

supplies

Wage levels Cost of real

estate

Cost of

construction

Wage levels Cost of

construction

Real estate Real estate

Tax incentives Infrastructure Tax incentives Tax incentives Cost of

construction

Infrastructure Cost of real

estate

Cost of

utilities

Local

potential to

recruit staff

General

business

environment

snapshot sichuan38

operating conditions can be purchased for relatively less than in other locations under evaluation. In this regard, municipalities that fall in or near the upper right quadrant of the scattergram are considered most attractive on an index combining cost and quality considerations.

Electronics companies in most of the municipalities reported operating costs clustered around the average, and with the exception of in Chengdu, the operating costs across the municipalities were fairly similar. In some municipalities, such as Suining, costs were up to about 35% lower than in the other municipalities, and in Chengdu, costs were almost 75% higher. However, only half the municipalities were ranked as average in terms of operating conditions, with the remainder falling up to 40% below the average. Consequently, the positioning of the municipalities in the scattergram derives mainly from their scores for operating conditions. Among the surveyed locations, Mianyang, Deyang, Leshan and Yibin offer a propo-sition best suited to the requirements of a typical electronics operation, based on both costs and operating conditions. Mianyang and Deyang both benefit from a sizeable local market. Yibin and Leshan, despite their distances from Sichuan’s principal markets, benefit from accessible transport via rail, river and road.

Electronics Industry SWOT Analysis

Sichuan province was analyzed for its strengths, weaknesses, opportunities and threats in attracting and retaining investment in each of the five subject sectors. The SWOT analysis for the electronics industry is summarized below.

Strengths

Western China and Local Market Access: With the exception of those located in Chengdu, investors in the electronics industry cited their ability to access markets

Figure 12: Operating Costs versus Conditions in the Electronics Industry

200

150

100

Qua

lity

inde

x(a

vera

ge =

100

)

50

00255075100

Operating cost index(average = 100)

125150175200

Chengdu

Mianyang

Deyang

Luzhou

Suining

Nanchong

Leshan

Panzhihua

Zigong

Yibin

snapshot sichuan 39

and suppliers as one of their top two site selection factors and reasons for investing in Sichuan.

Availability of Material Inputs: Primary and basic raw materials necessary for the production of electronics, such as steel, copper, aluminum, resins and silica gel, are sourced locally. Only 6.4% of electronic components are imported.

Good Educational Institutions: There are more than 400 research institutes located in Sichuan, many of which are located in the government-designated Hi-Tech Districts across the province. In addition, Sichuan province has over 68 insti-tutions of higher education, many of them nationally ranked, offering technical programs in electronics. For instance, Sichuan University’s College of Electronics and Information Engineering is nationally renowned and is host to three key depart-mental laboratories.

Preferential “Go West” Investment Incentive Policies: Preferential corporate income tax incentives improve the financial attractiveness of western China, already a low-cost location. Foreign investors in “encouraged” industries such as electronics can enjoy a 15% corporate income tax rate until 2010.

Weaknesses

Limited Access to Technology-Intensive Components and Equipment: High-value and technology intensive components – such as integrated circuits and polycrys-talline silicon for making integrated circuit wafers, fluoro-plastics and silicon wafers – are not available locally. Moreover, 10 out of 39 companies import more than 50% of their chemicals and equipment. The average import value of chemicals and equipment is about 23%.

Difficulty Recruiting and Retaining Employees: Among the five surveyed industries, electronics companies reported the lowest availability of labor for all employee levels. Managers reportedly are most difficult to recruit and retain; respondents ranked the availability of employees at the managerial level on average 2.6 out of a possible score of 5 points. Only 16% of companies interviewed reported sat-isfaction with the availability of managers. Some companies reported having to import managerial staff from other provinces, for instance from Changzhou City to Panzhihua.

Power Shortages: Although ranked first in China for hydropower potential, Sichuan, as in almost all other areas of China, suffers from power shortages. These shortages are limited to the winter season (from October to February), and are due to seasonal low water levels in the province’s rivers and to power diversions from Sichuan to the rapidly developing coastal areas.

Opportunities

Microelectronics: Because of Sichuan’s distance from major domestic and international markets, the best opportunities in the electronics industry are in microelectronics and similar products that can be conveniently shipped to both domestic and international markets by air freight. Intel’s US$375 million initial investment in a microprocessor assembly and testing plant – and its recently announced second plant of up to US$75 million – will likely spur the devel-opment of a microelectronics cluster in Sichuan. Many interviewed companies expressed confidence that “the future of the electronics industry will be bright.” One respondent attributed his optimism to the presence of other electronics com-panies such as ZDNET China and Intel, whose investments will be “accelerating this industry’s development.”

snapshot sichuan40

Microelectronics Supporting Industries: Sichuan’s electronics industry now includes some of the world’s leading MNCs, such as Legend, Intel, Motorola, Alcatel, Microsoft, TCL, Ericsson, Unisem, and SMIC. Intel’s presence, including a second plant opening in 2007 to handle the most advanced microprocessors, will likely encourage knock-on investments from “Tier-2” suppliers of materials and, particularly, the key services needed to support the company’s operations. Sichuan has the opportunity to leverage Intel’s investment to help encourage the development of a microelectronics cluster in Sichuan. This could be accomplished by collaborating with Intel to identify likely investors that the SIPB could then pro-actively target.

Growing Market Base for Consumer Electronics: Local purchasing power in Sichuan is rapidly growing. The GDP per capita, currently at US$920, is growing at 11% per year. Sichuan, with a population of 87 million, lies at the center of a south-western China market of more than 204 million people. As such, the production of consumer electronics has a good opportunity to access the potential of the local consumer base.

Threats

Rising Regional Competition: Countries and regions in East and Southeast Asia already have well-developed electronics manufacturing clusters and sup-porting infrastructure, and solid bases of world-class electronics manufacturing investment. It may be easier for these countries to attract expansion investments – because their existing investors are familiar with the operating environment – than it will be for Sichuan to attract these investors as pioneer investors.

Insufficient Investment in Electric-Generating Capacity: A reliable and stable electricity supply is critical to attracting advanced microelectronics manufacturers. If electricity demand from other regions of China continues to outstrip supply, preventing Sichuan from achieving a balance between local supply and demand, investors in the electronics industry may be dissuaded from investing because of the need to install expensive in-house, back-up generation and/or stabilization systems.

Continued Poor Intellectual Property Protection: Enforcement of laws and regu-lations ensuring the protection of IPR is deficient in China. Continued compara-tively poor IPR protection will place China and Sichuan at a disadvantage to other countries in attracting high value-added manufacturing activities, particularly in microelectronics.

Continued Competition for Labor from Chinese Coastal Areas: Many respondents cited the current problem of recruitment and retention of qualified employees. In particular, some companies reported that many employees leave for the coastal areas after receiving training, greatly disrupting these companies’ production pro-cesses. Without improvements in infrastructures and the quality of life, companies in Sichuan will continue to have trouble attracting qualified employees, and in turn, investment.

snapshot sichuan 41

3. Food and Beverage Processing

Sichuan province is one of China’s principal regions in agricultural production and its ideal combination of costs and operating conditions has attracted FDI in food and beverage processing. This industry benefits from an abundant supply of local raw materials and the high quality of water in the province. In addition, a large and available pool of unskilled labor is a critical resource that has attracted this labor-intensive industry, which employs the highest average number of workers among the five industries surveyed. This industry faces limitations if the existing roads and railways within Sichuan and the transportation infrastructure linking Sichuan to its major domestic and international markets are not improved. In addition, the development and enforcement of international health and hygiene standards are critical for international acceptance of food products from Sichuan.

Industry Overview

This section provides a summary of Sichuan’s food and beverage processing industry based on discussions with firms interviewed for this study.

Operations: The average number of people employed by the interviewed com-panies in the food and beverage industry was 571 – the highest of the five sectors – and ranged from 27 to 9,934 employees. The average investment of these com-panies was about US$13 million, ranging from US$60,386 to US$145 million. Sales averaged almost US$23 million, with a range of US$17,459 to US$193 million. Manufacturing facilities ranged in size from 220 to 512,390 square meters, with an average of 29,176 square meters.

Products Manufactured and Markets Served: The food processing companies interviewed for the study were extremely diversified in their operations. They reported various types of production: the canning and pickling of fruits, vege-tables and meat; processing of peanuts, soy and meat; beverage manufacturing, including beer and bottled water; production of near ready-to-eat foods like ver-micelli and noodles; manufacturing of various sauces; and milk processing. On average, exports accounted for about 18% of total sales of the companies inter-viewed. Four companies reported 100% of their sales were from exports and eight companies reported more than 50%. Thirty-one companies reported that 100% of their sales were domestic. Of those companies exporting, South East Asia, Japan, Hong Kong and Korea were cited as the principal destinations for exports, with fewer respondents citing Australia, the US, Canada and the EU.

Material and Capital Inputs: According to respondents, most raw materials are locally sourced; on average, just 3.3% of raw materials are imported and only one company said that it imported more than half of its raw materials. Component imports were even lower, averaging 1.3% of the surveyed companies’ total com-ponent purchases. Chemicals represented the largest share of imported inputs, averaging 24% of the respondents’ total chemical purchases. Thirteen companies reported that more than half of their chemical requirement was met through imports.

Reasons for Investment: Companies said operating conditions were more important than cost factors in their decisions to invest in Sichuan, reflecting an average 57% weighting for operating conditions and 43% weighting for cost factors. Unlike many of the other industries surveyed, the availability of raw materials such as vegetables, fruits and meat was critical to the food processing industry, while beverage manufacturers cited requirements for water availability

FOOD AND BEVERAGE PROCESSING INDUSTRY

SURVEY PROFILE

Companies Interviewed

51

Average Investment Characteristics

Ownership

– 35.3% from the municipality

– 27.4% foreign JVs

– 3.9% Chinese JVs

– 9.8% WOFEs– 9.8% Chinese

companies from other provinces

– 13.7% Sichuan companies

Investment Size US$12,938,145

Factory Floor Space

29,176 m2

Number of Employees

571

Sales US$22,706,473

Export Ratio (% of sales)

17.5%

snapshot sichuan42

and quality as highly important. Not surprisingly, the vast majority of companies ranked access to markets and supplies as the most important factor influencing their site selection.

Personnel: All but one of the 51 companies interviewed in this sector ranked Sichuan highly for its abundant unskilled labor. Thirty-eight companies reported a large, available pool of skilled labor, and 27 companies reported sufficient technical labor. The availability of professionals and managers received a lower rating; only 19 companies considered the supply of professionals adequate, as did 15 com-panies regarding the supply of managers. The surveyed companies cited the local Sichuan dialect and Mandarin as the main languages used at their facilities.

Incentives for Investors: The incentives received by the interviewed companies varied between municipalities and within a municipality from company to company. Some companies had received the Standard Corporate Income Tax incentive while others had not received any tax incentive. Some companies also enjoyed exemption on import duties of manufacturing equipment. Under the West China Development scheme, some of the FIEs qualified for a corporate tax reduction to 15%.

Comparisons of Operating Costs and Conditions by Municipality

This section presents comparisons of the individual municipalities’ costs and conditions for investors in the food and beverage processing industry. Figure 14 compares the total annual operating costs (including four major cost items) for the same hypothetical project located in each of the municipalities. Figure 15 compares the municipalities’ scores for operating conditions, weighted to reflect their relative influence in food processing investors’ location decisions. Table 7 summarizes critical categories of location factors for investors in this industry. Finally, Figure 16, a scattergram, plots the municipalities’ overall scores for both costs and conditions to determine those locations considered most favorable for the food and beverage processing industry from a cost and quality perspective. These comparisons provide a representative outcome of an evaluation for a typical food or beverage processing investment in Sichuan. However, because each investment project is unique in its requirements, strategy and the investor’s pref-erences, the findings presented here should be viewed as illustrative, rather than absolute, in their conclusions.

MIGA’s EBP methodology enables comparison of locations based on the major annual operating costs associated with a typical project, or model, in each subject industry. The parameters of this hypothetical firm, such as the wages of employees in various skill categories and the volume of utilities consumed, are derived from the average operating parameters of Sichuan-based companies interviewed for the study. Overall operating costs are an aggregation of the costs for utilities, building or office lease, land lease and labor.

In Sichuan, labor constitutes the primary operating cost for firms in the food and beverage processing industry. (See Figure 14.) Based on the parameters set for a hypothetical firm in this industry, Luzhou and Zigong have the lowest operating costs. Chengdu has the highest operating cost, followed by Panzhihua and Mianyang. Panzhihua has the highest total labor cost among the 10 munici-palities because it has the highest costs for skilled and unskilled labor in food and beverage processing. After labor, real estate (land usage rights costs and building leases taken together) is the next largest operating cost factor. Land usage rights constitute a major proportion of real estate costs.

Figure 13: Origin of FDI in the Surveyed Food and Beverage Processing Industry

Japan 13%

Poland 6%Malaysia 6%

UK 6%

US 6%Singapore 6%

Taiwan 19%

Hong Kong 31%

Switzerland 6%

snapshot sichuan 43

Figure 15 compares seven categories of operating conditions for food and beverage processors in the 10 selected Sichuan municipalities. Based on the interviewees’ stated motivations in selecting company locations, the operating condition factors were weighted to reflect their relative importance to investors in food and beverage processing. The vertical axis measures each municipality’s operating conditions index score, which can range from 1 to 200 (the higher the score, the more favorable the operating conditions). For more information about industry-specific location factors and weighting, see Table 7: Critical Site Selection Factors for the Food and Beverage Processing Industry, and Appendix 2, Table 2-3: Site Selection Factor Weighting by Industry.

5,000,000

4,500,000

UtilityBuilding and office lease/rentalLand leaseLabor

3,500,000

4,000,000

3,000,000

Total annual operating costs(USD)

2,500,000

2,000,000

1,500,000

1,000,000

500,000

0Chengdu Mianyang Deyang Luzhou Suining Nanchong Leshan Panzhihua Zigong Yibin

Figure 14: Comparison of Operating Costs in the Food/Beverage Processing Industry

Figure 15: Comparison of Weighted Operating Conditions in Food/Beverage Processing

0

20

40

60

80

100

120

Chengdu

Mianyang

Deyang

Luzhou

Suining

Nanchong

Leshan

Panzhihua

Zigong

Yibin

Living environmentReal estateInfrastructureFlexibility of labor & regulationsAccess to input and output marketsLocal potential to recruit skilled staffGeneral business environment

snapshot sichuan44

In terms of the quality of their operating conditions, Mianyang, Deyang and Leshan are best-suited to the requirements of a food processing operation. (See Figure 15.) Mianyang and Deyang have the highest scores for access to input and output markets. Leshan’s slightly lower access to market score is offset by its higher scores in real estate quality and flexibility of labor. Yibin has the highest score in access to markets, but its lower scores in quality of real estate and potential to recruit locally deflate its score for overall conditions. Although Mianyang has a very high overall score, investors have rated the quality of its real estate so low that it does not contribute substantively to the overall score.

Table 7 summarizes the five most critical categories of site selection factors by municipality based on responses from companies in the food and beverage pro-cessing industry interviewed for the study. The categories are listed in each column by their degree of importance in the interviewed investors’ site selection decisions.

Figure 16 marries the costs and weighted operating conditions in the food and beverage processing industry for each of the surveyed municipalities. The scat-tergram illustrates each municipality’s relative position according to standard devi-ations from the mean index score of 100. Costs are often reflected in the quality of operating conditions. Investors aim to find those locations where high-quality operating conditions can be purchased for relatively less than in other locations under evaluation. In this regard, municipalities that fall in or near the upper right quadrant of the scattergram are considered most attractive on an index combining both cost and quality considerations.

Based on the combined scores presented in the scattergram, a small cluster of three municipalities – Leshan, Deyang, and Yibin – is falling within or near the top right quadrant. All three of these municipalities benefit from proximity to raw materials. Deyang, with its close proximity to Chengdu, also gains from a large local market without the high operating costs of Chengdu. Leshan and Yibin both have reliable transport by rail and by river, with respondents in Yibin also reporting high satisfaction with road transport. Both Yibin and Leshan also have a high-quality water supply, especially significant for the food and beverage processing industry.

Table 7: Critical Site Selection Factors for the Food and Beverage Processing Industry

Chengdu Mianyang Deyang Luzhou Suining Nanchong Leshan Panzhihua Zigong Yibin

Access to

markets and

supplies

Access to

markets and

supplies

Access to

markets and

supplies

Access to

markets and

supplies

Access to

markets and

supplies

Access to

markets and

supplies

Access to

markets and

supplies

Cost of

utilities

Access to

markets and

supplies

Access to

markets and

supplies

Infrastructure Wage levels Local

potential to

recruit staff

Cost of real

estate

Cost of

utilities

Wage levels Cost of

utilities

Cost of trans-

portation

General

business

environment

Real estate

Cost of

transportation

Local

potential to

recruit

Wage levels Cost of

utilities

Cost of

transportation

Cost of

utilities

Cost of real

estate

Living envi-

ronment

Infrastructure Cost of

utilities

Wage levels Real estate Living

environment

Wage levels Infrastructure Cost of

construction

General

business

environment

Wage levels Local

potential to

recruit staff

Infrastructure

Local

potential to

recruit staff

General

business

environment

Infrastructure Infrastructure Wage levels Infrastructure Infrastructure Cost of

utilities

Cost of

utilities

General

business

environment

snapshot sichuan 45

Food and Beverage Processing Industry SWOT Analysis

Sichuan province was analyzed for its strengths, weaknesses, opportunities and threats in attracting and retaining investment in each of the five subject sectors. The SWOT analysis for the food and beverage processing industry is summarized below.

Strengths

Abundant Raw Materials: The food and beverage processing industry in Sichuan benefits from abundant local raw materials. Sichuan produces large numbers of agricultural outputs, including many varieties of fruits (including peaches, loquats, oranges, grapefruit, and kiwi fruit), grains, vegetables, oil seeds, and teas. In 2004, Sichuan’s total grain production was 33.3 million tons, ranking third in China, and meat production was 8.6 million tons. In addition, Sichuan is home to a number of well-known, national brands that depend on Sichuan’s abundant and high-quality water. The quality and sales of these Sichuan-produced beverages are among the best in China. Investors spoke highly of the availability of raw materials in the province. One interviewee, for instance, commented on the water supply in Sichuan as “high quality and non-polluted.” Only 3.3% of the raw materials are imported, the second lowest percentage among the five industries.

Abundant Unskilled Labor: Sichuan has wide availability of unskilled labor resources. Respondents from Sichuan’s food and beverage processing industry ranked the availability of unskilled workers an average score of 4.7 out of a possible high score of 5 points. Fifty of 51 companies reported their satisfaction with the availability of unskilled labor.

Figure 16: Operating Costs versus Conditions in the Food/Beverage Processing Industry

200

150

100

Qua

lity

inde

x(a

vera

ge =

100

)

50

00255075100

Operating cost index(average = 100)

125150175200

Chengdu

Mianyang

Deyang

Luzhou

Suining

Nanchong

Leshan

Panzhihua

Zigong

Yibin

snapshot sichuan46

Environmental Conditions: Sichuan’s temperate climate and abundant rainfall contribute to its position as one of China’s principal areas in agricultural pro-duction. Many respondents said that Sichuan’s relatively unpolluted environment and natural resources were important in their decisions to invest. Particularly for the beverage industry, Sichuan province’s “mountain clear” water was cited by tea producers, as well as by breweries.

Western China Market Access: Sichuan offers the strong combination of proximity to both large output markets and inputs for the food and beverage processing industry.

Weaknesses

Limited Access to Modern Agricultural Technology: Farming techniques in Sichuan are still very traditional, lagging behind other provinces in terms of mod-ernization.

Opportunities

Increased Economic Development in China: China has been growing rapidly since it began moving toward a market economy in 1978. China’s growing middle class with greater income, as well as the country’s rapid urbanization, will increase the demand for processed and packaged foods and enable further development of Sichuan’s food processing industry.

Beverages: Sichuan’s abundant, high-quality water make the province an ideal location for production facilities of beverages that can be shipped long distances without spoilage.

Canned and Packaged Fruits and Vegetables: Sichuan’s abundant, locally available fruits, vegetables, grains and meats make the province an ideal location for canneries and other high value-added food processors whose products can be shipped long distances without spoilage.

Temperate Fruits and Vegetables for Regional Export: Sichuan covers an area of varying altitudes. Sichuan’s temperate climate and favorable weather conditions make it ideal for growing temperate fruits, vegetables and flowers that could be exported to regional markets in South and Southeast Asia and along China’s coast. The cultivation and processing of off-season fruits, vegetables and flowers could be developed into an important industry.

Increasing International Awareness of Natural and Organic Products: As one of China’s largest agricultural producers, Sichuan has the potential to develop and expand its food processing industries with the growing worldwide consumption of organic products. In 2002, organic food amounted to a US$23 billion global business based on consumption primarily in Western Europe and North America.

Increasing International Awareness of Chinese Brands: Sichuan has an oppor-tunity to increase its investments in the food processing industry as Chinese brands and products gain recognition around the world.

Threats

Water Pollution: Ample, high-quality water is essential to the food and beverage processing industry. The pollution of the Yangtze River is already a problem, and companies in all but one of the 10 surveyed municipalities reported the low quality

snapshot sichuan 47

of the waste management system. Without sufficient protection of the quality of its water resources, Sichuan’s advantage as a desirable location for the food and beverage industry will be threatened.

Insufficient Development and Weak Enforcement of Health and Hygiene Standards: The development and enforcement of international health and hygiene standards for the processing of foods and beverages, such as the Hazard Analysis and Critical Control Point (HACCP) of the US Food and Drug Administration, are critical to international acceptance of manufactured products.

Insufficient Investment in Transportation Infrastructure: If the central gov-ernment does not continue to invest in further improvements of the transpor-tation infrastructure (air, rail, road, highway and inland waterways) interconnecting Sichuan and the municipalities within Sichuan with domestic and international markets, the province’s attractiveness as a destination for investment in the food and beverage industry may be limited.

snapshot sichuan48

4. Machinery and Machine Building

Sichuan lies in the center of southwestern China – a strategic location to tap a growing market for the automobile industry. The province has already attracted a large number of local and international investments in automotive and com-ponent manufacturing. Sichuan also has well-developed aerospace and mining industries that present attractive markets for manufacturers of aerospace com-ponents, mining machinery and related parts and components. Around Deyang, the heavy-machine building cluster supplies China’s nuclear power and large hydropower stations. Sichuan’s numerous technical education programs and the availability of skilled workers support growth in this industry; nearly three-quarters of respondents in machinery and machine building were very satisfied with the availability of skilled labor. However, the quality of components manufactured locally is not up to international standards, which may present challenges ahead for Sichuan-based manufacturers.

Industry Overview

This section provides a summary of Sichuan’s machinery and machine building industry based on discussions with firms interviewed for this study.

Operations: The number of employees at interviewed companies in Sichuan’s machinery and machine building industry ranged from 28 to 1,800, with an average of 353. The average total investment was more than US$8 million, ranging from US$87,000 to US$99 million. The average facility size was over 29,000 square meters, ranging from 1,000 to 303,000 square meters. These companies cited Mandarin and the Sichuan dialect as the principal languages used in their facilities. Among the surveyed group, technical and skilled workers comprised more than 82% of the workforce; the number of unskilled workers employed in these industries was only about 7% of the total employed.

Products Manufactured and Markets Served: Half of the companies interviewed in the machinery and machine building industry were in, or related to, the auto-motive industry. These companies included manufacturers of trucks, steering wheels, clutches, radiators and other auto parts. Another concentration of com-panies produced hydraulic equipment, such as hydraulic cranes, pipes, hoses and pumps. General machinery parts producers and building construction equipment and component manufacturers comprised the balance of the interviewees. Companies reported an average export ratio of about 11% of total sales; only one company reported that 100% of its earnings were derived from exports, and three companies reported more than 50% of their sales from exports. The export markets served by the interviewed companies were diverse, including: Japan, Korea, Hong Kong, Singapore, Vietnam, Sudan, Iran, Iraq, the EU, Canada and the US. Thirty-three companies received 100% of their sales revenues from local markets. Average annual sales were more than US$16 million and ranged from US$7,850 to US$283 million.

Material and Capital Inputs: According to respondents, the import content in the products manufactured by Sichuan’s machinery industry is very small. Interviewed companies reported importing an average of less than 3% of their raw materials. Similarly, companies reported using an average 7% imported components, with only one company reporting that 100% of its components were imported. Regarding equipment, the companies reported importing an average 14% of their manufac-turing equipment.

Reasons for Investment: Investors weighted operating conditions higher than cost factors in their decisions to invest. On average, operating conditions amounted to

MACHINERY/ MACHINE BUILDING INDUSTRY SURVEY PROFILE

Companies interviewed

56

Average Investment Characteristics

Ownership

– 48.2% from the municipality

– 26.8% foreign JVs

– 8.9% Chinese JVs

– 12.5% WOFEs– 1.8% Chinese

companies from other provinces

– 1.8% Sichuan companies

Investment size US$8,351,892

Factory floor space

29,461m2

Number of employees

353

Sales US$16,212,913

Exports (% of sales)

10.9%

snapshot sichuan 49

a weight of 53% in their influence on the decision as a whole. The majority of com-panies cited access to markets and supplies as the most important factor in their site selection, followed by low wage levels of relevant employees.

Personnel: Companies in the machinery industry reported the highest average salaries at all skill levels of any surveyed industry. In Chengdu, the average cost of management staff in the machinery industry was reported to be as high as five times that of the lowest-cost municipality. Fifty-four of 56 companies reported a large pool of unskilled workers and 41 companies reported a sufficient pool of skilled workers. However, only 27 companies found ample availability of technical workers. Professional and managerial talent needed by the machinery industry is apparently even harder to find, with only 13 companies reporting a sufficient supply of professionals, and only 10 companies reporting sufficient availability of managers. Surveyed companies cited the local Sichuan dialect and Mandarin as the main languages spoken in their workplaces.

Incentives for Investors: The incentives received by the surveyed companies varied between municipalities and within a municipality from company to company. Corporate tax exemptions varied widely. Some companies had received the Standard Corporate Income Tax incentive while others had not received any tax incentive. Some companies also reported receiving exemptions on import duties of machinery and equipment.

Comparisons of Operating Costs and Conditions by Municipality

This section presents comparisons of the individual municipalities’ costs and conditions for investors in the machinery and machine building industry. Figure 18 compares the total annual operating costs (including four major cost items) for the same hypothetical project located in each of the municipalities. Figure 19 compares the municipalities’ scores for operating conditions, weighted to reflect their relative influence in machinery investors’ location decisions. Table 8 sum-marizes critical categories of location factors for investors in this industry. Finally, Figure 20, a scattergram, plots the municipalities’ overall scores for both costs and conditions to determine those locations considered most favorable for the machinery and machine building industry from a cost and quality perspective. These comparisons provide a representative outcome of an evaluation for a typical machinery or machine building investment in Sichuan. However, because each investment project is unique in its requirements, strategy and the investor’s pref-erences, the findings presented here should be viewed as illustrative, rather than absolute, in their conclusions.

MIGA’s EBP methodology enables comparison of locations based on the major annual operating costs associated with a typical project, or model, in each subject industry. The parameters of this hypothetical firm, such as the wages of employees in various skill categories and the volume of utilities consumed, are derived from the average operating parameters of Sichuan-based companies interviewed for the study. Overall operating costs are an aggregation of the costs for utilities, building or office lease, land lease and labor.

In the machinery and machine building industry, Chengdu has the highest total annual operating costs among the 10 municipalities surveyed, based on the parameters of a hypothetical firm. (See Figure 18 on the next page.) Labor and real estate (land and building/office combined) costs both contribute to Chengdu’s rela-tively high operating costs. When land, building and office lease costs are all con-sidered, Chengdu’s real estate costs are about twice as high as those of the other municipalities. Real estate costs in Nanchong rank second highest, and in Zigong,

Figure 17: Origin of FDI in the Surveyed Machinery/Machine Building Industry

US 37%

Hong Kong 16%

Canada 5%

Other 16%

Taiwan 5%

Italy 10%

Japan 10%

snapshot sichuan50

third highest. With the exception of Chengdu, operating costs in the municipalities are broadly similar.

Figure 19 compares seven categories of operating conditions for machinery man-ufacturers in the 10 selected Sichuan municipalities. Based on the interviewees’ stated motivations in selecting company locations, the operating condition factors were weighted to reflect their relative importance to investors in the machinery and machine building industry. The vertical axis measures each municipality’s operating conditions index score, which can range from 1 to 200 (the higher the score, the more favorable the operating conditions). For more information about industry-specific location factors and weighting, see Table 8: Critical Site Selection Factors for the Machinery and Machine Building Industry and Appendix 2, Table 2-3: Site Selection Factor Weighting by Industry.

As shown in Figure 19, Yibin, Mianyang and Leshan scored highest in terms of operating conditions best suited to the requirements of companies in the machinery and machine building industry. Yibin is most attractive in terms of operating con-ditions due to its market access, real estate and infrastructure scores. Yibin scored particularly well as a result of its proximity to raw materials and the presence of suppliers and cluster networks. It also has widely available land and industrial buildings, as well as good access to transportation infrastructures, including air, rail and river shipping. Yibin’s high score in infrastructure is mainly due to its status as the port city farthest downriver on the Yangtze.

Mianyang received the highest score for access to markets; investors based in Mianyang were extremely satisfied with the municipality’s proximity to necessary raw materials, existing suppliers and cluster networks, and the size of the local market. Leshan’s high score is attributable to its availability of real estate, strong infrastructures, and investors’ reported satisfaction with the municipality’s general business environment.

Traditionally, Deyang has been the center of the machinery industry in Sichuan province. Deyang scored relatively high on access to markets in its proximity to raw materials and size of the local market due to its close distance to Chengdu. However, Deyang received relatively low marks on real estate and local potential to recruit skilled staff, reducing its overall attractiveness for investors in this

Figure 18: Comparison of Operating Costs in the Machinery/Machine Building Industry

7,000,000 UtilityBuilding and office lease/rentalLand leaseLabor

6,000,000

Total annual operating costs(USD)

5,000,000

4,000,000

3,000,000

2,000,000

1,000,000

0Chengdu Mianyang Deyang Luzhou Suining Nanchong Leshan Panzhihua Zigong Yibin

snapshot sichuan 51

industry. Although Deyang has some available staff with language skills, the total available labor pool remains small. Investors in Deyang also reported a shortage of available land.

Table 8 summarizes the five most critical categories of site selection factors by municipality based on responses from companies in the machinery and machine building industry interviewed for the study. The categories are listed in each column by their degree of importance in the interviewed investors’ site selection decisions.

Figure 20 on the next page marries the costs and weighted operating conditions in the machine and machine building industry for each of the surveyed municipalities. The scattergram illustrates each municipality’s relative position according to standard deviations from the mean index score of 100. Costs are often reflected in the quality of operating conditions. Investors aim to find those locations where high-quality

Figure 19: Comparison of Weighted Operating Conditions in Machinery/Machine Building

0

20

40

60

80

100

120

140

Chengdu

Mianyang

Deyang

Luzhou

Suining

Nanchong

Leshan

Panzhihua

Zigong

Yibin

Living environmentReal estateInfrastructureFlexibility of labor & regulationsAccess to input and output marketsLocal potential to recruit skilled staffGeneral business environment

Table 8: Critical Site Selection Factors for the Machinery and Machine Building Industry

Chengdu Mianyang Deyang Luzhou Suining Nanchong Leshan Panzhihua Zigong Yibin

Wage levels Access to

markets and

supplies

Infrastructure Cost of

utilities

Access to

markets and

supplies

Access to

markets and

supplies

Wage levels Local

potential to

recruit staff

General

business

environment

Access to

markets and

supplies

Local

potential to

recruit staff

Infrastructure Wage levels Real estate Local

potential to

recruit staff

Cost of real

estate

Access to

markets and

supplies

Access to

markets and

supplies

Real estate Cost of real

estate

Access to

markets and

supplies

Local

potential to

recruit staff

Access to

markets and

supplies

Wage levels Cost of trans-

portation

Real estate Cost of

utilities

Cost of

utilities

Access to

markets and

supplies

Infrastructure

Infrastructure General

business

environment

Local

potential to

recruit staff

Infrastructure Living

environment

Cost of trans-

portation

Infrastructure Infrastructure Wage levels Real estate

Cost of real

estate

Real estate Cost of

construction

Cost of real

estate

General

business

environment

General

business

environment

General

business

environment

Living

environment

Infrastructure Cost of

construction

snapshot sichuan52

operating conditions can be purchased for relatively less than in other locations. In this regard, municipalities that fall in the upper right quadrant of the scattergram are considered most attractive on an index combining cost and quality considerations.

As shown in the scattergram above, Yibin is positioned in the quadrant that denotes the highest quality of operating conditions for the lowest cost. Survey respondents were highly satisfied with Yibin’s proximity to inputs and suppliers and cluster networks, as well as its relatively strong domestic market access. Moreover, Yibin also is perceived to have strong infrastructures for air, river, and rail transport, given it has the second largest airport in the province, one of the largest river ports on the Yangtze, and rail connections to Chongqing, Chengdu, Neijiang, and Kunming.

Machinery and Machine Building Industry SWOT Analysis

Sichuan province was analyzed for its strengths, weaknesses, opportunities and threats in attracting and retaining investment in each of the five subject sectors. The SWOT analysis for the machinery and machine building industry is sum-marized below.

Strengths

Western China Market Access: Sichuan, with a population of 87 million, lies at the center of a southwestern Chinese market of more than 204 million people. Automotive producers, in particular, are increasingly attracted to west China and its recognized brands.

Educational Institutions: Sichuan province has over 68 institutions of higher edu-cation, including nationally ranked educational institutions with technical programs in machinery and related sub-sectors, such as automotive.

Figure 20: Operating Costs versus Conditions in Machinery/Machine Building

200

150

100

Qua

lity

inde

x(a

vera

ge =

100

)

50

00255075100

Operating cost index(average = 100)

125150175200225

Chengdu

Mianyang

Deyang

Luzhou

Suining

Nanchong

Leshan

Panzhihua

Zigong

Yibin

snapshot sichuan 53

Abundant Unskilled Labor: Sichuan has abundant, unskilled labor resources. Interviewed companies in all industries reported very high satisfaction with their ability to recruit and retain unskilled laborers. In availability of this category of worker, respondents rated Sichuan’s machinery and machine building industry an average score of 4.7 out of a possible high score of 5 points.

Aerospace Research Institutes Cluster: The Sichuan Space Industry Corporation (SSIC), a subsidiary of the China Aerospace Science and Technology Corporation, is located in Chengdu. The SSIC employs more than 6,000 people in 30 R&D institutes and production facilities, many of which are located in Sichuan.

Heavy-Machine Building Cluster: The cluster around Deyang comprising about 200 enterprises and some research and design institutes has provided the most important heavy equipment for nuclear power and large hydropower stations in China. The cluster is considered competitive, even from an international-market perspective.

Weaknesses

Precision Machinery Not Yet Up to International Quality Standards: Many respondents reported that the quality of Sichuan’s precision machinery does not yet meet international standards.

Quality of Local Suppliers of Raw Materials: One respondent reported that “the quality of locally sourced inputs does not meet requirements.”

Opportunities

Automotive Components: Because of Sichuan’s distance from major domestic and international markets, the best opportunities in the machinery industry will likely arise from local and regional demand. The central government is promoting the development of Chongqing as a motor vehicle and automotive component-manufacturing base. Sichuan borders Chongqing, and its capital, Chengdu, is about 300 kilometers from Chongqing city and easily accessible by road, rail and inland waterway. More than 50% of China’s domestic motor vehicle assembly and auto-motive components manufacturing capacity is located along the Yangtze River and in the Yangtze River delta. Moreover, given that the quotas for automobile imports will be eliminated completely by 2006 according to WTO regulations, Sichuan will have greater opportunity to expand its automotive components industries and to build an automotive and related parts cluster.

Aerospace Components: Sichuan has a well-developed aerospace manufac-turing cluster, including firms that are supplying parts and components to Airbus and Boeing and other world-class manufacturers, which forms the base for an aerospace manufacturing cluster that can be leveraged for additional investment.

Electromechanical Components: As in the other surveyed industries, Sichuan should focus on attracting high value-added industries and companies making products that have a high value to weight and volume ratio.10 These types of products include aerospace and electromechanical components such as computer hard disk drives, aircraft and even medical equipment. The aircraft components industry can leverage Sichuan’s existing base of foreign and domestic, civilian and military aerospace manufacturers.

Mining Machinery: The availability of skills and knowledge used in Sichuan’s machinery industry can be applied to the production of mining machinery.

10 Transportation costs may be considered a less critical factor for a product with a high value relative to its weight and volume.

snapshot sichuan54

Sichuan’s multiple mines, particularly in Panzhihua, present a market and demand for mining machinery, including, for instance, crusher spare parts.

Power Generation Equipment: In the coming years, the domestic market is expected to continue its strong demand for power generation equipment to mitigate the shortage of power across the country. Sichuan can use this oppor-tunity to develop the existing heavy machine building cluster around Deyang.

Threats

Continued Poor Intellectual Property Protection: Enforcement of laws and regu-lations ensuring the protection of IPR is deficient in China. Continued compara-tively poor IPR protection will place China and Sichuan at a disadvantage to other countries in attracting high value-added manufacturing activities.

Continued Competition for Labor from Chinese Coastal Areas: Many respondents complained of current problems with the recruitment and retention of qualified employees. In particular, some companies reported that many employees leave for the coastal area after receiving training, greatly disrupting their production pro-cesses. Without improvements in infrastructures and the quality of life, companies in Sichuan will continue to have trouble attracting qualified employees, and in turn, investment.

snapshot sichuan 55

5. Pharmaceuticals and Traditional Chinese Medicine

Sichuan’s pharmaceutical and traditional medicine industries are well developed, with sales revenues ranked ninth in the nation among Chinese provinces. Abundant medicinal plant-based ingredients are readily available for traditional Chinese medicine manufacturing, and China is a global supplier of basic chemicals that are used in the manufacture of active pharmaceutical ingredients. Local univer-sities and research institutions, many of which are nationally ranked in the pharma-ceutical and chemical fields, provide a fertile recruiting environment. Surveyed com-panies expressed satisfaction with the hiring and retention of skilled and unskilled workers. This strong combination of key human resource talent and availability of raw materials makes Sichuan an ideal location for pharmaceutical and traditional medicine manufacturers.

Industry Overview

This section provides a summary of Sichuan’s pharmaceutical and traditional Chinese medicine industry based on discussions with firms interviewed for this study. (Note: the background information in the opening of Operations, below, was obtained from supplementary sources.)

Operations: Sichuan-based companies in pharmaceuticals and traditional medicine range from local traditional medicine companies to multinational phar-maceutical manufacturers. Sichuan has more than 200 pharmaceutical and tradi-tional medicine companies, and at least 150 of these are “good manufacturing pro-cedures” (GMP) certified. In 2003, the sales revenue of Sichuan’s pharmaceutical industries ranked ninth among Chinese provinces at more than US$1.8 billion. Among interviewed companies, the number of employees ranged from 30 to 1,730, with an average of 249. The size of investment ranged from less than US$50,000 to US$27,342,900, averaging US$4.9 million. Facility sizes ranged from 200 to 100,000 square meters, with an average of about 14,000 square meters. Interviewed com-panies reported annual sales ranging from US$34,700 to US$29.4 million, with an average of about US$5.4 million.

Products Manufactured and Markets Served: The interviewed companies manu-facture an extremely diversified range of products in the province. These products include: traditional Chinese medicines, such as Huoxiangzhengqishui, Baihua oil, and other preparations; cosmetics; active pharmaceutical ingredient (API) interme-diates and APIs such as neomycin sulfate; and insecticides used in animal health care. The companies reported that the majority of their products made in the province are for local consumption. Two companies reported 100% of their sales were from exports, while seven companies reported more than 50%. The average export ratio was 14.7%. Companies reported that their products are exported to: Japan, the US, Taiwan, Malaysia, Singapore, Hong Kong, Thailand, Vietnam, and countries in the EU, among others.

Material and Capital Inputs: According to respondents, Sichuan’s pharmaceutical and traditional medicine industry has very low import content. Interviewed com-panies reported that raw materials for traditional Chinese medicines were pre-dominantly sourced within the province or within China. Common raw materials for patent pharmaceuticals such as pentoxyververine citrate, sulfate, glutamic acid and iodine were also sourced locally. The average raw material, component and equipment import percentages reported by respondents were 4.75%, 0.18% and 3.5%, respectively.

Reasons for Investment: Investors weighted operating conditions as more important than cost factors in their decisions to invest, ascribing an average weight

PHARMACEUTICALS/TRADITIONAL CHINESE MEDICINE INDUSTRY

SURVEY PROFILE

Companies Interviewed

43

Average Investment Characteristics

Ownership

– 23.3% from the municipality

– 14% foreign JVs

– 9.3% Chinese JVs

– 20.9% WOFEs– 18.6% Chinese

companies from other provinces

– 14% Sichuan companies

Investment Size US$4,931,565

Factory Floor Space

13,926 m2

Number of Employees

249

Sales US$5,376,158

Exports (% of sales)

14.7%

snapshot sichuan56

of 55% for operating conditions and 45% for cost factors in terms of influence on the decision as a whole. Investors cited access to markets and supplies as the most important factor in their site selection, which is not surprising given the nature of the pharmaceutical and TCM industry and its reliance upon local natural products. Other important factors cited include low cost of real estate and strong infrastructures.

Personnel: Investors rated the availability of unskilled labor in the province as extremely high; all 43 companies reported a large pool of unskilled workers. In addition, 33 companies reported a large pool of qualified skilled workers. Managers and professionals were reportedly more difficult to find; only 14 companies con-sidered the pool of available managers satisfactory, as did 19 companies regarding professionals. Interviewed companies reported that the Sichuan dialect and Mandarin are the main languages spoken in the workplace.

Incentives for Investors: The interviewed companies reported receiving various investment incentives. Those companies in “encouraged” industries or whose products qualified for Hi-Tech status, or that had invested in one of the EDZs, received the Standard Corporate Income Tax exemption. Those companies not invested in an “encouraged” industry or outside the established EDZs were not eligible for these investment incentives. Similarly, exemptions from import duties on equipment and raw materials ranged from 100% exemption for “encouraged” and qualified Hi-Tech industries to no exemptions for companies outside the established EDZs, not in “encouraged” industries or manufacturing non-Hi-Tech products.

Comparisons of Operating Costs and Conditions by Municipality

This section presents comparisons of the individual municipalities’ costs and con-ditions for investors in the pharmaceutical and TCM industry. Figure 22 compares the total annual operating costs (including four major cost items) for the same hypothetical project located in each of the municipalities. Figure 23 compares the municipalities’ scores for operating conditions, weighted to reflect their relative influence in pharmaceutical and TCM investors’ location decisions. Table 9 sum-marizes critical categories of location factors for investors in this industry. Finally, Figure 24, a scattergram, plots the municipalities’ overall scores for both costs and conditions to determine those locations considered most favorable for the pharmaceutical and TCM industry from a cost and quality perspective. These comparisons provide a representative outcome of an evaluation for a typical pharmaceutical/TCM investment in Sichuan. However, because each investment project is unique in its requirements, strategy and the investor’s preferences, the findings presented here should be viewed as illustrative, rather than absolute, in their conclusions.

MIGA’s EBP methodology enables comparison of locations based on the major annual operating costs associated with a typical project, or model, in each subject industry. The parameters of this hypothetical firm, such as the wages of employees in various skill categories and the volume of utilities consumed, are derived from the average operating parameters of Sichuan-based companies interviewed for the study. Overall operating costs are an aggregation of the costs for utilities, building or office lease, land lease and labor.

In the pharmaceutical and TCM industry, the cost of facilities, office rental and land usage rights are the major costs. (See Figure 22.) Based on the parameters set for a hypothetical firm, Chengdu has the highest land lease cost among the surveyed municipalities, while Nanchong has the highest building and office lease

Figure 21: Origin of FDI in the Surveyed Pharmaceutical/TCM Industry

Switzerland 7%Austria 7%Japan 7%

England 7%

Canada 12%

Taiwan 7%

Singapore 7%

Hong Kong 26%

US 20%

snapshot sichuan 57

costs. Mianyang, Deyang, Luzhou, Suining, Leshan, Panzhihua and Yibin were all comparable in terms of overall operating costs.

Figure 23 compares seven categories of operating conditions for pharmaceutical and TCM manufacturers in the 10 selected Sichuan municipalities. Based on the interviewees’ stated motivations in selecting company locations, the operating condition factors were weighted to reflect their relative importance to investors in the pharmaceutical/TCM industry. The vertical axis measures each municipality’s operating conditions index score, which can range from 1 to 200 (the higher the score, the more favorable the operating conditions). For more information about industry-specific location factors and weighting, see Table 9: Critical Site Selection Factors for the Pharmaceutical/TCM Industry and Appendix 2, Table 2-3: Site Selection Factor Weighting by Industry.

In terms of operating conditions, Mianyang, Deyang, Suining, Leshan, and Yibin were considered the best suited for companies in pharmaceuticals and traditional

16,000,000

14,000,000

UtilityBuilding and office lease/rentalLand leaseLabor

12,000,000

Total annual operating costs(USD)

10,000,000

8,000,000

6,000,000

4,000,000

2,000,000

0Chengdu Mianyang Deyang Luzhou Suining Nanchong Leshan Panzhihua Zigong Yibin

Figure 22: Comparison of Operating Costs in the Pharmaceutical and TCM Industry

Figure 23: Comparison of Weighted Operating Conditions in Pharmaceuticals/TCM

0

20

40

60

80

100

120

Chengdu

Mianyang

Deyang

Luzhou

Suining

Nanchong

Leshan

Panzhihua

Zigong

Yibin

Living environmentReal estateInfrastructureFlexibility of labor & regulationsAccess to input and output marketsLocal potential to recruit skilled staffGeneral business environment

snapshot sichuan58

Chinese medicine. The relatively high scores of Mianyang and Deyang were driven by their access to input and output markets, specifically their proximity to raw materials, suppliers/cluster networks, and the size of their local markets. For Suining, Leshan, and Yibin, relatively high scores in real estate offset relatively low market access scores. All three municipalities had widely available land and industrial buildings, according to respondents of the survey. In addition, investors commented very favorably on Leshan’s general business environment, particularly on the ease of doing business with government bureaucracy, but pointed out that the labor flexibility in Leshan, including working time regulations and social climate, was poor. Suining and Leshan scored comparatively high in infrastructure. Specifically, investors commented on the two municipalities’ good IT infrastructure, power supply, and water supply. Leshan also had good access to river shipping, while Suining had better access to transport by road.

Table 9 summarizes the five most critical categories of site selection factors by municipality based on responses from companies in the pharmaceutical and TCM industry interviewed for the study. The categories are listed in each column by their degree of importance in the interviewed investors’ site selection decisions.

Figure 24 marries the costs and weighted operating conditions in the pharmaceutical and TCM industry for each of the surveyed municipalities. The scattergram illus-trates each municipality’s relative position according to standard deviations from the mean index score of 100. Costs are often reflected in the quality of operating conditions. Investors aim to find those locations where high-quality operating con-ditions can be purchased for relatively less than in other locations. In this regard, municipalities that fall in the upper right quadrant of the scattergram are considered most attractive on an index combining cost and quality considerations.

As shown in the scattergram, seven municipalities offer similar cost and quality profiles. In absolute terms, Deyang offers both operating conditions and a cost proposition best suited to the requirements of pharmaceutical/TCM companies in Sichuan. Deyang offers an available and competent labor pool with sufficient language skills, as well as a large local market, given its proximity to Chengdu. Deyang also has good access to raw materials and suppliers, not surprising given its existing cluster of traditional medicine manufacturers. In addition, Deyang’s strong rail infrastructures and high-quality water supply are important for the transport and production of pharmaceuticals and/or traditional medicine.

Table 9: Critical Site Selection Factors for the Pharmaceutical/TCM Industry

Chengdu Mianyang Deyang Luzhou Suining Nanchong Leshan Panzhihua Zigong Yibin

Infrastructure Access to markets and supplies

Cost of utilities

Access to markets and supplies

Cost of real estate

Access to markets and supplies

General business environment

Cost of real estate

Access to markets and supplies

Infrastructure

Local potential to recruit staff

General business environment

Access to markets and supplies

General business environment

Wage levels Cost of transportation

Cost of utilities

General business environment

Infrastructure Cost of real estate

General business environment

Wage levels Infrastructure Infrastructure Access to markets and supplies

Cost of real estate

Real estate Wage levels General business environment

Access to markets and supplies

Access to markets and supplies

Cost of real estate

Real estate Cost of construction

General business environment

Cost of construction

Living environment

Cost of construction

Real estate Real estate

Wage levels Local potential to recruit staff

Cost of real estate

Wage levels Cost of utilities

Wage levels Access to markets and supplies

Local potential to recruit staff

Cost of utilities

Cost of construction

snapshot sichuan 59

Pharmaceutical/Traditional Chinese Medicine Industry SWOT Analysis

Sichuan province was analyzed for its strengths, weaknesses, opportunities and threats in attracting and retaining investment in each of the five subject sectors. The SWOT analysis for the pharmaceutical and traditional medicine industry is summarized below.

Strengths

Availability of Research Centers: Sichuan has a multitude of universities and research centers, including several that are nationally recognized for their phar-maceutical and chemistry programs. These include Sichuan University’s College of Medicine and its Key Laboratory in oral biomedical engineering. Sichuan also hosts several institutes dedicated to research in TCM, including Chengdu University of Traditional Chinese Medicine as well as the Sichuan Key Laboratory of Research Biology and Biopharmaceutical Engineering.

Specialized Educational Institutions: Sichuan has 68 institutes of higher edu-cation matriculating more than 43,000 graduates annually. Many of these schools are highly ranked nationally, particularly in the areas of pharmaceuticals and fine and specialty chemicals.

Abundance in Raw Materials: Sichuan is a significant producer of plants used in the manufacture of traditional Chinese medicine, including over 4,100 varieties of natural medicinal herbs, such as fritillaria, hemlock parsley, musk and caterpillar fungus. More than 80 companies in Sichuan produce traditional Chinese med-icines. Sichuan’s abundant high-quality water resources are an advantage for phar-maceutical and traditional medicine companies that require significant amounts of water in their processes. Sichuan also offers good agricultural land in its soil quality and relatively unpolluted environment.

Figure 24: Operating Costs versus Conditions in Pharmaceuticals/TCM

200

150

100

Qua

lity

inde

x(a

vera

ge =

100

)

50

00255075100

Operating cost index(average = 100)

125150175200

Chengdu

Mianyang

Deyang

Luzhou

Suining

Nanchong

Leshan

Panzhihua

Zigong

Yibin

snapshot sichuan60

Abundant Skilled and Unskilled Labor: Sichuan has abundant skilled and unskilled labor. Companies interviewed in the pharmaceutical and TCM industry reported they were very satisfied with their ability to recruit and retain both skilled and unskilled workers. In these two categories of labor, respondents rated the avail-ability of labor in pharmaceuticals and TCM the highest average score of any of the industries studied; out of a possible five points, the availability of skilled labor was rated 4.0, and the availability of unskilled labor was rated 4.8. The respondents’ relative satisfaction may be partly due to the fact that the pharmaceutical and TCM industry also had the lowest number of foreign-invested interviewed companies. The relatively large number of domestic companies interviewed in this industry may have contributed to an increased score related to their satisfaction with the supply of appropriately skilled labor. Among interviewed companies, 77% said they were satisfied with the availability of skilled workers.

Weaknesses

Electricity Reliability: Although ranked first in China for hydropower potential, Sichuan, as in almost all other areas of China, suffers from power shortages. These power shortages are limited to the winter season (from October to February), and are due to power diversions from Sichuan to the rapidly developing coastal areas and seasonal low water levels in the province’s rivers.

Difficulty Recruiting and Retaining Employees: Experienced professional, technical and managerial staff, and the best and brightest graduates from Sichuan’s educational institutions, are attracted by the higher wages and job opportunities offered in the coastal provinces. In the pharmaceutical and TCM industry, respondents reported that their ability to attract and retain managers and professional employees presented significant challenges. Respondents rated the potential to recruit and retain these employees an average score of 3.1 out of a possible score of 5 points. Many companies cited difficulties in recruiting talented candidates away from the Chinese coastal areas.

Intellectual Property Rights Protection: China has a developing IPR legal framework and a poor record of enforcing IPR, which are key to the international competitiveness of pharmaceutical companies.

Lack of Standards to Measure Efficacy and Safety of Traditional Chinese Medicine: While the use of TCM within China is relatively widespread (30–50% of medicines consumed in the country), the measurement standards for TCM’s efficacy and safety remain inchoate. Without standardized measurements, TCM cannot compete with Western medicine.

Opportunities

Increased International Interest in Traditional or Alternative Medicine: Increasing international interest in natural and traditional medicines suggests potential for Sichuan province to attract investment into this sector. The World Health Organization’s (WHO’s) official support for research in traditional medicine in China indicates the growing international interest in and acceptance of alternative medicine.

Active Pharmaceutical Ingredients and Intermediaries: China is becoming a major global source for active pharmaceutical ingredients (APIs) and API inter-mediate chemicals. Sichuan has some of the highest ranked basic and applied chemistry departments of educational institutions in China. Pharmaceutical and fine and specialty chemical manufacturers require this highly skilled expertise,

snapshot sichuan 61

even at the operator level. Sichuan has the opportunity to leverage the reputation of its educational institutions to attract investors in this industry.

Pharmaceutical Research and Development: Sichuan’s nationally ranked educa-tional institutions in pure and applied chemistry, as well as in pharmaceutical-related sciences, provide a strong base from which to recruit R&D talent.

Chinese Consumers Moving from Traditional Medicine to Western Medicine: The rapid development of the Chinese economy as well as the opening up of China to Western products have caused a shift over the past two decades toward greater consumption of Western medicine. Increased investments by Western pharma-ceutical companies in China have also helped to introduce Chinese consumers, among the country’s burgeoning middle class, to Western medicine.

Threats

Insufficient Investment in Electric Generating Capacity: A reliable and stable electricity supply is critical to attracting pharmaceutical and TCM manufacturers. If electricity demand from other regions of China continues to outstrip supply, preventing Sichuan from achieving a balance between local supply and demand, investors in this industry may be dissuaded from investing because of the need to install expensive in-house, back-up generation and/or stabilization systems.

Continued Insufficient Protection of Intellectual Property Rights: IPR protection is one of the keys to the development of the pharmaceutical industry. Without strong IPR legislation, FDI in the pharmaceutical industry will continue to be attracted to countries such as Singapore and, to a lesser extent, India, where IPR legislation is more mature and more strictly enforced.

Competition from India: India is already a major competitor to China in the man-ufacture of APIs, intermediate, and finished pharmaceuticals. It has a very large and well-educated labor force with particular strengths in biomedicine and phar-maceutical sciences. India has also considerably strengthened its laws protecting IPR, especially related to the pharmaceutical industry.

Insufficient Development of Standards for Efficacy and Safety of TCM: Without active government support to standardize the efficacy and safety of TCM, the development of TCM for widespread consumption and exportation will be com-promised. Industrialized countries with formal standards in measuring the safety of medicine are unlikely to approve products without such safety measures.

snapshot sichuan62

snapshot sichuan 63

Chapter IV

Comparative Costs at a Glance

The figures presented in this chapter compare the major operating costs of the

surveyed investors by municipality. These costs include: five classifications of

labor, plus benefits; utilities (electricity, natural gas and water); real estate costs

(land, lease and construction); and transportation by sea freight. The costs for

labor are presented by industry sector. Selected labor costs (for electronics and

food/beverage processing) and costs for utilities and real estate are also compared

against those of the coastal cities of Beijing, Guangzhou and Shanghai, and the

interior city of Wuhan. The data presented here is intended to supplement the

sector-specific information presented in the previous chapter, as well as the tables

of findings that appear in Appendix 4.

snapshot sichuan64

snapshot sichuan 65

Labor Costs by Industry

Labor Costs – Chemicals

Figure 25: Unskilled

Costs - Unskilled (US$/mo.)

132124

9764

97103

105119

100102

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

Yibin

Figure 26: Skilled

Costs - Skilled (US$/mo.)

295167

136108

157129133

155188

154

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

Yibin

Figure 27: Technical

Costs - Technical (US$/mo.)

387250

173168

222181

225211217

134

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

Yibin

Figure 28: Professional

Costs - Professional (US$/mo.)

563339

239174

310350

369323

312256

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

Yibin

Figure 29: Management

Costs - Management (US$/mo.)

1,164575

321625

411362

399399

667286

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

Panzhihua Zigong

Yibin

Figure 30: Benefits

Benefits (% of salary)

6371

8584

8077

8281

6569

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

Panzhihua Zigong

Yibin

snapshot sichuan66

Labor Costs – Electronics

Figure 31: Unskilled*

Costs - Unskilled (US$/mo.)128

11073

8258

87108

8172

117169

120215

99

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

YibinBeijing

GuangzhouShanghai

Wuhan

Figure 32: Skilled*

Costs - Skilled (US$/mo.)

148172

127102

80152

133142

105137

246214

357149

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

YibinBeijing

GuangzhouShanghai

Wuhan

Figure 34: Professional*

Costs - Professional (US$/mo.)495

308373

22283

245286

136155

213593

702895

386

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

YibinBeijing

GuangzhouShanghai

Wuhan

Figure 36: Benefits

Benefits (% of salary)

8163

7882

7865

7879

7766

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

Panzhihua Zigong

Yibin

Figure 35: Management*

Costs - Management (US$/mo.)1,177

448391

320143

319509

297206

2811,149

1,1941,612

709

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

YibinBeijing

GuangzhouShanghai

Wuhan

Figure 33: Technical*

Costs - Technical (US$/mo.)287

215183

15999

281232

176114

154431

564628

250

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

YibinBeijing

GuangzhouShanghai

Wuhan

* Sources for comparator city data: investor companies, Chinese Labor Bureau, Manpower, Hewitt Associates, ChinaHR, local recruitment companies, Hubei FIE Association, Wuhan East Lake High Tech Zone, Tractus database.

snapshot sichuan 67

Labor Costs – Food and Beverage Processing

* Sources for comparator city data: investor companies, Chinese Labor Bureau, Manpower, Hewitt Associates, ChinaHR, local recruitment companies, Guangzhou ETDZ Survey, Tractus database.

Figure 37: Unskilled*

Costs - Unskilled (US$/mo.)91

10780

848690

95186

11290

140155

195112

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

YibinBeijing

GuangzhouShanghai

Wuhan

Figure 38: Skilled*

Costs - Skilled (US$/mo.)115

214105108

135124125

216119118

172206

315145

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

YibinBeijing

GuangzhouShanghai

Wuhan

Figure 39: Technical*

Costs - Technical (US$/mo.)210218225

144225

181166

181128

121259

379579

239

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

YibinBeijing

GuangzhouShanghai

Wuhan

Figure 40: Professional*

Costs - Professional (US$/mo.)228227

298155

330251

357186190

228624

913849

389

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

YibinBeijing

GuangzhouShanghai

Wuhan

Figure 41: Management*

Costs - Management (US$/mo.)493

526499

250497

274519

226206

3361,179

1,5461,217

720

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

YibinBeijing

GuangzhouShanghai

Wuhan

Figure 42: Benefits

Benefits (% of salary)

6871

9388

7570

7992

2367

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

Panzhihua Zigong

Yibin

snapshot sichuan68

Labor Costs – Machinery and Machine Building

Figure 43: Unskilled

Costs - Unskilled (US$/mo.)

27894

106123

79105

97112

131127

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

Panzhihua Zigong

Yibin

Figure 44: Skilled

Costs - Skilled (US$/mo.)

464168

160160

127190

139142

174173

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

Panzhihua Zigong

Yibin

Figure 45: Technical

Costs - Technical (US$/mo.)

665376

215184

140195

216241

207198

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

Panzhihua Zigong

Yibin

Figure 46: Professional

Costs - Professional (US$/mo.)

1,247445

208271

165251

326443

325292

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

Yibin

Figure 47: Management

Costs - Management (US$/mo.)

2,266690

339401

203336

447607

327338

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

Yibin

Figure 48: Benefits

Benefits (% of salary)

5763

8478

7580

8285

7265

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

Yibin

snapshot sichuan 69

Labor Costs – Pharmaceuticals and Traditional Chinese Medicine

Figure 49: Unskilled

Costs - Unskilled (US$/mo.)

12469

10484

8166

10268

9962

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

Yibin

Figure 50: Skilled

Costs - Skilled (US$/mo.)

20487

167112

13287

130149

141101

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

Yibin

Figure 51: Technical

Costs - Technical (US$/mo.)

340140

267131

25799

208415

163135

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

Yibin

Figure 52: Professional

Costs - Professional (US$/mo.)

670110

261306

421131

278449

483112

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

Yibin

Figure 53: Management

Costs - Management (US$/mo.)

1,337231

428376

672164

416689716

185

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

Yibin

Figure 54: Benefits

Benefits (% of salary)

6978

9487

6674

7777

7984

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

Yibin

snapshot sichuan70

Utility Costs

Figure 55: Electricity (US$/kWh)*

0.060.06

0.050.06

0.060.060.06

0.050.05

0.060.07

0.080.08

0.05

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

YibinBeijing

GuangzhouShanghai

Wuhan

Figure 56: Natural Gas (US$/m3)*

0.130.12

0.100.08

0.120.10

n/a0.22

0.110.13

0.270.25

0.310.21

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

YibinBeijing

GuangzhouShanghai

Wuhan

Figure 57: Water (US$/m3)*

0.170.180.18

0.220.18

0.160.220.22

0.080.18

0.610.190.20

0.09

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

YibinBeijing

GuangzhouShanghai

Wuhan

* Sources for comparator city data: EDZs, Tractus database; electricity rates reflect rounding to nearest .01.

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Real Estate Costs

* Sources for comparator city data: EDZs, CB Richard Ellis, Tractus database.

Figure 58: Land Usage Rights (US$/m2)*

631818

1315

2327

4526

2472

2770

16

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

YibinBeijing

GuangzhouShanghai

Wuhan

Figure 59: Building Lease (US$/m2/mo.)*

1.270.630.60

0.360.30

0.430.18

0.420.88

0.423.67

2.242.56

1.50

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

YibinBeijing

GuangzhouShanghai

Wuhan

Figure 60: Office Lease (US$/m2/mo.)*

5.431.93

1.450.97

0.541.21

1.931.81

3.020.85

21.6511.00

29.703.70

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

YibinBeijing

GuangzhouShanghai

Wuhan

Figure 61: Warehouse Construction (US$/m2)

97

68

85

42

52

66

48

31

97

42

Chengdu

Mianyang

Deyang

Luzhou

Suining

Nanchong

Leshan

Panzhihua

Zigong

Yibin

Figure 62: Factory Construction (US$/m2)

175

87

112

59

57

103

45

19

13

54

Chengdu

Mianyang

Deyang

Luzhou

Suining

Nanchong

Leshan

Panzhihua

Zigong

Yibin

Figure 63: Office Construction (US$/m2)

145

94

101

74

72

139

94

54

106

85

Chengdu

Mianyang

Deyang

Luzhou

Suining

Nanchong

Leshan

Panzhihua

Zigong

Yibin

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Sea Freight Costs

Figure 64: Standard Container to Rotterdam*

Costs - Rotterdam (US$/standard Container)

2,200.002,683.00

2,297.002,100.00

2,466.002,466.00

2,683.002,483.00

2,441.002,441.00

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

Yibin

Figure 65: Standard Container to New York*

Costs - New York (US$/standard Container)

2,500.002,883.00

2,597.003,050.00

2,466.002,466.00

2,683.002,483.00

3,391.003,391.00

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

Yibin

Figure 66: Standard Container to Yokohama*

Costs - Yokohama (US$/standard Container)

1,200.001,683.00

1,297.00600.00

1,466.001,466.00

1,683.001,483.00

841.00841.00

ChengduMianyang

DeyangLuzhouSuining

NanchongLeshan

PanzhihuaZigong

Yibin

* Standard container of 30 cubic meters, 18 tonnes.

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Chapter V

Findings by Municipality

The methodology of the Sichuan benchmarking study called for in-depth analysis

at the local level in order to identify those municipalities best suited for investment

in each of the five subject industries. This chapter details the study’s findings for

each of Sichuan province’s 10 municipalities. On the following pages, each muni-

cipality’s investment environment is briefly discussed, including an overview of

basic facts and key differentiators related to the attraction of investment, followed

by the SWOT analysis, which summarizes each municipality’s strengths, weak-

nesses, opportunities and threats as a location for investment in the five subject

industries. The municipalities are presented in alphabetical order as follows:

1. Chengdu

2. Deyang

3. Leshan

4. Luzhou

5. Mianyang

6. Nanchong

7. Panzhihua

8. Suining

9. Yibin

10. Zigong

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snapshot sichuan 75

1. Chengdu

As the capital of Sichuan province, Chengdu’s key strengths are its physical and human assets. The province’s largest technical labor pool and strong educational institutions have attracted key investors in high value-added industries, such as Toyota in motor vehicles, Intel in electronics, and United Technology (Pratt and Whitney division) in aerospace. These provide opportunities for additional investments in supporting industries. As the economic and financial center of Sichuan, roads and other key physical infrastructures are connected to Chengdu, making it a natural point of distribution to western China. FDI is disproportionately attracted to Chengdu’s 11 EDZs, which offer preferential investment incentives. Chengdu’s appeal as a location for both domestic and foreign investment has resulted in relatively higher labor and other fixed costs, as well as shortages of appropriately zoned land in its EDZs. Although access to physical infrastructure is one of Chengdu’s strengths, investors remarked that transportation quality and reliability, particularly connections to coastal provinces, could be improved.

Municipality Overview

Basic Facts: Chengdu, the capital of Sichuan province, is located in the western part of the Sichuan basin. The municipality covers a total area of 12,390 square kilometers, including 87 square kilometers of urban area, and has a population of 10.6 million. Chengdu’s GDP in 2004 was US$26.4 billion, nearly five times that of the next largest municipality in terms of GDP, Mianyang.

Main Industries: Electronics and IT, machinery (including vehicles and auto parts), pharmaceuticals and food processing (including tobacco) are the main industries in Chengdu. In 2004, industrial value-added was about US$9,537 million.

In the electronics and IT industry, Chengdu’s main products include software and equipment for meteorological radar, telecommunications, radio broadcasting and television, and calculators. Chengdu also hosts a microprocessor assembly and testing plant owned by Intel. The machinery industry in Chengdu is focused on aircraft assembly, construction machinery, motor vehicles and motor vehicle parts. Tobacco, spirits and beer are the most important products in the food and beverage industry. Chengdu also has a large and varied pharmaceutical and tradi-tional medicine manufacturing cluster.

Foreign Investment: Chengdu is home to 3,491 FIEs, the most of any of the municipalities surveyed. These include 1,944 JVs, 207 cooperative ventures (CVs), and 1,340 WOFEs. Cumulative utilized foreign direct investment, at US$3.4 billion, is the highest of any of the municipalities in the study.

Economic Development Zones: Most FDI in Chengdu is located in the munici-pality’s EDZs. Chengdu has 11 national- and provincial-level EDZs. The EDZs that are most attractive to foreign investors are Chengdu’s national-level zones, which offer the most significant corporate tax and non-tax incentives. The national-level EDZs include: the Chengdu ETDZ, which focuses on motor vehicles and parts, aircraft components, construction equipment, construction materials, electronic parts, and processed foods and beverages; the Chengdu HIDZ, which focuses on

CHENGDU AT A GLANCE

Population 10,600,000

Area 12,390 km2

GDP (2004) US$26.4 billion

Industrial Value Added (2003)

US$8097 million

FDI11 (2004, utilized)

US$483.5 million

Principal Industries

Electronics and Information, Machinery, Pharmaceuticals, Food and Beverage Processing

Educational Institutions

29 universities and colleges140 vocational schools15 national technical

institutes13 national engineering

technical centers

Economic Development Zones

1 national HIDZ1 national ETDZ1 national EPZ8 provincial EDZs

Sources: Sichuan Investment Promotion Bureau and Tractus Asia research.

11 Includes foreign direct investment and foreign direct aid in the form of low interest loans and donations.

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electronics, pharmaceuticals and fine chemicals, and includes the Chengdu EPZ; and the national-level Cross-Straits Technology Industrial Park, which focuses on attracting light industrial investment from Taiwanese companies such as printing and packaging, foods processing (including instant foods, dairy products and bev-erages), and medicines.

Table 10: Ownership of Firms Interviewed in Chengdu

Sectors

Num

ber

of

Fir

ms

From

C

heng

du

Chi

nese

Fro

m

Sich

uan

Chi

nese

O

utsi

de

Sich

uan

Chi

nese

JV

Fore

ign

JV

100%

For

eign

Chemicals 5 0 0 0 0 3 2

Electronics 6 0 0 0 0 4 2

Food & Beverage Processing

5 0 0 0 0 2 3

Machinery 5 0 0 0 0 2 3

Pharmaceuticals 5 0 0 0 0 3 2

TOTAL 26 0 0 0 0 14 12

Market Access and Infrastructure: Chengdu is the only municipality with an international airport, Chengdu Shuangliu International Airport, which has over 200 domestic and international flights monthly.

Inter- and intra-provincial road and rail networks connect Chengdu with the other major commercial centers in Sichuan and western China. Chengdu is located at the crossroads of nine intra- and inter-provincial highways and features the longest ring highway in Sichuan. Typical over-the-road transit time to Shanghai is five to six days. Four railway lines interconnect in Chengdu, which has the largest railway terminal in southwestern China. In addition, the largest rail freight marshalling station in Asia is now under construction in Chengdu. There are direct express cargo trains to Shanghai with transit times of between six and seven days.

While land transport connections are well developed, Chengdu lacks a commercial water port and goods must be trucked to ports in Leshan, Luzhou or Yibin for onward waterborne shipment to Shanghai and cities in the Yangtze River delta. Chengdu is one of the top eight telecommunications hubs in China and also one of the network nodes of China’s optical fiber backbone lines. It has an internet data center and the Chengdu Internet Exchange Center.

Human Resources: Chengdu has 29 colleges and universities, 140 vocational schools, 15 national-level technical institutes and 13 national-level engineering technical centers. These include several institutions of higher education specializing in biomedical research, such as the China Medical Group, the Sichuan Antibiotics Institute, the Sichuan Pharmaceutical Research Academy, the Chengdu Biological Institute of Academia Sinica, the Sichuan University West China Medical Center, and the Chengdu Traditional Medical University. Among generalist institutions, University of Electronics Science and Technology of China, Sichuan University and Southwest Jiaotong rank among China’s top 100 universities.

Chengdu’s technical labor pool is the largest in western China and ranks fourth largest in China. New graduates tend to be drawn to Chengdu for the higher salaries and employment opportunities available in the capital city. Because of its

snapshot sichuan 77

large metropolitan area and population, there is a larger and more varied expatriate community and availability of amenities than in the other municipalities. Chengdu is the only city in Sichuan province with international secondary schools; there are more than 10 international and bilingual secondary schools in Chengdu.

Business Support Services: Chengdu is regarded as the financial center of China’s southwest region. Chengdu’s financial institutions rank first in western China for the number of transactions, and the turnover of Chengdu’s off-exchange stock markets ranks third in China after Shanghai and Shenzhen. As of the end of 2004, 13 foreign financial institutions had established representative offices and/or branches in Chengdu, including HSBC, Citibank and Standard Chartered Bank. The United States, Germany and Korea have established consulates in Chengdu.

Chengdu SWOT Analysis

Strengths

Provincial Market Access: Sichuan’s largest municipality and market is the com-mercial and administrative heart of the province. Investors rated Chengdu first in access to raw materials, components and parts, and two-times higher than second-ranked Deyang, Chengdu’s satellite city.

Transportation Infrastructure Access: All roads, and most other infrastructure, with the exception of waterways, lead to Chengdu, providing it with the best con-nections to markets in Sichuan province, western China and abroad. Chengdu has Sichuan’s largest and the only international airport.

Quality of Life: As a large metropolitan city with a substantial base of FDI, Chengdu has limited, but developing, expatriate infrastructure. Investors rated the cost of living and level of crime in Chengdu about average for the 10 subject municipalities.

Labor Availability and Quality: Chengdu has the largest labor pool of any of the municipalities surveyed, drawing graduates from the municipality’s many highly rated technical and specialist educational institutions, including a particularly well-qualified pool of graduates in chemistry and with biomedical expertise. Also, several technical institutes and centers specialize in the aerospace industry.

Weaknesses

Transportation Infrastructure Quality and Cost: While Chengdu’s availability of transportation infrastructure is more developed than the other municipalities surveyed, investors noted that transportation reliability, and infrastructure quality and costs need improvement. Road conditions, in particular, were cited as poor and often congested, resulting in low reliability of truck freight. Rail transport is reportedly slow and inefficient; some companies reported a shortage of rail cars that affects reliable shipping of finished products. During winter, Chengdu is blanketed in fog that can disrupt road, rail and air shipping.

Water Port Access: Chengdu has no inland water port. Manufacturers must either send goods by truck or rail or transship them to the nearest inland or coastal ports.

Electricity Reliability: Chengdu experiences frequent power shortages. Respondents reported the second highest number of blackouts and brownouts combined among the surveyed municipalities.

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Operating and One-Time Investment Costs: Chengdu has the highest labor costs in all categories of skill levels. Similarly, real estate costs (costs of land usage rights, lease for industrial and commercial space and factory construction costs) are the highest in the province. Many companies interviewed cited high transportation costs as a disadvantage of Chengdu, although the costs of all modes of transport are largely similar to those of other municipalities.

Opportunities

Logistics and Distribution: Chengdu’s central location within the province, access to intra- and inter-provincial transport networks, and its status as the “Gateway to Western China” place it in a position to act as the logistics hub for companies needing to distribute products throughout western China.

Electronics: Chengdu could leverage recent multinational investments in the elec-tronics industry, including Intel’s semiconductor assembly and testing facility, to promote the development of a value-added electronics cluster. Its nationally ranked educational institutions, existing electronics firms and several HIDZs can serve as a foundation to help attract electronics R&D centers, semiconductor manufacturing, and microelectronics. These types of products can be cost-effectively shipped by air to end-users, offsetting Sichuan’s remote location and long ground transport transit times.

Pharmaceuticals and Traditional Chinese Medicine: Chengdu could leverage its existing base of pharmaceutical/traditional medicine manufacturers, raw materials producers, and nationally ranked chemistry and biomedical-focused educational institutions to attract additional investors in the chemical and biomedical sup-porting industries. Specific opportunities exist in intermediate chemicals used in the manufacture of active pharmaceutical ingredients and R&D related to finished pharmaceuticals and traditional medicine.

Machinery and Machine Building: Chengdu’s technical labor base provides opportunities to attract additional machinery/machine building industries that have a disproportionate demand for skilled and technical labor and would benefit from Chengdu’s province-leading pool of technical manpower. Additionally, Chengdu’s base of aerospace-focused technical and research institutes and manufacturers provides opportunities to attract additional investment in the aerospace sector. Specific targets for promotion are automotive parts and components and aerospace component manufacturers. As the sole supplier of the rudder for Boeing’s new 787 aircraft, Chengdu can build further awareness of its world-class aerospace manufacturing capabilities.

Subway Construction: China’s central government has recently approved the plan for construction of Chengdu’s subway system, which will strengthen the municipality’s position as a center of southwestern China.

Threats

Rising Labor Costs: Labor costs average several times that of other munici-palities. Companies in Chengdu must compete for scarce managerial talent with China’s coastal provinces, which drives up costs.

Competition from Other Western Cities: The central government has invested over US$60 billion in infrastructure development in neighboring Chongqing over the past five years (equivalent to US$1 billion per month) to position it as the center of western China’s development efforts. Chengdu faces the prospect of being overshadowed by its larger neighbor.

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2. Deyang

Deyang enjoys lower costs than Chengdu, while benefiting from its proximity to Sichuan’s capital city and largest market. Deyang provides easy access to the inter-national airport and other transportation hubs. Deyang also sits atop the Sichuan oil and gas field, which has large natural gas and oil reserves as well as more than 30 kinds of commercially viable minerals. In addition, the municipality is home to vast reserves of pure spring water that can be used for food/beverage processing and the pharmaceutical industry. Operating conditions in Deyang are highly rated for the pharmaceutical, food/beverage processing and chemical industries. Respondents ranked these first, second and third in Sichuan, respectively. Deyang also has a strong manufacturing sector, which accounts for 80% of the munici-pality’s FDI and produces a large portion of China’s power generation and foundry equipment. Major multinationals such as GE and Alstom have a large vendor base in Deyang. While Deyang still has lower wages, utility and land usage costs than Chengdu, these costs are on the rise.

Municipality Overview

Basic Facts: Deyang is situated in the middle of Sichuan province 40 kilometers north of Chengdu, in the northeastern part of the Chengdu Plain. Deyang became a municipality directly under the provincial jurisdiction of Sichuan province in 1983. Deyang has six counties and county-level cities, a population of 3.8 million and land area of 5,954 square kilometers, about five times the size of Hong Kong. In the year 2004, Deyang’s GDP was US$5.1 billion.

Main Industries: The main industries in Deyang are machinery, food and beverage processing, chemicals, pharmaceuticals, apparel, and new materials. Deyang’s machinery industry is centered around three key state-owned enterprises producing heavy machinery: the China National Erzhong Group (manufacturing rolling mills used in steel plants, heavy cast and forged steel, and non-ferrous components), Dongfang Electrical Machinery Co. (manufacturing turbines and other equipment for hydroelectric and thermal power plants), and the Dongfang Steam Turbine Co.

Currently, 50% of China’s hydroelectric power generation equipment, 25% of thermal power generation equipment and over 30% of foundry equipment is made in Deyang. The city’s main electric power generating equipment manufacturers have won international orders to supply power generation projects around the world in cooperation with most of the world’s major power generation equipment manu-facturers including ABB, GE and Alstom. The municipality’s chemical industry is centered around phosphate and phosphate chemical production. Deyang’s food and beverage industry is known for its Chinese rice and plum wine products and beers. Deyang also has a large number of pharmaceutical manufacturers, espe-cially in traditional Chinese medicine.

Foreign Investment: At the end of 2004, 578 FIEs were located in Deyang. These included 370 JVs and 208 WOFEs. The total amount of actual cumulative utilized foreign direct investment at the end of 2004 was around US$700 million; approximately 80% of this amount was in manufacturing and 20% was in service industries.

Market Access and Infrastructure: Deyang’s closest international airport is the Chengdu Shuangliu Airport. Two highways pass through the Deyang municipality: the Chengdu-Mianyang Highway and National Highway 108 linking Deyang to

DEYANG AT A GLANCE

Population 3,800,000

Area 5,954 km2

GDP (2004) US$5.1 billion

Industrial value Added (2003)

US$1731.9 million

FDI12 (2004, utilized)

US$46.4 million

Principal Industries

Machinery, Food and Beverage Processing, Chemicals, Pharmaceuticals, New Materials, Apparel

Educational Institutions

3 colleges30 vocational schools

Economic Development Zones

2 provincial ETDZs5 local EDZs

Sources: Sichuan Investment Promotion Bureau and Tractus Asia research.

12 Includes foreign direct investment and foreign direct aid in the form of low interest loans and donations.

snapshot sichuan80

Shaanxi province in the north and Yunnan province, via Chengdu and Panzhihua, in the south. Two rail lines connect in Deyang: the Baoji-Chengdu and Dazhou-Chengdu lines. Deyang has no inland water port, which is common among most of the subject municipalities.

Human Resources: Deyang has three colleges and 30 vocational schools, including the Deyang Engineering College, which specializes in machinery and the Construction Engineering College.

Natural Resources: Deyang has more than 30 kinds of commercially exploitable mineral resources. Deyang is situated in the Sichuan oil and gas field, discovered in the 1960s and now the largest in southwest China. Its probable reserves of natural gas exceed 300 billion cubic meters. Reserves of phosphates amount to over 300 million tons and limestone reserves are over 5 billion tons. The Deyang area is also the source of abundant high-quality spring water.

Economic Development Zones: Deyang has two provincial-level ETDZs, with one focusing on machinery and apparel production, and five local-level EDZs.

Deyang SWOT Analysis

Strengths

Proximity to Chengdu: Deyang is only 40 kilometers from Chengdu, yet enjoys lower costs, including the lowest electricity rates and among the lowest land usage rights costs in Sichuan, and substantially lower labor costs than Chengdu. Deyang, therefore, has a distinct advantage due to its proximity to Chengdu’s infrastructure and market access, including its international airport. Many respondents cited proximity to Chengdu as one of their critical location selection factors.

Natural Resources: Deyang has abundant agricultural resources, which have attracted manufacturers of traditional medicine and abundant high-quality water essential for the pharmaceutical and chemical industries. Deyang is home to the fourth largest phosphate deposits in China.

Operating Conditions: Of the municipalities investigated, Deyang ranked third in operating conditions for the chemical industry, second for the food processing industry, and was the overall best for the pharmaceutical industry, according

Table 11: Ownership of Firms Interviewed in Deyang

Sectors

Num

ber

of

Fir

ms

From

Dey

ang

Chi

nese

Fro

m

Sich

uan

Chi

nese

O

utsi

de

Sich

uan

Chi

nese

JV

Fore

ign

JV

100%

For

eign

Chemicals 5 0 0 0 0 4 1

Electronics 4 0 0 0 0 3 1

Food & Beverage Processing

5 0 0 0 0 4 1

Machinery 6 0 0 0 0 6 0

Pharmaceuticals 5 0 1 0 3 0 1

TOTAL 25 0 1 0 3 17 4

snapshot sichuan 81

to respondents. This is due in large measure to Deyang’s access to input and output markets, relatively strong infrastructure and comparatively good living environment.

Heavy-Machine Building Cluster: The cluster around Deyang comprising about 200 enterprises and some research and design institutes has provided the most important heavy equipment for nuclear power stations and large hydropower stations in China. The cluster is competitive even from an international market perspective.

Weaknesses

Real Estate Costs: Real estate costs in Deyang are high. Warehouse construction costs in Deyang are US$85 per square meter. This is the third highest in Sichuan, after Chengdu and Zigong. The cost of factory construction in Deyang is second highest in Sichuan (after Chengdu) at US$112 per square meter. The construction costs of office space in Deyang are fourth highest in Sichuan, at US$101 per square meter.

Rail Transportation Reliability: The reliability of rail transportation services in Deyang is considered weak. Interviewees complained that rail freight service is poor. Demand for rail freight services is much higher than the available supply due to shortages of rolling stock. Losses were also reported to have occurred during rail shipping.

Customs Services Availability: Deyang has no customs office. Customs clearance procedures for imported and exported goods must be undertaken in Chengdu, because the Chengdu Customs Department is responsible for clearing goods for a number of municipalities in its vicinity.

Opportunities

Machinery: The Ministry of Science and Technology has designated Deyang as a “trial city for the upgrade of traditional manufacturing industries through techno-logical innovations” and as a “national key city for the normalization of the manu-facturing industry.” Deyang can leverage its reputation of existing nationally ranked manufacturers of turbines and heavy machinery used in hydro and thermal power plants to encourage investments by supporting industries in the machinery sector. Specific targets for promotion include suppliers of powder and high temperature super-alloy components serving the turbine manufacturers and aerospace com-panies in Chengdu.

Pharmaceutical Industry: Deyang’s proximity to Chengdu offers opportunities in pharmaceutical R&D. Chengdu is home to many establishments for phar-maceutical, biological, and medical research, including the nationally renowned Sichuan Antibiotics Institute and the Sichuan University West China Medical Center. The abundance in natural resources and plant variety in Deyang also provides good opportunities for the development of the traditional Chinese medicine sector, especially given the short distance to the Chengdu Traditional Medical University.

Chemical Industry: Deyang has a reputation for production in the chemical industry, which has attracted a large number of ancillary equipment manufacturers and suppliers. Given its abundance of raw materials, including a large natural supply of phosphate and water, Deyang has the resources to develop and expand its chemical industry, particularly phosphate-based agro-chemicals, detergents and other manufactures requiring natural phosphates as raw materials.

snapshot sichuan82

Threats

Water Pollution: Rapid industrialization in Deyang and nearby Chengdu has caused an increase in pollution, concentrated in the Min and Tuo rivers, which both empty into the Yangtze. Although efforts have been made to correct this problem, including a 1999 joint-project between the World Bank and the Chinese government (the China-Sichuan Urban Environment Project), lack of continued attention to this matter will pose a threat to the development of the food and beverage processing industry in Deyang.

Rising Costs: Deyang has some of the highest operating costs in Sichuan because of its proximity to Chengdu.

3. Leshan

Best known for its Giant Buddha, Leshan is located 100 kilometers southwest of Chengdu in a region of deep forests and waterfalls near Mount Emei, one of China’s four Holy Buddhist Mountains. Leshan’s abundant natural resources make it an ideal location for the development of the food and beverage processing industry as well as for pharmaceuticals. The traditional medicine industry has a long history in Leshan. In electronics, existing investors include companies such as Motorola, which established its first Chinese joint venture in Leshan. Other semiconductor companies have followed this course, setting up operations to take advantage of the availability of human resources and the relatively lower costs.

Municipality Overview

Basic Facts: Leshan is located in the southwest Sichuan basin about 100 kilo-meters south of Chengdu at the confluence of the Min, Qingyi and Dadu rivers. Leshan’s population of 3.5 million is spread around 11 districts and counties occupying a total area of 12,800 square kilometers. GDP in 2004 was US$3.2 billion.

Main Industries: There are four main industries represented in Leshan: elec-tronics, pharmaceuticals, construction materials and tourism. Leshan’s electronics industry is focused on the production of semiconductor accessories. Currently, there are three major electronics enterprises: Leshan Radio-Phoenix Co., Ltd., a joint venture with Motorola; Emei Semi-Conductor Material Plant; and Emei Shuanglong Fiber Optical Communications Co., Ltd. Total output of the electronics industry in Leshan was US$169.7 million in 2003.

The pharmaceutical industry in Leshan emphasizes the production of antibiotics and traditional Chinese medicines. Leshan and the surrounding area include over 22,000 square kilometers cultivated in plants used for traditional Chinese med-icines. Currently, the city is home to 21 healthcare-related companies, including 19 pharmaceutical manufacturing facilities, a pharmaceutical packaging company and a medical instrument manufacturing company, with a combined investment of US$153 million and sales revenues of US$85.3 million. In 2003, the construction materials industry accounted for 34.5% of the gross industrial output value of Leshan. The tourism industry is also significant to Leshan. Mt. Emei and the Leshan Giant Buddha are located in the area, along with 26 national and provincial

LESHAN AT A GLANCE

Population 3,476,300

Area 12,800 km2

GDP (2004) US$3.2 billion

Industrial Value Added (2003)

US$1080.4 million

FDI13 (2004, utilized)

US$50.9 million

Principal Industries

Electronics, Pharmaceuticals, Construction Materials, Tourism

Educational Institutions

3 universities1 vocational school

Economic Development Zones

1 provincial HIDZ1 national Agricultural Industrialization Zone

Sources: Sichuan Investment Promotion Bureau and Tractus Asia research.

13 Includes foreign direct investment and foreign direct aid in the form of low interest loans and donations.

snapshot sichuan 83

forests and natural protection sites. Leshan is the only city in China to be awarded the title “Paradise in China” by the UN Center of City Administration.

Foreign Investment: At the end of 2004, Leshan had 287 ventures with foreign investment, including 16 CVs, 16 JVs and 73 WOFEs. In 2004, eight ventures with foreign investment were established in Leshan, including six WOFEs, a JV and a CV. The total actual utilized investment volume was about US$51 million. Industries represented by these enterprises include: a company in real estate, two invested in the transportation and energy industries, two travel-related companies, an enterprise invested in the agricultural industry, an enterprise invested in elec-tronics, and a company providing consulting services.

Market Access and Infrastructure: The nearest international airport, Chengdu Shuangliu International Airport, is 125 kilometers away.

Human Resources: Leshan has three universities: the Leshan Normal University, Southwest Transportation University–Leshan Branch, and the Sichuan Science and Engineering University–Leshan Branch. In addition, it is home to a vocational school, the Leshan Advanced Career Skill School.

Natural Resources: Twenty-two types of non-renewable natural resources have been discovered in the Leshan area, including coal, phosphates, salt ores, limestone, earth used in cement, shale used in bricks and tiles, sandstone, mineral water, natural gas, copper, dolomite, clay, kaolin, basalt stone, wollastonite, granite, marble, and river sand. Leshan also has natural hot springs. Leshan’s renewable resources include potential hydropower reserves of approximately 5.7 million kilowatts.

Economic Development Zones: Leshan has a provincial-level HIDZ and Sichuan’s only national-level agricultural scientific and technology zone. The Leshan HIDZ was set up in 1996 and covers seven square kilometers. As of the end of 2004, five foreign invested enterprises had been established in the zone, in the industries of pharmaceuticals, machinery, apparel and chemicals. Leshan Agricultural Scientific and Technology Zone is one of 21 leading experimental units approved by six state departments, including the Scientific and Technological Department. Emphasized industries within the Agricultural Scientific and Technology Zone include: the bamboo and tea industries, as well as animal husbandry, crops and paper pro-duction, and other food-related industries.

Table 12: Ownership of Firms Interviewed in Leshan

Sectors

Num

ber

of

Fir

ms

From

Les

han

Chi

nese

Fro

m

Sich

uan

Chi

nese

O

utsi

de

Sich

uan

Chi

nese

JV

Fore

ign

JV

100%

For

eign

Chemicals 5 2 2 0 0 1 0

Electronics 5 1 1 1 0 2 0

Food & Beverage Processing

6 3 1 1 0 1 0

Machinery 5 2 0 0 2 1 0

Pharmaceuticals 5 0 1 1 0 1 2

TOTAL 26 8 5 3 2 6 2

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Leshan SWOT Analysis

Strengths

Operating Conditions: Among the surveyed municipalities, Leshan ranked third in overall operating conditions for the machinery industry, second for the chemical industry, and first for the food processing industry. This is due in large measure to Leshan’s availability of real estate and relatively strong infrastructure.

Telecommunications Infrastructure Reliability: The survey results showed one of the highest satisfaction ratings for the telecom infrastructure in terms of the quality of landlines and speed of installation.

Transportation Infrastructure Access: Leshan has Sichuan’s only container port. The Chengkun railway passes through Leshan municipality, connecting Leshan to the national market. In addition, Leshan is just 125 kilometers from Chengdu, requiring only 90 minutes in transit time from Leshan to Chengdu International Airport. Many respondents mentioned “the full-scale infrastructure and convenient transportation” as important factors in their decision to invest in Leshan.

Mineral Resources: Interviewees praised the high quality of mineral water in Leshan. The municipality is rich in mineral resources such as rock salt, phosphorus and wollastonite, which can be conducive to investment in the mining and mineral processing industries.

Factory Leasing and Construction Costs: Costs of factory leasing and con-struction in Leshan are among the lowest of the surveyed group, at US$0.18 per square meter/month for factory leasing and US$45 per square meter for factory construction.

Pharmaceutical Industry Cluster: Leshan has a long history of pharmaceutical production and an established pharmaceutical industry cluster. The municipality is home to 21 healthcare enterprises, including 19 pharmaceutical manufacturing facilities, a medicine-packaging company and a medical instrument manufacturing company. The existence of the cluster has created a good pool of technicians, labs and equipment manufacturers for this industry.

Customs Services: The local government has established a Commodities Inspection Bureau and a customs office that now allows goods for export to travel directly overseas from Leshan.

Weaknesses

Quality of Transportation Infrastructure: According to the interviewees, roads are not well developed and the railway is not easily accessible from the city.

Utility Costs: Natural gas costs in Leshan are the highest of the 10 surveyed municipalities. In addition, Leshan has the highest water costs, together with Luzhou and Panzhihua.

Access to Capital: Companies reported that it is difficult to obtain bank financing.

Quality of Life for Expatriates: From the perspective of the foreign investors, Leshan’s living conditions are less than ideal. There are no international schools in Leshan, although the city’s first foreign language school will begin development in 2005.

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Opportunities

Pharmaceutical Industry: Leshan’s government intends to develop Leshan as a base for the production of the raw materials necessary for the manufacture of anti-biotics and transfusion supplies. The development of traditional Chinese medicine production stands to benefit from the cultivation of a wide variety of medicinal herbs and plants in Leshan.

Food and Beverage Processing Industry: Leshan has the opportunity to focus its targeted investment promotion activities in the food and beverage processing industry around the Leshan Agricultural Scientific and Technology Zone to attract investors in agricultural and horticultural R&D. Leshan’s province-leading position for overall operating conditions in this industry makes it an attractive location for these high-value added service industries.

Export Processing Zone: An export processing zone is planned for Leshan. If approved, this EPZ will create opportunities for attracting export-oriented industries to the municipality.

Machinery: Leshan’s existing nationally ranked manufacturers of turbines and heavy machinery used in hydro and thermal power plants will encourage investments by supporting industries in the machinery and machine building sector. Specific targets for promotion include producers of powder metallurgy and high temperature super-alloy components that could locate in Leshan to supply local turbine manufacturers as well as to export their products.

Threats

Rising Costs: Especially in utilities, rising costs in Leshan will prohibit the full development of energy-intensive industries such as chemicals.

4. Luzhou

Luzhou’s rich mineral deposits, combined with the availability of technical univer-sities, make this location an attractive destination for investment in the mining, mineral processing and allied chemical industries. Luzhou is a large production base for chemical fertilizers as well as natural gas and coal-based chemicals. Luzhou also is an important machinery and machine-building base in China for major products including cranes, excavators, hydraulic accessories and automotive parts. A number of distilleries and breweries in Luzhou take advantage of the high-quality water supply. Its historic role as a wine producer – the name Luzhou is synonymous with the production of rice wine – gives the municipality name recog-nition in China and can open doors to other types of investments.

Municipality Overview

Basic Facts: Luzhou is located in the southeastern part of Sichuan province, at the confluence of the Yangtze and Tuo rivers. It is 270 kilometers from Chengdu

LUZHOU AT A GLANCE

Population 4,659,100

Area 12,249 km2

GDP (2004) US$3.1 billion

Industrial Value Added (2003)

US$780.1 million

FDI14 (2004, utilized)

US$8.17 million

Principal Industries

Food Processing, Machinery, Chemicals

Educational Institutions

5 universities and colleges29 vocational schools20 technical institutes

Economic Development Zones

None

Sources: Sichuan Investment Promotion Bureau and Tractus Asia research.14 Includes foreign direct investment and foreign direct aid in the form of low interest loans and

donations.

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and 200 kilometers from Chongqing. Luzhou has a total area of 12,249 square kilo-meters, and a population of 4.7 million. Luzhou’s 2004 GDP was US$3.1 billion.

Main Industries: Luzhou’s main industries include food and beverage processing, machinery, and chemicals. Within the food and beverage industry, beverage pro-duction is foremost, led by the production of rice wine (mijiu). Many of China’s premier wineries and distilleries have operations in Luzhou, including China’s oldest active distillery. Luzhou has a significant concentration of machinery and machine building companies, including manufacturers of cranes, excavators, street cleaning machines, hydraulic equipment and automotive parts. In the chemical industry, petrochemicals derived from natural gas and coal, including 80,000 tons of synthesized ammonia and 124,000 tons of urea each year, dominate the industry in Luzhou.

Foreign Investment: There are 81 FIEs located in Luzhou, with a total utilized foreign investment of US$33 million. In 2004, actual utilized foreign investment was US$8 million encompassing nine FIEs. Of these nine enterprises, six were JVs and three were WOFEs.

Infrastructure: The Luzhou airport is 6.5 kilometers from the city center, and has 24-hour service. Currently, direct flights are available to Shanghai, Beijing, Guangzhou, Haikou, Kunming and Guiyang. Luzhou is an inland river port city, with a current annual container throughput of 50,000 TEU (twenty foot equivalent unit).

Natural Resources: Luzhou’s mineral and natural resources are coal, including reserves of over 7 billion tons of high rank anthracite, 100 billion cubic meters of coal-bed methane, 65 billion cubic meters of natural gas, iron ore and limestone.

Human Resources: Luzhou has five universities and colleges, 29 vocational schools and 20 technical institutes. Its universities include Luzhou Medical University, Luzhou University and the Luzhou College of Law Enforcement.

Economic Development Zones: Luzhou has no economic development zones. However, the municipality is building West Sichuan Chemical City, designated by the National Development and Reform Commission.

Table 13: Ownership of Firms Interviewed in Luzhou

Sectors

Num

ber

of

Fir

ms

From

Luz

hou

Chi

nese

Fro

m

Sich

uan

Chi

nese

O

utsi

de

Sich

uan

Chi

nese

JV

Fore

ign

JV

100%

For

eign

Chemicals 6 0 1 1 1 1 2

Electronics 4 0 2 1 0 1 0

Food & Beverage Processing

5 0 1 1 2 1 0

Machinery 6 3 0 0 0 2 1

Pharmaceuticals 4 0 2 0 0 2 0

TOTAL 25 3 6 3 3 7 3

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Luzhou SWOT Analysis

Strengths

Existing Cluster in Chemicals: Luzhou is one of China’s largest production bases for chemical fertilizers and is home to West Sichuan Chemical City. The municipality benefits from numerous technical universities and institutes providing a reliable supply of skilled workers, as well as large natural reserves of coal-bed methane (100 billion cubic meters), natural gas (65 billion cubic meters) and anthracite (7 billion tons).

Transportation Infrastructure Access: Luzhou has an important role as a port city within China’s western development initiative, which has led to the development of port-related service industries. In addition to the water port, Luzhou has a national airport and connects to Chengdu to the west and Chongqing to the east.

Labor Costs: In the chemical and food/beverage processing industries, Luzhou’s costs were relatively low, including those in the higher skill categories. In chemicals, Luzhou showed the lowest costs for unskilled, skilled and professional labor, and its technical labor costs were second lowest after those of Yibin. In food and beverage processing, Luzhou's costs were the lowest for professionals and among the lowest for unskilled, skilled, technical and managerial employees. In machinery/machine building and pharmaceuticals, Luzhou's technical labor costs ranked second lowest.

Weaknesses

Rail Transportation Infrastructure Quality: Respondents reported that the service reliability of the China State Railway is poor. Five companies interviewed in Luzhou noted that they transport their products to customers via road due to rail transport inefficiencies. One respondent praised Luzhou’s convenient transportation access “except for the transportation by train.”

Telecommunications Infrastructure: Respondents in Luzhou reported the second longest installation time for telephone lines, an average of 3.6 days. Installation of internet services, including broadband, also averaged between 3 and 4 days for respondents located in Luzhou.

Opportunities

Chemicals: Luzhou’s West Sichuan Chemical City has attracted a number of new investments, notably the recent joint venture between the Japanese company Toyo Engineering and the state-owned Lutianhua Group to develop the world’s largest dimethyl ether (DME) plant. Such deals may be leveraged to attract more attention to Luzhou and to give the municipality more name recognition among interna-tional chemical industry investors.

Mining: Coal exploitation could ignite development in the energy industry through the development of the Luzhou Guxu mineral area.

Energy-Intensive Industries: Luzhou is one of four cities in Sichuan province selected as finalists for the site of two nuclear power plants planned by the China National Nuclear Corporation. If chosen, Luzhou should see significantly improved electricity reliability and availability, making Luzhou an attractive location for energy-intensive industries such as steel mini-mills and aluminum smelters.

Threats

Pollution: Rapid development of the mining and chemical industries in Luzhou has the potential to pollute Luzhou’s water supply and good agricultural conditions.

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The preservation of environmental conditions is particularly important for Luzhou given the municipality’s reliance on beverage production as an important industry.

Lack of Efficient Rail Transportation: Efficient railway transportation is highly desired by Luzhou’s resident enterprises, and continued failure to provide better management of this key mode of shipping could pose a great risk to the munici-pality’s development and further attraction of FDI.

5. Mianyang

Sichuan’s leading economic hub after the Chengdu/Deyang area, Mianyang has a significant number of electronics and IT industries and is attracting rapidly increasing amounts of FDI. The municipality is currently targeting growth in the bio and fine chemicals, new materials, and environmental protection equipment sectors, hoping to capitalize on its highly skilled workforce and the presence of pres-tigious government technical institutes. The area also benefits from large natural gas reserves and may reap future benefit by tapping its rivers for hydropower. Mianyang has been responsive to investor needs, establishing a customs point and administrative center to field foreign investor complaints. Recent investors include: a logistics project by New Hope Deshanghui, a medical instruments venture by Shenzhen Tiansheng and an automotive venture by Geely. Mianyang does face some challenges, particularly from relatively higher construction and transportation costs and seasonal power shortages.

Municipality Overview

Basic Facts: After Chengdu and Deyang, Sichuan’s provincial capital and its sat-ellite city, Mianyang is the second largest center of economic activity in Sichuan. Mianyang is located 100 kilometers northeast of Chengdu. Mianyang has a total area of 20,000 square kilometers (about the size of Israel) and a population of 5,290,000. It is divided into the central municipality, Mianyang, and six counties. In 2004, Mianyang’s GDP was US$5.5 billion and the value of its industrial output was US$1.7 billion.

Main Industries: Mianyang is known within Sichuan for its electronics and IT industries. Established companies in this industry include Jiuzhou, a machinery maker for electronics equipment and the Changhong Group, a manufacturer of home electronics. In the machinery industry, Mianyang hosts the Xincheng Company, which produces gasoline engines, and Chang’an, which produces light-duty trucks. The foods industry is also strong, with Shuanghui Company producing hams and sausages. In the construction materials industry, Mianyang hosts cement producers Shuangma and Fushan.

The economic development priorities of Mianyang city include: bio and fine chemicals, new materials, and environmental protection products and equipment. In addition, the government would like to develop four pillar industries: medical and chemicals, energy, textiles and light industries.

Foreign Investment: In 2004, Mianyang received US$35.36 million of actual utilized foreign investment – a 187% increase over 2003, encompassing 27 projects for an average investment value of US$1.31 million. Recent investments in Mianyang

MIANYANG AT A GLANCE

Population 5,290,000

Area 20,000 km2

GDP (2004) US$5.5 billion

Industrial Value Added (2003)

US$1520.5 million

FDI15 (2004, utilized)

US$35.4 million

Principal Industries

IT, Electronics, Machinery, Food

Educational Institutions

7 universities10 provincial technical

institutes 4 national technical centers

Economic Development Zones

1 national HIDZ1 provincial ETDZ1 local Tourist Zone1 local Agricultural Zone

Sources: Sichuan Investment Promotion Bureau and Tractus Asia research.

15 Includes foreign direct investment and foreign direct aid in the form of low interest loans and donations.

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include: a logistics project by New Hope Dashanghui, a medical instruments project by Shenzhen Tiansheng, and an automotive venture by the Geely Company, one of China’s rapidly growing vehicle manufacturers.

Market Access and Infrastructure: Mianyang has its own national airport, Nanjiao Airport, with direct flights to Beijing, Shanghai, Guangzhou, Shenzhen, Xi’an, Guizhou, Kunming, Chongqing, Haikou, Shenyang, Hangzhou, Dalian, Qingdao, Fuzhou, Xiamen and Harbin. Mianyang is situated on the main arterial expressway and the Bao-Cheng rail line linking Chengdu with Baoji in Shaanxi province to the northeast and Kunming in Yunnan province to the south. Municipal and county roads connecting outlying towns within the municipality are well developed and the municipal government has invested US$18.7 million over the past several years in road improvement and expansion.

Human Resources: Mianyang has a technologically skilled workforce due to the presence of numerous universities, technical institutes, and military, primarily aerospace, technical centers. The municipality has seven universities, 10 provincial-level technical institutes and four national-level technical centers. According to Mianyang statistics, there are a total of 100,000 employees working in engineering and technology research within the municipality.

Natural Resources: Mianyang is rich in natural resources. It is a major natural gas producer with reserves estimated at about 10 trillion cubic meters. It is also endowed with significant hydropower potential (estimated at 3 million kilowatts) because of the many rivers, fed from melting snow in Xizang to the west. Of this amount, approximately 1.38 million kilowatts of power have been harnessed.

Economic Development Zones: The Mianyang State Hi-Tech Industrial Park is Mianyang’s national-level HIDZ. Mianyang’s other EDZs include one provincial-level ETDZ, the Mianyang Economic Development Zone. The local agricultural zone is called Agricultural Technology Model Area, and Mianyang’s local tourist zone is called Xianhai Tourism Development Zone.

Other Investment Infrastructure and Services: Mianyang city has a bonded warehouse, commodities inspection and customs service offices. In addition, Mianyang has created other services for the convenience of investors, including an administrative center, an investment services center and an administrative office designated as the “Foreign Investor Complaint Center.”

Environment and Living Conditions: The city of Mianyang has emphasized culture and the quality of life. Mianyang has earned national and international

Table 14: Ownership of Firms Interviewed in Mianyang

Sectors

Num

ber

of

Fir

ms

Chi

nese

Fro

m

Mia

nyan

g

Chi

nese

Fro

m

Sich

uan

Chi

nese

O

utsi

de

Sich

uan

Chi

nese

JV

Fore

ign

JV

WO

FE

Chemicals 4 0 0 1 1 2 0

Electronics 5 0 0 1 1 3 0

Food & Beverage Processing

5 0 0 1 0 4 0

Machinery 5 0 0 0 0 4 1

Pharmaceuticals 5 0 0 2 0 0 3

TOTAL 24 0 0 5 2 13 4

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distinctions including, “National Clean City,” “National Garden City,” “National Model Environmental Protection City,” “Excellent Tourism City,” and the “United Nations Model Environment Improvement City.”

Mianyang SWOT Analysis

Strengths

Provincial Market Access: Located 100 kilometers from Chengdu, Mianyang is linked to the main inter-provincial arterial expressway and rail line running through the province, allowing for efficient access to Chengdu, the other principal cities within Sichuan, and neighboring provinces. Mianyang is Sichuan’s second largest market in terms of GDP.

Transportation Infrastructure Access: Interviewees in pharmaceuticals, food pro-cessing, chemicals and machinery mentioned Mianyang’s “good,” “convenient,” and even “perfect” transportation infrastructure. Mianyang has its own national airport with direct flights to 16 major Chinese cities.

Access to Raw Materials: Interviewees in the food processing, pharmaceutical and chemical industries reported good access to raw materials. Mianyang’s water quality was highly rated by respondents in both food and beverage processing and pharmaceuticals.

Local Government Support: In contrast to the mixed reviews respondents in other municipalities gave the local governments and their investment promotion policies, investors in Mianyang were uniformly positive in their assessment of municipal gov-ernment for its intentions, assistance and policies related to investment. Interviewees commented favorably on the government’s efforts to promote investment in Mianyang and the high quality of investor services and support. In an effort to attract FDI, the local government has emphasized the protection of intellectual property rights. Patent and other registrations may be completed within Mianyang. The gov-ernment also offers enterprise patent training classes and publicity campaigns that highlight the importance of trademark and patent registration.

Labor Availability and Costs: Interviewees mentioned that Mianyang has a rela-tively large and available labor force, especially for skilled and technical labor. The presence of 21 universities, technical schools and research institutes in Mianyang is an advantage for hiring professional and technical employees. Among the 10 municipalities surveyed, Mianyang has the lowest costs for the professional and skilled categories of labor in the pharmaceutical industry. The cost of technical workers in pharmaceuticals is also among the lowest of the surveyed group.

Real Estate Costs: Mianyang has the third-lowest land acquisition costs among the 10 cities surveyed, which at US$18 per square meter is equal to that of Deyang. Investors in the pharmaceutical, machinery, food processing, and chemical industries noted either “low land prices” or “low investment costs” among their reasons for locating in Mianyang.

Telecommunications Infrastructure: Interviewees praised Mianyang’s superior infrastructure and good service, and highly rated the quality of landline communi-cations and internet services.

Weaknesses

Electricity Reliability: Although Mianyang (and Sichuan) has large hydropower resources, the survey respondents noted that Mianyang had the third highest

snapshot sichuan 91

rate of blackouts among Sichuan’s 10 municipalities. This has resulted from the central government’s export of power from Sichuan to the fast-growing coastal regions, a practice that has prevented Sichuan from maintaining a local balance between supply and demand. Given the significance of the electronics industry to Mianyang, power shortages have a disproportionate impact on business activities.

Labor Costs: Among the surveyed municipalities, Mianyang has the highest skilled labor costs in electronics and the second highest overall labor costs in food and beverage processing.

Transportation Costs: Respondents noted that transportation costs are considered quite high, although they praised the accessibility of Mianyang’s transportation infrastructures. In order to export their products, manufacturers in Mianyang (as in most of the municipalities surveyed) must first truck their containers to Chengdu. From Chengdu, the containers are sent by truck or rail to Shanghai, where they are consolidated before export. Mianyang’s relatively high shipping costs are due to higher trucking costs to Chengdu, which puts Mianyang at a distinct competitive disadvantage.

Real Estate Costs: Mianyang has the third-highest building lease costs of the surveyed municipalities, after Chengdu and Zigong. Mianyang also has the third-highest office lease costs, equal to those of Leshan. The costs for constructing warehouse facilities, factories, and offices in Mianyang rank among the top half of those of all the municipalities surveyed. These costs could dampen the munici-pality’s prospects for future FDI.

Opportunities

Export-Oriented Industries: The central government recently approved the estab-lishment of an EPZ in Mianyang. Of 18 nationally approved zones, this will be the only one in Sichuan. The completed EPZ will allow manufacturers to import raw materials duty free for use in products for export.

Electronics: The study’s analysis concluded that Mianyang had the best overall costs/operating conditions in electronics. Mianyang’s relatively high cost of labor can be offset by a focus on high value-added electronics products. Mianyang has strong soft and hard infrastructure and a relatively well-developed electronics industry. It hosts the headquarters of Changhong, China’s second largest tele-vision manufacturer. Export-oriented electronics industries may be attracted to the city’s new EPZ.

Pharmaceuticals and Traditional Chinese Medicine: A wide variety of agricultural products are made in Mianyang, including important ingredients for traditional Chinese medicines such as maidong, fuzi and tianma. The ample availability of agricultural products supports the development of the traditional medicine industries. Furthermore, Mianyang’s government is promoting the development of the medical/pharmaceutical and chemical industry as one of its four pillar industries.

Threats

Rising Costs: Mianyang’s costs, particularly for labor, real estate and transpor-tation, are considered quite high. A rise in these costs will put Mianyang at a distinct cost disadvantage with the other municipalities seeking to develop the electronics and machinery industries.

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6. Nanchong

Incorporating five counties along the Jialing River, Nanchong benefits from low labor costs and abundant natural resources. Automotive parts manufacturing and a thriving agricultural sector in grain and citrus fruits are key existing industries that have potential for further development. Nanchong has large rock salt and natural gas reserves, and hydropower potential. Employers expressed satisfaction with the high quality of the local labor force. However, Nanchong currently suffers from poor market access, hampered by a lack of customs offices and a 15-day wait for approval of goods for shipment, poor transportation networks, and an under-developed financial sector. Some of these problems may be mitigated by public projects, including the recently finished Gaoping National Airport, an inland waterway container port set for completion in 2006, and planned improvements to road and rail networks. An application for a customs office has been made and several hydropower plants are planned along the Jialing River.

Municipality Overview

Basic Facts: Nanchong is located midstream on the Jialing River, a tributary of the Yangtze River. Nanchong is centrally located 270 kilometers from both Chengdu and Chonqging. Nanchong covers an area of 12,249 square kilometers (about half the size of Haiti) and contains three districts, five counties and one county-level sub-city. Nanchong’s population is 7.3 million, making it the second most pop-ulated municipality in Sichuan. Nanchong’s GDP in 2004 was US$3.7 billion.

Main Industries: Main industries in Nanchong include food processing, machinery, chemicals, and textiles. Nanchong has a long history of textile pro-duction. Its food processing industry is dominated by fruits and fruit products, and its agricultural products include sweet potatoes, fruit, bamboo and livestock.

Foreign Investment: From 1993 to 2003, 129 FIEs were established and the actual utilization of foreign direct investment was US$64.8 million. In 2004, eight new FIEs invested in Nanchong, including three CVs, two JVs, and three WOFEs. Individual investments were small. The total actual utilized FDI in 2004 was US$9.1 million. (Note: Only one FIE was interviewed for this study. The other respondents were either locally owned companies or those from outside Sichuan.)

Market Access and Infrastructure: Nanchong is located halfway between Chengdu and Chongqing, 270 kilometers to the east. Access to these markets is available via road, railway and inland waterway. Nanchong is intersected by the Chengda railway (linking Chengdu to Da County) and the Chengnan highway (linking Chengdu to Nanchong). Nanchong’s new domestic airport, completed in 2004, will improve access to major coastal cities and markets. Nanchong has one hydroelectric power plant located on the Jialing River.

Natural Resources: Mineral and energy resources include petroleum, natural gas and rock salt.

Human Resources: Nanchong has four universities, including the Southwest Petroleum University and North Sichuan Medical College, and the Nanchong Normal University. It also has one college.

Economic Development Zones: Nanchong has one local-level EDZ, the Nanchong Economic Development Zone.

NANCHONG AT A GLANCE

Population 7,300,000

Area 12,249 km2

GDP (2004) US$3.7 billion

Industrial Value Added (2003)

US$596 million

FDI16 (2004, utilized)

US$5 million

Principal Industries

Textiles, Food Production, Machinery, Chemicals

Educational Institutions

4 universities1 college

Economic Development Zones

1 local EDZ

Sources: Sichuan Investment Promotion Bureau and Tractus Asia research.

16 Includes foreign direct investment and foreign direct aid in the form of low interest loans and donations.

snapshot sichuan 93

Nanchong SWOT Analysis

Strengths

Machinery Industry Cluster: Nanchong enjoys comparatively good operating costs and conditions for the machinery industry, and hosts a concentration of automotive parts manufacturers.

Labor Availability and Costs: Nanchong has the lowest technical and the second lowest skilled and unskilled labor costs in pharmaceuticals, and the second lowest skilled labor costs in chemicals. It also has sufficient availability of unskilled laborers, essential for the food processing industry.

Agricultural Resources: A good climate – sufficient rainfall and plenty of sunlight – supports the cultivation of a variety of agricultural products. Nanchong is an important base for the production of grains, vegetables, and fruits, especially oranges.

Mineral and Energy Resources: Nanchong has reserves of rock salt and natural gas. Its location midstream on the Jialing River provides it with an abundance of high-quality water, as well as access to the river’s hydropower potential.

Weaknesses

International Market Access: Nanchong has relatively poor access to interna-tional markets. While centrally located between Chengdu and Chongqing, direct exports from Nanchong are not yet possible because the municipality lacks an inland customs point.

Transportation Infrastructure Access: Though the Nanchong railway system is physically interconnected with the state-owned national system, it is not well integrated with the holistic system in terms of the transportation plan and oper-ations coordination. Interviewees report rail delays and thefts during the transport of goods. In addition, because 15-days’ notice is required before goods can be approved for rail shipment, Nanchong-based companies often use more expensive truck transport.

Access to Capital: All companies interviewed mentioned the difficulty of attracting capital. Moreover, some companies cited lack of local government financial in-centives and/or assistance as a negative aspect of their investments in Nanchong.

Table 15: Ownership of Firms Interviewed in Nanchong

Sectors

Num

ber

of

Fir

ms

From

N

anch

ong

Chi

nese

Fro

m

Sich

uan

Chi

nese

O

utsi

de

Sich

uan

Chi

nese

JV

Fore

ign

JV

100%

For

eign

Chemicals 5 4 0 0 1 0 0

Electronics 3 2 0 0 1 0 0

Food & Beverage Processing

7 5 1 0 0 1 0

Machinery 7 4 1 0 2 0 0

Pharmaceuticals 3 0 1 2 0 0 0

TOTAL 25 15 3 2 4 1 0

snapshot sichuan94

Real Estate Costs: Factory construction costs in Nanchong are among the highest; only Chengdu and Mianyang were higher. Office construction costs are comparatively high, similar to those in Chengdu. Nanchong also has the second highest land lease costs.

Utilities Reliability: Some companies reported that industrial water is still not adequately supplied to all areas of the municipality, requiring them to create pumping facilities for their own water use, which increases their operating costs. Respondents reported that operations are often disrupted by unannounced power cuts and shortages of natural gas.

Opportunities

Transportation Infrastructures: The Gaoping National Airport, Nanchong’s new US$24.2 million airport, was completed in 2004, and a container river port will be completed in 2006. The government plans to construct the Nanyu Highway from Nanchong to Chongqing, and a railway from Lanzhou to Chongqing that will pass through Nanchong. Particularly for perishables, efficient transportation could enhance further development of the relatively strong food processing industry.

Government Services: The government has applied to establish a customs office in Nanchong, which will improve efficiency by allowing the direct import and export of goods from the municipality.

Utilities Infrastructure: The local power bureau is evaluating site locations for a new nuclear power plant and up to nine hydroelectric power plants within Nanchong. These projects, once completed, will greatly improve the local balance between electricity supply and demand. Nanchong has also made plans to con-struct a wastewater treatment facility. This will reduce the need for capital expen-ditures for on-site treatment in the pharmaceutical and chemical industries, thus reducing their costs.

Machinery and Machine Building Industry: Nanchong’s comparatively good operating costs and conditions in the machinery and machine building industry and the municipality’s strategic location between Chengdu and Chongqing, two of western China’s leading automotive manufacturing hubs, make it a good prospect for attracting investment in automotive parts and components production.

Chemical Industry: Nanchong’s large natural reserve of rock salt provides a good opportunity for the development of salt-based chemical industries, such as chlor-alkali and electrochemicals. Nanchong has a relatively low cost of skilled labor, and respondents expressed a high level of satisfaction with the availability of skilled and technical labor.

Banking Industry: Two German banks (DEG and SIDT) recently bought a combined 13.3% stake in the Nanchong City Commercial Bank (NCCB), the first foreign investment in a Sichuan bank and the first German investment in a mainland Chinese bank. As Sichuan’s financial structures develop further, oppor-tunities exist for investments in Nanchong’s financial sector. The entry of foreign investors in a Nanchong bank should alleviate some of the challenges in accessing capital reported by local SMEs.

Threats

Rising Operating Costs: Nanchong’s rising costs in the machinery, electronics, and pharmaceutical industries are second only to those of Chengdu. Given that Nanchong cannot offset its costs with higher quality and conditions, cost increases will greatly impact its future competitiveness.

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Lack of Intellectual Property Protection: Thus far, IPR protection has not been a priority for the local government. The lack of IPR protection in Nanchong will hamper, in particular, the development of manufacturing industries.

Limited Access to Capital: Nanchong’s lack of developed financial infrastructures, support services, and transparency in this area hinders investors’ access to capital and loans.

7. Panzhihua

Panzhihua’s pillar industry is steel, and the municipality is home to one of the 10 largest steel producers in China. Panzhihua is also a large producer of vanadium and titanium and has significant hydropower potential. Considered Sichuan’s remotest city, Panzhihua’s geographical distance to Chengdu has affected its devel-opment and attractiveness as a location for investment. However, the isolation of the municipality has allowed Panzhihua to retain its natural beauty, making it a very attractive tourist destination. A new national airport will improve accessibility to Panzhihua, but further investments to improve access by road, rail and inland waterway are needed in order to attract additional investment in manufacturing.

Municipality Overview

Basic Facts: Panzhihua is located in southwest Sichuan, near the border between Sichuan and Yunnan province. The Chengdu-Kunming Railway passes through this municipality. Panzhihua is 749 kilometers south of Chengdu, and 351 kilo-meters north of Kunming. The total area of Panzhihua is 7,440 square kilometers. Panzhihua’s total population is more than 1 million, including an urban popu-lation of 530,000. Panzhihua’s 2004 GDP was US$2.4 billion.

Main Industries: Panzhihua is southwest China’s largest steel-making region and steel is a pillar industry in the municipality. Panzhihua Iron and Steel Company (Pan Steel), a state-owned enterprise, is one of China’s 10 largest steel companies. Pan Steel has a pig iron production capacity of 4 million tons from which it produces 3.5 million tons of refined steel. Panzhihua is also the largest vanadium-producing area in China, and the third largest in the world, as well as the largest titanium pro-duction base in China. Er’tan Hydro Power Development Company, one of China’s largest hydroelectric power producers, is located in Panzhihua. The city has 4 gigawatts (GW) of installed generating capacity, which generates 20 billion kilowatt hours of electricity annually.

Foreign Investment: At the end of 2004, Panzhihua had 58 FIEs, including 37 JVs, eight CVs, and 13 WOFEs. (Note: only two FIEs were surveyed for this study.) Most wholly foreign-owned enterprises are invested in the energy, tourism, real estate, and food industries. Only four of the 58 foreign investors operate in the five industries surveyed for this report. In 2004, six FIEs were established in Panzhihua: two CVs and four WOFEs. Of these, three companies were involved in the pro-duction of energy, and one was involved in each of these industries: transportation, tourism, and construction and raw materials production. Total actual utilized foreign direct investment in 2004 was US$5.1 million.

PANZHIHUA AT A GLANCE

Population 1,070,000

Area 7,440 km2

GDP (2004) US$2.4 billion

Industrial Value Added (2003)

US$1187.3 million

FDI17 (2004, utilized)

US$5.1 million

Principal Industries

Steel and Iron, Vanadium and Titanium, Energy

Educational Institutions

1 university1 college

Economic Development Zones

1 provincial ETDZ1 local HIDZ1 local Tourist Zone

Sources: Sichuan Investment Promotion Bureau and Tractus Asia research.

17 Includes foreign direct investment and foreign direct aid in the form of low interest loans and donations.

snapshot sichuan96

Market Access and Infrastructure: Panzhihua has a remote location in Sichuan. It is connected to Chengdu, 749 kilometers to the north by road and rail. A domestic airport was opened in 2003, which has improved the municipality’s access. Although located at the convergence of the Jinsha and Yalu rivers, Panzhihua does not have a commercial inland water port. Companies located in Panzhihua rely on road and rail to transport goods from the municipality.

Human Resources: Panzhihua has one university, the Panzhihua University, as well as the Panzhihua Electronic Machinery College.

Mineral Resources: Panzhihua has 73 types of mineral deposits. The area contains 20% of China’s iron ore, some of the world’s largest titanium deposits and the third largest vanadium deposits in the world. Other significant metallic mineral resources include: cobalt, nickel, chrome, scandium and gallium. In addition, the city produces over 7 million tons of coal each year.

Economic Development Zones: Panzhihua is home to the Panzhihua High Energy Consumption Industrial Park, a provincial-level ETDZ. The park hosts a 100,000-ton electrolytic aluminum project, a 40,000-ton ionic membrane caustic soda and 40,000-ton polyethylene project, and a 33,000-ton ferro-alloy and 180,000-ton high titanium slag project. Panzhihua also has a local-level HIDZ, the High and New Technology Industry Park. Key investors in the park include manu-facturers of value-added vanadium and titanium and biomedical products.

Table 16: Ownership of Firms Interviewed in Panzhihua

Sectors

Num

ber

of

Fir

ms

From

Pa

nzhi

hua

Chi

nese

Fro

m

Sich

uan

Chi

nese

O

utsi

de

Sich

uan

Chi

nese

JV

Fore

ign

JV

100%

For

eign

Chemicals 11 10 1 0 0 0 0

Electronics 5 4 0 0 0 1 0

Food & Beverage Processing

2 1 1 0 0 0 0

Machinery 5 4 0 0 0 0 1

Pharmaceuticals 1 1 0 0 0 0 0

TOTAL 24 20 2 0 0 1 1

Panzhihua SWOT Analysis

Strengths

Mineral Resources: Panzhihua is home to 73 types of mineral deposits. Significantly, Panzhihua has 20% of China’s iron ore deposits and its largest titanium and vanadium deposits, which are also among the world’s largest. Other significant metallic mineral deposits include: cobalt, nickel, chrome, scandium and gallium. The municipality also produces over 7 million tons of coal each year.

Steel Industry Cluster: In its great diversity of mineral resources and world-class concentration of iron, titanium and vanadium deposits, Panzhihua is an important city for the metallurgy industry. Steel is the municipality’s pillar industry, which anchors a cluster of value-added, ferro-alloy industries.

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Investment Promotion Services: The local government is promoting devel-opment in its mining, steel and ferro-alloy industries by encouraging investments in linkages between these industries and downstream value-added processing and the machinery and machine building industries.

Weaknesses

Labor Availability: Panzhihua’s remote location makes it difficult for investors to recruit workers, contributing to one of the highest labor costs among the industries surveyed, particularly for skilled and/or unskilled employees in chemicals, food/beverage processing and pharmaceuticals. Panzhihua has the lowest availability of unskilled, skilled and technical labor among the 10 municipalities. Due to a shortage of professional career opportunities, talented local people tend to relocate to China’s larger cities. Many respondents noted difficulty in recruiting managers to the municipality.

Transportation Infrastructure: Investors remarked that Panzhihua’s rail trans-portation capacity and reliability are extremely inadequate. Companies reported experiencing frequent and significant delays in obtaining freight cars, including one company that had to stop production for three months for this reason. These transportation-related bottlenecks result in unpredictable transportation times and delayed shipments, which have caused companies located in Panzhihua to lose customers. Inland waterway transportation access is also very inconvenient. Although Panzhihua is located on a river, the nearest inland water port is over 400 kilometers away in the city of Leshan. Panzhihua is currently not connected to the Sichuan highway network. One company reported that it was forced to change its line of business from high-end to low-end products due to its inability to provide timely shipment to its customers in Beijing and Shanghai.

Utility Reliability and Costs: Panzhihua has the highest water cost (the same as Leshan and Luzhou) among the municipalities surveyed, and it suffers from the second highest incidence of water shortages, equivalent to four days per year as reported by the respondents. Panzhihua has also the second highest incidence of blackouts among the municipalities, equivalent to four days per year. Moreover, Panzhihua ranked among the lowest in quality for both telephone and internet. It takes three to four days to install a telephone line and four to five days to install an internet line in Panzhihua.

Opportunities

Improvement in Transportation Infrastructures: Substandard roadways have hindered the municipality’s development. However, the Panzhihua-Xichang Expressway, under construction with funding from the Asian Development Bank, is expected to cut the 14-hour driving time between Panzhihua and Chengdu in half. This will significantly improve access to the municipality, as well as its attrac-tiveness to targeted investors.

Electrical Power Generation: The city has 4 gigawatts of installed electric gen-erating capacity and significant additional hydroelectric generating potential. Panzhihua’s hydropower potential makes it an attractive location for additional investment in power generation.

Mining Industry: The presence of significant iron ore, vanadium and titanium deposits in Panzhihua can help attract investment in the mining industry.

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Machinery and Machine Building: Panzhihua’s existing steel and ferro-alloy industries hold the country’s major deposits of steel, vanadium, and titanium. Of particular note is the recent joint venture with Japan’s New Energy and Industrial Development Organization (NEDO) to develop Panzhihua’s Experimental Steel Plant for the production of high-speed rail steel. Titanium, ferro-alloys and alloy and special steel can also be exploited in order to expand the production of high-value goods for specialized industries such as aerospace.

Tourism: Panzhihua’s remote location has allowed the municipality to maintain its relatively unspoiled natural environment, which creates the opportunity to develop a nature-focused tourism industry. In addition to its natural hot springs, Panzhihua enjoys a sub-tropical climate and high mountains, at an altitude of 2000 meters.

Threats

Lack of Transportation Infrastructures: If Panzhihua’s transportation systems continue to lag behind those of the other surveyed municipalities, the municipality will continue to “lose out” to other cities in the attraction of foreign investment. Without adequate infrastructures, Panzhihua will not be able to realize its full potential as a provider of raw materials from its existing mineral deposits.

Slowdown of the Chinese Economy: Panzhihua’s reliance on its position as a major provider of steel could be significantly affected by a slowdown in the Chinese economy and the narrowing of growth in the machinery and other related industries in China.

8. Suining

Suining is a significant producer in Sichuan of electricity derived from hydropower. Its attractiveness as an investment location is enhanced by the highest ratings for electricity reliability of any of the municipalities surveyed, among the lowest costs for office/building lease and land usage rights, and its strategic location equidistant between Chengdu and Chongqing. Suining’s operating costs and con-ditions are favorable for the food and beverage processing industry, particularly meat production. While there are currently few FIEs with operations in Suining, the city offers convenient access to the two largest markets in western China.

Municipality Overview

Basic Facts: Suining is located in the central part of the Sichuan basin, on the lower reaches of the Fujiang River. Suining contains five counties and districts, and a total of 3.8 million people live on 5,300 square kilometers of land, about half the size of Jamaica. Suining’s 2004 GDP was US$2.3 billion.

Main Industries: Textiles, machinery, food processing, chemicals and power production are Suining’s main industries. These industries account for 80% of Suining’s industrial production. The food processing industry relies on locally

SUINING AT A GLANCE

Population 3,770,000

Area 5,300 km2

GDP (2004) US$2.3 billion

Industrial Value Added (2003)

US$456.6 million

FDI18 (2004, utilized)

US$5.98 million

Principal Industries

Textiles, Machinery, Food Processing, Chemicals, Power Generation

Educational Institutions

1 university10 vocational schools

Economic Development Zones

1 provincial ETDZ1 local ETDZ

Sources: Sichuan Investment Promotion Bureau and Tractus Asia research.

18 Includes foreign direct investment and foreign direct aid in the form of low interest loans and donations.

snapshot sichuan 99

produced agricultural products, including grains, fruits and vegetables and animal husbandry centered around pork production. The Suining area is also a significant producer of cotton and silkworms and the municipality has become a production base for cotton and silk-based textiles. There were no foreign companies, either JVs or WOFEs, surveyed in Suining. A majority of the firms interviewed were owned by local investors from the Suining municipality.

Natural Resources: Suining has 345 megawatts (MW) of hydropower potential and most of the electricity is generated from hydropower. Suining’s other natural resources include natural gas, rock salt and petroleum.

Human Resources: Suining has one university and 10 vocational schools. The vocational schools’ curricula focus on machinery and electronics.

Market Access and Infrastructure: Suining is situated halfway between Chengdu and Chongqing, 146 kilometers to the east. Access to these markets is limited to road and railway. A new high-speed rail link between Suining and Chongqing was recently completed, shortening the travel distance between the two cities to less than one hour and significantly improving access to Chongqing for companies located in Suining. Suining has neither a commercial inland water port nor airport. The nearest major commercial inland water ports are located in Chongqing and Yibin, and the nearest domestic airport is located in Nanchong 50 kilometers to the north.

Economic Development Zones: Suining has two EDZs. The provincial-level ETDZ focuses on veterinary medicine, animal feeds and textiles. The local-level ETDZ focuses on automotive parts and components.

Suining SWOT Analysis

Strengths

Location and Domestic Market Access: Suining is strategically located 147 kilometers from Chengdu and 146 kilometers from the Chongqing municipality, situated between the two major cities of southwestern China.

Utility Infrastructure: Suining received the best rating for electricity reliability of any of the municipalities surveyed, with respondents reporting on average only 2 days of blackouts and negligible brownouts per year. Companies also reported

Table 17: Ownership of Firms Interviewed in Suining

Sectors

Num

ber

of

Fir

ms

From

Sui

ning

Chi

nese

Fro

m

Sich

uan

Chi

nese

O

utsi

de

Sich

uan

Chi

nese

JV

Fore

ign

JV

100%

For

eign

Chemicals 5 3 1 1 0 0 0

Electronics 2 2 0 0 0 0 0

Food & Beverage Processing

6 3 2 1 0 0 0

Machinery 7 7 0 0 0 0 0

Pharmaceuticals 5 3 0 1 1 0 0

TOTAL 25 18 3 3 1 0 0

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the fewest water supply disruptions in Suining (equal to that of Deyang) among the surveyed group. Interviewees also highly rated the accessibility of telecommu-nication services; just 1.8 days are required to install a telephone line and two days for a broadband connection.

Food Processing Industry Cluster: Suining’s food processing industry, which specializes in meat production, benefits from the local focus on animal hus-bandry. Suining has one provincial-level ETDZ geared to veterinary medicine and animal feed.

Real Estate Costs: Compared to the other nine municipalities under study, Suining enjoys the lowest office lease fees (US$0.54/square meter/month) as well as one of the lowest land costs. Many interviewees cited the low cost of land as a major motivating factor in their decisions to invest in Suining.

Mineral Resources: Suining is a major producer of hydropower with a potential of 345 megawatts. In addition, the municipality has 4.2 billion tons of rock salt reserves and major reserves of natural gas.

Weaknesses

Transportation Infrastructure Reliability: Without a nearby inland water port or airport, investors in Suining rely on road and rail transportation for the shipment of goods. Respondents reported poor road conditions and quality of rail transpor-tation services.

Opportunities

Improved Rail Transportation Infrastructure Access: China’s first high-speed railway opened for a trial run in April 2005, connecting Chongqing with Suining. The express rail service for passengers and cargo operates at speeds of between 160–200 kilometers per hour. If successful, the Chongqing-Suining express railroad will greatly improve Suining’s access to markets in Chongqing.

Improvement in Utilities Services: The first phase of a new wastewater treatment facility in Suining has been completed. The facility will have a capacity for treating 45% of the current wastewater output from the city and will provide needed wastewater treatment capabilities to support manufacturing investments in Suining.

Food Processing Industry: Suining is an important production and processing base for agriculture products, especially wheat, rice and corn, and pigs. The avail-ability of a diverse range of agricultural raw materials and livestock makes Suining an attractive location for food processing industries. An added attraction is the recently established Gaoijin Foods Technology Park within Suining’s ETDZ. Gaoijin Foods could be leveraged as the anchor investor in attracting further food pro-cessing industry investments.

Chemical Industry: Suining’s large natural deposits of rock salt and brine, and relatively low costs for unskilled labor in the chemical industry, lend themselves to the development of the chlor-alkali and electro-chemical industry.

Machinery and Machine-Building Industry: Due to its proximity to Chongqing, the new high-speed rail service to the city, and an EDZ focused on automotive manufacturers, Suining makes an attractive location for automotive component suppliers serving vehicle assemblers in both Chengdu and Chongqing. Suining is a major production base for cotton and silk textiles, which rely on cotton and raw

snapshot sichuan 101

silk produced in the municipality, and there is a provincial-level ETDZ devoted to the textile industry. These factors and promising prospects for textile machinery production may make the city an attractive location for machinery manufacturers and related supporting industries. Suining’s 10 vocational schools are strong in machinery and electronics-related subjects.

Threats

Insufficient Investment in Transportation Infrastructures: While the opening of the new Chongqing-Suining express rail service will improve the reliability of rail service between the two cities, other modes of transportation may continue to pose chal-lenges for investors. Survey respondents cited poor road conditions and inadequate and unreliable cargo rail services. Suining may lag behind other municipalities in its attractiveness as an investment destination if these matters are not addressed.

9. Yibin

Yibin enjoys natural conditions conducive to the cultivation of tea and produces more than one quarter of China’s total tea production each year. In addition, Yibin is a major producer in western China of chemicals, in particular chlor-alkali. These industries benefit from relatively good transportation infrastructures in the form of one of the largest river ports along the Yangtze, and the availability of abundant water, natural rock salt and brine. Challenges to Yibin’s investment attraction include limited rail transport and limited access to capital for domestic investors.

Municipality Overview

Basic Facts: Yibin was established in the year 1114. It is located on the original Silk Road, in the southern part of Sichuan province. The Yangtze River begins in the city of Yibin, where the Min and Jinsha rivers converge. Yibin occupies an area of 13,283 square kilometers, about the size of the Bahamas. Yibin’s population was 5.15 million in 2003. GDP in Yibin was US$4.2 billion in 2004 – up 13.2% from 2003.

Main Industries: Yibin’s main industries include food products, machinery, chemicals, building materials, and electricity production. The city also produces paper, silk, and leather products. Within the food/beverage industry, Yibin’s Wuliangye Distillery covers an area of 4.5 square kilometers, and employs over 12,000. The acidic soil in the southern and northwestern parts of Yibin County is favorable to the cultivation of tea. Yibin has tea plantations covering more than 8,000 square kilometers, producing more than 10,000 metric tons of tea each year, which amounts to more than one quarter of Sichuan’s total production. The area surrounding Yibin has agricultural resources including rice, barley, oil seeds, sesame and 190 types of wild vegetation.

The local building materials industry is also strong, dominated by cement and brick production from the Shuangma Shuangshan Cement Company. In 2003, exports were US$160 million, up 52.3% and ranked fourth in Sichuan, with exports to 79 countries. Main exported products include: machinery, electronics, textiles, chemicals for the medical industry, and processed foods.

YIBIN AT A GLANCE

Population 5,150,000

Area 13,283 km2

GDP (2004) US$4.2 billion

Industrial Value Added (2003)

US$1438.8 million

FDI19 (2004, utilized)

US$7.0 million

Principal Industries

Food/Beverages, Machinery, Building Materials, Chemicals, Electricity Production

Educational Institutions

2 colleges41 vocational Schools

Economic Development Zones

2 local ETDZs

Sources: Sichuan Investment Promotion Bureau and Tractus Asia research.

19 Includes foreign direct investment and foreign direct aid in the form of low interest loans and donations.

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Foreign Investment: Yibin attracted four new foreign investment projects in 2004, which was half of the 2003 number. Actual utilized foreign investment in 2004 was US$7,030,000, up 35.5% over 2003, according to the Sichuan Investment Promotion Bureau. More than 60 foreign-invested enterprises have been approved in Yibin, with most investment originating in 12 countries and regions. Yibin cur-rently has 22 JVs and five WOFEs.

Natural Resources: Yibin has 44 types of exploitable mineral deposits, and is near to coal reserves of 4.14 billion tons.

Human Resources: Yibin has two colleges: the Yibin College and the Yibin Technical College. In addition, Yibin has 41 vocational schools.

Market Access and Infrastructure: Yibin is about a four-hour drive from Chengdu and Chongqing, and is located on a highway linking the two cities. Yibin’s airport provides weekly direct flights to and from Beijing, Shanghai, Guangzhou, Kunming, Beihai, and Shenzhen. Yibin port is one of the six largest inland ports located along the Yangtze River, has a 9 million-ton throughput capacity, and can accommodate 1000-ton vessels straight through to Shanghai. Yibin is connected to Kunming, Neijiang, Chengdu and Chongqing by rail.

Economic Development Zones: Yibin has two local-level economic and tech-nology development zones: Nan’an ETDZ and Jiuzhou ETDZ.

Yibin SWOT Analysis

Strengths

Agricultural Resources: The area surrounding Yibin is a major agricultural base, producing rice, barley, oil seeds, sesame and 190 types of wild vegetation. Because of acidic soil in the southern and northwestern parts of Yibin County, this area is also conducive to the growing of tea.

Transportation Infrastructure Access: Yibin has Sichuan’s second-largest airport and its Hejiangmen port is one of the six largest on the Yangtze. With a capacity of 9 million tons, the port can accommodate 1,000-ton vessels. Yibin is linked to Kunming, Neijiang, Chengdu and Chongqing by rail.

Food and Beverage Industry Cluster: Yibin is a major producer and exporter of frozen processed meat. The food processing industry cluster benefits from the

Table 18: Ownership of Firms Interviewed in Yibin

Sectors

Num

ber

of

Fir

ms

From

Yib

in

Chi

nese

Fro

m

Sich

uan

Chi

nese

O

utsi

de

Sich

uan

Chi

nese

JV

Fore

ign

JV

100%

For

eign

Chemicals 5 4 0 0 1 0 0

Electronics 5 3 0 0 2 0 0

Food & Beverage Processing

5 2 1 1 0 0 1

Machinery 5 4 0 1 0 0 0

Pharmaceuticals 5 2 0 2 0 0 1

TOTAL 25 15 1 4 3 0 2

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presence of two technical colleges and 41 vocational schools, creating a readily available pool of unskilled and low-skilled laborers.

Real Estate Costs: The cost of leasing office space in Yibin ranks second lowest after Suining among the municipalities surveyed, at US$0.85 per square meter/month. Yibin (tied with Luzhou) has the second-lowest warehouse con-struction costs, at US$42 per square meter.

Weaknesses

Utilities Costs and Reliability: Yibin, together with Luzhou, has the highest elec-tricity costs among the municipalities surveyed, at US$0.06 per kilowatt hour (kWh), and equals Chengdu in the second-highest gas costs, (after Leshan) at US$0.13 per cubic meter. Mid- to small-sized companies reported that Yibin suffers from unannounced power cuts and other indications of power shortages, such as unstable voltage supply.

Transportation Infrastructure Reliability: Survey respondents indicated that rail shipping is subject to delays and that it is often difficult to obtain access to rail cars. Problems with rail car availability are reportedly especially severe near the end of each year. Investors also reported difficulties loading and unloading vessels in Hejiangmen port. Only smaller vessels of up to 1,000 tons can ship from Yibin to Shanghai, limiting the volume of goods that can move via inland waterway.

Market Access: Yibin’s four-hour driving distance from other major cities, such as Chengdu and Chongqing, increases travel and shipping times, and costs.

Labor Availability and Turnover: Administrative, professional and managerial employees are difficult to recruit, and are often hired from outside Sichuan. Employee retention can be an issue, with exiting workers citing low wages and Yibin’s remote location as their reasons for resigning. Interviewees also suggested that Yibin’s cost of living is high, particularly in housing and commodities prices.

Access to Capital: Domestic Chinese companies reported that investors that are not considered “key industries,” larger or otherwise favored companies have dif-ficulty obtaining the necessary financing for expansion of their investments.

Opportunities

Improved Utilities Reliability: A new dam and hydroelectric-generating station is planned for the Xiangjiaba area. As local electric generating capacity expands in Sichuan and throughout China, the reliability of electric power should improve significantly.

Improved Transportation Infrastructure: A new port in Caiyuan is expected to relieve delays in loading and offloading cargo at the existing port. Also, two bridges have opened recently in the northern part of Yibin, improving road transportation access between Yibin and the rest of Sichuan.

Machinery Industry: Yibin has an opportunity to develop textile machinery production in support of its well-established textile industry. The study’s results indicated that Yibin had the best operating conditions in the machinery industry at similar costs to that of the other municipalities surveyed. Consequently, Yibin was ranked as the most attractive environment in Sichuan for the machinery industry.

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Chemical Industry: Yibin is home to the largest producers of chlor-alkali chemicals in western China. It also has one of the best cost-operating conditions for the chemical industry among the surveyed municipalities. In addition, in light of China’s astonishing growth in real estate development and given Yibin’s well established industry in construction materials, the chemical industry has the potential to grow further with the production of construction-related chemicals.

Energy Production: Opportunity exists for investments in energy production; Yibin has Sichuan’s largest coal reserves (4.14 billion tons) and its significant hydropower potential remains untapped.

Food and Beverage Industry: The acidic soil in the southern and northwestern parts of Yibin County is favorable for cultivating tea. Yibin has tea plantations on more than 300,000 mu (0.1644 acre = 1 mu), producing more than 10,000 metric tons (MTs) of tea each year, which amounts to more than one quarter of Sichuan’s total production. Tea has always been an important export product for China. Given that global consumption of tea over the past fifty years has grown sharply, and with the Chinese share of the export market growing accordingly, tea production in Yibin stands to benefit from the continuation of this trend.

Threats

Environmental Damage: Interviewed companies reported that pollution, partic-ularly in the form of dust from chemical plants, power plants, and paper mills, is an increasing problem. Pollution particularly threatens growth of the food and beverage processing industry, which requires high-quality water for many pro-cessing operations.

Continued Weak Transportation Infrastructures: Given Yibin’s distance from other municipal markets in Sichuan and nearby Chongqing, the lack of further improvements in its transportation infrastructures will hinder Yibin’s potential in attracting investments in the machinery and food processing industries.

10. Zigong

Zigong is one of the largest producers of chemical fertilizers in China, with an established chemical industry manufacturing cluster and a large pool of technical labor. Moreover, Zigong is endowed with mineral resources, including high-quality rock salt and brine reserves, which provide opportunities for salt-based and electro-chemical production. Zigong also is strong in the production of machinery, par-ticularly of machine parts. Zigong faces a challenge in improving its currently weak transportation infrastructures, which hamper its ability to attract investments.

Municipality Overview

Basic Facts: Zigong, located in the southern part of Sichuan province, has a total area of 4,373 square kilometers (about half the size of Puerto Rico), and a popu-lation of 3.15 million. Zigong’s GDP was US$3 billion in 2004.

Main Industries: Salt and salt-related chemicals, man-made fibers, machinery and new materials are the main industries in Zigong.

ZIGONG AT A GLANCE

Population 3,150,000

Area 4,373 km2

GDP (2004) US$3 billion

Industrial Value Added (2003)

US$886.1 million

FDI20 (2004, utilized)

US$19.95 million

Principal Industries

Salt Chemicals, Man-made Fibers, Machinery, New Materials, Food

Educational Institutions

1 university2 colleges37 vocational schools

Economic Development Zones

1 provincial HIDZ2 local ETDZs

Sources: Sichuan Investment Promotion Bureau and Tractus Asia research.

20 Includes foreign direct investment and foreign direct aid in the form of low interest loans and donations.

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Foreign Investment: At the end of 2004, Zigong had 68 FIEs, including 52 JVs, 15 WOFEs and a CV. The cumulative actual utilized FDI reached US$87.5 million, of which US$68.6 million resulted from JVs and US$18.6 million from CVs. In 2004, four FIEs were established in Zigong, including three JVs and a WOFE. Two of these four companies were engaged in the machinery/machine building industry, and there was one investment in each of the chemical and food/beverage pro-cessing industries.

Market Access and Infrastructure: Zigong is 250 kilometers from both Chengdu and Chongqing, the largest markets in western China and gateways for interna-tional shipments by air and inland waterway. Zigong is connected to other cities in Sichuan by road, and there are rail linkages to the inland waterway port in Yibin to the south and Chongqing to the east. Zigong has neither its own inland waterway port nor an airport.

Human Resources: Zigong has a university, two colleges and 37 vocational schools.

Economic Development Zones: Zigong has a provincial-level HIDZ and two local-level ETDZs. Its ETDZs are focused on the machinery and pharmaceutical industries.

Zigong SWOT Analysis

Strengths

Mineral and Energy Resources: Zigong’s mineral resources include rock salt, brine, sand for construction, quartz, coal, mineral water, natural gas, lime, clay, and alluvial gold. Reserves of rock salt and brine are especially large and of high quality. Current assessments of natural gas reserves are at 300 billion cubic meters.

Availability of Labor: Zigong has a large pool of qualified skilled and technical labor, according to survey respondents, who reported only rare instances of recruitment problems. The municipality has 64 scientific institutions employing more than 75,000 technicians.

Utility Costs: Zigong has the lowest water cost in Sichuan at US$.08 per cubic meter.

Real Estate Costs: Factory construction costs in Zigong are the lowest of the 10 municipalities surveyed at US$13 per square meter.

Table 19: Ownership of Firms Interviewed in Zigong

Sectors

Num

ber

of

Fir

ms

From

Zig

ong

Chi

nese

Fro

m

Sich

uan

Chi

nese

O

utsi

de

Sich

uan

Chi

nese

JV

Fore

ign

JV

100%

For

eign

Chemicals 5 3 0 0 2 0 0

Electronics 5 5 0 0 0 0 0

Food & Beverage Processing

5 4 0 0 0 1 0

Machinery 5 3 0 0 1 0 1

Pharmaceuticals 5 4 1 0 0 0 0

TOTAL 25 19 1 0 3 1 1

snapshot sichuan106

Chemical Industry Cluster: Zigong is regarded as one of China’s largest pro-duction bases for chemical fertilizers, and is also one of the 16 largest production bases for chemicals in China. Local government authorities are experienced in pro-viding services to investors in this industry, and there is a large pool of technically qualified labor with chemical industry experience.

Investor Promotion Service and Aftercare: Investors remarked that Zigong’s local government and investment promotion authorities were helpful in providing good service.

Weaknesses

Transportation Infrastructure and Transport Costs: Zigong is poorly connected to provincial, national and international markets. Rail transport services are not reliable, and there is neither an inland waterway port nor a domestic airport, leaving investors to rely on trucking services to transport their goods to domestic markets and international gateway airports in Chengdu and Chongqing, and to inland waterway ports in Luzhou and Yibin as much as 4.5 hours away. Respondents reported that the transport of goods by truck results in significantly higher shipping costs. There are also no professional logistics companies with offices in Zigong.

Labor Market: Although respondents expressed satisfaction with the availability of technicians, skilled and unskilled workers, they reported difficulties in recruiting management and administration staff in Zigong. It was suggested that the pref-erence of many recent graduates is to work in Chengdu or other larger cities. One company reported that it had tried to recruit a high-level manager for over six months before giving up.

Access to Capital: Zigong has a relatively undeveloped financial services industry. Many respondents reported difficulties in accessing capital necessary to finance the growth of their businesses.

EDZ Management: Interviewees also complained of “overly complex” gov-ernment administration procedures necessary to obtain services within Zigong’s high-tech development zone.

Availability of Real Estate: Zigong has only one provincial-level EDZ and two local-level zones. According to respondents, the land in many of Zigong’s EDZs is not appropriately zoned for industrial use, or its usage rights are held by the state and may not transfer to private investors for their use.

Opportunities

Chemical Industry: Zigong’s large natural reserve of rock salt and brine can also be exploited for the chlor-alkali and electro-chemical industries, while natural gas can be used as feedstock for the petrochemical industry.

Energy Production: As China continues to develop and demand for energy increases accordingly, Zigong has an ability to tap into its significant reserve of natural gas, one of the largest in Sichuan at 300 billion cubic meters, for natural gas-based electric generating plants.

Threats

Lack of Improvement in Transportation Services: Continued lack of attention to the improvement of road infrastructure and rail transportation reliability

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poses a significant threat to Zigong’s ability to attract investment. According to respondents, inefficiencies in the road and rail transport infrastructure are forcing them to consider relocating from Zigong.

Continued Absence of Awareness among International Investors: Like many of the municipalities in Sichuan, Zigong has little name recognition among interna-tional investors. In 2004, only four FDI projects were implemented in Zigong.

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Appendices

1. AcronymsandAbbreviations

2. Methodology

3. DataOrganization,DefinitionsandSources

4. TablesofFindings

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Appendix 1: Acronyms and AbbreviationsAcronyms and abbreviations used in this publication are listed below in alphabetical order.

API activepharmaceuticalingredientsCPDF ChinaProjectDevelopmentFacilityCV cooperativeventureEBP EnterpriseBenchmarkingProgramEDZ EconomicDevelopmentZoneEPZ ExportProcessingZoneESO SichuanEnterpriseSurveyOrganizationETDZ EconomicandTechnologicalDevelopmentZoneEU EuropeanUnionFDI foreigndirectinvestmentFIE foreigninvestedenterpriseGDP grossdomesticproductGMP goodmanufacturingproceduresGW gigawattHACCP HazardAnalysisandCriticalControlPointHIDZ High-TechIndustrialDevelopmentZoneICs integratedcircuitsIPI investmentpromotionintermediaryIPR intellectualpropertyrightsIT informationtechnologyJIT just-in-timeJV jointventureKbps kilobitspersecondkg kilogramkm kilometerkVA kilovolt-ampereskW kilowattkWh kilowatthourm2 squaremeterm3 cubicmeterMIGA MultilateralInvestmentGuaranteeAgencyMNC multinationalcorporationMT metrictonmu Chineseunitofsurfacearea(1mu=0.1644acre)MW megawattsNEDO NewEnergyandIndustrialDevelopmentOrganization(ofJapan)PCBs printedcircuitboardsR&D researchanddevelopmentSIPB SichuanInvestmentPromotionBureauSME smallandmedium-sizedenterpriseSOE state-ownedenterpriseSSIC SichuanSpaceIndustryCorporationSWOT strengths/weaknesses/opportunities/threatsTCM traditionalChinesemedicineTEU twentyfootequivalentunitUNCTAD UnitedNationsConferenceonTradeandDevelopmentVAT valueaddedtaxWHO WorldHealthOrganizationWOFE whollyownedforeignenterpriseWTO WorldTradeOrganization

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Appendix 2: MethodologyMIGA’s EBP methodology follows a process very similar to those used by investors in evaluating locations. In three stages – desktop research, company interviews and interpre-tation of the results – the researchers were able to collect voluminous data on costs and five main categories of conditions, and then distill it down to sector-specific scores for each surveyed municipality in Sichuan. When plotted on cost/quality matrices, called scat-tergrams, these scores provide a reading of the competitive landscape by industry from the perspective of the interviewed investors. This appendix provides further detail on several critical elements of the methodology: the site selection factors, data sources, the company sample, weighting of the factors and interpretation of the EBP model outcomes.

Site Selection Factors Used

The study aimed to capture the perspective of the investor by administeringadetailed survey toexisting investorswithoperations inSichuanprovince. Itexaminedboth cost andoperating conditions factorswhencomparing the10municipalities.Costfactorsincludedone-timeandoperatingcostssuchasrealestate, laborandutilities.*Operatingconditionsfactorswerethosedeterminedtoinfluencetheoperatingenvironmentofacompany,suchastheabilitytorecruitappropriatelyskilledstaffandaccesstoreliabletelecommunicationsandutilitiesinfrastructure.

Usingastandardquestionnaire, the research teamobtained information frominvestors inSichuanas to their costs and thequalityof operating conditionsin their locations in the 10 surveyed municipalities. The questionnaire askedtheintervieweestoassignacostorsubjectiveratingtothefactorsoutlinedinTable2-1,below.

Table 2-1:SiteSelectionFactorsUsedintheMIGAEBPModel

Factors Cost Sub-Factors Operating Conditions Sub-Factors

Labor LaborcostsWageburdenoftotalsalaryPotentialtorecruitlocalstaffFlexibilityoflaborenvironment

Infrastructure

CostofelectricityCostofwaterCostoftelecommunicationsCostofnaturalgasCostofshipment

QualityoftelecommunicationsQualityofpowersupplyQualityofwatersupplyAvailabilityandreliabilityoftransportation

Real EstateCostoflandCostofconstructionCostofofficespace

Availabilityoflandandofficespace

Living ConditionsQualityofliving(includingschools,safetyandhealthcare)

Access to MarketsTarifflevelsindestinationmarketsImporttarifflevels

SizeoflocalmarketProximitytorawmaterialsandcomponentsAccesstointernationaltourists

Business EnvironmentPolitical,financial,andeconomicstabilityLevelofbureaucraticregulationsTaxation

* Foreign exchange note: AllcostdataexpressedinUSdollarswasconvertedattherateof1.00USdollarequalto8.28Renminbi,theexchangerateprevailingatthetimethestudywasconducted.

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Origin of the Data

Giventheobjectiveofgettingactualcostsfromtheviewpointoftheforeigninvestorandthe limited, incompleteorout-of-datesecondarydataavailable inSichuanatthemunicipal level,existingcomparisonsacrosslocalitieswerevery limited.Therefore,theSichuanEBPstudyreliesheavilyonfirst-handinformationcollectedinthefield.Inadditiontotheprimarydatacollectedfromcompanyinterviews,additionalsecondarydatawasobtainedfromprovincialandnationalChineseandinternationalsources.

Company interviews: Thebulkoftheinformationwasgatheredthroughcompanyinterviewsusingastandardsurveyquestionnaire.Thesurveyrequestsbothquan-titativeandqualitativeinformationandidentifiesthemotivatingfactorsbehindtheinvestor’sdecisiontomakeaninvestmentatthecurrentlocation.

Local sources of secondary information: Localsources,suchasrealestateagentsandconstructionandutilitycompanies,providedtherequiredsecondary infor-mation.Thisinformation,for instance,typicalrealestaterentalandleaseratesandlandusagerightscosts,andelectricpowerandwatercosts,wasgatheredineachmunicipality.

International sources of secondary information: Desktopresearchwasusedtogatherdatafrominternationalsources,suchasEuromoney’sCountryRiskPollandmacroeconomicstatisticsfoundintheWorldBank’sWorld Development Indicatorsreport.

The Sample of Interviewed Companies

Tenmunicipalitiesparticipatedinthebenchmarkingstudy(inalphabeticalorder):Chengdu,Deyang,Leshan,Luzhou,Mianyang,Nanchong,Panzhihua,Suining,Yibin and Zigong. “Municipality” is used to describe an administrative unit.However,itshouldbenotedthatthemunicipalitiessurveyedrangedinsizefrom5,000to20,000squarekilometers.

IncoordinationwiththeCPDFandSIPB,fiveindustriesbelievedtobeofgreatcurrentandfutureimportancefortheeconomicdevelopmentofSichuanprovincewerechosenforthestudy:

• Chemicals

• Electronics

• FoodandBeverageProcessing

• MachineryandMachineBuilding

• PharmaceuticalsandTraditionalChineseMedicine

Atotalof250companiesoperatinginthesefiveindustrieswasinterviewedforthisstudy.Whenpossible,fivecompaniesperindustrywereinterviewedineachofthebenchmarkedmunicipalities.Prioritywasgiventoforeigninvestedcom-panies,boththosewhollyownedandjointventures.However,duetothelowrep-resentationofforeigninvestedcompaniesinSichuan,Chinesecompaniesweresubstitutedasnecessarytoensurethattherequirednumberofcompanieswassurveyedineachmunicipalityandindustry.Preferencewasgiventotheleadingcompaniesineachindustry.(SeeTable2-2forabreakdownofthesurveyedcom-panies'ownership.)

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TheChinesecompaniessurveyedwereclassifiedas:

• Chinesecompaniesfromthesubjectmunicipality

• ChinesecompaniesfromSichuanprovince

• ChinesecompaniesfromoutsideSichuanprovince

• JointventuresbetweentwoChinesecompanies

• Chinesejointventureswithforeigncompanies

Itwasdifficulttofindenoughforeigninvestorsineachofthemunicipalitiestomeetthesamplerequirements.Consequently,Chinesecompaniescompriseover60%ofthetotalsurveysample.Localcompaniesfromthemunicipalitiessurveyedweremostfrequentlysubstituted,andtheseaccountforabout40%ofthesurveysample.(InthecaseofNanchong,onlyoneFIEwasinterviewedforthisstudy.TheotherrespondentswereeitherlocallyownedcompaniesorthosefromoutsideSichuan.)Because of the large number of Chinese companies included in the survey, some sub-jective measures may not accurately represent the impressions of foreign investors.

Factor Weighting

Intheanalysisofthedata,theconditionsfactorswereweightedtoreflectthemoti-vationsoftheinterviewedinvestors intheirdecisionsto locate inthesurveyedmunicipalities.Table2-3showstheweightingpercentageapplied toeach indi-vidual locationfactorby industry,andtheaggregatedweightingpercentageforeachgeneralcategoryoffactors.Theweightingwasappliedinthecalculationofthemunicipalities’scoresthatreflecttheinterviewedinvestors’perceivedqualityof conditions in their locations.The resultingscores forconditionswere thenplottedagainstthescoresforcostsonthecost/qualitymatrices.(SeeFigure2-1:TheCost/QualityMatrix.)

Interpreting the EBP Model Outcomes

FromanIPI’sperspective,therearenoundisputablewaystodeterminewhetheranindustryisworthpromotinginaparticular location.Thecompetitivenessofaparticular location,however,canbeanalyzed inasystematicway toprovidevaluableinsightstopolicymakers,whichistheaimofMIGA’sEBPmodel.Eachmunicipality’scompetitivenessinattractinginvestmentinthechosenindustrieswasanalyzedbasedonthemunicipality’srelativerankingagainstoperatingcostand conditions factors. This relative ranking was graphically represented in acost/qualityscattergram,suchastheoneinFigure2-1.Thescattergram,which

Table 2-2:OwnershipofCompaniesSurveyed

Sectors Firms

Chinese Companies from within Municipality

Chinese Companies

from Sichuan

Chinese Companies

Outside Sichuan

Chinese JV Companies

Foreign JV Companies

100% Foreign Owned

Chemicals 56 26 5 3 6 11 5

Electronics 44 17 3 3 4 14 3

Food and Beverages 51 18 7 5 2 14 5

Machinery/ Machine Building

56 27 1 1 5 15 7

Pharmaceuticals/ Traditional Medicine

43 10 6 8 4 6 9

TOTAL 250 98 22 20 21 60 29

115

Table 2-3:SiteSelectionFactorWeightingbyIndustry

Chemicals Electronics Food and Beverage Machinery and Pharmaceuticals and Processing Machine Building Traditional Medicine

LOCATION CATEGORIES Weight (%) Weight (%) Weight (%) Weight (%) Weight (%)

Generalbusinessenvironment 15 16 12 15 22Localpotentialtorecruit skilledstaff 8 10 8 11 8Accesstoinputandoutput markets 34 29 39 27 23Flexibilityoflabor& regulations 6 6 5 6 5Infrastructure 19 19 15 18 18Realestate 12 13 11 14 15Livingenvironment 7 8 9 9 10Total 100 100 100 100 100

LOCATION FACTORS Weight (%) Overall Weight (%) Overall Weight (%) Overall Weight (%) Overall Weight (%) Overall

General business environment

Economic,financialand politicalstability 48 7.0% 39 6.1% 43 5.3% 40 5.9% 46 10.0%Doingbusiness&bureaucracy 23 3.3% 27 4.3% 30 3.6% 27 4.0% 31 6.6%Datatransfer&intellectual propertyrules 11 1.7% 12 2.0% 10 1.2% 14 2.1% 13 2.7%Corporatetaxation 18 2.7% 22 3.4% 17 2.1% 19 2.8% 11 2.3%Total 100 14.6% 100 15.8% 100 12.3% 100 14.8% 100 21.7%

Local potential to recruit skilled staff

Availabilityoflabor 83 6.5% 92 9.0% 87 6.6% 85 9.4% 86 7.1%Masteryoflanguage 17 1.3% 8 0.8% 13 1.0% 15 1.7% 14 1.1%Total 100 7.8% 100 9.9% 100 7.5% 100 11.1% 100 8.2%

Access to input and output markets

Exportcompetitiveness 3 0.9% 6 1.7% 2 1.0% 4 1.2% 3 0.6%Proximitytorawmaterials 32 11.0% 21 6.1% 48 18.9% 25 6.6% 43 10.0%Suppliers/clusternetwork 16 5.7% 16 4.5% 13 5.3% 19 5.0% 17 4.0%Sizeofdomesticmarket 49 16.8% 58 16.7% 36 14.2% 52 13.7% 37 8.7%Total 100 34.4% 100 29.0% 100 39.4% 100 26.5% 100 23.3%

Flexibility of labor & regulations

Flexibilityoflabor 21 1.1% 18 1.0% 23 1.2% 16 1.0% 27 1.3%Workingtimeregulations 21 1.1% 18 1.0% 23 1.2% 16 1.0% 27 1.3%Socialclimate NA NA NA NA NALaborturnover 33 1.9% 44 2.5% 33 1.8% 40 2.6% 29 1.4%Presenceoflaborunions 25 1.4% 20 1.1% 21 1.1% 28 1.8% 16 0.8%Total 100 5.6% 100 5.6% 100 5.4% 100 6.5% 100 4.6%

Infrastructure

Internationalpeopleaccess 3 0.6% 3 0.6% 5 0.7% 4 0.7% 3 0.6%Airshipment 2 0.4% 9 1.7% 2 0.2% 5 0.8% 4 0.7%Shipmentbytrain 22 4.1% 9 1.7% 20 3.0% 14 2.6% 14 2.6%Shipmentbysea 6 1.2% 2 0.4% 5 0.8% 4 0.7% 3 0.5%Shipmentbyroad 20 3.9% 21 4.0% 23 3.4% 25 4.5% 22 4.0%Qualityoftelephone 7 1.3% 9 1.8% 6 0.8% 8 1.5% 9 1.6%ITinfrastructure 4 0.8% 6 1.1% 5 0.7% 4 0.7% 4 0.7%Powersupply 20 3.9% 26 4.9% 17 2.5% 23 4.2% 21 3.7%Watersupply 15 2.9% 14 2.7% 17 2.5% 13 2.4% 19 3.5%Wastetreatment NA NA NA NA NAGassupply NA NA NA NA NATotal 100 19.0% 100 18.9% 100 14.5% 100 18.1% 100 17.8%

Real estate

Availabilityofland 64 7.4% 72 9.7% 74 8.5% 68 9.7% 67 9.9%Availabilityofindustrialbuildings 21 2.4% 16 2.2% 15 1.7% 20 2.8% 17 2.6%Availabilityofofficespace 15 1.7% 11 1.5% 11 1.3% 13 1.8% 16 2.4%Total 100 11.5% 100 13.4% 100 11.5% 100 14.3% 100 14.9%

Living environment

Costofliving 23 1.6% 26 1.9% 29 2.8% 30 2.6% 29 2.7%Safety 31 2.2% 27 2.0% 26 2.4% 26 2.2% 33 3.1%Schools 17 1.2% 17 1.3% 15 1.5% 16 1.3% 12 1.1%Healthcare 30 2.1% 31 2.3% 30 2.8% 28 2.4% 27 2.6%Total 100 7.1% 100 7.5% 100 9.5% 100 8.6% 100 9.5%

100.0% 100.0% 100.0% 100.0% 100.0%

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isdivided into fourquadrants, illustrateseachmunicipality’s relativepositionaccordingtostandarddeviationsfromthemeanindexscoreof100.Costoftenreflects thequalityofoperatingconditions. Investorsconsider locationsmostcompetitiveinmeetingtheirrequirementswhenhigh-qualityoperatingconditionscanbepurchasedforrelativelylesscostthaninotherlocations.

Operatingcostsareplottedonthex-axisasapercentageofthemeancostsofallmunicipalities.Weightedoperatingconditionsscoresthatarewithin0.5standarddeviation–aboveandbelowthemean–areplottedonthey-axis.AsshowninFigure2-1,amunicipalitywouldideallyliketofindthatinvestorsincuroperatingcostsandperceiveoperatingconditions in themunicipalitysuchthat it lies inQuadrant1,wherequalityishighandcostslow,relativetoothersurveyedmunici-palities.Ingeneral,industriesinthosemunicipalitiespositionedinQuadrant1areworthpromotingbecausethegovernmentandprivatesectorcanoftendosobycapitalizingonmarketingstrengthsinsteadofbyremedyingweaknesses.

Municipalities that lie in Quadrant 2 are considered competitive in terms ofoperatingconditions,but less so in termsof costs.These locationsmightbeconsidered attractive by companies that desire the highest quality operatingconditions,aconsideration thatdependsbothonhowtheEBPmodeldefines“quality”andinwaysthatfallbeyondthemodel’scalculus.Operatingconditions,particularlyhighlyskilledlabor,comewithhighercostsandmaybeverydesirableforcertaincompaniesand industries.Locations inQuadrant2canoftencapi-talizeontheirqualitystrengthsbydevelopinghigh-valueaddedsub-sectorswithinprovenindustries.

Figure 2-1:TheCost/QualityMatrix

Operating cost index(average = 100)

Competitivein Conditions

2

Most Competitive

1

Least Competitive

4

Competitivein Costs

3

Con

ditio

ns q

ualit

y in

dex

(ave

rage

= 1

00)

02550751251501752000

50

100

150

200

100

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Municipalitieswithscoresthatfall inQuadrant3areconsideredcompetitiveintermsofcosts,butlesssointermsofconditions.TheselocationsaretypicallynotasattractivetoinvestorsasthoseinQuadrant1,butareconsideredmoredesirablethan those inQuadrant4. Industries thatvalue lowcosts relativelymore thanthosethatrequirehighqualityoperatingconditionsmightconsideraQuadrant3location,particularlythoseclosesttotheoperatingconditionmean.MunicipalitiespositionedwithinQuadrant3canbecomemorecompetitivethroughpoliciesandpracticestoimprovethequalityoftheiroperatingconditionsforinvestors.

Quadrant4istheleastcompetitivepositionsincecostsarehighwithoutthebenefitofhigherqualityoperatingconditions.Additionaljustificationisprobablyneededtopromotemunicipalitieswhosescoresplacetheminthisquadrantofthescat-tergram.Incaseswherethescoreliesclosetotheoperatingconditionsmean,themunicipalitymaybenefitfrominvestmentpromotionactivitieswithaccompanyingpolicychangesandsupport.

Improvementsininfrastructureoralterationsinpoliciesandpracticescanhavethepositiveeffectofimprovingoperatingconditionsandloweringoperatingcostsforinvestors–effectivelyhelpingtomovethelocationintoamoredesirablequadrantonthepotentialinvestor’smatrix.Improvementsinthereliabilityofpowersupply,forinstance,notonlyimproveoperatingconditions,butalsolowerthecostsofpower-dependent firmsas fewerblackoutsorbrownouts translate intohigheroperatingefficienciesandyields.However,somefactors,suchasalandlockedgeo-graphicallocation,cannotbealteredandcertaincostswillalwaysremainhigheronacomparativebasis.

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Appendix 3: Data Organization, Definitions and SourcesThis appendix details the types of quantitative and qualitative data collected for this study, both through desktop research and fieldwork, and the sources used. Groups of data points are organized under general headings, immediately below, followed by an individual description of each data point, including its definition and the basis for rating or other form of measurement.

Organization of Data

DesktopResearch:QuantitativeData

Investmentcosts Sale price of industrial land; sale price oflandforhotels;warehouse,officebuilding,hotelandfactoryconstructioncosts

Realestatecosts Class A & B office rentals; lease price forindustrial site; additional office and siteoccupancycharges

Infrastructurecosts Sea and air transportation; telecommuni-cations;internet;power;water;gas

Accesstomarkets Tarifflevels

DesktopResearch:QualitativeData

Generalbusinessenvironment Economic, financial andpolitical stability;doingbusinessandbureaucracy;intellectualpropertyrules;corporatetaxation

Laborconditions Labor flexibility;working time regulations;socialclimate

Accesstomarkets Exportcompetitiveness;sizeoflocalmarket;accesstointernationalpassengers

Realestate Availability of land, buildings and officespace

InvestorQuestionnaire:QuantitativeDataLaborcosts Management; professional; technician;

skilled;unskilled;benefitsInvestmentcostsandrevenue* Totalinvestment;annualrevenueFacilitycosts* Size of office, warehouse, or production

facilities;sizeofland

InvestorQuestionnaire:QualitativeData

Laborconditions Presenceoflaborunions;laborturnoverLaboravailability Management; professional; technician;

skilled;unskilled;languageproficiencyInfrastructure Air, train, sea and road transportation of

goods; telecommunications; informationtechnology;power;water;wastetreatment

Livingconditions Costofliving;safety;qualityofinternationalandlocalschools;healthcare;recreation

Accesstomarkets Availabilityofrawmaterials,equipmentandcomponents

Investmentincentives* Exemption of import duties on capitalequipment and food and beverages; taxholiday; repatriation of capital; expatriatehiring;VATandsalestaxtreatment

*Furtherdefinitionnotprovidedinthenextsection.

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Data Definitions and Sources

LABORCOSTS

Data point: AnnualgrosssalariesLaborcostdatawascollectedduringthecourseof250companyinterviews,andaggregatedbyindustrysectorforanalysisaccordingtotheEBP.Companyofficialswereaskedtoindicatetheaverageannualfullyburdenedgrosssalariesofworkers–includingexpatriates–theytypicallyhiredinthefollowingfivejobcategories:

Management: Mid-toupper-levelmanagersProfessionals: Chieffinancialofficer,lawyer,consultantTechnicalWorkers: Engineer, programmer, systems analyst, agronomist,

accountantsSkilledWorkers: Data entry clerks, customer service representatives,

assemblylineworkerswithspecialskillsUnskilledWorkers: Drivers,janitors,chambermaids,entry-levelassemblyline

workers,farmhands

Grosssalariesincludewagesandbenefitssuchasmandatorypensionorsocialsecuritycontributions,healthcare,transportation,lodging,andanyotherbenefitspaidbytheemployer.Companieswereinstructedtoprovideaveragesalaryinfor-mationforthetypesofworkersthattypicallyfilltheabovepositions.Thehigherthelaborcosts,thelowerthelevelofdesirabilitytopotentialinvestors.

Source:Companyinterviews.

LABORCONDITIONS

PotentialtoRecruitLocalStaff

Data point:AvailabilityofqualifiedpersonnelCompaniesratedtheirsatisfactioninrecruitinglocalstaffforfivecategoriesofjobpositions–management,professional,technical,skilled,andunskilledworkers.Satisfaction ratingsweregivenonascaleof1 to5according to the followingcriteria:

Score=5: There are very many qualified candidates. It is an employer’smarket.

Score=4: Thereisalargeenoughpoolofqualifiedworkers,andthecompanyusuallyhasnodifficultyinhiringemployees.

Score=3: Thecompanyneedstosearchhard,buteventuallyfindstherightpersonnel.

Score=2: At least50percentof the time, thecompanycan findtherightpersonnelafteralengthysearch.

Score=1: Itisimpossibletofindtherightpersonnel.

Source:Companyinterviews.

Data point:MasteryofrequiredlanguageskillsCompanies then listed the languages they require employees to speak in theworkplace.Theywerethenaskedtoratetheeasewithwhichtheycanactuallyfindworkerswithsatisfactorycommandofthoselanguages.Satisfactionratingsweregivenonascaleof1to5accordingtothefollowingcriteria:

Score=5: There are very many qualified candidates. It is an employer’smarket.

Score=4: Thereisalargeenoughpoolofqualifiedworkers,andthecompanyusuallyhasnodifficultyinhiringemployees.

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Score=3: Thecompanyneedstosearchhard,buteventuallyfindstherightpersonnel.

Score=2: At least50percentof the time, thecompanycan findtherightpersonnelafteralengthysearch.

Score=1: Itisimpossibletofindtherightpersonnel.

Source:Companyinterviews.

FlexibilityofLaborandRegulations

Data point:LaborflexibilityDataontherigidityofemploymentwassourceddirectlyfromtheWorldBank’sDoing Business in 2005publication.Theindexmeasureshowdifficultitistohireanewworker,howrigidtherestrictionsareonexpandingorcontractingthenumberofworkinghours,andhowdifficultandcostlyitistodismissaredundantworker.Specifically,theindexistheaverageofthreeemploymentindicesthatevaluatethefollowing:

DifficultyinHiring: -Allowanceoftermcontractsfortemporarytasks -Regulatedminimumlengthoftermcontracts -Ratio of mandated minimum wage to average value-

addedperworker

RigidityofHours: -Restrictionsonnightwork -Allowanceofweekendwork -Legalworkweekof5½daysormore -Allowanceforworkdaytoextendto12hoursormore -Annualpaidvacationof21daysorless

DifficultyinFiring: -Abilitytofireworkersongroundsofredundancy -Needtonotifyunionforfiringoneworker -Needtonotifyunionforgroupdismissals -Needforunionapprovalforfiringoneredundantworker -Need for union approval for dismissing a group of

workers -Legalmandatefortrainingorreplacementofworkerprior

todismissal -Applicationofpriorityrulesfordismissals -Applicationofpriorityrulesforreemployment

“Rigidityofemployment”scoresareindexedonascaleof0to100.Thehigherthevalueoftheindexscore,themorerigidarelaborregulations.

Source:RigidityofEmploymentIndex,Doing Business in 2005,WorldBank.

Data point:WorkingtimeregulationsFirmswereaskedtoindicatetheaverageweeklyworkinghoursperemployee.Thisoftendifferedfromthelegallymandatedworkweeklength,andvariedbyindustry.Thelongertheworkweek,themoreattractivetheworkingenvironmentwascon-sideredforinvestors.

Source:Companyinterviews.

Data point:SocialclimateTheWorldEconomicForumconductsanannualExecutiveOpinionSurveyoffirmsthroughouttheworld.Entrepreneursandbusinessexecutiveswereaskedtoratethelabor-employerrelationsintheircountriesonascaleof1(“generallyconfron-tational”)to7(“generallycooperative”).

Source: Cooperation in Labor-Employer Relations, Global Competitiveness Report 2004–2005, WorldEconomicForum.

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Data point:PresenceoflaborunionsInterviewed firms indicated thepercentageofworkers in theircompanies thatbelongedtolaborunions.MIGA’sEBPisprogrammedundertheassumptionthatinvestorspreferlowerdegreesofunionization.

Source:Companyinterviews.

Data point:LaborturnoverCompanieswereaskedtoindicatetheannualaverageturnoveramongemployees.“Annualturnover”referstothenumberofemployeeswhoresignedvoluntarilyinthepastyear,dividedbythetotalnumberofemployees.Lowerratesofturnoverareconsideredmorepreferabletoinvestorsthanhighturnoverrates.

Source:Companyinterviews.

INFRASTRUCTURECOSTS

CostofFreightTransportation

Data point:InternationalairfreightratesThecostofshippingaparcelof45kilogramsorlessbyairfromeachmunicipalitytothefollowingdestinationswascalculated:

KennedyInternationalAirport,NewYorkCity,USA(EastCoast)LosAngelesInternationalAirport,LosAngeles,USA(WestCoast)SchipholInternationalAirport,Amsterdam,theNetherlandsChangiInternationalAirport,SingaporeNewTokyoInternationalAirport,Narita,Japan

Costsdonotincludethepriceofinsurance,handling,orothercharges.

Sources: Freight forwarders, air freight companies, and airlines; the SichuanProvincialStatisticsBureauESO.

Data point:InternationalseafreightratesThecostsofshippingastandardcontainer(30cubicmeters,18tonnes;typically,2.3x2.2x5.8meters)werecalculatedfromeachmunicipality–includingoverlandtransportationtothenearestwaterport–tothefollowinglocations:

PortofNewYorkCity,USA(EastCoast)PortofLongBeach,USA(WestCoast)PortofRotterdam,theNetherlandsPortofSingaporePortofYokohama,Japan

Costsdonotincludeinsurance,handlingcharges,orotherfees.

Sources: Freight forwardersandsea freight companies; theSichuanProvincialStatisticsBureauESO.

CostofTelecommunications

Data point:CostoflandlinetelephonecallsDatawasgatheredonthecostperminuteoflandlinetelephonecallsfromeachmunicipalitytothefollowinglocations:

-Localcallwithinthesamecountry-Calltoaneighboringcountry-CalltotheUnitedStates

Sources: Telecommunications companies; the Sichuan Provincial StatisticsBureauESO.

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CostofHigh-SpeedInternet

Data point:Monthlyhigh-bandwidthinternetconnectionDatawasgatheredonthemonthlychargefora256kilobitspersecond(kbps)internetconnection.

Sources:Internetserviceproviders;theSichuanProvincialStatisticsBureauESO.

Data point:InternetusageDatawasgatheredontheperminuteusagechargesforhigh-speed(256-kpbs)internet,ifany.

Sources:Internetserviceproviders;theSichuanProvincialStatisticsBureauESO.

CostofElectricity

Data point:ElectricitycapacitydemandchargesData was collected on charges levied by power companies for the maximumcapacityofelectricitydemandedforlowtomediumvoltagepower,measuredinkilovolt-amperes(kVA).

Sources:Electricityutilitiesineachmunicipality;theSichuanProvincialStatisticsBureauESO.

Data point:ElectricityusagechargesDatawascollectedonthechargesperkilowatt-hour(kWh)forindustrialelectricityusageduringpeakoperatingperiods.

Sources:Electricityutilitiesineachmunicipality;theSichuanProvincialStatisticsBureauESO.

CostofWater

Data point:WaterusagechargesDatawerecollectedonthechargespercubicmeterforwaterusedforindustrialandagriculturaluses.

Sources: Water utilities in each municipality; the Sichuan Provincial StatisticsBureauESO.

CostofGas

Data point:Costofnaturalgas(methane)Thecostofmethanegaswascollected,measuredincubicmeters.

Sources: Natural gas utilities, as available; the Sichuan Provincial StatisticsBureauESO.

INFRASTRUCTUREQUALITY

FreightShipmentbyAir

Data point:PunctualityofairshipmentsInvestorswereaskedthepercentageoftimethatairfreightshipmentsreachtheirdestinationsonschedule.Ifairfreighttransportationwasnotavailable,aresponseof“100”wasentered.

Source:Companyinterviews.

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Data point:LossofairshipmentsInvestors were asked to indicate the percentage of air freight shipments thatbecomelostorneverreachtheirdestinations.Ifairfreighttransportationwasnotavailable,aresponseof“0”wasentered.

Source:Companyinterviews.

FreightShipmentbyTrain

Data point:PunctualityofrailshipmentsInvestorswereaskedthepercentageoftimethatrailfreightshipmentsreachtheirdestinationsonschedule.

Source:Companyinterviews.

Data point:LossofrailshipmentsInvestorswereasked to indicate thepercentageof rail freight shipments thatbecomelostorneverreachtheirdestinations.

Source:Companyinterviews.

FreightShipmentbySea

Data point:PunctualityofseashipmentsInvestorswereasked thepercentageof time that sea freight shipments reachtheirdestinationsonschedule.Ifseafreighttransportationwasnotavailable,aresponseof“100”wasentered.

Source:Companyinterviews.

Data point:LossofseashipmentsInvestorswereasked to indicate thepercentageof sea freight shipments thatbecomelostorneverreachtheirdestination.Ifseafreighttransportationwasnotavailable,aresponseof“0”wasentered.

Source:Companyinterviews.

FreightShipmentbyRoad

Data point:PunctualityofroadshipmentsInvestorswereaskedthepercentageof timethatroadfreightshipmentsreachtheirdestinationsonschedule.

Source:Companyinterviews.

Data point:LossofroadshipmentsInvestorswereaskedto indicatethepercentageofroadfreightshipmentsthatbecomelostorneverreachtheirdestinations.

Source:Companyinterviews.

Telecommunications

Data point:QualityoftelephoneserviceCompanieswereaskedtoratethequalityof landlinetelecommunicationsonascaleof1to5,definedasfollows:

Score=5: Connectionsarealwaysclear.Callsareneverdropped.Linesareneverdown.

Score=4: Connectionisusuallyclear.Callsarealmostneverdropped.Linesarealmostneverdown.

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Score=3: Connectionissometimesnotclear.Somecallsaredropped.Linesaresometimesdown.

Score=2: Connection is sometimes not clear. There is a problem withdroppedcalls.Thelineisoftendown.Mobiletelephoneisrecom-mendedasanalternative.

Score=1: Connectionisneverclear.Callsarealwaysdropped.Linesareoftendown.Nolandlineisavailable.Mobiletelephoneisnecessaryforcommunication.

Source:Companyinterviews.

Data point:LengthoftimetoinstalllandlinetelephoneserviceInterviewedcompaniesindicatedthenumberofdaysitnormallytakestoinstallanewtelephonelandline.

Source:Companyinterviews.

InformationTechnologyInfrastructure

Data point:QualityofinternetserviceCompanieswereaskedtoratethequalityofhighbandwidthinternet(speedgreaterthan256kbps)onascaleof1to5,definedasfollows:

Score=5: Internet isalwaysoperational.Internetserviceisneverdownordisconnected.

Score=4: Internet service is usually operational. Service is almost neverdownordisconnected.

Score=3: Internet service is sometimes not operational. Sometimes theserviceisdroppedornotoperational.

Score=2: Internetserviceissometimesnotoperational.Thereisaproblemwithfrequentdisconnectionsofservice.

Score=1: Connectionisneveroperational.High-speedinternetconnectionsarenotavailable.

Source:Companyinterviews.

Data point:LengthoftimetoinstallinternetserviceInterviewedfirmsindicatedthenumberofdaysitnormallytakestoinstallinternetserviceintheirlocations.

Source:Companyinterviews.

PowerSupply

Data point:NumberofblackoutsCompanieswereaskedthenumberofdaysperyearthattheyexperiencedatotallossofpowerwithouttheuseofback-upgenerators.Firmsthatweretotallyreliantongeneratorpowerwereconsideredtobeunderpermanentblackoutconditions.

Source:Companyinterviews.

Data point:NumberofbrownoutsCompanieswereaskedtoindicatethenumberofdaysperyeartheyexperiencereductionslowerthantheminimumvoltagespecifiedforthesystem,orupwardspikesinthepowersupply.

Source:Companyinterviews.

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WaterSupply

Data point:WatersupplyshortagesInterviewedfirmswereaskedtoindicatethenumberofdaysperyeartheyexpe-rienceashortageofwatersupplyfromthepubliclysuppliedwaterprovider.

Source:Companyinterviews.

WasteTreatment

Data point:QualityofthepublicwastetreatmentsystemInterviewedcompaniesratedthequalityofthepublicwastetreatmentsystemonascaleof1to5,definedasfollows:

Score=5: Publicwastetreatmentfacilityprovidesfirststage(solidparticleremoval), second stage (aeration, organic matter killed), andthirdstage(removalofheavymetalsandchemicals)biologicalandchemical treatment to thehighest internationalstandards.Wastewaterischlorinatedandpotable.

Score=4: Publicwastetreatmentfacilityprovidesfirst,secondstage,andthirdstagebiologicalandchemicalwastewatertreatment.Wastewatercanbereturnedtoenvironmentwithnoillconsequences,butitisnotpotable.

Score=3: Publicwaste treatment facility provides first and secondstagetreatmentonly.Wastewatersmells.

Score=2: Publicwastetreatmentfacilityprovidesfirststagetreatmentonly.Wastewaterremainsharmfultotheenvironment.

Score=1: Publicwastewatertreatment isnotavailable.Rawsewagefreelyenters the environment, or company has its own treatmentfacility.

Dataonthisvariablewascollectedandutilizedinthereport,butwasnotpro-cessedbytheEBPmodel.

Source:Companyinterviews.

AccesstoInternationalPassengers

Data point:NumberofweeklydirectflightsfrommunicipalityDatawascollectedonthenumberofweeklydirectflightsfromeachmunicipalitytotheUnitedStates,toEurope,andtoAsia.“Directflight”isdefinedasaflightgivenasingleflightnumberthatoriginatesinthestudiedcountryandterminatesordischargespassengersintheUS,EU,orAsia.Directflightsdonotnecessarilyhavetobenon-stop,aslongaspassengersremainonthesameaircraft.

Sources: Travel agents, airports, and airlines that serve each municipality; theSichuanProvincialStatisticsBureauESO.

REALESTATECOSTS

CostofLand

Data point:PurchasepriceofindustriallandThecostofpurchasingindustriallyzonedlandorindustrialestatewasresearchedandenteredintheEBPmodelasthecostpersquaremeter.Thisdatawasverifiedincompanyinterviews,inwhichrespondentswereaskedhowmuchtheypaidfortheirsites.Inlocationswherethepurchaseoflandwasnotallowedbylaw,long-termleaseswerealsoconsideredas“purchases”forthepurposesofanalysis.

Sources:Realestateagencies,investmentpromotionagencies,andfreezonesandindustrialestates;theSichuanProvincialStatisticsBureauESO.

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Data point:LeasepriceofindustriallandThe cost of a yearly lease for industrially zoned land or industrial estate wasresearchedandenteredintotheEBPmodel.

Sources:Realestateagencies,investmentpromotionagencies,andfreezonesandindustrialestates;theSichuanProvincialStatisticsBureauESO.

Data point:AdditionalindustrialsiteoccupancychargesInlocationswhereindustrialestatesorfreezoneschargeadditionalmaintenancefeesorsecuritycharges,thisdatawasenteredintothemodelasadditionalcostspersquaremeter.

Sources:Realestateagencies,investmentpromotionagencies,andfreezonesandindustrialestates;theSichuanProvincialStatisticsBureauESO.

Data point:PurchasepriceoftouristhotellandThe purchase price of land in locations suitable for tourist development wasresearchedandenteredintotheEBPmodelasthecostpersquaremeter.

Sources:Realestateagenciesand investmentpromotionagencies; theSichuanProvincialStatisticsBureauESO.

CostofOfficeSpaceRental

Data point:Leasepriceof“ClassA”officespace“ClassA”officespaceisdefinedasofficesinornearthecenterofthecapitalcity.ThesecostswereenteredintheEBPmodelasthepricepersquaremeterforaone-yearlease.

Sources:Realestateagenciesandofficebuildingmanagementcompanies; theSichuanProvincialStatisticsBureauESO.

Data point:Leasepriceof“ClassB”officespace“ClassB”officespaceisdefinedasofficebuildingsoutsidethecitycenter.ThesecostswereenteredintheEBPmodelasthepricepersquaremeterforaone-yearlease.

Sources:Realestateagenciesandofficebuildingmanagementcompanies; theSichuanProvincialStatisticsBureauESO.

Data point:AdditionalofficespaceoccupancychargesIncaseswhereofficebuildingschargeadditionalmaintenance,parkingorsecurityfees, thisdatawasentered into theEBPmodelasadditionalcostspersquaremeter.

Sources:Realestateagenciesandofficebuildingmanagementcompanies; theSichuanProvincialStatisticsBureauESO.

ConstructionCosts

Data point:CostofwarehouseconstructionThepriceforconstructionofaconcreteblockwarehousewasenteredintotheEBPmodelasthecostpersquaremeterofconstruction.

Sources:Localengineeringandconstructioncompanies; theSichuanProvincialStatisticsBureauESO.

Data point:CostoffactoryconstructionThepriceforconstructionofafactorywasenteredintotheEBPmodelasthecostpersquaremeterofconstruction.Thisstudydidnotinvestigatethecostofout-fittingafactorywithmachinery.

Sources:Localengineeringandconstructioncompanies; theSichuanProvincialStatisticsBureauESO.

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Data point:CostofofficebuildingconstructionThepriceforconstructionofanofficebuildingwasenteredintotheEBPmodelasthecostpersquaremeterofconstruction.Thisstudydidnotinvestigatethecostofoutfittinganofficebuildingwithfurnishingsandequipment.

Sources:Localengineeringandconstructioncompanies; theSichuanProvincialStatisticsBureauESO.

Data point:CostofhotelconstructionThepriceforconstructionofahotelwasenteredintotheEBPmodelasthecostpersquaremeterofconstruction.Thisstudydidnotinvestigatethecostofout-fittingahotelwithfurnishingsandequipment.

Sources:Localengineeringandconstructioncompanies; theSichuanProvincialStatisticsBureauESO.

REALESTATEQUALITY

AvailabilityofLand

Data point:NumberofsitesevaluatedFirmswereaskedtorecallthenumberofindustrial,agricultural,hotel,orofficesites theyconsideredduring their initial investmentdecisions.Thegreater thenumberofsites,thehigherthequalityscorecalculatedbytheEBPmodel.

Source:Companyinterviews.

AvailabilityofAgriculturalLand

Data point:AvailabilityofarableareasThisstudyutilizedtheUnitedNations’annualsurveyofagriculturalland.Theavail-abilityofarablelandisgatheredandnotedinthousandsofhectaresforeachsurveyedcountry.

Source:AvailabilityofArableAreas,Food and Agriculture Production Yearbook,UnitedNationsFoodandAgricultureOrganization.

AvailabilityofIndustrialBuildings

Data point:Industrialpropertyvacancyrates

ThepercentageofavailableindustriallandandbuildingswithinthecapitalcitywasgatheredandenteredintotheEBPmodel.

Sources: Real estate agencies, free zones, and industrial estates; the SichuanProvincialStatisticsBureauESO.

AvailabilityofOfficeSpace

Data point:OfficevacancyratesThepercentageofavailableofficespaceinthecenterofthecapitalcitywasgatheredandenteredintotheEBPmodel.

Sources:Realestateagenciesandofficebuildingmanagementcompanies; theSichuanProvincialStatisticsBureauESO.

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QUALITYOFLIVINGCONDITIONS

CostofLiving

Data point:CostoflivingratingCompanies were asked to rate the cost of living in the investment location.Responsesdiffereddependingonwhethertheintervieweewaslocalorforeign.Costoflivingwasratedonascaleof1to5accordingtothefollowingcriteria:

Score=5: Muchlessexpensivethanwherecompanyheadquartersis;or,veryinexpensive.

Score=4: Slightly lessexpensivethanwherecompanyheadquartersis;or,fairlyinexpensive.

Score=3: About the same as where the company headquarters is; or,mediocre,butnotideal.

Score=2: Slightlymoreexpensivethanwherecompanyheadquartersis;or,fairlyexpensive.

Score=1: Muchmoreexpensivethanwherecompanyheadquarters is;or,veryexpensive.

Source:Companyinterviews.

LevelofSafety

Data point:LevelofsafetyratingCompanieswereaskedtoratethe levelofpersonalandcompanysafety intheinvestment location.Responsesdiffereddependingonwhetherthe intervieweewaslocalorforeign.Levelofsafetywasratedonascaleof1to5accordingtothefollowingcriteria:

Score=5: Muchsaferthanwherecompanyheadquartersis;or,verysafe.Score=4: Slightlysaferthanwherecompanyheadquartersis;or,fairlysafe.Score=3: About the same as where the company headquarters is; or,

mediocre,butnotideal.Score=2: Slightly lesssafethanwherecompanyheadquartersis;or,fairly

unsafe.Score=1: Much less safe than where company headquarters is; or, very

unsafe.

Source:Companyinterviews.

Schools

Data point:NumberofinternationalschoolsDataonthenumberofinternationalschoolsineachmunicipalitywascollected.

Source:SichuanProvincialStatisticsBureauESO.

Data point:QualityofinternationalschoolsCompanieswereaskedtoratethequalityofinternationalschoolsintheinvestmentlocation.Responsesdiffereddependingonwhethertheintervieweewaslocalorforeign.Levelofsafetywasratedonascaleof1to5accordingtothefollowingcriteria:

Score=5: Much better than schools where company headquarters is; or,excellent.

Score=4: Slightlybetterthanschoolswherecompanyheadquarters is;or,good.

Score=3: About the same as where the company headquarters is; or,mediocre,butnotideal.

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Score=2: Slightlyworsethanschoolswherecompanyheadquarters is;or,fairlybad.

Score=1: Much worse than schools where company headquarters is; or,verybad.

Source:Companyinterviews.

Data point:QualityoflocalschoolsCompanies were asked to rate the quality of local schools in the investmentlocation.Responsesdiffereddependingonwhethertheintervieweewaslocalorforeign.Levelofsafetywasratedonascaleof1to5accordingtothefollowingcriteria:

Score=5: Much better than schools where company headquarters is; or,excellent.

Score=4: Slightlybetterthanschoolswherecompanyheadquarters is;or,good.

Score=3: About the same as where the company headquarters is; or,mediocre,butnotideal.

Score=2: Slightlyworsethanschoolswherecompanyheadquarters is;or,fairlybad.

Score=1: Muchworsethanschoolswherecompanyheadquartersis;or,verybad.

Dataonthisvariablewascollectedandutilizedinthereport,butwasnotpro-cessedbytheEBPmodel.

Source:Companyinterviews.

Healthcare

Data point:QualityofhealthcareCompanieswereaskedtoratethequalityofhealthcareintheinvestmentlocation.Responsesdiffereddependingonwhethertheintervieweewaslocalorforeign.Levelofsafetywasratedonascaleof1to5accordingtothefollowingcriteria:

Score=5: Muchbetterthanhealthcarewherecompanyheadquartersis;or,excellent.

Score=4: Slightlybetterthanhealthcarewherecompanyheadquartersis;or,good.

Score=3: About the same as where the company headquarters is; or,mediocre,butnotideal.

Score=2: Slightlyworsethanhealthcarewherecompanyheadquartersis;or,fairlybad.

Score=1: Muchworsethanhealthcarewherecompanyheadquartersis;or,verybad.

Source:Companyinterviews.

QualityofRecreationalActivities

Data point:QualityofrecreationCompanieswereaskedtoratethequalityofrecreationalactivitiesintheinvestmentlocation,suchasaccesstorestaurants, familyactivities,golfandothersports,nature-relatedandotheractivities.Responsesdiffereddependingonwhethertheintervieweewas localor foreign.Levelofsafetywas ratedonascaleof1 to5accordingtothefollowingcriteria:

Score=5: Muchbetterthanwherecompanyheadquarters is;or,excellent,manyactivities.

Score=4: Slightly better than where company headquarters is; or, good,someactivities.

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Score=3: About the same as where the company headquarters is; or,mediocre,butnotideal.

Score=2: Slightlyworsethanwherecompanyheadquartersis;or,fairlybad,notmanyactivities.

Score=1: Muchworsethanwherecompanyheadquarters is;or,verybad,hardlyanyactivities.

Dataonthisvariablewascollectedandutilizedinthereport,butwasnotpro-cessedbytheEBPmodel.

Source:Companyinterviews.

ACCESSTOMARKETS

ExportCompetitiveness

Data point:CurrentexportperformanceThe ITCTradePerformanceCurrent Indexmeasures the tradeperformanceof14sectorsin184countries.Itprovidesastaticviewofacountry’srecentexportperformance,rankedbetween1and184.TheITCIndexwasutilizedforchemicals,electronics,machineryandpharmaceuticalsinthemodel.

Source:ITCTradePerformanceCurrentIndex,InternationalTradeCenter.

Data point:ChangeinexportperformanceThe ITC Trade Performance Change Index captures recent trends in changesassociatedwithacountry’sexportperformance.Theindexranks184countriesin14sectors.TheITCIndexwasutilizedforchemicals,electronics,machineryandpharmaceuticalsinthemodel.

Source:ITCTradePerformanceChangeIndex,InternationalTradeCenter.

Data point:AverageimporttariffsDataontheaverageimporttariffsforchemicals,electronics,machinery,pharma-ceuticalsandprocessedfoodfromSichuantotheUnitedStatesandtheEuropeanUnionwasgatheredandenteredintotheEBPmodel.Thisdata is indicativeoftheaccessofSichuantoexportmarkets.Averageimporttariffsareexpressedasapercentagetobeaddedtothevalueoftheimportedproduct.A“0.00”denotesnotariff.

Source:WTOWorldTradeReport.

AvailabilityofRawMaterials

Data point:AvailabilityofrawmaterialsCompanymanagerswereaskedthepercentageofrawmaterialstheyimportedforuseinproduction.“Rawmaterial”referstoanyinputthathasnotyetundergonesignificantprocessing,suchasrawcotton,timber,sugar,milk,steelingot,etc.Itisassumedthatlocationsinwhichrawmaterialscanbesourcedlocallyaremoreattractivethanthosewhererawmaterialsmustbeimported.

Source:Companyinterviews.

PresenceofSuppliersorClustersNetwork

Data point:Availabilityofcomponents/partsCompanymanagerswereaskedthepercentageofcomponentstheyimportedforproduction.“Component”referstoanyinputthathasundergonesignificantpro-cessingortransformation,suchasyarn,fabric,precisionmoldedplastic,engines,etc.Itisassumedthatlocationsinwhichcomponentscanbesourcedlocallyaremoreattractivetoinvestorsthanthosewherecomponentsmustbeimported.

Source:Companyinterviews.

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Data point:AvailabilityofcapitalequipmentorchemicalsCompany managers were asked to indicate the percentage of equipment andchemicalsrequiredforproductionthattheyimport.“Equipment”or“chemicals”referstoallcapitalinputssuchasmachinery,computers,telephones,fertilizers,hotelfurnishings,etc.Itisassumedthatlocationsinwhichcapitalequipmentcanbesourcedlocallyaremoreattractivetoinvestorsthanthosewhereequipmentmustbeimported.

Source:Companyinterviews.

Data point:AveragetariffforimportedinputsData on the average import tariffs for chemicals and electric machinery wasgatheredandenteredintotheEBPmodel.Thisdataprovidesanindicationastotheopennessofacountrytoimports,aswellasthecostofimportingnecessarycapitalinputsandintermediategoodsforproduction.

Source:WTOWorldTradeReport.

SizeofLocalMarket

Data point:MunicipalitymarketsizeThisdata takeseachmunicipality’sgrossdomesticproductasaproxy for thesizeofthelocalmarket.Manyfirms,particularlyintheelectronicsandmachinerysectors,specificallychosetheir locations inordertoservethe localmarkets inSichuanandotherwesternmarketsinChina.

Source:SichuanProvincialStatisticsBureauESO.

QUALITYOFGENERALBUSINESSENVIRONMENT

Economic,Financial,andPoliticalStability

Data point:CountrycreditratingThisindexisbasedonabiannualsurveyofleadingcommercialbanks,andcapturesriskperceptionsofthemaincommercial lenders.TheindexiswidelyreferencedwithintheIFC/WorldBankGroup.Onascaleof1to100,1isthebestrating.

Source:InstitutionalInvestor.

Data point:CountryriskratingThis data was derived from Euromoney’s semiannual rating of the political andeconomicperformancesof185sovereigncountries.Thisratingusestheviewsofexperts,headsofsyndicationandloans,aswellasdatafromtheWorldBank,forfeitinghouses,andcreditratingagencies.Onascaleof1to100,1isthebestrating.

Source:Euromoney.

DoingBusinessandBureaucracy

Data point:NumberofproceduresrequiredtostartabusinessTheDoing Businesssurveyexaminesthestart-upofcommercialorindustrialfirms.Itcountsallproceduresrequiredtoincorporateandregisterafirm.A“procedure”isdefinedasanyinteractionofthecompanyfounderwithexternalpartiessuchasgovernmentagencies,lawyers,auditorsandnotaries.

Source:Doing Business in 2005,WorldBank.

Data point:NumberofdaysnormallyrequiredtostartabusinessTheDoing Businesssurveyexaminesthestart-upofcommercialorindustrialfirms.Itcountsthenumberofdaysrequiredtoincorporateandregisteranewlyformedcompany.Timeisrecordedincalendardays.

Source:Doing Business in 2005,WorldBank.

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Data point:PerceptionofcorruptionThisindexmeasurescountriesintermsofthedegreetowhichcorruptionisper-ceivedtoexistamongpublicofficialsandpoliticians.TheCorruptionPerceptionIndexisthecompositeofcorruptionindicesfromindependentsources.Countriesaregivenanindexscorebetween0and10,withascoreof10indicatingnoper-ceivedcorruptionandascoreof0indicatingextremeperceivedcorruption.

Source:TransparencyInternational.

Data point:CustomsclearanceInterviewedcompanymanagerswereaskedhowlongitnormallytakesforimportedinputstoclearcustomsbasedontheexperiencesoftheirfirms.

Source:Companyinterviews.

IntellectualPropertyRightsProtection

Data point:IntellectualpropertyrightsprotectionDataisbasedonasurveyofintellectualpropertyrightsprotectionbytheWorldEconomic Forum. On a rating scale of 1 to 7, a rating of 7 indicates “mostprotected.”

Source:Global Competitiveness Report 2004–2005,WorldEconomicForum.

CorporateTaxation

Data point:CorporatetaxrateDataon thehighestcorporate tax rate ineachmunicipalitywascollectedandenteredintheEBPmodel.

Sources: PricewaterhouseCoopers Tax Guideand/or local taxauthorities;SichuanProvincialStatisticsBureauESO.

Data point:SalestaxrateDataonsalestaxorVATwasenteredintotheEBPmodel.

Sources:PricewaterhouseCoopers Tax Guideand/or local taxauthorities;SichuanProvincialStatisticsBureauESO.

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Appendix 4: Tables of FindingsThe tables below present the study’s findings by factor and municipality, including both quantitative and qualitative data collected through desktop research and fieldwork. The fieldwork consisted of interviews with companies operating in the 10 surveyed munici-palities. The scales of measurement for data gathered from desktop research sources are indicated beneath the tables. For qualitative data collected during company interviews, the 1–5 rating scale (5 is best score; 1 is worst) was used and is shown beneath these tables. (See also the fourth chapter, Comparative Costs at a Glance. For more infor-mation on the individual data points, their measurement and sources, refer to Appendix 3: Data Organization, Definitions and Sources.)

Table 4-1:LaborCosts(grossannualsalaryinUS$)–Chemicals

Municipality Management Professional Technical Skilled Unskilled

Chengdu 13,971 6,757 4,642 3,541 1,588

Mianyang 6,906 4,074 3,004 2,002 1,487

Deyang 3,853 2,868 2,071 1,636 1,159

Luzhou 7,499 2,086 2,016 1,293 770

Suining 4,928 3,720 2,659 1,879 1,169

Nanchong 4,348 4,205 2,173 1,543 1,234

Leshan 4,782 4,424 2,702 1,592 1,261

Panzhihua 4,790 3,881 2,533 1,856 1,432

Zigong 8,000 3,739 2,609 2,255 1,197

Yibin 3,433 3,074 1,602 1,850 1,220

Table 4-2:LaborCosts(grossannualsalaryinUS$)–Electronics

Municipality Management Professional Technical Skilled Unskilled

Chengdu 14,124 5,938 3,442 1,774 1,536

Mianyang 5,375 3,694 2,575 2,061 1,324

Deyang 4,689 4,472 2,198 1,519 879

Luzhou 3,843 2,669 1,909 1,229 982

Suining 1,716 991 1,185 956 697

Nanchong 3,833 2,937 3,370 1,826 1,039

Leshan 6,109 3,430 2,785 1,592 1,300

Panzhihua 3,570 1,627 2,114 1,700 969

Zigong 2,474 1,863 1,372 1,258 870

Yibin 3,368 2,552 1,849 1,650 1,407

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Table 4-3:LaborCosts(grossannualsalaryinUS$)–FoodandBeverageProcessing

Municipality Management Professional Technical Skilled Unskilled

Chengdu 5,914 2,733 2,520 1,374 1,086

Mianyang 6,307 2,720 2,618 2,574 1,288

Deyang 5,986 3,578 2,705 1,266 959

Luzhou 3,000 1,862 1,729 1,298 1,011

Suining 5,959 3,955 2,705 1,619 1,037

Nanchong 3,292 3,009 2,169 1,491 1,086

Leshan 6,234 4,283 1,994 1,502 1,138

Panzhihua 2,717 2,234 2,174 2,597 2,234

Zigong 2,470 2,277 1,542 1,428 1,344

Yibin 4,036 2,735 1,450 1,418 1,076

Table 4-4:LaborCosts(grossannualsalaryinUS$)–MachineryandMachineBuilding

Municipality Management Professional Technical Skilled Unskilled

Chengdu 27,192 14,959 7,983 5,572 3,332

Mianyang 8,279 5,339 4,509 2,015 1,134

Deyang 4,069 2,492 2,582 1,917 1,272

Luzhou 4,815 3,257 2,205 1,921 1,473

Suining 2,440 1,983 1,675 1,525 943

Nanchong 4,031 3,007 2,337 2,277 1,265

Leshan 5,362 3,911 2,597 1,664 1,159

Panzhihua 7,280 5,312 2,894 1,708 1,338

Zigong 3,930 3,901 2,481 2,085 1,572

Yibin 4,062 3,504 2,373 2,074 1,526

Table 4-5:LaborCosts(grossannualsalaryinUS$)–PharmaceuticalsandTraditionalChineseMedicine

Municipality Management Professional Technical Skilled Unskilled

Chengdu 16,039 8,043 4,077 2,447 1,493

Mianyang 2,773 1,321 1,685 1,044 823

Deyang 5,140 3,130 3,200 2,002 1,254

Luzhou 4,516 3,667 1,570 1,340 1,009

Suining 8,060 5,053 3,082 1,580 967

Nanchong 1,973 1,570 1,192 1,047 789

Leshan 4,997 3,331 2,491 1,560 1,219

Panzhihua 8,269 5,385 4,980 1,793 812

Zigong 8,590 5,796 1,957 1,697 1,187

Yibin 2,224 1,345 1,614 1,216 747

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Table 4-6:GeneralBusinessEnvironment

Municipality

Indicator

Surv

ey

date

(ye

ar)

Che

ngdu

Mia

nyan

g

Dey

ang

Luzh

ou

Suin

ing

Nan

chon

g

Lesh

an

Panz

hihu

a

Zig

ong

Yibi

n

Economic, financial and political stability

InstitutionalInvestorCountryCreditRatings1

2005 65.7 65.7 65.7 65.7 65.7 65.7 65.7 65.7 65.7 65.7

EuromoneyCountryRiskPoll2

2005 62.77 62.77 62.77 62.77 62.77 62.77 62.77 62.77 62.77 62.77

Doing business & bureaucracy

Numberofpro-ceduresrequiredtostartabusiness

2005 12 12 12 12 12 12 12 12 12 12

Numberofdaysrequiredtostartabusiness

2005 41 41 41 41 41 41 41 41 41 41

CorruptionPerceptionIndex3 2005 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4

Numberofdaystoclearcustoms4

2004 7.32 15.64 14.29 8.00 2.86 N/A 8.50 N/A 17.07 12.43

Data transfer & intellectual property rules

IPRprotection5 2004 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4

Corporate taxation

Corporatetaxrate(%) 2004 33 33 33 33 33 33 33 33 33 33

Salestaxrate(%) 2004 17 17 17 17 17 17 17 17 17 17

1Indexbasedonabi-annualsurveyof leadingcommercialbanks;1 isbestrating inrangeof1–100.2Ratingofthepoliticalandeconomicperformancesof185sovereigncountries;1isbestratinginrangeof1–100.3Indexthatmeasurescountriesintermsofperceivedcorruptionamongpublicofficials;10isbestratinginrangeof0–10.4“N/A”meansthatacustomsofficewasnotlocatedinthemunicipalityatthetimeofthestudy.5Basedonsurveythatasksexecutivestorateaspectsofbusinessintheirowncountries;7means“mostprotected”inrangeof1–7.

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Table 4-7:LocalPotentialtoRecruit

Municipality

IndicatorSu

rvey

dat

e (m

m/y

)

Che

ngdu

Mia

nyan

g

Dey

ang

Luzh

ou

Suin

ing

Nan

chon

g

Lesh

an

Panz

hihu

a

Zig

ong

Yibi

n

Availability of Labor (Qualified Personnel)*

Management 2004 2.84 2.92 2.96 2.46 2.80 3.08 2.96 2.76 3.12 2.76

Professional 2004 3.12 3.04 3.04 2.96 3.08 3.24 3.20 2.96 3.40 3.00

Technical 2004 3.56 3.64 3.50 3.33 3.80 3.44 3.76 3.16 4.00 3.36

Skilled 2004 4.08 4.20 3.68 3.54 4.12 4.04 4.16 3.24 4.44 3.60

Unskilled 2004 4.80 4.80 4.75 4.42 4.96 4.88 4.92 4.40 4.92 4.64

Mastery of Language*

Masteryoflanguageneededforwork

2004 4.52 4.88 4.60 4.80 4.80 4.64 4.48 4.36 4.52 4.40

Better Worse

*RATING 5 > 1

Table 4-8:AccesstoInputandOutputMarkets

Municipality

Indicator

Surv

ey d

ate

(mm

/y)

Che

ngdu

Mia

nyan

g

Dey

ang

Luzh

ou

Suin

ing

Nan

chon

g

Lesh

an

Panz

hihu

a

Zig

ong

Yibi

n

Export Competitiveness (current performance and change)1

ITCTradePerformanceCurrentIndexforchemicals

Apr-05 28 28 28 28 28 28 28 28 28 28

ITCTradePerformanceChangeIndexforchemicals

Apr-05 68 68 68 68 68 68 68 68 68 68

ITCTradePerformanceCurrentIndexforelectronics(electronicscom-ponents)

Apr-05 26 26 26 26 26 26 26 26 26 26

ITCTradePerformanceChangeIndexforelectronics(electronicscom-ponents)

Apr-05 35 35 35 35 35 35 35 35 35 35

ITCTradePerformanceCurrentIndexformachinery(non-electronics)

Apr-05 26 26 26 26 26 26 26 26 26 26

1Basedonindexthatrankscountry-leveltradecompetitivenessbysector;1isthebestrankinginarangeof1–184.

snapshot sichuan 137

Table 4-8:AccesstoInputandOutputMarkets(continued)

Municipality

Indicator

Surv

ey d

ate

(mm

/y)

Che

ngdu

Mia

nyan

g

Dey

ang

Luzh

ou

Suin

ing

Nan

chon

g

Lesh

an

Panz

hihu

a

Zig

ong

Yibi

n

Export Competitiveness (current performance and change)1 (continued)

ITCTradePerformanceChangeIndexformachinery(non-electronics)

Apr-05 6 6 6 6 6 6 6 6 6 6

ITCTradePerformanceCurrentIndexforpharma-ceuticals(chemicalindustry,asnopharmaindustryindicated)

Apr-05 28 28 28 28 28 28 28 28 28 28

ITCTradePerformanceChangeIndexforpharma-ceuticals(chemicalindustry,asnophar-maceuticalindustryindicated)

Apr-05 68 68 68 68 68 68 68 68 68 68

Import tariffs2

TariffforchemicalimportsfromthecountrytoUS(phos-phorusHS2804.7)-%

Mar-05 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

TariffforchemicalimportsfromthecountrytoEU(phos-phorusHS2804.7)-%

Mar-05 5.50 5.50 5.50 5.50 5.50 5.50 5.50 5.50 5.50 5.50

TariffforelectronicsimportsfromthecountrytoUS(elec-tronicscomponents)-%

Mar-05 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

TariffforelectronicsimportsfromthecountrytoEU(elec-tronicscomponents)-%

Mar-05 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

TariffformachineryimportsfromthecountrytoUS-%

Mar-05 4.40 4.40 4.40 4.40 4.40 4.40 4.40 4.40 4.40 4.40

TariffformachineryimportsfromthecountrytoEU-%

Mar-05 4.40 4.40 4.40 4.40 4.40 4.40 4.40 4.40 4.40 4.40

1Basedonindexthatrankscountry-leveltradecompetitivenessbysector;1isthebestrankinginarangeof1–184.2Averageimporttariffsexpressedasapercentagetobeaddedtothevalueoftheimportedproduct;“0.00”meansnotariffduetoexemption.

snapshot sichuan138

Table 4-8:AccesstoInputandOutputMarkets(continued)

Municipality

IndicatorSu

rvey

dat

e (m

m/y

)

Che

ngdu

Mia

nyan

g

Dey

ang

Luzh

ou

Suin

ing

Nan

chon

g

Lesh

an

Panz

hihu

a

Zig

ong

Yibi

n

Import tariffs1 (continued)

Tariffforpharma-ceuticalimportsfromthecountrytoUS-%

Mar-05 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Tariffforpharma-ceuticalimportsfromthecountrytoEU-%

Mar-05 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

TariffforprocessedfoodimportsfromthecountrytoUS(preparedorpre-servedpork-HS16024990)-%

Mar-05 6.40 6.40 6.40 6.40 6.40 6.40 6.40 6.40 6.40 6.40

TariffforprocessedfoodimportsfromthecountrytoEU(preparedorpre-servedpork-HS16024990)-%

Mar-05 10.90 10.90 10.90 10.90 10.90 10.90 10.90 10.90 10.90 10.90

Raw materials

Availabilityofrawmaterials(%imported)

2004 17.52 2.92 8.08 4.76 1.92 3.44 10.58 1.80 1.12 2.80

Suppliers/cluster network

Localavailabilityofcomponents/parts(%imported)

2004 11.04 2.80 7.60 1.80 1.00 0.08 3.30 0.00 3.28 0.07

Averagetariffforelectricmachinery-%

Mar-05 10.4 10.4 10.4 10.4 10.4 10.4 10.4 10.4 10.4 10.4

Averagetariffforchemicalsandphoto-graphicsupplies-%

Mar-05 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5

Size of local market (municipality)

GDP(US$millions) Mar-05 26397 5494 5130 3125 2337 3709 3210 2425 3011 4215

1Averageimporttariffsexpressedasapercentagetobeaddedtothevalueoftheimportedproduct;“0.00”meansnotariffduetoexemption.

snapshot sichuan 139

Table 4-9: FlexibilityofHumanResourceRegulations

Municipality

Indicator

Surv

ey d

ate

(mm

/y)

Che

ngdu

Mia

nyan

g

Dey

ang

Luzh

ou

Suin

ing

Nan

chon

g

Lesh

an

Panz

hihu

a

Zig

ong

Yibi

n

Labor flexibility

RigidityofEmploymentIndex1 2004 30 30 30 30 30 30 30 30 30 30

Working time regulations

Averageweeklyworkinghours

2004 40.68 41.23 45.02 43.85 45.50 40.76 40.94 41.21 44.03 41.80

Social climate

Laborrelations2 2004 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3

Presence of labor unions

Degreeofunion-ization(%unionized)

2004 73.72 83.56 61.22 50.52 83.48 74.06 76.08 69.36 81.12 74.77

Labor turnover

Laborturnover(annualrate-%)

2004 6.15 4.36 4.60 3.43 3.94 4.77 4.05 8.16 2.90 1.72

Table 4-10:Infrastructure

Municipality

Indicator

Surv

ey d

ate

(mm

/y)

Che

ngdu

Mia

nyan

g

Dey

ang

Luzh

ou

Suin

ing

Nan

chon

g

Lesh

an

Panz

hihu

a

Zig

ong

Yibi

n

Access to international passengers

NumberofdirectweeklyflightstoUS

2005 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

NumberofdirectweeklyflightstoEurope

2005 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

NumberofdirectweeklyflightstoAsia

2005 49.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Passengerarrivals 2005 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

Freight shipment by air

Punctualityofairshipments(%ontime)3

2004 98.50 96.43 95.00 100.00 97.50 100.00 99.40 100.00 100.00 100.00

Lossofairshipments(%)4 2004 0.09 0.20 0.00 0.00 0.00 0.00 0.22 0.00 0.02 0.40

1Indexbasedonsurveyofproceduresamongcommercialandindustrialfirms;100denotesthemostrigidregulationsforhiring/firingworkersinarangeof0–100.2Basedonsurveythatasksexecutivestorateaspectsofbusinessintheirowncountries;7isbestinrangeof1–7.3Ifthistypeoftransportationwasnotavailable,“100.00”wasentered.4Ifthistypeoftransportationwasnotavailable,“0.00”wasentered.

snapshot sichuan140

Table 4-10:Infrastructure(continued)

Municipality

IndicatorSu

rvey

dat

e (m

m/y

)

Che

ngdu

Mia

nyan

g

Dey

ang

Luzh

ou

Suin

ing

Nan

chon

g

Lesh

an

Panz

hihu

a

Zig

ong

Yibi

n

Freight shipment by train

Punctualityofrailshipments(%ontime)

2004 91.40 93.56 96.89 95.60 91.76 86.90 97.88 92.86 91.39 96.13

Lossofrailshipments(%)

2004 0.57 0.90 0.45 0.38 2.79 1.10 0.37 5.05 6.29 0.18

Freight shipment by sea

Punctualityofseashipments(%ontime)1

2004 95.33 89.86 98.89 95.00 93.33 70.00 100.00 100.00 97.83 92.57

Lossofseashipments(%)2 2004 0.00 3.57 1.43 0.00 0.00 0.00 0.00 0.00 0.14 0.14

Freight shipment by road

Punctualityofroadshipments(%ontime)

2004 94.82 97.13 90.59 98.88 97.72 96.38 99.13 99.30 96.16 99.22

Lossofroadshipments(%)

2004 0.54 0.06 0.63 0.46 0.08 0.58 0.35 7.97 4.09 0.04

Telecommunications

Qualityoftelephoneservice*

2004 4.04 4.36 4.48 4.25 4.64 4.44 4.44 4.20 4.28 4.28

Lengthoftimetoinstalllandlinetelephone(no.ofdays)

2004 2.48 3.10 1.73 3.64 1.76 1.54 1.98 3.70 3.14 2.23

IT infrastructure

Qualityofinternetservice*

2004 3.64 3.92 3.64 4.00 4.23 3.83 4.12 3.65 3.43 3.78

Lengthoftimetoinstallhighspeedinternetconnection(no.ofdays)

2004 4.40 4.42 3.36 3.83 2.02 2.57 2.26 4.52 4.79 3.45

Power supply

Blackouts(no.ofdays/year)

2004 4.40 4.42 3.36 3.83 2.02 2.57 2.26 4.52 4.79 3.45

Brownouts(no.ofdays/year)

2004 12.52 2.80 0.00 16.68 0.06 4.00 12.28 2.36 3.44 8.96

Water supply

Watersupply(no.ofdaysperyearwithlackofwatersupply)

2004 1.96 2.88 0.28 1.24 0.28 2.46 0.40 4.08 4.76 0.56

1Ifthistypeoftransportationwasnotavailable,“100.00”wasentered.2Ifthistypeoftransportationwasnotavailable,“0.00”wasentered.

Better Worse

*RATING 5 > 1

snapshot sichuan 141

Table 4-11:RealEstateQuality

Municipality

Indicator

Surv

ey

date

Che

ngdu

Mia

nyan

g

Dey

ang

Luzh

ou

Suin

ing

Nan

chon

g

Lesh

an

Panz

hihu

a

Zig

ong

Yibi

n

Availability of industrial land

Availabilityofindustrialsites(no.sitesevaluated)

2004 2.24 2.72 2.12 2.24 2.52 1.56 1.00 1.76 3.48 1.72

Availability of agricultural land

Availabilityofarableareas(sq.km;all-Chinafigure)

2005 1426210 1426210 1426210 1426210 1426210 1426210 1426210 1426210 1426210 1426210

Availability of industrial buildings

Vacancyrateforindustrialbuildings(%)

2005 8 5 8.5 9.8 17 0 10 5.6 5 10

Availability of office space

Vacancyrateforoffices(%)

2005 10.6 8.2 9.8 46.4 0 5 5 10.5 7.8 3

Table 4-12:QualityofLivingConditions

Municipality

Indicator

Surv

ey d

ate

(mm

/y)

Che

ngdu

Mia

nyan

g

Dey

ang

Luzh

ou

Suin

ing

Nan

chon

g

Lesh

an

Panz

hihu

a

Zig

ong

Yibi

n

Cost of living

Costofliving* 2004 4.19 4.19 4.17 3.29 3.63 4.00 3.84 2.80 4.20 3.86

Safety

Levelofpersonalandcompanysafety*

2004 3.52 3.57 4.08 3.63 3.63 3.30 3.92 3.32 4.10 3.81

International schools

Totalnumberofinternationalschools

2004 1 0 0 0 0 0 0 0 0 0

Qualityofinterna-tionalschools*

2004 2.62 3.75 1.38 1.40 1.00 1.20 1.12 1.25 1.15 1.20

Healthcare

Qualityofhealth-care*

2004 3.14 3.43 3.26 3.35 3.38 3.30 3.32 3.04 3.90 3.14

Better Worse

*RATING 5 > 1

snapshot sichuan142

Table 4-13:RealEstateCosts

Site Costs (US$/m2) Construction Costs (US$/m2)

Sale Price of Industrial

Land

Sale Price of Land for

Hotels

Warehouse

(2004)

Office Building(2004)

Hotel

(2004)

Factory

(June2005)

Municipality

Chengdu 63 507 97 145 139 175

Mianyang 18 42 68 94 119 87

Deyang 18 67 85 101 112 112

Luzhou 13 22 42 74 124 59

Suining 15 51 52 72 184 57

Nanchong 23 426 66 139 181 103

Leshan 27 101 48 94 118 45

Panzhihua 45 139 31 54 63 19

Zigong 26 160 97 106 169 13

Yibin 24 49 42 85 139 54

Table 4-14:PropertyLeaseCosts

Office Rental (US$/m2/month) Land Lease (US$/m2/month)

Class A Office Rent

Class A Office Occupancy

Charges

Class B Office Rent

Class B Office Occupancy

Charges

Lease Price for Industrial Land

Lease Price for Standard

Factory Building

Additional Industrial Site

Occupancy Charges

Municipality

Chengdu 5.43 0.24 9.80 3.20 1.45 1.27 0.14

Mianyang 1.93 1.81 0.90 0.90 0.27 0.63 0.07

Deyang 1.45 0.54 0.90 0.90 0.36 0.60 0.07

Luzhou 0.97 1.81 1.00 0.70 0.30 0.36 0.07

Suining 0.54 2.05 0.20 0.80 0.37 0.30 0.07

Nanchong 1.21 9.66 14.10 1.20 0.60 0.43 0.07

Leshan 1.93 1.21 1.60 1.40 0.27 0.18 0.07

Panzhihua 1.81 0.34 3.10 2.30 0.36 0.42 0.07

Zigong 3.02 1.81 2.70 1.30 0.48 0.88 0.07

Yibin 0.85 1.21 0.50 1.20 0.54 0.42 0.07

snapshot sichuan 143

Table 4-15:UtilityCosts

Telecom Costs (US$/minute)Internet Costs

Electricity CostsWater Costs (US$/m3)

Gas Costs (US$/m3)

Local Call

International Call to

Adjacent Countries

International Call to USA

Internet (US$/mo.)

Usage Charge For Industrial Use (US$/

kWh)

Demand Charge for Industrial Use (US$/

kVA)

Water for Industrial

Use

Gas for Industrial

Use

Municipality

Chengdu 0.03 0.08 0.85 8.45 0.059 2.174 0.17 0.13

Mianyang 0.02 0.05 0.60 8.45 0.057 2.174 0.18 0.12

Deyang 0.01 0.08 0.97 21.74 0.046 1.932 0.18 0.10

Luzhou 0.03 0.08 0.97 11.47 0.060 2.191 0.22 0.08

Suining 0.02 0.08 1.11 12.08 0.056 1.329 0.18 0.12

Nanchong 0.01 0.08 0.97 7.25 0.058 1.932 0.16 0.10

Leshan 0.01 0.08 0.97 9.66 0.059 1.691 0.22 0.22

Panzhihua 0.02 0.06 0.97 9.66 0.050 1.691 0.22 N/A*

Zigong 0.02 0.05 0.60 7.25 0.054 1.932 0.08 0.11

Yibin 0.01 0.04 0.97 6.04 0.060 2.174 0.18 0.13

*Panzhihuadoesnotprovidenaturalgas,accordingtotheESO.

Table 4-16:InternationalSeaFreightRates

Cost of Shipment by Sea

US$perstandardcontainer(30cubicmeters,18tonnes;typically,2.3x2.2x5.8m)

To Rotterdam To New York To Long Beach To Yokohama To Singapore

From

Chengdu 2200.00 2500.00 2400.00 1200.00 1700.00

Mianyang 2683.00 2883.00 2883.00 1683.00 2183.00

Deyang 2297.00 2597.00 2497.00 1297.00 1797.00

Luzhou 2100.00 3050.00 2300.00 600.00 950.00

Suining 2466.00 2466.00 2666.00 1466.00 1966.00

Nanchong 2466.00 2466.00 2666.00 1466.00 1966.00

Leshan 2683.00 2683.00 2883.00 1683.00 2183.00

Panzhihua 2483.00 2483.00 2683.00 1483.00 1905.00

Zigong 2441.00 3391.00 2641.00 841.00 1191.00

Yibin 2441.00 3391.00 2641.00 841.00 1191.00

snapshot sichuan144

Table 4-17:InternationalAirFreightRates

Cost of Shipment by Air

Regularrateforgeneralcargounder45kg(US$perkilogram)

To Amsterdam Schiphol(AMS)

To New York(JFK)

To Los Angeles(LAX)

To Tokyo Narita(NRT)

To Singapore Changi(SIN)

From

Chengdu 3.16 4.28 3.50 2.22 1.86

Mianyang 3.17 4.29 3.51 2.23 1.87

Deyang 3.17 4.28 3.51 2.23 1.87

Luzhou 3.18 4.30 3.52 2.24 1.88

Suining 3.17 4.29 3.50 2.23 1.87

Nanchong 3.17 4.29 3.51 2.23 1.87

Leshan 3.17 4.29 3.51 2.23 1.87

Panzhihua 3.20 4.32 3.54 2.26 1.91

Zigong 3.18 4.30 3.52 2.23 1.88

Yibin 3.18 4.30 3.52 2.23 1.88

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