FDI in Inland Provinces

FDI in Inland Provinces

Robert L.Wallack,

World Bank Consultant

and

Robin C. Carruthers,Lead Transport Economist

China: Regional Comparison

China Inland Regions are lagging the East East Central West Total Population 42.3% 34.4% 23.2% 1.262 billion Area 13.5% 29.7% 56.8% 9,581,000 km2 GDP 64.3% 29.4% 14.6% U$ 1,087 billion Per capita income U$ 1,293 U$ 727 U$535 U$ 861 FDI 85.8% 8.8% 5.4% U$ 49.3 billion % of export origins 90% 7% 4% U$438 billion

Source : OECD Foreign Investment in China’s Regional Development, 2001

China’s Westward Policy

• Western Region Economic Development Strategy of PR China began in 1999

• Managed by the Office of Leading Group for Western Region Development of the State Council

• The Region Comprises 12 Provinces (autonomousregions and municipalities) which include:Chongqing, Gansu, Guangxi, Guizhou, Inner Mongolia, Ningxia, Qinghai, Shaanxi, Sichuan, Yunnan, Xinjiang and Tibet

• A measure of success is that Jan-Jun 2004 GDP was up 12% and Fixed Asset Investment up 34% Over 2003

ChinaInland Infrastructure Investment

• U$9.6 billion investment by the end of 2004 in 10 key projects

• Projects include: Electricity Transmission,

Gas Pipelines, Highways, Water Supply and Control, and Railways

What has been the geographic pattern of growth?

• FDI and its associated export growth have been the engine of China’s economic development

• But it has nearly all taken place in the coastal port cities. These now have high labor costs, traffic congestion, poor air quality and other symptoms of too rapid growth

What is needed to address these negative growth impacts?

• Three approaches to finding out:• Central planning would create and implement a

Plan for new industries in the inland provinces. Tried in the 1950s and 1960s and failed

• Create mathematical development models to indicate what factors would lead to inland growth

• Ask the companies why they don’t move inland, and what changes might induce them

Nine Multinational Company Case Studies

• Agilent Technologies

• APL

• Tier One Auto Supplier

• Caterpillar Logistics Services, A-P, Inc.

• Coca-Cola (China) Beverages

• Intel

• Hewlett Packard

• Li & Fung (IDS Logistics)

• Cementhai Distribution Comp. (Siam Cement)

Agilent Technologies

• Manufacturer of test & measurement equipment

(1999 spin-off from Hewlett Packard Company)

• Net Revenue of U $7.2 billion in 2004

47% of all Business from Asia in 2003

• January, 2005 formed China Holding Co.

in Shanghai for investments

• Inland joint venture in Chengdu, Sichuan with

Qiangfeng Electronics Ltd., Corporation, Jan 2005

Agilent Technologies

• Obstacles to Inland Expansion:- Domestic Airlines Lack Supply Chain knowledge and technical competencies- Quarantine and Inspection bureau- Administration of Regulations

• Suggested Solutions:- Create logistics Industry Associations- Training in Supply Chain Management at all Levels- Guidance to provincial agencies for implementing national regulations

American President Lines (APL)

• APL and APL Logistics are now part of Neptune Orient Lines, Singapore

• Total Revenues of U$5.5 billion in 2003Employs 1,450 in China

• Pioneer of intermodal transport and doublestack trains (DSTs) for Inland Destinations

• Is now using an Intermodal DST model in China to engage China Ministries of Communications and Railways to promote DSTs in China

American President Lines (APL)

• Obstacles to Inland Expansion:-Infrastructure Development of Railways and Roads-Lack of Integrated Logistics (supply chain

management and intermodalism)-Administration of Customs

• Suggested Solutions:-Regular Consulting with Users-US West Coast Ports Training Sessions-China Ministries Meet with Ocean Liners and

World Customs Organization- facilitate DSTs in China, improve multimodal transport

Tier One Automotive Supplier

• Manufacturer of automotive components sold directly to automobile makers as original equipment

• Worldwide revenues of U$7.7 billion• Eight Facilities in China (Central and

Shanghai) --90% of sales are domestic• Plans to Invest U$10-20 million in China

over next 3-5 years

Tier One Automotive Supplier• Obstacles to Inland Expansion:

- High logistics costs- Inadequate infrastructure development- Lack of integrated logistics services- Lack of Standards for Logistics Providers

• Suggested Solutions:- Increase knowledge in China of rail services potential-Training of logistics providers-Central Registration/Certification of Logistics Providers

Caterpillar Logistics Services Asia Pacific

• Manufacturer of heavy equipment usedin highways, ports, energy projects and dams

• Worldwide Revenues of U$22.7b in 2003• Dealer network in China supported by

Caterpillar Logistics’ worldwide supplychain expertise

• It is developing a Parts Facility nearShanghai port for regional East Asia distribution and has acquired coastal equipment manufacturer

Caterpillar Logistics Services, Inc. Asia Pacific

• Obstacles to Inland Expansion:-Supplier and Service Providers-IWW Barge Companies Cartel?-Poor Rail/Roads for transport of raw materials

• Suggested Solutions:-All transport modes should consult with MNCs-High level Ministries training-Registration, Grading, Training of

Suppliers- create understanding of multi modal transport

Coca-Cola (China) Beverages

• Branded Sodas and Carbonated drinks manufacturing. Bottling franchise system in China

• Worldwide revenue of U$21b of whichAsia was 24% in 2003

• “Domestic Company” with model of one plant in each of 31 provinces. Since 1979, U$1.2 b invested ($10-30m/plant)

• Inland Strategies are long term based on consumer demand and income levels

Coca-Cola (China) Beverages

• Obstacles to Inland Expansion:

-Poor roads in Western region to serve local markets by trucks

-Uneven Pattern of Economic Development

• Suggested Solutions:

-Upgrading and better maintenance of roads in West to cover more rural territories

-Consult Leading Group for Western Region Development of the State Council to help stimulate demand through “Go West” policies

Intel

• Manufacturer of semiconductor productsused in computers, printers, cellular phones

• Total Revenues of U$30.b in 2003China was 12%, or U$3.7b

• Three Assembly&Test Facilities in China: • Shanghai • New A&T facility in Chengdu,• New facility in Sichuan

Phase One of possibly four more of U$200-300 mn on 400,000 sq ft for 1,500

Intel• Obstacles to Inland Expansion:

-Administrative-Transportation and Logistics Providers Operate

Nationwide-Barriers?- Too many problems in coastal locations to consider

inlandSuggested Solutions:

-Monthly meet with foreign exchange,Ministry of Information Industry,Customsand WTO officials

-Align Central and Provincial policiesfor smoother foreign and domestic services

across national frontiers under WTO rules.

Hewlett Packard

• Manufacturer of computers and printers, outsourced to Contract Manufacturers

• Total Revenues of U$73b in 2003

worldwide

• All HP notebook computers made in Shanghai need delivery in 5 days but best from inland is 10 days

Hewlett Packard

• Obstacles to Inland Expansion:-Lack of understanding of concepts:

Short Product Life Cycles and Just in TimeDelivery Required by MNCs for all shipments

-Slow Delivery to Seaports• Suggested Solutions:

-Tuition based Supply Chain ManagementTraining for Certification based on National Standards

-Development of inter-modal transport and technology

IDS Group

• Contract Manufacturing, Logistics and Marketing for retail customers (part of Li & Fung Group)

• Devises supply chain strategies from

materials to delivery based on client specifications• Worldwide supplier with 7,500 clients and CM

relationships to control information flows• Inland Hub Strategy to serve retail needs

IDS Group

• Obstacles to Inland Expansion:-Poor rail Infrastructure-Lack of intermodal transport-Lack of Track and Trace systems-High inter-provincial Truck Fees

• Suggested Solutions:-Improve inland rail networksIntroduce double stack trains-Introduce pilot tracking technologies for rail and truck-Ministry of Communications lead changein regulating inter-provincial truck fees

Cementhai Distribution Company

• Three activities: Trading and logistics,Sales and marketing, and seaport terminal operation

• All are managed and operational functions are outsourced locally (part of Siam Cement Group)

• Total Revenues of U$4 billion of whichCementhai Distribution is U$1b in 2003

• Inland strategy based on demand,competition, and ability to distribute using sea,rail and/or road) and level of taxation

Cementhai Distribution Company

• Obstacles to Inland Expansion:-Availability of Containers-Lack of Public-Private Cooperation in transport-International Trade Payments slow

• Suggested Solutions:-World Bank and Thailand

Ministries Meet to form Agreement-World Bank and National Logistics Council meet to

improve standards, facilitate better private-public cooperation-World Bank provide logistics quality standards and

measure performance against them

Summary of Obstacles and Proposed Solutions

Main obstacles to inland expansion• Poor infrastructure, particularly rail• Under developed multi-modal transport• Lack of understanding of what is feasibleProposed solutions• More investment in infrastructure, particular reference

to double stack trains• Institutional development of multi-modal transport• More training at all levels• Creation of Logistics Institute