The new frontier

In the shadow of Shanghai, the city of Suzhou is emerging as China's hottest manufacturing centre. Its boom with a flood of foreign investment has even brought a troubled industrial park that the city took over from Singapore to profitability--under new local management
  Far Eastern Economic Revoew
December 6, 2001
BY Ben Dolven/SUZHOU

PHILIP CHEN'S FACTORY in Suzhou is so new that the bright blue floors shine and potted plants sit in a corner waiting for someone to arrange them. With sounds of staff setting up for an opening ceremony wafting through the hall, the chairman of Taiwanese electronics-maker Avision talks about building the plant in this bustling city an hour's drive west of Shanghai.

His firm, which makes scanners and optical equipment for top companies like Canon, Hewlett-Packard and Brother, squeezes cost savings of 8 percent -10 percent for its higher-end products by building them here, rather than in Taiwan. Persuading customers that Chinese-made products are as good as those from home is no problem. "There's no need to convince them," he says. "They can't tell the difference." Transport? Chen laughs--the traffic and logistical snarl at home in Hsinchu near Taipei is worse.

Cranking up its new production lines in November, Avision joined an enormous boom in Suzhou, a broad swath of land on the plains west of Shanghai. In the past two years, overseas investors, including tens of thousands of Taiwanese firms making everything from paper flowers to personal computers, have flooded what was long a silk-making centre.

It's a key step in the maturation of greater Shanghai just as China enters the World Trade Organization. With the big city pouring its resources into high-end manufacturing, finance and other services, its labour and land costs are rising. This prompts more and more manufacturers to set up in its less-costly hinterland. It's the same cycle of business development that led to enormous manufacturing bases in Guangdong province around Hong Kong, and in the gigantic industrial parks of Taiwan's Hsinchu, not far from Taipei. Now it's Suzhou's turn for a place in the sun.

"We always have manufacturing bases surrounding the financial centres in the world," says Chen Deming, a former Suzhou mayor who is the local Communist Party secretary. "Suzhou has become one of the manufacturing bases in China."

In the first 10 months of this year, foreign investors signed contracts worth US$6.6 billion in the Suzhou municipality. That level of contracted foreign investment is more than for any other Chinese municipality and is the first time in a decade that the leader wasn't Shanghai. Suzhou municipality groups the city with several satellites, including Kunshan, a small city known as "Little Taiwan." While the money actually invested here still lags behind Shanghai and Guangzhou, the contracts are a sign that the burgeoning investment pipeline may shoot Suzhou to the top. Clearly, the global downturn poses risks, but for the moment Suzhou is one of the hottest manufacturing spots on the planet.

To gauge the climate, listen to Alan Lee, general manager of Taiwanese resistor-maker Yageo. Lee moved here in October to run the company's plant making resistors and capacitors for 20 percent -25 percent less than at home in Taiwan. "When the company assigned me to go to Suzhou, in Taiwan a lot of employees raised their hands and said, 'Alan, is there some opportunity there?'" There certainly is. Yageo now has 20 Taiwanese and 700 Chinese employees in Suzhou, and plans to double its production capacity in the next year with a new factory.

Land in Suzhou is cheaper than in Shanghai, but the city is still close enough for exporters to get their goods aboard ships or aircraft easily. Suzhou boasts labour costs 20 percent -40 percent lower than the big city. Transport links are simple--one of Shanghai's international airports is around 50 minutes away. And the two industrial parks flanking the centre of the canal-laced old city both have export-processing centres that allow companies to clear customs while the goods are still in Suzhou. Thus, exports can be out of the factory and in the air within two days.

Another of Suzhou's draws is the city's aggressiveness in establishing industrial parks and offering tax incentives for investors. One of the most difficult ventures was a joint project originally led by the Singapore government. Until recently it had brought as much acrimony as it did investment. But in the past year the Suzhou Industrial Park has managed fully to join in the region's prosperity. The SIP saw contracted investment jump by 150 percent to $2.45 billion in the first 10 months of this year compared with all of 2000. And the company managing the facility has turned its first net profit of $3.8 million in the same period.

Set up in 1994, the SIP was billed as a way for Singapore's industrial planners to show the Chinese how to run an industrial park. A brainchild of Singapore Senior Minister Lee Kuan Yew, the park features landscaped, tree-lined boulevards and a strict plan for balancing industrial and residential areas. But for years, the five-star rents it charged to pay for its five-star infrastructure--huge land reclamation, fail-safe electrical supply, a water treatment plant--made it hard to compete with the bevy of other industrial parks sprouting nearby. In a sense, Singapore's planners were swimming against the tide because investors were looking to Suzhou for costs lower than Shanghai's, and the SIP was charging Shanghai-style prices.

Facing tougher competition than expected and with municipal authorities promoting other parks, Singaporean leaders complained publicly about their partners, even lamenting that another industrial zone across town known as the New District was featured on more billboards than the SIP. Losses piled up. In 1997, Lee said the Singapore project might "bow out" if the city didn't give it priority.

All this culminated in 1999 with the transfer of majority ownership from the Singapore side to Suzhou. The Singapore consortium--government bodies and government-linked firms--cut its stake from 65 percent to 35 percent. Singaporean board participation shrank. All but three of the civil servants managing the park went home. The park's new chief executive is Wang Jinhua, the former manager of the New District, the SIP's rival, and a vice-mayor of Suzhou. "To manage an industrial park, we need some authority," says party secretary Chen.

Under the new management, the park is for the first time truly competing with the other industrial zones around this part of eastern China. The biggest single change: lowering industrial rents, which helped bring in more investors.

The friction that had dogged the project is now gone--at least publicly. Goh Toh Sim, the top-ranking Singaporean left in Suzhou, calls the public spats of the past "water under the bridge." He figures that the developer will end the year with a $7.5-million net profit, and says a plan to list the operation on a local stockmarket by 2004 is "very much in the pipeline." Helping out is the fact that since it took a majority stake, the city has begun subsidizing the joint-venture development company for shortfalls it suffers if land does not sell, and is offering other financial support. In a new $80-million science centre full of software companies and other start-ups, the city pays the rents for up to three years.

In many ways, the park benefits indirectly from the whole area's boom. For one thing, it's becoming a residential outpost for people working elsewhere. Goh admits that the organizers' profit this year will come from selling residential land, not from the original plan of selling and renting to industrial giants. Make no mistake, the park has plenty of residential bells and whistles: an international school, a park along the gigantic East Lake where newlyweds pose for pictures and music pipes from speakers lining the pathways. Companies say one of their biggest ways to attract employees is their participation in a pension scheme that supports apartment purchases. Flat prices have risen by more than 50 percent in the past three years.

Though the industrial side still lags in profits, the Taiwanese boom in surrounding areas makes life easier for the big companies doing business in the clean, green (and still a bit more expensive) SIP. "We are attracting each other," says Stephane Klajzyngier, director of the mobile phones division at France's Alcatel, which has an $80 million factory in the park. "By having Nokia, Alcatel and Philips all in Suzhou, there are a lot of suppliers who are coming here." Moreover, Klajzyngier says Alcatel has had little problem finding employees skilled in everything from engineering to supply-chain management. Many have already worked for other electronics-industry players in the area.

The new target for Suzhou is chipmakers. Samsung and Hitachi make chips in the SIP, and Philips Semiconductors has started building a $1 billion wafer fab in its far reaches. Fairchild Semiconductor is planning another. This takes aim at Shanghai's plans to build a chipmaking hub, but it's also hugely risky. Given the sharp downturn in the global chip market, Philips has temporarily halted construction of its plant in the SIP.

Many tenants say Chinese management is as good as Singaporean. Eddie Turrentine, an Alabama native who heads Emerson's operations making compressors and motors, admits that "there was a bit of nervousness at headquarters" when the local partners took the majority in the park. But two years on, he says: "The Chinese have done a great job learning and developing and actually improving some things." For one, municipal authorities accompanied Emerson to Beijing to negotiate the import of Japanese steel that Emerson's suppliers could use.

Still, the park feels like an island of calm surrounded by bustle and vibrancy. There's still an empty area of grassy fields at least a kilometre long in its centre. By contrast, in downtown Suzhou and other satellite towns like Kunshan, there are lively streets and a profusion of Taiwanese businesses. K.G. Ching, general manager of Philips Enabling Technologies, a firm providing machinery and plastics to Philips group companies, was transferred from Suzhou to Singapore in early 2000. When he returned to his new job a year later, dozens of new Taiwanese restaurants and coffee shops had sprung up. "They move very fast," he says.

The SIP, residents say, is different. Despite 25,000 people living there, it's sleepy in the evening. Residents choose between two Kentucky Fried Chicken outlets, some small food courts, a few small restaurants or a trip into the centre of town, 15 minutes drive away. Party secretary Chen notes that Europeans, Americans, Japanese and Korean investors still account for the bulk of investments in the SIP. "There aren't many Taiwan investors," he says. But some big ones are on their way. The Acer group already has five mobile-phone factories in the New District and a big personal-computer factory in Kunshan. Now its subsidiary, AU Optical, is building a big plant in the SIP to make liquid-crystal displays.

So despite the global downturn, investors from Alcatel to Acer to Avision are piling into Suzhou rather than out. And they welcome any rivalry between the SIP, the New District , and anywhere else. "The biggest problem for Suzhou is not that the two industrial parks are competing. Competition is always good," says Adrian Chang, deputy managing director of Acer Communications & Multimedia.

The problem for Suzhou comes from the very roots of its own success. In the same way it attracted business away from Shanghai's more expensive Pudong manufacturing areas, lower-cost locations are starting to nip at its heels. Alcatel recently saw two suppliers set up in cities a bit further inland at Wuxi and Nanjing. Says Alcatel's Klajzyngier: "The risk is that as soon as they [park developers] see the investment, they will push the prices higher, and kill the golden goose."