German companies face relocation challenge

Although the Chinese government's official Go West campaign is designed to lure manufacturers deep into the interior, German manufacturers seem to be more comfortable relocating from coastal areas to their neighbouring inland areas. For example, moving from Shanghai to Anhui or Jiangxi, said Christoph Hezel, a partner of Taylor Wessing's Beijing Office.

“Interior cities that are closest to the coast often offer better infrastructure, industrial chain support, government support (including local investment incentives) and are closer to the market,” said Hezel. He added that land and labour cost are not the only priorities when choosing a China location.

The relocation challenge

Air pollution, which is a serious problem in northern China's big cities, is also a factor for German managers who have been seconded from their company's headquarters. “You always have to relocate your people from headquarters to supervise local branches, but what if they don't come?” said Matthias Muller, partner of Beiten Burkhardt's Shanghai office.

Muller also highlighted the problem of finding the right workforce inland. “You have to relocate manager-level people from the first tier cities. It is this crew that can really run your business. But these people are mostly educated or have their families in tier one cities like Shanghai and Beijing. They are likely not moving from there.” he added.

Other expected problems when relocating include a lower working efficiency in second tier cities, as well as the local governments that can be more difficult to work with.

Volkswagen leads the way

Despite their misgivings, gaining central government's support sometimes is strategically important for German investors who want to open a new factory in China, and that may involve moving a further west than they want to.

During Premier Wen Jiaobao's visit to Germany last year, Volkswagen signed an agreement with its China joint venture partner SAIC on April 23 to open a new arm in Urumqi, capital of Xinjiang Uygur autonomous region. The factory has a target annual output of 50,000 vehicles when it becomes operational at the end of 2014.

The deal was signed after Zhang Chunxian, Communist Party Secretary for Xinjiang, met Martin Winterkorn, chairman of the management board of Volkswagen on April 11, about two weeks ahead of Wen's German visit. Winterkorn was very happy about the investment incentives the Xinjiang government offered, according to media reports.

Compared with Volkswagen's other facilities in China, like the Changsha branch, which is targeting 300,000 units year, the Xinjiang branch is small.

“The place is a desert for automobiles, but there is potential demand for people to travel around. Plus, it is a hub connected to central Asia, making it possible to start an export base. And most of all, German veteran Volkswagen knows how best to cooperate with the Chinese government's desires,” said Tan.

By Eve Yao

Further reading:

China question: Where to invest?

Government boosts regional investment

How Chengdu is using IP to attract foreign investment