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Podcast Transcript: Why Chengdu matters for China-bound firms

Canada has just doubled its commercial footprint in China.

The Canadian Trade Commissioner Service has opened six new offices in China. Starting now, Canadian companies can benefit from expanded trade, investment and innovation partnerships with in-market and local expertise.

The offices are staffed with business development experts with strong connections within each of the new cities, so Canadian companies might want to put their China strategy on the front burner if it isn’t already.

I’m Michael Mancini, Editor-in-Chief of CanadExport, the official e-magazine of the Canadian Trade Commissioner Service.

Today we’re looking at Chengdu – often cited as one of the top ten cities in China in which to invest. Let’s find out what makes this Western China so special and why the Trade Commissioner Service opened an office there.

I’m speaking with Ryan Baerg, Consul and Senior Trade Commissioner at the Canadian Consulate in Chongqing. Thanks for speaking with me today, Ryan.

Ryan Baerg: Thanks. Great to talk to you, Michael.

Michael Mancini: So what would you say are the top three reasons Canadian companies should do business in Chengdu?

Ryan Baerg: Oh, well, Michael, there’s a lot of reasons. I guess, you know, the first thing I’d mention is what experts often refer to as the Chinese economic miracle. So what I like to say to companies that come to this area is really Chengdu and this region in western China is sort of the next economic miracle of China. With the reform and open door policies that were enacted about 30 years ago, we saw a lot of prosperity that was developed on the eastern and southern coasts of China but, unfortunately, a lot of that prosperity never made it into the inland regions, or in particular western China.

But really what we’ve seen is 10 years ago an emphasis by the central government to support the development of these poorer regions. They were really backing infrastructure in large part to access foreign markets and this is an area that has been getting investment over the past 10 years to really drive the growth of this region. So what we’re seeing now, you know, a lot of people are saying is really the next Chinese economic miracle. Again, areas like Sichuan and Chengdu in particular following the path of the more prosperous coastal cities that really benefited the most from the economic development – development in China over the past 30 years.

So right now it’s a good time to get into the market, you know. There’s still an early mover advantage and some relatively low (inaudible) for Canadian companies that want to come to this area.

Michael Mancini: Okay. So basically the wave that hit the southern and eastern part of China is now hitting western China where Chengdu is.

Ryan Baerg: Yeah, exactly. You know in the past the development it was all from basically foreign companies investing in China and manufacturing products solely for export markets for the western markets and right now over the past 30 years I should say the biggest hindrance to this in the western region was the lack of really, you know, good infrastructure to move products from this area. It didn’t make sense to manufacture in this area for foreign markets when it was much cheaper to do it on the coast and put it on the ship directly.

And, you know, that really leads into I guess the second point that I would mention about one of the advantages of investing or doing business in Chengdu right now, you know, and that would be a domestic market focus. Again, another thing we hear from, you know, so-called experts is that China is looking for a new growth model. In the past, as I’ve already mentioned, a lot of the growth has just been purely from export markets. One investment here that was destined solely for manufacturing products for Europe or for North America. But we’ve come to a point where, you know, a lot of people want to know how many more Chinese products we can have on our shelves in western markets and, you know, when we see the economic downturn over the past year, we realize or the Chinese government has realized that they maybe need to look to a new model of development. When they have, you know, so many people in China that need to really benefit from economic development, it’s going to take more than just export markets.

They need to move to a pattern of domestic growth and domestic consumption in order to fuel sort of the next generation of growth.

So, you know, really we’ve seen 14 percent growth year over year in Chengdu and in Sichuan over the past couple of years and, you know, there have been a few reasons. One, people will say that it was, you know, reconstruction spending following the earthquake of 2008. There’s also a lot of stimulus money in 2009 that was directed primarily to western regions or maybe not primarily but disproportionately to western regions and, you know, but I would argue that much of it is also this focus on domestic consumption, the domestic demand and not being so reliant on foreign markets.

Now in Chengdu, this is already the third largest automobile market in China. A lot of people don’t know that. And Chengdu really is or has the highest per capita income in the western region. So it’s an area that has been already benefiting from, you know, natural domestic growth and they’re really positioned to take advantage of this new model in the years ahead.

Michael Mancini: Now it’s interesting that you say that there’s a domestic market focus. I’m trying to understand how that exactly will impact, you know, a Canadian company that would be looking to China. What kind of impact will this domestic demand have on foreign companies looking to the region? And how is that a benefit to them that there is an increased domestic market focus?

Ryan Baerg: Well, increasingly, you know, companies are looking to set up in China to take advantage of this domestic demand and so, you know, over the past, you know, 10, 20 years and 30 years – excuse me. Sorry. Maybe I’ll start that again. I have a little bit of a cold here.

Michael Mancini: No worries.

Ryan Baerg: Okay. So, sorry, should I just start again just start before my answer or do you want to introduce it again or?

Michael Mancini: No, no, because the first part of your answer was perfect. I guess what I’m wondering is I’m trying to connect how the – I’m trying to connect more how the domestic demand – domestic focus that there is now in Chengdu, how that fact makes it more attractive for Canadian companies.

Ryan Baerg: Michael, I think that the key is a lot of the original investment that came to China, you know, as I mentioned, was just for the export to foreign markets and a lot of the Canadian companies, you know, are not the large manufacturers, you know, with the exception of a few (inaudible) ones. So, you know, Canadian companies tend to be, you know, SMEs with a very distinct technology or products and I think that right now these are the type of companies that see the greatest or have the greatest potential in China. You know the – most investment that’s coming here is to take advantage of really this domestic market so a company can come here with an interesting technology or a really good product and find an interesting local market to sell it on. So a Canadian companies that had, you know, interesting or advanced technologies in the past were not – were not the ones that were coming to China in the early days. The ones that were coming in the early days were, you know, again, companies that were producing products on a massive scale simply because of the low cost of the labour and exporting 100 percent of these products back to Canada. So more and more, you know, the SMEs are beginning to find opportunities here and I would argue that they’re the ones that are set to benefit the most from this new trend in economic development in China.

Michael Mancini: Okay, so if I understand what it is, is that, you know, the Chengdu region is like many other regions in China are no longer sort of a one-trick manufacturing pony as it were. These are now sort of complex markets that many companies can take advantage of in many sectors, not simply manufacturing.

Ryan Baerg: Yeah, exactly. And to top it off, you know, what I’d say about Chengdu is that since it is so relatively early days it’s following a lot of the trend that we see across China but maybe not – without as much competition as some of the other centres. Going to Beijing and Shanghai and Guangdong might be quite fierce these days but in this region it’s still relatively open and maybe not quite the competition that you’d see in these other cities.

Michael Mancini: Okay. So what’s your third point?

Ryan Baerg: Well, the third point that I would make is just the general investment climate. You know there’s a recent American Chamber of Commerce study that was filed (ph) with Shanghai and U.S. firms have been – have chosen Chengdu (inaudible) as their top choice for investment in China in the coming year, in China’s, you know, second and third tier cities. So we’re seeing increasing investment in this region. You know it’s investment that’s brand new to China but as in this case or this survey as it points out investments that are moving from other regions of China so investments that originally came to Shanghai, to Beijing and are now finding that, you know, the advantages that they had in that area are maybe not as large as they used to be or, again, there’s larger advantages of coming to this area. They’ve solved a lot of the infrastructure issue in the region and now it’s possible to get the products out if you need to and so more and more of this investment is coming to this area. Again, there’s some similar drivers to the original investment on the coastal areas like low cost, labour is much cheaper here than in the more developed coastal regions. Land is much, much cheaper than you’d see in the big centres. And, again, in Chengdu in particular there’s a real, you know, solid base of skilled labour, you know, more so than you’d see, you know, further out west where the cost might be a bit cheaper but you really wouldn’t be able to find that skilled labour. So there’s a mix of a few things there that’s really driving more investment to this area.

You know on top of that I’d mention that preferential tax policy. There’s the Western Development Strategy which I talked about at the beginning which was basically enacted about 10 years ago and focussed a lot on infrastructure developments but it also provides incentives for investment in the region, so favourable tax policies. Local authorities are also, you know, jumping on the bandwagon and subsidizing – subsidizing investments through, you know, their own policies. Again, I mean tax rates or cheap office space and I’ve heard a lot of companies benefiting from training incentives so, you know, if you agree to train workers, there are incentives from the local government to do just that. So there’s a lot of reasons why companies would look to invest in this area and can really benefit from this trend.

Last year I believe I heard about four billion U.S. dollars in foreign direct investment and that’s about a 25 percent or 26 percent growth over the previous years. The stats that local officials like to quote the most is the number of Fortune 500 companies already established. They like to tell you that there’s over 150. So, you know, the companies are starting to come here definitely but, you know, it’s still a good time to get a foothold in the market.

Michael Mancini: Okay. So now why was it important for the Trade Commissioner’s Service to open an office in Chengdu as opposed to servicing the city out of our office in Chongqing?

Ryan Baerg: Well, there’s a couple of interesting reasons. I mean the first (inaudible) is that, you know, in China relationships still really matter, you know, and our western business culture is that they do as well but the bottom line really rules. In this area though, you know, these relationships are absolutely vital. And for the consulate in Chongqing it used to take about four to five hours’ train ride, similar by bus to get there so it’s just – it’s far enough that it can’t really service it properly. And now there’s a new high speed train link in the area which is a two-hour trip so I’m travelling to Chengdu myself almost every week but I find it’s still not enough. You know Chongqing used to actually be a part of the province of Sichuan where Chengdu is located and there’s a real intense rivalry between the two regions.

So I think from here we’ll still always be seen as somewhat of an outsider in the area. And the establishment of our office there will really help us develop our relationships and our networks in that area. The local authorities have warmly welcomed and long encouraged the establishment of an office there so this is really going to help us develop these closer contacts with local authorities and also perhaps identify opportunities early for Canadian companies.

Michael Mancini: Okay. Now I really want to get a sense for what it’s like for a typical company to do business in Chengdu. What would you say is a big challenge Canadian companies should be prepared for when it comes to doing business in Chengdu?

Ryan Baerg: Well, off the top I’d say, you know, government, government in business. You know I think it’s a challenge. I’ve been talking a lot about the opportunities here and reasons to do business here but it’s not easy, there’s no doubt about it. You know there’s great opportunity but there’s also some bigger risks and one of the things that companies often have to deal with is government involvement in business. You know I also spoke a little bit about investment and maybe I’ll continue on that thread. You know right now we – it’s generally accepted that Canadian direct investment abroad leads to increased trade in the long run.

You know companies that are able to thrive in an increasingly connective and, you know, extremely global – competitive global marketplace are often the ones that can invest to take advantage of regional cost advantages. So, you know, investing in new emerging markets like Chengdu is still intimidating. It’s frustrating, it’s time-consuming. You know language is an issue. Who should I deal with is often the Michael Mancini that we get there, you know, in Chengdu.

Companies ask me should I be talking to the Investment Bureau? Should I be talking to, you know, Association of Enterprises of Foreign Investment, the municipal government, the provincial government, special economic zones that have been set up directly? So I think it’s this type of maze of information and networks that we can help, you know, break apart out of it and help solve for Canadian companies if we tell them who the right people to talk to are and who really makes the decisions. And using a strong network to really get to the right people.

So this is something that we try to do on a daily basis and I know it’s something that we did very recently for a Canadian company that was looking to invest in Chengdu. We were able to steer them to the right people and they were able to negotiate really preferential terms and incentives for significant new Canadian investment in Chengdu.

So, you know, ultimately I think this will make the company stronger and more globally competitive. It’ll safe jobs back home.

But you know I’d also say that this is not only applicable to investment. It’s also just for Canadian companies looking for partners and looking for clients in the market. We can help, you know, steer them to good partners and the more we have a presence on the ground, the more we can identify these opportunities early and establish solid networks.

Michael Mancini: So, Ryan, if a Canadian company wants to learn more about Chengdu and how the Trade Commission Service can help, who should they contact?

Ryan Baerg: Well, the best person to contact now would be our new officer in the office in Chengdu directly. So his name is Frank Shi and you should be able to find the information on the Trade Commissioner website. That’s www.tradecommissioner.gc.ca Frank is – he’s actually already a well-known person in the area so we’re very lucky to have him and very thankful that we were able to convince him to come on into the office. He was actually a part of the CCBC, the Canada-China Business Council office when it was in Chengdu a few years back so he’s already been representing Canadian companies. He’s a known commodity to a lot of our companies and known in local circles in Chengdu so he’s really (inaudible) our work in Chengdu.

Michael Mancini: Well, I’m sure that’ll be – he’ll be a big help. Thank you very much, Ryan, for taking this time today.

Ryan Baerg: Thank you, Michael. Great talking to you.

Well, that’s all for this podcast edition of CanadExport.

Stay tuned for our next podcast which looks at another city in the expansion of the Canadian Trade Commissioner Service in China.

As Ryan said, don’t forget to contact Frank Shi at our office in Chengdu, to find out how he can help your company. Go to www.tradecommissioner.gc.ca/china to do that. Or you can get Frank’s contact information on the CanadExport website at www.canadexport.gc.ca.

While you’re there you can learn more about the other cities in the TCS expansion in China. You might also want to contact one of our 18 regional offices across Canada for help in assessing your export readiness. Again, just visit www.tradecommissioner.gc.ca/china to get that information.

I’m Michael Mancini, signing off for now.

To download our other episodes, just go to www.canadexport.gc.ca or go to iTunes and use the searchword “CanadExport.”

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