Foreign investors need to be keeping an eye on developments in west China and the recently launched Investor Going West Campaign. As the coastal regions get more expensive, pure economics encourages savvy international investors to look inland in order to both reduce costs and develop new domestic markets. Many are already there-and prospering. But what are the demographics of central China? Where are the places to look out for? What risks are there? And what incentives exist?

The Investor Going West Campaign

As an official initiative, for central China, this project includes the six provinces of Anhui, Henan, Hubei, Hunan, Jiangxi and Shanxi. This area comprises a population of some 361 million people over an area of 1.028 million square km. If it were a country in its own right, it would be the third largest in the world after China and India, while the population is the same as Indonesia and Japan combined. It includes 30 airports, 12 inland ports capable of handling up to 10,000 tonnage berths, 460,000 km of highway (about double that of Germany), and approximately 15,000 km of railway (about the same as the UK). Collectively, the region imported some $21.6 billion worth of goods in 2005, and exported some $27.8 billion worth of products.

Why go inland?

There are two essential drivers: economics and opportunity. Let’s look at these separately and consider the balancing factors.

Economics--lower operational costs inland?

The argument, simply put, goes that China’s main commercial centers on the coast, such as Beijing-Tianjin, Shanghai and the Yangtze River Delta and to a smaller extent the Dalian-Qingdao corridor, are getting more expensive. The cost of land and labor is increasing, and this trend shows no sign of changing. However, it is also true that for export-biased businesses, proximity to a port is a major advantage that going inland is going to start to eat into in terms of increased transportation costs. The main debate here then is a pure trade-off between the costs of land and labor, the predicted trend for these, and the comparisons between China’s coastal cities and those further inland. Balanced against this must be the additional logistics cost of getting products out of central China and to a port.

Taking the first-tier cities of Beijing, Shanghai and Guangzhou as benchmarks, we can compare the current legally permissible minimum salaries payable in these cities, and the capital cities of the six inland provinces and start to draw some conclusions. These statistics are courtesy of Dezan Shira & Associates National Investment Intelligence Unit.

- Current legal minimum salary levels as a comparison (yuan per month):

Benchmarks

Beijing: 640

Shanghai: 750

Guangzhou: 780

First-tier city average: 723

Central China

Hefei: 410

Wuhan: 460

Taiyuan: 550

Changsha: 600

Zhengzhou: 480

Nanchang: 360

Central provincial capital average: 476

Average discount on labor in central China over first-tier cities: 34 percent

Please bear in mind that we have taken the legal minimum as a guideline only-we know full well that many international investors pay far more than this, and that the legal minimum cannot cater for managers and more senior personnel. However it does provide a definition of the general discounted factor when hiring staff in inland areas as opposed to the first-tier cities. And 34 percent is a significant amount well worth considering.

- Factoring in mandatory welfare

It is also important to note that as a general rule of thumb, mandatory welfare payments to Chinese employees (pension, unemployment, medical insurance and housing) will typically be about 50 percent on top of the salary bill (there are regional variations on this percentage). This starts to make the additional cost gap between the benchmark cities and those of central China even greater. Mandatory welfare however does not apply to the additional salaried element of overtime pay.

Salaries after factoring in average mandatory welfare obligations (yuan per month):

First-tier city average: 1,084

Central provincial capital average: 714

(The average discount only changes by a fraction)

- Factoring in overtime

There is also the issue of overtime payment, especially pertinent for shift workers. Most factories will employ staff on an overtime basis in shifts, as it is economically more sensible to do so. China’s labor laws indicate a premium of 150 percent for normal overtime. As we build this case we will assume double shifts take place and estimate workers salaries then at an average of 125 percent of the legally minimum salaries above. This adjustment alters the employers cost further.

Salaries after additionally factoring in overtime for shift work (yuan per month):

First-tier city average: 1,355

Central provincial capital average: 892

(The average discount only changes by a fraction)

We will return to these figures later when we examine the costs of operating a factory in a first-tier city as against a central China location.

Chris Devonshire-Ellis is the Senior Partner of Dezan Shira & Associates-    www.dezshira.com