This is the second in a series of articles on this topic, the first of which appears in Issue No. 19

We now look at the cost of land. Here we have contacted the most popular local development zone in each city and taken their quotes for renting commercial land for a factory. Obviously there will be some variation in this, and negotiations can affect quotes, but it does provide a reasonable initial comparison:

Current averaged rental cost of commercial (factory) land as a comparison (yuan per square meter per month):

Benchmarks

Beijing: 20

Shanghai: 18

Guangzhou: 17

First-tier city average: 18

Central China

Hefei: 10

Wuhan: 10

Taiyuan: 9

Changsha: 14

Zhengzhou: 11

Nanchang: 6

Central provincial capital average: 10

Average discount on land in central China over first-tier cities: 44 percent

Against this however we need to look at the logistics costs incurred by being inland and not in close proximity to a port for product export. We can compare the cost of getting a standard container from each of these six cities to the nearest and most commonly used coastal ports for exporting from the region, being in this case, Shanghai and Shenzhen. Central China has an extensive rail network and we have obtained quotes using rail for freighting goods:

Quoted cost of getting a container to Shanghai and Shenzhen via rail:

From To Shanghai To Shenzhen

Hefei: $488 $937

Wuhan: $625 $812

Taiyuan: $875 $875

Changsha: $875 $875

Zhengzhou: $687 $937

Nanchang: $575 $687

Average cost of container transportation from central China to coastal port: $770

(Costs of six cities to both destinations added up and divided by 12)

How does this impact operational costs for an average small foreign investor?

Let’s add these up and try to get some sense and meaning into the figures. We have taken some reasonable basic averages of costing, between the main first-tier manufacturing hubs of Beijing, Shanghai and Guangzhou, being land and salary. These are typically the two largest portions of a manufacturing enterprises expense, usually eating up about 70 percent of all operating costs, although of course this can and does vary. The remaining 30 percent is often somewhat industry-specific and we leave this portion open for your specific analysis. Operational overhead such as utilities also vary, however not to a huge extent between first- and second-tier cities, so accordingly we have disregarded them from this survey. However, concentrating on the two most significant manufacturing overheads-albeit as a mean average, does allow us to fix at least a line in the sand to try and weigh up the pros and cons of investing in central China. Averages are just that-and it must be pointed out that in reality you can expect about a 30-percent swing in costs either way depending upon location, specific investment circumstances and the power of negotiation.

To get at what this could mean for an investor, we’ve assumed an average small-scale foreign-invested enterprise as an example, and for the sake of calculating a reasonable export amount, suggested an auto component manufacturer as this industry is relatively commonplace and is nationwide in China. We have assumed a factory unit size of 2,500 square meters and 100 staff to base our cost analysis on. A factory like that with such a product could typically export about 10 containers a week. Taking the figures we have thus far, and converting them to dollars for ease ($1=8 yuan), we can reach the following assumptions:

Land/salary overheads per annum as operational expense:

Benchmarks

Beijing: $75,000+$180,000=$255,000

Shanghai: $67,500+$210,900=$278,400

Guangzhou: $63,750+$219,300=$283,050

First-tier city annual average operating expenses (salary+land): $272,150

Central China

Hefei: $37,500+$115,200=$152,700

Wuhan: $37,500+$129,300=$166,800

Taiyuan: $33,750+$154,650=$188,400

Changsha: $52,500+$168,750=$221,250

Zhengzhou: $41,250+$135,000=$176,250

Nanchang: $22,500+$101,250=$123,750

Central provincial capital annual average operating expenses (salary+land): $171,525

Average annual land/salary discount in central China over first-tier cities: 37 percent

However, to be deducted from this is the additional transportation cost of being in central China and away from nearby port facilities. We’ve already identified the average costs of getting a container from a central China city and to either Shanghai or Guangzhou for subsequent export.

Back then to our average small foreign investor and his factory. If we assume our average factory is exporting 520 containers a year, then this is going to add an expense of $400, 000 to the transportation bill. This amount can be directly offset against the discount on having a factory in central China.