How to Choose the Location for Your Business in China?

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THE GLOBAL ENTREPRENEUR | BUSINESS

China is a large country. Foreign businesses who’ve just come to this country for the first time may have difficulty in choosing the right location for their business.”

Many businesses spent hundreds of thousands of dollars on strategy consultants to simply reach the final decision on where to set up their company. That alone is enough to tell how many companies are struggling in understanding how China works. Most US companies don’t have experience in doing business in China, so they tend to be hesitant and reluctant when it comes to choosing the perfect location. 

Many simply go for Shanghai – the first city that comes to mind. They think that Shanghai “has so many Americans there”. And, indeed, Shanghai is the most Westernized city in China. As a Western business, you will find that everything is so “familiar” to you, from the lifestyle to the availability of international brands.

Some others set up their business in whatever city their Chinese business partner lives in because they think they have “local understanding”. 

Some others set up their business in whatever Chinese city their competition goes to because they assume that their competition already “did the market research”. 

The result?

Sometimes they work. Sometimes they fail miserably.

When it comes to choosing a location for your business in China, you need to base your decision on the compatibility between your brand and the city, not your industry and the city. This mentality works for any other country, not just China, but in this guide, we will analyze China in-depth.

You should consider the following criteria when choosing the location for your business in China (not in any order of importance):

  • Modernization level
  • Human Resources (Labor Cost, Labor Law, Labor Quality, Expectation of Benefits)
  • Tax Benefits
  • Cost of Real Estate
  • Physical Infrastructure
  • Financial Infrastructure
  • Availability of Suppliers
  • Cost of Living
  • Availability of Competitors
  • Crime Rate
  • Utility Cost
  • Connection with other Regions
  • Political Stability
  • Friendliness to Foreigners
  • Availability of Demand
  • Fluency in English
  • Legal Environment

1. Modernization Level

Western companies tend to prefer cities with a high modernization level and fast growth, especially high-tech companies. There are so many reasons for them to choose this approach:

  1.  Cities with a high level of modernization tend to attract higher quality labors
  2. These cities have better infrastructure 
  3. These cities are strategically placed
  4. There are large communities of expats, creating a sense of “familiarity” for both businesses and customers
  5. Lower crime rate
  6. Higher quality of life, which is ideal for companies offering high-end products and services
  7. Better facilities

However, manufacturers and companies that rely largely on manual labor tend to move away from these large cities. The higher the level of modernization, the higher the cost of living, and of course, the cost of operations. Manufacturers set up their plants in the less developed regions with cheaper labor of China to maximize production and minimize cost.

how to choose the location for your business in China

The top 4 modern cities in China are Beijing, Shanghai, Guangzhou, and Shenzhen. These cities are located in the Pearl River Delta Economic Zone, and are the most affluent parts of China and Asia.

Shanghai has a unique culture. Being the most Westernized city, it is ideal for Western companies to establish their presence there. Basically Shanghai is a Chinese city with a foreign flavor. There is a reason that it is called the Paris of the East, or the NYC of China. It is luxurious, always filled with life, full of energy, and is the definition of a cosmopolitan city.

There are also a lot of English signs for foreigners and tourists, so it is quite easy to navigate around. The economic activities are always busy and robust, and foreign businesses can easily find local talents to help them build their brand and market their products/services to Chinese customers. Shanghai is also more central, and there is a huge drive for innovation. 

how to do business in China

Beijing is the capital city of China. It is more of a cultural hub, with many historical sites with cultural significance such as the Great Wall, the Forbidden City, as well as many major universities, the most prestigious being the Tsinghua University. If you run a business in Beijing, make sure to learn the Chinese culture and apply it to your daily business activities. It is also a region that uses both Traditional and Simplified Chinese, so you might need to learn the difference between the two.

how to choose the location for your business in China Beijing

Guangzhou is the most modern city. If you have a business with high-end and high-tech products, you can establish your brand there. In a way, Guangzhou is like Japan. It has an automated system for a lot of mundane things in life. Life there is infused with technology, so much that even foreign brands are surprised at their level of advancement.

However, there is not much Chinese culture retained in Guangzhou. You can do business in Guangzhou in pretty much the same way you do business in Western countries. There is little cultural consideration needed, unlike Beijing, where you have to take a lot of cultural nuances into consideration when building your brand.

In addition to all of those, the people in Guangzhou speak Cantonese, a unique dialect that you might need a while to get familiar with.

how to choose a location for your Chinese business

Shenzhen is fairly modernized. The level of modernization in Shenzhen is not as high as in Guangzhou because there are still some cultural values retained in daily life. Shenzhen is quite similar to Hong Kong.

2. Labor Cost

The next factor that many businesses look at when choosing a location for their business in China is the labor cost.

Many cities in China have recently increased their minimum wage standards 

In Beijing, the monthly minimum wage is currently RMB 2320 (approx. $360). Beijing also has the highest minimum hourly wage (RMB 25.3/US$3.9).

Many other major cities in China also raised their minimum wage above the RMB 2000 level (US $308). 

At the lower end, we have the city of Hunan (RMB 1,130/US$174 per month) and Anhui (RMB 1,150/US$177 per month). Liaoning has the lowest minimum wage (RMB 1,120/US$172 per month).

The minimum wage is a good parameter to gauge the level of development and estimate the average labor cost of the locations you want to bring your business to

Although it is a good estimate, the minimum wage doesn’t fully reflect the labor cost in China. 

According to a recent research on Statista, manufacturing labor cost per hour in China is $6.5 per hour, compared to $4.82 per hour in Mexico and $2.99 per hour in Vietnam. 

Workers in Shanghai make an average of RMB 9,580 ($1,475) per month. Employees of high-tech, foreign, international enterprises tend to earn much higher than that average. Workers in coastal provinces with high foreign investment and technological development also receive similar levels of income.

And the labor cost in China is rising.

If you are planning to enter China in the next few years, get ready to see a steady increase in labor costs. Considering the levels of productivity, infrastructure, and access to a massive domestic market, the rising labor cost is still acceptable for many foreign businesses. Keep in mind that there are a lot more factors to consider when choosing a location for your business in China than just the labor cost.

Once you have an idea of a good city to enter, you can start going deeper by identifying industry-specific wage levels, availability of talent, and access to regional incentives. These factors will offer a more nuanced view of ultimate labor costs within a given region.

3. Other Costs - Calculate costs of doing business in China based on the Tier system

There will be a lot of other types of costs that businesses need to factor in when choosing a location for their business in China.

The rule of Supply and Demand applies to China. In cities like Shanghai or Guangzhou, the cost of living, land cost, utility cost, logistics cost, and various other costs are significantly higher than other, lower-tier cities.

The Tier system is a fairly good reference point for foreign businesses wanting to evaluate the cost of doing business in each region and city. The higher the tier, the higher the cost, but also the bigger the opportunity.

The Tier System

  • Tier 1 cities: Beijing, Shanghai, Guangzhou, Shenzhen
  • New Tier 1 cities: Chengdu, Chongqing, Hangzhou, Wuhan, Nanjing, Tianjin, Suzhou, Xi’an, Changsha, Shenyang, Qingdao, Zhengzhou, Dalian, Dongguan, Ningbo
  • Tier 2 cities: Xiamen, Fuzhou, Wuxi, Hefei, Kunming, Harbin, Jinan, Foshan, Changchun, Wenzhou, Shijiazhuang, Nanning, Changzhou, Quanzhou, Nanchang, Guiyang, Taiyuan, Yantai, Jiaxing, Nantong, Jinhua, Zhuhai, Huizhou, Xuzhou, Haikou, Ürümqi, Shaoxing, Zhongshan, Taizhou, Lanzhou
  • Tier 3 cities: Weifang, Baoding, Zhenjiang, Yangzhou, Guilin, Tangshan, Sanya, Huzhou, Hohhot, Langfang, Luoyang, Weihai, Yancheng, Linyi, Jiangmen, Shantou, Taizhou, Quzhou, Handan, Jining, Wuhu, Zibo, Yinchuan, Liuzhou, Mianyang, Zhanjiang, Anshan, Quzhou, Daqing, Yichang, Baotou, Xianyang, Qinhuangdao, Zhuzhou, Putian, Jilin, Huai’an, Zhaoqing, Ningde, Hengyang, Nanping, Lianyungang, Dandong, Lijiang, Jieyang, Yanbian Korean Autonomous Prefecture, Zhoushan, Jiujiang, Longyan, Luzhou, Fushun, Xiangyang, Shangrao, Yingkou, Sanming, Lishui, Yueyang, Qingyuan, Jingzhou, Tai’an, Panjin, Dongying, Nanyang, Ma’anshan, Nanchong, Xining, Xiaogan, Qiqihar

Tier 1 cities and New Tier 1 cities, as we all know, are highly developed cities with a GDP of over US$300 billion. Tier 3 cities are less developed cities in the Western regions of the country. If you invest in the businesses in these cities and regions, you will receive a lot of government incentives, such as reduced tax rates and increased supports for your business.

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4. Legal Environment

how to choose a city to build a business in China

Many businesses choose to not enter China, but go for other options in the region instead, because they are afraid of the legal environment in China.

Firstly, China is notorious for its Intellectual Property violations.

There is a reason why Chinese products are perceived with such a negative eye in the global market. Many businesses are afraid that their clients might walk away with the IP that they spent so much money and effort into R&D to develop. And they are not wrong for being hesitant about that!

If you’re doing business in China, make sure to find a region where the law is sufficiently enforced.

China is an interesting country legal-wise because many of its regulations cause more problems than good for foreign businesses. In regions where the law is not strongly enforced, you can get away with those cumbersome regulations, which is a positive thing, at least.

The level of bureaucracy that entrepreneurs have to face is high, and it can take months, sometimes years to just register a new business. There are a lot of procedures in place to ensure that everything is under the control of the government.

Although the law is nationally enforced, there are still some legal nuances in different regions, and those are where you should be looking for when choosing the location for your new business in China.

For further information, you can consult your Chinese legal advisor, who can provide detailed consultation on the legal environment of the city you’re entering.

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If you decide to bring your innovations to China, keep in mind that:

  • You need to translate your patents for filing in China
  • You need to constantly be on the guard for copyright infringements and IP violations
  • By building connections with the local authority, you can have someone to help you be “on the lookout” for those IP violations

5. You can also choose the location for your business in China based on your personal preferences

Although it sounds irrational for such a big decision, sometimes it happens. It happens much more frequently than you thought. Sometimes the considerations don’t go beyond the major factor of costs and availability of talents and accessibility to other regions. In cases when there are too many similarities between the options, the CEO sometimes simply chooses the location based on their personal preferences.

Conclusion

how to choose a location to set up business in China

Realistically speaking, many business leaders only consider major issues like cost, labor force quality, and accessibility to other markets when choosing the location to set up their business. 

There are millions of other little factors to take into consideration, but they vary by industry and company. Each brand is unique on its own, and what works for other brands might not work for your brand. It’s a bad idea to go to a city simply because many other businesses go there. 

Know your brand is the best advice here. Know what makes your brand unique, and choose the place that maintains your uniqueness.

What advice do you have for businesses wanting to establish their Chinese presence? All comments are appreciated!

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