Taking It to the Next Level

6 May 2011

Export-driver Foshan seeks to upgrade itself By Staff Reporter

On a prime site in the centre of Foshan, in Guangdong province, a Hong Kong developer is building the largest real-estate project in the city’s history. It plans to sell upmarket apartments to buyers from all over China and overseas, as well as to local people.

“Foshan is in a transition phase,” said Kinkey Zhang, a consultant in the project’s sales office on the site. “Before, it was a city that made porcelain and bath tubs. Now it is moving to another level.”

Lingnan Tiandi (‘Heaven and Earth in South China’) is the work of Shui On Land, which has built similar projects in six different Chinese cities. The most famous is in downtown Shanghai, where it built a complex of restaurants, bars, shops and boutiques on an area of 57,000 square metres in a style that imitates the city’s traditional architecture.

The Lingnan project is a sign of how Foshan wants to redefine itself. Over the last 30 years, it has become one of the manufacturing powerhouses of Guangdong province. Last year its GDP reached 564 billion yuan, an increase of 12 per cent over the 481.5 billion of 2009. It ranked in the top 12 in the country, ahead of many cities with a larger population than Foshan’s six million. In the same year – 2009 – its individual bank savings reached 394.5 billion.

It has become one of China’s largest producers of household electrical appliances, building ceramics, aluminium materials and stainless steel as well as hosting the country’s biggest markets for furniture, flower pots and soya sauce.

Foshan now wants to move out of low-cost, polluting industries into new and higher-value-added sectors. It is slimming down its centuries-old ceramics industry, in the interests of cleaner air and water, and is moving into high technology, tourism, finance and other services. It has attracted companies making photo-electron screens, LEDs (light-emitting diodes) and photovoltaics.

Its target for annual GDP growth in the 2011–2015 period is 10 per cent.

Covering an area of 65 hectares in the city centre, Lingnan Tiandi is an important part of this future. It will have an entertainment and commercial area of 70,000 square metres – double the size of the complex in Shanghai – with bars, restaurants, hotels and cinemas. It aims to attract clients from all over Guangdong. Part of the complex has already opened, during the spring festival of 2011.

The project’s first phase, covering 110–250 square metres, is offering villas and apartments at a starting price of two million yuan.

Guandong’s rapidly expanding transport network is an essential part of this upgrading process. A subway line to Guangzhou, the provincial capital, opened in November 2010, enabling people to live in Foshan and commute to work in the capital. In January this year, a light rail line opened that links Foshan with Guangzhou and Zhuhai. These new transport links helped to take retail sales in the city last year to 165.7 billion yuan, a rise of 18 per cent over 2009.

Foshan as forerunner

Foshan means the ‘hill of the Buddha’. It was in 398 that a Buddhist monk from Kashmir arrived in the district and started to preach the religion. The town received its name in 628 because its many statues of the Enlightened One.

In imperial times, it was an important trading and distribution centre. It also became a major producer of ceramics, an industry that has continued until today. It is famous for Cantonese opera, martial arts, textiles and traditional medicine, as well as being the native place of millions of overseas Chinese.

Its transformation into a manufacturing centre of national importance began in the 1980s. Beijing announced a new policy of economic reform involving opening the door to the outside world. Guangdong was the pioneer province.

Foshan seized this opportunity like few cities in China. It aggressively courted foreign investment, principally from Hong Kong and the Chinese diaspora. These investors set up factories in Foshan, bringing with them capital, technology and raw materials while the city provided cheap land and labour.

Leading the way were two of the five districts that constitute the city – Nanhai and Shunde. By 1985, Shunde had 14 factories making 8.81 million electric fans a year, ranking top in China. The city encouraged each township to specialise in one product, including its parts and components, to bring an economy of scale and a competitive advantage.

Foshan pioneered the use of outside capital, including loans, bonds and shares, to finance infrastructure such as roads and bridges. It was also a forerunner in the disposal of state firms, selling them to their managers, to outside investors and foreign companies, and reducing the number of government workers. By the end of 1996, Shunde had sold 1,001 state companies.

In February 1999, a Foshan ceramics firm listed shares in Singapore, the first private Chinese company to list abroad.

In 2009, the private sector accounted for 60.4 per cent of Foshan’s economy, compared to 25.9 per cent for foreign-invested companies and 13.7 per cent for state firms. It had 324,500 private companies, which produced more than 60 per cent of the city’s industrial output. It now has more than 4,000 foreign-invested firms, of which 70 per cent are owned by overseas Chinese.

Their main products include electrical appliances, machinery and equipment, metallic goods, ceramics, textiles, electronics, food, plastics, precision machinery, pharmaceuticals and furniture.

Foshan produces 60 per cent of China’s building ceramics, 85 per cent of its ceramics machinery, 50 per cent of its processed aluminium materials and 25 per cent of its compact discs.

The measures Foshan took were followed by cities across China, Foshan’s brave steps rewarded by gaining first-user advantage.

In 2010, it contracted foreign investment of US$2.188 billion, an increase of 116 per cent over 2009, and attracted actual foreign investment of US$1.967 billion, an increase of five per cent. During the 2006–2010 plan period, it attracted a total of US$8.32 billion in foreign investment, including 90 of the Fortune 500 companies, and an increase of 170 per cent over the 2001–2006 period.

In 2010, exports rose 31 per cent over the year before to US$32.2 billion, and imports rose 31 per cent to US$18 billion. During the 2006–2010 period, it recorded foreign trade totalling US$201 billion, an increase of 2.29-fold from the previous five-year plan period.

Big brand names

Foshan’s most famous company is Midea, one of China’s biggest manufacturers of household appliances whose sales last year exceeded 100 billion yuan, up 33 per cent from the 2007 level. It has 14 production centres in China and three abroad, 21 overseas branches, three listed companies and employs 150,000 people. It exports a significant proportion of its output.

Established in 1968, the company started producing household appliances in 1980, going on to use the Midea brand the following year. In 1997, the management team reorganised the company with ‘a separation of powers’ between shareholders, the board of directors and management. In 1999, it started to offer shares to its employees, to give them an ownership stake in the business.

Last year Midea became the first company in Foshan to achieve sales of more than 100 billion yuan. Its products include air-conditioners, refrigerators, microwave ovens, washing machines, electric cookers, water heaters and kitchen appliances.

Chief Executive Huang Jian said the firm aims to become a global company along the lines of Philips and Matsushita (known globally as Panasonic). It aims to be the largest manufacturer of household appliances in the world by 2015. “Last year we spent one billion yuan on research and development of household appliances. We want to become China’s Matsushita, which has more than 50 per cent of the Japanese market with its products.”

This year it will invest 200 million yuan to double the number of its retail outlets in China to 6,000, and aims for 15,000 by 2015, with one in each county across the nation.

Chinese manufacturers account for 60 per cent of the global market for electrical appliances, with exports in 2009 worth US$13.8 billion. In the third quarter of 2010, exports accounted for 9.3 billion yuan of Midea’s revenue of 21.1 billion. However 85 per cent of these exports carry the names of other companies and only 15 per cent the Midea brand. Huang said his long-term strategy was to establish the Midea name in markets around the world.

Another global brand in Shunde is Galanz, the world’s largest producer of microwave ovens. A private company founded by seven people in 1978, it started with the production of duck feathers. In 1993, it signed an agreement with Toshiba to make microwave ovens under licence.

Now it produces more than 15 million ovens a year and employs nearly 50,000 people. It has R & D centres in the US and South Korea and 10,000 sales outlets in 170 countries and areas around the world. It plans to set up production bases in South East Asia, South America and Eastern Europe.

Pots for money

For centuries, ceramics was the most important industry in Foshan; it made the city famous all over China. But the government has decided that the air and water pollution that the industry brings is too serious, and so has published new pollution and production standards. Only companies that can meet these standards will be allowed to remain in Foshan.

Before 2008, the city had more than 260 ceramics producers. The new plan calls for only 42 to remain: in the first half of 2009, nearly 70 firms and more than 100 production lines were closed. Their owners have the option of taking their factories to other cities in China. It is a drastic and brutal restructuring, especially hard on those who have devoted their working lives to this traditional industry.

It is part of what Guangdong Communist Party chief Wang Yang calls ‘changing the bird in the rattan cage’ – upgrading the province’s industry from energy-intensive, polluting and low-value-added products to those with a high level of technology and skill as well as to the service sector.

In January, a Hong Kong company that had been producing leather goods in Foshan for 25 years announced that it was moving its plant to Qinzhou in the southwest region of Guangxi. It is investing 300 million yuan in the new facility. In Foshan, it used French and Italian equipment and employed foreign experts to produce leather goods, mainly for export. This is the kind of transformation into less-polluted industries that the city wants.

The financial sector is a priority. In 2007, Foshan opened the Guangdong finance and high-technology service park in the Nanhai district, to provide back-office services to financial institutions, like data-processing, call centres and training. HSBC has opened a global operations centre there, providing financial and banking services, including credit cards, loans, insurance and management of human resources. Insurer AIA is investing US$70-80 million in an office building to house its telephone sales, training centre and back-up services for South China.

Standard Chartered Bank has signed an agreement to open a branch in the park; it will be the first foreign bank branch in the city, which currently has 17 domestic financial institutions.

Three decades of rapid growth have created a high level of savings and of demand for financial services. As of the end of last year, Foshan’s banks had savings of 846.2 billion yuan, an increase of 17.35 per cent from the year before. Its financial institutions reported a profit of 14.4 billion yuan for the year, an increase of 4.473 billion over the previous year. The city aims to have 160,000 people working in the financial sector by 2015, making it the fastest-growing service sector.