WEB EXCLUSIVE
Plant Site Selection in Greater China
Finding the best and most appropriate home for your business in China.
by Jack Daniels
Manufacturing and distribution/service related businesses are establishing new businesses in China at a fast pace. Those responsible for the choice of a site usually rely on the conventional benchmark of available infrastructure, proximity to markets, availability of key components and materials and land cost.
While this group of key factors is important, in China there are a number of hard and soft elements, which have a great influence over the success, or failure of new enterprises. These include: (hard factors) the new subsidiary’s split between domestic and export sales; the amount of the capital to be injected in support of the new enterprise; the provenance of key production equipment and enabling technologies; (soft factors) the certainty of utility supplies; the flexibility of the provincial Customs Bureau; corporate income tax incentives, the available pool of executives and technical staff and the overall support level offered by the local government.
North American and European businesses must assess their risk tolerance, collective corporate culture and long-term business goals when selecting a site and then executing a development plan. It is critical to model the hard and soft factors in advance of launching a project.
Regardless of how individual companies’ rank we recommend that our clients prepare to understand four key differences in the construction management process as they create their short list of business sites.
1. Prepare For a Different Experience
Determining the most advantaged site for a new subsidiary in China should place you in contact with several special economic zones (SEZs). These SEZs are competing with one another to host your business and your capital investment. Key government officials will be pleased to meet with your team in hope of wooing you to their industrial parks. The people you meet will have titles such as Vice Section Chief, Senior Executive, CEO and General Manager – Marketing Department. They can be quite solicitous, have a polished appearance and luxurious offices.
The overall effect can leave you feeling that you’re meeting with a property development company rather than a government agency. It’s important to remember that in China, the practical functions of government bureaus and industrial parks are blended together. The officials sitting across the table wield a great deal of power including the ability to grant preferred taxation status, setting land prices, fast tracking the issuance of business licenses and determining the amount capital you must invest.
Because of these blended functions, your business needs to cultivate and maintain an ongoing relationship with the officials in the SEZ you decide to settle. Crafting a negotiation strategy that will support your long and short-term goals is very important.
2. Due Diligence and Chinese Due Diligence
As you would at home, it is essential to plan and execute a sound plan of due diligence when acquiring a plant site. Regardless of whether you are planning a green field or brown field development scheme, understanding the history of your proposed site is very important.
Property deeds play a very different role in China when compared to the West. First off, all individuals and businesses are prevented from owning land in China – that’s the role of the government. Typically, 50-year leases with an option to extend for an additional fifty years are available to foreign-invested businesses. So, a land purchase in China isn’t truly a purchase at all.
Even though the government owns all of the land, the terms associated with the land use certificate carry many of the same complexities associated with a deed. Despite the assurances from the SEZs’ marketing team that the land was a collective farm in its prior life and is clean, the actual history of the site may be quite murky. This is more the case when acquiring and lot populated with a building.
At this stage, foreign businesses should bring local counsel into the investigation. A reputable domestic law firm, which is based in the province where the property is resident, should be used. Your attorney will have a relationship network in place that can be used to unearth the true history of the site and reveal possible complications, which are invisible to you and beyond the reach of a firm located in Beijing or Hong Kong.
3. Fit and Finish Standards
Engineers and builders are well educated and trained in China. When sharing your design specifications, serious players will ask questions about the industrial processes to be housed in the building and seek to grasp the subtleties of the plan.
Conflicts or problems can occur in the final stages of construction when reviewing fit and finish details. Simply stated, the norm in China for interior trim, door and window hardware, painting, air conditioning and heating comfort and (quite important) restroom design and fixtures is below foreign standards.
We recommend inspecting buildings that were recently finished by candidate constructions companies to get a first hand sense of the fit & finish standards. Ask to interview several customers and
4. Hiring a Jian Li
Once you have hired an architect or designer and building contractor, one more construction professional must be selected. A Jian Li or building inspection company plays the role filled by municipal building inspectors at home. [The local municipality, usually represented by the Fire Bureau will perform a final inspection of the premises before issuing an occupancy permit.]
Most companies want the check & balance of a step-by-step inspection through the construction process. Your property and casualty insurer can recommend a jian li suited to the requirements of your building project.
Managing a construction project in China can be a rewarding and even an enjoyable experience if you accept that things will be different than they are at home. The industrial culture of China is distinct and unique, therefore it is important to learn about these differences and build them into your expectations. The most useful way to learn about local business culture is to go to China and meet the people with whom you’ll be doing business.
Jack Daniels is the president of EastBridge Partners, LLC, (www.EastBridgePArtners.com) a specialized consulting company.
