At the seminar of "BUSINESS SENTIMENT & OUTLOOK FOR CHINA AND GUANGDONG“
hold by the Benelux Chamber, Mr. Helis was honored to be invited to attend and give a speech about "European Manufacturing in Guangdong, past, present and outlook"
When we – as business people - talk about the province of Guangdong – with roughly 180 thousand square kilometres in size (size of Cambodia or twice Austria), then most of the time we actually mean the Pearl River Delta (PRD), the economic power house of South China – which makes up only a fifth of the size of Guangdong, but generates around 80% of the province’s GDP.
Guangdong as a whole has a GDP of around 1.4 Trillion USD – similar to Australia or Spain. When we talk about the Greater Bay Area – i.e. including the cities of Hong Kong and Macau plus the 9 PRD cities - then it increases to 1.6 trillion USD almost as much as South Korea. The main business activities are happening in Shenzhen, Dongguan, Foshan and of course Guangzhou.
Dongguan was for a very long time THE centre for the international OEM production but has in recent years moved up and enjoyed some of the spill over from Shenzhen due to their lack of land and rising property prices.
Shenzhen is the home of the Chinese champions. Names like DJI, Tencent, Huawei, BYD and others call Shenzhen their home. Foshan on the other hand is the home of the Cantonese champions and often so called hidden champions. Two Fortune 500 companies – Midea and Country Garden – are located here, companies such as VW and Andritz are probably the best European representatives.
And then there is Guangzhou – the capital of Guangdong province. Guangzhou has not much been in the limelight of China – such as Shenzhen and Shanghai. But it is actually the city with the largest amount of foreign invested companies as well as employed foreign direct investment South of the Yangtse River.
Companies like Zeiss, Siemens, Merck, GE, LG, but also many international SMEs have some of their largest global factories in the Guangzhou Huangpu development district.
From my observation of my European friends in China, - and I say particularly European Friends - Guangdong is the most underrated business location in China. The reason for that is the historically different development and attraction of foreign direct investment (FDI) following the opening up policy more than 40 years ago. When China opened up, it opened up first in the South. The main reason was of course the vicinity to Hong Kong, and in the first wave their investment poured into the neighbouring province. It was so much easier for the Hong Kong businessmen to come to Guangdong, where Cantonese is spoken, than venturing to other provinces. And these Hong Kong businessmen were also often the vectors for foreign investment from further afield, such as American.
Three decades ago, when Shanghai’s leaders looked out over the New China born of Deng Xiaoping’s economic reforms, it seemed history had gone off the rails. It wasn’t Shanghai, the city that invented Chinese capitalism, but Deng Xiaoping’s new experimental instant metropolis, Shenzhen, on the border with Hong Kong and Guangzhou’s Eastern part, that was brimming with factories and drawing thousands of ambitious young people from across the country.
Only when the 2nd wave of investment set in, Shanghai Pudong had been successfully established, and then the focus was very much on the European companies. That is why even today, American, Korean, and Japanese businesses still prevail here in Guangdong and European companies are still scarce. The German Chamber for example, whose SMEs and hidden champions are in high numbers in the Yangtse River Delta (YRD) count only 8% of their members in the South. But that does not mean it has to stay like that.
Why not? Because Guangdong has changed quite drastically. Especially in the last decade.
In the last decade – starting after the global financial crisis – two massive pushes happened. The first was a move away from cheap and mass OEM production to higher end production. In the wake, a lot of factories closed down. – Something we do not see so far this time around! - This happened under the slogan of ‘from Made in Guangdong’ to ‘Create in Guangdong’ and lead to a massive push in locally initiated innovation, but also the focus of bringing more high-end industry to Guangdong. Creativity in Guangdong has also brought something else very important onto the agenda: and that is intellectual property rights (IPR) protection. For a long time, IPR disputes were some of the biggest headaches for the members of the European chamber and it often ranked very high on the agenda. In recent years that has improved considerably, especially with the setup of one of the three IPR courts in China, the South China one being based in the Guangzhou Huangpu district. The European Chambers as a lobby group gave a big voice to this development, however a big impetus came from the local Guangdong companies that now spend a lot more on innovation and R&D and of course want to protect their patents. China-wide Mid August the Economist reported: that last year the Chinese courts accepted more than 480k IPR cases, five times of 2012. Foreign plaintiffs – that means us – won 89% of all patent infringement cases, according to Rouse, a consultancy company.
From ‘Sourcing in Guangdong’ to ‘Selling in Guangdong’
Another push - that is probably more of a China wide push - is what I would label ‘from sourcing in Guangdong to selling in Guangdong’. This is a trend that we have not just witnessed in Guangdong, but all over China and comes of course also in the wake of the local people having more disposable income. My friend Harley Seyedin the president from the American Chamber put it well into a statistical comparison that was published in the special report of the business in South China 2020: in 2003 their members produced 77% for export and 23% for the domestic market; in 2020 this ratio was almost the opposite, with now 71% producing for the domestic market.
Both trends are set to continue: interest in high-end production as well as a more demanding and discerning domestic market make it still – or perhaps even more- interesting for European companies to come to Guangdong.
One more example of the spending happy Guangdong customers is a statistics just published last week (mid-June 2020): Guangdong province spends the most online, with online retail sales accounting for 23.8 percent of the country's total in 2019, followed by Zhejiang province at 16.5 percent . That basically means around 1/14 of the Chinese population spends almost a quarter in online retail. Quite a staggering figure!
The impact of COVID 19 and the reaction of the government
When COVID19 first broke out, it heavily impacted the supply chain in the world. Goods could not leave China because factories were closed. Now that production is 100% back to normal, the challenge is that the export markets have been broken off. However, disruption started already in the last two years with the impact of the China-US trade war. But as I mentioned, the push to open up the domestic market has paid off well and alleviated the pain somewhat, with significantly less reliance on the export. However, companies that still rely to a larger part on export are facing a tough time.
How has the government reacted to that? A lot of policies were implemented to ease the burden on the businesses, both big and small. The government took the attitude that the business burden is also their burden, and recovery can only happen together. The incentives happened in all kinds of manners, with tax reliefs, production, and supply of masks, rent reduction and even online sales activities by some of the district mayor for goods produced in their district.
Conquer the market
And what is the outlook for manufacturing in Guangdong? It remains upbeat. But the focus has – as already mentioned before – changed away from export driven to catering to the local market, to high-end. While preparing for this speech I also read the work report, which Guangdong governor Ma Xingrui delivered at the Third Session of the 13th Guangdong Provincial People's Congress on January 2020. And here it says that “Promoting Quality Development of Manufacturing Industries received high-level support from the provincial leadership.” 26 times ‘manufacturing’ was mentioned in that report, combined with adjectives such as ‘advanced, smart, high-end, intelligent, and world class’ and verbs such ‘foster, promote, support’. I do not see a bleak message in this report, on the contrary ‘advanced, smart, high-end, intelligent’ are adjective that very much describe our European products. This is our strength.
European companies have actually been expanding and further investing in recent time. BASF invested 10 billion USD in a massive project in the East of Guangdong in Zhanjiang – the largest ever foreign FDI in Guangdong. The Austrian company Andritz is also expanding in Foshan. The German company Zeiss is currently building their 6th state of the art factory for pupil lenses in the Guangzhou Development District Sino Singapore Knowledge City, Siemens expanded with another project in Guangzhou too. And Merck – the German pharmaceutical set up an innovation centre last year on Guangzhou’s International Bio Island – a small island in the pearl river, fully dedicated to life sciences and R&D.
To conclude, your decision that you are here in Guangdong with your excellent business right now, was and is a RIGHT decision. As much as you will hear different stories or negative stories, the foreign direct investment goes on. I can tell you from my own experience in my current position, but even Western publications like the Economist can give you the numbers. For example, foreign investment from the US is very constant. And what many people don’t talk about: the FOREIGN direct investment is constant, but we never talk about REINVESTMENT of locally earned profits of foreign companies. That has been growing substantially over the last decade but does not count as foreign direct investment.
So Ladies and Gentlemen, focus on your business, do what you do best and don’t get too much distracted by the current noise. As Oscar Wilde once said: “Everything is going to be fine in the end. If it’s not fine, its not the end yet.”