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THROUGH all the years he has held his post, Wang Ji has been on a never-ending hunt for potential investors. As chief of the Domestic Investment Promotion Department at the XianHi-tech Industrial Park in Shaanxi Province, he has long struggled to attract investors from Chinas developed east. Recently, however, he has sensed a change in the wind as a growing number of corporations have started approaching him. During the 13th China East-West Cooperation and Investment Trade Fair last April, he secured a record RMB 24.1 billion in investment deals.

Financial Crisis Driving Corporations Inland

“In some ways the financial crisis has opened up new opportunities for western China,” says Wang Ji. For decades development of the interior has been impeded by factors such as capital shortfalls, depleted resources and a limited number of graduates willing to work in the region. “If the current economic slowdown prompts industries in the east to head inland, we will see big leaps in growth.”

During the East-West Fair, Zhejiang Provinces Taizhou Yongheng Electricity Construction Co., Ltd. signed a RMB 300 million contract to build a power station in Yunnan Province on Chinas southwestern border. According to the companys general manager Chen Wenxin, the investment is part of a long-term strategy.

“In recent years the coastal areas in eastern China have been straining to cope with the under supply of major production resources, such as land, labor, water, power and gas. This has pushed up production costs, and put greater pressure on the environment and population. In addition, the upgrading of industrial structure in the Yangtze and Pearl River Deltas has meant many old industries have had to relocate to make way for high-end manufacturing and modern services.”

Mr. Chen acknowledges that preferential policies, as well as cheap land and labor in western China are a big enticement for his company. These factors have also attracted the Shanghai-based Longcheer Holdings, a mobile phone manufacturer who moved several R & D projects to Xian Hi-tech Industrial Park in 2007. Some of the new products developed there have already entered production. Shen Feng, the companys 3G marketing manager, cites Xians numerous merits, including available land resources, a conflux of universities providing a large talent reserve, labor costs 30 percent lower than in the east, and a low employee turnover rate of three to five percent. Over the past few years top domestic hi-tech companies such as Huawei and ZTE have expanded their R& D staff in Xian from 2,000 to 10,000.

“The western regions have to make active moves to attract eastern companies,” says Shaanxi Vice Governor Jing Junhai, who has led several delegations to eastern China to court investors and gather first-hand information on local industries. Mr. Jing believes that cities in the western provinces can offer multiple incentives for relocation. Xian, for instance, has a population of 800,000 college graduates, making it an ideal location for technical research and innovation. As an air, railway and highway hub, it also offers multiple fast and cheap transport options for manufacturers.

So far 40-plus North American and European companies, including Oracle, SPSS and Emerson of the U.S. and Nortel Networks and Platform Computing of Canada, have set up branches in Xian. They have been joined by several prominent names in the IT business from Taiwan, such as New Soft, Advantech and Ling An Computer.

Completing the

Manufacturing Chain

There are obstacles, however, to a large-scale industrial exodus from the east. Many manufacturing sectors require extensive support structures that are either completely lacking or are only in their nascent stages of development in the west.

As Chen Wenxin, general manager of Taizhou Yongheng Electricity Construction Co., Ltd., argues, industrial development doesnt come from a congregation of factories, but is decided by the overall industrial environment. A complete support system is an essential precondition for large scale industrial migration. His advice for the western regions is: “Concentrate on sectors with shorter industrial chains, that are relevant to existing local industrial setups. Xian, for example, is in a good position to woo investors in the electronic and IT sectors, given its solid background in these two fields.”

Wenzhou-based garment producer Kobron has considered relocating its factories to Sichuan, but is yet to make the move because the province has few of the support businesses and services the firm needs. “There are missing links in the garment industry chain. Many local businesses remain at the primitive workshop stage,” claims Kobron President Chen Yunfeng.

In contrast, Guangdong, Zhejiang and Jiangsu provinces have long traditions of garment production, allowing manufacturers to find any materials or services with ease, whether its for turning out business suits or T-shirts. Having upstream and downstream vendors close at hand is not just about convenience; its a key element of cost control.

“We are aware of the importance of a complete industrial chain,” comments Wang Ji of the Xian Hi-tech Industrial Park. “In our industrial park we have companies in various sectors of the telecom industry, including transmission, exchange, mobile, and end equipment, and we have the countrys best handset and chip designers and manufacturers, such as Huawei, UFIDA Software, Kingdee and Digital China.”

Environment Valued Over Investment

The influx of factories in the ecologically vulnerable west has sparked environmental concerns. Wang Wei, vice-president of the Market Research Institute of the Development Research Center of the State Council, warned that overestimating the sustainable capacity of land, resources and the population in the west could create severe problems that would impede the interiors long-term development.

Lessons should be learnt from the east in this regard. After long taking an indiscriminate approach to developing industry, coastal zones now face intense environmental degradation, holding back further sustainable growth.

The west seems to be setting off down a better path. As Liu Feng, deputy chief of the Investment Inviting Department of the Xian National Civil Aviation Industrial Base Management Committee, declares: “Though it is not easy to attract investors, we will veto any project that may jeopardize the local environment – without hesitation.” Once a solar energy silicon chip manufacturer offered to move into the base, but when it was found that chip production would cause massive pollution, the offer was declined.

Wang Wei applauded this decision, insisting that the west should wisely select industries that will help optimize its long-term economic growth pattern, rather than blindly accepting whatever offers come to the door. “The goal of industrial relocation is to foster a situation in which industries in the east and west can supplement each other. A bar should be set for factories moving west, ensuring they meet certain technical, energy efficiency and environmental standards. No tradeoff between economic gains and environmental threats should be allowed.”

Careful selection will ensure the west garners capital, advanced equipment, modern management and marketing expertise, as well as new and high technologies. Only with these elements can Chinas interior ensure transformation of its industrial structure and long-term economic strength.