Reinvention and rejuvenation – Foshan seeks new model for success

Foshan

In 1968, He Xiangjian spent 5,000 yuan on a workshop to make bottle tops in a township of Foshan, Guangdong province. From this humble beginning grew the Midea Group, one of the most successful private companies in China.
In the first nine months of last year, it posted operating revenue of 93.747 billion yuan, an increase of 14.7 percent over a year earlier. It employs 135,000 people in China and abroad, making a wide range of electrical appliances.
From October last year, its subsidiary in Brazil, Midea Carrier, launched a new brand campaign with the theme ‘Viva mais cada momento’ (Live more for every moment), using print, radio and cable television, including Veja, the country’s most popular magazine. It will sell goods under its own brand, not those of other brands, as it has done for most of its history.
Midea is one of the success stories of Foshan, a city of 7.26 million people in central Guangdong. In 2013, the city achieved a per capita GDP of 96,000 yuan, higher than that of Beijing and Shanghai, and ranking 17th in China. That is more than in some member states of the European Union.
Its 2013 GDP (as opposed to its per capita GDP) was 701 billion yuan, an increase of 9.9 percent over 2012. Private companies accounted for over 65 percent of that GDP and 75 percent of industrial output.
Foshan is the third largest manufacturing base in the Pearl River Delta, after Shenzhen and Guangzhou. It is home to the world’s largest furniture and lighting wholesale markets. It has a cluster of industrial townships that specialize in a single industry – such as textiles, electrical appliances, furniture, ceramics and the equipment needed to make them. In addition to Midea, it has other firms that are national brands – Country Garden and Haitian. It is also home to two major automobile ventures, First Auto-Works (who are in partnership with Volkswagen) and Bei Qi Foton.
At the start of the reform era, Foshan was neither a special economic zone nor a provincial capital. It had no significant mineral resources. The secrets of its success were attracting outside investment from overseas Chinese, as well as from Macau, Hong Kong and Taiwan. It was able to offer cheap land and labor, a large and vibrant private sector, and decentralization of power to the township level, making the government quicker and more responsive to local needs. It has more than 1,000 business associations and NGOs, one of the highest numbers of an individual city in China.
Between 1979 and 1992, the city imported 700 advanced production lines and 210,000 pieces of advanced equipment, to improve the standard of its manufacturing. By 2012, it had attracted a total of USD18.8 billion in foreign investment.
It was always ahead of other cities. In the early 1990s, Shunde, one district of the city, pioneered the sale of government-backed enterprises to their managers, workers and outside investors. By 2011, the city had 340,000 private firms, one for every 20 residents. In 2012, they grew by an annual 13.1 percent, compared to 5.7 percent for the city’s state sector.
It has real diversity in its manufacturing. In 2010, its industrial output was US$ 241 billion, fifth among China’s cities. In 22 out of 30 main manufacturing sectors, it accounted for over one percent of national output, even though it accounts for only 0.5 percent of the nation’s population.
It is less dependent on exports than many cities in the Pearl River Delta. In 2012, exports accounted for 18 percent of GDP, compared to 37 percent in Shenzhen, 32 percent in Dongguan and 25 percent in Wenzhou. Its firms have done better in selling to the domestic market.
In the 1980s, the city permitted a market in communal land, which villagers leased to industrial companies; this was illegal, since national law reserved such land for agricultural use. Large firms did not dare to use it but small firms were prepared to take the risk.
This policy was a major reason for the growth of industrial clusters. It also meant that rural people have benefited from the city’s transformation into a manufacturing center and created a fairer distribution of wealth among the population. By 2010, the average Foshan resident owned property worth almost US$ 50,000. The average disposable income of its urban residents last year reached 38,040 yuan, an increase of 10 percent over 2012.
Over the past nine years, the government has allowed private firms to bid for over 500 projects, including power generation, water plants and rubbish-incineration facilities. From 1983−1991, it built a 357-km railway line to Maoming in the south of Guangdong province; this was the first time that private capital had been used in the construction of such a line, together with money from the central and local governments. The city has been a magnet for people, skilled and unskilled, from around China. Migrants account for half of the population of 7.26 million.
This remarkable success has come at a cost. It has involved heavy spending by the city government in infrastructure, education, welfare and other services.  By 2012, the city’s debt reached US$ 14.5 billion; paying principal and interest on this debt accounted for 47 percent of the city’s revenue that year. If interest rates rise, the debt burden will become even heavier.
Four of its inland rivers are heavily polluted. As a result, many of the city’s ceramics firms, an industry with a history spanning centuries, relocated elsewhere. Now less than 60 of the 600 firms remain. “We understand that our poor environment does not attract talented people,” said Mayor Liu Yuelun. “We want to provide greener lands for them.”
Foshan has created a platform of intense market competition. Some firms, like Midea, have prospered. Others have not. Jianlibao, a soft drinks producer, was set up in Foshan in 1984 and became a household name in China, its products competing with Pepsi and Coca-Cola. But bad management and fierce competition led to debts that exceeded one billion yuan in 2005.
In February 2007, its former president and CEO, Zhang Hai, was sentenced to 15 years in jail for embezzling public funds. The firm is still operating but on a much smaller scale. As with other cities in the PRD, wages are going up and land is running out. All this has made the government chart a new course.
Foshan is re-inventing itself again; it is moving from low-end production to high-end manufacturing, services, R & D and creative industries. In 2013, the service sector accounted for 40 percent of the city’s GDP, up from 36.1 percent a year earlier.
“The city has secured high-quality investment projects that help to transform and upgrade the local industrial structure,” said Zhou Zhitong, director-general of the city’s Bureau of Foreign Trade and Economic Co-operation. “Drawing more experts and professionals will help to strengthen the network of information collection and communication.”
This future is symbolized by two zones. One, in the east of the city, which is connected to Guangzhou by underground, is the Guangdong High-Tech Service Zone for Financial Institutions, established in July 2007. It provides the back-up services like those that New Jersey and Dublin give to New York and London respectively. It covers an area of 18 square kilometers in the Nanhai district, with property and salary costs lower than in Guangzhou city.
It has attracted numerous finance companies to set up there, such as American International Assurance; the People’s Insurance Company of China – a southern information centre; and the Sun Kung Kai Financial Group of Hong Kong. Also occupying offices there are Fujitsu Technology Corp; the business processing outsourcing centre for the Capgemini Group of France, as well as a similar centre for IBM, and a financial base belonging to Guangdong Development Bank.
The second zone is the Sino-German Industrial Services Zone founded on 6 July 2012. It promotes the development of modern service industries, focusing on Research & Development, design, testing, and certification, new IT new materials and energy, biotechnology and vocational training.
It has a total planning area of 88 square kilometers, divided into a core area of 5.76 sq km, plus a development area. In August 2012, it was listed in the joint statement signed by the Ministry of Commerce and the Federal Ministry of Economics and Technology of Germany, indicating support from the highest level of the two governments.
The zone hosts the Asia-Pacific headquarters of Osram, the south China headquarters of Allianz and the Steinbeis Foundation and the southern base of TUV Rheinland. It is preparing to build a Sino-German polytechnic.
The zone covers both sides of the Dongping river: one side has a port, loading and unloading containers full of manufactured goods. The other has parkland covered with cherry trees, mudflats to attract birds, a lake and a man-made beach. The two shores symbolise the past and future of the city.
Xiao Geng, vice president of research at the Fung Global Institute of Hong Kong, said that the zone was a software base to serve small and medium-sized foreign and domestic firms. “The government does not have the money for a large transport infrastructure in the zone and so should follow the Hong Kong model of using private capital to build one.”
He said each firm in Foshan felt a sense of crisis: “They must constantly upgrade the quality of their products. The city officials feel a sense of crisis too; they are thinking about how to make the market more active.”
The zone embodies the vision of the city government for the future –
not a cluster of factory chimneys but green and spacious parkland, which earns its revenue from highly, qualified people working in R & D facilities and service companies.  By Louise do Rosário, MDT/Macauhub