18 May 2011
Investment environment of southern Hunan as a destination for industrial relocation
- Hunan province has been proactive in taking up industrial relocation from the coastal areas in recent years. Located close to Guangdong, Chenzhou and Yongzhou in southern Hunan have fared particularly well in luring foreign investment. For the past few years, Chenzhou has been the province’s second largest city in drawing foreign investment while Yongzhou registered an average 27.7% annual growth in foreign investment from 2007 to 2010.
- Most of the production lines that moved to Chenzhou and Yongzhou are extensions of the main factory in the PRD. Close ties are maintained between these satellite factories in Hunan and the main factory in the PRD. The majority of Hong Kong- and Taiwan-invested factories are engaged in labour-intensive industries. Most of them still transport their finished products to the PRD. The PRD main factories take charge of the central sourcing of raw materials.
- Currently, major construction works are still going on in various industrial parks in Chenzhou and Yongzhou, where standardised factory premises are made available for lease. Local authorities hope to attract investors through the provision of standardised factory premises. Hence, the building of such premises is a priority in the local government’s drive to take up industrial relocation. However, to a certain extent, the lack of complete facilities at this stage undermines enterprises’ efforts to recruit workers to work in the industrial parks.
- The supply of industrial land in Chenzhou and Yongzhou is still abundant, with the minimum price of industrial plots ranging from over Rmb60,000 to Rmb168,000 per mu. The costs of land acquisition can be reimbursed to investors through various preferential measures and rebates. Other incentives include financial subsidies for building own factory premises and subsidies for installing environmental protection facilities. There are even subsidies for key enterprises on the social insurance premiums paid for their employees.
- The governments of Chenzhou and Yongzhou are adopting a pragmatic approach to attract industrial enterprises. While it is their wish to bring in large-scale or high value-added industries, they are also open to taking up relocation of processing trade. Local authorities are also more flexible in the implementation of certain policies such as environmental protection, where the overall requirements are not as stringent as those in the PRD.
- However, enterprises which need large numbers of workers will still face difficulties in worker recruitment. At present, workers are mostly locals or people living in neighbouring counties and villages, including some who have returned from the coastal regions. Overall, the workforce is a relatively mature one. A number of manufacturers indicated that productivity here is generally lower than that of the PRD, the reason being that workers apply for leave relatively more frequently to attend to family matters since their homes are close to their workplace.
- A number of manufacturers indicated that wages here are lower than those in the PRD by 20% to 30%. As well, local authorities are more lenient with regard to workers’ social insurance requirements.
- Where transport links with the PRD are concerned, continuous improvements are made to the inter-provincial land links serving Chenzhou and Yongzhou. In parts of Chenzhou which are closest to Guangdong, goods usually depart at night and arrive in places like Dongguan the next morning. Local manufacturers generally find the present transport time and arrangements acceptable.
Dispersed manufacturing strategy
After the global financial crisis, rising costs and labour shortage are once again posing as the biggest challenge to Hong Kong companies running factories in the Pearl River Delta (PRD) region. As migrant workers now tend to seek jobs near their homes, some enterprises -- in particular those in labour-intensive industries such as garment -- have begun to disperse away from the PRD. These enterprises will arrange for production processes to be carried out at smaller production points located across different regions with sufficient labour supply, instead of operating a large production base in the PRD or other locations. By doing so, enterprises can secure the required workforce size.
Hong Kong investors relocating their production facilities seldom do so at one go. Instead, most of them move in a gradual manner. Enterprises usually maintain their main production base in the PRD. Some of the high-tech processes and packaging activities (in particular for products where the transport costs differ a lot before and after packaging) will continue to be carried out in the PRD whereas the low-tech processes will be relocated elsewhere. The destinations for relocation are mainly regions near Guangdong, where transport links are more convenient so as to minimise transportation time and costs.
A survey by the Hong Kong Trade Development Council (HKTDC) revealed that, although there had not been a massive wave of relocations among Hong Kong companies with PRD production facilities, some were considering expanding production to other mainland regions. Among companies with ongoing production activities in the PRD, 6.2% said they planned to embark on new mainland production activities over the next three years. The PRD was their main choice of location, followed by areas in Guangdong province (other than the PRD) and inland provinces near Guangdong.
Proximity to Guangdong an advantage
When companies consider relocation, a major factor is the destination’s geographic connection to the PRD. In this respect, Hunan, situated north of Guangdong, has definite advantages. In recent years, Hunan has become a magnet for FDI. From 2006 to 2010, its actual utilised FDI surged by an average 20.3%, surpassing the national average of 12.3%.
Investment in the industrial sector makes up the bulk of FDI, reaching 82% in 2010. FDI in the industrial sector also reported an average annual growth of 32.3% from 2007 to 2010, evidence of the effective measures implemented by Hunan in recent years to attract industrial relocation.
In addition to FDI, domestic investment has also shown significant growth. In the three years from 2008 to 2010, the out-of-province investment in Hunan’s industrial sector climbed by an average 22% annually, amounting to Rmb89.6 billion in 2010.
Hunan proactive in taking up industrial relocation
In recent years, Hunan has been proactive in taking up industrial relocation from the coastal areas. Following the designation by the Ministry of Commerce in November 2010 of the cities of Changde and Hengyang as among the third batch of alternative destinations for relocating processing trade, the province now has six such destinations[*], ranking top among all provinces.
In 2008, Hunan promulgated the Opinions on Proactively Taking Up Industrial Relocation and Promoting the Development of Processing Trade, placing a key emphasis on taking up the relocation of processing trade in the province’s overall development plan. Apart from industries with certain technology contents, the province also aims to give full play to its advantage in labour resources. Hence, the relocation of labour-intensive processing trade is most welcome. In addition to preferential fiscal and taxation policies, the Opinions also spell out measures to further improve transport networks and customs operations in support of processing trade. These developments are indicative of the province’s proactive efforts to formulate policies to create an attractive investment environment.
To facilitate enterprises’ relocation and help them cut down on start-up investment as well as commence production as soon as possible, various industrial parks are offering standardised factory premises for lease. At the end of 2010, completed standardised factory premises totalled 12.33 million sqm in floor area. Reportedly, there were 2,795 industrial relocation projects across Hunan in 2010.The volume of processing trade export also soared by 70.8%, topping US$1.16 billion in value.
Investment environment in southern Hunan Adjoining Guangdong province to the south, the southern part of Hunan is geographically more attractive to Hong Kong companies. A staff researcher from HKTDC visited the cities of Chenzhou and Yongzhou in southern Hunan in late March 2011 to take stock of the investment environment there. It is hoped that Hong Kong companies would find this account useful. Indeed, thanks to their close proximity to Guangdong, Chenzhou and Yongzhou have fared well in recent years in luring foreign investment. For the past nine years, Chenzhou has been the province’s second largest city in drawing foreign investment (trailing only Changsha). From 2007 to 2010, Yongzhou registered an average 27.7% growth annually in wooing foreign investment, ranking first in the growth of foreign investment among Hunan’s major cities.
Investment environment in southern Hunan
Adjoining Guangdong province to the south, the southern part of Hunan is geographically more attractive to Hong Kong companies. A staff researcher from HKTDC visited the cities of Chenzhou and Yongzhou in southern Hunan in late March 2011 to take stock of the investment environment there. It is hoped that Hong Kong companies would find this account useful.
Indeed, thanks to their close proximity to Guangdong, Chenzhou and Yongzhou have fared well in recent years in luring foreign investment. For the past nine years, Chenzhou has been the province’s second largest city in drawing foreign investment (trailing only Changsha). From 2007 to 2010, Yongzhou registered an average 27.7% growth annually in wooing foreign investment, ranking first in the growth of foreign investment among Hunan’s major cities.
Operation models of HK-invested factories
In Chenzhou and Yongzhou, a number of manufacturing enterprises are capitalising on the local resources in their production, such as the metal industry or food processing industry, and they mainly target the domestic market. Where export processing enterprises are concerned, our impression is that many enterprises have started operation only in recent years or just begun trial production. Some frankly admitted that they are merely giving their operation a try there and will wait to see if it can work out.
Most of these factories are extensions of enterprises which maintain their main production base in the PRD. Additional production lines are being set up in Chenzhou or Yongzhou. There are also enterprises which completely ceased their operations in the PRD, but these usually entered Hunan at an earlier stage, and the relocation of all their production activities there has also taken quite some time.
To capitalise on the local labour resources, the majority of Hong Kong- and Taiwan-invested factories are engaged in labour-intensive industries. Here, industries such as garment, footwear and the production of electronic or electrical appliance parts are still operated in a labour-intensive mode. For instance, processes like assembly of power cable and plug, and colour coating of sports goods are handled manually. Most of the main factories of these local processing trade operations are located in the PRD, and the local factories usually take care of only one part of the whole production process. For example, a footwear factory in Chenzhou produces shoe uppers only, probably out of consideration for the high transport costs. The finished shoe uppers are transported back to Dongguan where they are further processed together with shoe soles and other parts.
Some factories in Hunan may produce the same products as their counterparts in the PRD, yet most will still transport their products back to the PRD for container consolidation for export. In some cases, the production arrangement takes the form of outsourcing, i.e. local factories operate as satellite factories to the PRD main factories.
Generally, the PRD main factories take charge of the central sourcing of raw materials and arrange for their import and forwarding to factories in Hunan. In fact, southern Hunan has not yet built its own industry chain, and upstream and downstream support industries are lacking. Hence, apart from some simple packaging materials, all other materials have to be imported or transported from the PRD.
Supportive policies: industrial parks
Chenzhou and Yongzhou have been proactive in taking up industrial relocation. Where government policy is concerned, the Hunan provincial government promulgated in 2009 a set of policies and measures in support of the pilot and early implementation of industrial relocation in Chenzhou (the so-called “34 Articles”). The document covers aspects such as land for construction, environmental impact assessment approval, fiscal support and construction of transport networks. In utilising land for construction, the following measures were put in place: allowing Chenzhou to expand the downtown area appropriately for new construction, offering financial subsidies to the building of standardised factory premises, and delegating to Chenzhou the authority to approve environmental impact assessment in a number of industries.
According to a local official, the supply of industrial land in Chenzhou and Yongzhou is still abundant. In principle, all industrial projects have to be located within industrial parks, and a number of industrial parks have been established in various counties under the two cities’ jurisdiction. In addition to state-level and provincial-level industrial parks, small industrial zones catering to different industries have also sprung up. Within the jurisdiction of Chenzhou, there are now four industrial parks in Zixing county and three industrial parks in Yizhang county. In Yongzhou, a total of 14 industrial parks have been built.
As we observed, major construction works are still going on in various industrial parks. As the terrain here is hilly, the size of each industrial park cannot be too large. Various industrial parks target different industries. For example, the non-ferrous metals industrial park in Chenzhou houses mainly non-ferrous metals deep processing factories. Other export processing industrial parks cater to other industries like food processing, footwear and garment. For example, the Fenghuangyuan economic development zone in Yongzhou is dominated by the processing of agricultural products, auto parts, electronics and hardware. There is also a processing trade corridor stretching across Lanshan, Ningyuan and Dao county (Lanningdao) near Guangdong, which aims to attract electronics, footwear and garment industries. Meanwhile, Yongzhou has also brought in a group of processing enterprises in footwear and knitwear.
Standardised factory premises: handy for enterprises
The industrial parks in Chenzhou and Yongzhou offer standardised factory premises for lease, with monthly rental ranging from Rmb5 to Rmb7 per sqm. Indeed, the local government hopes to attract investors through the provision of standardised factory premises, and the building of such premises is a priority in the government’s drive to take up industrial relocation. In Chenzhou, a total of 2.04 million sqm of standardised factory premises were built in 2010, placing the city first across the province in the construction volume of such premises. Their occupancy rate is close to 100%.
|To processing trade enterprises, renting factory premises will enable production to commence speedily and allow them to test out the local operating environment before committing to any long-term plans. In the case where the existing factory premises do not suit the needs of an enterprise, the local government can also help identify an investor for building tailor-made factory premises for the enterprise and then renting them out to the enterprise. Although an enterprise may have to commit to a longer lease period under such an arrangement, it brings much convenience to the enterprise.|
|Some local manufacturers pointed out that as some industrial parks are still under construction, facilities within the park or nearby for supporting workers’ daily lives, such as quarters available for renting, cultural and entertainment facilities or shops are still being built. In some industrial parks, only temporary quarters are provided. The lack of facilities will undermine enterprises’ efforts to recruit workers to work in the industrial parks. These drawbacks, however, will hopefully be overcome in time as facilities in the industrial parks are further developed and improved.|
Preferential and flexible
The supply of industrial land in Chenzhou and Yongzhou is still abundant. Depending on the location and zoning of the plots, the minimum price of industrial plots ranges from over Rmb60,000 to Rmb168,000 per mu. Yet, the costs of land acquisition can be reimbursed to investors through various preferential measures and rebates. For instance, qualified enterprises are entitled to rebates in enterprise income tax as a reward for land acquisition. Other incentives include financial subsidies for building own factory premises and subsidies for installing environmental protection facilities. There are even subsidies for key enterprises on the social insurance premiums paid for their employees. Meanwhile, individual districts also offer subsidies for container shipping costs for exports as well as export subsidies for processing trade enterprises.
According to some manufacturers who are now operating in Chenzhou and Yongzhou, the wide range of preferential policies is a key advantage of the local investment environment. In addition, local officials also proactively approach manufacturers to notify them of the preferential measures in place and the relevant application procedures.
Local authorities are also adopting a flexible approach in policy implementation. For instance, as indicated by some local manufacturers, it is acceptable for factories to just meet the basic environmental protection requirements, which are not as stringent as those in the PRD. A ceramics manufacturer who has moved his factory from Foshan in Guangdong to Yongzhou pointed out that he had decided to invest in a new factory in Yongzhou because heavy investment was needed to comply with the environmental protection standards in Foshan and it was uncertain whether such standards could be reached at all.
Pragmatic industrial policies
From our observations and the views gathered from local manufacturers, the governments of Chenzhou and Yongzhou are adopting a pragmatic approach to attract industrial enterprises. While it is their wish to bring in large-scale or high value-added industries, they are also open to taking up relocation of processing trade. A local official noted that although processing trade will not give a big boost to the local tax coffers or value-added of the local economy, it will nevertheless create more job opportunities and a clustering effect conducive to the overall long-term development of local industries. As such, enterprises are welcome to start with processing trade activities in the area, in the hope that their investment will be expanded gradually in the days to come.
Industrial parks have generally set investment thresholds for enterprises. Guiyang county in Chenzhou has the lowest investment threshold of US$1 million, and the investment threshold in Fenghuangyuan economic development zone in Yongzhou is US$5 million. Moreover, investors are also required to make an investment of Rmb500,000 to Rmb800,000 on every mu of land. However, from what we saw, some of the factories engaged in processing trade in industrial parks are not operating on a massive scale. For example, a factory in Chenzhou undertaking the maintenance of old/damaged mobile phones for overseas markets has only rented one floor of factory space and employs just around 70 workers. In some garment processing factories in Yongzhou which have just commenced production, the size of workforce is only about 100 people.
The local government has not put a blanket ban on the entry of polluting industries either. Polluting industries will be admitted provided that the local environmental protection standards are met and the necessary pollutant discharge systems installed. Indeed, the Fenghuangyuan industrial park in Yongzhou has plans to promote the development of the electronics industry chain and to bring in printed circuit boards manufacturers. Such plans have been endorsed by the relevant environmental protection authorities.
Hiring and management of workers
Many Hong Kong factories expanding their operation to other provinces often aim to capitalise on the local labour resources. Overall, Hunan is a major exporter of workers and commands great advantages in labour resources. Some Hunan people who have been working outside are returning to their home province.
Local manufacturers remarked that factories in need of a relatively small number of workers do not have any problems in worker recruitment. Yet, those who need more workers are facing difficulties in this respect, and the number of workers recruited often falls short of target. From our observations, factories now in operation are generally not large-scale, employing around several hundred workers. Those which have just commenced operation hire only 100 to 200 workers. According to a knitwear manufacturer who ventured into Yongzhou several years ago, the fact that more factories have been established in recent years has made it increasingly difficult to recruit workers these days.
At present, workers are mostly locals or people living in neighbouring counties and villages, including some who have returned from the coastal regions. Overall, the workforce is a relatively mature one. Locals include also those who are recruited from neighbouring counties and villages and for whom quarters have to be provided. These workers return home only during weekends.
To tackle the difficulty in recruiting workers, labour departments of local governments are also offering much assistance to enterprises. For instance, they have helped organise job fairs in villages and towns nearby, and rendered support to staff training programmes. The government in some places offer subsidies in living expenses to workers undergoing training and waive workers’ insurance premium payment for work-related injuries. Training courses are also offered by local vocational schools, while various industrial parks are also building community facilities as well as cultural and entertainment facilities in a bid to retain workers.
Apart from worker recruitment, manufacturers are also confronted with difficulties in managing their staff. A number of manufacturers indicated that productivity here is generally lower than that of the PRD, partly because the workers are older. Another reason is that workers apply for leave relatively more frequently to attend to family matters since their homes are close to their workplace. Owing to workers’ comparatively low productivity, some adjustment in arranging the production cycle is needed, which poses another challenge to the factory management. Furthermore, as some workers have never gone outside to work, they often do not understand a factory’s operations or work discipline, creating yet another problem for the management.
Wages lower than PRD levels
Generally, wages in Chenzhou and Yongzhou are lower than those in the PRD. Among the factories interviewed, monthly salary ranges from Rmb1,500 to Rmb1,800, which is 20% to 30% lower than that in the PRD. In some garment and handbag factories, salaries are calculated based on piece-work. While their piece-work rate is on a par with that in the PRD, local workers earn less than their PRD counterparts on a monthly basis because of their relatively lower productivity. Key management staff or technical staff are often re-deployed from the PRD, who are stationed here for a long period or on duty on a rotation basis. To these staff, additional subsidies have to be paid to entice them to come over.
Apart from lower wages, the local government also has more lenient requirements with regard to workers’ social insurance. While insurance on work-related injuries and medical insurance are stringently enforced, there is no strict requirement for employers to take out insurance in other areas all at once but rather they are allowed to do so step by step. Local manufacturers remarked that such measures have helped them save some costs.
|Although Hunan is a large exporter of workers, Chenzhou and Yongzhou are not major cities and their draw for workers from other parts of the province is hence relatively weak. Factories recruit mainly local people as workers. As noted by a responsible person of an industrial park in Chenzhou, the park does not plan to attract large-scale enterprises as the county where the park is situated has only a small population and cannot support enterprises with great manpower needs. According to local statistics, in Zixing county under Chenzhou, the surplus labour force amounts to 50,000 to 60,000 people, while some 50,000 people work outside all-year-round. In Yizhang county, it is estimated that the surplus labour force is approximately 50,000 people, with 100,000 people working outside all-year-round.|
Land links with Guangdong improving
In Chenzhou and Yongzhou, the supply of water and electricity can basically meet enterprises’ demands, and there is no need to implement peak load shifting or power rationing. Where transport links with the PRD are concerned, continuous improvements are made to the inter-provincial land links serving Chenzhou and Yongzhou. It now takes seven to eight hours to transport goods on highways from Chenzhou to Shenzhen. From counties like Ningyuan and Lanshan in Chenzhou which are closer to Guangdong, the transport time is also around seven to eight hours. Goods usually depart from Hunan at night and arrive in places like Dongguan the next morning. Local manufacturers generally find the present transport time and arrangements acceptable.
Improvement works to the expressway linking to Lianshan in Guangdong now under way are slated for completion in 2012. By then, transport time via highway to the PRD will be further reduced. Moreover, the opening of the high-speed rail passing through Chenzhou will provide a faster and more convenient transport mode to facilitate business activities. There are also plans by the local government to launch sea-rail intermodal transport services for cargoes bound for Shenzhen. Meanwhile, there are three return flights per week between Shenzhen and Yongzhou.
On the provision of logistics and transport services, manufacturers opined that these services can meet with their demands. Raw materials and finished products are transported to and from Shenzhen by bulk goods trucks for assembly or container consolidation. The charge is around Rmb3,000 per vehicle, depending on the weight of the goods.
With regard to support services provided by customs, Chenzhou and Yongzhou come under the Changsha customs territory, with customs offices set up locally. Some manufacturers choose to clear part of their goods with customs offices in Chenzhou and Yongzhou before transporting them to Shenzhen for export. Yet, customs officials here are found by some manufacturers to be relatively unfamiliar with the flow of processing trade. A factory representative expressed that difficulties have been encountered in the past in his application for factory transfer across provinces, and hence coordination in this area should be further strengthened. Meanwhile, Yongzhou also plans to seek approval to build bonded warehouses to further facilitate processing trade.
A viable destination for production expansion
Bordering Guangdong to the south, and thanks to improvement of transport links with the PRD, Hunan presents a viable option for Hong Kong companies to expand their production lines there thereby forming a production network with their existing operation in the PRD. In Hunan, production costs are now still on the low side and requirements on environmental protection and workers’ social insurance are less stringent. The various preferential measures in place also bring real benefits to enterprises. Yet, enterprises must be aware that local labour supply may not fully meet their needs and that the management of local workers is also an issue of concern. Such difficulties have to be addressed in order to make sure that production plans and overall development targets can be matched by the production capability.
* including Chenzhou, Yueyang, Yiyang, Yongzhou, Hengyang and Changde.