Investing in China’s Second Tier Cities

Setting up businesses in a second tier city, rather than in first tier cities such as Shanghai, Beijing, Guangzhou or Shenzhen, is certainly less-glamorous. But they are certainly not without their benefits:

  • cheaper labor costs (with comparable quality to that of first tier cities)
  • cheaper rent
  • cheaper energy costs
  • favorable local policies
  • steady flow of workers
  • faster city development
  • less chance that employees will quit to get jobs with a competitor
  • if you later wish to move to a first tier city, key employees will be more willing to relocate with you than the other way around (going from a first to second tier city)

It must also be noted that there are drawbacks to setting up shop in a second-tier city:

  • less developed supply chains and logistical services
  • less qualified/educated pool of employees
  • distance from air and sea ports, embassies/consulates, legal services, quality and logistics providers, testing and inspection offices, notary publics, provincial government offices

According to David Dayton, a simple rule of thumb to look for in a second-tier city to determine whether it has developed supply chain resources and a decent middle class is to check that it has an international airport and Starbucks.

Fourteen second-tier city account for eight percent of China’s population but fifty-three percent of its total imports. Here are a list of some of the second-tier cities.

Jones Lang LaSalle published a report in 2009 entitled, China40 – The Rising Urban Stars, highlighted forty of China’s up-and-coming second and third tier cities. The report cites Chengdu as a city with significant logistics potential with both access to large population bases and transportation hubs/ports.

In the year 2000, China launched the “Open up the West” (Xibu da kaifa) Campaign. Its stated goal was to close the gap between the underdeveloped west and the prosperous east. The primary motivation, some believe, however, was to simply develop the west so that it could provide natural resources to the east. In any case, the western interior received massive investment and development by the central government.

Read the very informative November 2008 DTZ report on investment opportunities in China’s second tier cities with case studies on Chengdu, Xiamen and Nanning.

China Expert Recommends Startups Break Into the China Market Through Second Tier Cities

In a Vator News interview from 2008 with James Nysather, then of BASAY International, Nysather advises small tech firms to set up shop in second tier cities (with population of one million or more) that are in the western interior parts of China in order to save on costs. He also suggests early stage foreign startups to use an outsourced sales and marketing firm inside China to represent them in order to enter the Chinese market (i.e., sell products and services to the Chinese in China).

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