into the West

"One world, one dream." That's the slogan for the 2008 Summer Olympics in Beijing, an occasion meant to herald China's arrival as a world economic power. But U.S. businesses need no reminder of China's roaring growth or its raging ambition. In the quarter century since the nation opened its economy to the forces of market competition, they've watched China emerge as a powerful force itself, one likely to play a dominant role in the global marketplace for years to come.

In fact, it'salready well on its way. Fueled largely by exports, China's red hot economy has been growing at nearly double-digit rates for the past few years. China's economy is now the fourth largest in the world. And some predict China will surpass Germany, Japan and the United States in the next two to three decades.

At least that looks to be the plan. "China is single-mindedly focused on the future," says author Ted Fishman, a frequent visitor to China. "This is China's golden moment when the future can be seized. As much as the U.S. has capacity constraints at its ports, China is building access, so there is a big mismatch and an expectation that China will continue to crank out an ever increasing amount of goods in the future."

There's no question China has the workforce needed to crank out those goods. With a population of more than 1.3 billion, it boasts a nearly limitless supply of labor, most of it cheap. Over the last 10 years, approximately 150 million residents have migrated from the countryside to China's cities, drawn largely by factory jobs that pay about 75 cents an hour. That mass exodus from the farm shows no sign of slowing, says Fishman. Another 150 million will flood into China's urban areas over the next 10 years, he predicts. That's the equivalent of building a city the size of Philadelphia every month.

But China's allure for foreigners isn't just its cheap labor. Another attraction is its burgeoning consumer market. In the past several years, China has emerged as the world's fastest wealth creator. It's seeing the highest growth in the number of millionaire households in the world. At the same time, the migration from the country to urban areas with higher-paying jobs has resulted in a rapidly rising middle class. Small wonder that U.S. enterprises are scrambling to build manufacturing plants and distribution centers in China.

Go west
One of those enterprises is software giant Oracle. During 2007, it plans to increase its subsidiaries in China from the current five to 26. But Oracle's plan to target China's fastgrowing second- and third-tier cities makes it somewhat unusual among foreign investors. In the past, foreign investment has been largely concentrated in China's coastal provinces, particularly around Shanghai, Shenzhen, Guangzhou, Hong Kong and Beijing.

That has the government worried. To keep the inland provinces from falling too far behind their richer coastal counterparts, China's leaders are moving aggressively to narrow the gap. In 2000, the government launched its trumpeted "Go West" campaign, aimed at enticing foreign enterprises to invest in interior locations like Chengdu and Zhengzhou. To help things along, it's offering rich incentives, like preferential taxes and infrastructure assistance. It's also building high-tech industrial parks and setting up export processing and free trade zones.

It's a strategy that has worked in the past. In 1990, the Chinese government began offering incentives to draw foreign investors to the Pudong region, which it hoped to transform into a financial, economic and trade center. Within a few years, it had lured chipmaker Intel to the area, which is across the Huangpu River from Shanghai. In the mid-1990s, Intel chose Pudong as the site for its first Chinese plant, citing Pudong's free trade zone as a major factor in its decision. The government is now following a similar strategy to promote development in the Binhai region. Located in northeast China near Tianjin Harbor, Binhai is starting to attract manufacturing and logistics operations.

More recently, the government saw another of its highstakes bets pay off. Thanks to its investment in roads and a telecom network, China's government succeeded in drawing Intel even further inside—this time to Chengdu. Located more than 1,000 miles west of Shanghai, Chengdu is China's fourth largest city. Last year, Intel opened a 600,000-square-foot testing and assembly facility near the Shuangliu International Airport in Chengdu's high-tech industrial development zone. Intel says it selected Chengdu because of its strategic location, its educational system and the region's well-trained workforce.

Trouble inside
For allits advantages, Chengdu also has its drawbacks. One of those, as Intel found to its dismay, is its transportation infrastructure.

"This is very much in the hinterlands of China," says Byron Ba, Intel's director of logistics for the Greater China area, which includes Taiwan and Hong Kong. "We knew before we announced our investment here that we may get into some trouble ... because it is so far inland, but we obviously had underestimated the ... problems that we got ourselves into."

One ofthose problems is the inability to land wide-body 747 aircraft at the local airport. That may not sound like a major obstacle, but it presents serious challenges for Intel, which imports the delicate precision equipment used to make semiconductors. The equipment's sensitivity to shock, vibration, and fluctuations in temperature and air quality makes it unsuitable for highway transport, leaving air as the only option. On top of that, Intel's equipment vendors have a contract that voids the warranty on the parts if they're not shipped by air.

"Not having a single wide-body freighter flying into Chengdu is our number one disadvantage," says Ba. "We are working hectically with local government and our freight forwarders to enable a pure freighter in and out of our market. We're cautiously optimistic."

As a temporary measure, Intel is using commercial jets to fly in its equipment. However, Ba suspects that by the middle of next year, Intel will run into a shortage of lift capacity. In addition to its airlift problems, Intel is still working out other transportation and handling problems that have arisen from its location so far inland and the inability to load by pallets. Intel has also found itself embroiled in complex customs negotiations. Those problems have been exacerbated by the fact that a growing number of Intel's parts are no longer exported out of China, but are being consumed within the country.

For these and other reasons, Fishman advises companies making their initial foray into China to start with one of the developed regions. "It's hard enough to manage when an operation is in one of China's most accommodating cities," he says, "but it becomes [that much] tougher when you locate people further and further away from the East."

Based on his experiences in Chengdu, Ba adds this advice: "Bring a strong team with you that can handle the customs and supply chain issues." Still, for all the challenges, Ba says he doesn't regret Intel's decision to build a plant deep in China's interior. "There can be some very painful issues," he admits,"but these are not showstoppers."