Global Report

The real opportunities in China today are found farther inland

Interior regions still seeing strong growth

Over 50,000 people attended this August job fair in Chongqing, China (ChinaFotoPress/Getty)

Over 50,000 people attended this August job fair in Chongqing, China (ChinaFotoPress/Getty)

From Alberta alfalfa farmers to industrial giants like Magna International, many Canadian companies have hitched their fortunes to China’s growth engine. But companies doing business in China have concentrated their efforts on traditional economic centres like Beijing and Shanghai, as this map detailing the findings of the Asia Pacific Foundation of Canada’s biannual survey of Canadian businesses operating in China shows:

Map showing provinces where Canadian companies do business in China

“The easy entry points are really Beijing, Shanghai, and Hong Kong; this is where you have direct flights from Canada,” explains Professor Yves Tiberghien, director of the Insitute of Asian Research at the University of British Columbia. “Those cities have easy infrastructure to support business but they are probably not the best place today for investment.”

The country’s new growth centres are located further inland, in provinces like Chongqing, and Guizhou, and cities like Chengdu. But Tiberghien notes that China is not a simple market to enter, unlike Canada’s favourite export target, the United States. Connections to government and support networks are vital to doing business in China, and they form an intimidating barrier for many companies. “It reflects the transaction costs and the risks of going where the growth is,” Tiberghien suggests. “Going to even Sichuan or Hunan if you are a mid-sized Canadian company in China is too difficult.”

Canada’s prosperity outlook is now firmly tied to China’s economic health, and the world’s second-largest economy has been slowing. Operating conditions have proved hostile for some large companies, with the Chinese government aiming to create “national champions” in high-margin and high-tech industries like pharmaceuticals and automobiles. While the federal Conservative government has indicated a desire for free trade talks with China, any agreement will require torturous negotiations and is unlikely to be reached any time soon.

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But it’s not all doom and gloom for Canadian SMEs looking to China for growth. Chinese companies have indicated they’d be willing to offer a discount to partners that transact in renminbi, a cost saving that could prove significant. And governments are working to smooth the way for our businesses, with key provinces like Ontario and British Columbia making overtures and setting up partnerships.

Businesses looking at interior China with interest have an ally in Phillipe Rheault, the Canadian Consul General in Chongqing. “Lots of Canadian companies—small, medium and large—are working pretty closely with us and we’re seeing a lot of positive results,” he says.

Canada has long had a presence in Chongqing, with the consulate established in 1997 upgraded to a consulate general in 2012 with veteran trade diplomat Rheault appointed to head it. While there’s still opportunity in traditional economic centres like Beijing or Shangai, there are also plenty of businesses looking to cash in on those chances. “Out here, there’s more and more opportunity but no sot many people chasing it,” Rheault notes. “It’s a little bit of a sweet spot.”

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The Department of Foreign Affairs, Trade and Development’s various consulates and trade commissioner offices scattered across China provide Canadian companies with links to local officials and potential business partners. “They’re liaisons and facilitators,” says Alfred Wahl, President of Polar Genetics. “They can offer translation, and provide the benefit of official response or categorization in China”

Wahl’s firm has done business in Chongqing and Sichuan, because that’s where the market is. “I’m in the livestock export business, particularly swine—live pig exports and frozen boar semen,” he explains. “To some extent, the development areas are going to be in the west more so than in the east—the coast is quiet heavily populated with pigs already because of previous years’ trade. So we’re going to follow some of this development where it goes.”

Chinese governments have spent recent decades building monuments to the country’s new prosperity and record-rivalling infrastructure projects. The strengthened western provinces provide a good manufacturing base, with giant corporations like Ford and HP taking advantage of the just-in-time shipping enabled by the Chongqing-Duisburg railway and improved maritime transport on the Yangtze river. Rheault notes that the logistical advantages of interior China outweigh labour costs that are now higher than those of upstart neighbours like Cambodia or Bangladesh.

The result is a so-called New Silk Road mirroring the old pathway to Europe. Many of the provinces leading China’s second wave of growth are located along that corridor, alongside resource-rich areas like Nei Mongol:

Map showing provinces with investment opportunities for Canadian provinces

But there’s now more money to be made from consumers than outsourcing. “We know that the growth model of China—which is an agglomeration of a lot of messiness, but is based heavily on infrastructure, exports and heavy industry—is running its course,” notes Tiberghien. “[The Chinese government] is trying to move their growth model towards consumption, urbanization and sustainable growth that is more and more energy efficient.”

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As a perverse reward for its rapid growth and heavy infrastructure investment, China is starting to face some of the trials of mature economies: a stagnant workforce, a real estate bubble, and high local government debt levels. Tiberghien says companies need to take those risks into account. “It’s not for everybody, and you need to carefully map this out,” he says. “But the potential is still very large, and it’s not just in Shangai and Beijing—it’s way beyond that.”