Local Incorporation Spurs Westward Moves

This past April, Chinese regulators started giving permission for foreign banks to incorporate locally. Incorporation means that the bank can do business in yuan and issue credit cards. Previously, foreign banks were only allowed to handle foreign-currency accounts, and were only able to offer credit cards through partnership deals with local partners.

Before, the foreign banks pretty much stayed in the coastal cities, going after the high-value, foreign-currency customers.

Today, those same banks have become much more appealing to China's middle class consumers -- and they have started moving to where those consumers are located. In other words, throughout China.

ABN Amro is now only one of foreign banks with branches in Chengdu and Chongqing, for example. HSBC, as today's story by Mai Yi demonstrates, goes even further, with a branch in rural Zengdu county.

Citibank, HSBC, Standard Chartered, and Hong Kong’s Bank of East Asia – among others -- are also competing head-to-head with domestic banks throughout China.

China's retail market is an attractive target, with 30 trillion yuan (US$4 trillion) in household savings and surging demand for credit cards and other financial services as incomes rise.

"When you are able to do local currency business, the more presence you have, the better off you are," one banking executive told us late last year. "The west is developing and it is developing fast or faster than the national average. Secondly, the government is encouraging western expansion and they are making branch licensing easier."

Foreign banks were first allowed to open branches in western and northeastern China in late 2003, but the lack of ability to do local-currency business hindered expansion.

It all bodes well for the Chinese consumer, who has one of the world's highest savings rates -- and enjoys some of the world's worst customer service when it comes to banking.

And not just Chinese consumers will benefit, though they will probably benefit the most, since there is more of them than just about anybody else.

Foreign businesses will benefit as well, since they will be able to get access to good banking services wherever they go throughout China

For example, it's a nightmare for my company to transfer money -- even within Shanghai. Too often, an employee has to carry stacks of cash between bank branches.

With international banks expanding in China, and bringing international service standards -- and product offerings -- local banks will have to shape up to stay competitive.

I'm looking forward to the day when I can transfer money electronically from my business account to my landlord, to my employees, and to my suppliers. Or, at the very least, write them checks.

In America, paper checks are so last-century. An inconvenience and a cost.

Here in China, paper checks, for some businesses at least, would be a big leap forward, and a cost savings over the current paper-bag-full-of-cash payment mechanisms.

Not to mention the security and risk management improvement.

Hotel Hotspots

Three years ago, work took me on a trip out of Shanghai, and my colleagues and I stayed at a decent-looking hotel -- one of the best in that area.

We were the only people there. When we checked in, the staff acted surprised that we needed things -- like room keys. Nobody showed us where to go, and for a little while we stumbled around in the dark, looking for our rooms in the multi-building complex.

The rooms were chilly, and badly supplied. None of the amenities I'm used to seeing in even the worst hotels in the US or Europe were present.

The hotel was located on a road lined with industrial enterprises -- but the road was strangely deserted every time we were on it.

The hotel managers had trouble getting us drinks, or calling us taxis.

The promised Internet connections didn't exist -- instead, I was given directions to a near-by Internet cafe. The cafe was a bit of a hike away, full of teenage boys and cigarette smoke. Not the worst working environment of my life, but not the best, either.

Hotels are high-visibility business projects. They can bring some glamour to a town, give a place for visiting executives and investors to rest their feet in nice surroundings.

Clearly, a good hotel is a must-have for any up-and-coming business city in China.

Three years ago, that feeling, that a location "should" have a hotel, was the primary consideration for putting one up.

But is the location any good? Is management effective? Is the hotel going to make money? These are the questions that must be asked instead. And today's hotel executives are doing just that.

As this week's story by Edward Russell and Miranda Li demonstrates, business logic is the driving force now in the industry -- and it is now flourishing, even in second-tier cities.

As a result, developers are paying attention to budget hotels -- less showy, but more practical, since most travel in China is domestic, and subject to price constraints.

However, as foreign interest continues to grow in central and western China, we're starting to see some high-end properties as well.

I'm now looking forward to visiting the Shangri-La hotel in Wuhan, for example.

Rooms are just around $100 a night -- a bargain by international standards. The hotel has conference and meeting rooms, a fitness center with a swimming pool, and honest-to-goodness Internet in the guest rooms.

But the same town also boasts a Novotel, a Ramada and a Best Western -- all of which have been getting great reviews from business travelers.

The Ramada Plaza Tian Lu hotel has all the same amenities as the Shangri-La, as does the Novotel Xin Hua, and the Best Western Premier Wuhan, and prices are about the same or lower -- many sites list prices at between $60 and $70 a night.

"I just attended a hotel conference at the Ramada Wuhan," says a typical review. "I was expecting a disappointing experience typical of interior cities. I was pleasantly surprised that it had good service and cleanliness."

Last time I traveled into China's interior, away from the major cities, I stayed with friends.

Next time, I'm going to give some of these new hotels a try.

India's Outsourcing Headstart

China has three major strikes against it when it comes to software outsourcing.

The first -- and biggest -- is that India has already sewn up the industry. It's got the contracts, the customers, the experience, the employees, the facilities, and the certifications.

Home-grown Chinese companies start out far, far behind. But even US and Indian outsourcing firms who come to China have to grapple with the lack of experienced personnel.

Typically, China dominates industry by coming in at a lower price point, and with more people. But India is at about the same price as China when it comes to wages -- at least, on the coasts.

In Central and Western China, Chinese firms could have a price advantage, and I know of a couple of domestic firms that are hard at work setting up branches inland in order to capitalize on just that. But, unfortunately, the lack of language skills and experience gets progressively more pronounced in the interior of the country.

In addition, India has plenty of engineers to go around. In fact, Indian colleges and universities are well suited to producing masses of engineers who can go to work for outsourcing companies -- again, because of India's track record. Established outsourcing firms have partnerships with universities, consult on curriculum, and produce veterans who can go back and teach. There are also plenty of internship opportunities. It's easy for an Indian student to find out what skills are needed in a software development job.

None of this is the case in China. Without a track record, without a critical mass of established firms, without collaboration between companies and educational institutions, the software engineers who graduate in China are less likely to have the skills needed by a world-class development house.

Related to the problem of track record is the issue of trust. Indian outsourcing firms have a long history of working for the world's top financial institutions, and, for the most part, doing a decent job protecting intellectual property and customer data. When a problem does happen, the industry reacts quickly, setting up security measures and procedures. For example, after Citibank had a problem with an outsourced call center employee stealing customer data, the Indian outsourcing industry put a process in place for tracking the history of each employee in the outsourcing industry and for checking the backgrounds of new hires.

In addition, India's justice system is reasonably fair and transparent. For India, the outsourcing industry its one of the main drivers of the economy. If anything happens to threaten that, the entire country can mobilize.

In China, the outsourcing industry is an afterthought to the country's main business, which is manufacturing. Intellectual property rights and other issues of critical importance to software developers don't get the degree of attention that they could. Even Microsoft backed down on its battle to protect Windows and issued a low-cost version for the Chinese market.

The last issue is not necessarily the most significant, but the one that comes first to mind of potential US customers: the language gap. Sure, Indian programmers have accents, but their knowledge of the English language itself is superb and they are generally easily understood. To make the language gap even smaller, many Indian outsourcing firms run "accent amelioration" programs for their employees.

In China, the problem isn't the accent as much as basic language skills. English just isn't as widespread in China as it is in India. For manufacturing firms, this is not a significant barrier. But for call centers, for data processors, and for programmers who have to work on projects with partners around the globe this is a major problem.

Today, the bulk of software development in China is localization projects -- producing Chinese-language versions of software and websites for foreign clients. There is also some domestic work, especially for Chinese financial firms looking to modernize their systems.

I predict that, in the next few years, China might become a regional outsourcing hub, producing software for Japanese and Korean companies, for example, as well as small, specialized projects for international firms. Other companies might outsource software development here because they already outsource of their manufacturing, or are interested in getting a foothold in China's domestic market by first playing nice with the Chinese government and creating white-collar jobs.

But, barring a significant catastrophe in India, it is not likely to catch up with that outsourcing giant anytime soon.

The Biggest City You've Never Heard Of

Actually, the above headline is not true. If you're reading our publication, you probably have heard of Chongqing - and heard a lot about it.

If Beijing is China's Washington, D.C. and Shanghai is New York City, then Chongqing is Chicago.

I used to live in Chicago - the American one. My first journalism job out of college was in the Windy City. Chicago's heritage is as a frontier town, though it's pretty civilized these days. I was always nostalgic for the past, however - that feeling of excitement, of being at the frontier, of building something new.

Today, Chongqing is that frontier. It's the frontier of industrialization, of modernization, a front line in the move from the farm to the city.

Shanghai, with dozens of pizza delivery places and a half-dozen competing English-language city magazines, with its supermarkets and movie theaters, its five-star restaurants and its World Expo, can hardly be considered a frontier any more.

In Chongqing, other than KFC and McDonald's and hotel restaurants - and how can you escape those? - it's hard to find a good western restaurant.

But Chongqing is the home of the world's biggest public toilet, where 1,000 people can answer nature's call at once.

The Chinese government is investing in highway improvements, the city is developing special economic zones, there's a monorail in town, and the long-lost twin of the Chrysler Building is going up.

While the rest of China is growing at an average annual rate of 11 percent - Chongqing is growing at 14 percent.

Over 30 million people live in the municipality, making Chongqing one of the largest metropolitan areas in the world. Most of these residents live in the countryside, not in the city proper - but that's likely to change as the city continues its push for industrialization.

Progress comes with a price, of course. According to the Natural Resources Defense Council, Chongqing is the fifth most polluted city on the planet.

This week, however, the city government announced that it's most of the way through a project to move 100 polluting factories out of the city - 82 are already gone and the rest will be moved within the next five years, according to the Chongqing Economic Commission.

I'm not sure how effective this plan will be to reduce pollution. After all, an estimated 200,000 people move into the city each year - many of them to work in new factories being built on the outskirts of the city. That's today's outskirts - the city is spreading out at a rapid pace.

Beijing and Shanghai are under pressure to clean up because they're showpieces - the Olympics and the World Expo are bringing in significant attention, but these cities have always been doors to the West. This is where the foreign diplomats and businessmen and journalists set up shop.

Development in Chongqing, however, will be independent of these considerations. It will be a true test case for whether the Chinese government is able to take a tough line on pollution and sustainable development - not for the sake of international perception, but for the sake of the long-term viability of the city.

Marketing to the Second Tier

The residents of Shanghai and Beijing have, by now, gotten used to a superabundance of advertising. On television and on the radio, in newspapers and magazines, in buses and subways, on the streets and in taxicabs and even in elevators. They haven't reached the level of cynicism of Western audiences, perhaps, but they're increasingly more sophisticated and demanding consumers.

By comparison, consumers in China's second and third-tier cities are where the tier-one cities were a few years ago: they're less used to advertising, less familiar with the products being advertised, and less willing to pay more for foreign brands.

They need more explanation of what a product does, and they need a lower price to be able to afford it. But, at the same time, they don't want to be talked down to, or get an inferior product pawned off on them.

Discovery Ogilvy China recently surveyed consumers in 65 lower-tier cities around China. The report, "The Real China," was released this month and shows some interesting insights, the results of which can be seen in our lead story.

To me, the fact that Ogilvy conducted this survey is a sign that international marketers are increasingly starting to look beyond Shanghai and Beijing when marketing their products in China.

And it's about time. Chinese consumers throughout the country need the same kind of services and products available in the big cities. They may have less purchasing power, and will be more selective in what they buy, but their sheer numbers far outweigh the populations in the tier one cities.

And as the economy continues to grow, so will their wallets. When the coastal markets are becoming increasingly saturated and hyper-competitive, it makes sense to look inland for new opportunities.

It will be interesting to see how fast the changes will come – and which foreign companies will take advantage of these trends, and which will stumble.

I hope that Ogilvy will continue to conduct this survey in the years to come, and that other marketing organizations join them in helping create a better picture of the Chinese consumer.