Widely regarded as the best place in China to do business, Hangzhou is reknowned for its infrastructure and technical talent.

Hangzhou is an ancient city, a former imperial stronghold known for its natural beauty. The capital of wealthy Zhejiang Province, Hangzhou lies 120 km south of Shanghai and is most famous for its West Lake, an inspiration for artists and leaders throughout the ages.

While Hangzhou remains a major tourist spot, it has also developed into Zhejiang leading economic engine, accounting for 22 percent of the province's GDP, nearly 30 percent of its imports, and 17 percent of foreign direct investment. Foreign firms are attracted to Hangzhou by steady infrastructure improvements, a highly educated work force, a strong spirit of private enterprise, and access to Zhejiang local markets. At the same time, high property costs and a shortage of qualified managers are concerns for many of Hangzhou foreign-invested companies.

Local officials view the eastern Jiangsu city of Suzhou as Hangzhou main competitor for foreign investment. Suzhou is the region's second-highest recipient of foreign investment after Shanghai, benefiting from proximity to Shanghai's top-notch support services for foreign companies, and from efficient logistics links. But Suzhou is currently suffering from problems related to overinvestment: widespread human resource shortages, rising raw material costs, severe power shortages, and congested transportation routes. Hangzhou is in a good position to narrow the Suzhou gap, simply because it is less heavily invested and has more room to grow.

Strengths: Infrastructure and technical talent

The Hangzhou city and Zhejiang provincial governments are modernizing transportation, shipping, and logistics networks. Of this work, the most crucial is the expansion of road links to Shanghai, a route on which many Hangzhou companies depend to move goods out of the country and connect to distribution centers across China. Two extra lanes are currently being added to the 102 km Hang-Pu Expressway between the two cities, which is supposed to be completed by 2007. Traffic problems will ease further after completion of the Hangzhou Bay Bridge targeted for 2008, which will allow Ningbo-Shanghai road traffic to bypass Hangzhou. In addition, the new Xiaoshan International Airport opened in 2000 with direct flights to Hong Kong, Japan, Singapore, and South Korea, means that Hangzhou-based businesspeople no longer have to fly out of Shanghai for their international travel.

Hangzhou has a deep pool of talented workers, with 35 colleges and universities that produce tens of thousands of graduates each year. Zhejiang University is one of the country's top institutions of higher learning and supports research centers in biotechnology, software development, and engineering. This educational base complements Zhejiang traditional strength in promoting private industry and entrepreneurial activity.

Property, people, and power shortages

All of the foreign company managers interviewed for this article were concerned with the high costs of residential property in Hangzhou, which rival those of Shanghai. This is a significant issue because it raises fixed costs; most companies consider moving to Hangzhou because they hope it will help lower expenses relative to Shanghai.

A related problem is the dearth of trained managers. Second-tier cities throughout China are experiencing a brain drain to Beijing, Shanghai, and abroad, and Hangzhou is no exception. Foreign companies have trouble finding local talent to fill demanding managerial-level positions. This problem is exacerbated by high housing prices, which discourage potential candidates from elsewhere who would need to rent living space in Hangzhou.

Like most other Chinese cities, Hangzhou faced power shortages this summer and will continue to do so through 2005. Companies in Hangzhou development zones express concern about the shortages, but note that advance warning systems for power shutdowns have improved from years past. In addition, a new natural gas line for Hangzhou, scheduled to begin operating by summer 2006, is expected to supply enough power to meet demand. The power situation remains very much in flux, however, with plans and target dates subject to change. In the meantime, most foreign manufacturers are purchasing diesel generators, with rebate subsidies available from Hangzhou development zones.

Riding the YRD investment wave

The strong foreign investment tide washing over the YRD is providing a short-term boost to all regional industrial centers, including Hangzhou. The city's solid infrastructure and educational foundation should support growth over the long term, especially in comparison to other nearby investment locations.

As Hangzhou manages future expansion, a key question will be how the city integrates higher education resources into the local economy. A potentially dynamic system of education-industrial partnerships has been slow to take off; in the meantime, talented students are lured by opportunities elsewhere. But educational strengths may become more apparent if Hangzhou can attract higher-value investments. Hangzhou indeed has the potential to base its economy on high-value research, development, and engineering projects—which would improve the city's chances for long-term success.

Other cities in the east include:
Shanghai
Ningbo

Source: This is an excerpt from an article originally published in the Jan-Feb, 2004 .issue of the China Business Review. Reprinted with the permission of The US-China Business Council, Washington D.C.