Foreign firms finding new fields

Despite loving Chinese history and culture, Kwon Oh-hyun didn't make his first trip to Xi'an, capital of Shaanxi province and an ancient capital of the country, simply to see the sights.

He instead went to help Samsung Electronics make plans for its future in the country's western region.

Kwon, vice-chairman of Samsung, took a group of 20 senior company officials to Xi'an in March to announce that Samsung will spend $7 billion to make advanced gadgets in the city, which is most associated with the army of terracotta warriors and horses that were unearthed at a site nearby.

"The move is sort of unheard-of before in Samsung, not only in the scale of investment but also the technology we would like to transfer to the Chinese side," said Kwon. "We expect to create a miracle here."

The factory, which will make NAND flash technology, a type of digital memory widely used in smartphones and tablet computers, is expected to come into operation in 2013. The operation will be the fruit of the largest foreign direct investment measured by value made in China's western region.

While labor costs are increasing rapidly along the coasts of East China, more foreign companies such as Samsung are looking to the country's west. Their plans promise to both bring renown to the region and to turn it into a magnet for foreign investment in the coming years.

In October, Samsung's headquarters decided to open a factory there. But the region didn't immediately grab the company's attention.

"Xi'an wasn't on the list even at the beginning," said Kwon, declining to elaborate on that statement.

After learning Samsung wanted to make a large investment somewhere in China, the Shaanxi government formed a special team charged with talking to the company. Two months later, Xi'an appeared on a final list of places that the company was most seriously considering investing in, finding a place alongside Beijing and Chongqing. Samsung chose Xi'an in March.

The city's greatest asset is its government support, Kwon said.

"Their great enthusiasm (in attracting the project) was so impressive that it triggered our decisions," he said.

To provide Samsung with a site for the project, the Xi'an municipal government prepared an area of 9 square kilometers in the western part of the city. Xi'an is also planning to establish an area that Samsung can use to import supplies tariff-free.

"We spent days on completing Samsung questionnaires that included more than 1,000 questions, and they covered a wide range of matters and issues, even including the quality of electricity in Xi'an," said Zhao Hongzhuan, a member of the Standing Committee of the Xi'an Municipal Committee of the Communist Party of China.

"We responded quickly to all their requirements, and of course, we were lucky to win the project.

"It's time (for foreign companies) to concentrate on cities in the west of China and to invest in the region, which is becoming a new driving force for China's economy," said Wang Zhile, director of the Ministry of Commerce's research center of transnational corporations.

Samsung is not alone in its interest in China's west.

In 2011, the computer maker Hewlett-Packard and electronics company Foxconn Technology Group announced they would invest $3 billion in Chongqing, a city in Southwestern China.

In early April, Ford Motor Co said it would modify its Chongqing factory to increase its annual output from 350,000 to 950,000 vehicles by 2014 in a project to be undertaken with its joint venture partner, Changan Automobile Group Co.

During the past year, the foreign direct investment going into China's western region has increased at a faster rate than that going into the country's coastal regions.

The Ministry of Commerce said China received $116 billion in foreign direct investment from last January to December, up 9.72 percent from a year before. Of that, the western region received $11.6 billion, up 28.24 percent year-on-year.

"Samsung's decision will lead to good results down the road," said Zhao, who is also secretary of the Working Committee of the Communist Party Committee of Xi'an Hi-tech Industries Development Zone.

"We are confident more foreign investment will continue to go into China's western region as well as into Shaanxi province."

Most of the foreign investment that goes into Shaanxi province is put into the development zone.

Cheaper, quality labor

Beyond local governments that are eager to attract companies, China's western region offers lower labor and operational costs, a plentiful supply of skilled workers and increasingly improved public accommodations.

Zhao said Xi'an's success in attracting Samsung was the result of several attributes: a stable supply of technicians, preferential policies, good infrastructure and efficient government services.

Among cities in China, Xi'an has the third most universities and institutes, from which more than 1 million students graduate every year.

Although it's an inland city, "companies can still gain access to coastal regions and developed markets overseas through ports, highways and rail links," Zhao said. "And that can guarantee that the time needed to take a trip from Xi'an to Hong Kong, Seoul and other business centers will only be from two to three hours."

Such attributes helped drive the amount of foreign investment in the city upward by close to 30 percent in 2010 and 2011.

The central government, to help the western region catch up with its coastal areas, introduced a western development policy in 2000.

Shaanxi province had 3,800 kilometers of expressways by 2011, which was the most in any province of the western region.

The province also plans to spend 170 billion yuan ($26.9 billion) to build an extra of 2,000 kilometers of expressway.

Chongqing, a large city in the southwest, has done much to attract foreign investment in the past two years.

In 2011, $10.53 billion of foreign investment went into the city, the eighth largest amount recorded in the country that year, accounting for one-fifteenth of the country's total.

More than 200 of the top 500 businesses in the world have opened outlets in Chongqing, Lan Qinghua, chief of the Chongqing Statistics Bureau, said in March. Lan said Chongqing is committed to opening up its economy.

"China's western region now has the attributes investors need: an enlarging consumer market, water, electricity, land, energy and labor resources and talented workers," said Li Qian, director in charge of managing foreign direct investment into Chongqing.

"In the next decade, the region will see the amount of foreign direct investment it attracts increase greatly."

Faster growth

"Samsung's decision will prove to be a great stimulus to Shaanxi's economy," said Zhao Zhengyong, governor of the province.

For one, it will help Shaanxi transform its industrial structure, he said.

The Samsung project is expected to attract investments in Xi'an from close to 200 companies and lead to the creation of more than 10,000 jobs.

The Shaanxi provincial government has set its target for economic growth this year at 13 percent, up from 12 percent last year.

That far exceeds this year's national growth target of 7.5 percent, which was announced by Premier Wen Jiabao earlier this year.

Chongqing, for its part, is aiming for 13.5 percent growth, and Chengdu, in Sichuan province, is expecting to have growth of 12 percent.

Last year, Chongqing's economy grew almost 16.4 percent, faster than the national economy, which increased by 9.2 percent. Chongqing's rate was also nearly doubled the 8.2 percent rate seen in Shanghai, China's financial hub. Chongqing has set itself the goal of attracting $11 billion in foreign direct investment this year.

Labor, meanwhile, has quickly become more expensive in China in the past few years, helping prompt some foreign companies, including the world's leading sportswear maker Nike, to move their factories from China out to countries such as Vietnam, where work can be obtained for less.

But many government officials and experts believe that such transfers will not become common in the future, noting that China's economy still has a lot of momentum. Also, they said, of the companies that are moving factories, many are of the type that requires a lot of manpower.

Despite the risk of further deceleration, China's economy is still growing faster than that of many other nations. To help ensure that will continue, the country has pledged to encourage domestic consumption in the years ahead. China receives the second-largest amount of foreign direct investment, just behind the United States, and the largest amount among developing economies.

Since November, the amount of foreign direct investment in China has fallen for sixth consecutive months. In April, the figure decreased by 0.74 percent year-on-year.

"The Chinese government doesn't need to worry about the drop. This cannot last long, and China is still very attractive," said Gerard Worms, chairman of the International Chamber of Commerce.

"China will continue to be attractive for years, even as capital shifts to the west from the rich coastal region," said Huo Jianguo, director of the Chinese Academy of International Trade and Economic Cooperation.

"I have to say that cities in the west have a huge potential to absorb foreign direct investment and that cities there will drive China's future economy."

The westward movement of international companies such as Samsung and HP will open opportunities in the region for other companies, which are likely to follow closely on the heels of the pioneers.

That will be the beginning of what Li Zhijun, director of Xi'an Bureau of Investment Promotion, calls the "ripple effect".

"The ripple effect from Samsung will be huge," and will lead to "slews of other foreign companies piling into Shaanxi and thus driving the local economy".

Since Samsung announced its decision early this year, the Shaanxi government has welcomed a number of foreign companies and visitors that are looking to make investments. Take Messer Group GmbH, a German company that manufactures and supplies various types of gas. It had planned to set up a small branch in Xi'an last year but later decided to open a fully fledged factory there.

Westward Ho!

The US company Applied Materials Inc, a producer of semiconductor equipment, is one of the first batch of foreign companies that decided to establish factories in China's west.

In 2003 - three years after the central government introduced its western development policy - the company decided to establish a global research and development center in Xi'an. The company has so far invested $255 million in the center.

"Xi'an has a rich reserve of talented workers thanks to its large number of higher learning institutes," said Zou Gang, general manager of Applied Materials Xi'an. "Also the government's policies are preferential."

Since the western region's economy is only in the early stages of opening up, "many of our foreign staff members who are working here said they don't find a great number of conveniences in their daily lives - on matters ranging from where they should eat and live to the sort of transport they can take," Zou said.

"Fortunately, the local government is cooperative, flexible and responsive."

Li Qian from Chongqing said the government should place a priority on having "stable and continuous policies, transparent rules and regulations and convenient access to various types of information".

As the country's west make preparations for its own economic rise, it all the while faces more intense competition from rival cities in central China that are also intent on attracting foreign companies.

Wuhan, in Hubei province; Zhengzhou, in Henan province; Wuhu, in Anhui province, and other cities are all welcoming capital and factories from the east and abroad. Two of their most recent successes came in attracting Unilever, a large maker of consumer products, and Continental AG, a tire maker.

Unilever, headquartered in London and Rotterdam, has moved seven factories to Hefei, capital of Anhui province, from Shanghai and plans to make the city its chief center for global manufacturing.

Besides Unilever, at least 25 other of the global top 500 companies have factories in Hefei. They include ABB Ltd, which provides engineering and other services, and the Japanese conglomerate Hitachi Ltd.

Ministry of Commerce data suggest that the amount of foreign direct investment entering China's central region in the first four months of the year increased by 12.6 percent year-on-year. The comparable figure for the entire country, meanwhile, decreased by 2.38 percent in the same period and that for the western region decreased by 15.2 percent.

"Judged by its preferential policies and infrastructure, the central region is less attractive than the western region," Huo said.

Still, western cities should work to add to their stock of "transportation, talent, service" and other resources.