When In China - Doing Business in 2nd & 3rd Tier Cities

Part 1 of 3 published on Monday

Second and Third Tier Cities

The tier classification of Chinese mainland cities is usually based on a combination of factors, such as political status, economic power, size, and regional influence. The lists vary, though few disputes that the first tier consists of Beijing, Shanghai, Guangzhou, and Shenzhen, while the next 90 or so cities are the 2nd and 3rd tier ones. It is at the line between 2nd and 3rd tiers where most of the variations reside, which is not the concern of this paper.

The second tier or third tier cities in China do not resemble rural towns or fishing villages. In fact, several of Chinese 2nd tier cities have populations around 10 million, or will have in a few years. Yes, they are 2nd tier cities in China, but their sizes are similar to that of Chicago.

The infrastructure in those cities is rather modern. Many 2nd tier cities received G3 licenses last year. There is still access to a high quality work force, thanks to China's solid basic education system. For high-level talent pools, Beijing and Shanghai do have high concentrations of China’s most prestigious institutes, such as Peking and Tsinghua Universities in Beijing, and Fudan University in Shanghai. But there are first-rate universities in many second and third tier cities as well.

Several years ago, transportation from inland regions to seaports or other destinations was an issue, due to road conditions and omnipresent local toll-booths. The logistics environment, like many other things in China, has since changed dramatically. Roads have been constructed or improved, and airports built or renovated. More and more manufacturers are shipping via air. Kunming, provincial capital of Yunnan and a sister city of Denver, is now building China’s 4th largest airport. While number four does not sound so impressive initially, considering that the
first three are the gigantic airports in Beijing, Shanghai, and Guangzhou, it is really still significant. When HP expanded their operations to Chongqing last year, the city extended an airport runway by 400 meters to accommodate Boeing 747-400 cargo planes’ non-stop flights to Europe and America.

Earlier this year, Foxconn, the manufacturer of our iPhones, iPods and many other gadgets, made the headline news when some workers in their Shenzhen factory started leaping off the buildings. Many contributing factors are blamed, including rapid rising costs in Shenzhen and long time separation from their families – just as in all first tier cities, the workers in the labor intensive factories are migrants from inland China. So Foxconn started building a new factory in Zhengzhou, an inland second tier city. That factory will house 300,000 workers, many from Shenzhen.

This white paper is based on the presentation by Dr. Jeff Wang, President of Poetica, at Colorado State University’s 2010 China Colloquium.

About POETICA

POETICA provides market research and partnership management for companies doing business in China. We also work with Chinese investors, in selecting emerging technologies or products, for commercialization, and additional growth.

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