China Inland Cities Power New Growth Offsetting Slowing on Coast

Don’t talk to Tobias Kerle about China’s slowing growth, the general manager of Continental AG’s 12-month-old tire factory in the city of Hefei is too busy planning to double output.

“We’ve been ramping up the plant at a speed more than double what we knew before,” said Kerle, 42, at the factory in the capital of Anhui province, 400 kilometers (250 miles) inland from Shanghai. “Five years ago this city had small roads. They’ve been bulldozing things left and right, putting in flyovers, a new subway and an airport.”

As rising wages and costs sap growth in the coastal centers that led China’s 30-year export boom, Hefei’s 15.4 percent expansion last year puts it in the vanguard of a new tier of inland powerhouses. Cities including Wuhan, Zhengzhou and Wuhu are drawing capital and factories from the east and abroad as companies such as Continental, the world’s fourth-largest tiremaker, and Unilever (ULVR), the world’s No. 2 consumer-products maker, bet they will underpin the nation’s next decade of growth.

“Cities in central China and even some in the west are becoming a new driving force for China’s economy,” said Zeng Xiwen, vice president for North Asia at Unilever in Shanghai. “Hefei’s got all the attributes investors need: land, energy and labor resources, rich education, ports nearby, talented workers and a huge consumer market on its doorstep.”

Unilever (UNA), headquartered in London and Rotterdam, has shifted seven factories to Hefei from Shanghai and plans to make the city its largest global manufacturing center.

Faster Growth

At least 25 more of the world’s 500 biggest companies, including Zurich-based ABB Ltd. (ABB) and Japan’s Hitachi Ltd., have factories in the city. That’s helped give Hefei a growth rate almost 70 percent higher than the 9.2 percent average for the country and almost double the 8.2 percent in Shanghai, China’s financial capital.

While Premier Wen Jiabao has set a national growth target of 7.5 percent this year, Hefei is aiming for 15 percent. Chongqing, China’s wartime capital on the Yangtze River, expects 13.5 percent, while Henan provincial capital Zhengzhou, Changsha in Hunan and Chengdu in Sichuan all predict growth of 12 percent or higher.

“Forget about national GDP,” said Ben Simpfendorfer, founder of Hong Kong-based consulting company Silk Road Associates. “It’s time to focus on the inland city clusters that will drive China’s future growth.”

Doubling Exports

Successfully shifting manufacturing inland could more than double China’s share of global exports to 23 percent in a decade, said Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong. That would give more time to reduce the economy’s dependence on investment, which investors in a Bloomberg poll forecast could cut growth to less than 5 percent by 2016.

Companies moving to Hefei from Shanghai can lower costs while still retaining access to the coast via the nearby Yangtze River, new highways, and a rail link that cuts the journey time to China’s business capital to as little as 2 hours and 23 minutes.

Unilever’s (UNA) move slashed manufacturing costs by at least 25 percent and was necessary because coastal locations in Shanghai, Zhejiang and Jiangsu provinces are “struggling with lack of energy, labor and land resources,” said Zeng.

Continental and Unilever also cite the quality of Hefei’s colleges, such as the University of Science and Technology of China, ranked the third best in the nation by Britain’s Times newspaper in 2011-2012.

Cheap Land

“You get cheap labor, you get cheap land and then you utilize the highway and the high-speed train and you can easily shift exports to Europe, the U.S. and Japan,” said Huang Haizhou, chief strategist in Hong Kong for Beijing-based China International Capital Corp. “The rapid customs clearance system means that, even from Hefei, they can reach the Shanghai port within eight hours. Many developing countries, including India, can’t compete with that.”

Hefei’s 5.7 million population is bigger than Singapore’s while the surrounding province is home to almost 60 million, more than Spain. About half of China’s economic output and more than 40 percent of its consumer market are within 500 kilometers of Hefei, according to consulting company KPMG.

The city’s appeal helped foreign investment rise 16 percent last year to $1.8 billion while overall investment, mostly from eastern coastal areas, surged 30 percent to 170.3 billion yuan ($26.9 billion), according to the Hefei Investment Promotion Bureau. Exports leapt 34 percent to $7.82 billion