Making Shanghai a world city

(By Luo Man)

In the last 15 years Shanghai has leapt forward and positioned itself as the gateway to China. Now the city is caught between its forward momentum and the challenges it must overcome.

Can it - will it - become one of the world's centres for finance, commerce and shipping? Will it elevate itself into a hub and a gateway, for China and for Asia Pacific?

"It seems to me that today's topic is about a dream, the dream of a global metropolis," said China Daily's Editor-in-Chief Zhu Ling at the opening of the newspaper's 12th CEO Roundtable in Shanghai on Friday.

"Shanghai has surprised the world with tremendous achievement along the way building itself into a centre for the world economy, finance, shipping and trade."

More than 30 business and government executives gathered at Shanghai's Hyatt Hotel for a discussion on "The World's Shanghai by 2020."

"In the last 15 years we have seen a lot of changes in Shanghai," said Edward Tse, managing director of greater China for consultant Booz Allen Hamilton in his opening speech. "Pudong has changed into a very modern living and working environment."

Shanghai's own momentum has created challenges that the city now has to overcome.

"A lot of people have the confidence that Shanghai will continue to do well," Tse said. "The question is how do we get it there? How can we as the various stake holders from the business community as well as the government work together?"

The city has a lot to offer, Tse said. It has a reasonable transportation and infrastructure network with a large port facility, comparatively ordinary off-market conditions, access to human resources, a location at the mouth of the Yangtze River Delta, financial institutions and a comparatively pro-business government with a reasonable degree of transparency.

At the same time, Shanghai has embraced outside influences faster than almost any other city in the mainland. Look at fast food.

James Chu, senior vice-president for the McDonald's China Development Company, said market penetration of fast food in Shanghai is over 59 per cent, similar to the 65 per cent rate in developed countries. By comparison, other places in China have allowed a 20 per cent penetration rate for restaurants such as McDonald's.

Now, as it becomes a more cosmopolitan centre, Shanghai is at a crossroad.

"The per capita GDP has increased significantly over the last five to 10 years," Tse said. "Today it is roughly about US$6,000, depending on what statistic you believe."

"Shanghai should focus on achieving something like US$8,000 per capita GDP by the year 2008," he said.

One way to accomplish this goal is to bring in more foreign investors in specific fields.

"The Shanghai government recognizes its limitations on its land, on its resources, on its environment," he said. "They believe they have to turn their attention to knowledge intensive, high value added, lower resource utilization and lower environmental pollution types of business."

Two areas that can play a big role are advanced manufacturing and high-end services such as finance, trade and information.

Another executive that called for the development of the service sector was the chairman of Carrefour, the French retail giant with 62 hypermarkets across China.

"I think it is time to establish a service sector, such as tourism, insurance companies and consumer rating," said Chereau. "Shanghai can be the first (in China) to be open to do this kind of business."

Challenges ahead

As it develops even further, Shanghai may just have to tackle a few issues, said Tse. Among them are diminishing human resources, the rising cost of real estate and obvious environmental concerns.

Other issues raised around the table were government transparency and access as well as a need for better transportation links.

"All the problems that we are currently discussing are not new to the major cities in the world," said Ying Yeh, vice-president of Eastman Kodak.

The fact that Shanghai is now trying to tackle these issues is a clear sign of its growing stature.

However, Ying agreed that higher costs are a problem that corporations setting up in Shanghai have to deal with.

Over the last few years, its relative affordability made Shanghai an attractive option when setting up shop, she said, after all "a Chinese PhD is just as good compared to all the other PhDs."

But "it is getting more expensive." Corporations need Shanghainese to help them "provide a more competitive edge."

People power

For any business, it is people that make things happen.

International banker HSBC makes finding the right people a standing order.

"There is no shortage of very, very highly qualified talent coming out of the schools and the universities. The challenge for all of us is to hire experienced talent," said Richard Yorke, HSBC's chief China executive.

HSBC plans to add 800 staff in the next 12 months, a quarter of them in Shanghai, he added, and that is not always easy.

"One of the biggest challenges is the competition for experienced HR talent."

Joseph Tse of Deloitte, agreed. With turnover of between 20 and 25 per cent the company is always on the lookout for talent.

"Looking for talent, training, retaining them and developing them into leaders of our practice is always in the top of our agenda."

The tough competition can force companies to rely on expensive expatriates for their development needs, said Foo Piau Phang, president of Dell China.

"We would like to know if there is any way we can relieve some of the expatriate cost," he asked.

Another aspect that is lacking is focused education, said Horst Loechel, board chairman and vice-president of the Shanghai International Banking and Finance Institute.

"What is really needed is professional education of a high, high level," he said. "It's nice to know a lot of things, but more importantly is how to use it and make the business more efficiently and more profitable."

Real costs

The cost of real estate was never far from the surface during the luncheon and the hour-long discussion that followed.

Ken McCall, CEO of TNT China, said his company's real estate costs have shot up in little more than a year.

"It has gone up 45 per cent in 16 months," he said. "We can't go to our customers with an increase of 45 per cent every 16 months."

One aspect that may be tackled in the future is relocation of people, said Nicholas Loup, Grosvenor's managing director for Asia Pacific.

"By coming out with a better, more effective system for relocation you can then come up with a plan for redeveloping and providing more properties in areas where they are needed," Loup said.

People who need to be relocated should not be moved to the far reaches of the city, rather, affordable housing should be built not far from where they live and work.

While the cost of real estate is a growing concern, said McCall, so is the ability to get to work or move products and people within the city, the country and beyond.

"I would say people and infrastructure are clearly the two most important things if Shanghai wants to be a truly international hub and a hub of Asia."

He said the cost of logistics in China is double what it is in other parts of the world. While the average spent on logistics in developed countries is between 9 and 11 per cent of GDP, the cost in China is between 18 to 22 per cent. The difference, some 140 billion euros (US$180.60 billion), could be spent on upgrading infrastructure.

"We have to be a low cost provider. It is very difficult to be in Shanghai," he said.

Logistical difficulties - and regulatory problems - can have very practical effects. Among other things, those difficulties put Shanghai at a disadvantage in the fashion world, said Pierre Denis, regional managing director of Asia Pacific for LVMH Perfumes and Cosmetics.

Shanghai could become a major international fashion city but "what counts is to have the products first."

"In Shanghai the import situation is a little bit complicated. We are one month behind," he said.

Ultimately, said McCall, logistics can hurt any development effort.

"Only if you drive you understand. People don't have licenses. People have no insurance - Just coming to Pudong is very difficult."

For some executives, hassle-free access to the world is a top priority.

""Need to have large flexibility in things like access to the airport without queuing for hours. Need to have flexibility of visas. Need to have flexibility of moving the goods and services," said Christian Reinaudo, Executive Vice-President and Asia Pacific President, Alcatel.

A world-class airliner - akin to Cathay Pacific - would give the city a big push towards that flexibility, added Jack Lin, CEO of Franklin Templeton Sealand Fund Management.

Legal base

Beyond logistics, there were also legal concerns that will need to be addressed as Shanghai looks towards 2020.

"If Shanghai were to be a financial centre of China or the region, we need to work towards getting a transparent capital market here," said Lin.

Among the most urgent issues, however, is IPR protection. IPR plays a role in a lot of industries, from fashion to high tech and entertainment.

"The whole world entertainment industry obviously very much believes in China," said Andrew Wu, Managing Director of Sony BMG Music Entertainment (China).

"Shanghai has a very important role to play because the Shanghai government wants Shanghai to become the cultural centre of China," he said.

"IPR is related to law and order. Law and order should not be just in theory but in practice."

"The cost of doing business in Shanghai is rising but the cost of IPR violations in Shanghai is going down - that is not a good match."

"You have to raise the cost of violating IPR issues in Shanghai. And that can be done, I'm sure."

Another important area is access to the government, said Anne Lam, chief representative at the Shanghai office of Fidelity Investment.

"I always find it difficult to communicate to the related government entity."

A green future

There is one area where Shanghai can take the lead in the next few years in environmental protection, said Peter Leupp, chairman and president of ABB China.

Both Shanghai and China face numerous environmental challenges but the city, as the financial engine of the country, could stay one step ahead. China is consuming energy at a rate 10 times the rate of the developed world.

It is in environmental protection that there are opportunities for improvement from which "you get immediate payback in a few years."

Of particular concern was the high consumption of energy coupled with a lack of supply.

"We all know that we are facing power shortages, but I think nobody can imagine a power outage during the World Expo (in 2010)," said Leupp. "I think this is an area where Shanghai really has to work."

Shanghai could also lead by complying with worldwide environmental agreements before it has to.

"One thing Shanghai can do is take a leadership position in areas China does not need to legally comply," Shane Tedjarati, president of Honeywell China.

For example, China has until 2040 to comply with the Montreal Protocol and eliminate ozone-depleting refrigerators. Europe has already complied and the United States is expected to by 2009.

"I think Shanghai can show a leadership position in the areas the can easily do with very little extra cost to the consumer, very little extra cost to the government but it can show it cares about the environment."

Another avenue open to both the city and its corporate citizens is to focus on energy saving at the same time as it increases capacity.

"Everybody is talking about adding capacity on the energy supply but I think it is also very important to saving on the energy supply," said Elmar Stachels, managing director for greater China for Bayer.

"On both sides you have the advantage. Less energy supply and less pollution on the environment - Beijing is talking about the green Olympics, I think Shanghai should talk about the green metropolis in Asia Pacific and we hope to help."

One area the city may have to seriously consider is transportation.

"I would like to see an improvement in the environment in terms of traffic, public transport, pollution related to the energy consumption," said Ian Thackwray, corporate vice-president of Dow Corning Asia.

Tug of war

Shanghai's future is anything but settled. Without a doubt, there are challenges ahead, but history has shown that there is also great opportunity.

"There are increasingly more concerns about Shanghai but there is increasing interest to come to Shanghai. The two forces are in a bit of a tug of war," said Dr. Tse.

Tse said Shanghai's authorities can continue to improve the legal environment, improve IPR protection, look to attract more and better trained workers fluent in both English and Chinese, work towards improving the environment and provide more facilities that would make life more attractive for foreign families.

"As we move to the year 2020 we would likely see Shanghai as a very, very international metropolitan area," Tse said.

Like China Daily's Zhu, Richard Lee, the China chairman of a company that sells Ferrari and Maserati vehicles sees Shanghai as a place that makes more than just products and services.

"Shanghai, to be an international city, needs to be a manufacturer of dreams."

(June 21, 2005)

Copyright 2004 by All rights reserved.