Apr 30, 2010

Chengdu: From Cultural Hub to Software Hot Spot

Chengdu is fast transforming itself into the “Bangalore of the west”, capitalising on its vast talent pool and infrastructural resources to emerge as an efficient mega city.

“Whether it is an MNC or domestic business, Chengdu is a must-go”

Capitalising on its stature as an aviation hub and financial centre of western China, Chengdu is integrating e-commerce into its modern economy and transforming itself into a more efficient mega city. The city is making software and service outsourcing industry its strategic pillar industry.

Offering a series of preferential policies and growing into China’s western Silicon Valley, Chengdu is the choice of several international MNCs looking to set up back-offices or development centres to capitalise on the good talent pool and low operation costs. Accenture picked Chengdu to set up a Global Delivery Centre in 2009, while DHL and Maersk followed suit shortly after. Besides MNCs, local giants such as Alibaba.com have established large centres combining R&D, maintenance, disaster recovery functions and training in the same year. As one of the fastest growing cities in the service outsourcing sector of China, Chengdu has been hosting the annual China International Software Summit, also known as Chinasoft since 2003.

Striving to be ‘Silicon Valley’

Moulding itself into the “Bangalore of the west”, Chengdu collaborates more than competes with India’s “Silicon Valley.” For instance, the first direct flight between China and Bangalore originates from Chengdu, reflecting the booming cooperation between the two cities. This will increasingly help Indian techies seeking to establish operations here. “Indian IT companies are under strong pressure from their customers to spread their human assets in different regions to balance risk. So far, Indian IT companies are mainly operating from India but will have to find another location to guarantee business contingency,” says Victor Jansson, Deputy General Manager of Chengdu Tianfu Software Park. In late 2009, Wipro Technologies, India's third largest software vendor set up its global delivery centre at Tianfu Software Park.

New Tianfu City, the future “software industry town and new urban landmark” of Chengdu, houses Tianfu Software Park, spanning 1,150,000 sqm of construction area, which has become a hot spot for global renowned software and service outsourcing companies such as IBM, SAP, Nokia-Siemens, Accenture as well as domestic giants Huawei, Tencent and Alibaba. The vast talent pool of over 120,000 IT and outsourcing industry professionals in Chengdu and services provided by the park such as HR solutions and public technology platform give them a competitive edge. “The labour cost is between 20 per cent to 50 per cent lower than first-tier cities such as Shanghai and Beijing, with a stable labour market, especially in the IT industry, having a low turnover rate in comparison to other cities in China,” says Jansson. “Key factors to guarantee success for foreign companies coming here: number one is to hire an experienced GM which accounts for half of the success, the second is the localization of HR functions as opposed to dispatching a team of recruiters from Shanghai.”

Drawing in Foreign Players

With the presence of 140 global 500 enterprises in Chengdu, the city holds the largest total foreign investment in western China, making its financial industry, which includes nine major international banks, the biggest finance centre and the gateway for foreign financial institutions in western China.

Chengdu is one of the leading second-tier cities in China and one of the most important cities in western China. Whether it is an MNC or domestic business, Chengdu is a must-go. Despite the fact that Chengdu also felt the ripple effect of the financial crisis in 2008/9, some major MNCs, such as Amazon and Maersk, still ventured into Chengdu, because a land-locked city like Chengdu is seen as being more insulated from factors affecting coastal areas, and the market in southwestern China is seen to be more stable.

Notably, the newest commercial property projects of international quality, single ownership and downtown buildings are Yanlord Landmark and One Aerospace Centre due to come on line in mid 2010. Grade A office rents are only a third or a quarter of those in Shanghai. Moreover, infrastructure development, including metro lines, new roads and new municipal facilities, will also soon complement its commercial property market further. One of the major trends of commercial property development is the upgrading of both supply and demand. Chengdu will have more international standard buildings developed by major international developers from the US and HK. More tenants are willing and going to relocate to better buildings as there have been a trend of increasing relocations in the second half of 2009. Serviced offices are another draw. Currently, there are only three service providers in the market – Regus, Servcorp and a local provider called CAP. Regus and Servcorp, being the more mature centres, have enjoyed high occupancy rates over the last two to three years.

Most MNC’s have their downtown offices located within ring one, while expats generally locate themselves in the south Tongzilin area. Chengdu has excellent living facilities, with the south and west districts being the most developed areas. There are over 10 bilingual schools, 27 four-star hotels and 14 five-star hotels around the city, including Intercontinental Century City Chengdu, Sheraton Chengdu Lido, Crowne Plaza Hotel Chengdu and Shangri-La Hotel, plus two international standard golf courses - the Mumashan International Golf Court and Qingchengshan Golf Court.

"During the pre-reform era, Chengdu benefited from an industrial policy that favoured the build-up of inland economies. Chengdu became the base for military research and development. That legacy has served Chengdu well, allowing the city to develop into a destination for IT outsourcing and begin to develop its own R&D capacity,” says Stephen Joske, Director of China Forecasting Service at Economist Intelligence Unit. “While advanced R&D will still be stronger in Beijing and Shanghai, a substantial cost advantage and an abundance of skilled labour will continue to attract less-complex projects to Chengdu,” he adds.

Vying With Chongqing

Boosting western China’s economy is part of national policy. The policy is likely to continue favouring Chengdu taking into account competition with Chongqing. “Chongqing, which is also seeking to become the main business operations centre in western China, is a challenge faced by Chengdu. However, competition between the two should prove a positive factor in the years to come,” says Joske, “Chengdu’s location is its chief drawback. The city cannot claim to be the first port of call for foreign businesses interested in taking advantage of the proximity to global markets of eastern cities. In the long run, Chongqing’s status as an independent municipality with water transport connections to Shanghai may enable Chongqing to edge out Chengdu as the logical location for investment in western China.”

Yet with 2,300 years of history under its belt, Chengdu still remains a top pick for numerous industries in the international arena. Together with a booming convention and exhibition industry, Chengdu is gaining global recognition in both urban modernization and cultural natural heritage. As an official from UNESCO predicted, with its unique culture and customs, Chengdu has the potential to be as well-known a city as Cannes, Milan or Munich.

This article was originally published on Shanghai Business Review.