The three capitals of China: which one is right for your Chinese HQ?

Chief Executive, The, Dec, 2004 by Rebecca Fannin

When Steve Fitz was searching for the right city in which to establish an Asian regional headquarters for EMC two years ago, he weighed several factors. Not least among them was access to good quality, English-language schools for his four young children. Thanks to a Hong Kong government-sponsored promotional group, InvestHK, Fitz got what he wanted. In a scene that illustrates how competitive corporate location has become in China, InvestHK lined up several headmasters of the top schools in Hong Kong and asked each to enroll in their academies not only Fitz's kids but also those of his management team. They agreed.

Fitz, president of Asian operations for the $8.1 billion data-storage company based in Hopkinton, Mass., was understandably pleased. He ultimately chose Hong Kong over other cities on his list of contenders--Singapore, Shanghai and Tokyo--based on a host of considerations, including its large English-speaking talent pool, Westernized lifestyle, efficient transportation links and proximity to China's quick-growing market just across the border. "Singapore was the most attractive on a cost basis, but was too far away from our markets," explains Fitz from his office, which has a panoramic view of the Hong Kong harbor. "Japan was expensive from a tax and cost-of-living perspective, plus the flying access was not as good. Shanghai was a runner-up to Hong Kong, and a lot of companies have moved their headquarters to Shanghai, but the infrastructure is not there yet--it's not nearly as flexible in terms of flights within Asia."

Previously, Fitz was based in Tokyo for a year after relocating from New York, and his five top managers were spread across several Asian cities. "Now, instead of having discussions over the phone, we meet here at least once a week for a formal meeting and for informal gatherings, too, which fosters better communication throughout the firm," he says.

The strength of China's markets is pulling some Asian headquarters away from Tokyo and Singapore, but which of China's "three capitals" makes the most sense--Hong Kong, Beijing or Shanghai? The answer, it appears, is that each has strengths and weaknesses, and chief executives making decisions about where to set up shop need to understand those and factor in the nature of their own businesses. Getting the right matchup is critically important--a wrong decision can lock a company into deep frustration.

Among its strengths, Hong Kong touts that it's part of the Pearl River Delta, close to thousands of factories, new airports and seaports in Shenzhen and Guangdong Province. Shanghai, transformed over the past decade into a modern metropolis, boasts of its position in the Yangtze River Delta, encompassing a semicircle of eight industrial cities. China's capital, Beijing, has been compared to Washington, D.C., and Chicago combined. To play host to the 2008 Olympics and an influx of business, the city's infrastructure is being rapidly improved.

By industry, generally Hong Kong is seen as the preferred location for companies in trading, logistics, banking and media--and it is also a hub for Asian operations. Beijing wins out for companies in heavily regulated industries, where close proximity to key government officials help build guanxi, or key connections--the all-important ingredient to success in China. Shanghai is emerging as an entrepreneurial center and a base for certain high-tech sectors such as semiconductors. It is also a financial hub for doing business within mainland China.

All three cities sport modernized air-ports and transport links, choice restaurants with international cuisine and numerous five-star hotels, many with more creature comforts than at top U.S. hotels. Prices for real estate and office space are fairly comparable, and English is now commonly spoken in all three Chinese capitals, although Hong Kong retains a clear lead in that department.

Hong Kong actually keeps track of the number of regional headquarters of overseas companies it attracts. In the most recent tally, it weighed in with 966 regional head offices, up from 948 the year before--despite the SARS scare. The territory's low 17.5 percent tax rate was cited as an important draw in choosing Hong Kong as a location, according to a survey by the Hong Kong government. Other factors included the free flow of information, political stability and security, corruption-free government, rule of law and an independent judiciary--characteristics inherited from Hong Kong's pre-1997 standing as a British colony and many of which cannot be guaranteed in mainland China.

But what Hong Kong does not provide is intimate access to key decision-makers, and China's economy is still dominated by Communist Party and government officials. If that is a company's top priority, then Beijing's central Chaoyang business district--the equivalent of midtown Manhattan--is one place to be. It's home to more than 60 percent of the city's foreign-invested companies and offers good transport links plus sightseeing; the Forbidden City and Tiananmen Square are a short cab ride away.