By David Dayton

Coast vs. interior. East vs. west. First tier vs. second tier. In China manufacturing, they boil down to the same thing: a debate over the benefits of shifting to a lower-cost, (usually) inland supply base. In a previous article, I worked through the basic question of whether or not to move from China's first-tier production centers, either to lower-cost areas within China or to other countries, and I listed key factors to consider (product price being only one). This time, as much as possible, I am going to do a point-by-point comparison of those factors in China's east and west.

I say as much as possible because I can't address the specific aspects of many different industries. If you're new to China and you want to know generally where to go, check out this post on China Sourcing Blog about some regional generalities and strengths. For a more in-depth look at the specifics of many Chinese provinces, All Roads Lead to China did some great province-by-province comparisons a year or two ago.

What I present here are not city-by-city or province-by-province advantages and specifics, but rather a broader look at what is -- and isn't -- on offer in China's coastal and inland locations, with some examples to illustrate what to expect.

Defining the first-tier
Beijing and Shanghai are always listed as first-tier cities. Guangzhou and Shenzhen are occasionally included as well. I don't understand why these two Pearl River Delta (PRD) cities are not always included.

If lists are based on income, Shenzhen has the highest per capita income in China, the country's first stock exchange and bragging rights as the first special economic zone (SEZ). Factory wages are as high, if not higher, in the PRD than just about anywhere else in the country.

If first-tier cities are determined by developed services or infrastructure, the PRD has great expressways, the busiest airports (plural) and growing subway systems. There are also abundant international legal and professional services, world-famous trade shows and golf courses, and myriad international schools in each city.

Whatever the reasoning applied by others, I count Shenzhen and Guangzhou as first tier -- as far as I'm concerned, the PRD from Hong Kong boarder to Guangzhou is one giant first-tier industrial zone.

The second tier: cities you might recognize
So, with those four cities out of the way, which ones belong to the second tier? Some lists go by population, some by income, some by location, some by political campaign and some by the Chinese government's amount of federal investment.

I may not be able to define it exactly, but, as the old expression goes, "I know 'em when I see 'em." Chengdu, Chongqing, Dalian, Huizhou, Nanjing, Ningbo, Qingdao, Shijiazhuang, Suzhou, Wuxi, Yiwu, Xi'an, Xiamen and Zhuhai are all second-tier cities that I've either visited or worked in at least a couple of times in the last five years. Haikou, Harbin, Kunming, Tianjin and Wuhan are others that I've only visited once, but not yet worked in.

I will be describing the differences between these first- and second-tier cities from my own manufacturing and sourcing experiences.

(Note: Although some second-tier cities are in the east -- indeed, Ningbo is about as far east as you can get on the mainland -- it is common to refer to China's second-tier cities as being part of "the west" as most are located away from the coast.)

How China's east and west stack up
Before deciding that moving is the best option for you, look at all the developed areas of eastern China and measure the costs and benefits.

Supply chains and logistical services.
Probably the single largest (and most underestimated) benefit of staying in the east is access to developed supply chains and advanced logistical services. You really can't place a dollar value on having a tried and tested supply chain. It doesn't show up in expense reports and, outside of trucking fees, it can be overlooked pretty easily to justify a move to a "lower cost" location. But it can make or break production deadlines and can be either a huge hidden asset or a huge hidden cost.

Personal story: Two years ago we produced some canvas items for a client. In the end, we had to chose between factories in Ningbo and Cambodia. Neither location was our first choice, but both had the products, quality and price we wanted. Unfortunately, neither had a well-developed supply chain or good logistical support. It was actually just as fast to get from Shenzhen to the Cambodian factory as it was to get to the Ningbo factory.

We don't have difficulties in supply chain or logistics in Shenzhen, but we don't have the canvas factories either. We had to ship canvas from Ningbo back to Guangdong province (or from Cambodia to Thailand) to finish packaging and complete the orders. The lesson here is that when you go west, unless the entire product and all the component parts can be made in the second-tier city, you're going to be shipping to and from multiple locations, often through less than ideal transportation networks.

Another example: In 2005 (and at a client's request), we started making molded stamps in Shijiazhuang and found we couldn't locate a number of the secondary factories we needed to support complete production. We couldn't get the mold work done satisfactorily, we couldn't find the quality PET packaging we needed, printing was purely domestic quality levels, and in the end we had to ship everything to another province for packaging. The city has a history of light manufacturing, but that didn't mean it was right for us.

Let it be a less expensive lesson for you than it was for us by spending a little more time or money or whatever it requires to give you confidence that the support systems you need are in place.

Staff quality
Another benefit of the east coast is the quality of the potential employee pool (at the expense of interior cities, no doubt). You get the best of the best on the east coast because of the draws of city life and the potential for higher earnings.

While you certainly can find and train quality people elsewhere, you can't discount the value of a large group of people that already have education, experience and some language skills in one location. Certainly this is changing as more opportunities open up in second-tier cities, but by and large first-tier cities still attract the cream of the crop.

Another personal story: As part of a larger project, we did some metal alloy work with a factory that was recommended to us in Jiangsu province. The factory was quite large, their supply chain quite good and their level of customer service very satisfactory. But their head engineer had just quit and his replacement was not yet up to speed. We initially tried to outsource the engineering work we needed, but couldn't find the level of professional service we needed.

We then worked with the factory to find someone to either supplement his skills or replace him and had little to no luck within Jiangsu. All the applicants were either not quite as impressive as their resume indicated or, if they were as good as advertised, didn't want to move to the city we were working in. We ended up "borrowing" an engineer from a Shanghai-area factory for the duration of the project.

Some of the best employees we've ever had were interns from US colleges and universities that were Chinese and/or business majors. The best Chinese employees we've had were people looking for expanding opportunities and came from completely different industries in Shenzhen.

The lesson: Don't discount the draw of a big city on educated, experienced, motivated employees. The east holds the aces here.

The good news is that more and more people are "staying home," as evidenced by the fact that two million people didn't return to Guangdong province after this year's Chinese New Year celebrations. It's getting easier, but still plan on your search taking longer than it would in Shanghai. China Vortex agrees.

Physical resources
A third advantage in coastal cities is the availability of physical resources. Airports (as opposed to air strips with a Chinese restaurant and a luggage belt), ports, embassies/consulates, legal services, third-party quality and logistics providers, testing and inspection offices, notary republics, rental car agencies, regional and provincial governmental offices and some Western creature comforts and hospitals. If you're doing business the right way, convenient access to these types of services is mandatory.

It goes without saying that distance to ports (both air and sea) is a distinct advantage. Each of the east coast cities and SEZs typically has its own port within a one- or two-hour drive, instead of a day or more. We work with a number of suppliers in landlocked Anhui province and always have difficulties with being on time because of delays in delivery to port. Not only is there a greater opportunity for things to go wrong with questionable roads and winter storms, but there are interprovincial licenses and permits that must be purchased for some items.

I have another example, but let me first say this: China's national tollway system is actually very good. However, trucking companies and factories don't like to use it because of the tolls and checkpoints. Furthermore, many of the access roads and local highways that connect to the national tollway system are horrible! When we ship domestically we require the logistics providers to use the toll roads.

We once shipped a container of glass bottles from an inland city to Dongguan, near Shenzhen. Almost the entire load showed up broken. Why? Because the bottle manufacturer refused to pay for the logistics company to use the expressway (unwittingly opting instead to pay for an entire container of replacement product).

Furthermore, suppliers that are not close to first-tier cities often don't have access to complementary resources that are readily available in first-tier cities. As pointed out above, just getting the major product cheaply is not enough -- you have to add in all the packaging, testing, printing, logistics, and so on.

We often do work in Xiamen and have found that some of the facilities there are truly world-class. The city is quite nice and the availability of professional services and other logistical support is really quite good. But we can't get everything we need there and so we are always shipping things to or from Xiamen -- adding time and expense to every project we do there. So why do we continue to work there? Because we have a well-developed supply chain in Guangdong province that can support our work in Xiamen. The lower prices in Xiamen are still a good value for us because we have everything worked out to complete the projects in Guangdong.

Making second-tier cities work
If you've noticed, while I've been singing the praises of first-tier cities, I'm also giving examples of work we've done in second-tier cities -- because the price is typically much cheaper and quality levels can be comparable. So it can be more cost-effective. It just takes more work. In general, manufacturing in China takes more work and more time than production in Europe or the United States; it takes much more time and personal involvement to get things done right in western China than in first-tier cities in the east. So as we shift to looking directly at the second-tier cities, the question really should be: What will it take to pull it off? And once that's known, are you still ahead on costs?

To answer that you'll need to understand and assess a few things. First, determine whether it is in your best interest financially and whether you are willing and able to make the extra effort to visit the factories. Second, understand what is happening in the second-tier (and even third-tier!) cities. And third, because each city is different, carefully examine which will offer you the features you find most important.

I'm going to reiterate a position I strongly believe in: if you are not here (meaning in your factories) regularly, the quality of your product will suffer. There is a direct correlation between your number of factory visits and the quality you will eventually ship from China. The further inland you move, the greater the number of logistics and quality-related issues you will have (not to mention the longer it will take to get to your suppliers). This does not mean you shouldn't go west, but it does mean you'd better be visiting more often if you want to maintain the same quality level. Unless quantities are massive, this extra QC alone can negate any cost savings you were expecting.

Finally, a simple rule of thumb: If the city you are looking at has an "international" airport and a Starbucks, you can be fairly confident it has developed supply chain resources and a healthy middle class. I know, it sounds laughable, but there is value in simplicity -- plus, the benefits of a good sense of humor cannot be overstated in some of the cities you visit!

David Dayton is the owner of Silk Road International and currently lives full-time in Shenzhen, China. He speaks English, Thai and Mandarin and has worked in Asia for more than 15 years. You can contact him at david@silkroadintl.net  or at www.silkroadintl.net.