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Where to locate your business in China? Think electricity.

by Dan Harris in 'China Law Blog'

I have always been fascinated by how foreign companies decide on where to locate their facilities in China. In a post I did a couple years ago, entitled, "Where To Locate Your China Business," I talked of how I love asking my firm's clients why they chose to locate where they did in China and the following, in no particular order, are their most common answers:

  1. Our long-term partner is there.
  2. Our suppliers are there.
  3. That is where our biggest client is located.
  4. That is where most of our customers are located.
  5. I studied there and I know a lot of people there.
  6. I like it there.
  7. That is where we can get the kind of skilled workers we need.
  8. Labor costs are low.
  9. Utility costs are low.
  10. We are getting government incentives.

I am probably going to need to add availability of electricity to the list. A China Daily article, entitled, "Power cuts worst for smaller businesses," talks of electricity shortages coming to Central and East China much earlier this year and how rationing has become the order of the day:

In previous years, electricity rationing usually occurred in mid-summer and winter, when the use of air conditioners and electric heaters increases the demand for power. This year, however, the electricity supply shortages began in April because of insufficient coal supplies and a rocketing price of oil, according to Central China Grid Co. Ltd, one of the largest branches of the State Grid.

More than 400 million people in Hubei, Hunan, Henan, Jiangxi and Sichuan provinces, as well as Chongqing municipality, rely on the Central China grid network, which has coal stockpiles sufficient for nine days, fewer than the recommended 15 days.

* * * *

Power shortages in Zhejiang have affected small and medium-sized enterprises since last year. To those enterprises using fewer than 2,000 kilowatts a day, power has been shut off every other day.

The article talks of how industrial electricity use is being curtailed and of how smaller enterprises are being given the lowest priority:

In Zhejiang province's Taizhou city, small enterprises that have an annual output value of less than 5 million yuan are not allowed to use electricity between 7 am and 5:30 pm, while medium-sized enterprises that have an annual output value of more than 5 million yuan are being asked to cut their use of power every two days.

"As a medium-sized enterprise with an annual output value of over 100 million yuan, we are luckier than the smaller ones that have to raise salaries and subsidies for people to work in the night," said Ye Mingchun, the owner of Zhejiang Tianyiqi Shoes Co. Ltd.

If this shortage sticks to the script of past electricity shortages in China, you can just about bet that many Wholly Foreign Owned Entities (WFOES) are going to find themselves at or near the bottom of the electricity distribution pile.

How is your electricity?

Dan Harris is founder of the Harris & Moure law firm, a boutique international law firm focusing on small and medium sized businesses that operate internationally. China is the fastest growing area for the firm. Dan writes as a source of China legal and business information.

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