Car and machinery makers drive into China'S vast northwest region

Volkswagen has never started a new factory project so fast. On April 23, when Premier Wen Jiabao visited its headquarters in Germany accompanied by Chancellor Angela Merkel, Volkswagen AG and its Chinese joint-venture partner SAIC signed an agreement to build a new factory in Northwest China. Just 42 days later, the groundbreaking ceremony of the Volkswagen factory site in Urumqi, capital of the Xinjiang Uygur autonomous region, was held.

Usually that would take about six months, says Zhang Yaoying, deputy director of trade and investment promotion bureau of the Urumqi Economic and Technological Development Zone, where the factory is located.

Since 2009, the central government has accelerated development in Xinjiang and put "modern industries" at the top of the agenda, calling for State-owned and major private enterprises in 19 eastern provinces of the country to invest there.

With financial support from the central government and a quick approval process by the local government, Xinjiang is becoming a new destination for car and machinery companies. Sany, Dongfeng Motor Group and Shaanxi Automobile have also been attracted to the region in the past two years.

The Urumqi development zone has attracted investment of more than 75.1 billion yuan ($11.78 billion, 9.59 billion euros) from outside the region. Investment in 14 projects each exceeded 1 billion yuan. Only $280 million came from foreign capital.

Xinjiang's GDP rose from 542 billion yuan in 2010 to 657 billion yuan in 2011, largely boosted by the new investments.

Wang Ning, head of the economic research institute at Xinjiang Academy of Social Sciences, says building the motor and machinery industries means a lot to the region's industrial restructuring and upgrading, since it stimulates related industries, including steelmaking and spare-parts manufacture.

Although making up one-sixth of China's land territory, Xinjiang lags far behind coastal areas in industry and services. For many years investors from China and abroad were reluctant to invest in the region due to a lack of market, supply chain and convenient transportation.

But the strong stimulus from the central government has boosted their confidence.

Karl-Thomas Neumann, then CEO of Volkswagen Group China, said at the groundbreaking ceremony that the car company cannot afford to lose this market.

Although sales in Northwest China only make up 7.8 percent of Volkswagen's total sales in China, it sees great potential in the region.

Since 2009, the number of all cars sold in Urumqi has doubled to 400,000 units, with 500 cars now sold in the city every day.

"Xinjiang is still a desert for automobiles, and some people back in Germany are concerned that it would be too risky to build a factory in Xinjiang," Neumann said. "But these remarks are exactly what we had when we entered the Chinese market 30 years ago. Now we have 50,000 employees in China, and China is the second home market of Volkswagen."

The first phase of the Volkswagen project will cost 2 billion yuan, and the factory will cover 407,000 square meters. It is expected to be producing 50,000 passenger cars annually by the end of 2014.

Xinjiang is also a springboard to jump into the central Asian, western Asian and South Asian markets, the company says.

Xinjiang borders eight countries and has been an important gateway to central Asia and the Middle East for 2,000 years. Currently, heavy industries in Xinjiang are mainly clustered in major cities such as Karamay, Changji and Hami prefecture, with 45 percent located in Urumqi.

"From 2011 to 2015, Xinjiang will build 10 major equipment manufacturing bases, with output of 100 billion yuan," says Gao Jianjun, director of Xinjiang Mechanical and Electronic Industry Management Office.

He says heavy industry has achieved an annual growth rate of 40 percent for the past five years, raising the ratio of manufacturing industry in Xinjiang's economy from 1 to 4 percent.

Currently, 93 percent of primary industry in Xinjiang is made up of mining and raw materials processing.

But the region's industry overall is gradually becoming a major driver of the local economy. For the past five years, it has been growing 12.5 percent a year, contributing 44.5 percent to the growth of local GDP in 2011, local government figures show.

Shaanxi Automobile is an investor that has benefited from this trend. Orders have soared for its heavy-duty trucks from infrastructure projects in Xinjiang since 2010.

Established in 1968, the company is based in Xi'an, Shaanxi province, about 2,600 kilometers from Urumqi by rail.

In 2011, the company sold more than 6,000 trucks - half the market - in Xinjiang. Fu Yizhe, general manager of Shaanxi Automobile for Xinjiang, says its presence in the region cuts a considerable part of its logistics costs.

To ship a truck from its Xi'an headquarters to Urumqi, the company needs to pay at least 10,000 yuan, and wait up to eight days for delivery.

In summer and autumn, most logistic companies in Xinjiang turn to transporting fruit, which is more profitable than delivering trucks.

"Then it can take 30 to 40 days to deliver a truck, and our clients were complaining about that," Fu says. "Now by moving to Xinjiang, we saved a considerable amount of money and changed it into profit."

Sany Heavy Industry was also attracted to Xinjiang. Based in Changsha, Hunan province, the company is China's biggest, and the world's sixth-largest manufacturer of construction machinery. In 2011, it earned 75 billion yuan in revenue, and a 11-billion-yuan profit.

Although winter in Xinjiang is harsh and lasts for six months, Sany managed to finish the 290,000 sq m factory within a year after starting in April 2011.

Li Jianhua, chairman of Sany Heavy Industry Northwest Co, says it will start operating in early October, with a project output value of 12 billion yuan by 2016.

The scale of Sany Xinjiang's operation is similar to that at its Hunan headquarters, but it targets Northwest China and central Asian markets, Li says.

The company is also expanding its product line to include wind power and coal chemical equipment, as Xinjiang is rich in both resources.

Sany has secured a wind power project in Dabancheng, 86 km south of Urumqi. The company plans to invest 45 billion yuan in coal chemical and setting up a world-class coal chemical research institute.

The influx of car, truck and machinery companies has also boosted business for local suppliers. Xinjiang Bayi Iron Steel Co Ltd is one that has quickly felt the benefit.

Stretching over 18 sq km, Bayi is the earliest heavy industry project in Xinjiang. Although the steel industry saw a plunge in sales during the first five months, Bayi remained resilient, thanks to demand from its new neighbors.

"We have begun to collaborate with local auto and machinery manufacturers," says Zhou Zhonghua, director of production management at Bayi. He says the company is already supplying steel for Shaanxi Automobile and BYD.

Bayi makes about 300,000 to 500,000 tons of steel for manufacturers, including auto companies and wind farms. The company plans to raise the amount of steel produced for manufacturing to 50 percent of its output in the near future, with the other half destined for construction.

Bayi is talking with Volkswagen and Shaanxi Automobiles on sales.

"The manufacturers here will contribute 8 billion yuan to Bayi annually, and auto and machinery companies can generate revenue of 1.6 billion yuan," Zhou says.

The vast western region not only presents enormous opportunities, but also difficulties.

When Fu from Shaanxi Automobiles came here last year, he found it hard to find qualified workers.

He says skilled workers are so few that they have to pay more to hire them before they are taken by other companies.

"A regular worker on the assembly line is paid 2,000 yuan a month in Xi'an, but here we have to pay more than 3,000 yuan," he says.

Li Jianhua from Sany is facing the same problem.

"We need at least 5,000 workers in the factories," he says. "We need top managers, but the biggest problem is that we don't have enough skilled workers to form the bottom of the pyramid."

Sany in Changsha will send some workers to Urumqi, but it is far from enough, he adds.

On March 18, when Sany Xinjiang received an order worth 700 million yuan, he was both thrilled and worried.

"We don't have enough skilled workers. Certainly, we can outsource some of the parts manufacture to other companies, but we have to make the key components, such as the cylinder and hydraulic parts ourselves in Xinjiang."

Li plans to recruit workers in Xinjiang and send them to Changsha where they can be trained.

The lack of a mature supply chain is another issue plaguing new auto and machinery companies.

Fu from Shaanxi Automobile says he has to ship engines and gearboxes from suppliers in Shandong and Shaanxi provinces. "Hopefully I can find suppliers for lamps, cables and other small parts nearby."

Back in Xi'an, more than 600 companies supply spare parts to the truck company, Fu says.

"A good industrial park should not only have OEMs, but also spare-parts suppliers, like a tree should have leaves as well as branches," he says.

While Zhou from Bayi admits parts suppliers are insufficient in Xinjiang, he estimated a supply chain will form within three years.

"Since we've already got the upstream industry - the steel company - and the downstream industry - the auto and machinery companies - auto parts companies should be here soon, especially private enterprises that act quickly."

Contact the writers at wangchao@chinadaily.com.cn and maoweihua@chinadaily.com.cn

(China Daily 07/13/2012 page16)