Shanghai Industries and the Yangtze Delta Megalopolis
Shanghai Industries and the Yangtze Delta Megalopolis
1. Formation of the Yangtze Delta Megalopolis
A s the global division of labor continues to deepen and change, the world's economic center of gravity is gradually shifting to the Asia-Pacific region. As a key growth region of China, the Yangtze River Delta region has attracted heavy investments from large numbers of multinationals with its advantages in market size, geographic location, and human and technical resources. Due to enhanced economic strength, the level of urbanization continues to rise, and the scale of metropolitan areas continues to grow. This region has rapidly grown into the Yangtze Delta Megalopolis,1 which has attracted worldwide attention.
The term Yangtze River Delta (Yangtze Delta for short) can be defined in terms of physical geography and geoeconomics. Geographically, the Yangtze Delta refers to the region that is located east of Zhenjiang in Jiangsu Province, south of the Nantong-Yangzhou Canal, and north of Hangzhou Bay in Zhejiang Province. It is a natural alluvial area created by sedimentary deposits from the Yangtze and Qiantang Rivers, and covers an area of about 50,000 square kilometers2 of the plains in the middle and lower reaches of the Yangtze River. In terms of geoeconomics, it encompasses 16 cities from Jiangsu and Zhejiang Provinces, as well as Shanghai Municipality. Its geoeconomic size is twice that of its geographical size. Geoeconomically, the Yangtze Delta includes the entire Shanghai municipality, the central and southern parts of Jiangsu, and the northern and eastern parts of Zhejiang. The region has an area of 100,000 square kilometers, about 1% of China's total, and a population of 75,340,000, about 6% of China's total. Specifically, the Yangtze Delta economic region includes: the entire Shanghai municipality, Suzhou, Wuxi, Changzhou, Nanjing, Yangzhou, Zhenjiang, Nantong, and Taizhou in southern and central Jiangsu, and Hangzhou, Huzhou, Ningbo, Jiaxing, Zhoushan, Shaoxing, and Taizhou in northern and eastern Zhejiang.
Facing the Pacific Ocean, the Yangtze Delta forms the midway mark of China's coastline. With access to both the river estuary and the East China Sea, it benefits from both the “Golden Coast” and the “Golden Watercourse.” Under China's multi-faceted opening-up strategy, the east coast and the Yangtze River economic belts, spanning from east to west, together form a closely linked T-shaped area, and are and will continue to be a key area for development for many years to come. The Yangtze River Delta is located right at the junction of the “T” shape. Its superior geographic location—connecting the hinterland of the Yangtze River Valley to the international market—and China's overall opening-up strategy have enabled the delta to become China's largest core economic region (see Figure 5.1).
In the Yangtze Delta region, cities of different sizes, standards, structures, and functions are closely linked by networks of transportation, commodities, technology, capital, talent, and information. These cities and their peripheral areas are tied up by the division of work, and improved through mutually supplementary resources, inter-city communication, and internal competition. With greater complexity and continued flux in the global division of labor, and the gradual shift of the global economic center of gravity toward the Asia-Pacific region, the Yangtze Delta Megalopolis has become one of the six megalopolises, the other five being the New York Megalopolis, the Great Lakes Megalopolis, the Tokyo Megalopolis, the Paris Megalopolis, and the London Megalopolis.
Since China's opening-up and reform, the Yangtze Delta region has experienced rapid economic growth, gaining an increasing share of China's total GDP. In 1978, the region had a GDP of RMB 64.577 billion, accounting for 17.28% of China's total of RMB 362.41 billion. The GDP for this region experienced a decline in its share of China's total GDP from the beginning of China's opening-up and reform up to 1991. After 1991, this trend reversed: the region's share began to rise and a healthy growth in its economy continued, particularly after 2000. The region's GDP rose from RMB 1,917.02 billion in 2000 to RMB 2,810.66 billion, representing an annual growth of 11.81%. In 2003, the GDP of Shanghai, Jiangsu and Zhejiang contributed to 29.8% of China's total, a significant increase of 13.3% from 1991. In the first half of 2004, regional GDP was RMB 1528.5 billion, making up 26% of China's total GDP of RMB 5877.4 billion in that period, 8.2% higher than that of 1978 (see Table 5.1).
In short, the region contributes to about one-third of every percentage point of growth in China's economy. With the revival of the Yangtze Delta, a series of positive changes have begun to take place in the economic structure of Shanghai, Jiangsu, and Zhejiang, enabling them to play an even more productive role as the engine for China's reform and development (see Figure 5.2).
Since China's opening-up and reform, the economy of the Yangtze Delta has grown rapidly, its economic strength has significantly improved, its level of urbanization has been raised, and the scale of its megalopolis has constantly expanded. As a result, the delta's competitiveness has increased continuously since the 1990s, enabling it to become China's leading economic development area.
From 1990–2004, the Beijing-Tianjin-Hebei region showed a slight improvement in competitiveness while the Pearl River Delta region saw little change. By comparison the Yangtze Delta's regional competitiveness showed an overall sustainable upward trend.
|China's total GDP|
(RMB 100 mil.)
|Yangtze Delta's GDP|
(RMB 100 mil.)
Spatial features of the Yangtze Delta Megalopolis
As an aggregation of urban space in a specific region, the Yangtze Delta Metropolitan Circle is a system with internal composite elements that are closely interrelated. Its external physical structure is characterized by axes, circles, and networks, fully reflecting the interaction between components and the system structure as a whole.
The cities in the Yangtze Delta Megalopolis are mainly distributed along three transport axes: Shanghai-Nanjing, Shanghai-Hangzhou, and Hangzhou-Ningbo railroads and expressways, forming a zigzag structure, with Shanghai, Nanjing and Hangzhou located at the three nodes. Industries are mainly concentrated along these axes, as well as along the river, the canal, and the coastal areas. Along these axes, cities and towns are evenly distributed, but in high density. On average, there is one city every 30 kilometers, forming a continuous stretch of urbanized areas. The industrial zones of most cities and small towns (particularly in the Suzhou-Wuxi-Changzhou area) stretch along the railroad, the canal, and the expressway, forming a “traffic corridor” for city distribution systems.
From the perspective of inter-city links and the diffusion effect, the zigzag-like layout of these cities, with Shanghai at its core, has three basic dispersion routes (see Figure 5.3):
- North Route: Shanghai → Suzhou → Wuxi → Changzhou → Zhenjiang → Yangzhou → Nanjing
- South Route: Shanghai → Jiaxing → Huzhou → Hangzhou → Ningbo
- East Route: Shanghai → Shaoxing → Ningbo → Zhoushan
Circles Shanghai leads the Yangtze River Delta with its robust economy. It serves as the source of economic stimuli and the center of gravity for industrial distribution. A physical concentric framework of the megalopolis has taken shape around Shanghai based on economic relationships and the distance from Shanghai.
Firstly, if GDP is used to evaluate the megalopolis' total economic output, its cities can be divided into three concentric circles around the pole of Shanghai, the outer ring being the weakest in terms of economic strength and connectedness with other areas (see Figure 5.4).
Shanghai's economic scale ranks top among all the cities in the region, in terms of such key economic indices as GDP, per capita GDP, total fixed asset investment, and local fiscal income. The inner ring around Shanghai includes Suzhou, Wuxi, Hangzhou, Ningbo, and Nanjing. This layer has a large portion of tertiary industries (about 40%), with less than a 10% share of primary industry. Its village and township enterprises are well developed, and are generally the circle's
economic pillars and sources of fiscal income. With regard to major economic indices, these five cities are almost on par with Shanghai and obviously surpass other cities in the region. As core cities in the megalopolis, they exert some degree of economic radiation effect on their neighboring cities and even beyond, helping to formulate secondary city clusters, such as the southern Jiangsu city cluster centered round Suzhou, Wuxi, Changzhou, Nanjing, Zhenjiang, and Yangzhou as one center, and the Hangzhou Bay rim city cluster with Hangzhou and Ningbo as another center.
The second ring around Shanghai consists of Jiaxing, Shaoxing, Changzhou, and Zhenjiang. The industrial structure of this particular circle is based on the descending order of priority of the secondary, tertiary and primary industries, with a per capita GDP of about US$1,800. This area's industrial sector has grown quickly, and is mainly focused on machinery and electronics. Serving as regional central cities, their influence is limited to their own administrative boundaries. However, they do have some influence on small cities and towns in their hinterland.
The third ring comprises Yangzhou, Nantong, Huzhou, and Zhoushan. The economic structure here features a relatively low
|Circle||Cities||Distance from Shanghai (km)|
|2||Wuxi, Nantong, Huzhou, and Ningbo||100–150|
|3||Changzhou, Hangzhou, and Shaoxing||150–200|
|4||Zhenjiang, Yangzhou, and Nanjing||200–300|
standard of industrialization, with more than 10% dedicated to primary industry, and little economic influence on surrounding cities. Nevertheless, these cities have some ability to assimilate and adapt to external influences. They fall into the “average cities” category.
Secondly, the Yangtze Delta Megalopolis, with Shanghai as its center, can be divided into four basic circles according to their distance from Shanghai (see Table 5.2).
As a general rule in transport economics, marginal flow cost is a positive function of transportation distance. Longer distance means higher marginal flow cost. Therefore, as the distance from Shanghai increases, the radiation effect received from Shanghai will progressively decrease.
2. Industrial Division of Labor in the Yangtze Delta Megalopolis
Historically, the Yangtze River Delta is a relatively integrated economic region, with close intra-regional economic ties. The progress of its regional economic cooperation since opening-up and reform can be roughly divided into three stages:
- The first stage: voluntary cooperation During the early to mid 1980s, the Yangtze River Delta entered a new phase of across-the-board industrialization, where the geographical distribution of production factors began to shift from centralization in cities to an equal flow into both urban and rural areas. Town and village enterprises boomed, creating a unique rural industrial development mode. In this period, large numbers of technically skilled workers from Shanghai flocked into medium- and small-sized towns and rural areas in the Yangtze River Delta to provide technical and managerial support for the industrialization of these areas. This voluntary flow of human resources was the first wave of regional cooperation in the Yangtze River Delta.
- The second stage: joint promotion by enterprises From the late 1980s to the early 1990s, some medium-and small-sized cities rapidly emerged, growing faster than even the cities of Shanghai, Nanjing, and Hangzhou. As a result, city clusters began to form along the railroads. In this context, state-owned enterprises and other industrial and commercial enterprises in Shanghai began to seek business expansion in other cities and rural areas in the Yangtze River Delta, establishing subsidiaries for spare parts and creating raw and auxiliary material bases, OEM, and associated companies. The governments at various levels and various economic entities in the Yangtze Delta also cooperated with Shanghai's industrial enterprises. A rudimentary industrial distribution system was set up, based on an across-the-board industrialization strategy and influenced by both the planned and market economies. Shanghai had large numbers of all kinds of associated businesses distributed in other cities and rural areas in the Yangtze Delta, and established a preliminary vertical division and collaboration system. With increasing economic strength and the flow of foreign capital and technologies into medium cities in the Yangtze Delta, Shanghai's relationship gradually weakened with other areas in the Yangtze Delta in the vertical division of labor. Subsequent parallel industrial development led to a highly identical industry structure and homogeneous competition.
- The third stage: joint promotion by market and government In the mid to late 1990s, economic cooperation in the Yangtze Delta experienced sweeping changes thanks to economic transformation, industrial restructuring, and strong foreign capital inflow. On the one hand, both the market and the government encouraged the expansion of economic cooperation, resulting in a gradual change in the mode of cooperation from horizontal collaboration to production factor integration and joint innovation in economic systems. The fields of cooperation were extended from producing, processing, and sales to commerce and trade, finance, tourism, equity, and ecological development, as well as scientific research and the sharing of talent. The cooperation mechanism gradually changed from pure enterprise behavior to one where the government would set up the stage, enterprises would perform, and the market would set the operation rules. The direction of cooperation gradually shifted from a previous one-way flow (i.e. Shanghai to other areas) to a two-way flow. On the other hand, the objective requirement for integrating the division of labor between different industries and different regions in the Yangtze Delta began to take full effect, and the influence of the rationality of economic structure on the whole region's economic growth rate accordingly became very pronounced.
The history and current status of regional cooperation in the Yangtze River Delta have undoubtedly seen a lot of progress and improvement in both the level and composition of cooperation. Economic links between the region's cities are becoming increasingly tight with the main cities growing rapidly and small- and medium-sized cities making strides. However, there is still much to be desired. Firstly, every city only takes care of its own business due to administrative division, and there is a lack of unified planning, coordination, and control in regional development. Secondly, there is no patent division of labor between cities, resulting in duplicated investment and excessive competition. The improvements in the level of economic development in various parts of the Yangtze Delta aside, the current division of work and collaboration is actually a retrogression compared to the early years when Shanghai and other parts of the Yangtze Delta favored a close vertical labor division and cooperation. Admittedly, the current development status, standards, and requirements have been altered drastically. What the Yangtze Delta pursues now and in the future is higher standards and greater efficiency in labor division and collaboration with the ultimate goal of achieving regional economic integration.
3. Industrial Planning in the Yangtze Delta Megalopolis
3.1 Shanghai Continues to Improve the Three-Ring Layout
Shanghai will speed up the establishment of a new industrial system in light of the requirements of a cosmopolitan city. It will treat the development of Shanghai and the Yangtze Delta as a regional whole, and follow the general guideline that the city center should be known for its prosperity and suburbs renowned for their strength. It will also take into account the geographical location and industrial correlations when constructing its industrial layout composed of three concentric rings.
Within the Inner Ring
In the area of high-level service industry, represented by such sectors as finance, insurance, trade, and logistics, will be prioritized for development while a fair portion of metropolitan industry will be retained. The key focus is the development and expansion of Pudong New Area. The development of the modern service industry and strategic new industries aims to further pool economic factors, enhance Shanghai's position in economic development, and make Pudong Shanghai's most global, multi-functional, and modern urban district.
Lujiazui Finance and Trade Zone will work to attract regional headquarters of multinationals, and strive to improve factor markets, so as to develop itself into the planned central business district (CBD). Waigaoqiao Bonded Area will accelerate the completion of its four major functions of export processing, modern logistics, international trade, and the transaction and exhibition of bonded goods. Zhangjiang High-Tech Park will stress the development of bio-medicine and information industries. The priority for Jinqiao Export Processing Zone will be on such industries as electronic information, automobile and auto parts, modern household appliances, and biomedicine.
Between the Inner and Outer Rings
Shanghai will give priority to the development of high-tech, high value-added, and pollution-free industries in order to improve existing industrial zones. Emphasis will be placed on the three national-level development zones of Caohejing New Technology Development Zone, Minhang Economic and Technological Development Zone, and Hongqiao Economic and Technological Development Zone. Caohejing New Technology Development Zone will focus its development on high-tech industries, such as microelectronics, photoelectronics, computers and software, and new materials. Minhang Economic and Technological Development Zone will primarily develop machinery and electrical equipment, modern biological engineering, pharmaceuticals, beverages, and recreational food industries. Hongqiao Economic and Technological Development Zone will prioritize the development of trade, exhibitions, and showcase industries.
Outside the Outer Ring
Here, the focus will be on primary and secondary industries. The city will spare no effort to develop municipal-level industry zones, and work to improve the economy's scale and intensity. The construction of the world's sixth manufacturing base is already underway. According to overall city and industrial development planning, the western suburbs of Qingpu, Songjiang, and Jiading that are connected with the industrial corridor spanning from Shanghai to Suzhou and Wuxi, will highlight the development of automobiles, electronics and communications equipment, electrical machinery, general-purpose machinery, and clothing industries. Backed by Songjiang Science Park and Export Processing Zone, Qingpu Industrial Park, and Shanghai Integrated Circuit Design and Entrepreneurship Center, this region will cooperate with Zhangjiang High-Tech Park and Caohejing New Technology Development Zone to specialize in chip manufacturing and design, chip packaging and testing, microelectronics R&D, microelectronic equipment manufacturing, raw materials for microelectronics, and other related supplementary industries. It will capitalize on the opportunity provided by the construction of Jiading International Automobile Town to develop such industries as research and development for, and manufacturing of, finished vehicles and auto parts, automobile trade, automobile logistics, automobile-related science and technology exhibitions, automobile- and culture-themed tourism, and automobile services. All these measures are being taken to build this region into a world-class automobile manufacturing base.
In the northern suburbs, such as in Baoshan, the city will place emphasis on the development of top-quality steel, such as steel for automobiles, petroleum pipes, plates for shipbuilding, stainless steel, electrical steel, and high-efficiency steel for architecture, so as to build this region into a world-class, top-quality steel base. By making full use of Changxing Island, it will develop cutting-edge, internationally competitive technologies, processes, and materials for shipbuilding, and enhance independent development and innovation of facilities for ships.
The eastern suburbs, such as Nanhui, are slated to provide supplementary services for the international airport and deep water port. Heavy and chemical industries will be restricted, but priority will go to the Lingang New City Industry Zone, which integrates advanced manufacturing, modern logistics, R&D services, export processing, free trade, and education and training.
In the southern suburbs, such as in Jinshan, effort will be made to forge ties with the heavy chemical industrial bases in Ningbo and Zhapu (Jiaxing), and build a world-class petrochemical and fine chemical base, that will eventually form a heavy chemical industry belt along the rim of Hangzhou Bay.
Apart from the above planning measures, Shanghai will step up the construction of its nine municipal-level industrial zones in Jiading, Songjiang, and Qingpu in accordance with a development mode where one industry stands out from multiple industries. This mode aims to achieve differentiated competition and harmonious development, and enhance the momentum of development at district and county level. The Jiading Municipal-Level Industrial Zone will focus on auto parts, photoelectronics information, and environmental equipment manufacturing, while the Songjiang Municipal-Level Industrial Zone will prioritize microelectronics, pollution-free new materials, biomedicine, foodstuffs, and healthcare product manufacturing. The Qingpu Municipal-Level Industrial Zone will specialize in information communication, biomedicine, new pollution-free modern textile materials, and pollution-free precision machining industries. The Minhang Municipal-Level Industrial Zone will promote the development of such industries as computers and communications equipment manufacturing, appliances and new materials, and the Baoshan Municipal-Level Industrial Zone will focus on the extended processing of top-quality steel, modern machinery manufacturing, new materials, and heavy container transportation equipment, and other related industries. The Jinshan Municipal-Level Industrial Zone will mainly develop fine chemicals, chemical building materials, and food processing industries. The Nanhui Municipal-Level Industrial Zone will emphasize electronics and electrical apparatus, auto parts, and new building materials. The Fengxian Municipal-Level Industrial Zone will focus on manufacturing electronic communications equipment, power transmission and distribution equipment, and electronics and machinery equipment. Lastly, the Chongming Municipal-Level Industrial Zone will specialize in environmentally friendly industries.
3.2 Jiangsu Works to Implement the Four-Belt Development Strategy
By enhancing its cooperation with Shanghai, Jiangsu Province can capitalize on the potential benefits of the latest international industry shifts, in particular, on the accelerated flow of international capital and industry into the Yangtze Delta. The province will step up the development of new and high-tech industries, such as electronic information, biological engineering, new medicine, and new materials, improve its independent R&D capabilities, and increase the proportion of high-tech industry in the industrial economy. It will take steps to develop such basic industries as equipment manufacturing, metallurgy, chemicals, energy, and resource processing. It will utilize appropriate advanced technologies to reshape and upgrade its historically dominant textile, clothing, and light industries. Meanwhile, it will diligently nurture the modern service industry, giving special attention to the production service industry, and shape up an international manufacturing base with higher industrial standards. It will adjust its industrial structure by upgrading the high-tech industrial belt along the Shanghai-Nanjing Railroad, accelerating the construction of a basic industrial belt along the Yangtze River, an industrial processing belt along the eastern section of the Lianyungang-Lanzhou Railroad, and an economic belt along the coast. In addition to this, it will strongly promote and optimize industrial clustering and layout, improve development standards in southern Jiangsu, and speed up the industrialization process in northern Jiangsu.
3.3 Zhejiang Strives to Build Three Industrial Belts
Based on its resource and industrial advantages, and with the objective of upgrading its international competitiveness and overall economic strength, Zhejiang Province will actively participate in regional economic exchange and cooperation with cities in the Yangtze Delta. Being ready to benefit from the radiation effects of Shanghai and participate in international industry shift, the province welcomes technical and capital inflows from Shanghai and overseas. It will uphold its characteristic development and differentiated competition, step up efforts to drive its textile and clothing industries, move toward the international-style clustering of industries, foster electronic information, modern pharmaceuticals, and other hightech industries, rationalize the development of heavy chemicals by the ports, and develop related modern service industries, so as to form a new industrial system based on expansion and coordination, dynamic optimization, integration and innovation, coherent progress, high efficiency, and low consumption. It will work hard to build itself into an advanced manufacturing industry base. In this base, advanced technology serves as the driving force, high value-added products are the mainstay, and traditional dominant industries serve as a base. Some industries develop on a large scale, possess strong technical innovation capabilities, and show a high level of specialization, a full range of functions, and a high degree of internationalization, while core enterprises are well managed, playing an exemplary role. In order to better coordinate regional economic development, optimize economic layout, promote industrial clustering, and provide space for the construction of an advanced manufacturing industrial base, Zhejiang will concentrate its efforts on building three industrial belts along the rim of Hangzhou Bay, along the Wenzhou-Taizhou coast, and along the Jinhua-Quzhou-Lishui Expressway.
The Hangzhou Bay rim industrial belt covers six cities (Hangzhou, Ningbo, Shaoxing, Jiaxing, Huzhou, and Zhoushan) along Hangzhou Bay, and the new development areas of these cities, and it also involves the functional areas that are closely related to their industrial development. Focusing on the two cities of Hangzhou and Ningbo, the region will make vigorous efforts to foster electronic information, biomedicine, and other high technology industries. By relying on the port resources of Ningbo, Zhoushan, and Jiaxing, it will also build an international shipping center together with Shanghai, and ensure planned development for such portside industries as petrochemicals, steel, and energy. In addition, it will reshape and upgrade its traditional but high value-added industries, such as textiles and clothing. With its two central cities of Hangzhou and Ningbo as the core, it will accelerate the growth of its own modern service industry in such areas as finance, insurance, information and consulting, modern logistics, science and technology services, and ocean tourism.
The Wenzhou-Taizhou coastal industrial belt is located at the southern tip of the central section of China's developed coastal region, being home to the most dynamic private economy in China, with large numbers of globalized light industries and specialized markets set up in small towns. Moreover, the region boasts flexible mechanisms, abundant private capital, and entrepreneurial innovative spirit. By strengthening economic cooperation with Shanghai and enhancing linked development with the Hangzhou Bay Rim Industrial Belt, it will enhance the trans-regional integration of economic resources, accelerate the internationalization of its economy, and achieve a full range of innovation for its private economy in terms of policy, science and technology, management, and culture. In addition, it will rebuild and upgrade its traditional dominant and favored light industry, appropriately develop high-tech and portside industries, focus on the development of the equipment manufacturing industry, and speed up the construction of international industry clusters that have a high market share, in-house core technology, and an international competitive edge. It will also focus on developing three equipment manufacturing clusters focusing on electrical machinery and devices, transportation equipment, and light industry machinery, while restructuring and upgrading six light processing industry clusters that focus on clothing and apparel, household supplies, craft furniture, household appliances, general-purpose machinery, and packaging and printing. It will also foster two new industries—modern medicine and healthcare food, and new materials.
The industrial belt along the Jinhua-Quzhou-Lishui Expressway covers the cities of Jinhua, Quzhou, and Lishui, and such counties along the expressway as Pujiang, Yiwu, Dongyang, Lanxi, Longyou, Jiangshan, Changshan, Wuyi, Yongkang, Jinyun, and Qingtian. Based on its ecological and resource advantages, it will strengthen its ties with the Yangtze Delta and step up efforts to attract foreign investment in order to foster such high-tech industries as electronic information and biomedicine. It will also absorb the labor-intensive industries and pollution-free industries relocated from the Hangzhou Bay Rim industrial belt and the Wenzhou-Taizhou coastal industrial belt, and highlight the development of such resource processing industries as organic food, bamboo, timber, and silicon. It will be committed to eco-friendly industries such as hydropower, green agriculture, and eco-tourism.
4. The Radiation Function of Shanghai's Industries
As the central city of the Yangtze Delta Megalopolis in terms of economic strength and scale, Shanghai will inevitably play a role of economic radiation. Shanghai is at the forefront of attracting international investment in the Yangtze Delta. The city leads the region with the largest concentration of foreign enterprises, the largest foreign investment, and the highest investment density. By developing the exhibition industry and promoting the Industrial Exposition and East China Commodity Fair, Shanghai is committed to sharing foreign investment with its Yangtze Delta neighbors. It will play increasingly critical roles as organizer, leader, and bridge in the multi-party joint-investment in, and common development of, the Yangtze Delta Megalopolis.
Many multinationals now moving into Shanghai are principally taking advantage of the internationally competitive manufacturing resources in Shanghai's neighboring areas. This movement has led to the establishment of an effective geographical division system for all the cities, where each city receives economic radiation from its adjacent areas. The radiation function of the industries in Shanghai is largely a response to the continuous upgrade, optimization, and adjustment of its industrial structure. Shanghai deliberately differentiates its industrial development from that of its neighboring areas, and continuously disperses certain industries to outlying areas.
Over the past few years, Shanghai has started a major industrial restructuring. In the next few years, Shanghai will eliminate or relocate 3,000–4,000 disadvantaged enterprises, leaving clear potential for less developed regions. In 2002, Shanghai invested RMB 10 billion in an IT industrial park in Jiashan of Zhejiang, and initiated the inflow of major electronic information enterprises from Taiwan. In early 2005, Lianyungang set up a special committee to take on industries relocated from Shanghai. Other cities in northern Jiangsu including Yancheng, Huai'an, and Xuzhou, and cities in Zhejiang, such as Huzhou and Quzhou, have also expressed serious interest in Shanghai's industrial relocation.
Currently, an IT industry chain has been formed in the Yangtze Delta Megalopolis. Shanghai has built a high quality industrial chain linking chip design, production, packaging, and testing. Three of China's four 8-inch chip production lines using technologies below 0.35-μm are located in Shanghai, while the Suzhou-Wuxi-Changzhou region has grown into a production base for IT products. Suzhou has formed a notebook PC and monitor industry chain with an annual output of 12 million notebook PCs, accounting for a quarter of the world's total output. Wuxi has become a hotspot for investment from Japan, and it focuses on the production of communication and PC parts, while Ningbo has established a cell phone production center, with Bird as the leader.
The radiation effect of Shanghai's industry is also observed in such industrial integration activities as mergers, acquisitions, and shareholding. For example, the Shanghai Automobile Industry Corporation (Group) (SAIC Group) bought Yizheng Automobile Co. Ltd. to develop lightweight cars in light of the demands of small-and medium-sized cities and rural areas. The Shanghai Clothing Group has established branches in Kunshan of Jiangsu and Shaoxing of Zhejiang, enabling it to compete in the nationwide market. A dozen textile enterprises affiliated to the Shanghai Textile Holdings Group are being moved into Dafeng in northern Jiangsu, and are expected to achieve an annual output of RMB 1 billion after Phase I is implemented.
In another example of this trend, a cartoon and animation industrial belt is being formed, with Shanghai acting as the leader and Jiangsu and Zhejiang as the wings. It will become an accelerator for future growth and geographical expansion of the cartoon and animation industry in the Yangtze Delta, and it will also become an “industrial corridor,” covering all the links of the industrial chain and promoting intra-industry interaction. The Nanjing-Shanghai information industrial belt has been established, with the Shanghai-Nanjing Railroad acting as the main line. This railroad extends for about 50 kilometers on each side, and stretches for a length of some 300 kilometers. In this industrial belt, a large number of information industrial parks, with electronic information projects as their main components, are densely distributed, with annual sales of above RMB 10 million. These parks are Suzhou High and New Technology Development Zone, Suzhou Industrial Zone, Nanjing Jiangning Development Zone, Wuxi High and New Technology Development Zone, Kunshan High and New Technology Development Zone, Wujiang Development Zone, and Nanjing Zhujiang Road Science and Technology Park.
Shanghai should abandon its previous parochial outlook on moving its labor-intensive traditional industries with high pollution, high energy consumption, high material consumption, low value added, and low technology content to less developed regions. Instead, it should adopt an across-the-board, hierarchical industrial shift strategy. Shanghai's creative, growing, mature, and declining industries are all affected by the new industrial shift, particularly the last three. The city should expand and relocate those industries that are at a rapid growth stage and those at a mature stage. It should relocate most of its mature industries and almost all of its declining industries. With regard to the destination of relocation, it should vary the time and method with different regions at different levels of development.
5. Internationalization and the Competitiveness of Shanghai Industries
As the core city of the sixth megalopolis in the world, Shanghai has always been at the forefront of internationalization and opening-up. Interaction with other cities in the Yangtze Delta can optimize Shanghai's industrial structure and boost its industrial upgrading. As an open metropolis, Shanghai's global economic environment provides an even wider platform to accelerate its pace of industrial optimization and upgrading, and offers an external impetus to enhance the competitiveness of its industries.
5.1 A World Manufacturing Center
New adjustments in industrial structure are taking place all over the world. The general trend is for agriculture's proportion to drop, the service industry's proportion to rise, and for manufacturing industry's share to either rise or fall depending on geographical location. One noticeable feature of manufacturing's proportion is that it tends to fall in developed countries and rise in developing countries. Currently, the gravity center of global industrial manufacturing is shifting from the western to eastern hemispheres, and from developed to developing countries. The major regions now on the move are East Asia, including China and Southeast Asia. Within China, the main regions are the Yangtze Delta region with Shanghai at its core, and the Pearl River Delta region with Guangdong at its center.
Since the 1990s, the world's manufacturing industry, represented by multinational corporations, has gradually shifted to China. More than two-thirds of foreign direct investment (FDI) in China has gone into manufacturing. The World Investment Report 2004, released at the UN Conference on Trade and Development, indicated that more than 400 Fortune Global 500 corporations had invested in over 2,000 projects in China, more than 400 of which were research and development centers. Almost all top-brand household appliances are now produced in China. The “Made in China” label can be seen on all manner of products all over the world. Most of these products come from industrial zones that are mainly concentrated in the Shanghai-centered Yangtze Delta region and the Guangdong-centered Pearl River Delta region.
With current industrial trends, discussions abound on China's position as the world's manufacturing center or global factory. Shanghai has also been involved in these discussions, which have increased in frequency and intensity. There are two categories of world manufacturing centers, based on what is produced. The first category refers to consumer goods manufacturing centers, and the second to machinery and equipment manufacturing centers. From this perspective, even if China qualifies for the title of global factory, it still remains a predominantly consumer goods manufacturing center. Although Shanghai has some advantages in machinery and equipment manufacturing, it is still far from being qualified to be a machinery and equipment manufacturing center—a description that better fits Japan now.
Fundamentally, for any country or region to become a global factory, it must have a technical or cost advantage. A low cost advantage is largely a result of cheap labor or efficient management. In order to become a global factory, Shanghai and the Yangtze Delta region should still depend on its cost advantage, which is at present mainly due to low labor costs. However, as Shanghai's economy becomes increasingly globalized, this cost advantage is being eroded, because neighboring regions are now gaining greater cost advantages, which can be clearly seen from the relocation of Shanghai's processing and manufacturing industries to its neighboring regions over the past few years. Therefore, to maintain competitiveness in its manufacturing industry, Shanghai must heighten its management efficiency to keep the costs down. It must also enhance its technical advantage by developing the latest state-of-the-art technologies to drive manufacturing growth.
In addition, international experience shows that when a comparative advantage runs out in a region or country where its technical level has improved, it should use the opportunity to transform itself from a consumer product manufacturing center into a machinery and equipment manufacturing center, so as to avoid falling into a structural trap when confronted by fierce international competition.
Undeniably, it is a significant step for a developing country to become the world's factory, and it is fitting that Shanghai, as China's largest entry coastal port, should be the gateway in this endeavor.
5.2 Transnational Procurement Center and Foreign Research and Development Center
A current trend of foreign investment in China is for multinationals to set up transnational procurement centers. The establishment of such centers is vital for multinational corporations, directly influencing their overall strategy and layout for overseas investment. After China's WTO accession, increasing numbers of multinationals have invested more heavily in China, and the country is set to become an important production, procurement, and research and development base. As these companies invest more in China, the localization of their business activities is an inevitable consequence. This localization will filter into management, research and development, talent, production, and procurement. This trend also explains why multinationals have established their regional headquarters, and research and development, production, and transnational procurement centers in China.
The establishment of transnational procurement centers plays an extremely critical role in promoting local exports, driving the growth of the manufacturing and service industries, speeding up industrial upgrading, and transforming the region into an international trade center. Therefore, this has become the yardstick of achievement for many of China's cities. In line with its role as China's leading business center, Shanghai was planning to build a procurement center for transnational chain store companies as early as the end of 1998, with an aim to secure orders from international chain store networks. In 2002, Shanghai proposed to expand the transnational procurement network from the commercial field to other fields, and build a transnational procurement center for chain stores, multinational manufacturing corporations, and comprehensive government procurement, as well as an online procurement center. In March 2002, the Shanghai Transnational Procurement Promotion Center and Shanghai Transnational Procurement Service Co. were formally established to quicken the pace of attracting regional procurement headquarters or global procurement centers of multinational corporations to set up operations in Shanghai.
In the present wave of foreign investment in China, research and development centers have emerged alongside processing and procurement centers. Currently, hundreds of multinational companies have set up more than 400 research and development institutes in China. In addition, it has already become a trend for these corporations to establish research and development centers in China, indicating a changed investment strategy. These centers, along with the processing and procurement centers, have created a new situation for foreign investment in China.
Since China started opening-up and reform, Shanghai has always been outstanding in terms of attracting overseas capital, and it has become the landing point for foreign and regional investors to make inroads into China. With regard to China's investment fields, the top three issues for foreign investors are the profitability, security, and liquidity of their assets. Foreign investment enjoys healthy profitability and security under Shanghai's current system and policies, but liquidity is still an area of concern. The policy barriers mainly include capital account inconvertibility and investment mode restrictions. Currently, foreign investment in China is mostly made through establishing foreign-invested enterprises, imposing substantial restrictions on the liquidity of assets. This issue will possibly be resolved by policy arrangements that allow foreign capital to invest in mergers and acquisitions. So far, China has promulgated several administrative regulations in this regard, which include the Provisional Regulations on Merger and Acquisition of Domestic Enterprises by Foreign Investors, Regulations on Foreign Investment to Set up Investment Companies, and Provisional Regulations on Foreign Investment to Set up Venture Investment Companies. All these regulations have laid an institutional foundation for Shanghai to break through the barriers in question. Shanghai has unique advantages in a number of areas, such as the capital market involving trans-border mergers and acquisitions, the number of regional headquarters for multinationals in relation to the setup of investment companies, and the objective conditions to establish venture investment companies. Shanghai should fully capitalize on its role as an experimental site by introducing and innovating policies that will affect future development in the rest of the country.
According to a report by the Shanghai Statistics Bureau in 2005, the scale of the utilization of foreign investment by Shanghai continues to expand, and the quality of foreign investments continues to improve. In that year, 4,091 contractual foreign direct investment projects were approved, down 5.6% from the previous year. Contractual foreign investment amounted to US$13.83 billion, up 18.3%, and paid-in capital was US$6.85 billion, up 4.7%. Foreign direct investment expanded at a faster pace in modern service sectors such as commerce and trade, logistics, advertising, and finance. In the same year, tertiary industry absorbed a contractual foreign investment worth US$7.31 billion, up 60.2% from the previous year, and accounting for over 50% of the total foreign direct investment, reaching 52.9% for the first time. Of this total, transportation, warehousing, and postal services attracted a contractual investment of US$1.37 billion, increasing 1.8-fold, and the wholesale and retail industry stood at US$1.21 billion, growing 1.2-fold. Annual contractual foreign investment in secondary industry was US$6.51 billion, down 7.9% from the previous year. The proportion of large-scale projects continued to increase. The annual incremental investment in foreign-invested enterprises amounted to US$6.89 billion, accounting for 49.8% of the total contractual direct foreign investment in Shanghai or 11% higher than the previous year. Also in 2005, 307 direct foreign investment projects, each of which involved a total investment of over US$10 million, were approved, down 21.7%. Their contractual investment was US$10.107 billion, up 18.4% and accounting for 73.1% of the total contractual foreign investment in Shanghai. By the end of the year, 120 countries and regions had invested in Shanghai.
The economy, driven by the increase of regional headquarters, was greatly developed, and there was an obvious increase in the number of projects with specific functions. Within the year, the number of newly established regional headquarters of multinational corporations, investment companies, and foreign research and development centers amounted to 38, 25, and 30 respectively. At the end of 2005, Shanghai was home to 124 regional headquarters of multinational corporations, 130 investment companies, and 170 foreign research and development centers.
5.3 Independent Innovation
As modularized production technology has evolved, tremendous changes have taken place in the form of work division between different enterprises and countries. In order to cut costs, many multinational corporations have diverted their low value-added production to developing countries. In this wave, China has become the OEM base in which the greater Shanghai area is one of its main strongholds. Based on their comparative advantages, labor-intensive production is distributed in developing countries where salaries are low, while high-tech content and high value-added processes, such as product research and development, are located in developed countries. As a result, there have been frequent industrial product exchanges centered on parts and intermediate materials between developed countries and developing countries in recent years. From this perspective, the competitiveness of Shanghai's industry remains to be further improved.
Located downstream in industrial labor division
In terms of participation in international labor division, Shanghai's industries are restricted to the low value-added sectors of the industrial chain. For example, the Microsoft-Intel architecture dominates the personal computer (PC) industrial chain. These two giants snatched 50% of the PC industry's total profit. Despite their large scales, China's PC enterprises have low profits because they are mostly involved in processing work. Hardware manufacturers only have a profit margin of about 2%, so price wars become the main means of competition in the industry.
Shanghai is currently at a critical stage of upgrading its industrial technology. On the one hand, Shanghai's industrial development has reached a stage driven by leading technologies and knowledge, where the per capita GDP amounts to US$5,000. However, looking at global industrial labor division, there are five stages in the industrial chain: research and development, core components manufacturing, parts manufacturing, assembly, and sales. China's manufacturing industry (including Shanghai) still remains at the third and fourth stages, characterized by low value added. Facing accelerated economic globalization, China's current independent innovation capability is not sufficient for the next round of rapid industrial growth. The goal of securing a sizeable share in the high-value zone of global manufacturing will give impetus to the upgrading of Shanghai's industrial structure, and pave the way for further development in the service industry.
Currently, Shanghai only serves as a commission processing and manufacturing base operating under the OEM (Original Equipment Manufacture) production model. OEM is aptly described by Chinese enterprises as “stick-the-brand-on production.” In other words, the brand owners do not directly engage in production. Instead, they focus on product research and development, planning guidance, sales channel control, and brand promotion. They assign actual production to other enterprises, and simply attach their brand names or trademarks to the end products. The country's advantageous conditions, such as a vast market, low costs, and large numbers of qualified talent, have made China the first choice for this new round of industrial relocation, with the greater Shanghai area as a key region in this shift.
A commission-based processing model for a global factory is also known as a non-technical innovation global manufacturing center. The production mode of this type of processing is determined by its low profits and low innovation capability. Although a commission-based processing global factory is an inevitable stage in economic development for developing countries, this does not preclude any opportunity for upgrade. As the scale of manufacturing grows ever greater, there will be an increasing demand for localized research and development and design. In other words, it is possible to convert a non-technical innovation manufacturing center into a technical innovation manufacturing center. This is more or less in line with the key strategy of rejuvenating Shanghai through science and technology. The Shanghai Municipal Government has highlighted the need to improve its independent innovation capability and enhance the core competitive strength of enterprises, so as to propel Shanghai's industry to an upstream position in the international industrial chain.
Shanghai will ultimately rely more on technological advancement to achieve its goal of transforming itself into an international shipping, financial, trade, and economic center. A comprehensive study on the history of modernization shows that countries that come late to industrialization typically experience three stages in building competitive advantages. At the outset, their economic development in the first stage mainly depends on resource consumption, and they create a degree of competitiveness by introducing and adopting technologies. As the economy grows, and per capita GDP surpasses US$800, their economic development moves into the second stage of development, in which investment becomes one of the main driving factors for economic growth, science and technology contribute more to the economy, and technological advancement is mainly achieved by introducing new technologies, with some innovations still based on the assimilation of imported technologies. At this stage, the formation of economic competitive advantage principally depends on continuous improvement in the work force and labor productivity. When the per capita GDP exceeds US$5,000, their economic development enters the third stage where the commercial and labor cost of economic activities continues to increase, resulting inevitably in decreased competitiveness. Therefore, in the third stage, economic growth is heavily reliant on independent innovations in such areas as science and technology and the commercial mode. Innovation gives tremendous impetus to the further optimization and adjustment of industrial structure and brings into full play the advantage in human resources. It also helps increase the value added of products and significantly improve labor productivity. Shanghai's modernization is at a pivotal point of moving from the second to third stages, and the upgrade of its industrial competitiveness will increasingly rely on independent innovation. Therefore, Shanghai has formulated the strategic policy of rejuvenating the city through science and technology, and this is the inevitable choice for Shanghai's economic development.
Fostering independent industrial innovation capability
Years of development have brought some high-level industrial advantages to Shanghai. These are specifically reflected in the following:
- The intensive advantage of high-tech industry. Since the 1990s, based on its comparative advantage, Shanghai has deliberately developed industries with high-tech content, a sharp competitive edge, and a vast market. Aiming to emulate the global orientation of high-tech development, Shanghai has started to develop large intensive high-tech belts, and has formed a modern multifunctional high-tech industrial base comprising inegrated circuits, biomedicine, and computer equipment manufacturing clusters.
- The advantage in complete auxiliary systems for the development of large-scale projects. Shanghai's strategic adjustments in its industrial structure, and its vigorous efforts to introduce and foster advanced technologies so as to transform and upgrade the traditional manufacturing industry, have given a huge boost to its industrial optimization and upgrading. It has formed a comprehensive regional industrial entity supported by large industries and projects.
- The leading advantage in functional industries. Since the 1990s, Shanghai has quickened its pace in expanding the tertiary industry. Functional industries, represented by the modern service industry, have become an important driving factor in Shanghai's efforts to become international shipping, trade, financial, and economic centers. Shanghai took the lead in launching such service sectors as finance, foreign trade, modern logistics, and research and development, bringing about the rapid development of production-oriented service sectors such as legal services, agencies, exhibitions, process design, and management consulting.
In addition, Shanghai is the top region in China in terms of comprehensive enterprise innovation capability. The role played by enterprises in the technological progress of a whole society is obvious. In 2002, enterprises of various types in Shanghai accounted for 59.6% of the city's total research and development expenditure, a substantial increase of 39.4% from 1990. The creative capability of Shanghai's industry in science and technology has improved remarkably compared to the planned economy period. Moreover, Shanghai has fostered a number of advantageous enterprises with core competitive ability. Examples include Shanghai Automotive Co. Ltd., Baosteel Limited, Shanghai Construction and Engineering Co. Ltd., Shanghai Lujiazui Finance and Trade Zone Development Co. Ltd., Shanghai Guangming Dairy Co. Ltd., Shanghai Pharmaceutical Co. Ltd., and Shanghai Pudong Development Bank Corporation for the finance industry. These enterprises have shaped their core businesses and products to reflect their higher market share. They have fundamentally or partially grasped the core or critical technology for these products, thus enjoying greater competitiveness than other enterprises. In addition, those enterprises with a strong science and technology innovation capability generally place emphasis on new product development, and have a larger percentage of engineering and technical professionals in their work force, as well as a higher research and development investment rate.
The majority of Shanghai's enterprises, with their current resources and ability, still lack some of the conditions required for fostering core competitive strength and competing in the global market. On the whole, Shanghai's enterprises do not have a strong research and development capability and own relatively fewer core products. Most of them are currently at the stage of absorbing technology. In terms of key technologies, it is still very difficult for these enterprises to compete with foreign companies that possess cutting-edge technologies. Meanwhile, Shanghai's enterprises are also hindered by such problems as a lack of critical talent, a neglect of fundamental research, and a serious imbalance in research and development capability between different enterprises in different industries, operating under different modes of ownership. Although scientific research expenditure for Shanghai's enterprises is among the highest in China, it still falls behind Guangdong and Jiangsu provinces.
Therefore, to enhance the competitiveness of its enterprises and industries, Shanghai must step up its efforts to upgrade its innovation capability. Shanghai lacks natural resources and has a small geographical area. Only by relying on high value-added innovative ideas and technology can it increase the overall technological content of its industries, and thus transform its industrial development from an extensive to an intensive mode.
Shanghai is now working hard to cultivate a system for independent IPR in order to improve the innovative and competitive ability of its industries and enhance the overall competitiveness of the city. In this regard, Shanghai has introduced some measures, such as pooling innovative capabilities in high-tech parks, fostering innovation sources, focusing on core competitiveness of enterprises, and shaping up new innovation entities. It is training innovation talent, building up sustainable innovation capabilities for the community, and making the most of its guidance and leadership role in creating an optimum environment for innovation.
The 2010 Shanghai World Expo has provided a golden opportunity for the economic development of Shanghai and the Yangtze Delta region. Shanghai will utilize the world's finest products and technologies to build the venues and associated facilities for the exposition. This will directly benefit the manufacturing enterprises in the Yangtze Delta. The World Expo will be a springboard for technological upgrading in the Yangtze Delta's industries. In addition, the process of preparing for and hosting the World Expo will require large numbers of qualified professionals They will spearhead Shanghai's development and aid in the upgrading of independent innovation capability and the enhancing of the competitiveness of Shanghai's industries.
1 Since French scholar Jean Gottmann first introduced the concept of megalopolis in 1957, it has become an important indicator to measure the level of social and economic development of a country or region. Gottmann set five basic conditions and standards for the formation of a megalopolis: firstly, the area in question should have a high density of cities. Secondly, there should be a number of large cities that form their own metropolis, and the main cities should have close social and economic ties with their peripheral areas. Thirdly, the main cities should be well connected with one another through transport systems. Fourthly, there should be a specified total scale for the area, with a population of over 25 million. Fifthly, the region should be a core region for the country, and serve as a hub for international exchange. For details, see J Gottmann, “Megalopolis in the world,” Economic Geography, 1959.
2 Quoted from Ci Hai, 1999 ed., p86.
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