Choosing the Best City in China for Your Tech Company

A Systematic Approach

By Tim Lindeman

Summary

The choice of where to land in China will have a huge impact on your business. But too often companies make this decision in an ad hoc manner. This article outlines a systematic approach to identify and evaluate Chinese cities based on your company’s capabilities and needs, the competitive environment, and market opportunity. By following this approach, you will be more likely to choose a location where your company can survive and thrive.

Takeaways

China is more like a continent than a country
China is huge, both in population and land area. It is possible to build a successful business by going after just one region of China.

The selection is much broader than Beijing, Shanghai and Hong Kong
Many foreign companies only consider well-known tier-one cities. China also has many lesser-known cities that offer unique advantages, such as specialized talent, reduced competition, and relatively low cost.

The best city is different for each company 
Each company has its own capabilities and needs, target customers, and competitors. There is no universal list of best cities in China for foreign tech companies. You will need to do your own research to find the city that is best for your business.

Gallery: Guangzhou Liaison Office in Boston

A Strategic Decision

Choosing a city in China is a strategic decision that will affect your business for many years to come.

Since China is massive, and each region has its own local customs and dialect, it isn’t practical to go after the entire country at once. You need to land and expand.

You can think about your choice of a city like the opening move in a game of chess. This move will impact all of the other moves in the entire game. You want to make this move thoughtfully and with confidence.

Where you land will impact who your first customers and partners will be. It will also impact who you can hire and who your competitors will be. And depending on what city you choose you will have different options for expanding to adjacent regions.

This decision is especially strategic for business-to-business (B2B) technology companies because relationships are crucial when selling to Chinese businesses. And like anywhere else, relationships are strongest when they are local.

The Lay of the Land

At the 20,000-foot level, China has tier-one, tier-two, and tier-three cities. (see endnote 1) It also has a growing number of megacity clusters that function as ecosystems. (see endnote 2) Some cities are rich. Others are poor. Some focus on technology. Others focus on the supply chain. Depending on who you are as a company, there are cities where you will thrive and others where you will struggle.

Beijing is a frequent choice for foreign tech companies landing in China. It is China’s traditional tech center with strong political, educational, and cultural resources. Shanghai is China’s largest city with a more central location, commercial focus, and access to a massive network of thriving cities throughout the Yangtze River Delta. And the Greater Bay Area with its dense urban landscapes stretching from Guangzhou to Shenzhen, Hong Kong, and Macao is the home of Huawei, Tencent, and other tech giants.

China’s interior also has many attractive cities for tech companies. Chengdu and Chongqing in the west have rapidly growing technology scenes fueled by government subsidies and relatively low HR costs. Guiyang in the southwest is the home of many data centers that take advantage of low energy costs. And Wuhan and Changsha in central China have low costs, strong universities, and very convenient access to Beijing, Shanghai, and the Greater Bay.

Figure 1: China’s Tiered Cities and Key Megacities

Chinese Cities Compared

Figuring out where to start your search is challenging given the many options. Fortunately, there are a couple of free reports that provide extensive quantitative research comparing Chinese cities on a broad set of criteria.

The “Savills Tech Cities index measures thirty cities from around the world against 100 individual metrics.” (see endnote 3) In the 2019 edition, six Chinese cities were included in the top thirty, including Shanghai, Beijing, Hong Kong, Shenzhen, Hangzhou, and Chengdu.

Figure 2: Savills Chinese Tech Cities

PwC publishes an annual “Chinese Cities of Opportunity” report that focuses exclusively on the China market. (see endnote 4) This impressive piece of research covers thirty-eight cities and compares them by ten major dimensions.

Figure 3: PwC Chinese Cities of Opportunity

These reports are an excellent source to help you start thinking about the factors that are important to you. However, keep in mind that the cities at the top of the rankings aren’t necessarily the best match for your business.

Analysis: Step One – Selection Criteria

After you have gotten a basic lay of the land and reviewed some research comparing Chinese cities it is time to begin your own analysis.

The first step in the analysis should be to define a set of criteria most meaningful for your business. The following high-level dimensions can be useful to organize your criteria:

• The city itself and the market opportunities it provides
• Your company’s internal capabilities and needs
• The competitive environment

When considering these dimensions together, you should be able to choose a city that offers an appropriate balance. The city should provide ample market opportunities, meet your specific needs, and enable you to develop a market presence without being overwhelmed by the competition.

Figure 4: Three Dimensions for City Selection

Below are some example questions to help you start thinking about your evaluation criteria:

• Capabilities and needs
  • Where are our staff, friends, and partners located?
  • Do we need specialized talent or ecosystem support?
  • How important is controlling cost?
  • …
• Market opportunity
  • Where are our target customers?
  • Is the economy growing?
  • Are there other nearby cities with attractive markets?
  • …
• Competitive environment
  • Where are our competitors?
  • Are we confident in competing head to head?
  • Or should we choose a city with less competition?
  • …

After you come up with a list of factors that are relevant to your business, create a table and include a column to rate the relative importance of each criterion (see Figure 5).

Figure 5: Example Selection Criteria

Analysis: Step Two – Mapping Competitors and Customers

The second step in your analysis is researching where your competitors and target customers are located in China. Putting competitors and customers on the map will help to visualize the market opportunity and competitive environment. Ideally, this analysis will uncover gaps on the map where there are strong market opportunities with limited regional competition.

Competitor Research

First, come up with a list of your top competitors in foreign markets. If your product category is covered by a major analyst firm such as Gartner or Forrester, you can use their vendor evaluation reports to come up with a fairly comprehensive list. (see endnote 5) After you have compiled your list, search the internet to find the location of each company’s China headquarters and place them on the map.

Likely, many of your foreign competitors will be based in either Beijing or Shanghai. There are good reasons for this. Since government relations are very important in China, large players looking to go after the entire market often choose Beijing. Others choose Shanghai because of its relatively foreign-friendly business environment and central location.

Next, you will want to look at Chinese competitors. This is trickier because many of them haven’t made the English press. If you don’t have Chinese speaking staff, you will probably want to enlist outside help to identify the key competitors and where they are based. In fact, you’re going to want to know this well before you decide whether or not to open an office in China. Once you have a list, add these competitors to your map.

Figure 6: Mapping Competitors in China – Data & Analytics Example

Looking at the example in Figure 6, you can see that almost all of the competitors in the data analytics market are based in major tier-one cities. The presence of so many foreign vendors indicates that the market is already fairly mature, at least in the coastal regions. It also appears that South China has much weaker regional competition than other parts of China.

Customer Research

Next, come up with a high-level definition of your target market in China. This could be something simple like the top 100 companies in a certain industry. Or it could be mid-market firms with certain characteristics.

As an example, Figure 7 illustrates the market opportunities for Dimensional Insight, a data analytics company that targets mid-to-large hospitals. Each red cross on the map represents one hospital from a list of the top 100 hospitals in China. (see endnote 6)

Figure 7: Mapping Potential Customers in China – Healthcare Data & Analytics Example

After you have your target customers on the map, you can see more clearly where your potential areas of opportunity are. In the Dimensional Insight example (Figure 7) Guangzhou looks particularly attractive because there are a large number of leading hospitals and no foreign competitors. Central China is also interesting. There is a cluster of top hospitals in the Wuhan / Changsha region. And a central position could serve as a gateway to Northwest and Southwest China.

Analysis: Step Three – Adding it All Together

The final step in the analysis involves coming up with a shortlist of potential cities and comparing them using the selection criteria you defined in step one.

Review the Savills and PwC reports (see Figures 2 and 3) and take note of any cities that you would like to include in your shortlist. Also, review your map of competitors and potential customers to identify cities with strong market opportunity and manageable competition.

Create a table with your selection criteria on the left and a column on the right for each city in your shortlist. Then gather the information that enables you to give an approximate score for each city against the criteria. Since this is only a preliminary analysis, if you are not sure of how to score a particular value make an educated guess or leave the value blank. After you are finished, add the total scores to see which cities come out on top.

Figure 8: Example City Comparison

Figure 8 provides an example based on Dimensional Insight’s set of criteria and choice of potential cities. Note that at the time of analysis, we lacked information on government incentives and chose to research this at a later date.

City Visits

The above analysis is a structured approach to identify and rank cities. However, the results of this analysis are preliminary at best.

Before you make the strategic decision of where to set up your China business, you will want to take trips to China and experience the local environment first-hand. When you plan for these trips, reach out to the following organizations to see if they can assist in setting up meetings:

• Your home country’s commercial service agency: to see if they can arrange meetings with potential partners and customers.
• Chinese city governments: to learn about incentives and business resources available; some government offices will also arrange meetings with prospects and development parks.
• Chamber of commerce: many Western countries have thriving local chambers of commerce in major Chinese cities; they can help you understand how other foreign companies are doing in the local market.

You might also choose to take a trip at the same time as a major industry trade show. That way you can walk the halls and get a first-hand impression of the competitors, potential customers, and the overall maturity of the market.

Recommendations

Consider selection criteria specific to your business

Don’t rely solely on a general list of criteria written by people who know nothing about your business. Consider factors such as where you already have connections in China, where your competitors are located, who your target customers are, and what kind of talent you need.

Evaluate a broad list of candidate cities

Make sure your list includes some lesser-known cities. These cities might be in the West, Southwest, or Northeast regions of China. Or they might be tier-two cities within megacity clusters. While these cities may not be the best choice for your business, including them in the process will give you a much better understanding of the options available.

Spend time visiting each city before making a final decision

You won’t get a full sense of whether a city is a good match until you spend time on the ground. Spend time talking with people and visiting sites that are important to your business. You may be surprised to find that the city that gives you the best impression wasn’t at the top of your list.

Suggested Reading

Why Foreign Tech Vendors Should Carefully Consider the China Market
Case Study: Analytics Software Company Goes It Alone In China
A Disciplined Approach to China Market Entry

Endnotes

1. 1. Source: “Chinese city tier system,” Wikipedia, viewed on December 14, 2019 (https://en.wikipedia.org/wiki/Chinese_city_tier_system)
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   2. Source: “Megalopolises in China,” Wikipedia, viewed on December 14, 2019 (https://en.wikipedia.org/wiki/Megalopolises_in_China)
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   3. Source: “Tech Cities 2019, 30 Cities at the Forefront of Global Tech Analysed,” Savills, (https://www.savills.co.uk/tech-cities)
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   4. Source: “Chinese Cities of Opportunities 2019 Report,” PwC, (https://www.pwccn.com/en/research-and-insights/chinese-cities-of-opportunities-2019-report.pdf)
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   5. The sample analysis in Figure 6 uses the list of competitors found in the Gartner Magic Quadrant. Source: “2019 Magic Quadrant for Analytics and Business Intelligence Platforms,” Gartner, (https://www.gartner.com/document/3900992). For a broader list of competitors in a particular tech category, see Forrester Research’s Now Tech reports. Source: “Now Tech: Enterprise BI Platforms, Q1 2019,” Forrester Research, (https://www.forrester.com/report/Now+Tech+Enterprise+BI+Platforms+Q1+2019/-/E-RES143818)
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   6. Source: “Chinese Hospital Competitive Rankings – 中国医院竞争力排行榜,” GZ Asclepius Healthcare, (http://www.ailibi.com/web/rank)
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If you are interested in having a conversation about how to choose a city in China or other China business-related topics, please connect with me on LinkedIn.

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