Tianjin takes the lead in attracting high-tech investment from Europe

Volkswagen, Novozymes, Danfoss, Novo Nordisk, Alstom and Kerneos are European companies that are market leaders in their respective segments. Though their lines of business are as different as chalk and cheese, one key to their global success lies in the port city of Tianjin, China.

It is not unusual for a European company to have manufacturing facilities in China, the growing cluster of such firms in the one area is highly attractive from a foreign direct investment perspective.

Industry experts often cite Tianjin's proximity to Beijing as a compelling reason for FDI along with its rich legacy in manufacturing. But it also has a crucial role to play in the Bohai Economic Rim, China's third engine of economic growth and it is one of the fastest-growing cities in China.

"We expect the Bohai Economic Rim to be the next hotspot for economic growth after the Pearl River Delta in the 1980s and the Yangtze River Delta in the 1990s," says Thomas Koniordos, president of Danfoss China.

The Danish company, one of the world's largest suppliers of energy efficiency technology, has its largest global manufacturing base in the Asia-Pacific region in Wuqing, Tianjin.

Over the past 14 years, the Tianjin Economic-Technological Development Area has consecutively topped the list of company destinations in China with the best investment environment and also figures among the top national development zones under the Ministry of Commerce. TEDA's FDI has been growing fast at double-digit rates. The area's FDI in 2012 is expected to reach $5 billion (3.81 billion euros), up 15 percent year-on-year. This year, eight new investors from Europe have joined around 165 other European companies in the area.

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But what really makes TEDA different from other regions in China is its wealth of high-tech and research and development investments. Most multinational companies need cutting-edge manufacturing technologies to gain an edge over their peers in the global marketplace. To this aim, they are investing huge amounts in dedicated R D centers in TEDA. Among the 60 multinational companies that have built R D centers in TEDA, 10 are from Europe.

"We have set up our largest high-tech and high-end product unit in TEDA along with considerable outlay for R D," says Jean-Yves Laguillez, the China managing director of the France-based calcium aluminate maker Kerneos.

From its inception in 1984, TEDA has been an attractive location for big technology-intensive companies from Europe and the US, says Mei Zhihong, director of TEDA's executive office of investment promotion.

Since then it has flourished and currently clocks annual GDP growth rates in excess of 25 percent. There is a constant buzz of activity in TEDA as companies upgrade their facilities. So much so, experts often say it is like an engine that never stops.

"We were lucky because most companies that initially came to the TEDA were market leaders in their segments. These investors have helped bring in other companies and also helped improve the added value to the region," she says.

In August, the Volkswagen Group, the world's second-largest automaker by revenue, said it would invest 920 million euros ($1.2 billion) to set up its second transmission unit in China in TEDA. The first stage of the unit is expected to start production by 2014 with an annual capacity of 450,000 units.

In September, Novozymes, the world's largest manufacturer of industrial enzymes and industrial microbial agents, opened its highest-standardized laboratory in Tianjin, the first of its kind outside Denmark, to cater to global needs.

"China is a strong growth engine for our global business and the TEDA unit will play a key role in the group's globalization strategy," says Michael Fredskov Christiansen, the regional president of Novozymes China.

For other European companies like Alstom and Kerneos, Tianjin is also a major manufacturing base apart from an R D destination of choice.

Amid the rapid growth, there have also been some problems as companies have incurred additional expenditure due to higher raw material and labor costs.

"Every year the labor costs go up by 15 percent, while our end customers seek further price reductions. We are caught in between as we have to factor both aspects," says Hubert Limbrunner, plant manager of Continental Automotive System (Tianjin) Co Ltd, a leading tire and automotive systems maker from Germany.

For companies like Kerneos, the real challenge is how to account for costlier raw materials, Laguillez says. "We use bauxite for some products in our Chinese plants, which has become a rare commodity in China. It means that prices are increasing and so are our costs." China is Kerneos' second-largest market for refractory applications, which is widely used in the steel industry.

"Steel manufacturers are also facing a lot of challenges as the industry has witnessed a slowdown this year. There is pressure on us to control prices to boost consumption. It is a tough task as we also have to factor in adequate margins to make a profit," Laguillez says.

Though some companies have expressed similar concerns, it has in no way taken the sheen off Tianjin. "Factors like higher labor and raw material costs are natural during the process of an industrial upgrade," says Ge Shunqi, deputy head of the Institute of International Economics at the Nankai University in Tianjin.