Jean-François Tremblay
C&EN Hong Kong

Only 10 years ago, going to China was a serious adventure. Telephones were rare and often did not work, flights were delayed, and even in the largest cities on the coast foreign visitors attracted the attention usually given to zoo animals. Bicycles dominated the roads. A common form of transportation in Beijing was a three-wheel peddle bike; in Shanghai, where one could purchase tiger parts at the bund, motorized rickshaws outnumbered taxis. China was a backward place, and multinational corporations considered posting their executives in Shanghai or Beijing to be a hardship.

	Photo by Jean-François Tremblay

In the space of a few years, China has accomplished astonishing changes, especially in the large cities on the coast. The pace of modernization has been so rapid that even Washington, D.C., Tokyo, or Hong Kong are left behind in some respects. Many of the largest cities' roads, highways, bridges, phone lines, and airports--as well as sewers and even trash cans--are brand new. "What I saw here in 1985 and what I see today is a huge change for the positive," says Shanghai's Charles G. Browne, president of DuPont China, who was recently posted in China for the second time. Browne adds, "If I walk up and down the street, I cannot tell whether I am in Hong Kong, New York, or São Paulo."

At a night club in Chongqing, a city on the Yangtze River in central China, surrounded by fashionable Chinese youth wildly dancing on tables and every space available, one French executive commented, "This is not how I imagined China."

The feeling of being on a movie set rather than a real place is strongest in Shanghai, China's showcase city, which has benefited from the largest investments in infrastructure. There, on newly redesigned Nanjing Road, neon signs, elegantly dressed pedestrians, and even open-air fashion shows compete for attention. One wonders how this can be possible in a country where the per capita income is $860.

It's not clear where all this money is coming from. Nonetheless, China's huge population of 1.25 billion, the past eight years' average gross domestic product growth of 10.5%, and all the changes that are immediately apparent on the streets add up to a powerful incentive for any company to establish a presence in China as quickly as possible.

But there are other attractions. Beyond the pull of market growth, additions to infrastructure are facilitating business in China. David Henley, director and deputy general manager of Yaraco, a BP acetic acid joint venture in Chongqing, is enthusiastic about new railroad tracks that will almost directly serve the production site. "We did not know about these developments when we went ahead with the venture," he says.

There are still many infrastructure needs. For instance, China still lags in terms of digital communications. On the one hand, for political reasons, Beijing restricts access to some foreign websites such as the news network CNN. But a bigger problem for businesses is that Internet connection speeds are extremely slow. Many people believe that this is only a temporary problem and that Beijing will soon proceed with construction of a national fiber-optic network. Nanjing-based agrochemical producer Red Sun is even going ahead with plans to set up a national Internet-based distribution network linking thousands of Red Sun retailers throughout China.

Government services are improving too. In 1978, China initiated its switch from Maoism to capitalism. Although there is an increasing number of news reports about the trials of corrupt government officials, there has been a growing sophistication in the abilities of government officials. Dai Zheng Ya, a vice director of the Nanjing Municipal Economic Commission, relates that when he joined the government in the 1980s, most of his colleagues were former soldiers from the People's Liberation Army. He, by contrast, used to perform engineering work in the electronics sector prior to joining the government.

Dai's subordinates, who began work at the commission in the 1990s, are professional technocrats. Kong Qiuyun, a division chief under Dai, holds an M.S. degree in social and cultural geography and recently graduated from an M.B.A. program in London. He feels a commitment to his job. "I could probably earn more in the private sector, but who would be here to do what I do in the government if I weren't here?" Kong asks.

Efforts are paying off. Over the past 20 years, Nanjing has attracted $8 billion in foreign investment pledges, half of which has actually been disbursed, Dai says. The figures do not include Nanjing's coup in attracting a $2.6 billion joint investment by BASF and Nanjing's Yangzi Petrochemical in an integrated petrochemical complex. Approved in June by Chinese Premier Zhu Rongji only a few weeks after submission of the feasibility study, the BASF project is now awaiting a license from the State Industrial & Commercial Bureau. Dai says the next step is to at-tract new investments in industries downstream of the project ( C&EN, July 10, page 10 ).

While China's economic restructuring is causing unemployment in many parts of the country, cities near the coast such as Nanjing are strengthening rather than experiencing an ordeal. There are many layoffs at state-owned manufacturing firms, Dai admits. However, many new jobs are created. Nanjing, in fact, successfully attracts workers from other parts of China who fill the employment needs of the municipality's dynamic economy.

Economic imbalances

The success of cities such as Nanjing is leading to regional economic imbalances. In the interior, a city such as Chongqing appears noticeably backward compared with the large coastal cities. Chongqing welcomed the opening of its first McDonald's outlet earlier this month, almost a decade later than in Beijing. At Chongqing state-owned firms, workers are losing their jobs, and few opportunities greet them at the impromptu job markets that appear daily in various public areas in the center of the city. Smokestack industries that seem to still use 19th-century technology are giving Chongqing a permanently gray look because environmental controls are not yet as strict as on the coast.

For decades, Beijing's strategy has been to develop the coast ahead of the interior. However, Beijing sees that the time has arrived to bring development inland because per capita income in Shanghai in 1998 was 60% higher than that of Chongqing's. As has happened on the coast, new highways, bridges, railways, and hotels are being built in the inter-ior in an effort to facilitate trade and investment.

Yet to portray China as inflexibly totalitarian is simplistic. "There are discussions taking place all over China these days," says Mei Deng Sheng, chairman of silane coupling producer Nanjing Shu Guang Chemical. "We are arguing on what steps we can take to strengthen our country to catch up with the rest of the world." Mei was commenting on a dinner discussion he had just heard between a Nanjing city official and a Communist Party cadre employed by Shu Guang Chemical. In a relaxed mood after a few glasses of beer, the city official had voiced his opinion that the Communist Party appeared to be slowing down China's progress. Far from being upset, the group had simply responded that the party needed to do a better job in order to avoid being a drag on China's progress.

Of the numerous changes taking place in China, none is being watched more closely than the country's imminent entry into the World Trade Organization (WTO) . A two-day international conference solely devoted to the impact of WTO on China's chemical industry will take place in early September in Singapore. Among other changes, China's entry into WTO is expected to establish more firmly the rule of law in China and to make it easier for foreign firms to develop distribution networks ( C&EN, Feb. 14, page 33 ).

DuPont's Browne considers WTO the principal factor affecting the current business climate in China. "WTO is the thousand-pound gorilla. It's one [issue] we've been watching very closely."

A sign of the times in China: A Sinopec gas station.

As part of its efforts to meet the challenges of globalization, Beijing has restructured the management of China's two largest oil and petrochemical companies. China National Petroleum Corp. and Sinopec, an acronym that now stands for China Petroleum & Petrochemical Co., are both issuing shares on the international market. The two conglomerates now both operate a network of gas stations. And both are negotiating with large multinational firms to build worldscale petrochemical facilities in China that will be able to compete globally.

In the 20 years that China has been open to foreign investment, companies representing the entire spectrum of the chemical industry have set up production facilities and distribution networks in the country. Although China's history in the 20th century should invite caution, not having a presence in such a rapidly developing market could prove to be a more reckless course.

Foreign investors

During the Maoist era, it became the norm for Chinese firms to provide shower facilities for their employees. During a tour of the joint-venture production facilities of a European chemical company in China, one manager explains--while pointing at freshly washed employees carrying wet towels with them on the plant site--that it hasn't been possible to break the old habits so far. Many Chinese do not have adequate bathing facilities at home, he says, and they believe that it is the employer's responsibility to provide facilities.

Browne

Dealing with different cultures is always a challenge when operating internationally. In China, an added difficulty is that communism has fostered ways of thinking and behaving that are often at odds with the capitalist system. With the progressive implementation of WTO requirements in China, many obstacles will fade away. Nonetheless, many hurdles will remain.

Operating in China's chemical industry usually entails building new production facilities. Construction in China can be a serious challenge. Once built, and depending on the product, the new facilities may face a cost disadvantage compared with the fully depreciated plants run by the Chinese competitors. Moreover, the newly arrived foreign company in China needs to build an organization and motivate newly hired employees who had previously never heard of their new employer. Chinese employees may also need retraining. "Chinese staff may have excellent credentials, but they need to adapt to the requirements of foreign employers," says Richard Hoover, Tokyo-based corporate vice president of Dow Corning who was president of Dow Corning Asia from 1996 to 1999.

In many cases, management in foreign ventures is initially provided by costly expatriates who often cannot speak or read the local language. However, they provide an essential service because of their technical skills and knowledge of the company. As they struggle with the new environment, the managers must also deal with the instinctive reaction of Chinese officials to promote the interests of local producers. And then, there is the need to locate customers who can actually pay their bills and are willing to buy from a non-Chinese supplier.

Implementation of WTO in China theoretically offers a way to ease many difficulties. Tariffs will become low enough that it will become possible to ship into China from sites located elsewhere. Some companies will adopt such a model, others will not.

"Once China gets into WTO, should we ship into China rather than produce there?" Browne asks. "Absolutely not. Our customers in China like to see DuPont located close to them. They prefer not to have a long supply chain."

Entry into WTO could actually increase the number of foreign investors in China. They will continue to be attracted by the growth in demand, and they will be reassured by the new legal guarantees that WTO membership will bring. Japanese executives typically cite flaws in China's legal environment as the top reason for their reluctance to invest in China.

Investors deciding to establish a presence in China will find that Chinese authorities eagerly welcome them as job providers and taxpayers. Chinese authorities also recognize that foreign investors bring with them technologies and management concepts that are either new or forgotten. The notion of marketing products, for instance, was lost in China during the decades of programmed production when factories shipped to each other according to a plan decided by central authorities.

Chinese provinces and municipalities strive to outdo each other in the concessions they provide foreign investors. Dow Corning began operating its first plant in China in 1997, a silicone finishing facility located in the Songjiang district of Shanghai. The company is considering an investment of more than $1 billion sometime this decade in a large upstream facility in Tianjin. "Some governments in China have more experience than others with foreign investors," Hoover says.

For example, in Gaochun County, a mostly agricultural district that is part of the municipality of Nanjing, investors are exempt from paying local income taxes during their first five years of operation. Furthermore, each investment of $100,000 grants a business the right to make use of 1 mu (0.165 acre) of land free of charge for 50 years. Shi Jian Bao, vice county head, says the county, which derives much of its income from the chemical industry, is considered an example for all of Jiangsu Province for its ability to promote industrial development while adhering to strict environmental standards.

Nanjing's Dai says many elements are starting to fall in place quite nicely in his city. For years, Nanjing has been investing in infrastructure such as highways. The city is served by both the Yangtze and the Yunhe Rivers. The latter is an artificial waterway built thousands of years ago to link inland areas to the coast. On the Yangtze, new piers can now accommodate modern, large capacity ships. Dai points out that 160 million consumers, including those of Shanghai, are within easy reach in a 300-mile perimeter around Nanjing.

Investment decisions

Many foreign investors are overall quite satisfied with the way their operations are developing in China. "We are getting fewer nonpaying customers than we expected," Hoover says. "Overall conditions here are not that different from those in other countries of Asia."

He adds that Dow Corning's Songjiang plant has yet to make a profit, but the company is nonetheless increasing its investment in Shanghai. Employment at the facility has grown nearly 20% since 1997. "The plant is now multifunctional. Its technology is increasingly sophisticated," Hoover notes. "This has helped the economics of the plant. We are quite happy overall." He attributes the lack of profit to ongoing start-up charges and the development of a distribution network. "If we stopped investing in China, the plant would be profitable," he says.

In China, DuPont operates a network of facilities producing agrochemicals; Lycra spandex fiber; Teflon perfluoropolymer coating; electronic materials; nylon 6,6; and polyester chip, yarn, and film. The firm also imports into China products made at DuPont plants elsewhere. "Really, our opportunities are very broad. I don't see any single segment where we say to ourselves, 'This doesn't make sense,' " Browne says.

China is a profitable market for DuPont, which began investing in production facilities in the country about 10 years ago. "There is an image somehow that China is a place where you cannot make money," Browne notes. "We do make money. We are very satisfied with the profit level of our businesses here in China, so it's a good business. We wouldn't be expanding, building [new facilities], if we weren't making money."

Most large companies rhetorically state that China is for them an extremely important market in which they want to develop customers, distribution networks, and production facilities sooner rather than later. But reality often lags behind the stated intentions. In DuPont's case, for instance, its investment in Taiwan still exceeds that in China.

Browne explains the situation: "China competes for our investment dollars versus opportunities in Europe, the U.S., and other Asian countries. It's not really a matter of lack of demand in China so much as that we look for opportunities globally. My job, and that of others here [in Shanghai], is to make sure that the opportunities in China are favorably seen within our corporation. I don't think that there is a limiting factor in China that causes us to say, 'We've got lots of money, but let's not put it in China because of this.' "

China may seem less attractive than other countries for many reasons. Surprisingly, the obvious question of the political stability of China and the country's symptomatic frequency of news reports of riots in the countryside is not a worry of the foreign executives queried by C&EN. Browne, in fact, blames media sensationalism for overemphasizing these incidents.

But the issue of intellectual property protection has slowed the introduction of new technologies into China. Products, labels, designs, and even production processes have been or are being extensively copied in China, mostly illegally, Browne says. "The laws are on the book. The critical laws do exist. It's really a matter of enforcement." He adds that enforcement is improving.

Large volumes of new laws are being produced in China, but foreign investors remain at the mercy of arbitrary decisions of government officials. In the depth of the Asian economic crisis in 1998 and 1999, for instance, Beijing all but froze for nearly two years discussions with foreign companies on the establishment of large integrated petrochemical complexes. These investors had been earlier assured that Beijing wanted to proceed with the projects as soon as possible.

Numerous news reports have emerged concerning the harassment of Taiwanese investors in China following the election this spring of Taiwan President Chen Shui-bian. An acrylonitrile-butadiene-styrene venture in Jiangsu Province by Tainan, Taiwan-based engineering plastic producer Chi Mei was reportedly the target of a surprise visit by 20 tax inspectors in May. The move was reportedly linked to Chi Mei's chairman, Hsu Wen-lung, an economic adviser to the pro-independence Chen.

But many of the difficulties now faced by foreign investors in China will eventually ease. Once Taiwan and China join WTO, arbitrary actions by authorities will no longer be permitted. China will also be bound to strengthen its protection of intellectual property rights. "Our perspective is that it will take three to five years to see changes take place in China, from the date of admission," Hoover notes.

Production costs may go down as well. Once companies are well established, costly foreign managers can be replaced by local hires. And as foreign firms' understanding of the market grows, they become increasingly competent at sourcing locally the raw materials and machinery that they need. Moreover, the size of the marketing investment in relation to sales also diminishes as the distribution network becomes more solidly established.

But new difficulties will appear. Foreign companies in China will face stiffer competition from increasingly adept Chinese firms. Mirroring the speed of the physical changes observed on cities near the coast, many Chinese companies are quickly boosting their production, technology, and marketing capabilities. Hundreds, if not thousands, of them are becoming fearsome competitors. One question Browne asks is: "How will we compete with Chinese firms in the future? They are learning very quickly."

Competition

Just a few years ago, recalls Yaraco's Henley, Chinese managers in the chemical industry did not believe that plant outages in foreign countries could affect the price of methanol and derivatives such as acetic acid in China. Henley says the situation is now completely different. Just recently, while visiting a customer in a relatively isolated Chinese city, he mentioned that uncertainty on the restart date of an acetic acid plant in Texas was making price predictions for acetic acid difficult. To Henley's surprise, the Chinese customer declared that the Texas plant had restarted the day before. And the customer, Henley later checked, was absolutely right.

There are several thousand chemical companies in China. The more famous ones, Shanghai Petrochemical or Beijing Yanhua, operate overstaffed petrochemical plants that are too small and too old to compete globally. There are also hundreds of fertilizer plants throughout the countryside that are ill-prepared to withstand the onslaught of competition that China's entry in WTO will bring. Moreover, Chinese authorities have been shutting down by the hundreds production facilities with outdated technologies in which the most visible contribution to their community is their harm of the environment.

However, there are numerous chemical companies in China that are learning very fast how to compete--not just in China, but internationally. Through the use of e-mail, participation in trade shows, and the fast-developing Chinese media, firms throughout China are targeting new customers and developing ways to serve them better. To assist them in competing against firms in foreign countries, they can harness the advantages that being a Chinese firm provides: low local input costs and an established position in a large and fast-developing market. Increasingly, the more competitive of these firms are matching up with foreign partners in mutually beneficial alliances.

Tu stands before new buildings at Changzhou Siyao Pharmaceuticals' complex.
Nanjing Shu Guang chemical's Mei in front of company headquarters (right) and employee housing background).

One obvious motivation for change is China's entry in WTO, which will put competitive pressure on Chinese companies. Another is the quest for profit. Catherine Chen, president of Eternwin, a chemical trading company she founded in Beijing in 1996, says she is ready to provide whatever chemical her customer needs. "When customers are looking, we find it for them," she says. Her company runs a small plant that manufactures on a custom basis drug ingredients such as octacosanol, a wheat germ extract that is used by some athletes, and alfacalcidol, a compound related to vitamin D. Chen, who regularly participates in international trade shows, says Eternwin's sales have increased to $30 million since 1996.

The process of improvement is not smooth and yields surprising contrasts. In Chongqing, the leaders of a state-owned conglomerate of 50 chemical companies, many of which are producing fine chemicals, had not heard of the Conference on Pharmaceutical Ingredients, the world's largest fine chemicals trade show. In Changzhou, located in Jiangsu Province halfway between Nanjing and Shanghai, Jiangsu Institute of Ecomones has invested $2.2 million in the construction of a research center that will eventually employ 160 researchers. Yet company officials appear unable to explain the scope of research at the new center beyond a need to develop new products. There is no director of research yet, even though construction of the center was completed in June.

Originally launched in 1978 as a nonprofit organization, the institute has become the largest producer of sulfonylurea in China. It focuses on the production of insect pheromones, which are used as insecticides with a low toxicity to plants and humans. Last year, it record-ed profits of $2.5 million on sales of $12.5 million. Market prospects of the institute are enhanced because Beijing is progressively adding restrictions on the use and production of toxic pesticides. The institute, says a company official from the import-export section, was the first organization in China to produce the insecticide fenvalerate. It also manufactures the herbicide bensulfuron.

Red Sun Chairman and Chief Executive Officer Yang Shou Hai, who used to work as an agronomist, says he launched his company in 1989. Located in the Gaochun district of Nanjing, Red Sun initially was repackaging imported pesticides. The Red Sun logo was on the package, but the ingredients provided by multinational companies were clearly identified, he says. Red Sun now is one of China's up-and-coming pesticide producers, manufacturing 26 lines of products that are mostly off-patent, low-toxicity pesticides invented by multinational companies.

Yang says he sells his pesticides in China for about 20% less than the competing product offered by a multinational corporation. His production costs are low, but the quality is world-class, he says. This year, he expects export sales will amount to $20 million of total sales of $125 million. This will represent a tripling of sales since 1998. In 10 years, Yang says, Red Sun's total annual sales will reach $2.5 billion.

In Changzhou, president of Changzhou Siyao Pharmaceuticals, Tu Yongrui, says his firm manufactures the least expensive crotamiton in the world. Eurax, a crotamiton-based cream used to treat scabies, costs between $40 and $50 per kg if purchased from Ciba, Tu says. The price from Siyao is a mere $19. One major difference, however, is that Siyao has not obtained Food & Drug Administration approval to export into the U.S.

Siyao, which has two joint ventures with California-based Watson Pharmaceuticals, is rapidly adding labs and production facilities to its complex. The company, Tu says, had its sales triple in the past decade. In the current year, he says, sales will reach $12.5 million. During the past decade, Siyao also successfully reduced its staff by 20%.

	Southwest Synthetic Pharmaceutical plant in Chongqing.

However, Tu is not completely bullish on the prospects for Chinese industry. On the one hand, he says, it is becoming easier for companies such as Siyao that are not state-owned to gain access to resources such as raw materials and bank loans. On the other hand, Tu laments that salaries have risen fourfold since 1990. The low production costs in China can make companies very competitive, but those costs are rising. Costs of raw materials, electricity, and water have also increased. Overall, he is optimistic about Siyao's prospects but points out that many companies in China are registering losses. "There is severe price competition in China, which reduces prices," Tu says. "Moreover, state firms sell at low prices even if their costs are high."

Many Chinese firms are privately owned, often by the people who work there. Many others are state-owned firms that are managing a difficult transition into the realm of the market economy. For Zhu Kejun, an intense technocrat in his thirties who works at the International Economic Cooperation & Trade Division of the Nanjing Municipal Economic Commission, the challenge of this transition is the most important one facing China today.

Zhu says: "China has not established a social insurance system. When state-owned companies are sold, the new owners need to support the retired workers. This could change in the next five to six years. [Premier] Zhu Rongji said it is a problem affecting the development of midsized state-owned companies. For the government to successfully divest from midsized companies, the question of retired workers is a big one."

Silane coupling producer Shu Guang Chemical provides a graphic example of the challenges of transition. Its headquarters in Nanjing are almost surrounded by the housing of its employees, either still working or already retired. Over the past five years, Shu Guang's Mei says, the government has sold its entire stake in the firm to a group of about 100 of Shu Guang's employees. Mei, now company chairman, was previously a bureaucrat, having been dispatched to Shu Guang six years ago from an earlier posting at a state-owned manufacturer of chemical production machinery.

The new owners agreed to assume responsibilities for all the assets and liabilities of the company, including company housing and retired workers. Despite all the obligations it carries, Shu Guang is in a relatively fortunate position and may well be able to meet all of its obligations.

Silane couplings are a type of silicone-based adhesive that binds together the rubber and metal components of radial tires. The company faces bright prospects in China as the road network expands and automobile production is boosted. The expansion of the highway network in particular is increasing demand for radial tires that are capable of withstanding high speeds. Beijing authorities have extended loan guarantees for Shu Guang to expand production since forecasts suggest that demand for the company's main type of silane coupling will grow sixfold in the next two years.

Shu Guang is an exporter as well. About 50% of sales are recorded overseas, Mei says. Remarkably, the firm joined the international market only two years ago. Mei explains that the primary marketing tool used by Shu Guang is sending e-mail messages to potential customers. A team of six young university graduates who are fluent in English spend their days in front of computers sending e-mail messages to potential clients. Mei says his company is attracting international attention and has been visited by major tire manufacturers. Talks of a joint venture in China have reached an advanced stage, he says, following 10 visits to Nanjing by a prospective partner.

The extension of a joint venture to Shu Guang's rapidly expanding operations will make the firm more complex to manage. In the space of a few years, the company has become private, entered the international market, and joined the new economy with its bank of bilingual e-mail marketers. The exceptionally rapid growth of Shu Guang and other companies such as Red Sun makes one wonder whether the expansion of these companies is manageable in the long run. As Chinese firms increase to sizes comparable with their foreign competitors overseas, they will likely face similar management challenges. But for all its universities, China has only a handful of management training programs.

Chongqing

Most people have heard of Sichuanese food, and some people know that the endangered panda is indigenous to Sichuan Province. Environmental activists may be aware that the Three Gorges Project, a network of dams meant to produce electricity and tame the Yangtze River, is being built near Chongqing. But beyond that, few can tell what one can find in Sichuan.

This is surprising. Sichuan has a population of 120 million people, according to Chinese statistics, making the province nearly as populated as Japan.

The largest city in Sichuan is arguably the world's largest city, with a population of more than 30 million people. Much goes on in Chongqing, which in the coming few years is likely to experience a transformation more profound than that under way in China's coastal cities.

Henley

Since late 1997, Chongqing has joined Beijing, Shanghai, and Tianjin as one of four cities in China that are directly administered by central authorities in Beijing. Remov-ing the administration of Chongqing from local authorities is meant to facilitate the implementation of an ambitious, yet brilliantly simple, plan: Pour millions of tons of concrete into Chongqing's infrastructure and turn it into an attractive destination for investors from abroad and other parts of China. From there, business can expand outward and develop in western China, which is lagging far behind the coast in terms of economic development. The municipality, which expands far into the neighboring countryside, is turning into a gigantic construction site.

The local chemical industry is part of the effort of reform that is now animating Chongqing. A newly launched state-owned conglomerate, named Huagong Yiyao Konggu Gonsi (Chemical & Pharmaceutical Holding Co.), is bringing together 50 companies in the Chongqing area. Together, the firms report annual sales of $7 billion and employ 45,000, says the holding company's chairman, Miao Guang Kui. Optimistic about the prospects of the conglomerate, Miao says Chongqing is the regional center of western China. "It has an extremely good geographical situation."

For Southwest Synthetic Pharmaceutical, a company that is part of the holding group, the decision to set up in Chongqing was made by central authorities years ago. The company, whose main product is the broad-spectrum antibiotic sulfadimidine, was set up in 1965 during the Cold War. Much as Chiang Kai-shek made Chongqing his capital during World War II, Southwest Synthetic was set up in Chongqing in order to be far away from the reach of potential enemies such as the U.S.

Despite its relatively remote location, Southwest Synthetic has been quite successful in the international market in recent years. Company President Li Bao Pin says about 60% of output is exported. Much goes to the U.S., where the firm has obtained FDA approval. About 49% of the company is publicly listed in Shenzhen, while the rest remains state-owned. Up until 1991, all the company's production facilities were located at Luoqi, just next to the Yangtze River. Many of the facilities have since moved closer to Chongqing because Luoqi will be submerged when the dam projects along the river are completed.

A decision to set up in Chongqing is a difficult one for foreign investors because so few foreign companies, particularly in the chemical field, are operating there. DuPont's Browne explains that DuPont has no reluctance to invest in Chongqing, although the majority of DuPont's customers in China are on the coast.

By contrast, BP has made what is to date its largest investment in China with its Yaraco acetic acid joint venture in Chongqing. It is performing above expectations. "Few joint ventures in China are as successful as this one. No one has challenged me on this point," Yaraco's Henley says. BP is implementing several expansions in Chongqing, including a doubling of the acetic acid production facility.

Yaraco is 51% owned by BP, 44% by Sichuan Vinylon Works, and 5% by the Chongqing government. The feasibility study was made in 1993-94. The venture was formed in 1995 and started production in the fourth quarter of 1998. The facility was initially expected to produce 150,000 metric tons of acetic acid per year, but this has been rerated to 200,000 metric tons because plant reliability has been higher than originally expected at the planning stage.

Main production unit (above) and loading dock on ther Yangtze River (below) for BP's Yaraco acetic acid venture in Chongqing.

Henley emphasizes that BP selected Chongqing before Beijing authorities began to provide incentives for foreign investors to go inland. BP found that natural gas is available in Sichuan, that Sichuan Vinylon is a capable partner, and that it is possible to integrate the infrastructure needs of the Yaraco venture into the existing facilities that are run by Sichuan Vinylon. Moreover, the local partner produces the raw material methanol. Overall, Henley says, Chongqing met nine of the 10 criteria that were most important to BP.

Pleasant surprises began to accumulate for BP once construction began. The firm says that creative solutions by its engineers enabled it to cut 25% off the planned construction cost. Production has been relatively smooth from the start. Henley says the facility produced at 95% of capacity in 1999, the first full year of operation. The first year of operation was also profitable, enabling the partners to share a dividend.

However, the venture suffers from a frustrating logistical handicap: The railroad track from which Yaraco can ship its products to various parts of China sits about 50 miles away from the plant site. This is the one criteria that wasn't met on BP's list.

The only solution found was to use an existing pier on the river from which barges are loaded with the product and pulled to the railway network where the acetic acid is then loaded onto railcars. But the vast program of infrastructure improvement that Chongqing is experiencing eventually will bring the railway track to within a short distance of the Yaraco site.

New infrastructure has also improved the lives of the three British chemical engineers who work at the Yaraco site. Pete Smith, for example, volunteered three years ago and left England for the Yaraco project, which he has found to be a fascinating experience. "I wouldn't have missed this for anything," he says. But at the plant site, he says, one is limited to walking or reading books for entertainment. "We get satellite TV, but without the sound," Smith says. A new highway has cut commuting time to the center of Chongqing from three hours to one hour though. The commute was occasionally taking up to 10 hours because of accidents blocking the flow of traffic.

BP is planning to double acetic acid capacity in Chongqing by early 2003. Using BP's proprietary Cativa catalyst, Yaraco will be able to achieve this increase in capacity simply by making a few plant modifications and adding a carbon monoxide plant to its complex. BP also is going ahead with a plan to start up early in 2002 an ethyl acetate and butyl acetate plant with an annual capacity of 80,000 metric tons that will create on-site demand for the acetic acid.

Henley is delighted with the success of the Yaraco venture. Pointing out that BP had not been exporting acetic acid into China, he says, "In 12 months, we went from nothing to market leaders in China. We have a 25% share of the open market." About 40% of shipments go to Shanghai and to Guangdong Province.

BP could face competition from Celanese in the future. Celanese is planning to expand annual capacity of Wujing, a Shanghai company, by 150,000 metric tons.

Tales of success such as that of Yaraco in Chongqing are still rare--so far. Chongqing remains an unenchanting backwater choking in industrial emissions. The cleanliness and relative sophistication of Shanghai appear a world away. There are only seven flights a week between Chongqing and Hong Kong, despite Hong Kong being the source of most of Chongqing's inbound foreign investment.

But it has only been two years since Beijing took direct control of the administration of Chongqing. And seeing the track record of Beijing in working with cities on the coast, one would be ill-advised to bet that Chongqing's economic development will be a failure.

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