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Critical Eye on Lanzhou

Eager to attract foreign investment, Gansu's capital dusts itself off

by Rebecca Karnak and Lin Jun

Once a major stop along the Silk Road, Lanzhou has remained a hub of trade and commerce in Northwest China. The capital of Gansu offers investors reliable and relatively inexpensive energy supplies and a good transportation network in and out of the city. It also has lower costs of living than those of rival cities such as Xi'an in Shaanxi and Chengdu in Sichuan and many second-tier cities along the coast. Yet although Lanzhou is at the center of trade activity in China's Northwest, the city feels remote, both in terms of geography and attitude.

Lay of the land...

Sandwiched between mountains in the north and south, Lanzhou's position both helps and hurts it. While the Yellow River runs through the city, providing it with abundant water, the surrounding area remains dry and difficult to cultivate. The hour-long ride from Lanzhou Airport into the city reveals Lanzhou's efforts to landscape the area—the brown mountainsides that line the road have been terraced and planted with trees.

In terms of transportation, Lanzhou is well connected to the rest of the country. Four major national rail lines converge at Lanzhou, including one that runs to the port at Lianyungang, Jiangsu. The city is a transfer center for containers being shipped along the Euro-Asian continental line, and the Lanzhou Western Railway Station is home to the largest cargo marshalling yard in China's Northwest. Six national highways stretch out from Lanzhou, connecting it to nearby Xining, Tianshui, and other Gansu cities, and west to Urumqi in Xinjiang and east to Xi'an. Airlines fly in and out of about 35 cities from the Lanzhou Airport.

The larger of Lanzhou's two state-level economic zones—both in terms of area and number of registered companies—sits to the west of the city. The Lanzhou New- and High-Technology Development Zone, approved by the State Council in 1991, spans more than 29 km² and hosts more than 1,000 enterprises, 35 of which were foreign-invested at the end of 2004. One of the newest foreign arrivals is the Gansu China National Cereals, Oils, and Foodstuffs Corp.-Coca-Cola Beverages Co. Ltd. bottling plant, a $12 million joint venture (JV) built to supply Gansu, Ningxia, Qinghai, Tibet, and Xinjiang with beverages. In 2004, the zone's economy reached $1.45 billion. This figure dwarfs the funds generated by Lanzhou's other state-level development zone.

The Lanzhou Economic and Technological Development Zone lies in Anning District just north of the Yellow River. Lanzhou is building a new residential area near the zone, as well as a bridge to create a faster connection between Anning and the rest of the city. The zone's economy grew 38 percent in 2004, reaching $423 million. With 21 large and medium-sized state-owned enterprises (SOEs), which mainly manufacture aeronautic materials, electronic instruments, and information technology products, zone officials hope to lure more foreign investors with preferential policies, cheap energy prices, and an eagerness to accommodate. After several months of negotiation, Wal-Mart Stores, Inc. recently decided to invest $12 million to open a 30,000 m² shopping mall and a 50,000 m² logistics center in the zone. Zone officials marked the arrival of the Fortune 500 enterprise as a breakthrough, since before the Wal-Mart deal, the zone was home to only three foreign enterprises.

As part of its effort to attract investors, Lanzhou has been developing entertainment areas along the banks of the Yellow River since 1999. One advertisement proclaims that the Yellow River Baili Scenic Strip will become Lanzhou's own version of Shanghai's Bund, complete with riverside parks and plazas, restaurants and bars, and cruise operators.

...And the sky

Lanzhou residents are well-aware of the city's reputation as one of the most polluted in China, and the city has taken some steps to remedy the situation. In a recent interview with development zone officials about the type of industries they want to attract, one official replied, "Ones that don't pollute." Though zone officials did not elaborate on currently active or planned pollution control measures, local Environmental Protection Bureau officials expressed interest in learning how cities in other countries regulate polluting manufacturers.

Over the next two years, local environmental protection officials will spend more than $128 million to replace roughly 1,100 coal-burning furnaces in industrial and residential buildings with natural gas furnaces. A similar plan is in place for buses and taxis.

Economic landscape

In 2004, Lanzhou's GDP reached $6.1 billion, an 11 percent increase over 2003. Local officials attributed the growth to more infrastructure projects such as road and cloverleaf-junctions upgrades, Yellow River Baili Scenic Strip developments, and natural gas, water supply, and water treatment networks. Since 2001, the city has received about $242 million annually from the central government as part of China's Great Western Development Strategy (see the CBR, March-April 2004, p.8). The funds have gone toward these projects as well as toward pollution abatement. Expansion of China's national retailing giant, Beijing Hualian Group, which recently opened a 66,000 m² shopping mall in Lanzhou, has also contributed to the city's growth. The city's major industries include nonferrous metallurgy, machinery manufacturing, pharmaceuticals, and textiles. Agriculture makes up only 4 percent of Lanzhou's economy.

Lanzhou is a petrochemical base and home to PetroChina Co. Ltd.'s largest refinery in western China, which started up in the 1950s. Indeed, certain parts of the western edge of the city feel like an old, industrial town, with dusty roads and a faint chemical smell in the air. PetroChina set up Lanzhou's oil additive manufacturing facility in 1963—the same year the city completed the nearly 2,000 km of rail that connect Lanzhou and Urumqi.

Oil and gas supplies in Xinjiang have driven the development of the sector in Lanzhou and have attracted the attention of several foreign investors. Lubrizol Corp., the partner of Lanzhou PetroChemical Co., is one of the largest foreign investors registered in Lanzhou's New- and High-Technology Development Zone. The JV, Lubrizol Lanlian Additive Co., Ltd., now operates the city's original oil additive facility. Lanzhou Petrochemical Machinery and Engineering Group, the top manufacturer of oil drilling rigs and refining equipment in China, has partnered with National Oilwell International to form the Lanzhou LS-National Oilwell Petroleum Engineering Co., Ltd., a JV with $17.3 million in registered capital.

Business environment

These investors stepped into existing facilities and administrative structures, bringing along their technology and management know-how. For these investors and others that are building from scratch, the Lanzhou municipal government has tried to streamline administrative procedures and improve transparency. Lanzhou's new one-stop shop in the city hall is designed to help investors navigate the local bureaucracy. One local businessperson confirmed that Lanzhou officials are increasingly accessible but said that they do not always understand their role as service providers. He reported that the city recently lost a large potential investor to a city in Hunan after the two sides could not agree on reasonable terms for a new facility.

Another difficulty investors face in Lanzhou is the city's shortage of skilled technicians, managerial talent, and competitive workers with strong communication skills. In recent interviews, more than one JV manager expressed frustration over finding qualified personnel among Lanzhou's 3.14 million residents. Lanzhou is home to 19 universities and research institutes, including Lanzhou University, which years ago ranked among the nation's top 10 (many view it as northwestern China's top university now). But with a relatively small number of foreign companies in the region, Lanzhou's educated workforce has little opportunity to gain critical cross-cultural communication and management experience without leaving the city. A few of Lanzhou's young and talented are doing just that—after studying and working in Beijing, Shanghai, and other eastern cities, they return home to fill positions in JVs and government offices.

What's next for Lanzhou?

Lanzhou officials are enormously eager to attract foreign investment in virtually any sector. As one official stated during a recent visit, "Ni zhuan qian, wo fazhan." ("You [the foreign investor] make money, and I [Lanzhou] develop.")

But Lanzhou faces a chicken-and-egg problem: With little experience courting and maintaining relationships with foreign investors, Lanzhou officials, while eager for investment, may not always understand what it takes to seal the deal. Yet until more foreign enterprises invest in Lanzhou, the city has little opportunity to gain this experience. In the near term, Lanzhou will likely continue efforts to reduce pollution and improve infrastructure, while hoping to inch higher on the list of top destinations for foreign investors looking at central and western China.

Rebecca Karnak and Lin Jun are research associates at the US-China Business Council in Beijing.

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