Ancient capital

Why is Samsung investing $30 billion in Xi’an?

Ancient capital

Tough call: Samsung chose Xi’an

These have been a stellar few weeks for Samsung. First off, the South Korean firm attained its ambition to become the world’s biggest mobile phone maker, selling 93 million handsets, and surpassing Nokia. And then it managed to delight investors too: first quarter earnings surged to $4.5 billion, its best since 2008.

Also announced – to somewhat less fanfare – was a colossal new chip factory in China. Located in Xi’an, the plant marks the largest foreign investment project ever in the country’s central and western regions. When all three phases are complete, Samsung will have poured $30 billion into the plant (although Reuters says the initial phase will amount to $7 billion).

Why was Xi’an selected? The city is best known for its Terracotta Warriors – that is to say, for its antiquity rather than cutting edge tech. WiC also paid a visit last October, and can say with some confidence that one item clearly not on the Samsung checklist is air quality. Almost as soon as you disembark at the airport, a tightness is felt in the throat. For South Korean executives who get posted there, our advice is to be prepared for smog.

The Economic Observer reports that Xi’an wooed Samsung with a major incentive package, drawing the Sunwon-based firm away from its initial preference, Beijing. The capital city made more sense to the Koreans, in part because it houses China’s equivalent of Silicon Valley, Zhongguancun. Chongqing too was also considered a better candidate, when Samsung first began scouting cities last year.

The man who ran the local bid for Samsung’s business, Zhao Hongzhuan, also concedes that Xi’an was originally grouped in Samsung’s category of ‘reserve’ cities.

What changed? Chongqing began to lose ground as the Bo Xilai scandal started to surface in February (see WiC138). And Xi’an put on an impressive performance when it came to responding to the 1,000- question document Samsung had sent to each contender.

The Xihan Dynasty capital of China, Xi’an has more than three millenia of history. But in its bid to win Samsung over it emphasised its more than 2,600 tech firms, 50 scientific research institutes and 40 colleges and universities producing engineering and science graduates.

But what really pipped Beijing’s bid was the financial package that Xi’an offered, says the Economic Observer.

This included the free provision of 1.3 million square metres of land, further subsidies for water and electricity usage, and a 10 year tax exemption. Aside from promising to build new roads and subways to a ‘Samsung City’ around the plant, enough sweeteners were thrown into the mix to offset almost a third of Samsung’s total investment.

A company official told the Guangzhou Daily that it was “speculation” that Xi’an had offered a multi-billion package, and said that it would not be disclosing the preferential policies that had been secured.

Inevitably, there is already some criticism being levelled at the supposed generosity of the package – especially as local authorities won’t receive any tax income from Samsung directly for years.

Instead the local government is banking on pulling in tax revenues from plenty of others, as the cluster effect brings in a host of new tech firms. And no question, Samsung is a marquee name to attract – accounting for 40% of the global memory chip market (producing both DRAM and Nand Flash).

Xi’an evidently saw this as a ‘must-win’ bid too. Growth in its industrial sector has lagged other major cities, with local officials looking on as rivals pulled in some leading foreign firms (Chongqing bagged HP, while Chengdu got Intel, for example).

This is also Samsung’s biggest overseas investment. Sheer scale aside, the Xi’an announcement indicates a continuity in how local government conducts industrial policy. The preferred tactic: lure a leading firm by using subsidies to beat rival Chinese cities.

Similarly, Wuhan announced this week that it has persuaded Lenovo to locate a new manufacturing and research centre in the city. The Chinese PC firm will spend Rmb5 billion ($791 million) on a plant to make smartphones and tablets, reports the Shanghai Daily.

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