Horist Speaks for Harbin
Harbin Comes in From the Cold
November 2005
by Michael O' Neill

From his hometown in the American midwest, businessman and entrepreneur Larry P. Horist would appear an unlikely campaigner for the Chinese city of Harbin, But this month, Horist, as president of the Chicago-based Harbin Business Exchange, will be leading a group of American business leaders and potential investors on a 10-day visit to the Heilongjiang provincial capital. "We have been promoting Harbin for half a decade and I think our efforts have been significant in bringing this city to the attention of the US investment and business community," says Horist, Under his direction, the Harbin Business Exchange - which among other services operates an online newsletter that already reaches over 18,000 subscribers - has been running trade missions to the city since 2002, introducing business opportunities across a variety of areas including import/export, manufacturing, infrastructure development and more.

As a location for overseas money, Harbin, located in the far northeast of China, is way down the pecking order on investor portfolios. As foreign investment has poured into the booming east coast cities, Harbin, like other inland cities, has been left on the backburner. But for Horist and his delegation, it is exactly this kind of untapped potential that has made the city so alluring. "I think that Harbin has some of the best opportunities in China," says Horist. "The difference with a city such as Shanghai is that the opportunities in Harbin are not served up on a silver platter. The investor has to go dig for them. That is why I liken the city to California during the 1849 Gold Rush - there is gold for those brave enough to go exploring."

BIRTH OF A CITY
Despite its relative isolation from the economic center of China, Harbin is historically one of China's most international cities, and was at one time one of the country's best-developed business and distribution hubs. Surprisingly though, just over one hundred years ago there was nor real city of Harbin to speak of. Although the region had given birth to two Chinese dynasties - the Jin (1115-1234) and Qing (1644-1911) - at the end of the 19th Century, Harbin was little more than a desolate Imperial outpost.

This all changed in 1898 when the Qing rulers allowed a Russian railroad company to build lines across Manchuria, as the northeast was then known. The Russians chose Harbin as the base of their operations and very quickly a new city was born. In 1907, Chinese authorities declared Harbin an 'Open City' and its cosmopolitan reputation quickly grew. By the 1930s, 16 countries had established consulates in Harbin and about 200,000 expatriates from over 20 countries had opened more than 1,000 manufacturing and financial enterprises in the city. Around this time, a network of rail, water, road and later air transport routes began to link Harbin to the rest of China and the world.

But while Harbin's early growth was certainly spectacular, its more recent decline has been just as eye-catching. As part of the northeastern 'rust belt', Harbin was once the center of China's State-planned heavy industry. From the 1950s on, the areas dominance in mining, steel production and heavy engineering made it a model city for New China. Over the last two decades, however, as the productiveness of these State-owned industries declined in the light of the new market-led economy, so did Harbin's economic fortunes. As recently as last year, it was estimated that State-Owned Enterprises (SOEs) still accounted for 88 percent of industrial capital in the province. With many of these SOEs heavily overstaffed and reliant on highly unproductive State subsidies, they have become a major burden for the city. In addition, a large number of SOE plants have already closed, leaving behind enormous employment and re-employment problems.

This situation has resulted in a government-led initiative known as 'Revitalize the Northeast', which hopes to breathe new life into the region, in much the same way as the 'Go West' campaign did for the fortunes of China's western provinces. Harbin has already received approval for 17 of Heilongjiang's 37 economic revitalization projects. The anticipated investment in Harbin for these projects is 2.67 billion yuan (USD 323.2 million). New industrial sectors are to be introduced, while old ones will be reformed to meet the needs of the modern market economy. The generation of fresh investment capital will also be encouraged as the region seeks to promote its natural advantages. So far, however, Harbin's regeneration has been slow in arriving. At present, the city has little of the ambitious modernizing of its northeast rivals Dalian or Shenyang in neighboring Liaoning Province. Rising glass-fronted skyscrapers, so often the symbol of a growing Chinese business city, are conspicuous by their absence.

INVESTMENT PATTERNS
What the city lacks in tall buildings, however, it is starting to make up for in other infrastructure developments. While Dalian is becoming the region's shipping center and Shenyang its financial hub, Harbin is well on its way to being the trade and shopping capital of the northeast. Rising levels of per capita consumption - in 2003 the average annual disposable income in the city reached 7,892 RMB (US$995) an increase of 12.7 percent over 2002 - is seen as a green light for investment and more foreign investors are now beginning to trickle into the city. Along the city's central avenues, for example, Lane Crawford and Parkson are just two of the outside developers that are backing Harbin's potential purchasing boom by opening new shopping malls. Metro and Wal-Mart have also set up shop in the town, with the latter retailer choosing Harbin as the location for its first store in the northeast. Meanwhile, the giant Wanda shopping mall recently opened on the banks of the Songhua River is home to, among others, a Warner Brothers multiplex cinema.

"Harbin is the commercial center for northeast China and an important commercial hub for all of northern Asia," says Steve Burrows, CEO and president of Anheuser-Busch International, Inc. Last year, in one of the most significant overseas investments to hit Harbin, the leading US-brewer acquired Harbin Brewery, one of the city's few instantly recognized brands and the fourth largest brewery in China. In an aggressive takeover battle with rival beer giant SAB Miller, Anheuser-Busch eventually won with a bid rumored to have been as much as US$720 million. For Burrows, the purchase of Harbin Brewery was in line with Anheuser-Busch's international business strategy of investing in leading brewers in important growth markets. The Harbin brand, as well as the brewer's strong management team and its solid position in what is the fastest growing beer market in the world, presented exactly that kind of opportunity to the St. Louis-based beer giant. In addition, there was the growing appeal of the city itself. "Harbin is a diverse city with enormous potential for multi-national companies. It is located in one of the fastest growing regions in the world. Harbin has many assets including a strategic location, an abundance of natural resources, a developed transportation system, a wealth of industrial and human resources, and a progressive government," adds Burrows. With this track record of growth, as well as the progressive local government and the emphasis by the central government in Beijing to further develop the northeast, Burrows believes there is great potential for the future growth of the beer industry in the region.

But while investment opportunities in the city are certainly widening, and will continue to grow as long as the central government continues to put the northeast on its priority list, the challenges are also mounting. In terms of overseas investment in particular, the city will have to grow up fast. "Harbin has been slow to develop the kind of outreach programs that attract the attention of [overseas-based] business," says Larry P. Horist. "Harbin does not invest enough in learning the [overseas] market needs."

Leading by example, Horist is himself a joint-venture partner in a chain of Hollywood-themed restaurants to be opened across China, the first of which will be showcased in Harbin. He advises those of a like mind to move fast: "Many medium size [US-based] companies are afraid of China and terrified of unknown cold places like Harbin. In the meantime, the Russians, the Japanese, and Eastern Europe are starting to make their plays in northern China and Harbin."

MOSCOW OF THE EAST
One group of foreign investors in the city that certainly need no encouragement is those coming over from the border with Russia. Although Hong Kong and South Korea have higher levels of direct investment, Russia is still Heilongjiang's number one trading partner. The imprint of the first wave of Russians to arrive in Harbin back in 1898 is still evident around the city, especially in its buildings. The Saint Sophia church, for example, a classic if somewhat underwhelming example of Russian Orthodox architecture completed in 1932, is still one of the city's leading tourist attractions. This architectural influence continues into the present day - clearly seen in the Russian 'onion dome' motif that features in the design of many of the new shopping malls that have sprung up in the downtown are in the last few years.

The next wave from Russia was a Soviet one when, shortly after Liberation, China invited a large number of engineers and technical experts to assist in rebuilding the city and its industry. While a thaw in Sino-Soviet relations soon after saw a speedy end to this cooperation, the Russian connections to Harbin persisted. These days, buildings apart, the most visible link of the long relationship between the two countries is seen in the numerous 'Russian Shops' scattered around the city, where consumers can buy a range of imported vodkas, foodstuffs and Russian-styled ornaments. In addition, the famous Sino-Russian market - actually an eclectic collection of shabby stores set around several streets - sells everything from Matryoshka Dolls to Soviet-era military surplus.

However, much more significant than the cheap trinkets for sale at the marketplace is the start of new era of cooperation between the two countries. In this, a key role is played by the Harbin Trade and Economic Fair, an annual event held in June. Beiginning in 1990, the Fair is an important link between Harbin and the outside world in general, and has over the last 15 years forged trade and investment ties between China and the Russian Federation in particular. This year the 16th Fair attracted more than 10,000 foreign business people from nearly 80 countries. Addressing the opening ceremony, Zhang Zuoji, provincial governor of Heilongjiang, said that the Fair would further a higher level of cooperation between China and Russia in the fields of economy, trade, science and technology. Proving Zhang's point, the Fair's 'Day of Russia' resulted in the signing of nine export and import contracts for an amount of US$669 million, 16.9 percent of the total number of import and export contracts signed at the Fair for 2005. In addition, ten major contracts for work under subcontract and cooperation abroad, worth US$271 million, were signed.

Perhaps one big advantage for such Russian investors is that their no-nonsense style of business is ideally suited to the 'gold rush' mentality suggested by Horist. While other business people are busy drafting contracts and sharpening their portfolios, their Russian counterparts are rolling up their sleeves and taking chances. As Horist says: "Harbin is an environment for entrepreneurs, not bureaucratic CEOs who want to be courted with limousines, 5-start hotels and golf dates."

 

Copyright 2005 Harbin Business Exchange, Inc.

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