Shanghai FTZ On Roll With Costco, Sinopec
After a year of mostly hype, Shanghai’s new Free Trade Zone (FTZ) has finally begun showing the world some substance in the last 2 months with a recent string of high-profile announcements by major companies that plan to set up in its borders. Microsoft (Nasdaq: MSFT) and Amazon (Nasdaq: AMZN) were among the first to announce plans, and were joined last week by US retail giant Costco (Nasdaq: COST) and top Chinese oil refiner Sinopec (HKEx: 386; Shanghai: 600028; NYSE: SNP).
The recent cases are all seizing on the zone’s fledgling policies that allow freer movement of capital and goods into and out of its borders for firms that engage heavily in foreign trade and finance. Equally important, all the big names are saying how they will use those policies to achieve a competitive edge for their projects, giving the broader business community a better idea of how they too can improve their business by locating in the zone.
Shanghai should continue this trend of crafting and implement policies that will attract foreign businesses to the zone, and also of making targeted marketing efforts to spread the word through the business community. It should be commended for letting companies themselves make actual announcements, giving more credibility to the zone’s attractiveness by providing real examples.
Last week the year-old Shanghai FTZ was in the headlines twice with major new wins, starting with the surprise announcement that US grocery giant Costco would enter China through a partnership with Alibaba’s (NYSE: BABA) popular Tmall online shopping mall. (company announcement) Costco typically operates huge warehouse style stores that sell products in bulk sizes, allowing consumers to get big savings.
Those large sizes don’t seem like a great fit for the e-commerce model, since many products are quite big and heavy and not easy or cheap to send via the legions of bicycle and scooter-based couriers that often deliver goods to people’s homes. But buried in the news was the fact that Costco would sell mostly imported goods via the initiative, which it would bring into China through the FTZ. That move would allow it to significantly reduce costs by getting preferential import tariff rates offered in the zone.
Just days after the Costco announcement, energy giant Sinopec announced its own new tie-up with Taiping Insurance Group to form a 5 billion yuan ($813 million) financial leasing joint venture in the zone. (English article) Such ventures typically raise big pools of cash, which they use to purchase large equipment for functions like building construction. They then lease that equipment to end-users like property developers that prefer to rent rather than buy such expensive machinery.
In that particular instance, the pair said they chose to locate in the FTZ to give them more flexibility for their purchasing. They explained that basing the venture in the zone would make it easier and cheaper to exchange currencies and make the large payments needed to buy a wide range of equipment that must often be imported and paid for with foreign money.
The list of big new initiatives for the FTZ dates back to August, when global online retailing giant Amazon announced it would set up a store for Chinese consumers who wanted to buy from its main website, Amazon.com. Amazon already operates a China-based site, but the new presence would offer Chinese consumers products now mostly available to its US customers. Amazon planned to make the process practical and affordable by importing products at preferential tariff rates offered by then zone, and then storing them in an FTZ-based warehouse that would allow for quick delivery to Chinese buyers.
The Amazon announcement was followed by similar ones from leading game console makers Sony (Tokyo: 6753) and Microsoft, which both disclosed plans to import their PlayStation and Xbox products via the FTZ in order to receive the preferable tariff rates. Both companies are just starting to sell their consoles in China after Beijing recently lifted a decade-old ban on import of the foreign products.
This stream of announcements by major corporations has provided a much-needed boost for the zone, which previously boasted hundreds of company registrations in its first year but few concrete business plans. Shanghai should be commended for working hard to bring these projects to market, and should continue its behind-the-scenes drive to recruit more companies to the zone. If it does that well, the headlines will come naturally from the companies themselves, bringing new momentum to this fledgling experiment in financial reform.
Bottom line: New deals in the Shanghai Free Trade Zone with Costco and Sinopec are adding momentum to the area as an experimental center for cross-border trade and finance businesses.
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