A Golden Gate On The Yellow Sea

To Americans, Dalian looks a bit like Houston 25 years back: a place on the move. This metropolis of 5 million boasts unusually wide, tree-lined boulevards and new skyscrapers that are redrawing the once-modest skyline. Its young people deck themselves out in the latest styles, dazzling visitors from staid Beijing. Houston, in fact, is a sister city. But rather than looking to Texas for a model, Dalian residents are imitating their neighbors to the east. The young man from the Foreign Affairs office who meets me on arrival apologizes at once for not speaking English. "I speak Japanese," he says.

A good choice. While Dalian isn't yet a blip on the radar of most Western multinationals, it's a favorite site for Japanese investors. Strategically located at the mouth of the Yellow Sea, Dalian offers an ice-free deepwater port, railway links to China's resource-rich northeast, and an educated workforce--all a mere 1,042 miles from Japan. "We are the outlet for the Far East," says Wang Diandong, director of Dalian's Port Authority. As one of the first Chinese cities allowed to experiment with economic reforms, Dalian has a huge development zone--with 29% of investment over the past 10 years coming from powerful Japanese players, including Toshiba Inc. and Canon Corp. While local officials are quick to point out that investments from Hong Kong last year eclipsed those from Japan, the presence of the Japanese is precisely the reason so many Hong Kong investors are drawn to this entrep t.

WAR PRIZE. For a century, Dalian has been a prime jumping-off spot for Japan's ambitions on the Asian mainland. In fact, the Russian and Japanese empires went to war over Dalian, Manchuria's outlet to the Pacific. In the late 1800s, after losing a war over Korea, a humiliated Beijing ceded Dalian and the Liaodong peninsula with strategic Port Arthur to the victorious Japanese. A few years later, the Japanese Emperor lost control over the area to the Czar. In 1905, the Japanese fought back and regained nearby Port Arthur, now a faded relic. The area was a key part of Japan's Manchurian empire. After Tokyo's defeat in 1945, the Red Army occupied Dalian. The Soviets pulled out 10 years later.

Now, in the post-cold-war era, the Japanese are flocking back. During the first part of this century, Tokyo had dispatched many officials and businessmen to its colony in China's northeast, and the children of these officials went on to play influential roles in Japan. Among them: Yusuke Kashiwagi, former Bank of Tokyo chairman, and Saburo Okito, a former Foreign Minister. When it came time in the 1980s to start investing in China, Dalian was a natural choice for Japanese raised on old tunes about the city's lovely acacia flowers.

The cityscape of Dalian is dotted with billboards advertising Japanese brands: Hitachi, Sony, Toshiba, etc. The locals covet such Japanese products as Sanyo TVs and have grown accustomed to seeing groups of Japanese executives and tourists. "Every year, more and more Japanese come here," says Wang Shijia, vice-mayor of the Dalian Municipal People's Government.

EDUCATED WORKFORCE. Takeshi Nakayama knows how true that is. As president of Toshiba's sprawling complex in Dalian, he is so besieged by requests from Japanese corporations to tour his operation that he finds it hard to get any work done. Nakayama predicts that with the rise of the yen, Dalian will experience "a surge of investment in the future."

But Nakayama and other Japanese executives do not view Dalian as a cheap labor base. "Some say the labor prices are low," Nakayama remarks through his assistant, a young Chinese woman who speaks fluent Japanese learned at a local university. "But that's not very correct." What Dalian does offer is an educated workforce "that compares with the Japanese market in terms of quality," he says. "Efficiency is higher here." His workers, who make TV parts that are later shipped to Japan, seem to be taking the lead from their Japanese counterparts: No street shoes are allowed on the factory floor, and all workers wear proper Toshiba jumpsuits. Nakayama says he's now expanding the business. The company intends to invest $95 million in three or four additional factories in the region.

While Dalian officials don't want to be overly reliant on the Japanese, they realize that the city needs as much foreign investment as it can get. If Dalian doesn't get overseas funding, it may fall far behind richer regions in the south and along the coast. "Competition among Chinese cities is fierce," says Vice-Mayor Wang. "It's easy to lag behind." Before 1993, Dalian ranked as the biggest port in China in terms of import and export volume. Now, it trails Shanghai, and other ports are coming on strong. Even smaller cities near Dalian are "all very ambitious, and they want to build the biggest port in the province," says Dalian Port Authority chief Wang.

There are other headaches. Dalian is a base of heavy industry, and it's saddled with unprofitable state-run plants. All over town, smokestacks belch pollutants into the air. Some 30,000 employees of state-run companies are now "waiting for work," getting paid 70% of their salaries in the meantime. By contrast, the private sector is booming, and wages are outrunning the 18% inflation rate.

To improve performance at state enterprises, Vice-Mayor Wang says she would like to "marry off" some state industries to foreign investors. There have been a few such weddings. Hong Kong-based China Strategic Investment Ltd., run by Indonesian-Chinese tycoon Oei Hong Leong, agreed last year to take a majority stake in 101 factories in Dalian. The factories make everything from plastic toys to electric motors.

NEW PORT. The Japanese are busy cutting deals on their own. Last October, Sanyo Electric Co. and trader Nissho Iwai Corp. formed a new company with state-owned Dalian Refrigeration Co. The $13 million venture, Dalian Sanyo Cold-Chain, will start producing commercial refrigeration equipment in Dalian's development zone later this year. In November, Matsushita Electric Industrial Co. and Dalian-based China Hualu Electron Co. announced plans for a joint venture to make VCR components. And in 1992, Japan's Onoda Cement Co. hooked up with Dalian's Huaneng Raw Material Corp. and Dalian Cement Works to form Dalian Huaneng-Onoda Cement Co.

Both the World Bank and the Asia Development Bank have made hefty loans to Dalian for port and water facilities. A new, modern port is in the works at Da Yao Bay, a few miles from Dalian's development zone. Japanese companies are building up Dalian's infrastructure as well. Within the city's special economic zone, a Japanese-Chinese consortium, Dalian Compound Industrial Co., is buying up raw land and developing it. The joint venture, in which the Japanese hold an 80% stake, installs everything from roads to pipes to dormitories for workers. Then, the group resells the land to Japanese companies for nearly a threefold profit.

Dalian would like nothing better than to attract American investors to offset the heavy Japanese presence. One key official, who drank a bit too much at lunch, blurted out that he never knows where the Japanese really stand. But the Americans, he said, are straight-shooters. The city is the Chinese home of Pfizer Pharmaceuticals Inc., which set up a $50 million joint venture to make antibiotics for the Chinese market. Dudley Schleier, general manager of Pfizer China, says he has "ready access" to the mayor's office--something foreigners can't count on in just any Chinese city. "Dalian is traditionally a Japanese area. But here we get regulatory support," says Schleier.

If the visitors turning up to take a look at the Toshiba factory are any measure, more Japanese companies are likely to set up shop during the coming months. On Mar. 19, Japanese Prime Minister Morihiro Hosokawa arrived in Beijing for talks. Wu Jianmin, a spokesperson for the Chinese Foreign Ministry, says that Japanese corporate leaders have finally decided to transfer technology to China, after years of holding back. "Investment and technology are in the pipeline," he says. If that's the case, the likeliest port of entry is Dalian.