The Rise of China's Southwest

Chengdu, China - It's a hot Friday evening on the sprawling campus of Southwest Jiaotong University. In a crowded classroom, students are presenting marketing plans for a Lenovo laptop, part of a nationwide contest that will take the winners to China's capital for a final face-off and a chance at an internship at the computer maker's headquarters. "Dominate the era of adolescence" is the slogan of one team, whose members finish their presentation with a rousing chant: "We are going to Beijing!"

While getting to the capital may be the goal of these enthusiastic undergrads, Lenovo Group (LNVGY) and other multinationals are heading in the opposite direction. With slowing sales growth and rising costs in coastal cities, companies are looking inland to Chengdu and other parts of southwestern China for expansion. Rural areas and smaller cities now account for 30% of Lenovo's sales, double the share of five years ago. Intel (INTC) is shutting an assembly plant in Shanghai and moving most of the work to Chengdu. A Volkswagen (VLKAY) joint venture is building a $735 million factory to make Jetta sedans there, and Toyota is doubling production capacity at its plant in the city.

Such moves are helping fuel expansion in the southwest. The region grew at a double-digit pace in the first quarter, led by Guizhou province, at 15.9%, vs. a national average of 6.1%. That's due to money Beijing poured in after last year's devastating earthquake, as well as stimulus funding for railways and power facilities and subsidies for rural families. The southwest "seems immune from the problems facing the rest of China and the world," says Dai Jingtong, regional manager for Lenovo, which saw its first-quarter unit sales in the southwest jump 23%, vs. 4.4% nationwide.

The rise of the southwest—five mostly rural provinces that are home to 250 million people—signals a big economic shift. The global downturn has slammed China's exports, and traditional growth areas are suffering. Guangdong province, where tens of thousands of export-oriented factories are located, grew 5.8% in the first quarter, and Shanghai's economy expanded just 3.1%—a recession by Chinese standards.

As manufacturers in those regions shut down or lay off thousands, their erstwhile employees, many from Sichuan and other southwestern provinces, are heading home. "When migrant workers were in the factories, the majority of people in the countryside were old," says He Jie, vice-general manager of Sichuan Huhui, a chain of 800 grocery stores in the southwest that is planning to open 300 more this year. "Now the young are returning, and they are more knowledgeable and eager to buy new products."

Although Beijing is not pleased with the slowdown along the coast, building up the interior and creating a more balanced economy have long been priorities. A program called "Develop the West," introduced in 2000, has improved highways, railroads, airports, and electric grids, making the southwest far more attractive to investors. Incomes are lower than on the coast. But they're rising fast as the infrastructure projects and new foreign-owned factories create jobs.

As consumers open their wallets, foreign retailers are moving in. Japanese department stores Seibu, Isetan, and Ito Yokado have opened Chengdu outlets in recent years. France's Carrefour has been expanding in the area, and Wal-Mart (WMT) has 25 stores there—about a fifth of its nationwide total—and plans to open more this year. "The southwest is a growing, vital region," says Terrence P. Cullen, who heads development for Wal-Mart in China. "We want to be there."

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