The prospects of Chinese investment in Galesburg

 

analysis by Mike Kroll

 

Plants are again blooming, trees are once again adorned by leaves, farmers are once again in their fields and singing birds can be heard morning and night, spring has arrived in Galesburg. While this is literally true it may also be figuratively true as well. The much ballyhooed signing ceremony held last Friday afternoon where Galesburg mayor Bob Sheehan and Chinese delegation representative Ligong Zhai signed a “Letter of Understanding” could be a signal of the first good economic news in this community in a very long time. While the actual wording of the agreement promised nothing beyond continuation of talks about Chinese investment in the Galesburg area there is reason to believe that this is a harbinger of more substantive news to come, perhaps shortly.

According to representatives of the Galesburg Regional Economic Development Association (GREDA) exploration of a relationship with the Chinese was initiated over two years ago. When incoming governor Rod Blagoivich ordered the revamping of the former Department of Commerce and Community Affairs into what is now known as the Department of Commerce and Economic Opportunity (DCEO) one key aspect of the new governor's vision was a greater focus on foreign trade. Local officials were apparently among the first to take advantage of these new opportunities in the immediate fallout of the October 2002 Maytag announcement that the firm would be closing the local plant.

Galesburg officials spoke to the folks at DCEO about the horrible impact of the Maytag closure even as the new governor was organizing his administration. Early on Galesburg began focusing on the prospects of bringing the Chinese to Galesburg due to the urging of local businessman Vern Stisser. who had both personal experience and contacts with Chinese business and government leaders (a distinction with little meaning in China, one of the few remaining communist countries in the world today). At Stisser's prompting GREDA officials contacted the Chicago office of the World Trade Organization (WTO) which brought the involvement of Jenny Gou. As Galesburg moved forward in making contact with the Chinese we now had the cooperation of Gou and the DCEO director of the Office of Trade and Investment Ross Horano.

Last Friday's announcement is easy to dismiss as meaningless from our American cultural perspective, but as Eric Hanson of the University of Illinois' Cooperative Extension Service explains, “If the Chinese weren't seriously interested in doing business here in Galesburg then Friday simply wouldn't have happened. In the Chinese culture interim agreements such as this are very important steps in the process. We showed them enough about the Galesburg community to convince them that they want to do business here.”

“Even before I was assigned to Galesburg this community expressed an interest in China while most other Illinois communities still have not. The success of this project is in large part due to the help and involvement of the State of Illinois and the WTO. It was with the assistance of these organizations that we were able to establish our contacts with the Chinese. There are other cities in Illinois actively pursuing foreign trade with the Chinese such as Chicago but Galesburg is still unique,” explained Hanson.

Hanson administers GREDA's Chinese Foreign Direct Investment Program. While the initiative began without him in late 2002 when the initial contacts were made between Galesburg and the WTO, Hanson was among the first four-member Galesburg delegation that visited China in May 2004 and visited 13 cities there. There have been at least two other trips to China since and delegations from China totaling over 60 individual representatives have made multiple trips to visit Galesburg. From the onset the focus of these talks has been to interest the Chinese into investing in the new logistics park. Hanson and his colleagues have been touting Galesburg as an ideal location for the Chinese to distribute goods to the two-thirds of the continental United States east of the Rocky Mountains.

“We have made essentially the same pitch we make to U.S. firms regarding the logistic advantages of distributing from Galesburg,” noted Hanson. “If anything those advantages are even greater for the Chinese. Nearly all of the goods imported from China by ship and enter the U.S. from three west coast ports in Los Angeles, San Francisco and Seattle. It is extremely costly and inefficient to distribute nationwide by truck from the west coast and the costs of operating such businesses near these ports is far higher than the cost of a logistics operation here in Galesburg.”

In all their marketing materials GREDA focuses on four major advantages of distributing from Galesburg. Three of those key on Galesburg's location relative to the Burlington Northern Santa Fe rail lines, the interstate highway system and Chicago. The fourth is the relatively low cost of living and business in the Galesburg area, particularly as compared to the west coast or large urban areas such as Chicago. The windy city is currently a major logistics hub for the exact same portion of the U.S. that GREDA officials tout for Galesburg. However the congestion that come with such success and the resultant delays and higher costs highlight Galesburg advantages according to GREDA.

“We commissioned a study that documented how Galesburg is within a 24-hour drive, assuming continuous team driving, from the entire country east of the Rockies and even into much of Canada,” explained Hanson. “That's 80 percent of the U.S. Population plus a good hunk of the Canadian population. Given the delays and congestion of Chicago as a distribution hub goods can be delivered from Galesburg as much as a whole day earlier than from Chicago. And beyond simply distribution the Chinese would need to establish a base for assembly, warranty and service here in the U.S. Galesburg would be a great location for those functions as well.”

 I hope GREDA didn't pay too much for this study as the handout they use to illustrate the results appears to be little more than a map with about a 1200-mile radius circle drawn upon it. While at a glance this looks impressive, unless we assume trucks traveling as the crow flies this is a simplistic analysis of the true 24-hour driving range from Galesburg. Nevertheless, the essential point being made by Hanson is indisputable for a large-scale distribution facility. This advantage is somewhat less clear if that distribution area is scaled back significantly.

The value of Galesburg's proximity to the BNSF local hub is also subject to circumstances. Anyone who pays attention to the makeup or “consist” of BNSF trains as they wait at a crossing has undoubtedly noticed that the boxcar of old has all but disappeared. Soon boxcars will join cabooses as historical relics as inter modal shipping containers take their place. While it was once commonplace it is extremely rare today for any railroad to drop off a small number of boxcars on a siding adjacent to a plant or business to be loaded or unloaded. Most of these sidings are now retired and most non-bulk goods shipped by rail are now loaded or unloaded from inter modal trailers that are trucked to or from an inter modal facility operated by a railroad. Before the merger of the Burlington Northern and Santa Fe each company tried to operate small inter nodal facilities in Galesburg with so little success that both have since been eliminated. Today the BNSF operates large inter modal facilities in Chicago (4), St. Louis, Kansas City, Omaha and St. Paul. Unless either the logistics park as a whole really takes off or the Chinese come into Galesburg in a really big way the BNSF “advantage” seems like a mirage.

The Chinese group that signed the “Letter of Intent” goes by the somewhat academic sounding name of Chinese Association for Productivity Science (CAPS) but like most entities in China is actually a offshoot of the Chinese government. Associated with the World Productivity Congress and the National Productivity Council of China members of CAPS have signed similar agreements in Europe and maintain relationships with German and British entities. At the Friday press conference following the signing I asked Zhai (through his translator) what other American communities had they signed similar letters of intent and what has transpired since. When the translator relayed Zhai's answer it had little to do with my question and the Chinese teen we brought to act as our translator whispered to me, “That's not what he said.”

As it turns out in the Chinese culture it is considered highly impolite to say “no” in a business discussion. I have been told that to use the word “no” is almost akin to breaking off discussions and that is why the translator took pains to obfuscate Zhai's answer. This was indeed CAPS first such agreement with a U.S. city and they therefore have no track record in this country but similar such agreements, in Germany for example, have resulted in significant Chinese investment and long lasting relationships.

This otherwise minor aside to the story highlights two important points to remember as this relationship plays out. First, do not underestimate the significance of the language difference. We were told by one DCEO official that the Galesburg delegation scored points with the Chinese because they took the effort to line up their own translators. A small number of Chinese Knox College students were recruited for this task and by all accounts served admirably. GREDA also went to the trouble of translating some of its marketing materials into the Mandarin dialect of Chinese scoring more points with the visitors.

Second, we must avoid the stereotype of the ethnocentric American. Our culture is very, very different from that of the Chinese (and much of the rest of the world for that matter) and we must work hard to learn and appreciate the differences so as to avoid inadvertently offending the Chinese or misinterpreting what they say or write to us. “Until you understand the Chinese business culture it is incredibly hard to see the real importance of what happened here Friday,” said Hanson. In these matters the people from the World Trade Organization, specifically Jenny Guo, were repeatedly cited as cultural tutors by GREDA insiders. While Hanson may have joined a bit late he says he has “been working on this project pretty much since I began my Galesburg position” and he has become the local quasi-expert on China business relationships. He is quick to lavish credit on Guo, Stisser and the Knox students who have been “outstanding contributors.”

We all must wait to see what follows this agreement. If Hanson and GREDA are accurate in their take on the developing relationship we shouldn't have to wait too long. Officially everyone is tight-lipped about any near term announcements regarding the Chinese but at least some inferred that a significant additional announcement might not be too far away. The next concern local citizens must deal with is exactly how much of a net gain might be realize if the Chinese do come.

All of the GREDA literature touts Galesburg as an inexpensive place to do business and points specifically to average wages that are markedly lower than U.S. metropolitan areas such as Chicago. To be real economic development news any investment by the Chinese or someone else must offer the prospect of a realistic living wage with benefits for the prospective workers. Labor compensation is definitely NOT an accomplishment in mainland China renown for producing goods inexpensively in large part by underpaying workers. When I asked Hanson about this point he assured me that the Chinese understand that such an approach cannot work here. “My origins are in a working-class union family and I understand well the importance of bringing good paying jobs to Galesburg. I am confident that the Chinese do as well.”

Finally, a point that has not been publicly raised anywhere since these discussions began. Why not look to establish relationships with the Chinese whereby local people own and operate importing, packaging and distribution businesses based on Chinese goods. In this way there is a very real prospect of a broader cross-section of job types beyond simply the blue-collar. These companies would need office help, marketing, advertising, sales and other white-collar types of employees. This would not only better diversify the local economy but it would place more control in our future with local business people, who would also need to assume some of the risk. If such endeavors were successful they could easily grow and support affiliated businesses in the region resulting in a healthier longterm economic prognosis. Let us hope this aspect of the relationship becomes a focus of continued talks with the Chinese.