October 2011

College town

By Alexander Gladstone

Duke University opens a business school campus in Kunshan, the ‘Silicon Valley of China’

The city of Kunshan, located between Shanghai and Suzhou, is at the center of several historic watertowns, as well as home to the largest reclining Buddha statue in the world. But it is the city’s phenomenal growth as a manufacturing center that has built its recent reputation, and attracted a major US university to build a campus.

Kunshan’s export-driven economy is based around electronics, precision machinery, and consumer goods. In the early 2000’s, the two most-exported products were laptops and cell phones, but the economy of the city has since diversified to include everything from computer keyboards to hydraulic engines. The presence of so many companies in the IT sector, such as Foxconn, the Taiwanese giant that produces parts and products for Apple, has led some to refer to Kunshan as the “Silicon Valley of China.”

But the city lacks a major university, and so the Kunshan Municipal Government approached Duke University several years ago, offering to make a significant investment towards setting up an international campus, reflecting the hope of establishing the city’s future as not just a manufacturing hub, but as a center for research, development and innovation. The campus is due to open in late 2012.

Michael Schoenfeld, Duke’s Vice-President for Public Affairs and Government Relations, said: “This was attractive to us because of the opportunity to be engaged in a very dynamic part of the country, close to Shanghai. We believe that a top-tier university like Duke can make a real difference in the region, and throughout China.”

The campus will be led by the Fuqua Business School, and “incorporate the most important elements of an American research university, to complement the extraordinary economic growth that has taken place in Kunshan.”

A solid base

Kunshan’s recent development has indeed been rapid, with the city’s GDP rising from just US$3.1 billion in 2000 to over US$33 billion in 2010. This GDP growth is driven largely by the IT sector, which is dominated by Taiwanese companies. The city produced over 80 million laptops in 2010, according to the Kunshan Daily.

The city has won a number of awards for its remarkable economic success. It has topped the government-ranked list, “Top 100 Best-Developed County-Level Economies in China” since 2005, and was also number one on Forbes China’s “25 Best Country-Level Cities in China” study in 2010.

With a total population of roughly two million people, there are only 680,000 permanent residents along with 1.2-1.3 million temporary residents and migrant workers. Kunshan has a per capita GDP of US$34,015, much higher than Shanghai’s US$11,447, thanks to the city’s concentration of high-value businesses.

The Kunshan Economic and Technological Development Zone (KETD) absorbed 60% of last years’ foreign direct investment (FDI) of US$3.2 billion, and accounted for 60% of Kunshan’s total export volume of US$82.1 billion, said Josephine Zhang, vice-manager for investment services at the zone. There are roughly 1,500 non-mainland companies registered at the KETD, and 80% of them are Taiwanese.

“The high rate of foreign investment has transformed Kunshan, making life much better for the people here,” Zhang said.

There are over 4,500 Taiwanese companies in Kunshan, and a high number of Taiwanese residents, leading some to call the city “Little Taipei.”

Hong Kuntai, CEO of the Kunshan-based Taiwanese company Lin Ge Infant Products, said the city’s government targeted Taiwanese electronics companies. The Taiwanese, looking to invest in mainland China, were attracted by Kunshan’s strategic position on the Yangtze River and close proximity to Shanghai. The first companies arrived in the early 1990s, enticed by favorable tax policies as well as significant government support. Their initial success led to more investment throughout the 2000s, until Taiwanese accounted for just over 50% of total FDI in the city, bringing in a total of US$15 billion in the past ten years.

While at first the government prioritized support for cell phone and laptop manufacturers, by 2000, companies from a variety of industrial sectors began to arrive, the majority of them producing electronic components and high-tech machinery.

Virgil Adams, Managing Partner of New Frontier Investments, a private-equity and real estate investment firm based in Kunshan, explained how integration of these companies was the key ingredient in the city’s growth: “Kunshan reached a critical mass, where suppliers, manufacturers and distributors all came together to form a completed infrastructure value chain.”

Aspiring to lead

This success is what has led many to compare Kunshan with Silicon Valley. But Kunshan lags behind its Californian counterpart in terms of invention and innovation. Adams says that Kunshan wants to move up on the value chain, by attracting companies involved with robotics, nanotechnology, biotechnology, and renewable energy, and more importantly by developing a stronger research and development sector. While many products today are “made in Kunshan,” the government wants to shift that towards “designed in Kunshan.”

Lin Ge Infant Products CEO Hong Kuntai points to a shortage of skilled labor. He says that 60 - 70% of Kunshan Taiwanese companies develop and design products in Taiwan, while facilities in Kunshan are devoted solely to manufacturing. “Kunshan lacks qualified researchers and designers. There is a 20-year gap with those in Taiwan,” he said.

It is in an effort to close this gap that Kunshan is making such a significant investment in the Duke Campus.

According to the Duke-Kunshan planning guide, the municipality will provide US$260 million for construction, as well as 200 acres of land leased at no cost for ten years. Duke will contribute US$42.5 million: $5.5 million for the architectural design and construction oversight, as well as $37 million to cover the first six years of operation.

Virgil Adams stated that, “Kunshan is investing in building up their talent pool. This might be where they come up with the next Apple or Google.”

Hong Kuntai is also optimistic about Kunshan’s future: “I feel the current market is still in its emerging stage. Sustainable development will last for at least 20 years.”