China Sourcing: Tier 1 or Tier 2 Cities?

Date: March 3, 2015

China Sourcing: Tier 1 or Tier 2 Cities?

Product Sourcing Considerations in Tier 1 and Tier 2 Cities

While Tier 1 cities in China (e.g., Beijing, Shanghai, Guangzhou, and Shenzhen) are on everyone’s radar, Tier 2 cities compare favorably to their larger, more economically powerful Tier 1 neighbors in terms of the quality of products, competition in the marketplace and foreign entry into the markets. Tianjin, Chengdu, Nanjing, Xi’an, Wuhan, and Hefei are now making more of a splash in the market when it comes to product sourcing.

Recently, greater economic freedom in both Tier 1 and Tier 2 cities has created an ever-widening market for smaller foreign companies to thrive and to explore further sourcing opportunities within China. Just a decade ago, given the limited scope and the less diverse nature of the industrial market in China, there were a smaller number of players within the industry, and most foreign companies stuck with the suppliers they knew. These were mostly based in Tier 1 cities which offered relative stability, security, and regulatory rigor. Back then, the initial low growth rate within the target market of buyers naturally led to a limited number of industry players and well-established, successful suppliers in China.

This leads us to one of the major benefits of sourcing in Tier 1 cities: the suppliers are generally well-established, have a proven (and generally successful) track record, and know exactly what buyers want. They are also more likely to be well acquainted with how to handle manufacturers and regulators. Obviously, competition is fiercer in Tier 1 cities, thereby ensuring that quality standards are normally high and servicing of businesses impeccable. Given the higher sourcing prices, however, smaller companies may not be able to afford a permanent product-sourcing foothold within Tier 1 cities. Suppliers there inevitably charge higher prices than those in Tier 2 or Tier 3 cities. Thus, smaller or medium companies seeking to make a profit may be more enticed by the suppliers they find in Tier 2 or Tier 3 cities within China.

There will obviously be a downside to opting for product sourcing in Tier 2 cities or Tier 3 cities. For instance, the industry standards and the market itself are comparatively less well established or stable in those places. This may render suppliers less adept at dealing with new or different kinds of business. Moreover, most of the available research conducted on China sourcing is based on Tier 1 target markets. For this reason, newcomers seeking to find good suppliers in Tier 2 cities may feel as if they are groping around blindly, trying to find a path that will lead to financial success. Companies will need to sacrifice some comfort and be willing to take risks in order to, sometimes, take a bet on certain Chinese suppliers within Tier 2 cities.

Foreign companies may also experience a stronger sense of culture shock when involved in commercial relationships, dealings, and negotiations with suppliers in Tier 2 cities. Whereas suppliers in Tier 1 cities are more used to dealing with foreign companies and buyers, and are more likely to be compliant with the plethora of Chinese regulations. This is certainly something to keep in mind, when considering the advantages and disadvantages of product sourcing in China’s Tier 1 vs Tier 2 cities.

In just a one-year period from 2009 to 2010, Tier 2 cities saw massive growth. To name just a few examples, Xiamen saw a remarkable 500+% growth in the pharmaceutical market, Tianjin increased railroad equipment imports by 600+%, and Hubei began what has continued to be the development of more and better wastewater treatment plants. In just over ten years (1995-2007), China’s high-tech industry’s revenue grew by eight times. Clean energy is also a hot growth sector in China right now. All this simply encapsulates the dizzying growth rates within these dynamic Tier 2 cities which has, inevitably, trickled down to the sourcing sector and has caused suppliers within such cities to keep up the pace and offer high standards and competitive prices.

Overall, Tier 2 cities have demonstrated a trend that shows no signs of stopping: as wealth continues to grow, more businesses will flock to them to find suppliers and sourcing partners. This increases competition, raises wages, and improves products and processes, since the market generally favors greater efficiency and higher quality. The choice of Tier 1 or Tier 2 cities will depend on the nature of the business and the resources available to any given company. What is undeniable, nevertheless, is that Tier 2 cities in China have made a place for themselves and should not be overlooked as potential hubs, both present and future, for players within the China sourcing market.

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