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China Sourcing Cities: Tier 1 vs Tier 2

By Jesus David Cano Romano
August 3, 2015


China’s development has been massive during the last years, making people migrate from rural areas to the urban metropolis, creating enormous conglomerations, and changing the face of some cities such as Shenzhen which 30 years ago was fisher-man and rural town, now morphed into a skyscraper megalopolis of 15 million inhabitants.

When you think about China, what are the cities that come to your mind? Beijing, Shanghai, maybe Guangzhou, Shenzhen and other well-known cities. Those economically strong cities are considered as the Tier 1 cities. Instead what you should rather have on your radar are the growing favorably Tier 2 cities. They beat their prominent neighbor cities in quality, market competition and possibilities to enter the markets. This is why Chengdu, Wuhan, Tianjin and other Tier 2 cities are now gaining more and more appreciation when it comes to product sourcing.

Tier 1 and Tier 2 cities lately attained increasing economic freedom and therefore provide a constantly growing market for foreign SMEs to prosper and to establish new sourcing opportunities in mainland China. Because of the restricted range and rather homogeneous market not long ago the amount of competitors in the Chinese manufacturing industry was limited and foreign companies were forced to work with suppliers that were familiar. Most of those suppliers again were located in Tier 1 cities because the cities were regarded as secure, stable and regulated. Resulting out of the target market’s small growth rate of demand, there was few supply as well. This again meant a low amount of competition and few entrenched and prosperous Chinese suppliers.

That brings us directly to the main advantages of sourcing in Tier 1 cities: the manufacturers are well-entrenched, have previous experience and references and already have the knowledge about the expectations of consumers. Furthermore it’s highly possible that they are experienced and competent when dealing with suppliers and regulators. As the concentration of supply and therefore the competition is higher in Tier 1 cities, the quality and service provided are very high standard. With this development there come unavoidable high costs for sourcing. For SMEs it may not be affordable to persistently source in those Tier 1 cities, while prices in Tier 2 and 3 cities are typically lower. This makes Tier 2 and Tier 3 cities more attractive for most SMEs.

Obviously, there also have to be disadvantages for manufacturing in Tier 2 and 3 cities. Those cities can’t keep with the same high establishment and stability  of the Tier 1 cities mentioned earlier. The suppliers have less experience and may have difficulties with new or diverse types of business. Existing research about China sourcing is furthermore geared to target markets of Tier 1 cities. This can make it tough for people new in the business to find the right supplier for their needs in a Tier 2 city and it is connected to a lot of effort. If the company is willing to give up comfort and decides to take risks, it may pay off to work with a supplier located in Tier 2 cities.

Another factor that shouldn’t be underestimated is the cultural difference in Tier 2 cities. In China, business works different than in the US or Europe. The supplier in Tier 1 cities are already adept with working with foreign consumers and companies and may be compliant with Chinese regulations, while Tier 2 cities mostly don’t have that previous knowledge. That can give foreign companies a hard time while dealing with negotiations or relationships with suppliers in Tier 2 cities and should be considered in the decision.

In the year between 2009 and 2010, Tier 2 cities have shown a great growth. Here are a few examples:
– Xiamen’s pharmaceutical market grew by more than 500 %
– Taijin’s railroad equipment imports grew by over 600 %
– Hubei developed wastewater treatment plants
The last few decades China’s industry experienced a massive growth. All this simply shows the dizzying growth rates within these dynamic Tier 2 cities. It has inevitably trickled down to the sourcing sector and has caused manufacturers within such cities to keep up the pace and offer high standards and competitive prices.

All in all, Tier 2 cities are representing a trend of China’s industrial sector that seems like continuing. Increasing wealth will attract more businesses to look for suppliers and sourcing partners in Tier 2 cities. Competition will then again increase, wages will raise and products and processes will improve. Tier 2 cities will catch up and the choice between Tier 1 and Tier 2 city will then be decided based on the type of business and the resources available.
For sure, Tier 2 cities shouldn’t be underestimated and be considered as potential hubs for sourcing in China.

China 2 West has establish many strong relationships with suppliers all across China, no matter if it is a Tier 1 or a Tier 2 city we are able to work with the location that best suits your product. Capitalize on our ten years of experience working with suppliers to ensure that you find some of the best manufactures in the world. Please come join us at China2West and take your product manufacturing to the next level.

  

Map of China’s Tier 1, Tier 2 & Tier 3 Cities.

Download the Full map here