Governor’s Mission: Prove China Needs Calif.

SHANGHAI —  When Gov. Arnold Schwarzenegger visits here Thursday as part of a weeklong trip to China, his first stop won’t be at the historic Bund riverfront district or the dazzling, butterfly-shaped glass music hall across the Huangpu River. Instead the governor will walk through the sprawling Bao Steel plant in Shanghai’s old industrial district.

The reason is the steel mill’s new environmentally sound wastewater treatment facility, which California firms are building for Bao in this city that is as smog-filled as Los Angeles in the 1970s. For the governor, it may be the perfect stage to show what California has to offer China, and what the Middle Kingdom means for the Golden State.

In the last couple of years California companies have dramatically stepped up their business in China, undertaking trade missions, opening research and design centers, and cutting deals to sell a wide range of goods and services. California’s leading corporations, including Yahoo Inc., Walt Disney Co. and Qualcomm Inc., have invested billions of dollars in Chinese ventures.

Economic links between China and California go back 150 years, when laborers were recruited to build America’s railroads, but they may never be as important as now.

The two economies are similar in size. By economic output, China is the world’s seventh-largest, California the eighth. Among the things they share are thousands of Chinese Americans who have returned to their motherland to do business. Countless other Californians have staked their company’s futures, and by extension people’s jobs, on what’s happening across the Pacific.

“We are growing because of China,” says John Allen, president of Wilden Pump & Engineering Co., an Inland Empire manufacturer that is supplying diaphragm pumps for Bao’s treatment system. Thanks to $3 million of sales in China, Allen says, employment at Wilden’s plant near Riverside has risen 8% over the last year to 250, the highest in the company’s 50-year history.

Overall, California’s merchandise shipments to China surged 25% last year -- faster than to any of the state’s top 10 trading partners -- to almost $7 billion. China now ranks No. 4.

The ramp-up in exports and investment coincides with China’s rising wealth and involvement in higher-end industries that are California’s specialties, such as computer services, software development and engineering. California also has firms with expertise in pollution control, transportation management and water conservation -- all of which Beijing needs help with to achieve its goals of improving energy efficiency and so-called green growth.

Chinese companies, for their part, are starting to invest and expand globally. And what many of them want most is a place to go where they can learn how to innovate. That makes Silicon Valley and Hollywood prime candidates.

Many Chinese also know California because they have relatives there; more than 1.1 million ethnic Chinese live in Jiazhou, as the state is called in Mandarin.

“This is an opportunity for California.... It needs to be at the vanguard of reaching out to China on behalf of America,” says Tom Manning, a consultant who splits his time between Hong Kong and Hillsborough, Calif., and sits on the boards of several mainland Chinese companies.

But Manning points out that despite California’s inherent advantages, it faces tough competition from other areas in the United States, not to mention around the world, that want to capitalize on an emerging superpower. About two dozen American states and cities have representatives in China. California’s trade office in Shanghai was shut down about two years ago, just before Schwarzenegger took office, because of budget cuts.

But not everybody is enthusiastic about China. Although most analysts agree that China’s rise has proved to be a net benefit to California’s economy, people worry that industries and jobs will come under more pressure as the Asian nation continues to move up the value chain, applying its cost advantages to more and more sectors of the economy.

The Riverside-San Bernardino area, for example, has made the most of China’s booming exports to American shores with its abundant warehouses and sophisticated transportation links. But manufacturers are starting to transfer sorting and packaging work to distribution facilities in China, enabling them to bypass storage centers in the U.S. and ship directly to stores.

When the Western Growers Assn., a group representing hundreds of California farmers, came to China on its first trade mission a few months ago, members were heartened to see rising living standards and the potential for greater sales of California’s premium vegetables, fruits and nuts. The state exported almost $650 million of agricultural goods and processed foods to China last year.

But California farmers also came away concerned, saying that China’s farmers were shifting to higher-value crops and becoming more skilled and productive growers.

For example, table grapes are one of California’s top farm exports. But members saw huge grape plantations in places such as Shandong province that to them represented a threat, not an opportunity.

At Zhaoyuan Feiying Seedless Grape Co. in Shandong, about 1,000 farmers work on 100 acres of grapes. The company has been selling the fruit to Asian countries for some time, company executive Yang Dengli said, and this year it exported 33 metric tons to Europe.

Yang doesn’t foresee shipping to the U.S. anytime soon. “We welcome American companies to invest here or cooperate with us,” he said. “We can provide land and workers.”

With cheap labor in mind, California’s largest electronics manufacturers, such as Intel Corp., Applied Materials Inc. and Hewlett-Packard Co., have been investing in China for years. But software and service companies have been much more wary, worried about exposing their copyrighted content or programs to piracy.

Recently, however, that caution has given way to a burst of activity in China by Bay Area companies.

Over the summer, Yahoo paid $1 billion in cash for a 40% stake in the Chinese e-commerce firm Alibaba.com to gain an edge in China’s fledgling online auction and Internet search engine business. Adobe Systems Inc. sharply lowered prices for some of its design software in China as part of an expansion effort dubbed Adobe China Storm. Electronic Arts Inc., the giant video game publisher, plans to sell online games in China next year and is building a design studio in an undisclosed location in Shanghai that reportedly will have a staff of 500 in a few years.

EA declined to comment, but analysts reckon that the change in game plan wasn’t just because of China’s expanding consumer base. Global companies, they say, can’t afford to ignore the budding engineering and technical talent in China.

“Many people think of China as a sweatshop,” says Oded Shenkar, a management professor at Ohio State University and author of the book “The Chinese Century.” “But there is a significant amount of research and development going to China.”

Does that mean high-paying American jobs are being lost to China? Few analysts believe it’s a zero sum, but Shenkar says it’s pretty clear what some firms will do: They’ll set up an R&D; in Shanghai, where they can hire 100 engineers for the price of 15 in San Jose.

China is also beginning to entice Hollywood, not just as a market for its movies but also as a place to shoot them.

Bill Kong, the Hong Kong producer of such hits as “Crouching Tiger, Hidden Dragon,” says he expects China to compete with Russia and other countries in Eastern Europe that have become popular filming sites. The same low labor costs that make China a manufacturing hub apply to movie-making economics. Moreover, Kong says, China’s large size, varied landscapes and undiscovered regions make it a natural draw.

“Hollywood is taking a very serious look at China,” Kong says.

Schwarzenegger, in his first visit to China since becoming governor two years ago, is expected to use his considerable Hollywood appeal to sell the “made-in-California” message to the Chinese while prodding their leaders to do more to stop piracy, which has huge repercussions for companies in the Golden State

When Schwarzenegger last toured China in the spring of 2000, fans in Shanghai and Beijing went wild. Sales of his “Terminator” movies were said to have soared, although the profits almost certainly went entirely to bootleggers.

This time, he has a lot more on the line.