Corporate America’s China plus one strategy

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By Chris Devonshire-Ellis

LOS ANGELES, Jan. 31 – Traveling around California and Nevada these past two weeks (you guessed it, Las Vegas has got to be an essential stop on any self-respecting conference go-er) it struck me in talking to American businesses large and small how much the Far East is changing in perception for the United States. Perhaps now with an increased confidence in all things China, savvy U.S. corporations are instructing their business development managers – now 10, 15 years down the track of running around Beijing, Shanghai, Guangzhou and some of China’s second tier cities – to look even further a field – other domestic markets and other alien tax incentives beckon. The same is true, but for different reasons, for smaller businesses.

One entrepreneurial businessman I met for martinis in the Bellagio was telling me China has gotten too expensive, and certainly now in Beijing, where he’s currently based. “Tianjin…” he said, “I need to consider relocating to Tianjin” referring to the major, yet somewhat shabby port city just 100 km east of Beijing. “Or failing that, Vietnam. I passed through there on my last Asia trip and it’s looking promising.”

The consistent views are interesting, and denote the beginning of what we shall dub the “China plus one” strategy that is forming in the minds of American businessmen. Two main factors are driving this, those two old chestnuts, economics, and opportunity.

The economics theory behind “China plus one” works like this: as China is getting wealthier, and its population older, it is getting more expensive to manufacture there. Wages are rising and so are the prices of commodities – China is experiencing some worrying inflationary trends right now that are pushing up the prices of everything from a bowl of rice to apartment rentals. Added to that, China unified its corporate income tax system last year, bringing the previous low rates that foreign businesses enjoyed up in some cases from 15 percent to 25 percent. Certain tax incentives also have disappeared, making other Asian destinations now more attractive than the PRC for the receipt of foreign investment. To compound this, the United States has quota systems in place for Chinese textiles, agricultural products and a whole host of other items, meaning once those quotas are used – and the annual quotas have tended to have been reached after just 9 months – there are no more permissible U.S. imports. Accordingly, some manufacturers are considering opening up elsewhere – or moving their operations entirely. Vietnam, with American most-favored-nation status is a prime recipient of this investment, especially for export manufacturers looking to sell back to the U.S. or markets elsewhere. It also has no U.S. quota-based issues to worry about.

The opportunity factor is different however. Still largely the preserve of the billion dollar plus multinationals, they perceive other markets in Asia as being prime for expansion to sell product too – India’s massive (and wealthy) middle class in particular – and they are adding that country to the destinations their hard pressed development executives are having to fly around.

The signs are on the wall. Every single American corporation I saw in California in the past ten days has a “China plus one” strategy. They may not have called it that, but they have it. “What do you know about Vietnam?” they ask. They have issues that need solving with staff they have already contracted and sent out to India to work on projects they’ve signed deals on. It’s already happening.

For many, the job of China expansion is done. The push into the inland regions there is proving financially unattractive. Other Asian destinations offer coastal facilities and in some cases demanding and growing middle class consumers on a scale that outstrips the Chinese. Why, after all, would you want to locate a new export manufacturing facility inland in China and away from the increasingly expensive coastal cities of Shanghai and Guangzhou, when you can have exactly the same plant slap bang on the coast in Vietnam or India, with an English speaking workforce and better tax investment incentives? You wouldn’t, and the savvy American boardrooms and entrepreneurs know this.

“China plus one” is the new expansion strategy for Asia, and corporate America is picking up on it.

Chris Devonshire-Ellis is the Senior Partner, International Practice of Dezan Shira & Associates and publisher of China Briefing, India Briefing and 2point6billion.com. He can be contacted here for matters of China, India & Vietnam investment comparisons and development strategy.

Further articles of interest:
China’s central regions and the Go Inland campaign

Should manufacturers move inland to avoid processing trade restrictions?

China-India investment comparision

Setting up foreign enterprises in India

Made in India

2 Responses

  • Ram Divani says:

    The big secret is out! You are 110% correct and the success of the China-India website at http://www.2point6billion.com is a perfect demontration of this. It amazes me many people aren’t aware of this shift and still think China is the be all and end all. It isn’t, and largely for the reasons you described, although as you have mentioned before, China has a vested political agenda in assisting India develop as well. I think both governments have reached concensus on the development paths both will take so as to not directly compete and to absorb as much of the Wests FDI as possible between them, and America right now is all lovey dovey with Vietnam to demonstrate ex-military enemies can be back into the fold, and that market is great for export manufacturing, you’re right, but not for selling too, it’s too small. But India…that is where big ticket construction projects are happening and unlike China, foreign investment is more than welcome in the construction and architectural sectors, which are still partially protected in China.

  • Tom Jones says:

    This isn’t what all those consultants who have invested so much in CHINA want to hear ! But I would agree with the statements concerning American sentiments – the need is now for advise on an Asian, not purely a China strategy. Suddenly China just got a whole lot smaller, and so did the China-only firms. A bigger strategic picture for the multinationals is needed, and you’re also correct I believe about the inland second tier Chinese cities – too expensive to get goods in and out and I can’t see why this would change unless you want to sell product domestically and mix it with the existing Chinese suppliers. Ouch. The alternatives such as Chennai in S/E India and Haiphong in S/E Vietnam make much better sense. Good luck guys, this may be unpopular to many in China but you’ve called it correctly imo – “China Plus One”.

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