More cash in pocket will make India a preferred destination for expatriate entrepreneurs
Sept. 14 – As I deplane from the Cathay Pacific flight, I am pleased to note it has arrived 30 minutes ahead of schedule. Walking through the brightly lit, air conditioned airport towards arrivals, I am whisked along by fast moving passenger walkways, noticing the HSBC, Avis, DHL and Crowne Plaza corporate advertising all along the walls. Down the escalators, and immediately in front is immigration. I am steered to an empty booth, while the line of immigration officials waiting to check documents stretches all the way down an enormous hall.
An official checks my visa, smiles, and waves me through. Walking through a vast emporium of duty-free items, I get towards the arrivals hall. The walls are lined with local art, statues and paintings; this is clearly an affluent city. I obtain a complimentary trolley cart, await my bags, and after five minutes the conveyor belt starts moving. I’m lucky – my suitcase is one of the first.
I walk through customs, there’s plenty of people milling around, but no queue, and again get waved through. I am met on the other side by a host of couriers holding up placards with hotels and names: “Yu Chen – Meridien,” “Tom Hauser – Shangri-La,” and the improbably named “Mr. Goolilly” who is apparently destined for the Hilton. A smiling chap holding a placard with my name on it spots me. He says hello, politely, in fluent English, makes small talk about the weather, enquires about my flight, and directs me to a locally-built BMW sedan. Loading up my luggage, we sweep out of the airport in an exercise that has only taken 25 minutes. We drive up through the large circular road ramp up onto an eight-lane highway, where corporate hi-rise blocks are distinguished by their names: “Airport Sheraton,” “Panasonic,” “Standard Chartered,” “Infosys,” “Ericsson.”
We drive past a huge, modern industrial estate crammed with office buildings, some still studded with cranes and all with the neon lights of advertising. We overtake a massive Mercedes truck loaded with what looks like a huge (and very expensive) turbine while passing other cars, taxis and lorries. We’re averaging about 60 kph – its slick, and easy, and there are no jams. The lights of the Westin blink on ahead, and we exit the highway, sweep around, drive through the lush gardens to the front of the hotel, and park outside the front entrance. The concierge is waiting – he knows my name, which I find impressive. My bags are picked up, and I am ushered into the main, cool, marble-clad lobby. A blonde expat girl smiles at me at reception, while two local receptionists jointly chorus “Welcome to the Westin, Mr. Devonshire-Ellis.” Indeed, and welcome to Delhi. Fifty-five minutes ago I was still strapped into a seat on an Airbus.
It’s a scenario those used to doing business in India will be very familiar with. I’m in Delhi or, to be precise, Gurgaon – a major suburb, but also the site of one of India’s largest development zones – to visit Dezan Shira & Associates’ local offices (also in Gurgaon) and spend two weeks evaluating our business in India. That I need to is paramount. Enquiries from international companies looking at setting up in India have never been greater, our local billing has never been higher, and we have growth pressures to deal with. “Good quality problems” as I always refer to them. I need to interview and hire more staff, and shockingly perhaps for those expats used to the China life, that will almost certainly include the relocation of some of our existing expatriate staff in China to India.
There are three main tipping points as to why this is, I suspect, becoming a trend. From the cosmetic perspective, India’s major cities are going through an overhaul. Delhi hosted the Commonwealth Games last year; and government used the event, just as Beijing did with the Olympics, to spend massively on improving infrastructure. The result is the ease of airport-hotel transfer I described above. Yes, Beijing’s Capital airport is far larger than Delhi’s Indira Gandhi Airport, but size isn’t everything. Beijing Capital is just so huge, so vast, that it takes well over an hour to exit, significantly more if that includes taxi queues. In the space of that same hour, I was sitting comfortably in my hotel in Delhi. Similar scenarios happen in Mumbai, Chennai and elsewhere. India, so long the butt of jokes about its infrastructure, is working. That’s not to say it hasn’t got a long way to go – Delhi, Mumbai and Chennai are just three cities amongst hundreds. But in India’s first-tier cities, things move. The result is an easier environment to live and conduct business in. You can get things done here without having to contend with broken architecture.
The second tipping point is India’s economy. It’s been pushed off the front pages by the plethora of mainstream China news, but the reality is that India has been the world’s second fastest, and second largest growing economy for much of the past decade. While China ran along at a 10 percent plus clip, India has consistently been hovering around the 8 percent mark during the same period. It’s almost incredible that this has largely gone unnoticed, yet the brashness of China, and the extolling of its deeds by its politicians, have pushed India’s achievements into the shade. Does India care? Probably not, they’ve just gone ahead and done it anyway. Now, India’s GDP growth rates are jumping ahead of China’s, as the latter experiences something of a slowdown. India today is the fastest growing economy in the world, and it’s a position it is likely to hold onto for the foreseeable future. That matters because India also has, like China, a massive population. In fact, India’s middle class – the wealthy – is about the same size as China’s – some 300 million. This shows, literally, in the showrooms. Ferraris are here, as are Porsches, while India owns Land Rover and Jaguar. Like China too, the roads are full of fancy sedans. India builds its BMWs in Chennai, China builds theirs in Changchun.
But the face of foreign investment in China manufacturing is also changing partly in India’s favor. Take, for example, the U.S. company Timken, a second-tier supply chain auto manufacturer which manufactures bearings, alloy steel, power transmission components, engineered surfaces and lubrication among their many products. They are a global business, but recently closed down their Guangzhou manufacturing operations, which once employed over 1,000 workers. Where did they go? To Chennai, where a US$8 million investment is expanding their investment in roller bearings and power transmission. (Its not all bad for China, another division just invested in two steel mills in China. But the labor heavy manufacturing has moved on).
The future markets for international businesses are of course both China and India, and it has been China to which MNCs have, in the main, turned to first. What has happened with Timken is just one example though of the fluctuations within FDI between the two. As China gets too expensive, or India’s market becomes more attractive, MNCs will and are moving entire production facilities.
Additionally, with a consumer population of 300 million and the world’s fastest growing economy, India is attracting more and more investment. An interesting aside – as a foreign investor myself in China and India – I can advise that the regulatory environment here, in India, is far more flexible than in China, at least in our industry. Simply put; I can do far more things with just one business license and capital investment in India than I am permitted to in China. That in itself is going to be a draw for foreign investors. You can get more done here now, incredibly, with less money or licensing administration than is possible in what China has now become. It’s not widely appreciated, but India has become less bureaucratic and offers more value at a time when China is adding more layers.
The third tipping point is the question of expatriate hires. Expats are a curious breed, willingly displaced, and increasingly over the past five years, inclusive of many economic refugees that couldn’t find a way to get ahead in the United States or Europe. Many ended up in China. From teaching English, to running bars, to operating businesses with wives and girlfriends, some have managed to pull themselves up by the braces and make something happen. Others may have managed to begin a China career, perhaps with an MNC, but still have a way to go to make it into senior management. These expats are going to hurt. As China has introduced mandatory social welfare payments applicable to expatriates in China, both employers and the expatriate employee are going to come under increased financial pressure.
“China will lose its veneer of expatriate entrepreneurs”
Employers in China, under the new social welfare rules, will have to make significant additional contributions, and the expatriates themselves will now see less in their pay packet due to the deductions. It effectively means that the 20-year era of relatively inexpensive expat hiring in China is over. Companies, already trying to absorb increasing local labor costs (China is going through a process of doubling the minimum wage by 2015) and now faced with the additional social costs for expats, are going to trigger a wave of redundancies, and increase localization of the domestic workforce. China’s responsibility is to provide jobs for its own citizens, not foreigners and as a result expats, unless they now pay for the privilege, are being squeezed out. For expats that might have set up businesses recently, the additional costs may introduce overheads that cannot be sustained. I expect to see several newly invested, expat-owned businesses almost immediately start to struggle. Some will go broke. China will lose its thin veneer of expatriate entrepreneurs.
The impact this is expected to have is that India will instead inherit this wave of young foreign talent. Why not? It’s exciting, growing, exotic and relatively inexpensive. India, less rapacious, also leaves far more money in the employees’ pockets. For example, while both China and India have staggered layers of individual income tax obligations, in China the highest band is at 45 percent, in India the highest band is 30 percent.
Concerning mandatory welfare – which China has just introduced for all expatriates – in India, companies that have less than 20 staff are exempt from paying social welfare (in India this is called the Provident Fund, and is one reason why India has so many small businesses). However, if the company is eligible i.e. if the employees are more than 20, than expatriate employees have to contribute to the Provident Fund. The total rates are at 24 percent of salary, borne equally by the employer and employee (12 percent each). However, the difference in India is that expatriates contributing to the social security scheme in their own country and having a status of “detached worker” as per the Social Security Agreement that India has with their country of origin will be excluded from the Provident Fund. This effectively means that expatriates do not have to contribute to India’s Provident Fund (social welfare), unlike China, where they now do.
Put simply, this combination of lower individual income tax and social welfare differences allow expatriate entrepreneurs to keep more money in their pocket in India than in China. This is an important ingredient when starting a business, cash is inevitably tight, and the most that can be retained in the business the better.
An Expatriate Manager’s Introduction to India
Last year, we published a pay-for issue of our India Briefing magazine about the costs and expectations of expatriates relocating to India. “An Expatriate Manager’s Introduction to India” has been one of the most popular issues during that time. Today, as we stand on the verge of a change in the range of opportunities available to young expatriates in both China and India, we would now like to provide that issue as a free download (just click on the image).
I think China has made a strategic mistake with its insisting that expatriates have no choice but to join the State-mandatory welfare scheme, as it has now stripped away the ability for young entrepreneurs to be able to afford an entry level venture into the country. There is value within that talent pool, and China will miss out. I expect many to review their options and India, with its wealth, and growth rates, and opportunities, is about to inherit a global resource that may not matter much in terms of FDI, tax and employment contributions today, but will within 10 years.
Those that do transfer are joining the ride of a country about to go places. If you’re looking for a huge, wealthy, domestic market, a country with the highest growth rates in the world, the ability to both create something new, lasting and with a proven empathy towards entrepreneurial skills, coupled with the ability to leave money in the bank – India now beckons.
Chris Devonshire-Ellis is the founding partner of Dezan Shira & Associates. The practice specializes in providing legal, tax and business advisory advice to foreign investors in China, India and Vietnam, and has 19 offices spread around the region. To contact the practice in India, please email: email@example.com. To contact the practice in China, please email: firstname.lastname@example.org.
India Briefing Guide to Doing Business in India (Second Edition)
This book aims to provide a basic overview of all topics related to doing business in India – history, business etiquette and culture, and how to invest into the country, in addition to a detailed, state-by-state demographic and geographic overview and a comparison with China.
Developing Your Business from China to India and Vietnam
Our complimentary 25-page PDF report detailing cost analysis, labor and factory overheads comparisons between Dongguan, Chennai and Ho Chi Minh City, as well as an overview of other emerging Asian markets such as Cambodia and Laos. It includes full factory cost analysis, descriptions of the legal establishment differences and options, the tax implications in these markets, as well as business and cultural differences. This is a must read for all executives interested in expanding into Asia.