Op-Ed Commentary: Chris Devonshire-Ellis
May 4 – As it becomes apparent that China’s slowdown is to have a greater impact than originally thought this year, debate needs to be constructed concerning whether to just ride any downturn out or to be proactive and go looking for new markets and production centers. With several prominent China economists suggesting that China’s growth has flat-lined and given increasing costs in China, there is a need to consider other options. Here is an overview of India, Vietnam and Myanmar and what is happening in these different, yet rapidly-emerging markets.
Recent business media has painted a grim picture of developments in the country, but in reality there’s not much behind the hype. Businesses always like to throw tantrums when their toys are taken away, and the introduction of GAAR regulations – principally aimed at plugging the capital gains tax loophole that has made Mauritius India’s largest source of FDI – has had many screaming foul at the top of their lungs and suggesting all kinds of tax horrors will emerge. They won’t. Getting laws onto statute to ensure fair and even play is a totally different beast from knee jerk media reports that India will reassess tax liabilities going back to 1962. It’s absurd and untrue, and in any event, India’s statute of limitations is six years.
So India’s media hype is damaging how the actual investment environment is being perceived – in the world’s noisiest democracy it pays to look beyond the headlines. In fact, reform has been occurring, with single brand retail now permitted and other sectors for foreign investment opening up faster than expected.
However, the main driver for India – over and beyond any politics – remains its population dividend. With an average workforce age of 23, it is one of the youngest countries in the world and this massive population will sustain a boom in manufacturing for the next two decades just as China starts to age and become more expensive. That population is the key driver for India’s growth and is a key reason why manufacturing is starting to shift there. It is also the main driver behind an increasingly wealthy middle class.
Other pointers are the rise of India’s air traffic growth (now the second fastest in the world), India’s overtaking China in size in terms of its LinkedIn community (now second in the world behind the United States), and that India will surpass Japan in auto sales by 2016.
In terms of the regulatory environment, things are actually improving despite the short-term shock horror media coverage, and in some cases are an improvement upon the situation in China. Foreign nationals are now allowed to directly invest into the Indian stock market while profit repatriation from India has become far easier. It is understood that the India experience may come as a shock to some more used to the China way of doing things, but that doesn’t mean some serious investment isn’t going on. Lakshmi Mittal, the wealthiest man in Britain and India, has stated that India remains a priority destination for investment despite political issues and, as indicated, the driver continues to be the population dividend and the wealth of India’s middle class.
India’s economy grew at 6.1 percent in Q4 last year, the slowest pace in three years, but the underlying fundamentals will not change the trend that makes India, along with China, the world’s two most cost-competitive nations, and that it is likely to overtake China later this century as the world’s largest economy.
Clearly, India is not going to go away and it is becoming more attractive. We compared the costs of manufacturing in China (Dongguan) with a similar operation in India (Chennai) here. With both a wealthy middle class and a young workforce, the demographics alone make the case for a very serious look at what remains one of the world’s fastest growing economies.
Further information concerning comparisons between China and India can be obtained from our articles Why India Matters and China’s Indian City Equivalents and the Reasons for Going, while our business cultural study on the differences between operating a company in India as opposed to China can be found in the two-part series Indianizing a China Business. India remains the number one destination foreign investors should be thinking about when it comes to looking beyond China. I should know, our own practice has been there for six years now and 2011 saw revenues increase by 62 percent. It’s time to get into this democratically ebullient, yet vital market.
The hype about Vietnam has also been misleading, with much talk of China-based businesses upping sticks and relocating. That has happened (mainly in the south), but not in the droves originally feared by the Chinese, and certainly not to the extent whereby Vietnamese domestic wealth becomes of huge interest as a consumer market.
There have also been gripes concerning inflation and the occasional strangely thought-out government policy concerning the economy that makes headlines. What has been going on is that as manufacturing capacity to service the China market has been used up, increased manufacturing costs in China have driven that capacity to Vietnam. This is a trend that will continue, not least because Vietnam is a member state of the ASEAN free trade bloc, which allows for full passage of goods and services between member nations by 2015, and will see ASEAN emerge as China’s largest trade partner by that time.
Put simply, using Vietnam as a manufacturing base makes sense to create capacity to service the China domestic market, as well as other emerging markets across ASEAN. With labor costs roughly one-third of those in China and logistics improving, Vietnam as a service center for producing for Chinese consumers and to some extent for export elsewhere (given a still sluggish global economy) makes a lot of sense and this for now is what is driving investment there.
It’s very early days for Myanmar of course, but one that we are keeping an eye on. My colleague Alberto Vettoretti is attending a Hong Kong General Chamber of Commerce Mission to Myanmar as I write, and the general consensus is that change may come fast. Dezan Shira & Associates will be there if that occurs, but in reality a huge amount of reconstruction needs to take place in a country sandwiched between China and India, yet having had no infrastructure development since World War II.
Corporate governance and corruption issues remain highly problematic, yet a trigger may arise as a pointer to involvement in the country as and when Burmese state-pwned enterprises are listed in either the Bangkok or Singapore Stock Exchanges. When that happens, it is suggestive of some semblance of accountability and transparency. Myanmar is listed as a least developed country (LDC), yet the LDC Asian nations have also contributed to the highest levels of growth in exports to the Asian giants of China, India and Thailand over the past 12 months, and at a rate twice as fast as global averages. It remains early days, but we’ll keep readers posted on developments as they occur.
Overall, the trend for Asia is highly positive, not least due to the ASEAN free trade agreements that are about to kick in and the fact that both China and India have tax agreements with the bloc. That alone should be kick-starting foreign investment into the region, and not just China. China has long been preparing its own companies for doing business with ASEAN and has set up a specific China-ASEAN trade service center. China-based manufacturers, including foreign investors, should be taking note of these trends and beginning to act on them, as all the signals are there that a shift in trade patterns across Asia is now firmly underway. We’ve already commented on the phenomena of becoming too fixated on China alone, and we published a list of ASEAN nations and their GDP growth patterns here.
The fundamental trend is for investments to move from China to elsewhere in Asia, and businesses will need to research and adapt to this new emerging Asia reality.
Chris Devonshire-Ellis is the founding partner of Dezan Shira & Associates. The practice maintains 20 offices throughout Asia, including China, India, and Vietnam. Please contact the firm at email@example.com for assistance.
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