Economy & Trade
Has your business factored in the implications of the China-ASEAN Free Trade and China-Vietnam Double Tax Agreements?
Next year will be an important one for manufacturing businesses in China. Fast approaching is something called the “ASEAN Economic Community” (AEC) 2015 deadline, which entails Cambodia, Laos, Myanmar and Vietnam all coming into line with the ASEAN community on tariff reductions. Of these, Vietnam is the big player, with a well-developed border with China, ports up and down its east coast and very close proximity to South China. Vietnam’s AEC compliance means that, under the ASEAN Free Trade Agreement with China, 90 percent of all Vietnamese manufactured products will be permitted to enter the China market duty-free.
With even Xinhua on the ball with what is about to happen, your business had better be as well. Vietnam’s lower operating costs – in terms of both land-use rights and worker salaries – mean that inevitably, production of low and medium tech products will leech away from China into ASEAN, and Vietnam in particular. In fact the shift is already taking place – while China’s trade with the rest of the world has grown by 1.6 percent this year, bilateral trade with ASEAN grew by 6 percent.
This latter figure has grown by leaps and bounds in recent years, in line with the development of the China-ASEAN Free Trade Agreement. In 2002, when the FTA was signed, trade between the two jurisdictions was just US$55 billion. This year it is expected to reach US$420 billion, and AEC compliance is expected to push it further, up to US$500 billion in 2015.
RELATED: The Competitive Advantages of Manufacturing in Vietnam
Here is a checklist of the issues your China manufacturing base will face as a result of this:
1) Are the products you are manufacturing in China also included under the China-ASEAN FTA?
2) Have you examined the implications for your China business of the China-Vietnam Double Tax Agreement?
If not, then it would be wise to seek professional advice to examine its implications for your China manufacturing operations. This should include:
3) A briefing on the implications for your company of the China-ASEAN FTA and Vietnam-China DTA;
4) Cost analysis of manufacturing overheads as a comparison between China and Vietnam
5) Infrastructure analysis on production capabilities between China and Vietnam
Based on these, you will need to make a corporate decision on what to do next. Typically, we have found that China-based manufacturers relocate part – not usually all, although it does happen – of their production to Vietnam. Less complicated component parts can be imported from Vietnam, with total assembly using more complex China-made parts being conducted in China, then resold onto the domestic market.
The harsh reality is that the supply chain is shifting – fast – and your China manufacturing base may start to become uncompetitive as early as next year. Now is the time to be examining the possibility of this, and looking hard at the Vietnam option. Your future as a profitable business depends on it.
Chris Devonshire-Ellis is the Founding Partner of Dezan Shira & Associates – a specialist foreign direct investment practice providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam, in addition to alliances in Indonesia, Malaysia, Philippines and Thailand, as well as liaison offices in Italy, Germany and the United States. For further information, please email firstname.lastname@example.org or visit www.dezshira.com.
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Manufacturing in Vietnam to Sell to ASEAN and China In this issue of Vietnam Briefing Magazine, we introduce our readers to manufacturing in Vietnam as a key part of their business strategy within the ASEAN region and beyond. Specifically, we explain the new ASEAN Free Trade Area, outline what foreign investors can look forward to when creating their manufacturing presence in the country, and introduce the country’s key tax points.
ASEAN’s Investment Horizons: Key Industries for AEC 2015 In this issue of Asia Briefing, we forecast the effects of ASEAN Economic Community on foreign investment into the region in the lead up to 2015. Following this, we highlight what is happening in some of ASEAN’s hottest industries for investment, including electronics, information and communications technology, textiles and medical devices. Lastly, we examine the growing potential of bilateral trade between ASEAN and India in light of recent historic developments in the latter.
Double Taxation Avoidance in China: A Business Intelligence Primer In our twenty-two years of experience in facilitating foreign investment into Asia, Dezan Shira & Associates has witnessed first-hand the development of China’s double taxation avoidance mechanism and established an extensive library of resources for helping foreign investors obtain DTA benefits. In this issue of China Briefing Magazine, we are proud to present the distillation of this knowledge in the form of a business intelligence primer to DTAs in China.
Manufacturing Hubs Across Emerging Asia In this issue of Asia Briefing Magazine, we explore several of the region’s most competitive and promising manufacturing locales including India, Indonesia, Malaysia, Singapore, Thailand and Vietnam. Exploring a wide variety of factors such as key industries, investment regulations, and labor, shipping, and operational costs, we delineate the cost competitiveness and ease of investment in each while highlighting Indonesia, Vietnam and India’s exceptional potential as the manufacturing leaders of the future.
“One country, two systems” is fast running out of special treatment favors
Apartment Block in Tai Po, Hong Kong, in cheaper area of the territory, near to border with Shenzhen. Cost of 750 sq. ft. apartment: HKD6.2 million. Mortgage payments per month (20 years) HKD22,000. Average salary of Hong Kong Office Administrator per month: HKD21,000.
Op-Ed Commentary: Chris Devonshire-Ellis
On the afternoon of June 30th, 1997, I walked across the Shenzhen border at Louwu and into Hong Kong, taking the MTR straight into Central. There was nothing remarkable about the trip per se; I had completed it hundreds of times previously, with Dezan Shira & Associates offices already well established in both cities. Yet the date was of significance – it was the last day of Hong Kong being under British administration. At midnight, it would all return to China.
At that time there was doom and gloom. To many, China was still very much an unknown quantity. Fortune magazine had run a cover story, “The Death of Hong Kong” and two years previously, Jardines, the old British trading hong, and then the most powerful company in the territory, had redomiciled from Hong Kong to Bermuda, and thousands of Hong Kongers were acquiring secondary passports.
Today, the pressure is not so much directly about democracy, but the impact of decades of poor governance and neglecting the needs of Hong Kong’s population. This is manifesting itself in a desire to have a greater say, or at least be governed by leaders who can provide Hong Kong’s residents with a future and the ability to sustain themselves in their own city. The problem is that even this most basic of rights is being eroded. Continue reading…
By Rainy Yao and Matthew Zito
SHANGHAI – On the occasion of the one-year anniversary of the Shanghai Free Trade Zone (FTZ), the State Council has revised and implemented a slew of administrative measures related to foreign-invested enterprises (FIEs) in the Shanghai FTZ, as contained in the “Regulations on International Maritime Transport”, “Regulations for the Administration of the Salt Industry”, and “Catalogue of Industries for Guiding Foreign Investment.” These consist of liberalization measures for FIEs in terms of business scope, qualifications and foreign equity ratios.
Based on these adjustments, wholly foreign-owned enterprises (WFOEs) established in the FTZ have been newly approved to participate in industries such as petroleum exploration, real estate brokerages, and small-capacity motorcycle manufacturing.
In many cases the revisions are subtle, but they are absolutely not to be overlooked. For foreign investors in niche industries, even a small change in the wording of industry restrictions can mean the difference between being able to operate in the world’s second largest economy and being locked out of China. Indeed, criticism of the Shanghai FTZ as lacking any substantive innovation ignores the trees in search of a forest.
RELATED: Shanghai FTZ Revised Negative List Introduces Targeted FDI Reforms Continue reading…
The China Price is Dead. It is the Asia Price that Counts.
Op-Ed Commentary: Chris Devonshire-Ellis
As we move into the tail end of 2014, many businesses are now starting to plan their China strategies for the forthcoming year. 2015 will be a significant year in Asia, with numerous trade development and incentive deadlines coming to fruition. These will have an immediate impact upon foreign investors in China, and in many cases will necessitate a change in business model.
While much media attention has concentrated upon the U.S.-led Trans-Pacific Partnership, this has yet to be finalized and potentially may never be so. Meanwhile, other agreements, which do not include the United States as a signatory, will ultimately shape the way that American and other foreign investors plan their 2015 strategies for China and beyond. Chief among these is the ASEAN Economic Community (AEC) compliance deadline that kicks in at the end of next year. Far too many China-focused executives, especially within SMEs, are blissfully ignorant of what this means and the impact it will have. Yet ignoring it could prove fatal.
Briefly stated, the AEC agreement reduces tariffs on products manufactured in ASEAN nations – and subsequently exported to China – to zero. This is due to affect some 90 percent of all products. Although countries like Indonesia, Malaysia, Philippines, Singapore and Thailand – the so-called “ASEAN 5″ – are already in compliance, others are not. Of these, Cambodia, Laos and Myanmar can effectively be written out of the manufacturing/sourcing equation, as for the most part their infrastructure problems continue to threaten the sustainability of production. Their day will come in a decade or so. Continue reading…
SHANGHAI – The free trade agreement (FTA) signed between Hong Kong and Chile will come into effect on October 9, according to an official announcement. The agreement, initially signed in September 2012, is Hong Kong’s first to be signed with a country outside of Asia or Europe. Its far-reaching provisions cover bilateral trade in goods and services, as well as investment, and entail commitments beyond those required by both parties’ membership in the World Trade Organization.
Chile will remove import tariffs on roughly 88 percent of scheduled items, and eventually remove tariffs on an additional 10 percent of items through 2017. The remaining 2 percent of tariff lines to be left untouched represent national priority industries such as cereals, sugars, and iron/steel components.
RELATED: Industry Focus: Importing Wine into China Continue reading…
When nearly one year ago a US business executive received word that his company was flatly denied membership to one of China’s biggest industry specifications and standards associations, he was left with many troubling questions. Were other companies turned down also? Was his company being singled out? But what troubled him most was the reported reason his industry-leading company was rejected: foreign companies were not permitted to join.
Since then, the executive says his company—a US-China Business Council (USCBC) member—has lobbied many times for reconsideration, but its application continues to be denied.
As a result, he says that competition with Chinese firms is proving to be the greatest challenge his firm is facing in the China. And he isn’t alone: After a steady ascent in the rankings, competition with Chinese firms is now the top challenge for American companies doing business in China. According to the USCBC 2014 member survey, US businesses say that they are facing increasing numbers of Chinese competitors who often enjoy preferential treatment over foreign firms.
This is echoed by the US executive. He says that it is unequal treatment in government regulations, not competitive Chinese goods and services, that makes this challenge so difficult to tackle. He says that Chinese companies striving for international recognition—and the central government—are driving these kinds of policies. “In my opinion, China wants nothing more than to have a brand similar to Lexus or Nikon,” he said. “And it’s going to be difficult with that sort of approach.”
The top challenge
As China’s economy has grown in size and strength, so have its domestic companies—both private and state-owned enterprises (SOEs). The competition American businesses face from their advantaged Chinese counterparts has grown stronger—and more pressing due to the recent slowing of economic growth in China.
Robust competition in itself is not a concern for foreign companies doing business in China, according to the 2014 survey. American companies are accustomed to strong competitors, which they face in markets all over the world. However, competition in which one group of companies is favored over othersis a significant concern, say respondents. While many have focused on preferential treatment that Chinese state-owned enterprises (SOEs) receive, survey data show that the issue is not ownership structure, but simply nationality. Chinese companies, regardless of ownership, receive benefits that foreign companies cannot.
In addition to membership access to industry associations, the USCBC member company executive also points to the Chinese government procurement law as a stumbling block for foreign companies. He says that the law’s regulations heavily encourage the purchase of Chinese goods and services on both business-to-consumer and business-to-business levels. What hurts his company the most is a regulation that forces state-owned enterprises to purchase exclusively from Chinese companies—even if a superior option is available from a foreign firm—unless they can convince the government that they can’t purchase what they need otherwise.
One last challenge is the threat of investigation under China’s antimonopoly law. Although both foreign and domestic companies are being investigated, foreign companies appear to be facing increasing scrutiny. Eighty-six percent of survey respondents are concerned about the lack of transparency, due process, and other issues surrounding competition-related investigations.
Preferential treatment of domestic enterprise is not in the long-term interest of China or its companies, according to the survey. Access to preferential benefits does little to create the type of efficient and innovative companies that China hopes will lead its economy to the next stage of development. As senior leaders such as China’s Premier Li Keqiang have noted inpublic statements, Chinese companies will become internationally competitive only through increasing fair and robust competition in China’s market.
The list continues
This year’s top 10 challenges include many issues that have made the list in previous years, though the order changes from year to year. As with previous survey results, issues that move down in rank are not necessarily doing so because the situation has improved. Rather, those issues are most likely eclipsed by more pressing concerns. Overall, companies report that little progress has been made in addressing many of these persistent challenges.
For instance, cost increases dropped from the top slot to the fifth, despite separate survey data that indicates costs have not moderated in China. In fact, most respondents note that the challenges associated with cost increases have gotten worse over the past year. This same trend holds true of other policy related challenges.
To genuinely confront the regulatory issues that foreign companies continue to face in China, USCBC says that regulators must focus on major policy changes, such as the conclusion and implementation of a US-China bilateral investment treaty (BIT). Addressing this issue and others will help make real progress on challenges like competition, investment restrictions, uneven enforcement of laws and regulations, licensing, and national treatment. Without such bold leadership, says USCBC, the top 10 challenges are unlikely to see substantive change in the future.
American companies continue to view China as a top-five market, but the number of companies increasing their resource commitment in China continues to drop, according to the survey. Fifty percent of companies report plans to boost resources in China over the next 12 months, down from almost 75 percent just three years ago. Virtually no companies are cutting back on their operations in China, however. Those that are not expanding their operations in China are maintaining current levels and few are redirecting investments from China to other countries.
Almost three-quarters of companies saw an increase in revenue last year, with another 12 percent reporting flat sales. Only 15 percent of companies reported a decrease in revenue in 2013. Most companies anticipate that their revenue will increase again in 2014.
Overall, American companies remain profitable, but at lower margins, with 83 percent of companies indicating that their China operations are profitable. But companies have seen an important shift in China’s performance compared to overall company operations. Although improved from last year, the profit margin of China-based operations continues to be well below the highs that companies experienced prior to 2012.
So what’s squeezing profit margins? Along with rising costs, this year’s top challenge is the answer. Not only is this competition with Chinese companies under preferential policy unfair, says the survey, but it’s also hitting China’s foreign investors in their wallets.
How do we move forward?
The full survey report provides a detailed account of the challenges that American companies face in their China operations. USCBC says it is important to keep in mind the contrast that China presents for companies: an extremely difficult business environment along with a vital, growing market for foreign businesses.
By USCBC calculations, China is at least a $300 billion market for American companies—but it should be bigger. Depending on which source is used, US firms have invested around $70 billion dollars in China over the past 30 years. Chinese companies are only now beginning to ramp up their investments in the United States, which will create additional jobs and opportunities for the American economy as well as tax revenue for local, state, and federal governments.
It is vitally important that the United States and China get their commercial relationship right, rather than allowing these issues derail what is and will remain the most important bilateral relationship in the world, USCBC says. That will require policymakers on both sides to work toward solutions to mutual problems: those that US companies face in China and those that Chinese companies experience when doing business in the United States.
The bottom line
All of the challenges US companies face in China warrant attention and remedies, but none is more pressing than leveling the playing field with Chinese competitors, USCBC says. The business executive whose company was denied association membership agrees. He says he worries that denying companies based on nationality and not qualifications could lead to lowered standards that may hurt the industry overall and present future challenges to his business in China.
China Business Review is the official magazine of the US-China Business Council, a non-profit and non-partisan trade association that represents roughly 230 American companies doing business in China.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email email@example.com or visit www.dezshira.com.
Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.
Revisiting the Shanghai Free Trade Zone: A Year of Reforms
In this issue of China Briefing, we revisit the Shanghai FTZ and its preferential environment for foreign investment. In the first three articles, we highlight the many changes that have been introduced in the Zone’s first year of operations, including the 2014 Revised Negative List, as well as new measures relating to alternative dispute resolution, cash pooling, and logistics. Lastly, we include a case study of a foreign company successfully utilizing the Shanghai FTZ to access the Outbound Tourism Industry.
Adapting Your China WFOE to Service China’s Consumers
In this issue of China Briefing Magazine, we look at the challenges posed to manufacturers amidst China’s rising labor costs and stricter environmental regulations. Manufacturing WFOEs in China should adapt by expanding their business scope to include distribution and determine suitable supply chain solutions. In this regard, we will take a look at the opportunities in China’s domestic consumer market and forecast the sectors that are set to boom in the coming years.
China Retail Industry Report 2014
In this special edition of China Briefing, we provide an overview of the retail industry in China and the procedures for setting up a retail shop, focusing specifically on brick-and-mortar physical retail stores. Further, we have invited our partner Direct HR to offer some insights on the talent landscape in the retail industry, as well as tips for recruiting retail personnel in China.
Our Latest Round-Up of Business News Affecting China-Based Businesses Investing in Asia
In this edition of China Outbound, we highlight the growing importance of India in global investment trends, as supported by the launch of Prime Minister Narendra Modi’s “Make in India” campaign for promoting high-tech enterprises to invest in the country. At the other end of the spectrum, we outline why India is poised to inherit low value-added manufacturing to serve China’s domestic consumer market, and review the results of President Xi Jinping’s recent South Asian tour in terms of infrastructure investment in India and Sri Lanka. These projects, together with streamlined customs initiatives in China such as those in the Shanghai Free Trade Zone, will facilitate the smooth flow of both goods and investment between these two Asian powerhouses. Continue reading…
SHANGHAI – Chinese Premier Li Keqiang and Spanish Prime Minister Mariano Rajoy have signed business deals worth approximately US$3.8 billion in a bid to boost bilateral cooperation and economic growth.
On September 25, 14 agreements were signed between the two parties at a ceremony in Beijing’s Great Hall of the People, covering cooperation in areas including the film industry, nuclear power, telecommunications, finance, wind power, sea water desalination and tourism. Rajoy further urged that the two sides strengthen cooperation in the food and consumer industries, adding that few countries offer such a good investment environment as Spain with its open and competitive market.
Companies which attended the meeting included Spain’s largest bank, Banco Santander (SAN.MC), Zara and Chinese e-commerce magnate Alibaba Group Holding (BABA.N). Among the attendees, Huawei, the world largest telecommunication equipment maker, signed a cooperation agreement with Spanish telecommunications juggernaut Telefonic. Four of the 14 deals were signed in the field of energy, including a contract to supply China with nuclear safety products.
Li stated that the Chinese government attaches great importance to its relations with Spain and urged the two sides to continue expanding bilateral trade and accelerate growth. He also mentioned that the two countries should strengthen cooperation in areas such as energy, finance, biological medicine and the aerospace industry. Continue reading…