ChinaGlare – Has Your China Business Become Too China-Centric?

Posted by Reading Time: 13 minutes

ChinaGlare can diminish the ability to properly assess other markets

ChinaGlare (chī-nə glair): When an Asian regional business, financial opportunity or development of similar magnitude to the economic situation of China at point of WTO entry occurs, but is overlooked due to the over-focusing of an individual or business exclusively upon developments within China as an investment market.”

Op-Ed Commentary: Chris Devonshire-Ellis

Apr. 13 – One of the key peculiarities about operating in emerging markets is one of the issues that makes them so appealing – not only are they exciting from an entrepreneurial standpoint with mass potential markets, but each one possesses a vibrant, almost exotic culture. Just the BRICS alone make up a Lonely Planet traveler’s best dream – Brazil, Russia, India, China and South Africa all wrapped up in one convenient package. Of these, China as an emerging market is arguably the most familiar. A benchmark is to ask someone, say in the United States or Europe, if they have ever been to China and a large percentage will have traveled there personally or will know someone who has. That is less true of the other countries on the BRICS list.

China then, as the most familiar, has also in many ways attracted the most attention. The mysteries of the Orient, a 5,000 year old culture, the still recent days of cultural revolutionary isolation, yet a massive and diverse country, a totally different language, bundled up with a smiling population all seemingly welcoming to foreigners. Shanghai, for example, is a wonderful city yet has developed into a foreigner’s gateway to China – it’s the easy option for Westerners to understand as an introduction to the rest of the Middle Kingdom, almost like a China for beginners. That wasn’t an accident. It exists to ease the passage of foreign businesses and to prepare them for the vastness of its heartland.

Foreign businesses and expats, many of them surfing along the top of the huge waves of globalization and chasing a promised market of 1.3 billion have, often choose China as their first venture overseas, or certainly their first in Asia. Seduced by success, the relative ease of doing business, a low tax rate, and a tolerant attitude to the worst expatriate excesses, it has also developed as a haven for MNCs. Many now generate a large percentage of their profits from their China operations. Interracial marriages have been skyrocketing as ties between overseas expats and local Chinese strengthen, and quite properly many will hear nothing said about what is fast becoming their primary residence. Indeed, over the next 10 years, we will see a new phenomenon arise – Westerners of a certain age choosing to spend their retirement in China, and to live out their days in this most enigmatic of countries.

Coupled with that is a resurgence in national pride. China won the most gold medals at the last Olympics, and Chinese stars abound in international arenas around the world. Just as Yao Ming wowed the NBA, so did Yujia Wang in her tiny dress at the Hollywood Bowl. Rachmaninoff never looked so sexy. Ai Weiwei, the naughty boy of art is globally acclaimed and exhibits at the Tate Modern, while Yue Minjun’s smiling faces now sell at famous auction houses for millions of dollars. Chinese contemporary writers make books about recent history in Wild Swans, or even bringing up today’s internet kids into Tiger Mom best sellers.

Not for nothing do the Chinese people have plenty to be proud about, and they deserve it. Chinese contemporary culture is now globally available. It’s also front page news – nearly everywhere today around the world a story with a Chinese focus will be featured. China isn’t just big, it has become mainstream on a global scale.

There is, however, danger here in terms of international business development. China’s star is shining so brightly that it tends to have the capacity to drown out all other stories. There are two sides to this, and the Chinese government – still in charge of their media – exploits this to the fullest. Take, for example, the position over the claims in the South China Sea, which impact upon three major neighboring countries – Vietnam, the Philippines, and Malaysia. Popular media has long promoted the Chinese claim to 90 percent of the South China Sea, and China has rattled swords about it. Yet in reality, China controls just 13 percent of the area. That’s a fact lost among the brilliant political radiation of China’s coverage of the issue.

But these are territorial disputes, and not so much to do with business, unless a military clash develops – which could easily happen in fact. If so, that should be no surprise, but would be given the lengths to which the Chinese side of the story has traction over all others. China is overdue a problem, as we haven’t had one since Bird Flu and on average we are behind schedule given that SARS, the Asian Financial Crisis, spats with Taiwan and U.S. spy planes all came before. Many people have forgotten the need to hedge, and the nation still has structural, political, economic and social weaknesses. China’s media machine glosses over these matters, and the less wary remain without inoculations.

But let’s stick with commerce. A more positive aspect of China has of course been its fantastic growth rates. Ten percent economic expansion for the past decade? Check. Creation of a middle class consumer base of some 250 million? Check. The source of many large profits from overseas investors? Check. Smiling sales and financial directors can look at their China investments and their team there with beaming eyes and brilliant white enameled (and probably capped) teeth, and await corporate pay rises as their China policy pays off for the board. Stock prices soar, profits increase, and everyone gets a bonus. Chinese staff are happy, and proud of their achievements. So too are the expatriates, more bonuses, a nice lifestyle and an easy ride to riches. “China is where it’s at!” they’ll say – and “This is the place to be.” And they’ll be right.

But it’s not the only place to be. And that gets overlooked in the glare of China’s brilliance.

Actually, that old Frank Sinatra song comes to mind for introducing the next part of my essay. “If you can make it in New York, you can make it anywhere.”

The same is almost certainly true of China. It’s never been that simple to be successful in China, it always takes a great deal of effort, determination and hard work. It’s not entirely surprising that after making it in New York, people settled down there. But how many of them actually left New York to “make it anywhere?” Probably rather few. And the same goes for China. For an individual based there, that’s OK. But it’s not OK for an MNC chasing sustainable profits and new opportunities, and such businesses should be well aware of an employee tendency in China to talk China up and diminish the potential of other markets.

What other markets? I can only speak of Asia, because that’s what I know, although having been in the United States recently I am aware that Brazil is getting interesting. However, that’s also closer to the United States than China is. Head offices can keep track of that, but with many investors heavily into China, that ChinaGlare gets involved again. So what is going on elsewhere in Asia?

India
India often gets a bad rap from the media, and especially from China where a border war in 1962 has tarnished relations for years. Many Chinese perceive India as being especially dirty and poor, while global media is only now waking up to the realities.

India today is a vibrant democracy, with a population about to exceed that of China and a growth rate almost certainly higher. However, rather like China 20 years ago, the country is undergoing a period of reform. Unlike China, it is played out in the full spotlight of democracy and a media that tends to view important issues only from the short term viewpoint. Recent international business media has concentrated on problems such as the Vodafone tax case (in which an offshore transaction may attract a sizeable tax bill and put off FDI), the 2G telecoms licensing debacle (in which foreign investors bought 2G networks at government auction, spent billions on infrastructure only to have licenses rescinded due to a faulty bid process), and concerns over faltering market liberalization to foreign investment (most notably in the retail sectors).

That’s all bad on face value. However, what it really indicates is that India is getting serious reform onto the statute. The debates above are all to do with additional clarifications being required, a position that India incidentally shares with China. Often times, China has issued a set of laws, only to leave serious gaps and questions lying open until the “implementing rules” are issued – sometimes 12 months later. India is no different in this regard except that it is democratic and the media like to express opinions. In China, media is state-controlled so the debates do not get exposure. What really counts in India is whether the government is getting liberalization and market freedoms into law. And the answer is “Yes.”

Here’s the real deal for example on Indian retail: single brand retail is permitted with 100 percent foreign ownership. You can see the latest on that here. Multi-brand retail is currently limited to 49 percent ownership, but the government is collating data to move that along to more positive territory. You can read about that here.

So the media talks up the problem, but it is in fact in the process of being clarified. That’s not unreasonable, and none of the issues raised above are particularly valid reasons to be put off India as an investment. How do I know? Because I established my own firm there six years ago, and last year’s revenues increased by 62 percent. It’s also interesting to note that while China’s domestic aviation growth last year was 5 percent, India’s reached 12.3 percent and is now the second fastest growing aviation market in the world, after Brazil.

A further, and perhaps the more important, aspect to India’s development lies in its demographic dividend. At the commencement of China’s growth curve 20 years ago, the average age of a Chinese worker was 23. Now it is 37. The average age of an Indian worker today is 23, and that single demographic fact will spur Indian manufacturing for the next two decades. With an existing middle class of 250 million consumers, MNCs should be looking beyond the democratic arguments and getting involved in the country.

As Bill Clinton nearly said: “It’s the demographics, stupid” and no one can make India’s massive workforce disappear. Meanwhile, China-India trade is expected to increase 30 percent in the next three years – vastly more than global averages. So if you’re not yet considering the other billion people consumer market – that of India – you’re being blinded by ChinaGlare.

India Briefing News
Our magazine and regular news service about doing business in India. We cover topics relating to the Indian economy, the market in India, foreign direct investment and Indian law and tax.

For advice concerning foreign investment into India, please E-mail india@dezshira.com.

ASEAN
ASEAN is a trade bloc made up of 10 Asian countries: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. They are important because as a bloc there is a huge amount of trade between them, with an all-inclusive, goods and services free trade ASEAN Economic Community due for implementation by 2015. There are increasing double tax treaty agreements with ASEAN (both China and India have signed these) and a full-on free trade agreement expected to be signed into law between ASEAN and China, India, Japan, Australasia and South Korea in 2013. Add that to ASEAN’s own integration into a full free trade bloc in under three years, and you have the creation of a massive area of duty-free movements of many goods and services on a pan-Asian basis.

ASEAN combined has a population of some 600 million, and an average worker age of 24. With an international financial hub in the form of Singapore, and strong manufacturing nations such as Vietnam, Thailand and Malaysia, it also covers emerging countries such as a booming Indonesia and up and coming potential players such as Cambodia and lately, Myanmar. While India may be more advanced in many areas as a market, ASEAN is set to be a player in its own right. ASEAN trade with China is three times that of India, and has, like India been rising at a very fast rate – 37 percent in 2011 alone.

While the tendency in China is to view Asian nations on a bilateral basis – stemming from central government policy – ASEAN’s significance lies in its proximity, its ability to unify Southeast Asian logistics and trade, and its tax and free trade treaties. If you’re not aware of what ASEAN does and its impact on China trade, you also suffer from ChinaGlare.

2point6billion.com
Our popular emerging Asia website and commentary dealing with China, India and other regional multilateral development, trade, culture, investment and politics.

For advice concerning foreign investment into ASEAN, E-mail asean@dezshira.com.

Vietnam
A member of ASEAN of course, this Southeast Asian nation borders Southwest China and has been largely responsible for removing much of South China’s textiles and light manufacturing industries. Low employment and land costs, increasingly effective infrastructure, low tax rates, and most favored nation status with the United States has positioned Vietnam as a manufacturing alternative to China.

While China as a consumer market booms, contradictions arise in that Chinese manufacturing is becoming more expensive. Vietnam is attracting that additional capacity, and with the China-ASEAN DTA in effect and about to be extended into a full free trade agreement next year, Vietnam is becoming a magnet for the development of additional manufacturing facilities and capacity. If you don’t have alternative plans for mitigating against China’s increasing labor costs, you are also blinking in the ChinaGlare.

Vietnam Briefing
Our magazine and regular news service about doing business in Vietnam. We cover topics relating to the Vietnamese economy, the market in Vietnam, as well as foreign direct investment and Vietnamese tax and legal issues.

To contact Dezan Shira & Associates for local advice, E-mail vietnam@dezshira.com.

Singapore
Singapore is another member of ASEAN and is Asia’s financial hub. While 20 years ago, Hong Kong was internationalized, over the past decade it has migrated more into a China service play and a center for China’s foreign investment. That’s been more than enough to secure Hong Kong’s future, and the very nature of its service industry, but it has meant that Singapore has developed alone as a bona fide Asian hub. As a member of ASEAN it provides both an excellent base from which to reach out into the bloc, and with free trade expansion looming across Asia, China and India within the ASEAN framework, Singapore is set for serious upgrading as a world class financial center – a status it already enjoys. It, rather than Hong Kong, will become the Asian New York or London, simply because of its wider geographical and political spread.

As a financial services and operational hub, Singapore has long been in the game and provides a transparent, easy-to-navigate framework for foreign investors. Transparency International rates Singapore as the 5th least corrupt country in the world (China: 75; India: 95; Vietnam: 112), making it an excellent base from where to keep an eye on these emerging markets. With a low corporate income tax rate of 17 percent and profits tax incentives for SMEs, Singapore additionally charges no income tax on profits realized from outside the country. If you weren’t sure that Singapore had overtaken Hong Kong as an investment hub for Asia, you didn’t put your ChinaGlare shades on.

For investment advice into Singapore, please contact singapore@dezshira.com.

Summary
The ChinaGlare effect doesn’t diminish China, it just washes out the importance of developments that are happening elsewhere. Thailand, for example, is booming and Bangladesh is also developing as an important hub for the global textiles industry.

Further afield, Russia recently joined the WTO – an event that has not generated much press in the wake of the media’s apparent dissatisfaction with Vladimir Putin, but one that will see Russian goods and services expand globally (We also publish Russia Briefing).

Multinational businesses have, for the first time in history, the ability to target and sell to two consumer markets that are one billion strong at the same time. ASEAN adds another 30 percent on top of that. While businesses in China can get caught up in their own success, and often keep total focus on it, it can be easy to forget that other opportunities lie elsewhere. It also makes basic strategic sense not to put all your eggs in one basket. If there is no foresight to hedge China, for better or for worse – that’s another example of ChinaGlare. In the meantime, the ChinaGlare phenomena is a useful benchmark to break out of the mold, buy some cool inoculating sunglasses, and take a look at the rest of Asia.

Where to start

ASEAN
Singapore is the regional financial and services center with an attractive tax rate and excellent business services environment. It makes a lot of sense if intending to establish operations elsewhere in ASEAN (Vietnam or Indonesia for example) using a Singaporean holding company.

India
It is possible to establish a presence in India without committing huge expenses. A liaison office performs the same function as a representative office in China, and permits the hiring of local staff and the ability to organize market research, QC and liaison activities.

Chris Devonshire-Ellis is the founding partner of Dezan Shira & Associates. The firm was founded in 1992 in China, and now has 11 China offices, 5 in India, 2 in Vietnam and one each in Hong Kong and Singapore. The practice provides regulatory investment, legal and tax advice and planning across Asia, in addition to due diligence, strategic and ongoing tax, accounting and compliance services to foreign investors in the region. He can be contacted at chris@dezshira.com The firm’s website is at www.dezshira.com and their brochure is here.

To obtain a complimentary subscription to our Asia Briefing weekly email round up of the week’s top business and regulatory news from all of our websites, please click here.

Related Reading

Doing Business in China
Our 156-page definitive guide to the fastest growing economy in the world, providing a thorough and in-depth analysis of China, its history, key demographics and overviews of the major cities, provinces and autonomous regions highlighting business opportunities and infrastructure in place in each region. A comprehensive guide to investing in China is also included with information on FDI trends, business establishment procedures, economic zone information, and labor and tax considerations.

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.

Doing Business in Vietnam
The inaugural edition of Asia Briefing’s regional business guide “Doing Business in Vietnam” – offering business-minded individuals an up-to-date reference source for all of the key issues concerning setting up and successfully operating a business in the country.

The China Alternative
Our complete series on other manufacturing destinations in Asia that are now starting to compete with China in terms of labor costs, infrastructure and operational capacity. Our last report focused on India.

Singapore as a Holding Domicile for Asia

The Three-Pronged Asia Investment Strategy

U.S. Exports to China Hit US$100 Billion For the First Time