China Demographics Dictate India as Global Manufacturing Hub

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Op-Ed Commentary: Chris Devonshire-Ellis

Sept. 27 – China’s rapidly aging population is set to dramatically shrink its workforce and effectively pass the baton to India as the world’s manufacturing hub, according to analysis from Morgan Stanley and the Global Times. China’s one child policy, which has seen it manage its population over the past three decades, is now finally kicking into the work pool and reducing the number of Chinese workers.

The Global Times says, “2015 will mark the beginning of the end of China’s demographic dividend.” The World Bank also echoes those sentiments, predicting that China’s GDP growth will fall to 7.7 percent in 2015 and to 6.7 percent by 2020. Morgan Stanley expects India’s growth to head in the opposite direction and to surpass China’s growth two years from now. Personally, I suspect that when speculation and manipulation is stripped out of China’s current GDP growth rates, India’s economy is already growing at a faster pace than China’s.

China’s aging workforce is already having an impact on the nature of conducting business in the country. It was in recognition of this that China strengthened its labor laws two years ago, making it more difficult for employers to lay off aging staff without having to pay significant compensation, based on years of service, for loss of employment. That move effectively made employers financially responsible for at least part of the nation’s pension requirements. China will possess 200 million people above 60 years in 2015, and workers coming to retirement age are expected to add an unprecedented 10 million retirees per annum to that figure. That loss of workforce is already starting to make China more expensive, and this trend will continue. India, however, is poised to provide the vast bulk of the global labor pool. By 2020, the average Indian will be 29, while the average Chinese will be 37.

The data has interesting repercussions.

China is becoming a consumer market to sell to rather than a global manufacturing hub
This is often quoted as the dynamic that will maintain China as a major destination for foreign direct investment. While this is true, the nature of selling to China is still wrapped in many problems, especially for overseas investors. The China market is prone to protectionist measures, and with the Chinese government itself still a major shareholder in many Chinese state-owned enterprises, foreign investors will have an increasingly tough time competing with them. Additionally, selling to China requires a profound knowledge of Chinese culture and tastes. Then there’s the stranglehold that China has on much of its domestic logistics industry. Selling to China is fine, but it is a path fraught with difficulties. The successful foreign investor will have deep pockets and a sound Chinese joint venture partner to help them. The domestic expertise and finesse to assist sales of products to the Chinese consumer will invariably require Chinese local expertise. Brands well-known globally will have to adapt marketing, positioning and even recipes to fit the Chinese model. As I pointed out two months ago, white goods need to become red.

India’s infrastructure woes have become its opportunity
The most common complaint about India is its infrastructure, which coupled with a generally moribund economy for 40 years after independence, and some quite extreme weather conditions, has meant a lack of investment in virtually everything. That is already changing, as airports are fixed, bridges spanning oceans are built, and city subway networks are opened. For contractors, architects and engineers who made good in China, India is the new opportunity. A staggering US$500 billion is being spent in the next three years in India, and foreign businesses involved in any aspect of infrastructure development are scrambling to get into the market.

Global sourcing is relocating
China will still maintain various sectors for sourcing in which it has specific expertise, and of course there is still its domestic market to service. But the sheer weight of economics makes India the future tiger of global procurement. Wages are significantly lower than in China, and our recent Asian Comparator survey of wage levels and related costs in China, India and other Asian countries consistently showed India as excellent value for money in the labor pool. Sure there are comments about quality and that infrastructure bugbear again, but China went through the same issues twenty years ago. “Made in China” was a poor brand in the 1980s. India’s infrastructure is not as bad as is made out either, and the cost savings are there to be had. Relocating a business from China to India is also, from the legal, operational and financial perspective, rather easier than is generally considered, as our report earlier this month demonstrates. China meanwhile, continues to become more expensive, as the Communist China Price re-establishes a policy of charging foreign investors more.

I took the matter up over the weekend with a number of expatriate CEOs working in India. Crucially, they had also spent time in China – a minimum of five years each, and some up to ten – running businesses and foreign invested enterprises. Now they were in India and all working with significant businesses with global turnovers in the tens of millions to billions of dollars. When it came down to it, they said, China was easier to do business in than India. China was better at organizing big projects, and the labor pool was disciplined and productive in ways that India was not. However, when it came to the smaller details, India was far easier to live in than China. Cultural differences, languages, and more acceptance by Indians than Chinese of their overseas background and experience all made them feel more comfortable in India than in China. However, although India was more difficult at first base to do business in than China, the feeling was that was the precise reason they all had MBAs and years of management experience – they were being paid to solve such problems, and therefore it was “just part of the job.” Asked whether they would prefer to live in India or China (Mumbai was regularly compared with Shanghai) the surprising conclusion was that India was preferable. Several executives expressed a desire never to return to China. The conclusion therefore is simple: “India is more awkward than China when implementing large projects. But it is not insurmountable, and I am well paid precisely to solve such issues.”

Clearly, the attitudes are changing, along with the demographics. China may huff and puff and posture all it wants, but as it becomes increasingly belligerent towards its neighbors, more expensive, and apparently quite willing to blame foreigners for taking all the money out of the country in response to its economic woes, it is progressively becoming less tolerant of foreign investment. India is the reverse. China cannot, for once, turn back the tide that its long-standing one child policy has now revealed, and it is akin to being King Canute to suggest it will. China’s demographic advantages are coming to an accelerating end, and it is India that is set to take up the slack.

Chris Devonshire-Ellis is the principal and founding partner of Dezan Shira & Associates, establishing the firm’s China practice in 1992. The firm now has 10 offices in China. For advice over China strategy, trade, investment, legal and tax matters please contact the firm at The firm’s brochure may be downloaded here. Chris also contributes to India Briefing , Vietnam Briefing , Asia Briefing and 2point6billion

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