By Teja Yenamandra
Mar. 14 – One of our colleagues in Suzhou recently attended a presentation by McKinsey & Company on China and other emerging market alternatives as potential low-cost countries (LCC) from which to source. Their findings support what many of our staff believe – namely that while coastal China is a great LCC for a wide variety of industries, there are several other alternatives that will allow a company to cut operating expenses as well.
Before picking your destination, it’s important to first understand the nature of your business. Are you capital-intensive, low-skilled labor-intensive, knowledge-based, or resource-based? As an example, labor costs may be quickly rising in coastal China, but that may be less important if you find your business to be capital-intensive.
Other alternatives to coastal China for sourcing destinations include: inland China, Vietnam, and India.
As it stands, coastal China comes out on top for three key reasons:
- Relative ease of doing business; and
- Economies of scale.
The picture, of course, becomes complex when trends are considered. Wages are increasing rapidly, and the RMB has appreciated by roughly 3.8 percent against the U.S. dollar since June 2010. Both trends are expected to continue in the short and medium-term.
Inland China, by comparison, has a lower cost of labor, and foreign businesses are encouraged to go inland by local governments through preferential tax and aid policy. Land is also significantly cheaper in China’s hinterlands. Logistics, however, end up being costly, and operations in inland China are still subject to the same upward trend in the RMB. For more information on whether moving inland is right for you, see this month’s issue of China Briefing Magazine titled, “Operational Costs of Business in China’s Inland Cities.”
India, both politically and economically, is a very stable LCC, and enjoys economies of scale for manufacturing-oriented industry comparable to those that exist in coastal China. Logistics, however, remain difficult.
Vietnam’s land and labor costs are the least expensive out of the four possibilities, though such savings are offset by a lack of scale in both capacity and resources.
A basic analysis affords the following conclusions: if your company’s costs are heavily affected by economies of scale (e.g., refining, metals, automotive manufacturing), it makes economic sense to stay in coastal China, with an eye toward inland China in the near future.
If your firm requires low-skilled, labor-intensive work and large amounts of factory space, inland China and Vietnam may be attractive options offering comparatively low cost alternatives.
If your firm requires skilled labor, India’s massive number of yearly English-speaking college graduates creates a relatively inexpensive labor pool at a different part of the value chain. And despite what many allege about India’s lack of tenable linkages, its transport systems do rival those of inland China—and therefore are not to be severely discounted.
As with any major decision, read more than just one article about the subject of interest and make sure you have a solid business-plan in place. Also consider the impact it would have on your risk (would it increase it or spread it out?), the level of initial investment that is required, and exactly how long it would take to offset that cost.
Dezan Shira & Associates is one of Asia’s largest boutique professional service firms providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in China, Hong Kong, Vietnam and India. For advice on corporate establishment or market entry in any of these markets please contact firstname.lastname@example.org or download the firm’s brochure here.
Doing Business in China
China Briefing’s Doing Business in China title is the definitive business guide to one of the fastest growing economies in the world.
Doing Business in India
Doing Business in India provides a thorough and in-depth analysis of India, its history, key demographics and overviews of the states and union territories highlighting business opportunities and infrastructure in place in each region.
Establishing Business in Vietnam
In this issue of Vietnam Briefing, we focus on establishing a business in Vietnam, from the corporate and personal income tax regime, to the various registration procedures foreign investors must go through to establish a legal entity in the country.
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