Hedging China Manufacturing Through India Just Became Corporate Strategy

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India and Vietnam are becoming increasingly attractive for manufacturing as China costs increase and workforces become aggressive

Op-Ed Commentary: Chris Devonshire-Ellis

Jun. 26 – The regrettable – and somewhat absurd – instance a few days ago of Chinese workers demanding to be fired in order to gain compensation payments has gained traction around the world. However, while the unofficial hostage taking of the American manager may be shocking, the underlying trend is not that of Chinese worker discontent. The underlying trend is what sparked the situation in the first place – the U.S. manufacturer uprooting part of its China plant and relocating it to Mumbai, India.

When I first ventured Dezan Shira & Associates out of China some seven years ago, I got not a little flack over it alongside accusations of stupidity. China was doing just fine, and order books were full. Yet, when making executive decisions concerning the firm’s development strategy, I have always kept an eye on the demographics. It was obvious at the time (Chinese officials even said so) that China’s worker demographic of young, inexpensive labor, was drawing to a close. While India’s infrastructure was, and still is, nowhere close to that of China’s, the country did possess the one thing that China was starting to run out of – an up-and-coming available young workforce.

When explaining my decision to invest outside of China and develop elsewhere in Asia, and specifically India, I made the observation that what we at Dezan Shira & Associates were really good at were three basic things:

  1. We weren’t afraid of huge countries (a lot of people are intimidated by China);
  2. We were used to dealing with emerging markets and evolving laws and regulations (dealing with that is where our expertise come in – and knowledge of dealing with it generates our fees); and
  3. We knew our way around countries with large and young work forces (HR and payroll issues are hugely important when dealing with labor forces that can run into the thousands, as some of our clients have).

Having had a look at several other markets – I studied North Korea and Mongolia – the answer seemed obvious. At the basic level, we wouldn’t be intimidated by India, although we would have a lot to learn. Consequently, we set up offices simultaneously in Delhi and Mumbai, registering Dezan Shira & Associates as a consultancy practice there. Back in China, people thought we were nuts.

That’s not to say I didn’t make mistakes. I did. One was to assume that after what was at the time 15 years in China, I’d seen all the scams and difficulties that could possibly happen. That was naïve, and I also got ripped off a couple of times and had dealings with avaricious lawyers and conmen when getting started. I should also have concentrated full time on India instead of commuting between India and China, which is what I did for five years. Had I done the former, certain obstacles and challenges would have been avoided.

India, then, is largely the same as China – you need management keeping a daily eye on it or things can go wrong. When the cat is away, the mice will play is as true in Mumbai as it is in Shanghai. But these are par for the course, and part of the learning cycle. Today, we now understand how to both operate and not operate a business there – always vital for the true professional consultants. It’s easy to pontificate from an office in Seattle or New York. The real professionals – and the valuable on-the-ground advice and experience that comes with them – are those that are physically based in Mumbai, Beijing and so on.

Meanwhile, in the years since we first set up shop in India, the hedging of China has become a reality. Wages have increased dramatically, and the Chinese government has upped the ante on social welfare payments (an aging population requires more money) and has begun cracking down on foreigners working in China (competing with locals for management positions in a shrinking workforce). Although we have had our ups and down there, India has been developing and passing laws and regulations in the meantime that make it increasingly friendly to foreign investment – just at a time when China has become less so. India still has a way to go before it becomes the investment darling of the world, but there are definable triggers that will make it so:

  1. Passing of the long debated Tax Reform Bill – which will reduce income tax by 30 percent overnight (possibly 2014)
  2. Electing a government that has at least some semblance of majority to pass through much needed economic reforms (elections are next year)

India’s low-cost labor dividend is already in place and in pure numbers it is already larger than China’s. Goldman Sachs states that India is adding 110 million workers to its labor pool by 2020 at a time when China will add just 10 percent of that in terms of total availability. There are other commercial factors that are pushing companies to hedge their China operations. Indian labor costs are about 30 percent of labor costs in China and, as the U.S. factory in Beijing will be well aware, the costs of laying off staff in India at present are just one month’s salary in lieu of notice. In China, it’s one month’s salary, plus another month’s salary for every year of service. Plus the welfare costs – not just the one month’s termination, but also for each month of severance.

India has its problems, but so did China when I first set up Dezan Shira & Associates over 20 years ago. Back then, China’s infrastructure wasn’t in place – the road to Beijing’s Capital Airport was just two lanes and had donkeys and carts on it. The only refreshments at the only terminal were dried noodles with hot water provided by a Russian Samovar and the only coffee available was in Nescafe sachets, topped up with water from the same Samovar. In Shanghai, the only places foreigners could shop were Friendship Stores, and it was illegal to possess RMB. Sparrows’ eggs were sold on sticks as a snack outside of the Peace Hotel, and the only nightclub was the doddery old Jazz Band in the same venue. Everything closed by 9pm. If anything, China back then was even more underdeveloped than India is today.

As I said at the beginning of the article, the trend is now for India to become the global manufacturer’s destination of choice. And as costs increase, even selling your product in China may not be a sufficient enough incentive to keep a factory and its operating costs in China. China’s own tax treaties with ASEAN just next door have done away with import duties between China and its neighbors, and with wages in Vietnam about 30 percent to 40 percent of those in Guangdong, factories have long been relocating.

The truth is out there, and it states that for many manufacturers, it makes better sense to put the factory in Vietnam or India, and then resell into the China market. Doing so avoids the hassle of Chinese militancy in the workforce, the high costs of wages, the high costs of social welfare, and the high costs of termination. Hedging China just became a fact, and the recent events at the American factory in Beijing prove one thing – the manufacturing investment trend is increasingly heading for India, Vietnam and the rest of emerging Asia. The corporate recognition of India as a serious competitor to China for establishing global manufacturing plants has just arrived as an acceptable and recognized multinational investment strategy.

Chris Devonshire-Ellis is the founding partner of Dezan Shira & Associates, starting the practice in China in 1992. Since then, the firm has grown to 12 China offices and is now also in India, Vietnam and Singapore. Chris ran the practice’s China operations from 1992–2009 and is now responsible for India and Singapore. He is based in Singapore.

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