The politics of manufacturing: China loses its luster

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By Andy Scott

Jan. 10 – This past year was China’s year, 2008 may be it again, what with the Beijing Olympics in August, but there is no denying that 2007 was the year of China. Unfortunately, for much of the world, that meant story after story about defective and contaminated products – from toys and tires to food and medicine. This resulted in increased pressure on multi-national corporations to step up quality control on products sourced in China, set off a giant “Made in China” scare before the holidays, and, especially in the United States, led to calls for increased diligence and pressure on corporations to justify their China policies. Now, rising prices in China and a politically-charged atmosphere are driving many manufacturers out of China and into places like India and Vietnam.

Last July, Vietnam passed China to become the most attractive destination for foreign direct investment, with FDI topping US$19 billion in 2007, much of that investment coming from the manufacturing and high-tech sectors. U.S., EU and Tawanese manufactures are moving in, with the U.S.-based Jabil Circuit constructing a US$100 million circuit plant in Ho Chi Minh City, the Foxconn group of Taiwan building two plants with a combined capital of US$80 million in Bac Ninh province, Piaggio investing US$45 million in a Vespa motor plant, and Taiwan’s Intelligent Universal dumping US$500 million into a laptop plant in northern Vinh Phuc according to figures released by the Ministry of Planning and Investment.

While not so much of an issue of European or Taiwanese investors, it was not so long ago that Vietnam dominated the political arena in the United States, and no single U.S. president since Lyndon Johnson has been elected without having to answer questions about the Southeast Asian country. But these days, it is a different war that dominates the speeches of presidential hopefuls, and Vietnam increasingly has become the safe political option for manufacturer worried about the bruised and battered “Brand China.”

India has also seen its star rise as Chinese policies, lax regulatory practices and other dangers, real or imagined, have led foreign investors to move to countries with more transparent systems and stronger rules of law.

And while India and Vietnam stand to benefit from the increased FDI interest, they have a long way to go to catch the big boy on the block. While India may have a strong rule of law in its corner, and Vietnam lower cost of labor and resources, China still trumps both countries with well developed infrastructure. Both India and Vietnam lag far behind in this respect and until they catch up to China’s coastal regions, their full FDI potential, as well as overall GDP potential will not be met.

China, for its part, needs to step up and shift real investment inland. Currently there is very little investment coming out of the inland provinces. The central government likes to play with numbers and both FDI and GDP figures are often inflated to meet provincial quotas, but until it is as cost efficient to send a container from Changsha, Kunming or Wuhan as it is to send one from Dongguan, China will continue to see investors look elsewhere.

The Holy Grail of selling to China is of course still one of the biggest draws for multinationals setting up in China, and no amount of cost analysis will stop Ford from setting up a plant in Chongqing. But India, with a similar sized population to China, already has a mature consumer market, and the increased integration of the ASEAN member states will give rise to a bigger potential markets in Southeast Asia. It remains to be seen just how much damage has been done to the China brand, but for the short term, expect to see record FDI flowing to Vietnam, India and Mexico as medium-sized and smaller manufacturers reconsider their China strategies.