Op/Ed by Chris Devonshire-Ellis
After a bumpy 2018, 2019 looks like more of the same and quite possibly a great deal worse as a China-US trade spat threatens to derail a lot of carefully laid out China development plans. At particular risk are foreign – and especially American-owned – service and manufacturing companies, whose client base in China is built typically upon handling international, rather than domestic Chinese, clients. Rare examples aside, businesses falling into this category in 2019 need to start to prepare for what could be a turning point for foreign businesses in China. Increasing China operational costs, fast-developing Asian competition, and a prolonged trade spat – or something even worse – could spell the end of the road for many foreign-invested businesses in China.
At the very least, what transpired in 2018 and what we already know from US President Trump’s modus operandi is that no one can be complacent with their China business and expect to get away with it. The good news is that this is all understood, and the majority of businesses likely to be affected are already calibrating their efforts to make systematic changes to their business operations in 2019.
In some ways, our practice, Dezan Shira & Associates, foresaw this over ten years ago, when we made the strategic decision to develop the practice out of China. Until 2006, we had been exclusively servicing foreign investors in China. From that year on, we expanded to develop the firm through establishing operations in India and Vietnam. The first issue of our India Briefing Magazine to support our India operations came out in 2007, while the first issue of Vietnam Briefing, which even then spotted the emerging trend and was titled “Global Manufacturing Moving To Vietnam” was published in April 2008. We have a 27-year history in China and over a decade worth of experience assisting China-based foreign manufacturers look at other markets in Asia. I recall the reason we justified the move, and the investment it would take in making it. It was simply “Because if we stay purely in China, we will suffer a slow death by gradually having our China business eaten away by local competitors.” That rings true for many foreign-invested businesses today.
While our China practice has in fact grown over that period, mainly because of China’s GDP growth rate, it is true that our China operational growth has come under pressure. That’s been absorbed (our 2018 China revenue growth hit nine percent) but crucially our operational growth in China (less setups, and more strategic advisory like international tax, internal control, enterprise resource planning implementation) and other markets has protected us from China bumps. Today, we have operations not just in China, India and Vietnam, but offices and partnerships in other Asian markets across ASEAN, including Singapore, Indonesia, Thailand, Philippines, Malaysia, and Myanmar.
To do that we had to take the first step: move partially out of China. That move essentially provided us with the market reach we needed to secure the future of the business. It’s a lesson many foreign businesses in China today should heed. Today, although the majority of our revenues still originate from China, we have a far healthier cash flow mix, with revenues also coming in from our other Asian operations. That is a far better strategy than having all your eggs in one China basket. Meanwhile, what have we learned that we can pass along to our clients and readers?
In fact – rather a lot. Here is our first-hand experience view of the alternatives for foreign companies in China looking to diversify part or all of their China operations elsewhere into Asia.
Dezan Shira & Associates have had an on-the-ground presence in Vietnam since late 2007. Today we maintain two primary offices, in Hanoi and Ho Chi Minh City (or HCMC). There is a fundamental difference between the clients we service in each, but our offices attract a healthy mix of service and manufacturing clients. HCMC is a major port and close to the best export processing and related free trade zones and areas in Vietnam, while also possessing supply chains into Thailand.
The best introduction to both assessing the country and what it offers is probably our Vietnam Briefing website. We have also produced the following magazines and country guides which will be of interest. These can be downloaded free of charge:
Our Vietnam practice can be reached at firstname.lastname@example.org.
India differs from Vietnam as a destination for foreign manufacturers as it offers, in addition to export manufacturing facilities, a sizeable domestic market of about 300 million middle class citizens, which may be attractive for MNCs looking to break into new consumer markets. It remains administratively awkward (a good reason to hire an experienced consultant) yet curiously, because India following independence took advice from the Soviet Union regarding centralization of its economy, is far closer in government and administrative business procedures to China than is generally recognized. China hands will find familiarity in Indian operations.
With two major coastlines facing both west and east, the initial question remains where to be based. The country offers familiar free trade and export processing zones and tax breaks. Foreign investors tend to head for Delhi in the services sector, as this is the seat of government, and Mumbai for export trade and financial services. Dezan Shira & Associates has offices in these locations.
Again, the best resource to explore India is probably our own India Briefing website, while the following country guides and magazines are also available for complimentary download:
Our India practice can be reached at email@example.com.
ASEAN is a huge and diverse region, with 10 countries all offering different opportunities and levels of development. Where to invest in ASEAN is a bespoke matter and needs to be tailored to your specific business needs, such as supply chains, costs, competencies, and tax incentives. ASEAN nations enjoy free trade agreements with both China and India, making the region attractive for sourcing and production.
Singapore is the de facto financial center, and many international HQs have their operations there, and especially those already diversified throughout ASEAN and Asia in general. Brunei is a very specific oil and gas play, while the economies of Indonesia, Malaysia, Philippines, and Thailand are all attractive. Cambodia, Laos, and Myanmar are all undergoing development and are probably suitable not for the inexperienced investor.
We have produced a great deal of intelligence about ASEAN, with a common theme among clients being “Where to choose?”. Dezan Shira & Associates is used to such questions and we regularly produce specific research reports matched to individual clients’ needs. In terms of ASEAN as a whole, our ASEAN Briefing website is extremely popular, while we have the produced the following complimentary publications to assist foreign investors find their way around the region:
For assistance with ASEAN, please contact Dezan Shira & Associates at firstname.lastname@example.org.
As mentioned, Singapore is a prime location for Asian head office operations, and although it does have some manufacturing capabilities, it is typically used as an Asian HQ base or for businesses needing to consolidate regional operations.
Dezan Shira & Associates has maintained an office in Singapore since 2009. Please refer to the following complimentary publication:
Dezan Shira & Associates’ Singapore office may be reached at email@example.com.
Indonesia is enjoying growth on four fronts: an emerging middle class consumer market, a huge infrastructure development campaign, as a sourcing base for China, India, and other ASEAN nations, and with rapidly improving manufacturing capabilities.
Dezan Shira & Associates has had partnerships in Indonesia since 2008, a practice that is becoming increasingly busy. The country has developed significantly in the past three to four years – we experienced 400 percent growth there last year.
Please refer to the following complimentary publication:
Dezan Shira & Associates’ Indonesia operations may be reached at firstname.lastname@example.org.
The Philippines is booming for similar reasons as Indonesia but with an additional factor – service industry investment in document processing and call centers. Dezan Shira & Associates has had partnerships in the Philippines since 2008.
Dezan Shira & Associates’ Philippines operations may be reached at email@example.com.
Thailand is now recovering after political turmoil and also provides a wealthy middle-class consumer base with manufacturing and export processing zones on both east and west coasts. Dezan Shira & Associates has had partnerships in Thailand since 2008; our clients and Asia Briefing readers have shown a lot more attention to Thailand in the past year.
Dezan Shira & Associates’ Thailand operations may be reached at firstname.lastname@example.org.
Foreign investors in China have plenty of options as to where to relocate all or part of their operations in Asia, a strategy that our firm realized would become increasingly relevant over a decade ago. It is a strategy we ourselves as a practice have gone through, and can provide that first-hand experience both from our own knowledge and that of handling clients in this area for the past 10 years plus. That marks us out as one of the only professional services firms in Asia with such a reach.
Meanwhile, in the face of both trade uncertainty and potential tariff wars, China-based foreign-invested businesses need to think long and hard about how to react. We understand the trade and investment implications of the current US-China tariff impasse and how China has responded and will continue to keep our clients updated. American-based clients wishing to talk to us may also contact the head of our North America Desk, Dustin Daugherty, in the US at email@example.com.
China Briefing is produced by Dezan Shira & Associates. The firm has a 27-year operational history in China with multiple offices throughout the country and throughout Asia. To contact us please email firstname.lastname@example.org or visit our firm at www.dezshira.com
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