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Op/Ed Commentary: Chris Devonshire-Ellis
Mar. 5 – As Asia reconfigures its sourcing capabilities, questions are now starting to be asked about the continuation of China as what is commonly described as the world’s ”global manufacturer.” In truth, the position of China as a number one sourcing destination isn’t going to change that much, although this is partially dependent upon specific industries.
What may start to change is the investment and financial position in terms of constantly basing international sourcing executives in China. The country is becoming more expensive to conduct business in through a combination of higher taxes, increasing worker salaries, and employment and social security contributions for Chinese personnel. Higher infrastructure costs and travel and transportation expenses are also eating into the benefits of the “China price.”
A common form of vehicle by sourcing companies internationally in China is the representative office. Over the past fifteen years, these have been suitable for the establishing of a China presence in order to evaluate suppliers. However, increasingly such RO are being used as quasi-China services offices, hiding China-derived income through usage of offshore companies in Hong Kong and elsewhere. It was never the intention for ROs to be used in this manner and consequently, China has begun clamping down on their use by increasing the taxes on ROs. Inherent in this is a need for many to now convert or change their China operations to a fully fledged import-export company, or a foreign-invested commercial enterprise. Our article today on China Briefing explains the differences between the two.
While we do not expect to see a mass exodus of sourcing businesses from China, the fact remains that for global companies that only require a limited China presence, the financing of a China RO is increasingly a burden. Businesses that have markets elsewhere, in the Middle East, Europe, or Southeast Asia may now wish to explore other markets or cost centers for establishing a sourcing presence. In these cases, a presence either to reduce Asia sourcing costs, or be complimentary to a China sourcing facility now begins to make sense.
In India, the majority of sourcing is carried out from Mumbai on the West coast overlooking the Middle East, East Africa and Europe, and Chennai, on the East coast, overlooking Thailand, Malaysia, Indonesia, China and markets in Japan. In India representative offices in India are known as “liaison offices.”
There are several differences between liaison offices in India and representative offices in China.
As can be seen, the expenses in operating a representative (liaison) office in India are now far more competitive than in China. Asian focused sourcing and other service businesses may now do well to start considering the addition of India as a regional player to their global operations.
Chris Devonshire-Ellis is the managing partner of Dezan Shira & Associates in India and previously spent 21 years in China. To contact him concerning the establishment of liaison offices in India please contact india@dezshira.com. To contact the firm over establishing representative offices or foreign-invested commercial enterprises in China, please contact Richard Hoffmann at china@dezshira.com.
Related Reading
RO vs. FICE
Establishing Liaison Offices in India
