Monday, November 20, 2017

Investment News and Commentary from Emerging Markets in Asia - China, India and ASEAN

About discusses business and investment news rising from the geopolitical relations of China and India, and the interactions these two countries have with the rest of emerging Asia.

Selling to China & India’s Middle Class – It’s a Vietnam Manufacturing Play

Op-Ed Commentary: Chris Devonshire-Ellis

Mar. 20 – Later this week, I’ll be speaking at the U.S. Department of Commerce “Hot Market Watch” event in Cincinnati. My (two) keynote lectures are about China and Vietnam, and with a little bit of India thrown in for good measure. The reasons for this are that the market dynamics over the global supply chain, the subsequent manufacturing base for that, and the opportunity to sell to more Asian consumers than ever before are all shifting. It’s something I’m looking forward to – having seen our firm, Dezan Shira & Associates, through 20 years of foreign investment advisory work in China. Six years ago we moved to do the same in India and, four years ago, to Vietnam. We spotted these changing dynamics way back, invested ourselves in these markets, and are now primary advisers to foreign investors throughout the emerging Asia region.

The reasons for the shifting demographics are fairly simple:

  • Increasing competition to China’s manufacturing powerhouse
  • The emergence of an increasingly wealthy, and aging, Chinese middle class
  • The maintaining of an existing, and very wealthy, Indian middle class
  • Improvements in Vietnam’s supply chain infrastructure

But it gets even better when one considers the role of ASEAN and its relationships with China and India, as well as the tax and free trade agreements that are starting to come into play.

It has long been apparent that China has become a more expensive manufacturing destination; especially in the cheap, low-end, labor-intensive industries. A national policy to raise the minimum wage by 20 percent annually, coupled with an increasingly expensive social insurance scheme and tougher labor laws has seen a host of manufacturing industries move out of China. Much of China’s textiles industry, and especially that percentage of it concentrating on selling to overseas markets, has now relocated to India and Bangladesh.

China’s labor force has become more expensive because it is aging. The average age of a worker in China now is 37, and such individuals now have responsibilities – a spouse, children, elderly dependents, a mortgage – and these life acquisitions are not affordable on the levels of wages commanded 20 years ago when the average age of a Chinese worker was just 23. China’s population demographic dividend is coming to a natural close. The question is, what comes next?

While rising labor costs may make many grumble in China about the costs of staff, another benefit occurs. That increasingly wealthy and prosperous worker can now afford to buy more goods. As McKinsey reported last week, the Chinese consumer is becoming increasingly affluent, with 51 percent of China’s middle class population living in cities within the next eight years (McKinsey define Chinese middle class as earning US$34,000 per year) while contributing a huge 38 percent towards national GDP in consumption expenditures. This is a market of some 250 million people, and growing as wealth increasingly moves into the third, fourth and even fifth-tier cities. Clearly, China is a market that international companies should be selling too.

India, meanwhile, has a middle class population of about the same number (250 million) and again, that sector is expected to grow from 5 percent of India’s population to 40 percent by 2025, according to McKinsey. By then, India will have the world’s fifth largest consumer market.

Today, in fact, India’s private spending by its middle class is currently even higher than China’s. That Indian explosion of wealth is another reason why the government has been under pressure to make reforms to the economy and open up their market more to foreign investors. It’s been happening – 100 percent FDI was permitted in single brand retail just at the end of last year, and foreign brands are pouring in. That consumer boom is already taking shape – India will overtake Japan in auto sales by 2016.

India’s advantage doesn’t just lie in its middle class consumer opportunities. It is also inheriting China’s population demographic dividend. As the average age of a Chinese worker is now 37, the average age of an Indian worker is now 23 (the same as China 20 years ago), and that demographic dividend is partly the statistic that will drive India forward – just as it did in China. This is referred to in economics as “The Lewisian Turning Point” and was partly the feature of a joint presentation I recently conducted about China and India with the Economist Group’s Ross O’Brien, titled “The Dragon & The Tiger – Wealth Creation and GDP Growth.”

So far, so sexy. Great emerging markets to sell too. But where best to locate your manufacturing operations? While not discounting the fact that for logistics purposes, mass production facilities will be required in both nations, an interesting candidate for servicing both China and India is Vietnam (which is one reason why we have two offices there). The reason for this manufacturing suggestion is because Vietnam is a member of ASEAN – the huge Southeast Asian trade bloc that also comprises Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore and Thailand. This is important because both China and India have free trade agreements with ASEAN.

These agreements, which have been in place for some time, are also expanding their scope. India’s FTA includes a deal on commodities that was signed 18 months ago, and there is strong hope that this will be expanded later this year to include free trade in services and investment.

China, on the other hand, has been wooing ASEAN by negotiating an RMB trade deal, suggesting the creation of an ASEAN bank, and pushing for a further FTA throughout East Asia. It also has its own agreements with ASEAN.

This means that with Vietnam being a member of ASEAN, and ideally placed close to both China and India, free trade developments dictate that cross-border transfers of products, goods and services between Vietnam and China, and Vietnam and India are getting closer to becoming fully liberalized. No customs duties is the way this is heading, and Vietnam makes sense as a regional hub to establish a manufacturing operation to service both of these gigantic consumer markets.

The other aspect that is helping open Vietnam up is that it is adding capacity to facilities already in China. In other words, as labor costs increase in China and global demand picks up, those jobs are going to Vietnam factories to meet orders. Much of the current demand for Vietnamese manufactured productions is already in Asia. An example being that the United States, which has provided Vietnam with “most favored nation” status, is still only the seventh largest foreign investor in the country. Asian growth is the major factor fuelling manufacturing demand in Vietnam, with the country the third most preferred destination for FDI into the region after China and India.

The signs that this is already the case, and that ASEAN is now strategically important are already there. Singapore, the de facto financial hub of ASEAN has become the second largest RMB trading center after Hong Kong, and is also an excellent regional base from which to run Asian regional operations – especially if your business is across Asia, China and India.

Vietnam, then, is starting to stand up as an important regional player when it comes to servicing markets in Asia, especially so for those wishing to take advantage of new opportunities in selling to the growing Chinese and Indian middle class markets. The role of ASEAN, and the free trade and double tax agreements it holds with China, India and other nations now need to be evaluated as the global race to sell to Asia begins in earnest. Establishing a manufacturing operation in Vietnam may well be a strategy that will hold up well in order to consecutively sell to China and India – and ASEAN.

Chris Devonshire-Ellis is the founding partner of Dezan Shira & Associates, establishing the practice in 1992. The firm now has 12 China offices, five in India, two in Vietnam and one in Singapore. The firm provides due diligence, business advisory, legal establishment, tax planning and ongoing tax, accounting and compliance services to foreign investors throughout Asia. The practice also publishes China Briefing, India Briefing, Vietnam Briefing and updates concerning ASEAN. A complimentary subscription to our weekly Asia Briefing business newsletter can be obtained here.

To contact Dezan Shira & Associates, please email [email protected], visit or download the firm’s brochure.

Related Reading

100% FOEs, JVs and the Promotion of Supporting Industries
As 2012 will be a year of significant change in limitations on foreign ownership regulations for 100 percent FOEs and JVs, this issue offers a clear snapshot of up-to-date regulations and specific changes to expect in 2012, as well as a useful summary of tax incentives and exemptions. Also, a road map and timeline for licensing procedures take the guesswork out of this initial step in establishing a business in Vietnam.

The China Ripples – Emerging Asia Beckons

Why India Matters

Singapore as a Holding Company for Your China Operations

This entry was posted in Business, Featured, Foreign Trade, Manufacturing, Markets and tagged , , , , , , , , . Bookmark the permalink.

2 Responses to Selling to China & India’s Middle Class – It’s a Vietnam Manufacturing Play

  1. Vic Williams says:

    There might also be less industrial turmoil in Viet than China as time goes on. Viet is not only lower cost, and also apparently somewhat more equal in how it treats its people. A smaller maybe more homogenous country can help that.

  2. Chris Devonshire-Ellis says:

    Thanks Vic. I also have to say that Vietnam is an amazing place to be based as an expat. Both Hanoi and Saigon are great, and the country has wonderful mountains and beaches. Our firms Guangzhou based Regional Partner has relocated to Hanoi with the firm and I have to say I am most jealous! – CDE

Comments are closed.

Dezan Shira & Associates provide a range of services for companies looking to undertake foreign direct investment into Asia, These include corporate establishment, accounting, tax, payroll, audit and due diligence. To learn more about the firm, please contact one of our specialists at [email protected], download our corporate brochure or visit at us

Dezan Shira & Associates, Twenty years of Excellence

The Asia Briefing Bookstore

Our best selling legal, financial, tax and regional guides to Asia business, industry reports and more…
Click here to view all titles now

China Briefing Book Store China Briefing Book Store China Briefing Book Store China Briefing Book Store China Briefing Book Store China Briefing Book Store China Briefing Book Store China Briefing Book Store China Briefing Book Store