Wednesday, August 20, 2014

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




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2point6billion.com 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.




India Wages and Currency Beckon Manufacturers from China

U.S.-India bilateral trade now same level as U.S.-China trade in 1997 and increasing

Op-Ed Commentary: Chris Devonshire-Ellis

Jun. 1 – India is beginning to look increasingly attractive as a destination for foreign investors as concerns over a lack of reform direction in China, coupled with increasing labor costs and a strengthening RMB position are placing some China based businesses under financial pressures. This was a point made earlier this week by Davide Cucino, president of the European Union Chamber of Commerce in China in its annual report – citing that 20 percent of its member companies surveyed said they were considering exiting the China market.

The issue with China is that the business model it offered foreign investors 10-20 years ago has now changed. China’s population is aging, its workforce is shrinking, and it needs more money to sustain its citizens. Even up to a decade ago, a Chinese worker could be hired for a little over US$100 a month, and he’d be happy with that, a couple of beers and some cigarettes. But as the demographics of age have kicked in, the average Chinese worker is now both older, and as a result, has more responsibilities; he’s now married, has a child, dependents in the shape of two sets of parents to look after, as well as needing money for future education and a mortgage for his family to live in a house. It is this simple reason why China has gotten more pricey, and those labor costs have risen to keep pace with his needs.

The implications of this are two fold; firstly, Chinese labor is becoming increasingly expensive, as is mandatory welfare and associated employment costs. When compared to the rest of Asia, China has the third highest labor costs throughout the emerging Asia region.

This means that if your business model requires cheap labor, and is not especially concerned about selling to the China market, then China is going to become increasingly unviable as a location to have your manufacturing or production facility. This would apparently account for the 20 percent of EU companies suggesting they wanted to exit China. However, the flip side to the increasing age and wealth of the Chinese population is that as a nation of consumers, the Chinese market is growing and has increasing amounts of disposable income to spend. If your business model supports selling to the Chinese consumer, then you would be part of the 63 percent of EU companies in the same report that indicated they would be expanding operations in China.

But for that 20 percent, what are the options? Interestingly, India looks increasingly likely to be the answer. Unlike China, India is getting reforms into place, and is opening up its markets. It has a large and cheaply available workforce, and the rupee is relatively low against the U.S. dollar and Euro. Just the currency situation alone means your dollar value goes further in India, whereas in China it is diminishing. India in fact has been making considerable progress – bilateral trade with the EU reached a record high of US$110 billion last year, an increase of 22 percent. Of that, exports from India to the EU also increased – demonstrating that even with the difficulties in the European markets, firms there are buying more Indian manufactured products.

It’s the same story regarding Indian trade with the United States. Last year’s bilateral trade reached a new high of US$57.8 billion, an increase of 19.88 percent according to the Indian Embassy in Washington. Of that, Indian exports increased faster than U.S. imports, suggesting again that the U.S. desire for cheaper products is shifting from a China base to an Indian one.

To put this into context, and to measure the level of bilateral trade between the United States and China and the United States and India today, the current level of bilateral trade between the United States and India now is about the same as the level between the United States and China in 1997, at the time of the handover of Hong Kong. As we have seen, trade levels can increase dramatically in the space of a decade, and the same is likely to happen in India, especially given the population and worker age demographics.

The sectors today that are attracting the highest volume of trade between the EU and India are below, in order:

  1. Textiles (17.9%)
  2. Precious stones & metals (16%)
  3. Pharmaceutical products (10%)
  4. Mineral fuel, oil (7.9%)
  5. Lac, gums, resins (6.3%)
  6. Organic chemicals (6.1%)
  7. Machinery (5.6%)
  8. Electrical machinery ( 4.4%)

Clearly, if your business is involved in these sectors then India is a market to now seriously consider. But what of the wages and welfare costs? The new issue of our India Briefing Magazine covers payroll, salaries and welfare costs in India. It is currently available online as a complimentary download for a limited time, and its content makes for interesting reading.

In it, we compare the salaries and welfare of employees in eight Indian cities, including Delhi, Mumbai and Bangalore, in addition to fast industrial developing areas such as Gurgaon and Pune.

The findings are broken down into a full sub section of salary and welfare components. In it, we discuss welfare and other payments in detail and find that these are significantly lower than when compared to China. Although basic wages in China and India are becoming comparable, the difference lies in the social insurance costs. In China, where government policy has seen average wages increases of between 15 percent to  20 percent annually the past few years, plus a high rate of mandatory welfare contributions regularly reaching an equivalent of roughly 50 percent of the actual salary, in India these add-ons are far less of a burden. The difference is striking, and now in times of economic austerity, well-worth considering. The magazine goes into some detail as concerns costs of Indian staff.

We also covered a direct cost comparison between China, India and Vietnam in terms of relocating an entire factory from China. In it, we found that a combination of land and labor costs, when looking at the operational cost differences between a factory of 300 people, were about four times more expensive in China than in Vietnam, and a whopping eight times more expensive in China than in India. Although the comparison cannot be considered exact as individual businesses differ so much, these are large enough differences at face value to begin to make it worthwhile for CFOs to sharpen pencils and start to look more closely at the costs of business across Asia as concerns alternatives to China.

India may indeed seem somewhat exotic, and perhaps even difficult as a destination for business, but don’t be fooled. I personally have conducted business in both for the past six years, and I am often asked about this. My reply is “the frustrations are different but the outcome is the same.” Essentially that means that if you can deal with running a business in China, India isn’t going to be any harder, just different.

China remains an excellent market in terms of foreign businesses approaching it for its increasing consumer wealth. However, for companies that need to continue with low-cost, export-driven manufacturing, India is now a key destination. And with a low rupee, English language abilities, and policies that are opening up market sectors for foreign investment, the time to take a long look at the cost dynamics of establishing operations in the country are now ripe.

Chris Devonshire-Ellis is the founding partner of Dezan Shira & Associates. Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.

For further details concerning India, including China-India cost comparisons, please email asia@dezshira.com, visit www.dezshira.com, or download the firm’s brochure.

You can also stay up to date with the latest business and investment trends across emerging Asia by subscribing to the Asia Briefing weekly newsletter.

Related Reading

Payroll Processing In India
In this issue of India Briefing Magazine, we aim to help expatriate managers and business owners grasp the overall picture of how payroll works in India. We also discuss how outsourcing payroll can benefit all types of companies, particularly those of small and medium-size.

Doing Business in India (Second Edition)
This book aims to provide a basic overview of all topics related to doing business in India – history, business etiquette and culture, and how to invest into the country, in addition to a detailed, state-by-state demographic and geographic overview and a comparison with China.

Increased Expat Costs in China Will Relocate Many to India

Hedging China – Manufacturing and Selling in India, Vietnam and Myanmar

Foreign Direct Investment in Indian Retail

Why ASEAN Matters for Your China Business

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11 Responses to India Wages and Currency Beckon Manufacturers from China

  1. There’s a whole bunch more China-India comparisons, cost analysis, business, tax and operational discussions, including free downloads, magazines and loads of related China-India links over at the China-India Business Update at China Briefing, online today, including comments from expats and entreprenuers who have worked or are working in both countries. Its a great resource, I urge those interested to use it: http://www.china-briefing.com/news/2012/06/01/china-india-business-update-jun-1.html

  2. Girish says:

    I have mentioned this earlier as well that China is going into big trouble due to this demographic problem where there will be less working people to support more mouth with less income and amazing high living cost (mostly due to home loans)
    The logic that China is moving into upward technological ladder and that this will be able to support the expensive workforce is flawed.
    Actually, This movement from low end to high-end should have been done at least 15 years back to be in the comfortable situation today when year 2016 will be the begin of decline of labor force in China.
    Wtih Average age of 34 and still remains largely a low cost manufacturer where almost 80% of the output is by foreign companies and not my domestic companies is a danger sign.

    In next 10 years, there will be massive unemployment due to rapid exit of low cost industries from China leaving massive labor forces which cannot be moved into Service and high end industries.

    Also, most important point is that high end industries depend much on protection of IP, skills, communication, investment, local market size and strategic interests.
    China is not favorable place for Western countries to move their high-end industries into China and Chinese domestic industries are yet reached to the level where they can export large volumes of their products. Not to forget the mistruct Chinese highend products face around the world. Hawaii is a good example. They cried out everything that they are a professional company and have nothing to do with PLA. Also, brand creation had been neglected in China due to quick money making in contract manufacturing. And High-end industry means Brands.

    South Keora is the best example to see how China missed the bus due to demographic problem.

    India is the country which has actually started from High-end industries (including Auto, IT, ITES, Design, R&D etc) where as it is eagerly becoming suitable destination for low end industries to support the mass movement of young labor forces from agriculture to Manufacturing. India is the favorite destination for Western counties for R&D, Design work and now its time for manufacturing too.

    India is an a golden time where it can grow in both High-end as well as low end industries simultaneously and thus provide job opportunities to all level of skilled people.
    This growth path is similar of that of US.

    Also, not to forget that Western companies are more comfortable to move their high-end industries into India due to better law and IPR protection apart from cost and market size factor.
    Also, not to forget the strategic issues where China is more a trouble for the West and Japan due to their too much dependence on it.

  3. Girish says:

    Year 2035,

    India, with third largest market size and middle class with average age of 34(equal to today’s China) and huge high as well as low end industiries is facing issues due to rising cost of labour.
    Its time to move the low cost industries from India to ?????? do we have any other country who can take this from India? as every one else is already more expensive and older then India.
    May be Africa?

  4. N Sivaji Rao says:

    I find this difficult to believe as despite all the problems of currency appreciation, increase in wages, China still offers a supply chain which is unparalled and which India will take, with the present pace of reforms (?) a decade to attain. As one working with a Company sourcing garments from both india and China and also from bangladesh and Indonesia, we see these differences rather starkly. I would rather rank bangladesh above India for garment sourcing.

  5. The_Observer says:

    @Girish
    Actually, 2016 is the year that China will obtain WTO developed market status and many of the current import restrictions in the developed countries regarding China will have to be lifted. Lower tariffs should benefit China’s manufacturers and the consumers in the West will also benefit.
    Also see the Reuters article in the link below as regards China’s use of robots and CNC tools to produce higher value goods,

    http://www.reuters.com/article/2012/06/03/us-china-economy-automation-idUSBRE8520F620120603

  6. @Giresh: India’s population dividend will carry it through the next two decades but will Africa inherit by 2035? That’s still very much in the balance – disease and war have taken large parts of the young population out of their growth curve. It remains to be seen.
    @N Sivaji Rao: Yes, Bangladesh is a great place for textile courcing (Dezan Shira has a partner firm in Dhaka) and we’ve seen Chinese producers lose business to Bangladesh. Much of this industry however is linked to quotas, and Indian cotton exports are also rising fast. It remains a volatile industry.
    @Observer: What WTO obligations suggest and what other countries (and China) actually do about them are two different issues. I’d be more inclined to take note of the ASEAN FTA myself.
    Thanks for your comments guys
    Chris

  7. Girish says:

    @Chris

    I agree on this, Africa is not going to be the replacement to take on the manufacturing work (except very few countries in Africa).
    I believe that India is the last young, cost effective, huge market country and once it also start becoming expensive (like that of China today), there will be no other alternative place to take the manufacturin work out of India. Also not to forget, Indian industry use automation on larger scale then in China due to labour issues in India. Thus India will always be able to balance the high cost with mixture of labour and automation in the future to maintain its competitveness as it has both the options in hand.

  8. The_Observer says:

    @Girish
    So which is it? The demographic dividend will be a boon for India where all the young people will have jobs or those same young people will remain underemployed as is the case now but at much higher levels because the elites in India will use automation?

  9. @The Observer – you’ll have labor intensive industries soak up the labor, not all industries can be fully automated. India’s labor dividend will last about 25 years, plenty of time to absorb mechanization and new technologies Thanks – Chris

  10. vel says:

    China reforming their standards.welfare status,salary,food safety and fake product is a major challenge for their country.They are not just leaving their market to vietnam and india.They dont want anymore low grade image worldwide.As far as i noted big invested firms not moved from china.those firms like to enlarge their domestic market because of chinese will power on purchase so good.of course those big investers can afford to pay current minimum wages.Still in india,bangladesh,cambodia,malysia and vietnam’s poor chain of supply,without support of china They cannot fulfill their product.

  11. @Vel – some good points. However, China is becoming an expensive place to manufacture. That is at the same time that it is developing a consumer class, so these two situations clash somewhat. What we see with our offices in South China especially is that both Chinese and foreign-invested manufacturers are indeed leaving China. They still have markets in China, but they are servicing those from manufacturing facilities they are setting up in Vietnam, and in some cases (textiles) in Bangladesh. There is movement of manufacturing facilities away from South China and into South-East Asia – its why we have offices in Vietnam and India and continue to evaluate emerging Asia. See: http://www.dezshira.com
    Thanks – Chris

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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 china@dezshira.com, download our corporate brochure or visit at us www.dezshira.com


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