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Shanghai from above. Once a poor man's town, it will surpass Hong Kong as the Chinese financial ... [+] capital within a generation.
GettyFor all-around emerging market manufacturing know-how, for reliability, for currency stability, for safety and for domestic market growth, China is No. 1. The rest are more like No. 100.
No one comes close in the developing world to China. And that is why U.S. companies are so headstrong about staying there. The trade war will have to get much worse before they are forced to source elsewhere.
Last week, one of the biggest lobby groups for American multinationals in China, the U.S. China Business Council, put out their annual member survey. China was still as profitable or more so than other emerging markets where they have set up shop or source supply.
Only 3% said they were relocating to the U.S. because of tariffs. Under 7% said they were leaving China.
Why do American companies love China so much? It can’t be just because of its size. India is comparably large and friendlier to the U.S. Brazil is pretty big—and closer. Mexico, even closer.
What’s so great about China?
Why not source out of Mexico? It's closer to the U.S. and it has a free trade deal.
Susana Gonzalez/© 2016 Bloomberg Finance LPForget the politics. Forget that it is a one-party state that censors its population and now has religious minorities in so-called “reeducation camps” in far Western China.
Honestly, does any of that matter to a transnational corporation? Unless they run afoul of the Communist leaders or are doing business with the parties deemed responsible for a human rights violation, then it arguably matters little to them. Where is the company that has stopped doing business with China because of human rights matters?
In fact, many companies that source from China, like Apple, are part of so-called ESG mutual funds that invest in what that acronym stands for: companies good on the environment, good on social responsibilities, and with good corporate governance.
For portfolio investors, many top-rated impact investment funds, like the five-star Morningstar-rated Calvert Emerging Markets Equity (CVMIX) that invests in companies considered good environmental stewards who pay women as much as men, hold top China corporations like Alibaba and Mengniu Dairy.
Beat up on China all you want—the truth is that companies overwhelmingly want to be there. Portfolio managers want to as well.
See: American Companies: China Unfair, But They Don't Care — Forbes
Unmoved. U.S. Trade Representative Robert Lighthizer, center, speaks to China's Vice Premier Liu He ... [+] as Treasury Secretary Steven Mnuchin looks on in July 2019 in Shanghai. (AP Photo/Ng Han Guan, Pool)
ASSOCIATED PRESSFrom a corporate perspective, here is what makes China better than the rest.
The corporate tax rate in China is 25%.
It’s 35% in India, 34% in Brazil, and 30% in Mexico. Right off the bat, China is at least 5% cheaper.
Five percent won’t be the deciding factor in deciding whether to set up a factory in China. But these issues sure will ...
China is a communist country, so one would expect their workers would have collective bargaining and other rights. While labor rights are stricter now in China than they were even five years ago and wages are rising, China wages are still cheaper than Brazil’s and Mexico’s.
In terms of labor rights, China ranks 5 on a scale of 1 to 5 as one of the world’s worst countries for workers, according to the International Trade Union Confederation. India is just as bad, meaning it’s a place where businesses can more easily exploit workers.
Mexico is a 4 and Brazil is a 3.
Brazil has some of the toughest labor laws around. Good luck firing someone in Brazil or beating a union lawsuit in a court.
Strong labor rights that favor unions tend to be unattractive to global capital looking for cheap inputs and little drama. China has comparatively weak labor protections on one hand, and a diverse pool of talent on the other—from stitch-and-sew factory workers to scientists and other high tech, advanced machine tool operators are all at the ready. There are hundreds of thousands of them. No country has this.
China workers to the world: "Anything you can do, we can do too. And faster. And cheaper."
Tomohiro Ohsumi/© 2015 Bloomberg Finance LPMoreover, even though India has a similar workforce situation in terms of rights and size, the government long ago decided to focus on being a software developer and IT service exporter.
As an economy, India is known for its IT firms and maybe a generic drug manufacturer. China is surpassing them on the generic drugs side.
China is known for producing everything. Need a photovoltaic cell panel for a drone? China can make that. Need a float for your swimming pool? China’s got it. It’s a wonder that Alibaba or Tencent haven’t spun off their own IT outsourcing unit to compete with Infosys yet.
India also changes governments every few years and only recently unified its cross-state tax code. China has none of these problems. Continuity makes life easier for businesses. It’s one less headache.
There are hidden costs involved in doing business in any country. Taxes can be written off. But countries like Brazil have hidden taxes hard to avoid. A simple corporate cellphone account is taxed nearly as much as the corporate tax rate.
In addition to the tax cost, there is a logistical cost of moving goods from one state to another, one country to the next.
Brazil is notorious for being a logistical mess. It has maybe three decent ports. China dominates on the port side. Its seaports are world class. There is nothing like them anywhere in Latin America or India.
Mexico’s ports are governed by cartels, as Mexico’s president Andres Manuel Lopez Obrador recently said about corruption at two of the country’s ports and customs stations.
India could be a good solution for its location, but its port infrastructure is nowhere near China’s, so logistical costs could be higher depending on product and destination.
Then there is corruption and crime which makes doing business in these countries more complicated.
Military soldiers patrol a street in Rio de Janeiro, Brazil. It's not any safer. Want to make your ... [+] widgets in Copacabana?
Dado Galdieri/© 2017 Bloomberg Finance LPChina is corrupt. But not as corrupt as any other major emerging market.
According to Transparency International’s 2018 Corruption Perception Index, China ranks 87th out of 180 nations. India is better at 78. Brazil ranks 105th and Mexico is terrible at 138, equal to Russia, a country everyone in the market refers to as the Wild East.
The small Southeast Asian nations that have been benefiting from Chinese manufacturers setting up factories there aren’t much better, according to Transparency International. Vietnam is ranked 117 out of 180. More corruption often means companies have to face bribes and other strong-arm tactics by politicians and regulators to do business.
Corruption perception in China is not great. But crime is low.
Crime is not as rampant in China as it is elsewhere in emerging markets. India, Mexico and Brazil are way more dangerous. If quality of life for expat workers comes into play, then building a factory in those countries is less safe than building one in China.
Investing in operations in Rio de Janeiro and bringing down American workers might sound enticing, but Rio is one of the most dangerous cities in the world, which is one factor why few companies even consider it.
India’s lackluster environmental regulations make it one of the most polluted places around. Would ... [+] expats want to live here?
Ruhani Kaur/© 2018 Bloomberg Finance LPOf the 10 most polluted cities in the world, 9 of them are in India.
China is also polluted and has poor air quality. But China is more active in this regard than anyone else. They have invested in high-speed rail that works. And are the largest electric-vehicle producers. The government is taxing coal producers and utilities, trying to reduce fossil fuels. They have a long way to go, but all of this creates opportunities for U.S. companies that want to serve the China market.
Brazil is a good example of this. Companies from Goldman Sachs to Shell Oil were big investors in Brazilian sugar cane ethanol when the government mandated a 10% mix in gasoline. It was an opportunity unique to Brazil, so companies wanted to be a part of that.
Beyond that, however, Brazil is one of the world’s cleanest producers of fuel thanks to its hydroelectric power grid. Outside of Rio and São Paulo, most cities in Brazil have clean air quality.
But electricity in Brazil, despite its free supply of water, is not cheap.
If you’re a company concerned about electricity prices (and Brazil’s taxes on top of that), then China is better at just $0.08 per kilowatt hour.
Is that due to the massive Three Gorges Dam power plant on the Yangtze? Probably not. Is it due to subsidies by the state? Probably. Regardless, keeping the lights on in China is cheaper than it is in Brazil and Mexico.
Abundant labor, from skilled to unskilled, weak unions, stable currency and politics, world-class logistics and a safer place to do business makes China better than the rest.
Looking at the big emerging markets as a possible alternative and it is clear: Either Brazil, Mexico and India reform their onerous tax rates, improve their infrastructure to help exporters and drastically reduce violent crime rates, or they will never be competitive with China for foreign capital.
In a global economy, where capital looks for the best return, they’re at least three steps behind.
China is the world’s largest manufacturer, sometimes referred to as ‘the world’s factory’. It has been an attractive destination for manufacturing in recent decades thanks to its low labour costs, technically skilled workforce and good infrastructure. But China’s competitiveness and manufacturing profile are changing, with more developed regions moving up the value-chain and labour-intensive manufacturing moving inland. Businesses are increasingly choosing to manufacture in China to service the growing Chinese market, rather than use it as low-cost option to manufacture export items.
Manufacturing’s percentage share of Chinese GDP has been slipping in recent years, but it remains a major sector, accounting for 42.6 per cent of GDP in 2014. The sector employs about 30 per cent of workers in China, and has ensured China remains the world leader in gross value of industrial output. On the more developed Chinese eastern coast, the focus has increasingly moved to advanced manufacturing, while lower cost and more labour intensive manufacturing is increasingly located further inland.
However, as China’s focus on the services sector likewise grows, increasing numbers of Chinese will be employed in the financial services sector, rather than manufacturing or agriculture.
Advantages of manufacturing in China include access to increasingly sophisticated Chinese research and development (R&D) and science and technology, as well as incentives offered by local, provincial and central government agencies. Another positive of manufacturing in China are the efficiency gains thanks to larger economies of scale in China. However, rising labour costs, skills shortages and intellectual property protection are significant issues to be considered when looking at manufacturing in China.
Other concerns and challenges when manufacturing in China are the current development stage and inconsistency with application of commercial law in China and variable quality of logistics and infrastructure systems. Using contracted manufactures or subcontractors may also cause serious difficulties that have to be strictly managed. These include the need for rigorous quality control, possibility of leak of products to the domestic and international market, production overruns and ethical and corporate socially responsible manufacturing.
There are a number of ways for foreign businesses to go about manufacturing in China. Contract manufacturing is a popular option for both large and small businesses across various industries. Australian businesses can also choose to invest directly in a factory in China, either independently as a wholly foreign-owned enterprise or as part of a joint venture with a Chinese company.
Location is another key consideration for manufacturing in China, with the Chinese Government encouraging investment in different types of manufacturing in different regions. On the more developed eastern seaboard, where wages are higher and the infrastructure is better, the Government encourages investment.
in high-end, low-polluting manufacturing. Further inland in China’s central and western provinces, where labour is cheaper and infrastructure less developed, the Government encourages investment in more labour- intensive manufacturing. Some cities and provinces specialise in certain industries and producing specific goods.
Quality control is an important consideration when choosing to manufacture in China. There have been high- profile cases in which poor quality control by Chinese manufacturers – usually sub-contractors – has caused significant problems for international brands, ranging from clothing to toys and food products. Make sure you have robust quality control mechanisms in place and perform due diligence.
Australia’s own manufacturing sector has been given a boost by the entry into force in December 2015 of the China-Australia Free Trade Agreement (ChAFTA). Under the ChAFTA, wholly Australian-owned companies will now be allowed to establish in China. In addition to this, almost all of Australia’s manufacturing exports will enter China duty free within four years. Australia has great opportunity to invest in advanced manufacturing in China, which has been earmarked as important future driver for China’s economy.
In 2006, 145-year-old Australian family business Michell Wool opened their 14,000-square metre Suzhou factory for carbonising wool – a required process to clean the wool.
Read more on their successful engagement with China’s manufacturing industry.
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