The China Plus One Strategy

The rising cost of sourcing from China, and a politically inspired initiative to lower manufacturing exposure to China, are driving US multinationals to frame a ‘China plus one’ strategy, says a Beijing-based specialist at a leading foreign direct investment practice.And competition for China in the manufacturing space is coming from India, emerging economies in South-east Asia and from Brazil and Mexico, says Chris Devonshire-Ellis, senior partner at Dezan Shira & Associates, a professional services firm providing FDI legal, tax, accounting and due diligence services for MNC clients in China, India, Hong Kong and Vietnam. “The ‘China plus one’ strategy is driven to an extent by US foreign policy objectives,” Devonshire-Ellis said.“The general political feeling in Washington is that there’s been an overenthusiasm of FDI in the manufacturing sector, particularly the low-end sector, going into China... Washington politics they would now rather see that being spread around the region a bit more, particularly in India.” But there’s also an economic angle to the trend of looking beyond China. “China has become more expensive over the past 18 months,” notes Devonshire-Ellis.“That’s been largely driven by Chinese government policy: China wants to move up the value-added chain in its manufacturing. That’s why its recent changes in legislation, particularly over tax unification, labour law and the tightening of environmental law, have all helped to push a certain type of manufacturing out of China and into other countries.” Accordingly, China is discouraging investments where there’s energy wastage and environmental pollution.On the other hand, China is attracting investments in high-tech businesses. “What’s going on is just a repositioning of China. China doesn’t want to be the manufacturing capital of the world; it wants to be the added-value production capital of the world.” And what’s the level of interest in India?“Very high,” says Devonshire-Ellis. “Our existing clients in China (all of whom are foreign-invested companies) are asking us to go to India, not necessarily to shut down their manufacturing operations in China, but to take advantage of the fact that there’s a large market in India.” China, he points out, is gradually changing from an export-driven society to a consumer-driven society.“You come to China to do one or two things: one, manufacture here for export — and that’s starting to get a bit expensive, which is why low-end guys are shifting to Vietnam,” he says.“Or you come here to manufacture and sell onto the domestic market, and that’s where the future money is. The same is true of India.”But does India offer the scale and ease of operations in the way that China does? “A lot of people talk about the bureaucracy in India and its impact on business development,” observes Devonshire-Ellis. “But although politics and bureaucracy... does hold up certain processes, you can go to India and establish a business in a relatively short time-scale. In fact, the processes to set up a representative office in India are actually two steps less than it takes in China.” In terms of actually getting things done on the ground and building a factory or setting up an office in India, “I think it’s relatively straightforward. A lot of people complain because the system there is a bit different and new. But people used to complain about China 20 years ago.” Devonshire-Ellis feels there isn’t any “massive difference” in the bureaucracies to get a business established and under way in India as compared to China. “But there’s one exception: India does have a lack of manufacturing capacity, although that problem will solve itself in the next two to three years.” But that aside, he says, the actual legal-administrative process to set up in India are “comparable and, in some cases, superior to China.”

No comments: