China-ASEAN Cost of Business Comparisons – Executive Summary
We have just completed our nine part series on the
cost of doing business in ASEAN compared with China. The nine country
comparisons (see below for all links) detail cost of labor and taxes,
together with bilateral trade profiles between China and Cambodia, Laos,
Indonesia, Malaysia, Philippines, Thailand and Vietnam. Brunei was
omitted from the series as it is of limited interest to foreign
investors except in the oil and gas fields, while Singapore was compared
directly to operational costs in Hong Kong.
As the operational cost of doing business in China
continues to rise, some of the ASEAN nations start to become attractive.
But which ones? The ASEAN-China Free Trade Agreement impacts on some
countries in different ways, and not all ASEAN members are in AEC
compliance as yet. Plus there are labor issues such as education and
workplace capabilities to consider. Also, some ASEAN countries wage
levels are not so far behind China. So where to go as a China
alternative is a complex issue.
What the series does do is demonstrate there is a
developmental hierarchy amongst ASEAN nations. I feel that Singapore and
Malaysia are developing extremely well in hi-tech and back office
capabilities. These are the support centers for ASEAN. Indonesia,
Malaysia, Philippines, Thailand and Vietnam all have great potential for
foreign investment manufacturing to then both re-export back to the
China market under the ASEAN-China FTA, while Cambodia, Laos and Myanmar
all face serious infrastructure issues and will take at least a decade
to reach potential.
ASEAN At A Glance
- Manufacturing, Financial & Support Services: Singapore & Malaysia
- Global Manufacturing: Indonesia, Malaysia, Philippines, Thailand & Vietnam
- Just Getting Started: Cambodia, Laos & Myanmar
Concerning the latter three states, it should be
noted that none of them are currently in AEC compliance, which is
supposedly due at the end of this year. That means that they have not
yet reduced tariffs on imported goods, which also affects their free
trade status with China in particular. I suspect these three countries
may miss the end of year compliance deadline, as none of them have
manufacturing capabilities strong enough to withstand the onslaught of
tariff-free cheap Chinese goods that would then result. I wrote about
the AEC Compliance deadline and its impact here.
That doesn’t mean that investment from China and
other ASEAN nations isn’t going into these countries. But it does mean
that they may not yet be economically strong enough to be part of the
full ASEAN story just yet. Myanmar in particular has extensive problems
with human capital, they have plenty of people, but hardly any of them
have any training beyond local subsistence farming. That is a problem
when it comes to organizing a labor force.
RELATED:
Concerning ASEAN’s regional trade, a key factor is
the Free Trade Agreements ASEAN has with China, India and Australasia.
These are key game changers. The China-ASEAN FTA is already reshaping
where and when China based manufacturers and sourcing agents do business
in Asia. Not everything can now be manufactured to quality standards
and at inexpensive production costs in China. That agreement is shifting
the global supply chain. The ASEAN-India agreement is still being
developed; services has recently been added to that and this will assist
Indian entrepreneurs. It would be possible for example for an Indian
company to set up a manufacturing plan in ASEAN and then sell their
production, duty free, to China. Australians too have been so
concentrated on their recent FTA with China their ASEAN FTA has largely
been overlooked. Yet it is worth a huge amount to the Australian
economy. For example, the amount of iron ore required in ASEAN to
upgrade infrastructure is double that which China committed in the
financial crisis and which in its own right set off a mini construction
boom. After China, ASEAN and India are the next great Asian opportunities.
Overall, the series paints a comprehensive picture of
the development state of ASEAN as it is today. For China based
manufacturers looking to relocate part or all of their production, the
likes of Indonesia, Malaysia, Philippines, Thailand and Vietnam can each
be considered. In addition to this, it is becoming apparent that in
order to properly run and develop an ASEAN operation, and especially if
there is likely to be more than one location involved, Singapore and
Kuala Lumpur are the service centers to consider.
Dezan Shira & Associates meanwhile can assist
with country cost comparisons and dig deeper for corporate bespoke
intelligence. Please contact the firm at asia@dezshira.com
Links to the other articles in this series are as follows:
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About Us
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates.
Dezan Shira 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 China, Hong Kong, India,
Vietnam, Singapore and the rest of ASEAN. For further information,
please email asean@dezshira.com or visit www.dezshira.com.
Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.
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Ref;http://www.aseanbriefing.com/news/2015/05/28/china-asean-cost-of-business-comparisons-executive-summary.html
China-ASEAN Wage Comparisons and the 70 Percent Production Capacity Benchmark
Op-Ed Commentary: Chris Devonshire-Ellis
As wage increases in China continue to rise – along
with the comparatively high national welfare costs – increasing comment
is being made as to the legitimacy of the “China Plus One” scenario.
Coined some years ago, this theory – in reality, more of a shrewd
observation – suggests that future manufacturing capacity will be placed
both in China and externally in another location by the same
manufacturer.
In fact, this has been going on for years, most
notably between China and Vietnam. The recent anti-Chinese riots there
have even prompted Hong Kong Shippers’ Council chairman Willy Lin Sun-mo
to state that Hong Kong manufacturers based in the Pearl River Delta
are running out of alternative, low-cost factory locations
with ample labour following recent instability in their two preferred
destinations, Vietnam and Thailand. I wrote about the Vietnam and Thai
issues – along with a risk analysis for doing business in the rest of
Asia – and China, earlier this week here, in this article “Anti-China Vietnam Riots a Passing Phase,”
and Willy Lin’s comments can also be construed as a mild political
point to Beijing that placing oil rigs in disputed waters hurts Hong
Kong manufacturers.
But beyond the recent China-Vietnam clashes, what is
the real deal behind the China Plus One issue? Why haven’t thousands of
China-based factories closed in face of increasing costs? Where is the
economic point at which China wages become non-competitive? And is
China’s superior infrastructure the reason why manufacturing will stay
in China? These are all important strategic questions for both the China
based manufacturer, and the foreign investor to be asking. I will deal
with these issues as follows:
How High in Comparison to the Rest of Asia are China’s Wages?
This is not such a simple question to answer. Firstly
because China is a large country with a considerable variables in costs
of labour on a national basis. Secondly because the cost of employing
staff in China usually involves an additional expense in mandatory
social welfare contributions – as is also the case in other countries.
But to get a handle on this, we can look at indicators – and in this
case, compare the average minimum wage in China as against the other
primary manufacturing destinations in Asia. I have taken the main ASEAN
manufacturing nations as well as India to compare.
Note that this figure is average. That means that it
combines lower minimum wage levels in China with more expensive minimum
wage levels – which tend to be precisely where manufacturing labour is
required. The average China figure then is actually a bit lower than it
would be should we just take minimum wages around the manufacturing hubs
of Guangdong, Zhejiang and Jiangsu.
In this comparison, China looks competitive when
compared with Thailand and Malaysia. However, the minimum wage
comparison is only part of the story. What then kicks in, are mandatory
social welfare contributions. These need to be paid by the employer on
top of the salary, and are calculated on a percentage basis against
salary. There is some regional variation here, but not so much as to
make huge differences to the mean average.
China
has relatively high social welfare compared to the rest of Asia. This
means that when trying to get a handle on labour cost comparisons, it is
important to take the wage level, and adjust it to take into account
the additional welfare costs in each country. An adjusted chart taking
both into account tells a more accurate story:
It
should also be noted that in China’s rush to wean the country from
being an export-driven economy and onto a consumer based economy, it is
State policy to place more money in the hands of Chinese nationals. This
means that China is the only country among those shown that has a
specific agenda of raising workers salary levels on an annual basis.
There are some variables concerning this, but over the past five years
these have averaged 15 percent, per annum. And any salary increase also
impacts upon the welfare costs. These are useful figures that can be
utilised to chart future costs in Chinese salaries looking forward.
To make it easier to break down, we can compare
regional wages, including the added social welfare component, against
China as follows:
Why Aren’t Thousands of China-Based Factories Closing?
In fact, they have been. The Hong Kong Federation of Industries
warned back in 2011 that some 16,000 Hong Kong owned factories were at
risk of closure. Of those, it is estimated about 30 percent actually
shuttered their doors. The figures for Taiwanese owned factories are
similar. Many slipped away to Vietnam or elsewhere. This movement has
largely gone unreported in international media as it has not tended to
involve Western investors to the same degree. However, what has been
happening is that the business model of many Western-invested factories
in China has changed. Instead of being limited to purely export-driven
manufacturing, the regulatory environment for foreign invested
manufacturers changed a decade ago to permit local production to be sold
onto the domestic China market. That was a game changer, and such
factories are now concentrating on servicing the China demand. Many are
also engaged in improving their China supply chain and distribution
networks. So the answer is, cheap Hong Kong/Taiwanese labour-intensive
factories aside, manufacturing investment in China has evolved to
service increasing China demand. Those factories are staying put.
At What Point Does Manufacturing in China Become Uncompetitive?
This question is actually industry specific. Many
manufacturers in China are doing very well, others not. We wrote about
the winners and losers in different types of industry in China recently
in this article, “South China’s Balancing Act Between Rising Wages and Keeping Investors Happy.”
But essentially, depending upon industry, the nature
of how some China based businesses began to become uncompetitive can be
traced back to January 1st, 2010. This is when the China-ASEAN Free
Trade Agreement came into effect. What this agreement broadly did was to
reduce the import/export duties on 90 percent of all products traded
between ASEAN nations and China. This impacted specifically on the more
advanced manufacturing nations of Indonesia, Malaysia, Philippines,
Thailand and Vietnam. Initially, Chinese manufacturers had a field day
as they suddenly found these markets very close to home were completely
open, and cheap, labour intensive factories – many owned by the Hong
Kong and Taiwanese investors I mentioned earlier – flooded into these
countries.
But what has gradually been happening since then is
the consistent rise in Chinese labour costs. This has meant that
countries such as Vietnam are now highly competitive when measured
against China. But again, the issue is mainly industry specific, and
many factory operations are still highly profitable and likely to remain
so. China is moving up the value chain, and these industries are doing
well – for the time being. Labour intensive industries or those with
thin profit margins for error are however at high risk. For further
details and downloads of the China-ASEAN Free Trade Agreement, please
see our sister ASEAN Briefing website here.
Why China?
The big deal about China is its transition from
export manufacturing to a consumer-driven society. Briefly put, the
impact of this means that China’s middle class consumer population is
expected to rise from approximately 250 million today to 600 million by
2020. That means an additional 350 million middle class consumers will
emerge across China in the next seven years. The question then becomes
this. Where is the manufacturing capacity going to be to service those
consumers? The answer is Asia. The existing China operations will
evolve, and continue to provide some manufacturing facilities. But they
are also changing to become more logistics and planning based, even to
the extent of importing, warehousing and distributing products
manufactured in a related factory elsewhere in Asia. The China facility
is still needed, but its function is changing. And the big win is in
being able to sell to a Chinese consumer market more than doubling its
existing size. The real question then is whether the additional
manufacturing capacity required to service this market should be added
to the existing China facility or based in elsewhere in Asia.
Increasingly, the cost dynamics are in favour of it being placed
elsewhere in Asia. Hence the “China Plus One” issue.
The ASEAN-China Infrastructure Gap: 70 Percent Productivity is the Rule of Thumb.
Also kicking in to the entire picture is the
infrastructure issue. China’s infrastructure, and especially in South
China and the Zhejiang / Jiangsu regions is generally excellent, less so
once factories start to move inland. China actually has a serious
shortage of central and inland warehousing, distribution and logistics
facilities inland. However, there is still an infrastructure gap between
Shanghai for example and Ho Chi Minh City; Guangzhou and Manila and any
other permutations. Operating a factory in many ASEAN countries means
having to deal with an infrastructure not as well developed as on
China’s eastern seaboard, and this eats into productivity levels.
However, even this can be measured. As a general rule of thumb, when
asking Dezan Shira & Associates clients in Vietnam, Indonesia,
India, Philippines and elsewhere, it often makes economic sense to place
manufacturing capacity into a secondary location if the facility can
get production levels up to 70 percent of the equivalent operation
achievable in China. There is another caveat to this too. China wages
are only going to keep increasing. And additional investment means the
infrastructure gap is going to keep decreasing. In ten years’ time,
production managers are going to be far less likely to complain about
infrastructure problems elsewhere in Asia when held up against China.
Additional Profitability Issues
Another issue to bring into the equation is the rate
of profits tax. This is a moving target in Asia, although the situation
in China is quite consistent. Foreign investors who are taking the bulk
of their profits in China may also wish to examine the regional
alternatives. Dividends taxes apply to foreign investors who wish to
repatriate their profits back to their parent company.
Of these, it should be noted that several countries
are set to reduce taxes below that listed above. India, for example, is
expected to finally get its tax reform bill through Parliament, and this
is likely to see a reduction in CIT from 40 percent down to 30 percent.
The Philippines too has been discussing the same, with reductions to 25
percent. Vietnam has already said it will reduce CIT by 2016 also to 20
percent. These will make the economic debate concerning the placing of
additional manufacturing capacity into Asia much easier to acknowledge.
Withholding Taxes
It should be noted that use of applicable Double Tax
Treaties on certain charges such as services rendered by the parent
company as a strategy can decrease the amount of withholding tax
payable. This is commonly used to legitimately decrease the amount of
annual profits a company declares. Withholding tax rates on corporate
charges such as royalties are usually permissible at a 10 percent rate,
lower than the Profits tax rate. DTA typically reduce withholding taxes
by 50 percent. However all of the countries mentioned in our comparisons
already have significant DTAs in place, and there is not much benefit
to be gained over one or the other in this regard when compared with
China: nearly all have similar mechanisms in place. For an overview of
how Double Tax Treaties can impact upon your China operations, please
see our article on the subject here.
Investment Incentives & Tax Breaks
China essentially standardized its tax position a
decade ago and apart from a few examples, did away with many of the 15
percent profits tax rates and five year tax breaks that marked much of
the 1980’s and 1990’s that encouraged foreign investment to pour into
the country. Now restricted to specific key underdeveloped geographical
regions and highly specific sought after technologies, China isn’t so
much of a bargain hunting ground when it comes to such deals nowadays.
But that doesn’t mean the rest of Asia is the same, and far from it. All
ASEAN nations as well as India possess free trade, special economic and
export processing zones, many of them offering the same sort of tax
breaks and low tax rates that China did a decade ago. The list is too
long to reproduce in this article, although we did cover the subject in
this issue of Asia Briefing Magazine “An Introduction to Development Zones Across Asia.”
When it comes to ASEAN and India, there are many tax breaks and
investment incentives around just as there used to be in China – so do
your research and shop around.
Winners & Losers
For China, this is all gain. However, existing
China-based manufacturing facilities will need to evolve a different set
of skills, most notably in developing supply chain, distribution,
warehousing and marketing skills into new regional China markets. The
China facility will become not just a manufacturer, but also a
facilitator, and this will mean a change of focus in addition to scope
of business to take advantage of the new China consumer dynamic.
Winners in Asia as we stand today include Vietnam,
who are set to lower their corporate income tax rate to 20 percent
(against China’s 25 percent) by 2016 specifically to better compete.
India too, with a new government in place, has both the benefit of an
inexpensive, huge and growing labour pool, and an improving
infrastructure. China has itself recognised the growing importance of
India as a manufacturing hub to service the China market – the Chinese
government have offered to foot 30 percent of India’s US$1 trillion infrastructure development
requirements to allow this to happen. And as sage China watchers well
note, it is always wise to follow China’s State policy. Plus India also
has a massive consumer market – one reason Ford have placed their entire
non-U.S. auto manufacturing capacity into Gujarat.
In terms of India’s relationship with ASEAN – it
should be noted that it too has a Free Trade Agreement with ASEAN –
meaning that 90 percent of all trade and services between the two are
now duty free. This provides an added incentive to establish an ASEAN
manufacturing facility to service not just China, but ASEAN and the
Indian markets in one fell swoop.
The Philippines and Indonesia are also likely to do
well. Despite the recent row over maritime borders, these have been kept
to diplomatic levels and bilateral trade has been increasing. A booming
Manila gambling scene, away from the eyes of the Chinese secret service
and spectacular beach resorts are fuelling a Chinese tourism boom,
while wide usage of English language and again, an improving
infrastructure is seeing the Philippines become an Asian investment sweet spot.
Indonesia too, although the Jakarta traffic situation
remains dire, is also offering large numbers of competent labour, an
increasingly educated workforce and a sizable Chinese diaspora who have
seen first hand the management techniques employed in mainland China and
are setting up similar operations in Java.
There is a lot of truth to the notion that the Indonesian city of
Surabaya is set to become that countries equivalent of Guangzhou – yet
how many foreign investors have heard of it?
Malaysia also offers a number of joint venture
business parks, run along the proven Chinese model, and these too offer
tax incentives and breaks no longer available in mainland China. The
country is politically stable, and provides excellent infrastructure –
as anyone who has taken the highway from the Airport to downtown Kuala
Lumpur will testify.
On the cautious side, Thailand looks set for a period
of military rule, which until the country is considered politically
stable enough, is likely to put off some foreign investors. Yet when
viewed as a longer term play, it has excellent dynamics and is
strategically placed in the centre of ASEAN. This makes the country an
ideal base from which to reach out to ASEAN’s own consumer market, as
well manufacture to service China and beyond. This is the reason Volkswagen have decided to base their Asian production facility in Thailand –
reaching out to the ASEAN market, while their existing China operations
will continue to focus on the growing Chinese domestic market.
Other commentators may ask why I haven’t mentioned
Cambodia, Laos or Myanmar. While they may sound adventurous, the reality
is that none of these countries as yet have any significant
infrastructure in place. Salary levels may well be low, but generally
speaking the infrastructure gap is too wide at present to make them
viable except for perhaps smaller manufacturers willing to spend a great
deal of time, effort, education and investment into these countries.
Neither are their international tax obligations especially advanced –
Cambodia, for example, has signed no double tax treaties at all, with
anyone.
For the next decade, these countries will remain the
preserve of big ticket infrastructure developers and will remain a step
too far for many, although over time this will change – just as
countries like Vietnam and Thailand start to become expensive. But that
is some way off yet.
Conclusion
The “China Plus One” issue is not just a theory, it
has already arrived and is being put into practice. Foxconn, for
example, are in the process of relocating their entire assembly
operations for Apple products to Indonesia.
Much of South China’s shoe-wear and fabrics industry
has already set up shop in Vietnam and Bangladesh, the latter to such an
extent that Bangladesh is now the world’s second largest producer of
textiles – after China.
Operational and economic trends as we have seen
dictate that Chinese labour is and will continue to become more
expensive, while the Asian infrastructure gap is narrowing. Yet China’s
own domestic consumer market is growing, as are those in the rest of
Asia – ASEAN and India included. The locating of a secondary production
facility elsewhere in Asia is not just a theory, it is an economic
necessity. Foreign investors wishing to sell product onto the China
market must now start to compare the economic costs of doing that from
China with that of placing that capacity elsewhere into Asia, and using
the China-ASEAN DTA to avoid import duties.
Chris Devonshire-Ellis is the Founding Partner of Dezan Shira & Associates
– 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, in addition to alliances in Indonesia, Malaysia,
Philippines and Thailand, as well as liaison offices in Italy, Germany
and the United States. For further information, please email asia@dezshira.com or visit www.dezshira.com.
Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.
Ref;http://www.china-briefing.com/news/2014/06/03/china-asean-wage-comparisons-70-production-capacity-benchmark.html
ASEAN infographics: population, market, economy
Here is a set of 4 individual infographics on the
share of each country in the population of ASEAN, the comparisons of
their economies as well as the aggregated ASEAN economy and market
compared to other major global market and economies: EU, US, China,
Japan and India.
Revised 15 March 2015
The following infographics present the data of the bigger “Why ASEAN: Economy & Demography Infographic”
with a focus on each of the main points. They can therefore be used
independently as needed for ASEAN presentations, websites, blogs,
illustrations, etc. with an interest on a particular point: economy,
population, market, comparisons…
ASEAN population
These two graphics present comparisons of the
population from within, between the 10 member countries, and from
outside, as a single market compared to other major markets.
Share of each country in the population of ASEAN
Embed code: ASEAN population
ASEAN market compared to the EU, US, China, Japan and India
Embed code: ASEAN market
ASEAN economy
These following two visuals show the important
differences in size of the economies of the ten ASEAN countries, but
also that they form together one of the largest economy in the world,
notably larger than India.
Compared GDPs of ASEAN countries
Embed code: ASEAN economies
ASEAN economy compared to the EU, US, China, Japan and India
Embed code: ASEAN economy
Related posts
ASEAN infographic: economy and demography
Connecting the ASEAN community
Overview of the US-ASEAN relations
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