Asian Outlook

Chris Runckel is the principal and founder of Runckel & Associates, a Portland, Oregon based consulting company that assists businesses expand business opportunities in Asia (www.business-in-asia.com).

WJI: Earlier this year, China cut export tax rebates on products that include steel wire. Why did that happen?

Runckel: Many subsidies like tax rebates, rebates on utilities, etc. are being phased out. The Chinese government has changed its policy because it feels that many of the industries that have settled in China are industries that elevate export totals but also may have negative effects on the environment and cause the Chinese government trade friction with other countries, etc. For these industries, the government is phasing out export subsidies. The value added tax rate has dropped from 17% to 13% over the last two years and will now be cut or eliminated depending on the commodity. The new rebate system will have five levels, 17%, 13%, 11%, 9%, and 5%. This is affecting a number of industries such as plastics, metal parts, etc. and starting to change the dynamics in international sourcing.

WJI: China has become the factory to the world. Will this affect companies that are increasingly dependent on outsourcing from China? Are supplier prices destined to rise soon?

Runckel: To this point, most Chinese suppliers have absorbed the costs caused by the changes in government policy on export subsidies but many Chinese companies have signaled that they cannot absorb much longer. Costs are therefore likely to go up. Many U.S. companies are starting to feel nervous as they feel the Chinese government seems likely to continue to cut back on export subsidies, to continue to let the RMB increase in value, etc.

WJI: Are there other factors that could affect manufacturing prices in China?

Runckel: The Chinese government is very close to issuing a new labor law and this will have effects on costs by stopping short term labor contracts, requiring severance pay, etc. When and if Chinese companies start passing
along these increased costs, many U.S. and other companies may start looking elsewhere for new suppliers. Many U.S. companies are already exploring backup companies in Vietnam, India and other lower cost countries and are waiting to talk with their suppliers to see if the costs will be absorbed. Many companies will absorb the increases, as even with the increases China is still a very economical place to produce in many if not most cases.

Another factor, however, that has gotten less attention but also matters to companies outside China that are looking to locate there is that land prices have nearly doubled from the first of the year. To some degree that is
related to a new national land policy was introduced, but the bottom line is that it will increase costs. Beyond that, there is the cost in general for doing business in different countries that can be hard to determine. We created a table (www.business-in-asia.com/asia/procedure_registration.html) that compares the time requirements for different business start-up requirements for 13 countries that shows just how demanding this step can be. It is not something that should be taken for granted in the planning stage.

WJI: Will multinational and other companies look into even lower cost countries like India and Vietnam?

Runckel: China suppliers have generally been able to absorb these costs. Therefore the effects of the new policy have been minimal to this point. What the future will bring is hard to say. I doubt it will bring jobs back to the U.S. but it well may make more companies more rigorous in their cost review on the cost and benefits of overseas sourcing. Vietnam is getting a lot of consideration from companies wanting to site a new factory, much
more so than last year, which was also a good year for Vietnam.

WJI: Benefits are a significant factor in costs i the U.S. and Europe: is it likely that over the next decade that they shall also become more of a factor, be it China, India or even Vietnam, Malaysia, etc.?

Runckel: Benefits are a growing factor in costs throughout Asia. Many companies do not fully appreciate the importance of benefits in overall personnel costs and often are attracted to countries on the basis of minimum wage comparisons. For many companies, especially smaller companies that are less labor intensive, the real analysis has to be made on salary and benefits costs for your particular mix of employees - management, office, technical, sales, etc. For example, Shanghai and its suburbs, Ho chi Minh City, Vietnam and Bangkok, Thailand can each in their own particular way be a good site to invest and start a factory. Looking at minimum salary costs alone, Vietnam looks the cheapest with Thailand and the Shanghai area pretty similar on minimum salary costs now. What differs between the three are benefits. Thailand is the lowest, Vietnam is next and China is third and China will probably be going even higher shortly when the new employment law is passed and severance and other costs become more complex. But again, what is important is a detailed analysis of all the costs - salaries, benefits, etc. for your particular project and your companies particular mix of skills. Most Asia locations will be much more economical than Western nations for minimum salary and basic manual labor costs. Where there will be a more pronounced increases and a narrowing in costs will be in management and technical staff wages and benefits which in Asia are already rising at a much quicker rate. Again, not to Western levels, but certainly to levels increasingly noteworthy of management attention.

WJI: If lower costs are the driving factor behind movement to Asian countries, how do you see the situation evolving over the next decade? Can it be that the focus will be moving to Asia for growth/demand from Asian countries versus for manufacturing products to be exported back to the U.S./Europe?

Runckel: Outsourcing strictly for cost reasons will wane. For the future, the driver for oversee expansion will be being closer to customers and for increased access to Asian markets. As Asia continues to grow and develop,
more and more companies will want to be there for the obvious reasons, better interaction with customers, quicker shipping times, lower logistical costs, better access to markets and other traditional factors that have
always driven market based economies.