China or India for Investment

By Christopher Runckel, in Wire Journal International Magazine, November 2005

This is the second of a two part presentation by Chris Runckel, whose consulting firm based in Portland, Oregon, USA, provides advice for companies seeking to find low-cost quality suppliers in Asia.

Picture: (left) Asia offers much in the way of potential, but knowing where to locate and why can be an difficult challenge.
(right) Inside a major air conditioning and compressor operation in

Thailand

Below is a comparison of the four countries in Asia -

China

India

Thailand

and

Vietnam

- that my company works most with. Here are some examples of the differences and similarities in 10 different categories.

Wages: In some respects, the lure of low wages unto itself seems to enough for some companies to move into Asia. China and Vietnam are comparable and the least expensive for unskilled labor in Asia. One must also look at government required benefits, however, and once these are added in the difference between China, India, Vietnam and even Thailand, in the areas away from Bangkok, become closer. In fact, some Chinese firms, such as textile companies, have relocated to Thailand because it is very cost-effective once benefits are considered. Further, salaries for office and management level jobs are more comparable between China, Thailand and Vietnam. Despite this, if labor is the biggest portion of the contemplated manufacturing project, chances are China or Vietnam will be lowest. The minimum wage in China, Thailand and Vietnam outside of the urban centers is about $85-90 base salary per month although it is highly recommend to pay slightly above the minimum wage (say 10-15%) to encourage employee retention and to attract better workers. To this base in China one must budget an additional 30 percent for mandated employment benefits like retirement/social insurance, unemployment insurance, workers compensation, etc. India is a very low labor cost market and is comparable to China or Vietnam in many respects. Labor laws in India fall under the purview of the state governments and although quite bureaucratic in the past are being streamlined now in many states. As the laws are set by the states, states are acting to rewrite or reinterpret their laws to attract more FDI. Permanent workers earn more than four times the wages of contract workers in most states and having a firm experienced in India HR management is a big plus in evaluating and starting a project. In Vietnam, the figure for government required benefits is slightly less - about 20 percent. In Thailand, the minimum wage is slightly higher (about $4 per day) and workers benefits are more voluntary although 3 percent is payable for Basic Endowment insurance by employers and 3 percent from employees.

Intellectual Property: China continues to have serious problems with intellectual property protection, enough so that HR, Acer and other companies have withdrawn R&D from there. Laws do exist but China has conflicts between its governmental hierarchy levels (province, city and nation) and Chinese companies and individuals exploit them, compromising IP for western and even Chinese companies. India is much stronger on IP protection and has a much more developed legal system with more predictable outcomes than China and therefore can be a better choice for projects with a larger IP component. Vietnam also continues to have problems with IP protection similar to China. Thailand is more unified nationally and has less conflict between its levels of hierarchy. Although Thailand has minor problems with IP protection, in generally is much better than China or Vietnam.

Requirement for a Local Partner: U.S. or European companies interested in investing in China or Vietnam today can and do generally establish a wholly owned subsidiary (a wholly owned foreign enterprise). Often, local officials will encourage you to consider a local partner and introduce them, but there is no requirement for local ownership on most investments in Asia today. Certain businesses in India are still restricted to Indian nationals only but for over 90 plus percent of businesses they are open to foreign investors and there is no requirement for a local partner. Thailand has long not required a local partner so China and Vietnam are now coming closer in line with Thailand on this, That said, the need for local knowledge and understanding if anything is probably greater today than it was in the past as the competition is more intense and there is a greater risk of losing money through poorly thought out agreements for supply, sourcing or OEM contracts. Good connections with local authorities, understanding the local culture, understanding the language and how business is done remain vital to any new venture. Initially, a company may be well served by seeking the experience of consultants who have actually been there and done deals and understand the pitfalls. Ultimately though, internal company expertise needs to be built up via local hire and from effective HR recruitment.

Taxes: Taxes typically are higher in India than in China. China generally only offers a two-year exemption and three years with a 50% reduction. In Thailand, approved Board of Investment projects in Zone 3 which is the area outside Bangkok and its suburbs offer eight year exemptions plus five years at 50% off. Another major difference in Asian countries in taxation is the way they apply the value added tax (VAT), which you can think of as a national sales tax. Most Asian countries follow the European VAT structure where a government tax is added at each stage of production. In China, that tax is 17%. In April 2005, India instituted a nation-wide VAT with a 12.5% rate. Vietnam's rate runs from 10-mid 20s% depending on the product. In Thailand, it is 7 percent. Generally, Asian countries have a system that allows the tax to be reclaimed in the event of export. Theoretically all the tax should be able to be reclaimed or returned but this has often not been true in some parts of China and Vietnam.

Domestic market: China and India both have huge domestic markets, but this statistic is meaningless as the majority of people in both countries do not have the money or the interest in most western products. Thailand admittedly is smaller - about 66 million people, but it has been the most aggressive player in Southeast Asia in terms of negotiating Free Trade Agreements (FTAs). Therefore, the real figure here should not be Thailand's population but where goods produced in Thailand have market entree. Thailand is part of the Asia Free Trade Area (AFTA) and as such has access to the over 500 million people throughout Southeast Asia. It also has a Free Trade Agreement with India, China, Australia and New Zealand. Additional FTAs are well along in terms of their negotiations with both the U.S. and Japan which further opens up markets representing fully half of the worlds' population.

Bureaucracy: China, for all the stories one may read, is not a bureaucratic country when it comes to business. Licenses, permits and approvals are generally quickly issued and acted upon. India is another story. An Indian government official told me that the British may have invented bureaucracy but India has perfected it. That situation has been improving but it still can be very difficult to get a project through on a timely basis. Thailand is much more business friendly. The Board of Investment (BOI) simplifies investment procedures, as do the major industrial parks through-out the country. Thailand has a very easily understood system and quick procedures. Communications costs: This term refers to telephone, fax, internet charges and international courier fees. These need to be budgeted for and considered in a project as it often can be 5% or more of ongoing expenses. Most countries in SE Asia, with the exception of Vietnam, have reduced their costs as has China. Shipping: The cost of shipping a 20- or a 40-tt container varies from port to port and from shipper to shipper varying on the time of year, volume of shipment made by the producer and other factors. Generally, we have found the cost of shipping from China and Thailand to be comparable in price. Vietnam and India tend to be higher for shipping ($300 or more per 40 foot container) and this often affects the profitability of locating large shipping-dependent manufacturing in these countries.

Safety: Safety is not viewed as important in most locally run plants in Asia as it is in the U.S. or Europe. There are safety rules in China, Vietnam and elsewhere but enforcement tends to be below standard. Workman's Compensation laws exist and are generally enforced against foreign companies but less so if at all against Chinese or Vietnamese owned firms. India has its own problems with safety as contract workers are used to circumvent safety. Safety in Asia remains an area of continuing concern.

Environmental: You have yet to experience pollution until you visit China. Rivers in or near major cities can reek of chemicals to the point where your eyes tear, and the air in Beijing, Chungching and other cities can often be yellow. China and Vietnam have laws mandating that all firms have to follow basic EP guidelines. These are most often enforced against new foreign-owned factories while existing locally owned factories get much less attention. India also has distinct problems with pollution but is doing better than China because it has a freer press and more active advocacy groups. Thailand has strict guidelines, especially for water and chemical usage, but it still has instances of corruption when it comes to enforcement.

Recommendations Do not start off any potential location project with a preconceived location. It is tempting today to think first (and second and third) of China, but it cannot be viewed as one big entity. Further, India could be a better choice, or Vietnam or Thailand. One must consider the goals and from there commit to understanding which venue will be most effective. Evaluate all costs and other relevant factors. The importance of this step cannot be overstated. If you cannot explain why one country (or one region in a given country) is right, you are not ready to act, If the process is daunting, and it can easily overwhelm one, get expert help. Visit the most likely options and consider how they work for your specific project. Time well spent now will be more than justified by the potential for savings and for developing a better thought out and researched business plan.

Runckel & Associates, a consulting firm based in Portland, Oregon, USA, assists companies interested in investing, manufacturing or opening an office or factories in Asia, specializing in guiding small, medium, and family-owned businesses. Its clientele has included wire and cable companies, Runckel & Associates can be contacted through its website, www.business-in-asia.com, or by e-mail at crunckel@business-in-asia.net or by calling tel. 001-503-244-4551.

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