Multinational Corporations Step Up the Search for the Next China 13 comments
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By Jason Simpkins
As far as foreign direct investment in Asia is concerned, China is still the undisputed leader, drawing approximately $42.78 billion in just the first five months of the year, an increase of 55% from the same period a year ago.
But China is coping with a number of growing pains that include higher wages and a strengthening currency. That has left a void for other emerging markets to step up and take the place of a multinational corporation’s best friend.
China used to be thought of as the world’s factory floor - a haven of cheap labor and minimal regulatory oversight for large multinational companies. The result was a massive influx of foreign investment and rapid gross domestic product (GDP) growth. But the country has outgrown this model and is shifting from low-skill, labor-intensive industries to a higher standard of living.
A recent study by the Booz Allen Hamilton Inc. consulting firm found that wages in China rose 9.1% for white-collar managers and 7.6% for blue-collar workers over the past year, the San Diego Tribune reported.
“The days of massive labor oversupply are over,” Cai Fang from the Chinese Academy of Social Sciences [CASS], said at a recent economic forum. “According to my research and relevant surveys, the wages of China’s migrant workers rose 2.8% in 2004, 6.5% in 2005, 11.5% in 2006 and 20% in 2007.”
Part of the reason is that China’s notorious one-child family planning policy is beginning to cause a labor shortage.
Last year, Zhang Yi from the Institute of Population and Labor Economics, told Asia News that the one-child policy has produced an effect where fewer rural workers are going into cities to work.
“In the beginning, it was believed that our big population would be a hindrance to our economic development. But over the past decades, experience has told us otherwise,” Zhang said. “Japan, for instance, has little in the way of resources and boasts one of the highest population densities in the world, but it is a thriving economy and one of the richest nations. Labor is the most important source of wealth.”
By 2025, China’s labor force will have been shrinking in total size for more than a decade, according to Zhang.
Another problem is inflation, as high consumer and producer prices are spilling over into wages. Consumer prices rose 7.7% in May after inflation reached a 12-year high of 8.7% in February. China’s producer price index rose 8.2% in May, the highest in more than three years.
Inflation also makes exports more expensive for foreign nations, particularly the United States. The Labor Department said last week that prices for Chinese-made goods were 4.6% higher in May than a year earlier.
Meanwhile, the dollar has fallen 20% versus the yuan since 2005. Yesterday (Thursday), The yuan rose to its strongest position ever, trading at 6.8762 against the U.S. currency as of 11:53 a.m. in Shanghai, Bloomberg News reported.
Companies used to avoid higher wages by moving further inland, but even rural villages are finding it difficult to muster up enough manpower to furnish factories. And now new government regulations and labor laws have companies retreating beyond the country’s borders.
Earlier this year, revisions to China’s labor laws greatly expanded the rights of workers and increased their bargaining power. A loophole that had allowed companies to layoff employees hired on temporary or fixed-term basis without compensation has been closed. Workers employed by a company for 10 years are now entitled to one month’s severance pay for every year worked. And employers are required to consult an “employee representative congress” with regard to changes in hours, benefits and compensation.
Willy Lin, managing director of Milo’s Knitwear (International) Group, told the Financial Times that the new labor law could increase costs by as much as 8% in 2008. However, in collusion with a higher minimum wage, increased social security payments and outside factors such as the appreciation of the yuan, Lin thinks the price paid by Chinese employers could be much greater.
“We estimate that, added together, labor costs [in mainland China] will be close to 40% higher for this year,” he said.
China is also phasing out its practice of charging lower corporate tax rates for foreign companies. And while it does so, other Asian countries are beginning to look more appealing to foreign companies.
Here are a few:
The Next China
Vietnam had a banner year in 2007, attracting $20.3 billion in foreign direct investment (FDI). But the country already expects to have accumulated another $23 billion in FDI in just the first half of 2008.
Canon Inc. (CAJ), for instance, is no longer expanding its operations in China, but it is doubling its Vietnamese workforce to 8,000 at a printer factory outside Hanoi, the New York Times reported. Both Nissan Motor Co. (ADR: NSANY) and Hanesbrands Inc. (HBI) and China’s own Texhong Textile Group Ltd. are also reportedly expanding their operations nearby.
“We found more ready availability of both land and labor in both Vietnam and Thailand,” Gerald Evans, president of Asia business development at Hanesbrands, told The Times.
Where as unskilled Chinese workers now earn $120 a month for a standard 40-hour workweek, factory workers in Vietnam make as little as $50 a month for a 48-hour workweek that includes a full day on Saturdays, the paper said.
Other facts to consider about Vietnam:
- More than half its population is under 25-years old.
- At 2%, Vietnam’s unemployment rate is among the world’s lowest, trailing only Azerbaijan, Cuba, Iceland, Andorra and Liechtenstein.
- Its labor and production costs are roughly one-third of China’s, making Vietnam a worthy contestant in the contest for new production sites.
- Its economy was able to shrug off the 1997 “Asian Contagion” financial crisis and averaged 5.5% growth for each of the next two years - while other nations in the region saw their own economies contract.
- Since January 2007, it’s been member of the World Trade Organization.
The Next Vietnam
If Vietnam is the next China, then Cambodia may be the next Vietnam. Capital interests are beginning to take notice because of its prime location in the fast growing Asia-Pacific region, young and inexpensive work force, rising productivity, pro-business government, stable politics, and strong GDP growth.
In 2006, foreign direct investment totaled $2.6 billion, up from just $340 million in 2004, according to the International Monetary Fund.
Ironically, China has become one of Cambodia’s biggest investors. According to the official China News Agency, 3,016 Chinese companies had made cumulative investments of $1.58 billion by the end of the end of 2007.
With even lower wages, the nation is fast becoming a new Mecca for the world’s textile industry. The industry employs about 300,000 workers and generates annual revenue of more than $1 billion.
“[Cambodia] is where Vietnam was some 8 to 10 years ago,” Marvin Yeo, who co-founded Frontier, which manages the Cambodia Investment and Development Fund, told the International Herald Tribune.
Renowned investment luminaries Marc Faber and Jim Rogers, who are advising some of the private-equity firms that will pour upwards of $500 million into Cambodia, have also praised the country’s investment prospects, the Wall Street Journal reported.
“Cambodia offers an enormous potential for future capital gains,” Faber wrote in a recent newsletter for acolyte investors.
Cambodia’s GDP peaked at 13.5% in 2005 but is expected to slide to a still-impressive 7% or 8% percent in coming years.
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This article has 13 comments:
Have you been to these countries? I have. Do you know what you'll be destroying? I certainly do.
This is one of the last great places on earth. Please. Hands off.
The patterns of FIT in Vietnam have been well established for the past several years, and will likley continue, at least near term. As I write this, Prime Minister Nguyen Tan Dung is traveling in the United States with senior memebrs of his country's trade delegation and Deputy Prime Minister and Minister of Foreign Affairs Pham Gia Khiem. The US and Vitenam have already signed economic agreements of note, including free trade, garment and textile, and aviation agreements. Most notable, perhaps, is that on 9 December 2006, the US Congress adopted the permanent normal trade relations status for Vietnam, and on 21 June 2007 the two countries signed Trade and Investment Framework Agreement (TIFA). There has been bilateral cooperation in scientific, technological, cultural, educational, medical and labor sectors, with many deals signed, including a joint communiqué on medical cooperation, and agreements on sports, labor, and education.
One attraction to foreign investors and diplomats alike has been Vietnam's history of continuity and centralized decision making. Unlike in China where provencial governments and civil leaders often change the rules as they go, Vietnam boasts a strong, centralized, federal policy making process. Stability in the regulations is a key point to investors. Employment has been stable, the largely Buddhist influenced population treasuring education, peace, and progress.
Still, like all opportunities, there are some risks to be weighed when contemplating a Vietnam linked investment. Property values there have more then tripled in some cases giving rise to questions among some investors about a possible bubble building. Saavy local investors have been plowing money into the property market, with a favorite tilt towards the sq. miles of condomenium space being built along many of Vietnam's more attractive shore lines. Many of these units have been flipped for a doubling or tripling of original investment with no end in sight of the investors flocking there from Hong Kong, China, Singapore and elsewhere.
However, Vietnam's step into the global economy has been a two edged sword. Inflation, like everywhere else, has reared it's ugly head. CPI has grown by 15%+, so far this year, though it hasn't prompted demonstrations or strikes as it has in other countries, perhaps a testement to the population's steady resolve and faith in their government. Hand in hand with the rising consumer prices is Vietnam's continuance as a net importer with a growing trade deficit which rose to $14B+ in May, compared to $12B in all of 2007, pressuring the Dong which now is at 18,500 per dollar on the blackmarket versus the official rate at 16,000 per dollar. Local investors have shied away from the bourse, driving it down from last year's regional star to this year's worst performing, and are likely among those driving the price of a gold, a revered holding among traditional Vietnamese people.
Tight bank liquidity, investor flight to gold, rising CPI, rising trade deficits, non-performing loans amidst the hangover's from last year's mania -- sound familiar? All investors should proceed with much caution IMHO.
Vietnam's entry into the WTO last year makes them fair game for the IMF, which is urging the government to ease off the throttle and slow their growth before inflation runs away with the prize. Concern's have driven the local stock markets down and
Vietnam's GDP grew 8.5% in 2007. The economy, on the whole, grew 7.4% in Q1,08. Notably, in today's commodity driven investment scenario, Vietnam is expected to export 8m tons of rice while other nation's struggle to meet domestic demand. FIT is running at a pace that is 2.5 times last year's $15.3B so far.
They could have gone to Bangladesh but the lack of Chinese ancestry in those countries make it an hard place to penetrate. Latin America or Africa are more for the resources than manufacturing.
I do not agree with you entirely with regards to Africa as as location only for resources. Africa is well positioned to be the manufacturing hub because the resources are within proximity, the cost of labour is still low and will be lower than Mainland China soon, as the cost of doing business there goes up. For any respectable brand, you are better of in a location that respects international laws with regards to human rights, labour conditions etc, whilst balancing the need for companies to be competitive.
Take small unknown countries like Swaziland, they have hosted MNC like Coca Cola Concentrate plant, exporting to almost half the world competitively. Recently the Government there unvailed one of the largest spinning, dyeing and weaving plants in Sub-Saharan Africa, operated by Tex Ray Limited. They now employ 6,000 people and export to the region and the US duty free. This are just some of the success cases in Africa. Mercedes Benz now assembles the C-class in South Africa. Africa needs these investments to address poverty and high unmeployment, mindful of the environment and scenic beauty this environment is endowed with.
On Jun 23 03:36 AM vitaminc wrote:
> Sorry to burst your little bubble but the big multinationals in EMS
> and textile manufacturing are already in Cambodia, which was under
> heavy Chinese influence like Vietnam.
>
> They could have gone to Bangladesh but the lack of Chinese ancestry
> in those countries make it an hard place to penetrate. Latin America
> or Africa are more for the resources than manufacturing.
As for Cambodia-oriented funds, I don't know that there are any, anywhere.
These ideas are pipe dreams for all but the most adventurous investors.
over 80% Live in Poverty, while the other are the dictators.. and are so desperate. They count Farmers as being Employed? Sure if you call making equivilant to $5,000 yr In the USA.. as Employed.