China passes U.S. as top FDI destination

China recently passed the U.S. as the country of choice for Foreign Direct Investment (FDI). In the first half of 2012, China (excluding Hong Kong) received FDI of $59.1 billion compared to the U.S.' $57.4 billion (Source: Global Investment Trends Monitor released by the United Nations Conference on Trade and Development).

Not all is rosy for China though. According to an article in the China Daily, China is losing some investments to neighboring countries in Southeast Asia. An excerpt:

Developing economies for the first time absorbed half of global FDI in the first half of 2012, despite a decline of 5 percent year-on-year.

"China is experiencing structural adjustments in their FDI flows, including the relocation of labor-intensive and low-end market-oriented FDI to neighboring countries," said the report.

Members of the Association of Southeast Asian Nations demonstrated strong attraction for global foreign direct investment. FDI inflows to Cambodia surged by more than 165 percent year-on-year in the first half, while inflows to Thailand rose by 62.1 percent and inflows to the Philippines increased by 10.6 percent, according to the report.

"For investment oriented with low costs, pulling out is normal and will continue in the future owing to China's rising costs and appreciation of local currency," Zhang said.

You can read the full article at: http://usa.chinadaily.com.cn/business/2012-10/29/content_15854071.htm

China remaining competitive despite a rise in labor rates

One of the questions around globalization is the issue of China's continued competitiveness in the face of rising labor rates as well as regional competitors.  The conventional wisdom is that China will lose its competitive edge due to increasing pressure on labor rates.

Turns out that hasn't come true, at least not yet.  A study recently released by the global bank RBS indicates that China continues to remain competitive.  Labor rates continue to rise, but other changes in China's economic environment are offsetting some of the cost pressures.

Here's an excerpt from a Wall Street Journal article:

RBS’s top China economist Li Cui writes in a research note published Wednesday that “evidence of China losing out is still absent.” Her view is that China has been remarkably adaptive to rising labor costs and a strengthening currency.

“One would have expected that labor intensive industries should have been hurt the most given their thin margins and relatively weak pricing power in the global market. However during this period China’s exports of light manufacturing products has risen to about one-third of the world markets (from 22% in 2005), dominating other regional competitors,” she writes.

Another website, The Edge (Malaysia), expands on the shift towards capital intensive exports which has the effect of reducing the impact of rising labor rates:

“But actual evidence of China losing competitiveness is still largely absent. In fact rising labour costs have gone hand-in-hand with China's rapid growth in global market share (from 7%% in 2005 to 11% in 2010).

“The rise in capital intensive exports has been a big part of the change. Machinery and transportation is now the largest category of exports, accounting for 53% of the total Chinese exports, up from 39% in 2001. In these sectors increases in labour costs have relatively minor effects,” said the report.

Due to the dynamic nature of globalization, no country can rest on its past accomplishments.  But given the ambition and talent of the Chinese people, it's unlikely that China will be out of the game any time soon.

Link to the Wall Street Journal article: China Isn't Losing Its Manufacturing Competitiveness After All

Link to The Edge (Malaysia) article: No Actual Evidence China Is Losing Its Competitiveness, Says RBS

China Phasing Out More FDI Tax Incentives

For years China has aggressively courted foreign owned firms with a number of tax incentives.  China has had to balance the economic incentives necessary to draw foreign firms with their desire to nurture and protect domestic firms. 

Chris Devonshire-Ellis at China Briefing has an interesting article on China's shift towards domestic firms through the phaseout of certain tax incentives for foreign-owned entities.  An excerpt from the article:

Foreign investors have long enjoyed a variety of incentives, including the once very attractive five year tax breaks, but these are now long consigned to the scrap heap as China aims to put foreign investors on the same financial platform as its domestic companies. However, in some regards this makes it harder for foreign companies to compete. While legally foreign investors should be treated the same way as domestic corporations, in reality they are not. Foreign invested enterprises are considered as Chinese companies in law, however treatment of them in administrative areas often leaves them at a decided disadvantage when compared with Chinese owned domestic businesses.

An interesting note in the article is that China is reforming its capital markets to enable foreign-owned firms to raise capital in the Chinese capital markets.  Previously foreign-owned entities have been prohibited from doing so.

You can read the full article at: China Phasing Out More FDI Tax Incentives

Asian Development Bank estimates China's growth at 10.1%

According to an article at Shanghai Daily, the ASD has revised China's expected growth.  An excerpt from the article:

THE Asian Development Bank has revised its forecast of China's economic growth this year to 10.1 percent from a September estimate of 9.6 percent.

China's faster-than-expected economic expansion will help emerging East Asia to grow 8.8 percent this year, up from a previous estimation of 8.4 percent, the ADB said in its latest edition of Asia Economic Monitor released yesterday.

The article also notes that strong capital flows into China has created inflationary pressures that have been fueling asset bubbles.  Additionally, the Asian Development Bank suggests China and other Asian countries should coordinate policies to achieve economic stability and sustained growth.

Read more: http://www.shanghaidaily.com/article/?id=456664&type=Business#ixzz17X6jpJEN

Dalian, China restricts foreign workers

Dalian, China has been a favored location for companies looking to service the Japanese market due in part to the high number of Japanese speakers in that area.  China Briefing, which covers business developments in the Chinese market, has an article discussing Dalian's move to restrict foreign workers in organizations with small capital investments.  As noted in the article, this new ruling will have little effect on manufacturing concerns as they require relatively high capital investments.  Rather, it's likely to impact IT and BPO operations that are not as capital intensive.

An excerpt from the article:

The Dalian government introduced a new policy [Effective August 1, 2010] restricting the ability of foreign investors with a registered capital of under RMB3 million to obtain work permits for their foreign staff, effectively stopping foreign employees that want to work for such companies from being able to apply for a Z visa to work in China.

This measure is likely to affect companies in the service and IT sectors more than the manufacturing sectors, as service and IT enterprises tend not to be capital intensive, relying instead on generating income to grow their operations. The policy is likely to have a particularly large negative effect on innovation and entrepreneurship in the area.

Corporations looking to locate a site in China should look at how this impacts their evaluation criteria, including the ability to use foreign workers.  You can read the full article here.

Outsourcing firms get tax break

A story from Shanghai Daily discusses China's efforts to boost its outsourcing business through tax incentives.  Despite the economic downturn, China continues to move agressively to remain attractive to US and European firms looking to outsource IT, BPO and KPO functions.  China has identified 21 cities that are exempt from taxes for companies setting up outsourcing operations.

An excerpt from the article:

OFFSHORE service outsourcing companies in 21 cities will be exempted from business tax effective through the end of 2013 as part of China's efforts to boost the offshore outsourcing business.

Revenues from information technology outsourcing (ITO), business process outsourcing (BPO) and knowledge process outsourcing (KPO) are eligible for the policy, effective from July 1. Firms registered in Shanghai, Beijing, Shenzhen, Guangzhou and 17 other cities can enjoy the tax break, the Ministry of Finance said yesterday.

You can read more here: Outsourcing firms get tax break

China GDP growth estimated at 11% for 2010

An article from Shanghai Daily discusses the belief of Chinese officials that GDP will rise 11% for 2010 largely due to fiscal spending by the government.  One point of interest to multi-national corporations is that part of that spending will be on infrastructure.  Not surprising since China has mad it an investment priority to build the infrastructure that not only benefits their own people but provides an incentive for North American and European companies to continue investing in China.

An excerpt from the article:

China's economy may grow 10 to 11 percent on an annual basis this year based on more fiscal spending, a senior government economist said, striking a more bullish note on the economy than other analysts.

Some fiscal expenditures are channeled as government investment into infrastructure construction, education, healthcare and subsidies for start-up businesses. More government expenditures can help raise domestic demand and stimulate the economy, Zhang said.

You can read the entire article at:

China's 2010 GDP may expand by 11%, economist says

Genpact appoints new Asia leader to focus on China

As a sign of its recognition of the importance of the Chinese market, Genpact recently announced that it has appointed a new lead for the Asia region.  Genpact has been in China, most notably Dalian, as a base for serving Japanese companies.  But it has recognized the growing importance of the China-to-China market and it gearing up appropriately.

An excerpt from the press release:

NEW YORK & BEIJING August 4, 2010:Genpact Limited (NYSE: G), a global leader in business process and technology management, announces that it has bolstered its leadership team in Asia to strengthen its growth strategy in China and Japan, including a focus on the China-to-China market. Charles Hunting has been appointed chief executive officer, Asia, reporting to President and CEO Pramod Bhasin. Hunting brings more than 17 years of services experience to Genpact and will focus specifically on growing the China and Japan markets. Mitsuru Maekawa, one of the pioneers of the business process management industry in China, will be returning to Japan as vice chairman, Japan for Genpact.

You can read the entire press release here.

Companies in China look inward to locate factories

From The Straits Times in Singapore comes an interesting article about Chinese sourcing.  Rising wages and government incentives are causing companies like Hewlett-Packard and Cisco to look inwards for new locations to locate factories.  Historically labor has migrated from the inland provinces to coastal locations like Shanghai in search of opportunities.  Now the opportunities are moving to less developed areas of China.

As the article states:

A growing number of foreign companies in China, faced with spiralling wages and a shortage of skilled workers, are moving their factories inland to contain rising costs, analysts say.

After a spate of strikes and minimum wage hikes resulted in hefty pay rises for millions of workers, firms are looking to capitalise on government incentives to shift their operations to impoverished western China.

Foreign-invested firms are also looking to tap into a young, talented labour force which no longer wants to sacrifice family ties by leaving home to work long days in the coastal industrial belt.

While wages have been increasing for years, Vajpayee said foreign and Chinese manufacturers had now reached a 'tipping point' where labour costs were growing at a faster pace than revenues. 'Investment in a new factory in an inland province is a better option than continuing with a high cost base in coastal regions,' he said.

Although the article deals specifically with manufacturing, support services such as Finance, HR, and IT will no doubt be impacted by the same factors.  Companies looking to establish or build Shared Service Centers in China will need to evaluate the migration of manufacturing labor and where support services should be located to best serve the organization. 

Shanghai continues to be top choice for regional headquarters

Shanghai continues to attract the notice of Western companies seeking to establish a regional headquarter in Asia.  An article at Shanghai Daily notes that 24 more companies have elected to establish their regional headquarters in Shanghai.  These companies include Walt Disney, Kraft Foods and Novartis International. 

An excerpt from the article:

THE Walt Disney Co, Kraft Foods Inc and Novartis International AG are among 24 multinational companies that decided to move their regional headquarters to Shanghai.

It pushed the total number to 795 - including regional research and development centers - and maintained the city's status as China's top destination for regional headquarters of multinationals.

"The growing number demonstrated foreign companies' recognition of Shanghai's overall environment for foreign investments," said Sha Hailin, chairman of the city's Commission of Commerce. "It also came at a special moment when the World Expo was held in Shanghai, which greatly boosted the city's awareness among many foreigners."

The article also notes that Foreign Direct Investment (FDI) in Shanghai grew 4.5% in 2009 (year over year) despite the global economic downturn.

World Bank forecasts 9.5% China growth

An article in the Shanghai Daily newspaper discusses new growth projections for China this year.  The World Bank is predicting 9.5% growth.  This growth will be lead by investment from the private sector as well as increased consumption and away from government led stimulus.

An excerpt:

China's economy is projected to grow 9.5 percent on an annual basis this year, with a shift from government-led investment to a mix of solid consumption, recovered exports and stable investment, the World Bank said today.

"Despite the global recession, China's economy grew 8.7 percent in 2009, and the growth momentum continued in the first months of 2010," said the World Bank's latest China Quarterly Update, a regular assessment of the China's economy.

It lay the ground for the bank to give an optimistic forecast of 9.5 percent for China's economic growth this year, which is well above the Chinese central government's target of 8 percent and United Nations' earlier prediction of 8.8 percent.

Here's a link to the full article:

World Bank Forecasts 9.5% China growth

China Rising

It's no surprise that China's getting a lot of press lately.  My last post noted a report on the top 50 offshore locations and China was near the top.  A new article in Forbes notes a study predicting that China will be the top destination for offshore activiy by 2011.  What I found interesting is how China is accomplishing this feat.  Through decades of manufacturing experience, China has focused on the following:

• Learning how to interact and meet the needs of foreign clients,
• Understanding project management,
• Upgrading their national English language skills
• Meeting global standards, and
• Establishing global brands

These factors, coupled with a vast labor pool and low costs, are converging to make China a powerhouse in global service delivery. 

You can read the full article here.

I Can See The Credit Card Offers Now

My previous post on China dealt with the challenges around patent infringement.  Here's a story with a slightly more positive spin.  China has put in place a central database with credit histories on 570 million people and 12 million businesses.  This has enabled Chinese banks to improve the credit environment in the country.  Prior to the establishment of the database, banks had no effective way to assess credit risk.  As a result, they typically only granted mortgage loans.

An excerpt from the Shanghai Daily article here:

The databases help commercial banks curb the credit risks by finding out how many loans businesses and individuals are paying off, said Su Ning, deputy president of the bank.

Many commercial banks resumed offering credit loans since 2006 when the database was put into use. Prior to 2006, most banks only offered mortgage loans.

Many defaulters have actively paid back their loans to banks since the central bank announced set up the database, Su said.

The World Bank Group recently made an assessment on China's business environment, concluding that China's credit index grew by one percentage point to four percent after the database was set up, much higher than the average credit index in Asia of 1.9 percent, Su said.

Foreign institutions said one-percentage point growth can drive the gross domestic product up 0.9 percent, Su said.

For the full article, click here.

Institutional knowledge of borrowers' financial obligations and payment history is essential to efficient credit markets.  Reliable borrowers will be able to borrow more easily and hopefully at better rates.  Now, if they can just get the credit card companies to stop stuffing their mailboxes.

At Least It Doesn't Look Like A Yugo

China hasn't exactly been vigorous in the protection of intellectual property rights.  In fact, they have a long history of turning a blind eye to patent infringement.  When China joined the World Trade Organization, they were supposed to step up their prosecution of those who violated  intellectual property rights.

As a recent story in Business Week has it, there's still a lot of work to do.  A Chinese car company is introducing some new models that look suspiciously like some of the models put out by BMW and Toyota.  An excerpt from the article:

The row was sparked by plans by the importer China Automobile Deutschland to present the Chinese cars CEO, UFO and Nobel -- which strongly resemble the BMW X5, Toyota RAV4 and the Smart Fortwo, respectively -- at next month's International Motor Show (IAA) in Frankfurt. If the cars do appear at the show, then German car giants BMW and DaimlerChrysler may consider suing the Chinese manufacturers, according to a report in the German car industry magazine Automobilwoche.

Let's hope that companies like BMW and Toyota are successful in protecting their intellectual property.  In the meantime, this story only serves as a reminder as to how much more work is required to bring China up to international standards.

Fixed Asset Investments in China Continue Rise

One of the aspects of globalization that has benefited Western companies is the ability to build plants in China on the cheap, relatively speaking.  Most people know that labor is substantially cheaper in China.  Indeed, the entire issue of labor outsourcing has been featured prominently in the news.  What gets less visability, however, is that capital costs are also substantially cheaper in China.  This only fuels the incentive for Western-based multi-nationals to continue shifting production to Asia. 

From the Shanghai Daily newspaper:

CHINA'S fixed asset investments continued to rise last month, buoying the money invested in factories and infrastructures to 29.6 percent in the first four months of this year, the National Bureau of Statistics said today.

Investments totaled 1.8 trillion (US$224 billion) from January to April, the bureau said.

In addition to the cheaper capital costs, the Chinese government also throws in various economic incentives such as tax holidays.  Without any counter-incentives from the U.S. and European governments, Asia looks increasingly attractive as a location to base manufacturing operations.  And the statistics continue to bare this out. 

Chinese View of American Business

There's an interesting article at CFO.com written by the Chinese editorial director of the magazine.  It discusses the Chinese view of American business.  The gist of the article is that the Chinese are loosing some of their respect for American business, although they still admire our entrepeneurial spirit.

You probably won't agree with everything in the article.  I sure didn't.  Still, it's interesting to get a different perspective.

The World is Fat

In developing the McDonald's theory of globalization, New York Times columnist Thomas Freidman may have overlooked an angle.  According to the Shanghai Daily, nearly 40 million Chinese are extremely fat.  Since China's population is over 1 billion people, they still have a lot of eating to do to catch up to Americans on a per-capita basis.  Still, it's interesting to see an article about Chinese health patterns.  Correlation does not imply causation, but I have to wonder if globalization and the growth of Western business in China (including McDonalds) is impacting Chinese health.  It remains to be seen if advances in health care will outweigh the disadvantages of a global economy, but at least the Chinese can overcome any depressing news with a nice Value Meal.

The World is Getting Flatter

I recently finished reading The World Is Flat by New York Times columnist Thomas Friedman. Of the many excellent points that he makes, one of them is that many educated workers in other countries no longer need to come to America to achieve the American Dream.  An article in the Shanghai Daily makes this point. 

The article, titled City Lures Back Overseas Workers, mentions that it is having great success luring back educated Chinese from countries like the United States and Great Britian.  Of the workers returning, 98% have a university degree, 23% have PhD's and 63% have Masters degrees.  It also mentions that private employers are powerful magnets for returning workers.  No longer do they need to leave their home and family to achieve their potential.  Due to China's aggessive entry into world markets, Shanghai is able to offer it's citizens multiple opportunities for professional achievement.

In the coming decades, American companies will have to compete more and more for educated workers.  It has been noted many times that American universities are not churning out near enough scientists and engineers to meet the future demand.  Until now, we've been meeting that need by 'importing' educated workers from countries like China and India.  As more and better opportunities become available to the citizens of those countries, American countries will be left scrambling.