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Foreign companies want to move their manufacturing plants out of China, but ....

China's deteriorating relationship with the world has crossed the point of no return especially with America, India, Japan, UK and Australia.  The Chinese Communist Party (CCP) which rules the People's Republic of China (PRC)  cannot change its model of functioning without giving up power which implies the CCP's self destruction. 

It is certain the CCP will fall, the only question is  when?

Unfortunately the CCP will take down the Chinese people, society and the Chinese economy down with it. 

Every cloud has a silver lining. One country's problems are another's opportunities. 

In 1992, the visionary leadership of  Deng Xiaoping the Chinese government decided to attract foreign investment to China by offering significant incentives to foreign investors, including the following:

  • Exemption from corporate income tax.
  • Exemption from VAT and other business taxes.
  • Free/cheap land and rent.
  • Exemption from social welfare payments for employees.
  • Exemption from personal income taxes for foreign employees and executives.
  • Freedom from control by the CCP.
  • Freedom from worker unions.

At that time, the average salary of a Chinese worker in the private sector was US$ 150 per year, working 12 hours a day, 6 days a week with no attendant benefits required to be provided to the worker.

These incentives encouraged a flood of foreign investment into China. These incentives did not apply to Chinese locally owned enterprises and at one point China imposed a 35% corporate income tax on Chinese owned businesses, while imposing no income tax on foreign owned businesses.

In 2020 all these exemptions have been withdrawn and now foreign owned companies also pay 35% tax.

The average salary of a worker is now US$ 13,500 per year with a host of statuary benefits to be provided.

There is another worrying development for investors and foreign owned Chinese companies. Short of foreign exchange,  since October 2016 companies are now unable to remit profits out of China in addition to requiring strict permission to remit money overseas. 

China also introduced China Compulsory Certification (CCC) where foreign owned companies are required to hand over all details, designs, processes of their products and services along with samples to Chinese authorities. They are also obliged to provide unfettered access to their facilities.

To their dismay the foreign owned companies discovered that there were cheaper copycat products introduced just a few years ago at much lower quality and costs that eroded both margins and market share of the original companies.

One is tempted to ask, "Why then do the foreign owned companies persist in staying on in China?

The reasons are several but the main ones are, manufacturing is not all done in one place and under one roof or in one company. In a concept of tiering the main manufacture focuses on design, quality, assembly, and marketing. The main product is broken up into main assembles which are produced by the tier 1 company. The sub assemblies and aggregates, are procured from tier 2 companies which produce sub assemblies and aggregates. Tier 3 companies produce the individual components and then finally there are tier 4 are the raw material suppliers. 

The entire manufacturing is thus handled by a cluster of a mother plant and many supporting companies.  So toy manufacturers will have their own clusters as will the garments industry, or the automotive industry or computer/smart phone manufacturing industry.

It is not that companies do not wish to move their manufacturing operations out of China, they simply can't do this overnight or even any time soon. However the deteriorating situation both within China and China's relationship with other countries will not give them the luxury of much time.

The question is where will these companies relocate manufacturing and sourcing?

No amount of just pontification and bluster can attract companies, technology, capital and markets. It needs firm leadership, clear policies that go down the line and a bureaucracy that facilitates rather than obstructs economic growth. 

This could be a once in a lifetime opportunity for countries like India. We cannot afford to screw it up.

_________________________

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