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China is still the right place for SMEs

by Dan Harris

I spent much of last week in Chicago meeting with “China people” and “talking China” and I left there with one inescapable conclusion: China is changing. No drum roll please.

Of course China is changing you are saying, but how? The conclusion is that China is getting more difficult for foreign companies, but why and how? The following was the consensus:

  • China’s government does not like large private companies, be they American (Apple and Yum Brands spring to mind) or even Chinese. China likes State Owned Entities that operate as much to advance the interest of the state as to make a profit. Worries about the economy stop the government from going much beyond putting big companies in their place.
  • China wages keep rising and China’s government is fine with this. But this has and will continue to have repercussions. It means that production costs are rising in China and that is leading to its own set of changes. Really large companies (the Intels, Canons, Toyotas of the world) that are able to build or maintain essentially self-contained operations in a country like Vietnam are doing exactly that. Companies that need substantial outside assistance are just starting to look more seriously at other countries for their manufacturing. On the flip side, many SMEs have little choice but to stick with China for their manufacturing because only China has the infrastructure to make what they need at anything approaching a reasonable price. Also, many companies are looking to move into China or to expand their China operations so as to capture the China market. If you think this sounds contradictory, you are right. On May 1, the Wall Street Journal did a story entitled, “Not Made in China: As Labor Costs Keep Rising, More Factories Flee To Vietnam” on one page, and a story on another page, entitled, “Welcome To General Tso’s Motors,” on how “China is becoming GM’s global export base.” In other words, China is no longer an “automatic” for American companies, not that it ever should have been.
  • In addition to increasing wages, China is becoming more difficult because of its legal enforcement. I hesitate to use the word “difficult” here because whenever I do so, someone usually writes to complain about how China has every right to enforce its laws and we as foreigners should not be complaining. China does have every right to enforce its laws and it is definitely doing so against foreigners, particularly its tax and customs laws. This stepped-up enforcement is increasing legal and tax costs for virtually all foreign firms doing business in China.
  • Countries like Bangladesh are not going to replace China. Certainly not in the short run and probably not ever. We all know Bangladesh is not even close to being big enough or populated enough or with sufficient logistics to replace China. I have always thought Bangladesh is a bad idea for American companies. I thought this before the fire and before the building collapse and before the killings in the streets by Islamic extremists. I have thought it because I just do not think it worth it to a company to locate in a place like Bangladesh, where the safety risks, both for Americans and for workers is so high. Even before the fallen building and the riots, I was sensing that more American companies are coming round to this view. It is also clear that even better functioning China alternatives like Vietnam or Thailand or even Indonesia are all far more difficult (at least right now) for SMEs than is China. Many are improving though and it the number of SMEs realizing this is definitely increasing.

What do you think? What are you seeing out there?


Dan Harris is founder of the Harris & Moure law firm, a boutique international law firm focusing on small and medium sized businesses that operate internationally. China is the fastest growing area for the firm. Dan writes ChinaLawBlog.com as a source of China legal and business information.

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