I attended two prominent annual US-Asia investment events this past week, namely the Hot Markets Watch in Cincinnati and the Asia-Pacific Business Outlook in Los Angeles. These events are high level, attracting many American CEOs, and are fully supported by the US Commercial Service and Department of Commerce – they pull in senior commercial officers from around Asia to speak and present at these events, in addition to inviting a number of prominent speakers.
Covering everything concerning US trade with Asia, “from Hollywood to Bollywood,” as one American businessman told me, the events included serious investment sessions on China, India, South Korea, Japan, as well as all the ASEAN nations, with Singapore, Indonesia and Vietnam dominating. Myanmar and even Laos got a look as well.
What struck me with such an array of American business people attending – well over 2,000 of them – is the range of interests that American businesses generally have across Asia. These events were not geared for the new American would-be exporter or opinionated blogger. To be a player in Asian trade generally requires prior experience in international trade and preferably experience of doing business with Asia.
Fading China Dream?
The general quality level of participants in terms of experience, proven Asian business tolerance, energy levels and enthusiasm was high in both conferences. However, this year saw a perceivable difference: China is starting to get sidelined.
While the overall American perceptions and experiences of doing business in China were all present and correct, somehow a feeling pervaded that the ‘China Dream’ is starting to fade. American attention is instead now turning to India, Indonesia, South Korea and Vietnam.
I believe that there are reasons for this. In this article, I’d like to examine some of these reasons, which include China’s continuing reluctance to play fair, its quality and pollution problems, unreasonable levels of expense, lack of transparency and diplomatic belligerence.
Reluctance to play fair. This covers a multitude of issues, from China’s appalling IP protection record and currency manipulation at a government level, in addition to an ongoing and massive trade deficit, to constant contractual disputes, receivables and quality problems, and on to pollution and corruption. Over the past decade China has done nothing much to improve any of these outstanding problems.
Quality and pollution problems. The 2008 Olympics promised a cleaner, greener Beijing. What happened has been a complete reversal away from those standards, and an actual regression. Quality issues remain, increasingly involving polluting contaminants.
Unreasonable levels of expense. It’s well known and understood that China needs to move away from an export-driven economy to a consumer-driven one, and that more money needs to be put in the hands of Chinese consumers overall in order to allow them to ‘buy more stuff.’ Hopefully, some of that will come from imports and China-based subsidiaries of foreign companies promoting their own international and domestic brands to the new Chinese consumer.
To accomplish this, wages need to increase. That’s fine. What’s not all right are the levels of deliverables and the standards one receives in China despite the higher prices one needs to pay for them. It is cheaper for me now to buy a normal lunch in London or New York City than it is in Shanghai or Beijing.
As for real estate, I just acquired a five-bed fully detached house with swimming pool and surrounding land in the up-market, quality residential area of Mississauga in Toronto. The amount I paid for that wouldn’t buy me a one bedroom apartment in Guangzhou.
Lack of transparency. Many examples exist, but this is best observed through the on-going spat indirectly between the US Securities and Exchange Commission and the Chinese Ministry of Finance, with international auditors caught in the middle.
Wanting to investigate alleged fraudulent behavior within Chinese companies listed in the United States, many of them partially state-owned, American courts have ordered the auditors of these companies to hand over documentation from their parent companies in China. But the Chinese Ministry of Finance has warned the auditors concerned that to do so would be breach China’s ‘secrecy’ laws and is a criminal offense leading to imprisonment and potential withdrawal of their business licenses.
It seems likely Chinese companies may well be barred from listing in the United States and Canada as a result; or the Chinese will simply take their listing portfolios elsewhere. Either way, it is not a satisfactory solution to what remains an issue of ethical compromise concerning Chinese standards of corporate governance and transparency.
Diplomatic belligerence. The treatment meted out to Japan over the Diaoyu Islands spat has been duly noted around the world. The issue has resulted in a number of anti-Japanese riots across the country, the sacking of factories, destruction of Japanese property, and harassment of Japanese nationals. Bilateral trade has plummeted. The Japanese, while not de-vesting from China, tend to no longer see it as a ‘desirable’ investment destination.
Japanese efforts at investing in Asia are now being concentrated on India, Indonesia and Vietnam, rather than China. Vietnam seeks to supplant China as the premier textiles supplier to the United States through the Trans-Pacific Partnership (TPP), a proposed free trade agreement covering 11 countries – Australia, Brunei, Chile, Canada, Malaysia, Mexico, New Zealand, Peru, Singapore, the US and Vietnam. Japan has apparently also agreed to join.
China is opposed to the idea, but then the point is that the US sees the TPP as an initiative to lessen dependence on supplies from China by seeking to develop trade partnerships elsewhere. While negotiations are still underway, the basic premise of the TPP is that the wealthier nations in the group will invest in the emerging nations’ manufacturing capabilities to help them upgrade their production to international standards.
Countries such as Chile, Mexico, Peru and Vietnam will especially benefit. There are official denials that the TPP has anything to do with a strategic desire to move part of the global supply chain away from China, but the intended deliverables seem clear.
Awareness of TPP was high at the two conferences I attended. When the US commercial officer for Vietnam asked a packed room of delegates, “Has anyone heard of the TPP?” everyone raised their hand. American businessmen are very much aware of the implications, the stark fact that the TPP excludes China, and the resulting shift in supply chains this will bring. The enlightenment is there.
In any case, with or without the TPP, China is no longer the only country in Asia that foreign businesses are interested in. China’s loss of FDI attractiveness is not all of its own making. In fact, much of the fading interest does not reflect a retraction of investment from China per se, but an increasing amount of interest concerning investment into alternative Asia as the demographics and opportunities there begin to become clearer.
Many global companies, having initially cut their teeth in China, are simply broadening their horizons. Huge markets such as India, with its middle class population the same size as China’s, are beginning to lure investors. Pan-Asian infrastructure projects, many World Bank- funded, are being executed as road, shipping and rail throughout the region get upgraded – much of it with overseas investment. Export manufacturing is on the move to Vietnam and Indonesia.
China has much to do to repair a damaged reputation. New President Xi Jinping and his team have their work cut out to get China and its involvement with foreign investment back on track.
Meanwhile, the rest of Asia is now ripe for opportunity and investment.
The message I am taking home from these two high-profile conferences is that American businesses are expecting to take advantage of the rise of other countries in Asia. China is now not the only game in town. American businesses are becoming increasingly bullish about emerging Asia both as an investment addition – and as an alternative.
About the Author
Chris Devonshire-Ellis is the founding partner and principal of Dezan Shira & Associates, a specialist foreign direct investment practice that provides advisory services to multinationals investing in emerging Asia. This article was first published in Asia Briefing and was reedited for clarity and conciseness. For further details or to contact the firm, please visit www.dezshira.com.