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View from Asia: Should I Stay or Should I Go?

Time to seek alternatives to China? Some CFOs think so.

I was hosting a dinner of multinational executives in Shanghai recently when the CFO of a well-known U.S. company that has been operating in China for ages told me that he was about to conclude a long assignment in Shenzen and move back to New York.

He said that he was looking forward to returning to the United States in part because he believes that the game will soon change for multinationals in the PRC. China’s welter of new laws (environmental, antitrust, labor, tax) will, he fears, provide an unfair advantage to local companies — not so much in the letter of the law but in the way that enforcement favors locals.

He offered anecdotal evidence. A government environmental auditor had gone over his company’s operations with a fine-tooth comb. The CFO asked the auditor, whom he had come to know, how a major Chinese telecom firm located nearby had reacted to a similar audit. “Oh, we don’t audit them,” the auditor quipped. “We only audit you.” When the CFO asked why, the auditor responded, “It’s logical. You’re the foreigners!”

This CFO is not alone. Multinational CFOs are reassessing the wisdom of being in China, and for many reasons. A study by Booz Allen Hamilton and the American Chamber of Commerce in Shanghai found that 17 percent of foreign firms manufacturing in China plan to leave, and more than half of the firms feel that China is losing its edge over other low-cost Asian countries. One key reason is that there are now alternatives to China in labor arbitrage: Vietnam, the Philippines, Bangladesh, Indonesia, and Africa all offer lower-cost labor.

But the companies cite other causes that have nothing to do with wage inflation. Sophisticated supply chains are harder to stitch together across China than those familiar only with the country’s industrial east coast might believe. A recent snowstorm — not severe by North American standards — paralyzed industry in central and western China for weeks.

And then there’s that hard-to-navigate terrain of laws and enforcement. Multinational executives have, for years, quietly bemoaned double standards in enforcement. Only recently has it become reasonable to move to lower-cost markets that also offer, in some cases, more-independent court systems, not to mention lower taxes.

The Chinese government isn’t alarmed at the prospect of losing lower-end manufacturing jobs, having already emphasized a push toward higher-value production. Booz Allen notes that a handful of companies have made their China strategies work by pursuing labor arbitrage and creating a market for their own goods and services in China as well as overseas. Given how quickly China’s domestic consumer market is expanding, that dual approach is perfectly feasible for companies operating in China that make products the Chinese want. But those that don’t fit that description may want to begin poring over maps.

Tom Leander is editor-in-chief of CFO Asia.

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