7/1/2020 Why American Companies Choose China Over Everyone Else

29,684 views | Sep 3, 2019, 11:58am EDT

Why American Companies Choose

China Over Everyone Else
Kenneth Rapoza Senior Contributor
Markets
I write about business and investing in emerging markets.

Shanghai from above. Once a poor man's town, it will surpass Hong Kong as the Chinese nancial ... [+] GETTY

For all-around emerging market manufacturing know-how, for reliability, for currency
stability, for safety and for domestic market growth, China is No. 1. The rest are more like
No. 100.

No one comes close in the developing world to China. And that is why U.S. companies are
so headstrong about staying there. The trade war will have to get much worse before they
are forced to source elsewhere.

Last week, one of the biggest lobby groups for American multinationals in China, the U.S.
China Business Council, put out their annual member survey. China was still as profitable
or more so than other emerging markets where they have set up shop or source supply.

Only 3% said they were relocating to the U.S. because of tariffs. Under 7% said they were
leaving China.

Why do American companies love China so much? It can’t be just because of its size. India
is comparably large and friendlier to the U.S. Brazil is pretty big—and closer. Mexico, even
closer.

What’s so great about China?

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Forget the politics. Forget that it is a one-party

state that censors its population and now has
religious minorities in so-called “reeducation
camps” in far Western China.

Honestly, does any of that matter to a

transnational corporation? Unless they run afoul
Why not source out of Mexico? It's closer to the
of the Communist leaders or are doing business
U.S. and it has a free trade deal. SUSANA

with the parties deemed responsible for a human GONZALEZ/© 2016 BLOOMBERG FINANCE LP

rights violation, then it arguably matters little to

them. Where is the company that has stopped doing business with China because of
human rights matters?

In fact, many companies that source from China, like Apple, are part of so-called ESG
mutual funds that invest in what that acronym stands for: companies good on the
environment, good on social responsibilities, and with good corporate governance.

For portfolio investors, many top-rated impact investment funds, like the five-star
Morningstar-rated Calvert Emerging Markets Equity (CVMIX) that invests in companies
considered good environmental stewards who pay women as much as men, hold top
China corporations like Alibaba and Mengniu Dairy.

Beat up on China all you want—the truth is that companies overwhelmingly want to be
there. Portfolio managers want to as well.

See: American Companies: China Unfair, But They Don't Care — Forbes

Unmoved. U.S. Trade Representative Robert Lighthizer, center, speaks to China's Vice Premier Liu He ... [+] ASSOCIATED

PRESS

From a corporate perspective, here is what makes China better than the rest.

Taxes:

The corporate tax rate in China is 25%.

It’s 35% in India, 34% in Brazil, and 30% in Mexico. Right off the bat, China is at least 5%
cheaper.

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Five percent won’t be the deciding factor in deciding whether to set up a factory in China.
But these issues sure will ...

Labor:

China is a communist country, so one would expect their workers would have collective
bargaining and other rights. While labor rights are stricter now in China than they were
even five years ago and wages are rising, China wages are still cheaper than Brazil’s and
Mexico’s.

In terms of labor rights, China ranks 5 on a scale of 1 to 5 as one of the world’s worst
countries for workers, according to the International Trade Union Confederation. India is
just as bad, meaning it’s a place where businesses can more easily exploit workers.

Mexico is a 4 and Brazil is a 3.

Brazil has some of the toughest labor laws around. Good luck firing someone in Brazil or
beating a union lawsuit in a court.

Strong labor rights that favor unions tend to be unattractive to global capital looking for
cheap inputs and little drama. China has comparatively weak labor protections on one
hand, and a diverse pool of talent on the other—from stitch-and-sew factory workers to
scientists and other high tech, advanced machine tool operators are all at the ready. There
are hundreds of thousands of them. No country has this.

Moreover, even though India has a similar

workforce situation in terms of rights and size, the
government long ago decided to focus on being a
software developer and IT service exporter.

As an economy, India is known for its IT firms and

maybe a generic drug manufacturer. China is
China workers to the world: "Anything you can
surpassing them on the generic drugs side.
do, we can do too. And faster. And cheaper."
TOMOHIRO OHSUMI/© 2015 BLOOMBERG FINANCE LP
China is known for producing everything. Need a
photovoltaic cell panel for a drone? China can make that. Need a float for your swimming
pool? China’s got it. It’s a wonder that Alibaba or Tencent haven’t spun off their own IT
outsourcing unit to compete with Infosys yet.

India also changes governments every few years and only recently unified its cross-state
tax code. China has none of these problems. Continuity makes life easier for businesses.
It’s one less headache.

Logistics:

There are hidden costs involved in doing business in any country. Taxes can be written off.
But countries like Brazil have hidden taxes hard to avoid. A simple corporate cellphone
account is taxed nearly as much as the corporate tax rate.

In addition to the tax cost, there is a logistical cost of moving goods from one state to
another, one country to the next.

Brazil is notorious for being a logistical mess. It has maybe three decent ports. China
dominates on the port side. Its seaports are world class. There is nothing like them
anywhere in Latin America or India.

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Mexico’s ports are governed by cartels, as Mexico’s president Andres Manuel Lopez
Obrador recently said about corruption at two of the country’s ports and customs stations.

India could be a good solution for its location, but its port infrastructure is nowhere near
China’s, so logistical costs could be higher depending on product and destination.

Then there is corruption and crime which makes doing business in these countries more
complicated.

Bad guys:

China is corrupt. But not as corrupt as any other

major emerging market.

According to Transparency International’s 2018

Corruption Perception Index, China ranks 87th
out of 180 nations. India is better at 78. Brazil Military soldiers patrol a street in Rio de
Janeiro, Brazil. It's not any safer. Want to make
ranks 105th and Mexico is terrible at 138, equal to
your ... [+] DADO GALDIERI/© 2017 BLOOMBERG FINANCE
Russia, a country everyone in the market refers to LP

as the Wild East.

The small Southeast Asian nations that have been benefiting from Chinese manufacturers
setting up factories there aren’t much better, according to Transparency International.
Vietnam is ranked 117 out of 180. More corruption often means companies have to face
bribes and other strong-arm tactics by politicians and regulators to do business.

Corruption perception in China is not great. But crime is low.

Crime is not as rampant in China as it is elsewhere in emerging markets. India, Mexico

and Brazil are way more dangerous. If quality of life for expat workers comes into play,
then building a factory in those countries is less safe than building one in China.

Investing in operations in Rio de Janeiro and bringing down American workers might
sound enticing, but Rio is one of the most dangerous cities in the world, which is one
factor why few companies even consider it.

Bad air:

Of the 10 most polluted cities in the world, 9 of

them are in India.

China is also polluted and has poor air quality. But

China is more active in this regard than anyone
else. They have invested in high-speed rail that
works. And are the largest electric-vehicle
India’s lackluster environmental regulations
producers. The government is taxing coal
make it one of the most polluted places
producers and utilities, trying to reduce fossil around. Would ... [+] RUHANI KAUR/© 2018 BLOOMBERG

FINANCE LP
fuels. They have a long way to go, but all of this
creates opportunities for U.S. companies that want
to serve the China market.

Brazil is a good example of this. Companies from Goldman Sachs to Shell Oil were big
investors in Brazilian sugar cane ethanol when the government mandated a 10% mix in
gasoline. It was an opportunity unique to Brazil, so companies wanted to be a part of that.

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Beyond that, however, Brazil is one of the world’s cleanest producers of fuel thanks to its
hydroelectric power grid. Outside of Rio and São Paulo, most cities in Brazil have clean air
quality.

But electricity in Brazil, despite its free supply of water, is not cheap.

Lower energy costs:

If you’re a company concerned about electricity prices (and Brazil’s taxes on top of that),
then China is better at just $0.08 per kilowatt hour.

Is that due to the massive Three Gorges Dam power plant on the Yangtze? Probably not. Is
it due to subsidies by the state? Probably. Regardless, keeping the lights on in China is
cheaper than it is in Brazil and Mexico.

Abundant labor, from skilled to unskilled, weak unions, stable currency and politics,
world-class logistics and a safer place to do business makes China better than the rest.

Looking at the big emerging markets as a possible alternative and it is clear: Either Brazil,
Mexico and India reform their onerous tax rates, improve their infrastructure to help
exporters and drastically reduce violent crime rates, or they will never be competitive with
China for foreign capital.

In a global economy, where capital looks for the best return, they’re at least three steps
behind.

Follow me on Twitter or LinkedIn.

Kenneth Rapoza

I've spent 20 years as a reporter for the best in the business, including as a Brazil-based staffer for
WSJ. Since 2011, I focus on business and investing in the big… Read More

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