EDEN BUILDING TO STOCK EXCHANGE Published: 07 June 2020
China plus one and FDI into Bangladesh https://dailyasianage.com/news/231399/china-plus-one-and-fdi-into-bangladesh
M S Siddiqui China plus one refers to a Japanese corporate diversification strategy of shifting the investment to other location from China. The SARS epidemic (2002) provided the initial impetus for the China-plus-one strategy, but the raise of labour cost and acute shortage of labour are the major drivers of Japanese firms away from China has been the rise of labour costs due to an increasingly severe shortage of labour, especially in urban areas. The political tension and rising anti-Japanese demonstration is another reason of such decision. The China plus one strategy is no longer limited to Japanese multinationals. Since 2008, relations between the United States and China and US sanction and counter sanction on each other has prompted the American companies are starting to adopt the China plus one strategy followed by European companies. Investors in all these countries adapted the policy to reduce their dependence on a single country. Some of the companies maintain Chinese plants in China for local consumers but re-locate some plants to other countries as a strategy of alternative locations. The out-break of Covid-19 has finally given a new dimension since Japan has already allocated $2.2 billion to help its manufacturers shift production units out of China. Korean companies are also planning to move out of China. The rapid development, raising cost of labour encourage Chinese companies to pursuit the highend or intelligent manufacturing process. China's 13th Five-Year Plan (2016-2020) incorporates 'innovation' as the key concept of development to build a moderately prosperous society in all respects by 2020. ' The made in China-2025' strategic plan focuses on upgrading China's manufacturing capability and equipment with the application of technological innovation. The vision aims to raise China's domestic content of core components and materials to 40 per cent by 2020 and 70 per cent by 2025. China also started re-location of low technology and labour intensive industries to other countries. Garment is one of priority industry to re-locate to other countries. The present wages in China is US$150 to 260, Vietnam US$125 - 180, Cambodia US$180, Bangladesh US$100 and Indonesia $110 - 180. The cost advantage once turned China into the world's factory has declined over the last decade. Labour costs is rising due to rapid development is China combined with rising indirect costs, environmental regulations and, more recently, the Sino-US trade war, has prompted global companies and their buyers to look for cheaper alternatives. The shift has bring opportunity for lower-wage Asian countries to grow their manufacturing capacity and exports, especially in labour-intensive sectors such as textile, footwear and electronics. For instance, between 2010-17, China's share of US apparel imports fell steadily
from 40% to 33%, while Vietnam's share more than doubled. Vietnam is going to over-take Bangladesh in US market very soon. The actual shift of industries has slightly modified since multinational companies are hardly shifting from China rather than a large-scale, cross-industry migration of global supply chains out of China. There is trend to inflate the urgency of moving out of China due to its rising costs, while the opposing side doubts that it's profitable, or even feasible, to find a substitute for the country's massive and mature supply chains. This evident from shifting of small-scale, industry-specific shifts such as textile, apparels, fabrics, toys, shores and simple electronics. Most companies are looking to complement, rather than replace, their China sourcing. Beyond cheaper labour, decision-makers are must considering the broader competitive advantages of each location, how they match their industry focus and business goals, and whether there are bottlenecks that could offset those opportunities. A China plus one now seems as strategy is one where investors complement their core China operations with additional ones in another country to lower costs, diversify risks, and access new markets. Vietnam and Cambodia has many advantages such as low manufacturing costs, overall proximity to China, and excellent network of trade agreements, but Vietnam facing many challenges to attract the re-location. Manufactures need to figure out how to realign their supply chains, which production elements to relocate, market entry strategies, and understand the rules and regulations that governs by many trade agreements of Vietnam. Despite many obstacle, Chinese textile and garment entrepreneurs have invested heavily in neighbouring Vietnam and Cambodia in the last two decades. There is a shortage of labour available in these two countries due high demand in other industries with rapid developments in different sectors of industries. Now two came into focus for re-locating garment industries are Myanmar and Bangladesh. Myanmar is has limit of work force due small population. Bangladesh still has the availability of cheap labour and young workforce is a suitable destination or lower-cost location for China based labour-intensive manufacturing industries. Like many other "plus one" FDI destinations, Bangladesh's advantage is found in its lower labor costs. Even in the capital of Dhaka, the average monthly wage is still around USD 100. The global research department of Standard Chartered points out that according to a survey by South China Manufacturing Centre in 2015, 11 per cent of the factories in southern China reportedly planned to move to ASEAN countries as well as India and Bangladesh to avoid increasing costs. The fact that these countries have a free-trade agreement with China under the fold of the ASEAN is an added advantage. According to a survey by the American Chamber of Commerce in China, 35 per cent of the companies operating in China have moved or have considered moving their production bases to other countries, including Southeast Asia. Bangladesh failed to attract the desired advantage of China plus one policy despite comparative advantage of low cost labour. The relocation of industries not only depends upon low cost labour. The investors analyse the differences between these locations, and finally highlight the important role that rules of origin play an important role determine the cost of products and amount of investment. The bi-lateral, regional and multilateral FTA and PTA determine the tax and rate of value addition for determining the country of origin for export. All of the candidate countries have FTA with countries in global value chain from source of raw materials to ultimate consumer countries.
Bangladesh relying on duty free quota free advantage as least developed country (LDC). The uncertainty of DFQF status with graduation from LDC by 2024 and reluctance of signing of FTA and PTA of Bangladesh giving a signal of uncertain future of Bangladesh in global value chain. Bangladesh should study the reason of re-location China based industries to other counties even where the cost of labour is higher than Bangladesh. The cost of labour in those countries is even higher than China but industries are re-locating due to other advantage of Cost of doing business, Ease of Doing business, better infrastructure and better regulations etc. Entrepreneurs try to understand the fate of their investment particularly free flow of goods and services in global value chain particularly the value addition for determining the country of origin. Bangladesh should come forward with a realistic approach. It may prepare an evidence based comparative statement of all the index of measuring cost of doing business and ease of doing business with different counties in South Asia and ASEAN countries for negotiation and for relocation of industries under China-plus-one policy. Bangladesh authority should understand why it's strategy failed to bring those industries even after China plus one policy into Bangladesh since 2002. Another opportunity created due to Covid-19 and stimulus package of Japanese government for Chine plus one policy. Bangladesh should reduce cost of doing business and ease the doing business. These are achievable without any investment but only through reform of regulations.
The writer is a legal economist. Email: mssiddiqui2035@gmail.com