The Next China

Comparing Vietnam to China

Dan Harris of China Law Blog did an excellent post discussing which country will be the next China, and his conclusion was China. Harris has admitted that he looks at China through rose colored glasses, but his analysis of why other countries will not be able to duplicate China's success anytime in the near future is well worth reading.

The post, entitled, "China is the Next China, Now; Vietnam May Be the Next China Someday", pointed out three distinct features that have made China an economic success: (1) political stability; (2) a large population, i.e. workforce; and (3) a supportive infrastructure. Harris argues that although other countries may have one or two of these elements, none currently have all three.

Though there are emerging market countries with stable governments, I see infrastructure and size as distinguishing China - not to mention that for places like Shenyang and Chengdu the "Chinese model" is their model. It is an easy blueprint for both the public and private sectors.

Like Vietnam, other nations come close. India and, to a lesser extent, Russia have size, but they do not have infrastructure. I have spent much time in Russia and I can attest that outside of Moscow and St. Petersburg, its infrastructure is, for the most part, a disgrace. Its airports, roads, internet and telephone system are sub par. I hear India's infrastructure is terrible as well. Russia's population is declining and crime there is rampant. I am convinced both Russia and India will continue to thrive economically, but I am also convinced neither will become the next China.

Again, I am a huge believer in Vietnam's potential. Strong growth is predicted and it is working towards membership in the WTO. But right now, Vietnam's physical and governmental infrastructure, though improving, is just not nearly as advanced as China's nor do I see it becoming so during the next decade. Because of this, a large number of companies either cannot or will not consider Vietnam for their outsourcing. Not yet, anyway.

Harris links to a number of articles that are worth reading, including a post on Peter Cochrane's Uncommon Sense Blog. Cochrane made the following observations during a trip to China:

So where is the big gain for Western companies outsourcing or moving operations to China?

First, there is a significant cost reduction. Land, buildings, materials, energy, transport and labour costs are all significantly cheaper than anywhere in the West.

Second, a ready supply of eager, hard working and highly educated professionals, skilled and semi-skilled people.

Third, a sense of national pride and urgency. This is a coordinated and planned transformation of an entire society that can only occur if it is generating sufficient wealth.

Fourth, a clean sheet of paper. There is no old infrastructure or industry to get in the way of what is clearly a high-tech focus. Progress and growth seem unfettered by the past, rules, regulation and planning processes.

Is there an end game here? I think so! Any company manufacturing commodities in the West that doesn't export its production plants to the East will be hard pressed to compete against those that already have. Only very high levels of automation can compete against low-cost human labour.

And when everyone has moved all they can to China, and all the costs have been reduced to the bone, we will be back with the same competitive market position we started with in the West. That is, a zero-sum position. But for the consumer there will have been a drastic reduction in prices and a massively increased supply of everything imaginable.

So what is in store for China? If they continue to follow the Western model, they can expect: rapid growth followed by competitive pressures to continually cut costs; efficiency drives; process re-engineering; consolidation, mergers and acquisitions.

Recognize the pattern? And then perhaps China 2, another nation needing to bring the living standards of its people into the 21st century, will emerge and the process will start again. So far we have seen the industrial revolution spread from the UK to Europe to the US to Japan and now to China. Provided the planet can stand it - and that remains to be seen - it sounds like a good formula for extending and expanding peace and stability.

Harris also links to a number of articles that analyze Vietnam's burgeoning market and potential as the next China. An article by Newsweek entitled, "Vietnam Revs Up", which refers to Vietnam as a "giant-killer" also said, "It competes against China in key Western markets but exports comparatively little to its northern neighbor. And many of its new investors have fled soaring costs and political uncertainty in China's coastal cities." Moreover, in support of its position, Newsweek used Taiwanese investors as evidence of a growing trend to invest in Vietnam rather than China.

One affirmation of Vietnam's prowess is the swarm of Taiwanese investors who have landed. Schooled by their island's own rise to affluence on the back of export-led light manufacturing, they are among the world's most cost-conscious, competitive industrialists, with niche factories that turn quick profits. Today they're flocking into Ho Chi Minh City and Hanoi, much as they advanced on mainland China in the early 1990s to tap its cheap labor. "Chinese work five-day weeks, but Vietnamese work six," says Albert Ting, chairman of CX Technology Corp. "That's a 52-day difference every year."

The article primarily analyzes investment in China from the point of view of the Japanese, which explains the comment about "political uncertainty in China's coastal cities." Currently, the only group of people that dislike the Japanese more than the Chinese are the North Koreans.

Also, I have to agree with an earlier post by Harris on China Law Blog entitled, "China is Expensive -- NOT! Go Second Tier and Life Will Be Good". Harris made the following point:

These "China is getting expensive stories" make the mistake of equating Shanghai and Beijing with all of China, effectively ignoring more than a billion people, whose wages are lower than those in China's ex-pat centers. The story I would be writing is how western companies are coming to realize there is more to China than just Shanghai and Beijing, and how they are beginning to consider a greater number of factors in deciding where to locate within China.

I am seeing more western companies interested in starting their China operations in cities outside the typical favorites like Shanghai, Gaungzho, Beijing, and Shenzhen. I also am hearing more talk from companies already in those cities about expanding elsewhere, with reasons as varied as the companies themselves. Some are interested in regional or city tax incentives. Some are thinking about logistics. Some want greater exposure to China's internal market. Some just want to be somewhere quieter and/or less polluted. And yes, some want to be where wages are lower or where the workforce they need is more accessible. Westerners (in the footsteps of Japanese and Korean companies) are now starting to recognize that for many businesses, particularly low and mid range manufacturing operations, there are many reasons to consider China's so-called second tier cities, such as Yantai, Tianjin, Dalian, Wuhan, Wuxi, Qingdao, Harbin, Chengdu, Chongqing, Shenyang, and Changzhou.

Don't be misled though, everyone, including China Law Blog, is in agreement that Vietnam has a promising future. Harris ends his post "China is the Next China, Now; Vietnam May Be the Next China Someday" by pointing out that although there are a number of blogs about Vietnam, very few focus on business and/or law in Vietnam. Harris recommends the Gao Center Blog, VietnamNet Bridge, Vietnam News, and Vietnam Globe.