Leveraging ASEAN to Sell More China Manufactured Products

April 7, 2014 Posted by China Briefing Reading Time: 8 minutes

China Outbound

Op-Ed Commentary: Chris Devonshire-Ellis

One of the benefits of being part of a firm that now has a Pan-Asia presence is the different viewpoints and perspectives it provides in terms of business opportunities beyond China. Although China will remain a heavyweight in Asia, it is changing, and manufacturers that came to China twenty years ago to manufacture cheap products and then resell overseas, primarily back to the United States and Europe, are having to change their business models.

It is now China that is developing as the “must be there” consumer market, with its middle class consumer base expected to rise from about 250 million today to some 600 million by 2020. That is the equivalent of adding the entire population of the United Kingdom as new affluent consumers, every year. Asia, meanwhile, is also going through a period of rapid economic growth and wealth creation.

The conundrum for manufacturers is that while China is becoming wealthier, operational costs are rising. Wages and mandatory welfare for employees are rising fast and are expected to do so, China is no longer a source of cheap labour in Asia, especially when you consider the cost of a worker in China is now five times that of the same worker in India.

The same pattern is true, to varying degrees, when comparing Chinese labour costs with those in Indonesia, Malaysia, Thailand and Vietnam, and even more when looking at operational costs in countries such as Bangladesh, Cambodia and Myanmar. This means that many China-based production facilities are coming under pressure to increase sales and expand their business, and that means looking beyond China’s borders and increasingly into Asia.

Assuming that China-based companies are already familiar with the China operational landscape and the scale for increasing sales within the country, two other markets are rising within Asia: ASEAN and India. Both remain, however, somewhat enigmatic, and rather mysterious in many ways.

An example of the lack of knowledge concerning ASEAN could be measured at the recent Euromoney ASEAN conference held in Jakarta last week. When the audience was asked if any executives present (some 600 attendees) had received any training about ASEAN, none raised their hand. India meanwhile continues to have a perception as being backward, poor and undeveloped. Yet remaining in the dark about ASEAN and being uninformed about today’s India is not going to help a China-based manufacturer sell to these new emerging Asian regions.

In fact, in many cases, it is Chinese businessmen that are leading the way, ahead of their China expatriate counterparts, in exploring what is happening and developing in new markets. In this article we examine the potential for selling to ASEAN.

The ASEAN Potential for China Sales
ASEAN consists of ten nations largely right on China’s doorstep. It includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. Of these, five can be considered large and increasingly affluent markets. ASEAN states have agreed to remove trade barriers between them, and this is largely in operation today.

However, for China based businesses, the real deal with ASEAN is that collectively it has negotiated a free trade deal with China, which has reduced import-export tariffs down to close to zero on roughly 95 percent of all products traded between ASEAN nations and China. We have covered the terms of these agreements extensively on our ASEAN Briefing website and listed each of the various protocols and agreements between ASEAN and China on that site.

These are downloadable for free here.

Additionally, within the ASEAN framework is a body known as the ASEAN+3. This refers to an additional trade group that includes all the ASEAN members, plus China, Japan and South Korea. Since this body began cooperation in 1997, the ASEAN+3 forum has broadened from its original intent to discuss many issues, including financial coordination, food and energy security, infrastructure development, trade facilitation, disaster management, poverty alleviation and counter-terrorism initiatives.

The trade aspect, however, is very much on the agenda. To this extent, China itself has established several ASEAN information offices throughout the country to help promote trade between China and ASEAN to Chinese manufacturers. The paradox here with foreign manufacturers in China is that they still tend to think of themselves as ‘foreign’ companies and do not tend to utilize such facilities. Instead they turn to their own Chambers of Commerce for assistance – but as neither the EU nor the United States, for example, has trade agreements with ASEAN, the knowledge about how ASEAN impacts on opportunities for foreign owned China-based businesses is rather thin on the ground. Yet, as China incorporated factories, foreign manufacturers also have the same rights to take advantage of the ASEAN-China Free Trade Agreement that Chinese manufacturers have.

Another aspect of ASEAN that is about to kick in shortly and that will dramatically shift the supply chain is the concept of the Asian Economic Community (AEC). As ASEAN has developed, not all ASEAN members have been able to comply in full with free trade, or to take up all the implications of the ASEAN-China FTA at this time. These nations are Cambodia, Laos, Myanmar and Vietnam. They have a deadline of the end of 2015 to come into full compliance, at which time all ASEAN nations will be almost completely open to import-export products to and from China at near to zero dutiable rates.

Essentially then, the real opportunity for China-based manufacturers is to sell their products to the ASEAN markets. A recent Asia report by Neilsen indicated that 52 percent of Asia would be middle class consumers by 2020, with the largest middle class consumers being in Indonesia, Philippines, Malaysia and Singapore – all ASEAN members. Meanwhile, Vietnam has the fastest rising group of middle class consumers in South-East Asia. Thailand also has a strong and affluent middle class sector.

There are a number of steps to take for foreign owned, China-based manufacturers to look at selling on to ASEAN. We can identify them as follows:

What are the tariff duties on my products into ASEAN? How does the ASEAN-China FTA impact upon these?
How can I find a distributor/agent in ASEAN?
Can I lower my ASEAN profits tax by parking them in a Singapore subsidiary?
How can I set up a liaison or representative office of my China business in ASEAN?

ASEAN Market Research
These questions are dependent upon the countries in ASEAN that are your target markets. However, it should normally be assumed that the larger ASEAN nations of Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam – the ASEAN Six – should be the ones to explore. Of these, a good first choice to begin to explore the ASEAN potential is Singapore, not least because the ASEAN secretariat is based there, but also because amongst all the ASEAN nations it is the de facto financial and services hub.

The ability to find agents and distributors in ASEAN countries can be concentrated in Singapore – all ASEAN members of course have sizeable embassy and trade representation in the country, including China. International Chambers of Commerce and the Singapore governments own Import-Export Centre are also highly valuable sources of market intelligence and resources when considering selling onto the ASEAN region.

Singapore as a Business Hub
Singapore also offers services that can be of use going beyond using agents and distributors. Singapore is the only ASEAN member that has a truly convertible international currency and is an RMB trading hub in its own right. This means banking facilities and trade can be carried out in Singapore in RMB. Many multinational corporations have set up branches in Singapore to reach out further into ASEAN as a result of this.

It may also make sense to establish a company in Singapore – corporate and individual income taxes are low, meaning that profits realized from trading products into ASEAN can be parked in Singapore (the corporate income tax rate is 17 percent) as opposed to directly repatriating to China (where the corporate income tax rate is 25 percent, plus another 10 percent to repatriate China profits overseas). We commented about using holding companies for Singapore here.

Liaison & Representative Offices in ASEAN
All ASEAN members allow the establishment of foreign companies and offices. Most also provide for liaison or representative office establishment, meaning they are not subject to direct profits tax, but can facilitate trade between the country of establishment, other countries within ASEAN and, of course, China. The procedures for these vary from country to country, but are not dissimilar to the same processes in China. With low wage and operational costs, the establishment of representative offices in ASEAN is starting to make complete commercial sense when it comes to looking at overseas locations to promote your China production.

For further information about how to set up a liaison or representative office in ASEAN, please contact us at ASEAN@dezshira.com.

Summary
As I travel around ASEAN and China on a regular basis, I note one consistent theme – the flights are packed with Chinese entrepreneurs. They are all taking advantage of the ASEAN-China Free Trade Agreement – allowing them to export China manufactured production to ASEAN, in most cases duty free.

Foreign owned, China-based businesses tend to be behind the curve on this for reasons discussed – they do not tend to have ready access to ASEAN market intelligence in China and they become too China-centric. Yet for markets beyond China for Chinese production, it is the ASEAN members that are the easiest and closest to access. Developing further sales and profits into a China-based business now means marketing and selling part of that production to ASEAN.

Chris Devonshire-Ellis is the Founding Partner of Dezan Shira & Associates – a specialist foreign direct investment practice providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam, in addition to alliances in Indonesia, Malaysia, Philippines and Thailand, as well as liaison offices in Italy and the United States.

For further details or to contact the firm, please email china@dezshira.com, visit www.dezshira.com, or download our brochure.

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