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China’s Demographics Point to India as the Next Global Manufacturing Hub

By Chris Devonshire-Ellis, Dezan Shira & Associates
Posted: 11th April 2013 09:08
China’s rapidly aging population is set to dramatically shrink its workforce and effectively pass the baton to India as the world’s manufacturing hub, according to analysis from Morgan Stanley and the Global Times. China’s famous one child policy, which has allowed China to manage its population over the past three decades, is now finally kicking into China’s expansive work pool and has thoroughly reduced the number of Chinese workers.
The Global Times has gone on record to say that, “2015 will mark the beginning of the end of China’s demographic dividend.” Unfortunately for China, the World Bank also echoes those sentiments as it predicted that China’s GDP growth would fall to 7.9 percent in 2015 and to 6.5 percent by 2020. Morgan Stanley expects India’s growth to head in the opposite direction and to surpass China’s growth two years from now.
Personally, I suspect that when speculation and manipulation is stripped out of China’s current GDP growth rates, India’s economy is already growing at a faster pace than China’s.
China’s aging workforce is also already having an impact on the nature of conducting business in the country. It was in recognition of this that China strengthened its labor laws two years ago, making it more difficult for employers to lay off aging staff without having to pay significant compensation for loss of employment (based on years of service). That move effectively made employers financially responsible for at least part of the nation’s pension requirements.
China will house about 200 million people above 60 years in 2015, and workers coming to retirement age are expected to add an unprecedented 10 million retirees per annum to that figure. That loss of workforce is already starting to make China more expensive, and this trend will continue.
India, however, is poised to provide the vast bulk of the global labor pool. By 2020, the average Indian will be 29, while the average Chinese will be 37.
China is becoming a consumer market to sell to rather than a global manufacturing hub
This is often quoted as the dynamic that will maintain China as a major destination for foreign direct investment. While this is true, the nature of selling to China is still wrapped in many problems, especially for overseas investors.
The Chinese market is prone to protectionist measures, and with the Chinese government itself still a major shareholder in many Chinese state-owned enterprises, foreign investors will have an increasingly tough time competing with them. Additionally, selling to China requires a profound knowledge of Chinese culture and tastes. There’s also the stranglehold that China has on much of its domestic logistics industry.
Selling to China is fine, but it is a path fraught with difficulties. The successful foreign investor will need to have deep pockets and a sound Chinese joint venture partner to help them; the domestic expertise and finesse to assist sales of products to the Chinese consumer will invariably require Chinese local expertise as even well-known global brands will have to adapt marketing, positioning and even recipes to fit the Chinese model.
India’s infrastructure woes have become its opportunity
The most common complaint about India is its infrastructure, which, coupled with a generally moribund economy for about 40 years after declaring independence and some quite extreme weather conditions, has meant a lack of investment in virtually every sector. However, that is already changing as airports are fixed, bridges that span oceans are built and city subway networks are opened. As a result, India represents an opportunity for contractors, architects and engineers who made good in China.
A staggering US$500 billion will be spent to improve India’s infrastructure over the next three years, and foreign businesses involved in any aspect of infrastructure development are now scrambling to get into the market.
Global sourcing is relocating
China will still maintain various sectors for sourcing in which it has specific expertise, and, of course, there is still its domestic market to service. But the sheer weight of economics makes India the future tiger of global procurement; wages are significantly lower in India than in China, and recent surveys of wage levels and related costs throughout Asian countries consistently show India’s labor pool as an excellent value for the money.
Sure there are comments about quality and India’s infrastructure problems, but China went through the same issues about 20 years ago. The ever-present “Made in China” stamps and stickers previously indicated a poor brand. In addition, India’s infrastructure is not as bad as it is made out to be either, and cost saving is there to be had.
Relocating a business from China to India is also, from a legal, operational and financial perspective, rather easier than is generally considered. China, meanwhile, continues to become more expensive as it tends to charge foreign investors more.
I took this matter up recently with a number of expatriate CEOs working in India. Fortunately, they had also spent time in China – a minimum of five years each, and some up to ten – running businesses and foreign invested enterprises. They all now work in India for significant businesses with global turnovers that number in the tens of millions to billions of dollars, and when it came down to it, all of them reiterated the same point: it was easier to conduct business in China than in India, China is better at organizing big projects and China’s labor pool is more disciplined and productive than that of India.
However, when it came to the smaller details and comfort, they all said that India was far easier to live in than China since cultural differences and language barriers were not as big a problem.
When asked whether they would prefer to live in India or China (Mumbai was regularly compared to Shanghai), the surprising conclusion was that India was preferable. Several executives even expressed a desire to never return to China. The conclusion therefore is simple: “India is more awkward than China when implementing large projects, but it is not insurmountable.”
Clearly, the attitudes are changing along with the demographics. China may huff and puff and posture all it wants, but as it becomes increasingly belligerent towards its neighbors, more expensive and apparently quite willing to blame foreigners for taking all the money out of the country in response to its economic woes, it has progressively become less tolerant of foreign investment. China cannot turn back the tide that its long-standing one child policy has now revealed. China’s demographic advantages are coming to an accelerating end, and it is India that is set to pick up the slack.
This article was first published on Asia Briefing.
Dezan Shira & Associates is 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 as well as liaison offices in Italy and the United States.
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