“China plus one” refers to the Japanese corporate diversification strategy of shifting investment to other locations from China since the SERS breakout. It is no longer limited to Japanese multinationals, of course. Since 2008, relations between the US and China and US sanctions and counter sanctions on each other have prompted American companies to adopt the China plus one strategy followed by European companies -- investors in all these countries adopted the policy to reduce their dependence on a single country.
Some of the companies maintain Chinese plants for local consumers but have relocated some plants to other countries. The Covid-19 outbreak has finally given this strategy a new dimension as Japan has already allocated $2.2 billion to help its manufacturers shift production units out of China, with Korean companies also planning to move out of China soon.
The rapid development and rising cost of labour have encouraged Chinese companies to pursue high-end or intelligent manufacturing processes. 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. China has also started re-location of low technology and labour-intensive industries to other countries, with garment as one of the priority industries.
Bangladesh's competitors
The present wage in China is $150 to $260, Vietnam $125 to $180, Cambodia $180, Bangladesh $100, and Indonesia $110 to $180. The cost advantage that once turned China into “the world's factory” has declined over the last decade while labour costs are rising due to rapid development. Combined with rising indirect costs, environmental regulations and, more recently, the Sino-US trade war, it has prompted global companies and their buyers to look for cheaper alternatives.
The shift has brought an opportunity for lower-wage Asian countries to grow their manufacturing capacity and exports, especially in labour-intensive sectors such as textile, footwear, and electronics. 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.
Despite many obstacles, 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, the two that came into focus for re-locating garment industries are Myanmar and Bangladesh.
Myanmar has a limited work force due to its small population, while Bangladesh still has the availability of cheap labour and a young workforce making us a suitable destination, or lower-cost location, for China-based labour-intensive manufacturing industries. Even in the capital of Dhaka, the average monthly wage is still around $100, which is why -- according to a survey by South China Manufacturing Centre in 2015 -- 11% 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% of the companies operating in China have moved or have considered moving their production bases to other countries, including Southeast Asia.
Bangladesh's weakness
Our country has failed to attract the desired advantage of the China plus one policy despite the comparative advantage of low-cost labour. The relocation of industries not only depends upon low-cost labour as investors have analyzed the differences between these locations highlighting the important role that rules of origin play in determining the cost of products and amount of investment.
The bilateral, 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 the global value chain, from source of raw materials to ultimate consumer countries.
Bangladesh relies on duty free, quota free advantage as a least developed country (LDC). The uncertainty of this status, with the impending graduation from LDC status by 2024 and a reluctance in signing of FTA and PTA for Bangladesh has paved the way to an uncertain future for our nation in the global value chain.
Bangladesh should study the reasons behind re-location of China-based industries to other countries even where the cost of labour is higher than ours. The cost of labour in such countries is even higher than China but industries are relocating due to other advantages such as cost of doing business, ease of doing business, better infrastructure, better regulations, etc. Bangladesh should come forward with a realistic approach to mimic that kind of attraction.
The administration can 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 for relocation of industries under China-plus-one policy.
As it stands, India has signed, or is negotiating, FTAs with more than 40 countries, including those in ASEAN (effective since 2010), Korea (effective since 2010), Japan (effective since 2011), the EU, and others. Overseas investors will get tax exemption in most of the market of the word due to India FTA with other countries.
What can we do?
Bangladesh authorities should understand why its strategy failed to bring these industries into the fold. Another opportunity was created due to Covid-19 and the sanctions of the US against China, and indeed the stimulus package of the Japanese government for the China plus one policy.
Overseas investors are not attracted to low-cost, low-efficient labour -- this our industries and our government need to understand better than anything else. Bangladesh should reduce the cost of doing business and work towards improving our ease of doing business.
We need to aggressively go for an FTA with major countries like China, India, ASEAN, the EU, the US, and Japan.
MS Siddiqui is Non-Government Adviser, Bangladesh Competition Commission.
