Despair in China set a stage for a new strategy for the MNCs in China. It was China+1 strategy. There are three benefits of China+1 strategy. First, it was seen as an hedge against China’s rapidly rising labour cost. Secondly, it led to risk diversification by spreading production process across the other Asian countries and hedge the foreign investors from relying on a single country which is prone to sagging export platform and vulnerable currency fluctuations. Third, spreading production process to countries with predominance of domestic demand oriented growth, such as India, would insulate the future investment in China. Thus, instead of relying on China as their sole beachhead in Asia, MNCs are contemplating to expand their operations in other low cost Asian countries, such as Vietnam, Indonesia, Thailand and India.

There were four reasons which were stifling to do business in China. They were rise in wages, withdrawal of tax privileges to the foreign investors since 2009, weak institutional framework to do business in domestic market and aging population. With China shifting to domestic base growth after Lehman shock and the pressure mounting on Chinese Yuan, the factors which were hitherto lure to foreign investors slipped into rust. China lost its sheen after the wages sprung and the export – based platform plunged into dim with the lackluster growth in USA and EU.

Wages spurt by over 25 to 30 percent over the period of two years. For example, between 2010 to 2012, in Beijing minimum monthly wages jumped from US$ 176 to 223; in Guangzhou, the leap was from US$ 197 to 247 and in Shanghai, the increase was from US$ 170 to 230. Salaries of skilled management reached sky-high. In 2012, in Beijing monthly salaries of an Engineer ( mid-level) was US $740-750 , in Shanghai it was US $ 840-850 and in Guangzhou it was US $ 705-710.

Besides, over dependence on export reflected the hardship of doing business in domestic market. Multiple complexities for doing business in domestic market compelled the entrepreneurs to export. Payment delay, official corruption, widespread counterfeits, stifling regulatory measures, poor logistics and distribution network are enhancing the transaction cost and make it difficult for the entrepreneurs to thrive in the domestic market. Further, it is tough for private sector to compete against State Owned Enterprises (SOE), who enjoy implicit subsidies and politically encouraged bank loans.

Population of working age are shrinking in China because of “one child” policy. China’s workforce is aging. The “Economist” survey revealed that Chinese dependency ratio on working – age class population (between 15-64 age) has declined to 30 percent. According to UN estimates, China will add only 23 million working age population by 2020. This forced the new Chinese politburo to relax one child policy

Foreign investment in India grew by 17 percent in 2013, despite unexpected capital outflows in the middle of the year, according to UNCTAD’ Global Investment Trends Monitor report. In contrast, FDI in China (excluding financial services) crawled to a marginal growth by 1.4 per cent over the three years period. This reflects that China’s image as an hotbed for MNCs investment is dwindling.

TESCO’s recent investment in India replicates China+1 strategy. TESCO is the first FDI in multi-brand retail in India. Having spent twenty years with over 100 stores in China , TESCO – the retail giant of UK- has decided to enter in multi-brand retail in India in December last as part of their China+1 strategy. High labour cost became the biggest challenge for TESCO in China, according to Mr Christophe Roussel, CEO of TESCO, China. More and more factories were running under capacity in China. Garments were a good example. TESCO increased its procurement of garment from India and Mediterranean Rim, Mr Roussel said.

Mr. Chris Devonshire Ellis, senior partner at Dezan Shira & Associates, a professional services firm providing FDI consultancy services in Hong Kong, said that many of their foreign investors’ clients in China were contemplating to go to India, not necessarily to shut down their manufacturing operations in China, but to take advantage of the large domestic demand.

Frequent frictions between China and Japan triggered Japanese companies, such as Toshiba, Hitachi and auto manufacturers to shift their R&D institutions in India from low cost production site in China.

In summing up, rising labour cost and lackluster domestic consumption growth in China set the stage for India to woo the MNCs from China who are contemplating to migrate under China +1 strategy. Currently, Vietnam is in forefront because of its low wage. The wages in Vietnam are half of India. However, given the large domestic demand and the large working age population, India will edge Vietnam and other countries. (IPA Service)