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China Contract Manufacturing: A Comprehensive Guide

Chinese factory worker

 

Contract manufacturing has been a common and effective solution to relieve the shortage of production output and decrease costs. China has undoubtedly been a major market for contract manufacturing, thanks to its manufacturing capabilities and developed supplier base.

In this article, we review contract manufacturing in China, including the benefits, risks, but also how you can find contract manufacturers.

What are the benefits of contract manufacturing in China?

Let’s start and review the benefits of contract manufacturing in China, some that you might be familiar with already.

Near market

China is estimated to be the largest consumer economy today as measured in purchasing power parity (PPP) terms. Over the next decade, it may add more consumption than any other country and is expected to generate more than 25% of all global consumption growth.  Manufacturing products in China can help companies being closer to the market and reduce transportation costs, as well as to ease import procedures.

Cost effective

Contract manufacturing is cost-effective and the reason why it has become particularly popular in the last two decades. Outsourcing manufacturing to China can help you save the expense of setting up factories or expanding existing manufacturing facilities. Meanwhile, even if labor costs have increased much in China in previous years, China is still considered a Low-Cost Country (LCC) for manufacturing. There’s also much development room in the China Central and Western parts as most manufacturers are concentrated along the East Coast.

Manufacturing capabilities

China has transitioned its market from low-cost supply to advanced manufacturing. The country has become a leader in the manufacturing of advanced products such as in automotive, telecom equipment, robotics, and consumer products. Compared to Vietnam, which is specialized in industries like textiles and electronics, China has an abundance of contract manufacturers and a larger industrial base. Many manufacturers in China are available for a large range of products.

Flexibility

Companies with own manufacturing facilities and equipment will suffer financially when workers or machines are idle or perform below capacity. At the same time, rents, salaries, and overheads still need to be paid. With contract manufacturing, however, you can plan for low-demand periods, and reduce your orders accordingly. Similarly, if you need to increase orders suddenly, your Chinese supplier should be able to manage this status too.

Quantity

One of the limitations of countries like Vietnam and India, which are China’s rivals in manufacturing, is their inability to manufacture a wide range of products and in a higher scale. So, no matter how large your order is, you are more likely to find a factory that can handle your order in China than in any other developing country. That’s why you must also carefully evaluate and select suppliers, keeping future orders in mind. If your supplier’s production capacity is higher than your average order, you will be able to increase your order without any trouble once sales pick up.

What are the risks?

Naturally, there are also risks related to hiring contract manufacturers in China. Below you can find some of the most notable ones.

Lack of control over timelines

When outsourcing manufacturing, unless a factory exclusively manufactures for your company (which is highly unlikely), your products might not be given priority. The factory will be bound to commitments given to customers who put orders before you and will only start production after pending orders are completed. This isn’t the case if you own the factory. But you can offset this disadvantage by planning your orders meticulously and sending in orders on time, keeping production timelines in mind.

IP rights

If the IP rights of your product are vital to your business, you open for risks of compromising your IP rights by outsourcing the production to China. Thus, one of the first things you should do is to register your IP rights such as trademarks, design patents, and copyrights. China is a so-called first-to-file country which means that the first company to register a trademark or patent is the first company to be awarded it.

It doesn’t matter if those rights are owned by you in the US or Europe. If a Chinese company has registered your trademark in China first, your products can be prevented from being exported due to Chinese laws and as you have infringed upon the IP rights of the Chinese company.

Finding contract manufacturers in China

This is the most interesting topic for many foreign companies, namely, how can one find contract manufacturers locally. Let’s review how a search can be conducted.

1. Pre-study in the market

Identify your specific sourcing strategy as well as the regulatory requirements for the targeted products. Once the preconditions are determined, careful market research should be conducted. During the research, you need insights of the overall compatibility between technology and your production requirements, price levels, competition, and industrial clusters, for example. When searching for the right contract manufacturers, the following questions can be asked:

  • Where are the business facilities located?
  • What are the business’s processing and analytical capabilities?
  • Does the manufacturer have the required certifications and registrations in place to manufacture products for your intended market?
  • What experience does the business have manufacturing your types of products?
  • Is the business’s quality system ISO certified?
  • How does the business demonstrate financial stability?
  • What are the packaging options available for clients?
  • Do the business offer warehousing, fulfillment, and logistical services?
  • What is the business’s production capacity?
  • What is the business’s track record considering on-time deliveries?
  • How does the manufacturer manage business processes?
  • What does the client onboarding process look like?
  • How will the business protect your Intellectual Property?

2. Implementation

Contact a service provider with expertise in contract manufacturing

Establishing relationships with high-quality suppliers and compliant factories is often the biggest challenge businesses face when starting to manufacture products in China. Asia Perspective is specialized in searching for suppliers, manage suppliers, and can help you create longstanding relationships with compliant factories. We connect you with businesses and factory facilities in China or even other supply chain locations across Asia.

Preparations during pre-production

Once a business has established a working relationship, it’s time to conduct pre-production inspections. From factory audits that account for production capacities, equipment condition and the quality of management practices to other inspections of processes, these preliminary measures are crucial for maintaining the highest standards.

Following the approval of suppliers and factories, a business should arrange for in-process services. These inspections and quality control measures are essential when considering how to manufacture a product in China. The first article quality control, defect sorting services and pre-shipment checks are all helpful measures for getting the highest returns on investment.

Protecting your IP

According to the Patent Law of the People’s Republic of China, Article 19, foreigners, foreign enterprises, or other foreign organizations having no habitual residence or business office in China should entrust lawfully established patent agencies to apply for patents or settle other patent issues in China. In this context, we can help you identify the premium agencies and improve your communication with them to promote IP issues settlement quickly.

3. Follow-up work

CSR Audits

In the subsequent management, you need to stay updated of the production status. On-site visits and audits are essential under such circumstances. However, due to the differences in culture and high costs, it can be wise to involve an experienced and objective third-party, to conduct CSR audits.

To learn more about the topic, you can also read our separate article about CSR audits in China.

Contract Manufacturers in China

These days, under the background of rice in the manufacturing industry of Southeast Asia, Vietnam, Thailand, Malaysia, and Indonesia have emerged a lot of good potential contract manufacturers. However, China is still a stable country to produce relatively complex products due to its numerous efforts in manufacturing capabilities, especially when time-to-market is critical and when assembly requires a lot of labor.

Electronics

China is notably big for contract manufacturing of electronic products, below are a couple of examples of large contract manufacturers being present.

Foxconn

Foxconn is well-known as the top electronic contract manufacturing company in China. It is an internationally renowned electronic foundry company and the world’s largest electronics industry technology manufacturing service provider. It specializes in the R&D and manufacturing of 3C products such as computers, communications, and consumer electronics. It has a wide range of digital content, A high-tech enterprise in the development and application of automotive components, channels, cloud computing services, and new energy & new materials.

BYD Electronics

BYD Electronics was established in Shenzhen China in 1995 and listed in Hong Kong in 2007. It is the world’s leading platform-based high-end contract manufacturing company in China. Focus on business areas such as smartphones and laptops, new smart products, automotive smart systems, and medical health.

Medical device

China also has a large contract manufacturer base for medical device, where the two listed companies below are examples that operate in the industry.

Seaskymedical

Located in Guangdong province, Seaskymedical is one of China’s leading medical equipment manufacturers. In the medical sector, where hygiene is of the utmost importance, Seasky ensures that the items created exceed health standards. With the help of a medical device clean room, equipment is designed with utmost sanitization. Seaskymedical has a strict quality check procedure. All their products are ISO 13485:2016 certified.

Shinva

Shinva is located in Shandong province and specializes in medical instruments and equipment, pharmaceutical equipment, and medical medicine services. It offers CSSD, pharmaceutical equipment, radiotherapy solutions, digital operating rooms, dental equipment, and vitro diagnostic reagents and instruments to customers, gaining a reputation in China’s high-end market.

Semiconductors

China plays an important role in the semiconductor supply chain while many contract manufacturers are located here.

SMICS

SMICS is one of the leading foundries in the world and is the front runner in manufacturing capability, manufacturing scale, and comprehensive service in the Chinese Mainland. SMIC Group provides semiconductor foundry and technology services to global customers on 0.35 micron to FinFET process node technologies. Headquartered in Shanghai, China, SMIC Group has an international manufacturing and service base, with three 8-inch wafer fabrication facilities (fabs) and three 12-inch fabs in Shanghai, Beijing, Tianjin and Shenzhen, and four 12-inch fabs under construction in Shanghai, Beijing, Shenzhen and Tianjin.

Huahong Group

Huahong Group is an advanced manufacturer in 8+12-inch chip production. The Group’s business includes integrated circuit research, development, and manufacturing. Its factories are in Pudong Jinqiao, Zhangjiang, Kangqiao and Wuxi. Currently, it has three 8-inch wafer fabrication facilities (fabs) and three 12-inch fabs.

Summary

China has maintained its position as the world’s manufacturing hub for decades, allowing the country to build tight supply relationships with other countries. Companies can reduce production costs, gain high manufacturing capacities, and attain access to the potential China market through contract manufacturing here.  Regarding the corresponding risks in finding CMs in China, effective management can spread the risks.


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    by Asia Perspective Asia Perspective No Comments

    Solar energy batteries are booming in China

    Solar farm in China

     

    The solar energy battery market has got much attention in China in recent years, being a fast-growing industry in renewable energy. In short, a solar energy battery is a semiconductor sheet that uses sunlight to instantly generate electricity, it is sometimes also referred to as “solar chip” or “photovoltaic cells”. The batteries can instantly generate electricity when illuminated under certain conditions.

    Following the focus on environmental protection and execution of the dual carbon goals policies, China’s State Council, the National Development and Reform Commission, Energy Bureau, and other related departments have issued policies to support the development of the solar energy battery industry.

    In this article, we go into greater detail and review why the solar energy battery market is exploding in China, and what opportunities this brings.

    Increasing Demand for Solar Energy Batteries in Europe

    Europe has grappled with energy problems and is eager to expand its solar energy capacity. This was particularly noticed during the energy crisis in 2022. Renewable energy sources such as nuclear and hydropower accounted for over 40% of Europe’s total energy supply in 2021. Yet deterioration of wind conditions coupled with weather anomalies such as drought all drove the demand for traditional energy sources like natural gas and coal.

    With the termination of Russia’s natural gas supply and the gradual implementation of various environmental policies, Europe is in dire search of a sustainable energy solution.

    Higher electricity costs

    Since Russia’s natural gas supply was cut to Europe, electricity prices have broken new records as days go by. European governments began taking drastic measures to limit energy consumption, such as Germany’s efforts to ban outdoor lighting in buildings and reduce indoor heating temperatures, and the UK regulators raised the energy price cap by 80% in early October.

    Soaring energy prices have also resulted in surging food prices, supply bottlenecks, and post-pandemic recovery efforts, which all led to expanded price pressures and inflation in recent months.

    Below you can find a graph that shows the electricity price increase in Europe until September 2022.

    Graph showing European wholesale electricity prices

    Increased demand for renewable products in factories

    Despite tax rates and additional costs arising from overseas sales channels, demands for renewable energy products such as photovoltaic products have remained hot in Europe. Solar Energy reported that more than 3,000 households had rooftop photovoltaic installed each week by the end of August 2022, three-folding what was three years ago.

    Chinese photovoltaic exports have reached new heights, where the country’s exports for the first eight months of 2022 already exceeded the previous year’s volume of 35.77 billion USD. It is estimated that Europe will take up to 50% of China’s total photovoltaic exports in 2022, a percentage previously dominated by Asia & Pacific countries.

    “It is currently the “cheapest way to generate electricity”, said Mr. Zhang, a director of a leading photovoltaic firm in China, “as the European market has become increasingly sensitive to price changes”.

    Price fluctuations

    Graph showing weekday hourly electricity prices

    As Europe is coping with electricity price fluctuations, differences in electricity prices at various hours of the day also took a toll on many households. Mornings and evenings of the weekdays, between the hours 7:00 – 9:00 and 17:00 – 20:00, are among the periods with the most energy consumption, where electricity rates during those hours would record an increase of 100% compared to hours with minimum energy consumption.

    Strong Chinese Supply Chain Eco-System

    China’s photovoltaic industry started around 2005, driven by European market demand. The industry has developed rapidly, where explosive industry growth has been demonstrated since 2013 following the rigorous introduction of national and regional to boost the photovoltaic industry.

    China’s photovoltaic industry has already surpassed the growth stage – subsidy policies have exited, and industrial growths have matured from a policy-driven to a market-driven stage. China’s photovoltaic production accounted for over 3/4 of the global photovoltaic module output in 2022’s first half.

    Graph showing China solar cell production

    Rapid Development of Solar Energy Battery Supply Chains

    A series of supportive policies launched by the Chinese government has made the solar energy battery industry a fast-growing industry in the new energy sector. In 2009, China implemented investment subsidies to conduct bidding for large-scale photovoltaic power plants. In 2016, the central government issued the “Thirteenth Five-Year Plan for the Development of Solar Power Generation”, setting a target that the installed capacity of solar power generation to reach more than 110 million kilowatts in 2020. To add further catalyst to the industry, the government has actively encouraged rooftop photovoltaic products for self-generation, self-use, and large-scale power stations.

    As the world’s largest solar power industry chain cluster and product exporter, China has a rich application market, a good investment environment, and the most photovoltaic patents. China’s photovoltaic industry has a complete industrial chain from upstream crystalline silicon production to midstream high-efficiency solar cell production to downstream solar photovoltaic power station construction and application.

    The market concentration of industry suppliers for the photovoltaic industry is high in China, where dozens of large-scale photovoltaic industrial parks are mostly found in Jiangsu, Hebei, Shandong, Zhejiang, and Anhui provinces. Listed companies include Tongwei, LONGi, Zhongli Group, and JA Technology are among the top photovoltaic producers in China.

    Summary

    With the gradual advancement of China’s “carbon neutral” and “carbon peak” plans, China’s solar energy battery industry will experience rapid development in 2022. Chinese suppliers must continue to reduce costs and increase efficiency and optimize their profit structure further. It is necessary to increase investment in technological innovation and enhance core competitiveness to ensure the supply of domestic and international markets.

    Many opportunities are also presented in China’s solar energy battery industry. With promising factors such as positive policy programs, strong market response, and an increase in demand for solar energy batteries from the European market, there is a foreseeable trend that solar energy battery technologies will gradually replace shares of energy production from traditional power generation methods.


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      by Asia Perspective Asia Perspective No Comments

      China’s Semiconductor Industry: Current Development and Complications

      Circuit board with semiconductor

       

      In 2022, the global semiconductor industry suffered greatly, following shortages in 2021. While the technology sector stocks lost over 30% year-to-year, semiconductor stocks have seen a decline of more than 40%. At the same time, leading chip manufacturers such as Intel, SK, and Samsung, announced production reduction plans for the products.

      The global semiconductor industry is indeed an interesting topic and where China plays an important role. In this article, we take a greater look at the Chinese semiconductor market and what we can expect.

      The Segments of the Semiconductor Supply Chain

      The semiconductor supply chain includes the supply of upstream semiconductor raw materials and equipment, the manufacturing of midstream semiconductor products, and downstream applications.

      A wide range of materials included in the manufacturing process can be divided into front-end manufacturing and back-end packaging materials. In thousands of chip processing procedures, the main types of equipment used are lithography machines, etching machines, film deposition equipment, ion implantation machines, testing machines, sorting machines, and probe stations. Downstream applications of the semiconductor industry include network communications, computers, consumer electronics, industrial control, automotive electronics, and so on.

      The below chart gives a better overview of the semiconductor supply chain.

      Chart showing semiconductor supply chain structure

      The Competitive Landscape in the Global Semiconductor Industry

      Thanks to strong research and innovation capabilities, the US maintains a strong competitive advantage in the semiconductor industry globally, especially in electronics automation design, core intellectual property, logic devices, and manufacturing equipment. Noticeably, however, its absolute competitiveness has weakened while other countries’ semiconductor industries are experiencing continuous upgrades. From 2013 to 2021, local US companies’ market shares fell from 56.7% to 43.2%, as exports from other countries squeezed sales.

      It’s worth noting that the entire East Asian region accounts for 73% of the world’s semiconductor capacity, corresponding to 83.85% of the global chipmaking semiconductor equipment demand. China mainland’s comparative strengths are in packaging testing, wafer manufacturing, and raw materials. South Korea, Japan, and Taiwan region are dominant in raw materials, memory chips, and wafer manufacturing. Currently, China mainland and Taiwan together account for 37 % of global chip production capacity while South Korea 21 %, and Japan 18% respectively.

      In each segmented semiconductor area, the core technology is often mastered by enterprises with oligopolies. In the silicon wafer and electronic technology market, the former is mainly occupied by Shin Etsu Chemical (Japan), Global Wafer (Taiwan), Stiebel Eltron (Germany), and SK (Korea), while the latter is led by the APD (US), Air Liquide (France), Dayolic (Japan), and Linde (Germany). Among semiconductor photoresist suppliers, Japanese companies dominate with 72% of the global market share. The same goes for the lithography equipment supply status where ASML, the Dutch giant, has a market monopoly with 83.3% of the high-end global lithography equipment market.

      Export Restrictions and the Impact on China’s Semiconductor Market

      On October 7th, 2022, the Department of Commerce Bureau of Industry and Security (BIS) released the Imposition of New Export Controls on Advanced Computing and Semiconductor Manufacturing Items Exported to China, significantly escalating US sanctions on China’s semiconductor industry since 2018. In the new export control rules, BIS added restrictions on the export of chips and related production tools to China for national security issues:

      1.  Restrict Chinese companies’ access to high-performance chips and advanced computers.
      2.  Restrict U.S. support for specific semiconductor activities that involve China.
      3.  Restrict China’s access to advanced semiconductor manufacturing items and equipment.
      4.  31 more Chinese entities and research institutions were added to the UVL list.

      Challenges for China’s Semiconductor Industry

      The restriction of US high-performance chip exports may directly hinder the development of AI technology and the IT industry in China. Chip designers and fabs that design supercomputing chips in mainland China, as well as overseas fabs that use US technology to make chips for Chinese supercomputing chip designers, will all be subject to US export controls.

      In addition, the US has extended restrictions on 28 entities and artificial intelligence technologies related to high-performance computing, including Haiguang, Jingjiawei, and Chinese supercomputing centers. As a result, the manufacturing of high-performance CPUs, GPUs, and AI chip in China will be blocked. Meanwhile, many foundries such as TSMC, Samsung, Intel, UMC, and Global Foundries will no longer be able to contract manufacture chips for such Chinese chip designers.

      The ban also included certain semiconductor manufacturing equipment and related items, which can be used in advanced chip manufacturing, into the Commercial Control List (CCL). All mainland Chinese chipmakers are subject to the restrictions, which have gone straight from “focused crackdown” to “full crackdown”. The scope of the restrictions has been expanded from 10nm to 16nm chips, targeting China’s domestic memory chip manufacturing industry. Export bans on 18 nm chips, used for the smaller DRAM memory chips, and on more than 128 layer NAND flash memory chips, used for semiconductor manufacturing equipment and storage, will significantly impact mainland China’s manufacturing industry and impede subsequent technology development.

      A new license is now required for exports of assembly components of semiconductor equipment by the Chinese mainland. That is to say, semiconductor equipment manufacturers in mainland China will be greatly hampered in making their own equipment.

      Europe’s Response to US Restrictions

      China’s market is especially important for the development of the global semiconductor industry. In recent years, China has increased investment in the semiconductor industry, especially in the rapid development of the semiconductor manufacturing industry, and has purchased a large amount of high-tech equipment. As a result, the revenue of foreign semiconductor factories from China continued to increase, climbing up to around 30% of their total revenue.

      In 2021, according to its financial reports, Pan Lin Group’s revenue from the Chinese mainland reached 33% of its total revenue, while Kolei generated 27%. European firms such as STMicroelectronics, Infineon, and NXP also rely heavily on Chinese buyers.

      Many companies have stated that they do not want to give up sales in China for political reasons. The Dutch government has, of the date we are writing this article, not agreed to impose any additional restrictions on ASML’s DUV equipment, essential production equipment in chips, exports to China, arguing that the measures could damage its normal trade relationship with China.

      Making China’s Semiconductor Industry Less Reliant on the US

      Among four major aspects of semiconductor manufacturing, including design, manufacturing, packaging, and testing, manufacturing is the bottleneck of China’s semiconductor industry. China also experiences a large technology gap in equipment production.

      Although China’s R&D is continuously developing, there is no doubt that a great mass of time and capital investments will be needed for development in the semiconductor industry. China may proactively seek cooperation with Dutch, Japanese, Korean, and other manufacturers to secure the Chinese semiconductor supply chain.

      Summary

      The semiconductor industry is of strategic importance to China, especially in the context of the international competitive environment. At present, the development of the global semiconductor industry depends on efforts and resources from all over the world. Due to the high technical entry barriers and uneven patent distribution around the world, a stable supply chain requires sound business relationships among all countries.

      China now has faced unprecedented challenges in its semiconductor market growth as US restrictions on China’s semiconductor industry have deepened into an all-around block. According to China officials, China will continue expanding its industry.


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        by Asia Perspective Asia Perspective No Comments

        Importing Wood to Vietnam: An Introduction

        Loading timber onto a truck

         

        Vietnam has a diverse sourcing market for wooden products and furniture, counting for more than 4% of the global market. It’s the second-largest market in Asia, and the largest in Southeast Asia, putting it under the spotlight from major trading partners. Since Vietnam’s admission to the WTO in 2007, the industry has grown much, particularly as eleven of its thirteen free trade agreements have been signed already.

        In addition to local sourcing of wood materials, Vietnam relies strongly on imported wood to meet the demand for products used domestically and overseas. As a result, an increasing number of wood manufacturers seek to import wood from overseas in the most effective way. In this article, we review the most important information to be aware of if you plan on importing wood to Vietnam.

        Vietnam’s Wood Industry

        Vietnam’s furniture industry has been active for decades and recently surpassed Poland and Germany to become the world’s second-largest furniture exporter, trailing only China. The industry has grown by double digits in recent years and is expected to grow even more with the implementation of new lucrative trade agreements.

        According to Vietnam’s General Department of Forestry, exports of wood and wooden products totaled 10.42 billion USD in the first seven months of 2022, a 1.3% increase over the same period the previous year. This sustainable development is expected to continue in the coming years, contributing to the growing demand for wood materials.

        As Vietnam becomes a key manufacturing hub, more and more foreign companies are establishing factories in the country, which also facilitates the growing demand for wooden pallets to support and move goods in warehouses, or for exports.

        When reviewing local wood types available, Acacia and Rubberwood are among the most popular materials for Vietnamese domestic furniture production, these wood types grow significantly faster in hot and humid climates. Yet, many companies must import raw materials as their foreign clients are unfamiliar with Vietnamese wood types or prefer Western wood.

        What foreign wood types are in demand in Vietnam?

        There are a handful of foreign wood types in high demand in Vietnam, including:

        • Pine
        • Oak
        • Ash
        • Beech
        • Walnut

        White Oak is a strong, versatile, and popular wood type used for top-quality furniture production. Given its luxurious look and stable supply possibilities, white oak remains one of the most important and sought-after wood species for furniture making in Vietnam, being used in cabinetry, indoor furniture, and engineered flooring.

        Ash is widely used for furniture manufacturing and is widely used for doors and general cabinetry due to its attractive price along with high quality, pleasing color and pattern. In the meanwhile, Beech is a relatively ‘low-cost’ hardwood species that is used for cabinet making and simple furniture, such as toys and chairs.

        In terms of pine, thanks to its durability, versatility, and abundant production, it remains the preferred material for sofa framing, low-value components, such as bed-slats in furniture. Pine is also popular to produce residential furniture such as tables, chairs, bookshelves, and wooden pallets.

        However, neither Oak, Walnut, Beech, nor Ash is available in Vietnam. Almost all Vietnamese factories rely on imports of these wood species.

        Here, Asia Perspective can help factories in Asia to source:

        • White Oak (Europe, USA)
        • Ash (Europe, USA)
        • Beech (Europe)
        • Pine (Scots Pine, Taeda Pine, Eliottis Pine)
        • Spruce (Sweden)

        Tariffs for Wood Imports to Vietnam

        Thanks to the EU-Vietnam free trade agreement (EVFTA), the import tariff of wood from Europe to Vietnam is more beneficial than that of the United States.

        Chart showing Vietnam wood import tariffs

        Vietnam Wood Exhibitions

        Participating in exhibitions has numerous advantages, the most significant of which is that it allows companies to bring their images and brands closer to consumers. By joining wood exhibitions, companies will have the opportunity to exchange information, find potential partners and customers, and learn new techniques and technologies. There are some outstanding wood exhibitions in Vietnam:

        VIETNAMWOOD

        Being recognized as Vietnam’s largest wood exhibition. VIETNAMWOOD is held every two years and has truly become the most effective networking platform for woodworking entrepreneurs seeking new business opportunities. The 19th exhibition held in October 2022, successfully attracted 11.650 visitors from over 32 countries.

        BIFA

        BIFA Wood Vietnam is a large fair for professionals in the wood industry, connecting suppliers with potential customers, diversifying import and export markets, and providing businesses with opportunities to find new markets. The 2022 fair was jointly organized by two of Southeast Asia’s most powerful brands in the timber and woodworking sectors: Binh Duong Furniture Association (BIFA) and Panels & Furniture Group of wood magazines.

        VIFA-EXPO

        VIFA, which began in 2008, aims to be the best place to promote and export Vietnamese furniture, home decoration products, and handicrafts. In 2014, VIFA collaborated with an exhibition organized by Ho Chi Minh City’s Ministry of Industry and Trade and changed its name to VIFA-EXPO. This combination has created favorable conditions for the rapid development of Vietnamese furniture.

        Summary

        Vietnam is the world’s second-largest furniture exporter, and the industry has been active for decades. Having said that, it has taken off in recent years, particularly since Vietnam acceded to the WTO in 2007. Many of its free trade agreements, including the EVFTA with the EU, have been signed since 2007.

        As input materials for wood manufacturing, various wood types are in high demand. The most common domestic woods are acacia and rubberwood. Popular furniture made of beech, oak, and pine, on the other hand, would necessitate the importation of wood.

        With the EU-Vietnam free trade agreement (EVFTA), the import tariff of wood from Europe to Vietnam is significantly lower than that of the United States.

        Joining wood exhibitions is an effective way for furniture manufacturers and wood companies to spread their images and brands closer to the market. Vietnam is a popular destination for the well-known wood exhibition, where corporations can exchange information, find potential partners and customers, and learn new techniques and technologies.


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          by Asia Perspective Asia Perspective No Comments

          Textile & Clothing Manufacturing in Indonesia

          Clothes factory in Indonesia

           

          With robust economic growth and rising purchasing power, Indonesia becomes an attractive destination for the clothing and textile industry. Still, fierce competition from international companies poses both risks and opportunities in the market.

          This article will introduce Indonesia’s textile and clothing manufacturing industry, describing insights such as why companies choose to source here and what are the benefits and disadvantages.

          Indonesia’s textile industry

          Indonesia is among the top 10 textile-producing countries in the world and the textile and textile product industry is among the most important industries for Indonesia’s economy, providing jobs to more than 3.7 million Indonesians. The textile industry accounted for 6.12% of the GDP of Indonesia’s manufacturing sector in 2021 or 1.04% of the total GDP. With a GDP of US$1.19 trillion in 2021, the industry reached a value of US$12.3 billion.

          The majority of Indonesia’s total textile and garment production is to supply international demand, with 70% of the output being exported. Before Covid-19, Indonesia ranked number six in worldwide textile output, and exports were valued at US$13.8 billion in 2019, a significant increase from US$10 billion the year before. The industry was heavily affected by the Covid-19 pandemic; textile and textile product exports dropped by 52% in May 2020 compared to the year before. Nevertheless, strong support and focus from the Indonesian government have helped recover the industry. In the country’s development masterplan “Industry 4.0”, the government is aiming to propel Indonesia into the top five textile producers in the world by 2030; the export target for 2022 is set at a value of US$13-14 billion.

          Contributing to the growth is also Indonesia’s shifted focus to new export markets, utilizing its connection with the Muslim countries. Several Muslim-majority countries now represent half of Indonesia’s trade missions and negotiations, and textile products are now hugely exported there.

          As garment companies continue to shift production out of China, Indonesia serves as an attractive alternative. China’s position as a global cotton importer is dropping and most cotton exports are being redirected to competing countries, including Indonesia. The USDA predicts that China’s cotton imports will rise by only 3.5 million bales during 2021-2030, compared to the estimated 8.1 million bales for the leading competing garment countries, Indonesia, Vietnam, Pakistan, Bangladesh, and Turkey combined. In 2030, China is expected to account for 24% of total global imports while the combined competing countries are expected to account for 47%.

          What textile products are manufactured in Indonesia

          With decades worth of experience in manufacturing textiles and garments, Indonesia is able to cater to a wide range of manufacturing needs.

          Apparel

          Indonesian manufacturers can produce a wide range of clothing, and many high fashion clothing brands have production in Indonesia due to its manufacturing plants ensuring high quality. Notable names such as Tommy Hilfiger and Calvin Klein have long put their trust in Indonesia’s fashion manufacturing.

          As the minimum wage in Indonesia can vary across regions, many textile factories are now located in Central Java after minimum wages started to rise in West Java and Banten. Still, the majority of weaving and finishing factories remain centered in Bandung. Other fashion brands such as H&M and Uniqlo manufacture in the manufacturing hotspots of Bali, Java, and Sumatra.

          Footwear

          Indonesia is the world’s 4th largest footwear producer and 3rd largest footwear exporter. Growing demand from emerging international markets as well as increased purchasing power amongst the domestic population provides a positive outlook for further growth for Indonesia’s footwear industry.

          It is possible to manufacture many types of footwear in Indonesia of many materials.

          Benefits of sourcing textiles & clothes in Indonesia

          There are many benefits to manufacturing in Indonesia, many are attributed to a young and growing labor force, low labor costs, and a growing domestic market which are further detailed in our market insight Sourcing and Manufacturing in Indonesia: An introduction.

          In addition, the textile and garment industry also benefits from the high support that the government is directing into the industry. Under the Industry 4.0 master plan, textile and garments are one of five targeted industries that Indonesia plans to put in extra effort to develop. Several key technologies are expected to boost the industry’s development, including AI, IoT, rapid data analysis, and sustainable practices. Furthermore, the government is carrying out a machine and equipment restructuring program specifically in the fabric refinement and fabric printing industries, as well as putting in additional efforts to improve the overall logistics and transport system in the country.

          What are the disadvantages?

          Like any other country, manufacturing in Indonesia also presents some disadvantages. This section presents some factors worth considering when choosing to manufacture textiles and garments here.

          High dependency on imported raw material

          Indonesia, like many other Southeast Asian countries, is highly dependent on imports of raw materials, in particular the garment sector. Around 18-30% of the sector’s production cost comes from imported inputs. At the same time, the government is aiming to boost the domestic market in general and reduce imports, applying higher tariffs and non-tariff barriers, which in this case also affects the imported inputs resulting in production becoming more expensive for domestic players.

          Its high dependency on imported raw materials also makes the industry vulnerable to external constraints such as the depreciation of the Rupiah. Indonesia’s textile and garment industry imports around US$300 to US$600 million worth of cotton, which is bought in USD. Companies that cater to the domestic market are thus outcompeted by international exporting competitors who instead benefit from the stronger dollar and increased revenue.

          High production costs

          Despite Indonesia’s labor costs being the lowest in Southeast Asia, production costs are raised by additional factors. Electricity and gas prices in Indonesia are relatively high compared to other textile producing countries.

          In addition, the machinery used in the textile and garment industry in Indonesia is aging and thus reducing productivity and efficiency. In 2019, it was estimated that 70% of machines used in the industry were old, some of which were over 3 decades old, and had a 50% less productivity rate. The government is providing substantial financial assistance to revitalize the technology used across the industry, which requires several million USD per year. Although the government is now carrying out restructuring programs, it will need some time before the equipment is up to par.

          Additional disadvantages such as infrastructure, bureaucracy and red tape, and free trade- and bilateral agreements are further detailed here.

          Trade and tariffs

          Indonesia has signed and implemented a number of free trade agreements, both with countries and regions globally, as well as part of the region-wide Association of Southeast Asian Nations (ASEAN) Free Trade Area. In total, Indonesia is currently part of 14 trade agreements, mostly within the APAC region.

          Indonesia is also in active discussion and negotiations to introduce trade agreements with India, Australia, Korea, and as part of RCEP. Discussions about an EU-Indonesia FTA have been going on since 2016 and have had 11 rounds ever since, with the last one being held in November 2021. A conclusion is yet to be made. Still, the EU is Indonesia’s fifth largest trade partner and the two regions have had a partnership under the Partnership and Cooperation Agreement since 2014. Indonesia is also part of the WTO and thus benefits from trade preferences where 30% of total imports from Indonesia enjoy lower duties.

          Examples of import tariffs on textiles, apparel and footwear in Indonesia.

          Table showing examples Indonesia's import tariffs

          Sustainable clothing in Indonesia

          In 2020, the government released its first sustainable development plan covering the period 2020-2024, aiming to lower greenhouse gas emissions. For the textile and garment industry, Indonesia is committed to reducing carbon and water consumption in the production process to reach its goals. In addition, the usage of environmentally friendly raw materials and applying circular economy principles are also highly encouraged in the market.

          As part of reducing dependency on international imports and improving sustainability, Indonesia is looking at using locally produced raw materials, primarily focusing on viscose staple fibers, or artificial cotton fibers, which are natural and biodegradable. One of Asia’s biggest viscose-rayon producer, Indonesia based Asia Pacific Rayon, is leading the cellulose fiber industry in the country and is ensuring that all its rayon comes from renewable and biodegradable materials. With Indonesia being the largest rayon producer in the world, the growing global demand for the material is expected to transform the fashion industry towards a more sustainable future.

          In addition, by keeping rayon production domestic, the demand for rayon will also help grow local fashion while at the same time reducing the country’s dependency on imported raw materials.

          Summary

          Indonesia’s textile and garment manufacturing industry has a strong history and market, holding an important position as a global supplier. With many notable fashion brands and international companies already invested in the country, it is now aiming to become part of the top five textile producers in the world by 2030.

          Companies in the industry can benefit from the industry’s high-quality products, significant governmental support, and low labor cost. Still, outdated machinery and high dependency on imported raw materials result in less advantageous production costs.

          Companies who seek to enter Indonesia’s textile and garment manufacturing industry will find promising growth opportunities in an already strong market.


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            CSR Audits in China: Complete Guide

            Workers conducting a CSR audit

             

            CSR has received increasing attention among companies with manufacturing in China in recent years. As a result of new government regulations and higher expectations from end consumers, companies are increasing their efforts to take CSR more seriously.

            In this article, we review CSR in China and what changes we can expect in the coming years.

            The Increased Importance of CSR in China

            Recently, ESG (Environmental, Social and Governance), an evolved CSR concept and framework, has gained popularity and become the subject of much discussion. In 2021, 1,366 out of 4,643 A-share listed companies in China disclosed ESG or CSR reports, accounting for 29.42% of all listed companies, a significant increase compared to the previous decade.

            However, compared to developed countries, China’s CSR standards are still relatively low when considering both awareness and implementation. Yet, many large Chinese companies have started to pay more attention to other stakeholders rather than only focusing on philanthropic work domestically, like in the early days.

            Instead of just highlighting donations to build new schools in rural areas, companies now express care for employees, community, environment, and sustainability in yearly CSR/ESG reports.

            China’s CSR Regulations

            Due to the lack of universal standards and guidelines, as well as different perceptions of what CSR entails, no unified CSR audit scope exist today.

            In 2013, a third-party business consultancy firm in China released a set of so-called DZCSR30000 standards, China’s equivalent to ISO standards, like ISO26000 and SA8000. The standards were endorsed by the Ministry of Industry and Information Technology, the Chinese Academy of Social Sciences, the China Enterprise Confederation, and other organizations. With that said, the standards have not been widely implemented. Different companies in different industries now adopt different standards such as AA1000, SA8000, ISO26000, BSCI, or their own code of conduct.

            Today, CSR is usually evaluated based on two main areas, with associated frameworks such as SA8000 and ISO26000: labor and EHS (Environment, Health and Safety). In a more detailed way, it would probably cover areas such as child labour, forced labour, discrimination, freedom of association, health and safety, working conditions, the environment, and business ethics.

            Differences Between Internal and External CSR Audits

            CSR audits are crucial to find non-conformities and enhance CSR performance. The audits are used to evaluate, measure, and track the CSR performance of suppliers, to see if the suppliers live up to pre-set requirements. Furthermore, from the perspective of risk management, the audits are also conducted to prevent the purchasing of conflict minerals, and child labour activities, for example.

            The scope and focus of audits often vary based on industry, considering audit strategies and practices. Take the example of a company that purchases textiles, which is labour intensive and where workers might be exposed to chemicals and acid mist. The auditor might then have to pay more attention to whether the workers use sufficient Personal Protective Equipment (PPE) such as protective clothing, helmets, and goggles.

            In a highly automated plant that produce automotive parts, on the other hand, there might be stronger emphasis on salaries, contracts, and work hours.

            Many large foreign companies in China have internal audit teams and conduct audits of their suppliers at least once a year. The auditors are commonly in-house experts with abundant experience in product quality control or supply chain management.

            Small and medium size companies may use external auditors as they lack resources or might not have a physical presence in the Chinese market. However, large foreign companies may also use external audit teams as they are more familiar with the working procedure. In addition, their independence will lead to higher credibility and more objective and unbiased results.

            Process when Conducting CSR Audits

            The CSR audit usually starts with the selection of a set of guidelines, for example, the company’s own Code of Conduct. The auditors would then use a comprehensive checklist, either provided by the client company, or use their own document based on certain requirements and standards such as SA8000 or ISO26000.

            After an introductory meeting between the three parties (the client, auditor, and supplier), the auditor(s) will conduct onsite audits, including document checks, site tours and interviews with workers. This will be followed by internal meetings with the auditors, and a closing meeting with the supplier. Under normal conditions, a comprehensive audit report will be delivered to the company two weeks after the audit.

            Below you can find a chart including the different steps and where the client is referred to as the audit consigner, the service provider as the auditor, and the supplier as auditee.

            China CSR audit process

            Audit Scope, Depth and Length

            The scope and depth of the audit depends on the client’s specific requirements and the chosen criteria. The time required for the audit depends on the size of the plant and the number of employees, as well as the complexity of the production process. An audit of a factory with about 100 employees usually takes at least 2 to 3 man-days.

            The Importance of Meeting Suppliers

            Foreign companies’ CSR work for suppliers in developing countries is generally achieved based on openness, mutual-trust, and collaboration. However, differences in language, culture, social environment, and economic development sometimes causes confusion and misunderstanding between auditors from developed countries and Chinese suppliers, especially those in less developed areas.

            For example, Chinese factories and workers can reach a consensus to not buy social insurances, which would be a CSR non-conformance for foreign auditors. However, Chinese workers may choose to not buy social insurances due to pre-existing insurances with the Chinese Hukou system (residence registration) to avoid paying extra money.

            Other times, workers prefer to not sign a labor contract to gain more freedom over their working hours. Local auditors in China, on the other hand, usually show a deeper understanding for these phenomena and its importance.

            Nevertheless, regardless of the auditor’s origin, it is important to visit the factory to perform onsite audits and meet with suppliers. Communicating with suppliers in person gives the auditor a deeper understanding of the underlying reasons behind non-conformances.

            Differences in Performance Between Industries

            Since there’s a strong focus on the workers in CSR audits, labor-intensive and less profitable industries usually mean higher CSR risks. In fully automated factories such as the automotive industry, workers generally operate in a less risky environment, whereas in the wig and hair-extension industry, for example, much of the production rely on manual labor.

            In addition, hazardous chemicals that are used in the production process also increases the likelihood of workers being in more hazardous work environments. Workers might then need more protection gear, training for work safety, and occasional health checks need to be provided.

            Post-Audit Improvement

            If you are unsatisfied with the CSR performance of a supplier, post-audit improvement actions are often needed. However, this also puts an increased importance on mutual trust and interdependence between you and the supplier. Usually, at the request of more important customers, suppliers will be more cooperative to improve but the time to complete the improvement can vary. Occupational risk assessments for employees in hazardous positions or providing social insurance for all employees will obviously take longer time than replacing expired fire extinguishers and purchasing appropriate personal protective equipment.

            You may also decide whether to continue its relationship with suppliers that fail to meet its targets, depending on the circumstances. For example, a company might stop the cooperation with a supplier that after an audit, is unwilling to improve their pay structure to align with local lowest wage standards.

            Tighter Supply Chain Regulations in Europe

            On February 23, 2022, the EU Commission adopted a resolution of a draft for EU Due Diligence Act. With a focus on human rights, the law aims to establish standards in the fields of occupational health and safety and environmental protection. It also aims to establish sanctions under public law and complaint procedures for affected parties.

            In Germany, the new Supply Chain Act (Lieferkettengesetz), also known as the Duty of Care Act, was passed and adopted into law in July 2021.

            With calls for tighter supply chain regulations throughout Europe, European companies with operations in China and/or other developing countries should have a robust plan in place for CSR audits and following improvements to prevent unnecessary risks.


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              FDI in Malaysia recovered remarkably from years of contraction

              Construction in Malaysia

               

              Foreign Direct Investment (FDI) has long been a key driver in the development of the Malaysian economy. Thanks to the government’s continuous efforts in making Malaysia an attractive FDI destination, the country witnessed an impressive growth of FDI inflows in 2021, breaking the downward trend from the last 4 consecutive years. The country has successfully regained foreign investors’ interest, a positive signal of economic growth and competitive edge recovery after the COVID-19 pandemic.

              In the past four years prior to 2021, Malaysia’s FDI attractiveness had been declining substantially, which was only further worsened during the COVID-19 pandemic. It was pointed out by the Malaysian Investment Development Authority (MIDA) that the severe drop in net FDI inflows was the result of unstable politics, non-transparent and inconsistent policies, causing the foreign investors’ confidence to diminish. Moreover, uncertainties caused by the pandemic and the global political situation created a gloomy investment landscape worldwide, including for Malaysia. Fortunately, those days might now be left behind, as Malaysia experienced a strong positive increase of FDI inflows in 2021.

              Malaysia’s net FDI inflows reached 10.9 billion USD in 2021, increasing 2.6 times from the 2020 figure. This is a new record compared to the previous record of 10.7 billion USD in 2016. Investment from countries in Asia are the biggest contributor to this growth, with a total of 5.1 billion USD invested, making up 46.7% of total investments. Among the Asian countries, Singapore, Japan, Korea, Hong Kong, and Mainland are the top five investors. It was followed by the U.S, which invested 4.2 billion USD. Europe ranked third with 1.3 billion USD, with the UK, Netherlands and Austria as the largest investing countries.

              Malaysia FDI inflows

              The sector receiving the most investments and that contributed to the growth in 2021 was manufacturing, with a total increasing from which had been severely impacted by the COVID-19 outbreak. E, transport equipment, and other equipment, followed by mineral and metal products, saw particular popularity, with 60% of the manufacturing investment going into these sectors. Manufacturing is gaining increasing interest from FDI investors, as its contribution to total FDI has become dominant since 2020, making up 53% and 61% of total net FDI inflows in 2020 and 2021 respectively. Meanwhile, it only accounted for 24% in 2019. The second biggest FDI sector was services, mostly in financial and insurance activities, which also rose significantly to reach 2.7 billion USD in 2021. However, services comprised only 25% of total net FDI inflows in 2021, a significant down from 54% and 40% in 2019 and 2020. This is different from the previous years when FDI poured the most into the service sector, with focus now clearly shifting towards manufacturing.

              Malaysia FDI inflows by sector

              Moreover, investment globally has also been rising substantially, with the number of newly approved FDI investments in 2021 rising above pre-pandemic levels, to a new all-time high of 47.5 billion USD. The Netherlands, Singapore, China, Austria, and Japan accounted for 88.9% of total FDI approved. As of December 2021, Malaysia recorded 352 high-profile FDI projects, including Fortune 500 companies with a total potential investment value of 8.9 billion USD. Overall, technologically advanced are the key focus sectors in Malaysia attracting FDI.

              For example, Intel Corporation (the U.S.) announced its investment of 7 billion USD in building a new semiconductor packaging and testing factory in Malaysia, which will begin production in 2024. This new investment is expected to create more than. In addition, Infineon Technologies (Germany) made Malaysia one of its regional manufacturing hubs by investing 4.5 billion USD in its integrated semiconductor manufacturing operation in 1999. Now the company announced that it will expand its semiconductors manufacturing base in Malaysia with a 2.27 billion USD investment. Further, Risen Energy, a Chinese solar energy company, chose Malaysia to be the location for building its first mega factory of photovoltaic modules in Southeast Asia, putting down 9.6 billion USD for 15 years.

              Malaysia’s impressive achievement in reattracting foreign investment has stemmed from several factors. Malaysia has benefitted from the recovery of global FDI flows as countries started to reopen borders after months of lockdown. The Malaysian government’s relief from pandemic containment measures at the beginning of 2021 also helped to bring FDI flow into the country. Furthermore, the strong governmental support with clear investment promotion policies and implementations plays a vital role in FDI attraction. In the 2021 budget, extensions of tax incentives were proposed, including tax exemption for new companies or a 100% tax allowance for five years for manufacturing companies that relocate to Malaysia. In April 2021, the government announced the National Investment Aspirations framework that is aimed to reform Malaysia’s investment policies, enhance regional and global supply chain linkages, and develop economic clusters tied to key sectors such as electrical and electronic industry with advanced manufacturing technology.

              To further promote new FDI projects, a new application method and procedure was implemented to simplify the process. The InvestMalaysia portal was launched in March 2021 as an online portal for investors to apply and manage their applications, from license approval status to granted incentives. This digitalization of investment applications is expected to speed up the approval process, which also contributes to the substantially increased number of approved projects in 2021.

              In summary, Malaysia has seen a vibrant success with an impressive rebound in FDI attraction after the pandemic. The country broke its own records of net FDI inflows and approved FDI investments within the manufacturing sector, This achievement closely aligns with the government’s strategic goal in the long term. Through several promotion policies and investment environment improvements, the country has proved its increasing competitiveness in the regional FDI landscape, gaining trust and confidence from foreign investors.


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                China’s Catering Industry Bouncing Back After COVID-19 Lockdowns

                Eating hotpot in a Chinese restaurant

                 

                As Beijing and Shanghai have recently resumed outdoor activities after months of lockdowns and tight restrictions, China’s catering industry, including the restaurant sector and bar sector, is roaring back to life.

                Dine-in Curbs Ease

                Unlike neighboring countries, China committed to a Zero-Covid strategy with strict movement restrictions to curb the outbreaks. Its capital city Beijing imposed travel controls and shut down various public facilities, including dining-in restaurants, gyms, and cinemas. Chinese citizens in Shanghai faced an even more severe situation with lockdowns that lasted for a few months.

                At the beginning of June 2022, the restrictions have been loosened in both cities, paving the way for the increase of domestic food consumption as well as for food services operators to revive their sales. Indoor dining is now allowed, however with a cap of 75% of restaurants’ capacity as set by authorities. Customers are expected to be back in flocks, especially in hotpot restaurants which are not a convenient takeaway option.

                The Catering Industry

                Following the easing of dine-in curbs is a long line of customers eager to experience diversified restaurant experiences. In fact, the trend started even before the restrictions, greatly fueled by the growth of China’s middle class.

                According to China’s National Bureau of Statistics, China’s food and beverage industry bounced back in 2021 from the initial hit of the pandemic in 2020, with a revenue of 704.83 billion USD, an increase of 18.6 % compared to a year earlier. The sector accounted for 10.6% of the total retail sales of consumer goods in the same year. It is a significant improvement from the year 2020, in which the revenue of China’s food and beverage industry was down 15.4% compared to 2019 due to the impact of the global pandemic. A report from Research & Markets estimated a 7.9% CAGR for the Chinese food services market during the 2021-2027 period.

                Due to recent lockdowns and restrictions in Beijing, the total consumption of the catering sector in one of the biggest metropolises in China decreased by 1.2% (YoY) in the first quarter of 2022. However, experts are still optimistic about the growth of this sector.

                One of the growth drivers is stable consumer demand. In a recent survey conducted prior to the major lockdowns, 84% of Chinese catering customers responded that they would maintain or increase their consumption frequency in 2022. The overall market demand is relatively strong.

                Demographics and income levels are closely related to food and beverage demand. In general, citizens from megacities spend more on dine-in services. For example, the consumption capability of Shanghai has seen rapid growth year-on-year, with its expenditures per capita up 14.91% from 2020. The growing middle class in China is seeking a healthy and high-quality eating culture as well as more diverse dining experiences.

                Chart showing Chinese consumers' consumption frequency

                Another growth factor is the increase in quantity and size of Chinese food and beverage operators. The number of restaurants in China reached 9.3 million in 2021, of which 41,641 are chain restaurants. In 2022, the number of outlets in the catering market is expected to continue to increase with a 10% average growth in every sub-sector, compared to 2017 data. Among all the sub-sectors, full-services restaurants will continue to be the biggest contributor, accounting for around 70% of the total outlets this year.

                Graph showing number of catering outlets in the Chinese market

                Large food and beverage services groups have kept expanding their market presence. Notably, Haidilao, a chain of hot pot restaurants known for its service and innovative marketing methods, emerged as one of the most lucrative hot pot enterprises in China, with a 43.7% revenue growth in 2021. Additionally, there is a growing interest in fast food from residents, especially the young generations, leading to the increasing market share of key players.

                The international reputation of Chinese restaurants is also growing, as four restaurants in China made it onto Asia’s 50 Best Restaurant 2022 list, a renowned global ranking that began nearly a decade ago. This marked the biggest number of Chinese entries ever, and experts believed that even more Chinese restaurants can be expected to make it on the list as China starts to open its borders to international travelers.

                Moving Forward

                After a temporary halt due to lockdowns and the pandemic, the resumption of outdoor activities and dine-in services in Beijing and Shanghai buoyed hope for catering businesses in the world’s biggest consumer market. The comeback in full swing of catering services is expected to happen very soon in China’s megacities. Subsequently, the development of other supporting industries, including food processing and transportation, will be greatly stimulated as well.

                With the growth of the Chinese economy, the pursuit of a more healthy and cultured eating experience for Chinese citizens, and the governmental focus on the food and beverage industry as one critical economic engine, China’s catering industry is one of the ideal investment targets for both local and foreign investors. To reap the advantages of the sector, businesses are recommended to watch out for the latest local movement regulations and prepare contingency plans to adapt their operations to the everchanging COVID-19 restrictions in the country.


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                  Mergers and Acquisitions in Vietnam: A Complete Guide

                  Consultant inspecting a factory

                   

                  Increasingly more companies seek to establish a presence in Vietnam through local M&A activities, a result of its growing manufacturing industry and domestic consumption. While the market experienced a slowdown from 2018 to 2020, it started to take off again in 2021.

                  Due to the increased interest in local M&A activities, we have written this article where we review Vietnam’s M&A market, the regulations, types of transactions, and the outlook.

                  Vietnam’s M&A Market

                  The M&A market in Vietnam has been growing fast since 2007, the same year as it joined the WTO.

                  In the first years, most investors came from foreign companies, including South Korea, Japan, Hong Kong, and Singapore. With that said, domestic Vietnamese investors have joined forces and are actively increasing their presence, both in terms of the number of deals and transaction values.

                  Acquiring a well-established local entity is a preferable market-entry strategy among many foreign companies, particularly in the consumer-related industries. Many Vietnamese brands are no longer owned by Vietnamese companies, but foreign ones.

                  For example, Sabeco, a state-owned beverage company with more than 100 years of experience was sold to ThaiBev in 2017, the largest transaction in Vietnam at that time. Kinh Do – who used to be the market leader with a 28% market share of confectionery in Vietnam, was also sold to Mondelez International in 2014.

                  Capturing the growing middle-income population in Vietnam, several finance-related sectors were also targets of foreign investors. Almost all consumer lending companies are also owned by foreign investors, at least partly. Examples include Home Credit (European), Shinhan Finance (South Korea), HD Saison with the involvement of Credit Saison (Japan), and MCredit with the involvement of Shinsei Bank (Japan).

                  Recently, SMBC’s purchase of shares in FE Credit from VPBank was known as one of the largest deals in 2021 in Vietnam, with a deal size of roughly 1.4 billion USD.

                  Graph showing M&A deals in Vietnam

                  Other finance-related industries, like insurance and banking, also receive more attention from foreign investors. Many non-life insurance companies in Vietnam now receive support from foreign strategic investors. One example includes BIDV Insurance Corporation with support from Fairfax Asia Limited (Canada), AXA (France), and Chevalier (Hong Kong). Bao Viet Holdings is another insurance company that got investments from Sumitomo Life (Japan).

                  Renewable energy is another industry that gets increasingly more interest from foreign companies. Solar energy projects that had Commercial Operation Dates (COD) before 31 December 2020 can enjoy fixed feed-in tariffs (FIT) set by the government.

                  This deadline for wind power projects was 31 October 2021. Hence, projects that were eligible for such FIT seem to be more attractive for investors, as their output is secured. With no fixed prices investors have more uncertainty which can be risky in Vietnam.

                  M&A Regulations in Vietnam

                  Like in other countries, M&A activities in Vietnam are subject to many regulations. The four most notable ones are the Investment Law, the Enterprise Law, the Securities Law, and the Competition Law.

                  These laws were revised between 2018 and 2020, in preparation for the booming trend of inbound and domestic M&A activities locally.

                  The Competition Law

                  The Competition Law on M&A transactions regulates Economic Concentration (EC). This can restrict M&A activities if they negatively affect competition in the market.

                  The National Competition Commission oversees this case-by-case and by various factors such as:

                  • The combined market share of the related parties to the EC
                  • The level of concentration pre- and post-EC
                  • The relation of the businesses participating in the EC
                  • The competitive advantage that the EC might bring to the market
                  • Specific characteristics of each industry

                  Transactions that make any company own more than 50% of the market shares are not allowed to proceed with M&As, except in special cases. If the market share is 30% to 50%, the company is required to report the transaction to local authorities. However, it has become more difficult to enforce such regulations as the market share can be subjective to estimate, unless obvious.

                  Tender Offer

                  A tender offer is often required when buying secondary shares of a listed company, as explained in the Securities Law. This is an effort to ensure fairness among the existing shareholders.

                  In detail, if an M&A transaction increases a shareholder’s ownership from less than 25% to more than 25%, a tender offer is required. If a shareholder already owns more than 25% of a company and wants to increase the ownership, a tender is also required if the transaction results in ownership of 35%, 45%, 55%, and so on.

                  This is waived in some cases, especially when fairness has been ensured before the purchase of shares. For example, when it is the purchase of new shares issued by the company, or when the purchase of the secondary shares has been approved by the Board.

                  Foreign Ownership Limit

                  Foreign ownership is restricted in some industries. Hence, foreign investors are suggested to consult with local experts and do research carefully before deciding to kick off an M&A strategy in Vietnam. Otherwise, transactions could result in a large waste of money and human resources, as the deal was not allowed from the start.

                  Let’s take the example of the banking industry. Foreign ownership is capped at 30% for any commercial banks in Vietnam. A foreign individual is not allowed to own more than 5% of a Vietnamese financial institution. Also, a foreign organization is not allowed to own more than 15% of a Vietnamese financial institution, except when the organization is a strategic investor, then the cap is set to 20%.

                  Another industry that receives much attention among foreign investors is the logistics industry. Companies providing ocean freight or inland waterway transportation can only have 49% foreign ownership. This limit also applies to companies providing other types of transportation, with the cap of foreign ownership between 49% to 51%, depending on the nature of the business.

                  Veto Right

                  It is also important to consider the veto right in joint-stock companies (JSC). The Enterprise Law explains that important decisions by Boards require at least 65% approval of the shareholders.

                  In other words, any shareholder that owns more than 35% of a JSC has the right to disapprove significant decisions, including but not limited to changes in business scopes, changes in the managerial structure, approval of the sales of projects or assets that have the value of more than 35% of the total asset of the company.

                  The veto right is crucial to take into consideration before acquiring a JSC in Vietnam. Hence, 35% (or 65%) of the ownership of a company is an important threshold. It could help the investor to minimize their paid capital, while remain the right to approve important strategic decisions of the company.

                  It could also help the strategic investor to eliminate the interference of small shareholders while keeping their investment at the lowest level (only buy 65%).

                  Types of M&A Transactions in Vietnam

                  M&A transactions can be structured in different ways, with the most common one being the acquisition of shares or capital contribution of target companies. Each transaction type has pros and cons that can benefit investors, depending on the case. Let us review both below.

                  Shares or Capital Contribution Acquisition

                  This is the most common type of M&A transaction where the buyer becomes the shareholder of the target company. This can be done by acquiring the primary (newly issued) shares or the secondary (existing) shares.

                  The process is comparatively simple with all the assets and liabilities being transferred directly and automatically to the new shareholders. The seller and buyer do not have to go through all items on the asset and liability lists. Hence, it saves time and cost for both sides to manage such M&A transactions.

                  However, it also brings disadvantages. The buyer automatically “inherits” all financial liabilities and might be facing potential unforeseen disputes or compliance issues later. Hence, it is important to have professional agencies in charge of the due diligence, to ensure transparency and that can foresee the potential risks of the target company.

                  Asset Purchases

                  In this method, the buyer purchases assets from the target company and incorporates such assets into an already licensed entity. This is common for asset-heavy industries (energy, manufacturing, or logistics), or when the buyer only wants to acquire a business division (unit) of the target company.

                  This option allows the buyer to be flexible in choosing the necessary assets to acquire, without taking over the irrelevant ones such as financial liabilities. However, the process of buying each individual asset will take time with complex documents required for each asset type.

                  The valuation is another challenge for this M&A type, especially when it comes to intangible assets. The investors are also suggested to prepare for a very high tax rate (as much as 20%) for the purchase of the property.

                  Merger or Consolidation

                  During a merger or consolidation, the target company transfers all its properties, labor rights, obligations, and legitimate interests to another company. Once done, the target company terminates all its activities.

                  Under this type of M&A, the most important factor to consider is the conflict of the culture between the two (or more) merging companies. How to balance the interest of all stakeholders (shareholders, employees, or management team) is also a crucial decision to ensure the smooth operation of the merged company afterward.

                  Outlook for M&A Activities in Vietnam

                  As mentioned, M&A activities have increased much in Vietnam since 2007. The market has become more active lately with the involvement of both foreign and domestic companies, acting as investors. Experts forecast that the market will keep growing fast, especially when the country is in the recovery phase after three years of being hit by the pandemic.

                  As mentioned, the growing middle-income population is one of the key drivers that attract foreign investors’ attention to the consumer-facing industries. In 2021, while many countries saw negative GDP growth rates, Vietnam grew by 2.58%, and the most M&A deals and total deal values were recorded.

                  With no travel restrictions, it’s easier for foreign entrepreneurs to visit and explore business opportunities here. One of the main challenges for M&A activities during the pandemic was the travel restrictions, which prevented investors from visiting the potential targets directly. This is even more difficult when it comes to manufacturing companies, having facilities that must be audited. Most of these assessments were either outsourced to local agencies or carried out remotely (by sending photos or through video calls).

                  Moreover, the many free-trade agreements signed have made Vietnam an increasingly interesting destination for trade and manufacturing. With wider access to global trade, as well as tariff exemptions, many domestic companies are expected to become more attractive, both as financial investments and as key parts of the global supply chains of foreign companies.

                  Summary

                  Vietnam’s M&A market has been highly active, despite the pandemic. The consumer-related industries have and will certainly be one of the key drivers that attract more foreign investment.

                  Japan, South Korea, and Singapore have long been the top investors in Vietnam, but the country has gained more interest from Western companies, as well as Vietnamese domestic investors. Major challenges that prevent Western investors from inbound investments are the cultural differences and the untransparent legal system.

                  To minimize such concerns, the Vietnamese government has been working to revise, update and provide a clearer legal system, including key regulations that directly affect M&A activities, such as the Enterprise Law, the Investment Law, or the Competition Law.

                  It’s fair to say that M&A is a preferred option among many foreign companies who want to get quick access to Vietnam’s domestic market and through inorganic growth. Just be sure to work with credible local partners that can minimize the risk of pitfalls and for proper due diligence.


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                    by Asia Perspective Asia Perspective No Comments

                    Moving Manufacturing from China to Southeast Asia: An Introduction

                    Factory workers in Indonesia

                     

                    Foreign companies have used low-cost country sourcing strategies for decades with a strong focus on China. In the past years, we’ve seen a new trend where increasingly more companies look for alternative sourcing markets in Asia.

                    In this article, we explore why this move is happening, specific brands that already moved parts of their production to Southeast Asia, what should you pay attention to if you are a manufacturer, and which countries are on the rise as alternatives to China.

                    Why are companies moving manufacturing from China?

                    Increasingly more companies have understood the importance of diversifying their supply chains from China, a trend that was accelerated during the pandemic.

                    The increasing labor costs is a major concern, which are around three times higher in China compared to Vietnam, and five times higher than Indonesia on average. Between 2009 and 2014, the Chinese minimum wage almost doubled, resulting in slimmer margins for foreign companies.

                    Another reason is the supply chain disruptions caused by the pandemic that sent shockwaves to global manufacturers, urging businesses to rethink their procurement strategies. Some companies have decided to move their production to other countries completely, while many adopt so-called “China plus one” strategies. This means that production is kept in China, while parts of the production is allocated to other countries.

                    The increasing import duties due to the ongoing trade war has also aggravated the struggles of businesses that are manufacturing in China. As China faces these and many other problems, Southeast Asia simultaneously rise fast and gain attention as an alternative market to China.

                    Companies Moving Out of China

                    Let’s review some notable companies that have moved parts of or all their production from China, and their future plans for the new manufacturing destinations.

                    Apple

                    Under the trade war pressure, Apple has been encouraging its suppliers to move production out of China. Parts of the iPhone’s production lines have been moved to India, some MacBooks are now assembled in the U.S, and Vietnam has been rising as an essential hub to produce Air Pods.

                    It plans to have 30% of its classic Air Pods produced in Vietnam instead of China. Foxconn for instance, the major supplier of Apple, invested 270 million USD in a plant to manufacture laptops and tablets in Vietnam in 2020. In fact, Apple tried to move more production to Vietnam in 2021, but the plan was postponed due to the pandemic, but the plan was resumed in 2022.

                    Samsung Electronics

                    Samsung stopped its smartphone manufacturing in China in 2019, and its TV and PC factory in 2020. Its global production is now based in Vietnam. The revenue of Samsung Vietnam is equivalent to roughly 20% – 25% of Vietnam’s total GDP in 2021 and the company is also a main contributor of FDI flows from South Korea.

                    Nike

                    Nike’s suppliers have been relocating production to Southeast Asia and Africa for a few years. The brand used to have much production in China with an estimation of 35% in 2006 but the brand has reduced its dependence on Chinese suppliers. In 2021, 51% of Nike’s shoes were made in Vietnam while only 21% were made in China.

                    Adidas

                    Nike is not the only apparel and footwear giant to shift its production location. About 25% of manufacturers for Adidas in China were shut down as foreign businesses stopped their partnerships with Chinese factories. The reason behind this was the penalty tariffs due to the trade war. Opportunities, therefore, open for counterparts in Vietnam, Thailand, Bangladesh, and Indonesia thanks to low-cost benefits.

                    HP

                    HP, Dell, and other tech firms planned to reallocate up to 30% of their notebook production out of China. HP has reportedly planned to shift 20%-30% of its Chinese production to Taiwan and Thailand to mitigate the risks of rising costs and disruptions, the US tariffs on tech products also reduced profits.

                    Considerations before moving manufacturing from China

                    It’s undeniable that China is still crucial for the global value chain, and the country has significant advantages that makes it competitive for manufacturing. Let’s review some important items to consider before relocating manufacturing from China to Southeast Asia.

                    Manufacturing capabilities

                    It’s easier to say what products cannot be manufactured in China than the other way around. Anything from clothing, machinery, electronics, telecommunication equipment, vehicles, and chemicals are produced here. Not only can you find products that require labor-intensive manufacturing at low costs, but also advanced manufacturing.

                    Manufacturing is also concentrated to different regions such as Guangdong province being particularly strong in electronics manufacturing, just to give an example.

                    Experience with foreign companies

                    Chinese suppliers are flexible and generally more experienced in working with foreign customers. They are nimble, fast, and understand Western standards well. The availability of skilled labor in China still also outweighs other Southeast Asian countries. It’s easy to come across suppliers who happily provide both OEM and ODM products, according to customers’ specifications.

                    The business ecosystem and mature supply chain

                    The supply chain in China has developed for decades. Foreign companies rely much on Chinese suppliers that are located. Therefore, moving out of China means moving the entire manufacturing and network from the country, which takes a great deal of effort, time, and money. Moreover, manufacturers around the world still depend a lot on Chinese raw materials and semi-final products. For example, clothing producers from Vietnam and Bangladesh must import most of their fabrics and threads from China; European manufacturers of cars must import wiring from China. This ecosystem makes China dominant in global manufacturing.

                    Relocation costs

                    With the strong concentration of manufacturing in China, relocations to other countries requires much capital and resources. Simply speaking, if you have your factory set up in China and want to shift to Vietnam, much capital is needed to set up a new factory, recruit workers, train the workers, send specialists to Vietnam for quality controls and inspections. You also have to add the work needed to deal with local authorities to get approvals and relevant certificates prior to operations.

                    China’s consumer market

                    Some enterprises hesitate to move from China due to its large consumer base. With a population of 1.4 billion, China remains the biggest consumer market for many products. If a company already has manufacturing in China, it is also easier getting access to the domestic market and to distribute products locally.

                    Otherwise, you would need to export the products to China, which comes with tariffs, customs clearances, additional shipping costs, and more.

                    What countries are companies moving to in Asia?

                    While China will remain an important manufacturing destination, there are a handful of countries in South and Southeast Asia that gain much attention. Let’s review the most notable ones.

                    Vietnam

                    Vietnam has traditionally attracted companies in furniture and textile production. Nowadays, multinationals set up production for more advanced products, including electronics, telecommunication equipment, and machinery. The benefits of choosing Vietnam as a manufacturing destination include its low labor costs, many trade agreements, enhanced manufacturing capabilities, and large labor pool. Even if Vietnam won’t replace China as a global manufacturing hub, it gains significantly as companies seek to diversify and set up manufacturing operations here.

                    Indonesia

                    With a population of 275 million, Indonesia is the most populous country in Southeast Asia and with a workforce of around 135 million. With rapid urbanization and a median age of 29.7, the country is set to become a leading manufacturing hub in Asia.

                    Its domestic market is expected to see great growth as disposable incomes increase and more people get access to smartphones, the internet, and modern financing options. At the same time, the country struggles with infrastructure issues, red tape, and regulations that tend to be unclear and change frequently.

                    India

                    The manufacturing industry is India’s most important. ‘Make in India’ is a program to put India on the map as a manufacturing hub and attract more businesses and investors. India’s main products includes automobiles, chemicals, clothing, consumer electronics, electrical equipment, furniture, heavy machinery, refined petroleum products, and ship building.

                    Notably, India has lower labor cost compared to China, yet you will have to deal with a weaker infrastructure, inefficient transport system, and lower domestic consumption.

                    Summary

                    In general, companies are moving from China due to the increased labor costs, supply chain disruptions, and trade war. At the same time China faces these issues, other countries like Vietnam, Indonesia, and India become more interesting and capable.

                    If you are considering a relocation from China, you should consider relocation costs and inefficiencies in new markets, not only looking at labor costs. China also possesses a business eco-system that cannot be replicated in the short-term.

                    Southeast Asian suppliers highly rely on imports from China, which drives logistics costs and final prices, so these rising countries can be one of the sourcing bases but cannot completely replace China.


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