China’s once mighty manufacturing sector being affected by heavy business costs
Print Edition
CHINESE tycoon Cao Dewang has become the latest Internet celebrity in China.
The founder and president of Fuyao Group — the world’s largest auto glass maker — said in a recent interview with China Business News that he had invested US$600 million on a new plant in the US state of Ohio, because it costs less to produce in the US than in his native China.
His statement dropped a bombshell. Although many Chinese are resigned to the idea that their country is no longer the “world’s factory,” to assert that the cost of Chinese manufacturing has outstripped the US’s might still be considered heresy.
Media ran sensational stories about Cao’s “flight” to the US, as if he were a banker who made off with depositors’ money.
In fact, Cao revealed that his decision to invest in the US was necessitated by a contract he signed with his client — in this case the General Motors — and he regretted not making the decision earlier.
For the information of his critics, Cao offered a breakdown of the costs of doing business in the US. Electricity costs are half those of China and natural gas one-fifth; interstate highways are toll-free, as opposed to motorways in China; and the land is much cheaper. He concluded by saying that except for labor costs, American manufacturers enjoy multiple advantages over their Chinese peers.
Moreover, the US corporate tax rate — arguably one of the highest in the world — stands at 35 percent. But this pales in comparison to the overall tax burden on Chinese firms. In addition to being subject to a 25 percent corporate tax rate, they also have to pay the VAT and miscellaneous other taxes. Combined, they make it 35 percent more expensive to manufacture in China, said Cao.
All this information might seem novel but it actually points to a trend set in motion several years ago, when the revival of US manufacturing was made an imperative under the Obama administration.
‘Reindustrialization’
I once attended a media event in Nanjing, Jiangsu Province, where a couple of American mayors promoted the strategy of “Reindustrialization” in the US and tried to woo Chinese investments.
And I frequently found myself attending conferences where speakers, full of gloom and doom, compared Chinese manufacturing unfavorably to American manufacturing. With this in mind, Cao’s revelation is hardly surprising or newsworthy. It made the rounds on the Internet simply because the person airing these views happens to be a well-known mogul and philanthropist.
The web portal Tencent published a series of commentaries that echoed Cao’s insights, with shocking headlines such as “Will Trump throttle Chinese manufacturing?” The author of this piece was convinced that the US president-elect would deliver on his campaign promise of cutting corporate tax from 35 percent to 15 percent — a step that would give US manufacturers an added edge over overseas competitors and cajole American companies into relocating their operations back into the US.
Although I’m not a businessman, I do empathize with the minority of entrepreneurs still “stranded” in manufacturing. During occasional conversations with them, they invariably complained about how hard it was to survive “cutthroat competition,” as most margins on manufacturing are down to 10 percent or less. Many have left manufacturing for industries that promise faster and higher returns on investment, such as real estate and finance, which also carry a degree of panache denied to manufacturing “underdogs.”
Informed observers, however, will naturally be alarmed at the extent to which the well-being of China’s economy has been predicated on the property boom and an exuberant financial market. It doesn’t take a genius to know that a castle built on quicksand cannot last.
Amid widespread pleas for lowering taxes for Chinese companies — especially small- and medium-sized companies — it is high time we explored the possibility of fiscal reforms that significantly reduce their tax burden.
But as Jia Kang sees it, such possibility is remote. The expert on Chinese fiscal issues recently told a forum held by Fudan University’s School of Management that Chinese businesses face an aggregate of 18 taxes, and despite efforts to reduce them there is little room for a steep tax cut.
A more realistic move would be waiving non-tax administrative costs borne by businesses. For example, he suggested lowering the rate of social insurance payments.
Jia also lamented the fact that many business people have to go to great lengths to secure official stamps of approval before they can proceed with their business proposals.
Although he didn’t use the word “bribery,” it is an open secret that businesses sometimes have to “grease the wheels” of power to get things done.
These “rent-seeking” costs eat into already dwindling profits. That’s why any talk of reforming the tax regime without mentioning these costs is totally irrelevant, said Jia.
People’s Daily also weighed in on the recent controversy surrounding Cao, editorializing that people should distinguish between outbound investments and abnormal capital flight.
Every issue Cao touched on is a constraint of China’s economic transition, and needs to be resolved through reforms, said the editorial.
If the past is any guide, the People’s Daily’s editorial may well herald positive changes. Hopefully Cao and Jia’s criticisms can catalyze a real revival of the beleaguered “Made in China.”
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