Bloomberg, March 23, 2010, 2:08 AM EDT, By Frederik Balfour
March 23 (Bloomberg) -- Google Inc.’s retreat from China, where U.S. executives say the business climate is becoming less welcoming, may hasten moves by foreign companies to look beyond the world’s fastest-growing major economy for expansion in Asia.
Google rerouted its Chinese Web site and today began directing traffic to Hong Kong, fulfilling a pledge to stop censoring searches as required by China. The move follows an American Chamber of Commerce report released in Beijing yesterday that said some U.S. businesses are losing Chinese sales because of rules to support home-grown technology.
While China still “is the biggest game in town,” more recently “I see a lot of U.S. companies looking for alternatives,” Susan Schwab, U.S. Trade Representative between 2006 and 2009, said in an interview in Hong Kong last week.
General Electric Co., L’Oreal and New Balance are among companies with longstanding operations in China that are expanding in countries such as Vietnam and Indonesia. Asia’s emerging markets outside China are home to more than 2 billion people and have growth rates that are gaining on the world’s most populous country.
Rising costs in China are increasing the need to diversify. VF Corp., the owner of North Face outdoor apparel and Lee and Wrangler jeans, decided to “push our sourcing strategies and vendors outside China,” said Thomas Nelson, vice president of global product procurement. Indonesia now accounts for 8 percent of the Greensboro, North Carolina-based company’s $2 billion of global sourcing, double the amount three years ago, he said.
‘China-Plus-Two’
Cuts in tax rebates for exporters, accelerating inflation, stricter labor laws, a shortage of workers in coastal manufacturing hubs and assumptions that China’s currency will appreciate, making exports more expensive, are all adding incentives for companies to look elsewhere.
“A China-plus-one, or China-plus-two strategy is definitely an essential component of any large brand-buying operation due to rising labor costs and shortages in China,” said Judith Mackay, Asia apparel and license compliance manager at New Balance. The closely held Boston, Massachusetts-based maker of athletic shoes, plans to find sub-contractors in Indonesia to augment four plants in China and one in Vietnam.
Indonesia was Asia’s third-fastest growing economy after China and India last year, and with 248 million people, is the world’s fourth-largest population. Vietnam, with 90 million people, had the region’s fourth-fastest pace of growth.
Ford, GE
Ford Motor Co. Chief Executive Officer Alan Mulally said March 18 it’s “absolutely” important not to focus solely on China and to pursue growth in Asian countries. Ford has invested $1 billion in Thailand in a venture with Mazda Motor Corp. and on March 10 launched its first made-for-India model, the Figo, as part of an $840 million investment there.
GE’s energy arm sees “huge” potential in selling equipment to producers of geothermal power in Indonesia, the company’s Kuala Lumpur-based Southeast Asian president Stuart Dean said in a phone interview. GE’s $61 million wind-turbine plant in Haiphong, Vietnam, is set to open this year as is Intel Corp.’s $1 billion chip test and assembly plant in Ho Chi Minh City.
French cosmetics maker L’Oreal is spending $50 million to expand its Jakarta manufacturing facility to produce mass market cosmetics under its Garnier and L’Oreal Paris brands.
Google, based in Mountain View, California, has less to lose in China than many multinational companies. Google derives about $600 million, or 2.5 percent of sales in China, compared with $10.7 billion, or 24 percent, for Melbourne-based Rio Tinto Group, the world’s third-largest mining company. Four Rio executives went on trial in Shanghai this week charged with accepting bribes.
Cyber Attacks
Google said Jan. 12 that it was the subject of a cyber attack originating in China. Hackers stole intellectual property from Google and targeted e-mail accounts of human-rights activists, it said.
Facebook Inc., which last week overtook Google as the most visited Internet site in the U.S., has avoided a misstep in China, where its site is blocked. The social networking company last week said it would open its first Asian operations center in Hyderabad.
Google also has a hub in the southern Indian city. The company controls 88 percent of the market for Web searches in India, a country of 1.2 billion people where the economy has expanded at an average pace of 8.5 percent in the past five years, compared with China’s 9.8 percent.
Chinese Rules
Chinese government rules to encourage home-grown technology are causing companies to cry foul, the American Chamber of Commerce said. Three ministries posted a notice in November requiring sellers of everything from computer software to office equipment to accredit their products for inclusion among companies offering equipment with “indigenous innovation” to the Chinese government.
Twenty-eight percent of 203 members responding to the chamber’s survey said they are losing business because of the policy. Foreign companies are concerned the rules may extend beyond the 599 billion yuan ($87.8 billion) government- procurement market to orders from state-owned enterprises, which last year had combined revenue of 22.5 trillion yuan.
“Many foreign companies are starting to believe that the future China business opportunity is shrinking,” said James McGregor, a senior counselor in Beijing at APCO Worldwide, a public affairs company.
--With assistance by Michael Forsythe in Beijing and Stephanie Wong in Shanghai. Editors: Bill Austin, Ben Richardson
To contact the reporter on this story: Frederik Balfour in Hong Kong at fbalfour@bloomberg.net
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