Asia outsourcing: China, India and Southeast Asia as sourcing partners

outsourcing in China  outsourcing in Thailand

(left) Chris Runckel in Weihai, China, one of many cities that has seen considerable foreign investment.  (right) The author inside a factory in Thailand

As companies continue to search for low-cost quality suppliers, much of the focus is on Asia. The below article, the first of two parts that addresses some of these issues, is by Christopher Runckel, president of Runckel & Associates, a consulting firm based in Portland, Oregon, USA.

The location search - By Christopher Runckel,  in Wire Journal International Magazine

Two countries that are virtually on every company radar screen at the moment are China and India. There are many reasons for these choices, most of which are relatively well known, but one needs to understand the pluses and minuses of the entire picture before making a decision on where to go to in Asia, be it to start a new manufacturing operation, to enter a joint venture or to sell to a growing domestic market.

One inescapable reason is sheer numbers: China and India have a combined population of 2.4 billion, more than a third of the total world population. Foreign Direct Investment (FDI) has followed: FDI for both China and India has grown by more than 1,500 percent between 1990 and 2003, and both countries have growing domestic considerable consumer markets, Both economies are starting to produce higher value products and develop networks to maintain competitive advantages beyond mere cost. By 2030, China and India's combined country-wide purchasing power will be five times greater than that of the U.S. today according to a 2004 DBS report.

For all the headlines of businesses locating in China, that does not mean that yours should too. That well could be the right answer, although even then one would have to determine where in China to go.

It is vital to understand both the differences and the opportunities, and that includes Southeast Asia as well. A company that targets just one country in Asia for its future but cannot explain why that it is that one has not done its homework.

This article, the first of two parts, will cover some of the considerations, which will continue next issue in the second part.

Comparing developmental - 'apples to apples'

One key place to start is the stage of development and government development plans. China opened its doors to FDI in 1978; India in 1991. Southeast Asia started in the early 70s. Today the coastal areas of China are mostly fairly modern although a few miles away conditions can be quite primitive. India has some very modern areas but infrastructure tends to be less developed and poverty right next to considerable wealth is often on view. Southeast Asia, particularly Thailand, is more modern in urban areas. Industrial infrastructure in Southeast Asia is often significantly better not only in roads, ports, etc. but also in the range of quality suppliers who have had experience working with Japanese, European and North American manufacturers.

The three regions, though, are taking very different paths to developing their economies. The approaches reflect the most basic difference between the three: Southeast Asia is largely democratic and non-bureaucratic; China remains state run but is gaining an increasing commercial class and is very pro-business; India is a democracy but also with a strong bureaucracy and continues state control on many key industries.

In Southeast Asia, business is leading growth. Thailand in 2004 was the fourth most attractive location for investment after the U.S., China and India, and received particularly strong investments from Japan and other Asian investors. Chinese companies are actually opening factories in Thailand because they find the business costs, logistics and supply possibilities advantageous.

In China, the government is taking a "planned" approach to development, while India is growing more organically. In 2003, China received $53.5 billion in FDI. more than 10 times that of India at $4.3 billion. In 2004, the disparity was even greater, with China attracting more than $153 billion in new agreements, up by one-third over 2003. Utilized FDI (the amount actually invested during the year) also surged to a record high of almost $61 billion, rising 13.3 percent over 2003. India, in the same period, was only able to increase its investment number to just under $6 billion.

China has aggressively sought outside investment and has been less encouraging for domestic entrepreneurship. Today, nearly 400 of the Fortune 500 firms have invested in more than 2,200 projects in China, Facilities include infrastructure projects like power generating equipment, telecommunication equipment, consumer electronics, pharmaceuticals, petrochemicals and power generating equipment.

In further comparing locations, China is by far the bigger player than India for manufacturing as much more of India's recent growth has come in services (computer programming, call centers, etc.) For example, India's consumption of aluminum is about two pounds per person, compared with nine pounds per person in China. For base metal consumption, India accounts for less than 2 percent of demand while China accounts for 22 percent, This will change but the statistics clearly indicate that China is far the larger manufacturing powerhouse than India at this time.

India has decided to rely less on outside investment, which is largely a function of government attitudes, and created a more nurturing environment for its own entrepreneurs. However, India still has a high level of government regulation of business, bureaucracy and poor actual infrastructure development. For example, one foreign investor was required to have 100 separate forms signed by 60 different authorities prior to being authorized to open operations in India. This level of red tape is much more than that found in Thailand and/or even China or Vietnam.

Legal considerations

Here is one important area where the three regions vary greatly India has a well developed legal tradition based on British legal roots. Intellectual Property (IP) protection is generally good although there has been IP infringement, some of which appears that the government has condoned, in the biotech seed industry Southeast Asia, in particular Thailand, also has a well developed legal system with generally predictable legal outcomes and good IP protection. Vietnam which is making the transition from a socialist system has a significantly weaker legal system with still weak IP protection and high levels of corruption. China is building a more law-based legal system but it is still problematic. IP protection in China is a major issue with poor enforcement and much regional variation.

Monetary policy

While countries throughout the region are concerned with inflation, India's restrained monetary expansion has managed to keep inflation at approximately 2% to 3%. China is trying to control its booming economy without causing economic development to stall, Last October, the government raised its one-year lending rate for the first time in nine years, from 5.31% to 5,58%, and recently allowed its currency to start a highly managed float which has led to about 2% currency devaluation. China is wary of lending money to overheated industries such as building construction and automakers with good reason.

Wage growth

China, Vietnam and India offer wage rates that can work out at about $1.50 per hour by the time benefits and government required regulations are considered. Thailand's wage rates are somewhat higher at the low end (unskilled factory worker) but often similar or even lower for mid- and upper-level positions which often can be more expensive in these other countries.

While all countries noted offer less expensive labor costs than the U.S. or Europe, this cost advantage may erode as wages rise. This is happening already in China in the Pearl River delta, Shanghai and Beijing wage markets and in some of the Indian key areas like Hyderabad, Calcutta, etc. Rural wages in China have increased 14 percent over the past year. Some industries, particularly those in Guangzhou and the Pearl River Delta, have already experienced a shortage in migrant workers which to this point had seemed unlimited over the past two decodes. In the last three years, wage inflation in executive and professional occupations has been growing at a tamer 6% to 8% per year, according to Hewitt Associates, although this increase is not uniform.


Here there is much differentiation but surprisingly it is something that many companies do not adequately consider in deciding on a location. Many if not most firms in Thailand have over 30 years of experience producing for Japanese, European and North American companies. Quality is understood and adhered to. ISO quality standards and just-in-time shipping are well understood and predictable logistics chains are the norm and more easily documented. Chinese, Indian and more recently Vietnamese suppliers have less experience supplying foreign vendors, Many if not most have not worked with Japanese suppliers and if your company would be their first foreign client you will have to help them build quality concerns into their manufacturing. Suppliers from the Pearl River Delta area, the Shanghai and coastal areas will have more experience but keep in mind that the time required to reach required quality levels is a business cost that needs to be considered.

Runckel & Associates, a consulting firm based in Portland, Oregon, USA, assists companies interested in investing, manufacturing or opening an office or factories in Asia, specializing in guiding small, medium, and family-owned businesses. Its clientele has included wire and cable companies. Runckel & Associates can be contacted through its website,, or by e-mail at or by calling tel. 001-503-244-4551.

About the Author:  

Christopher W. Runckel, a former senior US diplomat who served in many counties in Asia, is a graduate of the University of Oregon and Lewis and Clark Law School. He served as Deputy General Counsel of President Gerald Ford’s Presidential Clemency Board. Mr. Runckel is the principal and founder of Runckel & Associates, a Portland, Oregon based consulting company that assists businesses expand business opportunities in Asia. (

Until April of 1999, Mr. Runckel was Minister-Counselor of the US Embassy in Beijing, China. Mr. Runckel lived and worked in Thailand for over six years. He was the first permanently assigned U.S. diplomat to return to Vietnam after the Vietnam War. In 1997, he was awarded the U.S. Department of States highest award for service, the Distinguished Honor Award, for his contribution to improving U.S.-Vietnam relations. Mr. Runckel is one of only two non-Ambassadors to receive this award in the 200-year history of the U.S. diplomatic service.

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