WTO Condemns Brazil Industrial Policy: Brazilian Government Discusses New Subsidies Rules

According to the WTO, Brazil’s industrial programs are inconsistent with the international agreements signed by the country, in addition to providing prohibited subsidies.

Brazil’s industrial policy in check

The European Union’s (DS472) and Japan’s (DS497) disputes against Brazil’s industrial policy benefits are close to a conclusion. After almost four years since the beginning of the processes, the World Trade Organization (WTO) Dispute Settlement Body released the Panel’s report of the cases this past August, and argued that seven Brazilian programs that sought to promote technological innovation and boost exports do not comply with the Organization’s rules.

One of the main complaints was against the tax exemption granted to automotive companies that produced a percentage of their products locally. This would represent a disguised subsidy and distort international competition.

The Panel concluded that Brazil should withdraw all illegal subsidies within 90 days of the final text’s approval. On September 29th, the Brazilian government appealed to the WTO report on both cases. If the panel’s report is confirmed and Brazilian government does not comply with the WTO’s recommendation, parties could retaliate against the country. This could have direct impacts on companies doing business in Brazil.

The future of Brazilian industrial policy

The Brazilian government must now reassess its industrial policy during one of the country’s worst political and economic crises. For two years in a row, Brazil’s GDP has contracted by more than 3%. This in turn has helped drive the unemployment rate of to 13.7%. This economic contraction complicates Brazil’s ability to comply with the WTO’s requirements.

On the one hand, industrial policies have the objective of promoting innovation and productivity. On the other, policies aimed at alleviating the economic crisis should reduce government spending and increase public revenues.

The government will have to think of alternatives to tax breaks to spur industrial development, all with minimum intervention. The new policy will have to follow a more functional development policy, simplifying taxes and reducing the cost of doing business in Brazil, while supporting innovation and creating a proper environment for companies to invest in this kind of activity.

This is no easy task, especially given Brazil’s unstable economy and political scene. This task is further complicated by the lack of attention that the private sector has paid the WTO ruling thus far – even though it will need to be a major partner in drafting legislation, the public sector has largely remained uninterested in the rulings.

The Brazilian government’s ability to carry out these policy changes is further hampered by its entanglement in several ongoing corruption scandals. The government has spent the last 5 months focusing on defending President Michel Temer against two charges on corruption presented by the Attorney’s General Office. Temer’s refusal to resign has had a high cost for the country, and postponed the approval of highly important proposals for a faster economic recovery.

Now, for the next following months, the government will have to articulate to approve several unpopular measures, such as the pension reform, the postponement of salary readjustment for civil servants, and the end of benefits for several sectors. Additionally, the constant corruption scandals revealed by several plea bargains under negotiation by top politicians arrested and the upcoming 2018 presidential elections. Temer’s cabinet will continue to be affected by scandals, and changes might affect the continuity of the undergoing policies.

Starting in around April 2018, the runup to the October 2018 general elections, will further complicate the government’s agenda and make difficult to approve any proposal. It is important to note that any ministers that intend to run for the elections will have to leave their positions.

If the Minister of Development, Industry, and Trade, decides to run for instance, the ministry might be left without a clear leadership until 2019. Something that would reduce political influence in the draft of the new policy, however, without someone ahead of the ministry, the final decision over the policy would be postponed.

A new policy might take longer than expected

Brazil’s appeal of the WTO’s ruling will postpone the final decision against the programs at least 2018. Brazil might also benefit from the number of processes currently under analysis at the WTO and their constant delays – the WTO already broke all deadlines for the final report on the Brazilian cases.

The Trump administration’s recent attempt to block the appointment of new member to the Appellate Body exacerbates the likelihood of further delays. The Appellate Body is already operating with five members instead the normal seven, and will be down to four in December.

If the block continues and no new members are appointed, the delays might increase even more. This delay would allow Brazil to maintain the current policies while the appeal is processed, and would provide the government with more time to work on a long-term and sustainable industrial policy.

Amid major reformscorruption scandals, and elections, the industrial policy reformulation might not have the attention it needs to comply with the demands of the WTO. There is a high chance that any changes will have to be postponed to the next administration.

This exposes Brazil to a medium term risk of retaliatory sanctions from other countries. It is important to note, however, that this retaliation is not an immediate action and it has to be submitted to the WTO and takes a while to be settled. Without the possibility of counting on the government to focus on the discussion, the private sector and the civil society will have to participate actively in the draft of the new programs to promote innovation and productivity in the country.

 

Juliano Griebeler is an analyst at Global Risk Insights. As originally appears at: https://globalriskinsights.com/2017/12/wto-condemns-brazil-industrial-policy-brazilian-government-discusses-new-subsidies-rules-amidst-worst-economic-political-crises/

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Investment Incentives in Vietnam’s Central Highlands Region

The Central Highlands have long been a strategic economic, political location in the history of Vietnam. Sharing borders with Laos and Cambodia, this region is one of the most important location for the economic development of Vietnam in the next few years.

A region full of potential

The Central Highlands, or the Western Highlands, is located in the West and South West of Vietnam. The region contains five provinces: Lâm Đồng, Daklak, Dak Nông, Gia lai and Kon Tum. These provinces are expected to show high potential for development in renewable energy, agricultural and tourism in the coming years.

According to the Minister of Public Security’s speech in the fourth conference on investment promotion in Central Highlands total investment capital has reached VND 266 trillion in 2015 with an annual growth rate of 11.3 percent between 2011 and 2015. To date, there have been 140 FDI projects worth US$772.5 million in the Central Highlands. This number is expected to grow significantly in the next few years, especially as the government is trying to improve the region’s infrastructure and paying more attention to renewable projects in its long-term plan of development.

Tourism and agriculture are two important sectors that appeared very promising to foreign investors, especially investors from Korean, Japan, and China. However, Central Highlands are not being fully explored, thus, bringing more opportunities for future investors to enter the race.

Opportunities for renewable energy projects

The Central Highlands is a prominent location for solar potential maps in Vietnam. According to Vietnamese authorities, the total hours of sun in Central Highlands varies from 2000 to 2600 hours per year. Korean Solar power investors in this area are upbeat on the prospects for the region and have published findings indicating a direct solar radiation generation of 5 kWh per square meter. With this in mind, Vietnam’s Central Highlands is an ideal place to develop a solar power plant.

In addition, the region’s wind power capacity could reach 2000MW, which is even more than the second largest hydro power plant of Vietnam in Hoa Binh.

Realizing the favorable conditions for developing renewable energy of this region, Central Highland provinces have issued a number of preferential mechanisms and policies as well as simplified administrative procedures, to attract investors. Daklak is topping the list with 4 projects worth US$3.3 billion from AES Corporation, Vietnam’s Xuan Thien Limited Company, South Korea’s Solar Park Limited and Vietnam’s Long Thanh Infrastructure Development and Investment Company.

Promising land for coffee, tea, and pepper

In addition to its advantages in solar and wind power, the region is also getting more and more popular as a promising land for FDI projects in agriculture. Central Highlands cover an area of 5.46 million ha, in which 2 million ha are used for developing agricultural. Besides, the region contains 74.25 percent of the red basalt soil of Vietnam, making it an ideal place for large-scale production specialized in coffee, pepper, tea, cashew, cassava, rubber.

Realizing the growth potential of this sector, investors from Korea and Japan have launched several projects with advanced agricultural techniques to maximize production in the region. New policies and tax incentives are also available to encourage and attract investments. Although climate changes may appear to be a threat, agriculture will continue to grow and strengthen its position as an important sector of Central Highland’s provinces.

Top destinations for tourism

Dalat, Kon-Tum and Gia Lai are famous destinations for eco-friendly and historical tourism. Cool weather, beautiful natural sight-seeing, historical museums and also the variety of food specialties are the reasons why more and more tourist chose these destinations for a get-away on the weekend. In 2016, Dalat city of Lam Dong province welcomed 5.4 million visitors, an increase of 6 percent compared to 2015. On top of this, the number of international visitors reached 270,000 people with most travelers coming from South Korea, China, Thailand and the United States.

The city also has been ranked by The New York Times as one of top 52 tourist destination in the world. Although the region’s tourism industry used to suffer from the past because of poor infrastructure and facilities, the situation is getting better recently thanks to investments from government also foreign investors. New tourist products with better services are now provided, making the region even more attractive to tourist. Besides, many investments in hotels, amusement park, restaurants are about to kick off in the near future, helping these provinces to fully exploit tourism potential of this region.

Conclusion

The Central Highlands contributes 9 percent of Vietnam’s GDP. Ignoring all the advantages it has developed in its economy, the region still remains poor compared to others. Foreign investment is limited in both quantity and quality. However, with new incentives and support from the government, the investment’s environment of Central Highlands becomes more and more attractive.

Beside many investment incentives such as corporate income tax exemption, land use rental reduction, import tax exemption, etc., FDI projects can benefit from province-specific investment support. For example, investment project in high-tech applied agricultural business can receive support from Kon Tum province for the development of greenhouses and net houses with a support level of VND 50,000 per square.

Each province in the region have different types of support and incentives to attract foreign direct investment, thus to maintain the sustainable growth of the region. In the future, Central Highlands will continue to consolidate its position as an important region in the economic development of the whole country.

 

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

China’s Electric Vehicle Battery Producers Need To Overcome These Hurdles To Supersede Global Giants

The electric vehicle (EV) industry is just one priority area of the country’s ‘Made in China 2025’ industrial strategy, which aims to transform China from a low-end manufacturer to a high-end one. Yet, the government’s goals for the industry are staggering: its target is to have five million electric vehicles on its roads by 2020, up from one million today.

The battery industry’s success is closely tied to the EV industry’s success – a battery currently accounts for up to half an EV’s cost of production. Given the close relationship of the EV industry and battery industry, the government has picked domestic champions that it is promoting to lead the way in China’s domination of the global battery industry.

Fierce global competition in this industry is already under way as producers vie for their share of the what is predicted to be a US$25 billion global industry by 2020.

The competitive landscape

In previous decades, Japanese and South Korean producers, such as Japan’s Panasonic and South Korea’s LG Chem, dominated the battery industry. Panasonic is still the world’s largest supplier of EV batteries globally; it is currently building the so-called Gigafactory in Nevada, US, with US-based EV producer Tesla.

However, Chinese champions Build Your Dreams (BYD) and Contemporary Amperex Technology Co. Limited (CATL) have nearly caught up and are now two of the world’s top-five lithium battery makers. BYD, which is based in Shenzhen, is also a big player in the EV industry and is able to take advantage of the benefits of this vertical integration.

CATL, based in Ningde, is China’s fastest growing battery producer and had the capacity to produce 7.6 gigawatt hours (GWh) of batteries in 2016. Due to China’s big push, it is predicted that CATL will surpass Tesla’s ‘Gigafactory’ by 2020. Tesla has a target to produce at a capacity of 35 GWh by 2020, compared to 50 GWh for CATL and 12 GWh for BYD.

Other Chinese producers are also competitive. Lishen, based in Tianjin, has a target to produce 20 GWh by 2020. As well as expanding production domestically, CATL is also expanding its production abroad so that it is strategically located to do more business with foreign EV producers.

With large capital investments by battery producers, global battery production capacity has more than doubled to 125 GWh over the last three years. Analysts predict this figure to double again to over 250 GWh by 2020.

As Chinese battery producers, including CATL, BYD, and Lishen, continue their rise, and battery production shifts from Japan and South Korea to China, analysts expect China to go from currently producing 55 percent of global lithium batteries to 65 percent by 2021. It is quite clear that China recognizes the opportunities in the rapidly growing battery industry and does not plan to miss out on these opportunities.

Challenges for the domestic industry

While the battery industry has strong growth potential, it faces a number of challenges. Solutions and technologies to overcome these challenges will need to be developed if the industry is to be sustainable both in China and globally – this is a space where foreign manufacturers, suppliers, and consultants can collaborate.

Despite growing demand from the EV industry, there are production capacity concerns in China’s battery industry. As producers race to increase capacity and seize upon the opportunities presented by the EV market, there are overproduction concerns with 25 KWh batteries; the low-end segment of the market.

However, at the same time, there are underproduction concerns with the 75 KWh and 100 KWh batteries – the high-end segment of the market. Premium electric vehicles, such as Tesla vehicles, require the high-end batteries. High-end battery producers in the domestic market are in a strong position because they are faced with a high demand for their batteries.

To allow electric cars to go farther on a single charge, a critical factor for batteries is their energy density. For now, China lags behind South Korean producers in terms of the capabilities and technology to provide greater energy density, according to Bernstein analysts. The frontrunners in the market are LG Chem, Samsung SDI, SK Innovation, and Panasonic, with Chinese suppliers playing catch-up, the report says.

Many observers feel Chinese producers need to develop their technology and capabilities if they are to get the full attention of EV producers, especially foreign EV producers.

Separately, as the cost of the battery makes up a significant part of the cost of an EV, it is important to reduce the cost of the battery to make the EV industry competitive compared to conventional internal combustion engine (ICE) vehicles.

Due to advances in battery efficiency gained from developments in technology, significant progress has already been made by the industry, with global battery prices falling by roughly 80 percent (from US$1,000/KWh to US$227/KWh) between 2010 and 2016. Even at US$227/KWh, a 60 KWh battery is a US$13,620 component of a car. A 60 KWh battery is the typical sized battery used in an EV.

However, further reductions in battery prices will be required and the Chinese government is aware of this. A target to halve battery costs is among national 2020 targets. Based on current projections, battery prices could fall below US$100 KWh by 2030, which will mean some EV and ICE models will have price parity. That could be the start of a ‘tipping point’ for EV sales.

Even if EV models do have price parity with ICE models, there will be other obstacles that could prevent consumers from switching from ICE vehicles to EVs. These obstacles include the lack of EV charging infrastructure, the time taken to charge a battery, and the relatively low power density of batteries.

Moreover, the existing power density of batteries is about half of what is needed to sustain driving ranges of 400 kilometers, which many consumers want. One of the Chinese government’s targets is to improve energy by two-thirds by 2020.

China’s ambitious plans for both the EV industry and the EV battery industry mean that there are opportunities in China’s EV battery industry. However, if these opportunities are to come to fruition, and the industry is to be sustainable, the industry must overcome the challenges that it faces.

For China, the development of new technologies and the ability to produce high-end batteries will be of critical importance if it is to realize its ambitions to dominate the global EV battery market. It is in these areas where China can benefit the most from foreign investment.

 

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Pre-Salt Auctions: Brazil’s Oil Industry Is Back In Business

Four years after the first pre-salt auction in 2013, Brazilians have a reason to celebrate. The country raised 6,15 billion reais ($1.88 bn) in the second and third rounds of auctions, proving that the country can still attract foreign investors.

In November 2007, state-owned oil firm Petrobras discovered large amounts of oil in the earth’s pre-salt layer, off the coast of Sao Paulo and Rio. These resources are located beneath about 4,000 meters of salt, sand and rock. The discoveries were seen as a turning point that would allow Brazil to emerge as a major oil producer.

Ten years later, investment and development in these pre-salt areas is still lagging. However, the recent auction rounds of eight pre-salt blocks, which hold an estimated 12 billion barrels of oil, prove that the country is moving in the right direction. The firstround, in the Libra area, came in October 2013. It took place under the previous auction model, which stipulated that Petrobras serve as the sole operator with a minimum 30% stake.

New rules and competing views

Due to significant energy reforms, the 2017 auctions are more market friendly and open to foreign investment than the previous auctions. The new rules for the auctions going forward are: 1) Petrobras is not required to be the sole operator in pre-salt production projects; 2) revision to local content rules; and 3) expansion of Repetro (Special Customs Regime applicable to the export and import of goods used in the exploration and drilling for oil and gas reserves). These pro-market regulatory changes have ultimately driven greater international interest in Brazil’s pre-salt blocks.

Currently, there are two competing views of how best to structure oil contracts with foreign corporations to maximize profit for Brazil. Under the concession model, the company that offers the highest signing bonus to the government is awarded the contract. Under the production sharing model, the company that offers the highest percentage of oil profits to the government is awarded the contract.

In general, foreign companies favor the concession model, viewing it as less complicated.Rodrigo Maia, the Speaker of the House, has expressed that he plans to arrange a full review of the current production sharing regime, as he believes that a concession regime would earn the government more revenue.

It is still unclear which model will earn the Brazilian government more revenue. While the initial payout under the concession model is higher than under production sharing, upcoming payments to the government in both cases are highly dependent on future oil production, prices and consumption.

Pre-salt auctions

The auction on 27 October was delayed due to a federal judge’s injunction, which claimed the auction would cause a loss to public assets. However, supporters such as the Minister of Mines and Energy, Fernando Coelho, expressed that it was a “tremendous success” upon completion.

The Brazilian National Agency of Petroleum, Natural Gas, and Biofuels (ANP) offered eight pre-salt blocks, in the Campos and Santos basins, and raised 6.15 billion reais, 20% less than the expected 7.75 billion reais. Two of the eight available blocks did not receive offers. Eleven companies from nine countries won blocks, while Petrobras and Shell each won three of the six as part of consortiums.

Two American companies participated, although only one won a block, and three Chinese companies won with consortiums. The number of foreign companies in the auction was surprising, given the current low price of oil, indicating that pre-salt areas remain attractive to foreign companies due to their potential for high productivity.

Under the current production-sharing regime, there is a fixed signing bonus for each area. The Brazilian government awards the contract to whoever offers the highest percentage of profit-oil above the required signing bonus. The percentage of profit-oil exceeded 200% of the minimum requirement, making the auction a success not only due to the high signing bonus, but also because of the level of foreign investment captured.

Furthermore, even though two areas did not receive offers, this high percentage means the government will be able to collect more revenue in the future. The ANP predicts that the eight blocks will generate U$36 billion in investment and U$130 billion in royalties. The profits and income taxes generated from production will help with the government’sfiscal problems and create jobs for the local population.

Regulatory success

Brazil produces 2.6 million barrels of oil per day and is aiming to almost double that amount to 5 million by 2027, making it the world’s fourth largest oil producer at current rates of production. The ANP expects that all the wells offered in these auctions should enter production stage within 5-7 years from the auction date and that the blocks that did not receive offers will be auctioned off at the next opportunity.

Currently, foreign firms are responsible for 21% of total production of oil and liquefied natural gas (LNG) in Brazil, and their participation is expected to increase to 30% in 10 years. Despite this, Petrobras’ significant role in the auction indicates that it is unlikely to lose its predominance in Brazil’s oil sector. Still, the auction showed that the regulatory changes have been well received by the market and that foreign firms are once again willing to invest in Brazil.

Lorena Valente is an Analyst at Global Risk Insights. As originally appears at: http://globalriskinsights.com/2017/11/pre-salt-auction-brazil-back/

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

How Cambodia’s Garment Manufacturing Industry Earned A Prominent Role In Global Supply Chains

Cambodia is strategically located in the heart of Southeast Asia. The country is bordered by Thailand, Laos, and Vietnam, and has the Gulf of Thailand to its south-west. The country is popular for providing a low-cost manufacturing base for several industries. Among the many advantages that the country offers to investors are duty-free access to some large and developed markets, a stable economy, and several government incentives. Additionally, there are several special economic zones exclusively established to promote manufacturing across the country. In this article, we briefly discuss the chief characteristics of the garment manufacturing industry in Cambodia and the advantages it offers to foreign investors.

Cambodia’s garment manufacturing industry – a key driver of growth

Cambodia’s garment manufacturing industry is largely export-oriented and highly integrated into global supply chains. The European Union (EU) represents the largest market for Cambodian garment exports, accounting for approximately 40 percent of the total manufacturing, followed by the United States ( 30 percent), Canada (9 percent), and Japan (4 percent). Many companies in the country operate as contract manufacturers for major multinational brands such as Adidas, Gap, H&M, Marks & Spencer, and Uniqlo.

In the early 1990s, the Cambodian government took various measures to boost the industry’s competitiveness in the international market, which prompted foreign investors to direct their attention to the country. Additionally, the country’s industrial development was supported by the Multi-Fiber Arrangements (MFA) quotas and other preferential trade agreements implemented by developed countries like the US and EU.

Two decades later, the garment industry continues to drive the Cambodian economy through human capital development, employment generation and foreign direct investment (FDI). Currently, the industry employees over 600,000 people, making the sector the biggest employer in the country.

Further, the garment industry accounts for 16 percent of the gross domestic product (GDP) and 80 percent of Cambodia’s export earnings. In 2016, the total number of garment factories in the country stood at 589 factories.

Cut-make-trim model

Cambodia’s garment factories are generally based on the principle of cut-make-trim (CMT) model. Under this method of production, the raw material, machinery and the design of the garments are imported from abroad, while the assembly of the product is outsourced to the labor-intensive factories in Cambodia. The CMT implies cutting and sewing of material according to the clothing brands’ specifications.

The garment industry is essentially dominated by foreign owned firms, mainly from the neighboring countries such as China, Hong Kong, Singapore, Malaysia and Republic of Korea. The association with foreign-owned garments firms or brand names provide Cambodia’s garments industry an important channel into the garments global value chain.

Low-skilled workforce

The garment industry in Cambodia is essentially based on low-skilled, labor-intensive activities. Cambodia has a significant proportion of its population living below the poverty line with low levels of education. As a result, the country has a large pool of low-cost, and low-skilled workers. The vast majority of workers employed in the garment factories are women with minimum skills. Only a small proportion of the workforce includes higher skilled workers and professionals; these are mostly managers, supervisors, or members of the operations department.

Geographical distribution

Over 60 percent of Cambodia’s garment factories are located within or in close proximity to the capital city – Phnom Penh. The finished products are transported from the factories in Phnom Penh by train to the seaport of Sihanoukville where the garments are shipped to other countries.

Other key locations of garment factories are Kompong Som, Kompong Speu, Kompong Cham, Kompong Chhnang, Svay Rieng, Takeav and Kandal provinces.

Advantages of Cambodia

Strategic location

Cambodia is strategically located in the center of the east-west corridor of the Greater Mekong Sub-region (GMS), providing access to key world markets. This helps businesses take advantage of low-cost manufacturing in Cambodia as well as huge demand for its products in Asia.

Competitive labor force

Labor in Cambodia is cheaper than most regional competitors, except Laos and Myanmar. In 2017, Cambodia’s monthly minimum wage of workers in its garment industry increased to US$153, a double of the 2012 level. Yet, the country’s monthly minimum wage remains the most competitive when compared to Thailand (US$250) or Vietnam (US$166).

Preferential market access

Cambodia is a member of the ASEAN Free Trade Area (AFTA) – a regional economic integration pact wherein Cambodia benefits from the Common Effective Preferential Tariff (CEPT) agreement that reduces or eliminates tariffs on the manufactured goods traded between the 10 ASEAN member countries. The rapidly integrating ASEAN makes Cambodia an attractive investment destination because of its low-cost manufacturing, large regional markets and easier sourcing of raw material within the ASEAN Economic Community.

Cambodia has also been a member of the World Trade Organization (WTO) since 2004; this has increased its trade integration with the US and the EU. Cambodia benefits from the EU’s ‘Everything but Arms Scheme’, which allows low developing countries such as Cambodia duty-free access to the EU’s market for all export goods.

Supportive government policies

Some of the many incentives offered by the government of Cambodia include 100 percent foreign equity ownership, tax holidays of up to 9 years, and exemption from import duty on machinery and equipment. In addition to that, Investors can repatriate profit freely and reinvestment of earnings is encouraged with special depreciation allowances

Conclusion

Over the years, Cambodia has had a steady flow of foreign investment in its garment manufacturing industry demonstrating the many opportunities that the country offers to its foreign investors. Though certain challenges remain while doing business in a developing country like Cambodia – such as infrastructural gaps, and high energy costs – the considerable competitive advantages that the country offers cannot be ignored.

 

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Make In India: Still Falling Short After Three Years

Make in India is the government’s flagship program to revitalize the country’s flaccid manufacturing sector. When it was launched in 2014, Make in India stole headlines across the world – Prime Minister Narendra Modi and his government would finally make manufacturing in India viable. The initiative would attract foreign investment to grow the manufacturing sector, and create jobs for those that need employment. Many India hands thought Make in India would help the economy realize breakout growth.

Wieden + Kennedy deserve a lot of credit – Make in India set the stage for the new government. The broad policy direction was everything that India’s economy seemingly needed: removing barriers to foreign investment, improving the ease of doing business, as well as encouraging the development of infrastructure and the workforce. But after three years, what has changed?

The government removed most FDI barriers, but shock (demonetization) and poorly implemented (GST) reforms have caused some foreign investors to feel uncertain about India. The Smart Cities and Skill India initiatives – designed to create modern infrastructure and up-skill the labor pool, respectively, are great ideas, but have become social media bait for online trolls.

In a more competitive policy environment, Make in India would likely have been deemed a failure. This government is still struggling with basic industrialization and mass employment when other governments – like China – are developing technology-driven industry. The now-in-opposition Congress party had set the bar very low by 2014, making Modi’s Make in India platform look like a godsend, but India now needs something more than a good public relations campaign.

Make in India: A bird’s eye view

Make in India can count relaxed FDI Norms, improved investor perception, and a surge in automotive and electronics manufacturing among its successes.

The government liberalized FDI policy by allowing automatic route for over 50 percent investment in 25 sectors including railways, defense, medical instruments, and telecom. Consequently, the FDI inflow grew by 20 percent in 2014-15 and 2015-16.

In 2016-17, the country attracted its highest ever FDI of US$60 billion. Significantly, the manufacturing sector saw a 38 percent increase in investment in 2016-17.

Major firms including General Motors, Apple, and Foxconn name-checked Make in India when announcing big ticket manufacturing projects in the country, while countries including Japan, South Korea, Sweden, and Germany have pledged larger investments and technical support to India. In the most recent example, the Japanese Prime Minister committed to investing across sectors – automotive manufacturingstartups, and infrastructure.

Manufacturing activity has certainly picked up in the country. Data published by DIPP in December 2016 shows that industrial activity rose by 29 percent during 2015-16 over the previous fiscal. Much of this growth is concentrated in three states – KarnatakaMadhya Pradesh, and Maharashtra, which were in any case already established manufacturing bases.

Ultimately, however, Make in India has not resolved all the issues that it set out to do.

India’s manufacturing and transport infrastructure is also severely inadequate to enable businesses to conduct their operations smoothly. The government has initiated six major industrial corridors, dedicated railway freight corridors, and port development projects, but none of them are operational – optimists project 2019 as possible.

FDI inflows show that much of the funds are diverted towards stressed assets or brownfield projects. In 2015, nearly 23 percent of the total FDI inflow were invested in brownfield projects, increasing to 48 percent in 2016. Indeed, several global companies including US-based JC Flower and Apollo Global Management; Canadian fund Brookfield Asset Management; and, China’s Shanghai Fosun Pharmaceutical have set up joint ventures in India to buy up stressed assets.

India’s rank in the World Bank’s Ease of Doing Business has risen, but not many businesspeople will say that business in India has gotten any easier. As an example, there has also been a spurt in the number of stalled economic activities since September 2016. Economic projects – including in the infrastructure, manufacturing, and services sectors – are often stalled due to lack of government clearances, funds, raw materials, and other resources.

As of September 2017, the value of stalled projects stood at US$204.26 billion (Rs 13.22 trillion). In percentage terms, about 13 percent of all projects have been stalled, two-thirds of which are in the private sector. In the manufacturing sector, the stalled projects constitute about 25 percent of all activities in the sector. This trend has disturbed prospective investors, and resulted in a significant drop in the number of new projects announced this year.

Sudden, and at times contradicting, policy measures by the government is affecting businesses’ ability to plan their processes in advance. For instance, frequent changes in the GST rules is causing an environment of confusion and uncertainty in the economy. In another recent example, the luxury auto industry was blindsided by the government when the maximum levy was almost doubled, immediately after GST rates were set. Last year’s demonetization exercise also crippled manufacturing supply chains, leading to reduced industrial and shrinking retail activity.

Make in India overlooks broader manufacturing transformation

Make in India has had a patchy, and rather subdued, impact on the Indian economy so far. While the initiative succeeded in creating new interest for investing in India, it has not been able to transform it into any significant rise in manufacturing activity. In fact, recent economic shocks delivered by a poorly implemented demonetization and GST have dampened investor sentiment, neutralizing Make in India’s impact.

Further, the global value chains that ushered in manufacturing hubs in East Asia are now rapidly transforming. Businesses no longer rely on cheap labor for production purposes, but are instead adopting technologies such as 3D printing and smart automation. The technology-driven ‘fourth industrial revolution’ or Industry 4.0 is changing the fundamentals of manufacturing processes. World over, major manufacturing giants are rapidly adopting robotics in industrial units. Robotics in Chinese manufacturing units, for example, is likely to grow by 150 percent in 2018.

Recent political developments have also increased protectionism in Western economies, which were traditionally the destination for goods made in East Asia. Export-dependent manufacturing may no longer be a viable economic model for emerging economies to emulate.

India must quickly adapt its policies to reflect the changing nature of the industry. The government is already revamping the National Manufacturing Policy, and revising Make in India to accommodate these changes. It is seeking to modernize its digital infrastructure to support the new era of manufacturing. But is it too little, too late?

The country cannot rely on big-ticket industrial units alone to transform into a manufacturing hub. It must create a positive environment for small and micro businesses to function and grow in. Policies for these businesses must include flexible credit instruments, good industrial linkages, relaxed labor norms, and provision of some managerial assistance for scaling up businesses.

Until the government develops the political willpower to take up these challenges, the burden will remain on the private sector to find trusted partners on the ground in India.

 

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Why China’s Government Postponed What Should Have Been A Fall Blockbuster Film

It should have been a blockbuster, but the Party has a meeting

On September 23, news media began to report (link in Chinese) that the release date of director Feng Xiaogang’s 冯小刚 latest film, Youth (芳华 fānghuá), in China had been mysteriously postponed. Youth was originally supposed to premiere on September 29, during one of China’s most lucrative holiday movie slots, the National Day holiday weekend.

Ever since the news about the movie’s indefinite postponement broke, speculation on the reasons behind the axed release has been rife. While neither Feng nor Huayi Brothers Media, the main investor behind Youth, have offered any official explanations for the movie’s delayed premiere, many suspect that the reasons are most likely to be politically motivated (in Chinese), a conjecture that seems only to be strengthened by Feng’s Weibo post (in Chinese), which rebukes claims that the movie’s nixed release was a publicity stunt or due to poor ticket pre-sales.

This is not the first time that Feng’s movie has secured a coveted release slot during the National Day holiday, only to later lose it. Last year, Feng’s I Am Not Madame Bovary (我不是潘金莲 wǒ bùshì pānjīnlián) was scheduled to premiere during the holiday, but at the eleventh hour, its release date was bumped to November 18. Unlike I Am Not Madame Bovary, however, Youth’s postponed release may have come straight from the commands of political leaders, as USC professor and China specialist Stanley Rosen opines. While Youth had already gained clearance from China’s movie censors before its premiere, the fact that Feng’s latest movie deals with previously taboo subject matters such as the Cultural Revolution and the 1979 Sino-Vietnamese War may have still struck a nerve with China’s high officials, especially since the movie’s original release date landed close to the 19th Party Congress, which is scheduled to begin on October 18.

For the past few months leading up to the National Party Congress — a highly sensitive and politically symbolic event for the Communist Party that is held every five years — China’s administration has ratcheted up its control over media and entertainment content to ensure that no signs of dissent or discordance will mar the Party’s promulgated vision of nationalistic unity. And it will seem that Youth, despite the director’s insistence (link in Chinese) that the movie explores — rather than glorifies — the brutalities of war, may have just seemed too politically risky for government officials to chance.

Directors in China wage war against online review sites

These days, it would seem that directors and movie reviewers in China just can’t get along. On September 20, director Meng Qi 孟奇 accused (link in Chinese) several reviewers of posting malicious reviews of his movie Women Soldiers (娘子军传奇 niángzǐ jūn chuánqí) on Douban, one of China’s most popular movie rating websites, months before his movie had even been released in China’s theaters. In his Weibo post, Meng described these reviewers as “parasites” and claimed that the reviewers were extorting him for money in exchange for removing the negative reviews of his movie from Douban.

A few days later, grievances that Da Peng 大鹏, the director of City of Rock (缝纫机乐队 féngrènjī yuèduì), had against famous online reviewer with the username February Bird Speech 二月鸟语 (èr yuè niǎo yǔ) were made public when Da Peng’s private messages to a group of his friends on WeChat were reported (in Chinese) by Mtime. In his WeChat message, Da Peng claimed that February Bird Speech, an “ingratiating idiot claiming to be a film critic,” had given City of Rock a one-star review (in Chinese) on Douban without even seeing the movie and threatened physical violence against the reviewer. February Bird Speech proceeded to defend himself on Weibo (in Chinese), accusing the director of defamation of character and proclaiming that he had proof that he had seen the movie (1.6 times, to be exact, since he left the movie before its ending the first time and then saw it in its full length for a second time) before he gave City of Rock his final review on Douban.

Neither of these public brawls are isolated incidents and are, instead, symptomatic of the fraught relationship between moviemakers and movie reviewers in China, a country where the profession of film reviewers has yet to establish a secure standing in the industry and fraudulent reviews on the internet, either working for or against a movie, are fairly common. Film reviewers, however, are not the only ones that are being excoriated by filmmakers these days. Last week, Douban was publicly criticized (in Chinese) by the producers of Pure Hearts: Into Chinese Showbiz (纯洁心灵 chúnjié xīnlíng) for a 2.7 rating that the producers believed to be “impossible” and “contrary to the positive reception they had received from professional experts.” According to the producers, Douban’s erroneous rating hurt the movie greatly at the box office and in their letter to Douban, they sought a public apology as well as financial compensation.

China’s film, TV, and radio industry association imposes salary cap for stars

Over the past few years, there has been grumbling, from both the entertainment industry and the general public (in Chinese), that stars were being paid excessively high salaries, so much so that it was beginning to compromise the quality of many film and TV productions. When most of the production budget is being allocated to star remunerations, that leaves little room for areas like screenwriting, directing, and production design, etc., as pointed out (in Chinese) by Beijing Youth Daily. According to (in Chinese) the paper, star salaries take up, on average, 50 percent of the expenses of Chinese TV productions nowadays, and there are even cases when they occupy a whopping 80 percent of a production’s total costs.

Yet, soon, this may no longer be the case. On September 22, the China Alliance of Radio, Film, and Television issued guidelines to cap exorbitantly high cast salaries. The guidelines state (in Chinese) that the salaries of actors are no longer allowed to exceed 40 percent of total production costs. In addition, the wages of leading actors are limited to no more than 70 percent of the casting budget. While China’s media regulator, the State Administration of Press, Publication, Radio, Film and Television, has, over the past two years, issued notices denouncing (in Chinese) the sky-high salaries of actors and advising (in Chinese) TV broadcasters and streaming sites to not acquire content based solely on a show’s star casting, this is the first time a cap on star salaries has been explicitly codified in industry guidelines.

 

Pang-Chieh Ho is an editor at Digg.

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

FCRA Compliance In India: How 24,000 NGOs Lost Their License

Earlier this month, the Ministry of Home Affairs (MHA) cancelled licenses for 4,800 non-governmental organizations (NGOs) in India. The NGOs had not filed annual returns between 2011 and 2015 in accordance with the Foreign Contribution Regulation Act, 2010 (FCRA).

The MHA said some cancellations occurred because the NGO was not required to report foreign contributions, as is the case for some higher education institutions. The majority, however, had simply failed to complete their returns.

Many businesspeople in India will find it difficult to sympathize with affected NGOs. The MHA warned the NGOs, granted a one-time exemption, and recently announced a one-month extension.

According to an MHA public notice in May 2017, NGOs that had not filed their annual returns between 2011 and 2015 could make good by reporting their financials between May and June 2017. After more than 4,800 NGOs lost their licenses for failure to comply in September, the MHA gave them another month until October 18, 2017 to comply.

In this context, the NGO sector’s ambivalence to financial reporting appears shocking. What is perhaps more shocking, however, is the sheer number of NGOs that have lost their license since Narendra Modi took office – over 24,000 and counting.

Many in the sector defend themselves as victims of compliance creep; the Modi government has culled nearly two-thirds of the 33,000 NGOs it inherited from its books.

Foreign observers struggle to interpret the situation. Does the NGO sector suffer from a culture of non-compliance? Are NGO regulations broken? Does the government have dubious interests?

In India, one might call this a khichdi, or mixture, of all of the above.

NGOs in India are categorized under three legal categories: society, trust, and a limited company. They may be founded for a specific cultural, economic, educational, religious, or social purpose. These organizations are heavily regulated by respective state and federal government agencies.

At the state level, an NGO can be registered as any of the following:

  • Society under the Registrar of Societies;
  • Public trust through the execution of a trust deed; or,
  • Limited company under Section 8 of the Companies Act, 2013.

At the federal level, the Income Tax Department (IT Department) and MHA regulate registration, and require all NGOs to file annual tax returns and submit audited account statements to their respective agencies.

All types of NGOs are treated equally under the Income Tax Act of 1961.

In order to be eligible for tax exemption status, an NGO must be founded for a charitable purpose. As defined in India law, ‘charitable purposes’ include relief for the poor, education, medical relief, and the advancement of any other object of general public utility.

Once this status is established, charitable organizations can apply for an 80G certificate to enable donors to claim tax rebates against their donations.

The regulation of foreign funding of NGOs

The FCRA, 2010, the FCRA Rules, 2011, and FCRA Amendment Rules, 2015 were respectively enacted to regulate the inflow of foreign funds received by NGOs. The FCRA, 2010 replaces the erstwhile Foreign Contribution (Regulation) Act of 1976.

Key terms stipulated in the FCRA legislation state that an organization cannot receive funding from a foreign source, unless it is registered under the 2010 Act or has obtained special government approval for a specific project. In addition, registered NGOs have to comply with various post-registration requirements, as detailed in the provisions of the Act and its rules of enforcement.

The federal MHA is the nodal agency responsible for monitoring and implementing the FCRA rules.

Scope of the Act

The FCRA and its enforcement rules regulate “foreign contributions” received from “foreign sources”, whereby such ‘sources’ are entities established in a foreign territory.

The Act categorically defines ‘foreign contributions’ as a donation, delivery, or transfer made by a foreign source of:

  • Any article (unless offered for individual personal use), the value of which must not exceed US$387 (Rs 25,000);
  • Currency – foreign or Indian; or,
  • Foreign securities, including all foreign debentures, bonds, shares, stocks, and other instruments of credit (income or interest generated from these sources are also treated as foreign contribution under the FCRA).

Registration and prior approval

Once approved by the MHA, NGOs are legally entitled to accept foreign funds under the FCRA.

To obtain this eligibility, NGOs can either opt for special permission or go for a long-term registration that is valid for a period of five years.

In the case of the former, MHA approval must always be sought prior to receiving contributions. In the case of the latter, NGOs only have to apply for renewal six months prior to the ending of the registration period.

Foreign funding

NGOs have to open and maintain bank accounts, which will exclusively deal with the receipt and utilization of foreign contributions, as required under FCRA rules. A separate set of accounts and records must be maintained, exclusively for these transactions.

The FCRA also mandates that foreign contributions must be utilized only for the purpose for which they were received. Under Section 7 of the FCRA, the transfer of contributions is not allowed.

A person or entity is prohibited from transferring contributions to any other person, unless such transferee is authorized by the government to receive foreign contributions.

Reporting requirements

The most important reporting requirement under the FCRA is the submission of annual returns. All NGOs are required to submit their annual returns to the federal government within nine months from the closure of the previous financial year.

This return has to include all the details of the contributions received, namely:

  • Source and manner in which it is received;
  • Purpose for which it was received; and,
  • Manner of usage of the contributions.

Given the recent actions taken by the government against several NGOs, it is imperative that all such entities that receive foreign funding review the updated FCRA norms and meet their compliance obligations meticulously.

Once under the government scanner for non-compliance, such organizations may face all manner of restrictions and regulatory obstacles.

New normal for foreign-funded NGOs in India?

FCRA compliance does not appear overly complicated. The FCRA, 2010, FCRA Rules, 2011, and FCRA Amendment Rules, 2015 are plain as day.

But most businesspeople in India can tell you that NGOs have more reporting compliance requirements and stipulations than private companies that receive foreign revenue or remittances.

While many industries in India are impacted by convoluted, and fluid, regulations, the FCRA is a unique challenge for NGOs precisely because it is designed to curb foreign financing.

In 1976, then Prime Minister Indira Gandhi’s government implemented the FCRA during ‘the Emergency’, which occurred between 1975 and 1977. She ruled by decree, suspended democratic exercises, and curbed civil liberties during this period. The FCRA was one law implemented during this time; it limited the agency of foreign financed NGOs in the country.

In 2010 and 2011, the Congress-led government overhauled the FCRA, increasing the MHA’s powers and the number of compliances for NGOs. Notably, the overhaul followed several high-profile protest campaigns supported by foreign funded NGOs against critical infrastructure projects, including the Kudankulam Nuclear Power Plant in Tamil Nadu state.

Given the number of NGOs that did not file returns between 2011 and 2015, it appears that not many foreign financed NGOs took notice of the 2010 reform. Perhaps these NGOs assumed that the reform would only affect NGOs that targeted government infrastructure projects.

They may have been right during the dog days of the Congress-led government, but anti-corruption was very much at the front and center of the 2014 national elections. Modi managed corruption differently than his opponents in that election: he promised transparency and ease of doing business.

Transparency translated into compliance once Modi formed a government. Modi has worked doggedly to foster a culture of compliance; the NGO sector was one of the first to feel the brunt of this campaign.

In April 2015, the government placed the Ford Foundation, a charitable US-based organization, on a watch list allegedly funding groups acting against India’s national interests. This implicated the NGO of renowned civil rights activist Teesta Setalvad, which had received funds from the Ford Foundation, and was accused of creating ‘communal disharmony’ by the government of Gujarat for investigating the state’s communal riots in 2002.

Soon after, in September 2015, the MHA cancelled Greenpeace’s license and froze its bank accounts under the FCRA, alleging that the environmental group was working against “the country’s economic progress and public interest”. The MHA said the NGO violated laws when the NGO opened five bank accounts to use foreign donations without informing the concerned authorities.

Both NGOs were censured as part of larger FCRA dragnets in which thousands of NGOs lost their license. Then US Ambassador to India Richard Verma condemned the “potentially chilling effects of these regulatory steps focused on NGOs.”

By December 2015, the government notified FCRA Amendment Rules, 2015. The new rules moved most all NGO reporting requirements online, but perhaps more importantly, narrowed the scope and purpose for foreign financing, and increased the frequency of reporting it to every three months.

Over 24,000 NGOs have now lost their licenses. The MHA has cited various compliance failings, including the inability to meet reporting requirements and failure to file financial returns over long periods.

The MHA’s amnesty earlier this year – which granted a one-time exemption to organizations who were seeking NGO registration renewal under the FCRA, but had not uploaded their annual returns from 2011 to 2015 – suggested that the government had taken in interest in making compliance easier.

But the same week the subsequent suspensions were announced, the MHA sent a warning to 1,000 NGOs to validate the bank accounts they use for foreign contributions.

Those that fail can be prosecuted, while those that received foreign contributions into multiple bank accounts are also liable for censure. After clearing the deck of NGOs that failed to report their financials, the MHA is now after NGOs that may have violated FCRA stipulations for banking.

There is no easy way out for NGOs. Given the demanding regulatory environment, and the government’s interest in enforcing its difficult regulations, foreign financed NGOs can no longer afford to take compliance lightly.

 

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Young Wanderlust: How Millennials Are Changing China’s Travel Industry

This week, over 700 million Chinese will be on the move, hitting the nation’s superhighways or boarding trains, planes, buses, and cruise ships to embark on National Day (国庆 guóqìng) vacations. Six million far-flung travelers will visit 100 different countries, while the vast majority, traveling within China, will generate 480 billion yuan ($72 billion) in revenue over this year’s extra-long eight-day break. The projections indicate more trips and more revenue than last year’s holiday — unsurprising, given that outbound travel spending has seen double-digit growth year after year since 2004.

As the supersized Chinese tourism industry grows, so, too, does the variety of trips that the country’s travelers will make. The days of chartered European bus tours offering hardcore shopping opportunities and Chinese-food banquets are waning. Many travelers now want unique cultural experiences and adventure: rain forest tours in China’s Yunnan, trips tracking animal migration through Africa, and excursions to bask under the glow of the aurora borealis. The North Pole is hot this year.

Millennial tastes

Some of these changes are natural as a young industry matures, and tourists look for new and upgraded experiences, experts say. But there is another force at work that is greatly impacting China’s travel industry — the millennial generation.

As the first group of Chinese to come of age with truly mainstream international travel, the middle- and upper-class children of the 1980s and 1990s are typically more globally minded. Their preferences are shaped by their distinctive socioeconomics: This group is more affluent and staying single longer than their predecessors. And they are digital natives.

“I prefer the kind of traveling that is free and unconstrained, which opens up my mind and allows me to experience different cultures and ways of life. That way, I feel free from the bounds of my limited knowledge and vision of the world,” says investment manager Tia Lu 陆余恬, 27, who is spending the holiday week traveling across the U.S. with a group of five friends — hitting everything from New York City’s Museum of Modern Art to Yosemite National Park in California. “People in my generation want an in-depth experience in the culture and way of life when we travel to a new place.”

In this spirit, some of China’s millennials are steering clear of organized tours, instead preferring to book their own travel, take solo trips, and seek out adventure and unique experiences. For them, travel is an escape, an expectation, and even a way to push back against the cultural pressures inherent in Chinese society.

“When we travel, we see more and more different kinds of lifestyles, what people in other countries and the young people there are doing, and we find inspiration for ourselves,” explains Hong Kong-based travel blogger Sheryl Xie 谢丹妮, 26. Exposure to different lifestyles and value sets is important for members of her generation, Xie says, as they struggle to create their own paths, distinct from the social and familial expectations of buying homes and settling into stable jobs. “Young people, they’ve got minds of their own — they can choose what they want to do.”

That’s a message that Xie shares with her roughly 3,000 followers on Weibo and WeChat. Though she works full time in the financial planning industry, Xie is also one of numerous young travel bloggers who are powering China’s independent travel industry. In her blog, Xie shapes her own travel tales around personal growth, writing about how travel has inspired her to think more broadly about happiness and personal values. “That’s one reason to travel, to discover other ways to live,” she says.

But though her travel to places like Cuba, Japan, and the U.S. has become a formative part of Xie’s life, these experiences are relatively new to her. In fact, for Xie, who grew up in the southwestern city of Chengdu, international travel wasn’t even something that had crossed her mind until her late teens, when the miniseries documentary To Berlin by Thumb (搭车去柏林 dāchē qù bólín) was aired. Before watching the journey of Gu Yue 谷岳 hitchhike westward from China, Xie had never even considered the possibility of international travel. It wouldn’t be until later in her university years, when she was an exchange student in Taiwan, that she first left mainland China.

The world is a new oyster

Her experience marks a critical feature within China’s current experience of travel: Though the country has been the world’s top source of international tourists for the past five years (spending $261 billion last year alone), world travel has only recently become accessible to most Chinese. The millennial generation has grown up alongside this opening up, which began in the early 1990s, when the Chinese government began to ease travel restrictions to more countries and the economy strengthened. And as millennials entered into their teens and early adulthood, the industry really began to boom. And now they are major contributors: This fall, over 50 percent of travelers are 23 to 34 years old, making them uniquely poised to shape this industry.

The rise of China’s travel industry alongside the coming of age of this generation also means that millennials tie their personal life satisfaction to their ability to travel, suggests Dr. Suosheng Wang, associate professor of tourism management at Indiana University, who recently published a study (paywall) relating to this topic. Part of this is external: Posting photos of exotic trips starts interesting conversations on social media and signals to others that you are happy, successful, and have had some valuable life experience, Wang found. But he also points to specific stresses on this demographic — for example, being single children responsible for aging parents, perhaps while becoming parents themselves — as added reasons why travel is important.

“They are a hardworking group, working in a very competitive environment to earn money and have a good promotion. It’s a dull, routine life,” he says. This relates to why they don’t just want to travel — they want to escape and “explore those exotic places where people haven’t traveled yet.”

As young people seek out these unique travel experiences, and share them on social media, these preferences trickle down into the mainstream. For Ivan Xiang 向仕强, who owns a travel agency in Chengdu, the impact has been very clear. As travelers’ tastes shift from sightseeing tours to more in-depth (and pricey) cultural experiences like rural homestays or adventure-based mountain-climbing trips, he’s seen a sevenfold increase in his profits over just two years. This is not only accounted for by young travelers — Xiang also sees this as a trend that is linked to their preferences.

“Because they have lived a better life, and they have seen more of the world, they will prefer something unique,” he explains. And while the trips he offers are currently limited to rural areas in Western China, like Sichuan and Xinjiang, Xiang says he’s planning to add a nature-focused trip based in Africa to keep up with customers’ evolving tastes.

Getting away from Chinese menus

The same impact is felt in the upper echelons of the market. Dirk Eschenbacher, a founding partner of the Beijing-based premium travel agency Zanadu, which provides customized vacations to destinations as far afield as California’s Coachella music festival, Northern Europe, Namibia, and Bhutan, states that finding the next new spot or a novel adventure is key across age groups for his clients. Once a place becomes popular in the mainstream among Chinese tourists — for example, by offering menus in Mandarin and Chinese barbecue on the streets — it’s time to move on. “That’s something that our audience doesn’t want to experience,” he says.

The quest to find these new experiences has led to a burgeoning world of travel blogging, where community members rely on one another for advice and inspiration. In addition to travel-focused blogs on China’s major social media platforms like Weibo and WeChat, major travel booking sites like QunarCtrip, and Qyer have created space for a lively social media community, where hundreds of millions of users, included sponsored and amateur bloggers, make profiles to share their photos, travel stories, and recommendations.

These communities can lead to inspiration for new trips, or for new lives. Such is the case for Jeff Wang 王瑞斌, 34, of Beijing, who recently quit his office job of seven years to focus on things he loves. “I want to be a professional traveler — that’s my dream,” he says. Wang is spending his free time working on his own blog, based on his solo trips to Europe and Asia. Though he knows it’s a distant dream, he already feels excited by comments and questions that he’s gotten about his posts: “Actually, I feel like I have had an impact on others — it’s exciting to be a part of that.”

 

 

Simone McCarthy is a graduate of Columbia School of Journalism and a student of Chinese language and culture.

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Bittersweet: Manufacturer Stocks to Watch If Cocoa Prices Reverse Trend

If cocoa prices reverse trend

News of the world’s top cocoa producers attempting to gain great influence over the supply of cocoa to boost prices stands to affect top manufacturers using cocoa (CHOC) (NIB) as a raw material in their production process. The price of cocoa has been heading south over the past year on account of excess supply which has served the chocolate factories well.

Chocolate manufacturers stocks to watch

However, as Ivory Coast and Ghana, which together produce 60% of the world’s cocoa, resolve to obtain more control over world cocoa prices, chocolate manufacturers will be watching these developments closely. Here’s a list of the top chocolate manufacturers of the world (ACWI) (VTI). These are stocks most vulnerable to a reversal in the trend being followed by the price of cocoa currently.

Mars Incorporated, the makers of Snickers, Twix, M&Ms, Bounty, Galaxy, and many more chocolates, is the world’s top chocolate manufacturing company with $18 billion in net sales recorded in 2016. Mondelēz International (MDLZ), the owner of Kraft Foods (KFT) and Cadbury, the seller of world-leading chocolates including Toblerone, Dairy Milk, Milka, Ritz etc, stands second with $12.9 billion worth of net sales recorded in 2016. Other leading chocolate manufacturers include the Italian Ferrero Group, Japan-based Meiji (MEJHY), Switzerland-based Nestlé S.A. (NESN.VX), American Hersheys (HSY), and Europe’s Lindt & Sprüngli (LDSVF), among others.