The West need to re-industrialize? – China: world’s factory?

New industrial revolution?

Betting on the West to re-industrialize is absurd, China will continue to be the world’s factory. Did the US import taxes on Chinese goods repatriate jobs? Not at all, despite the consumers prices increase and despite the so call Covid’s effects on shipments costs and raw materials costs, adding to this the extraordinary sense of opportunity of Chinese factories increasing their prices as numerous electricity cuts are in fact paid by Western consumers, this based on an easy principle: less production – higher prices.

Consumers prices are going ballistic, the western world isn’t realizing this fully as the most recent products with prices increased are still under shipment. As example 200,000 containers are right now waiting off Los Angeles port.

Re-industrialize – How?

Few weeks to wait and the results all of these prices increase with directly harm the Middle-class purchasing power, in France the yellow-jackets will be back in the streets and many governments will once again talk about self-sufficiency and strategies to re-industrialize.

China isn’t anymore a country with low labor costs and this fact is very displeasing to Western governments, BEFORE the excuse was the low labor costs, “unbeatable” from a Western perspective.

NOW, the Chinese labor costs could be higher than Europe, the working hours quite similar and the expectations of the labor force identical.

The West destroyed production capacities, they discouraged the only ones having the capacities to maintain and develop inter European industries: the entrepreneurs.

Without entrepreneurs there is no production, the governments don’t have the power to create jobs, they used their power to increase regulations, laws, taxes and administrative burden.

The only exception is when patriots are maintaining and developing industries, having for clients the defense industry, so making profits directly on tax payers.

That’s surely one of the reasons behind the Anti-Chinese campaigns, by exaggerating fears you could justify an increase of the government budget on defense, so to maintain and develop the defense industry and the attached labor force. But then you should raise taxes and once again a wave of potential entrepreneurs will leave your country or simply abandon any idea to create industrial jobs.

Will the West be feed by Chinese products purchased with their salaries obtained by working for the defense industry or generated by civil servants’ jobs?

The West should focus on seducing entrepreneurs, liberating energies by decreasing obstacles and taxes. Although entrepreneurs don’t want to fully admit it; the reasoning behind the decision for an entrepreneur to start a venture and to take risk is to obtain higher rewards.

If you can’t achieve freedom and financial success with at minima 3 times the income of a salary-man doing the same job, it’s better to seek for the security of a civil servant’s job.

Being an entrepreneur is painful, of course a government composed of individuals whom seldom worked in the private sector or even less as entrepreneur has no understanding of the difficulties.

The western world will re-industrialize only if the governments have a knee on the floor, begging the new generation to help, giving credit facilities, erasing stupid regulations and decreasing drastically taxes.

So, the West will not re-industrialize, the prices will go down a little bit, then everybody will calm down, Chinese factories will increase salaries and create jobs, China will continue to conquer by really improving the well-being of its population.

Solution

Under such circumstances, and despite the political attacks, incorporating a Hong Kong company is a short to long term solution to access Mainland China suppliers, ease the payments, and jump the queue of the competition. Credibility and low tax environment in the most pro-business city.

Combined with an efficient Fintech solution to manage currencies, a Hong Kong company setup cost will be reimbursed with the first order in China.

Will a massive expatriation be the main result of digital economy and which countries are likely to benefit?

Today decision takers are in their forties and plus, they are investing in the digital economy although they often started their careers at a time when FAX was still existing. Obviously, you don’t need to be a young geek to understand, accept and accompany the digitalization of the economy.

The issue of an investor in the digital economy is basically his/her own environment, too often the possible Internationalization of the sales is well understood but applying fully a “cloud” environment by not renting office and having local employees is not yet in the DNA of an investor.

A digital business could be destined to the local market, but this shouldn’t justify an abandon of certain principles, the main one is to honestly questioning the need to locally hire and to rent office space.

Till COVID times it was easy to lie to ourselves, to mention COMMUNICATION issues, motivation, creativity meetings, local situation awareness etc.… to justify the need to rent an office and to hire local personalities.

The truth was certainly a mix of good reasons and some more unmentionable ones, we like to physically see our investments, we like to share a coffee with the team, we simply do it because we are not willing to work differently, as example to expatriate ourselves.

But what did we do for the last 18 months? We conducted business by renouncing to our comfort, we were forced to adapt and to accept to drastically change our way of working. This was possible but wasn’t FUN, this was even unbearable for some.

Expatriation

COVID 19 constraints are eyes openers for a generation of entrepreneurs and investors.

  1. A physical office is not an absolute necessity, at minima the office space could be reduced and social interaction could be maintained by having the team being present only few days a week.
  2. Most of the back-office tasks could be outsourced few thousand kilometers away, the staff wasn’t at office for the last few months and this basically changed nothing.
  3. A lot of talented individuals did seize the opportunity to change of location and a large number of important contributors are willing to work, at least partially, from home.
  4. Apart companies directly impacted by confinement (restaurants, hotels etc..) the companies suffered eventually from a decrease of demands but not from an absence of physical sales meetings.
  5. The importance of local teams in countries of exportation and importation is increasing, some traders which were under enormous commercial pressure to survive despite the Alibaba efficiency in China are now seeing large turnover increase because of their quality controls and leverage with factories.
  6. Quality of services and products is finally regaining some importance, with an absence of filters between a mistake made and its discovery by the senior management.
  7. Low efficiency team members are being caught by time and tasks trackers.

The digital economy will create waves of expatriations.

  1. When considering business opportunities and the scale-up of business it’s nearly impossible to avoid commercialization or purchasing in English speaking/working countries. Having employees or freelancers in multiples countries is becoming an obligation.
  2. A generation of talented employees has already left their poor sun and high tax countries, pushed away by insecurity and social issues. These freelancers or potential employees possess skills and expertise applied to specific countries; they just do not live IN the country.
  3. Business partners and investors are easier to meet outside of Europe, easier to approach and to convince.
  4. Most of the countries supported the economy by injecting billions of dollars, now they will tax more companies and successful individuals.
  5. By investing in marketing and organization instead of paying high taxes, by escaping administrative burden, the companies are using their resources to increase the business.  

Which countries are likely destined to host waves of entrepreneurs in the digital economy?

The process to select a country is reflecting the concerns of European candidates for expatriation: security and low pollution, ease to find private school, health system and insurances costs, visa system.

The tax environment is crucial, it’s really easy to find countries with lower taxes than Europe but every aspects of the tax regime should be analyzed carefully.

Hong Kong

  • Preferred location of many digital entrepreneurs for the setup of a Hong Kong company which will claim offshore profits (if the profits doesn’t derive from activities in Hong Kong) this could mean a ZERO tax bill
  • With activities in Hong Kong very low tax environment (8.25 till USD 250,000 of profits then 16.5 %) with no VAT and no capital gain.
  • Entrepreneur visa is difficult to obtain, life is expensive and the city is suffering from the aftermath of social unrest.
  • IDEAL solution for single operators in the digital marketing, with a company in Hong Kong they do benefit from credibility and stable environment while living in neighbour countries.

UAE

  • Very trendy as welcoming influencers in need of showing success and participating in parties, the Instagram city…
  • Very favourable tax environment if structured properly with local office and local employees, fake residents will get caught easily by their country of tax residence.
  • Poor commercial logic as definitive local absence of clients and suppliers, no business support.

Singapore

  • Same advantages as Hong Kong but with a reduced access to China when Covid constraints will be “over”.
  • Difficulties to bank outside of Singapore with a Singapore Company (when the company has the turnover of a SME) this situation creates tax risks for many entrepreneurs attracted by an offshore situation.
  • Beautiful city with less pollution and nicer standard of life than Hong Kong, still an expensive location.

Thailand

  • Not a good country to setup a company but a very nice one to live-in while having a Hong Kong offshore company.
  • Ever changing Visa and Tax environment, a local company should have at minimum four local employees for each expatriate under working contract.
  • Many solutions with nominee services to effectively own a company or a land but with high-risk exposure on the long term.

Philippines

  • THE location of the best freelancers available to support digital economy, from developers to graphic designers and content specialists. Very nice professionals with pleasant personalities.
  • Total burden to create a company, if not discouraged by the process you will abandon later when confronted to a complicated and expensive maintenance.
  • Insecurity in the main cities, outside of the cities great social & internet issues.

Mauritius

  • Low tax environment very attractive to French speaking entrepreneurs.
  • Easy banking but with regular issues with their correspondent banking, so clients should be prepared with T/T blocked/delayed and heavy compliance.
  • Fantastic Island for mature entrepreneurs, not really for start-ups
  • Ease to create and to maintain tax substance.

Indonesia

  • Few solutions with nominee services which are difficult to maintain without issues on the long term.
  • A nice alternative to Thailand with similar advantages but in an Islamic environment, so a different way of life.
  • Enormous local market with 270 million inhabitants.

A lot of countries, with low tax environment, pro-business governments and lower operational costs are welcoming the digital economy. The only whom to seems to realize the attractivity of such offers are the European governments.

Compare yourself to the losers and end-up just as one of them?

winner or loser

The European governments are leading with a new concept consisting of comparing their results to the worst of their neighbors.

As an example, when the French are proudly stating that they are doing better than the Spanish in term of COVID management, why don’t they EVER compare their results with Asian countries? 

This doesn’t only translate on health and security subjects, this tainted mindset spread continuously by the medias is destroying the moral foundations of a nation.

Educating the youth by advocating auto-satisfaction is a change of values, no standing what our political views are; US and Chinese populations aren’t nurturing auto-satisfaction but are instead dreaming their futures and fighting to gain a better life.

Nobody is dreaming anymore in Europe, they are certainly too focused to erect new laws and regulations, to protect a dying system.

BUT the new generation is understanding what to do!

Young entrepreneurs are leaving Europe, waves of Digital experts and E-commerce founders are now trying a new way of life, far away from their native countries. The covid didn’t stop them, surprisingly, and they establish themselves in Asia and in Dubai.

They might be disappointed after their honeymoon period as guests in a new country, after all life is difficult everywhere and governments are showing inability to deliver their promises.

But as a guest in a new country, you know from the start that your actions only, your success only, will allow you to stay, no social net is expected.

The more courageous are leaving, the ones with a true entrepreneurial spirit and, let’s face it, the ones with a minimum of financial capacities. This mobility of an entire generation of digital entrepreneurs is an absolute disaster for Europe.

Can Europe stop waves of digital entrepreneurs living the continent?

I believe it’s too late, the ones hesitating, for family reasons or because of a fantastic way of life (that might come back in 2-3 years after Covid constraints) will continue to hesitate…. and this wait and see attitude reflected in the management of their projects will anyway kill them economically. Absence of decisions and success are the two main reasons behind bankruptcies. 

A Moral U-turn is urgently needed.

This would start by pragmatism,

The Chinese Communist Party is doing more for its population than most (to not say all) of the governments, they do deliver results. The main stream anti-Chinese opinions are here only to divert attention to the true reality faced by most of European habitants.

If we forget for a while the disastrous foreign policy of all the US administrations in the past 70 years, we should all agree that they are keeping dreams alive in US, creativity and sense of entertainment are contributing to a population often happier and definitively POSITIVE.

So, the two dominant nations are in fact delivering hope, and taking care of their populations but in the same time Europe is increasing poverty and insecurity, with continuous failures in the past 30 years.

Then, facing the reality,

We should embrace our differences and not be afraid about our values being challenged, this is part of an evolution that couldn’t be rejected.

We should start to admire results, and stop to recognize efforts, stop leniency and favor strengths. We should be attracted by good practices, copying good solutions when not creating our owns.

The world is changing fast and not for the best, we have the choice to fight changes or to embrace them, to spend energy trying the status quo or to focus on opportunities.

Time to compare ourselves to the winners and to adopt the same attitudes, this means going EAST and going DIGITAL. 

GOING DIGITAL

Only the old generation is willing to protect taxi drivers against UBER, only the old generation is willing to protect jobs by erecting new laws and regulations. Even the most politically motivated are turning to e-commerce for their purchases and are participating unwillingly to the slow death of retails shops.

GOING EAST and understanding China

10 facts about China to (hopefully) change your perspectives:

  1. Workers are not underpaid, they have very often higher salaries than in Europe.
  2. They don’t live all in dormitories, a lot of them are purchasing flats which are much more expensive than European properties.
  3. Factories are facing difficulties to attract workers: a qualified wood worker is taking home more money than his French colleagues and despite this it is difficult for factories owners to hire new workers.
  4. The population wasn’t only drastically forced to a strict covid confinement, they also did wear face masks and respected instructions.
  5. They suffered weeks from a total absence of freedom, the rest of the world is suffering since months of a partial absence of freedom.
  6. Without the Asian’s purchases most of the luxury brands would bankrupt.
  7. By the end of 2020, about 989 million people had access to internet in China, Alibaba was fined $2.8 billion after antitrust investigation; a move to protect smaller businesses which wasn’t even considered with the same power by Europe or US against GAFA dominance.
  8. Chinese government never commented political decisions of other countries, except rarely about their foreign policies, when requesting the same respect this is denied.
  9. The Chinese’s wealthy are slowly but surely purchasing properties and companies around the world, not a show of trust for their government but without doubts a show of financial power.
  10. Gambling is a real issue in China and this disturbing reality is a cause of great concerns for the government, its fueled with underground banking and other practice endangering the national sovereignty.

If you want to go East and benefit from a pro-business environment, setting-up your company in Hong Kong and starting a new life in Asia, please feel free to contact me.