Op/Ed by Mourme Taruna Halim
Dezan Shira Asia Alliance, Jakarta
When discussing the type of foreign clients we are looking for, we find ourselves proud to serve a wide variety of clients with diverse business operations. But if we reflect purely on our government policy of accelerating foreign investment growth in Indonesia, we could say that the country has opened the door more widely for certain business sectors, especially within the manufacturing, agriculture, marine, infrastructure, and tourism industries.
As a consequence of our large population, which represents 40 percent of ASEAN’s total and 38 percent of ASEAN’s consumer market, Indonesia tends to prioritize labor intensive industries to develop its competitive advantage. For example, opportunities in the mining industry have declined in the last several years as it is no longer a profitable investment until China’s consumption picks up again – likely to be some time away.
Report Linker has just released a report on the future of China’s automated logistics industry covering the period 2016 to 2020. Titled “China Automated Logistics Equipment Industry Report, 2016-2020 “, it’s a timely piece, given that much of China’s logistics industry is set to change, especially with an eye on the overland routes that will start to come into play with the advent of the new Silk Road Economic Belt.
In fact, the One Belt One Road project has some experts divided as to the merits of the overland versus sea routes. Shipping freight by sea is always going to be less expensive than by land, yet China has built two extraordinary inland ports at Alashankou in Xinjiang and Manzhouli in Inner Mongolia. So what gives? After all, the Russian economy isn’t exactly doing brilliantly right now.
The Mongolian government has cancelled the visa on arrival program that was extended to 42 countries in mid-2014. This means there will be no such facility during 2016 and all travelers from these nations now need to apply for a visa in advance from the Mongolian Ministry of Foreign Affairs.
The visa-free access for the 42 nations concerned was granted from June 2014 until 31st December 2015, but the decision not to extend it and revert back to a strict pre-visit visa-issuance program has taken many diplomats, businesspeople, tourists and travelers by surprise; especially as the decision impacts most significantly upon EU nationals, who are amongst the largest investors in and travelers to the country. The process to attain a pre-visit visa takes a minimum of three days and must be accompanied by various documentation concerning the visit.
One aspect of the proposed China Silk Road that is not often factored into the route is that of India, and especially the South Asian Association for Regional Cooperation (SAARC) trade bloc. In fact, SAARC has long been of high interest and importance to the Chinese, who tried to join a few years ago and were rebuffed.
SAARC’s members, which essentially comprise the entire Indian sub-continent, include India, Afghanistan, Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri Lanka. The body also includes, as observers, Australia, China, the European Union, Iran, Japan, Mauritius, Myanmar, South Korea and the United States. South Africa has also participated unofficially in meetings, which must have generated some interesting side-line conversations about cricketing ties.
Op/Ed by Chris Devonshire-Ellis
Photo by Chris Devonshire-Ellis
Sri Lanka is often overlooked in Asia. A relatively small economy at just US$80 billion GDP per annum, and a population of 20 million, it is eclipsed in size by many Asian cities, let alone sovereign nations. The country’s economy is the same size as that of New Orleans.
That small size justifies the term “Leopard Economy” – Sri Lanka is smaller than the traditional Asian Tigers of Thailand, Malaysia and Indonesia, and isn’t home to any tigers itself – but the country does boast the world’s largest population of leopard sub-species in the world.
North Korea rarely enters the media unless it is bad news: rockets being shot over Japan, saber rattling with the United States, or nuclear testing. Yet there is another reality – that of North Korea as a product finishing destination. This recently came to light in the Rip Curl case, where I helped calm the waters over what had threatened to engulf the company in a wave of negative criticism. That piece, “Rip Curl’s North Korea Scandal Is Actually A China Rules of Origin Issue“, detailed how it is common for Chinese factories, and particularly those in the Dongbei (North-East) region of China, to subcontract finishing of products to North Korean factories across the border. Many of these factories are in fact Chinese invested. The basic reason is twofold – firstly, North Korean wages are about 25 percent of those payable to Chinese factory workers in the North-East, and secondly, because they can.
What caught many people by surprise are the internationally agreed “Rules of Origin” guidelines, which determine how much locally sourced material and processing must go into a finished item and still permit it to have a “Made in China” label. That amount varies depending upon the product, but it is rarely 100 percent. In fact in terms of garment finishing – sewing on buttons, collars, cuffs, inserting zippers and so on, which is what would have been happening in Rip Curl’s case – it can be as high as 40 percent.
It is entirely conceivable that Rip Curl didn’t know about this. But it does demonstrate that their China lawyers were somewhat sloppy in their contractual due diligence. If you don’t want products to include outsourced finishing in third countries, put it in the production contract. North Korea is just next door, and I have visited factories in the DPRK where very well-known brands are being finished there, for shipment back to China, where the fixing of a “Made in China” label is carried out, and the product then re-exported to its ultimate market in Japan, South Korea or the United States. I take a somewhat perverse pleasure in knowing that it remains entirely possible that Donald Trump may in fact be wearing items finished in the DPRK.
Much of North Korea’s beef of course has to do with the United States, although the international community, including China, certainly do not approve of their nuclear testing. China recently joined with the Americans in approving additional sanctions on the country following the latest tests, although frankly it remains unclear what else can be done to further squeeze a regime already sanctioned to the hilt.
Recent American blog comments elsewhere suggest that North Korea’s business environment is similar to that of China and provides (second hand) anecdotes to illustrate that. However, such comments are misguided, potentially dangerous, and in terms of encouraging American companies to look at the DPRK market while it remains under sanctions, illegal. It is naive in the extreme to suggest that the DPRK business environment is the same as China’s. Doing business in North Korea is not at all like doing business in China. I should know: my firm was asked back in 1999 to establish an investment office to be seated in the North Korean Ministry of Commerce building in Pyongyang. I was also hired, and carried out, a project to assist the DPRK write their foreign investment laws, which mainly consisted of answering questions about China’s relevant legal structure and sending the DPRK Minister of Commerce a series of books about Foreign Investment Law in several other countries. North Korea’s Foreign Investment Laws have, and I quote a local law firm’s comments, “a surprisingly sophisticated framework of foreign investment and related legislation in place, with dozens of laws and regulations covering numerous aspects of foreign business activity, including a revised dispute resolution law”. Needless to say, our mooted Pyongyang office never materialized, although it was fun to look at it from a potential perspective, and an honor to be asked at the time. The unwise placing of North Korea as part of an “Axis of Evil” by then incoming President George W Bush rather put a stop to any hopes that the country would open up and become a de facto sub-contracting Province of China while maintaining its sovereignty. We’ll never know what could have been.
North Korea does however have a number of well-established experts, for want of a better word, in situ, with a rare handful of expatriates having made the country their base for business for upwards of two decades now. If that doesn’t qualify someone as being an “expert”, when so few have ever been to the country, let alone regularly visited it, then I don’t know what does. But I can assure readers it is nothing like China. I wrote an article about China’s trade with the DPRK, “China’s Trade With North Korea“, fairly recently, which outlines the trade and investment support given by China to the North Koreans. Although my hope for a rapprochement at the time has not materialized, it does outline the hard trade support the Kim regime still enjoys.
The Asia Briefing bookstore meanwhile regularly features North Korea business intelligence reports. These are sited under the “Partner Publications” section on our Bookstore and are free. The country remains a pariah, and its bellicose attitude doesn’t win it any friends. Yet overall, the United States diplomacy towards the country hasn’t been the best either. I don’t especially recommend investing in North Korea as an alternative Asian destination: it is too prone to sudden disruptions in trade, and there are the sanctions to consider, although these don’t affect everyone. Nonetheless, it is a fascinating country and I do recommend a visit. Understanding the issues that countries such as North Korea face is key to a more pragmatic and ultimately peaceful response.
International lawyers wishing to keep their clients out of the country should insert clauses forbidding sub-contracting of work to third countries. For the rare and brave souls out there that have ties with North Korea, opportunities are there, as there are in all countries under immense pressures in terms of permitted trade and investment. But it is not like China.
Chris Devonshire-Ellis is the Chairman of Dezan Shira & Associates, a full service foreign direct investment practice with 28 offices across ASEAN, China and India. The practice advises foreign investors in these markets with research, legal advisory, tax advisory and related business services, including due diligence, compliance, accounting, payroll and related assistance. Please email to email@example.com or visit our website at www.dezshira.com .
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DPRK Business Monthly: February 2016
The latest issue of DPRK Business Monthly is now available as a complimentary PDF download on the Asia Briefing Bookstore. This regular publication looks at current international, domestic, and peninsular affairs concerning North Korea while also offering commentary and tourism information on the country.
D.P.R. Korea’s Rajin-Songbong Economic & Trade Zone
This UNDP report is a special guide on the climate for foreign investment and foreign transit trade in the Democratic People’s Republic of Korea’s Tumen River Area, specifically focusing on the Rajin-Sonbong Economic and Trade Zone.
The Great Tumen Initiative Investment Guide
The Greater Tumen Initiative is an intergovernmental cooperation mechanism in Northeast Asia, supported by the United Nations Development Program, with a membership of five countries: People’s Republic of China, Democratic People’s Republic of Korea, Republic of Korea, Mongolia and Russian Federation.
Vietnam is set to be one of the performing global stars in terms of growth during 2016, according to an essay from Bloomberg titled “Vietnam Growth Makes It An Emerging Market Standout In a Shaky World”. Citing generally difficult trading conditions in 2016, Bloomberg’s market analysis places Vietnam as the second most dynamic growth economy during the year with an expected 7 percent growth rate. India in fact leads the way with an expected GDP growth performance of 7.5 percent – some way ahead of China’s 6.2 percent prediction.
The global property company Knight Frank have released their 2016 India residential investment advisory report for 2016, which can be used as a useful barometer for how well the Indian economy is doing overall. This is especially true of consumer trends – of vital note to foreign investors hoping to sell products to India’s massive middle class consumer base.
Unlike China, where worrying signs are that property prices are set to retrench, India’s residential property market looks healthy. The report, which specifically features the main India cities of Mumbai, Delhi, Bengaluru, Chennai, Hyderabad and Pune, also covers areas of prime infrastructure interest, such as the New Gurgaon area in Delhi, and the airport development project in Pune. That means some welcome and detailed on the ground research has been put into this survey.
The New Climate Economy is a major international think tank, examining how countries can achieve economic growth while dealing with the risks posed by climate change. It was commissioned by seven countries – Colombia, Ethiopia, Indonesia, Norway, South Korea, Sweden and the United Kingdom – as an independent initiative to report to the international community. Notable and deliberate omissions amongst its members are the United States, China and India, where it is felt an initiative free of political influences would paint a more accurate and impartial picture as to challenges the world economy faces when dealing with climate issues, including pollution.
The Organization for Economic Cooperation & Development (OECD) has just released its 2016 study on the economic outlook for South-East Asia, China and India. Using data culled from 2014-2015 performance indicators, this comprehensive study examines several areas of interest to foreign investors throughout the Asian region.
The study is divided up into three main sections, the first dealing with specific regional economic monitors and depicting the medium-term economic outlook and macroeconomic challenges in the region. The second section consists of three chapters on “enhancing regional ties”, which is the special thematic focus of this report. The third section includes structural policy country notes and a summary.