CPEC and industry relocation

CPEC and industry relocation

Should we expect any Chinese industry to relocate to Pakistan under the China-Pakistan Economic Corridor (CPEC)? And if it happens, which industries are likely to benefit from such relocation? Before we answer this question, it is important to understand why companies relocate. An industry would relocate to another city or country if such relocation entails a significant regulatory, locational or cost advantage. The locational advantages include reduced transportation time due to proximity to raw materials or market, market size or even better living conditions at the destination. The cost advantages, on the other hand, include lower input costs, better employees or overall lower cost of doing business, whereas the regulatory advantages may cover tax breaks, policy incentives, less stringent controls, etc. Let’s first discuss the location advantages. While CPEC will greatly reduce the travel time from western China to the Indian Ocean, the shorter distances are mostly relevant for only those Chinese enterprises which are located in the three western provinces of Xinjiang, Tibet and Qinghai and are exporting to the Middle East and North Africa. For others, using the sea route through eastern ports or the overland route to Europe would make more sense. Moreover, except Xinjiang with exports of more than $13 billion, exports from other two provinces are almost negligible. But Pakistan itself is a very lucrative market with a growing middle class. The huge potential of the local market has generated significant Chinese interest in household appliances and automotive sectors. In fact, this interest predates CPEC and included investments by Haier, Gree and Changhong. It is, therefore, likely that this sector is going to see much more Chinese investment in the next few years. Early interest and pipeline of potential investments by Changan Automobile Limited to assemble and sell its cars in Pakistan, Jinbei Auto to build a completely knocked down assembly and joint ventures by LIFAN and Beijing Automobile Works further validate this notion. Similarly, the locational advantages also support the case for agri business and food processing industry which can form another potential candidate for Chinese investment to serve the local industry as well to target the massive Chinese food market. Coming to the cost advantages, the garments and textile industry seems to be a good choice for relocation. China is already facing a surge in production costs, owing to appreciation of its currency, inflation, higher cost of raw materials, etc. Moreover, as Chinese labour is graduating from low-paying to high-paying jobs, along with introduction of improved labour laws, the labour costs are also rising sharply. The average labour cost of an operational hour in the coastal and inland regions of China is thrice the cost in Vietnam and Pakistan and six times that of Bangladesh. These pressures are compelling Chinese manufacturers to look elsewhere to relocate. For now the Chinese focus seems to be on Vietnam, Myanmar, Cambodia, Indonesia and Bangladesh. But there is room for Pakistan to join the race as well. Lastly come the regulatory factors. The sunset industries in China are being pushed out due to overcapacity, rising production costs and environmental factors. These include copper and aluminum smelting, cement, papermaking, textiles, iron and steel, light engineering and low-end motors and machines. While smelting would need abundant availability of inexpensive energy, some of the other sunset industries can very well be relocated to Pakistan. No wonder that the initial parleys with China and the earlier version of the long-term plan mentioned textiles and garments, agri businesses, food processing, mining, cement, light industrial products and transportation machinery and household appliances as sectors that could potentially benefit from CPEC. The focus for Chinese industry relocation is, therefore, quite clear and makes much commercial sense. Now it’s for our policymakers and industry to make it happen.

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