Facing higher taxes, costs, foreign companies shutter operations in China

By Li Xuanmin Source:Global Times Published: 2017/1/17 18:48:40

Closing up shop

The planned closure of US disk drive manufacture Seagate's factory in Suzhou, East China's Jiangsu Province, as well as US tech giant Oracle's layoff of one of its research groups in China, has put the country's changing business environment under the spotlight. Taxes, rising labor and leasing costs, as well as uncertainties over US President-elected Donald Trump's presidency are the major challenges faced by foreign companies working in China, experts noted.

Employees work on a production line at the Fuyao Glass America plant in Ohio, the US, in October 2016. Photo: IC

Employees work on a production line at the Fuyao Glass America plant in Ohio, the US, in October 2016. Photo: IC

It has been less than three weeks since the start of 2017, and foreign companies have already begun announcing that they are shutting down some of their operations in China.

US disk drive manufacture Seagate will close its factory in Suzhou, East China's Jiangsu Province, as part of the company's continued optimization of operational efficiencies, according to an e-mail it sent to the Global Times on Friday.

The move will result in the loss of more than 2,000 jobs, domestic news website the paper.cn reported on Sunday.

Seagate said it was closing the factory because of "shrinking market demand," according to the e-mail.  The disk drive manufacturer said it is seeking to "decrease the scale of Seagate's global production so as to better adapt to current and future market demands."

However, most of the laid-off workers, who received notice of the closure over a week's time, did not buy the explanation, according to a statement the factory workers sent to the Global Times on Monday.

Some have staged a strike to demand better compensation. "The Suzhou plant is apparently making a profit, so why would it close?" the statement asked.

As Seagate trims its global business, it has been relocating the bulk of its operations to Southeast Asia, according to media reports.

It plans to invest $470 million in Thailand over the next five years to expand capacity at its largest facility in the country, Reuters reported in February 2015. The company said it is scaling up operations in Thailand due to the country's "workforce and favorable cost structure."

"Sluggish demand might be part of the reason, but the differences in Seagate's strategy between China and Thailand sheds light on a string of changes in China's business environment, such as growing tax burdens and labor costs, as well as uncertainties brought by US President-elected Donald Trump's upcoming presidency," said Bai Ming, a research fellow at the Chinese Academy of International Trade and Economic Cooperation.

These factors combined may have dampened foreign investors' enthusiasm for China, Bai told the Global Times on Sunday.

On Saturday, US tech giant Oracle also announced plans to lay off all of the 200 employees on its research team for storage and operating systems in Beijing, citing "adjustments in the company's business," according to sources close to the matter. The number represents 10 percent of the company's research and development staff in China.

The cutoff comes amid robust revenue performance in the storage business and a large global demand for such services, a senior engineer in Oracle's storage department, who spoke only on the condition of anonymity, told the Global Times on Sunday.

Growing tax burdens

Media reports have linked Seagate's Suzhou factory closure with a 2014 government audit that determined the company owed 1.5 billion yuan in back taxes, stemming from "tax and interest associated with changes to the company's tax filings for the calendar years 2007 through 2013," the Jiangsu Provincial State Administration of Taxation said in a statement posted on its website.

The two sides also reached a deal that allows the administration to ascertain tax liabilities in advance.

"Seagate voluntary applied for a deal to ascertain tax liabilities beforehand, and the move is in line with relevant Chinese tax laws," according to a statement on the administration's website on Tuesday.

"The bureau's conduct is in line with China's tax laws, which enable regulators to punish incidents of tax evasion going back as far as 10 years," said Liu Ying, deputy director of the Tax Research Institute at the Capital University of Economics and Business. "But Seagate executives might hold a different view about the amount, which was one of the country's largest back tax charges ever recorded."

The amount was based on Seagate's corporate profits as well as those of its factory in Suzhou, Liu said.

"But the low-end products manufactured in Suzhou are less profitable than those made at other plants, and that's the source of the disagreement," Liu told the Global Times on Monday.

Taxes might be one of the most important factors driving foreign companies like Seagate to shutter certain businesses in China, experts said.

Because the government has been enforcing tax laws more effectively over the last few years, some foreign companies have seen their tax bills go up, Bai explained. "But it is important to remember one thing: the Chinese tax system treats domestic and foreign investors equally," he said.

In December 2016, Chinese tycoon Cao Dewang, chairman of Fuyao Glass Industry Group Co, caused some buzz when he said the overall tax on manufactures is 35 percent higher in China than in the US.

"The so-called death tax rate is an exaggeration, because the taxation structure in China has more corporate taxes and fewer individual taxes, while in the US it is the opposite," Liu said.

"And that doesn't even take into account China's value-added tax reform, which significantly lowers the tax rates," he noted.

Rising costs

In addition to taxes, rising costs, such as labor and land costs, have also undermined China's traditional advantages in manufacturing, experts noted.

A businessman in East China's Zhejiang Province surnamed Peng told the Global Times on Monday that he pays each worker 4,500 yuan ($652.32) in salary each month, but the true cost is about 6,000 yuan when he factors in payments to the local government's social security programs. With labor costs that high, Southeast Asia becomes a more attractive location for manufacturers.

For multinational companies like Oracle, hiring locally means a smaller payroll, but they also need to take into account soaring office leasing and management costs, the Oracle employee said.

The employee also linked the layoff with Trump's campaign pledges to return manufacturing to the US and create new jobs.

"It's a move to retain employment opportunities for people in the US. Oracle does need an IT staff to continue offering its storage service, so most of our jobs will be transferred to US engineers," the employee complained.

Trump has proposed lowering the US's corporate tax rate to 15 percent from 35 percent. If the US goes through with Trump's policies, then 2017 will be a challenging year for China, both internally and externally, Bai said.

Despite these headwinds, China's business environment is improving, and has shown no sign of deteriorating, Ministry of Commerce Vice Minister Wang Shouwen said in a statement on the ministry's website.

"The country ranks as the second most popular destination for foreign investment," Wang said.



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