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Google's retreat from China may send others elsewhere

Google's retreat from China, where U.S. executives say the business climate is becoming less welcoming, may hasten moves by foreign companies to look beyond the world's fastest-growing major economy for expansion in Asia.

Google rerouted its Chinese Web site and Tuesday began directing traffic to Hong Kong, fulfilling a pledge to stop censoring searches as required by China. The move follows an American Chamber of Commerce report released in Beijing that said some U.S. businesses are losing Chinese sales because of rules to support homegrown technology.

While China still "is the biggest game in town," more recently "I see a lot of U.S. companies looking for alternatives," Susan Schwab, U.S. trade representative between 2006 and 2009, said in an interview in Hong Kong last week.

General Electric, L'Oreal and New Balance are among companies with long-standing operations in China that are expanding in countries such as Vietnam and Indonesia. Asia's emerging markets outside China are home to more than 2 billion people and have growth rates that are gaining on the world's most-populous country.

Rising costs in China are increasing the need to diversify. VF Corp., the owner of North Face outdoor apparel and Lee and Wrangler jeans, decided to "push our sourcing strategies and vendors outside China," said Thomas Nelson, vice president of global product procurement. Indonesia now accounts for 8 percent of the Greensboro, N.C.-based company's $2 billion worth of global sourcing, double the amount three years ago, he said.

Cuts in tax rebates for exporters, accelerating inflation, stricter labor laws, a shortage of workers in coastal manufacturing hubs and assumptions that China's currency will appreciate, making exports more expensive, are all adding incentives for companies to look elsewhere.

"A China-plus-one, or China-plus-two strategy is definitely an essential component of any large brand-buying operation due to rising labor costs and shortages in China," said Judith Mackay, Asia apparel and license compliance manager at New Balance. The closely held Boston-based maker of athletic shoes plans to find subcontractors in Indonesia to augment four plants in China and one in Vietnam.

Indonesia was Asia's third-fastest-growing economy after China and India last year and, with 248 million people, is the world's fourth-largest population. Vietnam, with 90 million people, had the region's fourth-fastest pace of growth.

Ford Chief Executive Officer Alan Mulally said Thursday that it is "absolutely" important not to focus solely on China and to pursue growth in Asian countries. Ford has invested $1 billion in Thailand in a venture with Mazda and March 10 launched its first made-for-India model, the Figo, as part of an $840 million investment there.

GE's energy arm sees "huge" potential in selling equipment to producers of geothermal power in Indonesia, the company's Kuala Lumpur-based Southeast Asian president, Stuart Dean, said in a phone interview. GE's $61 million wind-turbine plant in Haiphong, Vietnam, is set to open this year, as is Intel's $1 billion chip test and assembly plant in Ho Chi Minh City.

French cosmetics maker L'Oreal is spending $50 million to expand its Jakarta manufacturing facility to produce mass-market cosmetics under its Garnier and L'Oreal Paris brands.

Facebook, which last week overtook Google as the most-visited Internet site in the U.S., has avoided a misstep in China, where its site is blocked. The social networking company last week said it would open its first Asian operations center in Hyderabad, India.

Google also has a hub in the southern Indian city. The company controls 88 percent of the market for Web searches in India, a country of 1.2 billion people where the economy has expanded at an average pace of 8.5 percent in the past five years, compared with China's 9.8 percent.

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