Survey Reveals Cautious Optimism

Companies responding to USCBC’s 2009 membership survey remain optimistic about China despite the economic recession’s sting.by US-China Business Council staffEach year, the US-China Business Council (USCBC) surveys its members on their views of their priorities when doing business with China. The results provide a useful update on business and investment conditions and form the basis of USCBC’s work on behalf of its members.

This year’s survey was conducted in June 2009, when global economic data was still looking dim. Though survey responses indicate that US companies have seen the recession’s impact on their China operations, China has remained a bright spot for companies in the midst of the global slowdown.

Familiar business problems in China remain unresolved, however. Business licensing, market access in services, the ability to navigate China’s standards-setting system, and the protection of intellectual property rights (IPR) remain areas in which foreign companies face problems. In addition, companies again cited protectionism in China as one of their top 10 concerns, noting in responses to separate questions a trend in PRC policies that seems to favor domestic industries over foreign competitors.

Given the overarching themes that dominate the survey results and the unique situation created by the global recession, much of this year’s survey report focuses on members’ views of these broader topics.

Global economic recession and its impact on China operations

Over the years that USCBC has surveyed its membership about China’s business climate, companies have consistently reported that China is a priority in their global strategic plans. Though the global economic recession may have curbed China’s growth temporarily, the 2009 survey shows that companies remain optimistic about their prospects in this important market. In fact, senior executives in China reported increased pressure from global headquarters to boost their China performance to compensate for reduced sales in the united states and other markets.

Reduced sales, investments, and staff

The majority of survey respondents indicate that the global economic decline has affected their companies’ China operations (see Figure 1). Seventy-five percent report reduced sales because of the recession (though more than half project China sales to increase in 2009), and almost 70 percent note that they have reduced or delayed planned investments in China.

Thirty-seven percent of respondents report that they have decreased their employment levels in China to address the downturn. Of those who reduced their employment rolls, more than half cut staffing by 5 percent or less. Less than 20 percent of those cutting staff made reductions of more than 10 percent. These cuts were felt across the board for Chinese and foreign employees alike: 67 percent of respondents reduced their expatriate work force in China along with cuts for domestic employees.

While sales, investment, and staffing reductions affected many companies, shutdowns or pull-backs from the market did not. Only 2 percent of respondents indicated that they closed manufacturing facilities in China.

Stimulus not stimulating US companies—yet

China has taken well-publicized steps to mitigate the effects of the recession on its domestic economy. Its almost $600 billion stimulus package, announced in November 2008, includes projects to develop infrastructure and healthcare, as well as revitalization plans for industries that are important to the overall strength of the country’s economy.

USCBC members have mixed views on whether China’s stimulus will benefit their companies. Forty-five percent of respondents were at least somewhat optimistic that they will gain business due to the stimulus package, but almost 40 percent reported that it was too early to tell, even though seven months had passed since the first large injection of capital. Most companies reported not feeling a direct, tangible impact. More than 70 percent reported that they had not had any increases in sales or contracts related to the stimulus package.

Whether companies benefit directly from the stimulus package, however, depends largely on the sector in which they operate. For details on USCBC’s subsequent follow-up discussions with member companies on this topic, see the full USCBC 2009 Member Priorities Survey Results.

Optimism prevails despite concerns

Despite the stimulus package’s limited benefits for foreign companies to date, many companies report an uptick in sales growth due to China’s general economic recovery, which was spurred, in part, by the significant monetary expansion in the first half of 2009. USCBC members remain optimistic that their investments in China will prosper, and they continue to plan for the future development of the China market.

USCBC members view China as an important part of their companies’ operations. The numbers bear this out: Just under 90 percent of respondents indicated that China is the top or among the top five priorities for their companies’ global strategic planning.

This commitment to the market, however, appears to be based on solid returns. Three-quarters of respondents report that the revenue from their China operations rose in 2008, despite the onset of a recession, though at a slower rate than in previous years. Further, more than half of respondents expect their 2009 revenue to increase. Only one-third of respondents note they expect a fall in income as the recession continues. And nearly half plan to increase their resource commitment in China in the coming year—accelerating their investments, executive time, expenditures, and head count in the market.

Profitability also remained relatively healthy in 2008, despite the downturn. More than 80 percent of survey respondents reported that their China operations are profitable in general. When comparing profits in 2007 and 2008, 45 percent of respondents reported that the profitability of their companies’ China operations increased, 22 percent said profitability remained unchanged, and one-third reported a decrease in profitability. The performance of companies’ China operations was better than the company overall for almost half of the respondents—a figure comparable to previous years.

That said, the recession has affected the bottom line of USCBC members’ operations. One-third cited lower sales due to the economic slowdown as the primary restraint on their profitability in China (see Figure 2). Other factors also played a role in limiting profitability, including PRC policies and regulations.

Overall, USCBC members remain confident: 93 percent of respondents were optimistic or somewhat optimistic about the five-year outlook for their companies’ businesses in China.

Top 10 business issues in China

As part of USCBC’s annual survey, respondents are asked to assess how the issues related to their top concerns have changed in the previous year—whether the issues have improved, remained unchanged, deteriorated, or new problems have appeared. In 2009, companies reported that most of their top concerns saw little movement in the previous year—many respondents identified six of the top ten as unchanged (see Figure 3). Two issues received the most reports of deterioration: the economic downturn and protectionism risks. The remaining two issues—standards and conformity assessment and competition and overcapacity—were almost evenly divided between unchanged and deteriorated.

1. Administrative licensing, business, and product approvals

The virtually endless licensing and approval process remains a constant challenge in China. Companies’ global business models are geared toward leveraging China’s market scale, but their ability to implement those plans is hindered by bureaucratic barriers to expansion and paperwork burdens for continuing operation.

Half of this year’s survey respondents indicated that there had been no changes to the difficulties they faced in the previous year, and more than 30 percent reported that the situation had deteriorated or that new problems had been identified.

2. Economic downturn’s impact on China operations

Since the global economic downturn did not begin until after the completion of USCBC’s 2008 survey, the survey had not previously asked about the impact of the global recession on companies’ operations in China. Unsurprisingly, those that cited the downturn’s effects in the 2009 survey primarily cited a negative impact: 64 percent reported deterioration or new problems.

3. Human resources: Talent recruitment and retention

Difficulties in locating and retaining qualified employees in China have been a recurring problem for USCBC members. The issue has been at or near the top of USCBC’s annual survey for the last four years. As in 2008, human resources was cited broadly as a problem—that is, many respondents noted human resources as their second, third, fourth, or fifth top concern, rather than ranking it first.

4. Competition and overcapacity in China’s market

Competition and overcapacity in China has been another recurring issue in the top 10 list, with 86 percent of respondents indicating that there have been no changes in the previous year or that the situation has deteriorated. As noted in last year’s survey report, though US companies in many sectors retain a significant technological edge, the ability of Chinese companies to draw on support from local officials and national domestic policies that encourage “indigenous innovation” and national champions assists them in gaining market share. In addition, the ability of domestic companies to acquire ready financing from state banks—coupled with a traditional emphasis on fixed-asset investment as a major driver for economic growth—contributes to almost chronic overcapacity in many industries.

5. Market access in services

China’s services market is expected to provide significant opportunities for growth, but regulation hinders the ability of foreign companies to fully access it. Sixty-five percent of survey respondents reported that they saw no progress in market access in services in the past year and 22 percent of respondents reported that the situation had deteriorated. New regulations on express delivery are of particular concern, but existing regulations that favor domestic companies over foreign ones and restrict foreign investment remain problematic in financial services, healthcare, and standards and conformity testing.

6. Standards and conformity assessment

Standards and conformity assessment returned as a top 10 issue after a year below the mark. The vast majority of 2009 survey respondents indicated that standards development did not improve over the last year. Most respondents were fairly evenly divided between seeing no changes (33 percent) or deterioration in the process (38 percent). Twenty-one percent of respondents experienced new problems. One respondent put it bluntly, “We are concerned about [the] trend toward China-specific technical standards that favor domestic companies.”

7. Developing sales and distribution channels

Most respondents—about 70 percent—noted that they had seen no changes in this area in 2009, likely because of the the global economic recession. But some companies saw glimmers of growth—15 percent saw improvements in the development of their sales and distribution channels over the previous year.

8. IPR enforcement (Tie)

IPR enforcement—a long-standing challenge for USCBC members—continued its slow drop in the rankings, but the issue remained a top concern. Almost 70 percent of respondents noted no changes in China’s IPR protection regime in the past year, and most of the remaining 30 percent said there had been some improvements, continuing the slight trend of progress seen in the last four years.

Those improvements were not exclusively due to the PRC government’s actions, however. USCBC members report that Chinese companies are beginning to seek protection of their own rights—a positive sign.

9. Transparency (Tie)

Transparency covers the full extent of a country’s rulemaking system, including the drafting of new laws and regulations and the solicitation of public comments, government decisionmaking on policies and licensing, and the availability of information on costs and markets. Transparency concerns are also related to a host of other issues that affect companies’ daily operations, such as administrative licensing, uneven enforcement, standards, IPR protection, and investment policy.

While almost 60 percent of respondents saw no progress on transparency in the previous year (with respondents noting particular difficulty in getting information on China’s stimulus package projects), 27 percent reported improvement since 2008.

10. Protectionism in China

Half of the respondents to this year’s survey cited deterioration in the fight against protectionism in China, and another 36 percent felt the situation remained unchanged from previous years.

[author]The US-China Business Council (USCBC), publisher of the China Business Review, is the leading organization of US companies engaged in business with the People’s Republic of China. Founded in 1973, USCBC provides extensive China-focused information, advisory and advocacy services, and events to more than 200 US corporations operating within the United States and throughout Asia. This article is adapted from USCBC 2009 Member Priorities Survey results. For the full report, see www.uschina.org/public/documents/2009/10/uscbc_member_survey.pdf.[/author]