US Companies Report Views of China Business Environment

USCBC’s 2010 membership survey results show companies experience continued growth—and rising protectionism concerns.by US-China Business Council staffThe results of the US-China Business Council’s (USCBC) 2010 annual member survey show similar business and investment trends as in the past three surveys. The results are also consistent with recent surveys conducted by other business organizations, including the American Chamber of Commerce in Beijing and Shanghai and the European Union Chamber of Commerce in China:

• Companies report strong growth and profitability in their China operations despite the global economic downturn;
• Companies remain committed to the China market overall, with resource commitments returning to pre-recession growth patterns; and
• Companies remain optimistic about business prospects in China over the next five years, but believe the China business environment is less welcoming now than it was three years ago.

This year’s survey results reveal that increasing concerns about protectionism and continued market access barriers threaten the commitment for some, but not all, companies and sectors. Many firms are less concerned about the immediate impact of protectionism on operations today and more about policy trends that could disfavor foreign companies and discourage future investments—if the trends continue and these policies are fully implemented.

The survey results suggest two contrasting views of the current business and investment landscape in China. The optimistic view is that companies still have an opportunity to influence these trends and prevent implementation of protectionist policies. The pessimistic view is that these trends are entrenched within the PRC government and the outlook for foreign companies will deteriorate. Only time will tell which one is accurate, but the difficult task of engaging China to influence policy and achieve outcomes favorable to US companies remains as important now as any time in the past three decades of commercial relations.

China’s current business climate

Sales and profitability

Despite PRC policy and regulatory challenges, licensing barriers, and rising costs, 87 percent of this year’s respondents stated that their China operations are profitable, consistent with responses in previous years. In each of the past five years’ surveys, more than 80 percent of companies have reported profitability in China. This year’s survey results are only slightly below past surveys’ highest results on this topic—in 2008, prior to the global economic downturn, 88 percent of companies were in the black.

These numbers were robust even in a tough economic climate recovering from the global economic recession. Nearly 65 percent of respondents saw at least a 10 percent increase in revenue in the last year, including 21 percent who stated that their company’s revenue in China rose by more than 20 percent. Most companies report that their China operations turned these revenue gains into increased profits in 2009, although almost 30 percent report that profitability was flat compared to the prior year (see Figure 1). These results also continue to outpace companies’ global profitability rates. This year, 88 percent of respondents reported that their China operations’ profit margins were the same or better than their other global operations, a situation that has been reflected in USCBC surveys for the last five years. Most firms expect to increase revenues further in 2010. This is significant at a time when the rest of the global economy is weak and sales in more mature markets, especially in the United States, have yet to fully rebound. Companies increasingly rely on their business outcomes in China to help maintain their existing operations—and employment—back in the United States.

As in previous years, nearly all of this year’s respondents (96 percent) report that they invest in China primarily to access or serve China’s domestic market (see Figure 2). Transportation lead times and costs, plus the need for many businesses to be closer to their customers, mean that many US companies cannot reach the China market simply by exporting from US operations. But 40 percent of respondents indicate they are also using China as an export platform to sell goods to other non-US markets.

Perhaps unsurprising given the above results, 74 percent of survey respondents rank China among their top five priorities for their company’s global strategic investment planning and nearly 20 percent of respondents make China their top global investment priority. Two-thirds plan to accelerate their investment plans in China in the next year.

Clouds gathering: Tempered optimism about China’s business climate

Data from the previous five annual surveys show a strong and steady view that China will be a place where companies can find growth. This year, almost 60 percent of survey respondents indicated they are optimistic about their five-year outlook for business in China and another 37 percent indicated they are somewhat optimistic. This result is virtually identical to data from USCBC’s 2009, 2008, and 2007 surveys.

These numbers are tempered by increasing concerns about the longer-term outlook in China. This year’s survey asked how respondents currently view the business climate compared with three years ago. Though most companies were optimistic or reported no change in their views, almost 40 percent of respondents indicated they were less optimistic about the business climate now than they had been in the past.

The concerns about China’s business climate center around various policies, including China’s domestic indigenous innovation policies, government procurement policies, and continuing restrictions on foreign investment and market access. Each of these policies has important near- and long-term ramifications for many companies; each also plays into issues that appear in USCBC’s top 10 list, including protectionism risks in China, transparency, and competition with Chinese state-owned enterprises (see Top 10 Business Issues in China).

USCBC believes the PRC government needs to take this shift in opinion about the business climate seriously as it develops and implements policies that affect foreign companies and their ability to compete on a level playing field with Chinese enterprises, particularly China’s state-owned enterprises. This concern about recent trends is significant enough that some companies may be carefully considering what their future China investment plans and strategies will look like. USCBC conversations with some companies indicate these internal company discussions are already occurring at senior levels.

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Top 10 Business Issues in China

1. (Three-way tie) Human resources: Talent recruitment and retention
1. Administrative licensing
1. Competition with PRC state-owned enterprises or national champions
4. Intellectual property rights enforcement
5. Cost increases
6. Market access in services
7. Transparency
8. Protectionism risks in China
9. Government procurement
10. Standards and conformity assessment
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[box] 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 in the United States and throughout Asia. This article is adapted from USCBC 2010 Member Priorities Survey Results. For the full report, including analysis of the top-ten issues, see www.uschina.org. [/box]