January 20, 2016 – The majority of foreign companies remain optimistic on domestic market growth potential, a new survey shows, even as they feel less welcome and are increasingly frustrated by unclear laws, inconsistent regulatory interpretation and difficulty obtaining required licenses. The poll of almost 500 member companies of the American Chamber of Commerce in China (AmCham China), conducted in partnership with Bain & Company, also showed that China remains a top investment priority for more than half of companies, but that revenues and profitability came increasingly under pressure last year.
“As China’s economic growth rate decelerates, this year’s report reflects that American businesses will need to revise their strategies to ensure profitable growth in China,” said AmCham China Chairman James Zimmerman. “In addition, our members report increasing concerns about transparency, predictability and fairness of the regulatory environment, as well as the extent to which they are allowed to participate in the ongoing reforms and serve China’s market.”
The China Business Climate Survey Report shows that 45 percent of respondents reported flat or declining revenues last year compared to 2014. At the same time, the proportion of companies characterizing their business as financially profitable in 2015 fell to 64 percent – the lowest level in the last five years. Financial performance differed significantly among industries, however. For example, nearly two-in-three services companies reported increased revenues, while nearly half of the industrial and resources companies reported declining revenues.
There were also a number of positive signs that helped to counterbalance the challenging economic climate. Relative to other developing markets, China is still well-positioned – the country remains a top three investment priority for 60 percent of member companies, and the No. 1 priority for about 25 percent of members.
However, the benefits of economic reform have not been fully realized by American companies operating in China, despite improvements in the protection of intellectual property rights. Respondents now cite inconsistent regulatory interpretation and unclear laws as their No. 1 business challenge. Furthermore, difficulty obtaining required licenses is again among the top five challenges, and increased Chinese protectionism tied with a number of other items for the number six challenge. In all, more than three-quarters of respondents feel that foreign businesses are less welcome than before in China. This response is consistent across industries, but is strongest among companies in the industrial and resources, and technology and R&D-intensive sectors, which report greater concern with the country’s overall regulatory environment. Furthermore, technology and R&D-intensive sectors report a greater number of regulatory and policy-related challenges in China than other sectors, despite recent government announcements supporting innovation. Technology and R&D-intensive sectors also reported the greatest pessimism towards the future regulatory environment.
Foreign companies believe a stronger legal framework is necessary to overcome some of these challenges and facilitate future business growth. The top three expected benefits of a U.S.-China Bilateral Investment Treaty (BIT) include benefits beyond market access; nearly 80 percent of companies expect the BIT to increase transparency, predictability, and fairness of the regulatory environment; and nearly three-quarters expect it to ensure a level playing field with domestic enterprises. This would directly address a key business challenge highlighted by member companies. Survey respondents also believe completion of a high-standard U.S.-China BIT would significantly improve the investment environment for U.S. companies and the broader U.S.-China relationship.
Although much remains to be done to address member company concerns, the business and regulatory environment has improved along some dimensions. Nine of ten respondents agree that China’s enforcement of intellectual property rights (IPR) has improved during the last five years. Similarly, the percentage of respondents who believe the risk of IP leakage and IT or data security threats is greater in China than in other geographies continues to decrease. Corruption, which has historically been a top 5 business challenge in China, remained off the list of top business challenges for the second year in a row.
Looking ahead, companies continue to see a number of important opportunities for their China business. Growth in domestic consumption and the rise of an increasingly sizeable and affluent middle class is a top opportunity across industry sectors, while consumer and technology and R&D intensive companies also see significant opportunities in “Internet+” and the growth of e-commerce. Services companies, however, most commonly cite the globalization of Chinese companies and increased outbound investment as a top growth opportunity.
Despite the opportunities, one in four respondents has either moved capacity outside of China in the past three years, or is planning to move capacity. While industrial & resources and consumer companies most commonly cited countries in developing Asia as the region capacity was moved to, technology and other R&D intensive industries most frequently reported moving to the U.S. or NAFTA region. Looking to 2016, even as 46 percent of companies expect to increase headcount, more than 20 percent of companies are planning to decrease headcount.
For companies committed to growth in China, innovation is a critical priority. More than 90 percent of respondents believe that innovation for China will be important to their company’s future growth. Companies are acting on this conviction, with 40% of respondents reporting that more than half of their China revenues come from products that were locally designed, developed, or at least tailored to Chinese requirements. One important priority for innovation noted by survey respondents is “digitalization.” Respondents report that “digitalization” will be a top priority – more than 70 percent rate digitalization of sales, marketing, distribution, and customer relationship management as very or extremely important to enhancing their competitiveness.
“The importance of China as a top global growth priority coupled with the country’s changing and competitive business environment demands that business leaders develop new strategies to grow during the next phase of China’s development,” said Stephen Shih, a Bain partner and management consultant. “Companies will need to address a broad strategic agenda: They need to decide whether to continue investing in China, determine how to innovate for the Chinese market, and carefully review and manage costs — all while also strengthening their organizations.”
This is the 18th year that AmCham China has conducted the Business Climate Survey, which this year elicited 496 responses. For a second year, AmCham China partnered with Bain, which helped construct the survey and analyze the responses.
View the report online at: https://www.amchamchina.org/policy-advocacy/business-climate-survey/
About AmCham China:
The American Chamber of Commerce in the People's Republic of China is a non-profit, non-governmental organization whose membership comprises more than 3,800 individuals from over 1,000 companies operating across China. The chamber's nationwide mission is to help American companies succeed in China through advocacy, information, networking and business support services. AmCham China is the only officially recognized chamber of commerce representing American business in mainland China. With offices in Beijing, Tianjin, Dalian, Shenyang and Wuhan, AmCham China has more than 60 working groups, and holds more than 300 events each year. Visit: www.amchamchina.org
About Bain & Company
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