54% of companies forecast industry market growth under 5%, while 62% view China as a top three global priority for investment, despite bilateral tensions and longstanding business challenges.
Beijing, February 26, 2019 – Most American companies in China continue to see their revenues grow, although financial performance has softened compared with previous years, according to a new survey released today by the American Chamber of Commerce in China (AmCham China) in partnership with Deloitte. Despite trade tensions, the survey also makes clear that China remains a high priority market for the majority of companies, although many appear to be tempering their investment plans.
The overall outlook has shifted from cautious optimism to cautious pessimism, as many longstanding concerns – especially inconsistent regulations and uneven enforcement – persist, even as new challenges – namely bilateral US-China tensions – take center stage. Furthermore, the survey results suggest that the full impact of the tariffs has yet to be felt, with some companies maintaining a "wait and see" attitude.
"Our members have been very clear on actions that should be taken by both the Chinese and US governments to improve China's business environment and foster more sustainable economic ties between our two countries," said Tim Stratford, Chairman of the American Chamber of Commerce in China. "Substantial improvements in market access, intellectual property rights protection, regulatory transparency and evenhanded enforcement are all cited by members as critical to their continued success. Additionally, members are asking the US government to advocate even more strongly for a level playing field, pursue investment reciprocity, and engage in results-oriented discussions between the two sides."
This is the 21st year that AmCham China has surveyed its members on the business environment in China, and the first year it has partnered with Deloitte for data collection and in-depth analysis. The survey was conducted between November 13 and December 16, 2018. It was sent to 771 AmCham China member company representatives, of which 314 completed the majority of the questions.
Despite a general decline in performance relative to 2017, companies are still experiencing modest growth following the lows of 2015. Most companies were profitable, although the percentage declined slightly in 2018 (to 69% from 73% in 2017). Service sector companies reported the greatest increase in revenues, while Resources and Industrial (R&I) industry members experienced a sharp decline in profitability. Earnings before interest and tax (EBIT) were also down across the board, though more than a fifth of respondents said their China EBIT margins are higher than those in the rest of the world.
Despite tempered growth and investment expectations, China remains an important market. More than 80% of member companies said they expected positive industry growth in 2019, though more than half said they expected their industry to grow at no more than 5%, below the Chinese government’s forecasted GDP growth rate for 2019 of 6.3%.
Member companies continue to view the US-China relationship as important for their success in China. However, nearly three-quarters expect bilateral relations to deteriorate or stay the same in 2019. When members were asked to rank their top business challenges, "bilateral tensions" — a new survey option — ranked as a top challenge for businesses in China regardless of sector, just behind "rising labor costs", and "inconsistent regulations and unclear laws and enforcement".
Market access restrictions and a lack of regulatory transparency continue to pose significant challenges for members. In Technology & other R&D-intensive industries, 73% of surveyed companies said market access restrictions inhibit their operations. Nearly half of members reported they would consider increasing their investments in China if its markets were open to the same extent as they are in the US. Similarly, one-third of respondents report that they limit China investment because of IP protection concerns alone, rising to nearly one-half of companies in the Technology and R&I sectors. However, the majority of respondents acknowledged China's efforts to improve the way in which IPR laws are written and enforced, especially with respect to trademark and brand protection.
"The real challenge for China is how it will manage trade tensions with the United States," said Sitao Xu, the Chief Economist at Deloitte. "There are both short-term issues, imbalances and market access, and long-term ones, such as the possible spill-over effect of China's industrial policies, and the two need to be addressed separately." Kevin Li, a Deloitte partner in Risk Advisory added, "Finding a comprehensive and enduring resolution to the current trade frictions is critical to create a more positive, predictable environment for companies, which in turn will benefit the citizens of both countries, and indeed the world."
The survey also found:
- 65% of members said trade tensions are influencing their longer-term business strategies, and nearly a quarter are delaying additional China investments.
- 50% of members are optimistic that steps will be taken to open markets further for foreign companies in China – the highest level since members were first asked about it in late 2016.
- 32% of respondents expect their investment to slow in 2019, compared with 26% a year ago.
- 52% of R&I and 30% of Technology & other R&D-intensive members indicated they are adjusting their supply chains by “seeking to source components and/or assembly” outside of China or the US.
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