China remains a top investment priority for 60 percent of foreign companies, despite a challenging year for growth and profitability

A new AmCham China survey developed in collaboration with Bain & Company reveals that foreign businesses recognize the importance of innovation in China and are revising their strategies in response to the country's economic slow-down

Beijing – Jan. 20, 2016 – This past year was a challenging one for foreign businesses operating in China. Although over 75% of respondents operating in China for more than 5 years reported a positive return on investment since entering China, this year a significant number reported challenges on both the top-line and bottom line.

The Business Climate Survey of the American Chamber of Commerce in China (AmCham China) members, conducted in partnership with Bain & Company, found that approximately 40 percent of the nearly 500 companies surveyed reported declining or flat revenues 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. Performance varied by sector. Services companies were the most likely to report growth, while almost half of Industrial and Resources companies reported declining revenues.

However, there were a number of positive signs that helped to counterbalance the challenging economic climate. Relative to other developing markets China still is positioned ahead of the pack. The country remains a top three investment priority for 60 percent of member companies, and the number one priority for about 25 percent of AmCham China members – buoyed, in part, by the continued optimism by survey respondents on domestic market growth and the government's actions to address key business challenges, notably intellectual property concerns and corruption.

"Even with fewer companies reporting growth and profitability over the past year and the expectation of continued challenges, over sixty percent of survey respondents reported that China remains a top three global investment priority," said Michael Thorneman, Managing Partner of Bain & Company, Greater China, "This reflects the continued importance of the China market globally and recognized improvements in various areas of China's business environment such as better intellectual property rights enforcement and anti-corruption efforts."

AmCham China members ended the year with an improved sense that China is showing signs of progress on some areas, compared to 2014. Labor costs are no longer at the top of the list of major business challenges in Chin as labor cost increases finally show signs of decelerating. More than 80 percent of surveyed companies expect average labor cost per employee to increase by less than 10 percent in 2016. However, 52 percent report that ongoing air pollution continues to hamper their recruiting efforts.

Nine out of ten respondents agree that China's enforcement of intellectual property rights (IPR) has also 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 declined this year.  Corruption, which historically was a "top 5 business challenge in China" has fallen off the list of top 5 business challenges for the third year in a row.

Respondents now cite inconsistent regulatory interpretation and unclear laws as their number one business challenge. Additionally, industry overcapacity appeared as a top five challenge for the first time after having been added as a new option in the 2015 survey.

Looking ahead, most surveyed companies are looking to their core businesses for growth in 2016. While most sectors are also prioritizing growth initiatives such as launching new products or services or targeting new customer segments, Industrial and Resources companies are prioritizing operating cost reductions and improved efficiency as a top business objective.

Overall, foreign businesses recognize a need to adapt their growth strategies for the China market. Survey respondents report an increased percentage of their revenues coming from products or services that have been designed, developed, or tailored for the China market requirements. In addition, more than 90 percent of respondents believe that innovation in China will be important to their company's future growth in China. Respondents also 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.

Foreign businesses are also showing signs of caution in expanding their investment levels. This year, 32% of member companies do not plan to expand their investments in China, a higher percentage than during the financial crisis in 2009. While the majority of companies plan to increase investments in China during 2016, they are doing so at lower rates than in previous years. In addition, approximately one in four respondents have either moved capacity from China in the past three years or are planning to move capacity. The most commonly cited destinations are to either countries in ‘developing Asia' or the US/NAFTA region.

"As China's economy matures and shifts toward consumption and services, foreign businesses will need to actively revise their strategies in order to continue achieving profitable returns on investment in China," said Stephen Shih, a Bain partner based in Beijing. "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."

# # #