Report

China Business Climate Survey Report 2015

Slower revenue and profit growth in 2014 led to the most challenging year in recent history for many members of the American Chamber of Commerce in China.

First published on 2月 11, 2015
min read


Executive Summary This year’s Business Climate Survey offers a unique and important view of the rapid changes in China’s economic, business, and regulatory environment and their impact on American businesses in China. 2014 Performance Snapshot: Decelerating Top-Line and Bottom-Line Growth Slower revenue and profit growth in 2014 led to the most challenging year in recent history for many member companies. While three out of five companies reported higher revenues in 2014 than in 2013, two out of five reported comparable or lower revenues. In terms of profit margins, two out of five reported increasing margins, while three out of five held steady or reported declines. Investing for Future Growth: Established Companies, Complex Choices Despite the slow down in 2014, member companies continue to see growth opportunities, especially related to domestic consumption trends, the continuing rise of an affluent middle class and urbanization. AmCham China members are well on their way to localizing their businesses and have invested significantly in local innovation in China. For example, a strong majority have Mainland Chinese in 75% or more of their top country management positions. In addition, nearly one-third of companies now derive more than half of their revenues in China from locally designed, developed, or tailored products and services. Meanwhile, many other companies use China as a base for global growth. Nearly half of companies in R&D Intensive Industries or Resources & Industrial Industries have established R&D centers in China, and almost 40% of these companies are using the centers not just for China, but also for a broader set of emerging markets. For 2015, most companies have set organic revenue growth as a primary business objective, with 44% planning to launch new products or services, and 41% targeting new customer segments. Meanwhile, only 6% of companies list acquisitions or JVs as a primary objective. The key challenges to inorganic growth include difficulty obtaining credible information and a lack of attractive targets. Although companies’ operations are more established in China than ever, many are now revisiting their China investment strategies. More than 30% of companies have no investment expansion planned in 2015, the highest rate since the recession of 2009. And while China remains a top-three priority globally for over 60% of members, more than 35% now view it as “one among many destinations” or “not a high priority.” Solving Business Challenges: Human Resources and Regulatory Concerns Challenges in China are on the rise, with a significant uptick in the number of companies reporting that the quality of China’s investment environment is deteriorating. Human resource concerns and inconsistent regulatory interpretation and unclear laws continue to top the list of challenges. On the positive side, corruption dropped from the fourth-largest issue in 2013 to the sixth-largest issue in 2014, and fell off the list of top ten challenges entirely in this year’s survey. Human Resource Challenges High labor costs continue to be the top human resource challenge, and increasing costs are impacting company strategies. As one example, an increasing number of member companies—15% in 2014—have moved or are planning to move capacity or investments outside of China. Shortages of qualified employees and managers also round out the list of top challenges. These shortages are further exacerbated by air quality issues, which in 2014 caused over half of surveyed companies to experience difficulty in recruiting senior executives to work in China. Resolving human resource challenges will remain a top priority for American businesses in China in 2015. Regulatory Concerns and Solutions From a regulatory perspective, almost half of companies believe that foreign businesses are less welcome in China than before. Market access limitations are the top regulatory measure limiting willingness to invest in China. Companies are also very concerned with ineffective enforcement of policies and rule making that is non-transparent, unclear or inconsistent. Internet censorship—and its effect on Internet speed—also continues to have a negative impact on business. Ineffective enforcement of intellectual property rights (IPR) remains a concern for nearly 80% of members. Even though many companies have set up infrastructure for local innovation, significant improvements in IPR are needed for member companies to conduct more of their core global R&D and innovation activities in China. On the positive side, 86% of members believe that China’s enforcement of IPR has improved during the last five years. Infographic Doing Business in China Growth is more of a challenge for US companies in China, but most companies remained profitable. In this year’s survey, “increasing Chinese protectionism” is again among the top five challenges. 55% of respondents believe foreign firms are being singled out in recent enforcement campaigns, and more than 50% of these state that such campaigns have a negative effect on their intent to invest in China operations. While recognizing the current challenges in the regulatory environment, American companies see potential solutions. Specifically, member companies believe there will be significant benefits from a prospective US-China Bilateral Investment Treaty (BIT). Many members reported that the BIT will allow their companies to enter new business or product segments, or improve their ability to make acquisitions. Importantly, 65% of respondents also anticipate that a BIT would reduce the general complexity of the regulatory environment in China. The BIT is a major opportunity to improve both market access and the overall regulatory environment for American business in China. Overall Business Climate Outlook: Growth Opportunities, but Increasing Challenges. As our member companies look toward the next two years, almost 70% are optimistic on domestic market growth. However, achieving this growth will not be easy. Many survey respondents see increasing competitive, regulatory and cost challenges. In this year’s survey we also see differences by sector, with services companies more optimistic than resources and industrial companies on growth opportunities, for example. Conclusions For businesses: The deceleration of growth in 2014 and the significant business challenges faced in China have become important triggers for American businesses to review and revise their business plans for China. Companies will need to make clear decisions on whether to continue pursuing growth and investing in China, or whether to wait on the sidelines and see what happens in the Chinese economy over the near-term, while prioritizing other growth opportunities. For companies committed to growth in China, they will need to ensure that their strategies and organizations are well adapted to China’s changing market opportunities and human resource challenges. For policymakers: While members have shown increased concern over perceived anti-foreign sentiment, the recent pronouncements for strengthening rule of law and providing greater transparency, and the decline in reported challenges from corruption are positive signs for our members. In addition to further market access, the American business community in China works to ensure their operations comply with the evolving framework of rules and regulations, and therefore clearly looks forward to improved transparency, predictability, consistency and fairness in the enforcement of policies and regulations relevant to their business, though especially as they relate to investment, standards, and IPR. A top priority for both Chinese and US policymakers should be the pursuit of a high standard US-China BIT to improve the ability of US companies to invest and innovate in China on an even playing field to the benefit of China’s future economy. For both businesses and policymakers, 2015 will be an important year to continue to adjust to the new economic and market realities, set new directions where required, and implement the important changes necessary to successfully navigate the economic transformation currently under way in China. Read the full report

Executive Summary

This year’s Business Climate Survey offers a unique and important view of the rapid changes in China’s economic, business, and regulatory environment and their impact on American businesses in China.

2014 Performance Snapshot: Decelerating Top-Line and Bottom-Line Growth

Slower revenue and profit growth in 2014 led to the most challenging year in recent history for many member companies. While three out of five companies reported higher revenues in 2014 than in 2013, two out of five reported comparable or lower revenues. In terms of profit margins, two out of five reported increasing margins, while three out of five held steady or reported declines.

Investing for Future Growth: Established Companies, Complex Choices

Despite the slow down in 2014, member companies continue to see growth opportunities, especially related to domestic consumption trends, the continuing rise of an affluent middle class and urbanization.

AmCham China members are well on their way to localizing their businesses and have invested significantly in local innovation in China. For example, a strong majority have Mainland Chinese in 75% or more of their top country management positions. In addition, nearly one-third of companies now derive more than half of their revenues in China from locally designed, developed, or tailored products and services. Meanwhile, many other companies use China as a base for global growth. Nearly half of companies in R&D Intensive Industries or Resources & Industrial Industries have established R&D centers in China, and almost 40% of these companies are using the centers not just for China, but also for a broader set of emerging markets.

For 2015, most companies have set organic revenue growth as a primary business objective, with 44% planning to launch new products or services, and 41% targeting new customer segments. Meanwhile, only 6% of companies list acquisitions or JVs as a primary objective. The key challenges to inorganic growth include difficulty obtaining credible information and a lack of attractive targets.

Although companies’ operations are more established in China than ever, many are now revisiting their China investment strategies. More than 30% of companies have no investment expansion planned in 2015, the highest rate since the recession of 2009. And while China remains a top-three priority globally for over 60% of members, more than 35% now view it as “one among many destinations” or “not a high priority.”

Solving Business Challenges: Human Resources and Regulatory Concerns

Challenges in China are on the rise, with a significant uptick in the number of companies reporting that the quality of China’s investment environment is deteriorating. Human resource concerns and inconsistent regulatory interpretation and unclear laws continue to top the list of challenges. On the positive side, corruption dropped from the fourth-largest issue in 2013 to the sixth-largest issue in 2014, and fell off the list of top ten challenges entirely in this year’s survey.

Human Resource Challenges

High labor costs continue to be the top human resource challenge, and increasing costs are impacting company strategies. As one example, an increasing number of member companies—15% in 2014—have moved or are planning to move capacity or investments outside of China. Shortages of qualified employees and managers also round out the list of top challenges. These shortages are further exacerbated by air quality issues, which in 2014 caused over half of surveyed companies to experience difficulty in recruiting senior executives to work in China. Resolving human resource challenges will remain a top priority for American businesses in China in 2015.

Regulatory Concerns and Solutions

From a regulatory perspective, almost half of companies believe that foreign businesses are less welcome in China than before. Market access limitations are the top regulatory measure limiting willingness to invest in China. Companies are also very concerned with ineffective enforcement of policies and rule making that is non-transparent, unclear or inconsistent. Internet censorship—and its effect on Internet speed—also continues to have a negative impact on business.

Ineffective enforcement of intellectual property rights (IPR) remains a concern for nearly 80% of members. Even though many companies have set up infrastructure for local innovation, significant improvements in IPR are needed for member companies to conduct more of their core global R&D and innovation activities in China. On the positive side, 86% of members believe that China’s enforcement of IPR has improved during the last five years.

Infographic

Doing Business in China

Growth is more of a challenge for US companies in China, but most companies remained profitable.

In this year’s survey, “increasing Chinese protectionism” is again among the top five challenges. 55% of respondents believe foreign firms are being singled out in recent enforcement campaigns, and more than 50% of these state that such campaigns have a negative effect on their intent to invest in China operations.

While recognizing the current challenges in the regulatory environment, American companies see potential solutions. Specifically, member companies believe there will be significant benefits from a prospective US-China Bilateral Investment Treaty (BIT). Many members reported that the BIT will allow their companies to enter new business or product segments, or improve their ability to make acquisitions. Importantly, 65% of respondents also anticipate that a BIT would reduce the general complexity of the regulatory environment in China. The BIT is a major opportunity to improve both market access and the overall regulatory environment for American business in China.

Overall Business Climate Outlook: Growth Opportunities, but Increasing Challenges.

As our member companies look toward the next two years, almost 70% are optimistic on domestic market growth. However, achieving this growth will not be easy. Many survey respondents see increasing competitive, regulatory and cost challenges. In this year’s survey we also see differences by sector, with services companies more optimistic than resources and industrial companies on growth opportunities, for example.

Conclusions

For businesses: The deceleration of growth in 2014 and the significant business challenges faced in China have become important triggers for American businesses to review and revise their business plans for China. Companies will need to make clear decisions on whether to continue pursuing growth and investing in China, or whether to wait on the sidelines and see what happens in the Chinese economy over the near-term, while prioritizing other growth opportunities. For companies committed to growth in China, they will need to ensure that their strategies and organizations are well adapted to China’s changing market opportunities and human resource challenges.

For policymakers: While members have shown increased concern over perceived anti-foreign sentiment, the recent pronouncements for strengthening rule of law and providing greater transparency, and the decline in reported challenges from corruption are positive signs for our members. In addition to further market access, the American business community in China works to ensure their operations comply with the evolving framework of rules and regulations, and therefore clearly looks forward to improved transparency, predictability, consistency and fairness in the enforcement of policies and regulations relevant to their business, though especially as they relate to investment, standards, and IPR. A top priority for both Chinese and US policymakers should be the pursuit of a high standard US-China BIT to improve the ability of US companies to invest and innovate in China on an even playing field to the benefit of China’s future economy.

For both businesses and policymakers, 2015 will be an important year to continue to adjust to the new economic and market realities, set new directions where required, and implement the important changes necessary to successfully navigate the economic transformation currently under way in China.

Read the full report