AmCham Review

China Business Climate Survey Report 2016

An overview of the performance of AmCham China member companies in 2015, their plans for future growth in China, and their assessments of China’s economic, business, and regulatory environment.

First published on 1월 20, 2016
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Executive Summary This year’s Business Climate Survey provides a timely overview of the performance of AmCham China member companies in 2015, their plans for future growth in China, and their assessments of China’s economic, business, and regulatory environment. 2015 Performance Snapshot: A difficult year for growth and profits Although many member companies continued to grow in 2015, almost one in four companies reported declining revenues and another one in five companies reported flat revenues compared with 2014. Companies in the Services sector were most likely to grow, while the Industrial & Resources sector had the toughest year, with almost half of companies reporting declining revenues. At the same time, the proportion of companies characterizing their business as financially profitable in 2015 fell to 64%, the lowest level in the last five years. Business Climate Challenges: Economic, Regulatory and HR concerns top of mind China’s economic challenges are clearly impacting member companies. For example, industry overcapacity was reported as a top five business challenge. Although many respondents remain optimistic about China’s domestic market growth potential, almost half of survey respondents expect that China’s overall GDP growth in 2016 will be lower than 6.25%. However, in addition to the economic challenges, member companies report the regulatory environment as being a key factor hindering their ability to invest and grow. For the first time in five years, member companies cited “inconsistent regulatory interpretation and unclear laws” as the top business challenge. “Obtaining required licenses” also returned to the list of top five business challenges. Human resources issues continue to be challenging, with labor costs and a shortage of qualified employees both making the list of top five challenges. However, there are signs of progress. For example, labor cost increases may be decelerating, with more than 80% of companies expecting average labor cost per employee to increase by less than 10% in 2016. Outlook on investment: China remains a top priority, but fewer companies increasing investment levels in China China remains a top three investment priority for six out of ten member companies. This, however, is significantly below a high point in the 2012 report when almost eight out of ten companies named China a top three investment priority. Consumer and Services companies are most likely to prioritize China in growth plans, while Industrial & Resources companies are the least likely. Approximately one-third of member companies are not planning to increase their investments in China during 2016. Slower economic growth and rising costs are the most commonly cited reasons for decreasing investment levels. However, market access barriers are the primary barrier for 1 of 6 respondents (most frequently cited by those in the Technology & R&D Intensive and Services sectors). Survey respondents have also moved or are considering moving capacity outside of China. By the end of 2015, 25% of respondents have either already moved or are planning to move capacity outside of China. While almost half of respondents are moving capacity to “Developing Asia,” almost 40% report moving capacity to the US, Canada or Mexico. Within China, member companies are prioritizing investments for the Northern and Eastern Coast regions, followed by the Southern Coast and the Southwest. Although respondents see significant economic growth opportunities in the southwest, they rate the region relatively lower on ease of doing business. Growth opportunities: Member companies prioritizing innovation Innovation is an important business priority for most member companies. More than nine in ten respondents believe that innovation in China will be important to their company’s future growth in China. Respondents also report that brands, technology and IP, and development and innovation are among the top five competitive advantages member companies have relative to domestic competitors. Innovation can help capture growth opportunities in new customer segments and is required for launching new products or services, both of which are listed as primary business objectives for most member companies. This innovation is increasingly designed for China, with 40% of companies reporting that more than half of their revenues come from products or services designed, developed or tailored to local requirements, a significant increase from 32% last year. Infographic Challenges and Opportunities for US Companies in China Growth continues to be a challenge for US companies in China, but many companies remain optimistic and see opportunities in innovation. AmCham China member companies are also innovating in line with changes in the technology environment. Respondents report that “digitalization” will be a top priority, with more than 70% rating digitalization of sales, marketing, distribution and customer relationship management as very or extremely important to enhancing their competitiveness. This is consistent with companies in most sectors reporting that China’s “Internet +” and the growth of e-commerce are important growth opportunities for them. In order to innovate in China, member companies are hiring domestically and investing in employee training. Hiring talent and developing talent are also reflected as the top two HR priorities for all companies in 2016. In addition, more than 40% of companies with 250 or more employees in China have established an R&D center in China to support their innovation strategies. Furthermore one-third of respondents have established partnerships with Chinese organizations or companies. Policy Trends: Steady progress in areas, but Bilateral Investment Treaty remains a critical requirement for the future Although member companies report significant business challenges with inconsistent regulatory interpretation and unclear laws and difficulties acquiring licenses, comparing this year’s survey responses with prior years suggests progress on protection of Intellectual Property Rights, the data security environment and anti-corruption. These areas continue to be pressing concerns for many survey respondents, but the trends are positive. Regarding Intellectual Property Rights, a majority of respondents view patents, copyright and trademark laws and regulations as being effective. Only trade secret laws and regulations are viewed by a majority as being ineffective. And while the enforcement of Intellectual Property Rights is rated somewhat lower in terms of its effectiveness, nine in ten respondents believe China’s enforcement of IPR has improved during the last five years. Similarly, while 52% of respondents believe the risk of IP leakage and IT or data security threats is greater in China than in other regions, this percentage is lower than last year’s 60%. Corruption, which has historically been a “top five business challenge in China,” has fallen off the list of top ten business challenges for the second year in a row. Despite this progress, 77% of respondents feel that foreign businesses are less welcome than before in China. This response is consistent across industries, but most often highlighted by companies in the Industrial & Resources and Technology & R&D Intensive sectors. These companies report a greater concern over the regulatory environment overall. Of note, the strong concerns and pessimism over the regulatory environment from Technology & R&D Intensive companies suggest that the stated government priority to support innovation in China is not yet being felt by foreign businesses. Completion of a US-China Bilateral Investment Treaty (BIT) may be the key to improving member company perceptions of the overall environment. For example, the number one anticipated benefit from a BIT is increased transparency, predictability and fairness of the regulatory environment. This would directly address a key business challenge highlighted by member companies. Survey respondents also believe completion of a high standard US-China BIT would significantly improve the investment environment for US companies and the broader US-China relationship. Conclusions For businesses: As China’s growth decelerates and companies in more sectors confront the challenges of overcapacity, businesses will need to revise their strategies to ensure profitable growth. Foreign businesses will need to continue to invest in innovation and talent to offer new products and services and serve new customer segments. This year, carefully reviewing and managing costs will also need to be a top agenda item. With updated strategies, China can still be an attractive profitable growth opportunity for many foreign businesses. For policymakers: Member companies recognize the progress that has been made in areas such as Intellectual Property Rights and anti-corruption and are supportive of continued efforts. The top challenges are increasing concerns about transparency, predictability and fairness of the regulatory environment and the ability of foreign companies to participate in the ongoing reforms in order to serve China’s market. A top priority for both Chinese and US policymakers should be the pursuit of a high standard US-China Bilateral Investment Treaty that meets the high expectations of the business community. As a result, US companies will be able to better invest and innovate in China on an even playing field to the benefit of China’s future economy. For both businesses and policymakers, 2016 will be an important year to set the path for future quality growth.

Executive Summary

This year’s Business Climate Survey provides a timely overview of the performance of AmCham China member companies in 2015, their plans for future growth in China, and their assessments of China’s economic, business, and regulatory environment.

2015 Performance Snapshot: A difficult year for growth and profits

Although many member companies continued to grow in 2015, almost one in four companies reported declining revenues and another one in five companies reported flat revenues compared with 2014. Companies in the Services sector were most likely to grow, while the Industrial & Resources sector had the toughest year, with almost half of companies reporting declining revenues. At the same time, the proportion of companies characterizing their business as financially profitable in 2015 fell to 64%, the lowest level in the last five years.

Business Climate Challenges: Economic, Regulatory and HR concerns top of mind

China’s economic challenges are clearly impacting member companies. For example, industry overcapacity was reported as a top five business challenge. Although many respondents remain optimistic about China’s domestic market growth potential, almost half of survey respondents expect that China’s overall GDP growth in 2016 will be lower than 6.25%.

However, in addition to the economic challenges, member companies report the regulatory environment as being a key factor hindering their ability to invest and grow. For the first time in five years, member companies cited “inconsistent regulatory interpretation and unclear laws” as the top business challenge. “Obtaining required licenses” also returned to the list of top five business challenges.

Human resources issues continue to be challenging, with labor costs and a shortage of qualified employees both making the list of top five challenges. However, there are signs of progress. For example, labor cost increases may be decelerating, with more than 80% of companies expecting average labor cost per employee to increase by less than 10% in 2016.

Outlook on investment: China remains a top priority, but fewer companies increasing investment levels in China

China remains a top three investment priority for six out of ten member companies. This, however, is significantly below a high point in the 2012 report when almost eight out of ten companies named China a top three investment priority. Consumer and Services companies are most likely to prioritize China in growth plans, while Industrial & Resources companies are the least likely.

Approximately one-third of member companies are not planning to increase their investments in China during 2016. Slower economic growth and rising costs are the most commonly cited reasons for decreasing investment levels. However, market access barriers are the primary barrier for 1 of 6 respondents (most frequently cited by those in the Technology & R&D Intensive and Services sectors).

Survey respondents have also moved or are considering moving capacity outside of China. By the end of 2015, 25% of respondents have either already moved or are planning to move capacity outside of China. While almost half of respondents are moving capacity to “Developing Asia,” almost 40% report moving capacity to the US, Canada or Mexico.

Within China, member companies are prioritizing investments for the Northern and Eastern Coast regions, followed by the Southern Coast and the Southwest. Although respondents see significant economic growth opportunities in the southwest, they rate the region relatively lower on ease of doing business.

Growth opportunities: Member companies prioritizing innovation

Innovation is an important business priority for most member companies. More than nine in ten respondents believe that innovation in China will be important to their company’s future growth in China. Respondents also report that brands, technology and IP, and development and innovation are among the top five competitive advantages member companies have relative to domestic competitors. Innovation can help capture growth opportunities in new customer segments and is required for launching new products or services, both of which are listed as primary business objectives for most member companies. This innovation is increasingly designed for China, with 40% of companies reporting that more than half of their revenues come from products or services designed, developed or tailored to local requirements, a significant increase from 32% last year.

Infographic

Challenges and Opportunities for US Companies in China

Growth continues to be a challenge for US companies in China, but many companies remain optimistic and see opportunities in innovation.

AmCham China member companies are also innovating in line with changes in the technology environment. Respondents report that “digitalization” will be a top priority, with more than 70% rating digitalization of sales, marketing, distribution and customer relationship management as very or extremely important to enhancing their competitiveness. This is consistent with companies in most sectors reporting that China’s “Internet +” and the growth of e-commerce are important growth opportunities for them.

In order to innovate in China, member companies are hiring domestically and investing in employee training. Hiring talent and developing talent are also reflected as the top two HR priorities for all companies in 2016. In addition, more than 40% of companies with 250 or more employees in China have established an R&D center in China to support their innovation strategies. Furthermore one-third of respondents have established partnerships with Chinese organizations or companies.

Policy Trends: Steady progress in areas, but Bilateral Investment Treaty remains a critical requirement for the future

Although member companies report significant business challenges with inconsistent regulatory interpretation and unclear laws and difficulties acquiring licenses, comparing this year’s survey responses with prior years suggests progress on protection of Intellectual Property Rights, the data security environment and anti-corruption. These areas continue to be pressing concerns for many survey respondents, but the trends are positive.

Regarding Intellectual Property Rights, a majority of respondents view patents, copyright and trademark laws and regulations as being effective. Only trade secret laws and regulations are viewed by a majority as being ineffective. And while the enforcement of Intellectual Property Rights is rated somewhat lower in terms of its effectiveness, nine in ten respondents believe China’s enforcement of IPR has improved during the last five years. Similarly, while 52% of respondents believe the risk of IP leakage and IT or data security threats is greater in China than in other regions, this percentage is lower than last year’s 60%. Corruption, which has historically been a “top five business challenge in China,” has fallen off the list of top ten business challenges for the second year in a row.

Despite this progress, 77% of respondents feel that foreign businesses are less welcome than before in China. This response is consistent across industries, but most often highlighted by companies in the Industrial & Resources and Technology & R&D Intensive sectors. These companies report a greater concern over the regulatory environment overall. Of note, the strong concerns and pessimism over the regulatory environment from Technology & R&D Intensive companies suggest that the stated government priority to support innovation in China is not yet being felt by foreign businesses. Completion of a US-China Bilateral Investment Treaty (BIT) may be the key to improving member company perceptions of the overall environment. For example, the number one anticipated benefit from a BIT is increased transparency, predictability and fairness of the regulatory environment. This would directly address a key business challenge highlighted by member companies. Survey respondents also believe completion of a high standard US-China BIT would significantly improve the investment environment for US companies and the broader US-China relationship.

Conclusions

For businesses: As China’s growth decelerates and companies in more sectors confront the challenges of overcapacity, businesses will need to revise their strategies to ensure profitable growth. Foreign businesses will need to continue to invest in innovation and talent to offer new products and services and serve new customer segments. This year, carefully reviewing and managing costs will also need to be a top agenda item. With updated strategies, China can still be an attractive profitable growth opportunity for many foreign businesses.

For policymakers: Member companies recognize the progress that has been made in areas such as Intellectual Property Rights and anti-corruption and are supportive of continued efforts. The top challenges are increasing concerns about transparency, predictability and fairness of the regulatory environment and the ability of foreign companies to participate in the ongoing reforms in order to serve China’s market. A top priority for both Chinese and US policymakers should be the pursuit of a high standard US-China Bilateral Investment Treaty that meets the high expectations of the business community. As a result, US companies will be able to better invest and innovate in China on an even playing field to the benefit of China’s future economy.

For both businesses and policymakers, 2016 will be an important year to set the path for future quality growth.