Member companies are preparing for a third straight year of slower economic growth in 2017, but many are finding ways to adapt and maintain profitability. Nonetheless, increasing numbers are deprioritizing China as a target for investment expansion. While both foreign and domestic companies feel the impact of slower economic growth, this year’s survey shows that AmCham China member companies are increasingly reconsidering their investments because of unfavorable regulations and other policy-related challenges. In this context, most respondents also believe that positive bilateral relations are critical for continued business growth.
2016 Performance Snapshot: Slightly better than 2015, but still below the long-range trend
Member companies in China continue to find growth and profits harder to come by. In 2016, 58% of survey respondents reported positive revenue growth in China, up from a low of 55% in 2015, but still far from historical levels of more than 70%. More companies also say that their China operations were profitable in 2016 (68% vs. 64% in 2015), but 80% say their margins in China are less than or only equal to their global average. In addition to slower market growth and domestic competition, they point to a host of barriers to doing business, such as unclear regulations, inconsistent enforcement, and rising labor costs.
Beneath these averages, however, is a sharp divergence in performance among industries and sectors. About two-thirds of respondents in the Technology and Services sectors reported higher revenue in 2016, but Technology companies also expressed the greatest pessimism about the regulatory environment. In Industrial & Resources and Consumer industries, less than half of companies reported revenue growth in 2016. There are also performance differences between large and small employers. More respondents with 250 or more employees say sales are increasing in China, and 77% say China operations are profitable, compared with only 55% of smaller employers.
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Business-climate challenges: Companies anticipate slow growth and worry about regulation
Survey respondents’ consensus estimate for 2017 GDP growth is 6.1%, which is well below the 7.8% average from 2010 to 2015. Companies are also worried about growth in their sectors: 29% project that sales for their sectors in China will be flat or down in 2017, and another 27% expect growth of 5% or less. But 44% still expect growth to be above 5%, and 14% even predict double-digit growth. Again, this varies by sector, with greater optimism in Technology and Other R&D-intensive industries, and lower expectations in Industrial & Resources industries.
Companies report that inconsistent interpretation and enforcement of regulations and unclear laws, followed by rising labor costs, remain their biggest challenges. Although member companies noted that some regulatory challenges affect domestic and foreign companies, more than half of respondents feel that foreign companies are discriminated against in enforcement. This sentiment was particularly strong among respondents from Technology and Other R&D-intensive industries. Increasing Chinese protectionism, which had fallen off the list of top five challenges in 2016, is again a top concern for 2017.
Investment outlook: More companies are slowing investment in China
More companies are slowing investments and deprioritizing China as an investment destination due to slowing growth and increased concerns over barriers to market entry, the regulatory environment, and rising costs. The share of companies that say China is a top three global priority dropped to 56% this year, compared with a peak of 78% of companies in 2012. Investment and hiring plans reflect these shifting priorities. About one-third of companies say they do not plan to increase investment in 2017, and 39% say their investment budgets will rise by less than 10%. Half of respondents say they will maintain or reduce their headcounts.
As in the previous survey, about 25% of respondents say they have moved operations from China in the past three years or are planning to do so, citing rising labor costs, other strategic priorities, and regulatory issues as key factors. Nearly two-thirds of such operations have been redirected to other parts of Asia and 37% to North America. Even among those who maintain operations in China, most respondents say China’s environment now discourages investment: Eight in 10 say they feel foreign companies are less welcome in China than in the past, and more than 60% have little or no confidence that the government is committed to opening China’s markets further in the next three years.
The age of adaptation: How US companies are learning to live with the new normal
Companies continue to adapt to the changing business environment, playing both offense and defense. Now that they cannot count on double-digit economic growth to drive sales, companies are looking to grow by investing more in innovation in China and by branching out beyond core markets and customer segments. This year, more than 90% of AmCham China members say that innovation is an important priority for their success. At the same time, however, companies cite ongoing barriers to innovation, including uncertainty about intellectual property protection, access to talent, and concerns over data security. In some R&D-intensive sectors, companies are relatively bullish about the potential for organic growth, driven by the continuing expansion of China’s middle class. Some 65% of Technology companies, for example, expect growth of more than 5% in 2017. But in other sectors, companies are hunkering down and focusing on improving operations in their core businesses: Cost reduction is now a top three priority for more than half of respondents.
To execute these strategies, AmCham China member companies continue to invest in human capital and are increasingly localizing their management teams. This year, seven out of 10 member companies said that three-quarters of top country management teams are native Chinese.
Implications for business leaders
Despite the challenges, China remains an important market for most multinationals. From the survey results, there is a clear sense that companies are doing what they can to make the most of the situation. Instead of relying on a rapidly expanding Chinese economy to deliver sales growth and counting on low costs to keep profits high, US companies operating in China know that now they need to fight as hard or harder for sales and profit as they do in other parts of the world. In this new environment, companies need to develop a realistic view of their position and prospects and decide how much to invest in China vs. other global opportunities. Companies seeking profitable growth in China will need to innovate and differentiate their offerings to capture growth. They will also need to dedicate management attention to making operations more efficient and reducing costs. Delivering on this new agenda will require companies to ensure that their organizations are fine-tuned with the right talent and strategies to win in China.
Implications for policymakers
Members overwhelmingly report that a positive bilateral relationship between the US and China is critical for business. Yet 83% of respondents expect bilateral relations to remain the same or to deteriorate in 2017. The big question for many member companies as 2017 dawns is how the bilateral relationship may affect their business and what steps both governments will take to ensure a positive business environment.
Regardless of the bilateral relationship, the Chinese government could take concrete actions to encourage more investment from foreign companies. In particular, survey respondents note that they would significantly increase investment in China if the government were able to provide greater transparency and predictability in regulatory compliance, lift investment restrictions, and remove discriminatory barriers to foreign-invested companies.