China Business Environment 2011-2012

I have received an email from a subscriber who attended AmCham Shanghai presentation of its 2011-2012 China Business Report (315 US-based companies with operations in China surveyed). I share bellow what he felt were the main conclusions from the presentation but first I would like to thank him for taking the time to share this information:

 

1 China is a highly profitable market for those with a long term investment in it. 

I thought the profitability number (78 percent vs 79 percent last year) was rather high, but then looked at the length of time the survey respondents had had a physical presence in China – 80 percent of the companies surveyed have been in China for more than five years, 10 percent have over 20 years’ experience and only two percent of respondents have been in China for less than two years.

 

2 China is a maturing market.

Legal and regulatory challenges (those which are usually unique to China, in one way or another) are a constant. So progress on this is not being made (bad). But, the challenges US companies are more worried about now are “normal” business challenges – rising costs, scarce talent, growing local competition coming from the private sector.

China has become an essential market for multinationals, going beyond a mere supportive role for companies’ worldwide operations. In 2011, 66 percent of the companies report their revenue growth in China exceeded that of their operations worldwide.

 

3 In China for China

US companies are meeting these challenges by localising their China operations, and are increasingly focused on the domestic market – “in China for China”.

Some key figures to back this statement:

  • 58 percent of the companies produce goods or services for China as their primary strategy
  • 71 percent of companies sell and support products and services uniquely designed for the China market
  • 90 percent have expanded their operational footprints in China to include sales offices and research and development centers (R&D), in multiple locations outside Shanghai
  • 80 percent report “high” or “moderate” priority for staff localization
  • 61 percent report “high” or “moderate” priority for manufacturing localization

 

4 US companies in China are driving US exports

  • 62 percent of the companies report they import parts or finished goods from the U.S. into China
  • U.S. exports make up 32 percent of their China sales by value.

 

5 Short term optimism for China

Confidence is still relatively high. There is no evidence, from the survey outcomes, that US companies feel exposed to risks that have been talked about lately like those related to the housing market, the financial sector or to China’s reliance on exports to Europe.

What are your views?

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Top Legal / Regulatory Challenges in China

As I mentioned in one of my previous posts, AmCham Shanghai has released its 2011-2012 China Business Report, a detailed and comprehensive report that covers major issues companies face in China. Today I will focus on legal/regulatory challenges, as perceived by AmCham survey respondents (315 US-based companies with operations in China).

The report reminds us that China is not an easy place for business, and one of the reasons is the fact that the country’s legal framework is still in the process of being built. Even if the law is fully developed, the application and enforcement can be uneven, especially in areas outside Tier 1 cities (Shanghai, Beijing and Guangzhou). Bellow you may find the key legal/regulatory challenges identified ( % indicates that a challenge “seriously hinders” or “somehow hinders” business).

Key legal/regulatory challenges in China

1.Bureaucracy (74%)

2.Unclear regulatory environment (72%)

3.Lack of government transparency (67%)

4.Tax administration (66%)

5.Customs clearance delays (62%)

6.Customs and trade regulations (61%)

7.Difficulty enforcing contract terms (61%)

8.Obtaining required licenses (58%)

9.Difficulty in litigation (50%)

10.Domestic protectionism (between provinces) (49%)

11.Legal restrictions on market access (49%)

The list is topped by the same challenges we have seen in last year´s reports: bureaucracy, an unclear regulatory environment and a lack of government transparency. It is important to highlight that 71 percent of respondents say the regulatory environment in their industry has either “not changed” or “deteriorated” over the past year.

Responses to legal/regulatory challenges vary by industry but the less affected one seems to be the auto industries. As a well established industry in China( and a welcomed one) it does not so much perceive regulatory challenges as a major issue (it scores lower than any other on the question about challenges seriously hindering their business).

 Are these also your regulatory challenges?

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Top Business Challenges for Foreign Companies in China (2011-2012)

AmCham Shanghai has released its 2011-2012 China Business Report. The report insights are based on a survey conducted amongst some of its corporate members ( 315 US-based companies with operations in China participated in it).
I will share some of their key findings in the next few posts. Today I will focus on business challenges and highlight some news.

Key Business Challenges in China (%) (*)

  1. Rising Costs   (91%)

  2. Human Resource Constraints    (90%)

  3. Increasing Competition    (83%)

  4. Lack of Market Maturity    (73%)

  5. Corruption/Fraud   (61%)

  6. IP Infringements      (54%)

  7. Unfair procurement practices   (54%)

  8. Preference for Domestic Companies   (53%)

  9. Labour Unrest (e.g., from restructuring)  (37%)

  10. Lack of Infrastructures    (36%)

  11. Business Disputes    (27%)

 (*) % that answered that a challenge “seriously hinders” or “somehow hinders” their business

 It is difficult to compare these results to last year´s results because this time the challenges have been divided into regulatory/legal and business challenges while last year they were presented in a common list. Still there is something that clearly stands out: “Rising Costs”. Not mentioned last year in the top 10 challenges it makes now a strong appearance at the top of the list.

 Some of the biggest challenges presented last year (bureaucracy, unclear regulatory environment, lack of transparency) are still perceived as important issues and top the list of regulatory/legal challenges.

Coming soon, more on China challenges.

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Top Business Challenges for Foreign Companies in China

AmCham Shanghai has just released their 2010-2011 China Business Report survey. These are the top business challenges as perceived by US companies doing business in China (322 sample size):
1. Human Resources Constraints
2. Inconsistent Regulatory Interpretation
3. Unclear Regulations
4. Bureaucracy
5. Lack of Transparency
6. Intellectual Property Rights Infringement
7. Tax Administration
8. Domestic Protectionism
9. Difficulty Enforcing Contract Terms
10. Corruption

The companies interviewed belong to a wide range of sectors and have different sizes…. I was wondering, from the perspective of  entrepreneurs and SMEs, are these also your challenges? Which are your top ones?

US Companies Feel Positive about China

Today I attended a lunch organized by AmCham Shanghai to present their 2010-2011 China Business Report. It was a really interesting presentation and the survey brings, as in previous occasions, good insights on how US companies are performing and how they see their future ahead in China (I would imagine we could extrapolate a lot of those insights to other countries’ realities)

These are a few highlights of the survey results: (more to come)
-companies are not just doing well… they seem to be doing great “reporting all-time performance highs”
– 87% of the companies reported “revenue growth” (Vs.  47% in 2009)
– 79% reported being “very profitable” or “profitable” (Vs. 65 % in 2009)
– 61% reported market share gains (Vs. 40% in 2009)

And they feel the future ahead is equally bright- with 71% of the companies expecting increase revenue growths by more than 10% in 2011.

Having said that, China is still a challenging market, with a wide range of issues like HHRR constraints, lack of transparency, protectionism, IP risks… just to mention a few. But today I will finish the post on a positive note and will write about some of those challenges in future posts.

Business Environment for Foreign Companies in China

Asia Pacific Forum has just published an article I’ve written on the topic: “Business Environment for Foreign Companies in China”. The article deals with the fact that, although media has been portraying quite a negative picture of the business environment for foreign companies, a recent survey carried out by AmCham Shanghai shows foreign companies based here sound absolutely positive.

You can read the article here. !! Update: the link to this article is no longer available. You can read the original post bellow:

China Business Environment for Foreign Enterprises.
Media Perception not Shared by Foreign Companies Here.

There has been plenty of press coverage on the deterioration of business environment for foreign companies in China. In response, the American Chamber of Commerce in Shanghai took the initiative to conduct a “Hot Topic Survey” (March 24th-31st) on the “Business Climate in China- 2010 1st Quarter” to assess whether American companies felt the situation had changed in recent months. Good news are coming from the survey findings: companies based here do not seem to share these pessimistic views the press presents to us.

Some key findings from the survey:

  • 90% of companies feel their business has either improved or stayed the same in the last six months (sample size= 217)
  • 78% of companies feel business environment has either improved or stayed the same over the past six months (sample size= 218)
    • Even within the 22% that perceives situation to have worsened, 69% still feels that their business itself has improved or stayed the same!

  • 63% of companies have not changed their company’s plans in the last six months (sample size= 218)
    • Out of the 37% that changed them… more than 80% were actually increasing their activity in China (investment, manufacturing, procurement, R&D…)

So, if companies sound so undeniably positive why is the perception we get from the press so unmistakably negative?

I guess there are plenty of signs that are helping to build this feeling that things are going the wrong direction. Just to mention the most obvious ones, there has been a series of Government announcements that have got potential investors uneasy:

  • New regulations on Foreign Investment with its emphasis on welcome vs. unwanted investments (announcement highlights)
  • Tighter regulations affecting the Set Up of Representative Offices (regulations summary)
  • Tax Increases for Representative Offices (further info on the topic).
  • Indigenous Innovation Policy (which would discriminate in favor of Chinese technology when competing to access government procurement business )

But I must say that a good amount of this type of news is no news at all. There have been previous announcements on favored investment industries, R.O.s may be further restricted but WFOEs (Wholly Foreign Owned Enterprises) are easier and cheaper to set up than some years ago and the Indigenous Innovation Policy has already got modifications that improve the access of foreign companies to government procurement business (updates on the Indigenous Innovation Policy draft).

So, what is my take on all this? China has always been a challenging investment environment. And that is not going to change now, to make it easier for us, precisely when the country is in less need of investment. Announcements of the type mentioned above are always going to cause anxiety due to the uncertainty they bring about for these operating here or planning to set up in the future. But, China is still a market full of opportunities and growth rates that every economy has probably envied during the recent economic downturn. And we all want to get our share of it.

China National Indigenous Innovation Product Accreditation: Some Good News.

The Ministry of Science and Technology (MOST), National Development and Reform Commission, and Ministry of Finance have issued the Draft Notice Regarding the Launch of the National Indigenous Innovation Product Accreditation Work for 2010. The USCBC (US China Business Council) is providing an unofficial English translation of this draft in their website.

The USCBC also highlights, in a document that seeks its members’ comments, the main improvements that this new notice represent for foreign investment and the unsolved concerns.

Two clear wins in the requirements to qualify as indigenous innovation:

  1. Intellectual Property: moving from being based solely on IP developed and owned in China to allow products based on IP that has been licensed for use in China from overseas.
  2. Trademark registration: Trademarks and brands are no longer required to be first registered in China. Applicants must have exclusive rights to the product’s trademark, or have the right to use the trademark, in China.

Technology requirements are also more relaxed but the text is so vague that it feels less “scary” but not more clear.

And the main concern remains the possibility that foreign investment will still be discriminated, given that there is no amendment to the application form that inquires about the ability of the applicant’s product to substitute imports.

Foreign Investment: New Regulations…Now Issued.

The State Council, China’s Cabinet, released yesterday April 13th new regulations on overseas investment. You can find the announcement in the Chinese Government’s Official Web Portal (source: Xinhua).

The English website does not provide too much detailed information, so I’m still looking for an English translation of the Chinese text, but here you can find the main points covered in the release:

  • Foreign investment is welcome in high-tech industries, services sectors, energy-saving and environmental protection, but polluting and energy-gorging or projects in industries running at overcapacity are not wanted.
  • China will continue to support Chinese A-share listed companies in further introducing strategic investors from home and abroad, and standardize foreign companies’ investment in domestic securities and corporate merger and acquisition moves.
  • A national security examination mechanism will be built as soon as possible for foreign-funded companies’ merger and acquisition operation in China, according to the regulations.
  • Qualified foreign-funded companies are allowed to go public, issue corporate bonds or medium-term bills in China.
  • Multinationals are encouraged by the regulations to set up regional headquarters, research and development centers, procurement hubs, financial management and other functional offices in China.
  • Importing items for scientific and technological development by qualified foreign-funded R&D centers will be exempt from tariffs, importing value added tax and goods and services tax by the end of 2010, according to the regulations.
  • Foreign-funded enterprises are also encouraged to increase their investment in China’s central and western regions, particularly in environment friendly and labor-intensive companies

Foreign Investment in China: New Regulations Soon to Be Issued.

Worrying news for foreign investors arrive from the Annual Boao Forum for Asia (Hainan). Xinhua released an article last Saturday titled “China to unveil new rules on foreign investment” (10/04/2010). In this news story a deputy minister of the National Development and Reform Commission (NDRC), China’s top economic planning agency, announces that new regulations on attracting overseas investment will soon be issued. These are some of the key messages from the article:

  • “China still wants foreign investment in high-tech and services sectors, but polluting and energy-gorging projects are no longer welcomed”
  • “The rules would stipulate that China will more actively and efficiently encourage good foreign investment”
  • “We welcome foreign investment that is conducive to the transformation of the economic growth pattern”

According to this same source, a press conference to be held on Wednesday by the NDRC, the Information Office of the State Council and the Ministry of Commerce may throw more light on the policy details. I am eager to find out what “good investment” will mean.

This press release has also reminded me of a comment I posted just a few days back on the China Law Blog. In that post, Dan Harris was describing a trend identified by his law firm: “China’s local governments are more often delaying or denying applications for wholly foreign owned enterprises (WFOEs) and joint ventures”. My comment to that was a request to elaborate on that piece of info and I quote myself (comment #3 in that post): “… are those applications denied or delayed because they don’t fall into the currently favoured industries…”

What is your experience on this? Have you experience a change in attitude towards foreign investment?

Corporate Social Responsibility (CSR) and Labour Law Violations… Can Entrepreneurs and SMEs really do anything about it?

A few weeks back I started drafting a post about CSR and Labour Law Violations. The CSR topic is never off the table and at that time there were two triggers to this blog post idea. Apple had made it news again. I had been reading about it in local newspapers (Shanghai Daily_among others “Apple suppliers defy labor laws” 02/03/2010- sorry can’t provide link) and in some of the blogs I subscribe to. I especially recommend a very good post by All Roads Lead to China (Did Anyone Learn anything from Nike?).

The second trigger was an anecdote I heard from somebody connected to a big multinational settled in China that prides itself in taking CSR very seriously.  A Chinese employee was sent to a trade show looking for an item for a one-off promotion, so no big volumes involved. And, surprise, surprise! She just couldn’t find a supplier who would accept a written commitment to their CSR policy!

So, I started wondering, if big companies with enough negotiating power to impose their CSR standards clearly have problems keeping track of what their suppliers do or just can’t impose their terms unless they are backed by big purchase volumes… Is there anything entrepreneurs or SMEs can do?

I checked with a few entrepreneurs. The feedback was, as expected, not too encouraging. When you are struggling to start up a business, CSR may not be in your check list. For those who had given it a second thought, the feedback was that they had only encountered law-abiding factories…but that somehow did not feel too realistic to me…so my post got stuck there.

Today I decided to resurrect it because “I’ve seen light at the end of the tunnel”… or maybe just a tiny flash of light. I’ve come across a press release by AsiaInspection which shares some promising figures and insights based on 9.500 inspections they performed during the last quarter of 2009. Their article is titled “Importing Nations Leading China to Social Responsibility” and it highlights the fact that the Social Audits they were commissioned grew 75% during Q4 09 …The article is not clear, though, on how many of those 9.500 inspections were actually Social Audits (and I fear, most of those inspections would be shipment and production inspections), but a positive trend of that magnitude is still good news.

So now that I’ve recovered my enthusiasm, I will make a point to follow up on what the profile of these companies requesting social audits is and whether we can also find in the list committed entrepreneurs and SMEs.

Do you have some insights on this topic?