US companies in China: tougher times

US companies in China: tougher times

Feb 28, 2013 11:30am by Stefan Wagstyl

After a string of cautious statements on China from US companies ranging from Caterpillar to Yum!Foods, the American Chamber of Commerce in Shanghai has declared that the days of relentless sales and rising profits are over.

The “new normal” is one of slower economic growth, rising costs, skilled labour shortages and an increasingly competitive business environment. Tougher times “will be the rule rather than the exception in the years ahead,” AmCham says in a report.

In a survey of US companies’ financial performance for 2012 published on Thursday, the chamber says they “continued to perform strongly but for the second year in a row experienced a dip in top-line performance indicators – profitability, revenue and operating margins.”

The chamber said:

Although U.S. companies in China continue to find success, a leveling off in performance reflects not only an increasingly complex and challenging domestic market but a Chinese economy slowed by China’s continued transition away from export and investment led expansion to one sustained by consumption and services.

It added:

The reality of the new normal is U.S. managers should no longer expect China’s economy to grow at the same double-digit rates of years past. Steadily rising costs, human resource constraints and an increasingly competitive business environment – issues that continue to be top challenges for U.S. companies in 2012 – will also be the rule rather than the exception in the years ahead.

But don’t despair, says AmCham. US companies are responding to China’s transition from export-led growth, with nearly two thirds of those surveyed saying they were focusing on the domestic market. A record 91 per cent said they were “optimistic” or “slightly optimistic” about the Middle Kingdom.

While manufacturers did better in profit terms in 2012 than retailers and service companies, the second two groups are more positive about the future than the first.

Moreover, 40 per cent of US companies still enjoy better margins in China than elsewhere, so they are entering the coming years of tougher competition from a strong position.

But while US groups are ready for the challenges of rising costs, labour shortages and increasing competition, they may struggle with an “increasingly challenging” regulatory/policy framework.

The report warns:

A majority of U.S. managers cited what they observe as uneven enforcement of laws and regulations that favor local Chinese companies in their industry as a hindrance to their business. Perhaps most concerning, in this year’s survey more than two-thirds of companies said the regulatory environment was either “not improving” or “deteriorating,” a consistent trend over the previous three years.

The chamber doesn’t mince words:

U.S. companies operate in accordance with U.S. law, adhere to strict internal rules and take seriously their obligation to act in strict compliance with local laws. In some cases, the same cannot be said of their domestic competitors.

The Chinese authorities, says AmCham, must get on and do something about it. Otherwise US companies will look at going elsewhere. Or as the report puts it more politely: “As the Asia-Pacific market as a whole continues to develop, American businesspeople will undoubtedly evaluate other market opportunities for their companies.”