Compliance becomes hotter issue for U.S. firms in China: report

Compliance becomes hotter issue for U.S. firms in China: report

Mon, Feb 24 2014

By Adam Jourdan

SHANGHAI (Reuters) – U.S. companies in China placed greater focus on compliance last year after several high profile probes into corruption and high pricing, but rising costs and a skills shortage remained their main concerns, the American Chamber of Commerce in Shanghai said in its annual report.

The handover of power to a new generation of Chinese leaders last year raised uncertainty among U.S. companies over the political environment, but they were less worried than earlier about the risk of a slowing Chinese economy, according to the report released on Tuesday.

China is the world’s second largest economy and posted 7.7 percent GDP growth in 2013, slow by Chinese standards but far quicker than stagnant growth in Europe and the United States.

Issues of corporate corruption caused ripples last year after a series of investigations against firms from British drugmaker GlaxoSmithKline Plc (GSK.L: QuoteProfileResearchStock Buzz) to U.S. milk powder maker Mead Johnson Nutrition Co (MJN.N: QuoteProfileResearchStock Buzz).

This pushed compliance up the agenda, with 44.2 percent of the roughly 400 firms polled saying there was a greater focus on this area last year, up from 36.6 percent who said the same in 2012. Over four in 10 said they would increase compliance spending over the next year.

“Despite optimism and growth, challenges in the business and regulatory environment in China continue to hinder business,” the report said.

U.S. firms turned attention from international corruption laws to China’s own domestic legislation, with 46.8 percent of firms saying it was the most important area of legal compliance. That was up markedly from 31.5 percent the year before.

USUAL SUSPECTS

The top five challenges cited by U.S. firms were still high costs, a skills gaps, competition from local rivals, an immature market and corruption.

Rising costs was cited by 89 percent of firms as a hindrance to their business in China last year.

Human resources was the second most cited problem, with rising wages, an ageing population, and greater social mobility making it more difficult to recruit and retain staff.

“The stand out in Asia is really China, where there is a consistent skills shortage,” Simon Lance, regional director for China at recruiting expert Hays Plc (HAYS.L: QuoteProfileResearchStock Buzz), told Reuters in an interview last week.

Slower Chinese growth meant that fewer firms reported a growth in annual sales, with 67 percent seeing an increase in revenue last year compared to 71 percent in 2012. This was the fourth year in a row the figure had fallen back.

However, profitability remained a bright spot, with 74 percent of firms in profit for the year, edging up slightly from a year before, according to the report.

Services overtook manufacturing for the first time as the main driver of sales, accounting for around 52 percent of firms’ revenues, up from 41 percent the year before. Manufacturing slipped 10 percentage points to 37 percent.

Concern over initial property rights (IPR), a long-running complaint from foreign firms in China, remained high on the agenda, although the proportion who said it hindered their business in the country fell from 63 percent to 56.3 percent.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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