US firms in China upbeat despite challenges

Despite China’s economic slowdown and increasing competition from Chinese domestic companies, most US businesses in China have remained profitable and optimistic about the market, according to the latest survey by the US-China Business Council.

The 2016 China Business Environment report, a USCBC annual membership survey, shows that 90 percent of companies are profitable, but at lower margins that reflect increasing competition, rising costs, regulatory impediments, and, in some sectors, overcapacity.

The 90 percent level is the second highest in the last five years, surpassed only by the 91 percent in 2013, according to the survey released on Tuesday.

About 30 percent of the companies expect increased profitability this year, while 35 percent expect the same as the previous year; the other 35 percent expect profitability to fall.

While China’s economic slowdown is impacting US company financials and market sentiment, some 62 percent of the surveyed companies anticipate continued growth this year, 21 percent expect no change, and 17 percent expect revenue to decline this year.

Sixty-five percent of companies surveyed reported revenue rose in 2015, while 10 percent saw no change, and 26 percent saw sales fall.

About 36 percent expect their head count to increase this year, while 44 percent expect no change; 20 percent forecast a contraction.

On the five-year outlook for business in China, optimism prevails. Seventy-two percent of companies are optimistic or somewhat optimistic. Only 10 percent are pessimistic or somewhat pessimistic.

Despite the headwinds of the economy and competition, of companies expect growth China remains a priority market for most American companies, according to the survey, which is in its 11th year.

About 17 percent say China is their companies’ top priority, while 67 percent say China is among the top five priorities; 12 percent consider China one of many priorities. Only 4 percent say China is not a priority.

A total of 85 percent of the companies say they did not reduce or stop planned investment in China in 2015.

About 73 percent believe China’s growth prospects to be better than other emerging markets, while 18 percent say the same. Only 9 percent say the prospects are worse.

Comparing the policy environment, about 34 percent of the companies say China is better than other emerging markets, while 33 percent say the same; 32 percent say it is worse.

A total of 44 percent say they are seeing significant or some benefits from China’s economic reforms, while 56 percent say they are not seeing benefits.

62 percent

The study also finds that of the top 10 challenges, such as intellectual property rights enforcement, transparency and licensing, six would be improved by a USChina Bilateral Investment Treaty.

Sandy Chu, principal and national leader of the China Business Group of Grant Thornton LLP, said the findings are fairly consistent with her company’s experience in helping US companies doing business in China.

“I am not surprised to see the survey found competition with Chinese companies is their top challenge,” Chu said.

She said China has succeeded in transforming itself from a low-cost manufacturing powerhouse into a highvalue service powerhouse.

“This is because the ‘competition’ here would refer to competition in high-value service space, i.e., consumption market,” she said.

Chu added that the Chinese market is the biggest draw for foreign investment. That means US investors have yet to effectively compete with Chinese companies.

“One seems to be key but yet less recognized/exercised perhaps by the US investors to be successful in the competition is to have a local management team on the ground who truly know and nderstand the market and to manage the investment,” she said.