February 20, 2009

Multinational Companies Strengthening Commitment to China Despite Economic Challenges, Finds New AmCham Shanghai / Booz & Company Study

While Reporting Manufacturing Cost Increases and Declining Sales, Many Companies See ‎Continued Opportunities in China and Plan to Expand Operations.

Rising costs, declining rates of domestic growth, and decreased demand for Chinese exports ‎are pressuring multinational corporations that operate in China. At the same time, according ‎to a study conducted jointly by the American Chamber of Commerce in Shanghai (AmCham ‎Shanghai) and management consulting firm Booz & Company, the global business ‎community increasingly views China as an essential player in an eventual turnaround. As a ‎result, multinational manufacturers have strengthened their commitment to China as a key ‎base of operations for Asia.‎

The survey of 108 foreign invested manufacturing companies operating in China found that ‎unemployment and softer consumer demand, especially from the developing middle class, ‎led to a decline in domestic sales and exports among 40 percent of survey respondents. Still, ‎the second annual “China Manufacturing Competitiveness 2008-2009” study found steady ‎evolution in the manufacturing sector and a resounding commitment among multinational ‎corporations (MNCs) to remain in China and expand operations.‎

Despite the challenges of the downturn and steadily increasing manufacturing costs, the ‎MNCs surveyed were fairly optimistic about China’s efforts to position itself as a world-class ‎manufacturing center. Government focus on manufacturing infrastructure development and ‎product safety improvement, coupled with more MNCs upgrading their manufacturing ‎facilities, has reduced interest in locating manufacturing operations in lower-cost countries ‎like India and Vietnam.‎

‎“China is not immune to the pressures of the recession, and many operations here are ‎definitely starting to feel pain, like most everyone in the world,” said Kaj Grichnik, Partner, ‎Booz & Company. “However, even though costs of operation in China have risen, ‎government investments in infrastructure and product safety are paying off, as ‎manufacturers increasingly commit to professionalizing their operations here. And so, we ‎may also see a beneficial impact of the crisis: more attention to how we manufacture in China ‎versus how much we manufacture.”‎

Brenda Foster, President, AmCham Shanghai, said, “China’s focus on meeting global ‎manufacturing needs and trade benchmarks in spite of the economic downturn has led to ‎remarkable changes among manufacturers, both in technological improvements and in their ‎market opportunities, both domestically and abroad.” Continued Foster, “We’re seeing a ‎deeper commitment among multinationals to make China the focus of their Asian presence.”‎

Easing cost pressures and continuing improvement of China’s image and ability to meet ‎global production and trade benchmarks were recurring areas of interest among survey ‎respondents. Among the study’s key findings:‎

  • Effects of the downturn: In spite of prospects for robust growth, the worldwide economic ‎downturn has negatively impacted China’s domestic market. Consumer demand in Western ‎countries has tumbled, which has placed downward pressure on the country’s export market, ‎while domestic sales are also softening significantly, leading to a significant decline in ‎domestic sales and exports. As a result, the majority of respondents felt it was important for ‎the Chinese government to ease cost pressure on local manufacturers, in addition to focusing ‎on worker training, education, and job creation.‎

  • Major challenges in the manufacturing sector: Nearly three-fourths (73 percent) of ‎respondents said that enforcing intellectual property protection was “important” or “very ‎important.” Other manufacturing sector issues ranked similarly include improving education ‎and productivity of Chinese labor (67 percent), increasing quality and safety standards for ‎Chinese-made products (66 percent), and welcoming foreign investment (62 percent). ‎Respondents reported that the Chinese government has made noticeable progress on ‎improving manufacturing infrastructure and incremental progress on protecting intellectual ‎property rights.‎

  • Committed to China: Despite the downturn, doing business in China is becoming more ‎expensive. However, even as companies report rising costs in China—by as much as 15 ‎percent this year compared to 10 percent last year, centered primarily on labor and ‎management—fewer companies expressed an interest in relocating their manufacturing ‎facilities out of China in the next five years (10 percent this year vs. 17 percent last year). The ‎number of companies who expressed concern about China losing its competitive edge to ‎lower-cost countries like India and Vietnam fell by more than half. Nearly 50 percent of ‎respondents expressed an interest in growing their mainland China production capacity over ‎the next couple of years.‎

  • Best practices are no longer a luxury: This year’s survey incorporated new questions about ‎implementing production technology and found that nearly 25 percent of respondents were ‎upgrading their Chinese facilities with state-of-the-art technology. At the same time, the ‎Chinese government has made efforts to improve industrial infrastructure, as it continues its ‎quest to become a higher-value manufacturing location. Overall, this has led to a significant ‎trend in the Chinese manufacturing sector to incorporate greater innovation across the board, ‎ultimately resulting in greater performance and competitive advantage. Best practices, such ‎as advanced statistical forecasting, lean systems, and optimized product flows are more ‎prevalent than ever before with 39 percent of companies adopting some aspect of these ‎practices, vs. 27 percent last year.‎

  • Success lies in China’s duality: The most successful MNCs harness the dual opportunities of ‎China as a source of exports as well as a huge domestic market, compared to their ‎competitors whose narrower objectives were typically either taking advantage of labor ‎advantages on a limited scale or only importing products into China’s growing domestic ‎market. A dual strategy—pursued by 57 percent of respondents, up from 47percent a year ‎ago—integrates both sales and sourcing strategies. The study also found that key ‎opportunities for MNCs in bolstering the soft domestic market include expanding product and service offerings to meet middle- and local-market demand.


Study Implications

According to Booz & Company and AmCham Shanghai, the survey findings indicate that ‎developing strong manufacturing capabilities in China is central to MNCs achieving a ‎stronger competitive position across their global supply networks, particularly in the current ‎economic climate. For companies that are already on this path, the imperative is to stay ‎focused on intensifying their efforts in China to strengthen what they have started. For ‎companies just realizing China’s role strategically and operationally in their businesses, now ‎is the time to develop a robust China agenda and assess the potential for a dual strategy.‎

Further, determining the right manufacturing strategy in China is strongly related to the ‎advantaged capabilities that companies strive to develop. Across a broad set of ‎manufacturing best practices, the most successful companies do not try to adopt all ‎capabilities; rather, they focus only on those practices that are most relevant to how they seek ‎to drive success in the market.‎


Study Methodology

Using a combination of online surveys, on-site visits, and in-depth interviews, the American ‎Chamber of Commerce in Shanghai (AmCham Shanghai) and Booz & Company surveyed ‎‎108 manufacturing companies doing business in China about their perceptions of China as ‎both a sales market and production center for domestic distribution and exports. As the ‎global economic downturn worsened in November and December, follow-up questions were ‎posed to these companies to gauge the impact of the worldwide recession on their Chinese strategies. Of the companies surveyed, 82 percent were wholly owned by foreigners, ‎‎11 percent were joint ventures between multinationals and Chinese partners, and 7 percent ‎were categorized as "other."‎

The manufacturers' industries included consumer, industrial, healthcare, and materials. ‎About 40 percent of the respondents have an additional major presence in China beyond their ‎manufacturing footprints, including representative offices, regional or global headquarters, ‎regional or global procurement centers, and regional or global research and development ‎centers.‎