Abstract

This year’s Business Climate Survey provides a timely overview of the performance of AmCham China member companies in 2015, their plans for future growth in China, and their assessments of China’s economic, business, and regulatory environment.

2015 Performance Snapshot: A difficult year for growth and profits

Although many member companies continued to grow in 2015, almost one in four companies reported declining revenues and another one in five companies reported flat revenues compared with 2014. Companies in the Services sector were most likely to grow, while the Industrial & Resources sector had the toughest year, with almost half of companies reporting declining revenues. At the same time, the proportion of companies characterizing their business as financially profitable in 2015 fell to 64%, the lowest level in the last five years.

Business Climate Challenges: Economic, Regulatory and HR concerns top of mind

China’s economic challenges are clearly impacting member companies. For example, industry overcapacity was reported as a top five business challenge. Although many respondents remain optimistic about China’s domestic market growth potential, almost half of survey respondents expect that China’s overall GDP growth in 2016 will be lower than 6.25%.

However, in addition to the economic challenges, member companies report the regulatory environment as being a key factor hindering their ability to invest and grow. For the first time in five years, member companies cited “inconsistent regulatory interpretation and unclear laws” as the top business challenge. “Obtaining required licenses” also returned to the list of top five business challenges.

Human resources issues continue to be challenging, with labor costs and a shortage of qualified employees both making the list of top five challenges. However, there are signs of progress. For example, labor cost increases may be decelerating, with more than 80% of companies expecting average labor cost per employee to increase by less than 10% in 2016.

Outlook on investment: China remains a top priority, but fewer companies increasing investment levels in China

China remains a top three investment priority for six out of ten member companies. This, however, is significantly below a high point in the 2012 report when almost eight out of ten companies named China a top three investment priority. Consumer and Services companies are most likely to prioritize China in growth plans, while Industrial & Resources companies are the least likely.

Approximately one-third of member companies are not planning to increase their investments in China during 2016. Slower economic growth and rising costs are the most commonly cited reasons for decreasing investment levels. However, market access barriers are the primary barrier for 1 of 6 respondents (most frequently cited by those in the Technology & R&D Intensive and Services sectors).

Survey respondents have also moved or are considering moving capacity outside of China. By the end of 2015, 25% of respondents have either already moved or are planning to move capacity outside of China. While almost half of respondents are moving capacity to “Developing Asia,” almost 40% report moving capacity to the US, Canada or Mexico.

Within China, member companies are prioritizing investments for the Northern and Eastern Coast regions, followed by the Southern Coast and the Southwest. Although respondents see significant economic growth opportunities in the southwest, they rate the region relatively lower on ease of doing business.

Growth opportunities: Member companies prioritizing innovation

Innovation is an important business priority for most member companies. More than nine in ten respondents believe that innovation in China will be important to their company’s future growth in China. Respondents also report that brands, technology and IP, and development and innovation are among the top five competitive advantages member companies have relative to domestic competitors. Innovation can help capture growth opportunities in new customer segments and is required for launching new products or services, both of which are listed as primary business objectives for most member companies. This innovation is increasingly designed for China, with 40% of companies reporting that more than half of their revenues come from products or services designed, developed or tailored to local requirements, a significant increase from 32% last year.

AmCham China member companies are also innovating in line with changes in the technology environment. Respondents report that “digitalization” will be a top priority, with more than 70% rating digitalization of sales, marketing, distribution and customer relationship management as very or extremely important to enhancing their competitiveness. This is consistent with companies in most sectors reporting that China’s “Internet +” and the growth of e-commerce are important growth opportunities for them.

In order to innovate in China, member companies are hiring domestically and investing in employee training. Hiring talent and developing talent are also reflected as the top two HR priorities for all companies in 2016. In addition, more than 40% of companies with 250 or more employees in China have established an R&D center in China to support their innovation strategies. Furthermore one-third of respondents have established partnerships with Chinese organizations or companies.