Many companies are counting on China to deliver more
With leading economies of the world in dire shape, multinational companies (MNCs) are counting on China to deliver more of their global revenues and they believe that Beijing’s policies to raise incomes and hence consumption will create huge markets for them. At the same time, however, they are facing an increasingly difficult operating environment with competition increasing, their traditional advantages eroding and policies on technology transfer causing confusion and concern. These are among the key findings of Multinational companies and China: What future? an Economist Intelligence Unit research report released today. The report is based on a survey of 328 senior executives at non-Chinese multinationals[1], as well as in-depth interviews with executives of major foreign multinationals, business scholars and market analysts. The report is sponsored by CICC.
Among the key findings:
- Multinationals, and large companies in particular, are clearly counting on China to deliver more revenue. Almost half (49%) of all the survey respondents said that the fallout from the global financial crisis has raised their companies’ expectations for China. Among larger companies (global revenues of more than US$5bn), the figure is 73%. But not all companies are planning to invest more in order to increase returns. Among the larger companies counting on China to deliver more, half are counting on existing operations to deliver more growth.
- Today, China is still a relatively small market for many multinationals, but this is expected to change quickly. Analysis of financial results for 70 MNCs[2] showed that in 2010 only for ten did China account for more than 20% of their global revenues. For more than half, China accounted for less than 10% of global revenues. Companies do expect this to change. Only 8% of our survey respondents said China is already their biggest market, but another 17% expect it to become so in less than five years, while another 21% expect this to happen in 5-10 years.
- China’s consumption story is driving MNCs’ strategy. Among survey respondents, 58% said the Chinese government’s drive to raise incomes and shift growth towards domestic consumption will have the biggest impact on their China strategy, while 56% said that growth prospects for their industry was the key driver of their China strategy.
- While MNCs are bullish, there are signs that some are hedging their bets. The exuberance of consumer goods firms aside, China seems to have stalled, rather than risen, on MNCs’ agendas. The share of survey respondents reporting that their headquarters views China as “critical to global strategy” was 37%. This is down from 53% reported in a similar survey conducted in 2004.[3] But this does not mean that China is not an important market for many firms. A further 33% of respondents said that while it is not critical, it is strategically important.
- There are signs that foreign MNCs’ traditional competitive advantages are beginning to erode in China. It is often taken as fact that multinationals have superior technology and better brand management, and hold more appeal for talented workers. There are signs that all of these advantages are beginning to erode in China. Even among the large companies surveyed for this report (global revenues of more than US$5bn), only one-quarter felt they have superior technology or a stronger brand, with these figures were even lower for the sample as a whole. Human-resources consultancies report that local talent is increasingly gravitating towards mainland companies.
- China’s policies aimed at encouraging local innovation are causing a great deal of concern among multinationals. Among our survey respondents, 49% were concerned or very concerned that they would be forced to give up their intellectual property in exchange for market access. Among big companies the figure was 52%. And 46% of respondents said that China’s regulatory environment and industrial policies were likely to have a big impact on their China strategy in the next five years.
- Large multinationals are beginning to reorganise to match the importance being placed on China. Among large companies responding to our survey, only 8% said that their China CEO sits on the global company board (for 45%, the China CEO reports into regional headquarters). However, 40% of large companies said that they had posted very senior executives to greater China, a move aimed at improving understanding of China and speeding decision making at headquarters.
- While planning how to win in China, multinationals are beginning to think how they can leverage their relationships there to compete elsewhere in the world. While most arrangements seem to involve cooperative agreements with Chinese partners on the use of specific products in other markets, there are signs that this could be taken a step further to include joint ventures in third countries.
Multinationals and China: What future?
is available free of charge at:
http://www.businessresearch.eiu.com/multinational-companies-and-china.html
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The Economist Intelligence Unit (EIU) is the world's leading resource for economic and business research, forecasting and analysis. It provides accurate and impartial intelligence for companies, government agencies, financial institutions and academic organisations around the globe, inspiring business leaders to act with confidence since 1946. EIU products include its flagship Country Reports service, providing political and economic analysis for 195 countries, and a portfolio of subscription-based data and forecasting services. The company also undertakes bespoke research and analysis projects on individual markets and business sectors. More information is available at www.eiu.com or follow us on www.twitter.com/theeiu
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About CICC
China International Capital Corporation Limited (CICC) is China’s first joint venture investment bank. With a unique combination of expertise in both the domestic and global capital markets, extensive industry know-how, in-depth understanding of China and the international business environment, CICC is committed to establishing long-term relationships with clients by offering world-class and innovative financial services and providing them strategic advice. Since its inception in 1995, CICC’s outstanding underwriting achievements in many key strategic sectors have made it an unparalleled arranger of global offerings for China’s state-owned enterprises (SOEs). As milestones for CICC and even China’s investment banking industry, many of these successful deals have won CICC domestic and international awards from key media, making CICC an industry leader. CICC has strong expertise in domestic and overseas equity underwriting, securities brokerage, asset management, fixed income and market research, and is the key choice of major industry players in China.
