Commentary
The first quarter of 2016 saw a series of updated survey reports released from organisations such as the American Chamber of Commerce in Shanghai and the Economist Corporate Network (ECN). The data therein has been gathered from SME/MNC that are trading and doing in business in China. New Zealand companies operating their own Wholly Foreign Owned Enterprise (WFOE) in China and/or simply trading with third party distributors can use the results to benchmark operating performance and calibrate expectations for the year ahead. Selected points of interest are summarised below:
Revenues and Profits
• 71% remain profitable but revenue growth and investment levels are slowing for 2015 and 2016. 61% reported revenue growth for 2015, a significant decrease from the 2014 level of 75%.
• The number of companies with declining revenues more than doubled to 23% from last year’s 11%, with the manufacturing sector suffering the most.
• Subsidiaries in China feel that headquarters have comparatively unrealistic growth expectations, so strong communication from China back to the home office is vital.
• Companies are focused on driving efficiencies and deploying technology in order to retain positive margins.
Investment expansion
• 81% plan to increase their investment in 2016, but with greater caution across all industries.
• Companies are customizing products and services for the China market and would do more, save for lingering intellectual property right protection concerns, particularly in research and development.
• Whilst most companies are still planning to increase investment in China, research and development in China still remains small relative to overall global research and development investments.
• China’s e-commerce market is still largely untapped and companies must build up local capabilities, embrace a range of platforms and respond more quickly.
• Regionally, Kuala Lumpur and Beijing are going backwards as investment/regional hubs due to issues around pollution and traffic congestion; Singapore and Shanghai remain positive destinations when operating regional hubs.
Doing business challenges
• Costs, domestic competition and economic slowdown are seen as key risks for 2016.
• New issues such as Internet quality, data security and protection of commercial secrets were also identified as significant challenges.
• In terms of longer term risks, competition from China’s private companies is viewed as the number one disrupter to foreign companies over the next five years.
• Key reforms sought by businesses included strengthened legal institutions, streamlining of administrative approvals and taxation, and elimination of market access restrictions.
• Anti-corruption efforts are generally viewed as positive/neutral on most businesses, but a sense of bias against foreign investors lingers.
Talent management
• Salaries are expected to increase 6.9% from 2015 to 2019, which is a growth rate faster than GDP (no doubt a sector specific story will apply).
• The 2016 Hays Asia Salary Guide provides useful recruitment trends and other salary data can be found for people working in sales and marking, supply-chain, HR, and office professionals.
• About 70% of companies have an employee turnover rate of 15% or lower.
• Layoffs are well under way in the manufacturing sector.
Summary
The experience of companies in China increasingly varies significantly by industry and for different reasons. Similarly, expectations for sales growth and profit margin are likewise a sector specific story. Overall, and looking long term to 2020, 80% of companies maintain an optimistic or very optimistic outlook. Whilst this is still high, it does nevertheless represent a drop on prior years.
For more information about the work NZTE is doing to help companies increase their profiles in China, and other markets, visit www.nzte.govt.nz.New Zealand Trade and Enterprise is New Zealand’s international business development agency.
By Damon Paling, NZTE Trade Commissioner, Shanghai
Damon Paling is based in Shanghai as an NZTE Trade Commissioner.
Mar 5, 2016