Long-term perspective only hope for any multinational
Many multinational corporations (MNCs) which came to China during the first investment wave in the early 1980s tended to have unrealistic expectations of the mainland market.
'If every one of the 1.2 billion people uses our product' was an oft-quoted line of many investors to justify investment then, and the assumption was they could make quick returns.
Alas, most who invested on this basis have been sorely disappointed.
Fortunately, as a recent survey by United States consulting firm A.T. Kearney and The Economist Intelligence Unit found out, MNCs have lowered their expectations.
The survey, covering 67 foreign companies operating in China, said: 'Headquarters of several MNCs are becoming more patient in terms of when returns from their China investments will materialise. They have more realistic expectations compared to the first investment wave, when many overly optimistic projections failed to materialise.' Most MNCs today expect it will take three to four years to break even in China, concurrently it will take more than three years to reach global rates of return on investment.
Indeed, more than 60 per cent of respondents suggested it would take six to 10 years to achieve global rates of return. To reach long-term objectives, many MNCs appear willing to accept lower short-term performance.
The survey found that Beijing's plans to 'level the playing field' for foreign and domestic companies will continue to change significantly the competitive business environment.
The move has pros and cons for foreign investors: import tariffs are being cut, fees for power and land use will be equalised, further easing of investment spheres, uniform but higher taxes, and removal of tax incentives.
Despite the removal of some tax incentives, foreign investors are increasing their investments in China. They recognise that a China presence is an essential part of a global strategy, the market is becoming extremely difficult but challenging, and a long-term view is essential to success.
The survey said: 'The additional amount planned to be invested in China over the next five years is twice that already invested and committed. This additional investment will take the form of more joint ventures and/or wholly-foreign owned subsidiaries.' These additions, coupled with plans to increase significantly geographic coverage, will raise the management complexity of operating in China. Government actions to create a level-playing field will, in all likelihood, be the bumpiest road for the MNCs - a road which requires a long-term perspective.
So, quitting China may be an option few MNCs can afford to entertain.