Multinationals take mature approach to emerging giant
An EIU report finds that foreign firms have overcome their inexperience and have begun to see profits
Tempered by experience, multinational companies are now approaching the China market with realism and careful strategic planning, according to an Economist Intelligence Unit (EIU) report.
The country was no longer seen merely as a cheap manufacturing base, nor as a limitless consumer market, but as a critical engine of growth that multinational companies could not afford to ignore.
The report, 'Coming of Age: Multinational Companies in China', draws on a survey conducted this year of 217 senior managers for multinational firms with operations in China. Of the respondents, 38 per cent were from companies with annual global revenues exceeding US$8 billion and almost 70 per cent represented firms with revenues of more than $1 billion.
The report said 50 per cent of respondents saw China as 'critical to global strategy' while 41 per cent said it was 'strategically important'. Almost 80 per cent said their global chief executive had travelled to China during the past year.
Early expectations of a market of one billion consumers had proved illusory but China nonetheless had a swelling middle class numbering in the tens of millions as well as a growing business-to-business market. As China offered both lucrative opportunities and daunting risks, only firms committed to long-term strategic planning were likely to succeed.
The report's release yesterday was hosted by the EIU's chief economist Robin Bew and the EIU's China economist Paul Cavey. Also present were representatives from DHL, KPMG and Monitor Group, who, along with Citigroup, are the principal sponsors of the report.
'Ten years ago, a lot of companies thought it was enough to sign a joint-venture agreement, set up a production plant and then leave it to someone junior,' Monitor Group vice-president Anthony May said. 'A lot of the strategic planning that goes on elsewhere is now just as relevant in China. That's something some [early market entrants] didn't think about.'
Head of Financial Advisory Services at KPMG China Paul Brough said: 'The main issues for our clients when investing there originally in the 1980s and 1990s were finding the right partner and actually making money in China.'
Multinationals had become more sophisticated and were finally beginning to post profits 'but they still face the day-to-day operational [challenges] - such as intellectual property rights violations and corruption', he added.
Other problems include a shortage of skilled labour, a tangle of red tape and, in many sectors, the absence of a level playing field.
Infrastructure has improved but the report said it had been overwhelmed by the recent upturn in economic activity. These issues affected all companies but they presented the most serious challenges to smaller foreign firms with little China-specific experience.
The report notes that China's authorities have relaxed regulations limiting foreign participation in the economy, making expansion through mergers and acquisitions an increasingly viable option. But corporations should do their due diligence before moving into China as the alternative was to 'marry in haste, repent at leisure', Mr Brough said.