Feature: Business Environment
Companies Speak: The State of US Business in China
The US-China Business Council's annual membership survey shows US companies gain in China, but still face hurdles
by US-China Business Council staff
Each year the US-China Business Council (USCBC), publisher of the CBR, surveys its members to better understand their perspectives on the operating and investment climate in China, as well as China's progress in implementing its World Trade Organization (WTO) commitments.
This year's USCBC Member Priorities Survey results counter several common misperceptions about US companies operating in China:
- Eighty-one percent of companies said that their China operations are profitable. In addition, more than half said that profitability rates for their China operations meet or exceed their company's global profit margins.
- Most US investment in China is in wholly foreign- owned enterprises, not joint ventures with Chinese partners.
- USCBC member companies invest in China primarily to serve the Chinese domestic market, not export back to the United States. Fifty-seven percent of the respondents said that their main investment objective was to access the China market. Only 18 percent invest in China as an export platform to the US market. The remainder export to other countries.
The survey reveals several important improvements in the operating environment:
- US companies are building their sales presence in China by implementing newly granted distribution rights—a key market-opening measure.
- China's WTO entry and mandated market openings have clearly benefited US companies (see below).
- Ninety-seven percent of respondents are optimistic or somewhat optimistic about the prospects of their China business over the next five years.
The survey also shows, however, that significant operating barriers remain, and China has not implemented all of its WTO obligations.
Top operating issues in China
Since China's 2001 WTO entry, USCBC has regularly asked its members to identify their top operating issues in China. As China's market openings have proceeded, the ranking of concerns has shifted frequently, showing that some issues have been resolved and new problems have emerged. In 2006, companies listed the following as their top 10 issues, ranked in order of importance (see Figure).
Human resources
USCBC members, for the first time, ranked a nonregulatory matter as their top operating issue in China: recruiting and retaining qualified workers. In China's rapidly growing economy, demand for talented workers is outstripping supply, resulting in significant challenges for companies (see the CBR March-April 2006, p.19). More than half of the respondents indicated that recruiting and retaining employees had become more difficult over the past year or that they had seen new problems arise. In particular, companies have difficulty filling mid-level management positions. In 2005, human resources ranked as the fourth-most important concern.
Administrative licensing and business approvals
Although in previous surveys respondents had not listed securing administrative licenses and business approvals among their top 10 issues, the challenges in navigating China's licensing and regulatory procedures are widespread and have existed for years. Concerns in this area cover almost all sectors and include the approval of various types of licenses, certifications, and registrations. Unclear procedures for foreign-invested enterprise (FIE) liaison offices have also created confusion. More than two-thirds of the respondents indicated their problems in this area were unchanged or had even deteriorated in the previous year, though 26 percent noted some progress.
Intellectual property rights enforcement
Intellectual property rights (IPR) enforcement has appeared in USCBC members' top 10 issues consistently for the past four years. IPR protection's dip in this year's rankings may reflect the greater immediate concerns on the human resources and licensing fronts. It may also reflect the business community's view that the PRC central government now acknowledges the importance of IPR enforcement and is taking steps to address it, although implementation problems remain at local levels. For the second straight year, most respondents (57 percent) reported that China's IPR enforcement had remained unchanged, though 33 percent reported some progress. The final 10 percent of respondents said enforcement had deteriorated. These results are slightly more positive than in 2005, when 59 percent of respondents reported no change in China's IPR enforcement, 26 percent noted some improvement, and 11 percent indicated deterioration.
The survey also asked respondents their views of the April 2006 rules on the transfer of IPR cases for criminal prosecution. Thirty-five percent indicated that these rules, plus the Supreme People's Court 2004 judicial interpretation on IPR, had not improved the prospects for criminal prosecution of IPR violations. Thirteen percent of companies noted that it was easier to obtain criminal prosecutions.
The IPR legal framework—as distinct from the enforcement of those laws—ranked among the top 10 concerns in 2003, 2004, and 2005, but fell to eleventh place in the 2006 survey, reflecting continuing movement to create and strengthen IPR laws and regulations.
Competition and overcapacity
Competition and overcapacity in the market, another nonregulatory issue, is a new top issue. Fifty-two percent of respondents assessed the situation as unchanged since 2005, but just over 40 percent said the situation had worsened in the past year. Overcapacity plagues a variety of sectors, ranging from construction and autos to steel and cement, fueled to a great extent by China's government policies and partially reformed financial sector.
Transparency
Transparency generally refers to the availability of necessary information to evaluate the costs and opportunities of doing business in a market. In practice, that means an open and accessible government decisionmaking and rulemaking process. In such a system, regulations are published for comment before implementation, and suggested modifications are factored into rules before they are finalized.
Transparency, which has made the list of top 10 issues every year that USCBC has surveyed its members, remains a top problem for company operations in China. Almost 60 percent of those surveyed in 2006 said no progress had been made in improving transparency over the past year. Another 12 percent noted deterioration or new difficulties, including persistent problems with inadequate public comment periods on proposed rules and regulations that have been implemented but never published.
Standards setting
The ability to get information on the setting of China's product and technology standards, and to participate in and influence standards setting, is a central part of navigating any market. In China, that ability is frequently impeded because of an opaque standards-setting process and the use of unique domestic standards that put foreign companies at a disadvantage. Only 8 percent of respondents noted improvements in these areas, while 12 percent identified deterioration or new problems since last year. The great majority of respondents reported no changes.
The survey asked respondents about their ability to participate in China's standards-setting process. Only 8 percent of respondents described their ability to participate in standards setting as "good" (liang 
). Thirty-eight percent evaluated their participation as "fair" (yi ban 
) indicating that they have some difficulty in getting information on the processes and that they are only occasionally included in standards setting. Nearly a quarter view the standards-setting process as "poor" (cha 
), noting that they are excluded entirely from the process.
Distribution rights
In a positive development for US businesses in China, distribution rights—arguably the most important of China's WTO entry obligations—dropped from first and second place in 2004 and 2005, respectively, to seventh place in 2006. "Distribution rights" refers to a foreign company's right to sell in China products it imports or sources from third parties; previously, foreign companies were required to use domestic import-export agents and distributors for their imported products. Fifty-seven percent of respondents said the implementation of distribution rights had improved in the past year, reflecting the resolution of licensing issues. Another 33 percent felt the situation was unchanged from 2005, and only 10 percent identified new problems.
US visas
One US domestic policy issue ranked among the respondents' top concerns: difficulties in securing US visas for PRC-national employees, partners, and customers. Half of this year's respondents reported deterioration in their ability to obtain visas, and another 4 percent noted new problems. About one-third viewed the visa approval process as unchanged, and only 15 percent said there had been improvements in the past year.
National treatment
Nondiscrimination and national treatment ranked among the top 10 issues for the first time since 2003, when it also ranked ninth. Respondents said China has failed to meet the basic WTO requirement of treating foreign companies equally with domestic ones. As with transparency and standards, the lack of national treatment for foreign companies operating in China prevents them from competing on a level playing field. Thirty-five percent said the situation had deteriorated in the past year, while 8 percent noted new problems, ranging from ambiguous administrative requirements on foreign firms and differential tax treatment to local protectionism.
Market access in services
Rounding out the top 10 issues is market access in services, dropping to tenth from fifth in 2005. The successful implementation of distribution rights and progress on other service sector openings likely caused this drop. Nonetheless, 67 percent of companies reported no progress on the issue since 2005, with almost a third reporting deterioration, reflecting the fact that barriers still exist. These include restrictions on foreign law firms operating in China and on Chinese lawyers practicing with foreign law firms, limited access for foreign films, restrictions in the telecom sector, ownership caps that require partnerships with Chinese companies, and limits on foreign investment in certain sectors.
WTO impact and implementation
As did previous surveys, the 2006 survey polled companies about the impact of China's WTO entry on their China operations and their assessment of China's progress in fulfilling its WTO commitments.
General views of WTO entry
As China completes its fifth year in the WTO, it has already implemented many of the mandated market opening commitments. Respondents were asked whether China's WTO accession had been relevant to their companies. Eighty-two percent affirmed the importance of WTO market openings, up from 75 percent in 2005. The remaining 18 percent were equally divided among respondents who said WTO was irrelevant and those whose primary business objectives are outside the scope of China's WTO accession agreement.
Respondents were also asked to evaluate China's record in implementing its WTO commitments. As in 2005, the majority of respondents said China had done a "fair" (yi ban ) (45 percent) or "good" (liang ) (38 percent) job at implementing its WTO commitments. In last year's survey, 55 percent of respondents gave China a "fair" grade, and 38 percent rated it as "good." Four percent of respondents gave China an "excellent" (you 
) grade for implementing its commitments, up from zero in 2005, and a final 5 percent rated China's efforts as "poor" (cha ), the same as in 2005.
Most important WTO commitments
As in 2005, respondents were asked to identify the most important WTO commitment China has implemented (see Table 1). Reflecting progress made since the last survey was conducted, trading and distribution rights were rated number one. Second in importance was market access, followed by tariff reductions and the lifting of foreign ownership and investment restrictions. In 2005, the top-ranked commitments were tariff reductions, financial services, trading and distribution rights, IPR enforcement, and foreign ownership and investment.
Most significant WTO implementation shortfall
The survey asked respondents to identify the issues that China had not implemented in accordance with its WTO accession agreement (see Table 2). Companies cited inadequate IPR protection as their top concern, followed by financial services market openings, where foreign banks, insurance companies, and securities firms still face restrictions. Rounding out the top five concerns were transparency, local content requirements, and national treatment. In 2005, the top-ranked concerns were trading and distribution rights, IPR enforcement, local content requirements, market access, and WTO commitments whose deadlines for implementation had not yet arrived.
For the full USCBC report, visit www.uschina.org.
Respondent Demographics
Most of the 112 US-China Business Council (USCBC) members who responded to the 2006 survey were based in China (62 percent). Another 34 percent were based in the United States, and the remaining respondents were based in Hong Kong, Japan, or Singapore. Reflecting the general diversity of USCBC's membership, respondents hailed from a variety of sectors and were evenly split between manufacturing and services, with the balance consisting of energy, agriculture, and high-tech companies. The vast majority (81 percent) of respondents have more than 10 years of operating experience in China.
USCBC companies continue to expand their China-based workforces as their businesses there develop. Eight percent of respondents employ more than 10,000 workers in China, up from 5 percent in 2005. Twenty-eight percent have between 1,000 and 10,000 employees, up from 23 percent last year. Nearly two-thirds of respondents employ fewer than 1,000 workers in China. Though this figure is down from 70 percent in 2005, it nonetheless reflects that many companies are still in the early stages of building their businesses in the country.
US companies are taking advantage of the increasing variety of options for structuring their operations in China as the country further opens its economy to foreign participation. To gauge this development, the survey asked respondents about the types of legal entities their companies have in China. The top legal vehicles were consistent with the 2005 results: wholly foreign-owned enterprises (23 percent), representative offices (18 percent), and joint ventures (17 percent). An additional option in this year's survey, regional or branch offices, ranked fourth (14 percent). Other investment vehicles, such as holding companies, regional headquarters, and research and development centers, were less common.
—US-China Business Council staff
| Table 1: Most Significant WTO Commitment Implemented (%) |
| Trading/distribution rights |
25 |
| Market access |
21 |
| Tariff/duty reductions |
16 |
| Foreign ownership/investment |
10 |
| Financial services market openings |
9 |
| Direct sales |
3 |
| Express delivery services |
3 |
| Government procurement |
3 |
| Other |
10 |
| Table 2: Most Significant WTO Commitment Failed to Implement (%) |
| Intellectual property rights |
31 |
| Financial services |
14 |
| Transparency |
12 |
| Local content requirements |
5 |
| National treatment |
5 |
| Tariff/duty reductions |
5 |
| Trading/distribution rights |
5 |
| Construction and engineering |
3 |
| Direct selling |
3 |
| Government procurement |
3 |
| Other |
14 |
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