Business Environment

US Companies' China Outlook

The USCBC's annual membership survey results show US companies remain optimistic but face operational challenges and protectionist threats.

by US-China Business Council staff

Each year the US-China Business Council (USCBC) 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 (see Respondent Demographics). The 2007 survey results show that many US companies doing business in China benefit from the market openings that were created by China's WTO membership. The majority of companies report that they are expanding their business in China, with increased revenues, profitability, and investment (see US Companies Take Advantage of China's Market Openings).

At the same time, however, the majority of respondents report that China's business environment remains challenging and express concerns about the future direction of China's trade and investment policies. The ranking of top issues by USCBC's membership remained largely the same as last year. Companies continue to encounter difficulties finding qualified personnel, obtaining business licenses in many sectors, and enforcing intellectual property rights (IPR). Rising protectionist sentiments in both China and the United States also threaten to undermine the gains made to date, according to the survey results.

Top operating issues in China

As in past years, the survey asked respondents to rank the top five issues of importance to their China operations. Respondents were then asked to assess the progress that China has made over the past year in addressing those issues (see Figure). Result highlights are listed below.

Human resources: recruiting and retention

For the second year in a row, USCBC members ranked recruiting and retaining qualified workers as their top operating issue in China. In fact, more than 90 percent of respondents indicated that recruiting and retention pressures had intensified or showed no improvement over the past year.

Despite China's large population, rapidly increasing supply of college and technical education graduates, and growing workforce with business or skilled labor experience, demand from foreign and Chinese employers outstrips supply, particularly for the most qualified workers and managerial talent. The pressures for companies range from factory and service labor, where costs have increased—particularly in the more developed coastal areas—to managerial, sales, and technical staff, where costs have risen sharply in China's largest cities. Turnover rates are high relative to other economies in Asia and globally and can approach 15 percent or more annually in some cities.

Administrative licensing and business approvals

The second-most-important issue for USCBC members, for the second consecutive year, was securing administrative licenses and business approvals. Sixty-two percent of respondents indicated that no improvement had been made on the issue in the past year.

Though the challenges of navigating China's licensing and regulatory procedures have existed for many years, the high ranking of this issue during the past two years is probably a direct result of greater market access due to China's WTO entry. As China opened more sectors to meet the terms of its entry agreement, companies have sought more licenses and approvals to initiate or expand their business in these sectors—and have encountered difficulties doing so.

Administrative licensing and business approvals encompass a wide range of issues. Companies in some segments of the financial services sector, for example, have had to wait months or longer for license approvals that PRC regulations state should be decided in a matter of weeks. Disagreements among PRC regulators can result in confusion about applying for permits. Duplicative, cumbersome, and expensive testing procedures, often based on opaque rules or local standards that diverge from internationally accepted norms, hinder the ability of US goods to penetrate the market.

Respondent Demographics

The 2007 survey reflects an almost equal balance of views from US-China Business Council (USCBC) members based in China and the United States. About half of the 97 survey respondents were based in China, with 45 percent based in the United States, and the balance of respondents based elsewhere in Asia.

Reflecting the diversity of USCBC membership, respondents hailed from manufacturing (49 percent), services (46 percent), agriculture (3 percent), and other categories including energy (2 percent). US companies employ multiple options for structuring their operations in China. Wholly foreign-owned enterprises are by far the most popular investment vehicle, with 70 percent of respondents having one or more. Joint ventures are the second-most-common vehicle with 50 percent of respondents having one or more. Representative offices follow at 46 percent. Other entities established by USCBC members include branches, regional headquarters and holding companies, and research and development centers.

The survey results reflect the views of companies with significant experience in China. Nearly 80 percent of respondents have been doing business in China for more than 10 years, with 45 percent of those respondents in the market for more than 20 years.

Seven percent of respondents employ more than 10,000 workers in China. Thirty percent have between 1,000 and 10,000 employees. The remaining respondents employ fewer than 1,000 workers in China, with 16 percent having fewer than 50 employees in the country.

IPR enforcement

IPR enforcement remains a top concern for USCBC members. The drop of IPR enforcement from the number one problem in the 2005 survey to the number three problem over the past two years does not reflect a lessening of IPR concerns. Rather, it is an indication of the longer-term or structural nature of resolving intellectual property concerns versus the more immediate human resources and administrative licensing issues companies face. For the third consecutive year, just over half of respondents (53 percent) reported that China's IPR enforcement environment had remained unchanged over the past year. Almost 40 percent reported some progress, however, suggesting company practices and the PRC government's IPR campaigns are having some impact. Only 8 percent of respondents said enforcement had deteriorated or that new problems had arisen.

IPR problems affect the types of activities that companies are willing to undertake in China. Two-thirds of respondents indicated that China's lack of viable IPR protection affected their willingness to bring their products to China's markets or to engage in research and development there.

Competition and overcapacity

For the second year in a row, survey respondents indicated that competition and overcapacity was the fourth-most-important issue facing their companies in China. More than half noted that the issue had worsened or cited new problems in the previous year.

Overcapacity appears to affect companies operating in many sectors in China. Authorities are often reluctant to allow market-consolidating mergers and acquisitions (M&A) for fear that they will lead to unemployment. Bankruptcies are still rare; the PRC government only recently passed the long-awaited Enterprise Bankruptcy Law. Overcapacity is also linked to China's rapid economic growth and high rate of fixed-asset investment. Chinese companies often plow profits back into expanded production because they lack alternative options for retained earnings. The result is excess capacity that drives down margins and, in some cases, leads Chinese companies to aggressively pursue exports, contributing to trade frictions overseas.

Transparency

Insufficient regulatory transparency remains the fifth-highest concern that US companies face in China, but it is also one of the most important and far-reaching. Transparency touches upon the rulemaking system, including the drafting of new laws and regulations and solicitation of public comment; government decisionmaking on policies and licensing; and the availability of information on costs and markets.

China continues to take small steps toward introducing greater transparency: 35 percent of survey respondents indicated some improvement over the past year. The publication of the draft Labor Contract Law and high-profile invitation of public comments prior to the law's finalization is one example of such progress. But despite the PRC State Council's March 2006 notice requiring all laws and regulations affecting trade in goods, services, intellectual property, or foreign exchange to be published in the Ministry of Commerce gazette, about 60 percent of survey respondents noted no improvements in transparency in the past year.

Standards setting

China's product and technology standards-setting process remains locked in sixth place for the third year in a row. The ability to get information on 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 tendency to devise and use unique domestic standards that sometimes put foreign companies at a disadvantage.

For the second year, the survey asked respondents specifically about their ability to participate in China's standards-setting process. Forty-seven percent of respondents evaluated their participation as "fair" or average. Another 34 percent of survey respondents view the process as "poor," up from 23 percent in 2006. This increase in dissatisfaction with the PRC standards-setting process is troubling given the volume of new standards coming out of China and the increasing number of US companies wanting to sell there.

Protectionism in China and protectionism in the United States

For the first time, USCBC's survey asked respondents to evaluate protectionism risks in China and the United States. Both issues debuted in the top ten, with Chinese protectionism ranking seventh and US protectionism ranking tenth.

Concerning Chinese protectionism, new policies that appear to restrict foreign direct investment and M&A in certain sectors have been frequently cited as indications that China may resist openings beyond those in its WTO accession agreement or even roll back access in sectors previously opened. An active debate on the role of foreign companies in China's economy is taking place among government policymakers, in the media, and even in Internet blogs, much of it with a more nationalistic tone. The 2007 survey asked respondents to assess their level of concern with these policies. Most respondents were somewhat or very concerned—64 and 21 percent, respectively. Only 15 percent indicated they were not concerned about these policies. Forty percent felt the protectionist trend in China had grown stronger in the past year.

The ranking of US protectionist threats is lower but clearly constitutes a serious concern for USCBC members. Eighty-seven percent of respondents indicated that the issue had become a more serious threat in the past year. The broader debate in the United States about the impact of globalization and the need to scrutinize new trade agreements is no doubt reflected in the survey responses; the specific legislative threat of applying retaliatory tariffs to China for currency policy or other perceived trade transgressions adds to the sentiment.

Two emerging issues

Tax policy

In 2008, China will unify its tax code, bringing foreign and domestic companies under the same rules for the first time. Previous tax rules created incentives for foreign companies to invest in China or to export most of what they produced; many of these incentives will be eliminated under the new rules that take effect January 1.

The 2007 survey asked whether preferential tax rates had been a primary reason for investing in China and whether changes to those policies would have an impact on the company's investment plans in the country. Just over half of survey respondents indicated that preferential tax policies had slightly affected their decision to invest in China, and another 11 percent said it was highly important. The remaining 38 percent said China's tax policies were not a factor in their previous investment decisions. Almost 70 percent of companies indicated that the new tax laws will not affect their future investment plans in China.

Operating costs

The perception that China remains the lowest-cost location for company operations may be changing. Nearly 90 percent of survey respondents indicated that their operating costs are rising in China, with the majority of those companies believing that rising costs will have some, or a considerable, impact on their long-term investment plans for China. The cost of most concern: labor, likely reflecting the tight labor market and China's dwindling pool of surplus labor. Other cost concerns included rising taxes, materials, and real estate, each with about 10 percent.

US Companies Take Advantage of China's Market Openings

Most survey respondents reported good news about their China operations.

Companies are profiting and optimistic

USCBC members see China as important to their company's global operations: Eighty-four percent of respondents said China was at or near the top of their companies' priorities.
Eighty-three percent of respondents said their China operations were profitable, up slightly from last year's survey results, and two-thirds say their profitability rate in China meets or exceeds their company's global rate.
Eighty-five percent of respondents said their China revenues increased in 2006, up from 70 percent in last year's poll, and 92 percent expect the increases to continue in 2007, up from 80 percent in 2006. The overwhelming majority of respondents, 93 percent, view their companies' medium-term future in China positively.

USCBC members are primarily serving the Chinese market

Nearly all respondents, 96 percent, indicated they were primarily in China to access or serve the Chinese market.
Another 46 percent said a secondary motive is to use China as an export platform for Asia and or other parts of the world.
Only 28 percent of companies indicated their China operations were set up to export to the US market, an important and consistent finding that is often overlooked in discussions about US companies operating in China.

US companies bring higher pay and better facilities to China

Three-quarters of respondents noted that they pay employees above the average wage paid by domestic Chinese enterprises.
Almost all respondents (97 percent) indicated that they bring their companies' global environment, health, and safety (EHS) standards to their operations in China. Ninety-nine percent say these standards either exceed or meet local Chinese EHS standards.

The US-China Business Council (USCBC), publisher of the CBR, is a nonprofit membership organization that has been serving US companies doing business in and with China since 1973. USCBC is headquartered in Washington, DC, with offices in Beijing and Shanghai. This article is adapted from USCBC 2007 Member Priorities Survey Results. For the full report, see www.uschina.org.

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	E-Mail \| Print \| License Business Environment US Companies' China Outlook The USCBC's annual membership survey results show US companies remain optimistic but face operational challenges and protectionist threats. by US-China Business Council staff Each year the US-China Business Council (USCBC) 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 (see Respondent Demographics). The 2007 survey results show that many US companies doing business in China benefit from the market openings that were created by China's WTO membership. The majority of companies report that they are expanding their business in China, with increased revenues, profitability, and investment (see US Companies Take Advantage of China's Market Openings). At the same time, however, the majority of respondents report that China's business environment remains challenging and express concerns about the future direction of China's trade and investment policies. The ranking of top issues by USCBC's membership remained largely the same as last year. Companies continue to encounter difficulties finding qualified personnel, obtaining business licenses in many sectors, and enforcing intellectual property rights (IPR). Rising protectionist sentiments in both China and the United States also threaten to undermine the gains made to date, according to the survey results. Top operating issues in China As in past years, the survey asked respondents to rank the top five issues of importance to their China operations. Respondents were then asked to assess the progress that China has made over the past year in addressing those issues (see Figure). Result highlights are listed below. Human resources: recruiting and retention For the second year in a row, USCBC members ranked recruiting and retaining qualified workers as their top operating issue in China. In fact, more than 90 percent of respondents indicated that recruiting and retention pressures had intensified or showed no improvement over the past year. Despite China's large population, rapidly increasing supply of college and technical education graduates, and growing workforce with business or skilled labor experience, demand from foreign and Chinese employers outstrips supply, particularly for the most qualified workers and managerial talent. The pressures for companies range from factory and service labor, where costs have increased—particularly in the more developed coastal areas—to managerial, sales, and technical staff, where costs have risen sharply in China's largest cities. Turnover rates are high relative to other economies in Asia and globally and can approach 15 percent or more annually in some cities. Administrative licensing and business approvals The second-most-important issue for USCBC members, for the second consecutive year, was securing administrative licenses and business approvals. Sixty-two percent of respondents indicated that no improvement had been made on the issue in the past year. Though the challenges of navigating China's licensing and regulatory procedures have existed for many years, the high ranking of this issue during the past two years is probably a direct result of greater market access due to China's WTO entry. As China opened more sectors to meet the terms of its entry agreement, companies have sought more licenses and approvals to initiate or expand their business in these sectors—and have encountered difficulties doing so. Administrative licensing and business approvals encompass a wide range of issues. Companies in some segments of the financial services sector, for example, have had to wait months or longer for license approvals that PRC regulations state should be decided in a matter of weeks. Disagreements among PRC regulators can result in confusion about applying for permits. Duplicative, cumbersome, and expensive testing procedures, often based on opaque rules or local standards that diverge from internationally accepted norms, hinder the ability of US goods to penetrate the market. Respondent Demographics The 2007 survey reflects an almost equal balance of views from US-China Business Council (USCBC) members based in China and the United States. About half of the 97 survey respondents were based in China, with 45 percent based in the United States, and the balance of respondents based elsewhere in Asia. Reflecting the diversity of USCBC membership, respondents hailed from manufacturing (49 percent), services (46 percent), agriculture (3 percent), and other categories including energy (2 percent). US companies employ multiple options for structuring their operations in China. Wholly foreign-owned enterprises are by far the most popular investment vehicle, with 70 percent of respondents having one or more. Joint ventures are the second-most-common vehicle with 50 percent of respondents having one or more. Representative offices follow at 46 percent. Other entities established by USCBC members include branches, regional headquarters and holding companies, and research and development centers. The survey results reflect the views of companies with significant experience in China. Nearly 80 percent of respondents have been doing business in China for more than 10 years, with 45 percent of those respondents in the market for more than 20 years. Seven percent of respondents employ more than 10,000 workers in China. Thirty percent have between 1,000 and 10,000 employees. The remaining respondents employ fewer than 1,000 workers in China, with 16 percent having fewer than 50 employees in the country. IPR enforcement IPR enforcement remains a top concern for USCBC members. The drop of IPR enforcement from the number one problem in the 2005 survey to the number three problem over the past two years does not reflect a lessening of IPR concerns. Rather, it is an indication of the longer-term or structural nature of resolving intellectual property concerns versus the more immediate human resources and administrative licensing issues companies face. For the third consecutive year, just over half of respondents (53 percent) reported that China's IPR enforcement environment had remained unchanged over the past year. Almost 40 percent reported some progress, however, suggesting company practices and the PRC government's IPR campaigns are having some impact. Only 8 percent of respondents said enforcement had deteriorated or that new problems had arisen. IPR problems affect the types of activities that companies are willing to undertake in China. Two-thirds of respondents indicated that China's lack of viable IPR protection affected their willingness to bring their products to China's markets or to engage in research and development there. Competition and overcapacity For the second year in a row, survey respondents indicated that competition and overcapacity was the fourth-most-important issue facing their companies in China. More than half noted that the issue had worsened or cited new problems in the previous year. Overcapacity appears to affect companies operating in many sectors in China. Authorities are often reluctant to allow market-consolidating mergers and acquisitions (M&A) for fear that they will lead to unemployment. Bankruptcies are still rare; the PRC government only recently passed the long-awaited Enterprise Bankruptcy Law. Overcapacity is also linked to China's rapid economic growth and high rate of fixed-asset investment. Chinese companies often plow profits back into expanded production because they lack alternative options for retained earnings. The result is excess capacity that drives down margins and, in some cases, leads Chinese companies to aggressively pursue exports, contributing to trade frictions overseas. Transparency Insufficient regulatory transparency remains the fifth-highest concern that US companies face in China, but it is also one of the most important and far-reaching. Transparency touches upon the rulemaking system, including the drafting of new laws and regulations and solicitation of public comment; government decisionmaking on policies and licensing; and the availability of information on costs and markets. China continues to take small steps toward introducing greater transparency: 35 percent of survey respondents indicated some improvement over the past year. The publication of the draft Labor Contract Law and high-profile invitation of public comments prior to the law's finalization is one example of such progress. But despite the PRC State Council's March 2006 notice requiring all laws and regulations affecting trade in goods, services, intellectual property, or foreign exchange to be published in the Ministry of Commerce gazette, about 60 percent of survey respondents noted no improvements in transparency in the past year. Standards setting China's product and technology standards-setting process remains locked in sixth place for the third year in a row. The ability to get information on 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 tendency to devise and use unique domestic standards that sometimes put foreign companies at a disadvantage. For the second year, the survey asked respondents specifically about their ability to participate in China's standards-setting process. Forty-seven percent of respondents evaluated their participation as "fair" or average. Another 34 percent of survey respondents view the process as "poor," up from 23 percent in 2006. This increase in dissatisfaction with the PRC standards-setting process is troubling given the volume of new standards coming out of China and the increasing number of US companies wanting to sell there. Protectionism in China and protectionism in the United States For the first time, USCBC's survey asked respondents to evaluate protectionism risks in China and the United States. Both issues debuted in the top ten, with Chinese protectionism ranking seventh and US protectionism ranking tenth. Concerning Chinese protectionism, new policies that appear to restrict foreign direct investment and M&A in certain sectors have been frequently cited as indications that China may resist openings beyond those in its WTO accession agreement or even roll back access in sectors previously opened. An active debate on the role of foreign companies in China's economy is taking place among government policymakers, in the media, and even in Internet blogs, much of it with a more nationalistic tone. The 2007 survey asked respondents to assess their level of concern with these policies. Most respondents were somewhat or very concerned—64 and 21 percent, respectively. Only 15 percent indicated they were not concerned about these policies. Forty percent felt the protectionist trend in China had grown stronger in the past year. The ranking of US protectionist threats is lower but clearly constitutes a serious concern for USCBC members. Eighty-seven percent of respondents indicated that the issue had become a more serious threat in the past year. The broader debate in the United States about the impact of globalization and the need to scrutinize new trade agreements is no doubt reflected in the survey responses; the specific legislative threat of applying retaliatory tariffs to China for currency policy or other perceived trade transgressions adds to the sentiment. Two emerging issues Tax policy In 2008, China will unify its tax code, bringing foreign and domestic companies under the same rules for the first time. Previous tax rules created incentives for foreign companies to invest in China or to export most of what they produced; many of these incentives will be eliminated under the new rules that take effect January 1. The 2007 survey asked whether preferential tax rates had been a primary reason for investing in China and whether changes to those policies would have an impact on the company's investment plans in the country. Just over half of survey respondents indicated that preferential tax policies had slightly affected their decision to invest in China, and another 11 percent said it was highly important. The remaining 38 percent said China's tax policies were not a factor in their previous investment decisions. Almost 70 percent of companies indicated that the new tax laws will not affect their future investment plans in China. Operating costs The perception that China remains the lowest-cost location for company operations may be changing. Nearly 90 percent of survey respondents indicated that their operating costs are rising in China, with the majority of those companies believing that rising costs will have some, or a considerable, impact on their long-term investment plans for China. The cost of most concern: labor, likely reflecting the tight labor market and China's dwindling pool of surplus labor. Other cost concerns included rising taxes, materials, and real estate, each with about 10 percent. US Companies Take Advantage of China's Market Openings Most survey respondents reported good news about their China operations. Companies are profiting and optimistic USCBC members see China as important to their company's global operations: Eighty-four percent of respondents said China was at or near the top of their companies' priorities. Eighty-three percent of respondents said their China operations were profitable, up slightly from last year's survey results, and two-thirds say their profitability rate in China meets or exceeds their company's global rate. Eighty-five percent of respondents said their China revenues increased in 2006, up from 70 percent in last year's poll, and 92 percent expect the increases to continue in 2007, up from 80 percent in 2006. The overwhelming majority of respondents, 93 percent, view their companies' medium-term future in China positively. USCBC members are primarily serving the Chinese market Nearly all respondents, 96 percent, indicated they were primarily in China to access or serve the Chinese market. Another 46 percent said a secondary motive is to use China as an export platform for Asia and or other parts of the world. Only 28 percent of companies indicated their China operations were set up to export to the US market, an important and consistent finding that is often overlooked in discussions about US companies operating in China. US companies bring higher pay and better facilities to China Three-quarters of respondents noted that they pay employees above the average wage paid by domestic Chinese enterprises. Almost all respondents (97 percent) indicated that they bring their companies' global environment, health, and safety (EHS) standards to their operations in China. Ninety-nine percent say these standards either exceed or meet local Chinese EHS standards. The US-China Business Council (USCBC), publisher of the CBR, is a nonprofit membership organization that has been serving US companies doing business in and with China since 1973. USCBC is headquartered in Washington, DC, with offices in Beijing and Shanghai. This article is adapted from USCBC 2007 Member Priorities Survey Results. For the full report, see www.uschina.org. Further Reading Companies Speak: The State of US Business in China Click here for copyright permissions Copyright 2007 US-China Business Council Top of Page Table of Contents
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