Report: U.S. Companies in China Performed Well Last Year Despite Challenges

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Feb. 17 – On average, U.S. companies in China reported strong financial performances last year, despite facing challenges from both the global economic downturn and China’s business environment, according to the “2011-2012 China Business Report” recently released by the American Chamber of Commerce (AmCham) in Shanghai.

The annual report, which drew its results from 318 U.S. companies surveyed between mid-November and mid-December 2011, says 78 percent of respondents reported that their companies were “profitable” or “very profitable” last year. This proportion of profitable companies roughly matched the levels recorded in 2010.

A strong majority also reported revenue growth in 2011, although the group shrank slightly from 87 percent of participants in last year’s report to 80 percent this year.

It is worth noting that, despite strong financial performances by most survey participants in 2011, fewer of them saw their profits help improve their operating margins. Roughly 51 percent witnessed expansion in operating margins, compared to 66 percent last year.

“I’m pleased to see that our members reported strong financial performance in 2011 but I am concerned that U.S. companies are facing many of the same challenges that have been raised for some time,” AmCham Shanghai President Brenda Foster said, foreseeing a tough road ahead for U.S. businesses in China.

AmCham Shanghai’s China Business Climate Indices – which consists of three broad performance indicators including success, confidence and the degree to which companies feel China offers a welcoming environment – decreased from 2010, indicating that investors may be facing less positive prospects in the Chinese market.

Rising costs, human resource (HR) constraints, and increasing competition are identified as the top three business challenges. In 2011, U.S. businesses felt those challenges have been more pronounced: price indices have surged beyond warning lines, new HR policies have led to growing expenses, and strengthened national protectionism now poses a threat to hopes of creating a level playing field.

China’s uneven legal and regulatory environment also represents a major hindrance to U.S. companies. Some 71 percent of respondents believe Beijing’s regulatory environment is either staying the same or deteriorating, compared to the 63 percent who said so in last year’s report. Bureaucracy, lack of clarity in regulations, and opacity in the legal system lead the list of legal/regulatory challenges.

“…China is a tough place to do business, it always has been, and this year’s China Business Climate Indices quantify that,” said Kent Kedl, Greater China and North Asia Managing Director at Control Risks and a supporting partner for this year’s China Business Report.

While there is a long way to go before addressing all of the obstacles, U.S. companies seem to have weighed those challenges against the opportunities in the Chinese market, and have shown a willingness to tackle such difficulties. During the survey, more than half (51 percent) of the participants identify China as a top-three priority for investment and 18 percent state China is their No.1 priority. Around 58 percent of companies are producing in China to serve the rapidly-growing domestic market, and 67 percent said the revenue growth generated in China is higher than growth levels seen elsewhere in the world.

The demand from the Chinese market is also becoming an increasingly important drive for the recovery of U.S. economy. Around 62 percent of the businesses report that they import parts or finished goods from the United States into China to support their Chinese operations. In total, those U.S. exports contribute 32 percent to their China sales by value.

Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in China, Hong Kong, India, Singapore and Vietnam. For further information on establishing or operating a business in China, please email china@dezshira.com.

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