A majority of US businesses still bullish on China and are optimistic about its market growth potential. They intend to expand their operations in the country despite US-China tensions, increasing competition from local players, and hiring challenges.
Pharmaceuticals, medical devices, and life sciences companies as well as automotive, non-consumer electronics, and industrial manufacturers are among the most optimistic.
Contrary to expectations, over 72 percent of respondents said that they had no plans to move supply chains out of China in the next three years.
On September 23, 2021, American Chamber of Commerce in Shanghai (AmCham Shanghai) released the 2021 China Business Report. The report found that optimism among US companies in China has surged and almost returned back to pre-trade war levels.
The survey was conducted from mid-June to mid-July 2021 and received responses from 338 AmCham member companies. Here, we summarize some key takeaways from the report.
Revived optimism about China business outlook
More than three quarters of the surveyed American companies are “optimistic” or “slightly optimistic” about their business outlook in China over the next five years, akin to the 80 percent figure observed from 2015-2018. Less than 10 percent were pessimistic, versus around 20 percent in 2020 and in 2019.
The buoyancy is reflected in companies’ projected investment. The vast majority (over 80 percent) of companies had no plans to redirect their China investment to other places. Almost 60 percent of companies reported increased investment for 2021 compared to 2020, up 30.9 percentage points from last year.
The leading reason behind this may be that businesses are seeing more growth potential of the China market versus other markets. Nearly 70 percent of respondents expected revenue growth in China to outpace their companies’ worldwide growth over the next three to five years. Among them, healthcare and hospital services, chemicals, pharmaceuticals, medical devices, and life sciences firms forecast the best revenue growth.
Which sectors are most confident?
Higher than many expected, about 77 percent of surveyed companies reported profits in 2020. What’s more, over 80 percent of companies projected higher profits in 2021 than in 2020.
Pharmaceuticals, medical devices, and life sciences companies, automotive, non-consumer electronics, and industrial manufacturers are among the most sanguine industries.
In 2020, 87 percent of respondents in pharmaceuticals, medical devices, and life sciences reported profits. Nearly 70 percent of them planned an increase investment in 2021 that year.
Despite the Chinese government’s bulk purchasing/price control requirements, the burgeoning middle-class purchases of imported medical devices, the growth of medical insurance market, government subsidies, and tax incentives present opportunities for medical-related businesses.
In the automotive sector, despite fierce competition from local players, this year, about 78 percent of auto firms in China plan to increase investment over 2020. Auto firms in China are seizing opportunities in the new energy vehicles (NEVs) market that Beijing has encouraged with subsidies; part of its goal is for NEVs to form 20 percent of new car sales by 2025. However, since this year’s chip shortage, auto firms have realized that they need to invest in more proactively managing chip supply chains.
A surge in demand for computers, computer peripherals, and data storage devices during the pandemic has benefited non-consumer electronics companies. The report shows 80 percent of them saw greater revenue growth in 2020 than 2019. The majority (70 percent) of non-consumer electronics companies were optimistic about their five-year business outlook in China. However, in the long term, they have growing concerns about their sustainability, especially due to China’s “dual circulation strategy” and risks of technological decoupling between the US and China.
Where are companies putting their money?
The majority of companies see sales, marketing and development as a number one investment priority (which implies a race to reach Chinese consumers).
Notably, about 70 percent of respondents have increased their investment in digital technologies since COVID-19. In several industries, over 80 percent of companies are increasing investment in this area, including agriculture and food, healthcare and hospital services, and logistics, transportation, warehousing and distribution.
Among them, about 56 percent were upgrading their technology to further enable virtual working, and around 50 percent were implementing technologies to enable digital marketing.
Unsurprisingly, the logistic, transportation, warehousing, and distribution industries had the most investment in automation of “CRM (customer relationship management) and sales management technology”, and so too in “automating the back office via robotic process automation and other technologies”.
Supply chains staying put in China
Beyond most expectations, of the 125 surveyed manufacturing enterprises, 72 percent said that they had no plans to move supply chains out of China in the next three years. This result denied the predictions since early 2020 that China’s role as the world’s manufacturing center will be undermined.
Of the remaining 28 percent that do plan to move some production, only two companies will move all production in the next three years. Just five companies intend to move more than 30 percent of their production.
What are the challenges for US businesses in China?
US-China geopolitical tensions remain the top issue concerning headquarters of multinationals, following by domestic competition and labor costs.
Trade barriers and export controls imposed by the US on a wide range of products sold in or to China have impacted about 45 percent of companies in this report. Almost all non-consumer electronics and many technology, hardware, software, and services companies listed US-China tensions as a top concern.
However, despite heavy media coverage of consumer boycotts, only 6.5 percent of US companies labelled this as a top concern for their head offices. High-profile retailers are most susceptible to consumer backlash.
Some US companies present that they’re facing increasing pressure from domestic competitors, including management consultants, law firms, retail businesses, auto firms, etc.
US retail businesses have lost market share due to local competition. Foreign retailers face a strong challenge from Chinese companies that nimbly use e-commerce platforms and make swift production and supply chain changes to offer new products.
In addition, retaining local talent is getting harder as local companies offer more appeal, while getting foreign talents is also hindered by travel restrictions. About two-thirds of respondents planned to increase the number of employees in China this year, but over 60 percent reported a shortage of labor supply.
Regulatory transparency continues to fluctuate. Education and training industry members of AmCham were among the most dissatisfied, as projected. In addition to the worrisome crackdown on the EduTech sector, upcoming individual income tax rule changes may lead to business restructuring of international schools in China.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at firstname.lastname@example.org.
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