Are Foreign Firms Leaving China?

According to the American Chamber of Commerce in the PRC, 2015 was a challenging year for foreign companies in terms of profit and growth, with member companies yet again citing regulatory changes and depressed economic conditions as key challenges. Human resources were a surprising area of concern for foreign companies, as the cost of wages and living standards continue to increase in China. Foreign companies, long considered as favourable working environments through which to gain ‘western business training’ are now finding it more difficult to retain valuable local staff.

More and more companies are reportedly scaling back their investments in China, and turning to the rest of South East Asia to outsource key areas such as manufacturing to some of China’s relatively cheaper neighbours. Some companies are even removing themselves from China altogether. 25% of AmCham China’s respondents suggested they were either planning to move or had already moved operations outside of the PRC. 50% of these were moving to Asia and 40% back to the US or Canada.

It could be argued that this perceived drop off in numbers of foreign companies investing in China could simply be an indication of the development of China as a sophisticated market in which to operate. Gone are the days when foreign companies could swoop in and make easy money through the much-venerated first mover advantage. Now, like any other market with it’s own challenges and unique circumstances, the Chinese marketplace is one in which foreign companies must thoroughly prepare themselves to do commercial battle. A company’s brand offering whether Foreign or Chinese must be adequately differentiated, a particular challenge facing foreign companies not already established in the Chinese market in an environment where the value proposition of foreign brands is under greater scrutiny than ever before.

That isn’t to say that opportunity in China has evaporated. The numbers are still compelling. China’s massive population of around 1.3 billion and expanding middle class are tantalizing reasons to invest. Higher wages for Chinese labour are translating into higher rates of discretionary spending, making it tougher to manufacture in the People’s Republic, but transforming the market into a better environment in which to sell. In 2014, China’s online retail market grew by 50% reaching the equivalent of half a trillion Australian dollars in value. E-commerce especially provides access to over 332 million tech savvy Chinese consumers attracted by low cost and convenience to purchase from Australian producers both large and small. $90 billion of Australia’s exports are forwarded to China.

But then what about that decelerating economic growth rate?

The shift in China’s economic growth rate from a breakneck 10% to a more manageable 6-7% has been trumpeted by many as the end of the era of foreign investment in China. But this analysis is deceptive. To put it in perspective, Australia’s economic average growth rate for 2015 fluctuated between 2-3%. The economic growth rate of the prevailing superpower the US was only 1-2%. (Check out the Australian Bureau of Statistics and US Department of Commerce for more information).

China’s slowing economic growth rate has been proclaimed as a sound reason for foreign enterprise to pack up shop and ship on out. ’China’s growth rate is at a 25 year low!’ ‘Foreign companies leave China!’ are the trending headlines, but in a similar vein to what Patrick Smith at The Fiscal Times asserts, “reality doesn’t mean early onset doom and gloom.”

Let’s face it; the rate of growth and change in China over the last decade has been phenomenal to say the least. Rapid, does not even begin to cover what has been accomplished in such a short period of time. Sure, there’s a lot that could be better, but there was always going to be difficulty in realizing such incredible social and economic change over the course of a handful of 5-year plans. As the International Monetary Fund claims in it’s economic health check survey, “China is moving to a new normal of slower yet safer and more sustainable growth.”

Let’s repeat. Slower, but more SUSTAINABLE, growth.

China still has considerable room to grow, and its future success will depend largely upon quality of regulation and reform policies as it’s command economy transitions and matures in coming years.

But what does this mean for foreign businesses operating or looking to expand into China?

The difference now for foreign firms that wish to remain profitable will be in how they commit to long term investment strategies, how flexible these strategies are, and how effectively individual companies can differentiate their respective brands. The opportunity is still very much there, for those that are brave enough to take advantage of it.