Key Points:

  • Recent study shows more foreign-invested enterprises in China are targeting China-based markets
  • As companies migrate away from export-driven models, they will adjust sales structures to meet demand in Western China and second-tier cities

Foreign-invested enterprises (FIEs) in China are coping with the global economic crisis, and subsequent slump in exports, by targeting China-based markets, according to a survey done by Squire Sanders and EAC- Euro Asia Consulting.

More than 230 managers from companies in Asia, Europe and the United States participated in the survey. Respondents included leaders in company headquarters located outside China and China-based subsidiaries. Participating companies operate in industries such as automotive, health care, machinery and pharmaceuticals.

“This survey was a great opportunity to learn how our clients are faring during these historic economic times,” said Rainer Burkardt, a Squire Sanders partner in the Shanghai office whose practice focuses on foreign direct investment and corporate transactions. “Our research confirmed the steadily growing trend of companies in China aggressively seeking new business models – ‘in China for China’ has become the rule, not the exception. This change will have a lasting impact on their long term business strategies.”  

Priorities for Thriving in China

In the midst of the worldwide economic crisis, China's economy, the third largest in the world, grew 7.9 percent in the second quarter of 2009, up from 6.1-percent growth in the first quarter. That growth was reportedly driven by an ambitious economic stimulus program and aggressive bank lending.

That growth is also reflected in FIEs’ optimistic take on opportunities in China. More than half the companies surveyed report profit margins ranging from 5 to 20 percent, and 60 percent expect their business in China to be more successful in 2009 than their parent companies.

That said, survey results indicate that China FIEs face a number of challenges, the most significant being rising labor costs, mounting competition and increasing commodity prices. In response, many are reducing administrative costs, manpower and executive bonuses.

Daniel Berger, EAC’s chief representative in Shanghai, said the survey provides valuable insight on how specific industries are managing costs.

“Automotive and health and pharmaceutical companies followed the general pattern of cost cuts – focusing on general costs (such as travel), external services and bonuses – whereas machinery companies are focused more heavily on reducing local and non-China-based personnel,” Mr. Berger said.

Rather than lowering production capacity, most respondents are negotiating better deals with suppliers. “In the automotive sector, nearly three-quarters of respondents said they are increasing sourcing in low-cost countries such as China and improving warehouse/inventory management,” Mr. Berger said. “For health care players, optimization of logistic chains is on the agenda, while machinery companies are reevaluating ‘make versus buy’ decisions.”

A large majority (91 percent) of FIEs is refocusing sales efforts in hopes of avoiding sales force cuts. As they migrate away from export-driven models to target markets within the country, they will adjust sales channel structures to account for growing opportunities in Western China and second-tier cities, according to the survey. Of the respondents, 44 percent indicated they are already producing locally for China markets.  

The Outlook for FIEs in China

More than 40 percent of China-based FIEs believe the country will recover from the global economic crisis by the end of 2009, and 35 percent see a recovery in mid-2010. By comparison, most respondents believe the global crisis won’t be finished until the end of 2010.

That said, business leaders surveyed pointed to future obstacles such as increasing competition, decreasing international demand and lack of reliable forecasting. In particular, the technical capabilities of local competitors to FIEs are increasing as local businesses transition from copycats to innovators. The survey identified trends in the following areas:

  • “In China for China and other emerging markets” continues to be a growing trend for FIEs
  • Initiatives FIEs are undertaking to lower costs, improve financial management, optimize supply chains, adjust project portfolios and fine-tune sales structures
  • FIEs’ planned and implemented reductions of local and foreign personnel
  • Short-term measures survey respondents are taking to ensure the solvency of their operations  

“Businesses with an interest in China can take comfort from knowing that the country has potential to become an attractive sales market, and they should take note that companies that create an ‘in China for China’ approach are more likely to ride out the financial storm,” Mr. Burkardt said.