In recent years, foreign companies in China have benefited from an economic upswing incomparable to anywhere else in the global economy. Deficiencies in financial controls, quality assurance, process optimization, innovation capability and general market understanding were offset by revenue increases far above global benchmarks. Given the stellar economic performance of many companies during that time, implementing efficiency improvement measures was not a priority. Thus, many organizations in China were not prepared for the sudden global meltdown.

Despite aggressive government stimulus measures, and notwithstanding positive reports in the PRC media, China is in the stranglehold of the global financial crisis, and so are the companies operating there. How are foreign-invested enterprises affected? How do foreign enterprises assess future business opportunities in China? What strategic adjustments to current business models are required?

Over the past four weeks, EAC- Euro Asia Consulting and Squire, Sanders & Dempsey L.L.P. have conducted a survey among foreign-invested enterprises in China addressing a number of questions. The response of more than 230 participants can be found in the attached.

Key messages of the survey:

  • The majority of the enterprises interviewed operate in China with a clear focus on China as a local distribution market and not as a low-cost production base for overseas demand
  • 76 percent of the foreign-invested enterprises believe that China will recover from the crisis already in 2009 – much sooner than other major economies
  • Despite the positive recovery outlook, enterprises are facing tremendous challenges which need to be addressed to survive the crisis:
    • Increasing competition, driven by continuous improvement of domestic companies and increasing governmental support (e.g., local subsidies), and
    • Negative scale effect due to declining international demand combined with risk of rising material and labour costs
  • Most of the companies have already implemented quick-win measures including reduction of overhead expenses and working capital optimization
  • Long-term business model adjustments which ensure sustainable operations (e.g., supply chain optimization, increase in sales efficiency and IPR protection) are still left unattended – mainly due to lack of know how and resources
  • Foreign-invested enterprises are required to re-position towards enforced localization (alignment to local market requirements also in the field of product development)

 To view the full survey click here.