MNCs increasingly focused on growing China market
Multinational manufacturers are increasingly focused on accessing the growing China market while the number of companies viewing China purely as an export base continues to decline, according to the third annual China Manufacturing Competitiveness survey.
It was jointly conducted by the American Chamber of Commerce in Shanghai (AmCham Shanghai) and management consulting firm Booz & Company.
The survey of 202 foreign manufacturers in China shows that while respondents still consider China a hub for exports to the Asia-Pacific region and beyond, nearly 83 per cent of the companies surveyed said that their primary motive for locating manufacturing operations to China was to access the Chinese marketplace, up from 71 per cent two years ago. Meanwhile, the percentage of respondents planning to use China primarily as a base to supply other Asian markets has slipped from 54.6 per cent in 2008 to 50.5 per cent in 2009.
Multinational corporations (MNCs) are responding to rising costs, as well as labour availability challenges, by relocating or expanding their manufacturing operations from well-developed areas in the south and east of China.
The survey found that 28 per cent of respondents are considering moves to lower-cost areas in southwest or central China, up from 17 per cent in 2008. In addition, 8 per cent of respondents reported plans to relocate or expand outside of China, and of those, more than half are evaluating emerging Asian countries such as India (most preferred), Vietnam, Indonesia, and Thailand.
"Multinationals are shifting their China strategy as the country's manufacturing sector matures," said Joni Bessler, Partner at Booz & Company. "Many companies are focusing on best practices in the face of increased labor challenges and rising materials costs, while some companies are looking for lower-cost locations, both inside and outside of China."
"China can no longer be viewed solely as a hub for low-cost exports. The growing domestic market in China offers rich opportunities to foreign invested manufacturers," said Brenda Foster, President of AmCham Shanghai. "While challenges certainly exist, China remains a strong manufacturing partner and top investment destination."
While overall respondents' average earnings before interest and tax (Ebit) margin shrank from a 2009 average of 8.3 per cent from 15 per cent the year before, 61 per cent said that China's 2008 RMB4 trillion (Dh2.15trn) stimulus package was effective in strengthening critical economic underpinnings such as rural infrastructure, transportation, health, education, environment, and industry, and prevented a more significant downturn.
As the global economic downturn led to earnings shortfalls and a sharp drop in exports, the study found, companies are battling reduced profitability with a multi-tiered approach, turning to sophisticated best practices for their China operations. Nearly 22 per cent are enhancing internal cost-control systems, while 17 per cent reported efforts to improve productivity, along with cutting costs by applying energy-saving measures (15.7 per cent) and switching to low-cost raw materials (14.8 per cent). More than 16 per cent are applying lean manufacturing principles to reduce waste and improve productivity.
To compete for talent and respond to new labour regulations, many MNCs were found to be broadening their offerings to Chinese workers. A large majority (79 per cent) of respondents said they are providing more training and career development assistance to employees, rather than relying solely on compensation to attract and retain workers. Three-quarters of respondents said that they were adopting green technology in their China operations, and 60 per cent anticipate savings from their green investment. The number one priority was to increase energy efficiency (86 per cent), followed by conserving or recycling water (83 per cent).
A majority of MNCs (58 per cent) are selling services into the Chinese market that benefit the environment or that are produced and distributed in ways that are environmentally sound.
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