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, jointly conducted by theAmerican Chamber of Commerce in Shanghai (AmCham Shanghai,www.amcham-shanghai.org)and management consulting firmBooz & Co. (www.strategyand.pwc.com).
“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,” says the survey report.
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 percent of the companies surveyed said that their primary motive for locating manufacturing operations in China was to access the Chinese marketplace, up from 71 percent 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 percent in 2008 to 50.5 percent in 2009.
On the move
Multinational corporations(MNCs) are responding to rising costs, as well as labor 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 percent of respondents are considering moves to lower-cost areas in southwest or central China, up from 17 percent in 2008. In addition, 8 percent of respondents reported plans to relocate or expand outside of China, and of those, more than half are evaluating emerging Asian countries like India (most preferred), Vietnam, Indonesia, and Thailand.
“Multinationals are shifting their China strategy as the country’s manufacturing sector matures,” said Joni Bessler, Booz & Co. partner. “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, AmCham Shanghai. “While challenges certainly exist, China remains a strong manufacturing partner and top investment destination.”
Stimulus effective
While overall respondents’ average Earnings Before Interest and Tax (EBIT) margin shrank to a 2009 average of 8.3 percent from 15 percent the year before, 61 percent said that China’s 2008 RMB 4 trillion (US$586 billion) 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.
Among the study’s key findings:
•Combating challenges with best practices.As the global economic downturn led to earnings shortfalls and a sharp drop in exports, companies are battling reduced profitability with a multi-tiered approach, turning to sophisticated best practices for their China operations. Nearly 22 percent are enhancing internal cost-control systems, while 17 percent reported efforts to improve productivity, along with cutting costs by applying energy-saving measures (15.7 percent) and switching to low-cost raw materials (14.8 percent). More than 16 percent are applying Lean Manufacturing principles to reduce waste and improve productivity.
•Addressing labor challenges.人才竞争和应对新的劳动注册ulations, many MNCs are broadening their offerings to Chinese workers. A large majority (79 percent) 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.
•Going green.Three-quarters of respondents said that they are adopting green technology in their China operations, and 60 percent anticipate savings from their green investment. The number-one priority was to increase energy efficiency (86 percent), followed by conserving or recycling water (83 percent). A majority of multinationals (58 percent) are selling services into the Chinese market that benefit the environment or that are produced and distributed in ways that are environmentally sound.
Study methodology
In this third annual China Manufacturing Competitiveness Study, Booz & Co. and the American Chamber of Commerce in Shanghai (AmCham Shanghai) used a combination of online surveys and focus groups to survey 202 foreign-invested manufacturing companies about their perceptions of China as both a sales market and production center for domestic distribution and exports. This year’s survey was designed to gain a better understanding of how companies are managing the new and still-changing business environment—which continued to expand, albeit at a slower rate—through theglobal economic downturn.
Of the companies surveyed, 85 percent were wholly owned by foreigners, 9 percent were joint ventures between MNCs and Chinese partners, and 6 percent were categorized as "others." More than 70 percent established their first China manufacturing operations after 1995. Industries represented include consumer, industrial, healthcare and materials. Approximately 40 percent of respondents have an additional major presence in China beyond their manufacturing footprints, including representative offices, regional or global headquarters, regional or global procurement centers, and regional or global research and development centers.
An executive summary of China Manufacturing Competitiveness 2009-10 is available on the Booz & Co. Web site.
American Chamber of Commerce in Shanghai
www.amcham-shanghai.org
Booz & Co.
www.booz.com
