2007 Business in China

I attended an AmCham luncheon today where they unveiled the 2007 China Business Performance Report based on a survey of AmCham members collected in October and November. It is interesting. 72% of companies report profits or large profits from their China operations this year. 23% are at break even. About 90% expect to make money next year.

75% of businesses believe that, at least to a slight degree, China is losing its competitive edge because of rising costs (mostly labor). But 85% are optimistic about their 5 year forecast.

42% are active in China to produce or source goods or services in China for the China market (down from 62% in 2005). 22.7% are active in China to produce or source goods for the US market and 20% are here to import goods into China.

Most foresee their company's investment in China increasing in the short run. 55% did not consider the acquisition of a Chinese company and 24% considered an acquisition but didn't pursue it. The main purpose of the acquisitions was market access, enlarging the customer base or acquiring capacity or technology. The biggest challenges to acquisitions were 1. negotiation of the valuation gap (the Chinese do not know how to value companies or real estate; they base everything on what they heard some one's cousin's brother got for his company or industrial building); 2. obtaining permission from the target to be sold; 3. due diligence (almost impossible without reliable public records or enforceable reps and warranties); 4. negotiating the letter of intent (there is no such thing as a "deal"; the Chinese will continue to negotiate points they've agreed on even after the contracts are signed); 5. and existing managerial support.

The top business challenges companies face when operating in China are 1. human resource restraints; 2. unclear regulations; 3. inconsistent regulatory; 4. lack of transparency; 5. bureaucracy; 6. visa difficulty (that is US visa difficulty, not Chinese); 7. IPR Infringements; 8. difficulty enforcing contract terms; 9. lack of credit information and 10. obtaining the required licenses.

The one that really blew me away was the answers to: "How would you rate Chinese domestic banks' ability to provide the banking services you need?" 16% said Chinese banks can handle transactions as well as banks in the US or Europe (I'd love to know what Chinese banks these guys are using); 8% said they are as competent as Korea or Taiwan; 42% said they can do a few things but they aren't sophisticated in their management tools; 16% said they really suck; 7% said they are too horrible to use; 11% said they would change partners if a foreign bank entered the market. Those numbers are far more generous to Chinese banks than I would have been.

Every other month (and I'm not kidding) we have to send one of our secretary's down to Citibank to help them locate the wire transfer we sent three weeks before to CIIC's account to make payroll. They always find it (we always have the wire confirmation) but it rolls around in space at the bank while they collect the float. Without the Fed to beat them up, they don't care. Like Southwestern Bell in the 70's: What are you going to do? Go with Bank of China which is no better?

In the wake of the product scandals, most companies report that they are paying more attention to their sources and manufacturers.

So once again labor is the biggest issue as it has been for years. The talent pool is so limited that all major companies are fighting for the same 6 qualified managers and the GE's of this world who don't pay well are in trouble. In the US, they can sell their company name. That doesn't work here. People just care about cash.