Impacted by a slowing economy, American companies in China had a tough year last year with a record-high percentage of them reporting drops in revenue and profitability, according to the latest business climate survey by the American Chamber of Commerce (AmCham) in Beijing.
The annual survey found that 21% of 372 surveyed American businesses especially those which produce in China for the Chinese market saw a drop in 2019 revenue – the highest since 2015 and up from 12% and 7% respectively in 2018 and 2017.
Some 61% of responding companies said they were profitable – the lowest level in two decades and down from 69% and 73% respectively in 2018 and 2017.
The survey was conducted late last year and hence failed to reflect the impact from January’s signing of the U.S.-China phase-one deal and the coronavirus outbreak.
At that time, 24% of respondents said they didn’t expect market growth in 2020 while businesses in the manufacturing and energy sectors were even more pessimistic with 40% expressing a bearish outlook.
“Even prior to COVID-19, our member companies were quite cautious about the market growth prospects due to the softening of the economy and, of course, that’s going to be further accentuated by the COVID-19 epidemic,” chamber president Alan Beebe told a media briefing on Tuesday.
The chamber’s flash survey in mid-Feb already showed that nearly half of 169 surveyed executives expected 2020 revenue to drop if their business operation doesn’t resume to normal by April.
Almost one-fifth forecast a massive 50% drop or more in 2020 revenue shall the coronavirus outbreak ravage through August, although only 4% of respondents were considering relocation due to the outbreak.
Major global economic institutes including IHS Market, the International Monetary Fund or the Economic Intelligence Unit have revised downward China’s economic growth target by 0.4 to 0.5 percentage points to the 5.5% level if the outbreak can be contained this quarter.
Tough year ahead
Expecting another tough year ahead, chamber chairman Greg Gilligan estimated that American firms, whose operation was disrupted by the virus outbreak, have resumed more than 50% or up to 80% of their productivity.
The chamber plans on conducting another flash survey next week to update the business sentiment of its member companies, he said.
According to the annual survey, 83% didn’t consider moving away from China while the remaining 17% said they were considering or had started the process of relocating manufacturing outside of China – a trend which Beebe called a “de facto diversification” instead of a de facto decoupling.
He said rising labor costs in China have driven labor-intensive American companies to move manufacturing away from China, so have tech firms in order to comply with export controls or avoid hiked tariffs.
“Decoupling has a business meaning and also a political intonation to it. And we’re not in politics. We’re in commerce. So, for us, it’s really about how we responsibly do business in a way that benefits America’s economy, China’s economy and the people of both places. So, it’s really just about that cost equation,” Gilligan told the same media briefing.
Still, 59% ranked China as their priority investment market despite growing uncertainty and tensions between the U.S. and China, the survey showed.
No expansion plan
While half of respondents agreed that China’s regulatory and investment environment has improved, 37% didn’t plan on increasing investment or expanding, a 5-percentage-point increase from a year ago due to uncertainty over U.S.-China relations and slowed economic activities, the annual survey found.
Also, 56% expressed confidence in China’s commitment to further open up market to foreign businesses. But many remained uncertain about the implementation process, Beebe said.
When it comes to market access, as high as 82% of respondents especially consumer-oriented and tech firms saw it as a major barrier to their operation in China.
Tom Cai, CEO of Beijing-based Prism Think Tank, insisted that China is committed in intellectual property rights protection and its open-up policy toward foreign businesses.
“In past years, no foreign firms were allowed to set up wholly - owned foreign enterprises in e-commerce ventures. But now the market is open. These represent a major policy breakthrough. So is the [creation of a free trade zone in Shanghai,” he said.
“I think the exchange between the private sector and the government should be enhanced so that [foreign businesses] have a full understanding of China’s regulatory change,” he added.
Cai also urged both the U.S. and China to refrain from talks of decoupling because he thinks it’s impossible for both economies, which have been closely dependent, to do so.
Forced tech transfer?
Despite 91% of consumer-oriented firms saying they voluntarily shared technology and proprietary knowledge, 20% of firms said they shared tech “due to informal pressure from the business authorities,” according to the survey.
Beebe said that China’s cyber security law, increased emphasis on tech self-sufficiency and the broader U.S-China commercial relationship complexity surrounding decoupling will make the upcoming year a challenging time for American tech firms in China.
Overall, rising U.S.-China trade tensions, labor costs and inconsistent regulatory interpretation and unclear law enforcement were top causes of concern for American businesses, according to the annual survey.
Members of the chamber thus urged the U.S. government to advocate more strongly for a level playing field in China, pursue results-oriented government dialogues and reduce tariffs on Chinese goods.