Booz Allen/AmCham Shanghai Study Finds Key To China Success

Tuesday, March 4, 2008 8:41
Posted in category The Big Picture

Press release just went out that Booz Allen & AmCham Shanghai have teamed up to study American businesses in China, and how they are doing.

The first collaberation between the two (AMCHAM Shanghai previously conducted the survey on their own), the 12 page China Manufacturing Competitiveness 2007-2008  offers some very interesting data from their study that represented a cross section of companies:

66 of the largest foreign-owned or foreign-invested manufacturers in China, representing more than 10 percent of the 600 largest foreign-owned or foreign-invested manufacturers in China.  Online survey questions, on-site visitations, and in-depth interview methods were all deployed.  Of the companies surveyed, 81 percent were wholly owned by foreigners, 10 percent were joint ventures between multinationals and Chinese partners, and 9 percent were categorized as “other.”

According to the release the key findings were:

Operations management is a factor: The study found that three out of four companies lack fundamental best practices in their China operations, including integrating the dual functions of export platforms and domestic market penetration.

Declining competitiveness: More than half, or 54 percent, of companies surveyed believe that China is losing its competitiveness to other low-cost countries.

Companies eyeing Vietnam and India: Nearly one in five companies surveyed (17 percent) say they have concrete plans to relocate at least some of their China-based operations to other countries.

Majority staying in China: Despite the rising costs of manufacturing in China, 83 percent of manufacturers said they will maintain their operations in the country.

Outside of these findings, the things that I found the most interesting were:

Firms saw access to the China market as the #1 reason for investing in China (Labor cost savings #2, access to other Asian  markets #3)
Why this is interesting is that (1) Many people still view China as an export only option, when clearly the largest firms see China as key to regional competitiveness.  This is a much more mature way to look at the market.  Note: this data point is one that would be heavily skewed if all 66 were large multinationals.  It would be very interesting to see a cut of SME vs. F500

Top concerns:  #1 RMB, #2 Inflation, and #3 Wages.. 
all concerns we have covered here, and I would say all will continue to bring pressure (RMB to 6.50, inflation to stay above 4-5% for next 6 months, and wages will always increase)
Top 5 things where alternatives to China’s are more attractive: Labor Costs, Tax benefits, competitive landscape, IP protection, and utility costs
the first five represent China’s challenges in attracting FDI, and 2 of those are new ones (labor and tax), 2 of those are old (competitive landscape and IP), and one is a mix of both (utility costs).  My opinion is that labor costs, tax benefits, and competitive landscape will surely continue to apply the same pressures, but as regualtions are clarified and industry shakeout occurs, some relief will come.  IP Protection is getting better, but baby steps occurring in some areas while stagnate in others…Top 5 things where China is more attractive to the alternatives: Availability of supply base, IT Infrastructure, market growth, logistics infrastructure, size of market
on the other side of that coin, what you have is where the dream meets planning, and all of these things are going to continue to carry China forward.  This is where India and Vietnam cannot compete (scale of supply base, Logistics, and size of market).  Were people simply operating on export only basis, that might be different, but we are seeing where manufacturing is occurring to sell into this market and it will take more than a good port to export containers to bring investment

On the whole, I would say that the findings are a fair representation of the current environment, but I think the pool should have been larger than 66… and the questions could have probed more deeply into the issues surrounding barriers to success, and planning for the curveballs that we are already talking about here on All Roads.

Highly suggest you download the report and look it over

comments are welcome

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