Is China Still a Priority Market?

on October 28 2013 | in Retail Trends | by | with No Comments

Rolls-Royce, Lamborghini,

The business climate for foreign brands in China has started to feel frigid.

Has the Chinese government lost its appetite for promoting foreign businesses in favor of local businesses? Last week China’s state-controlled CCTV accused Starbucks of high coffee prices and said Samsung’s smartphones work poorly.

“The operating environment for foreign firms has deteriorated in the last year in a serious way. In my 16 years in China, it’s some of the worst business sentiment among foreign executives. They don’t feel as welcome as they used to,” Shaun Rein, managing director of China Market Research Group tells Bloomberg.

Domestic politics are causing a lot of uncertainties for foreign brands and have led some to question whether China should still be a priority market. Some observers indicated that the current business environment in China has less to do with protectionism and more to do with the government’s desire to keep inflationary pressures in check. Regardless, foreign brands are feeling the heat.

The US-China Business Council (USCBC) released the result of its 2013 China Business Environment Survey after gathering data from its roughly 220 member companies, including Apple, PepsiCo, and Estee Lauder. The study has found that while China remains a high priority, profitability and optimism in the market there are leveling off.

This year, 96 percent of respondents said China was one of their top five priorities, including 15 percent who said China was its number one priority. Compare this to the 2012 survey results, when 94 percent of responders said China was a top-five priority, but 22 percent ranked it number one. The study found, “Rising costs – particularly for labor – competition with Chinese companies, and challenges with the licensing and business approval process continue to rank as the top issues of concern to foreign companies doing business in China.”

The 2013 survey data show that 15 percent of responders reduced or stopped planned investments in China in the past year, mainly because of global economic uncertainty and not a loss of faith in the Chinese market.

Almost 75 percent of respondents said that their revenue from China businesses increased throughout 2012, but that the times of booming revenue growth are winding down. Last year, 30 percent of respondents reported growth of 20 percent or more; this year, just 12 percent did so. One responder commented, “It is getting more and more difficult for foreign companies in China, with cost hikes (both material and HR), with the economic downturn, overcapacity in China, and a gloomy global economy.”

“Many companies face business and market access issues in a market that for the past five years has been a rare bright spot in a difficult global downturn,” the survey said. Overall, more respondents are “somewhat optimistic” about China (49 percent) than all-out “optimistic” (39 percent).

“It might not be as profitable as it used to be, but it’s not a dead end,”  said Ken Peng, senior economist at BNP Paribas in Beijing. “There are new opportunities to discover.”

image credit: ffrade

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