Operating Under the "New Normal" in China
Foreign firms investing in China face tougher times, as the country's economic growth slows. More regulations and the search for talent also make it harder to operate there. The outlook nevertheless remains positive.
China's economic growth has slowed down substantially over the past couple of years, from double-digit growth rates to more sustainable annual rates around 6-7 percent. "The Chinese economy used to be very predictable, but this is not the case anymore. China's various provinces and cities develop very differently," said Jörg Wuttke, the President of the European Union Chamber of Commerce in China said during a panel discussion on "Doing Business in China" held at the Credit Suisse Asian Investment Conference.
Crucial Trading Partner for Europe
China is the European Union's (EU) second-largest trading partner, with exports totaling 165 billion euros in 2014, while the Middle Kingdom is Switzerland's third-largest trading partner behind the EU and the US (see adjacent graph). Around 4 percent of Switzerland's exports, or 8.8 billion Swiss francs, went to China in 2013. The free trade agreement (FTA) between Switzerland and China that entered into force in July 2014 should boost Swiss exports further, as this FTA will lead to tariff reductions for individual products or product groups. Companies exporting to China, however, need to be aware that the country's general business environment has become tougher in recent years. "The Chinese market has definitely become more challenging for foreign firms trying to implement themselves there. Not only is growth slowing. There is generally greater domestic competition and the authorities have imposed tighter controls on the Internet and also demand a certain degree of domestic content (in some sectors)," stressed Vincent Chan, Head of China Research at Credit Suisse. "Talent retention is definitely also an issue, as well as the war for the best (store) location," said Robert Buchbauer, a member of the Austrian crystal jewelry producer Swarovski's executive board.
Lack of Skilled Labor, Slow Internet, Rising Costs
The increasing difficulty in recruiting and retaining skilled workers is one of the greatest challenges affecting foreign firms, and the slow speed of the Chinese Internet is another, according to the experts taking part in the panel discussion. Nearly 90 percent of European firms state that the slow speed of the Internet is a constraint on their business development in the country, and a third of them will not invest in research there because the connections to the web are too slow to send large files, said Wuttke. Another trend, which should not be overlooked, is the country's cost structure: "land, labor, utility and financial costs are on the rise and could be two-thirds higher by 2025," he warned.
Emergence of Stronger Local Competitors
Specific sectors face very different types of hurdles in their daily operations. Chinese airspace capacity is, for example, an issue directly impacting the aerospace industry. "In the West, 80 percent of the airspace is allocated for civil use and 20 percent for military use. In China these proportions are reversed," said Marc Allen, president of Boeing International. This results in congestion and flight delays. The ongoing anti-corruption efforts and domestic companies entering the Chinese market have affected the entire luxury goods sector to some extent, noted Buchbauer. Domestic competition is also becoming more intense in daily products such as toiletries, telecoms and electronics, with the notable exception of food where the Chinese population remains worried about food safety. "High-end consumer products are, however, less affected as their brand value is huge and difficult to duplicate," Chan noted.
Pragmatic Approach to Implementation of Rules
Even though the number of regulations has increased and their implementation has become tougher in recent years, the Chinese authorities remain pragmatic. "They've adopted a fail fast policy like in Silicon Valley," noted Allen. If a regulation does not work, they are willing to step back. "This flexibility is important, as it gives space for cooperation and dialog at a bilateral and multilateral level," he said. Earlier this year, for instance, China suspended plans to heavily regulate technology in the banking sector, which would have forced banks to buy a large proportion of domestic content. "Foreign banks cannot operate without their Oracle, IBM or SAP systems, and would have been forced to set up a different operating system for the Chinese market," Wuttke explained. The backing of the Chinese authorities in this issue show that "they sometimes are very flexible, which is very positive," he added.
Nevertheless, the Future Looks Promising
There should still be many opportunities ahead in China, notably driven by the emergence of a strong middle class. Every year more than 20 million Chinese households are estimated to enter the middle class, a fact that translates into formidable business opportunities for domestic and foreign firms. "We are currently growing in China and see room for further expansion, despite the regulatory environment," said Buchbauer. As for Boeing, the airplane manufacturer sees no reason to worry. "We saw a 100 percent increase in passengers on domestic routes and a 20 percent rise in international travel last year," said Allen, adding this growth is based on the current situation where only a third of the Chinese population on average takes one flight annually. "China is such a large market, so the steady stream of foreign firms setting up operations there should continue and thrive despite tougher times from a regulatory and economic point of view," said Chan.