How Are US Businesses in China Doing? Key Findings from the AmCham 2023 Business Report
The recently released AmCham 2023 China Business Report underscores the formidable challenges confronting American companies operating in China today. These difficulties are especially pronounced against the backdrop of geopolitical tensions and efforts towards decoupling. Despite these hurdles, businesses are exhibiting cautious optimism by maintaining steady revenue expectations, and demonstrating resilience and adaptability.
On September 19, 2023, the American Chamber of Commerce in Shanghai (AmCham Shanghai) released its highly anticipated 2023 China Business Report (hereinafter referred to as “report”).
This report draws its insights from the results of AmCham Shanghai’s 2023 China Business Survey. The AmCham Shanghai survey is one of the longest-running surveys of the foreign business landscape in China.
Each year, the surveyed companies provide their insights at the conclusion of the year, offering their perspectives on the expected growth of their businesses in China for the upcoming year. The survey encompasses companies from four primary sectors, namely Technology and Research & Development, Resources and Industrial, Consumer, and Services.
In the 2023 survey, respondents placed significant emphasis on various factors influencing the business landscape in China. These factors prominently included the consequences of the COVID-19 pandemic, tensions between the United States and China, and the evolving regulatory and policy framework, among others, which collectively impact the operational environment in China.
In particular, member companies have reported a discernible decline in their business performance. Their collective outlook for China has also become notably less optimistic, and they are currently working to fortify their business resilience by diversifying their supply chains.
Nevertheless, the end of the pandemic has lent stability to revenue expectations, prompting a surge in companies intending to increase their investments in China in 2023 compared to 2022.
In this article, we discuss key report findings, shed light on the challenges faced by US companies operating in China, and provide insights into the strategies and opportunities that are shaping their business landscape in this evolving environment.
Revenue expectations remain stable
Despite challenges posed by the COVID-19 pandemic and evolving market dynamics, there is a degree of stability in revenue expectations among US companies in China.
With the relaxation of pandemic-related measures, over half (52 percent) of the respondents anticipate exceeding their 2022 revenue figures. The retail sector, in particular, show remarkable optimism, with 74 percent of retail companies expecting revenue improvements. This resilience suggests that the retail industry successfully rebounded after the pandemic.
However, it is noteworthy that the percentage of companies expecting China’s revenue growth to outpace global growth has decreased by 7 percentage points to 40 percent. This decline indicates a more cautious outlook among companies operating in China. Moreover, while the retail sector remains optimistic, manufacturing and services sectors appear to be more guarded in their growth expectations.
Financial metrics suffer
The report underscores the profound financial challenges faced by US companies in China during 2022. A record-low 68 percent of respondents reported profitability in the previous year. This decline in profitability can be attributed to city-wide closures and intermittent lockdowns that significantly disrupted business operations. Moreover, only 49 percent of companies experienced revenue growth in 2022 compared to the previous year, marking a substantial 27-point decrease from the previous survey. Additionally, just 37 percent reported marginal increases, reflecting a 17-point decline year-over-year.
These financial metrics indicate the ongoing impact of the pandemic and regulatory changes on the financial performance of US businesses in China, emphasizing the need for prudent financial planning and risk management strategies.
Decreasing optimism for the five-year business outlook
Optimism about the five-year business outlook in China has reached its lowest point in the history of the survey, standing at 52 percent. This decline, down 3 percentage points from the previous year, suggests that US companies are increasingly cautious about their long-term prospects in China.
Increased investment plans
Encouragingly, despite the challenges, there is a notable increase in companies planning to increase their investments in China in the current year. The primary drivers behind this decision include China’s market growth potential, the relaxation of zero-Covid restrictions, and the imperative to localize operations to better cater to the Chinese market.
On the other hand, 22 percent of companies expect to decrease their investments, primarily due to concerns about the US-China trade relationship, expectations of slower growth in China, and uncertainties surrounding future Chinese commercial policies.
This mixed sentiment underlines the need for a nuanced approach to investment strategies in China, considering both opportunities and risks.
Diverse business destinations
Companies are diversifying their investment destinations, as a symptom of the ongoing recalibration of risks and opportunities. In the report, 40 percent of the respondents are redirecting or planning to redirect investments originally earmarked for China.
Southeast Asia remains the preferred alternative investment destination, followed by the United States, Mexico, and Europe—which has now surpassed the Indian subcontinent for the first time.
In the rapidly evolving landscape of China’s business environment, US companies or member companies face a range of operational challenges that significantly influence their strategies and decision-making.
Rise in costs and competition: major challenges
A noteworthy shift is evident as domestic competition emerges as a pivotal operational challenge. A substantial 32 percent of respondents regard domestic competition as a serious factor impacting their business operations. This marks a 10-point increase from 2020, underscoring the growing competitive challenge from agile local businesses and state-owned enterprises (SOEs).
Local businesses have benefited from increased support and consolidation, making them increasingly competitive with multinational corporations (MNCs). The technology hardware, software, and services sector, in particular, faces significant competition, with 47 percent of companies considering it a serious challenge.
The second major operational challenge is rising costs, with 25 percent of US companies listing it as a serious hindrance. Although this represents a slight decline from 30 percent in 2022, an additional 64 percent consider rising costs to be of some hindrance. Labor costs have decoupled from broader inflation, rising by approximately 7 percent annually.
Strategies to address operational challenges
Faced with mounting competition, US companies are increasingly turning to product localization as a strategic choice. Adapting products to the local market emerges as the most common strategy across all sectors. This approach allows companies to better compete with domestic firms by tailoring their offerings to meet local consumer preferences.
In response to competition, retail companies are notably expanding their use of digital strategies, with the high majority (55 percent) of them seeking to boost competitiveness through digital means. This contrasts with 35 percent for manufacturing and 33 percent for services.
The digital realm, especially e-commerce, offers significant opportunities for businesses to engage with consumers and gain a competitive edge.
R&D investment and localization remain strong
Despite the economic challenges posed by China’s evolving business environment, a notable 42 percent of member companies with research and development (R&D) activities in China are steadfast in their commitment to increasing R&D investment within the country.
This decision is indicative of several strategic considerations and reflects the renewed support shown by the Chinese government in this domain. Such strategies include (but are not limited to):
- Tapping into China’s culture of innovation: One compelling factor behind the increased R&D investment is the desire to tap into China’s vibrant culture of innovation. China has rapidly emerged as a hub for technological advancement and innovative solutions. By investing in R&D activities within the country, US companies seek to harness the creative potential that thrives in China’s innovation ecosystem.
- Leveraging abundance of STEM workers: China boasts a robust pool of Science, Technology, Engineering, and Mathematics (STEM) talent. The availability of highly skilled and specialized professionals in these fields is a magnet for US companies looking to bolster their R&D capabilities. Leveraging this talent pool enables companies to undertake advanced research and development projects.
- Customizing products for local demand: The commitment to increased R&D investment is also driven by the recognition that customization is key to meeting local demand effectively. China’s diverse consumer base and evolving preferences necessitate tailored product solutions. By intensifying their R&D efforts in China, US companies can design and develop products that resonate with local consumers, thereby gaining a competitive edge.
Sentiment toward regulatory and policy landscape
China’s evolving regulatory environment presents both hurdles and openings for foreign companies, requiring a delicate balancing act. While certain regulatory challenges persist, opportunities arise amidst the complexities.
Data localization and cybersecurity
One of the prominent regulatory challenges revolves around data localization and cybersecurity requirements, affecting 70 percent of respondents. Although strides have been made in clarifying these rules, uncertainties endure, impacting efficiency and costs. Notably, 84 percent of technology hardware, software, and services companies report increased uncertainty. Striking a balance here entails China providing clearer guidelines and transparency in interpreting and enforcing digital and data security laws.
IP protection and enforcement
IP protection in China has raised concerns among foreign entities, with 41 percent indicating limitations on their R&D activities. A similar percentage cites constraints on product manufacturing.
Addressing these challenges entails bolstering the IP protection framework and enforcement mechanisms. This move would not only safeguard foreign interests but also stimulate R&D investment and product manufacturing within China.
Navigating China’s policy and regulatory landscape
Chinese policymakers are grappling with a delicate balancing act—fostering economic growth while managing regulatory changes. The report indicates that more US firms perceive a deteriorating business climate than those witnessing improvements, with one-third reporting concerns about policy shifts.
Yet, it’s essential to recognize that China’s dynamic economy and evolving priorities inherently lead to policy adjustments. Such changes, though disruptive in the short term, often reflect the government’s adaptability and commitment to aligning with global trends.
Balancing predictability with adaptability is the key. Establishing a clear, long-term policy trajectory while remaining agile in response to global shifts is a complex task. To enhance China’s attractiveness to foreign investment, policymakers should communicate policy changes transparently, engage stakeholders proactively, and provide a robust framework for businesses to navigate regulatory shifts.
What is next for US businesses in China?
As US businesses look to the horizon in China, based on the findings discussed in the report, several key considerations come into focus:
- Embracing regulatory shifts: US companies must actively engage with evolving regulations, advocating for greater transparency and predictability. Collaborative efforts with Chinese authorities can help create a more conducive business environment.
- Adaptability is key: China’s economic journey is characterized by dynamism. Policymakers seek to balance regulatory adjustments with the aim of fostering economic growth. US businesses should be prepared for policy changes while recognizing the government’s commitment to global alignment.
- Innovation and localization: Increasing R&D investments offer US companies the opportunity to tap into China’s culture of innovation and the pool of STEM talent. Customizing products and services to cater to local demand is a strategy that can boost competitiveness.
- Advocacy and cooperation: Continued engagement with Chinese authorities and industry stakeholders is vital. Advocating for a more transparent and predictable regulatory environment is a shared goal that can enhance China’s appeal to US investors.
Seizing opportunities in China
Despite challenges, China remains rife with opportunities. Optimism in the retail sector regarding revenue growth, increased investment plans, and a burgeoning middle class paints a promising picture for US businesses.
Recent government initiatives, such as the extension of expatriate tax benefits and the release of 24 measures to promote foreign investment, signal a commitment to fostering an environment that attracts foreign talent. These measures may boost confidence among US investors, provided their implementation aligns with their intent.
In this ever-evolving landscape, US businesses in China have the opportunity to not only overcome challenges but also thrive and contribute to the nation’s dynamic economic journey.