Confidence with a caveat Go back »

2011-06-09 | All chapters

Confidence with a caveat
China Daily Europe, 3rd June 2011

European companies are in the money in China. Businesses from the EU are making ever-larger profits from their activities in the world's second-largest economy, according to a major new survey. The European Business in China Business Confidence Survey, produced by the European Chamber of Commerce (EUCCC) in China in partnership with strategy consultants Roland Berger, is seen as one of the major barometers of the mood of European companies operating in the country.

This year, of the 600 companies surveyed, of which two-thirds were small and medium-sized enterprises, 71 percent reported they were making more profits than a year ago.

Business confidence is also high with 79 percent of respondents saying they were optimistic about growth in their sector.

Just as there are credits on the ledger of doing business in China, there were debits too, however.

As many as 43 percent of respondents felt favoritism was shown to homegrown corporations, compared to 33 percent in 2010.

Nearly half (46 percent) believed they would be facing an even more unfair playing field in future.

One of the key surprises, however, is a sudden increase in the profitability of European company activities in China.

In 2010, only 43 percent reported they were making more profits than a year before but this proportion has climbed this year by almost two-thirds.

Dirk Moens, secretary general of the European Chamber of Commerce in China (EUCCC), said the profits in China were now in some cases running ahead of those before the economic crisis.

Profits are picking up and we are seeing the numbers back to pre-crisis level and maybe a bit ahead of that," he says.

Charles-Edouard Boue, president Asia of Roland Berger Consultants, believes doing business in China has never been more profitable.

"In my many years in China, it's the first time that there is so much profitability. This is a good message. European companies feel that the country is very important market for their business. It's growing fast and with positive momentum and profit," he says.

Nearly three-quarters (74 percent) of the respondents in the current survey reported a net profit margin in 2010, compared to 58 percent in 2009 and a slightly higher 63 percent in 2008.

Bernhard Hartmann, managing director for Greater China for international management consultants AT Kearney, based in Shanghai, says one of the reasons is that profit is now a real driver for European and other foreign businesses in China.

"The main focus of companies in the 10 years up to the financial crisis was going for growth without them generating any real profit," he says.

"They have now grown operations in China on a par with other markets in the world but going forward they don't want to build on something that is inherently not profitable and that is why companies are going for more profitability."

Piter de Jong, managing director of Dutch bank ING in Shanghai and chairman of the city's EUCCC chapter, says European companies could receive an even bigger profit boost from the government new Five-Year Plan (2011-1015), which is trying to focus the economy on the domestic market rather than export markets.

"There is a shift away from export-driven growth to the domestic market. This is especially good news for European retailers like Carrefour and Metro and also for makers of luxury goods," he says.

Wen Jiyong, a senior spokesperson for Volkswagen, said the survey accurately reflects the company's own profitability in the market.

"Although the growth of the car market might cool down in 2011, we still expect to deliver a good performance," he said.

Volkswagen, which operates in China through joint ventures and also has wholly-owned enterprises, plans to invest 10.6 billion euros expanding its facilities in the country up to 2015.

It aims to produce 3 million vehicles a year and will start to produce electric vehicles by 2014.

"China is the world's largest and most important passenger car market. It has sustainable growth and I think this will continue going forward. We want to create thousands of new jobs at our joint ventures and dealer networks."

European companies, however, feel they are coming up against increased competition in China from domestic companies.

Forty per cent of respondents cited increased competition as affecting their business outlook with this impacting on larger companies the most, 45 percent of which cited it as a problem, compared to small- and medium-sized enterprises, where just 36 percent said it was an issue.

Moens, a former Asia0Pacific president and China chairman of Belgian drinks giant Anheuser-Busch InBev, says one of the reasons for these differences relating to size of company is that smaller companies are not often competing directly against the big State-owned enterprises.

"The bigger companies are often more aware of the pressure. Traditionally, SMEs have a niche, something very specific to offer and are part of the supply chain," he says.

The chamber secretary-general says that in some sectors such as wind power generation competition from domestic companies has decreased margins.

"Foreign investors used to have 70 percent of this market with Chinese companies 30 percent. Now, however, it is the other way round. It used to produce double digit profits for European companies but now we are down to high single digits," he adds.

Regulation remains a key issue for many European companies. Many felt regulations were often implemented in a confused and inconsistent way.

Some 42 percent of companies said there was only discretionary enforcement of laws and regulations, which were often broadly drafted and difficult to understand. Forty percent cited a lack of coordination between different regulators as a problem and 39 percent said there was a lack of harmonization with global standards.

Marcus Wassmuth, head of the representative office of German banking group Landesbank Baden-Wurttemberg and a board member of EUCCC in Shanghai, claims many European companies find difficulties dealing with the masses of regulation.

 "The majority don't think it's a level playing field and it seems like it is getting worse. There are more hurdles for them to do business in China," he says.

He said this was also true of the banking sector, where European banks were facing tougher rules and supervision.

"The situation for small- and medium-sized European banks is getting more and more difficult. On the regulatory side, it is getting more complicated, with the supervisory bodies asking for more reports and this kind of thing," he adds.

Wu Changqi, professor of strategic management at Guanghua School of Management at Peking University, says European companies often have a perverse attitude to regulations because it is they who are often the beneficiaries.

"Regulations often affect European companies the opposite way they say. When the Chinese government brings in tougher food safety regulations, carbon emission controls and environmental protection legislation this, on balance, tends to favor higher quality imported products, which have already had to meet more stringent regulations in their own countries."

Wu said recent moves by the Beijing municipal government to control the number of new cars so as to ease congestion by implementing a quota determined by a lottery benefits foreign car manufacturers.

"If you bring in a quantitative quota like this, if someone obtains the right to buy a car through a lottery, he or she is more likely to buy an Audi, BMW or Mercedes-Benz than a 30,000 yuan budget Chinese car since people want to make more use of their allocation," he says.

Moens, however, who has been in China since 2002, says there were still problems relating to access to the China market, particularly in areas such as public procurement.

"This is particularly true in the construction sector and affects many European companies in design, engineering as well as architects," he says.

"To get a qualification to apply for projects in China you often need to prove a track record of buildings you have worked on in the country. This is the sort of chicken and egg situation a number of companies face," he says.

"They are then forced into joint ventures with Chinese companies whether they want to do that or not. This is where there is a real barrier to operating in the market."

Lu Jinyong, director of theChina Research Center for Foreign Investment at the University of International Business and Economics in Beijing says many European companies need to come to terms with the Chinese government gradually withdrawing favorable benefits foreign companies received after reform and opening up.

"Some favorable policies have been cancelled as the Chinese economy has developed. Foreign companies are now treated the same as Chinese domestic companies. This process requires a kind of adjustment and understanding from foreign companies," he says.

China unified income tax rates for domestic and foreign-funded companies at 25 percent in 2008.

Wu at Guanghua School of Management believes European companies often exaggerate their problems.

"If you look at Chinese private companies they have real problems accessing finance at the moment from domestic banks. They can't get loans. At least European companies have access to sources of funding outside of China," he says.

He also questions whether some have a real commitment to doing business in China at all.

"I went to a seminar recently put on by a European company. All the senior executives spoke English and made no attempt to communicate in Chinese. I am sure if I had been in Tanzania for, say five years, I would be able to speak some Swahili," he says.

Any difficulties have to be set against a more profitable trading environment for many European companies.

The survey highlights that 32 percent of respondents said they were making substantially more profits than a year ago. In the same survey last year only 14 percent could make that claim.

De Jong from ING says China is a more profitable place to do business than Europe itself.

"The Chinese government has targeted an average annualized growth of 7 percent over the next five years, and this seems fairly conservative. This is still a lot better than what is expected in Europe."

Hartmann at AT Kearney says there is going to be no rushing back to Europe to benefit from any sort of nascent recovery there when there is real money to be made in China.

"The only economy that is really growing is the German one and they are export orientated I don't see a strong argument for anyone here to refocus on Europe."

Lu at the University of International Business and Economics, says it is now often difficult to distinguish between European and Chinese companies.

He says the reason why European companies are becoming more profitable is that they have fully integrated into one of the fastest growing economies in the world.

"A lot of European companies entered the Chinese market very early and a lot of their management staff are local Chinese. These European companies are actually now part of the Chinese economy," he says.