with Christian Murck, President, American Chamber of Commerce in the People’s Republic of China (AmCham-China)
China is actively climbing the economic value chain, and is evolving from a straightforward manufacturer to a nation that seeks to innovate and creatively market products, to enter foreign markets, and to increasingly compete globally as a sophisticated player. To what degree does this shift prove a partnership opportunity for U.S. companies—and to what degree should American organizations be fearful of loosing an inexpensive manufacturing hub, while gaining a powerful new competitor?
Firstly, as you mentioned, the Chinese are beginning to actively contribute to foreign markets; and going forward, I think we are going to see a very large increase in Chinese Foreign Direct Investment. This FDI will certainly enter the United States, but it will also enter Europe, Africa, and Latin America. The first outward investment wave is focused on natural resources—however, if we look at Chinese investment into the U.S., it is already moving very much beyond resources into many kinds of industries, and many locations: about 35 U.S. states so far.
Chinese investment will add employment opportunities; it will add technology; it will add competition. I think that it will be good for the market in the U.S., and other markets as well.
There is an interesting dynamic at play. China is a massive and growing economy that has a large state-owned sector, and is a country where industrial policy is based on deliberate government support for national champions. We have never seen a country like that develop a global presence, and become not only a trading nation but also an investor and a competitor worldwide. We have to figure out ways in which we will relate to Chinese enterprises as they go into our own market in the U.S., and into third markets around the world, as partners, counterparties, and clients.
I think the potential is very large, and American enterprises are beginning to explore it. But there are obviously unresolved issues. At the AmCham, we hope and believe that over time, we will develop the ‘win-win,’ and a mutually beneficial approach—an approach that will probably be different in different sectors. At least initially, some transactions will work and others won’t.
In any case, we are seeing qualitatively new developments: for example, the joint venture between SAIC and Iveco, which is a global joint venture in the light truck business. This kind of cooperation is new—previously, American and Chinese companies formed joint ventures for the Chinese market, not for global markets. Another example is the GE Avionics JV with AVIC, which again is a global partnership.
There have also been several very large Chinese investments in the Oil & Gas sector around the world, including in the U.S. Everyone has paid much attention to the first attempt by CNOOC to buy some Unocal assets, an endeavor that was awkwardly handled and failed for political reasons. However, more recently, their investment in the American shale gas sector with Chesapeake Energy was both large and quite smooth. I think there is clearly a learning curve in terms of how to invest globally on the part of the Chinese; and on the U.S. and European sides, we must learn to discern what we want from these transactions and how they can be helpful to us. These are questions that are not completely resolved yet, but we are definitely moving down that road and will continue to move down that road.
When I look at our member companies and speak to them about their businesses here, many of them are very, very large. I was speaking to a high-tech hardware equipment company about a month ago, and they will have China revenues this year that exceed 5Bn USD. Their business is growing, depending on the quarter, 20-40% over the prior year quarter.
How sustainable is that kind of growth?
That is a good question. For the company I am speaking of, they have a very large business that is absolutely material to their global bottom line, and is growing at a very high rate. At the same time, when they look at the future, they can see that, whereas for the past five years, they have primarily been managing growth—answering questions of how to build distribution and secure talent, etc.—the concerns have now become more sophisticated. Because of demographic change, and economic developments like rapidly rising compensation and resource costs, in the future, they will not only have to manage growth, but also manage cost structure and their bottom line margins much more carefully than in the past.
If you look at AmCham survey data, a large group of our members—approximately 40-45%—say that their net profits in China are better than their global average margins. This region has not only been high-growth, but has also afforded better-than-average profitability. However, this too will come under pressure in the future because of rising costs. This is one reason for uncertainty.
Another reason for uncertainty is the fact that the Chinese economy has become too large to be export-driven over the next 20 years, and too large to be driven primarily by fixed-asset investment. Currently, this type of investment is over 40% of GDP, and that is an increasingly unsustainable, inefficient way to generate growth. We have to shift to domestic demand, and shift away from largely government-directed investment as a driver. There is significant uncertainty as to how that pivot will be accomplished.
Despite the uncertainty, this is a shift that seems to be a strong opportunity for American companies.
Indeed, it is an opportunity for foreign companies—and for Chinese companies as well. However, when you look at the particular example I was speaking about, the high-tech group, one of the things they want to do is get into providing cloud services. Their intention is to build data centers—perhaps between 25 and 50 of them—around the world, where they will have large groups of servers that will offer cloud-based services to clients. They see their niche evolving beyond building and selling hardware.
To do that in China, you have to get a value-added telecom services license from MIIT. You have to joint venture. There are issues regarding data security, and etc. Therefore, they see significant regulatory barriers to market access going forward.
I think Tthese barriers are present across many sectors. There is no shortage of large, rapidly growing, profitable foreign businesses in China, and operating conditions are really quite good this year. But when you look at the 3-10 year investment environment—when you think about how you are going to continue to grow your business and where you are going to put your capital (and the capital to grow that scale of business is substantial)—then you are faced with a high degree of uncertainty.
All of this means that we get a very strong focus on this market for its vital strategic importance, and also a rising degree of concern, and even anxiety. We are in a very interesting moment where businesses are trying to evaluate their strategies, and trying to build relationships with the Chinese. I think there is a similar attitude on the Chinese side as well: that there is major potential, but at the same time, a lot of change is coming. The question is how exactly to accomplish the goals of all parties.
This is an interesting dichotomy. The 2011 AmCham business survey found that 83% of respondents would increase investment in China operations in 2011. At the same time, members reported that, for the first time in 30 years of China’s “reform and opening up” policies, U.S. enterprises in several sectors are questioning the possibility of long term growth—and even continued market participation—in China. What is the role of the AmCham in helping to resolve this contradiction?
At the AmCham, we are involved in two main streams of activity: first, we have a very active ongoing advocacy program which is addressed primarily toward the Chinese government, via tools like our annual white paper which looks at a number of sectors every year and tries to suggest ways in which we think the business environment can be improved to the benefit of all participants.
We also address the U.S. government: we are, for example, looking at the Joint Commission on Commerce and Trade framework that occurred this past weekend in Chengdu. We spend a lot of time talking to the Ccongress regarding what they should—or, in the case of the current legislation, should not—do. We have been doing this kind of advocacy very actively for the last 15 years, and will continue to do it very actively in the future.
Another area of our work is in market development. We form specific coalitions among our members and try to work with Chinese enterprises and the Chinese government to improve specific market sectors both by raising technology, and developing personal and institutional relationships.
For example, we have an export compliance working group, which has about 15 member companies, that is supporting the export control reform that is ongoing in the U.S., and working with Chinese enterprises to convey the fact that the license process in the U.S. is not actually threatening. There are fewer things that require licenses than the Chinese commonly believe, most licenses are approved, and if you have a compliance program in place, the process is not particularly challenging. We are working to promote high-tech trade by educating Chinese enterprises on how to operate within the U.S. legal system.
This is a very interesting point—Chinese companies are fearful of the bureaucracy in the U.S.? It would seem that, given a heavily bureaucratic home market, U.S. regulatory requirements would not prove daunting for them.
Yet it is absolutely true! Many Chinese companies will say, “I want to buy this piece of equipment, but I cannot get it in the U.S. because of export control, so I’ll have to go elsewhere.” As the AmCham, we do not want them to think that way. Therefore, we are working with them in this specific area of export controls.
Let’s consider another side of the coin, and speak about the value proposition that American companies bring here. In our interview with Mr. Dirk Moens of the European Chamber of Commerce, he remarked that in order to be successful on this market, foreign players increasingly require a very clear business plan and value proposition. In oil and gas, for example, Western enterprises are often in a position to bring advanced technology to the market, which is much sought after by the authorities and China’s SOEs. What do you feel are some of the most significant value propositions that U.S. companies can offer in China today?
Firstly, it has never been about capital. Even 30 years ago, the Chinese have always had enough money to invest. Their need for foreign inward investment has not been a need for funding—it has been a need for technology, management skills, and help with integration into global markets. I think that is still the China value proposition for any successful multinational today. You bring in an approach to management, and skills that are not readily available in this market; you bring in technology. That is true in oil and gas, and it is also true if we consider consumer products, in terms of product differentiation and marketing.
Global and regional integration is key. I recently had dinner with a friend of mine, who is working in a major marketing firm here. He is involved in a project where he is designing a global set of websites that will be up in different languages to support half a dozen brands in the luxury consumer market. The Chinese luxury market is a central concern for them, but nonetheless it is quite interesting that they are developing the strategy for a global direct marketing venture, here in China. I believe that what my friend has found is that he is bringing talents here that are not readily available in the local market, and in return, he is getting the opportunity to work on projects that are not only Chinese projects, but are regional and global in nature—for some very interesting clients.
Do you believe Westerners can continue to offer this competitive edge here over the next five or ten years? Or will the Chinese themselves develop these competencies?
I believe China will develop these competencies very rapidly. That is already occurring. If we consider the last thirty years, much of the story has been about the global economy absorbing between 100-150 million low-skill, low-cost Chinese factory workers. That was done pretty successfully over these years—with some trade friction, but successfully nonetheless.
Now, it is yesterday’s problem. The size of the workforce in China is actually declining in numbers because of demographic change and the enforcement of the one-child family policies. That means that the minimum wage will go up: the current 12th 5-Year Plan is calling for 12-13% increases per year. We think that just reflects market forces. The government is not pushing this drive. Labor-intensive industries are going to move elsewhere—to Bangladesh, etc. We will not have this source of trade friction anymore. The number of Chinese people of working age will decline rapidly from this point onwards. But, the number of Chinese engineers, scientists, economists, lawyers, etc. will increase exponentially. There will be hundreds of thousands of young people pouring out of Chinese universities, and the country will be competing in a new and different way.
Part of the question remains how we are going to organize and integrate this into global innovation networks, global development networks, and so on. I think there are actually great prospects for doing that. On the other hand, there will undoubtedly be new kinds of trade friction with the West—there already is, in terms of questions like intellectual property. We need to continuously make the case to the Chinese side that the optimal way to come up the value-added curve is to get themselves well lodged within global networks. In light of this, we will undoubtedly be talking about different kinds of partnerships, and China adding to the global markets.
I think, if we get the right policy mix—and there is a good chance that we will—China will continue to be a very exciting market, and a market where there will be lots of opportunity for foreign participants.