China remains a strategically important market for multinationals (MNCs), however they also face a number of challenges as they expand their footprint in the world’s second largest economy, according to a recent KPMG report.
The report, titled: The Future for MNCs in China, highlights a number of challenges, including rising labour costs and wage inflation, staff turnover, complexity of regulations, strengthening local competition, and an economy not immune to the current global economic malaise.
MNCs therefore see an increasing need to adapt their strategies in China, in order to succeed. Peter Kung, Regional Senior Partner, Southern China, KPMG, says: “This is a critical report at a time when MNCs face difficult global conditions, not least the ongoing crisis in the Eurozone, but also at a time when China faces its own challenges, including the need to rebalance its economic model.”
“The issue is not that China is short in money supply. The general public has a higher saving rate when compared with the Western world. However, the money is not going to the right channels. A lot has gone to the property sector, but not enough is reaching the private companies in order to help them grow. If more money was directed to the country’s high-growth sectors, then the outlook would be far stronger,” he adds.
Many of the MNCs interviewed maintain that benefiting from China’s growth story is not easy. For example, it is far harder to capture growth opportunities in the inland provinces compared to the coastal provinces. They describe the inland provinces as higher-cost, lower-yield, and more fragmented places to do business. However, some of the largest MNCs seem to find it possible to invest for the long-term in the inland provinces, whereas the smaller MNCs tend to be contented with staying in the coastal provinces, at least for now.
Nick Debnam, Partner, KPMG China, says: “The relationship between China and the world’s multinationals is set to not only grow, but also grow in complexity. There is little doubt that China will remain a large and growing source of revenue for the world’s multinationals. However, the shift from ‘cheap China’ to ‘consuming China’ means firms will be looking to produce less in the country’s factories, and instead sell more to its consumers—ultimately a more challenging business model, but one that offers significant rewards. And MNCs are now in China ‘for China’ and not simply to manufacture for those overseas markets.”
The report highlights the rising popularity of joint-ventures, especially as a result of greater local competition and a move into the more challenging third- and fourth-tier cities. It has therefore, made sense for multinationals to team-up with local partners as a way to expand their market, rather than through acquisitions or organic growth.
An additional change is the extent to which multinationals invest more in the services sector, versus the manufacturing sector, a development that is consistent with China's goal to move up the value-chain. So far, such investments have been largely limited to the logistics and financial sectors. Were China to open up a wider range of service industries to foreign participation, multinationals would be sure to respond, according to the CEOs interviewed.
Many of the MNCs interviewed said that more government support is needed, in order for them to succeed in this market. The government in turn, has also urged multinationals to bring best practice from abroad, to share their expertise and contribute to China’s growth.
Kung concludes: “China continues to rank high on multinationals’ wish lists, both as a place to source products and to build a retail presence. If China continues to maintain a growth rate of seven to eight percent in the next few years, it is expected to account for as much as 30 percent of the world’s growth through to 2017. This indicates that China will remain a large and growing source of revenue for the world’s MNCs.”
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