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Is China Key To Global Profitability? PDF Print E-mail

By Elaine Kurtenbach, AP Business Writer
Manufacturing.Net - December 09, 2009

SHANGHAI (AP) -- U.S. companies are finding China crucial for their profitability as they increasingly focus on selling to the fast-growing Chinese market rather than manufacturing there for export, a report said Wednesday.


The annual report on U.S. businesses in China, issued by the American Chamber of Commerce in Shanghai, found that two-thirds of the 369 companies responding to the survey had stable or improved profit margins in 2009 despite weaker revenues. Almost all said they were "profitable" or "very profitable."

The report followed earlier surveys showing that most multinationals intend to continue their expansions in China, where the economy grew 8.9 percent over a year earlier in the third quarter of this year after falling to a still respectable 6.1 percent growth rate in the first quarter.

"In this bleak global economic climate, global companies are searching for growth and finding it in China," said Kent D. Kedl, vice president of consultancy Technomic Asia, which helped compile the report.

"China's moving from a 'nice to have' status to a 'need to have' one," he said.

Companies that began operations in China mainly to use it as a low-cost manufacturing base for exports are increasingly shifting their focus to the local market, especially regions outside affluent coastal cities like Shanghai.

Nearly 60 percent of the companies in the survey said they were in China mainly to make goods for the local market, up from 39 percent last year.

That includes a wide range of companies, from big agribusinesses like Cargill Inc. and automakers like General Motors Co., to pharmaceutical makers and high-tech companies setting up shop in provincial centers far from the coasts.

"We see agricultural opportunities, particularly in major cities in the western provinces. There are vast opportunities out there," said J. Norwell Coquillard, a former representative in China for Cargill, which has 35 factories across the country.

According to the survey, most companies plan to increase their investments in China in 2010, with three-quarters listing it as one of their top three global priorities.

But businessmen who helped present the report said that rising costs, an issue that abated during the global slump, were bound to re-emerge as a problem due rising demand for skilled workers and raw materials.

Increasingly strict enforcement of labor and environmental standards will also likely force companies to improve the quality of their investments, said Pierre Cohade, Asia-Pacific president for Goodyear Tire & Rubber Co.

"Other places will have cheaper labor," he said. "You don't come to China to pollute. That's the old business model," he said.

Given the urgency of other issues in a weak world economy, perennial problems such as weak enforcement of copyrights and trademarks, and controversies over currency values, received relatively little attention in the report.

Many of China's trading partners complain that Beijing's policy of keeping the value of the Chinese yuan, or renminbi, tied to the weakening U.S. dollar gives its manufacturers an unfair advantage in overseas markets.

But multinationals operating in China can benefit from lower costs for imported materials and from increased exports to the Chinese market, said Michael Klibaner, head of research in Shanghai for Jones Lang LaSalle, a global real estate company serving many foreign clients.

"A stronger renminbi helps combat inflation," he said.