US firms see slower growth in China

US companies in China expect their business in the country to experience slower growth this year as they tackle a macroeconomic slowdown and soaring operating costs.

That's the key finding of a poll conducted by the American Chamber of Commerce in China, in which more than three quarters of surveyed companies continue to predict growth in revenue this year, but at a slower pace than in 2011.

A total of 390 companies in industries including services, manufacturing and high-tech participated in the chamber's annual business climate survey.

The survey showed that 43 percent of companies expect their sales to rise by more than 11 percent. This was down 15 percentage points compared with the previous year.

This is a result of companies scaling back their investment and growth plans in China. Only 20 percent of the surveyed companies expect China to be their top investment destination this year, compared with 31 percent in 2011.

The faltering economic environment, both in China and globally, were the top two factors that weakened companies' confidence, while 46 percent cited an economic slowdown in China as their primary concern, up 15 percentage points from 2011.

And against an uncertain global backdrop dominated by the eurozone crisis and a downgrade in the US credit rating, 40 percent viewed China as less immune to global economic instability.

However, US firms remain committed to China, with 78 percent listing the nation as among the top three priorities in their investment portfolio.

Besides, the "in China for China" trend continues to be strong among US companies. Nearly two-thirds of the companies said that they produce goods or services for the China market.

"This year's survey indicates that after several years of posting exceptionally strong performance in China, our member companies are concerned about the prospect of relatively slower economic growth. Profit margins in China are coming under pressure, though they remain healthy," said AmCham China Chairman Ted Dean.

Among the many challenges, 39 percent cited soaring costs as a critical issue. The shrinking working-age population, wage inflation and new social insurance measures have significantly boosted operating costs in China.

As a result, 82 percent of the respondents said rising costs have hindered their businesses and 89 percent believe that this is blunting China's competitive edge.

The findings echo a recent study conducted by the American Chamber of Commerce in Shanghai, in which soaring costs displaced human resource constraints as the biggest challenge to business.

The recruitment and retention of skilled employees has always been a headache for foreign companies. This year, 43 percent of the surveyed firms ranked management-level human resource constraints as their top business difficulties.

Concerning regulatory challenges, just 22 percent said foreign and Chinese companies receive equal treatment in the granting and enforcement of licenses, and one-third of the survey's respondents said they had been harmed by policies that require technology transfers.

Despite forecasts that China's economy will slow, General Motors China has set aside $1 billion to $1.5 billion annually to double its sales volume to 5 million units over the next five years, said Kevin Wale, GM China's president and managing director.

But it is not considering moves such as mergers and acquisitions any time soon, Wale said.

"Our plan is to emphasize doing business on the existing value chain."

He added that the company managed to control costs by expanding to second- and third-tier cities.

To meet the demands of the maturing Chinese market, Dow Chemical Co has allocated $200 million to invest in a terminal and logistics center and a transactional processing service center in Tianjin, according to Peter Sykes, president of Dow China.

"The Chinese government targets slower yet healthier economic growth during the 12th Five-Year Plan period. China will invest a tremendous amount of resources and effort to restructure the economy, promote social equality, and protect the environment, which we see as a great opportunity for Dow," Sykes said.

The company opened a new innovation center in the southwestern city of Chengdu to widen its innovation coverage across the country.

For foreign firms, investing in China is no longer an option but a necessity, according to Sarah Butler, managing director of consultancy for Booz and Company in China.

"Even if slowed, China's expected economic growth is still unparalleled compared with that of the rest of the world. It is a critical element in most firms' global strategy today," she said.

And as China ascends the global value chain, companies are no longer treating China as a "market to tap into" or a "manufacturing base", she added.

Faced with increasing costs and competition for skills, Butler said it is critical for foreign players to establish the right operating model with the right balance of headquarters involvement and delegated accountability so the Chinese business can respond to the market with speed and agility.