US companies remain optimistic despite profit fall

US company profits in China dropped for the second straight year in 2012, but the country remains a vital market, according to a report by American Chamber of Commerce in Shanghai on Thursday.

The chamber said China ranked in the top-three investment destinations for 54 percent of US companies surveyed, although some may leave the market because of rising costs.

Of the 420 companies surveyed, 73 percent were profitable in 2012. This is down from 78 percent in 2011 and 79 percent from the year before.

Less than 15 percent had moved, or were planning to move, operations overseas due to rising costs, while 23 percent had moved to other regions in China, the China Business Report 2012-13 revealed.

The majority of US companies surveyed said they remained optimistic about the long-term outlook and planned to increase investment, the report said.

A leading trade analyst agreed that most US companies are bullish on China.

"It is true that people are talking about the economy slowing down, and costs are rising," said Kent Kedl, managing director (greater China and North Asia) of Control Risks, an independent global risk consultancy.

"But we found many companies are staying in China instead of leaving."

The biggest attraction of China is that it has a perfect combination of a large diverse market and a good manufacturing environment, he said.

"If you go to Bangladesh or Vietnam, you can get low-cost manufacturing, but you will not have the great market."

Profit growth and revenue also slowed from previous years, the report said, a point echoed by Davis Huang, general manager of Tennant Cleaning System & Equipment (Shanghai).

"Revenue growth for my company slowed to 6 percent in 2012 from more than 30 percent a year earlier.

"The macro-economy slowing down pressures companies. But as an emerging market, China still has a great gap in GDP per capita compared with mature markets, which means great opportunities for companies like us," he said.

Jenny Wang, senior vice-president, China, at TE Connectivity cautioned against undue optimism.

"We should no longer expect China's economy to grow at the same double-digit rates like years past."

But 7 or 8 percent growth is still eye-catching, and the market and business opportunities in China are still very attractive, she said.

The Chinese economy expanded by 7.8 percent in 2012, its slowest pace in 13 years, in the face of weakness at home and in key overseas markets.

Foreign direct investment in China fell for the first time in three years, declining to $111.72 billion from a record high of $116 billion in 2011.

A record 91 percent of the companies surveyed reported an "optimistic" or "slightly optimistic" outlook for their five-year business prospects in China.

However, rising costs, human resource constraints and an increasingly competitive business environment are presenting challenges.

But Kedl said the companies are making transitions in their strategy, rather than leaving the China market.

"That is why more and more US companies are adopting an 'in China, for China' strategy," he added.

The survey found that 60 percent of US companies were producing for the China market in 2012, up from 55 percent in 2010.

The number of US companies in China producing primarily for the US market fell to 17 percent in 2012, down from 13 percent in 2010.

Household income in China grew by nearly 10 percent in 2012, and it could triple in the next 20 years, according to consultants McKinsey & Co.

"While European companies tend to dominate the luxury brand markets, the US has carved out large parts of the rising middle-class brand market and the transition in China's market favors companies targeting this consumer sector," said Robert Theleen, Chair of AmCham Shanghai and Chairman and CEO of ChinaVest.

The survey also found that US companies continue to struggle with bureaucracy and an unclear regulatory environment in China.