Fri, Nov 12, 2004 - Page 10 News List

Firms find China has improved

PROFIT CENTER China is becoming more business friendly, but multinationals there still face challenges, the Economist Intelligence Unit said in a white paper

By Joyce Huang  /  STAFF REPORTER

Despite intensifying competition and rapid economic change, China is becoming a more mature market for multinational companies doing business there, the Economist Intelligence Unit (EIU) concluded in a white paper yesterday.

"The market [in China] is not only much bigger, but more accessible," Paul Cavey, Hong Kong-based chief China economist at the unit, told a press conference yesterday. The unit released a white paper and a recent survey of China-based multinationals at the conference, adding that "it is a market that can't be ignored."

"For many big firms, China has become a global market and a profit center," he said.

The growth of the "middle class" is creating strong demand, while there is also a burgeoning business-to-business and industrial market in China, the white paper said.

Cavey yesterday lauded the Chinese government's efforts to facilitate a business-friendly environment by improving both physical and regulatory infrastructure.

However, in hand with the growing demand, there's also more competition, as well as sector-specific headaches for foreign companies to deal with.

According to Cavey, domestic Chinese companies pose a threat to their foreign counterparts as they simply copy their products. Meanwhile, the foreign companies face a higher cost of doing business and are also encountering strategic challenges.

Multinational companies, however, do have an advantage in their brand-building capabilities, and in becoming more like China's domestic companies -- by taking advantage of local production and financing, selling to the domestic market, as well as using local research and development talent.

The relaxation of regulations in China, moreover, now allows multinational companies to expand through mergers and acquisitions.

"It's now possible [for foreign firms] to buy local competitors," Cavey said.

Commonly, multinational companies face challenges such as skill shortages and violations of intellectual property rights, although the latter is no longer at the top of most companies' business agendas, the chief economist said.

They also encounter industry-specific problems, he said.

For example, China's automobile sector has high profit margins, but this is undermined by overcapacity and stiff competition, which force foreign auto firms to devise long-term strategies. Retail and consumer goods sectors, meanwhile, need to come up with successful marketing strategies to reach domestic consumers.

For financial services and pharmaceuticals, both sectors have to tackle central-government regulation, red tape and corruption, according to Cavey.

The unit based its analysis on a survey conducted in March and early April, which received 217 e-mail responses from executives at large multinational companies in China.

Almost 70 percent of polled respondents represented companies with revenues of over US$1 billion.

Steve Lin (林祖嘉), an economics professor at National Chengchi University, yesterday added that China is expected to become the world's second largest consumer market, taking its future purchasing power into account, since per capita income reached US$1,000 last year.

In the next few years, China's service sectors will open up and see rapid growth once its economy matures, Lin said at yesterday's press conference.

"By the year 2010, the service sector in China is likely to account for 40 percent of its GDP, up from the current 30 percent," Lin said, adding that business opportunities will be seen in the financial services,telecommunications, logistics, legal, accounting and publishing sectors.

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