Foreign companies in China are facing a future of slimmer profit margins as their number multiplies and competition gets fiercer, the American Chamber of Commerce chief warned yesterday.
"This place is getting more competitive," AmCham President Charles Martin told a briefing in Beijing.
"There's more foreign companies coming in, there's more Chinese companies getting stronger," he said.
A survey of AmCham member companies suggested that about 30 percent were seeing better profits in China than in the world as a whole, down from 40 percent in previous years, he said.
"[China] is acting more like a normal competitive market and we would expect that to continue to happen over the coming years," he said.
"You're going to get more competition, you're going to get pressure on the margins," he said.
The tougher competition is coming about not just as more foreign enterprises enter China but also as new local competitors emerge, typically in service industries such as media and law, according to Martin.
"They say -- we can't do the offshore investment but we can do everything else you need done here at one half the price or one third the price," he said.
Hard data on profitability is usually difficult to come by in China, partly, observers said, because enterprises tend to understate the amount of money they make in order to avoid taxation.
But figures released earlier by AmCham showed that about 86 percent of members taking part in a survey said they posted higher revenues last year compared to 2003.
In the same survey, 68 percent stated they were "profitable" or "very profitable" last year.
The fact that a large number of foreign companies are making money at all in China is a fairly recent phenomenon, linked to China's entry into the WTO in late 2001, Martin said.
"The change from not profitable to profitable clearly is coincident with the WTO," he said.
"When China entered the WTO and started implementing WTO rules, companies started making much more money," he said.
WTO entry dismantled a large number of rules obstructing business in China, allowing wholly foreign-owned enterprises into a broader range of industries and so giving foreign investors an immediate profit boost, he said.
While WTO membership has improved the business environment for many foreign enterprises, some select industries are still facing insurmountable obstacles, according to Martin.
"In most countries, construction is hard to get into but the Chinese have put so many conditions on getting into the construction industry that companies are really unable to get in there," he said.
Oil exploration is another area that should be opened up, since China itself might also benefit from such a move, he said.
"China should open up its oil exploration, particularly onshore, more to foreign companies," he said. "Largely it's been a domestic game."
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