Despite rising labor costs, increasing quality issues, declines in sales and challenges with government regulations, multinational corporations with plants in China are finding reasons to stay.
In a survey by American Chamber of Commerce in Shanghai (AmCham Shanghai) and management consulting firm Booz & Company, multinational corporations with plants in China said that despite the economic downturn many have reasons to continue operations in China, and in some cases, expand.
In fact, in an Associated Press interview, Harley Seyedin, the president of the American Chamber of Commerce in South China, noted that companies polled in a similar survey showed they had no plans to shut down.
This is a drastic difference from the AmCham Shanghai survey done a year ago, in which many China-based multinational corporations said they were considering moving operations to cheaper countries, such as India and Vietnam, due to rising labor costs and declining demand in China.
“The current credit crisis is forcing companies to stay. With less investment capital to set up new operations anywhere, companies must work with their current capacity or expand their operations in China,” says Ron Haddock, partner, Booz & Company.
But Haddock also notes that one of the most important reasons to move capacity anywhere is to be close to markets. If your suppliers and your demand are based in China, then keeping your operations there is a logical bet.
In addition, other emerging countries, Vietnam in particular, have come under a lot of volatility in the past 12 months. Vietnam’s macro situation there has been falling apart substantially, making them far less viable option compared to China, says Haddock.
China’s Challenges
But China isn’t without its problems. Seyedin noted in the AP interview that slightly fewer firms gave high marks to China's business environment due to ongoing economic woes and the government's tendency to frequently change regulations without enough warning or input from businesses.
Haddock expects that will change as the Chinese government starts to take notice of what manufacturers need to stay in business.
“I would expect to see government-led initiatives to figure out what the best practices are and how to put them in place. The government itself will take action to help companies figure out how to become more productive,” said Haddock.
Haddock notes that last year’s survey results were not overlooked by China’s government. China became much more committed to keeping manufacturers’ operations based there and began working to clean up its reputation for poor quality control and leniency towards intellectual property rights.
“We give the government high marks for stimulating domestic demand as well as emphasizing intellectual property rights and quality. In the area of quality, in particular, they have really cracked down in the last year due to some high profile cases,” Haddock points out.
But drawing more business to China is essential -- with the current economic downturn and 20 million people out of work, the manufacturing industry has become is a serious issue for Beijing.
“They are very concerned about losing business. They have seen the drop in foreign direct investments and they know they need to do whatever they can to increase value-added products and innovation,” says Haddock.
Corporations Willing To Stay
Survey results show that multinational corporations are willing to stay as China has been working to improve infrastructure, honor tax incentives, and enforce regulations.
And despite declines in demand, multinational corporations have set up their operations with the appropriate technologies and capacities, and are clearly stronger than a lot of the local companies that try to mimic them.
In fact, nearly 50 percent of the companies polled in the survey are considering expanding production capacity over the next couple of years.
“With these results, we can broadly assume that the companies we surveyed don’t fit the category of having to shut down their facilities for lack of competitiveness. It’s actually quite the contrary,” he adds.
But multinationals based in China still must do more to remain competitive. Survey results show that implementing best practices, such as incorporating lean systems, advanced statistical forecasting and optimized product flows, in China has been fairly low-level, but is on the rise.
“A lot of that is because in the past, you could get away with sloppy manufacturing, but the recession has the effect of cleaning up sloppy operations by potentially putting them out of business,” says Haddock. “So, for corporations in China that have not updated their cost structures or operating systems, now is the time to do it in order to remain competitive, he advises.
Ronald R. Haddock specializes in strategic, operational and organizational issues affecting private enterprises and public institutions particularly in the Asia Pacific region. For more information, www.booz.com