I reported in March on the latest annual survey of U.S. business in China by the American Chamber of Commerce in Shanghai. There is also an annual business climate survey released by the AmCham in Beijing last month. The AmChams have been doing these surveys for years and they have been extraordinarily useful in working with officialdom in Beijing and in briefing Washington’s politicians about what is happening in China. There is some sampling bias, however, that you need to take into account.

By sampling bias, I mean that such surveys are naturally focused on the AmCham’s members – who are likely to be companies well-established in the market. These members probably have a well-staffed office and may even be among the host country’s major manufacturers. These are companies with a lot of skin in the game, not so much the small newcomer to the market. I have served on the boards of five AmChams (or equivalent business organizations) and it is the larger, more influential member firms who get the attention. It is to be expected that AmCham surveys will be biased towards the views of their larger, older members. The questionnaire for the most recent survey was sent to about 1,100 AmCham members and 325 responses were received, a pretty good response rate. We can assume, however, that the responses will be biased in favor of companies with staff large enough to take the time to fill out the questionnaire. That means a bias towards companies with something to lose in China and incentive not to rock the boat.

I have been corresponding with a couple of friends with long business experience in China. One of them has filled out the survey questionnaire several times in the past; the other isn’t American. They say that when businesspeople get together over a couple beers in China, they will tell you that the AmCham surveys have a positive bias. That they tend to emphasize the good stuff and minimize the bad about doing business in China. To the extent the surveys criticize Chinese practices, the situation for smaller firms, new to the market, is likely to be worse than the surveys might lead one to expect.

There is another reason for the positive bias. If you are an executive for a publicly-held U.S. company and your company has been touting the magic of the China market to its shareholders, you want no part of creating negative publicity for operations in China. That risks taking your share price down and may even jeopardize your job. Thus we can assume a positive bias in AmCham surveys. That doesn’t make such surveys any less useful. In fact, given the sampling bias, any bad news that is found in such surveys should raise red flags for anybody thinking about going into the market.

This may explain why Beijing rarely, if ever, criticizes the annual survey findings in public. It is close to sensational that a spokesperson for China’s Ministry of Commerce commented publicly last week that the AmCham Beijing survey results are “debatable” because the AmCham under-represents foreign firms doing business in China. The argument is disingenuous because an American Chamber of Commerce is composed of American firms or companies closely tied to the United States, and does not pretend to represent all foreign firms in the market. It also ignores the positive sampling bias of the surveys.

The proximate cause of the Ministry’s reaction is that, even with the positive bias, the latest survey reports that only 28% of participating U.S. companies think that China’s investment environment is improving, a precipitous drop from the 43% who thought the same that last year. The Ministry is also unhappy that more than 25% of the respondents said they have had data breaches or theft in their China operations, hardly a confidence builder.

Such results will mislead the decision-making process of international investors considering China’s market conditions and investment opportunities, the official said, adding that some foreign media have already sent false signals to the business community by citing the conclusions of the survey.
~ Xinhua

Xinhua and the Ministry of Commerce inadvertently hit the nail on the head – though what is debatable is whether the AmCham findings are misleading “false signals“. Given their positive sampling bias, these are red flags that any company should pay attention to. I read the Ministry’s bleat as a confirmation that American companies, and probably others, are seriously looking at putting new investment in the United States, Mexico and elsewhere – not in China. The positive sampling bias of AmCham surveys almost guarantees it.

Perhaps a little shaky, as I read the 2012-2013 China Business Report released last week by the American Chamber of Commerce in Shanghai. It isn’t that business is bad in China, it’s just not as good as it once was, according to the AmCham’s 2012 survey of its members. (Bear in mind that the members of an AmCham are mostly companies that have set up operations in the country, sometimes substantial investments, not the trader who goes in and out. So the AmCham Shanghai report is based on the views of firms that have already invested in China.) The survey found that profitability, revenue and operating margins of American companies in China have fallen for two years in a row.

We are not likely to see the gaudy growth rates of the past (especially if China’s economic statistics ever become reliable), and the focus of the Chinese economy is shifting from exports and large-scale investment to more of a consumer-oriented society. For those manufacturing in China, they can expect steadily rising costs, decreased availability of low-priced labor, and increased competition from domestic companies aiming at the Chinese consumer. This trend will accelerate if Chinese manufacturers can ever win a decent reputation for quality in the mind of the Chinese consumer. American companies in China are responding to these changes to position themselves to supply Chinese consumers rather than just export products from China.

… China’s new normal offers tremendous opportunity for American business. Survey results indicate that U.S. companies are adjusting to this new business environment and have largely moved away from the low-cost export model that once drove U.S. business strategies in China. Nearly two-thirds of companies surveyed said they were “in China for China.” They are here to compete in the growing domestic market driven by steadily increasing household income and consumption. U.S. companies remain committed to the China market – a record 91 percent report an “optimistic” or “slightly optimistic” outlook for their 5-year business prospects in China.

2012 was a good year for U.S. personal technology products, automobiles and healthcare products, but AmCham Shanghai expects their growth rates may soon be eclipsed by U.S. firms that can provide an attractive retail presence and by service companies. Nor will it surprise that larger companies that have been in China longer generally perform better than newcomers and small businesses. (Which is among the reasons I have long advised SMEs to go to Hong Kong, Singapore or Taiwan before trying China. But who listens to silly me?)

American companies in China have seen three years of falling profit margins. That said, profit margins for China operations have generally been higher than what they can get in other countries. China has survived the global recession rather handily and investment plans of U.S. companies reflect that. About 20% of the companies surveyed by the AmCham say that China remains their company’s #1 investment priority. (Remember, this is from the China managers of companies already in China.) Nearly half the respondents said they plan additional investment in their China operations, while fewer than 15% say they plan to move production out of China as a result of rising costs. Most new U.S. investment in China will go to expanding existing operations and redirecting them towards China’s internal market. There is little interest in buying up Chinese companies or facilities.

Continued U.S. investment in China does not mean mean the market is getting any easier to work in. It is not.

U.S. companies continue to struggle with bureaucracy and an unclear regulatory environment … A majority of U.S. managers cited what they observe as uneven enforcement of laws and regulations that favor local Chinese companies in their industry as a hindrance to their business. Perhaps most concerning, in this year’s survey more than two thirds of companies said the regulatory environment was either “not improving” or “deteriorating,” a consistent trend over the previous three years. While these challenges may impact Chinese companies as well, anecdotal evidence suggests a lack of transparency is a competitive issue for U.S. companies.

A vague regulatory framework opens the door to selective enforcement of China’s laws by local regulators – sometimes to the benefit of domestic companies. U.S. companies operate in accordance with U.S. law, adhere to strict internal rules and take seriously their obligation to act in strict
compliance with local laws. In some cases, the same cannot be said of their domestic competitors. Reports from American managers competing in China indicate that some domestic firms take advantage of unclear rules, laws and regulations to give them a competitive leg up.

McKinsey & Company forecasts that China’s GDP will grow 9% annually through 2030. But before committing your company to China, find out what obstacles you will have to face. And remember that there is no stigma, and a lot less risk, for picking lower-hanging fruit elsewhere before you plunge into the Middle Kingdom.