China now a key profit source for MNCs

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amega
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Joined: Nov 18, 2004
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Posted: Sep 24, 2005 - 01:17 AM
Post subject: China now a key profit source for MNCs

China now a key profit source for MNCs

BEIJING - Sixty-eight percent of American companies in China reported profitable or very profitable performances in China last year, while 86% of the companies reported higher revenues over the previous year, according to a recent survey by the American Chamber of Commerce in China of some 450 of its member companies.

The 2005 Business Climate Survey, included in the chamber's White Paper 2005, showed that 93% of survey respondents reported that China's economic reforms have improved the climate for US businesses, and 92% said their five-year business outlook in China is "optimistic" or "cautiously optimistic". It was

noteworthy that 62% of respondents said they are in China to serve the local market and another 11% are exporters to China.

Results of the survey show that with sustained, high-speed economic growth, China has become not only a leading market in the world, but also a significant profit source for foreign investors. Statistics show that over 450 of the top 500 multinational companies (MNCs) have started business in China. "What lures them is definitely profits," said Zhu Hengyuan, PhD of economics and management at Qinghua University.

Mobile phones, autos seen as key success stories
China has become the largest profit source for Finland-based Nokia, and the China market is still growing faster than anywhere else. Nokia's net sales in China rose from 2.013 billion euros in 2003 to 2.66 billion euros in 2004; while in the American market, its sales fell from 4.475 billion euros in 2003 to 3.416 billion euros in 2004. Motorola has even closer ties with China. Since entering China in 1987, Motorola has witnessed substantial growth. With its wireless paging products, Motorola became the market leader in China and also a winner in the global market within a short period of time. Statistics from the Ministry of Information Industry show that in the first seven months of this year, China's tally of mobile phone subscribers rose by 3.319 million to a total of 368 million.

A similar story is going on in China's auto industry. In 2004, 25% of General Motors' profits came from the China market, and the percentage is expected to grow this year. In June 2004, GM decided to move its headquarters in the Asia-Pacific region to China. Obviously, GM regards its sustainable growth in China as a critical factor for the company's development in the global market. "China's market is similar [to] the European market in its growth model, but the growth rate is five times the European market," said Kevin E Wale, president of GM China. He said China has become GM's second largest market in the world and predicted it would grow at 10-15% this year. And GM, with 85% of its Asia-Pacific business in China, would maintain double-digit growth, said Wale. Statistics from the Ministry of Commerce show that over 5 million cars were sold in the Chinese market in 2004, and the country boasted 27.09 million cars at the end of the year, making it the third largest auto market in the world.

Domestic companies feeling the heat
While foreign companies are happy with increasing profits, their Chinese counterparts are feeling the pressures of competition.

On September 1, Liu Heng went as usual to his mobile phone shop near Sanyuanqiao in the bustling business area of Beijing. Everything was the same except the fate of the shop. After five years of selling domestic-brand handsets, September 1 was the shop's last day. "Times are too hard for domestic brands," said Liu. His shop struggled for some time and was finally sold. The young man was reluctant to say goodbye to the shop, where he made his first "bucket of gold".

Liu's sad story is emblematic of the recent difficulties faced by the mobile phone manufacturing industry in China. Major Chinese handset maker TCL released its half-year report on August 31, announcing a loss of US$110 million. In the first half of the year, the mobile phone maker only sold 1.9 million handsets, a drop of 57% over the same period last year. TCL was not the only failure. Another well-known domestic mobile phone brand, Bird, reported a loss of 107 million yuan (US$13.2 million), against profits of 111 million yuan in the first half of last year. Amoi and Konka had similar stories. The losses of all four major Chinese brands of mobile phones at the same time broke a record in the history of China's mobile phone industry.

The losses were all the more bitter against the overall background of the industry: China has become the world's largest market for mobile communications, and foreign brands are enjoying rising profits there. "The lucrative mobile phone market has become a paradise for foreign companies but the cake is a little bitter for the domestic brands," said Huang Jing, an expert on mobile telephony with the China Center of Information Industry Development (CCID), a global consulting company in China. "Technology and after-sales service are two vital factors that fail the domestic brands," said Huang.

Chinese automakers, in a disadvantageous and inferior position in terms of technology and marketing experience, are undergoing similar difficulties. "We have to pay [large sums] for patent fees to foreign companies for molds, designs and even upgrading of electronic technology," a senior executive with an automaker in east China's Zhejiang province said as he related how his company was struggling to survive in the seemingly expanding car market. "As for the core technology of high-end engines, we have no place to buy [it] and even if foreign companies agreed to sell, we could not afford it," he said. "Lack of core technology is the main reason why Chinese companies give the lucrative market away to foreign companies," said Zhu Hengyuan.

Ever since China entered the World Trade Organization, the country has been following the relevant rules to open its industries step by step. Most of the multinational giants in the auto industry have already come to China. With competition heating up, the market share for Chinese companies is getting smaller and smaller, said Zhang Yuxian, an expert with the State Information Center. Boasting in-house core technology, advanced management expertise and global marketing experience, the foreign-invested companies are sure to be more competitive than their Chinese counterparts in the short term, and therefore can expect to win more profits from the Chinese market, said the expert.

(Asia Pulse/XIC)

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Here is a question: Shaould China protect its domestic industries like others did with textile?