COMMENTARY: Despite Worries, American Companies in China Pushing Ahead

The American Chamber of Commerce survey shows a dichotomy, as concerns are balanced by most firms opting not to delay investments in the Middle Kingdom.

Mark Melnicoe
    Mar 30, 2019 5:05 AM  PT
COMMENTARY: Despite Worries, American Companies in China Pushing Ahead
author: Mark Melnicoe   

Every year the American Chamber of Commerce in China surveys its member companies on their sentiments about the business climate and how it is affecting them. The 2019 poll, released last month, shows some interesting trends, and as one might imagine, the increasing commercial tensions between the U.S. and China are taking center stage.

While the trade war has caused 89 percent of the American companies surveyed to say they are pessimistic about the bilateral trade relationship, there is a side I find surprisingly positive - only a quarter of the firms said they are delaying investments in China.

"Bright prospects for domestic consumption and a modestly improved investment environment have helped China remain a top investment destination globally, meaning that it remains as important as ever for the two sides to continue their efforts to move the relationship onto a more solid footing," AmCham China Chairman Timothy Stratford said in his message accompanying the report.

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That's important because it means that despite more than a year of increasing tensions accompanied by tariffs and at times nasty language from Team Trump in Washington, U.S. companies operating in China remain mostly hopeful about their future there.

They are mindful that China is far too important to give up on without giving it every chance, and they want to continue the effort to pry open the country's markets. Of course, that's exactly what U.S. and Chinese trade officials are in the midst of negotiating, as talks hit a critical stage while circling back and forth between Beijing and Washington.

Tariffs Not the Answer

What almost everyone hates, including the U.S. corporate community, is the way President Trump has gone about the fight. American companies overwhelmingly object to tariffs (only 4 percent support in the survey), seeing them as a blunt instrument subject to retaliation and ineffective at bringing about real change.

Rising tensions in the bilateral relationship ranked second as the companies' biggest challenge in China, topped only by the longstanding issue of the inconsistent and opaque regulatory/legal environment. Tensions topped such other concerns as rising labor costs in China, tariffs and a shortage of qualified workers.

Clearly, a lot hangs on the outcome of talks, given that we're talking about far and away the two largest economies in the world. Virtually all economists agree that a protracted trade war will inflict serious damage on the global economy. That certainly includes China itself, which is seeing a more pronounced slowdown that many expected. This is partly due to the trade war but also caused by the country's own problems, including mounting debt, a looming shortage of workers and bloated state-owned companies.

"The real challenge for China is how it will manage trade tensions with the United States," said Sitao Xu, chief economist at Deloitte, which partnered with AmCham for the survey. "There are both short-term issues - imbalances and market access - and long-term ones, such as the possible spillover effect of China's industrial policies, and the two need to be addressed separately."

Market Access is Primary Concern

American companies have clamored for decades for a quicker opening of China's markets. With a population of 1.4 billion increasingly affluent consumers, it's the dream market for companies from Starbucks (Nasdaq: SBUX) to Nike (NYSE: NKE) to Qualcomm (Nasdaq: QCOM). While the Seattle-based coffee purveyor is doing well in China with its shops nearly ubiquitous in many cities, many technology companies are facing headwinds.

Apple (Nasdaq: AAPL) has seen a big drop in sales of its flagship iPhone, and companies such as Nvidia (Nasdaq: NVDA) and Micron Technology (Nasdaq: MU) are dealing with issues of technology transfer and increased competition from domestic Chinese firms.

Because China is rising as a tech power and wants to compete with Western companies across an array of industries, access is a big problem for foreign technology firms in China. Fully 70 percent of the American companies in the survey said that market-access restrictions inhibited their business last year.

Probably the biggest takeaway from the survey is that U.S. firms, on the whole, saw revenue growth last year despite China's slowing growth, expect further market openings, and worry a great deal about the rise in tensions between their home country and, for many, the one that brings them their greatest profits.

The chamber characterizes the overall outlook as shifting since last year "from cautious optimism to cautious pessimism."

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