Multinationals: Enduring China’s Slowdown?


China’s economy continues to slow, creating conditions that challenge the business of multinationals. The latest PMI statistics out of China indicate that manufacturing is continuing to contract, as domestic and foreign demand remain weak. China is also in the process of restructuring away from a manufacturing-based economy toward a service-based economy. Multinationals have in recent years found themselves in an increasingly competitive market, finding rivals in domestic Chinese firms under a less encouraging regulatory environment. Will they endure China’s slowdown and changing economic climate?

The short answer is, for now, yes. While some multinationals, such as Revlon and Best Buy, have shut down their China business, many others are hanging on. This is happening despite a higher wage bill paid to Chinese workers, loss of market share to Chinese products, and regulatory crackdowns under the broader corruption campaign and anti-monopoly law. Most multinationals currently in China are hiring few additional workers at present but some, particularly those in the services sector, are expanding business capacity. For many multinationals, China contains a large domestic market, has a track record of high growth, and is well integrated with suppliers. Doing business in China therefore is an important component of their overall business strategy.

However, the road ahead looks rocky. Multinationals have attempted to maintain profitability despite slowing revenue growth. Profits have declined most starkly in the manufacturing sector. Multinationals that had been faced with rising costs in the eastern coastal regions of China reaped the gains of moving to China’s interior, but this practice has been exhausted. Rather than focusing on conquering new markets or relocating to low-cost regions, multinationals have to do the hard work of improving managerial and productive efficiency.

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Meanwhile, service sector MNCs are unable to participate extensively in Chinese markets, since services sectors such as the financial and telecommunications sectors remain relatively closed off to foreign companies. It is not clear when these industries will be further opened up, despite the intentions of the Chinese leadership to increase output in the services sector. Unlike the manufacturing sector, tertiary industry has not made much room for foreign competition due to existing inefficiencies and government protection, and there is no guarantee that this will change in the near future.

China holds many prospects for multinationals, as urbanization and consumer demand increase. The country continues to grow at a faster clip than most of the rest of the world. As conditions change, business strategies and processes must become more sophisticated than ever to compete. Businesses seeking to reach consumers in lower-tier cities, for example, may be assisted by local partners in order to gain traction in these less accessible locations. Multinationals must increasingly compete in marketing and selling products, as well as in creating new products, to compete against domestic Chinese firms. Investing in sectors that the government currently favors is necessary, as long as foreign competition is embraced.

China will likely continue to be an important base for multinationals, even though all low-hanging fruit has been picked, at least until the service sector is liberalized. The country’s connectivity to the rest of Asia, its large and increasingly sophisticated urban consumer base, and its potential growth preserve China’s attractiveness to multinationals, even in the face of somewhat waning economic activity. To survive, these businesses will have to bring their A-game to China’s increasingly challenging business sphere.

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