American Chamber survey finds companies less sanguine on China prospects

SINGAPORE--American businesses, including members of the pharmaceutical industry, appear to be less sanguine about their prospects of doing business or expanding it in China, according to a survey of the nation's business climate. That is particularly true for industries heavily engaged in research and development.

The just-released 2015 survey by the American Chamber of Commerce in China found that R&D-intensive industries, pharma's category in the report, already are heavily invested even as reliance and trust in China are in decline. Nearly half the surveyed R&D companies have centers in China, nearly 40% of them serving as a hub for emerging markets as well.

American businesses operating in China as a whole are reviewing their former plans for investing in the country, nearly a third deciding to make no further investment this year, a six-year low in AmCham surveys. And only 6% of them have acquisitions or joint ventures as their main objective, another 35% saying the country no longer is a high priority.

Back with the R&D sector, pharma and the rest of its members together voiced a remaining concern for enforcement of their intellectual property rights as one reason for their reluctance to conduct more of their core R&D innovation in China. But, 86% said enforcement had improved over the past 5 years.

Although numerous, the operating size of companies heavy in R&D is relatively low, most with fewer than 50 employees producing and most with only $1 million to $10 million in revenues. Those numbers would not appear likely to increase much given other concerns the companies expressed.

Those concerns--which include increasing costs, market barriers that tend to dampen expansion enthusiasm and the improvement of other markets--are resulting in a demotion of China by many of the R&D-intensive companies from being a top destination for investments to just one of many.

When asked why the 45% of R&D members located a center in China, 71% responded that tailoring products or services to the market, such as drug makers concerned about proper dosage and geographically unique diseases in Southeast Asia. Other responses included: 62% for cost competitiveness, 59% the local worker pool; 50% for faster production; 39% for aiming products at emerging markets; 38% to better-serve customers; and 19% because of legal or regulatory concerns.

Interestingly, as did GlaxoSmithKline ($GSK) when it so famously got in trouble in China in July 2013, most R&D category responders said they use local talent for more than 75% of their top management positions in China, more than any other category of businesses covered by the AmCham survey.

At the other end of the scale, the R&D category turned out to be the most pessimistic about the quality of their investment environment in China, with two-thirds reporting it had deteriorated or remained the same, no better. Additionally, 17% said they already have or plan to relocate their China operations elsewhere. But the category includes many industries unaffected by China's growing and aging population, who provide a rich source of revenue for the health-care segment.

Fifty-three percent of category members--which outnumbered percentages in other sectors--indicated they felt less welcome in China than before. The same group said that in descending order, the biggest reasons for them being less willing to invest were market access; enforcement targeted at them and other foreign companies; government funding for local competitors; de facto technology-transfer requirements; and equity shares required for local partners.

Just over one-third of the category that includes pharma said government approvals are more difficult to obtain, yet 70% said they remained optimistic about growth in the domestic market over the next two years.

- read the full report here