While addressing a seminar of European Union officials and business groups in June, Karel De Guch, the EU’s Trade Commissioner, remarked that impediments placed on European firms when investing in China, such as mandatory joint ventures and regulatory approval conditioned on technology transfers, makes deepening investment links between the EU and China problematic. Commissioner De Guch also remarked that due to the restrictive nature of China’s FDI policies, the country is listed by the Paris-based organization for Economic Co-operation and Development as “having the most restrictive regime for foreign investment in all of the G20”.
We should make it clear that we have no intention in arguing against what is a fact; China does place restrictions on foreign investment in certain segments of its economy. However, simply viewing the regulatory requirements for foreign investment in China in isolation of the vast opportunities inherent to the market is a mistake, and one we find made far too often by foreign companies (and politicians) viewing China from a continent or ocean away. When weighing the decision to enter China, it is imperative that firms view potential regulatory hurdles within the proper context. To this end, ChinaVest encourages firms to ask themselves one simple question when evaluating the merits of entering China: how successful have foreign firms been in operating under China’s “restrictive” investment policies?
We would argue that the level of success foreign firms have enjoyed in China is one of the best kept secrets outside of the mainland. A recent survey by the American Chamber of Commerce in Shanghai revealed that 78% of members surveyed (315 in total) were profitable or very profitable in 2011, and in relation to their global operations, 66.3% reported that their China revenue growth was either slightly (30.6%) or significantly higher (35.7%) than their international operations as a whole. Simply put, foreign firms are thriving in China, even those operating in the more regulated corners of China’s economy.
For example, China’s passenger vehicle industry is one of the most highly regulated industries with regard to foreign investment. Under current regulations, foreign participants must operate under a joint-venture structure, cannot hold a stake exceeding 50% in their JV and must transfer technology to their domestic partner. However, even under these stringent regulations – Commissioner De Gucht specifically cited the issue of “mandatory joint-ventures that apply to cars” as a reason he was pessimistic on increased investment between China and the EU – foreign automakers are flourishing. At the end of 2011, 70% of passenger vehicles sold in China were foreign brands, up from roughly 30% five years ago.
At the firm level, General Motors is one of the companies that have benefited the most from its China presence. GM currently operates 11 joint ventures in China which generated 77.1% of the company’s total vehicle sales in the Asia-Pacific, Africa, Middle-East region and 20% of the firm’s global profits in 2011. Critics of China’s current restrictive FDI regime could easily retort that GM’s profits from China would have been significantly higher without having to operate under a JV structure. However, we would argue that this is a gross overstatement. One of the reasons for GM’s success is they have actively engaged their domestic partner. GM has been aggressive in developing on-the-ground R&D capabilities in China (where a domestic partner is crucial) and has integrated the JV’s design team into the company’s global operations – GM’s Shanghai-based engineers worked on the design of the 2010 Buick Lacrosse and this year GM introduced the Buick Verano (which was designed entirely by their China JV specifically for Chinese drivers) to the US market.
Of course, even with all the success that foreign companies have achieved in China, the market does come with challenges: regulatory obstacles, fierce competition from domestic players, and adapting to a unique local market are just some of the common stumbling blocks new entrants can expect to encounter on their path into China. However, by no means do the challenges outweigh the opportunities, and the firms that are the quickest to embrace the market’s inherent inefficiencies, as opposed to lamenting them, will be the ones best positioned to capitalize on the once-in-a-generation gains up for grabs in China’s rapidly evolving market.