By Jim Tompkins, CEO, Tompkins Associates
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Hello, my name is Jim Tompkins, President and CEO of Tompkins Associates and Tompkins International.
I am very excited about our guest today, as we have Kent Kedl who heads up Technomic Asia, a Tompkins International company based in Shanghai, joining us.
You’ve probably heard us talking about Technomic Asia, but to refresh your memory, they are a leading market strategy consulting firm in China, as well as supporting the Tompkins Associates supply chain outreach.
We are celebrating 25 years in China this year with Technomic Asia, and that’s quite a milestone! It’s good to have you with us, Kent.
Kent:
It’s good to be here, Jim. Thanks.
Jim:
I understand that Technomic Asia just helped the American Chamber of Commerce in Shanghai do a survey of their members. I would like to talk about that a bit today and find out what the results were. First of all, tell us a bit about AmCham Shanghai and this survey.
Kent:
Sure. The American Chamber of Commerce, also known as “AmCham,” is a global, non profit organization that helps bring together American businesses. I am not sure that people in the U.S. are really familiar with AmCham, but if you do international business, you will end up hearing about it somehow. Here in Shanghai, AmCham has over 4,000 members, it’s now the largest AmCham chapter in the world – it just passed Japan last year, pretty proud of that.
AmCham sponsors events, training, seminars and really generally encourages American businesses to get together and learn from each other. Over the years, Technomic Asia and AmCham have worked together very closely on a number of things, and we have spoken at many of their conferences, seminars, things like that.
Every year, AmCham Shanghai does a survey of their members to get some insight into how business is going that year in China, what companies are doing to succeed, things like that. In the past, AmCham has run this survey on their own. But this year’s been particularly special, the economic crisis has made this year pretty high on people’s radar screens. So they wanted a partner to help them to do this survey.
Here at Technomic Asia, we’ve been doing market research and surveys for 25 years here, so we were able to bring that experience together with them and to partner with them and to do it. And I think we produced, what I think, is a pretty darn good survey if I do say so myself. We were also able to compare this year’s data with about 10 years of past data on some questions, not all questions, with some we were not able to do that, but I think we came up with some really good responses on the questions. For those listeners that want to get a copy of the report themselves, you can go directly to the AmCham website at www.amcham-shanghai.org.
Jim:
Kent, that sounds really exciting! Tell us a bit about the demographics of the survey: Who responded, what types of companies they were and so forth.
Kent:
Well the survey went out to nearly 1,500 corporate members. We had 369 responses, so we have a 25 percent response rate – the highest ever, and actually for survey research is a pretty incredible response rate. So I think people were pretty excited to respond to this and get the results. Both large and small companies were represented, 60 percent of the respondents had more than 100 employees.
Seventy percent had less than 49 million in China revenues. We had both manufacturers and service providers. Sixty percent were manufacturers, 40 percent were service providers.
We had respondents from 28 industrial sectors, which is pretty broad and diverse set of respondents. Eighty-five percent had a legal presence in Shanghai, and an additional 30 percent had additional offices in Shanghai, manufacturing offices, things like that.
Probably one of the most interesting points of demographics was that nearly 45 percent of the respondents had been in China for longer than 10 years. That to us was a pretty amazing statistic.
Jim:
Well, obviously, 2009 was a tough year for us all, and I know we are all really happy to see it pass by. How did American companies fare in China?
Kent:
You know Jim, I’d agree with you, I think even here in China, we’re pretty happy to see 2009 in the rearview mirror. It was a challenging year here this year, and remember we’re coming off of several years of really go-go growth here. Thirteen percent growth – GDP growth – over the past few years here in China, or up to 13 percent I should say.
So we’re coming off some pretty heady years. However, this year, according to the survey, 39 percent of the companies surveyed saw a decrease in their revenue over the last year. Only 23 percent had this happen in 2008.
And this year, 36 percent projected flat profits or even a loss of 2009. This is the largest percentage since 2002 that have projected kind of a flat year. That being said, in China, there still was some growth. Sixty-six percent of those surveyed said that their operating margins in 2009 were equal to or better than 2008.
Sixty-five percent said that they are profitable or very profitable in 2009, and 58 percent said that they had increased their China investment from 2008 to 2009. So, if you just look at China by itself compared to previous years, it was a difficult year. But compare China to the rest of the world, and it’s actually looking pretty good.
Jim:
Well, that last part certainly sounds encouraging! So it seems that, although foreign companies in China took a bit of a beating, that there was some good news as well.
Kent:
I suppose the term ‘who loses’ is all relative.
But overall, the survey found that China really was a bright spot for companies in an otherwise bleak global picture. Fourty-one percent of the surveyed companies said that they had higher operating margins in China than in the rest of their worldwide margins.
Sixty percent reported that the crisis had a bigger impact on global operations than it had in China. Only 19 percent said that the impact was greater here in China. Probably the most significant finding in this section was that 74 percent of the companies surveyed ranked China as a top-investment priority in their global companies.
Nearly 20 percent ranked it as their number one. What we’re finding is that companies are putting China very high on their list of global priorities. China is no longer just a ‘nice to have,’ it’s actually a ‘need to have’ right now.
Jim:
You said at the beginning of the interview that nearly 45 percent of the companies surveyed had been in China longer than 10 years. This is an amazing statistic to me. In the West we often think about China as being kind of a “new” thing, but it seems that there are some veterans in China as well, including all of you at Technomic Asia. So what are American companies thinking about now that they have been in China awhile. Where is the “growing edge” for them?
Kent:
You’re right Jim, all that experience is good but the question is, where do you go from here? The finding in the survey – and this actually mirrors a lot of what we’re doing in our own practice in Technomic Asia – is that companies are looking to China’s tier 2 and tier 3 cities for expansion. That’s where a lot of them are going.
A lot of companies came in to the bigger cities, cities of up to 20 million people – they’re monsters – they’re starting to go into tier 2, tier 3 cities. Now when I say, tier 2, tier 3, these are not small towns. A tier 2 city in China can still have 10 million, 12 million people in it. These are larger than what we would call a tier 1 city in the United States.
Our survey found that 25 percent of the respondents plan to expand into second and third-tier cities here in 2009 and really primarily to increase market reach. They’re looking to reach new customers – remember I said earlier that growth is down.
They’re looking for growth opportunities. Another interesting finding is that for the first time a top business challenge as we found in second and third tier cities is that those challenges are the same as the main challenges in first tier cities.
Challenges, such as – unclear regulations and making relationships and things like that. So what that says to us is that the China second and third-tier cities are becoming as mature as China’s first tier cities. The survey found that the top five cities for expansion into China’s cities: number one was Chengdu, which is out in Sichuan province in central China. Number two is Wuhan. Number three is Suzhou, about an hour and a half from Shanghai. Number four is Xi’an, and number five is Chongqing.
Those are the top five cities that companies are expanding into in 2009 and going forward.
Jim:
We hear a lot about the challenges in China for companies to protect their intellectual property. Did you ask about that in the survey?
Kent:
You’re right Jim. Intellectual property protection – IPR, intellectual property rights, is really a key concern and a big challenge for foreign businesses in China. In fact, it’s a challenge for local businesses as well, as they’re starting to face that. Not much has changed here, according to the survey.
Sixty percent of the respondents to the survey said that IPR enforcement has remained the same from 2008 to 2009, so no great improvements there. One interesting finding we got from the survey though is that those who consider intellectual property to be critically important to their business were also significantly less bullish on how much IPR protection has improved. In other words, those that know the most about IPR are the most realistic.
They say IPR has not improved all that much. However, we found that those companies were also the most optimistic about their five-year plan for China. So what that says to us is that people are taking a more realistic approach to China.
Even though IPR is very important to them, they’re saying, yeah, we know it’s important but we have to have China, we have to be there, we have to figure out a way to protect it and once we do, then we really see some interesting opportunities in China. A couple of best practices that companies are using to protect intellectual property in China – number one, 40 percent said they are educating customers on how to spot counterfeit goods and how to value and protect intellectual property. Thirty-nine percent said they are taking the legal route.
They are filing suit, prosecuting the offending party. We’re hearing more examples of successful prosecutions here in China, which is encouraging. Thirty-seven percent said they are collaborating with the Administration for Industry and Commerce, which is a Chinese organization. So companies are doing things to help protect IPR, but it still remains a key challenge.
Jim:
Kent, I’m really impressed with the data here. So let’s try to bring some of the headlines together for our listeners. China is a huge place; it is very fragmented; it can be a confusing place to do business. You said that part of the purpose of AmCham is a place for American companies to come together to share their expectations and learn from each other. What are some of the highlights and best practices that came out of the survey this year?
Kent:
I would say probably the key finding for the survey was actually quite similar to findings we’ve had in the past, and that’s what we call here “China for China.” Meaning that companies are investing in China, they’re hiring people, they’re putting up resources in China. Primarily for the China market, the conventional wisdom says that companies were exporting jobs from the US. Instead of setting up factories in the US, they’re setting up factories in China for low-cost goods, things like that.
But the primary reason for companies setting up in China is to invest in the China market. They have to be here, they have to manufacture here and operating here in order to access the growth opportunities for the China market. Those producing in China for the China market jumped to 59 percent. This is only 39 percent last year.
Then at the same time, those in China who were primarily to export to the US dropped to 16 percent from 21 percent in 2008. So, “China for China” is becoming more important. Obviously we know that demand in the West, particularly in the US, dropped significantly in the last year, and so exports were less valuable.
Those companies that were focused on the China market and were here for the China market were significantly less impacted by the downturn as well. Again, China provided a barrier against changes in the global environment. Another thing we that we found too, we did some statistics on this, ran some regression analysis on the data and found that there were five factors that were significantly associated with a company’s profitability. They are these: number one: size. Especially those with more than US $10 million in China.
It seems that once you reach scale, you protect yourself better, you’re able to grow more. Number two is experience. Those with more than five years in China tended to be more profitable here. So it seems that China takes a bit of getting used to, I guess. Three, the China revenue relative to global revenues. Companies who derive more than five percent of their global revenues in China tended to be more profitable in China.
See, it’s logical, it’s got greater focus and speaks to the size and scale issue as well. Number four: China priority. Companies that set China as their number one priority in global investment plans were more profitable here. This is a very synergistic relationship.
You said China is the number one priority, it becomes more profitable, it supports your global profitability, which I would imagine make it even more of a number one priority for companies. Number five, this goes back to what we talked about in tier 2, tier 3 city expansion. China’s sales footprint was a significant determiner of profitability here. Companies that had sales offices in two or more cities here tended to be more profitable, tended to be more successful.
Jim:
Interesting! In some ways this sounds almost counter-intuitive to how companies are responding to the global economic crisis. When times get tough, they pull in their investments, protect their core and don’t want to expand too quickly.
But what this survey seems to be saying is that just the opposite may be true, at least for China. That American companies who are successfully expanding into China are actually able to use this expansion as a hedge against the challenges they are facing in their home markets. Is that fair to say?
Kent:
I think it’s a very fair thing to say Jim. The one word that came out of the survey this year, which is really ironic given the global situation. That one word is optimism. American companies are more optimistic about their future in China than ever before. Ninety percent of those surveyed said they are optimistic or slightly optimistic about the five-year growth outlook here in China.
That’s up from only 81 percent in 2008. The median term forecast also held up very well. Eighty-two percent forecasted their 2010 revenues to be higher than 2009. Asked about their future plans – 64 percent have plans to increase their China investment in 2010. Overall, fewer companies think that China is losing competitive cost advantages here – only 19 percent said that was the case in 2009. This is down from 30 percent in 2008.
So I think China is a bright spot in companies’ global portfolios, and you said it right: it is counter-intuitive in a sense, but when the going gets tough, the tough invest. A lot of them are investing in China.
Jim:
Well, this is all very encouraging news, Kent, and I think that, here in the US at least, we could all use encouraging news. Now, I understand that plans are already underway for next year’s survey?
Kent:
Right. We are already putting a member committee together to design an even better survey for 2010. We really want to dig deeper into the factors that make for a successful company in China. I think we’ve only scratched the surface in this last survey.
We have so many companies in the AmCham membership that have been very successful in China, they have been here a long time. We really want to tap that experience and learn from it.
Jim:
Good stuff, Kent. Very exciting. Thanks for being with us, and we look forward to hearing about the 2010 survey when it comes along.
Kent:
Thanks for having me on the program Jim. It was good to be here. I hope that everyone finds this news encouraging and it could be some guidance for 2010 for your companies.
Jim:
Kent, I’m really pleased that we covered the AmCham survey today, because it’s a great introduction to the next series on the Global Supply Chain Podcast. We’ll be kicking off in just two weeks a series on mergers and acquisitions. I’m really pleased that we’ll have Kent back, as well as other executives from Technomic Asia, as well as executives from Tompkins Associates.
Really look forward to that, and look forward to speaking to you again real soon.
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