US Companies Are Getting Squeezed Hard In China

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SHANGHAI (Reuters) – Profitability and sales are harder to come by in China as U.S. firms face increasing competition from domestic and foreign players, said a U.S. business group survey on Thursday.An annual survey by the American Chamber of Commerce in Shanghai showed a majority of firms believed that competition had intensified, while the number who said they were profitable in 2012 dropped to 73 per cent from 78 per cent in 2011.

This reflects the challenge for global firms looking to boost profits in faster-growing economies such as China, and underlines the impact of China’s slowdown in 2012, where GDP grew at its slowest pace in 13 years.

The 420 U.S. firms surveyed identified rising costs, human resources constraints and heightened domestic competition as the main business challenges, said the report.

“We accept these are going to be the rule rather than the exception in the years to come,” said Brenda Foster, president of the chamber at the report’s Shanghai launch on Thursday.

70-one per cent of firms said revenue had increased versus last year, down from 80 per cent in 2011, while those who reported operating margin growth edged down to 48 per cent from 51 per cent.

As the Chinese boom years of 10 per cent-plus GDP growth recede, international firms are preparing themselves for a ‘new normal’ in China – one less reliant on exports and investment, and more tied to the domestic Chinese market, the survey said.

This meant retail and service sector firms scored higher on the survey’s Shanghai Business Confidence Index, measuring confidence in future business opportunities.

The survey also said many U.S. firms feel China has not done enough to level the playing field for foreign firms, with 54 per cent of respondents saying a lack of transparency favoured domestic companies, up from 46 per cent in 2011.

But despite the challenges of setting up and operating in China, U.S. businesses are still keen to be on the inside of China’s growing domestic market, set to grow 9 per cent a year through 2030, according to estimates from consulting firm McKinsey & Co.

The survey data shows that firms making over 10 per cent of total global revenue from China rose to 45.5 per cent from 41.2 per cent, while nearly three-quarters of respondents said they plan to increase investment over 2013, a three-year high.

Intellectual property rights – a topic flagged dramatically by a recent U.S. report linking the Chinese government to international hacking of private information – remained high on the agenda.

Around 70 per cent of firms said IPR was “critically important” or “very important” to their business in 2012, up from 68 per cent in 2011.

(Reporting by Adam Jourdan; Editing by Sanjeev Miglani)

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