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NO. 41 OCT 8, 2015
Bit by BIT
American companies flock to China but say change is needed if businesses are to remain successful
By Zhou Xiaoyan | NO. 41 OCTOBER 8, 2015

New Buick Hideo sedans come off the assembly line at a GM factory on January 28 in Wuhan, capital of central China’s Hubei Province (CFP)

In 1997, a little more than a decade after its founding, folding bicycle company Dahon California Inc. set up a factory in south China's Guangdong Province to take advantage of the country's cheap labor.

The move paid off. Over the past decade, sales in China have grown 18 percent on average per year. Today, China accounts for about 70 percent of the company's global sales and Dahon has almost a 10-percent stake in China's folding bicycle market, CEO David Hon told Beijing Review .

Looking to use the "China miracle" to its advantage, Dahon is one of the tens of thousands of U.S. businesses that have moved their manufacturing base to China since the country's reform and opening up started in the late 1970s, and the establishment of diplomatic ties with the United States in 1979.

According to data from China's Ministry of Commerce, a total of 1,176 U.S.-funded businesses were established in China in 2014, a 10.8-percent increase over the previous year. Direct U.S. investment in China totaled $2.67 billion last year. By the end of 2014, the United States had invested in more than 64,000 projects in China with a value totaling $75.4 billion.

Sino-U.S. economic ties are more intertwined than ever before. But sources say that the Chinese market needs to be reformed to make it more accessible to private companies and that intellectual property rights (IPR) need to be better protected if China hopes to continue attracting foreign companies.

Strong confidence

According to the "2015 White Paper on the Business Environment in China" released by the American Chamber of Commerce in South China (AmCham South China) in February, 94.4 percent of U.S. companies surveyed reported they were already profitable or would be within the next two years.

"Our companies are doing well, and they are still growing. They are not growing as fast as they were in the previous years, but that's understandable because they are adjusting to China's economic transition," Harley Seyedin, President of AmCham South China, told Beijing Review .

According to Seyedin, the past decade has proven to be a golden era for U.S. businesses that have an eye on the Chinese market. The number of AmCham South China's member companies has grown to more than 2,300.

According to business environment studies conducted by AmCham South China, there had been a shift in where U.S. companies operating in China sell their products. A decade or so ago, China was primarily being used as a manufacturing hub with less than 23 percent of AmCham South China members selling the products they manufactured in China to the Chinese market. In 2015, that number was 79.3 percent, due to surging demand from a wealthier generation.

Over the past decade, AmCham South China has been tracking the reinvestments of the profits its members make in China. It found that instead of transferring money overseas, the companies are reinvesting the majority of it in China to innovate and keep up with increasing demand from the Chinese market.

Its member companies have a reinvestment budget of $12 billion for 2015 to expand existing operations in China. The amount has recently been extended to $13 billion each year for the next three years.

"That means our companies are optimistic, because if people are not optimistic, they don't invest. If they don't see a good future, they don't put their money in. American companies are voting with their money," Seyedin said. "They are reinvesting in the future of the Chinese economy because they believe in the economy."

But despite an increasingly competitive environment and concerns about the opacity of doing business in China, American firms are still looking for a way into the market. "At the end of the day, you make a decision whether to invest or not," Seyedin said. "This is a market that we cannot walk away from."

Seyedin shrugged off concerns over China's slowdown, which he said is caused by economic restructuring.

According to Seyedin, China has reinvented itself and no longer needs to be the "world factory." The old development model characterized by cheap labor and resources is no longer sustainable. Right now, China is more fixated on developing a new economy that will focus on value-added production, technology and innovation, he said.

"Our companies have also changed to accommodate that need. The biggest investment that our companies have made over the past three years has been in research and development--acquiring and developing technologies--and in hiring skilled employees," he said.

Seyedin hailed the Chinese Government's recent efforts to move away from a government investment-driven economy to one led by private investments and to allow the market to develop on its own.

But he said if the country wants to improve the business environment for foreign companies, the Chinese Government should beef up support for private businesses and accelerate its reform of the country's sluggish state-owned enterprises (SOEs).

Many areas of the market are currently inaccessible to private Chinese and foreign companies because of the near-monopoly of SOEs. The government needs to make it easier for foreign small and medium-sized enterprises (SMEs) to set up in China because the vast majority of innovations come from individuals, startups and SMEs, Seyedin said.

"(Private businesses) are creating thousands of jobs, each of high quality for the Chinese people. We need to continue to encourage investment by individuals and SMEs, whether they are domestic or international," he said.

Future prospects

In 2008, China and the United States began talks to create the bilateral investment treaty (BIT), which would further deepen Sino-U.S. economic ties. The second phase of talks kicked off in June 2015.

If passed by the two countries' respective governments, the treaty would enable American companies to enter the market without partnering with their Chinese counterparts or sign technology transfer agreements, which critics say would help minimize the intellectual property theft.

A total of 30 CEOs, including Apple's Tim Cook and Alibaba founder Jack Ma, met for a closed-door discussion on September 23 where they signed a letter to Chinese President Xi Jinping and U.S. President Barack Obama urging them to advance BIT negotiations.

Seyedin hopes Xi's state visit to the United States will further BIT talks and enhance economic ties between the two countries.

"There is no question that the United States needs China, and China needs the United States," he said. "The more we work together, the better it is for the people of two countries. We cannot succeed without China, and China certainly can succeed a lot faster together with us."

For Dahon's CEO, Xi's visit could lead to the construction of a better environment for IPR protection in China, something that he is all too familiar with having lost out on a substantial chunk of the folding bike market in China.

"Many companies would blatantly steal my company's patents. Without having to invest heavily on research and development, they could sell folding bikes at a much lower price than my company, greatly squeezing my company's market share," Hon said. "If there were a sound environment for IPR protection in China, my company should have occupied half of the folding bike market in China, compared with the current 8 to 10 percent."

Hon said poor IPR protection and deep-rooted protectionism held by Chinese local governments are the thorniest issues faced by U.S. businesses in China.

"When Dahon attends bicycle expositions held by local governments, we are always assigned with those remote booths while local brands are always given the most prominent spots," he said. "We feel like an unwelcome outsider."

But the issue goes deeper than merely feeling unwelcome. A dichotomy exists between the Central Government's intention of encouraging research and development and how that is carried out by local governments who want to protect local businesses. The local government worries if they crack down on IPR violations it will reduce their fiscal revenue, Hon said.

Moving forward, Hon thinks the Chinese Government should focus more on improving technology protections and encouraging innovation, rather than merely giving financial incentives to potential investors.

"I think instead of earmarking money to encourage innovations, the Chinese Government should use the money on IPR legislation, implementation and stricter supervision," he said.

Copyedited by Jordyn Dahl

Comments to zhouxiaoyan@bjreview.com

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