In March 2011, four Best Buy stores in Shanghai, Suzhou, and Hangzhou officially ceased operations and were no longer open to the public. CFP — From Best Buy to Barbie dolls, from PepsiCo China to Danone and Nestle, several multinational corporations are scaling back their operations in China. The withdrawal of some multinationals reflects changes in China's economic environment - despite the tempting opportunities, it is no longer considered an "emerging market." Compared to the past when cheap land prices, low labor costs, and preferential policies attracted foreign enterprises, the current business environment for companies is becoming increasingly challenging. They must now face strong competition from domestic enterprises and strict government supervision.
The last day of 2011, the White Paper on Shanghai's Foreign Investment Environment, released by the Shanghai Municipal Commission of Commerce, showed that foreign investors had cumulatively established 240 investment companies, 353 regional headquarters of multinational companies, and 334 research and development centers in Shanghai. The number of regional headquarters and investment companies of multinational companies ranked first nationwide, while the number of foreign-funded R&D centers was the second highest in the country.
Despite the large numbers, the appeal of multinational companies to job seekers is declining. "Chinese domestic enterprises have developed rapidly in recent years and compared to some multinational peers, they have more growth potential. Some domestic enterprises can offer even higher salaries than multinational companies to attract local senior talents; they are more flexible in procedures, making them more attractive than multinational companies," a senior executive based in Shanghai of a certain company told the China Economic Weekly. The company he serves has over 100 years of operating history and originates from Germany.
Ms. Li, an employee of a French bank based in Shanghai, still recalls the layoffs she experienced recently with trepidation. "I used to think my job was secure, but suddenly realized there are no guarantees." Without any warning, the bank announced the layoff of one-third of its Chinese employees a month ago. "On that night, my supervisor showed me the layoff list, which included my name. Fortunately, my supervisor replaced me at the last minute, allowing me to keep my job."
For Chinese senior talents who possess bilingual skills, cross-cultural backgrounds, and can navigate both domestic and international business environments with ease, the appeal of foreign companies is gradually decreasing.
Multinational companies are undergoing a "strategic retreat"
On December 5, 2011, Xu Jie, spokesperson for Danone Dairy China, announced that Danone Dairy (Shanghai) Co., Ltd would temporarily halt production. Two days later, He Tong, spokesperson for Nestle, stated that Nestle would end its ice cream retail business in East China by the end of December 2011 and cease ice cream production and operations in the region. He Tong mentioned, "Nestle continuously evaluates its ice cream business and makes corresponding adjustments to ensure its long-term development."
The skillful rhetoric of these two spokespeople could not conceal the difficulties their businesses faced. In contrast to Danone and Nestle's vague claims of "temporary shutdown" and "corresponding adjustments," PepsiCo China took a more direct approach by announcing its exit from its core bottled beverage business.
Even earlier than PepsiCo China was Best Buy. On February 22, 2011, Best Buy announced the closure of all its retail stores on the Chinese mainland and withdrew from China. Although Best Buy expressed intentions to return to the Chinese market in September of the same year, there has been no significant progress as of now.
On the list of multinational companies that announced their exit from China last year were Mattel's Barbie flagship store, Europe's largest building materials distributor - Saint-Gobain subsidiary "Maison Paris," and toy giant Simba Toys Group.
An increasing number of high-end American manufacturing companies are quietly retreating from China's real economy: American toy manufacturer Wham-O began redirecting 50% of its frisbee and hula hoop orders to domestic U.S. producers, whereas previously these orders were produced in countries and regions including China. Ford Motor Company, which originally outsourced part of its auto parts production to China, is bringing this production back to the United States. ATM supply giant NCR has relocated part of its ATM production from China to Columbus, Georgia, USA.
These changes are more evident in the IT and home appliance sectors. Many brands once active in the Chinese market have withdrawn from or scaled back their operations in China in recent years: In 2008, Whirlpool signed an agreement with Suning to exclusively sell air conditioners through Suning; in 2010, Philips sold its TV business production and sales to AOC; Panasonic sold its Sanyo white goods department to Haier Group of China for 1 billion yen; in September 2011, Electrolux signed an agreement with Gome to have Gome produce and sell its series of products under its brand in China.
Although many of these actions are described as "strategic retreats" due to rising human resources and other costs, it cannot be denied that the businesses of these companies in China have reached difficult times.
China is no longer an "emerging market"
From macro data, the inflow of foreign capital into China is slowing down. According to statistics from China's Ministry of Commerce, the actual use of foreign investment (FDI) in China grew by 9.72% in 2011, compared to 17.4% in 2010.
The loss of traditional advantages has made multinational giants operating in China increasingly concerned. A report from The Economist stated: Despite the exciting opportunities in China, the business environment will become increasingly challenging. After surveying 328 multinational companies operating in China, The Economist Intelligence Unit found that during China's transformation into a high-tech economy, corporate business models will come under increasing pressure, and profit figures are scarce. Some people believe that for many industries, China is no longer an "emerging market." The days of maintaining high profit margins (15%-20%) are gone forever.
On the other hand, the increase in costs due to higher policy access thresholds and the cancellation of preferential policies has also made it more difficult for multinational companies to operate in China.
Lin Ruiming, chief researcher of the Strategy Management Group at Samsung Research Institute China, discovered that affluent areas in eastern China such as Suzhou and Wuxi in the Yangtze River Delta have raised investment thresholds. For new incoming foreign enterprises, there are no specific preferential policies, and high requirements are placed on their industry types and energy conservation and emission reduction.
A senior executive in the public relations department of an internationally renowned multinational corporation also admitted to the China Economic Weekly that since December 1, 2010, when China unified the urban maintenance construction tax and education surcharge tax for domestic and foreign enterprises and individuals, and since 2007 when it unified the tax rates for domestic and foreign enterprises, their company's tax burden has increased significantly, though he refused to disclose the exact amount.
Besides cost constraints and policy restrictions, fierce competition from domestic Chinese enterprises is also a new problem facing multinational companies. An analysis by British Off-Highway Research shows that although the sales of U.S. construction equipment supplier Caterpillar in the Chinese market tripled from 2005 to 2010, its market share in China dropped from 11% to 7% during the same period. The entity that seized its market share was not its arch-rival Komatsu of Japan, but Chinese domestic enterprises.
According to the Economist Intelligence Unit's survey report, executives of multinational companies in China listed competition from domestic Chinese companies as the second biggest threat, with intellectual property protection being the top threat.
It is quite dangerous for multinational companies to overlook the competitive threats posed by Chinese enterprises: A former executive of a multinational company openly expressed contempt for Chinese domestic enterprises. This company's management team weekly tracked the market share changes of traditional global competitors but never paid attention to competition from Chinese domestic companies. It wasn't until one day that the market share of the latter exceeded 50% that they woke up, but it was already too late.
A similar situation occurred with Danone. In the Shanghai market, Danone Dairy was defeated by local competitors like Bright Dairy, Mengniu, and Yili in brutal price wars, forcing it to close its factory in Fengxian County, Shanghai in early December last year.
According to a survey conducted by the American Chamber of Commerce among U.S. multinational companies operating in China, the biggest concern of American companies is that Chinese state-owned enterprises are taking away their markets. The 2011 Business Climate Survey released by the American Chamber of Commerce in China showed that 26% of respondents saw a decline in their business, and 40% expected further declines in the future.
In a recent report published by Booz & Co., four emerging companies were highlighted: Wong Lo Kat, Foshan Jingxing Hygiene Products Co., Ltd., Bawang International Shampoo, and Hangzhou Hancao Biotechnology Co., Ltd. The authors of the report pointed out: China is nurturing a group of powerful domestic leading enterprises, and competing with them is a new reality for multinational companies. These domestic enterprises are closer to and understand consumers better, focusing on producing affordable alternative products, emphasizing marketing and distribution strategies, and developing new products and innovative sales models that closely meet the needs of Chinese consumers.
Foreign enterprises also need to "adapt, transform, and reform"
Despite a significant proportion of multinational companies believing that the Chinese market is crucial to their global strategy, if they fail to adjust their pace of advancement in China, adjustments and withdrawals similar to those of Best Buy, Mattel, Danone, and Simba Toys in China will become common scenarios for more multinational companies.
Xu Sitao, head of global forecasting for China at The Economist Intelligence Unit, believes that multinational companies need to restructure themselves in line with their level of emphasis on China to respond to challenges from domestic enterprises. Although multinational companies have not yet rolled out large-scale strategic adjustment plans, relevant strategic adjustments have indeed begun.
A senior executive of a multinational company in the equipment manufacturing sector in Shanghai told the China Economic Weekly that the company's measures to respond to changes in the Chinese market environment include adjusting and optimizing product structures, upgrading low-end products, and shifting towards higher value-added product research and development. In fact, Xu Jie, spokesperson for Danone Dairy China, confirmed to the China Economic Weekly that Danone Dairy Shanghai Co., Ltd was suspending production and concentrating efforts on transforming "Activia" into a high-value-added strong brand.
The Economist's survey showed that currently only 8% of multinational companies have their China CEOs stationed at their global headquarters, while 45% claim that their China CEOs report to regional headquarters. Notably, 40% of large multinational companies indicated that they have dispatched very senior managers to the Greater China region to improve understanding of China and accelerate decision-making processes at headquarters.
Additionally, considering the high cost pressures in the east, multinational companies are attempting to shift their bases in China from first-tier cities in the east to second- and third-tier cities. Among the multinational companies surveyed by The Economist, 33% of respondents said "the company is currently moving to second- and third-tier cities." There was a slight difference in the case of large companies (with annual revenues exceeding $5 billion globally) - 45% of them were moving to second- and third-tier cities. Companies relocating to more remote areas accounted for 12%.
Carrefour Group, which entered the Chinese market in 1995, told the China Economic Weekly that due to saturation of large retailers in first-tier cities, Carrefour has always faced pressure from customer分流tion. On the other hand, it also faces pressure from rising raw material costs from suppliers.
To cope with these pressures, Carrefour has taken localization measures. In 2010, Carrefour held the "Promotion to Home" event, where more than 1,500 Chinese employees received promotions. Currently, over 99% of Carrefour's employees in China are Chinese nationals, 95% of its store managers are Chinese, and 99% of the products sold in all Carrefour stores are made in China, purchased domestically, and distributed locally.
Hiring local employees is not a foolproof solution. At the end of last year, shortly after its newly established subsidiary SOCORO, Carrefour shipped its first batch of 45 tons of Fuji apples and pears from Zhongyi Cooperative in Qixia, Shandong Province to European markets for sale. After setting up its office in Shanghai, China will gradually become another important fruit origin for Carrefour worldwide, supplying agricultural products to its hypermarkets around the world.
In its localization development concept, innovations such as "direct supply from farmers" through SOCORO may be an important layout for Carrefour to escape crises and participate in local competition.