According to two recently published reports, European companies have become less starry-eyed about business prospects in China. One, published by the China-based consultancy Fiducia and with backing from the European Commission in Beijing, is based on the responses of 96 managers of European companies in China.
The other is a survey of German companies conducted jointly by the consultancy firm Roland Berger, the German Embassy in Beijing and the Delegation of German Industry and Commerce in Beijing. A total of 199 German companies in China took part in this survey, accounting for 53 per cent of all German-invested realised capital, which stoo d at US$2.5bn in September 1997.
In the German study, just over half the companies declared themselves satisfied with the overall performance of their China operations while only 20 per cent were dissatisfied. However, in hindsight a significant minority would do things differently ?only 67 per cent would use the same location while just 61 per cent would invest using the same legal entity.
The Fiducia study findings were rather more negative, 52 per cent of respondents saying their performance was worse than planned while 61 per cent said they had over-estimated the market potential. In many cases these miscalculations have resulted in consolidation and restructuring.
Nearly half the German companies (47 per cent) reached break-even before the start of this year and an additional 11 per cent aimed to attain this goal duringthe course of 1998. One-fifth have already succeeded in amortising their investment and an additional four per cent expect to do so this year. This rep-resents quite an impressive achievement since the average age of companies is quite young, at just 3.5 years.
Most of the major problems which German companies confront in China appear to be ameliorating, although the differing goals of collaborating partners were reported to have worsened over the course of an investment. Particularly significant progress has been made in the areas of infrastructure and the servicing and maintenance of machinery. Difficulties with the supply of raw materials and problems with product quality are now reported in about one-third of cases, down from more than 50 per cent at the start of production. About half of the companies still cite difficulties in recruiting well-qualified staff. In the Fiducia survey, corruption was seen as a major constraint by 60 per cent of companies, while 55 per cent had encountered counterfeits. The majority of companies had failed to come up with any successful remedies.
German companies reported that the main conditions for success in China include an efficient distribution net-work (57.5 per cent), loyal employees (53 per cent) and the choice of location (47 per cent). The favoured remedies against high staff turnover used by European companies are materialistic loyalty bonuses, extra allowances and housing subsidies. Career planning was mentioned by 18 per cent of respondents and overseas training by five per cent.
Failure to solve distribution problems appears to be tied to the lack of qualified personnel with experience in this area. According to the Roland Berger report, successful German companies are more likely to think about creating an efficient distribution organisation before they commit to an investment, with the result that distribution problems are solved faster. In practice, they tend to use more than one distribution channel, or establish or manage their own distribution companies or task their representative office or holding companies with the responsibility for distribution.
Some 24 per cent of investors are dissatisfied with their choice of location. In this respect, the Roland Berger report concluded that unsuccessful companies were too much influenced by the location of their partner, while successful ones preferred to select on the basis of infra-structure, the availability of personnel and the supply of raw materials and nearby clients. Only one-quarter of all respondents chose a location within a special economic zone, the reason being that most provinces have their own economic development areas which offer investment conditions similar to those of the SEZs.
Naturally there is a high correlation between a successful operation and satisfaction with a joint venture partner. Time spent trying to understand the motivation and aims of a potential partner is normally rewarded with improved likelihood of achieving shared goals and ongoing co-operation. Successful German companies negotiate on average six months longer (21 months) than unsuccessful companies (15 months).
Misguided expectations and differing goals of the collaborating partners are the most important reasons which can lead to failure of an investment project in China. The company which does not plan carefully will face a lot of problems once it arrives in China.
Dissatisfaction with partners is one of the reasons why some multinationals have already withdrawn from certain China projects. It has also contributed to changing minds about future investment strategy. Among the European companies surveyed, two-thirds of those respondents who plan to increase their China engagement said they would employ the wholly foreign-owned vehicle rather than the joint venture.
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