Serving the China Market Emerges as Primary Strategy of Multinational Manufacturers in New AmCham Shanghai / Booz & Company Study

Use of China as a low-cost export base declines

Continued sector maturity contributes to bullish outlook while rising costs and labor availability spur more companies to consider relocation within and outside of China

SHANGHAI, March 30 /PRNewswire-Asia/ -- Multinational manufacturers are increasingly focused on accessing the growing China market while the number of companies viewing China purely as an export base continues to decline, according to the third annual China Manufacturing Competitiveness survey, jointly conducted by the American Chamber of Commerce in Shanghai (AmCham Shanghai) and management consulting firm Booz & Company.

The survey of 202 foreign manufacturers in China shows that while respondents still consider China a hub for exports to the Asia-Pacific region and beyond, nearly 83% of the companies surveyed said that their primary motive for locating manufacturing operations in China was to access the Chinese marketplace, up from 71% two years ago. Meanwhile, the percentage of respondents planning to use China primarily as a base to supply other Asian markets has slipped from 54.6% in 2008 to 50.5% in 2009.

Multinational corporations (MNCs) are responding to rising costs, as well as labor availability challenges, by relocating or expanding their manufacturing operations from well-developed areas in the south and east of China. The survey found that 28% of respondents are considering moves to lower-cost areas in southwest or central China, up from 17% in 2008. In addition, 8% of respondents reported plans to relocate or expand outside of China and of those more than half are evaluating emerging Asian countries like India (most preferred), Vietnam, Indonesia, and Thailand.

"Multinationals are shifting their China strategy as the country's manufacturing sector matures," said Joni Bessler, Booz & Company Partner. "Many companies are focusing on best practices in the face of increased labor challenges and rising materials costs, while some companies are looking for lower-cost locations, both inside and outside of China."

"China can no longer be viewed solely as a hub for low-cost exports. The growing domestic market in China offers rich opportunities to foreign invested manufacturers," said Brenda Foster, president, AmCham Shanghai. "While challenges certainly exist, China remains a strong manufacturing partner and top investment destination."

While overall respondents' average Earnings Before Interest and Tax (EBIT) margin shrank from a 2009 average of 8.3% from 15% the year before, 61% said that China's 2008 RMB 4 trillion (USD$586 billion) stimulus package was effective in strengthening critical economic underpinnings such as rural infrastructure, transportation, health, education, environment, and industry, and prevented a more significant downturn.

Among the study's key findings:

-- Combating challenges with best practices. As the global economic

downturn led to earnings shortfalls and a sharp drop in exports,

companies are battling reduced profitability with a multi-tiered

approach, turning to sophisticated best practices for their China

operations. Nearly 22% are enhancing internal cost-control systems,

while 17% reported efforts to improve productivity, along with cutting

costs by applying energy-saving measures (15.7%) and switching to

low-cost raw materials (14.8%). More than 16% are applying lean

manufacturing principles to reduce waste and improve productivity.

-- Addressing labor challenges. To compete for talent and respond to new

labor regulations, many MNCs are broadening their offerings to Chinese

workers. A large majority (79%) of respondents said they are providing

more training and career development assistance to employees, rather

than relying solely on compensation to attract and retain workers.

-- Going green. Three-quarters of respondents said that they were adopting

green technology in their China operations, and 60% anticipate savings

from their green investment. The number one priority was to increase

energy efficiency (86%), followed by conserving or recycling water

(83%). A majority of multinationals (58%) are selling services into

the Chinese market that benefit the environment or that are produced

and distributed in ways that are environmentally sound.

Study Methodology

In this third annual China Manufacturing Competitiveness Study, Booz & Company and the American Chamber of Commerce in Shanghai (AmCham Shanghai) used a combination of online surveys and focus groups to survey 202 foreign-invested manufacturing companies about their perceptions of China as both a sales market and production center for domestic distribution and exports. This year's survey was designed to gain a better understanding of how companies are managing the new and still-changing business environment -- which continued to expand, albeit at a slower rate -- through the global economic downturn.

Of the companies surveyed, 85% were wholly owned by foreigners, 9% were joint ventures between MNCs and Chinese partners, and 6% were categorized as "others." More than 70% established their first China manufacturing operations after 1995. Industries represented include consumer, industrial, healthcare and materials. Approximately 40% of respondents have an additional major presence in China beyond their manufacturing footprints, including representative offices, regional or global headquarters, regional or global procurement centers, and regional or global research and development centers.

About the American Chamber of Commerce in Shanghai

The American Chamber of Commerce in Shanghai, known as the "Voice of American Business" in China, is the largest and fastest growing American Chamber in the Asia Pacific region. Founded in 1915, AmCham Shanghai was the third American Chamber established outside the United States. As a non-profit, non-partisan business organization, AmCham Shanghai is committed to the principals of free trade, open markets, private enterprise and the unrestricted flow of information.

AmCham Shanghai's mission is to support the success of our members by promoting a healthy business environment in China, strengthening U.S.-China commercial ties and providing high-quality business information and resources.

Visit http://www.amcham-shanghai.org for more information about AmCham Shanghai.

About Booz & Company

Booz & Company is a leading global management consulting firm, helping the world's top businesses, governments, and organizations.

Our founder, Edwin Booz, defined the profession when he established the first management consulting firm in 1914.

Today, with more than 3,300 people in 60 offices around the world, we bring foresight and knowledge, deep functional expertise, and a practical approach to building capabilities and delivering real impact. We work closely with our clients to create and deliver essential advantage.

For our management magazine strategy+business, visit http://www.strategy-business.com .

Visit http://www.booz.com to learn more about Booz & Company.