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Why are multinational companies attracted towards China and their strategies?

| by Swaminathan Venkataraman

(October 03, Singapore City, Sri Lanka Guardian) In recent years, there have been huge investment in China by the multinational companies in variety of sectors such aspetrochemicals, pharmaceuticals, biotechnology, paint and coatings etc. Such investments have not been confined to buildup manufacturing plants alone but have also been done extensively in research and development facilities that have far reaching importance and significance to both China and multinational companies.

Every major international technology and engineering organization in the world have presence in China. At the same time, one does not see the presence of Chinese technology and design organizations providing similar services to other countries, to the extent that China receives from companies abroad.
It can be now said with confidence that there are only a very few large sized companies in the world, who do not have their presence in China, either in research functions or in manufacturing or in trading. There are no multinational organization today, who do not have presence in China in one form or the other.

Most of such ventures of multinational companies in China are based on mutually beneficial technical and financial collaboration arrangements with the Chinese companies. There appear to be high level of comfort amongst the multinational companies operating in close cooperation with the Chinese companies.

The investments by some of the multinational companies in China have been really huge such as BP (around US$4.7 billion), Shell (around US$4 billion) and BASF (around US$5 billion). It is not only multinational companies based in Europe and USA that have been investing in China in a big way, but companies from other regions have not been left behind. For example, Kuwait National Petroleum Company and Russia’s Rosneft Oil have won approval to build large refining/petrochemical projects in China.Brazilian state oil company Petrobras and Venezuelan state oil company PDVSA have signed joint venture agreements with Chinese partners. Several important Indian companies like Tata, Dr.Reddy’s Laboratories, Aurobindo Pharma have significant presence in China.

Factors that attract multinational companies

Obviously, there are several factors that are attracting the multinational companies towards China. Such factors are not only serving the interest of the Chinese companies but also that of the multinational organizations.

Ofcourse, the most important factor is the large geographical size of China with different climatic conditions and with the availability of variety of natural resources, mineral deposits and agro products, which facilitate investment opportunities in multiple directions, offering enormous scope for product development and market penetration. The large population and consequent high consumption power along with large geographical size have made China to be an investment destination, that can be ignored by multinational companies only at huge cost to them.

What is equally attractive to multinational companies, apart from the above factors, are the largely pro active industrial and licensing policies of government of China, that have created confidence amongst the multinational companies about the long term stability of the policies and security of their investments and interests in China.

While the government of China is playing its role in attracting the investment from abroad, the Chinese industry as well as research and development bodies are not lagging behind. With their positive attitude and approach, they have contributed to create enthusiasm amongst the multinational companies to have cooperation and collaboration with them.

How is China different for other countries?

There appear to be widespread view amongst the multinational companies venturing into China that China has several distinct characteristics that set it apart from several other countries in the world, which make China to be a preferred destination.

Government of China has made significant contribution for the development of such positive views about China amongst the investing multinational companies. Policies and strategies of the Government of China are viewed as pro active both from the short term and long term point of view. Many multinational companies seem to think that such policies are largely fair and they take into the consideration to a large extent the interests of Chinese as well as multinational companies.

Market in China is still wide open and market potential remain large. There is also enormous potential for growth in the service sector.

Apart from the conducive climate for foreign direct investment that have been made possible by the pro active policy of government of China and the dynamic attitude of the Chinese industries, what particularly has impressed the multinational companies is the commitment to deliver and the wherewithal to deliver.

There are other factors such as high level of national savings and urban and rural migration along with the rapid spread of education, that have made the multinational companies to dig their heels deep in Chinese soil with long term plans for investment in China.

Finally, it is well recognized that Chinese universities and technological institutions have high innovation capabilities, which are steadily forging ahead to match their counterparts in the western countries.

As a result, many multinational companies find it attractive to outsource their research and development activities in China, using the huge technological man power strength and capability of the Chinese engineers and technologists.

Investment climate and business confidence

By joining the World Trade Organisation, Government of China has created confidence amongst the foreign companies, about its long term policy commitments and willingness to abide by International regulations. Chinese government has a clear perception of what it wants to achieve and then they decide and they do it. This approach is a big confident boosting measure amongst the investors.

There is overwhelming consensus amongst multinational companies about outlook in China, which is clearly evident. In fact, more than 90% of multinational companies presently operating in China plan to increase their investment in China in the next five years. It is estimated that 27.5% of multinational companies presently present in China will increase their investment by more than half in the next five years.

Foreign investment is vitally important for the development of Chinese industrial sector . Local industries need cash, technology, equipment and know how which are provided by foreign companies. Most notably, China is dependent on the continued import of oil, gas, metals and a number of semi-manufactured goods to sustain previous growth rates.

The global industry is also increasingly dependent on China to sustain their growth, which create a compelling need for them to be present in China. At the same time, multinational companies know that the Chinese companies need them as much as they need the marketing and investment opportunities in China. Dependence of multinational companies and Chinese industry on each other is obvious and both entities realize this and have no problem in recognizing this fact.

China’s dependence for technology on multinational companies

Every major international technology and engineering organization in the world have presence in China. At the same time, one does not see the presence of Chinese technology and design organizations providing similar services to other countries, to the extent that China receives from companies abroad.

While industries in China are making rapid strides in technology front, they are well aware that they are still behind the multinational companies and developed countries in this regard. Under the circumstances, the best strategy for industry in China to catch up with the technological practices of multinational companies is to cooperate and collaborate with them. This strategy is now paying very well for the chemical industry in China.

Issues facing multinational companies

While there is enthusiasm amongst the multinational companies about their role and prospects in China, it is not as if they have no issues and problems. Multinational companies certainly have to constantly readjust or reposition themselves to the steadily changing scenario in China due to rapid industrial and economic growth.

As the time goes, it is certainly likely that the dependence of the companies in China on multinational companies will become less and it is likely that multinational companies will have to modify their approach in dealing with the Chinese players.

When multinational companies started to make investment in China, one of the important advantages in their view, apart from several other favourable factors, was the comparatively low wages for workers in China vis-à-vis the wages in western countries. However, in recent times, the worker’s wages in China have appreciated by more than 100% between 2003 and 2010. China’s one child policy in force for more than 30 years has started pushing up wages, as the workforce shrinks. The average age of the Chinese population is around 35 years. Rising labour costs in China may lead to the flattening out of foreign direct investment in cost sensitive industries.

Some companies are thinking now about moving to China's inland and western regions, when the wages in coastal regions grow. Some international companies are reportedly considering plans to shift plants to cheaper Asian markets. Multinational companies are conscious of the fact that other countries like Vietnam, Mexico are offering attractive incentives such as tax holidays.

There are other issues such as the tough competition from the domestic rivals. The multinational companies have to transfer technologies to Chinese companies under their partnership agreements, thus growing their own competitors.

The key is whether multinational companies have confidence in their innovation and whether they can grow fast enough to keep ahead of competition from domestic players in China. However, this is an issue everywhere, not only just in China.

Review of business models and investment strategies

Turnover and sales of the Chinese multinational subsidiary companies are now growing steadily at around 16% per annum. Such subsidiary companies which are jointly operated by Chinese and multinational companies have contributed to enhance the performance standards of the overall industry in China to a considerable extent.

After the advent of such multinational subsidiary companies, the Chinese market have undergone transformed innovation process and increased consumer expectations. As a consequence, the multinational companies have to review their business models in China, after the initial process of getting into China and acclimatizing themselves with the conditions.

Therefore, foreign companies in China are focusing on a few new areas. They are taking special steps to identify possible mergers and acquisition opportunities in China. The way of investment by foreign companies are changing from forming joint ventures to acquiring Chinese companies and seeking full ownership or controlling stake. Many foreign companies are creating their own industry chains for making overall deployment in China. They are also trying to develop strength in niche areas such as speciality products and they are exploring ways of further strengthening their research and development base.

Many foreign companies tend to partner renowned domestic companies, using the Chinese firms’ popularity and distribution channels to improve their own brands’ influence and competitiveness in the China market.

Another important strategy adopted by the multinational companies is to combine the market in China with the market in the neighbouring countries, making their operations in China to be the raw material supplier for their operation in other nearby countries to some extent and selling the products produced in China in the nearby countries also.

( The writer , Director, Nandini Consultancy (S)Pte Ltd., Singapore. He can be reached at swaminathan.v@nandinichemical.com )

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