A Huge Market for Multinationals

Investments by multinational companies will continue to drive China’s economic growth

By TAN WEI

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Contrary to the decreases of foreign direct investment (FDI) in the world economy over the past five years, FDI in China continues to increase, making it the biggest market for foreign investors. Among all foreign investment in China, the investment of multinational companies, especially big multinational companies, is the most eye-catching.

Take Beijing for example. Since China began its commitments to the WTO in 2001, an average of 2.24 foreign companies have been setting up offices in Beijing per day. At present, about 60 percent of the world’s top 500 companies have established representative offices or research and development centers in Beijing. A 2004 report delivered by the Institute of Finance and Trade Economics under the Chinese Academy of Social Sciences shows that more than 8,000 foreign enterprises have chosen Beijing as the location for their representative offices.

According to statistics provided by the Ministry of Commerce (MOFCOM), by the end of last year, China had approved altogether 508,941 foreign-invested companies. Foreign investment in place surpassed $60 billion in 2004, the highest ever.

Findings of a latest survey by the Research Institute of MOFCOM suggest that the future of multinationals in China will be even more encouraging. A total of 82 percent of the transnational companies in China will continue to expand their investment in terms of production, marketing and research. Another 35 percent are at the investment preparation stage and are planning to launch a new round of investment in China. The multinational companies’ effort to integrate their resources in China is for the purpose of creating a presence fit for the Chinese market.

The survey mainly targeted the top 1,000 multinational companies listed by BusinessWeek, in industries like information technology, electronics, chemical manufacturing, and pharmaceuticals. The survey covered multinational companies from Europe, America, Japan, and South Korea.

Increases Continue

Over the past 10 years, China has attracted the most foreign investment among all developing countries. When China entered the WTO nearly four years ago, 159 of the world’s top 500 companies had already entered Chinese market.

Experts believe that as it opens wider to the outside world and transforms into a market economy, the Chinese mainland will become an ideal place for investment. Meanwhile, foreign investment is already playing an important role in China’s economic development.

In the first quarter of this year, multinationals were still pouring into China, though at a slower rate than in the past. According to the MOFCOM, from January to March, the number of newly approved foreign-invested enterprises reached 9,305, a decrease of 9.15 percent compared to the same period last year. Contractual foreign investment, however, reached $35.22 billion, a growth of 4.5 percent year on year, and foreign investment in place reached $13.39 billion, an increase of 9.48 percent.

According to Wang Jinzhen, Vice Secretary General of China Council for the Promotion of International Trade, by the end of February this year, China had approved more than 510,000 foreign-invested companies, with contractual FDI approaching $1.12 trillion and FDI in place hitting $566.2 billion.

Wang said that China has become an increasingly important destination of foreign investment since the 1990s. In 2003, the actual influx of foreign capital surpassed that of the United States, which marked China the priority of multinational companies’ investment in the world. Dow Jones & Co., Inc. once conducted research concerning the future development trend of the top 50 major multinationals. Findings show that among all the factors that influence the development of those big companies in the coming five years, the economic growth of China ranks first, as China can provide fine-quality products with reasonable prices, excellent human resources and a huge market. About 20 percent of the companies involved believe that their future profits in the international market will mainly come from China, which will equal that from the United States.

MOFCOM’s survey also indicates that the paramount reason for multinationals to expand their investment in China lies in the high development speed and huge market in all industries of China. The IT and auto industries are a clear demonstration. In 2003, China’s IT market accounted for 30.8 percent of the total Asian-Pacific region excluding Japan, and it is estimated to reach 38 percent in the year 2008, high above the global IT growth rate. This year, the number of cars registered is expected to reach 8.5 million, increasing 30 percent compared to last year. The high speed and large scale of development in the IT and auto industries illustrate the reasons why transnational companies are looking for new growth points in China.

He Manqing, Deputy Director of the Research Center on Transnational Corporation of the Chinese Academy of International Trade and Economic Cooperation (CAITEC) under MOFCOM, stated that in the next two years, multinational companies would probably begin to integrate their business in China and make significant readjustments. The strategic integration of those companies requires perseverance and wisdom and will constitute a real integration of localization and globalization policies, according to He Manqing. She pointed out that although China has attracted the most FDI in the past three years of anywhere in the world, the readjustment of foreign capital in China is still at the beginning stage and is far from mature.

Strategic Integration

Multinationals are facing increasingly fierce competition in the Chinese market. The market environment is becoming more complicated and diversified. Over the past decade of fast development, local companies also have been growing at a rapid clip. Therefore, multinational companies often have had to cooperate with Chinese enterprises to more fully integrate in the huge market.

“In the last century, Toshiba only saw China as a production and manufacturing base. But now, we figure out that we have to integrate designing, marketing and production into our business system in China,” said Tadashi Okamura, President and Chief Executive Officer of Toshiba Co. Ltd. “We must establish an integrated base in China.”

It is reported that multinational companies have set up about 600 research and development centers in China. Among them, more than 100 R&D centers belong to world renowned companies like IBM, Microsoft, General Motors, Alcatel and Siemens, and are mainly located in Beijing, Shanghai, Guangzhou and Shenzhen. Motorola alone has set up 18 R&D centers in big Chinese cities like Beijing and Shanghai. The R&D centers of Procter & Gamble (P&G) have long connected to the company’s other 18 research centers in the world and are integrated globally.

Wang Zhile, Director of CAITEC’s Research Center on Transnational Corporations, MOFCOM, believes that to invest in the R&D centers in China is just one part of the multinational companies’ global strategy. That strategy is far more than just exporting and selling goods to China, or merely establishing manufacturing and production bases in China. In other words, the ultimate goal of those multinational companies is to integrate their production, R&D, operation and marketing in China into their global network and achieve an integrated business operation globally.

Tang Hanyu, a special assistant to the president of Via Technologies, Inc. noted that in terms of organizing, transnational companies in China must operate independently like a special zone, which allows considerable flexibility and makes adjustments at any time necessary in accordance with the real situation. This is a must for transnational companies to maintain their competitiveness, Tang said.

Before China entered the WTO, establishing joint ventures with Chinese companies was the first, and often only, option for multinational companies entering China. However, with the Chinese marketplace opening further, some multinational companies like Panasonic, P&G, and Siemens are turning their joint ventures in China into exclusively foreign-funded enterprises. Li Yanjun, Researcher with the MOFCOM, explained, “Previously, the purpose for multinational companies to set up joint ventures in China was to expand in the Chinese market with the help of the sales network built up by their Chinese partners. However, as China has entered the WTO, the Chinese market and industrial development have become more transparent and standardized. They no longer have to establish and depend on joint ventures.”

Analysis of MOFCOM survey finds that multinationals are at the preparation stage for a new round of investment. Their investment trend in the next three years will probably involve maintaining their advanced technology, transferring their basic industries to China at a greater speed, and continuing to expand production investment in China. Some transnational companies will invest more in the sector of trade in services, especially in the sales and after-sales services; hence striving to work out a sales network and establish their brands. Some manufacturing companies have already finished moving assembly plants to China and are transferring technology. For example, in the IT industry, some multinationals are establishing their applied R&D centers in China and training local technological and management staff.

Xian Guoming, Director of the Center for Transnationals’ Studies of Nankai University in Tianjin, noted that China has become a huge market that must be carefully managed and is no longer just the manufacturing base of the old days.