This report outlines where China currently fits on the agenda of multinational companies (MNCs) and shows how global companies are recalibrating their China operations in reaction to new realities. Its findings are based on a survey of 328 senior executives conducted in June and July 2011, as well as in-depth interviews with executives of major foreign multinationals, business scholars and market analysts.

With leading economies of the world in dire shape, China now has become a crucial engine of global growth—sooner than anyone had imagined. While developed countries remain in a quagmire, China keeps roaring ahead. While consumers elsewhere worry about their jobs and financial future, many in China are getting rich, and about to get even more so.

Beyond the headlines about China’s growing weight in the world—whether in purchasing power or otherwise—what does China now mean for multinational companies (MNCs; unless otherwise noted, this term refers to non-Chinese multinationals)? Are they backing up their talk about the importance of China with real investment? Are they being rewarded in return? Equally important, and not unrelated, what do MNCs
mean for China? Will they be allowed to realise their dreams? Or will they be held in check while local companies improve their capabilities?

This report, Multinational companies and China: What future?, outlines where China currently fits on the agenda of MNCs and shows how global companies are recalibrating their China operations in reaction to new realities. Its findings are based on a survey of 328 senior executives conducted in June and July 2011*, as well as in-depth interviews with executives of major foreign multinationals, business scholars and market analysts.

Among the key findings:

• Multinationals, large companies in particular, are clearly counting on China to deliver more. Almost half (49%) of all the survey respondents said that the fallout from the global financial crisis has raised their companies’ expectations for China. Among the larger companies (global revenues of more than US$5bn) the figure is 73%. But not all companies are planning to invest more in order to increase returns. Among the larger companies counting on China to deliver more, half are counting on existing operations to bring more growth.

 • While MNCs are bullish, there are signs they are hedging their bets. The exuberance of consumer goods firms aside, China seems to have stalled, rather than risen, on MNCs’ agendas. Among the respondents to our survey, the share reporting that their headquarters view China as “critical to global strategy” was 37%. This is down from 53% reported in a similar survey conducted in 2004.** But this does not mean that China is not an important market for many firms. A further 33% of respondents said that while it is not critical, it is strategically important.

• Today, China is still a relatively small market for many multinationals, but this is expected to change quickly. Analysis of the financial results of 70 MNCs*** showed that in 2010 only ten had China revenues that accounted for more than 20% of their global revenues. For more than half, China accounted for less than 10% of global revenues. Companies do expect this to change. Only 8% of our survey respondents said China is already their biggest market, but 17% expect it to become so in less than five years, while another 21% expect this to happen in 5-10 years.

• China’s consumption story is driving MNCs’ strategy. The Chinese government’s drive to raise incomes and shift growth towards domestic consumption is likely to have a profound impact on most companies. Among survey respondents, 58% said that this policy is the factor that will have the biggest impact on their China strategy, while 56% said that growth prospects for their industry was the key driver of their China strategy.

• One of the greatest challenges facing multinationals is achieving “China speed”, while maintaining a low profile. Multinational
companies tend to want to build more slowly and solidly than their local counterparts, but if they do so in China their competitors are likely to fill the gaps. Overall, 59% of our survey respondents remain focused on “improving penetration in wealthier coastal cities/southern region”, and only 33% of them are “currently moving into second- and third-tier cities”. At the same time, companies worry about getting too far ahead of the local competition, lest they attract unwanted attention. This could explain the seemingly low expectations of our survey respondents in terms of using acquisitions as a route to growth in China: only 20% chose acquisitions as the most important strategy for growth in China, while 63% chose organic growth and 46% said joint ventures.

• There are signs that multinationals’ traditional competitive advantages are beginning to erode in China. It is often taken as fact that multinationals have superior technology and better brand management, and hold more appeal for talented workers. There are signs that all of these advantages are beginning to erode in China. Even among the large companies surveyed for this report (global revenues of more than US$5bn), only one-quarter felt they have superior technology or a stronger brand, with these figures even lower for the sample as a whole. Human-resources consultancies report that local talent is increasingly gravitating towards mainland companies.

• China’s policies aimed at encouraging local innovation are causing a great deal of ill will among multinationals. Among our survey respondents, 49% were concerned or very concerned that they would be forced to give up their IP in exchange for market access. Among big companies the figure was 52%. While some of the more objectionable measures have been softened by the central government, executives still worry about local protectionism. And 46% of respondents said that China’s regulatory environment and industrial policies were likely to have a big impact on their China strategy in the next five years.

• Multinationals need to reorganise to match the importance being placed on China. Among large companies responding to our survey, only 8% said that their China CEO sits on the company board (for 45%, the China CEO reports into regional headquarters). However, 40% of large companies said that they had posted very senior executives to greater China, a move aimed at improving understanding of China and speeding decision making at headquarters.

• While planning how to win in China, multinationals are beginning to think how they can leverage their relationships there to compete elsewhere in the world. While most arrangements seem to involve cooperative agreements with Chinese partners on the use of specific products in other markets, there are signs that this could be taken a step further to include joint ventures in third countries.

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* The survey covered 328 companies from a range of industries. The respondents came equally from companies headquartered in Europe, North America and Asia- Pacific. In terms of size, 55% had global revenues of more than US$500m, with 44% having more than US$1bn in revenues. For more details see appendix.

**Coming of age? Multinational companies in China, Economist Intelligence Unit, 2004. The demographic for the 2004 survey was similar to the 2011 survey, though nearly 70% of the 217 respondents in 2004 were from corporations with global revenues of US$1bn or more; in the 2011 survey, 44% of the 328 respondents had US$1bn in revenues or more. Focusing only on the responses of companies with more than US$1bn in global revenues, the figure is still down in the 2011 survey—48% view the country as critical.

***In compiling our list we examined Interbrand, S&P 100 Global, and S&P 500 companies to find those that disclosed their China revenues in their latest published annual reports or other reliable sources.