Sifting through the annual China business report by AmCham Shanghai
By Yael Farjun, China Deputy GM at PTL Group
Since 1999, AmCham Shanghai has published its annual business report, gathering insights from around 300 members on their business outlook, perceptions of the business environment, regulations, challenges, and confidence in China. This year’s report marks a new low in optimism, with just 47% of respondents feeling positive about the next five years in China.
** All the images accompanying this post are taken from the 2024 report published by the American Chamber of Commerce in Shanghai.
Finding the positives
In his opening remarks, AmCham’s Chair Allan Gabor urged businesses to focus on the positives. He reminded the audience that companies survived the challenges of COVID-19 and emerged in relatively stable condition. His message was clear: There is still a lot of strength there, and long-term planning for China remains important.
With that in mind, we reviewed the report’s key challenges to help businesses plan for 2025. Here’s a summary of the most relevant insights for international companies operating in China.
Geopolitical tensions
Geopolitical challenges were expected to feature prominently in a report focused on American businesses, but these issues affect more than just US-China relations. Global disruptions, such as the Russia-Ukraine conflict and instability in the Red Sea, have impacted supply chains and increased costs for businesses worldwide.
For companies operating in China, two aspects stand out. First, Chinese policies have increasingly focused on “self-reliance” and favoring local companies. Second, international companies focus more on reducing risks in their China operations. While discussions about decoupling were common in recent years, the focus has now shifted to “de-risking.”
This year, 60% of respondents believe Chinese government policies favor local companies, up from 56% last year. The trend varies across industries, as shown in the chart below.
During the pandemic, many businesses adopted an “In China, For China” approach due to shipping disruptions and a rise in local consumer trends such as the Guochao trend. However, this strategy now seems less feasible. For example, the percentage of manufacturers maintaining this approach has remained stable (36%, up from 34% last year), but the retail sector saw a sharp drop of 18%, down to 36%. In the technology hardware, software, and services sectors, the figure is 35%, though there’s no comparison with last year’s data since we couldn’t find it.
With decoupling seen as impractical, many companies have turned to de-risking. According to the report, 36% of respondents have invested in supply chain resilience, and 25% have separated their data between China and non-China resources.
Economic slowdown
China’s economy is still recovering from the impact of the zero-COVID policy. Allan Gabor pointed out that while some companies have seen improvements in their operations, overall business sentiment and investor confidence have declined.
Still, 66% of respondents reported profitability in 2023, and 50% saw revenue growth compared to 2022. While these numbers are lower than pre-COVID levels, they show continued business activity. For 2024, 54% of companies expect revenue growth, and 56% said they would increase their investment if market access improves.
In the technology, hardware, software, and services sectors, 65% of respondents said they would increase their investment if better market access were provided. This comes at a time when China is strengthening its governance of the technology space, focusing on cybersecurity and national security.
Increasing local competition
Local competition remains a significant challenge for 56% of respondents. From our experience working with foreign companies in China, speed to market is a common issue. Differences in work practices and market expectations between headquarters and local teams often cause delays.
In this report, 73% of respondents acknowledged that their local competitors were faster to market. Reasons for this include insufficient local production capacity, limited inventory in China, and broader supply chain management challenges.
Additionally, 40% of companies said their local competitors were more advanced in digital strategies, and 39% said they were ahead in adopting new technologies. For foreign companies in China, digitalization and local adaptation are increasingly important.
On a positive note, talent shortages are not widely seen as a problem. In fact, 53% of respondents reported that workforce availability does not affect their operations, and 63% said they have no issues finding and recruiting employees. Meanwhile, 49% of companies expect to increase their R&D investment in 2024. Read more about Recruitment & HR Management in China
In terms of intellectual property (IP), 31% of respondents believe enforcement of IP rights in China has improved over the past year. However, concerns about prosecuting IP infringements remain high (63%), and 23% of respondents fear IP theft by employees. In the panel discussion following the presentation of the report, the GM of a major American corporation said that the larger concern may be local talent catching up with or surpassing foreign technology faster than expected. Read more about Trademark Registration in China.
Looking forward, Planning for 2025
The Chinese regulatory and business environment has evolved in the past year due to geopolitical tensions, the lingering impact of COVID-19 policies, and increased local competition. While there is no single approach to planning for 2025, some key strategies should be considered.
Localization is one such strategy. This includes adapting to local technology, hiring local talent, developing local intellectual property, and moving production to China. Speeding up operations is also crucial. This might involve improving supply chain resilience, moving inventory into China, and appointing local leaders to accelerate decision-making.
Though this report primarily reflects the experiences of large corporations, it provides valuable insights for any foreign business in China. Our recommendation? Focus on the most relevant findings to your industry and business, and incorporate them into your planning for the coming year.
Need help with your China operations? Our team has the knowledge and expertise to support your business in China. Reach out and learn how we can help you prepare for 2025.
