Making a profit in China – the WTO column

(Later also in Chinabiz)

The answer to the question whether foreign companies make a profit in China is almost as useless as its annual GDP-figure. Some do, some don’t. The general answer is not going to help you when you have to decide to add your bit to the record foreign investment China noted last year: US$60.6 billion. That figure in itself has been fuelled by the drop of the US dollar and the renminbi against the euro, but that is again another statistical problem.

The question of the profitability of foreign companies emerged in the fringes of the lobby by 54 multinationals against a change in taxation that would end preferential treatment of foreign enterprises. Chinese media quoted an anonymous business consultant (not me) who claimed that those poor foreign companies were already making a loss in most cases anyway, and doubling the current income tax rate would only add to their dreadful existence in China.
That remark is not in line with the annual overview the American Chamber of Commerce publishes in its white paper on the state of foreign enterprises in China. After almost a decade of relentless complaints about the possibilities for its Amcham members to make a profit in China, a few years ago suddenly the majority of its members made a profit and some even a high profit, according to its white paper.
That sudden watershed in its assessment sounded more like a policy change than a real increase in profitability. Again, the answer itself might be not that relevant anyway. Knowing that most others make a profit while you don’t makes it only worse.

Entities of foreign banks are required by their friendly hosts in China to show a profit in their books, while it seems very unlikely they have been able to make substantial money up to know.
What makes working in China so fascinating is that doing business – including making a profit – is so profoundly unpredictable. A few industries who have been solid money makers in the recent year saw their fortunes turn around in the past year in a dramatic way.
Education in foreign countries by Chinese has dropped dramatically, overall 30, 40 percent over the past year. US institution blamed the new rigid visa regulation for the drop, but some European institutions report a similar drop, so there might be more reasons to explain the drop. Returning graduates have found out that a foreign education offer much less financial added value than they expected and simply do not go in the same huge numbers.
More dramatically is the reversal in the automotive industry, where output first doubled in the two years following China’s entry into the WTO, came in 2004 to a standstill while for the coming years even a drop in numbers is expected. This happens as billions of investments are still used to add to the current overcapacity in the industry. Expert say that it might take another decade before China might export cars in a high enough volume to justify a larger domestic automotive industry.
New regulations on curbing bank loans and disgruntled customers have undermined sales. Reports already indicated that sales figures were very volatile, even when the growth was still brisk. Now the new car owners stand in traffic jams and hear over their radios that the prices of their cars have dropped again. That indeed is the best way to discourage any Chinese buyer: the prospect that prices might go down even more.
The big car markers will survive, since they have outsourced most risks to their suppliers, but here a worldwide consolidation will be unavoidable.

Keeping an eye on these rollercoaster-like movements seems a better idea than wondering whether foreign companies make a profit in China or not. Those who didn’t can make a profit this year. Those who did in the past, might be the losers of today.

Fons Tuinstra