Multinational corporations have become sophisticated about China and are becoming reasonably profitable as they are deepening their participation in the country's economy, providing a badly needed lift to the economy.
A decade ago, most multinationals simply tried to replicate in
China what they were doing in rich countries and ignored the low
consumption power in China since they were naively enamored by the
image of one-billion-people market.
"As a result, the 'China dream' turned into a bottomless pit
for capital without profit at that time," recalled Andy Xie,
senior economist for Morgan Stanley's Asia Pacific.
Xie has recently visited multinational companies headquartered
in Beijing. He said that multinationals are now confident enough
to predict one billion-dollar profit per annum by 2010.
Statistics show that funds flow out of China from foreign
income in China rose to 27.2 billion U.S. dollars in 2000 from 17
billion just five years earlier. Experts here estimated that as
total foreign investment was 304 billion U.S. dollars until 1999,
the capital return on foreign investment in China should average
between 10 percent to 15 percent, or two to three times that for
the state-owned enterprises.
Economic analysts also believed that 10 percent to 15 percent
returns on China's 392 billion U.S. dollars foreign direct
investment would imply the total income of 40 billion to 60
billion U.S. dollars for foreign investors or 3.3 percent to 5
percent of the country's GDP.
In comparison, the U.S. companies in the S&P 500 index earned 3.
3 percent of GDP on average between 1990 and 2000, on the other
hand, Chinese companies that are listed in the local market made
about 1 percent of GDP in 2000, the analysts noted.
Xie told Xinhua that he found during his visits many new
developments have changed the profit outlook for multinationals in
China.
As China's gross domestic product (GDP) rose to 1,160 billion U.
S. dollars in 2002 from 388 billion U.S. dollars in 1990, the
Chinese consumption power has tripled since 1990, but is still in
a low level compared to that in developed countries.
Xie said that due to China's huge population and inability to
create wealth on a booming economy, the per capita income is still
very low, and the net household wealth lower. And unless China's
companies become vehicles of wealth creation by increasing
franchise value over time, Chinese households have to continue to
rely on bank deposit for wealth accumulation.
"If China's corporate reforms become more successful,
deflationary pressure could ease also," the economist said. This
macro-economic environment would provide multinationals with
greater chance to expand their business in China, according to Xie.
Another important factor that makes multinationals in China
profitable is that they have become successful in increasing scale
and cutting costs to match selling prices with Chinese wages, Xie
said.
The combination of global scale and the Chinese production cost
has made Multinationals' products affordable to Chinese consumers,
he said. "This is the most important factor that multinational
companies in the consumer sector have become profitable," Xie
added.
Multinationals are now turning China into a production base for
distribution. They are separating the production and sales
functions in China and fit both into their global strategy,
according to Xie.
"Naturally, China's low cost structure means that its share in
multinationals' global production is rising, which is a major
force in driving up China's economy now," Xie said. This is why
China can continue to grow at about 7 percent, even though it is
undergoing structural reforms, he concluded. Enditem
Xinhuanet 2002-03-08 18:26:51
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