During the last few decades, India’s economic progress has been constantly measured vis-a-vis the ‘blitzkrieg-type’ growth in China. Questions such as “Do I really need to invest in India or is China sufficient?”, “Is India indeed only 10-15 years behind China or will she never see China’s exponential growth?”, “Are political freedom and democracy not small prices to pay compared to the rapid improvement of living conditions?” have been the topic at conferences, and dinner tables alike. So is the Chinese dragon indeed a better bet for foreign investors than the Indian tiger?

The 10th Annual Business Confidence survey of European companies in China prepared by the European Chamber of Commerce in collaboration with Roland Berger has sobering news.

The survey covers responses from 552 companies, with constituents spread across sectors. Of these 40 per cent were from Industrial Goods, 31 per cent from Consumer Goods, and 24 per cent from Professional Services. The sample is comprehensive in scope, as it takes into consideration a cross-section of companies in terms of revenue, number of employees and time present in China. More than half the companies in the sample have been in China for over a decade. Thirty four per cent of the companies have a revenue of over Euro 50 million, of which 9 per cent have a revenue of over euro 1 billion. About a fifth of the respondents employed more than 1,000 people, of which 9 per cent employed more than 5,000. With 64 per cent of participants participating in last year’s survey as well, the stability of data is adequate.

The findings of the survey are significant:

Two thirds of large companies state that business in China has become more difficult. State-owned enterprises, in particular, increase competitive pressures.

Nearly half of all European companies believe that the “golden age” for MNCs in China has ended. The Chinese economic slowdown is now the top future business challenge rather than rising labour costs.

Companies are scaling down their China ambitions. Only 57 per cent plan to expand their current China operations, down from 86 per cent last year.

Forty five per cent of companies believe that the Third Plenum reforms, if consistently implemented, will be good for their company.

Clean air, clean business The challenges in the business environment are reflected in a number of facts. The percentage of companies that reported an increase in revenues has consistently dropped from 78 per cent in FY10 to 59 per cent in FY13.

While revenue performance differs significantly across sectors as shown in Figure 1, an equally worrying sign is a strong reduction of profitable companies from 74 per cent in FY10 to 63 per cent in FY13. Over the last two years the percentage of firms with China profit margins lower than the global average has been higher than vice versa (for instance, 33 per cent with margins below global average Vs 30 per cent with margins above global average in FY13).

While 68 per cent of companies are still optimistic about future short term growth, this number is significantly lower than the 78 per cent in 2010 and comparable to the crisis level of 65 per cent in 2009.

On the HR front, rising labour costs are on top of the mind for executives at 31 per cent compared to 28 per cent for talent shortage. Increasing difficulties in attracting international talent to work in China results in particular, from concerns about air pollution as shown in Figure 2. While China has focused more on the environment recently, these numbers clearly indicate that it still has a long way to go and that negligence of the environment has tangible negative consequences.

Overall, 46 per cent of all companies believe that the “golden age” of MNCs with rapid growth and strong margins is over.

While 48 per cent of all companies surveyed achieve 10 per cent or more of their global revenues in China, the country has slipped as a top investment destination. Only 21 per cent of all companies identify China as #1 in 2014 Vs 33 per cent in 2012.

Compared to last year, the number of companies with expansion plans in China has dropped from 86 per cent to 57 per cent, the corresponding number for firms with M&A intentions dropped from 41 per cent to 15 per cent.

Clearly, foreign companies are looking for alternatives to their investments in China. De-risking strategies with a China + 1 or China + 2 approach are the need of the hour.

Time to act This is where India needs to grab the emerging opportunity. India has an established low-cost base for both manufacturing and R&D combined with a large internal market.

Attracting FDI may never have been this easy provided that key issues (infrastructure development, cutting of red tape, improving transparency and increasing decision speed, labour law reforms, etc.) are addressed.

None of these issues are easy to implement, many of them will take 3-4 years before the full impact will be seen. Nevertheless, the time to get the job done is now.

The writer is managing partner at Roland Berger Strategy Consultants India

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