US companies in China are shifting their focus to the service sector in line with China’s transition from being the world’s factory floor to a knowledge-driven economy, a survey has found.
For the first time, services accounted for more than half, or 52 percent, of US companies’ revenue in China in 2013, up 11 percentage points from the previous year, according to the annual China Business Report released on Tuesday by the American Chamber of Commerce in Shanghai (AmCham Shanghai).
China continues to be a key profit center for US companies, the survey also found, with 74 percent of respondents reporting profits in 2013. Three out of four saw positive cash flows in their China operations, up 3 percent from a year ago.
The survey, which tracks performance and confidence of the largest US business community in China, showed that companies are continuing to move beyond purely manufacturing for exports as costs surge and markets mature.
The growing importance of services contrasted sharply with manufacturing, which dropped by 10 percent to comprise 37 percent of companies’ revenues in 2013, the survey showed.
“It is important to keep in mind that China’s leadership has prioritized the development of the country’s service sectors, and American businesses are world leaders in these areas,” said Kenneth Jarrett, president of AmCham Shanghai.
David Denoon, director of the NYU Center on US-China Relations and professor of politics and economics, said, “The service sector is increasingly important, and part of it is due to the need for rebalancing, and part of it is due to the fact that foreign firms can compete effectively in the services sector and they will want access in the area.”
The American Chamber of Commerce in Shanghai interviewed 399 member companies that run operations in first-tier cities, including Shanghai and Beijing, the Yangtze River Delta region, as well as central and western powerhouses of China. Fifty-four percent of them have been in the country for more than 10 years.
The service sector accounted for 46.1 percent of China’s gross domestic product in 2013, outpacing manufacturing for the first time in the country’s economic output, according to the National Bureau of Statistics. Shanghai has the largest proportion of the service sector, with more than 62.6 percent.
Buoyancy in the sector is backed by the increasing presence of small and medium-sized US enterprises, thanks to growing transparency in China and lingering economic struggles in the home market, the survey showed.
Thirty-seven percent of companies identified themselves as small and medium-sized enterprises (SMEs) in 2013, or firms with 500 or fewer employees worldwide, up from about 25 percent a year ago.
Robert Theleen, who chairs AmCham Shanghai and is chief executive officer of merchant bank China-Vest, which is based in the city, said that with China demonstrating its ongoing commitment to economic liberalization through initiatives like the Shanghai Free Trade Zone, it is only natural that more firms are setting up in the country.
“When you combine this improving infrastructure with the decades of experience that American businesses now have in this market, it’s easier for US companies to profit from China’s growth, regardless of their size,” he said.
Ann Lee, a professor of economics at New York University, said that the services sector is a “great low-hanging fruit” for US companies.
“It’d be a gigantic opportunity, because if you assume that the consumption levels would get close to that of the more developed nations from its current levels, you’re talking about gigantic leaps of GDP growth and opportunity. It could be trillions,” she said.
Eighty-six percent of the firms surveyed said they remain “optimistic or slightly optimistic” about forecasts for China’s business prospects in the next five years. But only 65 percent of the firms reported making additional investment in China, down from 74 percent the previous year. As a top-three investment priority, China fell by 8 percentage points to 46 percent.
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