Foreign firms bullish about economy

A woman demonstrating a heat-resistant material at a building materials fair in Shenyang, capital of Liaoning province. Many foreign companies are still bullish about China's property market and have continued to invest in both real estate and building materials. [Photo/China Daily]

Germany looking more to China than Europe for overseas investment

Germany has always been the cornerstone of the European economy but Europe is not as important to Germany as it used to be.

For the first time China has become German companies' top foreign investment destination, totaling $1.36 billion by the end of last year, according to a survey by the Association of German Chambers of Industry and Commerce. The amount was more than the combined German investment in France, Spain and Italy.

The profound shift is visible in the case of Knauf Gips KG, a German-headquartered plasterboard manufacturer.

When asked what helped turn the family-owned workshop into the world's second-largest gypsum board maker, Mark Norris, the company's China chief executive officer, said one particular factor stands out - China.

After its entry into the Chinese market in the 1990s, Knauf built three plants in Beijing, Shanghai and Guangzhou. The initial investment soon gave Knauf a solid foothold in the country's dry-wall market.

Norris said he was quite bullish about the future and remained committed to continuing investment, despite decelerating economic growth in China, compounded by the European crisis and stagnation in the United States.

"In relative terms, China remains a dynamic growth engine compared with places like Spain and Greece, where there is absolutely no growth," he said.

"And people seem to forget that the market is so big, the demand for good quality is there.

"As we noticed over the past five years, a mid-to-upper class has emerged and the quality of life is increasing. People are prepared to pay for green building materials. Even though it's not comparable to the European or US standard, it is catching up quick."

While Knauf is poised to continue investing in the world's fastest-growing economy, its plans this year are set to be more reserved.

Knauf's ongoing project portfolio includes the completion of its largest plant in China in Taicang, Jiangsu province, a manufacturing base close to Shanghai. It will become the most advanced factory in the Asia-Pacific region that strives to stay carbon-neutral, according to the company.

But rather than expansion, Knauf will focus more on upgrading its existing plants. Starting from this year, Knauf is devoting millions of dollars to ensuring that all of its existing plants are purely steam-driven and no coal or heavy oil is used.

"If you look at the 12th Five-Year Plan (2011-15), you will notice that the previous one was much about quantity, growth and volume, whereas the current one is about quality, better living standards and a good environment," said Jan Kreibaum, president and CEO of Knauf Asia-Pacific. "It attaches importance to quality, where we exactly fit in.

"You can't have 20 coal plants with oil burners and say, 'yes, we are going green'. Chinese customers now do care that the green process is from start to finish," Kreibaum said.

Confident but rational, and putting quality before quantity - Knauf's China strategy this year is shared not just by other German companies but many European and US firms.

According to a poll conducted by the American Chamber of Commerce in Shanghai in February, the majority of US companies are bullish about China's economic outlook and will expand their investment this year.

According to Sarah Butler, managing director of consultancy Booz & Company's China division, for foreign firms, investing in China is no longer an option but a necessity.

"This reality is driven partly by the natural and inevitable saturation of their home markets as the Western economies mature and companies are driven by the need to continuously seek growth opportunities internationally."

Despite forecasts that China's economy will slow - which was verified by the latest year-on-year GDP growth of 8.1 percent in the first quarter - General Motors China is planning to double its sales volume to 5 million units over the next five years, said president and managing director Kevin Wale.

"It will still come between 7.5 to 9 percent of GDP growth, I believe. We will have a continuous and very strong presence here," he told China Daily.

GM has set aside $1 billion to $1.5 billion to support its China business, and will focus on renovating its current plants. For instance, the company just opened an extension to its plant in Qingdao and is extending another plant in Yantai.

"We will not consider major moves such as mergers and acquisitions any time soon," he said.

Jeff Kirwan, managing director of clothing retailer Gap Inc, said although the company is fairly new to the country, he still sees chances to do well.

Kirwan told China Daily that Gap plans to have 30 more stores, up from the current 15, and its presence will reach 10 cities by the 2012 fiscal year. Besides, China will be its largest growth vehicle in terms of both sales and investment.

"China is a competitive market and is becoming more so as more international retailers enter the marketplace. I foresee multiple brands coming under one company over the next five years," he said.

The downward adjustment of China's GDP growth target has failed to deter multinational corporations, as many see the opportunities to turn the current government goal to their advantage.

"From China's 12th Five-Year Plan, we see a clear strategic switch for China to be more focused on the quality of growth instead of speed. We think that is a right direction. In fact, we see more opportunities in that direction, especially in the fields of improved living standards, innovation of new materials and biotechnology," said Jiang Weiming, DSM's China president.

Headquartered in the Netherlands, the specialty chemical company has in the past five years aggressively entered life sciences, particularly food nutrition, which witnessed a 10-fold jump in sales.

DSM has developed vitamin and mineral mixtures to meet the needs of Chinese children suffering from anemia. Its net sales in China increased 30 percent year-on-year to $2 billion in 2011.

Jiang said DSM will continue its strong focus on China and expects to more than double its China sales to more than $3 billion by 2015, supported by planned investment of $1 billion.

But it will shift from "an intensive portfolio to maximizing sustainable and profitable growth, with concentrated efforts to meet high-end demands for health and nutrition in China", Jiang said.

Only 8.5 percent of surveyed US companies in the AmCham survey are set to build new offices in China in 2012, whereas the majority would "evaluate" the pros and cons before making such a move.

This is a trend which will be sustained over the next decade or so, said Butler. Companies need to make the necessary investments to sustain their presence and competition over time.

According to Dan Steinbock, research director of international business at the India, China and America Institute in the US, it is only reasonable for European and US companies to shift from "going for presence" to "going for quality".

"When foreign companies established their operations in the mainland, China was still a low-cost nation. Now several regions are moving toward innovation-based competition and, over time, relatively poorer cities and provinces will follow. If foreign companies want to compete successfully in China's rapidly changing environment, they cannot remain complacent."