The sixth-floor windows of the American Chamber of Commerce in China face Beijing's boxy CCTV tower. It's a clear-enough day to make out the tower's outline from the conference room, though many days the thick smog renders it invisible from only a few blocks away. As Christian Murck, the chamber's outgoing president, sees it, air pollution, a growing and complex economy, a rapidly urbanizing population — these are all challenges that the Chinese leadership confronts in the first year of a new administration. They are also challenges for the American business community as its presence and investment increase in China.
Murck has lived in Beijing for 17 years and has served as president of the Chamber of Commerce in China for the past three, overseeing a membership of roughly 1,500 American corporations doing business in the Chinese market. As he prepares to retire, Murck reflected on the issues shaping U.S. business in China. This has been edited for length and clarity.
Q.What's your outlook on the Chinese economy?
A: The Chinese economy is at a significant turning point, where we see structural changes coming that will have a big impact on the business environment. We had a very successful period over the past 30 years of the development of the Chinese economy. But when we look at the next 30 years, it's clear that the economy is not going to develop along the same path or in the same way. Demand has to shift from external demand to internal demand if the economy is to continue growing.
There has been a significant change in patterns of compensation. China is no longer a low-labor-cost environment. The increases in labor cost are now faster than economic growth. We don't think that's cyclical. That's a long-term trend.
There is significant demographic change, which affects the availability of the workforce. The workforce is shrinking every year. The number of retired people is dramatically increasing. That will be a huge fiscal challenge for the government.
Q: Are these shifts affecting the way Americans manage businesses in China?
A: Many companies had 15, 20 percent growth in revenue every year. That hides a lot of problems. When you have your revenue growing that fast, what you're really worried about is: How am I going to make the stuff fast enough? How am I going to transport it to clients? And where am I going to find and train the people? Managing growth had been the theme.
That's going to downshift. If you look at the pharmaceutical sector, for example, they're still seeing about 20 percent growth. But if you look at construction equipment, it's negative. So it's become more differentiated by sector, with a general shift down on the revenue side.
And then everyone is experiencing increase in cost. Land is more expensive, less available. Labor of course is going up dramatically. Commodities and raw materials also, depending on the sector, are going up. So all of a sudden, in the last 18 months, the focus of management has shifted from managing growth to managing costs.
We're now seeing people apply the same disciplines in this market that they apply in North America or Europe. People are trying to figure out how to do more with less. Generally speaking, large American multinationals are used to that sort of environment. We think we can work with it and continue to do well in this market, but it does mark a significant change.
If you're in a capital-intensive industry like automobiles, you cannot be a global leader in the next several decades unless you have a major presence in China, because you will not have the volume required to amortize the huge cost of developing models.
Interestingly, Chinese companies face the same strategic problem. There are lots of Chinese companies that want to be global leaders — not just leaders in the Chinese market, where they are national champions and have some protection. And for them as well, you can't be a global leader in many sectors without a strong presence in Europe and North America. So we're seeing now a wave of Chinese investment. Last year, we saw $6 billion in foreign investment from China into the United States, a record. Twice that went into Europe — $12 billion. We're going to see, I think, a deeper integration of China into the global economy.
Q: How much confidence do you have in the new Chinese leadership's ability to support these changes?
A: Our view of the new leadership is that they represent a very deep and broad consensus within Chinese society that these structural changes I've been talking about have to be adjusted to by accelerating the process of market reform — accelerating the process of shifting to market-based pricing in energy, accelerating financial liberalization, doing away with the financial repression we've had the past few years, improving capital allocation, reducing the role of government, reducing the administrative burden of government approval.
That doesn't mean they're actually going to do all that, of course. But I think the new leadership has deliberately tried to distance themselves from their predecessors, who talked about these issues a lot but accomplished little.
The expectations are very high in the business community and the academic community that significant new programs will be announced in October at the third plenum. We were very happy that President Obama and President Xi [Jinping] were able to meet in California, because right now is the period when the Chinese government is trying to decide exactly what they are going to put before the public at the third plenum, which I hope will be some detail and some specifics behind the acceleration of market reform. If it is not, it will also be interesting. Because if they go through the third plenum and they don't release anything, that will tell us they don't have a consensus and they're not going to move aggressively.
Q: What are U.S. companies doing to manage costs?
A: Usually not downsizing, because we're still seeing growth. Usually they're investing in capital equipment for automation. And they're looking at business process, doing a certain amount of outsourcing. Internally also, they're really looking hard at how to organize what they do. We've moved quite a bit beyond the stage where localization meant having Chinese employees in management positions. What we're looking at now is becoming the Chinese competitor. That's a theme of the Honeywell Corp. in China, for example.
By that they mean being as quick to market as a Chinese company they compete with. Moving the new product approval process to China, not to the head office. Moving a general counsel and other corporate functions to China so that they can have a quick response time. It also means understanding the cost structure that companies operate under here and matching it. No longer trying to hit only a small slice of the upper end of the market, but going for the middle, where you can hope to hit the biggest business. Part of that will be about location, part of that will be about how you organize your distribution and logistics, part of it is about how you recruit, train and pay people.
Q: What are some of the challenges you see to attracting top U.S. talent to China? Are quality-of-life issues, such as air pollution, keeping some away?
A: Given the change in the Chinese economy globally, some exposure to this market and economy often advances you. A large number of so-called "fast track" employees in big companies want to have a few years in China on their resumes. So there are positive reasons to come here.
There are also negative reasons to come here. One of them is air pollution, another is traffic, a third is censorship. So if your boss says we have an opening in China, you add up the pros and the cons and you talk to your spouse. An expat assignment succeeds or fails based on if the trailing spouse is happy.
When I first came to Beijing, they were still burning coal for a lot of heating and cooking, and you could sort of taste the air in the wintertime. Your collar would be black when you came in. That went away for a period of years, but the pollution has since gotten more sophisticated based on emissions from coal-fired generating plants as the demand for power has grown. We've also had a dramatic increase in the number of automobiles. So the result is what you see outside.
Q: If one key to sustaining growth is to create more domestic demand, what is the government's strategy?
A: The key strategy that the premier talks about and other people talk about is urbanization. A lot of companies, particularly those in consumer goods areas, have focused on that. We're about 50 percent urban now, and the expectation is that the shift will accelerate a little bit and then stabilize when China is about 70 or 80 percent urban in its population.
So if you're a company like Procter & Gamble, you don't necessarily want to have the number-one product in the 10 largest cities in China. You want to have a presence in every city with over 1 million in population, and there are well over 100 such cities in China. So people are investing very heavily to build out logistics, to build out their psychical presence, to spend on marketing, especially online and social media — in all ways to develop connections with these urban consumers.
The problem with this is a household registration system, the "hukou" system. About 250 million residents of cities are migrant workers, which means they don't have an urban household registration — they have a rural one someplace — and they're here in many cases without their children or spouses. Roughly 250 million people are in this second-class-citizen status today, and over the next 20 or 30 years we're talking about moving another 250 or 300 million people into urban areas. Are we going to do that and keep them second-class citizens? Does that work? Probably not. You can see the political problem that begins to pose.
Successful urbanization, or inclusive urbanization as some people are now calling it in the Chinese government, must mean that Chinese citizens will have the right to move anywhere within China, get a job, bring their family, buy a house, put their kid in public school, get the local retirement benefits and everything else. However, no one knows how that's going to be financed or how that's going to happen. My members are out there investing lots of money based on the urbanization thesis because we see the economic potential. That's an expression of confidence that the Chinese government will figure out a way to do it.
If you don't do it, what happens then? This source of economic growth from new urban residents and new middle-class consumers suddenly goes away. If you don't have the urbanization push, what's going to keep the economy growing? On the other hand, if you do have urbanization pushing, how do you deal with merging these two very separate benefits schemes and managing everybody's discontents and problems? It's a huge and very interesting social problem, as well as a question of economic development. They have their work cut out for them.