5 Years ago, Now, and Going Forward
Just How Important is China to Western MNCs?
Just how important is China to western multi-nationals? For years we have been hearing talk of how important China is going to be to western business, and how China as well as other BRIC and developing countries would drive growth for these companies. One of the best ways to measure this is to look at the total contribution of China to the total revenues of leading multi-nationals in China- now compared to several years ago. So is this potential now being realized?
The short answer is, with exceptions, yes. The average China revenue of 20 large multinational corporates increased from USD 2.8 Bn in 2006 to USD 6.1 Bn in 2011- thus more than doubling in this five year period. Just as important, for this sample of 20 MNCs China now accounts for nearly 11% of their global revenues as of 2011.
One big reason for this is that China's market itself has increased substantially, both in absolute terms as well as a percent of the world economy. In 2006 China accounted for 5.6% of the world economy (nominal), and last year this was 10.4%- an increase of nearly 90%. At the same time, for these MNCs, sales to China increased by 88%- almost an exact correlation- as noted in the table. So at an important level, MNCs sales to China have increased less because they are gaining market share, and more to the fact that China has grown so fast.
Figure 1: Importance of China to Western MNCs- an Overview
Source: Company Info, Secondary Sources, GCiS *Nominal
Given China's recent growth, even with a slower economy now, one could reasonably assume that the importance of China to western business will continue to increase. Even with a projected annual growth rate of only 5%, by 2016 China will be looking at a GDP of $9.3 trillion, and by 2021 of $11.8 trillion. MNCs will then be looking at much larger shares in China in total, as well as China as a percent of their global sales. This 5% rate is very arguable, and could be less if China takes a longer time to dig out from its current slump. Though given recent growth rates of over 10%, it is within reason, and may be a low estimate.
If by 2021 China accounts for 15% of the world economy, then will it also account for 15% of the global sales of these MNC? Or will the MNCs do better than this, or worse? No one can answer this question now, though looking at the performance in China of individual companies will shed some light on this.
Note: this sample is not designed to evenly represent multi-nationals in China, as this is for the most part in the B to B field, which is what GCiS covers. And companies must have at least sales of $ 1bil in China, so the focus is on larger companies. These are listed below.
By Company, the Story is not Uniform
The table above indicates that as China's economy expands, the sales of Western MNCs expand in relation to this. However, looking at this sample by individual companies, the story is very different. Here companies are all over the map in terms of total sales to China, percent of global revenues to China, and how the latter is changing.
Just looking at total revenues to China, the resource giants Rio Tinto and BHP in 2011 had massive sales to China, of about $20 bil each, mainly in iron ore. The world's top auto producer GM had sales of about USD 20 bil (from sales of 2.3 Mn autos), and the world's top chemicals firm BASF sales of over $8 bil. And of these 20 companies, all sold at least $1 bil- so the absolute revenues figures are substantial.
As measured by percent of global sales to the China market, again there is great variety, as shown in the chart below. With both Rio and BHP, China sales are over 25% of global sales. With manufacturers, six sell over 10% of global sales to China, including DSM, GM, and Nokia. A few, including GE and Saint Gobain, are below 5%.
Figure 2: Importance of China to Western MNCs- an Overview
Source: Company Info, Secondary Sources, GCiS
*Increase in Sales to China as % of Global Total, 2006 to 2011
Chem-Mat = Chemicals & Materials, Ind-Power = Industrial & Power (HW also has large aerospace & materials business, so classification here is imprecise)
Figure 3: China Sales as % of Global Sales for Key MNCs (2006, 2011)
(Rio Tinto and BHP data not shown here- this is manufacturers only) ?
What is especially interesting, which this chart illustrates, is how the importance of China as measured by sales has changed over the past 5 years. Just focusing on the manufacturers, this has increased significantly, though not for everyone. There are only a couple companies for whom their China sales share decreased from 2011 to 2006. The top example here is Nokia, which has been losing market share worldwide over the past 5 years, not just in China. Just as notable is a few companies that have made large investments in China and still have a hard time growing fast in this market, GE and Siemens in particular. Neither conglomerate grew much in China in the past years, which may be in part that they face strong domestic competition in key areas, including power, and in many of their markets have to deal with complex governmental customers.
The largest increase here is GM, for which China now accounts for nearly 15% of its global sales, second only to its home market- up from 2.6% in 2006. The rise of DSM in China has also been dramatic, partly fueled by its nutrition business, which sells to the China F&B industry, and partly to engineered products, which has a more diverse customer base. Caterpillar has also seen its China sales quadruple over the past 5 years, even as the construction boom in China has tapered.
This sample is mostly materials-chemicals and industrial-power, where GCiS has many clients. It is possible that companies in these two sectors do especially well. Western materials firms have had very strong performance in the recent 5 years in particular. However, MNCs in other sectors also have strong performances in China. Witness USD 8 bil from Apple in China last year, or strong sales by GM and VW, P&G, Pepsi, etc.
Is China important to MNCs? Yes, in some cases very important, and growing. To have access to a large market that has been growing at over 8% per year until recently, with some sectors such as automotive or construction growing much faster, is a boon to Western firms looking at 1-2% growth or less at home. And while some specific complaints about market access may be valid, depending on the industry, the 5 year growth figures indicate that to a good measure there is access.
Is the China market fulfilling its potential? This question cannot be answered yet, and the data shown here does not account for profits, ROI, cost of access, and other such issues. Cost of access will include investment structure limits, IP transfer etc. But this is at least partially a "yes" for many firms, as their sales in China continue to swell. For most of these companies, sales in China should greatly outpace sales to the other BRIC countries.
Can MNCs continue to ride the wave of China growth, and make the China market an even more important part of their global portfolio, or will many stall like a GE? This is the more pertinent question, which we will address in a follow-up article.