Reuters
U.S. companies in China on Silk Road at last
Wednesday February 12, 3:02 pm ET
By Wei Gu
NEW YORK, Feb 12 (Reuters) - U.S. companies, after years of investing good money in China, have finally struck gold as profits from their efforts there are now offsetting weak economies elsewhere in the world.
China has turned from the perpetual market of tomorrow into a profitable here-and-now marketplace in the past few years. In fact, during the current earnings reporting season, profits from China helped boost companies such as Eastman Kodak (NYSE:EK - News), Yum! Brands Inc. (NYSE:YUM - News) and Intel Corp. (NasdaqNM:INTC - News) .
"The profits foreign companies generated in China have contributed significantly to their bottom lines as they have faced weakness in North America, Japan and Europe." Nicholas Lardy, senior fellow at thinktank Brookings Institution in Washington, said. "China is standing alone as the center of rapid economic growth."
In a survey last September, the Beijing-based American Chamber of Commerce found that nearly two-thirds of 200 American companies doing business in China were profitable. Surveys for the past three years have consistently shown that American companies are mostly profitable or, in the case of start-ups, on plan toward becoming so, said Chris Murck, chairperson at AmCham China.
Profits in China have been driven by a $1.2 trillion economy that is growing at a steady 8 percent a year, and the burgeoning middle class, which is wealthy enough to afford Western luxuries, said Ming-Jer Chen, author of the book, "Inside Chinese Business."
Kodak, the largest U.S. photography supplier, said sales in China, its second-largest film market, jumped 32 percent in the fourth quarter despite lower U.S. sales.
"The only bright spot is Asia and that is heavily driven by China," Kodak's Chief Executive Dan Carp told investors in January.
Yum Brands, owner of KFC and Pizza Hut, among other fast-food chains, posted higher 2003 earnings, due to aggressive expansion in China. Yum said China is its fastest growing and most profitable country outside the United States, and KFC has been rated the No. 1 brand in China.
"We are extremely bullish on China," Yum's Chief Executive Dave Novak told analysts recently. "It's an absolute gold mine for us."
Yum's 761 restaurants in Greater China, most of which are company operated, now generate almost a third of its international profits, and Yum is opening more than 200 restaurants in China per year.
Intel, the world's largest chip-maker, said its fourth-quarter earnings more than doubled with particular strength in China where sales are growing at the fastest pace of all its largest markets. It said sales in China were the largest in Asia, its biggest region in terms of sales.
The fact that companies are talking a lot about China means something to Wall Street.
"Most U.S. companies used to be secretive about the financial performance of their China businesses and refused to break them down," said Zhenghong Fan, a global investment strategist at Merrill Lynch. "Now are they more open about the situation because they are making money now."
Tempted by some 1.3 billion potential customers, foreign investors poured about $50 billion into China in 2002, which may surpass the United States in terms of outside investment, according to China's Ministry of Foreign Trade and Economic Cooperation.
China is already the world's largest mobile phone market and is currently signing up about 4 million wireless users every month -- or about the population of Kentucky -- to its 200 million cell-phone user base. Mobile handsets maker Motorola Inc. (NYSE:MOT - News) now sells 13 percent of its products there.
China has also recently displaced Japan to become the No. 2 market for computers and Internet use, helping computer makers as well as chip makers.
General Motors Corp. (NYSE:GM - News) expects China to be the world's second-largest vehicle market by 2010, and take the No. 1 car sales spot by 2025. GM China expected its 2002 China sales to double to about 115,000 units from 2001, but did not disclose profits from GM China.
Airplane makers such as Boeing (NYSE:BA - News) see China eventually becoming the world's biggest aviation market, but feel that may take a decade or two. Boeing sells 30 to 40 airplanes to China in an average year, which accounts for 10 percent of its total sales.
But the Great Wall is far from being fully scaled in industries such as insurance, local-currency banking, and media, even after China pledged to open its domestic market further as part of its terms for joining the World Trade Organization in 2001.
And U.S. companies face some major headaches from their engagement with China. Piracy is still rampant, with the latest versions of software and movies found on the streets of Chinese cities for as little as $1.
Cisco Systems Inc. (NasdaqNM:CSCO - News) in January filed a lawsuit against Chinese network equipment maker Huawei Technologies, which has emerged as a significant low-cost competitor to Cisco, claiming unlawful copy of its intellectual property.
Indeed, Chinese domestic competitors are learning quickly how to produce quality products at cheaper prices, and some Western companies who have been doing well in China for some time are starting to feel the heat. For example, Motorola, now the market leader in China, saw China's average handset price dip 25 percent last year, restricting its margins.
"It is the right time to go to China because it is poised for a tech take-off," said Denis Simon, dean of Lally School and Management and Technology at Rensselaer Polytechnic Institute in Troy, New York, and a former director of consulting firm Accenture in China.
"But will the newcomers take advantage of that as well? It will be increasingly difficult with the maturing domestic players," he said.
