China seen losing sheen for IBM to Nike

BEIJING >> Companies from IBM to Starbucks are struggling with new obstacles in China as Communist Party officials tussle over the direction and depth of economic reforms.

China s state controlled media last week accused Starbucks with charging too much for coffee and said Samsung Electronics smartphones don t work properly. IBM s China revenue slipped 22 percent in the third quarter, contributing to the first ever sales decline in the company s growth markets division, as state owned companies started delaying orders, including mainframes and servers.

The operating environment for foreign firms has deteriorated in the last year in a serious way, said Shaun Rein, managing director of China Market Research Group in Shanghai. nike air max In my 16 years in China, it s some of the worst business sentiment among foreign executives. They don t feel as welcome as they used to. executives this month, the chief complaints included rising costs and bureaucratic red tape. firms polled said profit margin would be flat or narrow this year. Only 39 percent are optimistic about the next five years in China; 58 percent felt that way in 2011.

Since opening its economy to foreign investment in the 1970s, China has been a growth engine that has generated billions of dollars in revenue for multinationals. While foreign firms struggled in the early years, the business environment improved after the nation joined the World Trade Organization in 2001. More recently, rising labor costs have prompted some companies to put their factories elsewhere. Now, with economic growth slowing, policymakers are struggling to pull off a long awaited transition from export fueled growth to an economy driven by domestic consumption.

China has pared economic growth projections to an average of 7 percent this decade, compared with 10.5 percent in the previous 10 years. Even maintaining that slower pace will be challenging. Leaders are battling a property bubble, while a five year credit expansion has free run canada put the economy s debt burden in the same vicinity that preceded crises or sharp slowdowns in Japan and other Asian nations. Wages, adjusted for inflation, have tripled in the past decade.

The current economic model is running out of gas, said James McGregor, Greater China chairman of consulting firm APCO Worldwide Inc. If they don t reform they can t keep growing.

Slowing growth caught up with Coca Cola in the first half of this year, as retail sales slowed the most in 10 years, the company said in July. Low priced water accounted for most of the beverage industry s growth as consumers cut back on pricier juices and sodas.

Stronger domestic competition and more discerning shoppers have hurt sales at Nike and Yum Brands. McDonald s same store sales fell 3.2 percent in the third quarter, the fourth decline in a row.

Chinese consumers are very cautious and typically revert to local chains in difficult economic times, Chief Executive Officer Don Thompson said on a call with analysts.

Chinese filmmakers are also capturing most of the country s growth, with rules that favor local productions. share of film receipts in China shrunk to 42 percent this year from 58 percent a year ago, according to Rentrak, a research firm. companies haven t lost their appetite for the world s second largest economy.

General Electric boosted sales 13 percent there in its most recent quarter owing to a surge in orders for health care devices. business sags, the handbag maker s sales surged more than 35 percent in China. General Motors and Volkswagen each plan to sell a record 3 million vehicles in China this year.

Domestic politics are driving much of the uncertainty in the executive suite. The recent broadsides against foreign companies may have less to do with protectionism than with assuaging public concerns about prices, analysts say. While salaries are rising in China, prices for housing, education canada Nike Air Force 1 Womens and health care are growing faster. In the past, inflationary pressures have sparked protests, which the government is keen to avoid.

There may be more clarity on what shape reforms will take next month when top leaders and heads of the biggest state firms and banks have a third full meeting of the Central Committee. It was after such a plenum in 1978 that China opened the economy to foreign investment and loosened state controls.

Opinions vary on how much change will come this time. Industries, including pharmaceuticals, health care and education, will be opened to foreign investments, according to Ken Peng, senior economist at BNP Paribas SA in Beijing.

It might not be as profitable as it used to be, but it s not a dead end, Peng said. There are new opportunities to discover.

With the government in its first year, this meeting may also be nothing more than paying lip service to reforming state owned enterprises and breaking barriers into industries monopolized by the state, Lu Ting, head of Greater China economics at Bank of America Corp. in Hong Kong, said in a note on Oct. 22. It won t be a make or break moment.

Next month, companies will be watching the rhetoric emanating from Beijing. Executives are hoping the government reiterates that foreign companies are welcome in China and they can have fair access to this market, McGregor said.

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