Multinationals reshuffle their Chinese operations

On Feb. 18, NEC Corp. announced plans to reorganize its Chinese operations into two companies focused on sales and service for IT and communications products. Set for completion in July, the reorganization of NEC’s Chinese subsidiaries is the most significant reshuffling undertaken by NEC during its 30 years of doing business in China.

NEC is not alone in reorganizing its Chinese operations. Canon Inc., Siemens AG, Nokia Corp., Motorola Inc., Koninklijke Philips Electronics N.V., Sony Corp., Matsushita Industrial Co. Ltd., Fujitsu Ltd., Kyocera Corp. and Ricoh Co. Ltd., among others, have all announced plans to reorganize their Chinese operations in recent months.

“This surge in corporate reorganizations is no accident. It is being driven by the growing importance of the Chinese market and the high growth rate of China’s economy,” said He Jun, a senior analyst at Anbound Group, a Beijing consulting company. “With its high growth rate, expanding market and an ever-growing lion’s share of the world’s manufacturing capacity, the Chinese market is becoming the most important variable of the world’s economy and is commanding more attention and revaluation from foreign investors.”

“The primary target of the reshuffling of operations and structures by multinationals to their investment in China is to reconsider their strategies under these new circumstances, with China becoming the fastest growing market and manufacturing base,” He said.

“In addition, due to the amazing economic growth pace of Mainland China and the declining importance of operations in Hong Kong and Taiwan, the parallel structure established by companies with Greater China and Mainland China operations coexisting side by side is no longer suitable to the new environment. Microsoft Corp. is a case in point,” He said.

Changes in government regulations have made it easier for foreign companies to do business in China. On Feb. 13, China’s Ministry of Commerce revised the regulations that govern the establishment of foreign-invested companies. That revision marked the second time the regulations have been revised since China joined the World Trade Organization (WTO), ministry officials said.

“The revised regulations grant more freedom to foreign-invested companies to trade unlisted corporate shares held by listed companies and allows them a greater range of operations,” said Wang Zhile, vice president of the Investment Association of China’s subcommittee on foreign investment.

“In fact, the recent corporate reshuffling has much to do with the rules of WTO and the related changes in China’s foreign investment policies. It has been going on since China joined the WTO in 2001,” Wang said. When multinationals first entered China in the 1990s, they established various enterprises in many localities and fields to diversify their operations as well as to steer clear of the investment ceiling of US$30 million placed on each joint venture.

For example, by the end of 2003, Matsushita had set up 49 joint ventures, including 41 factories. For its part, NEC had 23 subsidiaries and 27 associated companies in China. Including its Chinese headquarters, NEC (China) Co. Ltd., the company has a total of 51 branches in China.

Many foreign companies are reluctant to set up so many subsidiaries as this is both detrimental to administrative coordination and a waste of resources. With more flexible policies now being put in place, they are eager to reshuffle their operations.

In addition to reorganizing their Chinese operations, multinationals are also getting more interested in buying out their Chinese partners to transform joint ventures into wholly-owned subsidiaries.

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