Multinational companies are still expanding operations in China despite the global downturn, but they are hurting from plunging exports and local sales, according to a report.

 

The annual report on manufacturing competitiveness, issued by the American Chamber of Commerce in Shanghai and other foreign business groups, found that most companies surveyed see their China operations as vital for weathering current hard times.

 

But like manufacturers everywhere, they are suffering.

 

A survey in late December, which followed up on a broader study conducted in the early autumn, found that nearly half of 79 foreign companies responding suffered export declines of more than 10 percent in the October-December quarter. More than 40 percent saw sales in China drop more than 10 percent.

 

"China is not immune to the pressures of the recession, and many operations here are definitely starting to feel pain, like most everyone in the world," said Ronald Haddock, a partner at Booz & Co., which conducted the surveys.

 

While some operating in China are planning layoffs or temporary leaves of absence for staff, a full 80 percent said they intend to expand production capacity in China in the coming one or two years.

 

A majority of the companies surveyed, most of them U.S.-based manufacturers of industrial and consumer goods, said they planned to increase investments in factories and new technology in China over the next year or so.

 

Only a year ago, a similar survey by the American Chamber of Commerce and Booz & Co. found that China risked losing its competitiveness due to surging costs for labor and raw materials, among other factors.

 

Now, with many home markets in full-blown recession, companies view China as one of the few good options. A growing number are making it a hub both for production both for export and selling to the local market of 1.3 billion potential customers.

 

"China continues to be the most promising growth play," Haddock said.

 

A recent report by Global Sources, a Hong Kong-based company that creates marketing Web sites and trade shows in China, found that half of surveyed buyers of Chinese exports planned to maintain or increase their purchases in 2009, although average price per item fell slightly.

 

"China remains at the center of their sourcing plans," the company's COO, Craig Pepples, said in a statement.

 

Within China, businesses linked to construction, especially, are hoping to win a piece of the 4 trillion yuan ($586 billion) government stimulus package announced last fall, but even consumer goods could benefit, said Edward Tse, Booz's managing partner for China.

 

"The trickle down to consumption is fairly fast in China," Tse said.

 

A large share of companies are striving to come out of the crisis stronger than before the downturn, but they need to build up their size to take advantage of China's cost and marketing advantages, Haddock said.

 

"China's a big market and it's a good place to export from if you can build scale," he said. "The name of the game is building scale."