For decades, US corporate leaders viewed China as a money spinner. They spoke of the hundreds of millions of consumers, calling it “one of the greatest opportunities” and predicting that this would be “China’s century.”
Now these executives have left recent visits to the country with a more sober look. Western companies doing business in China are facing pressures that were unimaginable just a few years ago. The country’s economy is floundering and relations with the United States are strained. Three years of border restrictions and an effective commercial lockdown have opened cracks that have yet to heal.
Nine months after the country reopened after Covid-19, businesses are grappling with a harsh reality: China’s $18 trillion economy is fraught with danger but remains impossible to ignore and difficult to exit. A pullout could mean losing an edge over future global competitors. Many Western companies still see their business in China as a long-term gamble, but the payoff is tempered by risk.
“There is an awareness among CEOs that they need to mitigate certain risks,” said Myron Brilliant, senior advisor at Dentons Global Advisors-ASG. “They don’t want to ignore the market, but everyone has their eyes wide open in this environment.”
The list of concerns is long. Police raids on Western companies, hefty fines, failed deals, regulations restricting data transfers and a far-reaching counterintelligence law have increased the cost of doing business. Other risks are known as gray swans – rare but not unimaginable events such as a new pandemic, increased economic sanctions or open cross-border conflict. These concerns add to what Gina Raimondo, the US Secretary of Commerce, recently described as a feeling among US companies that China is “non-investable”.
The consequences can be rapid. Reports this week that the Chinese government is banning iPhones for employees at government agencies and other state-controlled entities caused Apple’s stock to fall 6 percent, wiping nearly $200 billion from its market value.
The deteriorating economic outlook has increased corporate concerns, making it more difficult to invest more money in the country. After being locked out for three years, foreign business leaders are finally starting to visit their staff in China. Many expected the economy to recover.
Instead, some executives have returned home with concerns that Chinese officials are overconfident that they can handle the country’s economic downturn. Privately, business leaders have looked with concern at how investment from Chinese companies has dried up. Why, they ask, should we put money in China if its own private sector has no confidence in the economy?
“The conversation about China in corporate boardrooms is inexorably shifting toward more caution,” said Jude Blanchette, a China specialist at the Center for Strategic and International Studies in Washington. The reason, he said, was the slowing economy, as well as “Beijing’s erratic and punitive regulatory behavior, the move toward totalitarianism, and the US government’s actions to divert technology and investment to other markets.”
The attitude of US officials, whose sentiment has turned against China, also complicates matters. Pursuing a “business-as-usual” approach to China could mean getting subpoenaed by US lawmakers. “You’re number one when you say something positive about China,” said Jon Mills, a spokesman for Cummins, a century-old American multinational engine company.
The investigation has reputational and legal ramifications. A House of Representatives special committee on competition with China, headed by Representative Mike Gallagher, Republican of Wisconsin, has subpoena powers and political clout. And the commission is not the only voice calling for the Chinese partnerships to end.
A deal by Ford Motor to license electric battery technology from a Chinese company for a plant in Michigan was a “Trojan horse” for the Chinese Communist Party, according to Virginia Republican Governor Glenn Youngkin, who had dissuaded Ford from getting involved. to establish the state.
Moderna’s decision to research, develop and manufacture mRNA drugs in China was “a betrayal of the American taxpayers whose hard-earned dollars made this technology possible,” said Senator Marco Rubio, Florida Republican.
And plan by Tesla to build a large-scale battery factory in Shanghai raised questions in Mr Gallagher’s mind about whether Tesla relied on “access to the Chinese market”.
Companies try to balance political oversight with the belief that if they don’t compete and collaborate on research and innovation with Chinese companies, they risk falling behind as Chinese competitors will beat them in global markets.
Rather than expand its business in China and risk domestic criticism, Ford structured its recent partnership with China’s Contemporary Amperex Technology Co., Limited, also known as CATL, to allow Ford to own and run its Michigan battery plant. The automaker said the scheme would create 2,500 jobs. The $3.5 billion plant will use technology from CATL, the world’s largest manufacturer of electric vehicle batteries, to “help us build more electric vehicles faster,” said William Clay Ford Jr., executive chairman of Ford.
Nevertheless, Republican lawmakers have said they are examining the agreement over concerns that CATL has ties to Xinjiang, the region of western China where the United Nations has found systematic human rights violations.
When it comes to pharma, China has made it clear that it wants companies to change the way they traditionally operate, collaborating with local scientists and investing in research, rather than just putting foreign-developed drugs on the market. to market.
China’s large patient base, deep pockets for pharmaceutical research and clinical trial resources likely contributed to the decision to collaborate, according to Moderna, less than a year after it was reported that Moderna had rejected China’s request for the intellectual property behind to transfer his Covid vaccine. . Moderna faces declining demand for the vaccine, the company’s only commercially viable product, and its presence in China allows it to work on other vaccines that use the mRNA technology in one of the largest pharmaceutical markets in the world.
The Xi Jinping-controlled government has sharply drawn China’s attention in its decade as a top leader. “Structurally, the positioning is very different from previous governments,” said Helen Chen, managing partner at LEK Consulting. “It is vital that China emerges, so what does that mean for Western companies?”
Even if executives wanted to disconnect, as some U.S. lawmakers want, many companies say it’s unreasonable. Restricting operations in China is not feasible, said Mr. Mills of Cummins. The manufacturer of engines, generators and auto parts has 21 factories in China and earns about a fifth of its profits in the country. “Our success in China has led to global success and job growth in the US,” he added.
It’s a feeling that other companies share.
“I think it’s important for the American people to understand that in the relationship with China, we have to find a way to get along,” said Greg Hayes, the CEO of RTX, an aerospace and defense contractor formerly known stood like Raytheon. I spoke to CNBC earlier this year. It would be impractical to withdraw supply chains from China, where it has two subsidiaries that make commercial engines, aerospace systems and cabins, Mr Hayes said. The market is “too big, too important and too necessary for the US economy.”
But fierce competition and the rising geopolitical, strategic and financial costs of doing business have eroded the excitement US business once had for China.
And as China faces the biggest threat to its economy in decades, many multinationals are looking to grow in other parts of the world, said Mr. Brilliant of Dentons Global Advisors-ASG, who was formerly executive vice president of the US Chamber of Commerce. Trade.
“Given the degree of uncertainty hanging over China’s economic direction, it would be a malpractice for corporate leaders to continue to exercise patience,” he said.
