China’s Captive Market Captures Foreign Businesses

Fear is not the best way to run a business, yet running a multinational company with an office in mainland China leaves you in a strange limbo.

If you want to relocate, you are afraid to follow through because you presume – not without reason – that China will retaliate if you leave. Not only that, but you are afraid to even say that this is what you fear, for the same reason.

Don’t take my word for it. Ask the anonymous chief executive for Asia at an anonymous company, who declined to let The New York Times print his name because of the legal repercussions that can arise from openly criticizing China. He did say, however, that many companies now are “just convinced if they open that R.&D. center in China, every technical secret they’ve got will be copied, every patent exploited.” (1)

The Times further reported that several multinationals have left mainland China for Singapore, while still others express the desire to relocate but hesitate because of reprisals. Such action is far from unheard of. Jardine Matheson reincorporated in Bermuda in the 1980s and delisted from the Hong Kong Stock Exchange in the mid-1990s. In return, Beijing penalized the company for more than a decade, making it difficult for it to invest in mainland China in any substantial way.

Some companies report having difficulty convincing executives to move to China because of air pollution and limited educational opportunities. Given the climate of fear, however, it seems likely that the real reasons for dissatisfaction run deeper.

I have limited sympathy for the companies that now wish they were less exposed to China. They couldn’t resist the lure of a captive market of over 1.3 billion people. And they couldn’t seem to comprehend, though the risks were already knowable and known, that they would become captives themselves in turn.

Belatedly, however, companies are beginning to realize that choosing China for their Asian center of operations was a decision that held serious drawbacks. A survey of over 500 companies, released in May by the European Union Chamber of Commerce in China, registered an atmosphere of pessimism about Chinese profit margins. (2) Barriers to non-Chinese businesses are well known, both in Europe and the United States, and they seem likely to limit growth there.

China lacks freedom of information, freedom of expression and a legal system free of coercion. These three freedoms – a Chinese-sounding phrase if there ever was one – are essential to good business management in the modern world. But companies stampeded into China over the last 20 years for fear of missing out. Now, like it or not, in many ways they find themselves stuck.

They might get lucky. China might evolve into a more open, democratic and free society. It has happened before in places like South Korea. For a brief moment in the 1990s, there seemed to be hope that it was happening in Russia, though today Russia is an arguably worse environment for business than China.

More likely, however, multinational companies will find themselves divided on opposite sides of the chasm that is opening between China on the one hand and its Asian neighbors and their Western allies on the other, who are threatened by China’s increasingly aggressive territorial claims and protectionist impulses. China is big, but it is not an easy market for foreigners, and it could increasingly cost companies business elsewhere in the region.

For now, however, multinationals already have big problems with their Chinese offices. Major companies have faced complaints from Chinese authorities about everything from food safety to “unparalleled arrogance.” While facing prosecution, foreign companies can also find themselves lambasted by the Chinese press. Companies cannot rely upon the force of law to keep them out of trouble in China when authorities there will act in the best interest of the ruling elite regardless.

We can also be sure that whenever an American or European CEO today visits his company’s Chinese headquarters, he carries no data of any significance on his laptop and uses a smartphone specially scrubbed for the purpose – or, in some cases, a low-tech flip phone without Internet capabilities at all. To carry any sort of intellectual property into China willingly is tantamount to surrendering it to the Chinese government.

It’s a heck of a way to do business, but it is the way these companies chose. Now they have to live with it, or suffer the consequences of leaving.

Sources:

1) The New York Times, “Looking Beyond China, Some Companies Shift Personnel”

2) Bloomberg Businessweek, “Is the ‘Golden Age’ for Multinationals in China Over?”