Are Irritated Multinationals Giving Up on China?

While I was in Tianjin for the World Economic Forum’s Annual Meeting of New Champions last week, I was struck by Premier Wen Jiabao taking great pains to assure foreign investors that China would not discriminate against them. “All enterprises registered in China according to Chinese laws are Chinese enterprises and their products are made-in-China products,” he said in his opening address. Foreign-invested enterprises registered in China would receive “national treatment.”

 
He added: “In government procurement, China gives equal treatment to products from foreign-invested enterprises and Chinese-invested enterprises alike.” The premier also stressed that “China gives high priority to intellectual property protection and has made this a national strategy,” an apparent reference to long-standing complaints by foreign companies about patent and copyright piracy.
 
The comments make sense if you remember what has been happening in the past few months. China has felt pressure from some multinationals over what they see as Beijing’s growing hostility towards non-Chinese companies. In May, Microsoft CEO Steven Ballmer expressed his frustration. “India is not perfect but the intellectual property protection in India is far, far better than it would be in China,” he told Bloomberg. “China is a less interesting market to us than India, than Indonesia.”
 
In July, according to the Financial Times, General Electric CEO Jeffrey Immelt joined the fray. “I really worry about China,” he reportedly told a group of businessmen at a private dinner in Rome. “I am not sure that in the end they want any of us to win, or any of us to be successful.” The company later said that the remarks were taken out of context and that China remains an attractive market for GE, but Beijing was put on the defensive.
 
Also in July, the CEOs of two of Europe’s companies complained directly to Wen. “This is not our idea of partnership,” BASF chief Jürgen Hambrecht told the premier, referring to regulations that threaten to cut BASF’s access to China if it does not transfer technology. At the same meeting, Siemens chief executive Peter Loescher griped that domestic companies enjoy unfair advantages in public procurement projects compared with foreign-invested firms.  
 
Not Yet Good-Bye
The irritation with China has not yet resulted in any major MNC pulling up stakes in a big way, although GE is transferring production of hybrid water heaters to Kentucky because it says rising labour costs in China and shipping rates are making it more competitive to make the items in the U.S. British mobile phone company Vodafone has announced the sale of its 3.2% stake in China Mobile, but the motive appears to be profit realisation – the shares will raise £4.3 billion (US$6.7 billion), nearly twice what Vodafone paid in 2002.
 
Vodafone has emphasised that it is not leaving China. “Both companies have enjoyed a strong relationship and cooperated closely in many areas of business and in the development of the mobile industry,” it said in a statement. “Following today’s announcement, both companies will continue this cooperation in areas such as roaming, network roadmap development, multinational customers and green technology.”   
 
There is no evidence yet that the recent slowdown in foreign direct investment is a direct result of the griping -- FDI in August was US$7.6 billion, up just 1.38% from a year earlier, compared with FDI of $6.92 billion in July, which is 29.2% higher than a year ago. According to the Wall Street Journal, the slowdown may be due to a statistal base effect.
 
However, despite Wen’s soothing words, the level of frustration remains high. “What we are telling [the Chinese government] is that our companies are willing to invest, and for that they need to be sure that they will be treated equally,” Jacques de Boisséson, president of the European Union Chamber of Commerce in China, told TIME magazine. “Today they are concerned that this wouldn’t be the case.”
 
The American Chamber of Commerce in China is also speaking up. Christian Murck, the group’s president, says that IT and other companies dependent on intellectual property are greatly concerned for the future “because of the regulatory-policy changes and narrowing of market access.” Chamber members still see China as a top priority, he adds, “but of course that future investment will depend on the degree to which there is scope in the market for foreign companies to operate.”
 
What Foreigners Want
Both Wen and Chinese Vice President Xi Jinping have been on a charm offensive, but the MNCs are looking for concrete action. The American and European chambers of commerce have a lengthy wish list, which include the following:
 
  • Withdraw discriminatory procurement, standards, tax, IP, IT security and other policies. Foreign IT and telecom companies are particularly unhappy with rules that they believe are designed to benefit individual domestic companies, rather than promote competition. Foreigners should be permitted to participate in an identical manner with Chinese rights holders in standardization matters regarding intellectual property rights protection. Foreign lawyers should be allowed to attend and participate in hearings alongside local counsel and all companies should have the right to counsel of their choice (including international lawyers) in any proceedings or investigation.
 
  • Clear up ambiguities in newly enacted legislation. Foreign companies want to see the Supreme People’s Court speed up its issuance of national judicial interpretations on the Labour Contract Law and its implementation rules, including clarification of the statutory terms for permitted uses of temporary, auxiliary and substitute positions. They want clarification and streamlining of the approval process in the private equity sector to ensure that foreign investors are able to operate on the same basis as their domestic counterparts. Foreign companies also want clarification on the qualifications required to undertake engineering, procurement and construction contracts.
 
  • Ensure consistent implementation of policies by sub-central ministries and regulators. Foreign companies especially single out enforcement of environmental laws and regulations and issuance of engineering, procurement and construction tenders at the local levels. They want regulatory data protection laws to be fully implemented and an effective patent linkage system established to prevent copies of patented medicines from receiving government marketing approval.
 
  • Ensure that foreign companies have market access on the same terms as their local counterparts. The equity caps for foreign investors in agricultural industries should be scrapped and restrictions introduced in the November 2007 Foreign Investment Catalogue should be lifted. Foreign banks should be allowed to underwrite financing facilities for non-financial enterprises, participate in the domestic currency market and exempted from the foreign debt quota, or at least from foreign debt quotas in trade finance and project lending. Market entry restrictions on foreign-invested enterprises in the real estate sector should be eliminated.  
 
  • Treat domestic and foreign companies equally in government procurement. The U.S., European Union, Japan, Korea and other countries are party to the World Trade Organisation’s Government Procurement Agreement, but China has yet to sign the pact. The European Chamber of Commerce notes that all 25 large contracts so far awarded under Beijing’s huge stimulus package have gone to local firms. Government tenders, for example in the wind-power sector, are said to include criteria that only domestic companies can meet.
 
What Will China Do?
It remains to be seen what will happen next. Will action be taken on the specific areas raised by the chambers of commerce? Will foreign companies be satisfied with those moves? What will foreign investors do if their complaints are not addressed? Can they really afford to ignore a humungous market of 1.3 billion consumers?  
 
My guess is that China will take a sectoral approach, picking and choosing which industries it wants foreign investors to be in and trying to address expectations in those industries. The American Chamber of Commerce acknowledges progress in civil aviation, transportation and logistics, and media and entertainment, for example. Policy makers have said that they want direct investments to go to inland provinces and those in the west, and to high-end manufacturing, services, energy and green technologies.

 

The approach to other sectors will be more calibrated as policy-makers weigh the competitiveness of domestic companies, including state-owned enterprises, the importance of foreign technology transfer, national security concerns (which are often cited for restrictions in telecommunications and Internet businesses), job creation and other issues.
 
Beijing’s ability to actually address the complaints will also come into play. Local fiefdoms, particularly in places far from Beijing, often pay only lip service to directives from the centre. Capacity-building at the sub-ministry and local regulatory levels will need time, as will the maturation of institutions like the judiciary and the legal system.
 
Political sensitivities must also be taken into account. How will citizens react to the news that a foreign enterprise, not a domestic company, has been entrusted with stimulus money?  
 
Some may disagree, but China seems to think that it no longer needs to rely as much on foreign investment and capital as it did in the past. It’s becoming a more normal economy and so it is reassessing its relationship with foreign companies.
 
China will also note that not all MNCs are complaining. “I think there’s just as many more who haven’t said anything, but are finding the environment satisfactory for them,” London-based Ray Leclercq, CFO of telecom multinational BT Global Services, told CFO Innovation. “There’s no doubt that no matter which country you’re on, there are ways of improvement that you would like them to do, that you would like to see. But that’s just to be expected in terms of operating across the globe.”
 
Adjusting expectations and relationships does not need to become a zero-sum game. China appears to be listening to foreign investors, as all markets should do, but it does not have to do everything they want. It will act according to what it thinks is in the national interest, which includes what is best for domestic enterprises.
 
For their part, foreign companies will also act according to what they think is in their best interests. If they are convinced that they will not get a fair shake, they may decide to follow Vodafone’s lead. They may take profits now but still retain a presence in China, even as they invest in India, Indonesia, Brazil, Russia and other markets – where globalising Chinese companies may eventually join them.
 
About the Author
Cesar Bacani is senior consulting editor at CFO Innovation.
 
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