The China Development Forum, a high-profile government-sponsored conference attended by executives from various countries, served as an opportunity for the Chinese government to renew its efforts to attract foreign companies.
Companies from outside China are “not foreigners, they are family members,” said China’s Commerce Minister Wang Wentao. state media reported CEOs of Apple, Pfizer and Procter & Gamble were in attendance at the forum in late March. For many of the dozens of business leaders there, it was their first visit to China since it closed its markets to the world and derailed its economy with draconian coronavirus policies.
Wang promised to remove obstacles to further investment by businesses, declaring 2023 to be “the year to invest in China.”
The goodwill did not last long.
The recent targeting of foreign-linked consulting and advisory firms through raids, detentions and arrests has rekindled concerns about doing business in China. Management teams of both midsize manufacturers and large enterprises are looking for ways to mitigate threats to their business and protect their employees.
China has become less business-friendly in recent years, and for the first time in decades, some companies and investors are already beginning to wonder if the risks of investing in the country outweigh the potential benefits. board.
The supply chain disruptions brought about by “Zero Covid-19” have awakened companies to the downside of their dependence on China. The geopolitical confrontation between the United States and China has heightened the risks, forcing many multinationals to develop alternate contingency plans and seek ways to “decouple” China.
And some companies are taking action as China’s supreme leader, Xi Jinping, calls on the Chinese government to step up national security and limit information to foreign governments and companies.
Seattle-based attorney Dan Harris, who works with foreign companies in China, said in recent weeks that an unusual number of companies are looking for ways to reduce their presence in China without exiting the market entirely. He said he heard.
One of his clients, an American furniture maker, is working on a deal to sell its products through a Chinese company in order to force American workers out of the country. A U.S. education company, which is also a customer, has closed its China division and licensed the technology to its current Chinese employees. He declined to provide further details as he advises his clients not to discuss leaving China until after they leave.
“The Chinese government is accelerating decoupling rather than trying to slow it down,” said Andrew Collier, managing director of Hong Kong-based economic research firm Orient Capital. “If companies feel that their operations are constantly exposed to intrusions, they will not be comfortable working in that environment.”
In the past few months, raids and official security visits have been made to well-known consulting firms, including US firms such as Mintz Group and Bain & Company, and most recently Capvision Partners, a consulting firm headquartered in New York and Shanghai. Reports are alarming. Such companies help foreign companies to evaluate their investments before putting money into the company. They are particularly important in China, where reliable information can be difficult to obtain and can result in premium charges. Capvision said in regulatory filings two years ago that most of its research specialists earn about $200 an hour, with some earning as much as $10,000 an hour.
China’s draft law was approved last month anti-espionage law Anxiety was further compounded by the formal expansion of the law’s already wide-ranging definition of what constitutes an espionage. Employees of foreign companies in China can be targeted as spies for normal commercial purposes, such as gathering information about competitors, markets and industries.
At a conference on China hosted by the U.S. Chamber of Commerce in Washington on Wednesday, the chamber’s chief executive, Suzanne Clark, said new anti-espionage laws and a crackdown on consulting firms “will increase the risks and uncertainties in markets. It’s slowly rising,” he said.
At the G7 Finance Ministers’ Meeting in Niigata, Japan, on Thursday, Treasury Secretary Janet L. We are looking at what we can do together.” of action. ”
Liu Pengyu, spokesman for the Chinese Embassy in Washington, said China welcomes foreign companies. “China is a law-based country,” he said. “All companies in China must operate in accordance with the law.”
China has always been a risk for foreign companies. In its journey to become the world’s second-largest economy, businesses ignored many red flags. But now, with stagnating growth and increasing risk, the math is different.
Deal closings in China are slowing. In 2022, 25 deals were announced in China by U.S. companies, down from 56 a year earlier, according to data services firm Deallogic.
Advisors to companies looking to invest have said new focus areas include Japan, South Korea and Singapore. Last year, US traders announced 28 deals in Singapore, 24 in Japan and 21 in South Korea, all about the same or slightly higher than the previous year.
At a Chamber of Commerce event this week, pharmaceutical company Eli Lilly lobbyist Heather Clarke spoke from China about opening its first office in Shanghai in 1918 and again in 1993. said the outflow of funds underscores the need to find a more pro-business country. .
During a panel discussion with the chairs of the House Select Committee on China, which holds hearings on China’s economic and security threats to the United States, Clark said, “Every company in this room has a strategy for China. We are re-evaluating,” he said. He will make recommendations to Congress.
“So where will that investment go in the future? It will come back to the US and it will go to other friendly countries,” she said.
Companies and investors may think deeply about injecting new capital into China, but divorce from China is unlikely, at least in the short term.
For manufacturing, no other country can match the scale of China’s infrastructure and skilled workforce. Companies with products to sell are reluctant to exit a market of 1.4 billion potential consumers.
James McGregor, Greater China chairman of advisory firm APCO Worldwide, said the standard for U.S. companies remains “it just has to be there.”
An executive with operations in China said many CEOs of client companies are now asking if their products can be manufactured elsewhere. But it is often the same company’s operations and engineering staff who argue that the required quality cannot be achieved elsewhere. The official requested anonymity due to the highly sensitive nature of China.
“As far as I know, no one has actually left China,” said Michael McAdoo, a partner in the Boston Consulting Group’s global trade group. “They are probably just looking elsewhere where they can balance the investments they have made.”
By extending new security measures across the economy, China is amplifying a lack of transparency that has already become one of the biggest risks to investing in China.
“It will backfire,” said Collier of Orient Capital, who has done due diligence work in China. “People who want to build a $50 million factory will not be comfortable doing so because they cannot research the location, the land involved, the partners, etc.”
Victoria Kim and Claire Who Contributed to the report from Seoul.
