An excellent article in the previous edition of the Economist argues that China is no longer the place to do business for foreign companies it once was. It begins, “Mao Zedong’s disastrous policies had left the economy in tatters. The height of popular aspiration was the ‘four things that go round’: bicycles, sewing machines, fans and watches. The welcome that Deng Xiaoping, China’s then leader, gave to foreign firms was part of a series of changes that turned China into one of the biggest and fastest-growing markets in the world. For the past three decades, multinationals have poured in. After the financial crisis, many companies looked to China for salvation. Now it looks as though the gold rush may be over”.
It makes the point that “China’s market is still the world’s most enticing. Although it accounts for only around 8% of private consumption in the world, it contributed more than any other country to the growth of consumption in 2011-13. Firms like GM and Apple have made fat profits there. But for many foreign companies, things are getting harder. That is partly because growth is flagging (see article), while costs are rising”.
The problems however are manifold, “Talented young workers are getting harder to find, and pay is soaring. China’s government has always made life difficult for firms in some sectors—it has restricted market access for foreign banks and brokerage houses and blocked internet firms, including Facebook and Twitter—but the tough treatment seems to be spreading. Hardware firms such as Cisco, IBM and Qualcomm are facing a post-Snowden backlash; GlaxoSmithKline, a drugmaker, is ensnared in a corruption probe; Apple was forced into a humiliating apology last year for offering inadequate warranties; and Starbucks has been accused by state media of price-gouging. A sweeping consumer-protection law will come into force in March, possibly providing a fresh line of attack on multinationals. And the government’s crackdown on extravagant spending by officials is hitting the foreign firms that peddle luxuries (see article)”.
Another aspect that is harming foreign companies is the fact that “Competition is heating up. China was already the world’s fiercest battleground for global brands but local firms, long laggards in quality, are joining the fray. Many now have overseas experience, and some are developing inventive products. Xiaomi and Huawei have come up with world-class smartphones, and Sany’s excellent diggers are taking on costlier ones made by Hitachi and Caterpillar. Consumers will no longer pay a hefty premium just because a brand is foreign. Their internet savvy and lack of brand loyalty makes them the world’s most demanding customers (see article). Some companies are leaving. Revlon said in December that it was pulling out altogether. L’Oréal, the world’s largest cosmetics firm, said soon afterwards that it would stop selling one of its main brands, Garnier. Best Buy, an American electronics retailer, and Media Markt, a German rival, have already left, as has Yahoo, an internet giant”.
Even those companies that are brave, or stupid, enough to stay are having difficulties, “Some of those who are staying are struggling. IBM this week said that revenues in China fell by 23% during the last quarter of 2013. Rémy Cointreau, a French drinks group, reported that sales of its Rémy Martin cognac fell by more than 30% during the first three quarters of last year because of a plunge in China. Yum Brands, an American fast-food firm, said in September last year that same-store sales in China had fallen by 16% in the year to date”.
These companies should have known, or been made aware of, the dangers of doing business in China that they obviously know needs a state owned company to “assist” them in breaking into the Chinese market. If this trend continues and more companies stock price falls and there are more anti corruption stings targeting foreign companies then the prospect of entering China for foreign companies will look like something not worth bothering about. Instead they will go to Africa or Latin America and there will be fewer jobs for Chinese workers.
It concludes “First, rising costs mean that bosses must shift from going for growth to enhancing productivity. This sounds obvious, but in China the mentality has long been ‘just throw more men at the problem’. One way to get a grip on costs is to invest in labour-substituting technology, not only in manufacturing but also in services”. It goes on to make the argument that “Second, tighter control is another must. GSK’s bosses in London admitted that its problems in China were partly the result of executives acting ‘outside of our processes and control’. Managers in headquarters must ensure that executives’ behaviour and safety standards are as high as anywhere else in the world. Chinese consumers are even more active on social media than those in the West, so any scandal is instantly broadcast nationally. Lastly, a One China policy no longer makes sense. Most firms set up their local offices when China’s economy was smaller than $2 trillion. Although it will soon be five times that size, many still try to run their operations from Shanghai. That makes little sense when tastes in food, fashion and much else vary between provinces and mega-cities that have populations as big as European countries”.
The piece ends, “China is still a rich prize. Firms that can boost productivity, improve governance and respond to local tastes can still prosper. But the golden years are over”.