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China Is Full of Risks. So Why Can’t Corporate America Leave?

China Is Full of Risks. So Why Can’t Corporate America Leave?


For decades, America’s corporate chieftains saw China as a money spinner. They gushed about its hundreds of millions of consumers, called it “one of the biggest opportunities” and made predictions that this would be “China’s century.”

Now, those executives have come away from recent visits to the country with a more sober view. Western companies doing business in China are facing pressures that were unimaginable several years ago. The country’s economy is floundering, and its relationship with the United States is strained. Three years of border restrictions and an effective commercial lockdown have opened cracks that have yet to heal.

Nine months into the country’s post-Covid reopening, companies are grappling with a tough reality: China’s $18 trillion economy is fraught with peril but remains impossible to ignore and difficult to leave. A retreat could mean losing an edge to future global competitors. Many Western companies still see their China operations as a long-term bet, but the payoff is tempered with hazards.

“There is a recognition among C.E.O.s that they need to mitigate some risks,” said Myron Brilliant, a senior counselor 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 worries is long. Police raids on Western companies, steep fines, scuttled deals, regulations restricting data transfers and a wide-reaching counterespionage law have increased the costs of doing business. Other risks are known as gray swans — rare but not unimaginable events like another pandemic, more economic sanctions or open cross-border conflict. The concerns add up to what Gina M. Raimondo, the U.S. commerce secretary, described recently as a feeling among American businesses that China is “uninvestable.”

The fallout can be swift. Reports this week that the Chinese government is banning iPhones for employees at government agencies and other state-controlled entities sent Apple’s stock sliding 6 percent, erasing nearly $200 billion from its market value.

A worsening economic outlook has added to companies’ concerns, making it harder to justify investing more money in the country. After being shut out for three years, foreign corporate heads are finally beginning to visit their staff in China. Many expected to find an economy roaring back.

Instead, some executives have returned home with concerns that Chinese officials are overconfident they can handle the country’s economic downturn. Privately, corporate leaders have looked with alarm at how investment by Chinese companies has dried up. Why, they ask, should we put money in China if its own private sector doesn’t have faith in the economy?

“The conversation about China in corporate boardrooms is inexorably shifted toward more caution,” said Jude Blanchette, a China specialist at the Center for Strategic and International Studies in Washington. The reason, he said, is the slowing economy, as well as “Beijing’s erratic and punitive regulatory behavior, its movement toward totalitarianism, and actions by the U.S. government to steer technology and investment to other markets.”

The stance of U.S. officials, whose sentiment has turned against China, also complicates matters. Pursuing a business-as-usual approach to China can mean being summoned by U.S. lawmakers. “You’re in the hot seat if you say anything positive about China,” said Jon Mills, a spokesman for Cummins, a century-old American multinational that makes engines.

The scrutiny comes with reputational and legal consequences. A special House committee on competition with China, headed by Representative Mike Gallagher, Republican of Wisconsin, has subpoena powers and political sway. And the committee isn’t the only voice calling for China partnerships to be scuttled.

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’s Republican governor, Glenn Youngkin, who had blocked Ford from setting up in the state.

Moderna’s decision to research, develop and manufacture mRNA medicines in China was a “betrayal of the American taxpayers whose hard-earned dollars made this technology possible,” according to Senator Marco Rubio, Republican of Florida.

And plans by Tesla to build a factory for large-scale batteries in Shanghai raised questions from Mr. Gallagher about whether Tesla was dependent on “access to the Chinese market.”

Companies are trying to balance the political scrutiny with a belief that if they don’t compete and collaborate on research and innovation with Chinese firms, they risk falling behind because Chinese competitors will beat them in global markets.

Instead of putting more operations in China and risking criticism at home, Ford structured its recent partnership with China’s Contemporary Amperex Technology Company Limited, also known as CATL, so that Ford could own and run its battery plant in Michigan. The automaker said the arrangement would create 2,500 jobs. The $3.5 billion factory will use technology from CATL, the world’s biggest maker of electric vehicle batteries, to “help us build more E.V.s faster,” said William Clay Ford Jr., Ford’s executive chairman.

Nevertheless, Republican lawmakers have said they are investigating the agreement over concerns that CATL has ties to Xinjiang, the region in western China where the United Nations has pinpointed systemic human rights violations.

When it comes to pharma, China has made it clear that it wants companies to change the way they have traditionally operated, by teaming up with local scientists and investing in research, instead of just bringing foreign developed drugs into the market.

For Moderna, China’s large base of patients, deep pockets for pharmaceutical research and resources for clinical trials probably contributed to its decision to collaborate, less than a year after it was reported that Moderna had refused China’s request to hand over intellectual property behind its Covid vaccine. Moderna is facing waning demand for the vaccine, the company’s only commercially viable product, and being in China allows it to work on other vaccines that use the mRNA technology in one of the world’s largest pharmaceutical markets.

The government controlled by Xi Jinping has pulled China’s focus sharply inward in his decade as top leader. “Structurally, the positioning is very different from previous administrations,” said Helen Chen, a managing partner at L.E.K. Consulting. “There is quite an importance for China to rise, so what does that mean for western companies?”

Even if executives wanted to decouple, as some American lawmakers are pushing for, many companies say it is unreasonable. Cutting China operations is not feasible, said Mr. Mills of Cummins. The manufacturer of engines, generators and auto components has 21 factories in China, and earns about a fifth of its profit in the country.

“Our success in China has led to global success and U.S. job growth,” he added.

It’s a sentiment that other companies share.

“I think what is important for the American people to understand is that the relationship with China, we have to find a way to get along,” said Greg Hayes, the chief executive of RTX, an aerospace and defense contractor formerly known as Raytheon, speaking to CNBC earlier this year. Pulling supply chains out of China, where it has two subsidiaries making commercial engines, aviation systems and cabins, would be impractical, Mr. Hayes said. The market is “too big, too important and too necessary to the U.S. economy.”

But fierce competition and the mounting geopolitical, strategic and financial costs to doing business have chipped away at the excitement that corporate America once had for China.

And as China confronts the biggest threat to its economy in decades, many multinationals are searching for growth in other parts of the world, said Mr. Brilliant of Dentons Global Advisors-ASG, who was previously the executive vice president of the U.S. Chamber of Commerce.

“With the degree of uncertainty hanging over China’s economic direction, it would be malpractice for corporate executives to stand pat,” he said.





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