For decades, American corporate leaders viewed China as a lucrative opportunity, praising its massive consumer base and predicting it would dominate the 21st century. However, recent visits to the country have left executives with a more cautious perspective. Western companies operating in China now face unprecedented challenges, with a struggling economy and strained relations with the United States. After three years of border restrictions and commercial limitations due to the pandemic, cracks have appeared that are yet to heal.
Nine months into China’s post-Covid reopening, companies are grappling with the reality that China’s $18 trillion economy is full of risks but impossible to ignore or abandon. Withdrawing from the market could mean losing a competitive edge to future global rivals. While many Western companies still see their China operations as a long-term investment, they are well aware of the hazards involved.
There is a growing recognition among CEOs that risks need to be mitigated, according to Myron Brilliant, a senior counselor at Dentons Global Advisors-ASG. Companies do not want to ignore the Chinese market, but they are approaching it with caution in the current environment. The list of concerns is extensive, including police raids on Western companies, hefty fines, failed deals, data transfer regulations, and a counterespionage law that has increased the cost of doing business. There are also “gray swan” risks, such as another pandemic, economic sanctions, or cross-border conflicts. These worries have contributed to the perception among American businesses, as expressed by U.S. Commerce Secretary Gina Raimondo, that China is “uninvestable.”
The consequences can be swift. Reports of the Chinese government banning iPhones for employees at government agencies and state-controlled entities led to a 6% drop in Apple’s stock, wiping nearly $200 billion from its market value.
Furthermore, a worsening economic outlook has made it harder for companies to justify further investment in China. Foreign corporate heads, after being unable to visit their Chinese staff for three years, returned to find an economy that wasn’t as robust as expected. Executives raised concerns about Chinese officials’ overconfidence in their ability to handle the economic downturn. They also noted the drying up of Chinese companies’ investment and questioned why they should invest in China if even the private sector lacks faith in the economy.
Jude Blanchette, a China specialist at the Center for Strategic and International Studies, stated that corporate boardroom discussions about China are increasingly cautious due to the slowing economy, Beijing’s unpredictable and punitive regulatory behavior, its move towards totalitarianism, and U.S. government efforts to divert technology and investment to other markets.
The stance of U.S. officials, who have become increasingly critical of China, further complicates matters. Taking a business-as-usual approach to China can result in summons from U.S. lawmakers. Jon Mills, a spokesman for Cummins, a century-old American multinational that manufactures engines, explained that mentioning anything positive about China puts companies in the hot seat. The scrutiny can lead to reputational and legal consequences.
The House committee on competition with China, led by Representative Mike Gallagher, has the power to issue subpoenas and holds significant political sway. This committee is not the only entity calling for partnerships with China to be abandoned. Ford Motor’s deal to license electric battery technology from a Chinese company for a plant in Michigan was described as a “Trojan horse” by Virginia’s Republican governor, Glenn Youngkin. Moderna’s decision to conduct research, development, and manufacturing of mRNA medicines in China was labeled a betrayal by Senator Marco Rubio. Even Tesla’s plans to build a battery factory in Shanghai have raised questions about its dependence on the Chinese market.
Companies are trying to navigate the political scrutiny while recognizing the importance of competing and collaborating on research and innovation with Chinese firms to avoid falling behind in global markets. Ford, for example, structured its partnership with China’s Contemporary Amperex Technology Co., Limited (CATL) to allow Ford to own and operate its battery plant in Michigan. However, Republican lawmakers are investigating this agreement over concerns about CATL’s ties to Xinjiang, where systemic human rights violations have been reported.
China has made it clear that it wants pharmaceutical companies to change their traditional operations by partnering with local scientists and investing in research instead of simply importing foreign-developed drugs. Moderna’s decision to collaborate with China likely stems from the country’s large patient population, ample resources for research, and a significant market for clinical trials. China provides Moderna with the opportunity to work on other vaccines using mRNA technology, especially as demand for their Covid vaccine decreases.
Under the leadership of Xi Jinping, China has become more inward-focused. Western companies now question how this structural shift will impact their operations. While some American lawmakers advocate for decoupling from China, many companies deem it unreasonable. Companies like Cummins and RTX (formerly Raytheon) believe they cannot afford to cut ties with China due to the size, importance, and necessity of the Chinese market.
However, intense competition and the growing costs associated with doing business in China have dampened corporate America’s excitement for the country. As China faces its biggest economic threat in decades, multinational companies are exploring growth opportunities in other parts of the world. Myron Brilliant of Dentons Global Advisors-ASG believes that with so much uncertainty surrounding China’s economic direction, corporate executives would be remiss to remain complacent.
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