Why you should care
Doing business in China can still pay off big-time, but increasingly it’s on China’s terms.
There were plenty of customers crowding Wal-Mart’s produce and meat departments on a recent Sunday morning at the gigantic Wangjing Beijing store. But throughout the rest of the two-story rabbit warren, stacked high with goods for sale, shoppers were sparse. Wang Chun Hang, a 32-year-old office worker, paced the floors with her husband, looking cold despite a thick winter jacket. She was there on a once-a-month shopping expedition to pick up a few things. “Few” is the key word here.
The store is a “little bit more expensive” than other local food stores, she says. The bulk of her spending goes to a Chinese rival retail chain called Beijing Chao Shi Fa. Fruits, veggies, meat and rice — she purchases them all at a Chao Shi Fa near home.
Business is getting tougher for foreign companies in fast-growing China, in sectors from retail to technology to consumer goods. Why? Chinese companies are increasingly competitive, the Chinese economy is slowing, rising nationalism is turning the Chinese suspicious of foreign rivals and an anti-corruption campaign is spilling over to affect foreigners. On top of it all is the erratic manner in which the Chinese government is enforcing laws.
Everyone’s worried, especially about competition with Chinese rivals.
It’s not just that “China’s getting more difficult for business,” says Daniel Wright, CEO of GreenPoint Group, which advises companies on doing business in China. Rather, Wright points out, the country is evening out once-foreign-friendly preferential treatments. In the 1980s, China started opening up and rolled out the welcome mat: tax breaks and other incentives to attract technology and capital. Now China’s just a more “normal” place to do business, Wright says. James McGregor, chairman of the business advisory firm APCO Worldwide for China, agrees. “For years, companies have been saying we wanted to be treated like Chinese companies,” he says. Apparently, the treatment isn’t so pleasant.
Just one example is the story of Wal-Mart, the $466 billion company that operates more than 6,100 stores in 26 countries outside of the U.S. but is hitting headwinds in China. When Wal-Mart arrived in China almost 20 years ago, it was blazing a retail trail. No longer: Chinese sales fell in the third quarter last year by 0.8 percent, after rising by 1.1 percent in the previous quarter. (Sales totals are not disclosed.)
It’s not just Wal-Mart — everyone’s worried, especially about competition with Chinese rivals. Not to mention a general sense of alienation in the air. Sixty percent of companies told the American Chamber of Commerce that they felt less welcome in China than in the past. On many people’s minds is Microsoft. Last year, the government banned the use of Windows 8 on government computers, ostensibly over security concerns. Then over the summer, China’s antitrust regulator raided Microsoft offices over suspected violations of the 6-year-old anti-monopoly law. Finally, in November, authorities levied a $140 million fine on the giant software company over taxes it said Microsoft owed. (A Microsoft spokesperson declined to comment on the Chinese government’s actions.) Of course, Microsoft is no stranger to regulatory battles, but many foreign companies fear that China’s singling out the software giant because it’s foreign owned. Government officials deny the suggestion.
Let’s be clear: Business is still pretty good. A survey by the US-China Business Council found that 83 percent of member companies are operating profitably last year, though that’s down from 91 percent in 2013. Profit margins are the same or higher in China than elsewhere for 69 percent of companies. Sure, only half of all foreign companies currently posting up in China are planning to increase resources to China. But hardly anyone’s pulling back.
A stricter law enforcement environment spread to foreign companies following the rise to power of Chinese President Xi Jinping in late 2012, when he launched an anti-corruption campaign that’s caught tens of thousands of officials in government- and state-owned industries on the receiving end of bribes, including the arrest in November of the once-powerful security chief Zhou Yongkang. Chinese citizens like the campaign; high officials and their relatives have grown fat as the economy has sped ahead. (“It’s probably saving a lot of people’s livers,” jokes a business consultant, referring to the decline of heavy drinking at corporate banquets with government officials.) On the other hand, McGregor says, while reforms are forcing foreign companies to toe the line, they’re also opening up new sectors for business — for example, health care and clean energy.
Maybe, as Wright argues, China’s private sector is just becoming more, well, Chinese. For a country with the second-largest economy in the world, a completely expat-led model makes little sense; outsiders, at least, need to integrate better, with leaders comfortable in the language and culture, he says. One example of a foreign success story? Wright cites GE, which last summer appointed 43-year-old Shanghai native Rachel Duan as China CEO of GE’s $7 billion business. (Wright does not work with GE.) In the meantime, businesses from multinational corporations to tech companies to retailers alike are sure to become more frenetic in their searches for the right sort of leaders. But as ever, when the winds change, a few people benefit. Like who? Wright knows at least one example: “Headhunter firms in China are very busy.”
Ben Halder contributed reporting.