What’s the trouble with doing business in China?
Plenty, according the presidential candidates. For all their sparring, President Obama and Mitt Romney agree on this: China lurks as a threat to U.S. businesses.
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Their campaign ads have drawn the ire of Henry Kissinger, the former secretary of state whose diplomacy reopened economic and cultural exchanges with China 40 years ago after a generation of isolation and hostility. Kissinger described the candidates’ language labeling China a cheat in business as “deplorable.”
But the tide of opinion in Washington may be going against Kissinger. One indication of the shift came with the recent bipartisan congressional report condemning two Chinese telecom supply companies, Huawei Technologies and ZTE. Investigators said the firms were neither trustworthy nor transparent enough to supply telecom equipment to the U.S.
Aside from the national-security concerns, the report gave further evidence that at least part of the U.S. economic malaise — stagnant wages, tepid growth, lost jobs to overseas factories — can be attributed to the unfair advantages of China’s companies. These include their receipt of below-market credit from state-owned banks, their appropriation of foreign technology without royalties, trade and regulatory barriers put up to favor them and China’s burst of acquisitions globally that give the country momentum for economic hegemony.
U.S. businesses are facing Chinese competitors wielding unfair business practices on a scale never seen before.
Some of the biggest companies in the world, of course, have the muscle to operate there. Yum Brands, which owns KFC, Taco Bell and Pizza Hut, plans to open more than 700 restaurants in China this year. GM manufactures more cars in China than in the United States. And Nike’s 35 percent margins in China are the envy of U.S. business. These companies get a lot of press but are exceptions. More typical are companies with a small market share and skimpy risk-adjusted returns.
While American chief executives can see the problems in China, many are under pressure from Wall Street to pursue the growth that China promises. The typical approach to entering China is to form a joint venture with a Chinese company in which the firms share product technology, process technology and know-how. In return, foreign firms such as DuPont, WalMart and Whirlpool supposedly share an ever-growing slice of the expanding Chinese market.
But most companies have to deal with Chinese competitors in a country that U.S. Trade Representative Ron Kirk has taken to task: “In 2011, the prevalence of interventionist policies and practices, coupled with the large role of state-owned enterprises in China’s economy, continued to generate significant concerns among U.S. stakeholders.” Kirk named China — for the eighth year — to his agency’s priority watch list for theft of copyrighted material and intellectual property.
U.S. executives have been slow to realize that the competition they face in China is not like what they have faced in most of the world. Their companies are not competing against other corporate rivals. They are competing against an entire country. Most firms in China operate with at least some support of the party’s political apparatus. The executive-staffing decisions at state-owned firms, for example, are vetted by China’s top bureaucrats, and about half of China’s firms are either partly or wholly owned by the government.
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