Pessimism from US business in China

Lanterns
Andrea Murad By Andrea Murad, CA Today

17 May 2019

In the ongoing global trade war, what’s happening to US companies in China? We discover the impact and growing pessimism stemming from rising tariffs.

A few years ago, companies were focused on figuring out whether to sell or outsource to China; a country too big to ignore. After President Trump’s inauguration and the tariffs that followed, companies are now analysing whether China should be part of their long-term vision and strategy.

US companies first went to China for inexpensive manufacturing and to tap into the 1.3 billion people-strong Chinese consumer market.

Today, selling to the Chinese market is just as important, but it’s also becoming more of a challenge. “The Chinese sentiment regarding US made products is changing – [President Trump] has created a lot of anti-US sentiment in China,” said Stanley Chao, President of All In Consulting.

A survey of 314 businesses by the American Chamber of Commerce in China revealed that around 20% have moved or are considering moving production outside of China due to tariffs and rising costs.

China’s transformative initiatives

iPhone sales in China have slowed, for example, while Huawei, which is a Chinese manufacture of an iPhone equivalent, saw sales skyrocket.

It is now commonly the case that smaller and less-known companies seeking a place in the Chinese market need to be based in China, manufacturing with Chinese employees and hold a Chinese name, rather than export to China, due to trading costs.

“The Chinese government has a strategy to make everything in China – they’re trying to promote their own products with Made in China 2025,” said Stanley. And with this goal, China is getting set to end its reliance on the West.

China’s Belt and Road Initiative (BRI) will also help distribute products manufactured in China to the participating countries across Asia, Africa and Europe. “Setting up in China is not just selling to China, but also to the other half of the world – these countries comprise 65% of the world’s population and almost 40% of the world’s GDP,” said Stanley.

China is trying to make physical connections with highways, railways and sea transport, but also create political influence by loaning these countries money to build the infrastructure.

Trade tariffs

No doubt, Trump has shaken up the world system. Tariffs could be the new normal, and western companies will continue worrying over the next five to 10 years because the US is now talking about enforcement, explained Stanley.

There’s the potential for each country to continue to raise tariffs in retaliation, and companies exist in uncertainty over they should sell products to, or buy supplies from, China.

Companies can resolve this uncertainty by establishing a local operation in China that bypasses these tariffs, which raises the question whether they’re able to do this independently or as part of a joint venture while retaining IP.

In reality, there’s been no progress with tariff negotiations; tariffs could be here to stay and increase, or pre-tariff business could resume as usual

Dealing with China from a trade perspective in some ways was inevitable, said Stanley, but “the administration’s biggest mistake is Trump wants to do everything on a unilateral basis and negotiate with every country separately.

“Every other country has the same problem with China that the US has, so if the administration went after China collectively with the EU and the South American countries on his side, he could have had a bigger impact.”

IP and technology transfer

Some companies are now seeking to unravel their joint ventures in China because it often requires handing over intellectual property (IP).

“The western partner isn’t happy because the Chinese have the technology, changed it and created a third company to compete with the joint venture, so the western company wants to get out of the venture,” said Stanley.

The technology transfer isn’t “forced”, however, since companies willingly went to China, and their contracts clearly state what is given up.

If companies joined together through trade groups or associations and agreed not to set up these joint ventures, it would force China to stop forming joint ventures and allow American companies to sell their product without having to give up their IP, said Stanley.

There is hope that China will enact a new foreign investment law that allows companies to do business in China without having to give up their IP.

Tesla is the first auto company to set up its own independent subsidiary, but in time, other companies might be able to ship products to China or manufacture them in the country without entering a joint venture.

Behind the intentions of the trade tariffs is the core belief that US-made products can become cheaper than imported ones and stimulate purchasing power within the country, but for now, the economic ripples continue to be felt by US-owned / China-based businesses


About the author

Andrea Murad is a New York–based writer. Having worked on both Wall Street and Main Street, she now pursues her passion for words. She covers business and finance, and her work can be found on BBC Capital, Consumers Digest, Entrepreneur.com, FOXBusiness.com, Global Finance and InstitutionalInvestor.com.

Topics

  • CA life
  • Business
  • North America

Previous Page