Is China losing its appeal to global companies?

The decision last month by US company Seagate, the world’s largest producer of hard disk drives, to close its factory in Suzhou “has rekindled fears that China is becoming increasingly hostile towards foreign firms operating in the country”, according to a report in the South China Morning Post (SCMP).

Loss of 2,000 jobs

Seagate's pull-out, resulting in the loss of 2,000 jobs, comes in the wake of Panasonic's decision to stop producing TVs in China after 37 years, the sell-off in November by Sony of all its shares in its Guangzhou plant making consumer electronics, and the withdrawal from China of the likes of Marks & Spencer, Metro AG, Home Depot, Best Buy, Revlon and L’Oreal.SCMP commented, “A passionate speech presented by Chinese president Xi Jinping at the World Economic Forum meeting in Davos in early January had been hoped to address the issue, and reassure investors that China’s remained open to foreign investment.“Xi defended globalisation and promised improved market access for foreign companies, a positive sign seen by many that China is still sticking firmly to its opening up policies, first rolled out by late leader Deng Xiaoping in the 1980s.“Yet Seagate joined a spate of foreign companies to shutter operations in China in recent years, for various reasons, but most have attributed the country’s high tax regime, rising labour costs and fierce competition from domestic companies.

Foreign companies 'fallen out of favour'

“Once considered Beijing’s most-welcomed guests, bringing with them the money, management skills, and technical knowledge that the country so badly needed, foreign companies now appear to have fallen out of favour.”Prof Chong Tai-Leung, associate professor of Economics at the Chinese University of Hong Kong, told the newspaper: “China doesn’t need foreign companies so badly now in terms of acquiring advanced technology and capital as in previous years, so of course, the government is likely to gradually phase out more of these preferential policies for foreign firms.”Keith Pogson, a senior Ernst & Young partner who oversees financial services in Asia, said a major factor was quite simply fierce competition from Chinese rivals.“We are seeing more Chinese companies becoming champions in other countries and, of course, that adds a lot of pressure on foreign corporates,” he said, adding that the gradual phasing out of preferential policies for foreign firms was bound to be in China’s self-interest.

Home-grown firms on the rise

He cited the fact that, last year, Chinese TV brands overtook their South Korean rivals last year for the first time, to rank first in global sales, with the market share of TCL increasing more than 50 per cent in Northern American market in the past year.With the rise of such home-grown firms, the Chinese authorities have been leaning towards their own “children”, Mr Pogson said, with the gradual phasing out of preferential policies for foreign companies likely to continue.Unclear tax and other laws, and the inconsistent interpretation of them, were the two top factors hindering foreign firms’ ability to invest and grow in China according to a survey last year by consulting firm Bain & Company and the American Chamber of Commerce in China (AmCham-China). High labour costs and a lack of qualified employees were also among the top five problems identified in the study.

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A quarter of the AmCham-China’s 532 member firms taking part in the survey said they had either moved or were planning to move operations out of China, with almost half moving to parts of “developing Asia”.The SCMP said: “An example of the type of regulation that is now hindering foreign progress is the new cyber security law, approved by parliament last November.“It sparked fears that foreign technology firms would be shut out and subjected to contentious requirements for security reviews, and for data to be stored on Chinese servers.“Despite more than 40 international business groups signing a petition to amend some sections of the law, the final draft approved by the parliament remained unchanged – a clear indication of Beijing’s determination to toughen its stance against foreign firms.”For related news and features, visit our enterprise section.Access hundreds of global services and suppliers in our Online Directory  Subscribe now to our Global Mobility Toolkit

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