It was meant to be the great market opportunity of the 21st-century. Between its billion people, rapid growth, and increasingly open market, for most of the last twenty years chief executives couldn’t stop boasting about their “China strategy”. And yet this year something significant has started to happen. Not only have global companies cut back on new investments, many are now starting to pull out of the country. And, in truth, while it is a shame to give up on China, they are completely right to do so. If anything, they should be retreating even faster than they are now.
Rewind a decade or so, and China was the great hope of global capitalism. It was the poster-boy for the so-called BRICS (Brazil, Russia, India, China and South Africa) that would surely dominate the coming decades. The opening of its market to the world, with its voracious appetite for Western machine tools, software and consumer goods, made it one of greatest commercial opportunities in living memory. And as China’s total GDP soared from just over $1 trillion at the beginning of the century to nearly $18 trillion last year, there was plenty of money to be made for everyone. German auto giants, French luxury goods houses, British pharmaceuticals and drinks manufacturers, American aerospace companies; all wanted in. Entire corporate strategies were built around the opportunity it presented.
When Chinese President Xi Jinping and American President Joe Biden met in San Francisco earlier this month to try and dial down the tensions between the two counties, all the usual business leaders were on hand to try and pretend that business could get back to normal. In reality, however, something far more interesting is happening. Companies are getting out. A report from the Petersen Institute for International Economics this week showed that not only are Western businesses no longer investing as much in China, many are actively selling out where they can. Chinese statistics, to put it mildly, are not always completely transparent. Even so, it calculates that at least $100 billion in foreign investment left China in the first three quarters of this year. “For the first time ever, [foreign companies] are large net sellers of their existing investments to Chinese companies and repatriating the funds” produced by such sales, concludes author of the report Nicholas Lardy.
This is, of course, disappointing. China is already the second largest economy in the world after the United States, and the largest in purchasing power terms. It has a prosperous middle class with plenty of disposable income. And it is still expanding at a rate that puts Europe to shame. But the simple facts of the matter indicate that global business may well be right to get out.
China is an increasingly hostile environment for capital. Last month, police raided the Shanghai offices of the British advertising giant WPP. Earlier this year, police questioned staff at the China office of the consulting giant Bain & Co. In March, an employee of the Japanese pharmaceutical company Astellas was arrested on charges of spying. The list goes on and on, with firms dragged into the opaque workings of the Chinese judicial system. Combine this with restrictions on technology transfers and investments between Euoope, the US and China, and it makes for a hard environment in which to do business.
That’s without talking about Taiwan. If Beijing does launch an invasion, overseas investors stand to lose everything. The Russian invasion of Ukraine has given the world’s corporations a harsh lesson in the realities of geo-politics. Sanctions were imposed, and assets were seized without compensation. One estimate put the combined losses from operations in Russia at 100 billion euros, and the final bill may well be a lot higher. From Ikea to McDonald’s a whole series of major corporations have fled for the door. Many have taken a huge hit in the process. BP, for example, took a hit of $25 billion after its exit from the country.
The few that have shamefully remained have taken an even larger hit to their reputation. Any CEO is now painfully aware that it doesn’t matter how big you are, or how much you have invested over how many decades. If there is a conflict over Taiwan, sanctions will be imposed immediately, and everything in China will be lost overnight. The risk is too high. It makes more sense to get out while your assets still have a realistic price.
Finally, there is the risk that China will “learn” from your technology. As many have discovered, Chinese subsidiaries are happy to acquire skills and expertise from Western giants. The tables are quickly turned, however, and very soon you are facing a formidable Chinese competitor, with all your technology, and lower costs, and it is taking you on in your domestic market. By the time you realise what is happening it is too late to do anything about it.
Western companies are completely right to get out of China as fast as they can. We can forget about the vast opportunities of its market, making a lot of money for everyone, and fuelling the expansion of all the major conglomerates. Instead, there will be intense rivalry between Chinese and Western companies. China won’t be the place to make money any more. Soon, the only real question many CEOs will have to answer is this: what’s the exit strategy, and how much shareholder money will we lose in the process?