As Chinese President Xi Jinping promises the nation’s biggest market opening in two decades, the reality for some of the most successful foreign companies in the country is a raft of probes and laws that curb their operations.
This month, after China’s ruling Communist Party promised to make markets “decisive” in shaping the world’s second-largest economy, carmakers Jaguar Land Rover Automotive Plc, Fuji Heavy Industries Ltd.’s Subaru division and Audi AG became the latest targets when state media accused them of charging “unfair” prices for spare parts.
The automakers joined foreign companies from Starbucks Corp (SBUX:US). to Burberry Group Plc, Qualcomm Inc (QCOM:US). and Apple Inc. in the roll of those with deepening challenges in China even as the year-old leadership team headed by President Xi Jinping seeks to elevate the private sector. Rising scrutiny of overseas firms by regulators and state media follows a jump in labor costs that may diminish the lure of investing in the $8.2 trillion economy.
“There’s a disconnect between the way they’re talking about the direction they want to take the economy and these crackdowns, which seem to be very discriminatory and motivated by a desire to wall off the Chinese economy,” said Patrick Chovanec, chief strategist at Silvercrest Asset Management Group LLC in New York and a former professor at Beijing-based Tsinghua University. “Every foreign company is wondering who is next for either the wrath of the NDRC or the state media.”
The National Development and Reform Commission, China’s main economic planning agency that has been among the agencies stepping up scrutiny of foreign business, will have a central role in executing the vision outlined by Xi and his colleagues last month after a plenum of the Communist Party.
China's Pain Points
Policy makers pledged to relax market-entry requirements for foreign companies in areas from finance and medical care to education, according to a document released after the party’s four-day gathering. Optimism that the embrace of markets will stoke profits helped boost the benchmark index for mainland companies in Hong Kong the most since December 2011 in the week after the plenum.
While businesses await specific changes that would let them into new markets, they face the potential of setbacks for their existing ones.
“The reality is harsh: It’s hard to make a profit in the market,” says Masanobu Nakamura, a spokesman for Meiji Holdings Inc., a Japanese dairy-products company that was one of six infant-formula makers probed by the NDRC for price fixing in China this year. “The business environment changed.”
The market became so difficult for the maker of one-third of Japan’s baby formula that the Tokyo-based company said in October it would stop selling the product in China after 20 years in the country.
Growth in the business stalled for Meiji in 2010, after an outbreak of foot-and-mouth disease in southern Japan prompted China to ban imports of Japanese dairy products. While other countries lifted their import bans after Japan’s farms got the all-clear, China didn’t.
As Meiji’s sales fell to a third of their 2009 peak, revenue doubled for the listed unit of local rival Hangzhou Beingmate Group Co. Beingmate was also part of the NDRC probe, while neither it nor Meiji were fined because of their cooperation with the investigation, according to the companies. Among those that were fined: Glenview, Illinois-based Mead Johnson Nutrition Co. and Paris-based Danone.
Meiji continues to sell other products in China.
Perceptions of discrimination make rising competiveness of home-grown companies all the tougher for the 446,400 foreign-invested enterprises in China. Along with local rivals, they also are contending with pay gains that have seen manufacturing workers’ wages climb almost 49 percent in the past three years, according to government data.
The European Union Chamber of Commerce in China estimates that its more than 1,700 members in China lost at least 17.5 billion euros ($24 billion) last year in potential revenue because of market-access barriers such as uneven regulatory treatment, a failure to enforce intellectual property rights and burdensome regulatory reporting requirements.
Commerce Secretary Penny Pritzker said the U.S. is pushing China to provide fairer treatment for foreign companies that operate in the country.
“The challenge that specific companies are having with their situations here in China are ones that we very directly talked through with our counterparts,” Pritzker said on Dec. 20 in an interview in Beijing, where she was attending trade talks. U.S. officials are “pointing out where we see such actions to be unfair,” she said.
A survey released in October by the Washington-based US-China Business Council showed fewer U.S. businesses rank China as their top priority, citing issues such as rising costs, competition with Chinese companies and challenges with licensing and business-approval processes.
“Most respondents feel that China’s state-owned enterprises receive benefits or other favorable treatment not available to foreign-invested companies,” the council said in the report. Almost three-quarters of respondents reported that they know or suspect that their private local competitors receive benefits or subsidies only available to Chinese firms.
Complaints cited by foreign companies range from anti-monopoly concerns to copyright infringement, import bans, higher taxes, accusations of corruption and attacks in state media.
“They have done things that we normally wouldn’t do in Europe or in the U.S. -- such as imposing conditions to hamper the ability of foreign companies to become more competitive,” said Mario Mariniello, author of a study on competition in China published in October by Bruegel, an economic-policy research group in Brussels chaired by Jean-Claude Trichet, former president of the European Central Bank.
For all the challenges, China’s market remains a lure for its size. Gross domestic product will total $8.9 trillion this year, rising 98 percent from five years ago, according to the International Monetary Fund. By comparison, U.S. GDP is estimated at $16.7 trillion for 2013, up 14 percent from 2008.
“China is just too big a country to ignore for any large global firm,” said Frederic Neumann, Hong Kong-based co-head of Asian economic research at HSBC Holdings Plc. “Even though some of these recent investigations have certainly rattled some foreign investors, overall, the Chinese economy is too big a prize.”
APCO Worldwide Inc., a Washington-based consulting company that has advised companies including Procter & Gamble Co. and Daimler AG’s Mercedes-Benz, says “the need for modernization in sectors ranging from healthcare to agriculture to environmental cleanup to banking and finance will certainly open opportunities for foreign companies that have sufficient patience, persistence and a strong stomach for uncertainty.”
Apple is among those willing to take on the challenges. The Cupertino, California-based company struck a deal with China Mobile Ltd., the world’s biggest mobile phone carrier, to sell the iPhone in China after six years of negotiations. China Mobile will sell the two newest iPhone models in its retail stores starting Jan. 17, according to a joint statement Dec. 22.
Apple was among the foreign companies singled out by state-owned media for criticism earlier this year. Chief Executive Officer Tim Cook apologized for the company’s iPhone warranty and repair policies in China after China Central Television criticized the company’s customer service.
CCTV in October accused Starbucks of charging more for coffee in China than elsewhere and said Samsung Electronics Co.’s smartphones didn’t work properly. Starbucks’s pricing is based on local market costs, including labor and real estate, the Seattle-based company said in an e-mailed statement. Samsung apologized and said it would provide some phones with free maintenance and an extended warranty.
In December, the TV channel turned its attention to automakers, accusing Jaguar Land Rover, Subaru and Audi of overcharging.
Jaguar Land Rover said in a statement it abides by China’s laws and determines pricing based on market conditions. Audi applies the same standards for pricing of spare parts worldwide, said Martin Kuehl, head of corporate communications in Beijing. Subaru’s Tokyo-based spokesman Fusao Watanabe said the price of its parts in China tend to be higher because it has no manufacturing plant in the country.
“They are clearly overlooking a lot of practices by domestic firms and focusing on western brands,” said David Bandurski, a researcher at the University of Hong Kong’s China Media Project, which analyzes changes in the country’s media industry. “This is a targeted campaign of some kind, but it’s not clear exactly where it’s coming from.”
The NDRC said on its website on Dec. 15 it will begin to supervise pricing in certain industries and punish companies that break antitrust rules to keep price levels stable. No industries were named in the statement.
China’s Ministry of Commerce, State Council Information Office and the NDRC didn’t answer faxes or repeated calls seeking comment on the measures against overseas enterprises.
San Diego-based Qualcomm, the world’s largest maker of chips for smartphones, said Nov. 25 it was being investigated by the NDRC under an anti-monopoly law. Qualcomm said it will cooperate with the probe into its operations in China, which made up 49 percent of its sales in the year through September.
China’s antitrust suits have been effective in reducing some prices. In July, Nestle SA, Danone and Mead Johnson (MJN:US) cut their prices by as much as 20 percent after antitrust regulators pursued a probe of foreign infant-formula makers. GlaxoSmithKline Plc pledged to lower drug prices after Chinese authorities began an anti-corruption probe over allegations of bribing hospitals, doctors and officials. Brentford, U.K.-based Glaxo said it’s fully cooperating with the investigation and that some employees may have broken China’s laws.
Xi’s commitment to elevate the role of markets for everything from the prices of natural resources to the cost of credit signaled a shift from the decade of relative stagnation in policymaking under the previous generation of leaders, headed by Hu Jintao.
While Deng Xiaoping opened the nation to private capital in the 1980s and former Premier Zhu Rongji revamped state-owned industries in the 1990s, Hu oversaw a period of growth dominated by government-directed investment that stored up risk of bad loans.
Even with Xi pushing ahead with the promised market changes, it will take years to turn the country around, said Zhu Haibin, chief China economist at JPMorgan Chase & Co. in Hong Kong.
“Transforming China’s economy from an investment-led to a consumption-led growth model will probably take until 2020,” said Zhu, who previously worked at the Bank for International Settlements.
Meantime, foreign companies face more scrutiny in the country. Wilmington, Delaware-based InterDigital Inc. this month said China threatened to arrest or detain its employees over its bid to collect patent royalties from Shenzhen-based Huawei Technologies Co. The NDRC said it “couldn’t guarantee the safety of people” sent by InterDigital to a meeting set for Dec. 18, said William Merritt, chief executive officer of the company that licenses its patents on wireless technologies.
Luxury-goods maker Burberry is also battling in China to get the protection for its trademark checked pattern it’s accorded in markets from Japan to the U.S. The London-based company said Nov. 28 it’s appealing a decision by regulators to restrict its trademark for leather goods.
“Once companies start to be really quite prominent here, quite profitable, they will invite regulatory intervention and competition,” said Duncan Clark, the Beijing-based chairman of advisory firm BDA China Ltd., which has advised clients including Nokia Oyj and Samsung Group. “The tallest tree gets felled first.”
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