Political Risk Rises in China

As the nation diversifies its economy, even U.S.-based multinationals may be targeted for protests.

dragonAs Chinese, Taiwanese and Japanese ships challenged each other over some tiny rocky outcroppings in the Sea of Japan in September, both Toyota and Nissan announced late last month that they were cutting back production of their vehicles in China—Nissan for eight weeks. The reason: protests by angry Chinese citizens at Toyota and Nissan dealerships in China that led to damage to some locations and concerns about a boycott of Japanese products, which some auto industry analysts suggest could be relatively long-lived.          

Might the same thing happen to American companies in China someday during some diplomatic flare-up between the two countries?

China has long been a favored destination for multinationals, including U.S. companies, anxious to tap into the world’s biggest national market and use China’s industrious but relatively low-wage workforce to manufacture goods for sale back home or in other developed markets. But investing in China has always carried political risk for companies from most countries. As Japanese companies know, and are learning once again, when China has a dispute with another country, it can impact companies from that country that operate inside China as Chinese officials, either overtly or behind the scenes, use the network of Communist Party officials who are still placed in all schools, state companies and other organizations to stir up latent Chinese xenophobia and nationalist rage.

In recent years, companies based in Japan, France, Germany, Taiwan and elsewhere have found themselves the targets of protests, boycotts, strikes, legal harassment and other attacks when their countries have hit diplomatic rough patches with Beijing, but U.S. firms have largely been immune.

Not that the U.S. hasn’t had its diplomatic tiffs with China, such as the 1996 anger over the stationing of a U.S. aircraft carrier in the Taiwan Strait during a tense moment between China and America’s ally, the island nation of the Republic of China (Taiwan), China’s capture of a U.S. spy plane and, more recently, last May’s embassy standoff over blind dissident lawyer Chen Guangcheng. But American-based companies went about their business in China largely unscathed through those disputes, reflecting both the enormous importance of the U.S. market to Chinese manufacturers and the overwhelming power of the U.S. military. 

“China tends to pick on little guys,” says Alban Laloum, multinational practice leader at insurance brokerage Marsh. “Even Japan, while it is a big economy and a big trading partner, is a little guy militarily. We’ve seen riots against French, German and Japanese interests in China, but so far not against any big American firm. That’s not to say it won’t happen, but the day it does will be a bad day.”

But America’s relationship with China is changing, and from the point of view of U.S. companies’ insulation from political risk, not for the better. As China refocuses on developing its domestic economy and shifts away from an export-based model, while also diversifying its foreign markets into the Asian region and elsewhere, the relative importance of the U.S. market has declined. At the same time, China has significantly enlarged and modernized its military, including its deep-water navy, and now feels much less intimidated by the U.S. in its western Pacific neighborhood.

Hal Sirkin of Boston Consulting Group“U.S. companies have to be in China,” says an analyst with long experience in Hong Kong and China who currently works for an advisory firm with a number of clients with investments in China. “The market is just too big and too important to ignore. But they should be aware that they could become political targets someday.”

Hal Sirkin, senior partner and managing director at the Boston Consulting Group, says, “Good companies are always thinking about risk. In general, intellectual property risk was No. 1 for U.S. firms in China, but now I’m sure corporate risk managers are thinking about political risk there too.

“Given the style of government they have in China, it could happen that they’d turn on U.S. companies” in a dispute, adds Sirkin, pictured at left.

There is also the problem of things spinning out of even Beijing’s control. China expert and financial journalist Gordon Chang, author of the book The Coming Collapse of China, notes that in the latest wave of anti-Japan xenophobia, Chinese protestors also targeted the outlets of non-Japanese companies such as Rolex, Samsung and McDonald’s. “Once you stir up these passions, many Chinese people will just become anti-foreign in general,” Chang explains.

Marsh’s Laloum adds that even if China doesn’t stir up anger directly against U.S. companies as it might against a French or Japanese firm, it can go after local businesses that supply U.S. companies. While the latest labor unrest in September at the giant Taiwanese-owned Foxconn plant in Taiyuan may not be politically motivated, Foxconn’s critical role in Apple’s supply chain shows the potential political risk for U.S. companies that depend too much upon a supplier in today’s China.

The American Chamber in China reports that U.S.-based companies are already feeling increased pressure from Chinese authorities and state-owned domestic competitors, for example, to transfer more technology. Such pressures are becoming increasingly common at technologically advanced U.S. companies with operations in China such as Intel and Cisco, both of which have brought major cases against Chinese companies for theft of intellectual property.

 

 

For more coverage on this topic, see Appetite for Dim Sum Bonds Revives, Change Grabs China and Paying Suppliers in RMB.

 

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