U.S. companies have become increasingly worried that unfair Chinese business practices are hurting their ability to compete and will start eating into the juicy profits they've been extracting from the Asian giant.
Problems with how China treats foreign businesses have been simmering for several years, but a recent incident with Wal-Mart Stores Inc. (NYSE: WMT) has pulled those issues back into the spotlight.
Earlier this month the Chinese city of Chongqing forced Wal-Mart to close 13 of its stores for two weeks because officials said the retailer had mislabeled less expensive pork as a better organic type. The officials also fined Wal-Mart $423,000 and even arrested two employees.
This unusually severe response isn't the first. Chinese authorities in May fined Unilever PLC (NYSE ADR: UL) more than $300,000 for announcing that it planned to raise prices - a move officials said undermined the government's attempts to control inflation. French-based Carrefour (PINK: CRRFY) was fined for posting erroneous prices.
Google Inc. (Nasdaq: GOOG) had a protracted battle with Chinese authorities last year over censorship of its search service. Google moved its search engine overseas in protest. Many analysts saw the incident as a way for the government to shepherd users toward domestic search giant Baidu Inc. (NYSE ADR: BIDU).
These penalties top years of unfair Chinese business practices that give advantages to state-owned businesses, including regulations that compel foreign companies to transfer their technology to Chinese firms and laws that weigh more heavily on foreign companies than domestic ones.
"If I were a foreign company, I'd be pretty scared right now," Corbett Wall, a retail expert who heads Shanghai consulting firm +CW Associates, told USA Today. "I absolutely think that [what happened to Wal-Mart] has to do with tensions building up between China and foreign companies."
Hurting Profits
Big U.S. companies have relied on expansion into China's growing economy to prop up earnings during a period in which Western economies have sagged. They're concerned that if the trend of unfair Chinese business practices worsens, it'll threaten their profits.
According to the 2011 annual survey of U.S. companies conducted by the American Chamber of Commerce in China (Amcham), a majority of U.S. businesses - 71% - said China's licensing process discriminates against foreign companies.
And 40% said they thought the "indigenous innovation" policy - in which the Chinese government favors domestic companies over foreign ones in matters of official procurement - would hurt their business. More than one in four - 26% - said that policy already had hurt them.
A similar number, 24%, said that economic reforms in China had not improved the business climate for U.S. companies, a steep increase from the 9% who said so a year earlier.
At the same time, 78% of U.S. companies said that their operations in China were "profitable" or "very profitable."
"There are two themes to the data," Amcham China Chairman Ted Dean told Bloomberg News. "American companies are doing well and American companies are concerned about in some cases the current regulatory environment and in others the trend line for the regulatory environment."
Brewing for Years
U.S. companies have been complaining about unfair Chinese business practices for years.
Last year, at a conference in Rome, General Electric Co. (NYSE: GE) chief executive Jeffrey Immelt had some particularly harsh words about China.
"I really worry about China," Immelt said, noting that his company was facing the most difficult conditions there in 25 years. "I am not sure that in the end they want any of us to win, or any of us to be successful."
China's unabashed promotion of its huge state-owned entities - three of which now sit in Fortune's Top 10 - even drew a rebuke from the U.S. government in August.
"It is not up to the U.S. to question the wisdom of other nations in establishing state enterprises. But it is very much a U.S. concern if the playing field is not level between them and their American competitors," said U.S. Under Secretary of State Robert Hormats.
Those top three state-owned companies - China Petroleum & Chemical Corp. (NYSE ADR: SNP), China National Petroleum Corp. and energy provider State Grid Corp. - will make it harder for U.S. oil and energy companies such as ExxonMobil Corp. (NYSE: XOM), ConocoPhillips (NYSE: COP) and Chesapeake Energy Corp. (NYSE: CHK) to compete.
But unfair business practices affect a wide swath of industries, with banking, insurance, auto manufacturing, telecom and information technology among the most affected.
Technology companies such as Microsoft Corp. (Nasdaq: MSFT) and Apple Inc. (Nasdaq: AAPL) have long struggled with China's indifference toward protecting intellectual property, with piracy and knock-offs commonplace.
Worse still, the Chinese government often requires certain foreign businesses to yield technology to their domestic Chinese counterparts as a condition of being granted access to the country.
Once China has obtained technology from Western firms, it often transfers it to the state-owned companies, which then compete against the foreign companies for future contracts - a policy that threatens the profits not just of Apple and Microsoft, but of industrial giants like The Boeing Co. (NYSE: BA), Honeywell International (NYSE: HON), and GE, as well.
And yet the Chinese market is so massive, and its potential so great, that most U.S. companies will continue to invest there - even if unfair Chinese business practices cause it to be less profitable than it should be.
"For the high-tech sector, the ITC industry and industries that are heavily dependent on intellectual property, there is a great concern about the operating environment in the future," Amcham President Christian Murck, told Time Magazine. "Companies say that China remains their top priority for future investment, but of course that future investment will depend on the degree to which there is scope in the market for foreign companies to operate."
News and Related Story Links:
- Money Morning:
China's Economy Continues to Ascend - But Watch Out for Speed Bumps - Money Morning:
What China Can Learn From its Dustup with Google - Money Morning:
China Using Government Muscle to Turbo Charge its Auto Industry - Money Morning:
Pacifying the Panda: U.S. Companies Must Take a New Approach to China - The Financial Times:
List of US concerns with China grows - The Financial Times:
China - Foreign companies 'losing out' in China - The Financial Times:
China takes a short-cut to power - The Associated Press:
US firms doing well in China but worry on future - The Financial Times:
US companies find China less welcoming
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.