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."
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."