“We’ve seen much stronger repression of civil society movements and the media.”
2016 was a huge year for the United States in many places in the world. What was notable to you about China?
In some ways, China was an exception to the massive geopolitical shifts we saw elsewhere in the world. There was not a lot of change in the status quo in 2016. The news in the last few years has been dominated by Xi Jinping. He is a very strong leader who has consolidated power in a way not seen since Deng Xiaoping. One of the hallmarks of his rule has been a persistent anti-corruption campaign that has investigated thousands of government officials and executives at state-owned companies. Xi has also put forward a strong notion of Chinese sovereignty and what he likes to call “the Chinese Dream”, a China that is strong economically, politically, and militarily. This has had huge impacts on all aspects of Chinese life. We’ve seen much stronger repression of civil society movements and the media. Some businesses have suffered under the anti-corruption campaign as well. One of its impacts has been a reduction in beer consumption and the sale of high-end liquor. His nationalist and protectionist policies have also affected tech companies. For example, the investigation of drug company GSK, and in December, the announcement of an investigation of alleged price fixing by General Motors’ Chinese operation. In some ways, under Xi, we’ve seen a much tougher climate for foreign businesses.
What does this mean for foreign companies operating in China? Does it only affect large companies, or medium and small businesses too?
It principally impacts large businesses, but it generally means a tougher environment for any foreign companies. This is not simply due to government intervention. One of the other factors in play in recent years is that Chinese companies themselves have become world class at many of the things they do. When I first went to China in 1995, Chinese companies lacked expertise in logistics and distribution, marketing and branding, and other business operations. Since then, Chinese companies have closed this gap in virtually every field. Additionally, China as a whole has a famous work ethic, and Chinese companies are obviously experienced in dealing with the Chinese government, so they represent formidable competition.
There was a recent American Chamber of Commerce (AmCham) report released that found it is becoming harder for American companies to operate in China. 77 percent of companies feel less welcome in China than they did a year ago. 57 percent said the top challenges are in consistency in regulatory practices and murky laws. What has prompted all of this?
That report expresses very clearly what I was saying. You have a government that is less welcoming to foreign entities because it needs them less than it once did. There is also some nationalism and protectionism in government policy regarding the treatment of foreign businesses, so it is a difficult time at the moment. The European Chamber of Commerce released a similar report in 2014. There are, of course, many successful foreign businesses in China. For example, China is about to surpass the United States as Starbucks’ largest market. That said, there is no low hanging fruit left.
What are the most important lessons from the 2013-2016 period for companies considering entering the Chinese market?
It depends greatly on which industry you’re in. The environment for tech and internet companies is much more difficult than other industries. This has a great deal to do with the Chinese government’s desire to control the internet and network technologies. There is no foreign company that is dominant in China’s internet sector. Even Uber, with its vast resources, had to concede defeat. They sold their Chinese entity to DiDi, their primary competitor in the country. Google still does business in China selling advertising, but they’ve essentially closed down their China operations. eBay also failed to make headway against Alibaba. Hardware is slightly different; Apple, IBM, and Cisco all make a lot of money, but even they face headwinds. When it comes to internet industries, any company considering China should think very carefully about it. It’s hard to see Facebook gaining any meaningful ground in China. Other industries are easier. Restaurant chains like Starbucks, McDonalds, and KFC have made a lot of money. The auto industry has also been successful. Drug companies have been profitable as well, despite the investigation into GSK. The places where I see the most opportunity are in healthcare and businesses that will provide to China’s large aging population. With many families having only one child, the care of the aged will present opportunities for businesses. Any company trying to enter or expand in China should endeavor to align with aims of the Chinese government.
Are there any industries that stand out as having an easy time operating in China?
All industries face some difficulty. It has always been difficult to do business in China. A popular expression among business executives when I first arrived was that “anything is possible, but everything is difficult” in China.
With many Chinese businesses climbing up the experience curve and gaining competency within China, what does this mean for Chinese companies looking to expand globally?
It’s not going to be that easy for Chinese companies. You’re already seeing a great number of electronics products coming from China, but one of the features of the Chinese landscape is that Chinese businesses become very adept at doing business in China, but this is a somewhat different skill set than is needed to do business in more developed markets. They’re not particularly good at building brands, because the skill set needed to build a distribution network in the United States is very different than it would be in China. So it is not as though China is about to take over overnight, but they are coming. This would likely happen over the course of decades, not years.
There has been a great deal of talk about getting money out of China and capital controls. Where do you see this going in 2017?
Many Chinese people feel they don’t have a sense of security in China, and this has not changed. This is a factor that drives emigration and foreign investment. Many young people are much more confident in China than their parents were, but a deep sense of unease remains. The government has put various measures in place to restrict capital outflows, and I think 2017 will see more of the same. Barring some kind of disastrous event, there won’t be major change, but the impulse to park money abroad will continue.
What is the conversation in China like regarding our election and Donald Trump?
Funnily enough, Trump had a decent amount of supporters in China prior to the election. Partially because China celebrates successful businessmen. There is also a sense of schadenfreude that the United States could elect someone who much of the world perceives to be a complete clown. Some also believe that Trump will go easy on Chinese human rights violations and issues like Tibet.
What do you expect to see in terms of government and social behavior toward America and American symbols if the Trump Administration continues the behavior it has exhibited thus far?
The signs indicate it could be a rocky time for Sino-US relations, particularly if Trump’s rhetoric continues or is acted upon. You could see investigations into American companies for various wrongdoings, real or perceived, and potential trade barriers. His cabinet picks are not necessarily helping things. Trump’s pick for head of the National Trade Council, Peter Navarro, is behind the book/documentary “Death by China” which basically accuses China of ripping the heart out of the US economy, so he is someone who is very anti-China in terms of both trade policy and human rights. It’s unclear what the National Trade Council will do, but Navarro has made his career on China bashing, so that is a bad sign. Furthermore, Secretary of State pick Rex Tillerson said this week that the US should block access to the artificial islands China has built to serve its claims in the South China Sea, which is an aggressive statement on what China considers a core issue. So it’s hard to be optimistic about US-China relations going forward. That said, Trump’s cabinet is largely made up of billionaires, many of whom have significant business interests in China, so it is possible they will walk very differently than they are talking right now.
You’ve been in China for periods of instability in US-China relations, how does this impact the everyday treatment of Americans and American businesses in China?
During the Obama Administration, relations were fairly smooth. President Obama’s Pivot to Asia was an annoyance to the Chinese government, but it didn’t really impact the way Americans or American businesses were treated on the ground. There are two incidents I can think of where there was some tension. One being the US Air Force’s mistaken bombing of the Chinese Embassy in Belgrade in 1999, which led to anti-American demonstrations and sentiment. The second was a collision between a US Navy plane and a Chinese Air Force jet that left a Chinese pilot dead and resulted in the US surveillance plane being recovered and examined by the Chinese. Generally speaking, though, Chinese people tend to have a fairly positive view of Americans, despite a current of anti-Americanism that does exist. But this has not been a significant factor for American businesses in recent years.
What do you think about the 19th National Congress of the Communist Party of China?
The 19th Party Congress is generally a fairly boring affair, because most of the decisions are made in advance. What will be interesting is to see whether Xi Jinping will attempt to stay in power longer than the conventional two terms, as he is not actually bound by law. In the 19th Party Congress we’ll get a sense of whether that will happen, but if he does stay on, he is a known quantity. Any major changes to the Chinese economy or the way the government is run are unlikely.
What kind of signals would indicate Xi Jinping is trying to extend his stay in power?
You’ll see the Politburo made up of his people, and you won’t see signs of someone being groomed for succession. Personnel changes, or lack thereof, will be a very important signal.
What do you see as the biggest risks in China in 2017?
The greatest risks are the possibility of a trade war, or even an actual conflict between China and the United States. I think increased scrutiny of foreign companies will also be a risk factor. Technology companies in particular are already under a spotlight, and this could get worse.
What are some of the 2017 priorities of SupChina that companies should be keeping an eye on?
SupChina is a startup that is just under a year old, so our priority is to grow our product, which is news and podcasts, and a lot of video in 2017, which has just gotten underway. We aim to be the most comprehensive and useful source of news and information about China that exists. We have three areas of coverage: politics and current affairs; society and culture; and business and technology. We will certainly be increasing our coverage of business and technology. I am currently editing the website, as well as doing podcasts.