Foreign companies, lured by the prospect of sharing in China’s growth and sales to a population of 1.4 billion, are increasingly concerned about being caught up in the country’s anti-corruption campaign and rising economic nationalism. Several court cases have underlined the dangers for multinationals as they do business in a country where corruption has been widespread and the law seems to demonstrate a greater willingness to prosecute foreign companies. GIS guest expert Cameron Frecklington looks at why foreign companies seem to feel besieged and confused.
GLOBAL multinationals have invested billions of dollars in China. But under President Xi Jinping’s anti-corruption campaign, China has ramped up scrutiny into the operations of foreign companies based in the country, investigating them for everything from bribery to antitrust to tax evasion.
China has ramped up scrutiny into the operations of foreign companies based in the country, investigating them for everything from bribery to antitrust to tax evasion
The investigations are seen as one of the most significant risks to doing business in China in many years. They have increased since the GlaxoSmithKline (GSK) case of 2013 in which Chinese police accused the company of bribing doctors, hospitals and government officials to boost the sale of its medicines in China. GSK was fined a then-record US$489 million in September 2014.
Since the GSK investigation, a good many of the world’s corporate titans have been investigated.
Many foreign companies feel they are being unfairly targeted by Chinese authorities, usually the National Development and Reform Commission - the body responsible for antitrust investigations.
In their 2015 China Business Climate Survey Report, the American Chamber of Commerce in China reported that '55 per cent of respondents believe foreign firms are being singled out in recent enforcement campaigns, and more than 50 per cent of these state that such campaigns have a negative effect on their intent to invest in China operations’.
Yet in the very next section, the report states, ‘recent pronouncements for strengthening rule of law and providing greater transparency, and the decline in reported challenges from corruption are positive signs for our members.’
So are foreign firms being unfairly targeted? Perhaps.
It is entirely plausible that China is singling out foreign companies for punishment in order to assist domestic companies. With China’s economic structure now being driven by consumption, China giving a leg up to domestic companies in the face of Western competition which has a great many more established brands is a distinct possibility.
But for a company like Microsoft, a US$140 million fine is a mere slap on the wrist. Microsoft is not going to leave China because of a tax avoidance fine, nor is Qualcomm - despite being hit with its record fine.
It speaks volumes that not one of the foreign companies fined has sought to challenge the charges in Chinese courts, instead preferring to pay the fine - although the belief that they will not receive a fair trial in China may have something to do with this.
The most likely explanation for foreign firms being targeted is that they have broken the law.
In the GSK case, it is hard to believe that the company believed they could continue to get away with bribery and other such behaviour once President Xi Jinping and his anti-corruption mandate came to power. Their crimes were most surely a product of the environment, with kickbacks in the Chinese pharmaceutical industry previously endemic. But that does not excuse them or mean that foreign companies are being targeted.
Western companies were offered huge incentives for investment in the past - tax incentives and cheap rent among others - and China was an almost-lawless economic country.
There exists in China today a certain element of nationalism, much of the time encouraged by the government when it suits and then scaled back accordingly
This can be seen in China’s poor intellectual property laws of the past, the numerous allegations of labour exploitation, and the fact that China did not have an antitrust law until 2008. Those days are seemingly over as China extols its shift towards a rule of law.
How this perceived anti-foreign corporate targeting is viewed largely depends upon the parties involved. Foreign companies are going to feel targeted by the investigations, and Chinese regulators feel as though the investigations are warranted.
Media coverage is unlikely to help, with foreign media covering the investigations of foreign multinationals with great interest but generally ignoring the investigations into Chinese companies, and Chinese media covering the issue with the absolute denial of any wrongdoing or protectionism.
In response to the increasingly regular investigations, Xu Kunlin, head of the anti-monopoly bureau of the National Development and Reform Commission (NDRC) said in September 2014, ‘there is no selective enforcement’ and that the investigations are based upon consumer complaints. Mr Xu also stated that of the 335 enterprises investigated by the NDRC, only 33 were foreign.
Premier Li Keqiang has regularly featured in the media defending the NDRC’s investigations while promising that the investigations are based on wrongdoing and nothing more. At a September 2014 meeting of corporate leaders in Tianjin ahead of the World Economic Forum, Mr Li told the audience, ‘China's door has opened, and it will never be closed again. I do hope that you will not worry for the future of China's opening-up. But, of course, the investment in China should follow the laws and business ethics.'
There exists in China today a certain element of nationalism, much of the time encouraged by the government when it suits and then scaled back accordingly. Most of the time the nationalistic sentiments play upon China’s ‘century of humiliation’ at the hands of Western forces or the Japanese invasion and occupation of the country and is then spun into today’s issues such as the Diaoyu/Senkaku islands debate, and China’s perceived sovereignty over the South China Sea. Attitudes towards Western companies can also be stoked at times.
International corporate powerhouses such as McDonald’s, Wal-Mart, Carrefour, Apple, Volkswagen (twice), Nikon, Nissan, Jaguar Land Rover, and Zara have all been ‘exposed’ by China’s now-infamous 315 Evening Gala - an annual show held in March that supposedly exposes business misconduct and protects consumers rights. While other domestic companies have also been targeted, it is usually foreign companies which have borne the brunt of the report.
If these companies are found to be breaking the law, they should be punished. In 2013 Volkswagen recalled 384,181 cars after the show exposed a gearbox malfunction that resulted in inconsistent speeds. That case cost Volkswagen millions. Yet sometimes it does feel as if there is distinct targeting, especially if one company has become too big for the system.
The reasons given for China’s antitrust investigations are generally the protection of consumer interests and implementation of China’s increasingly emphasised rule of law, ridding the country of the incentives once offered to Western companies to encourage foreign investment and evening the playing field
And while Western companies may have been targeted more so than their Chinese counterparts - be that targeting because of protectionist measures or because Western companies have received such preferential treatment for so long or because they are bigger brand names and big brands names garner greater media attention - they are not the only companies to be reprimanded.
In late January 2015, Chinese e-commerce giant Alibaba, one of the country’s corporate darlings, was accused of doing little to combat the sale of fake goods through its online marketplaces Taobao and TMall by the State Administration for Industry & Commerce.
This was followed by a strong response from Alibaba and a much-publicised truce between the two parties. The fact that the agency would go after a major player in an emerging industry shows that no one company is above reproach.
Sceptics would, and do, argue that Chinese companies often seem to get away with lesser fines or sometimes no fine at all - a 2011 antitrust investigation into the pricing practices of China Unicom and China Telecom resulted in no fines for either company - and yet to argue if foreign companies are being targeted or not, unfairly or not, is beside the point. The Chinese regulators have their position, the American and European chambers of commerce have theirs, and neither seem likely to budge.
When it comes to the current Chinese antitrust investigations, there are few ways for the situation to play out.
The least likely scenario would involve China increasing foreign targeting and investigations while ignoring (or imposing double standards of enforcement) the wrongdoings of domestic companies, in turn bringing about more negative publicity as they attempt to globalise and open up (parts of) the country’s economy. While China does want to change the current world order by reducing the influence of the US and other traditional powers, it also realises that its future is inextricably linked to these countries and will remain so, at least in the short-term.
To continue down the present path of measured investigations into foreign companies would likely bring about the same consequences and reprisals as the above scenario, albeit at a slower rate.
Chinese companies looking to head abroad would face greater resistance and could find themselves being investigated heavily as a form of payback.
Telecommunications networking and equipment company Huawei is keenly eyeing the US market but is currently locked out of the market due to suspicions of the company’s ties to the Chinese government - Huawei founder Ren Zhengfei is an ex-military officer - and upstart electronics company Xiaomi will undoubtedly look to the US market in time also.
Whether or not they are permitted access may come down to a tit-for-tat battle between China and the US regarding such investigations, and such a dogfight would have a distinct possibility for escalation at a time when neither country or economy wants to kowtow to the other.
The most likely scenario is that these investigations continue for a short while and then eventually die down, but only if foreign companies accept that their once-privileged role in the Chinese economy is now over.
Certainly, some industries will seek out investment with incentives and other strategic sectors will remain blocked, but the general economic playing field will be level.
The official reasons given for China’s antitrust investigations are generally the protection of consumer interests and the implementation of China’s increasingly emphasised rule of law, ridding the country of the incentives once offered to Western companies to encourage foreign investment and evening the playing field. If applied evenly across all companies, then this would be a good thing.
Foreign companies are perhaps being targeted unfairly at present in the name of championing domestic companies, but this is more likely to be ‘making an example of big names and scaring the rest’ than a trend for the future.
If China is truly as keen to open up and integrate into the global business world as it makes out, this continued practice can only set it back, and Chinese leaders undoubtedly realise that.
Companies under scrutiny
- US chip-maker Qualcomm was fined a record US$975 million in February 2015 for antitrust violations
- Microsoft was fined US$140 million in November 2014 for tax evasion and remains under investigation for monopolistic practices
- The Audi unit of Volkswagen was hit with a US$40.5 million fine after being found guilty of price-fixing in September 2014, with BMW, Mercedes, and Chrysler all investigated and also fined
- A group of infant milk powder suppliers that included US-based Mead Johnson and Dumex Baby Food (a subsidiary of French food products company Danone) were fined US$109 million for price fixing in August 2013 and the list could go on