Foreign technology companies and other Western multinational enterprises operating in China are becoming increasingly concerned about recent Chinese government anti-trust actions that they complain put them at a disadvantage against local competitors. The companies are wary of voicing their opinions publicly and are instead using back channels and political pressure from their home governments to ask Chinese regulators to be more open and fairer about their investigations and conclusions, according to industry observers.
Indeed, many U.S. technology companies and others in other economic areas, including pharmaceutical and automotive, have felt the ire of the Chinese government recently for alleged antitrust practices. The charges were, in cases, spurred by complaints from local rivals and the investigations and conclusions – conducted often in secret – aren’t easy to contest, explained industry sources contacted for this story. All of them declined to be quoted for fears of jeopardizing current business interests in the country.
An organization representing these enterprises is fighting back, however, by detailing actions by China that it says make operating in the country difficult for foreign firms. Amidst signs China may intensify remedial steps being taken against foreign enterprises deemed to have “monopoly positions” in certain economic sectors, the American Chamber of Commerce in China is voicing highly critical opinions about the government’s recent anti-trust actions and has cautioned that these steps could force companies to further delay investments in the country.
There is a risk “that China will permanently lose its luster as a desirable investment destination,” said the American Chamber of Commerce in China in a recent report. “With the economy slowing and foreign companies coming under increasing government scrutiny, the still-chilly investment environment is contributing to an increasing sense of pessimism among foreign multinational companies in China.”
In the electronics area, leading companies like Apple Inc., Cisco Systems, IBM Corp., Microsoft Corp. and Qualcomm have in the last year been hauled before Chinese regulatory authorities to answer questions about security issues or what China alleges are antitrust practices after complaints by local firms. Qualcomm, for example, was accused by China’s State Administration of Industry & Commerce (SAIC) with overcharging for its wireless chips and using its dominance of the sector to put Chinese telecom equipment providers at a cost disadvantage. More recently, Microsoft was given 20 days to answer critical questions from the SAIC about its Windows operating system.
Foreign businesses operating in China see the situation differently. The American Chamber of Commerce in China believes the business environment for foreign firms in the country has turned “chilly” and in a statement charged the government with imposing “onerous laws, regulations and practices,” on foreigners. The result is that many Western firms in China are no longer feeling welcome in the country with many of them withholding further investment because of worries they may be targeted for alleged antitrust or monopoly actions by the government, according to Gregory Gilligan, chairman of the American Chamber of Commerce in China.
“Since we analyzed the investment environment last year, there have been many encouraging promises of reform, but the environment for many foreign companies has nevertheless deteriorated,” Gilligan said, in the statement. “While we still believe in China’s ability to make the changes necessary to transition to the next stage of development, delays and disruptions are leading foreign investors to alter their perceptions of the China market in fundamental ways.”
The growing perception that China has become less welcoming to Western businesses is shared by many of the foreign players in the economy and not just technology firms. The result of a recent survey conducted by the American Chamber of Commerce in China indicate respondents largely believe the country’s risk profile has risen in recent years as a result of actions by the government that reportedly target them in favor of local companies.
About 60 percent of the respondents to the survey said they believe foreign companies were not as welcomed in China as before while 49 percent agreed with the notion that Western firms were being “singled out in recent pricing or anti-corruption campaigns,” a position technology companies have taken although executives are reluctant to say this openly for fears of jeopardizing existing operations in the country.
“Our members have been and remain enthusiastic supporters of China’s integration into the global economy, but sadly this survey suggests that their positive sentiment is eroding,” Gilligan said. “Our concern is that if the investment environment deteriorates too far, important relationships and linkages between China and the rest of the world will be materially damaged, seriously impairing China’s ability to attract the investment that will be crucial in taking the country to the next stage of economic development.”
Perhaps foreign companies in China should have anticipated this development. China embraced Western companies initially to open up its economy and eagerly courted foreign direct investment to boost growth and employment across all industries. As technology companies poured in, China became the world’s major manufacturing hub with Western companies taking advantage of the lower wage structure to reduce their total operating costs.
China has since expressed its desire to move beyond being simply a provider of low cost manufacturing services. It wants to move up the food chain to provide innovative solutions and enjoy the associated higher profit margins. The country also wants to provide better jobs for its citizens many of whom could not afford some of the products they assembled.
Simultaneously, the fast ascent of local Chinese businesses has put pressure on the government to level the playing field and remove the advantages enjoyed by Western companies. This is where technology companies have come under the radar of China’s regulators. Companies like Apple, Microsoft and Qualcomm operate high margin businesses and, in the case of the latter two, dominate their business segments. Microsoft’s Windows operating system is dominant worldwide, a fact that often gnaws at governments concerned about its vulnerability to hackers as well as worries about other security issues.
In May, for example, China banned the installation of Windows 8 on all government computers after Microsoft discontinued support for Windows XP. The government said the ban was to increase the use of “energy-saving products.” It piled on the pressure in August by raiding Microsoft’s offices in China as well as those of the company’s partner Accenture PLC, according to a Reuters report.
Other Western – and especially American – technology companies have also come under Chinese regulators’ scrutiny. The latest include Symantec, a California-based anti-virus provider. China has banned the installation of Symantec software on government computers reportedly because the government believes the product could open a backdoor for security violations of its systems.
Does this necessarily mean China is targeting foreign businesses and technology firms to give local companies an advantage? Gilligan at the American Chamber of Commerce in China believes the country is going through a transition phase that is not being well managed. The West and China need each other, he said, but the relationship must be based on clearly defined rules and regulations that are equally enforced for all players, local and foreign.
“We still believe that China’s economy will emerge from this difficult period stronger than before, and US companies in particular have a great deal to offer in the services sector so crucial to the economy’s transformation,” Gilligan said. “We will be closely watching the upcoming Fourth Plenum, and hope to see concrete moves toward creating a society based on the rule of law, rather than rule by law.”