For days now, I have been planning to write a “moderate” post on the state of FDI in China. By moderate, I mean one between the “sky is falling down everyone flee now” lines being pitched by some (mostly those who are actually not involved in China) and those who are writing that everything is great, there are no problems, come one come all (mostly by those whose livelihoods either depend on foreign companies coming to China or on the CCP). My overarching theme was going to be that whatever you want to say about Google and Rio Tinto, the reality is that neither of them have much meaning for foreign direct investment (FDI) in China.
But David Wolf of Silicon Hutong has beaten me to it and, to add “insult” to injury, he did so by quoting my co-blogger, Steve Dickinson, in his post, entitled, “Some Overdue Balance on China and FDI“:
There has been of late no shortage of hand-wringing abuout the changing business climate in China, and some of that angst has targeted the matter of how and where the authorities are allowing foreign companies to invest.
The investment climate is changing, as we should expect as China’s economy and it’s relative position in the world evolves. It also means, as some commentators are apt to forget, that America’s door to Chinese FDI is not as open as we would like to think.
Steve Dickinson sums up the situation with dispassionate equanimity:
While potential investors may claim that China’s inward FDI policies are unfair, Steve Dickinson, an international lawyer working in China, argues that these are simply China’s laws and policies, which it has always been very clear on. It is just that these laws do not “fit with [the complainers’] idea of how China should be.”
He’s right, like it or not.
And that is the point. Google and Rio Tinto do NOT signal any change in China, they just highlight how things are, and they are not even all that instructive for that.
Let me explain.
When the Google thing started coming down, I started asking my people (including Steve) and my firm’s clients about Google. I asked whether they were talking about it in the context of their businesses and what impact they thought it would have on their businesses. Literally without exception, they told me they had not once talked about Google in the context of their own business. Some (surprisingly few, actually) had talked about it because they found it interesting, but they had not done so for business reasons. When I asked Steve about this, it was a few hours after speaking with a reporter who made it seem as though my downplaying Google’s impact on foreign business was to avoid having to talk on the record regarding Google. Steve threw it all back to me and said, something along the lines of, “come on, do you really think Boeing’s Board of Directors has just gotten together and said “in light of Google, should we be pulling out of China or do you think they are meeting to try to sell more into China?”
Rich Brubaker of All Roads Lead to China also did a great post on the state of foreign investment in China, entitled, “What is China’s Obligation to Make Firms Feel Comfortable?” Here are Richard’s money quotes:
[I]f you were to read the western press, one would think that it is the right of every global firm to enter China’s energy, food, information and resources markets on a “fair playing field” without thought or consideration of why China may or may not have a problem with such openness. Secondary to that, and regardless of whether or not one would believe China would have some sort of right to determine the level of openness and transparency around a market (or set of markets), I find it equally interesting that firms who enter those markets, and fail to crack them, feel little responsibility for owning up to their own failed strategy to try and penetrate a market that was so clearly being protected.
The fact is that, since 1979, China has had a very clear trajectory that it wished to follow, and that trajectory was not to open itself up in a manner that would wipe out domestic industries. Even if that is exactly what should have happened, and would have resulted in China”s best long term outcome, and that goes double for a number of core industries (defense, energy, food, etc). It was always a game where JV arrangements would be allowed so that the domestic partner could access the technology of the foreign party, and it was always the hope that through these relationships domestic enterprises would develop – even if that technology was 3rd generation. In many cases, and after a significant JV incubation period, the market would be opened, but again.. China was hoping that domestic competition would have developed to such a point where an all out routing would be avoided, and if possible, the domestic middle/ lower markets could be held (Chinese firms typically believed those to the be the best long term markets anyway)… and everyone in China knew this game was being played.
In other words, Google and Rio Tinto do not signal a change in China and if Google surprises you, then you simply were not looking hard enough (or at all). I completely agree, and so does Jess Conover in his post, “Why The Negativity?” [link no longer exists] over at Taikongron’s Advice Blog:
When has Chinese regulation been consistant? When have the judicial system of China worked well? Right now, China’s law system is more advanced than ever in China’s history. As fair and effective as in the United States? Does that question have to be asked?
The barriers have always been here [in China] and mostly they were worse in the past. Even the big issue… Google … is not about new regulation, despite what NYT and mainstream Western media says. Google was self-censoring for five years. There was no change in its environmental conditions during that time; only (maybe ) a change in Google’s expectations.
Yes, Western companies must achieve higher performance when it comes to EHS/EPA and labor relations issues. But, is that not a good thing? Is this not a reason for pride? Will this not grant a longer-term benefit?
Reports (including the Amcham survey) are saying US companies are feeling pressured to have local (China) IP in their offering, and/or transfer IP to China. Wow. Those Chinese bastards! I would be so appalled by this… if I didn’t know this has been the policy of China since the 1980s. Read Beijing Jeep, published in 1989, about that issue. Anyway, this is not such a big issue. Most companies only transfer their lowest-end IP to China, and in return they get big tax savings.
So…in my not-so-humble opinion, I believe the real issues are:
-That Chinese companies, in some industries, are almost as good as foreign counterparts…maybe even better. Chinese industrial customers are starting to understand that there is little premium value in having a circuit-breaker made by Siemens when a Chinese brand selling at lower price will do just fine.
-Some parts of the Chinese market are maturing; its not good enough just to be a foreign brand, a foreign company, a foreign manufacturer. And people know this..
-Many companies do very stupid things in China. Google is an example. Many of my customers are also examples. Well…nowadays, you can’t be stupid and survive in this market.
-The tax incentives given to foreign companies…which gave those companies an unfair advantage over locals… are ending.
And the biggest not-real issue? The narrative told by Western leaders and Western media about China. BTW, Rich Brubaker, at All Roads Lead To China, wrote a great post about this, asking, “[is it] China’s obligation to make firms feel comfortable across the board, or if it should have the right to hold up a flag that indicates a line that should not be crossed.. just as several US senators have done themselves.”
And where does Rio Tinto even fit into all this? It doesn’t.
Rio Tinto is NOT a “China is changing” issue. Rio Tinto is not a it is tougher to do business in China issue. Rio Tinto is not even a business issue. It is a criminal law issue relating to paying bribes. The takeaway from Rio Tinto is that you should not pay bribes and you should not pay bribes no matter who tells you that you should.
My take (and that of everyone who does business in China with whom I have talked on the issue — always me bringing it up) is that some employees of Rio Tinto are or were being charged bribery involving millions of dollars. Is that legal? Does anyone think that is legal? Now if you (like the hosts did to me when I went on Power Lunch the other day) are going to say either that “everyone does it” or that one “has” to do it to survive in China, I am going to respond by saying that virtually nobody does that and yet foreign companies are (for the most part) thriving in China. And then I am going to tell you (which is exactly what I tell my clients) that if you need to pay bribes to make money in China or take bribes to do business in China, then you really better think about whether it is worth it to you to risk going to jail for that. For more on that, check out the following:
— The Foreign Corrupt Practices Act (FCPA) Wants You. Even If You Are In China.
— Understanding China FCPA Risks. Who Is A Foreign Official?
— The FCPA And China. Do I Need To Get All Loud On You?
— The Foreign Corrupt Practices Act. Can You Say China Relevant?
— China’s Anti-Bribery Laws Rising
— Avoiding Chinese Jails. I’m Talkin’ To You.
What is happening in China is not so much new laws against foreigners or even an increase in the bias against foreigners (though I am not going to dispute that there has been an increase in the later, particularly in the areas of government procurement). What is happening in China is that China is stepping up enforcement of its laws, most of which are really quite sensible. I called this back in my beginning of the year post, entitled, “China’s Top 5 Business Law Trends For 2010” where the overall theme was stepped up law enforcement against foreign businesses. For more on how China is less interested in foreign business in China, check out “With China’s New Standing Come New Errors” [link no longer exists] and this just published, must-read, Business Week article, “China: Closing for Business?” (h/t China Challenges)
Google and Rio Tinto are huge issues and I do not mean to in any way downplay them, but they are not huge business issues for those doing business in China. Google and Rio Tinto will impact foreign businesses in and planning to go to China to the extent they will serve as reality checks for those who believed operating in China is no different from operating in Kansas. They do not signal some massive shift in Chinese government thinking regarding foreign investment.
FDI in China? It’s rising.
What do you think?
UPDATE: Just came across this great Evan Osnos quote from his Letters from China blog and his post, “Life Without Google” (h/t Jottings From The Granite Studio):
There is, however, a deeper, more troubling sensation. As Americans living in China at this moment in its history, many of us have fashioned an image of a country that is moving–in its own shambling pattern of fits and starts–toward something better for itself and the world. Sure, it thrashes around a lot along the way, but on many days it seems to end up a fraction of an inch closer to a better, healthier, more humane way of life. But this is not one of those days. A superpower that is willing to jettison a tool so central to life as a global citizen begins to look less like a calculatingly pragmatic steward of its people’s interests and more like an addled Goliath.
I am one of those who does believe China is moving forward, with a whole lot of ebbing and flowing, to a better, more humane, more rule of law centered, way of life. But with ebbs and flows, come ebbs and flows, and it is simply unrealistic to expect smooth sailing from China (or from any other country for that matter).