Multinationals in China: Guardian warriors and golden eggs; The state’s crackdowns on big firms are not all about bashing foreigners

Multinationals in China: Guardian warriors and golden eggs; The state’s crackdowns on big firms are not all about bashing foreigners

Aug 24th 2013 | SHANGHAI |From the print edition

FOREIGN companies love to complain about doing business in China. The rules of the game are rigged against them, they grouse, the locals are corrupt and the government is always turning the thumbscrews on them. Amid such moans it is worth remembering that, for all the barriers that foreign multinationals face in China, it has welcomed them with open arms compared with the protectionism imposed by Japan and South Korea at comparable stages in their economic development. Nevertheless, the recent spate of high-profile crackdowns on international firms, and people associated with them, has prompted worries about a generalised anti-foreigner backlash.This week police in Shanghai formally arrested a British fraud investigator, Peter Humphrey, whom they had detained for six weeks as part of an inquiry into alleged bribery of doctors by foreign drug firms, along with his wife, also an investigator. Mr Humphrey had done work for GlaxoSmithKline (GSK), a British drugs firm, four of whose Chinese managers were arrested last month. Since these arrests other foreign drugmakers have come under investigation, including Sanofi and Eli Lilly. All three firms say they will co-operate with the inquiries. There have also been crackdowns on alleged price-fixing by foreign manufacturers of milk formula, and regulators are scrutinising the prices charged by foreign carmakers and their joint ventures with local firms.

Now foreign technology firms are worried that they may be next. Chinese nationalists were outraged when Huawei, a local telecoms-equipment giant, was blacklisted last year by American politicians on unsubstantiated allegations of spying. But they grew apoplectic when Edward Snowden earlier this year revealed the extent of American spying on China. Official media outlets have since been calling for the expulsion of Cisco and other leading American technology firms, dubbed the “eight guardian warriors”.

This has made some observers nervous. Rhodium Group, a consultancy, gave warning that “The implications for business prospects of foreign firms operating in the world’s second largest economy are potentially far-reaching.”

So, is the new Chinese government really about to boot out the foreigners? Not likely. Cut through the official media’s hype about greedy foreigners and it seems that a mix of motives is at work.

Consumers are growing ever angrier about the cost of living in China’s main cities, be that the soaring prices of homes, health care or safe food. So it seems the government, which despite its tight grip on power does care about public opinion, is putting on a noisy show of trustbusting. Foreign firms are not the only targets: recent action on alleged price-fixing by jewellers and the distillers of spirits, for example, nabbed only Chinese firms. The antitrust regulator is now promising to get tough on telecoms and banking—two industries dominated by domestic (and indeed state-owned) firms.

In contrast the drugs industry is dominated by foreign firms. Doctors are underpaid and thus highly susceptible to being incentivised to peddle pricey pills. Most patients have to pay for their treatments, are angry at how much they cost and blame graft among health professionals. So by cracking down on alleged bribery by the foreign drug firms, the new Chinese government of Xi Jinping is also fulfilling another promise it made on taking office last year, to stamp out corruption.

A crutch for lame ducks

In many industries where local firms compete hard with foreign-backed ventures, the Chinese firms are struggling. Often their products are perceived as lower-quality (cars, for instance) or unsafe (dairy products). The economic slowdown is making things worse for them. Although regulators, by getting tough with the foreign firms first, are propping up some local lame ducks in the short term, they may be setting a precedent, and softening up public opinion, for when they eventually turn on the local firms.

As for the foreign technology firms, and the fear that a nationalist backlash will drive them away, it is true that some in officialdom and in the online Weibo-sphere are eager to see their departure. And there is some evidence of such firms losing a contract here or there. However, it will be bizarre if China were to chase away these firms in the same way that America has seen off Huawei. American technology firms are the world’s best. America does not need Chinese technology, whereas China most certainly needs access to American inventions.

In all, life for the many multinationals operating in China may get more difficult, with further cases of harassment by officials likely to emerge. But it seems unlikely, in most cases, that they will be forced out of the country. China’s model of economic development depends, and has depended for years, on inviting in the world’s best companies, and—legally or otherwise—benefiting from their intellectual property. So why would China kill the goose that lays the golden egg?