Even though tensions in the U.S.-China relationship have grown steadily over the past four years, the China market is still attractive for American companies because of its large and growing middle class and its massive and efficient manufacturing environment.
Plenty of American companies cannot afford to relocate some or all of their supply chain from China or have no business reason to do so. Many American companies are also doing just fine selling their products or services to China, with no economic reason to stop. In other words, the death of business relationships between American companies and China has been greatly exaggerated.
But virtually nobody disputes that doing business in and with China keeps getting tougher and riskier, which means American companies need to up their games to better protect themselves. What should companies be doing to minimize their risks and maximize their potential returns from their China operations or relationships? Here are the fundamental issues for businesses that continue to wrestle with these decisions.
Politics matter. What was previously safe for American companies can be a lot riskier today. For example, only a few years ago, American schools were all the rage in China. Now the Chinese Communist Party (CCP) strongly discourages them. Former U.S. Speaker of the House Tip O’Neill said, “All politics is local,” and U.S. companies operating in China will do well to remember that virtually all of the Chinese government’s statements and actions are in support of its overarching goal of remaining in power. If you are even a casual student of Chinese politics, you have watched President Xi Jinping cement his grip on power by increasing the CCP’s influence over every aspect of Chinese life and business. As is also true for every Chinese company and citizen, your company’s coexistence with the CCP will depend on your willingness to conform with China’s existing political and legal framework.
Perform rigorous due diligence. China’s Great Firewall is a combination of legislative, regulatory, and technological barriers to the free flow of information across the Chinese border. It is also a metaphor for doing business with China: many Chinese companies and even Chinese governmental entities are not what they seem. Chinese government information controls are an intended obstacle to effective due diligence, and Chinese organizations can and regularly do exaggerate their capabilities and obfuscate their intentions. Companies planning to manufacture in China should investigate the factory, check out a company’s registration information, and investigate its reputation before sending money or sharing intellectual property. If you find that things are not as they should be, look for another partner. The extra initial effort will be worth it in the long run, both financially and in terms of minimizing potential disruption to your operations.
I fought the law, and the law won. Do not think you can get away with cutting legal corners in China, even if your Chinese counter-party says “everything will be fine.” Everything may be fine, right up until it is not, when you find that someone has blown the whistle on your illegally operating company or your illegally compensated employees. If high-ranking CCP comrades with extensive guanxi can fall out of favor and disappear, so can foreign companies. History shows that when the Chinese economy is under stress — which it is right now despite (and because of) ambitious CCP growth targets — the perennial scapegoats are foreigners and their China enterprises, especially those from countries at odds with China — the United States, Canada, Australia, Sweden, and Great Britain immediately spring to mind. That means companies and people from these countries will have targets on their backs as long as the CCP is in charge. And in rare instances, representatives from foreign companies have been prevented from leaving China – or even jailed – pending resolution of corporate legal problems that in many cases they did not even know existed. If you have any concerns about your organization’s compliance with Chinese laws and regulations, consider having an unbiased third party audit your business operations to determine your existing level of compliance and how you can improve. Smart companies typically do this yearly.
Protect yourself. It is easy for foreign companies to fail in China, but you can set yourself up for success and, if need be, a hasty exit and comprehensive cleanup. You do that by using the same tools Chinese companies use. Start with the Chinese legal system, which the World Bank ranks as #5 globally for contract enforcement. You want contracts that protect you, your operations, and your intellectual property as comprehensively as the law allows. You do not want to rely on your Chinese counterparts to register your intellectual property or draft your contracts, and you want to be certain your Chinese-language contracts say exactly the same things as the English-language versions. You want to be sure all parties are in agreement about which contracts have legal force, and you want to be certain that the contracting entities are the ones actually conducting business.
Looking forward. Yes, U.S. foreign policy will almost certainly return to something approaching “normal” under President Biden, but it is difficult to envision sufficient fence-mending between China and the U.S. that will cause those on both sides to say, “We were just kidding” and forget everything over a shared bottle of baijiu (Chinese liquor). The tariffs, the arrests, the threats, and the heightened risk have had a severe impact on bilateral relations, and many of the issues that strain U.S.-China relations remain unresolved.
And “normal” of course means “the new normal.” Recently Secretary of State Antony Blinken explicitly stated: “We’re not simply picking up where we left off, as if the past four years didn’t happen. We’re looking at the world with fresh eyes.” Blinken continued, “Our relationship with China will be competitive when it should be, collaborative when it can be, and adversarial when it must be. The common denominator is the need to engage China from a position of strength.” To put it another way, the U.S. has moved from its Sputnik moment to its Shenzhou-5 moment.
At the same time, President Biden issued an interim national security strategy paper that noted, “Our democratic alliances enable us to present a common front, produce a unified vision, and pool our strength to promote high standards, establish effective international rules, and hold countries like China to account.”
The document continued, “The most effective way for America to out-compete a more assertive and authoritarian China over the long-term is to invest in our people, our economy, and our democracy. By restoring U.S. credibility and reasserting forward-looking global leadership, we will ensure that America, not China, sets the international agenda, working alongside others to shape new global norms and agreements that advance our interests and reflect our values.”
Should I stay or should I go? Over the past several years, many U.S. manufacturers have ceased manufacturing in China or sent at least some of their production elsewhere. At the same time, a large number of U.S. firms are forming new Chinese entities with the aim of accessing China’s growing middle class and large B2B market.
What sort of companies are going into China? Mostly tech companies and companies that sell their products and services to China. Many of these companies either do not care much about tariffs or are expanding their China distribution because of the tariffs, i.e. they are selling China-manufactured products inside China while relocating ex-China manufacturing to serve markets elsewhere.
Ultimately, the question of whether your company should be in China, doing business with China, or neither depends on your company’s specific calculated risk and return analysis.