Is China Really Getting More Difficult?

Thursday, October 24, 2013 8:52
Posted in category Invest in China

A debate over whether China is or is not a friendly place for foreign firms has been brewing for a few years, and while the economic model of foreign firms has been a hot topic lately, I am wondering if recent the recent debate is one that is recycled news or if there is something more to it now (vs. 5 years ago).

In the WSJ piece American Firms Find China Hard Work, the following quote stuck out:

“Though foreign companies remain eager to invest in the Chinese market, challenges such as discriminatory industrial policies, opaque investment approval procedures and a lack of effective administrative and legal recourse when investments are denied pose huge barriers,” said Greg Gilligan, the chamber’s chairman.

Investment approvals are particularly vexatious, with complaints ranging from apparently arbitrary decisions to excessive paperwork. The proportion of U.S. firms who think foreign and local companies compete on a level playing field with regard to approvals has fallen to 14% from 29% in 2011, according to the chamber’s survey.

That is part of the reason foreign direct investment is losing momentum, Mr. Gilligan said, though rising labor costs and a slowing Chinese domestic economy have also played a part.

Setting aside the fact that China has NEVER really been an easy place to do business, the quote above frames a discussion I have found myself having more and more recently.

One that I would say is part of a process where firms are beginning to rub the “you gotta be here” out of their eyes” and are looking at China with a mature perspective.  On the one hand, it is a discussion that is about expectations versus reality, where after 5, 10, or 15 years in China firms are able to assess what the ROI on their investment have been.  Which for some have been really poor as billion dollar investments in R&D have returned far less to the business than anticipated.  while for others, luxury retail for example, the returns have been far more than they ever imagined (if looked at on the whole), but have certainly seen a slow down in the last 18 months as Chinese buyers shop more overseas, they are able to access multiple shops in a single city, and the fact that some luxury products were simply oversold.

Which, to be honest, is the hard part about these stories. The data is presented in a way that paints the market a single color, or perhaps a few shades of the same color, when in not really there is a far more complex dynamic in play.

Yes, YUM, Apple, Starbucks, and others have all taken a beating in the press lately, but while walking through my clients campus today (which has a fleet of golf carts shuttling people around) I was told they were seeing governments across China give them preference as they represent safe investments in an otherwise unsafe industry.  Which is to say that their environmental, social, and economic standards are some of the highest in the world, and that is (finally) a selling point for cities. On the other hand, while speaking to a service based organization, the story was quite different. They were, after 5 years of partnering with Chinese peers, exhausted by the hurdles, run around, and undercutting, of what should have been very fruitful engagements. Their service quality, and you will just have to take my work for it, is regularly ranked at the top of the market, which was were things were a problem. Everyone wanted to be their partner, so that they could leverage the relationship to their own benefit.

My guess is that they will pull out.

Which leads me back to my initial question. What is really going on here, and is it really getting any more difficult?

For me, I honestly do not think that it is materially more difficult than it was 10 years ago. Yes, the competition is getting better, and yes the paperwork that is mentioned in the article is a pain in the ass. As it has always been.

What is materially different is that firms were once willing to look past it all and chalk it up to china, where they are no longer willing to. The pain of developing the market is being realized in advance, and SOME firms are FINALLY making what is the smart choice. To stay away from China, or for those already here, to reallocate.

Would be interested in your views,and what you are seeing. Particularly if there is an industry that you feel is seeing a clear trend (good or bad).

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