Foreign businesses in China need to heed the lessons of Russian exodus
www.ft.com
The attempt by US president Joe Biden last week to extract a promise from China’s leader Xi Jinping not to give material support to Russia’s invasion of Ukraine was always going to be a long shot. The fact that after two hours it ended with little more than mutual threats of sanctions should be a wake-up call to foreign businesses operating in China.
The risks of doing business in China have been escalating for some time. Tensions between Washington and Beijing over technology exports, the mass incarceration of 1mn Uyghurs and other Muslim groups in Xinjiang, and the crackdown in Hong Kong, have forced many companies to think about contingency plans. Supply chain disruptions caused by the Covid pandemic then drove home the dangers of relying on China for key components or products.
But the underlying assumption held by many companies has been that, in the end, China’s interest in economic and political stability would stem any rash actions such as a military move on Taiwan.
Few companies are yet willing to ask whether the risks of dealing with Xi’s increasingly authoritarian regime are beginning to outweigh the benefits of being in a market of 1.4bn people. Volkswagen, which relies on China for at least half its annual net profit, has even been prepared to brave the reputational risk of having a factory in Xinjiang.
“In the past year . . . companies have been scrambling to find a solution to maintaining their economic interests in China while realising they are exposing themselves to political risk,” says Max Zenglein, chief economist at the Mercator Institute for China Studies. “They lacked a concrete example of what this means and didn’t anticipate how quickly this could escalate.”
Russia’s aggression may have changed that calculus, however. In less than four weeks, more than 400 companies have pulled out of Russia or suspended operations, according to the Yale School of Management. Some have left for fear of being caught by sanctions but others — such as McDonald’s, Starbucks, TJ Maxx or Uniqlo — have recognised the risk of a customer backlash if they stay open.
The Russian crisis “makes them realise that maybe they need to factor these risks more heavily into their calculations”, Zenglein says. “It is a case study for how the global system can unravel.”
It would not be that easy to quit China, which is the world’s largest importer and exporter of intermediate goods used to make a finished product. In 2020, China’s share of foreign direct investment rose to an all-time high of 25 per cent, according to the Peterson Institute for International Economics.
But a report by Merics’s Zenglein points out that while certain industries (the auto sector) and countries (Germany) rely heavily on China, the dependence of European business can be overstated. A survey of 25 listed EU companies from different countries revealed that on average they derived 11 per cent of revenue from China in 2019.
A few — notably on the Republican right in the US — are suggesting that businesses decouple entirely from the country. That would spell disaster for the global economy. But some executives are reassessing the principles that have previously guided their China plans.
“Things you would normally do because it made commercial sense to do them, you have to ask if it makes sense any longer,” said a senior executive at a European multinational, who asked to remain anonymous to protect the company’s interests. “Is this supplier relationship going to be feasible in an environment where the prospect of sanctions is just around the corner?”
Corporate lawyers such as Dan Harris of US-based Harris Bricken are advising clients to start thinking about “asset light” strategies, such as licensing or franchising where appropriate. At the very least, diversification of manufacturing elsewhere in Asia, or even further afield, should be a priority.
It may also be wise to ensure that in future Chinese operations are dedicated to the local market, separate from the rest of the world. “In the past people might have chosen to create global export capability around a nucleus in China. But they aren’t going to do that any more,” the executive said.
Most China experts believe that Beijing has no imminent plans to follow Russia’s example with an invasion of Taiwan. But many Russian experts also thought Moscow would not send tanks across the Ukrainian border. The lesson of Russia’s invasion is not just that the unthinkable can happen, but that the consequences can play out at a speed and scale few had imagined possible.
[email protected]
The attempt by US president Joe Biden last week to extract a promise from China’s leader Xi Jinping not to give material support to Russia’s invasion of Ukraine was always going to be a long shot. The fact that after two hours it ended with little more than mutual threats of sanctions should be a wake-up call to foreign businesses operating in China.
The risks of doing business in China have been escalating for some time. Tensions between Washington and Beijing over technology exports, the mass incarceration of 1mn Uyghurs and other Muslim groups in Xinjiang, and the crackdown in Hong Kong, have forced many companies to think about contingency plans. Supply chain disruptions caused by the Covid pandemic then drove home the dangers of relying on China for key components or products.
But the underlying assumption held by many companies has been that, in the end, China’s interest in economic and political stability would stem any rash actions such as a military move on Taiwan.
Few companies are yet willing to ask whether the risks of dealing with Xi’s increasingly authoritarian regime are beginning to outweigh the benefits of being in a market of 1.4bn people. Volkswagen, which relies on China for at least half its annual net profit, has even been prepared to brave the reputational risk of having a factory in Xinjiang.
“In the past year . . . companies have been scrambling to find a solution to maintaining their economic interests in China while realising they are exposing themselves to political risk,” says Max Zenglein, chief economist at the Mercator Institute for China Studies. “They lacked a concrete example of what this means and didn’t anticipate how quickly this could escalate.”
Russia’s aggression may have changed that calculus, however. In less than four weeks, more than 400 companies have pulled out of Russia or suspended operations, according to the Yale School of Management. Some have left for fear of being caught by sanctions but others — such as McDonald’s, Starbucks, TJ Maxx or Uniqlo — have recognised the risk of a customer backlash if they stay open.
The Russian crisis “makes them realise that maybe they need to factor these risks more heavily into their calculations”, Zenglein says. “It is a case study for how the global system can unravel.”
It would not be that easy to quit China, which is the world’s largest importer and exporter of intermediate goods used to make a finished product. In 2020, China’s share of foreign direct investment rose to an all-time high of 25 per cent, according to the Peterson Institute for International Economics.
But a report by Merics’s Zenglein points out that while certain industries (the auto sector) and countries (Germany) rely heavily on China, the dependence of European business can be overstated. A survey of 25 listed EU companies from different countries revealed that on average they derived 11 per cent of revenue from China in 2019.
A few — notably on the Republican right in the US — are suggesting that businesses decouple entirely from the country. That would spell disaster for the global economy. But some executives are reassessing the principles that have previously guided their China plans.
“Things you would normally do because it made commercial sense to do them, you have to ask if it makes sense any longer,” said a senior executive at a European multinational, who asked to remain anonymous to protect the company’s interests. “Is this supplier relationship going to be feasible in an environment where the prospect of sanctions is just around the corner?”
Corporate lawyers such as Dan Harris of US-based Harris Bricken are advising clients to start thinking about “asset light” strategies, such as licensing or franchising where appropriate. At the very least, diversification of manufacturing elsewhere in Asia, or even further afield, should be a priority.
It may also be wise to ensure that in future Chinese operations are dedicated to the local market, separate from the rest of the world. “In the past people might have chosen to create global export capability around a nucleus in China. But they aren’t going to do that any more,” the executive said.
Most China experts believe that Beijing has no imminent plans to follow Russia’s example with an invasion of Taiwan. But many Russian experts also thought Moscow would not send tanks across the Ukrainian border. The lesson of Russia’s invasion is not just that the unthinkable can happen, but that the consequences can play out at a speed and scale few had imagined possible.
[email protected]
www.ft.com
The attempt by US president Joe Biden last week to extract a promise from China’s leader Xi Jinping not to give material support to Russia’s invasion of Ukraine was always going to be a long shot. The fact that after two hours it ended with little more than mutual threats of sanctions should be a wake-up call to foreign businesses operating in China.
The risks of doing business in China have been escalating for some time. Tensions between Washington and Beijing over technology exports, the mass incarceration of 1mn Uyghurs and other Muslim groups in Xinjiang, and the crackdown in Hong Kong, have forced many companies to think about contingency plans. Supply chain disruptions caused by the Covid pandemic then drove home the dangers of relying on China for key components or products.
But the underlying assumption held by many companies has been that, in the end, China’s interest in economic and political stability would stem any rash actions such as a military move on Taiwan.
Few companies are yet willing to ask whether the risks of dealing with Xi’s increasingly authoritarian regime are beginning to outweigh the benefits of being in a market of 1.4bn people. Volkswagen, which relies on China for at least half its annual net profit, has even been prepared to brave the reputational risk of having a factory in Xinjiang.
“In the past year . . . companies have been scrambling to find a solution to maintaining their economic interests in China while realising they are exposing themselves to political risk,” says Max Zenglein, chief economist at the Mercator Institute for China Studies. “They lacked a concrete example of what this means and didn’t anticipate how quickly this could escalate.”
Russia’s aggression may have changed that calculus, however. In less than four weeks, more than 400 companies have pulled out of Russia or suspended operations, according to the Yale School of Management. Some have left for fear of being caught by sanctions but others — such as McDonald’s, Starbucks, TJ Maxx or Uniqlo — have recognised the risk of a customer backlash if they stay open.
The Russian crisis “makes them realise that maybe they need to factor these risks more heavily into their calculations”, Zenglein says. “It is a case study for how the global system can unravel.”
It would not be that easy to quit China, which is the world’s largest importer and exporter of intermediate goods used to make a finished product. In 2020, China’s share of foreign direct investment rose to an all-time high of 25 per cent, according to the Peterson Institute for International Economics.
But a report by Merics’s Zenglein points out that while certain industries (the auto sector) and countries (Germany) rely heavily on China, the dependence of European business can be overstated. A survey of 25 listed EU companies from different countries revealed that on average they derived 11 per cent of revenue from China in 2019.
A few — notably on the Republican right in the US — are suggesting that businesses decouple entirely from the country. That would spell disaster for the global economy. But some executives are reassessing the principles that have previously guided their China plans.
“Things you would normally do because it made commercial sense to do them, you have to ask if it makes sense any longer,” said a senior executive at a European multinational, who asked to remain anonymous to protect the company’s interests. “Is this supplier relationship going to be feasible in an environment where the prospect of sanctions is just around the corner?”
Corporate lawyers such as Dan Harris of US-based Harris Bricken are advising clients to start thinking about “asset light” strategies, such as licensing or franchising where appropriate. At the very least, diversification of manufacturing elsewhere in Asia, or even further afield, should be a priority.
It may also be wise to ensure that in future Chinese operations are dedicated to the local market, separate from the rest of the world. “In the past people might have chosen to create global export capability around a nucleus in China. But they aren’t going to do that any more,” the executive said.
Most China experts believe that Beijing has no imminent plans to follow Russia’s example with an invasion of Taiwan. But many Russian experts also thought Moscow would not send tanks across the Ukrainian border. The lesson of Russia’s invasion is not just that the unthinkable can happen, but that the consequences can play out at a speed and scale few had imagined possible.
[email protected]
Trade Secrets
The Trade Secrets Newsletter is the FT’s must-read email on the changing face of international trade and globalisation. Written by FT trade specialist Alan Beattie, it is delivered to your inbox every Monday. Sign up hereThe attempt by US president Joe Biden last week to extract a promise from China’s leader Xi Jinping not to give material support to Russia’s invasion of Ukraine was always going to be a long shot. The fact that after two hours it ended with little more than mutual threats of sanctions should be a wake-up call to foreign businesses operating in China.
The risks of doing business in China have been escalating for some time. Tensions between Washington and Beijing over technology exports, the mass incarceration of 1mn Uyghurs and other Muslim groups in Xinjiang, and the crackdown in Hong Kong, have forced many companies to think about contingency plans. Supply chain disruptions caused by the Covid pandemic then drove home the dangers of relying on China for key components or products.
But the underlying assumption held by many companies has been that, in the end, China’s interest in economic and political stability would stem any rash actions such as a military move on Taiwan.
Few companies are yet willing to ask whether the risks of dealing with Xi’s increasingly authoritarian regime are beginning to outweigh the benefits of being in a market of 1.4bn people. Volkswagen, which relies on China for at least half its annual net profit, has even been prepared to brave the reputational risk of having a factory in Xinjiang.
“In the past year . . . companies have been scrambling to find a solution to maintaining their economic interests in China while realising they are exposing themselves to political risk,” says Max Zenglein, chief economist at the Mercator Institute for China Studies. “They lacked a concrete example of what this means and didn’t anticipate how quickly this could escalate.”
Russia’s aggression may have changed that calculus, however. In less than four weeks, more than 400 companies have pulled out of Russia or suspended operations, according to the Yale School of Management. Some have left for fear of being caught by sanctions but others — such as McDonald’s, Starbucks, TJ Maxx or Uniqlo — have recognised the risk of a customer backlash if they stay open.
The Russian crisis “makes them realise that maybe they need to factor these risks more heavily into their calculations”, Zenglein says. “It is a case study for how the global system can unravel.”
It would not be that easy to quit China, which is the world’s largest importer and exporter of intermediate goods used to make a finished product. In 2020, China’s share of foreign direct investment rose to an all-time high of 25 per cent, according to the Peterson Institute for International Economics.
But a report by Merics’s Zenglein points out that while certain industries (the auto sector) and countries (Germany) rely heavily on China, the dependence of European business can be overstated. A survey of 25 listed EU companies from different countries revealed that on average they derived 11 per cent of revenue from China in 2019.
A few — notably on the Republican right in the US — are suggesting that businesses decouple entirely from the country. That would spell disaster for the global economy. But some executives are reassessing the principles that have previously guided their China plans.
“Things you would normally do because it made commercial sense to do them, you have to ask if it makes sense any longer,” said a senior executive at a European multinational, who asked to remain anonymous to protect the company’s interests. “Is this supplier relationship going to be feasible in an environment where the prospect of sanctions is just around the corner?”
Corporate lawyers such as Dan Harris of US-based Harris Bricken are advising clients to start thinking about “asset light” strategies, such as licensing or franchising where appropriate. At the very least, diversification of manufacturing elsewhere in Asia, or even further afield, should be a priority.
It may also be wise to ensure that in future Chinese operations are dedicated to the local market, separate from the rest of the world. “In the past people might have chosen to create global export capability around a nucleus in China. But they aren’t going to do that any more,” the executive said.
Most China experts believe that Beijing has no imminent plans to follow Russia’s example with an invasion of Taiwan. But many Russian experts also thought Moscow would not send tanks across the Ukrainian border. The lesson of Russia’s invasion is not just that the unthinkable can happen, but that the consequences can play out at a speed and scale few had imagined possible.
[email protected]
