China has always mixed business with politics, whether it’s banning Australian beef in response to an investigation into the origins of the COVID pandemic, or boycotting salmon in Norway after a Chinese human rights activist received the Nobel Peace Prize.
Yet starting in the late 1990s, international companies involved in aerospace, high-tech, and oil and gas couldn’t wait to sell their wares to China or form minority-stake joint ventures there. For example, after the Commercial Aircraft Corporation of China, Ltd. (COMAC) was established in 2008, companies including Honeywell, Raytheon and GE Aviation were eager to collaborate with COMAC in one form or another. While consulting for smaller, second-tier aerospace companies, I met dozens of supplier representatives and retired Boeing and FAA consultants at COMAC’s makeshift offices. I was taken aback by the amount of foreign technology and brainpower being poured into a domestic Chinese product.
Was it right to sell military-civil products to China? It felt slimy. “It’s the price we have to pay to play in China,” a senior executive counseled me at that time.
Now, after more than two decades of free trade with China, U.S. policy is addressing this conflict of interest. In the last week of Trump’s presidency, the Department of Defense blacklisted COMAC, alleging it has close ties to the Chinese military. It appears President Biden won’t rescind the order, fueling speculation that COMAC-like dealings could be a thing of the past as national security issues take precedence.
Foreign companies best get accustomed to this reality and devise new strategies to deal with China’s confluence of business and politics. It’s also time for businesses to consider how doing business in China affects their public image.
“Public opinion against China is historically low in Western countries, and it’s just a matter of time when this starts to impact a company’s brand value and goodwill,” Dr. Sari Arho Havrén, a fellow at the Mercator Institute for China Studies in Berlin, told me.
Some of my American clients have already moved parts of their supply chains to Mexico and other geopolitically neutral countries for the sole purpose of “looking good” to their customer base. One of my clients who recently moved some operations to Vietnam and Malaysia told me that while China is still one of the best manufacturing locations, “we don’t want to be seen fraternizing with the ‘enemy.’ I can sell ‘Made in Vietnam’ in the U.S., while selling ‘Made in China’ in China, thereby not ruffling any feathers in either country.”
Companies used to play the ignorance card when it came to human rights or military-civil fusion issues, but the business climate has changed. Gordon Houlden, director emeritus of the China Institute and professor of political science at the University of Alberta, told me, “Large corporations need to reassure their shareholders that due diligence is being applied to ensure their China operations are not supporting oppression, military-civil fusion, forced labor or human rights violations.”
Companies, big and small, will need to be proactive in declaring how they are maintaining ethical and responsible operations in China. Disney learned that the hard way when human rights organizations chastised the company for thanking the local Xinjiang government in the final credits of the movie Mulan. American moviegoers responded, and the animated film flopped at the box office.
“One Company, Two Systems”
Dr. Havrén believes the geopolitical divisions will also force companies to consider a one-company,-two-systems approach.
Yum! Brands split off its China operations into Yum China, a totally independent operation, in 2016. The two companies trade separately on the New York and Hong Kong Stock Exchanges and Yum China has its own China-experienced C-level executives. And it makes sense that Yum China operates independently. Just look at their menu options—chicken and seaweed rice bowl, congee, Dragon Twisters, and my favorite, matcha ice cream.
I fully expect companies with dual military-civil products and services like Google, Caterpillar, Applied Materials, and Schlumberger to follow in Yum China’s footsteps. This way, companies can buy, sell, design, and manufacture what they want freely in China, or at least as freely as their moral conscience will allow.
This strategy also coincides with the general belief that China and the U.S. are headed towards an all-out economic decoupling. “As far as high-tech, the bifurcation is already in place,” explained Houlden.
He doesn’t see companies fleeing China any time soon, but “if both countries descend into a full-blown war, all bets are off. Normal trade and investment relations would become impossible.”
The Chief Geopolitical Officer
When I visited China’s large, state-owned enterprises in the 90s, I was always introduced to their chief communist party officer. These pseudo company-political appointees make “recommendations” on whether a company’s business policies jive with the Communist Party’s political agenda and whether they will be given direct access to Beijing’s elite party officials. They wield exorbitant powers and have been known to derail the careers of Chinese CEOs and the companies they run. Just ask Jack Ma.
Dr. Havrén feels the time is right for foreign companies to hire their own chief geopolitical officers (CGO): “The whole arena of geopolitics has become increasingly complex, and quite a task for just a CEO to handle as companies take on new challenges like populism, diversification and deglobalization.”
Last year, the NBA could have used an in-house CGO when Daryl Morey, general manager of the Houston Rockets, recklessly tweeted, “Fight for Freedom. Stand With Hong Kong,” days before Shanghai was set to host two NBA pre-season games.
I wrote in the USA Today that to save the NBA’s reputation, “Morey should resign to preserve the NBA’s billions of dollars of revenue, investments and goodwill [in China]. Morey and the NBA didn’t listen and they both paid dearly for his political incorrectness as China canceled the NBA’s television rights for the whole season, costing the NBA an estimated $400M, and ultimately, Morey his job.”
Fortune 1000 corporations have relegated guidance on geopolitical issues to outside consultants. Given today’s climate, these issues should be taken more seriously and brought in-house. Just imagine the public relations mess if a company was seen passing the buck for using slave labor in its supply chains.
Same Old, Same Old
We’re certainly entering perilous waters as U.S.-China relations drop to its lowest point since the Tiananmen riots in 1989. Don’t expect things to get any easier as President Biden, taking cues from Trump, remains tough on China.
But hasn’t doing business in China always been an almost insurmountable proposition? Old timers like me are accustomed to the many nuances. Businesses will tough it out. Biden and President Xi Jinping will find middle ground and the world, once again, will be restored. Why? Because, as Professor Houlden put it, “Ignoring China and its market is hardly a winning strategy.”
Stanley Chao is the author of “Selling to China: A Guide for Small and Medium-Sized Businesses,” and the managing director of All In Consulting, which assists companies in their China business. Twitter: @stanleychao6.