SCMP May 16, 2010

Hurdles get higher for foreign firms


For years, foreign businessmen on the mainland complained about a litany of problems that made doing business there a nightmare. But the mood took a definite turn for the worse late last year when Beijing unexpectedly announced its new Indigenous Innovation Product Accreditation Programme on ministry websites.

Government officials said the new programme would promote Chinese innovation. Foreign companies feared it was designed to lock them out of the government procurement market in favour of the country's 'national champions'. The result was an unprecedented international outcry. And while Beijing proceeded to pull back in the face of widespread criticism, fears remain among the foreign business community, for whom China is one of the few bright spots in the global economy.

'Foreign companies are seeing a wide array of policies that make life difficult in China,' said James McGregor, senior counsellor for APCO Worldwide. 'It appears that the future market opportunities are narrowing.'

In a rare public comment about the frustrations being felt by the international business community in China, McGregor wrote on a Time website in January that in his more than two decades in China, he had seldom seen the foreign business community 'more angry and disillusioned than it is today'.

He went on to say that 'banquet-table chatter is now dominated by swapping tales of arrogant and insolent Chinese bureaucrats and business partners'. He said further that the complaints ran the gamut from 'inconsistent and non-transparent enforcement of regulations, rampant intellectual-property theft, state penetration of multinationals through union and Communist Party organisations, blatant market impediments through rigged product standards and testing, politicised courts and agencies that almost always favour local companies, creative and selective enforcement of WTO requirements ... The list goes on.'

In April, Joerg Wuttke, president of the European Chambers of Commerce in China, wrote a surprisingly frank and bold assessment in the Financial Times titled 'China is beginning to frustrate foreign business'.

'In the 10 years since the establishment of the European Union Chamber of Commerce in China, I have seldom seen market sentiment among members so bleak or pessimistic,' wrote Wuttke. 'After 30 years of progressive market reforms, many foreign businesses in the country feel as though they have run up against an unexpected and impregnable blockade.'

He continued: 'Suddenly political developments and regulatory restrictions have converged to create a dangerous cocktail that, for many companies, smacks of protectionism.'

McGregor said: 'The indigenous innovation and various associated policies seemed aimed at getting foreign technology and tweaking it a bit and transforming it into Chinese technologies. Foreign companies feel this technology will come back at them in global markets as Chinese technology under a Chinese brand name.'

The six categories requiring accreditation under the indigenous innovation policy, jointly issued by the Ministry of Science and Technology, Ministry of Finance, and the National Development and Reform Commission, are computers and appliances, telecom products, modern office equipment, software, renewable energy and equipment, and energy-saving products.

Foreign IT firms were also concerned about Beijing's plans to require compulsory certification for a wide array of technology products. The new rule, which took effect on May 1, restricts suppliers of encryption-related products - firewalls, secure routers and smart cards - from taking part in government tenders unless they undergo testing and certification to meet Chinese standards.

The process requires some companies to supply software source codes and other confidential details, leading to fears that foreign intellectual property might be leaked to local competitors.

'That's a big barrier for some companies,' said Dirk Moens, secretary general of the European Union Chamber of Commerce in China, who said the Chinese were asking for far more information than was required in other countries.

Despite the growing anger, individual companies continue to refrain from speaking out publicly, instead relying on chambers of commerce, industry associations and their governments to do their complaining. The reluctance is a sign of the stranglehold the Chinese government continues to exert on foreign businesses, even when their core interests are at stake. Of six American companies approached for interviews, one refused to speak and five did not respond. 

When Google discovered its core IT systems had been hit by a series of cyber attacks in January, it went to some 30 other companies that had also been victims of what are strongly believed to have been government orchestrated efforts. Not one would stand with Google to publicly confront China over the issue, and two companies, Microsoft and Hewlett-Packard, played down the threat while playing up China's business potential.

Recent survey's by the American Chambers of Commerce in China actually indicate optimism is rising, although this may be more wishful - than realistic - thinking.

The American Chamber of Commerce in the People's Republic of China (AmCham-China) released its 12th annual Business Climate Survey on April 2. The results showed 'strong overall optimism' in the Chinese economy among US companies, albeit 'coupled with concerns about trends in the regulatory environment'. More than four in five companies (82 per cent) reported being more optimistic this year than last year.

The American Chamber of Commerce in Shanghai a day earlier released the results of a survey that said that more than three-quarters of American companies polled said that the business environment in China 'has either improved or stayed the same over the past six months'. 

In private, sentiment is not so upbeat.

'Behind closed doors companies are very unhappy and they're reassessing their China plans,' said McGregor, author of One Billion Customers: Lessons From the Front Lines of Doing Business in China. 'But as China business is important to their bottom line they're very very quiet in public.'

An e-mail that widely circulated on the internet last week spoke of a hastily arranged meeting held recently in Washington of members of the American Chamber of Commerce in China to discuss the situation. One participant, a high-ranking American businessman, was quoted as saying that he had 'detected dramatic change in Chinese policy in recent months'. The e-mail said that the company, which has publicly spoken in defence of government policies, anticipated a shift by China from export-led growth to growth sustained by domestic consumption 'but that part of that transformation is to go even further than in the past in blocking foreign producers who in anyway compete with Chinese producers'.

Some observers attribute Beijing's moves to China's growing confidence, a result of having emerged seemingly unscathed from the global economic crisis while the US and other Western countries are flailing. This, say some analysts, has made China feel that the West now has less leverage over it and that it can stand up to the foreign business community.

Anger over the indigenous innovation plan, however, may have been stronger than Beijing anticipated.

On December 10, 33 international associations from the United States, Europe, Japan, South Korea and India - representing the world's most important technology companies - sent a joint letter to the heads of the Ministry of Science and Technology, Ministry of Finance and National Development and Reform Commission, saying they were 'deeply troubled' by Notice No. 618, the official name of the new policy, which they said 'will hinder, rather than promote, China's own goals of advancing its science and technology capabilities'.

The letter went on to say that the 'restrictive and discriminatory program criteria would make it virtually impossible for any non-Chinese supplier to participate.' 

Foreign experts say it is natural for China to want to climb the hi-tech ladder, but they worry about the method it is using to do this.

'No one can argue against policies that favour local R&D and innovation,' says Moens. 'What we are worried about is how those policies will be implemented. That's where we get nervous.'

'China is no longer able to compete on the basis of low-cost labour, so a natural process is to move up the added value ladder,' said Christian Murck, president of the American Chamber of Commerce China. 'The question always is, when you get down to the details, how this will be played out in different sectors. The argument we are making is that China can best achieve this on an open architecture of trade and investment.'

Murck says that American companies performed well in China last year, despite the global economic downturn, with a survey showing that some 38 per cent of respondents reported higher profit margins here compared to the rest of the world.

He said, however, that there were worries among hi-tech, IT and other sectors about the need to protect their intellectual property rights. 'The concern here is about the direction of China's innovation policies,' he said.

According to a survey that the chamber carried out at the beginning of the year, specifically focused on the indigenous innovation policy, some 38 per cent of respondents said they were feeling increasingly unwelcome in China, a sharp rise from a recent survey a year earlier. 

The American Chamber of Commerce in Shanghai said that of the member companies aware of the indigenous innovation policy, 30 per cent reported that the directive would hurt their businesses.

Murck said that issues such as standards, technology transfers, encryption and security requirements 'suggest that there could be problems down the road'.

'If you look at the horizon and wonder what the environment will be like in two to five years, the implication is that the market will be narrow with China favouring domestic companies as opposed to the products and services of foreign enterprises in China,' he said. 'From our point of view, protection is counterproductive in the long run. This is not the way to build an innovative society or move up the hi-tech ladder.' 

Some experts see the new policies as a wake-up call to the need to understand the direction China is moving in.

Ian Bremmer, president of the Eurasia Group, said in an interview with Barrons in April that the rise of 'state capitalism' in China meant that the playing field for multinationals in the country was going to shrink, rather than expand, especially for companies in technology, telecommunications, consumer durables, and the automotive and aviation industries.

He went on to say that he was not suggesting foreign companies could not do business in China. He said, however, that in sectors where there was competition from Chinese companies, Western corporations would have to 'either leave or change their model', a point that many failed to understand.

While foreign business has long been an ally of China, the recent frustrations have dampened the enthusiasm to go to bat for China. 

'A lot of people who thought they were going to make big money in China are discovering or about to discover that it is an expensive dead end,' Scott Lilly of the Centre for American Progress wrote this month in an e-mail sent to colleagues and then spread around the Internet. 'Much of the corporate support for protecting China from trade sanctions is about to go away.'

The foreign business community is taking cautious optimism from recent signs that Beijing is trying to make amends. A turning point came in March when Premier Wen Jiabao responded to growing concerns among the foreign business community.

'I must say I am still not in very close touch with foreign businessmen doing work in China,' Wen said during a news conference in March. 'In the next three years I will create more opportunities ... to listen to your views.'

Then came the news that the indigenous innovation policy had quietly been shelved, for the time being at least.

'I think the sentiment has improved in the last few months because Chinese responded positively on Indigenous Innovation and there was a greater attempt to reach out to the business community from Premier Wen and on down,' says Murck.

Moens says that Wen met with representatives of more than 33 European companies on April 30, which he described as 'encouraging'.

Moens said further that recent meetings with the Ministry of Science and Technology assuaged some of the fears the foreign community was feeling about the indigenous innovation policy. 'Clarity is one thing that can improve things here,' he said. 'Companies don't want surprises. They want as much as possible to have consistency in the regulatory framework.'

For now, companies are waiting to see what happens next.

'Because the business community was so vocal in their complaints the Chinese government started listening,' said McGregor. 'But there is still a long way to go. Right now we're seeing a charm offensive and that's very welcoming. We hope that leads to policy changes.'

Cause for pause

US businesses in China are feeling 'increasingly unwelcome,' a survey says

The number of international associations to complain about the innovation policy was: 33