December 1, 2019 All Industries
In an August tweet, President Donald Trump said that “our great American companies are hereby ordered to immediately start looking for an alternative to China,” adding that those companies would be better off without China.
Despite the rhetoric, American companies are hard pressed to ignore China’s 1.4 billion consumers. Walmart, which had 443 stores in China as of July 2019, said it will spend an additional $1.2 billion on distribution centers in the country. Other firms doing substantial business in China include Starbucks Corp., Boeing Co. and General Motors Co. Kentucky Fried Chicken sells more chicken in China than it does in the U.S. General Motors, in conjunction with its Chinese partner, sells more cars to China than it does to Americans.
Foreign investment into China rose nearly 3% in the first nine months of 2019 from the year prior, according to the Chinese Ministry of Commerce — the same growth rate as 2018, according to Bloomberg. Although those figures are clouded by the fact that many Chinese companies move funds off- and onshore, it seems clear that American companies haven’t given up on the Chinese market.
Tesla, for instance, is considering locating its first factory outside the United States in a plant near Shanghai. Chinese banks pledged $521 million in loans for the project. Companies that manufacture inside China for its domestic consumers may be able to avoid retaliatory tariffs on their goods. That could be reason enough to start expanding manufacturing in China, David Dollar, a senior fellow at the Brookings Institution in Washington, told Bloomberg.
But Chinese-American trade tensions have escalated, forcing executives to weigh the costs and benefits of being in China and not being there. “It becomes a more-difficult environment in general to do business in China,” says Patrick Chovanec, chief strategist at investment advisor Silvercrest Asset Management and adjunct professor of international and public affairs at Columbia University. Even if the CEO of a major American company thinks it’s unlikely that the U.S. government will “order” companies to abandon China, that CEO has to consider the possibility that something similar might happen.
Forgive an executive for feeling whiplash. Ten years ago, the question on the minds of investors and analysts was why U.S. companies weren’t expanding more into China? Now, Chovanec says the question is ‘What are the risks of doing so?’ One tactic is to counter the prevailing wisdom that American companies must pull out of China.
“(Executives) might have to think about how they’re going to push back on the thinking in D.C. that we’ll just pull out and worry about the consequences later,” he adds.
Still, executives have to worry about tensions getting worse. The Chinese government retaliated against the arrest of Huawei’s chief financial officer Meng Wanzhou by arresting two Canadians and placing them in solitary confinement. Could the Chinese government decide to arrest American businesspeople too?
The two major American chambers of commerce in China are AmCham China and AmCham Shanghai. A joint survey of 250 of their members conducted in May 2019 found that 53.1% said they had not seen any increase in non-tariff retaliatory measures. But one in five had seen increased inspections and slower customs clearance. About 14% had seen slower approval for licenses or other applications than in the past.
Such hassles may not stem the tide of interest in China. The country is expected to generate about one-third of global GDP over the next 10 years, so it’s understandable why U.S. companies want to be in and doing business with China, writes Doug Barry, director of communications and publications at the US-China Business Council.
A modest trade agreement also remains possible, Barry said in an email. Although his group believes “decoupling” the U.S. and Chinese economies would be a disaster, a recommitment to trust between the two countries might lead to agreements on tough issues such as opaque subsidies of each other’s industries.
Whether politicians will recommit to China is another matter. Michael Bloomberg, a longtime advocate for businesses in China who is outspoken against the tariffs, just entered the Democratic presidential primary for 2020 and is the most Chinese friendly candidate, according to The Washington Post.
His company’s New Economy Forum was just held in Beijing. But after announcing his presidential candidacy, Bloomberg stepped off the agenda for the conference. It’s uncertain at this point whether Bloomberg will meaningfully shift the conversation on China.