China: foreigners struggle to compete

And its getting harder. Despite huge investment, few international corporations have penetrated the domestic market.

The squeeze is on, reports The Economist, as China proposes that expats and foreign workers alike should now chip into and benefit from local public services like healthcare, pensions and insurance. 

It's uncertain how retirement contributions could lead to pension payments after a foreign worker leaves China, or receive redudancy pay after they lose their jobs, as they'll be forced out of China as they forego their work permis. Chinese hospitals are poor by international standards, so how many would stop paying international health insurance to benefit from world-class healthcare? Some foreign firms might try to shave costs by stopping contractually agreed fringe benefits, now that China would in theory offer these services. But the reality is that few foreign workers would find that acceptible. Does China care? Not much, it seems.

When they arrived in the 1990s, international companies poured in billions in foreign inward investment (FDI). But they've sorely failed to penetrate the local domestic market. Often thwarted by Chinese state owned or sponsored businesses, level-playing-field competition has been hard.  

The Economist reported in 2010 that despite bringing "capital, technology, management skills and the prospect of better corporate governance" to China, foreigners have recognised that the reality on the ground is a "far cry from the dreams some Westerners once had about China." Few companies complain openly as this would irk the authorities, it seems.  And in any event the booming equity market has created profits from initial investments for foreigners. But penetrating the domestic scene remains an issue. And now the squeeze on foreign workers will invitably put off many who would have sought to work there.

Many foreign corporations adopted the model of taking minority stakes in local firms, as Telefónica's 8.8% of Unicom, Vodafone's holding in China mobile, or Fonterra's bulky stake in Sanlu Group exemplified. Yet a contiminated milk powder scandal led to Sanlu's demise in 2008, and Vodafone sold its 3.2% stake in the Chinese mobile operator (generating a US$3bn profit from the investment). Many firms are cashing out when timing is prudent. Although Telefónica's sticking to its holding despite contrarian views from advisors.

I recall Uniliver developing a presence in China in the 1980s. It encountered huge difficulties and unprofitable trading conditions at first but, through strong R&D investment and restructuring into a holding company, it has survived and prospered. In fact, its commitment to China has been something to emulate. In recent years the consumer goods group's Chinese activity has been growing by 18-19% per annum, evidently. So last June Unilever's Asia chief, Harish Manwani, told Bloomberg there'd be a five-fold increase in its future business in the People's Republic.

Persistence and stamina can prove profitable business attributes, it appears. But the market is tough and, as Chinese companies become ever more sophisticated, it's bound to become tougher.

As Chinese corporations increasingly seek to develop their interational operations, snap up globally recognised brands and established significant footprints abroad, some form of reciprocation ought to be negotiated. 

It would be a shame if China followed the route of Japan, where a massive export-driven economy with huge international presence led to highly profitable Japanese corporations, while inside Japan itself foreign firms were prevented from creating similarly dynamic and competitive concerns.

Free trade should mean just that: open and equal access. Not one rule for one side, and another for the other. But as China takes its rightful place as a global economic superpower, now predicted by some to overtake the US by 2020, a cautious attitude towards Chinese foreign acquisitions should be pursued, unless China first opens its domestic market to greater international competition.

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