For years, business news has served an evergreen headline, something like “Foreign businesses leave China.” This week it’s “McKinsey cuts hundreds of jobs in China business.” In August it was “IBM is the latest Western firm to retreat from China.”
A few companies make their announcements, and then journalists project a trend. The aim of the story seems always to identify the trend and skip the more interesting details about each business decision. Perhaps writers reason, Why dwell on the pain and embarrassment?
Fault
McKinsey’s divestiture of its market research services is required by Red China’s new security restrictions. That’s a no-fault loss, if you consider it was ever a reasonable business model to poke around in dirty communist business laundry. IBM executives, on the other hand, are totally at fault for having opened an R&D center, no less, in the country of a totalitarian adversary. Having to close it was just bowing to the inevitable.
Reporting on the particulars of a retreat rarely gets down to brass tacks. One Forbes story refers to “everything from supply chain concerns to concentration risks.” Here’s another rubric: “The business decision was made due to the ‘increasing cost’ of operating in the region.” Or how about this gem, on how “politics played a role in this decision. In their view, China has become too politicized.”
The communists are becoming too politicized. Quiet, please; genius at work.
The headlines portray companies leaving China. In some cases, they do: Gap, Hershey’s, and a few others. More common, though, are reductions in operations, not complete shutdowns.
Nick Marro, from the Economist Intelligence Unit, explains that “We aren’t seeing many companies pulling out of China. Many of the big multinational firms have been in the market for decades, and they’re not willing to give up market share that they’ve spent 20, 30 or 40 years cultivating. But in terms of new investment, in particular, we are seeing a reassessment.”
Those firms have to answer for too much if they pull out: sunk costs, potential damage to the brand, lost income, and the humiliation of having spent 20, 30, or 40 years cultivating an expensive mistake.
Whither goest China?
“Maybe they’re not leaving,” U.S. Ambassador to China Nicholas Burns tells “60 Minutes.” “But they’re not investing. They’re not making major investments until they can see exactly where the government is headed.”
You don’t need to be a weatherman, ladies and gentlemen.
Ambassador Burns says that the communists have “raided six or seven American businesses since last March. They’ve gone into American companies and shut them down and made accusations we believe are very much unwarranted.”
The result, says Burns, is that more money “is leaving China for the first time in 40 years than is coming in from American, Japanese, European, Korean investors….
“They’ve passed an amendment to their counter-espionage law and it’s written in such a general way that it could be that American business people could be accused of espionage for engaging in practices that are perfectly legal and acceptable everywhere else in the world—collecting data to do due diligence so that you can decide whether you want to invest in a company or form a joint venture, right?”
Right. This helps explain the fact that global law firm Dentons “is splitting from its Chinese operations to comply with impending data regulations, one of the more significant withdrawals by a Western company as Beijing intensifies a campaign to curb leakages of valuable information. Partner Beijing Dacheng Law Offices will gain full independence to serve domestic clients.”
It shows remarkable stubbornness, this determination to continue doing business in an environment of police raids and jailing. An environment in which collecting information about competitors is illegal.
Headlines be damned
Two years ago, Lisa Anderson, CEO of supply-chain firm LMA Consulting Group, said that there’s “no doubt that tech manufacturing wants to move out of China. They cannot afford the risk of continued disruption to supply, and they want to gain better control over their ability to serve customers.”
Two years later, the headlines keep coming. But so many foreign firms keep staying, headlines be damned.
In February 2024, Reuters reported that “German direct investment in China rose by 4.3% to a record high of 11.9 billion euros ($12.7 billion) last year and also increased as a share of the country’s overall investment abroad, official Bundesbank data analysed by the IW institute [German Economic Institute] showed…. Investment in China as a share of Germany’s overall investments abroad rose last year to 10.3%, the highest level since 2014, while German direct investments elsewhere in Asia were stagnant at around 8%.”
There’s more. According to a business confidence survey published in January 2024 by the German Chamber of Commerce in China, “Although 83% of companies surveyed think that China’s economy is facing a downward trajectory, 91% plan to continue doing business in the country. 78% are expecting consistent growth in their industry in the coming five years. 54% plan to increase investment….”
The rest of the world does not seem to be as enthusiastic as the Germans here. As the bad-news headlines continue to roll out, let’s see if German commitment continues to match German sentiment. □
James Roth works for a major defense contractor in Virginia.
