An unprecedented array of risks is being navigated by American companies that are doing business in China, from the trade war to slowing growth and pro-democracy protests ongoing in Hong Kong. Despite the risks, the companies are continuing to push deeper into the huge Chinese market. In recent weeks, a handful of US businesses have received some positive signals from China, which have paved the way for some very lucrative deals in the second biggest economy in the world. For instance, PayPal just clinched a license for providing digital payments in the country last month. Last week, it was reported by the Wall Street Journal that BlackRock is in talks with Chinese tech company Tencent regarding a possible tie-up.
In August, JP Morgan also won an auction that would enable the bank to take control of its asset management business in the country. Final approval has yet to be made. Nonetheless, there are plenty of other American companies that are expanding in China and becoming entrenched. In order to take advantage of the biggest market in the world for electric cars, last year Tesla built a huge factory in Shanghai. According to reports, the factory mat begin production as early as this month. But, Tesla didn’t respond when asked about this report.
Such relationships between China and US companies are not that unusual. After all, the country comprises of more than a billion people, which is undoubtedly a massive customer base for businesses and is ripe for the taking. The President of the American Chamber of Commerce in Shanghai, Ker Gibbs stated that Corporate America is still interested in the country. He said that American business executives are not thinking about disassociating at this point. For one thing, it is undoubtedly profitable for them to be on the ground. Almost 77% of the companies that participated in AmCham’s annual survey this summer stated that they earned money in 2018 in China. Nearly half of the respondents also added that they were expecting to invest more in China this year, as compared to a quarter of them who said they would be scaling back.
Jamie Dimon, the CEO of JP Morgan, said in March that in 30 years, China would become a fully developed nation and its economy would be just as big as the United States. While he mentioned that there were a litany of challenges to be dealt with, such as lack of transparency and corporate corruption, he asserted that his bank was committed to doing business in the country. As per experts, the sheer size of the market makes it very difficult for businesses to ignore China. It is not possible for a global or multinational company to not have a presence in a country with 1.2 billion people and this is partly why businesses are continuing to push into China. For the businesses and companies that are successful in breaking into the Chinese market, even a small presence can pay off. PayPal is an excellent example.
The company may not be able to catch more than a sliver of the digital payments market as there are already other giants, such as Tencent and Alibaba’s Alipay. However, the fact is that even a sliver of the huge Chinese market is substantial. Beijing is working on relaxing restriction on some kinds of foreign investments, but it can still be tough for businesses to overcome the regulatory barriers. American behemoths, such as Visa (V) and MasterCard (MA) are still unable to enter the market. The acceptance of PayPal could be an indication that the country is confident its homegrown companies will continue to dominate the market.
Nevertheless, there are other problems to contend with. China’s ongoing trade war with the US and its economic slowdown has created huge uncertainty for businesses and that’s not going to go away anytime soon. The top concern that was cited in the AmCham survey was slowing growth. Furthermore, more than 53% of the respondents said that they would either reduce or delay investment due to the increasing US-China trade tensions. Market experts are of the opinion that US companies are keeping their heads down in China for now and are working on contingency plans.
The recent onslaught of tariffs on the country is a good enough reason for American manufacturers to move out of China. Many of these companies were already looking at other places, such as Vietnam, as China has become a more expensive place than it used to be due to increasing labor costs. While some companies, such as Tesla and Walmart are continuing to expand in China, others have postponed their decisions until both countries are able to reach a new understanding on how they will operate in each other’s markets. This would certainly be bad for business, particularly for foreign direct investment.
In the first half of the year, foreign direct investment reached $6.8 billion by US companies in China. This is slightly more than the average that has been recorded in the first half in the last two years. The automotive sector, in particular, recorded a surge which was driven by Tesla’s project. Tariffs are not that big of a problem for companies that don’t have their manufacturing base in China. The problem is that trade war has turned out to be a bigger fight over national security and the future of technology, which has created other headaches.
For instance, the US government’s decision to ban doing business with some Chinese companies, such as Huawei, has created problems for US suppliers like Micron and Intel. While the former has been able to sell some products to Huawei as they are not subjected to restrictions, the company said that its revenue has been affected and so have the sales. The protests in Hong Kong are also worrisome because tensions are high. Last weekend, an NBA team executive Tweeted in support of the protestors, prompting all official Chinese partners of the NBA to suspend their ties with the league. This indicates how China is attempting to use its economic power for achieving its political goals, which would certainly be a problem for businesses.
You must be logged in to post a comment.