Business between two worlds

Kenneth Jarrett, President of the American Chamber of Commerce in Shanghai, tells Brunswick’s Anne Bark about the promising outlook for US enterprise

Businesses have long been sensitive to the cultural differences between the US and China – differences that shifting political pressures on both sides are currently making even more complicated. The group’s 2017 China Business Survey, published in July, showed that while optimism for the next five years remains high, it is still down 10 percent from several years ago – a recognition of pressures from a slowing Chinese economy, growing domestic competition and a perceived increase in favoritism by the government toward domestic companies.

Kenneth Jarrett, President of the American Chamber of Commerce in Shanghai, spoke with Brunswick’s Anne Bark about the current political and economic climate, and the short-term and long-term outlook for business in the region. AmCham has served as the “voice of American business” in China for over a hundred years. Founded in 1915 by 45 US business leaders, the group even then was part of an exploding American presence in the city. A century later, some 23,000 US expatriates live in Shanghai. The Chamber’s membership today stands at 1,500 companies.

Jarrett’s position gives him a distinct view on the challenges and rewards of business conducted between the two countries. In particular, he sees the employment policies that US companies bring with them from their home country as a valuable commodity in the Chinese labor market, giving them an edge when it comes to attracting and keeping talent and skills.

American businesses are growing steadily in both influence and market share, Jarrett says, even as they fight headwinds from China’s regulators and policy makers and a slowing Chinese economy. He backs up his observations with results from the 2017 survey and makes the case for optimism.

 

How are American businesses in China reacting to the political uncertainty right now between the US and China over trade relations?

Apart from a few rare instances, it’s business as usual. This uncertainty will be with us for some time, or at least until the Trump administration articulates a China strategy with a clear explanation of its long-term vision and objectives. But most large companies have long time horizons for capital investments, often up to three to four years, and they make investments on a commercial basis rather than around any reading of the political runes.

Our recent China Business Survey, published in July 2017, supports that observation. Sixty-five percent said the new administration would have no impact on their plans, about 18 percent were unsure how it would impact their plans, and 12 percent said they were reviewing their plans. Interestingly, three percent said they would increase investment, and only a miniscule one percent said they would decrease investment.

 

Are Chinese businesses more reluctant to engage with US partners in this climate?

I don’t believe so. Many Chinese see [US President Donald] Trump as sympathetic to investment, given his focus on job creation, and there are plenty of US states that eagerly welcome Chinese investors. Yes, there is some anxiety growing among Chinese investors looking to make technology acquisitions, but that is specific to that industry. For many Chinese investors the biggest anxiety is domestic – will they be able to move capital offshore to make investments, particularly given the recent tightening on offshore investment flows.

 

How do you think M&A activity has responded, globally?

If you look at the US, the number of private or public company mergers is on course to be greater than in 2016. So despite the Trump administration’s unsteady start, corporations seem unfazed. Asset prices may be high, but corporate borrowing costs are very low and companies are taking advantage of this cheap financing. 

In Europe, the tumble in the pound following Brexit led to some acquisitions of UK companies at what must have seemed bargain prices for American or foreign companies. One example was the Softbank acquisition of ARM Holdings. So depending on where you sit, Brexit has arguably created either hazard or opportunity. 

 

Is the Chinese government’s regulatory scrutiny on capital outflows adding to the slowdown to cross-border M&A activity? How significant is that?

This has been very significant indeed. The number of deals has dropped, the size of deals is much smaller, and deals are taking longer to close. We have seen several well-known Chinese household names abandon acquisitions in the US and elsewhere, in many cases because of the new capital controls but also because the Chinese government is exercising greater oversight regarding certain types of investment – such as into entertainment, media and property. Some of these companies, such as Wanda, the country’s largest commercial property owner and theatre operator, have been placed under growing scrutiny as a result of China’s efforts to rein in corporate debt levels at home. As a result, their offshore activities have been curtailed.

There is undoubtedly a political element here, as the Party wanted economic stability before the 19th Party Congress in mid-October. I suspect the government tightened capital controls and increased its scrutiny of some senior business figures to ensure they were solidly lined up behind Xi in advance of the Congress. Those restrictions may now loosen somewhat, but a few months may pass before we can gauge this properly. 

In the meantime, I would expect Chinese M&A to remain muted, except in the rare circumstance where a high-quality foreign firm comes up for sale or looks like a once-in-a-decade fit for a major state-owned enterprise. Interestingly, state-related companies now account for most of the outbound activity, suggesting that they are better navigators of the recent controls than private companies.

 

More broadly, what do you think the biggest issues are for American businesses in China?

There are plenty, but let me give you four. First, Chinese government policies and regulations still firmly favor local firms over American enterprises, so a level playing field for foreign and domestic firms remains elusive. China’s use of industrial policies to develop what they call “national champions” is one example. Local companies in certain emerging technologies with long-term strategic importance – like AI, Internet of Things, new energy vehicles, robotics, new materials – receive the full resources of the state. That makes it hard for American companies to compete.

Second, intellectual property is insufficiently protected in China, is frequently stolen, and is often demanded in exchange for companies participating in the economy. Half of our members say that inadequate protection of IPR in China prevents them from bringing their best IP to the country. Ultimately, this hurts Chinese consumers and will delay China’s ambitions of becoming an innovation giant.

Third, recent Chinese laws around data security are confusing, unnecessarily onerous, and add to the cost of doing business. They are and will continue to be a headache for many companies. This is an example of the need for greater transparency and predictability in China’s regulatory regime, something we as a business chamber constantly underscore.

Fourth, competition from local companies is only getting more intense – this is completely natural and something American companies must learn to live with. Local firms are increasingly nimble, getting better at branding as well as understanding consumer behavior, and adept at using new media channels and adapting to e-commerce. American companies will have to sharpen their game. We don’t mind the competition, as long as it’s fair.

 

For US businesses operating in China, do you feel their employee engagement policies are consistent with what they do at home?

Absolutely. Many American companies that come to China bring the entirety of their human resources approach with them. This is something that has historically made American companies popular with Chinese employees.

When Chinese employees at American firms talk about why they like their work they often highlight early responsibility and autonomy, training and education subsidies or support, flexible working hours, corporate responsibility programs, ethical business practices and healthcare support programs, to name a few. A lot of these systems and ideas are now being adopted by Chinese companies, sometimes as a competitive response and sometimes because they have an enlightened leadership that has travelled and seen how companies in the US and Europe engage their employees.  

 

Do you believe there are big differences in the approach to employee engagement between the US and China?

One big difference – one of the major cultural differences between China and the West: many Chinese companies still have most decision-making authority vested in the leader, and this concentration of power can mean that people lower down have little empowerment. There is also a stronger tendency to defer to the leader, or to one’s immediate supervisor, for most key decision making. That works for some people but not for all.

 

Corporate governance in China has become more important in recent years. Are you seeing improvements and is that trend having a positive effect?

Yes, but there has been some recent backsliding. On the positive side, many large Chinese companies have listed their shares in Hong Kong or on overseas stock exchanges, and the regulatory and compliance demands placed on these companies have forced them to adopt some board practices common to the West. 

However, some board appointees, particularly outside directors, are there for window-dressing purposes. Within state-owned companies, Party appointees will do what’s best for the Party, not the company. There have been recent reports of Party committees within companies assuming a more formal role, including in foreign joint ventures. That’s what happens in a political economy where social stability is placed before profit or even solvency.

 

Do you see a level playing field between Chinese businesses, state-owned enterprises and foreign companies doing business in China?

Not yet, and nor do most AmCham members, 56 percent of whom believe that Chinese government policy still favors local companies, according to our July survey results.

The list of examples is considerably long: state-owned enterprises continue to receive cheap funding that is funnelled to them through the four largest state-owned banks; Chinese state and private companies are privy to regulatory shifts ahead of private companies; American companies in many industries are forced into joint ventures; and so on.

In certain industries, such as finance and technology, the Chinese government has also shielded local companies from foreign companies until those local companies have built up an unassailable industry lead. This foot-dragging, sometimes in contravention of WTO rulings, contributes to the unevenness of the playing field. Electronic payment systems is perhaps the best example, as this market was only recently fully opened to wholly owned foreign players, even though China lost a WTO case in 2012 on non-compliance with its 2001 WTO commitments. Yes, the market has now been opened, but local players completely dominate and it will be hard for American companies to get even a toehold. If the market had been opened much earlier, as promised, US companies would have faced a completely different competitive landscape.

 

What can foreign businesses operating in China do to be more successful or endure in China?

On the operational side, they need to keep innovating. Fleet-footed Chinese competitors are producing better and better goods across a variety of sectors, and innovation will help foreign businesses compete in return. Corporate headquarters also need to give their local teams more authority. China’s business tempo is fast and foreign companies will lose precious time if too much decision-making occurs back at the home office.

On the human side, foreign businesses need to keep attracting the best Chinese talent, whether through good pay, progress up the management hierarchy, gaining international experience through overseas postings, or offering the kind of family-oriented working hours that are becoming more common in the West.

There’s a regulatory element too, and that’s foreign companies working with their own governments or China-based chambers of commerce to convince the Chinese government that a level playing field is in everyone’s interests.

In the absence of a level playing field here in China, I can see European governments and the US government becoming less tolerant of Chinese companies enjoying a level playing field overseas. We are already hearing voices calling for reciprocity, and they will assuredly get louder unless China improves market access. That is something worth watching.

 

Formerly the Greater China Chairman for Washington-based public affairs consultancy APCO Worldwide, Kenneth Jarrett was named President of the American Chamber of Commerce in Shanghai in September 2013. From 1982 to 2008 he served as a US diplomat. Among his postings were Consul General in Shanghai, Deputy Consul General in Hong Kong and Director of Asian Affairs at the White House National Security Council. He is the recipient of the Magnolia Award (Silver) from the Shanghai government and is a member of the National Committee for US-China Relations.