Microsoft Corp. (MSFT:US) joins a growing list of companies relying on growth in China yet crashing against the reality of a market still prone to protectionism, unpredictable laws and unreliable suppliers.
Just this month, Chinese regulators opened an anti-monopoly investigation into Microsoft and state media accused Apple Inc. (AAPL:US) of using its iPhone to steal state secrets. In May, Chinese authorities alleged GlaxoSmithKline Plc sales people bribed doctors and hospitals to boost sales.
Foreign companies across multiple industries are increasingly encountering the challenges of doing business in China -- be it a function of efforts by Chinese officials to give homegrown businesses a leg up or in response to a U.S. crackdown on the country’s alleged theft of corporate secrets.
“People have been blunting their swords on growth in China for quite some time,” said Foster Finley, head of the supply chain practice at global consultancy AlixPartners LLP. “It’s getting harder, no question about it. China is a proud country with capabilities and would much rather produce products their citizens enjoy than make it easier for foreigners.”
China stepped up pressure on U.S. companies after American prosecutors indicted five Chinese military officers in May for allegedly stealing corporate secrets. State media have since criticized Microsoft, Google Inc. and Apple for allegedly cooperating with a U.S. spying program; Qualcomm Inc. in November disclosed an anti-monopoly investigation.
Official Corruption
The arduous business environment coincides with efforts by President Xi Jinping to tighten his grip on power and show ordinary Chinese that he’s serious about battling official corruption. Today, Beijing announced an official investigation into the nation’s former security czar, Zhou Yongkang, who is the loftiest official to be probed for graft since the Communist Party took power 65 years ago.
The challenges for Western firms in China extend beyond the government crackdown. In some cases their own stumbles -- or those of local suppliers -- have given Chinese media reason to pounce. Wal-Mart Stores Inc. came under scrutiny earlier this year after fox DNA was found in donkey meat. The company said it would invest 100 million yuan ($16.5 million) over three years to upgrade food safety in China by adding a mobile food-inspection program and ramping up supplier training.
McDonald’s Corp. pulled beef, pork and chicken items from its restaurants in China this week after it emerged that a local supplier owned by OSI Group had repackaged and sold expired meat. Yum! Brands Inc.’s China division, Starbucks Corp. and Burger King Worldwide Inc. all cut ties with OSI, which is based in Aurora, Illinois.
Appetite Remains
U.S. companies haven’t lost their appetite for the world’s second-largest economy. China is a $300 billion market for U.S. firms that will get even larger as the middle class doubles to 600 million in the next decade, according to the U.S.-China Business Council, which counts Wal-Mart and Apple among its more than 200 members.
Still, 35 years after China opened to foreign investment, patience by companies is in increasingly short supply. When the U.S.-China Business Council, a Washington-based trade group, surveyed U.S. executives last year, the chief complaints included rising costs and bureaucratic red tape. Just over half the companies planned to commit more resources to China this year, down from 67 percent in a 2012 survey. Only 39 percent are optimistic about the next five years in China; 58 percent felt that way in 2011.
Vietnam Exodus
Amid rising wages and growing barriers to doing business, the beneficiaries will be countries like Vietnam for footware, India for soft goods and Mexico for manufactured hard goods such as metal assembly, AlixPartners’ Finley said. By next year, the consultancy estimates it will cost about the same for a U.S. firm to manufacture in America as in China.
“China has long since fallen from the number-one place that everyone had to be,” he said.
Even as costs rise, Western companies are facing an increasing barrage of criticism. In October, China’s state-controlled media accused Starbucks of charging too much for coffee and said Samsung Electronics Co.’s smartphones don’t work properly. Samsung later apologized to Chinese customers and offered free maintenance. Starbucks received an outpouring of consumer support after the reports.
In the case of Glaxo, the Brentford, U.K. company has said employees in China evaded the company’s processes and controls to defraud it and the Chinese health-care system. Glaxo is cooperating with the investigation. Other drugmakers have been probed, though no further charges have been brought.
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