Foreign businesses in China need to heed the lessons of Russian exodus

US President Joe Biden’s attempt last week to wring a promise from China’s leader Xi Jinping not to provide material support to Russia’s invasion of Ukraine always went a long way. The fact that it ended after two hours with little more than mutual threats of sanctions should be a wake-up call for foreign companies operating in China.

The risks of doing business in China have been escalating for some time. Tensions between Washington and Beijing over technology exports, the mass incarceration of 1 million Uyghurs and other Muslim groups in Xinjiang, and crackdowns in Hong Kong have forced many companies to consider contingency plans. Supply chain disruptions caused by the Covid pandemic then led to the dangers of relying on China for key components or products.

But the underlying assumption of many companies was that China’s interest in economic and political stability would ultimately thwart any rash action, such as a military strike against Taiwan.

Few companies are still willing to question whether the risks of dealing with Xi’s increasingly authoritarian regime are beginning to outweigh the benefits of a market of 1.4 billion people. Volkswagen, which relies on China for at least half of its net income, is even willing to take the reputational risk of having a factory in Xinjiang.

“In the past year . . . Companies have struggled to find a solution to maintain their economic interests in China while realizing they are exposing themselves to political risks,” said Max Zenglein, chief economist at the Mercator Institute for China Studies. “They didn’t have a concrete example of what that meant and they didn’t anticipate how quickly this could escalate.”

However, Russia’s aggression may have changed that calculus. In less than four weeks, more than 400 companies have withdrawn from Russia or ceased operations. according to at the Yale School of Management. Some have left for fear of sanctions, but others — like McDonald’s, Starbucks, TJ Maxx or Uniqlo — have recognized the risk of customer backlash if they remain open.

The Russian crisis “makes it clear to them that they may have to include these risks more in their calculations,” says Zenglein. “It’s a case study of how the global system can unravel.”

Leaving China, which is the largest in the world, would not be so easy importer and exporter of intermediates used to manufacture an end product. In 2020, China’s share of foreign direct investment climbed to an all-time high 25 percent, according to the Peterson Institute for International Economics.

But one report von Merics’ Zenglein points out that while certain industries (the auto sector) and countries (Germany) are heavily dependent on China, the dependence of European companies can be overstated. A survey of 25 listed EU companies from different countries found that in 2019 they generated an average of 11 percent of their sales in China.

A select few – notably the Republican right in the US – are proposing that corporations decouple from the country entirely. That would be catastrophic for the global economy. However, some leaders are rethinking the principles that previously guided their China plans.

“Things that you would normally do because it would make commercial sense to do them, you have to ask if it still makes sense,” said an executive at a European multinational, who asked to remain anonymous to protect the interests of the company to protect. “Is this supplier relationship viable in an environment where sanctions are imminent?”

Corporate lawyers like Dan Harris of Harris Bricken, based in the US, advise clients to think about “asset light” strategies such as B. Licensing or franchising where appropriate. At the very least, manufacturing diversification elsewhere in Asia, or even beyond, should be a priority.

It may also be wise to ensure that future Chinese activities are focused on the local market, separate from the rest of the world. “In the past, people may have chosen to build global export capabilities around a core in China. But they won’t do that anymore,” the executive said.

Most China experts believe Beijing has no immediate plans to follow Russia’s lead by invading Taiwan. However, many Russian experts also thought that Moscow would not send tanks across the Ukrainian border. The lesson of Russia’s invasion is not only that the unthinkable can happen, but that the consequences can unfold at a rate and on a scale few would have believed possible.

peggy.hollinger@ft.com

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