While businesses across the globe scramble to exploit the potential opportunities to be found in a country with 1.3 billion consumers, operating in China comes with profound business risks as well.
The country’s regulatory practices -- especially as they are applied to foreign businesses -- leave much to be desired, as most companies that do business in China eventually come to realize. The latest casualties of aggressive Chinese trade policies are foreign technology firms, most notably Cisco and Apple, which were dropped from approved state purchase lists for dubious sins.
The systematic targeting of U.S. companies by China’s various regulatory authorities is straining U.S.-Sino relations and chilling foreign investment into the country. While China may meet the letter of the law when it comes to myriad WTO rules, Chinese officials use the arbitrary and capricious enforcement of byzantine regulations as a cudgel to punish foreign firms that encroach on the turf of politically connected domestic businesses.
The most egregious example occurred last July, when enforcers with the Shanghai Food and Drug Administration (SFDA) raided a processing plant of Husi Food, a subsidiary of U.S.-based OSI Group. Under the accusation that Husi was selling expired meat to American restaurants operating in China, the SFDA arrested six employees and shut down the plant. They remain incarcerated in a Chinese prison to this day.
The supposedly incriminating evidence was a video of an employee dropping meat on the floor and throwing it back into the mix, which turned out to be the work of two reporters from the state-controlled Dragon TV, working undercover at Husi to film the plant’s operations. It turns out that one reporter purposefully dropped the meat and the other filmed it.
While the Chinese government recently cracked down on investigative journalists who were selling their choice of subject to the highest bidder, the benefits of taking down a rival business this way is too lucrative to expect the practice to simply cease. Last week, CCTV, Chinese state television, took aim at foreign car companies selling in China, with the regulatory authorities quickly following up.
While U.S. businesses may kvetch about regulatory authorities, at home, they largely deal with a single agency and have recourse via the courts to fight irrational rules or dubious enforcement. Not so in China, where each city and province has its own regulatory authority, every one of which operates under a dual mandate: to protect both consumers as well as domestic companies. It's a noxious mix.
Under President Xi Jinping’s virulent anti-corruption campaign, the need for high-profile action items by provincial and local-level government entities has risen. While the SFDA targeted the Husi plant under the guise of” food safety,” trumpeting their actions in the Chinese press was more than just an ancillary outcome. For the government, the arrest was a triple-win outcome: By targeting a U.S. subsidiary, local officials deflected attention from their own rampant political corruption, shamed a foreign-owned company to the benefit of Chinese-owned competitors, and claimed credit--albeit falsely--for improving food safety.
The severity of the SFDA’s attack on the OSI group is merely one example of the broader problem of a worsening foreign investment climate in China. A regime that unfairly targets foreign business interests harms the Chinese economy as well as the companies that operate in the Chinese market, which at this point in our intertwined global economy includes nearly every multinational corporation on the globe and tens of thousands of smaller businesses in the U.S. and elsewhere.