Sound the retreat

When it comes to divesting assets in China, few investors have grabbed more attention than Li Ka-shing. As we have pointed out before (see WiC297), the Hong Kong tycoon has come in for criticism from China’s official media for selling down some of his Chinese business interests and switching his focus to the UK and Europe. Last month Li found himself in the cross hairs again, this time as the focal point of feature articles in CBN, a state-controlled newspaper.

Much of this is about the symbolism. According to CBN, Li’s Rmb6 billion investment in Shenzhen’s Yantian port in 1993 was the biggest foreign investment in China at the time. “Back then mainland projects accounted for one fourth of Li’s assets,” it reported. Today, Li is disposing of many of his mainland assets (“Now Li’s commercial property portfolio has dwindled to the size of 21 football pitches,” calculates CBN) and in October there was another deal: the sale of a huge commercial complex in Shanghai, which has fetched Rmb20 billion ($2.95 billion) for Li’s listed flagship CK Hutchison.

The portfolio could shrink further, with rumours that Li is looking to sell another retail-and-office development in Shenzhen. Dismal footfall at the site led dozens of angry shopkeepers to travel from Shenzhen to protest outside Li’s Hong Kong headquarters this month, accusing his firm of not doing enough to promote the venue.

But for policymakers, the bigger worry is that a company like CK Hutchison isn’t alone in losing its enthusiasm for the China story. Other multinational giants have also cut back on their investments lately, leading some analysts to ask whether the Chinese market has lost some of its appeal for foreign investors.

Which multinationals have been divesting?

One of the world’s leading consumer brands – Coca-Cola – is the latest to have scaled back. The American soft drink giant said last week that it will sell part of its Chinese bottling business for about $1 billion to Swire Pacific. One response is that this is a case of a foreign firm selling to another. But Swire – a British-run conglomerate listed in Hong Kong – has a long history of operating in China. In fact, the bottling deal coincides with Swire celebrating the 150th anniversary of opening its first office there.

While international firms may want to scale down their presence, their Chinese employees are often reluctant to see them depart. After the sale of the Coke bottling business was announced, more than 600 workers at three plants staged strikes. According to Caixin Weekly, the protesters are concerned they could lose their jobs or have their employment terms changed under the new owner. “We worked hard for over a decade but were sold in less than a second. Compensate!” read one of the striker’s banners in Chongqing, according to a picture posted on WeChat.

Similar fears were on show among workers at Coca-Cola’s French rival Danone. Employees at its Guangzhou factory have only just returned to work after a two-week protest at Danone’s decision to sell its purified bottled water business to a local firm. Production at Sony’s smartphone camera factory in the same city also halted for two weeks last month after the Japanese electronics maker said the plant would be sold to a Shenzhen tech firm.

Retreating or restructuring?

By rethinking how they operate in China, multinational firms are responding to changes in trading conditions, not just a slowing in China’s growth rate, but also the burgeoning capabilities of many of its domestic firms. That’s apparent in the global investment data as well. For the first time, Chinese companies invested more in the US last year than American companies in China. Chinese overseas investment has also surged 53% in the first 10 months of this year to Rmb962 billion, says the Ministry of Commerce. Foreign direct investment into China increased just 4.2% to Rmb666 billion.

Nonetheless, American companies are still much more heavily invested in China than vice versa. More than 1,300 American firms have major operations in China, with 430 having invested over $50 million and 56 having pumped in more than $1 billion, according to the Rhodium Group, which specialises in analysing cross-border investment.

Talk of foreign investors fleeing China is also overblown. “We have seen some big-name foreign companies scaling down their China operations recently. But in many cases that is a result of the restructuring in the Chinese economy,” Tencent Finance noted. “For example, many multinationals are just retreating from their factories in China but they have not given up on the Chinese market.”

It added: “More high tech manufacturers such as Siemens have actually upped their investment in China this year. Some have even located their R&D centres here.”

Danone has been offloading some of its poorer-performing Chinese businesses since late last year, trying to focus on marketing its stronger imported brands. Likewise, Coca-Cola says the sale of its bottling business will allow its franchising partners to handle more of the day-to-day operations while it concentrates on managing its brand in a country which now counts as its third biggest market.

McDonald’s is another global giant that seems to have reached a similar conclusion on reshaping its China operations. The American firm is looking for a buyer to be the controlling franchisee of its 2,000 outlets in mainland China and Hong Kong. (Likewise Yum Brands has scaled down its exposure, having sold a stake in its China operation to a local consortium including Alibaba’s founder Jack Ma, prior to spinning off the unit on the New York Stock Exchange last month.)

Other major brands from the US gave up running their China factories a long time ago, choosing reliable local partners to manage lower-end production for them. Taiwan’s Foxconn, for one, is a key parts supplier for Apple’s iPhones. It employs nearly 700,000 Chinese workers and remains one of the largest employers in the country, although its staff numbers are down from a peak of 1.3 million in 2012.

Of course, businesses like Foxconn will be wondering whether such longstanding relationships could be undermined by the policies of Donald Trump. The President-elect has pledged to push American companies to make more of their products at home. And according to Nikkei Asian Review, Foxconn has been studying the possibility of moving more of its iPhone production onto American soil, even though its chairman Terry Gou isn’t enthusiastic because of the higher costs. The Japanese news outlet agrees that it wouldn’t be easy for an American supply chain to compete on costs and says that Washington would need to subsidise local companies to spur domestic production of key components.

How about Japanese companies?

While investors are monitoring how Trump’s trade policies might reshape the China-US relationship, Japanese firms have a longer history of political blowback, because of ongoing tensions over rival maritime claims between Beijing and Tokyo in recent years.

In order to improve ties with the Chinese government a delegation of more than 200 Japanese businessmen visited China in September this year. But rather disappointingly the tour turned out to be counterproductive. According to the Economic Observer, the visiting contingent expressed hopes that the authorities would improve the investment environment. But another request of the visitors – that their hosts simplify procedures for withdrawal from the Chinese market – seemed revealing.

The implication is that Japanese firms are a lot less bullish on their China investments than in the past. Some will also have been influenced by news in the Japanese press of unfair treatment – epitomised by Sony’s predicament at its Guangzhou plant. Because a local firm is taking over its business, Sony wasn’t required under Chinese law to pay compensation to workers. But as the employee strike wore on, Sony paid protesters in full for the two weeks of work they had missed, plus further payments for returning to work. Nikkei Asian Review comments that a string of Japanese firms including Honda, Sanyo and Panasonic have faced similar industrial disputes in China and many of them have ended up paying workers large amounts in compensation.

Is business confidence waning?

Direct investment from Japan in China totalled $2.1 billion in the first eight months of 2016, down 8.4% from the year-earlier figure, according to the Ministry of Commerce. (China attracted about $104 billion of foreign investment in the first 10 months of this year, an increase of only 0.2% year-on-year.)

The German business community seems gloomier as well. In the past, companies from Germany have been some of the most successful foreign firms in China. But that feel-good factor has faded somewhat in the last couple of months (see WiC345). According to the German Chamber of Commerce’s annual business confidence survey in China – which was published this week – 2016 has been one of the most difficult years in recent memory. Phoenix News reported that only 35% of the surveyed companies plans to increase investment in China next year. That figure compares with 45% in the same survey last year and 50% in 2014, demonstrating dwindling enthusiasm.

The uncertain mood for many of the multinationals is partly a matter of timing, says Michael Enright, a professor at the University of Hong Kong and the author of Developing China: The Remarkable Impact of Foreign Direct Investment. He says the upcoming reshuffle at the top of the Chinese government is persuading foreign investors to “temporarily” slow their FDI. “What we are seeing at the central level is there are a lot of uncertainties about personnel change in 2017 and 2018,” he told the South China Morning Post in an interview this week. “That would appear to lead to a huge amount of caution in the decisionmaking, because we have upcoming changes in the Party and governments, whether it’s a bureaucrat at the provincial level or a senior decisionmaker in a state-owned enterprise.”

The Chinese newspapers have also picked up on the stories about diminishing enthusiasm from overseas. “Recently a number of foreign firms have withdrawn from China, our foreign exchange reserves are under downward pressure and our economic growth has slowed. Some critics have drummed up overly pessimistic predictions on foreign capital fleeing China. Is that true?” the People’s Daily has asked.

But it answered its own question by concluding that China is still a hugely attractive investment destination. Citing Gao Hucheng, the minister of commerce, it said China’s FDI had still managed to grow 30% over the current 12th Five-Year Plan (2012 to 2016).

Nor did it sound too bothered that foreign firms are feeling a bit unloved. Indeed, the message was the opposite – that the multinationals need to toughen up. As China’s economy changes, the country could no longer afford to offer foreign firms “treatment superior to that offered to domestic businesses,” it sniffed.

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