U.S. Firms Feel Shut Out in China


Wall Street Journal

By ANDREW BROWNE And LORETTA CHAO

BEIJING—A growing number of U.S. companies feel unwelcome in China, according to a new survey by the American Chamber of Commerce in China, as measures aimed at squeezing foreign technology companies out of the vast government-procurement market start to bite.

The survey of Amcham’s members adds to evidence of a darkening mood among multinational companies in one of their most important global markets.

Negative sentiment among Amcham’s members, which traditionally have been a strong lobby in Washington arguing for more engagement with China, adds to wider risks in U.S.-China relations. On Sunday, China’s commerce minister, Chen Deming, warned that China “will not sit back” if the U.S. Treasury Department labels China a currency manipulator and trade sanctions follow.

Washington has been piling pressure on China to let its currency rise against the dollar in order to make its exports more expensive and narrow its trade surplus with the U.S. Other contentious issues include the U.S.’s arms sales to Taiwan and a recent meeting between President Barack Obama and the Dalai Lama, the Tibetan spiritual leader whom Beijing accuses of “splittism.”

So far, there is little evidence that American companies are alarmed enough to pull out of China, although Google Inc. is threatening to exit after a hack attack on its systems—which it blames on China—and because of growing limits on free expression in China. But people with close links to the U.S. business community in China say a number of multinationals are starting to rethink their China strategy, and may consider diversifying future investments to other parts of the world.

Amcham’s survey polled 203 members about planned government-procurement regulations, and also repeated a question asked in annual surveys about the general business climate.

The percentage of companies that feel they are unwelcome to participate and compete in the Chinese market jumped to 38%, up from 26% in the 2009 annual survey released just a few months ago in December, and 23% in 2008. It was the highest level of dissatisfaction recorded in the four years since Amcham, which lobbies for U.S. businesses in China, began polling its members on this question, and indicated that sentiment is rapidly deteriorating. Amcham conducted the latest survey because it was concerned about the deteriorating investment environment and the impact of the rules on indigenous innovation.

In late October, three Chinese ministries posted a joint notice requiring technology vendors to gain accreditation for their products before they could be included in a government-procurement catalog of products containing “indigenous innovation.” The catalog will cover dozens of products sold by foreign companies, including servers, mobile base stations, security and finance software, and wind-power generators.

Among technology companies questioned about the new policy, 57% said they believed it would negatively affect their China operations in the future, while 37% said it was already having an impact—even though the regulations haven’t officially taken effect.

“In just the last few months we’ve witnessed a growing level of concern from American tech companies as a result of the new rules and product catalogs,” Amcham-China President Michael Barbalas said in written comments. Such policies “discriminate against foreign companies and narrow market opportunities.”

The notice gave companies only weeks to apply, but many foreign companies balked because the application required all products to “have Chinese intellectual property and proprietary brands,” and be “totally independent of overseas organization or individuals.”

More than 30 industry groups representing technology concerns such as Microsoft Corp., Adobe Systems Inc. and Cisco Systems Inc. have complained to the government that the rules make it virtually impossible for any products copyrighted by foreign companies to qualify, and if implemented would shut the companies out of a rapidly growing market valued at billions of dollars.

It’s unclear whether the rules will apply only to central government agencies, or whether they will influence purchasing by China’s state-owned companies and local governments.

However, this broader push for “indigenous innovation” has already been interpreted and implemented in different ways across the country, and industry groups say that in some cases provincial-level officials have taken it upon themselves to implement their own preferential purchasing practices. That explains why some companies in the Amcham survey say their businesses are already taking a hit.

Among such companies, 32% are in the high-technology and information-technology sector. However, 30% are in manufacturing and 27% in services, demonstrating that the impact is being felt far beyond the technology sector.

At a high-level conference in Beijing, Mr. Chen, the commerce minister, warned the U.S. against politicizing the currency issue, and repeated recent comments by Prime Minister Wen Jiabao, who said the Chinese currency isn’t undervalued.

A U.S. Treasury report due next month must decide whether to label China a currency manipulator, which would trigger talks between the countries followed possibly by sanctions. Asked how China would respond to such a designation, Mr. Chen said that if there were “trade sanctions or trade measures, I think we won’t sit back.”

Mr. Chen said that in the first two months this year, China’s international trade surplus fell 50% and China “probably recorded a trade deficit in March.” A transcript of his comments at the China Development Forum was posted on the Web site of the China Economic Daily.

Of those companies that feel generally unwelcome, 58% cite inconsistent regulatory interpretation and judicial treatment, and 50% mention indigenous innovation policies.

Many foreign companies have invested heavily in establishing research and development operations in China and fear the new procurement policy is aimed at forcing them to share their innovations with Chinese competitors or government agencies.

“Some companies might say, ‘Maybe we won’t put research and development in China’,” said one businessman close to Amcham. “You will at least see a diversification of investment,” he said, adding that “a lot of people are rethinking their China strategies.”

Chinese officials deny the policy discriminates against foreign companies, and instead complain about protectionism in the U.S. and other countries. Although China is a World Trade Organization member, it hasn’t signed on to the WTO’s voluntary Agreement on Government Procurement, which bars discrimination against foreign companies bidding on government projects.

—Bai Lin contributed to this article.

Write to Andrew Browne at andrew.browne@wsj.com and Loretta Chao at loretta.chao@wsj.com

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