Western companies are finding themselves shut out as Beijing promotes homegrown rivals
Not so long ago in China, Western business executives traveling to the provinces could expect a hearty welcome and a banquet with endless toasts of maotai liquor. In February, however, representatives of General Electric (GE) and a dozen other U.S. companies got a taste of the way commercial relations have been changing. They were in Wuhan, a city of 9 million on the Yangtze River, for a seminar on water-treatment technology organized by the U.S. embassy. At a dinner after the meeting they were supposed to have a chance to mingle with top local officials. But at the last minute, Wuhan's mayor canceled his keynote speech and backed out of the gathering. That same day the provincial party secretary and governor begged off a separate event for American Ambassador Jon M. Huntsman Jr. One attendee, who won't be quoted by name, speculates that the Wuhan officials were responding to direct orders from the central government in Beijing not to meet the Americans. The provincial government acknowledges that the original lineup was changed but notes other officials attended the events.
Nearly a decade after China's entry into the World Trade Organization, many foreign companies say the warm reception they once received has turned frosty. While China can still be highly profitable, some question how long that will last as Beijing changes the rules to give a lift to its domestic companies, especially state-owned enterprises. A new government procurement program known as "indigenous innovation" features rules favoring local firms: It could block sales worth billions of dollars a year, says Joerg Wuttke, director of the European Union Chamber of Commerce in China. Beijing has written strict standards for everything from cell phones to cars, often couching them in a way that gives an advantage to domestic producers. A recently revised patent law could force foreign companies to hand over key technologies to Chinese bureaucrats. And anti-monopoly regulations have been used to limit foreign access to sectors such as construction machinery and energy. "They have moved away from a level playing field to benefit their own companies," says Wuttke. Multinationals "are seeing the golden China opportunity become a mirage," says the China government relations chief of a major tech supplier, who would not be named for fear of reprisals.
Trade associations can speak more openly. A Jan. 26 letter to the White House from the U.S. Chamber of Commerce, the Business Software Alliance, and more than a dozen other groups representing hundreds of multinationals such as Microsoft (MSFT), Boeing (BA), Motorola (MOT), Caterpillar (CAT), and United Technologies (UTX), warned of "systematic efforts by China to develop policies that build their domestic enterprises at the expense of U.S. firms." The signatories asked the Administration for its "urgent attention to policy developments in China that pose an immediate danger to U.S. companies."
Why a chill now? Chinese look across the landscape of their economy today and see much that could be improved. After 30 years serving as the workshop of the world, mainly producing low-value goods for foreign brands and distant markets, they want to move up the value chain. To date they have only been able to capture a fraction of the value of a Nike (NKE) shoe or Apple (AAPL) iPhone. And they know they have a poor record in creating global brands. Apart from telecom equipment maker Huawei, notebook giant Lenovo, appliance marketer Haier, and perhaps consumer electronics maker TCL and car companies Geely and Chery, they have few champions. Even at home, General Motors (GM) and Volkswagen vie for the top spot, while Nokia sells the most handsets of any company in China, with a 32.9% share. "People feel that foreign brands have taken too much market share," says Wang Yong, director of the Center for International Political Economy at Peking University.
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