Foreign businesses in China say Beijing is targeting them

Over the last year, China has become an increasingly hostile place to conduct business, especially for tech companies, manufacturers and other big industries, according to an annual survey of more than 470 U.S. and foreign companies released Wednesday by the American Chamber of Commerce in China.

The survey found rising concerns about protectionist policies in China and unfair targeting of foreign companies for monopolistic practices. In 2013, only 40 percent of companies surveyed said the government was “singling out” foreign companies for prosecution. In the latest survey, conducted in November, that figure had risen to 57 percent.

There’s still big money to be made in China. Overall, nearly three-fourths of those surveyed reported that their Chinese operations were profitable or very profitable, but revenues have leveled off and labor costs continue to rise.

Mark Duval, president of the American Chamber of Commerce in China, said it was clear that several “research-and-development” industries – a sector that includes high-tech, pharmaceuticals, clean technology and aerospace – had concerns about China’s trajectory.

“These R&D-intensive industries typically have to invest a lot of money,” said Duval, a former executive at Motorola China. “The bets they have to make in China are probably more expensive bets. And if they are not getting the licensing they need to sell their products . . . why would they continue to invest in China?”

The chamber has been polling its member companies in China for 17 years, but this is only the second survey released since Xi Jinping became the country’s president in March of 2013.

One of the most powerful Chinese leaders in decades, Xi has launched several major initiatives, including a restructuring of the economy and an effort to root out official corruption. At the same time, he’s tried to inoculate China from Western influences by arresting dissidents and more rigidly controlling what’s taught in schools and made available on the Internet.

The chamber’s latest survey reflects those trends. Whereas official corruption was once a top-five concern of foreign companies, it’s fallen off the list the last two years. At the same time, 47 percent of businesses surveyed in 2014 agreed that “foreign businesses are less welcome in China than before,” an increase from the previous year. Some 43 percent said there’d been no change; 10 percent said China was more welcoming.

In addition, more than 4 of every 5 companies said China’s Internet censorship – known here as “the Great Firewall” – hurt their business in varying degrees. According to chamber officials, much of this concern stems from slow data speeds caused by the government’s surveillance of Web traffic.

For the last three years, labor costs, inconsistent regulations and shortages of qualified workers have been the top three concerns of U.S. companies in China. Yet for the first time since 2009, “increasing Chinese protectionism” made the list of top five concerns, partly because of well-publicized fines imposed on foreign companies.

Last year, China’s National Development and Reform Commission fined 12 Japanese auto parts suppliers a total of $202 million after concluding they’d colluded to raise prices. Audi and Chrysler were fined for requiring dealers to charge minimum prices for vehicles and service. A year earlier, the commission had fined five foreign dairy companies and one from Hong Kong for requiring distributors to charge minimum prices.

Yet the biggest of the fines came Tuesday – right before the chamber released its survey – when China handed down a $975 million fine against Qualcomm for charging wireless manufacturers “unfairly high” licensing fees for chips and other technology. In announcing the fine, an official from the commission, Xu Kunlin, praised Qualcomm’s technical capabilities but said “some practices have hindered the innovation capabilities of other companies.”

China enacted a sweeping anti-monopoly law in 2008, a step that many observers say was crucial for the eventual breakup of numerous state-owned enterprises. But in recent years, foreign companies have complained about being unfairly targeted by the government, with little due process even to obtain details of the accusations against them.

A report last month by the U.S.-China Business Council, a group separate from the chamber, highlighted those concerns.

“Antitrust investigations must be transparent, nondiscriminatory, follow internationally accepted due-process procedures and allow legal counsel participation,” says the report.

Attracting talent is another challenge for foreign firms in China. For the first time, a majority of companies surveyed said China’s poor air quality had created difficulties in recruiting senior executives. According to the survey, the biggest recruitment challenge was compensation packages adequate to lure executives to China’s increasingly expensive top-tier cities.

The chamber’s membership includes many of the biggest companies with business in China, including 3M, Exxon Mobil, General Electric, Microsoft, Procter & Gamble and Qualcomm. The annual anonymous survey allows chamber members to vent without appearing to be publicly critical of the Chinese government, which could hurt their business.

To conduct the survey, the chamber partnered with a consulting firm, Bain & Co., to poll 1,012 of its member companies. The results are based on responses from 477 companies that fully responded to the survey.