beyondbrics

The heads of General Electric, Siemens and BASF are known in Beijing as “foreign friends” of China.

This hallowed title comes with certain responsibilities, chief among them defending the autocratic Beijing’s government policies’ from its critics abroad. If foreign friends fail in this task or become openly critical of the Chinese leadership they can find themselves accused of being ignorant of China and its unique national conditions or, even worse, of “hurting the feelings of 1.3bn people”.

So how will China react to Jeffrey Immelt, Peter Loescher and Juergen Hambrecht – chief executives of GE, Siemens and BASF – after their recent attacks on the difficulties of doing business in China? What have they risked by speaking out?

So great is the fear of losing the special status of ‘friend of China’ and being shut out of the huge and growing market that global executives almost never complain publicly about their hardships.

“It’s simple – we would never openly criticize the Chinese government because China’s now the biggest car market in the world and we really need it to hit our sales targets,” one senior executive at a global car manufacturer told the Financial Times.

When Hambrecht voiced his complaints about access to markets in a face-to-face meeting this weekend with premier Wen Jiabao, Wen told him to “calm down’. Later Wen said the foreign criticisms were “untrue”. Chinese state media calls the allegations of a worsening business climate “shaky”.

The official line in Beijing is that the foreigners are just making excuses for the fact they are becoming less competitive vis-à-vis their Chinese counterparts.

China has so far taken a pretty relaxed view of the foreigners’ grumbles. Wen this weekend pointed to a 19.6 per cent year on year rise in foreign direct investment to China in the first half of this year as evidence that China is not less welcoming to foreign investors.

The increase comes off a low base caused by the global financial crisis last year and some analysts believe a portion of the rise in FDI is disguised capital inflows coming to China to speculate on the rising Rmb.

But even taking this into account the numbers suggest a strong continued drive to invest in China, despite the difficulties.

As Chinese vice-premier Wang Qishan pointed out to European officials during a trip to Brussels last year: “Whatever you tell me [about difficulties doing business in China] doesn’t really make a difference. You are going to invest there anyway.”

But while denying that the investment climate is worsening as Wang did, officials recognize they need to do something to address rising discontent among foreign investors, who are still a valuable source of technology, expertise and innovation.

That is one reason why China has submitted a new proposal to join the World Trade Organisation Government Procurement Agreement, nine years after it promised to sign the agreement “as soon as possible.”

China’s government procurement market is estimated at up to $500bn and the exclusion of foreign businesses from many areas is a key complaint.

While Beijing’s latest offer to open its procurement market falls short of what the US, EU and other major trade partners would like and is likely to be rejected, the proposal marks a Chinese desire to at least appear to be making an effort to appease foreign investors.

But, given the weight of the criticisms from Immelt, Loescher and Hambrecht, this and other attempts to mollify the critics may not be enough to head off a re-evaluation in western boardrooms and capitals over how open their own markets should be to China.

If that is the case, Beijing may not add insult to injury by singling out GE, Siemens or BASF for reprisals. That could be counter-productive. After all, China still needs its “foreign friends”, notably for their technology and expertise.

For example, according to China Daily, a Chinese motor industry expert today called on the country’s automakers to expand research and development initiatives abroad in order to overcome limitations to their innovation capacities at home.

Hu Kaibin, a research fellow from the Economic Management Research Institute of Beijing Automotive Industry, said the three major advantages of conducting R&D abroad were access to advanced technologies, cost and time efficiencies, and the ability to attract a wider range of professional expertise.

All this can be acquired single-handedly. But it is much easier in the company of ‘friends’.

Related reading:
‘I really worry about China’ says GE’s Jeffrey Immelt, FT beyondbrics
China: multinationals right to demand proper returns on decades of investment, FT beyondbrics guest post