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It is no secret that China is the largest and one of the fastest growing economies in the world. Its enormous population and low labor rates are the reason thousands of American and European businesses have expanded operations or moved production to China. However, recent reports show that foreign companies in China are experiencing some speed bumps.
The Chinese government is now requiring tech companies to give them access to secret “source codes.” A source code is a set of instructions that determines software functionality. Someone with access to a company’s source codes could potentially steal patented ideas or find weaknesses in the code to exploit for espionage. The government is also forcing firms to allow intrusive audits and create “back doors” into their software and hardware. Essentially, these news rules would require companies to unwillingly reveal confidential information. Foreign companies are interpreting the new regulations as protectionism: “the theory or practice of shielding a country’s domestic industries from foreign competition.” The Chinese government claims the new policies are simply the result of legitimate security concerns. However, their measures are much more intrusive than most other countries’. Companies argue that the new regulations will cause long-term damage to U.S tech companies in China. Notable companies being affected by these new rules include Apple, Cisco, and Qualcomm.
Another sore subject for foreign companies operating in China is the government’s hefty fines against large corporations. Recently, U.S. based cellphone parts manufacturer Qualcomm was fined $975 million for violating the country’s antitrust laws. In the past year, other companies such as Microsoft, Accenture, and many German and Japanese automakers have also found themselves the subject of an antitrust investigation.
How are companies interpreting these actions of the Chinese government? An annual survey conducted by the American Chamber of Commerce revealed that 47% of U.S. companies feel less welcome in China than they did a year ago. Thirty-one percent of the companies surveyed said they have no plans to make fresh investments in China, the highest percentage this survey has seen since the financial crisis of 2009. In addition, the survey found that fewer companies expect better profit margins or increased revenue this year compared to last. Finally, 57% of the firms believe that foreign businesses were singled-out in recent government investigations, with many of them citing this occurrence as the reason for not planning on increasing future investment in China.
While the recent government actions in China have been a source of discouragement, firms are by no means in a state of panic. Most companies involved in the survey indicated that they are optimistic about the outlook for the Chinese market, and almost two-thirds of them still kept China on their list of top three investment locations.
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