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Tuesday, November 24, 2015


U.S. Tech Firms in China Face New Business Challenges

American companies in China are dealing with an increasingly protectionist business climate, growing trade-related tension between their home and host countries, and numerous other trade-related uncertainties. As these new challenges make it harder to operate there, U.S. technology firms need to be ready for complex restructuring decisions.

Spy vs. spy
Geopolitical risks are an ongoing issue for foreign businesses in China. In recent years, U.S. tech companies have been caught in the crossfire as the two countries have battled over cyberespionage.

The U.S. has long accused China of state-sponsored theft of American trade secrets, but things took a sharp turn for the worse in 2013, when Edward Snowden disclosed that a National Security Agency surveillance program used U.S. technology to spy on other countries’ governments. Tensions escalated in 2014, when the U.S. indicted five Chinese military officers on charges of hacking American companies to benefit Chinese firms. The Chinese government retaliated, in early 2015, by removing some U.S. technology vendors―including Cisco, Apple and McAfee―from state procurement lists. Policy experts also saw the removal as a way for China to favor its domestic technology industry.  

Since then, in the wake of a ramp-up in cyberattacks against American targets, the U.S. has threatened to impose economic sanctions against Chinese companies that benefit from state-sponsored hacking. Washington shelved the sanctions after China arrested some hackers and agreed, in September, to help the U.S. stop the online theft of trade secrets for economic gain, but they could be back on the table if that agreement doesn’t work.  If sanctions are imposed, it could prompt China to take further action against U.S. companies operating there.

American firms are also worried about China’s new national security initiative. In July, China approved a sweeping national security law and issued a draft cybersecurity law aimed at helping the government tighten its control over cyberspace and the flow of online data. Although it’s still unclear how the vaguely worded legislation will play out, tech firms fear that they may be forced to give China more access to their technology.

Chinese regulators target foreign firms
U.S. companies are also feeling pain from what many say is targeted regulatory enforcement by an increasingly protectionist Chinese government. In the American Chamber of Commerce in China’s 2015 business climate survey of member companies, 57% of respondents said foreign companies were being singled out in pricing, anti-monopoly or anti-corruption actions.

Over the past few years, China has waged an anti-monopoly campaign against a range of foreign firms, including U.S. tech giants Microsoft and Qualcomm. In February 2015, China accused Qualcomm of overcharging Chinese manufacturers for technology licensing and fined the semiconductor maker $975 million. In addition to paying the fine, Qualcomm also agreed to lower the royalty rates on its patents used in China.

New challenges could affect restructuring strategies
U.S. technology firms aren’t likely to abandon China and its huge market, but the latest round of business challenges there could impact their corporate restructuring decisions. This could bolster a much-publicized reshoring trend, which has emerged in recent years as China’s manufacturing costs have soared.  In a 2014 Boston Consulting Group survey of U.S.-based manufacturing executives, 54% of the respondents said they were considering or had already begun reshoring some manufacturing back to the U.S. from countries such as China.

Although it is perhaps over-hyped, reshoring can provide real benefits for tech companies. For example, it can help firms better serve their U.S. markets and avoid supply chain risks, such as shipping disruptions. Keeping manufacturing and development teams geographically close to one other and clients also makes it easier for tech stakeholders to collaborate, which can increase productivity and innovation.

This doesn’t mean that a large-scale flow of production from China back to America is likely. According to a recent global supply chain study conducted by Wharton School professor Morris Cohen and Stanford professor Hau L. Lee, companies are instead creating a complex web of supply chain movements between various countries. The ongoing study shows that firms are making a vast range of what can seem like contradictory decisions―such as reshoring one department while at the same time outsourcing another to China―as they weigh their risks and restructure at an unprecedented rate.

Of course, companies will need to have the operational flexibility to implement complex restructuring strategies. From a systems standpoint, this means that firms must further embrace technologies that provide agility and malleability in terms of corporate restructuring, consolidations/eliminations, and tax and regulatory compliance―and that do so in a way that allows them to shift quickly without a huge reinvestment in reimplementation. To achieve this, companies will need to leverage technology solutions, including cloud technologies.

U.S. politics create uncertainty on trade policy
The U.S. political climate is another wild card for future trade relations. As the 2016 U.S. presidential race shifts into high gear, some of the leading candidates are taking a more protectionist stance, which could signal a shift away from free-trade policies. This is illustrated by their opposition to the recently announced Trans-Pacific Partnership (TPP) free-trade agreement, which has been a main initiative of the Obama administration.

Although the Republican establishment typically supports free trade, one of the party’s current frontrunners, Donald Trump, has been very critical of the TPP. Among leading candidates for the Democratic nomination, Bernie Sanders is strongly against the trade agreement, and Hillary Clinton also opposes it. The TPP, which Congress still has to pass, includes the U.S., Japan and 10 other Pacific Rim countries (not China). The U.S. is also working on a similar trade deal with the European Union.

China further fueled protectionist sentiment in the U.S. in August, when it shocked global financial markets by unexpectedly devaluing its currency in the largest such intervention in more than 20 years.  Although trade experts say the devaluation was partly related to China’s desire to gain official reserve currency status from the International Monetary Fund, it was also meant to boost the country’s exports. U.S. politicians in both parties condemned the surprise move as an unfair assault on American-made goods. 

Expect more of the same
As the U.S. and China continue to spar over trade issues, tech firms can expect more shifts in the business climate. Whether it’s corporate spying, licensing fees or geopolitical shifts, organizations will need the flexibility to restructure their operations in response to new challenges, whatever they may be.  


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