Erratic China: Accounting for the Unaccountable
Beijing confounds Western predictions – as illustrated by recent protests, COVID-19 lockdowns, purges of top leadership, high-profile crackdowns on major Chinese companies, and other irregular events. Yet China is frequently characterized as a puzzle that can be solved: with enough access, cultural awareness, language skill, or business savvy, China can be understood and navigated, business leaders are told by China experts. In practice, however, U.S. companies are frequently left with after-the-fact analysis that does little to help manage uncertainty in China: events in China still catch companies off-guard and without a clear path forward.
Western corporations have previously grappled with deep uncertainty in their relationship with China: following the 1949 founding of the People’s Republic of China (PRC), British firms struggled to navigate a fundamentally altered environment in China as the favorable pre-1949 environment for foreign businesses turned hostile under the new Communist regime. The experience of British firms during this tumultuous period, as recounted by the University of Maryland’s Thomas Thompson in an overlooked 1979 paper, illustrates key patterns for U.S. companies navigating unpredictability in the contemporary U.S.-China relationship.1
Bias towards the status quo: Even as conditions for foreign businesses in China rapidly deteriorated after 1949 as the Chinese Communist Party (CCP) moved to nationalize foreign firms, British companies were slow to recognize that the status quo had ended. Corporate leaders discounted worsening conditions – including a Nationalist blockade of Communist-controlled Shanghai, where many British firms were domiciled, a heavy levy on private firms, and prohibitions on downsizing despite unprofitable conditions – as disparate events rather than the emergence of a new paradigm.
Consensus among Western companies in China is unlikely: From 1949 to 1951, British firms navigated changing circumstances differently, as predictions for the future trajectory of China varied: some firms believed expulsion was forthcoming, while others believed they still had a long-term future in China. By 1952, most British firms had concluded that circumstances were so dire that exiting the Chinese market was the only option, but still lacked consensus about how to withdraw. Several companies advocated a collective withdrawal to coordinate timing and cut-off dates for the remittances the CCP required to keep British firms operating, but the effort failed to materialize. Firms could not agree to a timeline or terms of exiting, and instead proceeded with withdrawal plans tailored to their specific circumstances. Absent consensus, the British government would not consider facilitating firms’ exit from China.
Ambiguity in Chinese policy: Chinese leaders are unlikely to provide Western companies with clarity regarding how to navigate business conditions in China. In the early 1950s, the ambiguity of Chinese policy directives often led to great confusion among foreign firms: even as the CCP moved to push foreign companies out of China in the long-term, the Party sought to slow their withdrawal to ensure a smooth transition to Chinese control. Foreign companies required the CCP’s permission to close operations in China, but found it perplexingly difficult to secure it, as Thompson details: “Chinese officials reminded British executives that the People’s Government had never said ‘no’ to the firm’s application for closure. China’s ‘yes’ in response to British firms’ closure application, however, only came gradually.”2 In Baron’s own experience, many U.S. companies confront complex and convoluted approval processes, leaving them stuck waiting for allegedly forthcoming licenses or authorizations that may never come. In one notable example from Baron’s work, a company seeking to negotiate with a Chinese company’s supply department found the company to have not one, but four supply departments. Only after two or three incorrect meetings was the company able to meet with the correct person – who was willing to talk business only after two meetings.
Likely discrepancy between official statements and policy: Even as foreign firms faced increasingly hostile conditions in China in the early 1950s, official CCP statements reassured foreign firms that a future in China was possible. A 1950 statement in the official newspaper of the Shanghai Committee of the CCP, taken as indication of government policy, assured firms that “If they can dutifully obey all ordinances and rulings of the People’s Government and engage in business which is beneficial to the livelihood of the people and the livelihood of our country, they will be permitted to exist and will be protected.”3 De facto policy told a different story, however: conditions ensured foreign firms in China were operating on such great losses that withdrawal was the only real option. In a particularly memorable case Baron worked on, the U.S. company’s China strategy was tied to a close relationship with a high-ranking official, yet when that official suddenly lost his job, there was no broader policy support for their business.
The foreign private sector and government are indistinguishable to Beijing: In the 1950s, China viewed British firms as vassals of the British government, as Thompson recounts: “To realize expectations of future trade relationships with China, the various British firms felt that they had first to allay Chinese fears that closure and withdrawal were part of a [British] plan to further retaliate against China for its involvement in Korea.”4 Today, Beijing is likely to view U.S. companies as proxies for the U.S. government, even, in Baron’s experience, when corporate leadership presents the company as international or multi-national.
A failure of imagination: In the 1940s, British firms found the contingency plans they had developed of little utility, as one executive reflected, because they did not account for the potential for major changes in the business environment: “I considered we did have a policy [to minimize losses] but the implementation of any policy was entirely dependent on the conditions under which it could be executed.” Regarding the firm’s future profitability, the executive recounted, “I found myself like the agnostic… I just did not know.”5 Recent events illustrate companies’ continued need to account for a broader range of possibilities: protests in China, the most intense since the 1989 Tiananmen Square protests, caught observers off-guard, prompting a flurry of after-the-fact explanations by China experts.
Experts often assume a range of possibilities that is too narrow for China. Yet as leading U.S. companies have experienced with protests and other unexpected events, and as history has shown, the Middle Kingdom often surprises. U.S. companies with significant exposure to China should assume a low-information environment with likely surprises and disruptions. Succeeding in this environment calls for new approaches to coordinating China risks and opportunities between corporate strategy, government relations, risk management, business continuity management, and global security and operations.
1. Thomas Thompson, “China’s Nationalization of Foreign Firms: The Politics of Hostage Capitalism, 1949-57,” University of Maryland School of Law, Occasional Paper/Reprints Series in Contemporary Asian Studies, Vol. 1979, No. 6 (1979), https://digitalcommons.law.umaryland.edu/cgi/viewcontent.cgi?article=1026&context=mscas.
2. An exchange between a Chinese official and the British executive of a bottling firm seeking to expedite his firm’s withdrawal from China illustrates the ambiguity in Chinese policy British firms encountered in this period: British business executive: “The right to sell beverages has been taken away from the management because it is impossible for a bottling company under foreign management to compete with government operated bottling companies whose sale is being pushed everywhere in Shanghai to the detriment of (our) firm’s… If our company were taken over by the Government it would be operated at a profit, because the bottling company’s plant and machinery are the most up-to-date but (they are) a dead loss under foreign management.” Chinese official: “The question of who is to operate the bottling company will be decided by the authorities concerned, but until that question is decided (the parent firm) should be responsible for the operation, production and the workers’ welfare.” British executive: “(The firm) will, of course, do their best to manage the bottling company, but (the firm) cannot be responsible for lending money to the bottling company.” Chinese official: “I have not said anything about the parent firm lending money to the bottling company. I said the parent firm should be responsible. Whether or not you lend money is for you to decide.” See Thompson, “China’s Nationalization of Foreign Firms,” pages 42-43.
3. Ibid, page 21.
4. Ibid, page 46.
5. Ibid, page 26.