Multinationals Keep Walking Away From China. How Did 20 Years of Prosperity End Like This? | 2017's Biggest Business Stories, No. 6

Growth and bubbles driven by enormous capital, the wealth and the problems piled up along the way, and a political direction no one can predict — after more than 20 years of prosperity, all three tangled together in this year's business world. There was no shortage of hot stories, but look closely and business logic was not what decided which companies won and which lost. This is the sixth piece in our series on 2017's biggest business stories.

Two promotions in five years, and Matt still quit at the end of 2017.

He had worked his way up to senior brand manager at a well-known foreign chocolate brand. He is now weighing an offer from one of China's leading ride-hailing platforms.

"Working at a foreign company now is nothing like it used to be — it's not only that people see foreign companies differently, it's the (traditional) industry I'm in and the way we work," Matt said. "I feel out of step with the times." The feeling is sharpest when he talks to friends who work in the internet industry.

Justin, a tax manager at one of the world's four largest accounting firms, said that when he joined in 2011 he already sensed the Big Four had passed their golden years in China. Since then his own firm and its three rivals have all, at one point or another, cut base pay or ordered mandatory unpaid leave. The Big Four used to be a gold-lettered signboard in the talent market.

"Before 2009, a report started at 200,000 yuan. Now you can get one done for 30,000, and there are cases priced lower than that," he said. Which shows how brutal survival in the Chinese market has become for the world's four biggest auditors.

The glory days of "foreign companies" ended a long time ago.

This is not a new subject, but one thing caught our attention: over the past year, multinationals left China in every conceivable form, and more tightly bunched together than in 2016. By incomplete count, more than twice as many multinationals pulled out in 2017 as in 2016.

All of them are famous names that fought in the Chinese market for years.

McDonald's sold its business and switched to licensing — the owner of its 2,400-plus mainland stores became CITIC, and its offshore company was even renamed Golden Arches. Kosé, the Japanese cosmetics group behind Sekkisei and Decorté, sold off its Hangzhou production company. Asahi alone sold farms and ranches to New Hope early in the year, sold all its shares in Master Kong's beverage business mid-year, and at year's end sold its stake in Tsingtao Brewery to Fosun.

The steady drip of news has left both the people working inside these companies and the graduates about to enter the job market with the same impression: multinationals are in a slump.

Ivy, who left IKEA last July, told QDaily that because she worked in human resources, her strongest impression of the past five years is that foreign companies have plainly lost ground in the fight for talent.

ManpowerGroup's employment outlook survey shows that the hiring sentiment of foreign companies has fallen without interruption since 2010. In the fourth quarter of 2010, their hiring outlook index stood above 50%. By the first quarter of 2018 it was 9%.

The multinationals that streamed into China in 1980, under the reform and opening-up policy, came with great confidence that they would strike gold in an emerging market, and they poured in capital and people. Nearly 30 years of prosperity later, they look beset with problems. What changed?

Local Companies Rise Wave After Wave. In China, the Multinationals Are Still the Same Ones

"Designing and making a new product used to feel like a big deal. Now I realize how small its effect is." For Matt, the turning point in how he saw his own traditional industry came in 2014, the year Tmall started staging its Double 11 gala. "From that year on, our chocolate brand's media split became 4:6, even 3:7. The 3 is television."

The internet has indeed taken all the attention. And even within the internet, the hot businesses have turned over wave after wave — portals, search, e-commerce, social networking, group buying, O2O, mobile payments, the sharing economy — each wave throwing up a company that came to stand for it. That is how business cycles normally work.

But look closely and, over the past 20-odd years, the multinationals that stand for foreign business in China — by name recognition and influence — have barely turned over at all.

Mention foreign companies and it is still the same list: Procter & Gamble, Unilever and Coca-Cola in consumer goods; McDonald's and KFC in fast food (both now Chinese-owned); the Big Four accounting firms; the carmakers in manufacturing; Pfizer, GlaxoSmithKline and their peers in pharmaceuticals.

That's right — all of them belong to traditional industries, and the businesses they run have not changed much either. The new generation of foreign companies has essentially failed to get off the ground in China.

Shao Yu, South China general manager at the HR consultancy Aon Hewitt, traces the "talent anxiety" foreign companies in China have felt since around 2012 and 2013 to the rise of China's mobile internet. "Foreign companies missed that train, and the hot companies the mobile internet produced became a very strong competitor in the talent market." The management trainee programs that once drew so many college students saw high attrition in 2014 and 2015, which deepened the anxiety.

The multinationals in China are, on the whole, American.

The five most valuable companies in the world today — Apple, Alphabet (Google's parent), Microsoft, Amazon and Facebook — are all American.

But Google left China in 2010. Amazon's share of China's e-commerce market is counted together with Xiaomi's and Gome Online's, and the three add up to just 1.3%. Facebook founder Mark Zuckerberg has courted China repeatedly and still cannot get in. And Apple has made, and keeps making, more and more compromises in the Chinese market.

As for the newer tech companies, Uber, the one that got furthest in the Chinese market, sold its China business to its imitator Didi in 2016. Airbnb has had just as hard a time, nowhere near the momentum and pull it has at home in the US.

As you know, "BAT" caught on as a phrase starting in 2012: Baidu, Alibaba and Tencent were seen as the three rulers of the Chinese-language internet. We analyzed the latest shift in our annual company coverage: Tencent has begun to dominate this new round of competition.

None of it has anything to do with multinationals.

"Our pay hasn't really changed — it's still decent — but not changing is itself a step backward," Matt said over the phone.

The Demographic Dividend Is Over, and the Competition and the Consumer Market Look Nothing Like Before

In an August 2017 interview with The New York Times, Starbucks chairman Howard Schultz was asked why Starbucks was raising its investment in China while McDonald's and Yum! Brands were struggling. He said: "I'm not in a position to criticize them, but I think those two companies sold their franchise rights very early on, and yet they're still in the fast-food business."

Fast food does face challenges everywhere. But these chains once grew fast and steadily in China precisely because of the label "foreign fast food." And it was not only KFC and McDonald's. Sum it up and the 20-plus years of prosperity that multinationals including Procter & Gamble, Coca-Cola and Nestlé enjoyed in China rested on two things: scarcity and sheer population.

The demographic dividend is, of course, more or less the root of almost every company's fast growth, and multinationals clearly had the advantage in exploiting it — not least because their local rivals used to be so weak. In Matt's words: "In the past, a foreign company entering China could grow fast on advanced management, standardized products at scale and lower prices, and build a moat at the same time."

Now mass-produced products are out of favor with young consumers, and a great many distinctive niche brands have used the internet to become their competitors. When the food giant Mondelez (Oreo's parent) reported its third-quarter 2017 results, its China CEO, Irene Rosenfeld, remarked that the food industry is changing faster and faster: through social networks and e-commerce, a niche food or drink brand can rise in no time.

The shift means many independent brands, startups included, are in a global market from day one, and they are better at pleasing young consumers. QDaily has run a feature on how the traditional consumer giants gradually lost their appeal. As it happens, the multinationals cooling off in China are running into the same trouble worldwide.

Jing Fan, a partner-designate at the HR firm ManpowerGroup, told QDaily that the disruption the internet has brought means companies need more people who are flexible, so they can keep up with shifting trends and seize them.

But attracting good people has become harder and harder. Shao Yu said that around 2014 foreign companies began to see that the management trainee recruiting they were used to was getting difficult to carry out. "Hiring new graduates has got harder and harder, and even when we hire them, attrition has gone up." The reason: multinationals are at a historic low both in how fast they are expanding and in how fast pay is rising.

The China Employment Market Prosperity Report, published jointly by Renmin University of China's China Institute for Employment Research and Zhaopin, shows that in the second and third quarters of 2017 the employment prosperity index for wholly foreign-owned and listed companies stayed below 1 for two quarters running — meaning openings were fewer than applicants — the lowest for several quarters in a row among categories that include private and state-owned firms.

Justin said his firm keeps squeezing labor costs. "The administrative work around a project — invoicing, collections and the rest — used to be what a new hire spent the first year doing. Now, when the firm wins a project, that work is carved out and sent to delivery centers out west, in Sichuan and Chongqing."

China's 2015 decision to allow a second child was read as the marker that the demographic dividend had ended. Plenty of companies also read it as the start of the next one. But nothing is that simple.

Worries About Regulation and Policy Uncertainty

We noted in our year-end series in 2016 that the Chinese and foreign internets are growing ever more sealed off from each other. American internet companies can take almost any market on earth and still cannot get into China. Meanwhile the internet companies that succeeded in China's market — Tencent, Alibaba and Baidu among them — have been unable to push their products into markets abroad.

The problem got worse over the past year, and tighter regulation and law now covers more companies, not just multinationals. McDonald's China's move to franchising (which in fact matched the strategy at its US headquarters), Coca-Cola's sale of its bottling plants (a burden it has been shedding worldwide) and Asahi's exit from the Chinese market all came with worries attached about where policy goes next.

Those worries have in fact been around for years. According to the Financial Times, the European Union Chamber of Commerce in China said as far back as 2010 that discriminatory treatment by government departments and regulators was costing foreign companies market share across many Chinese industries.

In 2014, dozens of European, American and Japanese companies — GlaxoSmithKline, Samsung, Volkswagen, Daimler, Microsoft and Qualcomm among them — were hit with surprise antitrust investigations, followed by audits for tax evasion. That, too, was read as a policy signal unfavorable to multinationals.

Michael Clauss, Germany's ambassador to China, went so far as to say at the end of 2017 that market access, cybersecurity, the requirement for Communist Party organizations inside companies, and legal and policy uncertainty had all reduced German companies' willingness to expand their investment in China, and might even push some German firms to consider leaving.

More and more multinationals have started complaining about China's business environment. One thing they see ever more clearly: the days when landing in China meant you had found your growth engine are over.

Some companies, though, are doubling down on China.

Starbucks, for one, opened the largest roastery in the world in Shanghai last year, after paying US$1.3 billion in cash to buy back the remaining 50% stake in its East China joint venture, Shanghai President Starbucks Coffee. Howard Schultz — who in recent years has appeared with Jack Ma at public events, on visibly friendly terms — believes the China business will eventually be bigger than the US one.

The New York Times's verdict is that Starbucks found its own "China prescription": paying wages well above its competitors', extending employee share ownership to every worker, entering into Chinese culture, and winning the government's favor.

As Hans Tung, managing partner at GGV Capital, put it: "[Foreign companies] can't make money just by entering the market, but if you can help the Chinese government reach its goal of being a model of growth, you'll reach your own goals too."

Apple is another. In an October 2010 email to several executives laying out strategy for the coming year, Steve Jobs said China could be the next breakthrough — on the condition that the company obey Chinese law.

That same year, the App Store in China pulled an app at the government's request for the first time. Apple's spokesperson said then: "We follow local laws. Not all apps are available in all countries."

At the Fortune Global Forum held in Guangzhou in December 2017, Apple CEO Tim Cook restated that position, expressing respect for China's legal system. "When you enter a country and compete in its market, you comply with that country's laws and regulations. You don't bring in the laws and regulations you wish existed."

Five months earlier, Apple announced a US$1 billion investment in a data center in Gui'an, Guizhou, to run its iCloud service. China's 2016 cybersecurity law requires that tech companies' data stay inside the country. The latest news, at the start of 2018, is that iCloud will be operated by a Chinese company.

Then there are the carmakers eyeing the electric-vehicle market. Because EVs must be built in China, GM, Volkswagen, Ford, Nissan and others have been hurrying to set up joint ventures with Chinese partners.

For a multinational, the choice is to work out how to keep taking part, or to pull out of the world's second-largest economy.

And whether a multinational chooses to stay in China or a Chinese company sets out to go global, an uncertain political direction is shaping its future in both markets. The rules of global business are changing.

Manufacturing Is Moving in Two Directions

After studying in Japan, Jasmine spent the past 10 years at a human resources firm in Tianjin, recruiting for local Japanese companies, mostly manufacturers. "From the time I came back until now, the volume of hiring has kept shrinking, and this year will be worse — I'm getting very few orders," Jasmine told QDaily. More and more Japanese companies have pulled their investment out of Tianjin.

Look again at the Japanese companies that left China over the past year and most turn out to be tied to manufacturing. Nikon closed its Wuxi factory; Kosé sold its local cosmetics production company in Hangzhou. It holds for European and American firms too: the American hard-drive maker Seagate shut its Suzhou factory, and the German company Autec, which makes toy racing-car systems, moved all its production back to Germany.

Some of this is shrinking markets — hard drives and cameras — and the fact that "Made in Japan" can charge a premium consumers are willing to pay. But the larger reason is the rising cost of labor in China. On top of that, with more careers to choose from, fewer young people want to work in a factory.

The Economist has reported that since 2001 the hourly wages of Chinese manufacturing workers have risen by an average of 12% a year. A 2016 Deloitte report said that in the decade since 2005, labor costs in China rose fivefold.

People have been talking for years about low-end manufacturing moving to Vietnam, the Philippines, Bangladesh and other Southeast Asian countries, apparel above all. Around 2012, Indonesia overtook China as Adidas's largest manufacturing country by capacity worldwide. Vietnam became Nike's largest manufacturing base around 2010. And Uniqlo's latest plan is to begin trial production of shirts and other clothing in Ethiopia in 2018, for export to Europe and the US.

Labor is not the only cost going up: raw materials and land have risen too. Add the fact that China in recent years is no longer in a hurry to attract foreign investment and has cut many of the preferential policies for foreign capital, and the costs stack up. "Made in China" is no longer cheap.

On the other side, to create more jobs at home, Trump has been rolling out policies to push back against globalization: pulling out of the TPP, cutting corporate taxes sharply, raising border taxes on imported goods, and offering a one-time preferential rate to companies bringing money back to the US. Some companies have already responded. Toyota and Mazda decided to invest US$1.6 billion in a joint factory in Alabama expected to create about 4,000 jobs, and Nike's new US plant is said to be able to provide more than 10,000 positions, in manufacturing as well as technology, R&D and engineering.

The Chinese government, for its part, is pushing to upgrade and transform "Made in China." The Made in China 2025 strategic plan, issued in May 2015, was described by The New York Times as an ambition to lead future technology: "Beijing is trying to dominate a wide range of cutting-edge technologies within a decade, including advanced microchips, artificial intelligence and electric cars. And China is seeking to get some of the world's biggest technology players involved." Money and policy are bound to tilt that way.

The human resources firms and the several foreign-company employees QDaily interviewed all said that over the past five years, as foreign companies gradually shifted their recruiting to China's second-, third- and fourth-tier cities, they also began offering jobs with more customization and flexibility. For senior staff, they have stopped capping pay and added flexible hours.

Gao Xiaosong, speaking in support of Alibaba last June, said: "People used to follow the fashion and give themselves a foreign name — in business you'd run into a whole crowd of Michael Wangs. Now the fashion is to use a nickname."

In 2017, Tsinghua University's Career Development Center hosted about 580 campus recruitment talks. Set aside the state-owned enterprises and the banks and most of the rest were Chinese tech and internet companies. Never mind the big ones — Tencent, iQiyi, Huawei, OPPO — even "new economy" companies like Yooli, Mobike and Ofo have started holding recruitment sessions on campus.

That is the scene on campus in graduation season now: the loudest recruitment banners no longer belong to foreign companies but to Chinese internet and tech firms.

Multinationals that left the Chinese market in one form or another in 2017

January

The German toy company Autec announced that from the spring it would move all production back to Germany

January

Asahi Breweries sold farms and ranches to New Hope

January 7

The American hard-drive company Seagate closed its Suzhou factory

January 17

Oracle cut about 200 R&D jobs in Beijing, requiring those affected to leave by March 31

February 21

The Japanese apparel company Itokin decided to pull out of China

March 2

The fast-fashion brand Honeys cut its China store count from 600 to 430

March 21

The FPGA chipmaker Microsemi closed its Shanghai factory

April 25

The South Korean supermarket chain E-Mart planned to close six China stores by year's end

July 1

Asahi Breweries transferred its roughly 20.4% stake in Master Kong's beverage business for about 4.1 billion yuan

August 3

The British drugmaker GlaxoSmithKline made fresh adjustments in China

August 8

McDonald's China's new company was formally established, and McDonald's in China went entirely to franchising

October 12

Asahi Breweries sold its entire stake in Tsingtao Brewery

October 30

Nikon China closed its factory in Wuxi, Jiangsu

November 2

Kosé sold off its factory in Xiasha, Hangzhou

November 29

Word went around that a German carmaker might leave China

At the interviewees' request, Matt, Justin, Ivy and Jasmine are all pseudonyms

Cover image source: Visual Hunt