In May 2005, when the corporate world’s enthusiasm for China was at its peak, I spent a few days in Beijing in the company of a bunch of top business executives from the U.S. and Europe. The occasion was a conference sponsored by my then employer, Fortune, and as I sat through the speeches and panels and dinners, I was repeatedly struck by the almost puppy-like devotion to the Middle Kingdom voiced by Western CEOs.
This can’t possibly last, I remember thinking. I had no real idea how it would end, though, just a vague sense that the Chinese mix of economic freedom and political repression might eventually prove combustible. Well, we’re still waiting on the combustion China is already motoring out of the global economic downturn, and its government seems as cohesive and entrenched as ever. But the economic romance between the world’s most populous nation and the biggest multinational corporations is nonetheless on the rocks. The Chinese government has begun turning a cold shoulder to Western corporations hoping to cash in on its consumers. Meanwhile, corporations are paying much closer attention to the risks and hidden costs of supplying their home markets with stuff made thousands of miles away in China. None of this necessarily means an end to the extraordinarily co-dependent economic relationship that China and the U.S. in particular have built up over the past decade. But it does mean big changes. To understand why, let’s go back to May 2005. Back then, CEOs loved China because it had become the world’s low-cost, increasingly high-quality manufacturing hub. They loved its vast and growing ranks of middle-class consumers. Most of all, the capitalist bosses loved working with officials of the nominally communist Chinese government, who were far easier to deal with than the politicians back home. And why not On one side, you had autocrats who feared losing their grip on power if the economy didn’t keep growing; on the other were autocrats who feared losing their grip on power if profits didn’t keep growing. They had a lot in common. Over the past couple of years, though, the China equation got unbalanced. First came a spike in shipping costs that led manufacturers in the West to take a closer look at all the costs time to market, quality control, etc. of stringing their supply chains across oceans. While shipping rates have since subsided, the shift in mind-set among executives has stuck, says John Ferreira, head of the manufacturing practice at Archstone Consulting. No longer is there a herd mentality pushing them to China and other faraway places, he says. When Ferreira surveyed U.S. and European manufacturing execs late last year, almost 90% said they were contemplating bringing some operations home or at least closer.The sharp downturn in global trade has delayed action on those ideas. So far the only evidence of the shift is in consultant surveys like Ferreira’s. In Beijing, though, the downturn has brought its own attitude adjustment. “The Chinese response is ‘We are too coupled to the American economy,'” says Ian Bremmer, president of the Eurasia Group, a political-risk consulting firm. That has led to more domestic spending by the government and attempts to boost Chinese consumers’ spending. True, neither is necessarily bad news for foreign firms. It has, however, also meant an increasing reluctance to let U.S. companies call the shots in China. The most visible evidence of this was the denial in March of Coca-Cola’s bid to buy juicemaker Huiyuan, but Bremmer says that’s just the tip of the iceberg. “The ability of Western companies to do effective business in China over the next five years is going to be increasingly limited,” he says. To some extent, this is the inevitable cooling down of an overly intense relationship. But in economics as in love, breaking up is hard to do. Bremmer recently co-authored the book The Fat Tail, which details the political risks facing the global economy. He counts the U.S. relationship with China among the fattest of fat tails. American corporations may come to see China as a rival meaning they’ll be less likely to fight congressional crackdowns on trade. The U.S. investment banks that have been China’s biggest boosters are not the powers they were two years ago. And in China, the troubles of the U.S. financial system have led to a growing mistrust of U.S. intentions and the American form of capitalism. The love affair was strange and overdone. The aftermath could be ugly.See pictures of China rebuilding.
See pictures of China doing business in Africa.