Unfair Chinese Business Practices Threaten Profits Of U.S. Businesses (SPY, FXI, FXP, WMT, AAPL, GOOG)

David Zeiler: U.S. companies (NYSE:SPY) have become increasingly worried that unfair Chinese business practices are hurting their ability to compete and will start eating into the juicy profits they’ve been extracting from the Asian giant.

Problems with how China (NYSE:FXI) treats foreign businesses have been simmering for several years, but a recent incident with Wal-Mart Stores Inc. (NYSE:WMT) has pulled those issues back into the spotlight.

Earlier this month the Chinese city of Chongqing forced Wal-Mart to close 13 of its stores for two weeks because officials said the retailer had mislabeled less expensive pork as a better organic type. The officials also fined Wal-Mart $423,000 and even arrested two employees.

This unusually severe response isn’t the first. Chinese authorities in May fined Unilever PLC (NYSE ADR: UL) more than $300,000 for announcing that it planned to raise prices – a move officials said undermined the government’s attempts to control inflation. French-based Carrefour (PINK: CRRFY) was fined for posting erroneous prices.

Google Inc. (Nasdaq:GOOG) had a protracted battle with Chinese authorities last year over censorship of its search service. Google moved its search engine overseas in protest. Many analysts saw the incident as a way for the government to shepherd users toward domestic search giant Baidu Inc. (NYSE:BIDU).

These penalties top years of unfair Chinese business practices that give advantages to state-owned businesses, including regulations that compel foreign companies to transfer their technology to Chinese firms and laws that weigh more heavily on foreign companies than domestic ones.

“If I were a foreign company, I’d be pretty scared right now,” Corbett Wall, a retail expert who heads Shanghai consulting firm +CW Associates, told USA Today. “I absolutely think that [what happened to Wal-Mart] has to do with tensions building up between China and foreign companies.”

Hurting Profits

Big U.S. companies have relied on expansion into China’s growing economy to prop up earnings during a period in which Western economies have sagged. They’re concerned that if the trend of unfair Chinese business practices worsens, it’ll threaten their profits.

According to the 2011 annual survey of U.S. companies conducted by the American Chamber of Commerce in China (Amcham), a majority of U.S. businesses – 71% – said China’s licensing process discriminates against foreign companies.

And 40% said they thought the “indigenous innovation” policy – in which the Chinese government favors domestic companies over foreign ones in matters of official procurement – would hurt their business. More than one in four – 26% – said that policy already had hurt them.

A similar number, 24%, said that economic reforms in China had not improved the business climate for U.S. companies, a steep increase from the 9% who said so a year earlier.

At the same time, 78% of U.S. companies said that their operations in China were “profitable” or “very profitable.”

“There are two themes to the data,” Amcham China Chairman Ted Dean told Bloomberg News. “American companies are doing well and American companies are concerned about in some cases the current regulatory environment and in others the trend line for the regulatory environment.”

Brewing for Years

U.S. companies have been complaining about unfair Chinese business practices for years.

Last year, at a conference in Rome, General Electric Co. (NYSE:GE) chief executive Jeffrey Immelt had some particularly harsh words about China.

“I really worry about China,” Immelt said, noting that his company was facing the most difficult conditions there in 25 years. “I am not sure that in the end they want any of us to win, or any of us to be successful.”

China’s unabashed promotion of its huge state-owned entities – three of which now sit in Fortune’s Top 10 – even drew a rebuke from the U.S. government in August.

“It is not up to the U.S. to question the wisdom of other nations in establishing state enterprises. But it is very much a U.S. concern if the playing field is not level between them and their American competitors,” said U.S. Under Secretary of State Robert Hormats.

Those top three state-owned companies – China Petroleum & Chemical Corp. (NYSE:SNP), China National Petroleum Corp. and energy provider State Grid Corp. – will make it harder for U.S. oil and energy companies such as ExxonMobil Corp. (NYSE:XOM), ConocoPhillips (NYSE:COP) and Chesapeake Energy Corp. (NYSE:CHK) to compete.

But unfair business practices affect a wide swath of industries, with banking, insurance, auto manufacturing, telecom and information technology among the most affected.

Technology companies such as Microsoft Corp. (Nasdaq:MSFT) and Apple Inc. (Nasdaq:AAPL) have long struggled with China’s indifference toward protecting intellectual property, with piracy and knock-offs commonplace.

Worse still, the Chinese government often requires certain foreign businesses to yield technology to their domestic Chinese counterparts as a condition of being granted access to the country.

Once China has obtained technology from Western firms, it often transfers it to the state-owned companies, which then compete against the foreign companies for future contracts – a policy that threatens the profits not just of Apple and Microsoft, but of industrial giants like The Boeing Co. (NYSE:BA), Honeywell International (NYSE:HON), and GE, as well.

And yet the Chinese market is so massive, and its potential so great, that most U.S. companies will continue to invest there – even if unfair Chinese business practices cause it to be less profitable than it should be.

“For the high-tech sector, the ITC industry and industries that are heavily dependent on intellectual property, there is a great concern about the operating environment in the future,” Amcham President Christian Murck, told Time Magazine. “Companies say that China remains their top priority for future investment, but of course that future investment will depend on the degree to which there is scope in the market for foreign companies to operate.”

Written By David Zeiler From Money Morning

We’re in the midst of the greatest investing boom in almost 60 years.  And rest assured – this boom is not about to end anytime soon. You see,  the flattening of the world continues to spawn new markets worth  trillions of dollars; new customers that measure in the billions; an  insatiable global demand for basic resources that’s growing  exponentially ; and a technological revolution even in the most distant  markets on the planet.  And Money Morning is here to help investors  profit handsomely on this seismic shift in the global economy. In fact,  we believe this is where the only real fortunes will be made in the  months and years to come.

Leave a Reply

Your email address will not be published. Required fields are marked *