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Challenging Times

by Patrick Body

December 8, 2021

 

 

Ker Gibbs is the outgoing President of the American Chamber of Commerce in Shanghai. He first came to China in 1985 and has worked in various roles giving him broad exposure to US-China relations and business issues facing American companies opening in Asia. His career has spanned Asia and Silicon Valley, with executive positions at Apple, Disney, and other technology and media firms. Most of his time in Shanghai has been in banking and investments, he was head of tech and media for greater China at HSBC.

The relationship between China and the United States has on occasion been turbulent, but in recent years tensions between the two countries have gone up by several notches, having knock-on effects for businesses across different sectors. As a former banker, investment adviser and CEO of high-growth tech companies and now, as the President of AmCham Shanghai, Ker Gibbs is uniquely positioned to provide insights on US business in China at both the macro and micro levels.

In this interview, Gibbs discusses US business sentiment in the China market, post-pandemic business recovery and the problems and benefits of doing business in China.

1. In AmCham’s 2020 business climate survey, the majority of members cited US-China relations as the biggest issue weighing on their companies’ activities here. How has the change in administration in the US and the developments that have followed changed the sentiment of US businesses operating in China?

The business community is pretty nervous. I wouldn’t say they were disappointed in the Biden administration but we’re certainly not seeing a return to the more optimistic days that we had before. The good news is that it’s a much more professional approach from the Biden administration, a much more consistent, predictable approach and business definitely likes that.

But the Biden administration is trying to tackle a very different set of issues. For Trump, it was really just transactional, it was all about trade and investment, whereas Biden has taken on a set of issues that are very difficult to negotiate, so they’re very difficult for China to give ground on. We all know how to negotiate a soybean trade, but how do you negotiate over human rights or democracy?

Most of my members are strapped in for the long haul and expect the tension to remain for quite some time because, frankly, there’s no off-ramp in sight. It’s really difficult to see how some of these issues are going to come to conclusion. I wish I could be more optimistic about it, but I think we’ve got a challenging situation here for sure.

2. Specifically, how are US-China trade tensions affecting the business activities of US businesses in China? Do you have any examples?

In practical terms, we are finding that the space in which we operate is becoming narrower. This is largely driven by compliance issues and export controls, especially in the technology space. Then we’ve got sanctions and counter sanctions which leave businesses feeling caught in the middle. Making sure that they are compliant with both Chinese law and US law, at the same time, is becoming increasingly challenging. And in some cases, that’s deliberate, you look at the “anti-sanctions” laws that China has put in place to make it more difficult for companies to comply with US sanctions.

If you look at it quantitatively, recruiting and retaining staff is also a difficulty, Chinese staff are really thinking twice about going to work for an American company, which is unfortunate. Running businesses in China is all about the talent, so if you’re having trouble recruiting and retaining staff, that’s a major problem. And we’ve seen that in statistics, in the survey we put out a last year, we asked people if the tensions were leading to difficulty in recruiting and retaining staff and over 30% of our members said yes. It’s a major problem.

3. To what extent were foreign businesses in China hurt by the COVID-19 pandemic? And to what extent have they recovered and recouped the losses, or is it a long road ahead?

The pandemic has certainly changed the way that we do things, but it hasn’t actually had the severe negative impact on business that we’ve seen in other parts of the world. China has actually done extremely well in controlling COVID-19 and getting businesses reopened and, as a result, business performance has actually been quite good, even through 2020. In 2021, I would say all but a few businesses have recovered. Companies such as airlines or movie theaters, that are directly impacted by the Covid controls, are still facing some issues.

That’s not to say that we don’t have our issues. Our assumption at this point, looking at COVID-19 both inside and outside China, is that we’re expecting the restrictions on international travel to be in place for quite a long time. That, in and of itself, should not stop businesses from operating as usual or taking advantage of China as a market. But it is going to have an impact as it is more difficult to operate businesses without international travel. We’re having trouble getting expats and dependents smoothly in and out of the country, which will change the way the businesses operate in China in the long-term. I think American businesses in particular have localized, probably faster than the Europeans, but there are still positions that require someone from headquarters or non-local staff, so a lack of mobility will impact that. Having said that, most of our members are still anticipating excellent growth in 2021, especially as the Chinese consumer market continues to expand.

4. The Chinese government has issued a number of announcements in recent months on relaxation of regulations on foreign investment. To what extent are you seeing positive developments in the environment in which US businesses operate in China? And how would you characterize the domestic business environment overall?

I look at it as being too little too late, especially in commercial banking and insurance. Those opportunities are pretty challenging because if you look at market share and the sheer size of some of these banks and insurance companies, the domestic players dwarf the foreign players, so even though they’ve lifted the equity caps, and given us much more room to expand, the market opportunity is pretty limited.

There are foreign players that have got a domestic securities license now, but it’s yet to be seen how much success they’ll have within the securities space. There is still a limited fee pool, and a lot of domestic competition. Within financial services, the bright spot seems to be asset management. We welcome the relaxation of some of the controls there and we’re seeing more and more companies coming into that space.

Staying within the financial services, what we’d like to see is a lot more cooperation, and cross-border investment in fintech because we think that’s an area where there’s a lot of innovation happening in China that it would be good if the foreign players can take advantage of that. Also, it’s a big domestic market and fintech generally is a very exciting space. We expect to see a lot of innovation in that area.

5. China is home to some of the most exciting tech innovation happening today but this is often not recognized by the tech industry outside of China. What are the relative strengths and weaknesses of the US and China in terms of tech development and innovation?

In Silicon Valley there’s so much myopic thinking and, frankly, arrogance. It is inherently understood that they invent in Silicon Valley and that’s where the innovation takes place. And that’s just not true. China is very innovative, especially around financial technologies and I think it has a couple of advantages in that. First of all, China’s speed comes up again and tech entrepreneurs have learned to fail fast and move onto something new. The other thing is the law of large numbers. There are a lot of entrepreneurs here and while we only hear about the successful ones, for every one of those, there are hundreds of other entrepreneurs that are experimenting and tinkering with various things.

There’s still amazing things happening in Silicon Valley and it’s still a magnet for the best and the brightest, it’s home to some of the best universities in the world and the opportunities for talent are excellent. I wouldn’t count the US out.

It is important to talk about innovation because when I talk to foreign businesses that are not in China, or are reevaluating their presence in China, a common talking point is the fact that domestic companies in China are innovating like crazy. I think it’s to our advantage to be in the market where our domestic and global competitors are, because the likelihood is that our next competitors are going to be coming out of China. So it’s better to be here, watching what they’re doing and learning from it, rather than waking up one day and seeing that we’ve been overtaken.

6. The business landscape in China has changed over the years and the aspects that made a company successful in the early 2000s would not necessarily provide the same levels of success today. Can you provide some examples of US companies that have successfully adapted to the China market over the past few years?

Most of our businesses are very successful. I think that the successful foreign businesses have had to adapt in two ways. One is China’s speed and the other is China’s tastes. To take a negative example, eBay experience here, after spending a lot of money buying their way in, demonstrates this. They didn’t adapt their global platform and the global business model to the way things were done in China. Even though Taobao came into the market much later, it was able to outmaneuver and is now wildly successful.

Matching China’s speed is also necessary, but it’s hard. In general, multinationals are a little bit hamstrung because a lot of the decision-making goes back to headquarters which imposes at least a day or two delay, just to get an answer back. China moves at a much faster pace than that. That’s something that the more successful companies have figured out, how to adapt and move at a faster pace.

7. How is the Chinese government’s support for the Dual Circulation policy, emphasizing domestic companies and economic growth, impacting US companies doing business here?

We’re still in early days in terms of Dual Circulation, and they’re still sorting out their interpretation of that policy. But we are getting anecdotal stories that encourage buying domestic and so it does keep foreign companies out of certain markets, especially in the technology space.

China still welcomes and wants foreign businesses but I’m not sure they believe they need foreign businesses. China is very different from a market like Singapore, for example, where the domestic market is just an economy, it’s just a very small island, and so it must have foreign participation in order to survive. China is very different. It is dependent on the outside world for certain things like oil and semiconductors, but for the most part it’s large enough and diverse enough to just do it on its own.

8. How do you see prospects for American companies changing in China over the next five to 10 years?

This is a tough one, politically both countries are on a new trajectory, which makes this difficult to predict. Clearly, China is on a more aggressive path and I think certain elements within China like the position that the government is taking, but there are also elements in China that enjoy benefits from the relationship with the United States and so they want both. They appreciate China is pursuing its own interests, but they also want a relationship with the US and the rest of the world. That’s going to have to be a balance that China will need to work out.

On the US side, some degree of decoupling is inevitable as the US is feeling somewhat defensive. When faced with the aggressiveness of China, the US is not as patient as it once was—after the WTO, for example. Outside China, nobody views it as a developing country anymore and to be more specific, nobody is willing to give them special rights and privileges connected to their status as developing country. And what that means in the US context, and the European as well, is reciprocity—China is going to be expected to abide by the same rules and principles as everyone else.

I’m fundamentally optimistic, I don’t see a full decoupling and I don’t see American companies leaving the China market anytime soon. So over the next five or 10 years, I think we’ll certainly still be present here. Again, China wants the foreign companies here. They don’t necessarily need them, but I would still expect China to welcome foreign companies and make sure that we’re able to operate here.

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