Jeep shuts China factory as decoupling continues

In a week where the visit by House Speaker Nancy Pelosi to Taiwan — and China’s angry response, including military drills — overshadows everything in the already tense U.S.-China relationship, talk of economic decoupling might seem like a sideshow. But the reality is that Beijing and Washington will move past this fraught moment without war. So let’s temporarily set aside the obvious hostilities on display, and take a look at what has been happening in the business and investment relationship over just the last few days.

It’s not pretty. Exhibit number one: Jeep’s decision to close its one remaining factory in China, citing government meddling. Jeep did not make the decision lightly: The car brand opened the first Sino-foreign joint venture vehicle factory in 1984.

Broken trust and government favoritism

“We have been seeing over the last few years more and more political interference in the world of business in China,” Carlos Tavares, CEO of multinational automotive manufacturing corporation Stellantis NV, said on Bloomberg Television on July 28, noting that there was “broken trust” in its 12-year partnership with Guangzhou Auto, following disagreements that came up after his company decided to raise its stake to 75% in the joint venture producing the Jeep Cherokee, Renegade, Compass, and Grand Commander models.

Also a major concern: Beijing’s tendency to favor its own local brands, a bias that perhaps has contributed to a drop of about a fifth in sales of German and U.S.-branded vehicles, and a double digit fall in Japanese cars, in China in the first half of 2022, while sales of domestic brands grew. “We see that for Western players, selling cars in China is becoming increasingly difficult,” Tavares said. (Some point instead to the often more affordable and high quality Chinese alternatives now available as at least an equally important reason for the foreign brands’ declines.)

More directly related to the hostilities now on display in the Taiwan Strait, Tavares also expressed what has already become a major concern for multinationals in recent months: Getting caught up in any future sanctions directed at China, following a military conflict over Taiwan. “We don’t want to be a victim of cross-sanctions as has been the case for other companies in other regions of the world recently,” Tavares added in a clear reference to companies hit by sanctions targeting Russia after its invasion of Ukraine in February.

The decision by Jeep to exit its last China factory inevitably brings to mind the classic 1989 book by James Mann Beijing Jeep: A Case Study of American Business in China, which already a quarter century ago was warning of the often insurmountable challenges of dealing with local partners and officials. “From the outside, China has always seemed malleable,” Mann, a former Los Angeles Times reporter writes. “From inside, it seems intractable, endlessly capable of frustrating change.”

No country for old multinationals

It’s hardly surprising that Beijing’s top leaders feel an ever stronger imperative to find ways to become more self-reliant, as the U.S. and other countries levy ever larger numbers of sanctions on its top technology companies including those in its all-important semiconductor industry (which, ironically, may help to drive its growth.) The passage of the CHIPS and Science Act, which cleared Congress last Thursday and provides $52 billion for chip companies that set up shop in America, for Beijing is just more proof of the necessity of policies that help its own companies get a leg-up in the geopolitical battle for chips. China must keep “the lifeline of science and technology firmly in China’s own hands and make the country’s development more independent, self-reliant and secure,” Xí Jìnpíng 习近平 said on a visit to Wuhan in late June.

The larger picture for multinationals in China is not pretty. Overall, foreign-invested business saw an almost 14% drop in profits so far this year, statistics released by the National Bureau of Statistics last week show. (China’s state enterprises, by contrast, saw just over a 10% jump in profits, while private firms fared worse with a 3.3% drop.) And while American companies reported in March that China is still a top priority for business, they also said they do not plan significant new investments this year, citing “sustained air travel disruptions [due to pandemic controls], an increasingly uncertain regulatory environment, difficulty attracting and retaining talent, and the strained U.S.-China relationship.”

Some 60% of European companies have downgraded their China revenue prospects for this year in part because of Beijing’s unrelenting and business-damaging pandemic controls. The “allure of China” is waning, said longtime China resident and head of the European Chamber of Commerce Joerg Wuttke in an interview in late May. Meanwhile, Tony Danker, head of the Confederation of British Industry of Commerce, was reported saying over the weekend that companies from the UK were “rethinking their supply chains” because of the inevitability of a future “decoupled world from China.”

Even as the din of saber rattling temporarily drowns out everything else, there is also still plenty to worry about in the slow motion drama of China’s economic and business decoupling.

Note: Text amended to correct year of publishing of Beijing Jeep: A Case Study of American Business in China.