US companies are picky about investing in China. The exceptions? Burgers, lattes
WASHINGTON — There is no shortage of tough news for China's economy, as some of the world's biggest brands consider or take action to shift production to friendlier shores, at a time of unrest over security checks, protectionism and rocky relations between Beijing and Washington.
Count Adidas, Apple and Samsung among those looking elsewhere.
But as a tumultuous 2023 comes to a close for the Chinese economy, there is at least one bright spot for Beijing when it comes to foreign investment: American fast-food chains have decided that a market of 1.4 billion people is simply too good to pass up. upwards.
The parent company of KFC China opened its 10,000th restaurant in China last month and aims to have stores within reach of half the Chinese population by 2026. McDonald's plans to open 3,500 new stores in China over the next four years. And Starbucks invested $220 million in a manufacturing and distribution facility in eastern China, its largest project outside the US
This is certainly not what Chinese President Xi Jinping had in mind when he advocated the benefits of China's “super-large market” to American CEOs last month while in San Francisco for a summit of world leaders. The investments in fast food and other consumer goods, while Washington restricts exports of computer chips and other high technology, do not fit China's own blueprint for modernizing its economy.
“As you try to interpret the signals from McDonald's and Starbucks and other chains,” says Phil Levy, chief economist at the supply chain management firm Flexport, “note what the industries are: These are not high-tech burgers.”
And while some U.S. companies are increasing their investments in the world's second-largest economy, overall foreign investment has begun to decline this year. In the July-September quarter, net foreign direct investment in China fell to a deficit of $11.8 billion, the first quarterly deficit since Beijing started publishing the data in 1998.
As tensions between China and its Western trading partners simmer, many multinational companies are shifting their investments elsewhere, such as Southeast Asia or India, or repatriating their revenues. That has robbed China of a key engine as its economy has yet to fully recover from the disruptions of the pandemic and a real estate crisis that has slowed growth.
Beijing places some of the blame on US government policies.
Ministry of Commerce spokesperson Shu Jueting recently said: “The US side has repeatedly politicized economic, trade and technological issues and overloaded the concept of security, abused export control measures and restricted trade and investment in China by its own enterprises, which forces companies to give up opportunities in the Chinese market and opportunities for win-win cooperation.”
A survey published in September by the US-China Business Council, which represents US companies in China, shows that uncertainty has taken its toll, with 43% of members saying China's business environment has deteriorated in the past year, and 83% % say they were less optimistic about China than three years ago. Twenty-one percent said they were investing fewer resources in China, compared to just 10% who were investing more.
Surveys of European and Japanese companies have shown similar results.
Although the Chinese market is huge, it is sickly. Unemployment among young Chinese rose to more than 20% in June, the last time the government released this data. Home prices are falling and the stock market is down almost 15% since the summer. That has made many Chinese nervous about their spending.
Still, the bullishness for China, as other industries try to take the risks out of Beijing and untangle themselves, could be a profit-boosting strategy for the fast-food industry.
“We believe there is no better time to simplify our structure given the tremendous opportunity to meet increased demand and further capitalize on the long-term potential of our fastest-growing market,” said McDonald's CEO Chris Kempczinski, as quoted in the statement. Chicago-based company announced in November. it increased its 20% minority stake in its licensed McDonald's stores in China, Macau and Hong Kong to 48%.
Burgers and lattes don't cause the kind of friction that more high-tech industries have in the complicated U.S.-China relationship. These tensions have persisted under the presidency of Joe Biden, who took office promising to do more to counter China's growing military power and the threat to its neighbors, to address the country's treatment of Uighurs and other ethnic minorities country, and to crack down on intellectual property theft. .
Relations reached a low point in February when Biden ordered the downing of a Chinese spy balloon crossing the continental United States. Beijing, which claims Taiwan's self-rule as its own territory, also protested a US stopover by the island's President Tsai Ing-wen earlier this year. China responded to new US controls on exports of advanced computer chips and the technology to make them with its own restrictions on exports of key raw materials such as graphite, gallium and germanium, all metals used in making semiconductors, solar panels, rockets and radar.
The relationship appears to be stabilizing somewhat as 2023 draws to a close, highlighted by Biden and Xi's meeting outside San Francisco last month. But since then, Biden's top advisers have said there are no plans to change the strategy of tightening regulations and blocking US high-tech investments in China, citing the need to safeguard national security.
Both former President Donald Trump, the Republican Party's 2024 presidential candidate, and Biden are concerned about dependence on China, a potential adversary, for the supply of crucial materials used in many high-tech products. Both have sought to reduce U.S. dependence on Chinese factories and have encouraged companies to move from China to other countries — so-called “friendshoring.”
Still, Biden administration officials have said they do not want to see a total decoupling of the world's two largest economies.
“Reducing risk, yes. Decoupling, no,” Nicholas Burns, the US ambassador to China, said recently at an event in Washington. “We want to continue an important trade and investment relationship with China, but not … in areas that could help them leapfrog us in military technology sometime in the next decade.”
Rosemary Coates, executive director of the nonprofit Reshoring Institute, noted that decisions to expand or cut back are relatively simple for a company like McDonald's or its fast-food rivals.
Franchises “can be opened or closed,” Coates said. “It's not like investing in a car factory or some kind of machine shop.”
China's vast market is vital to many foreign companies: At their annual investor day this month, McDonald's executives noted that 70 million of the 150 million customers enrolled in its customer loyalty program are in China.
KFC China says its new outlet growth has averaged more than 22% over the past five years. The Popeyes Louisiana Kitchen chain relaunched its brand in China in August with a flagship restaurant in Shanghai and plans to open 1,700 stores over the next decade.
But for all the promise of China's huge market, American companies have other reasons to think twice about expanding in China.
In July, the US advised Americans to reconsider travel to China due to arbitrary law enforcement and exit bans and the risk of unlawful detentions. Commerce Secretary Gina Raimondo has warned Chinese leaders that American companies could stop investing in their country if they do not respond to complaints about deteriorating conditions due to raids on businesses, unexplained fines and unpredictable official behavior.
While Beijing insists that China is eager to attract foreign investment, it has given no indication that it could change trade, market access and other policies that irritate Washington and its other trading partners.
“Where do you draw the line?” asked Levy, a former White House economic adviser in the George W. Bush administration. “Someone might say: if you want to buy sensitive computer chips, it should be done in a place that I really trust. … The other extreme is: we do sell them lattes and burgers. But where do you draw the line for the things in between, for example car parts? What about ball bearings?”
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Kurtenbach reported from Bangkok. AP writer Ken Moritsugu contributed to this report from Beijing.