An article in the New York Times last week caught my eye.  It described recent actions by the China State Administration for Industry and Commerce (SAIC), which is basically the antitrust arm of the government. Last year, SAIC agents stormed the offices of Microsoft, confiscating computers and other records related to its business strategy in the country.  Microsoft was suspected of causing “computer compatibility problems” by not fully disclosing details regarding its operating system and Office applications.

 

Microsoft is not alone as a target.  Qualcomm, Volkswagen and Chrysler also fell afoul of SAIC in 2014.  It takes very little internet digging to find other actions taken by the Chinese government in the past few years against US-based companies. Perhaps the most prominent company targeted was Google, who was ordered to assist the Chinese government in censoring the internet.

 

Google tried to be accommodative without outright censoring, but after five years of adventure, including cyber intrusion into its facilities, in 2010 the company refused to cooperate further.  This, of course, means that access to Google is censored—by someone else.

 

Fortunately the Chinese people were not left without search capability.  A home-grown company called Baidu, which already had significant market share was happy to step into the vacuum.

 

And the Times reports that Dell is now shipping computers to China with a Chinese operating system called NeoKylin.

 

So why am I telling you this in a chemistry-related blog? Because I think there may be ramifications for chemistry-related industry.

 

I started doing business in China in 1986, when it was still relatively unusual to be doing so.  We were licensing PVC resin technology and I had some responsibility for sales as well as implementation.  I learned early on how the deal worked:

 

You bring the technology and some money, and we’ll bring the site and the market.

Then we share.

 

On one level, a fair trade. On another level, a loss of protection of your technology, and at least in those days, no right to take profits out of the country.  This was not just the deal in chemistry, it was the same for everybody, and everybody who was there took the deal.

 

I also felt the regulatory environment was two-tiered.  It seemed to me that the rules on us as a foreign licensor were way more stringent than the rules on our competitors, which were largely government-owned enterprises.  Perhaps this is not a bad thing: to this day the foreign joint ventures have a much better safety record than their competition, and spectacular news events bear that out.

 

What all this speaks to is a strong Chinese government preference for Chinese businesses.  That may not be headline news to you, but it does have ramifications, and seems to me to be accelerating.  The government of Xi Jinping has, since taking over in 2012, become more assertive militarily and more restrictive socially—including restrictions against foreign non-government organizations.  While government purchase preference for indigenous enterprises is no longer the official policy, it was for some time and may well still be an unspoken one.  I don’t believe you compete against Chinese companies, I believe you compete against the entire Chinese team.

 

Ten years ago the driver was the China price.  But China’s become a more expensive place—both on a transactional basis and a “total cost of ownership” basis.  Many industries that can move are moving.  But chemical industries may have large capital or intellectual property investments that don’t move or are difficult to protect and are kind of stuck. If I were in that circumstance, I’d be a little concerned.  Speaking as a frog, I think the water’s getting warmer (if that’s not too oblique). In the New York Times article, Robert B. Atkinson, President of the Information Technology and Innovation Foundation, notes “I think the strategy is basically de-U.S.A.”

 

I don’t know that Atkinson’s statement is totally correct, but it’s hard to argue that the business climate is as welcoming today as it was ten to twenty years ago, and I think it’s an intentional repositioning by the current government.  I loved my time in China; my great-grandfather did business there, and my father was stationed there in World War II.  I have good friends there, and Chinese have been very kind to me personally.  But this isn’t personal.  I think China will be a tougher place to work the next few years, and maybe not the safest place to invest.  According to Atkinson: “This is about business—that’s all it is.”

 

That and a strong preference for the home team.

 

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Dr. William F. Carroll, Jr. holds a Ph.D. in Organic Chemistry from Indiana University, Bloomington, IN.  He received an M.S. from Tulane University in New Orleans, and a B.A. in chemistry and physics from DePauw University in Greencastle, IN. He holds two patents, and has over sixty-five publications in the fields of organic electrochemistry, polymer chemistry, combustion chemistry, incineration and plastics recycling.

 

Editor's note: If you're interested in reading more on this topic, check out IndustryWeek's recent article: US Firms Eye China Exit as Conditions Worsen, Survey Says.