Shanghai over the weekend unveiled a 50-point plan to ease the economic fallout of its “zero covid” policy after lockdowns in recent weeks in the global business hub created financial losses, disrupted global supply chains and raised concerns about the lack. of transparency and predictability.
The impact of the turmoil on foreign companies is not likely to go away anytime soon, according to Alan Beebe, a former chairman of the American Chamber of Commerce in China and longtime head of China who is now an outside consultant to Bain & Co. based in Beijing.
“Confidence is being lost. China has always been, relatively speaking, a very predictable business environment. You might not like every policy, but at least it’s been predictable,” Beebe said in a Zoom interview. “Now it’s very unpredictable, and of course companies don’t like that. And that adds to last year’s crackdown on the Chinese private sector, for tech companies and education companies in particular.” New York-listed shares of Internet heavyweight Alibaba have lost 57% in value in the past year, while those of education companies such as TAL Education and New Oriental Education are down 89% in the past 12 months.
“So, in a way, people feel ‘once burned, twice shy,’” Beebe said. “Just because the government comes out and says, ‘Hey, let’s change the policy’ or ‘Don’t worry about it,’ I doubt people will go back to the (previous) level of normalcy.”
Beebe, a Nebraska native and a Yale graduate, led AmCham China for the past six years to March 2022; the organization has more than 1,000 members, including Boeing, Microsoft and Morgan Stanley. Beebe has more than a quarter of a century of experience in Asia and has been based in Beijing since 2002. Excerpts from edited interviews follow.
Flannery: What is the impact of China’s Covid policies on US companies there?
Beebe: What’s happening is unprecedented. The draconian measures that China has taken have had a huge impact on business and, frankly, the psyche of every individual being impacted by this, whether foreign or Chinese. It creates an unprecedented level of uncertainty, non-transparency and ambiguity as to what the future holds.
It’s one thing to have isolated cases or lockdowns that have relatively little impact on the economy. But the scale, magnitude and uncertainty surrounding what we have today is putting huge question marks around the economic outlook.
Surveys by AmCham China and the European Union Chamber of Commerce in China show that revenues have dropped. Perhaps what is not captured in these surveys is the level of discomfort people have. I feel it every day for myself, but also among the many people I know, whether foreigners or Chinese. In this kind of environment, few will actually make meaningful business decisions, let alone investment decisions. People here see a black box in terms of how government decision-making is being made, and there is growing speculation that there is conflict within China’s government over the best policy direction for the economy and Covid-19. They are in a difficult situation right now.
Flannery: Was the business impact of smaller expatriate entrepreneurs greater than that of larger multinationals?
Beebe: I would say it’s different. You almost have to put them in two categories. Smaller companies may be led by an individual who has likely made a substantial commitment to be in China. For them, raising their stakes, packing up and leaving is simply not so easy, both in terms of business and personally.
At the same time, their business is being hurt and hit hard, and there is nowhere near the protection that a large company has. If you have to do the payroll, you have to do the payroll. If you have to pay rent, you have to pay rent.
So I think it’s probably across the board in terms of how they’re handling this situation, ranging from just hunkering down and taking more drastic action, whether it’s laying off employees or delaying payments and so on. It’s no different than any small or medium-sized business anywhere in the world that is dealing with a situation like this.
While most large companies are able to weather the storm, they are putting off important decisions and implementing plans to diversify their supply chains. They are locating positions that may have traditionally been earmarked for foreigners or expats to tackle the situation in the short term.
The medium and long-term concern is that trust is being lost. China has always been, relatively speaking, a very predictable business environment. You might not like every policy, but at least it’s been predictable. Now, it’s very unpredictable, and of course companies don’t like that. And that adds to last year’s crackdown on the Chinese private sector, for technology companies and education companies in particular.”
So, in a way, people feel ‘once burned, twice shy’. Just because the government comes out and says, “Hey, let’s change the policy” or “Don’t worry about it,” I doubt people will ever go back to that (previous) level of normalcy.
I really think we’re at a key inflection point for foreign companies. For example, if you look at international schools – which have been a base for the foreign business community – I really don’t know if these foreign schools can survive. They are facing all sorts of fundamental political and financial struggles. There are so many question marks.
Flannery: House research shows that the overall relationship between the US and China influences business decisions about China. How do you see the overall relationship now?
Beebe: Going back to my tenure at AmCham China, I was continually impressed by the resilience of US business in China despite all the fireworks, especially around the tariff hike. Adapted companies. They didn’t like it. There have been some winners and losers, but for the most part they have adapted to it.
I think this time it could be different. Firstly, once the Biden administration took office, there was an arguably false hope that things would get better between the US and China, but we see now that this is clearly not the case. I think there’s an acknowledgment that the relationship is what it is, and the question is whether it’s going to stay the same or it’s going to get worse.
As a result, companies are taking action, or will take action. What are these actions? They don’t want to give up on China’s market opportunity. At the same time, they want to minimize their risks. I imagine you won’t see a large scale coming out of China, but a diversification of supply chains to become less dependent so they can serve the Chinese market but less exposed to unpredictability.
Another development that is not directly related to the US-China relationship – but is – is the Russia-Ukraine war. I was surprised at how quickly American companies and foreign companies generally left Russia. No doubt this also makes the Chinese government think, “If things got this bad, could we really count on foreign companies staying in China? Does the economy really trump everything else?” And I think the answer is no.
Flannery: That’s an interesting point. I’ve been thinking about calling Starbucks and saying, “I noticed you closed 150 stores in Russia because of the invasion of Ukraine. What is your backup plan if, one way or another, Taiwan and mainland China come into conflict?” China is a big part of their business.
Beebe: It’s good corporate governance and strategy to have scenarios that are pretty well developed and robust so that once certain triggers occur, companies can take appropriate action. And I can imagine that many, many leading companies are going through this exercise right now. And if they aren’t, they should be.
Flannery: With Taiwan?
Beebe: Yes, even with Taiwan. Just to clear this up, one of the things that surprised me was how some companies responded when Covid came back in early 2020. There was massive unpredictability. People didn’t know what it was, how big the impact would be, and so on. But there were a good number of companies that seemed pretty calm.
Why were they calm? It’s because they had backup plans. They drew on similar experiences from other parts of the world. They pull out the manual which is more similar. For example, energy companies that have invested heavily in, say, the Middle East or North Africa, where there has been political turmoil and war, have their contingency plans. In some ways, I was pleasantly surprised by the resilience of these companies. They have an institutional capacity to prepare for the best and plan for the worst.
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