The China decision that has global giants worried

Amid the heightened tensions between the US, its allies and China there’s been a lot of discussion of how multinationals might protect their businesses and investments within China. There’s now some significant movement on that front.

Earlier this month one of the world’s most influential technology investors, the giant Silicon Valley venture capital group, Sequoia Capital, announced plans to carve up its business, hiving off its China and Indian operations into entities separate from its core US business.

UK pharmaceutical giant AstraZeneca is considering separating its China business and listing it in Hong Kong or Shanghai, in effect making it a domestic Chinese business.Credit: AP

Then, at the weekend, the Financial Times reported that AstraZeneca, with the largest presence of foreign pharmaceutical groups in China, is considering separating its China business and listing it in Hong Kong or Shanghai, in effect making it a domestic Chinese business.

Other multinationals have been pursuing less dramatic strategies to reduce their exposure to China, choosing to diversify their production bases, either establishing plants in South-East Asia, Mexico or India or “reshoring” activity to their home bases or “friend-shoring” it to trusted US allies.

The pressure for change is coming from both the US and China.

The US, in its efforts to slow China’s technological challenge to its geopolitical and military pre-eminence, has sanctioned a host of Chinese tech companies and imposed controls on exports of strategic technologies, like semiconductors. It has urged its allies to do the same, with some success.

The Biden administration is also considering restricting outbound investment flows to China, particularly in sectors deemed significant to China’s strategy of commercial and military “fusion” to enhance its military technologies and capabilities.

China, apart from threatening retaliatory action against US companies and others, has unnerved foreign companies with its recent raids on foreign consulting firms after revising its counterespionage laws to expand them to include any material related to its national security and state interests, without defining what those might be.

It has also begun cutting off foreigners’ access to what was previously open-source data on Chinese companies and its economy, significantly complicating the ability of foreign companies to assess investment decisions within the country.

Sequoia has been an important, and very successful, provider of venture capital to China. It was a key investor in many of its most successful technology companies – it has invested in more than 1000 of them – including companies like e-commerce giants JD Com and Alibaba, food delivery platform Meituan and TikTok’s parent, ByteDance.

It has channelled more than $US56 billion ($85 billion) of foreign capital, much of it from North American investors, into China. Sequoia Capital China (which will be renamed HongShan) raised another $US9 billion to invest in China only last year.

Silicon Valley venture capital giant Sequoia Capital announced earlier this month plans to carve up its business, hiving off its China and Indian operations into entities separate from its core US business.Credit: Bloomberg

China’s crackdown on its technology sector last year, which wiped more than $US1 trillion off the value of the sector, and the expanding range of US restrictions on investment in the sector, would limit the amount of foreign capital available to be deployed in China.

Existing investors would be concerned that they would be trapped, or their investments impaired, by any retaliation by China.

Thus, the idea of ring-fencing investments in China within a domestic entity or, as in AstraZeneca’s case, quarantining its Chinese interests from the rest of the group, means those interests are more likely to be treated kindly by China’s authorities while putting them beyond the reach of the US and its allies.

As the largest of the international pharmaceutical companies within China, a market considering extremely attractive because of China’s massive but ageing population, AstraZeneca would be loathe to walk away from, or limit, its growth potential.

Structuring the business as a discrete entity with its own financing (but still, apparently, controlled by the UK parent) would be a pragmatic response to the increased risk for multinationals doing business in China.

A lot, of course, depends on how the Chinese, US and European authorities respond to the concept of ring-fencing. China wouldn’t want to lose access to the research and development, technologies and capital that foreign companies bring with them while Western governments are balancing the geopolitical issues with their economic ambitions.

This year’s crackdown on consultants and access to data alone would give companies operating within China pause for thought about the future of their businesses in China.

It’s a delicate balance. US Treasury Secretary, Janet Yellen, in a speech last week, foreshadowed restrictions on US private equity firms’ investments in Chinese companies that have connections with China’s military, which would, given China’s fusion strategy, have implications for quite a lot of US investment.

She also said, however, that it would be a mistake for the US to try to decouple from China and even urged a deepening of their economic ties.

“I think we gain and China gains from trade and investment that is as open as possible and it would be disastrous for us to attempt to decouple from China,” she said.

She said the US intention was to “de-risk” the relationship with China, rather than inflicting economic harm.

Trying to interpret the difference between de-coupling and de-risking would be a head-scratching challenge for multinational boards and their executives, particularly as the degree of tension within the relationship, and the extent to which US allies support its various policies targeting China’s ambitions, is quite volatile and unpredictable.

Treasury Secretary Janet Yellen s said last week that it would be a mistake for the US to try to decouple from China and even urged a deepening of their economic ties.Credit: AP

As might be China’s own policies. As Treasury Wine Estates could testify, China can be thin-skinned and quick to act if it feels insulted or threatened and the efforts by the US and its allies in Europe, Japan, UK and Australia to contain its technological and military ambitions raise the likelihood of retaliation.

This year’s crackdown on consultants and access to data alone would give companies operating within China pause for thought about the future of their businesses in China. Businesses can’t operate without understanding their markets and competitors and having access to expert insights.

Add the complexity of the geopolitical tensions and it wouldn’t be at all surprising if Sequoia and AstraZeneca are the early movers in a scramble by foreign companies with significant interests within China to find ways to distance their larger businesses from their Chinese operations without destroying the value of their Chinese investments in the process.

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.