Jop Western companies continue to abandon operations in China and Russia, highlighting obstacles to profitability in powerful Eurasian countries.
On July 18, fast fashion retailer H&M announced that it would “end” its operations in Russia due to “current operational challenges and an unpredictable future”, becoming the latest company to leave Russia at the moment. following its attack on neighboring Ukraine. . The invasion killed thousands of civilians and destroyed towns, prompting global outcry and sanctions.
“After careful consideration, we consider it impossible, given the current situation, to continue our business in Russia,” H&M Group CEO Helena Helmersson said in a statement.
On the same day, automaker Stellantis revealed it was ending a joint venture with Guangzhou Automobile Group, or GAC, to build Jeep vehicles in China and would instead focus on importing SUVs. Stellantis cited “a lack of progress in the previously announced plan for Stellantis to take a majority share of the GAC-Stellantis joint venture” as the reason for the exit.
“Stellantis intends to work with GAC Group to bring an orderly end to the joint venture formed in March 2010, which has been loss-making in recent years, and will record a non-cash impairment charge of approximately $297 million. euros in the first half of 2022. results,” the company said.
The moves by major retailers and manufacturers to move away from China and Russia underscore the difficulties of gaining a foothold in the two countries, which have large trade markets that prompt Western companies to keep trying.
Economic ties between the United States and China “remain deeply intertwined,” according to the American Chamber of Commerce in China, with $560 billion in two-way merchandise trade in 2020. “China is one largest and fastest growing markets in the world and is an important market for American products and services,” the group said.
“In order to be globally competitive, American producers and service providers must be able to compete in the Chinese market on an equal footing,” he continued, pointing out that “extensive barriers to market access, protectionism, an opaque regulatory system and discriminatory law enforcement measures continue to hamper the operations of American companies in China today.
Arthur Dong, a business professor at Georgetown University, said Stellantis’ experience in China “is also shared by other companies and many are now weighing whether the benefits of having a presence in China outweigh the the risks and challenges of doing business there,” he said. said in an email. “Western companies in particular are often caught in the crosshairs of government sanctions in China if any of their statements conflict with official state policy.
“On any day, an American company could step on a landmine and face retaliation from government leaders on any topic that contradicts the Chinese belief system, no matter how minor,” Dong added.
Although very different countries overall, the authoritarian governments of China and Russia have often put them at odds with the West, especially the United States, creating obstacles for American companies hoping to operate with success in important foreign markets. Recent geopolitical events, such as the COVID-19 pandemic and Russian President Vladimir Putin’s war in Ukraine, have only exacerbated some of these problems, according to Dong and other experts.
Regarding Stellantis’ Jeep business, “they are pulling back because their overall market sales have not met expectations and the continued Covid-related lockdowns have disrupted their operations so much that they believe it it’s better to stop it than to continue,” Dong said.
Meanwhile, along with H&M and Russia, the retailer “is a latecomer, as other retailers such as Zara and Ikea left Russia months ago” following the invasion of Ukraine.
“Western companies are pulling out of Russia because they have to cater to their best customers,” Dong continued. “Their best customers reside in their home countries, such as the EU and the US. Continuing to do business in Russia sends a potentially damaging signal that they have no qualms about continuing operations in a pariah state.
The retailer must also consider its shareholders, Dong said, “who are increasingly concerned about the negative exposure and risks” of staying in Russia. “Western sanctions have limited the Russian economy and their average consumers are also feeling the pain. As such, they are holding onto their wallets and limiting their spending as the war continues to strain the Russian national economy,” he said.
H&M said its departure from Russia would cost the company about 2 billion Swedish crowns, or about $195 million. Although the Russian economy is the 11th in the world in terms of gross domestic product, Dong said it was still “smaller in terms of GDP than the GDP of the state of Texas.”
This is not the case in China, however, which has the world’s second largest economy by GDP at around $17 trillion. The United States ranks first with $22 trillion, according to 2021 data from the World Bank.
“While a challenging market, China’s vast size, growing wealth, shifting demographics and economic transformation continue to create opportunities for well-prepared American businesses,” says the International. Trade Administration, an agency of the US Department of Commerce. “China’s gross domestic product (GDP) and its market are larger than those of Japan, Germany, the UK and India combined.”
The ITA notes that over the past 20 years, “China’s middle class has experienced one of the fastest growth rates in the world” as the country transitioned “from a traditional low-wage manufacturing economy and labor-intensive towards a technology-intensive economy value-added production.
“Chinese consumers are playing an increasingly important global role, now the world’s largest market for many products, from vehicles to air conditioners to video games,” the ITA says. “Because of this growth, retail sales in China are expected to outpace those in the United States over the next two years. US companies note that this growing consumer power means the Chinese market is increasingly influential in global consumer trends, making success in China increasingly critical to their ability to compete at scale. world.
For automakers like Stellantis, formed from the merger of Fiat Chrysler and French group PSA last year, breaking into the world’s biggest car market was a priority.
“Since day one of Stellantis, we have been analyzing the situation with our partners and we are now finalizing our plans for China, which we consider to be a strategic market in terms of untapped potential,” said Grégoire Olivier, COO of Stellantis. in China, said earlier this year.
In 2021, another joint venture between Stellantis and a state-owned Chinese automaker “sold more than 100,000 vehicles in 2021, more than doubling the annual sales volume of 2020,” the company said. This company, between Stellantis and Dongfeng, based in Wuhan, produces Peugeot and Citroën vehicles in China for the local market.
Along with Jeep, Stellantis announced in January that it would seek to increase its stake in the joint venture with GAC from 50% to 75%. “This announcement is a key part of Stellantis’ plan to establish a new base for its business in China,” the company said at the time. “GAC Group and Stellantis have agreed to collaboratively complete the relevant formalities of the agreement, which remains subject to the approval of the Chinese government.”
Stellantis said it may make the move following Beijing’s recently relaxed regulations regarding foreign investment in joint ventures.
But the market proved difficult to crack, and Stellantis’ plans to acquire a majority stake in the GAC partnership never materialized. The Dongfeng business is undergoing restructuring, and the Jeep business is said to have been mostly idle in recent months.
China’s governance system is a major hurdle for U.S. and foreign companies looking to do business there, says the ITA: “Despite the Chinese government’s significant efforts to streamline bureaucracy and reduce red tape, companies Foreigners continue to complain about lengthy and opaque administrative procedures, particularly regarding permits, registration and licenses.
“A recent focus on self-reliance has contributed to China’s pursuit of industrial policies that limit market access for imported goods, foreign manufacturers and foreign service providers while offering government guidance, resources and substantial regulatory support for Chinese industries,” the ITA said. adds. “The main beneficiaries of these policies are state-owned enterprises as well as other privileged national enterprises.”
Dong, the business professor, said that “the attractiveness of the Chinese market is that it is huge, the lack of attractiveness is that it is very crowded with competition and therefore not an easy market to operate in.
“Add to that supply chain disruptions, shifting and sometimes arbitrary government treatment, growing nationalist sentiment against foreign brands which, in sum, are making the Chinese market less and less attractive for many companies doing business there. business,” he said.