MNCs in the News-2015-02-06

In mid-January, the CBRC pressed Chinese banks to shun buying new mainframe computers in 2015 and to make plans to replace their current ones. Since 80 percent of domestic bank core servers and systems are foreign, the new stance clearly impacts foreign tech providers. The policy links to a broader government initiative to remove foreign technology from domestic banks, state-owned enterprises, and the military; that is, if foreign firms do not turn over core technologies or allow invasive inspections. Foreign business associations have raised strong concerns about China’s policy and asked China to develop its policies in a transparent manner (Steven Yang, “China Said to Summon Banks to Stress Safe Technology Push,” Bloomberg Business, January 29, 2015, http://www.bloomberg.com/news/articles/2015-01-29/china-said-to-summon-b...)

At the beginning of February, China implemented new rules to limit tax avoidance by MNCs, rules that conform China’s practices to international ones. Foreign businesses fear China will use rules in a discriminatory way and target them. China’s assessment of US $140 million in back taxes against Microsoft in late 2014 followed by the State Administration of Taxation’s move to set up “an international division with an emphasis on auditing multinationals” are some of the factors raising alarm. Among the rules drawing special attention are China’s move to limit tax privileges for non-substantive holding companies outside a company’s home country (Michael Martina, “Firms Prepare for New Tax Rules as China Vows Crackdown,” Reuters, January 31, 2015, http://www.reuters.com/assets/print?aid=USL4N0V91IR20150201; Keith Bradsher, “China to Crack Down on Tax Collection from Multinational Companies,” New York Times, February 4, 2015, http://www.nytimes.com/2015/02/05/business/international/china-to-enforc...)

In early February, the American Chamber of Commerce in Beijing released a report focusing on the agricultural situation in China and a number of associated Chinese government policies. It called for a loosening of trade and investment barriers and highlighted the potential for cooperation in agricultural technology and the distribution of agricultural goods. It specifically raised concerns about Chinese barriers against imports involved genetically modified crops, noting that the free flow of such goods “supports China’s national food security strategy” (Mu Chen, “US Farm Firms Urge Easing of Barriers to Investment,” China Daily, February 5, 2015, http://www.chinadaily.com.cn/business/2015-02/05/content_19494626.htm)

As noted in past MNCs in the News issues, Mexico cancelled, rebid, and then shelved a high-speed rail project, once successfully bid by China Railway Construction Corp. (CRCC). CRCC noted it is working with Mexico on determining compensation for Mexico’s shelving of the project. The reasons for the cancellation remain unclear with some highlighting Mexico’s domestic politics and others its fiscal situation. China’s National Development Reform Commission and Foreign Ministry expressed concerns about Mexico’s cancellation and hoped it would “effectively protect the legitimate rights of Chinese companies.” Events in Mexico are driving CRCC to look to other countries for deals (“CRCC Seeks Compensation for Mexico High-Speed Project,” China Daily, February 3, 2015, http://www.chinadaily.com.cn/business/2015-02/03/content_19476982.htm; “Beijing Urges Mexico to Ensure Chinese Firms’ Rights, Interests,” WantChinaTimes.com, February 3, 2015, http://www.wantchinatimes.com/news-print-cnt.aspx?id=20150203000108; Lu Bingyang, “Railroad Company Seeks Payout for Cancelled Contract with Mexico,” Caixin, February 4, 2015, http://english.caixin.com/2015-02-04/100781550.html; and “Chinese High Speed Rail Companies Look to Projects in US, Russia,” WantChinaTimes.com, February 6, 2015, http://www.wantchinatimes.com/news-print-cnt.aspx?id=20150206000103)

Japan’s Ministry of Health, Labor, and Welfare may, for the first time, issue a business suspension to a pharmaceutical company. The firm in question is Swiss pharmaceutical giant Novartis whose Japanese employees distorted trial data about the effectiveness of a Novartis blood pressure drug and hid the side effects associated with a Novartis leukemia product. Novartis, which already replaced its top Japanese management team in 2014, would be banned from doing business for only 15 days. Novartis’s head of pharmaceuticals said at a press conference “‘we are committed to changing the culture at [Novartis] in Japan and demonstrating ethical leadership’” (Andrew Ward, “Novartis Faces Suspension in Japan over Drug Trial Allegations,” Financial Times, January 3, 2015).

Japanese auto firms like Fuji Heavy Industries Ltd.’s Subaru brand have been forced to incur significant new costs as a result of labor disputes at US West Coast ports, which have been occurring with great severity since October 2014. The dispute which pits dockworkers against shippers and terminal companies is making it necessary for Japanese companies to use air freight to ship parts, a far more expensive option than ships. It has also reduced production time at some factories. Not all Japanese firms have been equally affected by the dispute (Chang-Ran Kim, “Japan Automakers Hit Production Snags as U.S. Port Dispute Drags On,” Reuters, February 6, 2015, http://www.reuters.com/assets/print?aid=USKBN0LA0MR20150206)

In its 2014 Competitiveness Survey, the WEF ranked Korea 26^th in the world in terms of overall competitiveness. In contrast, it ranked Korea 133 out of 144 in terms of policy transparency. This rank was even lower than that of Cambodia, Burma, and Madagascar. Analysts have criticized the Korean government for flip-flopping on policies, which discourages investment and hiring, and a Korean Chamber of Commerce and Industry survey of 200 foreign firms showed 55.2 percent of surveyed companies deemed the Korean government unfriendly to business (Lee Hyo-Sik, “Korea’s Policy Transparency at Bottom,” Korea Times, February 1, 2015, http://www.koreatimes.co.kr/www/news/biz/2015/02/123_172800.html)

Foreign businesses in Korea face rising labor costs, an ageing population, increasing social spending, and aggressive unions unwilling to accept pay-for-performance schemes. Michael Reed, the Chairman of the British Chamber of Commerce in Korea and a trustee for the European Chamber of Commerce in Korea, said the government must move to control salary and benefit increases lest Korea becomes non-competitive relative to other locations. Some foreign business representatives do not believe foreign firms will leave Korea, assuming Korea continues to grow, but they believe Korea will experience issues attracting new investment. Others warn Korea will lose investment to neighboring countries (Choi Kyong-ae, “UK Chamber of Commerce Chides Unions,” Korea Times, February 1, 2015, http://www.koreatimes.co.kr/www/news/biz/2015/02/123_172827.html)

Foreign businesses express numerous complaints against the KFTC. They charge is it “biased and vindictive towards foreign companies,” often seems to “have reached its own conclusions before it begins any investigation, and “has stigmatized non-Korean firms as ‘villains.’” Furthermore, they charge the KFTC is excessively sensitive to external political pressure and public opinion. A KFTC spokesman refuted the charges, saying it applies policies “in a fair and balanced manner.” Whatever the case, foreign concerns will need to be addressed if the government is to achieve its goal of raising inward forward direct investment by more than 5 percent over 2014 (Park Si-Soo, “FTC Vindictive against Foreign Firms,” Korea Times, February 3, 2015, http://www.koreatimes.co.kr/www/news/biz/2015/02/123_172958.html)