MNCs in the News-2015-03-27

China remains CEO’s second most important foreign investment destination after the US and a top investment priority for American firms as investors covet opportunities flowing from inter alia China’s burgeoning middle class and attractive growth rate. However, observers argue greater amounts of investment will flow after China has clarified its laws (e.g., Anti-Monopoly) and policies and increased transparency and regulatory predictability. Foreign investors’ continuing interest in China is shown by the case of Shanghai where contracted FDI for February jumped substantially year over year with contracted FDI for the Shanghai Free Trade Zone representing a major portion of this amount (“Shanghai’s FDI Grows by Slow 1.9% in February,” Shanghai.Gov, March 20, 2015, http://www.shanghai.gov.cn/shanghai/node27118/node27818/u22ai79482.html; Mu Chen, “China Remains Top Foreign Investment Destination,” China Daily, March 21, 2015, http://europe.chinadaily.com.cn/business/2015-03/21/content_19873437.htm; Mu Chen, “Regulators and Investors Face New Challenges,” China Daily, March 24, 2015, http://www.chinadaily.com.cn/business/2015-03/24/content_19889246.htm)

China media reports that China is considering making it easier to foreign businesses to get involved in China’s security sector. One of the biggest contemplated changes is that China would let foreign investors assume majority ownership of their local joint ventures (JV). Another noteworthy change is that foreign investors might be able to engage in activities beyond just underwriting stock and bonds. Even though foreign firms might be allowed to have majority ownership and engage in new business lines, it is not clear yet under what conditions the China Securities Regulatory Commission would allow their JVs to offer such services (“Securities Sector May Open Wider to Foreign Partners,” China Daily, March 24, 2015, http://www.chinadaily.com.cn/business/2015-03/24/content_19888796.htm)

The U.S. recently submitted a filling at the WTO, querying the purpose of China’s planned banking sector technology restrictions that require all technology to be “secure and controllable,” the meaning of terms of “secure,” “controllable,” and “indigenous” software, and the applicability of the rules to foreign banks in China. The restrictions, discussed in past MNCs in the News issues, have raised considerable anxiety among foreign technology companies and led Europe, Japan, and the US to communicate their concerns to Beijing. There are serious concerns among foreign governments, firms, and industry associations that China’s regulations are not about security but protectionism (Tom Miles, “U.S. Questions China at WTO on Banking Restrictions,” Reuters, March 26, 2015, http://www.reuters.com/article/2015/03/26/us-china-tech-usa-idUSKBN0MM26...

The global dominance of foreign seed companies and agribusinesses such as DuPont, Monsanto, and Syngenta are leading to aggressive action by China to nurture domestic seed champions as pressure grows on it to open to foreign companies to meet its rising food needs given limits on increasing yields from already “overworked arable land” and insufficient “local seeds.” To ensure foreign firms do dominate after entry, the government is working to boost research & development spending, to increase patents, and to push consolidation. Regarding the latter, the number of domestic companies already has been cut from 8,700 in 2011 to 5,200 (Chuin-Wei Yap, “China Seeks to Develop Global Seed Power,” The Wall Street Journal, March 23, 2015, http://www.wsj.com/articles/chinaseekstodevelopglobalseedpower1427049765)

The oversight board of the United Kingdom’s Banbury cyber security evaluation center has stated in a report to the UK national security advisor that China’s Huawei, one of the UK’s most important suppliers in terms of telecommunications infrastructure and equipment supplies to private firms, does not pose a threat to UK national security. The oversight board wrote “‘the technical assurance’ provided by Banbury was of “‘sufficient scope and quality to meet its obligations.’” It is important to note that Huawei established the Banbury center, though an independent audit said the oversight board was meaningfully independent (Daniel Thomas, “Huawei Does not pose Risk to UK National Security, Report Finds,” Financial Times, March 25, 2015)

In June 2015, Japan and Australia agreed to cooperate on military technology as Australia moved towards buying Japan submarines to upgrade its fleet. However, pressure from Australian labor unions, the main opposition, and elements within his own party led Prime Minister Tony Abbott to move to an open bid. Despite an encouraging government attitude, Japanese firms like Mitsubishi Heavy Industries and Kawasaki Heavy Industries have been passive about lobbying Australia due to risk considerations, a habit of avoiding defense business, and fears of technology leakage. Lately, however, Japan seems willing to seal a deal by building more submarines in Australia (Tim Kelly and Nobuhiro Kubo, “Japan Firms to be a Surprise No-Show at Aussie Submarine Event,” Reuters, March 22, 2015, http://www.reuters.com/article/2015/03/22/us-australia-submarines-japan-... Matt Siegel, “Japan Should be Flexible in Australian Submarine Tender: Retired Japanese Admiral,” Reuters, March 26, 2015, http://www.reuters.com/article/2015/03/26/us-australia-submarines-idUSKB...)

Japanese automobile firms like Toyota and Suzuki have won the praise of the Indonesian Investment Coordinating Board (BKPM) because of their commitment to make multi-billion dollar investments in Indonesia. The investments are seen as helping to expand Indonesian exports, build a foundation for bringing automobile parts firms to Indonesia, and increase jobs. Indonesian President Joko “Jokowi” Widodo stated that the government would move to eliminate hindrances relating to shipping and logistics. Indonesia, though, planned to be cautious about welcoming foreign parts firms given the potential negative impact on local firms (“BKPM Praises Expanded Japanese Automotive Investments,” The Jakarta Post, March 26, 2015, http://www.thejakartapost.com/news/2015/03/26/bkpm-praises-expanded-japa...)

The KFTC ordered the local unit of Bayer AG, a German pharmaceutical giant, to “dispose of its assets and rights related to the contraceptive Mercilon” that it acquired when its German parent bought part of Merck—this was so because the acquisition would give Bayer control of 82 percent of a market of which it already had a 39 percent share prior to the purchase. The FTC already had made the disposition a condition of approving Bayer’s purchase of Merck’s healthcare business last spring. Bayer did not say whether or not it would launch a court challenge against the KFTC (Park Si-Soo, “Bayer Ordered to Sell Oral Contraceptive in Korea,” Korea Times, March 23, 2015, http://www.koreatimes.co.kr/www/news/biz/2015/03/123_175738.html)

A Korean non-government organization called Arbeit Workers Union (AWU) charged McDonald’s Korea was engaging in “various unlawful business practices” such as hiring workers on a contractual basis to avoid paying higher wages and benefits. Among other things, the AWU, which has engaged in labor actions at several McDonald’s restaurants and plans more occupations, is demanding higher wages for part-time workers and better working conditions. McDonald’s denies that it has violated any labor laws and regulations while their Korea communications director said “‘their claims against us are totally baseless’” and that “‘we don’t maltreat’” part-time workers (Park Si-Soo, “McDonald’s Refutes Labor Exploitation Allegations,” Korea Times, March 24, 2015, http://www.koreatimes.co.kr/www/news/biz/2015/03/123_175796.html

Various factors such as regional trade pacts shape Korean corporate overseas investments. NAFTA, for example, is encouraging Hyundai-Kia to expand its operations in Mexico. Hyundai-Kia, which already has a sales headquarter, design center, and factories in the US, sees an expanded presence as having three benefits. First, it can build a “globally-company, strategic base for rapidly growing automobile markets in Central and South America.” Second, it can localize to address the tastes of Mexican consumers. Third, Mexico is a base for exporting cars to Canada and the US since exports are duty-free pursuant to NAFTA (Lee Hyo-Sik, “Kia Aims to Use Mexico as Beachhead for Latin America,” Korea Times, March 26, 2015, http://www.koreatimes.co.kr/www/news/biz/2015/03/123_175955.html)

Taiwan firms are grappling how to response to mainland China’s changes to the preferential policies that it previously gave to foreign investors—China’s State Council has ordered ministries and local governments to eliminate non-conforming incentives that have not received State Council approval. Some commentators believe that the policy change will give Taiwanese businesses incentives to return to Taiwan. However, shortages of high-tech human resources on the island may limit how many firms actually return to Taiwan. Other observers, though, doubt that the removal of the incentives will have an effect given Taiwanese firms’ competitive advantages (“Taiwanese Businesses Ponder China’s Preferential Policy Move,” WantChinaTimes.com, March 23, 2015, http://www.wantchinatimes.com/news-print-cnt.aspx?id=20150323000044&cid=...)

Volkswagen has decided not to move forward on building a factory in Taiwan given current conditions. Specifically, Taiwan’s membership in the WTO and the conclusion of the cross-Strait Economic Cooperation Framework Agreement have reduced tariffs and non-tariff barriers, which, in turn, have led to a surge of imported cars to the point where imports take 40 percent of the Taiwan market. This makes the market very competitive for firms producing in Taiwan. VW hopes that China-Taiwan progress on removing trade barriers may give it a future opportunity to set up operations in Taiwan that can export tariff-free to the mainland (Chen Hsin-Jung, “Volkswagen Suspends Taiwan Production Plans,” WantChinaTimes, March 23, 2015, http://www.wantchinatimes.com/news-print-cnt.aspx?id=20150323000018&cid=...)