MNCs in the News-2014-11-28

Wang Dong, the Deputy Director-General of the NDRC’s Department of Foreign Capital and Overseas Investment, said that China’s 6th Foreign Investment Catalog will incorporate a negative list approach, where FDI not forbidden is allowed. This approach also is used in the Shanghai Free Trade Zone. The NDRC already has reduced the number of sectors with restrictions on foreign investment from 79 to 35 and lowered the number of sectors that require a Chinese majority shareholder from 44 to 32. Moving towards a negative list approach will prepare the groundwork for a China-US bilateral investment treaty (Lan Lan, “‘Negative List’ Heads for Wider Adoption,” China Daily, November 22, 2014, http://www.chinadaily.com.cn/business/2014-11/22/content_18958825.htm)

At the 2014 Guangzhou Auto Show, the President and CEO of Volkswagen (VW) Group China Jochem Heizmann has stressed VW’s intent to be “‘the most sustainable car manufacturer in China.’” Pursuant to this, the German car giant plans to produce more eco-friendly and energy efficient products, intensify water and energy-saving production, and make massive investments in eco-technology and production in China. In particular it will offer a wider range and massive production of electric and hybrid vehicles. Heizmann put it thus “‘we understand the fundamental importance and assume our responsibility’” (Zhuan Ti, “‘Sustainable’ Vision of Volkswagen Group,” China Daily, November 20, 2014, http://www.chinadaily.com.cn/business/motoring/2014-11/20/content_189484...)

Foreign car companies have played a critical role in the development of China’s automobile sector and recognize the importance of good corporate social responsibility (CSR) in order to continue to maintain smooth operations. Mercedes-Benz has been trying to be a good corporate citizen by supporting a variety of child safety programs run through schools and intends to promote road safety programs through its extensive dealer network as well as other channels. More broadly, Mercedes-Benz has been working on CSR initiatives in areas such as environmental protection, social care, and education (Li Fangfang, “Mercedes-Benz Looks to Nurture the Future with CSR Initiatives,” China Daily, November 24, 2014, http://www.chinadaily.com.cn/business/motoring/2014-11/24/content_189665...)

Business media reported last week China had launched its first tax evasion case against a foreign MNC, requiring the MNC to pay back taxes of about US $140 million and pay about 100 million RMB more a year going future. In tandem, China announced it would increase its efforts to combat tax evasion. Reports later revealed the penalized party as Microsoft (MSFT). Per reports, the problem is that MSFT reported excessive losses in China and engaged in questionable transfer pricing practices. MSFT denied, though, it paid any back taxes. MSFT also faces an anti-monopoly probe (Toh Han Shih, “Beijing to Step Up Tax Evasion Campaign after US Multinationals Caught,” South China Morning Post, November 25, 2014, http://www.scmp.com/print/business/china-business/article/1647942/beijin... Bill Rigby, “Microsoft to Pay China $140 million for ‘tax evasion,’” Reuters, November 25, 2014, http://www.reuters.com/assets/print?aid=USKCN0J92DD20141125; Charles Clover, “China Charges Microsoft $140m for tax ‘evasion,’” Financial Times, November 26, 2014; Gao Yuan, “Microsoft Reported to be Facing $137 Million Bill for Back Taxes,” China Daily, November 27, 2014, http://www.chinadaily.com.cn/business/2014-11/27/content_18983568.htm)

According to a study by Henan’s Academy of Social Sciences, the inability of Henan’s local governments to support local firms and boost local economic development has led the province to turn to attracting foreign investment through special incentives in the form of resources, land, and tax breaks. This has brought major firms such as Foxxconn into Zhengzhou, which represents Apple’s largest smartphone production base in China, and accelerated urbanization, industrialization, and modernization as well as made Henan a major exporter. However, the incentives have been costly, running between $1.95-2.45 billion (“Foxxconn Plant Transforming Henan’s Local Economy,” WantChinaTimes.com, November 25, 2014, http://www.wantchinatimes.com/news-print-cnt.aspx?id=20141125000141&cid=...)

The recently concluded China-South Korea FTA will significantly reduce import tariffs. There is an increasing awareness, though, that the FTA’s impact will go far beyond trade. Some expect, for example, that Chinese companies pour money into South Korean gaming companies in order to obtain games, acquire brands, or invest in new game development. These companies will be able to sell their games in South Korea and China, a major market for South Korean game exports. Some also see potential for Chinese investment in the South Korean fashion sector whose products are attractive to Chinese consumers (“With FTA in Mind, Chinese Investors Look at S Korean Industries,” WantChinaTimes.com, November 25, 2014, http://www.wantchinatimes.com/news-print-cnt.aspx?id=20141125000142&cid=...)

Japanese carmakers have been facing a more challenging operating environment in China due to various factors. One is reduced consumer demand flowing from the intensification in 2012 of the China-Japan conflict over the Diaoyu/Senkaku Islands. The other is increasing competition from American and German companies in the small-car segment, previously the preserve of Japanese firms. Yet another is shifting government fuel efficiency standards and delays in China’s subsidy program for the purchase of hybrid vehicles, which influenced the competitive environment (Tokuhiko Saito and Kaname Ohira, “Japan Carmakers Struggling to Keep Up with Foreign Competitors in China,” The Asahi Shimbun, November 25, 2014, http://ajw.asahi.com/article/business/AJ201411250027)

Japan’s largest life insurer, Nippon Life Insurance, also known as Nissay, will boost its stake in one of India’s biggest conglomerates, Reliance Capital Asset Management, from 26 to 35 per cent, paying approximately US $100 million. Within two years, Nissay plans to increase its stake to the maximum limit of 49 per cent. India’s Prime Minister Narendra Modi has been working on increasing from 26 to 49 percent the maximum stake a foreign firm can hold. When Modi visited Japan in September this year, the two companies struck a deal (Laura Davidson, “Nippon Life to boost stake in 34 billion fund manager reliance,” Bloomberg Businessweek, November 27, 2014, http://www.businessweek.com/news/2014-11-26/nippon-life-to-boost-stake-i... “Nippon life to raise stake in mutual fund to 49%,” Economic Times, November 27, 2014, http://economictimes.indiatimes.com/industry/banking/finance/finance/nip...)

Honda publicly announced it had failed to report more than 1,700 claims of injury or death to the U.S. National Highway Traffic Safety Administration (NHTSA) for over 10 years after 2003. It had failed to report 60 per cent of incidents that should have been reported to the NHTSA under a new law implemented in 2000, and Honda explained that the underreporting resulted from administrative mistakes. It is possible that the NHTSA may levy a record fine of $35 million on Honda for its failure to meet its reporting obligations (“Honda faces record $35 million U.S. fine for 1,700 unreported claims,” The Japan Times, November 25, 2014, http://www.japantimes.co.jp/news/2014/11/25/business/honda-audit-shows-1... “Honda failed to report over 1,700 injured or deadly accidents for over 10 years to the authority,” Nikkei, November 25, 2014, http://www.nikkei.com/article/DGXLASGM25H3Y_V21C14A1EAF000/)

The Japanese government plans to create a financing body for Japanese firms to promote weapons exports and fund defense industry cooperation abroad. As China’s military power grow, Prime Minister Shinzo Abe is striving to strengthen regional security by invigorating Japan’s defense industry. Although the Defense Ministry declined to comment on the matter, the Japan Bank for International Cooperation (JBIC) and the Japan International Cooperation Agency (JICA) may provide financing. Last year, Kawasaki Heavy Industries approached JBIC about possible financing, and Mitsubishi Heavy Industries tried to co-build with Britain’s BAE Systems, which failed for financial reasons (Tim Kelly, Nobuhiro Kubo, “Japan mulls financing body to boost weapons exports,” The Japan Times, November 27, 2014, http://www.japantimes.co.jp/news/2014/11/27/national/government-eyes-mil...)

According to a new Australian government report, major mining project investment commitments are at the lowest level in more than a decade. The report notes that in the last six months only three large projects worth total of US $597 million received a positive “final investment decision” while 8 projects worth US $22.2 billion failed to progress. Furthermore, seventeen projects have been removed from the list after being abandoned or having no work done on site for a year. However, the report is optimistic in regards to the future, given Australia’s rich mineral and energy deposits and company cost-cutting measures (Stephen Letts, “New Mining Investments Crash to Decade Low,” ABC News, November 26, 2014, http://www.abc.net.au/news/2014-11-26/mining-investment-commitments-cras...)

The Indonesian government recently has revealed plans to develop integrated industrial areas and technology parks in a number of regions throughout the country as part of President Joko “Jokowi” Widodo’s program to accelerate economic growth. The government plans to build a total of 100 techno parks next year and expects the number to reach 500 by 2019. Infrastructure building offers a way for Indonesia to lessen its reliance on imports as well as boosting investment in development. The government is preparing incentives to encourage development in the integrated industrial areas (Grace D. Amianti, “Govt to Build More Industrial Estates,” The Jakarta Post, November 26, 2014, http://www.thejakartapost.com/news/2014/11/26/govt-build-more-industrial...)