The biggest worry for many is an abrupt order for foreign workers and their employers to start paying up to 40 percent of their wages for pensions and other welfare. Automakers face a possible tax hike, while tax authorities are testing a system to collect dues for China's umbrella labor group from companies without union workers.
The changes come against a backdrop of critical coverage by state media of product safety and other complaints against high-profile corporations such as Wal-Mart Stores Inc. and energy giant ConocoPhillips Co. Companies also are uneasily awaiting the release of new patent and copyright rules they worry might push them to hand over technology.
The pension and medical charges took effect Oct. 15, less than six months after they were announced. Companies scrambled to come up with the money while employees wonder whether they will ever be able to collect the benefits.
The cost "may make the difference for some companies between a profitable year and an unprofitable year," said Adam Dunnett, deputy managing director of the Beijing office of consulting firm APCO Worldwide.
The changes have prompted questions about whether Beijing's attitude toward foreign companies that invested $105 billion in China last year and employ nearly 10 million Chinese workers is souring.
The communist government needs their investment and skills to develop its computer, auto, energy, telecoms and other industries but sees them as rivals to Chinese companies it wants to build into global competitors.
"China's enthusiasm for foreign companies is certainly waning," said James Zimmerman, a partner in Beijing with the law firm Sheppard Mullin Richter & Hampton who has worked in China for 14 years. "The government has become more selective in the types of investments permitted market access and more critical of those investors that are either out of favor or perceived as troublemakers."
Those hit hardest by the social charges will be consulting firms, international schools for foreign children and others with big foreign staffs that account for up to 70 percent of their costs. The impact on manufacturers should be limited because foreign employees are a small share of their workforces.
"This year we are probably going to just have to absorb it, which will probably cause us to show a loss," said Tim McDonald, headmaster of the International Academy of Beijing, which has 260 students and 45 foreign employees.
Foreign companies are on edge about patent and copyright rules due to be released soon under an anti-monopoly law enacted in 2008. A vague section of the law forbids abuse of intellectual property to hamper competition and companies worry it might be used to compel them to give know-how to Chinese rivals.
It is unclear whether the changes are related but they come at a complex time for the communist leadership both financially and politically.
Beijing needs to raise revenue to fulfill promises to improve schools and health care for China's poor majority. That comes as Communist Party factions wrangle over next year's handover of power to younger leaders — a politically tense period when looking sympathetic to foreign companies can be a liability for officials.
The changes add to pressure on foreign companies just as China's rapid economic growth slows. It eased to 9.1 percent in the three months ending in September from the previous quarter's 9.5 percent — the result of a clampdown to cool the overheated economy. Growth is expected to wane further as Europe's debt crisis and a sluggish U.S. economy erode demand for exports.
Business groups have long complained that Beijing hampers access to banking, construction and other industries in violation of free-trade principles. More recently, they say it might be trying to push foreign competitors out of promising fields such as clean energy.
Washington's ambassador to the WTO complained in a Nov. 30 speech that Beijing is retreating from free trade and increasing its role in the economy despite its pledges to allow free competition.
Chinese officials argue the charges for pensions, unemployment and health benefits will provide a safety net for foreign workers and are similar to those imposed in Europe, the U.S. or Japan. But the speed of the rollout caught companies unprepared after they already had made annual budgets.
"They are struggling to cope," said Dunnett. "Costs will go up and companies will have to make tough decisions on hiring as a result."
There were an estimated 590,000 foreign nationals living in China last year and 231,700 had work visas, according to government data. Foreign companies in China employed 9.8 million people in 2009, the last year for which figures have been reported.
The social welfare charges vary by city. In Beijing, they will cost foreign workers and their employers a total of up to 3,780 yuan ($590) a month for pensions and medical insurance. It is unclear how foreign workers can collect pension or unemployment benefits, because those who retire or lose their job usually lose the visa that allows them to stay in China.
Meanwhile, a tax change could raise costs for foreign automakers or other companies that operate several lines of business such as sales, production or financing and are required by the government to register them as separate corporate entities.
Tax authorities say they will treat money moved among those entities, such as profits from auto loans that are reinvested in manufacturing, as being taken out of China and impose a tax — a charge that would not apply to Chinese competitors.
At the same time, companies such as retailer Wal-Mart Stores Inc. and energy giant ConocoPhillips Co. face a wave of critical coverage by state media of grievances against foreign companies.
ConocoPhillips has been lambasted over leaks in June from an offshore field on China's northeast coast that released about 700 barrels of oil and 2,500 barrels of drilling lubricant. Five months later, the press still is reporting on the spill and the government's declaration that it was due to company negligence. A spill 15 times bigger from a pipeline owned by China's biggest state-owned oil company disappeared from the government-controlled press after a few days.
Wal-Mart, which has nearly 100,000 Chinese employees, was forced to close 13 stores for two weeks and two employees were detained on charges of mislabeling pork as higher-priced organic meat, a penalty industry analysts said was excessive.
The measure to collect union dues follows a multiyear campaign by China's umbrella labor group, the All-China Federation of Trade Unions, to set up unions in foreign companies.
Under a pilot project, tax bureaus in some districts of the Chinese capital have begun charging foreign companies the equivalent of 2 percent of workers' wages to pay for activities by ACFTU-affiliated unions, according to Zimmerman.
If a union is formed, the government will refund 60 percent of the dues to pay for labor activities. But if no union is formed, the tax bureau keeps the money. There is no indication whether the system will be rolled out nationwide.
MNCs keep the faith while India Inc frets
Arijit Barman / Mumbai December 5, 2011, 1:07 IST
India is indispensable for Irene Rosenfeld, the high-profile CEO of Kraft Foods. Her growth blueprint: A bigger bite of the market as a top-five snacking powerhouse. To sustain double-digit growth, she’s already pumping 70 per cent more investments in Kraft-Cadbury’s India operation.
It’s the same fizzy story for her rivals from Atlanta. With a war chest of $2 billion (Rs 10,000 crore), Coca-Cola India and its bottling partners will tap into the potential in the non-alcoholic, ready-to-drink beverage market over the next five years. That’s equal to the investments Coke has made in the past 18 years of its presence in India. “India has reached a scale where we want to see it in the top five countries,” says Ahmet C Bozer, Coke’s president, Eurasia & Africa Group.
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It’s not only companies in the global fast moving consumer goods (FMCG) sector. In automobiles or retail, engineering or even the regulated insurance sector, the traction for foreign investors seems to be rising. Take Siemens, largest engineering company in Europe, or its Swiss peer, ABB. Both have taken long-term calls on India, making it a hub for other emerging markets. Earlier this year, each shelled out Rs 5,000 crore to raise their stake in their India subsidiary.
Also, Siemens is seriously indigenising local reseach and development to develop 60 innovative, low-cost, base line products to cater to local price points. This means an additional ¤250 million (Rs 1,735 crore) investment over the next decade, with an aim to generate an incremental $1 billion (Rs 5,000 crore) revenue. “We are here for the long run. India, besides China and the US, is a focus market for us,” explains Armin Bruck, managing director, Siemens India.
“India is a strategic destination because of the tremendous investments that have to occur in the economy, for example in the infrastructure sector. There is growing domestic consumption and a very young population. Foreign MNCs see this as very long runway for growth,” observes Greg Guyett, CEO, Global Corporate Bank, JP Morgan. So, even growth in the Indian economy is coming down, it is still better than in the West.
THE CONTRAST
The gloom, doom and paralysis of policy theory doing the rounds don’t seem to be affecting these CEOs, who continue to pump their dollars into India. Between January and September this year, foreign direct investment has touched Rs 101,614 crore, up 38 per cent, compared to the same period a year before. These FDIs accounted for 7.6 per cent of total investments in India. The view from outside seems very different from the one within. Especially, the upbeat sentiments from the global managers are in stark contrast with the sense of despondency and ennui in India Inc.
There are, of course, some headline-grabbing projects on the ground — Reliance Industries’ Rs 40,000-crore capacity expansion of the Jamnagar refinery, Essar Power’s Rs 55,000-crore power portfolio of 9,500 Mw, Tata Steel’s expansion in Jamshedpur and its Kalinganagar venture (these two projects alone are a Rs 50,000-crore bet) or Hindalco’s Rs 40,000-crore expansion of Indian operations through a series of expansions and new projects — but these have been mostly work-in-progress or already-committed projects.
Fearing a demand slowdown, fresh investments by most Indian companies have almost dried up. Infrastructure projects are moving at a snail’s pace. ICICI Bank MD & CEO Chanda Kochhar says: “The current credit growth is still coming from past sanctions that are now getting disbursed. The new approval rate has gone down, as there are no projects or very few projects coming for financial closure.”
Engineering heavyweight Larsen & Toubro, which saw a 23 per cent slump in orders in the engineering and construction segment and has reduced the full-year outlook for order inflows to just five per cent, from the earlier 15 per cent, has a similar concern. “Conditions have undergone a sea change. There has been a slowing of investment and projects are getting reviewed,” says chief financial officer R Shankar Raman.
Some in India Inc say while the pessimism is real, it is unfair to compare MNC investments in India with that of corporate India.
“One needs to differentiate the complexities of setting up mega projects that are land, capital and labour-intensive, requiring outlays in thousands of crores, with the smaller-sized investments that have less interdependencies,” says Koushik Chatterjee, group CFO, Tata Steel.
In simpler terms, even today it is far easier to set up an FMCG plant or an ancillary industry where one doesn't need a large land bank or natural resources or even a large workforce. “Today, the challenge is for regulated sectors, where environmental clearances and land acquisitions are becoming a serious threat. One may argue that the vindictiveness seems ore towards India Inc, but it affects even the global players. What is happening to Posco’s plan or that of ArcelorMittal in India? They were to bring billions of dollars of investments, but they have not been able to move ahead even after so long,” says a corporate strategy head of one of India’s leading business house, on condition of anonymity.
For Tata Steel, MoUs signed in 2004 with the Orissa government are only now coming to fruition. Delays in government approvals areestimated to have held up Rs 150,000 crore of projects and investments affecting JSW, the Aditya Birla Group, HCC, Vedanta, Essar and other leading companies. More than currency volatility, the courts and the government have wreaked havoc on the business plans of many of these corporate poster boys. “Unless there is more certainty in the process, serious capital flow would be hard to come by, as corporations would find alternate deployment of expensive capital," Chatterjee adds.
The environment is precipitating efforts of Indian entrepreneurs to geographically derisk, but Raj Balakrishnan, MD, M&A, investment banking, DSP Merrill Lynch, adds another dimension. He sees India Inc’s globalisation drive as a normal process of corporate evolution. "Compared to many of their Korean or European counterparts, large Indian conglomerates are still extraordinarily exposed to India. For most global corporations, only a small part of their total sales comes from their native countries. Why should our conglomerates be an exception? Prudent boards, therefore, need to diversify geographically," he adds.
Logically, then, the MNC investments here should also be seen through a similar prism. “For these global corporations, their India operations are a relatively small part of their overall portfolio. So, for all those who believe in India’s long term potential, it’s important to continue to invest prudently through the cycle,” feels Alok Eknath Kshirsagar, director and head of Mckinsey Asia Centre.
Balakrishnan has a final word of caution. While advising clients for big-ticket mergers and acquisitions, he says, compared to a year ago, even foreign companies are getting cautious about India. “Most MNCs are moving away from the extreme positions and now there is an appropriate balance between euphoria and sckepticism. Old fashioned metrics like generating RoIs, or EVs are getting more important now to build a business case around India.” Follow @remy_zakaria
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