Tough Talk on Trade

A Conversation with James McGregor

As we wait for Chinese and American negotiators to work out a deal, EURObiz talks to experienced ‘China hand’ James McGregor of APCO Worldwide (Shanghai), who shares his views on the current situation.

Q: You said last year that “governments and enterprises around the world must keep a close watch on the opportuni­ties and obstacles that emerge” (in China). What opportunities and obstacles have emerged that you think we should be keeping a close eye on?

What’s going on now is a whole different world with this trade war and all of the things that go back and forth between China and the EU, China and the US – basically China and everybody else.

China’s under huge pressure right now. Because of the trade tariffs, its economy is fragile at this point. There’s a lot of talk about different openings and different reforms, and some of it might even come to fruition this time around. China has been talking about a lot of reforms for a few years, but the business community is not listening so much anymore because it hasn’t happened.

But I think we are going to see changes as this gets sorted out, and you’ve got to stay on top of everything. You’ve got to really watch closely, and you’ve got to talk to people because there may well be opportunities, and there may well be new obstacles. It’s all driven by policies and politics. It always has been, quietly, but now that’s right to the forefront. So those doing business in China who are not paying attention to policy by the day, and who are not talking to people, are probably hurting themselves.

Remember: China needs a lot of what the West has to offer. They need a lot of the technology, they need a lot of the know-how, they need a lot of the products. And they also need to have their market open enough so that the other markets will be open to them. So welcome to the brave new world.

Q: The European Chamber has stated that the tariff war we are now going through is “a source of headaches for European firms”, and the friction is to a large extent driven by China’s ‘re­form deficit’. Is that a diplomatic way of stating the problem?

I look at it a different way. I call it ‘reform and closing’. Under Deng Xiaoping it was ‘reform and opening up’, but lately it has been reform and closing – reforming for Chinese companies, but closing or narrowing the opportunities for foreign companies so China can replace them.

Nobody was in favour of the tariffs in the foreign business com­munity in China. We looked at tariffs as kind of a crazy way to do things because we didn’t look at the deficit as being a problem. But having gone down the road with them now, I think Trump has stumbled onto a strategy. The tariffs got China’s attention.

There has been a sea-change, because China had figured out our systems and they knew how to play us. In Europe they played countries against each other, and in America they played compa­nies against each other. They figured out the political systems of both areas (Europe and the US) and were able to respond in very targeted ways to anything coming their way they didn’t like.

The American chambers recently put out an extensive report. One of the key things this position paper calls for is a new form of arbitration outside of China. They are calling for moving more of this stuff over to the WTO over time. China may find that hard to accept, but unless you have enforcement, no matter what China promises, it’s not worth anything.

Q: Will the Americans, or the Europeans, accept the WTO as a ‘supreme court’ for business decisions?

There’s a consensus around the trade world that the WTO is absolutely essential and that the WTO doesn’t work anymore.

Under the GATT [General Agreement on Tariffs and Trade] there were a small number of countries that ran the thing, and so had the biggest say, so they were able to make some progress as eco­nomics and technology changed, and the ways of doing business changed.

Under the WTO, from day one it’s been a full democracy of approx­imately 160 countries. They all have equal say so nothing can get done. The rules of the WTO are antiquated. The dispute-resolution mechanism in the WTO only works if all members are willing to abide by it and actually let it happen.

Maybe all this [the current trade dispute] will finally drive real WTO reform. God knows.

Q: Apple has announced that sales were lower than expect­ed in China in late 2018, and Starbucks has indicated that its numbers are plateauing as well. Is it possible that part of this new phase we’re in is that Chinese consumers are no longer enthralled by foreign products?

In late 2018, Apple saw sinking sales revenue in China across all of its leading products including iPhones, Macs, and iPads.

I think that for the most part Chinese consumers are agnostic about origin: they’re not tied up with where things come from. They’re into quality products at a good price.

The Chinese phones—OnePlus, Huawei, Oppo—are really good, and they’re cheaper than Apple, so people are turning to them because the price point is so much better. I don’t know what that has to do with politics or ideology regarding Apple – they had a good run.

The same thing is happening in the auto industry. Some of these local manufacturers, which have been in JVs [joint ventures] with foreign companies, are really learning how to make top-quality cars, or much better cars, at a much better price point, so their sales are feeling it.

I go to Starbucks—there’s a Starbucks on every corner in China, or at least in Shanghai and the major cities—and they are all pretty full. So…

But as a general statement, I think that the best days of the MNCs [multinational companies] in China are behind them. They had had an outsized market share because China couldn’t do it. Even mul­tinationals that were pretty incompetent in China in the late ‘90s and the 2000s could make a lot of money because China couldn’t do it.

But the Chinese companies are smart, they move fast, they take risks, they make quick decisions, they’re on top of their market. So, in addition to politics, you have to be good to compete with them.

Q: How much of that could be down to unfair technology transfers, or the undue government support that Chinese com­panies often receive?

I’ve seen more companies commit suicide in China than have been killed in China. Because their headquarters have been very slow-moving: they can’t make decisions, they’re risk-averse.

I speak to many boards of directors [of Western firms] and when questions come back to me from the directors, 90 per cent or more are about risk, not opportunity. When you talk to Chinese compa­nies, risk does not come up, it’s all about opportunities. Some­times, when we’ve been rich too long, we move too slowly.

I’m not saying that China hasn’t stolen technology and hasn’t been unfair and the opportunities haven’t been lopsided. All of these charges are true. But equally true is the behaviour of foreign companies in a market where they have to be a lot more agile and smart and quick. They have to be willing to take risks and willing to chase opportunities.

James McGregor is chairman of APCO Worldwide greater China region and author of two highly regarded books: No Ancient Wisdom, No Followers: The Challenges of Chinese Authoritarian Capitalism, and One Billion Customers: Lessons from the Front Lines of Doing Business in China. A former chairman of the American Chamber of Commerce in China, he has lived in China for nearly three decades and is fluent in Chinese.