MILAN, Dec 2 (Reuters Breakingviews) - Beijing’s anti-Covid rules have triggered the biggest domestic protests since the Tiananmen Square uprising of 1989. While the Chinese government looks set to ease some health measures, the episode has got Western corporate boards pondering what to do in case of an escalation. Yet companies’ red lines on China are out of their hands.
Undeterred by growing geopolitical tensions and slowing Chinese growth, several Western companies have this year intensified the rate at which they bet on the People’s Republic. Foreign direct investments by German carmakers, which last year represented about 40% of all European Union investments into China, reached 4.6 billion euros by the end of September 2022. That’s 42% higher than those for the whole of 2021 and the biggest amount in a year since 2000, Rhodium Group data show. In recent years, most European inflows have come from a handful of big companies.
The upshot is stark. Volkswagen, General Motors, Toyota Motor and Tesla derived between 20% and 40% of their global sales from China last year, according to Goldman Sachs analysts. At 10.2%, their average net profit margins in China were significantly above the 7.7% recorded at group level. Luxury giants including LVMH and Kering, which collectively made 21% of their global sales in China last year, opened 55% of all new global stores in the Middle Kingdom. China is forecast to become the world’s largest bling market by 2025.
All this creates an obvious economic incentive to overlook human rights concerns and East-West political sniping. Using the sanctions currently imposed against Russia as a blueprint, companies and investors are working out scenarios that envisage China facing similar penalties, one senior Western executive told Reuters Breakingviews. Yet the negative impact of a Chinese blockade would be so massive that no contingency plan would really work. Western groups that have curbed their China presence, including Stellantis and CNH Industrial, tend to be players with less exposure.
Western boards can try to contain some of the risk by building production slack or seeking alternative suppliers, perhaps in India, to allow continued manufacturing outside the People’s Republic. But that has limited impact. And there’s no upside to pre-emptive self-sanctioning.
If Western states decide to impose sanctions, boards would have their red lines decided for them. Until that happens, their main strategy is just to assume such a step won’t happen, as the ramifications would be too seismic. Western companies will keep betting on the Middle Kingdom, until their governments stop them.
CONTEXT NEWS
Reacting to anti-lockdown protests, China is set to announce a nationwide reduction of the frequency of mass testing and will allow some people infected with Covid and some close contacts to isolate at home under certain conditions, sources familiar with the matter told Reuters on Dec. 1.
German foreign direct investments into China totalled 5.49 billion euros during the first three quarters of this year, 15% up from 4.8 billion euros during the whole of 2021 and the highest level of investment in a single year since 2000, data from the Rhodium Group showed.
China’s domestic sales of luxury goods grew 36% to 471 billion renminbi ($67 billion) in 2021 from a year earlier, representing a 21% share of the global market, according to a report by Bain & Company. The report predicts China will become the largest global market for luxury goods by 2025.
Editing by George Hay and Pranav Kiran
Source: Reuters