Nokia exit: Is China's 'golden age' of foreign investment over?

In the Yizhuang hi-tech industrial park in southeast Beijing, a gleaming seven-story glass and steel building that houses Nokia’s mobile phone factory will close by the end of the month. Its sister plant in southern China is to suffer the same fate as Nokia’s new owner, Microsoft, shifts jobs and investment to Vietnam. 

Nokia's high-profile move is the latest sign that for international companies, China is losing some of its luster after years of shining as the brightest star in global capital's firmament. “The ‘golden age’ for business in China is drawing to a close,” a recent report by the European Union Chamber of Commerce in Beijing concluded.

China is still a huge, growing market that no global company can afford to ignore. Its economy, the world's second largest after the US, is expanding at around seven percent a year. 

But for reasons ranging from air quality to restrictive rules, to higher costs of business and obstacles on market access, China has become a tougher place to do business. And that is putting off many foreign companies. 

One big problem for these firms is simply that China’s economy isn't growing as rapidly. Seven percent a year is high by international standards but it is well down from the double-digit rates that astounded the world for the past 30 years. And most forecasters expect growth to slow further, while still outpacing Europe and the US. 

A survey by the American Chamber of Commerce in Beijing last September found other reasons that made 2014 what it called “the most challenging year in recent history” for many of its members.

High among them was a widespread sense that Chinese laws are unclear and often arbitrarily applied. Fifty seven percent of US firms believed that foreign companies are being singled out in recent government anti-monopoly, anti-corruption, and pricing campaigns.

At the same time, foreign firms are being kept out of some of the most lucrative investment opportunities in China's service sector. “These are some of the most strictly controlled sectors in terms of foreign investment,” complains James Zimmerman, Chairman of the American Chamber of Commerce.

Nearly half of the survey respondents felt that foreign businesses are less welcome than they once were, and for the third year in a row the survey found an increase in the number of firms moving production out of China or planning to do so, though they still represent only 15 percent.

Foreign investment plateau

After a decade that saw annual flows of foreign investment into China double, the rate has flattened. In its report Thursday to the annual meeting of China’s parliament, the government’s economic planning agency said it expected foreign investment this year to be similar to the $120 billion it registered in 2014.

Microsoft’s decision to decamp to Hanoi was doubtless influenced by lower production costs there. The Japanese trade agency JETRO found in 2012 that Vietnamese wages were around one third of Chinese wages.

But the company also decided to close its handset factories here, with the loss of 9,000 jobs, because Nokia’s Lumia model was not selling well in China. Microsoft decided on “an adjustment of production capability based on current levels of demand,” says company spokeswoman Steffi Cao, and headed for Southeast Asia where market prospects for its phones seem brighter.

That illustrates a swelling trend towards making things as close as possible to the people who will buy them, says Rosemary Coates, founder of supply chain advisers Blue Silk Consulting based in Los Gatos, Ca.

Once, not long ago, the southern Chinese province of Guangdong was called “the workshop of the world.” It exported goods across the globe. Today, 80 percent of American firms in south China are focused on the Chinese market; only 20 percent manufacture primarily for export. 

General Electric, for example, which moved all its water heater production lines to China in the 1990’s, now only makes the cheaper models, aimed at Chinese customers, here. It has “re-shored” to Kentucky the manufacture of its high-end heaters that sell better in America.

“I did off-shoring to China for 15 years,” says Ms. Coates. But now she is helping some three dozen companies move production out of China. “For the past two years clients have been asking me about re-shoring,” she says. “The momentum is clearly building on this.” 

Competitive domestic market

China's consumer market continues to grow, which helps explain the shift by factory owners in Guangdong towards domestic shipments. China's government is emphasizing domestic-led growth over exports, while also promoting the service sector. 

But at the same time China is getting more competitive and harder to sell into, says Sage Brennan, head of China Luxury Advisors, which helps luxury goods companies break into China. “It is no longer the untapped marketer’s paradise that it once was,” he says.

One US company making that unwelcome discovery is GoPro, makers of miniature action cameras. The firm had barely begun to expand into China when Chinese mobile phone maker Xiaomi last week unveiled its own Yi Action Camera, selling for half the price of GoPro’s basic model.

Lawyer Dan Harris, who helps small and medium sized American companies operate in China, says that most of the businesses here he has helped to wind up have closed because of disappointing local sales, not because they are moving elsewhere.

Smaller firms cannot afford to move abroad because they have made big investments to establish themselves in China, Mr. Harris says. Nor are they big enough to take sufficient advantage of lower per-unit production costs to make a move from China to Vietnam worthwhile, as it has been for Microsoft, Intel and Samsung, among other global firms.

“But if the big companies go, the feeder firms will want to go too,” says Harris. “Eventually my clients will have to follow them.”

“A company puts its resources where it thinks its future market will be,” says Mr. Brennan. “China is not going away, but it is becoming just one market among others” while countries such as Indonesia offer the prospect of faster revenue growth.

“So far, companies have been focusing on China,” Brennan adds.  “Now they are looking at southeast Asia and India too. We are seeing a groundswell shift in what companies are spending their time on."