How Westerners in China Can Fight Back

The best strategy for dealing with Beijing's chilly new business climate is not to copy Google's example

By Daniel Michaeli

No matter how tense commercial relations between the U.S. and China become, American corporations cannot afford to mimic Google's (GOOG) mistake and give up huge growth opportunities in the world's largest market. That's why business leaders need to adjust their strategies quickly to stem the damage.

First, they must cultivate untapped sources of support within China, beginning with independent executives who also chafe at Beijing's market-unfriendly policies. Coordinating a message with these leaders would change the narrative, removing the perception that greater economic openness means giving in to foreign pressure.

Some are already willing to join U.S. companies in public support of better Chinese economic policies. On Mar. 24, for instance, Bloomberg reported that Chinese executives including Yang Yuanqing, CEO of Lenovo (LNVGY), have gone public with their support of the currency realignment U.S. exporters need to be more competitive in China.

Allies Inside China

One place to look for allies is among the private executives upset because they cannot secure loans from state banks that pump cheap money into state-owned enterprises. Case in point: Last year, Liu Jieyin, the founder of Okay Airways, complained about the unfair dominance of state companies to Forbes. And he said the business climate for independent firms was so bad that "if you asked me to set up a private airline now, I would not dare."

American companies should also try to enlist help from state-owned enterprises that have an interest in open trade and investment. For example, the Commercial Aircraft Corp. of China (Comac)—which is making the C919, China's first jumbo jet—recently signed a $10 billion contract for an engine made by a joint venture of General Electric (GE) and France's Safran (SAF:FP). Comac is already taking orders for the C919, but whether the jet will be ready by 2016 as pledged depends on the successful execution of the engine contract. A worsening of the business environment could put such contracts, and even access to future export markets, at risk.

Despite the shrill rhetoric coming from Beijing, many government officials appreciate the concerns of foreign businesses. Some have long histories with foreign companies; others hope to restore economic openness for other reasons. They worry about stifling innovation and weakening the private sector, which has fueled growth for decades; creating housing and equity bubbles; and paying the environmental and public health costs of overinvestment. These worries were all raised publicly at the National People's Congress meeting in March.

Choose Your Battles

In addition to mustering support within China, U.S. companies must choose their battles more carefully. So when an attempted hacking raised the prospect of local competitors stealing trade secrets, Google should have focused on compelling authorities, perhaps by dangling the threat of going public about the hacking, to commit to protecting its intellectual property. Instead, Google threatened to leave China's search engine market if search censorship wasn't lifted—an impossible request of an authoritarian state. This action invited a hard-line response, failed to secure Google's intellectual property, and will only hinder Chinese citizens' access to information.

When threats are necessary, they should come from business groups with substantial combined leverage. U.S. companies manufacturing in China are collectively responsible for the livelihood of millions of Chinese workers. They also have the ability to build up the capabilities of regional competitors such as India. This gives them political leverage if they act in unison.

Market openness serves China's long-term interests. It strengthens the country's dynamic private companies and improves access to Western technologies. But it may take time for China's leaders to realize that. In the meantime, U.S. companies need to challenge Chinese policies more effectively. If American businesses fail in China, they put at risk both U.S. economic competitiveness and the most important bilateral relationship of this century.

Michaeli is a research associate at the Council on Foreign Relations. He blogs at www.asiaruminations.com.