Why US companies have started fleeing China

Why US companies have started fleeing China, by Noah Smith.

The Chinese government just shut down two of Apple’s key service products, the iBooks Store and iTunes Movies. It has also denied Apple the right to trademark the name “iPhone,” allowing other companies to use the name for their own, non-Apple-related products.

The allure of China:

For many years, the vast Chinese market — more than 1 billion consumers in a fast-growing economy — sent thrills of excitement up the spines of corporate managers throughout the developed world. Who cares about the stagnation in Europe and Japan, when China has many more people than all of those markets combined?

China takes the intellectual property from western companies:

Not long after multinationals showed up in China, they were made to hand over much of their technology to native competitors (almost all of which are directly or indirectly owned by the Chinese government). This was happening as early as 2006, as the Harvard Business Review reported:

“These rules limit investment by foreign companies as well as their access to China’s markets, stipulate a high degree of local content in equipment produced in the country, and force the transfer of proprietary technologies from foreign companies to their joint ventures with China’s state-owned enterprises.”

Then China boots them out and competes with them:

Proprietary technology is the most valuable asset owned by many multinationals. So China truly offered a lose-lose choice for these companies — either they could miss out on the Chinese market in the short term, or give away technologies that would allow Chinese competitors to challenge them all over the world in the medium term.

Multinational companies often think very short term, so perhaps it isn’t surprising that many chose to make the devil’s bargain. Now the bill is coming due, as China’s government promotes its own national champions, many of which are now equipped with pirated foreign technology.

There are signs that some multinationals have had enough. Many are closing offices and factories in China, as costs rise and the government shuts foreigners out of the domestic market. Some recent examples include Microsoft, Adobe, Panasonic, Yahoo and Adidas.