Review: Pandering to Beijing has shrinking payback

A heart-shaped Chinese flag installation ahead of the 70th founding anniversary of People’s Republic of China is seen on a street in Shanghai, China September 26, 2019. Picture taken with a slow shutter speed and a zoom effect. REUTERS/Aly Song – RC19BA3710A0

HONG KONG, April 1 (Reuters Breakingviews) – In the late 1980s American aerospace company McDonnell Douglas was locked in a life-or-death struggle with rival Boeing (BA.N). Having assessed the vast potential of the Chinese aviation market, it signed a $1 billion deal in 1992 to supply jetliners to the People’s Republic. At the same time, the company entered into a joint venture with Shanghai Aviation Industrial Corporation to assemble the planes inside China. The hope was that Beijing would direct local airlines to prefer its products, even though it would help the country learn to build a domestic rival to U.S. aircraft.

It was a massive mistake. The MD-90 probably inspired China’s ARJ-21 regional jet, but local orders never came. “Chinese airlines simply do not want to buy an airplane that’s been manufactured in China,” raged one baffled executive. “It’s totally amazing that the Chinese system permits this.” The miscalculation contributed to McDonnell Douglas’ ultimate merger with Boeing.

Capitalists have a long and mixed history of pandering to dictatorial regimes. In “America Second: How America’s Elites Are Making China Stronger”, journalist-turned-China-risk-consultant Isaac Stone Fish catalogues those who kowtowed to Beijing, from erstwhile Disney (DIS.N) Chief Executive Michael Eisner to former U.S. Secretary of State Henry Kissinger. It’s fun to see the greedy and hypocritical named and shamed. However, the profit margin on pandering keeps shrinking.

Stone Fish believes politicians and executives misled American voters in their desire to tap China’s cheap labour force and vast market. “Corporations recognized they couldn’t argue that China was actually making progress on human rights,” he writes, so they insisted economic growth would fix the problem: “Trade with China would both benefit Americans and democratize China.” Stapleton Roy, who was America’s ambassador to China from 1991 to 1995, told Stone Fish that few in the U.S. government believed this thesis. The idea “was used to sell policy, not formulate it.” In the event, China’s opening up stopped far short of democracy, and President Xi Jinping’s rise sent it into reverse.

Today, unable to argue they are advancing democratic norms, some business leaders have pivoted to openly defending the Chinese system, citing its decisiveness and ability to make long-term strategic investments. In private they also argue it keeps pesky social and environmental activists in check. Ray Dalio, the founder of Bridgewater Associates, believes the United States is doomed to be overtaken by China. Tesla (TSLA.O) boss Elon Musk insults elected U.S. politicians on Twitter but has opened a dealership in Xinjiang, where Beijing has executed a controversial programme to deradicalise Muslim minorities.

For some companies, sucking up appears to have worked. Take Rio Tinto (RIO.L), (RIO.AX). In 2010, Stone Fish writes, the Anglo-Australian miner hired Kissinger to advise it on how to deal with four employees China had convicted for corruption and stealing commercial secrets. Kissinger advised executives to build trust with Beijing, so Rio fired the employees. Five years later, Stone Fish notes, China accounted for 40% of the company’s global revenue, implying the pandering paid off.

Yet the reality is more complicated. Even a vicious tariff spat between China and Australia did not dent Rio’s sales in the People’s Republic, which reached 58% of the total in 2021. Western companies whose products are not as vital to China’s economy were less successful. Meta Platforms (FB.O) founder Mark Zuckerberg spent years publicly praising Xi, and in 2016 the New York Times reported his company was developing a censorship tool that would comply with Chinese law. Yet the social network remains locked out of China.

Meanwhile, industries for which accommodation used to make sense may be having a rethink. Hollywood movies once accounted for 40% of the Chinese box office. Hoping Beijing would relieve them of onerous revenue-sharing requirements and let them release more titles, studio bosses took self-censorship to new extremes. But the restrictions stayed in place, and now local production houses dominate the $7.4 billion market. read more Similarly, in 2016 Apple (AAPL.O) had to commit to invest $275 billion in the country read more to relieve regulatory pressure on its business, according to The Information. That’s more than the $249 billion in revenue the iPhone maker collected in Greater China over the last five years.

The McDonnell Douglas executive who was baffled by the failure of his China venture might have considered that corruption is not the same as stupidity. Executives at Chinese state-owned airlines in the 1990s knew how bad poor local quality control was. As for Kissinger, China’s paramount leader Mao Zedong described the diplomat as “just a funny little man who shudders all over with nerves every time he comes to see me.” Like most people, Chinese leaders have little respect for sycophants.

Follow @petesweeneypro on Twitter

CONTEXT NEWS

– “America Second: How America’s Elites Are Making China Stronger” by Isaac Stone Fish was published by Knopf on Feb. 15, 2022.

Editing by Peter Thal Larsen and Katrina Hamlin

Our Standards: The Thomson Reuters Trust Principles.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.