MULTINATIONALS: Complex Sino-US Ties Shine In Avon, Solar, Qualcomm Cases
Bottom line: China and the west will continue to find common interests in fighting corruption, while Beijing’s state support for certain industries will remain an area of contention for the foreseeable future.
Sino-US business ties are on display in 3 separate headlines today, reflecting the increasingly complex relationship between these 2 economic superpowers that sometimes agree but often clash on different issues. One of the few things they agree on is the need to fight corruption, which is the theme in one headline that has the US fining health care products maker Avon (NYSE: AVP) for bribery at its China operation.
But the areas of disagreement are a bit more numerous, including US disapproval of Beijing’s strong state support for industries it wants to develop. That disagreement was at the center of another headline that saw the US finalize anti-dumping tariffs against Chinese solar panels, capping a 3-year-old clash on the issue. Heavy western ownership of globally used technologies is another sore spot, which was in the headlines as the US pressured China on a probe it is conducting into the licensing practices of mobile technology giant Qualcomm (Nasdaq: QCOM).
Let’s jump right into this round-up of Sino-US business stories with Avon, which was one of the earliest companies to enter China with its model of selling directly to consumers rather than through traditional stores. Following a 6-year investigation, Avon’s China unit has pleaded guilty to bribing local officials and falsifying records, and has agreed to pay a $68 million fine. (English article)
The investigation was conducted by the US securities regulator, and accused Avon of bribing local officials to get the necessary licenses to do business in China. This kind of bribery is rampant in China, and was on prominent display last year in another case where Beijing levied a record fine on British drug giant GlaxoSmithKline (London: GSK) for paying billions of yuan to doctors and medical professionals who bought its products.
While the US and China agree on the need to crack down on bribery, they differ quite a bit on Beijing’s policies of state support for China’s key focus industries. That support often includes policies like tax rebates and low-interest bank loans, which both the US and Europe argue gives exported Chinese products from those sectors an unfair advantage over similar products manufactured in the west.
The issue came to a head in the solar sector 3 years ago when a number of major panel makers in the US and Europe went bankrupt after China started flooding the global market with cheap solar cells. The US conducted a probe that determined Beijing unfairly supports its solar panel makers, and has just now finalized punitive tariffs that will apply to all such panels imported from China. (English article) Of course Beijing wasn’t happy about the move, and has taken its own counter measures.
Finally there’s intellectual property, which has become another sore spot in recent years. That’s because western companies often hold many of the key patents for globally accepted technologies in areas like telecoms. The conflict arises because China often makes many of the actual products in those areas, and locally based manufacturers of products like cellphones complain that they often have to pay big royalties to companies like Qualcomm,
The issue burst into the headlines earlier this year when China began an anti-monopoly investigation into Qualcomm over its licensing practices. Recent reports have indicated that probe is nearly finished, and will end with a decision that includes a record fine and also orders Qualcomm to radically change its licensing practices. In anticipation of that, media are reporting that US President Barack Obama admonished Chinese President Xi Jinping at a recent meeting, warning him not to use China’s anti-monopoly as a tool to implement policies that favor Chinese manufacturers. (English article)
It looks unlikely that we’ll see a decision on the Qualcomm case before the end of the year, though Beijing-ordered changes to its licensing practices will clearly be the central element to watch. I do expect that clashes over licensing practices will decrease as Chinese firms develop their own technology in the years ahead. Fighting Corruption will also continue to be an area of common interest, though Chinese state support for certain industries will continue to be an area of contention for the foreseeable future.
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