US President Joe Biden’s attempt last week to secure a pledge from Chinese leader Xi Jinping not to provide material support for Russia’s invasion of Ukraine was always going to be a long way off. The fact that after two hours it ended with little more than mutual threats of sanctions should be a wake-up call for foreign companies operating in China.

The risks of doing business in China have been increasing for some time. Tensions between Washington and Beijing over tech exports, the mass incarceration of a million Uyghurs and other Muslim groups in Xinjiang, and the crackdown in Hong Kong, have forced many companies to mull plans. emergency. The supply chain disruptions caused by the Covid pandemic then highlighted the dangers of depending on China for key components or products.

But the underlying assumption of many companies is that ultimately China’s interest in economic and political stability will stem any rash action such as military intervention in Taiwan.

Few companies are yet ready to consider whether the risks of dealing with Xi’s increasingly authoritarian regime are beginning to outweigh the benefits of being in a market of 1.4 billion people. Volkswagen, which depends on China for at least half of its annual net profit, has even prepared to brave the reputational risk of having a factory in Xinjiang.

“Over the past year . . . companies have struggled to find a solution to maintain their economic interests in China while realizing that they are exposing themselves to political risks,” says Max Zenglein, chief economist at the Mercator Institute for China Studies “They didn’t have a concrete example of what that means and didn’t anticipate how quickly it could escalate.”

Russia’s aggression may have changed that reckoning, however. In less than four weeks, more than 400 companies have pulled out of Russia or suspended operations, according to the Yale School of Management. Some left for fear of being caught by sanctions, but others – such as McDonald’s, Starbucks, TJ Maxx or Uniqlo – acknowledged the risk of customer backlash if they remained open.

The Russian crisis “makes them realize that maybe they need to factor these risks more into their calculations,” says Zenglein. “It’s a case study of how the global system can break down.”

It wouldn’t be so easy to leave China, which is the world’s largest importer and exporter of intermediate goods used to make a finished product. In 2020, China’s share of foreign direct investment reached an all-time high of 25%, according to the Peterson Institute for International Economics.

But a report by Merics’ Zenglein points out that while some industries (the automotive sector) and some countries (Germany) are heavily dependent on China, the dependence of European companies may be overstated. A survey of 25 listed European companies from different countries found that, on average, they derived 11% of their revenue from China in 2019.

A few – notably from the Republican right in the US – suggest that the companies are decoupling from the country entirely. It would be a disaster for the global economy. But some leaders are reassessing the principles that previously guided their plans in China.

“Things you would normally do because it made business sense to do them, you have to ask yourself if it still makes sense,” said a senior executive at a European multinational, who asked to remain anonymous to protect the public. company interests. “Will this supplier relationship be feasible in an environment where the prospect of sanctions is fast approaching?”

Corporate lawyers such as Dan Harris of US-based Harris Bricken advise their clients to start thinking about “asset light” strategies, such as licensing or franchising where appropriate. At the very least, diversifying manufacturing elsewhere in Asia, or even further afield, should be a priority.

It may also be wise to ensure that in future Chinese operations are dedicated to the local market, separate from the rest of the world. “In the past, people might have chosen to build global export capability around a hub in China. But they won’t anymore,” the executive said.

Most Chinese experts believe Beijing has no imminent plans to follow Russia’s lead with an invasion of Taiwan. But many Russian experts also believed that Moscow would not send tanks across the Ukrainian border. The lesson of Russia’s invasion is not only that the unthinkable can happen, but that the consequences can occur at a speed and on a scale few would have imagined possible.

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