Top Western companies continue to abandon operations in China and Russia, highlighting the obstacles to profitability in the powerful Eurasian countries.
On July 18, fast-fashion retailer H&M announced that it would be “winding down” its operations in Russia due to “current operational challenges and an unpredictable future,” becoming the latest business to depart Russia as a result of its attack on neighboring Ukraine. The invasion has killed thousands of civilians and demolished cities, prompting global outcry and sanctions.
“After careful consideration, we see it as impossible given the current situation to continue our business in Russia,” Helena Helmersson, CEO of H&M Group, said in a statement.
That same day, automotive manufacturer Stellantis revealed that it was ending a joint venture with Guangzhou Automobile Group, or GAC, to build Jeep vehicles in China and would instead focus on importing the SUVs. Stellantis cited “a lack of progress in the previously announced plan for Stellantis to take a majority share of the GAC-Stellantis joint venture” as the reason for the exit.
“Stellantis intends to cooperate with GAC Group in an orderly termination of the joint venture formed in March 2010, which has been loss-making in recent years, and will recognize a non-cash impairment charge of approximately €297 million in its first half 2022 results,” the company said.
The moves by major retailers and manufacturers to shift away from China and Russia underscore the challenges to securing a foothold in both countries, which have large commercial markets that lure Western businesses to keep trying.
The economic links between the United States and China “remain deeply intertwined,” according to the American Chamber of Commerce in China, with $560 billion in two-way goods trade in 2020. “China is among the largest and fastest growing markets in the world and constitutes an important market for US products and services,” the group says.
“In order to be globally competitive, American producers and service providers must be able to compete in the China market on a level playing field,” it continued, pointing out that “extensive market access barriers, protectionism, an opaque regulatory system, and discriminatory enforcement continue to hinder the operations of US business in China today.”
Arthur Dong, a business professor at Georgetown University, says Stellantis’s experience in China “is also shared by other companies and many are now evaluating whether or not the benefits of having a presence in China outweighs the risks and challenges of doing business there,” he said in an email. “Western companies in particular are often caught in the crosshairs of governmental sanction in China should any of their statements come in conflict with official State policy.
“On any given day, an American company could step on a landmine and face retribution from government leaders on any topic that contradicts China’s belief system, however minor that may be,” Dong added.
Though vastly different countries overall, China’s and Russia’s authoritarian governments have often put them at odds with the West, particularly the U.S., creating obstacles for American firms hoping to tap significant foreign markets successfully. Recent geopolitical events, such as the COVID-19 pandemic and Russian President Vladimir Putin’s war in Ukraine, have only exacerbated some of those issues, Dong and other experts say.
When it comes to Stellantis’s Jeep venture, “they are pulling out because their overall sales in the market have not met expectations and the continuing Covid-related lockdowns have so disrupted their operations that they feel it is better to shut it down than continue,” Dong said.
With H&M and Russia, meanwhile, the retailer “is a late-mover as other retailers such as Zara and Ikea departed Russia months ago” as a result of the invasion of Ukraine.
“Western companies pull out of Russia because they have to answer to their best customers,” Dong continued. “Their best customers reside in their home countries such as the EU and the United States. Continuing to do business in Russia sends a potentially damaging signal that they have no qualms about continuing operations in a pariah state.”
The retailer also has to consider its shareholders, Dong said, “who are increasingly worried about the negative exposure and risks” of remaining in Russia. “Western sanctions have constrained Russia’s economy and their average consumers are also feeling the pain. As such, they are holding onto their wallets and restricting spending as the war continues to strain the domestic Russian economy,” he said.
H&M said its departure from Russia would cost the company around 2 billion Swedish kronor, or about $195 million. Though Russia’s economy is the eleventh largest in the world by gross domestic product, Dong said it is still “smaller in GDP terms than the GDP of the state of Texas.”
That isn’t the case in China, however, which has the second-largest economy by GDP in the world at around $17 trillion. The U.S. sits in the top spot with $22 trillion, according to 2021 data from the World Bank.
“Although a challenging marketplace, China’s vast size, growing wealth, changing demographics, and economic transformation continues to create opportunities for well-prepared U.S. firms,” says the International Trade Administration, an agency within the U.S. Department of Commerce. “China’s gross domestic product (GDP), and its market is larger than that of Japan, Germany, the United Kingdom, and India — combined.”
The ITA notes that in the past 20 years, “China’s middle class has experienced one of the fastest growth rates in the world” as the country has shifted “from the traditional low-wage, labor-intensive manufacturing economy towards more technology-intensive high value-added production.”
“Chinese consumers play an increasingly significant global role, now the world’s largest market for many products from vehicles to air conditioners to video games,” the ITA says. “As a result of this growth, retail sales in China are expected to outpace those in the United States within the next couple of years. American firms note that this growing consumption power means the Chinese market is increasingly influential in global consumer trends, making success in China ever more critical for their ability to compete globally.”
For automakers such as Stellantis, formed by the merger of Fiat Chrysler and the French PSA Group last year, penetrating the biggest automotive market in the world was a priority.
“Since day one of Stellantis, we analyzed the situation together with our partners and we are now finalizing our plans for China, which we consider as a strategic market in terms of untapped potential,” Gregoire Olivier, chief operating officer for Stellantis in China, said earlier this year.
Another joint venture between Stellantis and a state-owned Chinese automaker “sold over 100,000 vehicles in 2021, more than doubling the annual sales volume of 2020,” the company said. That venture, between Stellantis and Wuhan-based Dongfeng, produces Peugeot and Citroen vehicles in China for the local market.
With Jeep, Stellantis announced in January that it would seek to increase its shareholding in the joint venture with GAC from 50% to 75%. “The announcement is a key element of Stellantis’ plan to set a new basis for its business in China,” the company said at the time. “GAC Group and Stellantis have agreed to collaboratively complete the relevant formalities of the deal, which remains subject to the approval of the Chinese government.”
Stellantis said it could make the move as a result of Beijing’s newly loosened regulations around foreign investment in joint ventures.
But the market proved tough to crack, and Stellantis’s plans to acquire a majority share in the GAC partnership never came to fruition. The Dongfeng venture has been undergoing restructuring, and the Jeep venture has been reportedly mostly dormant in recent months.
China’s system of governance is a key impediment for American and other foreign firms looking to do business there, the ITA says: “Despite significant Chinese government efforts to streamline bureaucracy and reduce red tape, foreign companies continue to complain about lengthy and opaque administrative procedures, especially with respect to permits, registration and licensing.”
“A recent refocus on self-reliance has contributed to China’s continued pursuit of industrial policies that limit market access for imported goods, foreign manufacturers, and foreign services providers while offering substantial government guidance, resources, and regulatory support to Chinese industries,” the ITA adds. “The principal beneficiaries of these policies are state-owned enterprises as well as other favored domestic companies.”
Dong, the business professor, said the “attractiveness of the China market is that it is huge, the unattractiveness is that it is very crowded with competition and thus not an easy market in which to operate.
“Add to that supply chain disruptions, shifting and sometimes arbitrary government treatment, growing nationalist sentiment against foreign brands that in sum make the China market less and less attractive for many companies doing business there,” he said.
