Investing in China: is it worth the risk?

Its crazy, economy-bashing pandemic strategy is deterring foreign companies. Any with the slightest amount of brains are also factoring in the risk of losing their dough if China starts a war.

But they'll hardly give up on selling products in China, if they don't have to. It's an enormous market, and foreign brands are highly regarded there.

One of the more imaginative theories still popular in some quarters is that big companies pull the strings in starting wars. The idea became popular after World War I, though no one could ever show that the big end of town, in its top hats, had actually called the shots in 1914. The notion just sounded attractively sophisticated, I suppose.

Before the war there had been an opposite theory, that fighting could not break out because it would be bad for business.

The truth is that economic interests influence policy in peacetime - as we see when countries go soft on China to protect their trade - but, when the chips are down and military violence is in play, far greater forces take command.

This year, democratic governments have dynamited tens or hundreds of billions of dollars of their citizens' capital in Russia by imposing severe sanctions in response to the invasion of Ukraine.

As international payment and trade channels were frozen and as Russia retaliated, BP wrote off its $37 billion share in a local oil company, Russian airlines refused to return leased aircraft to foreign owners, and Western fast food chains sold their local businesses to whichever buyers they could find.

There was hardly a squeak of political complaint from the companies that lost their investments. They had taken their own risks, and now they took the consequences.

This catastrophe of capital has no doubt attracted attention in board rooms of companies with a lot of money in China - attention that must have sharpened last month when Beijing conducted aggressive military exercises surrounding Taiwan.

Stellantis, which owns a wide range of car brands, from Chrysler to Peugeot and Fiat, was one victim of this year's war sanctions and counter-sanctions in Russia. It closed its local factory in April.

Then in July it said it would pull out of manufacturing in China, partly because of political meddling in its business - and partly, said chief executive Carlos Tavares, because Stellantis didn't want to be a victim of sanctions (again).

Stellantis evidently understands - as other big companies must, too - that, if China attacks Taiwan, democratic governments will again swiftly mount a massive economic counterattack, even if doing so creates another bonfire of international investment.

Such open corporate discussion of strategic risk is unusual. More commonly, foreign companies' thoughts on the risks and difficulties of operating in China must be judged by what they're doing or what they say they may do.

At the moment, their calculations include frustration with President Xi Jinping's politically driven zero-COVID strategy. Strict lockdowns repeatedly rolling across the country, most recently in Chengdu, are giving hell to companies trying to keep Chinese factories open or run businesses elsewhere that rely on supply from them.

So it's not surprising that we've seen news of Apple shifting more production from China to Vietnam. Honda reportedly plans to reorganise to build automobiles in China only for the Chinese market. And Mazda has told its suppliers to make more parts in countries other than China.

The European Union Chamber of Commerce in China reported in June that 23 per cent of European companies in the country were thinking of shifting investments elsewhere.

More important than departures are probably numerous unannounced corporate decisions not to enter China and, for companies that are already there, to withhold further investment - for example, by not updating plant and equipment.

Don't expect some rush to the exits to cripple the Chinese economy. Rather, what's happening is the outside world's slow turning away from China as China itself turns inward.

You can also see this in sensitive areas that get more government attention, such as advanced technology and supplies of critical materials: Beijing doesn't want to rely on democracies, and they're learning that they don't want to rely on it.

But having no factory in China, or not buying from the country, doesn't mean not selling there, which is something that just about any firm with a big international business wants to do.

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Beijing does what it can to slant markets towards local brands, but Chinese happily eat Nestle ice cream, cook in Panasonic microwave ovens and, if they can afford to, buy Louis Vuitton handbags.

Foreign brands are consistently well regarded, so their owners can earn nice profits, though they often have to share the winnings with local partners.

Almost anyone in China with a moderate to good income would be proud to own a new Volkswagen, for example.

When I lived there, my friends admired my Buick - which was actually a Holden, put together in Shanghai from major assemblies sent from Australia. In fact, Buick is considered quite equivalent to Toyota in China, which must shock the Japanese, and maybe even many Americans.

The problem for the foreign brands is that China's standard tactic has long been to allow access to its market in return for setting up local production.

Bosses will have to decide whether the hoped-for profits are good enough to cover long-term risks.

Stellantis, at least, has decided that they aren't.