Late last month, executives from more than a dozen top European companies in China met in Beijing to discuss their concerns about the growing role of the ruling Communist Party in the local operations of foreign firms, according to three people with knowledge of the discussions.
President Xi Jinping’s efforts to strengthen the party’s role throughout Chinese society have reached the China operations of foreign companies, and executives at some of these entities don’t like the demands they are facing as a result.
The party’s presence has long been a fact of doing business in China, where party organizations exist in nearly 70% of some 1.86 million privately-owned companies, as enumerated by the official China Daily last month.
Companies in China, including foreign firms, are required by law to establish a party organization, a rule long regarded by many executives as symbolic rather than anything to worry about.
One senior executive whose company was represented at the meeting told Reuters some companies were under “political pressure” to revise the terms of their joint ventures with state-owned partners to allow the party final say over business operations and investment decisions.
Companies in China, including foreign firms, are required by law to establish a party organization, a rule long regarded by many executives as symbolic rather than anything to worry about
He said the company’s joint venture partner was pushing to amend their agreement to include language mandating party personnel be “brought into the business management organization,” that “party organisation overhead expenses shall be included in the company budget,” and that board chairman and party secretary posts be held by the same person. Changing joint venture agreement terms is the main concern, the executive said, noting that his company had thus far resisted.
“Once it is part of the governance, they have direct rights,” he said.
The State Council Information Office (SCIO), which doubles as “spokesman” for the party, told Reuters in a faxed statement that there was no interference by party organizations in the normal operating activities of joint venture or foreign-invested companies.
However, it added, “company party organizations generally carry out activities that revolve around operations management, can help companies promptly understand relevant national guiding principles and policies, coordinate all parties’ interests, resolve internal disputes, introduce and develop talent, guide the corporate culture, and build harmonious labour relations.”
“They are widely welcomed within companies,” the SCIO said.
Major decisions
Of the 13 executives, all from different foreign companies, interviewed by Reuters, eight expressed concerns about increasing demands from the party or noted increased activity from party groups. They all spoke on the condition that they and their companies not be identified given the sensitivity of discussing relations with the party.
Just two of 20 major multinationals queried by Reuters – South Korea’s Samsung and Nokia, of Finland – confirmed having party units in their China operations. Most did not respond to questions on the subject. Only the German chemicals giant Bayer AG acknowledged participating in the meeting, organised by the European Union Chamber of Commerce in China, but declined to comment on what was discussed.
Carl Hayward, general manager and director of communications at the European Chamber’s Beijing chapter, acknowledged the meeting was held to “understand from our members if party structures are being formally introduced into the governance of joint ventures.”
He said: “We have not noted any formal change of policy that reflects this. This is as we would expect since such a change would act as a deterrent to foreign investment in China.”
Real muscle
Under Xi, the party has sought to address the “weakening, watering down, hollowing out and marginalization” of party leadership at state enterprises, the party’s official People’s Daily wrote in June. The paper cited an official with state-owned oil giant Sinopec as saying the company had demanded all its foreign joint venture partners “specify the requirement for party-building work” in their articles of association.
While plans to expand party organizations in foreign companies have been a quiet concern for several decades, only under Xi has “some real muscle” been put behind the goal, said Jude Blanchette, who studies the party at The Conference Board’s China Center for Economics and Business in Beijing.
A significant number of major foreign companies operate in China through joint ventures with state enterprises. Foreign business groups have complained that their members are forced to allow Chinese partners access to their technology or risk losing market access.
Many Chinese state enterprises listed on the Hong Kong stock exchange have this year altered their articles of association to give an explicit role to internal party committees.
A party member at a US-based Fortune 500 company in Shanghai said her firm’s unit was not involved in business matters and instead engaged in activities such as planting trees and sponsoring children
One country head at a major European manufacturer with a southern China joint venture said that late last year it allowed a party unit to meet on company premises – after hours. The party unit asked for overtime pay to hold the meeting, which the company rebuffed. But then it also demanded the company hire more party members, and even tried to weigh in on investment decisions.
“That’s when we said this is a no-go zone. We didn’t anticipate that they would discuss investment decisions,” the manager told Reuters.
A sales and marketing head in China for a major US consumer goods firm said its party cell had recently become more active, and had pushed for locating a new facility in a district where the local government was promoting investment, a move the company made.
Still, several executives with foreign companies in China said the role of party units was benign and could help to resolve issues with officials. A party member at a US-based Fortune 500 company in Shanghai said her firm’s unit was not involved in business matters and instead engaged in activities such as planting trees and sponsoring children.
“They will give you some tickets to see movies together. When the State Council has a meeting and there’s some news they will send bullet points by email,” she said.
Reuters
"I have alerted investors so many time……………" What do you know? Have you ever managed a joint enterrprise in China. If you have not, shut up. You are not qualified!. I have, 5 joint ventures over a period of 15 years. At that time, joint ventures seem only the way to go, especially in important industries. China was then really with experimenting opening up to foreign investments. I can understand that. Much Later, the Chinese began to allow wholly owned investments. The foreign companies rushed in was because they wanted a slice of the Chinese market. Its not that they went in blind. They had the best paid lawyers and savvy well-informed investment advisors to guide them. As the saying goes, the proof of the pudding is in the eating. From my own experience, joint venture is definitely not the way to go. The best way is as a wholly owned company. But as I said, for certain critcal industries, you have no choice but to go in on a joint venture basis. Nothing wrong with what the Chinese authorities mandate. Its to protect certain industries they defined as important/critical. All countries have various ways to do exactly the same thing e.g. only as a minority shareholder; company management structure to reflect the country’s racial composition(as in Malaysia); only for Islamic/muslim investors; a defined percentage component of the final product to be maufactured in the country rather than CKD; etc, etc,. all kinds of restrictions and constraints. No one forced you. Before you jumped in, you assessed what you think is fair for what you expect to get out of it. If you thought you have made a mistake, or you found out you do not like it, too bad, pack up and leave. Understand? So stop being a smart arse riting your comments on articles in this website with your half baked English.
I have alerted investors so many time in social media that communist regimes are to be NEVER trusted. They would let investors build good businesses in their regimes, and they would come out with strange or different rules later to coerce investors either to pay "huge protection fees" or being threatened to abandon their so good businesses. Then Party favorable officials oe investors can become the next owners.
The tatic has been used in Vietnam, Laos, and Cuba!