Doing business in China getting tougher for U.S. companies

Just a few years ago, the mantra in Silicon Valley went like this: What's your China strategy? A 2010 update could be: What's your China headache?

China's allure is stronger than ever. It remains a cheap place to manufacture goods, and its rapidly growing domestic market includes 400 million Internet users and 700 million mobile-phone subscribers, numbers unmatched anywhere else in the world. But a country already known for obstacles is becoming less welcoming to foreign businesses.

Google's frayed relations with the Chinese government over intellectual property theft and censorship spotlight the growing discontent many Western companies are experiencing in the country. And American companies are certain to face even tougher conditions there if U.S.-China tensions continue to rise over issues such as China's currency controls, which experts say boost China's exports while limiting imports from the United States.

"It was inevitable after a certain time they would no longer roll out the red carpet for foreign companies and give them special treatment," said Susan Shirk, a former deputy assistant secretary of state in the Clinton administration responsible for U.S. relations with China. "But now we don't have a level playing field. We have nontariff barriers (in China) designed to protect local companies."

Much like Google, other companies are reviewing their commitments to China, longtime Silicon Valley forecaster Paul Saffo said. "I


think we will see more companies opt to quietly back away or at least limit their exposure in the Chinese market," he said.

American corporations for decades have been China's biggest boosters. Companies from Hewlett-Packard to General Electric have collectively spent billions of dollars to set up world-class research and development centers there.

But as China's business sectors mature, the government is shifting its emphasis to nurturing its own corporate champions to become global competitors. It has been emboldened in its demands on foreign companies, experts say, by the nation's rising economic stature. China emerged quickly from the global recession while other countries, including the United States, are still mired in the slowdown.

Though reluctant to complain publicly for fear of retribution from China, many U.S. companies are frustrated by official policies they say prop up homegrown companies at the expense of foreign competitors. The American Chamber of Commerce in Beijing released a survey last week that reported 37 percent of tech companies complained of lost sales because the Chinese government favors products from local companies over those from foreign corporations. And they fear future preferential policies will skew the competition further.

Silicon Valley giants HP, Intel and Applied Materials, all of which have extensive operations in China, declined to comment for this report, and several other valley companies with China operations did not respond to requests for interviews.

But the Information Technology Industry Council, which represents many U.S. companies, said one example of the new hurdles its members face in China is government procurement policies requiring that products contain intellectual property developed and owned in China.

That's a big chunk of business to miss out on. In 2008, the Chinese government spent an estimated $90 billion on tech and nontech products.

Tech companies also chafe against rules that require their products adopt China's local technology standards. That means they often must create two versions of a product: one for China and one for the global market. China Mobile, for example, is reportedly close to an agreement with Apple to use the iPhone on its 3G network — if Apple reconfigures the device to run on China's standard, which is used only in that country.

Foreign companies are "caught between a rock and a hard place," said Daniel Slane, an Ohio businessman who chairs a panel created by Congress called the US-China Economic Security Review Commission. "They've invested a lot of money and they're making a lot of money, but they're starting to see the pendulum move. I think some of them are starting to get nervous."

Google on Monday stopped censoring its Chinese search results, redirecting traffic to an unfiltered site in Hong Kong after the Mountain View company's China operation was hit with cyber attacks. The company is paying a price for its decision to pull back: State-owned China Unicom, the nation's second-largest mobile operator, is removing Google's search function from new Android handsets it developed with Google. And popular Chinese Internet sites announced they would stop using Google's search feature.

On Wednesday, the world's largest Internet domain registration company, Go Daddy, said it, too, was rejecting China's censorship rules after regulators began requiring more detailed information — including photographs — of its Chinese customers.

"The exchange of information is so much freer on the Internet and that really makes (the Chinese government) nervous," said Christine Jones, general counsel of Go Daddy, which has 27,000 domains under Chinese registration. "I wouldn't be surprised to see (other companies) follow suit."

The public retreat of two companies from China doesn't make a trend, said Emily Parker, a senior fellow at the Asia Society's Center on US-China Relations. Google, she added, is a special case.

But Google is not alone in facing new challenges in China. Last summer, PC makers, including Palo Alto-based HP, ran into a roadblock when the government demanded that all new computers sold in China be preloaded with the so-called "Green Dam" Web-filtering software to block pornography and banned political sites. After a domestic and international uproar, the government indefinitely set aside the requirement.

HP has said little publicly about the contretemps. China is clearly critical to the company's business.

In 2008, HP sold more than 4.4 million PCs in China, making it the nation's second-largest computer vendor after Lenovo, according to the IDC research firm. China, along with India and Brazil, are three developing countries where HP sees huge growth opportunity, Executive Vice President Todd Bradley, the head of the company's PC division, told analysts last fall.

But tensions between the United States and China have surged in recent months. Earlier this month, more than 100 members of Congress called on the Obama administration to label China a "currency manipulator" because they believe it keeps its currency artificially low, giving Chinese companies an unfair advantage in global trade.

"China is focused not on the world but on itself," said Ed Black, CEO of the Computer & Communications Industry Association. "We don't know how it will be in the long run. But right now it's a difficult situation."

Contact John Boudreau at jboudreau@mercurynews.com. Contact Brandon Bailey at bbailey@mercurynews.com.