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Larry Gonzales, Our Texas State Representative, District 52 » Foreign Firms Brace for More Pressure in China

Foreign Firms Brace for More Pressure in China

Maybe this Chinese approach will bring more jobs back to the U.S. – Larry



The Wall Street Journal



Recent troubles in China for Apple Inc. AAPL -1.06% and Volkswagen AG VOW3.XE -1.06% represent a growing risk for global companies, as their dependence on the booming Chinese economy leaves them exposed to Beijing’s shifting winds.

In some cases, foreign companies are coming under withering attacks from state-run media. In others, they are running afoul of Chinese regulators or government policies, such as an anticorruption campaign that limits ostentatious gifts.

On Monday, Apple apologized for its Chinese customer-service policies and said it would revamp them following more than two weeks of criticism from government-run media. It isn’t clear whether the spotlight will hurt Apple in what has become the tech giant’s No. 2 market after the U.S.

Late last month, Volkswagen said it would recall 380,000 vehicles following a television broadcast that said some of its cars suffered from maintenance issues. Analysts said the move could cost the auto maker up to $618 million. Fast-good giants Yum Brands Inc. YUM -1.12% and McDonald’s Corp. MCD +0.79% took sales hits after state media accused them late last year of failing to quickly address problems with chicken suppliers.

For years, companies invested in China because of its potential. Now they are confronting a bracing reality: China is already a crucial market, and it isn’t the easiest place to operate.

Roughly seven out of every 10 passenger cars sold in China are foreign-branded. China last year accounted for 28% of all vehicles sold by Volkswagen and 30% of those sold by General Motors Co. GM -0.79% Yum Brands’ China revenue represents just more than half of its $13.6 billion in total revenue, up from 36% in 2010.

The result of state pressure in such an important market is that global companies are changing their response policies and reviewing the way they deal with the Chinese government. Coca-Cola Co. KO -1.13% is reaching out to state-run media and local officials and offering public-relations training to plant managers, while Wal-Mart Stores Inc. WMT +0.25% is adding social-media staff to spot brewing online controversies.

“I am aware of growing concern and discussion coming from a range of industries, but finding and pursuing immediate solutions to help encourage balanced treatment seems to remain challenging,” said Piper Stover, president of the China-based arm of the U.S.-China Business Council.

China’s media outlets and consumer-rights groups say some companies have let complaints linger for months and must be pressured into improving customer-service policies. In an article late last month, the official Xinhua news agency said Apple’s “innovative products and aggressive marketing strategy have made it fearless of consumers’ frowns.”

Foreign companies have long faced pressure in China. In 2010, state-run national broadcaster China Central Television turned the spotlight on Hewlett-Packard Co., HPQ -1.48% reporting that consumers were filing complaints against the electronics company for selling faulty laptops. HP apologized and said it would take immediate action.

Changing domestic politics means a changing terrain for foreign companies. In November, Chinese President Xi Jinping and a new slate of top officials assumed power and said they would rev up efforts to combat official corruption—a growing threat to the leadership as public discontent has built amid a spate of recent corruption scandals. French distiller Pernod Ricard SA RI.FR -1.07% said last month that new limits on gift-giving and banqueting hurt demand for whiskey. Burberry BRBY.LN -2.43% PLC of the U.K. and Hong Kong’s Chow Tai Fook Jewellery Group Ltd. 1929.HK -3.77% said last year that new scrutiny of official displays of wealth had damped sales.

Mr. Xi also has pushed for the development of local auto brands, while a government-sponsored research organization questioned the popularity in China of smartphones that use Google Inc.’s GOOG -1.51% Android mobile-operating software, saying China has become too reliant on Android phones. Google has declined to comment.

Foreign firms are changing their tactics. After relying for years on high-level executives in China to serve as its main representatives with government officials, Atlanta-based Coca-Cola has begun training managers of its 40 bottling plants in the country to double as public-affairs officers. Coke managers in China are encouraged to meet with local food-safety regulators and local officials, inviting them to the plants and to presentations on local community projects.

Coke hasn’t avoided all controversy: It said last month it was working with officials after local authorities in southwestern Yunnan province accused it of illegally using Global Positioning System data to gather confidential information. Still, state broadcaster CCTV helped Coke debunk in January a rumor that some of Coke’s products contain fungicide.

Wal-Mart is figuring out that localization should go beyond stocking its China stores with sea cucumbers and chicken feet, and into communications, the spokesman said. Wal-Mart, which faced setbacks in 2011 when officials arrested and detained employees for allegedly mislabeling food, has started launching its own internal promotions to acknowledge commemorative days—like Food Safety Week—that are recognized in China.

Apple has seen tremendous growth in China, with sales in the quarter ended Dec. 29 jumping 67% to $6.83 billion and operating income rising 49% to $2.54 billion. Greater China, which includes Hong Kong and Taiwan, accounted for 13% of the Cupertino, Calif., company’s total sales.

In a March 15 prime-time broadcast on consumer rights, CCTV accused Apple of skirting warranty periods and adopting different customer-service policies in China than it does elsewhere. In a statement shortly after the broadcast, Apple said it takes customer service in China seriously. In a second statement on March 23 posted to clarify its warranty policies, the company said its after-sales practices in China are “roughly the same as in the U.S. and all over the world.” It also said in the statement that it provides “incomparable user experience.”

The second statement drew a blistering attack from the People’s Daily, the Communist Party’s mouthpiece. It ran a series of stories that week that called Apple arrogant and its statement hollow.

What Chinese officials were looking for was an apology, say China marketing experts. “Brands that have unshakable faith in their own righteousness find it difficult to respond in China,” said Tom Doctoroff, Asia chief executive of WPP Group’s JWT ad agency.

On Monday Apple apologized and changed its policies, saying it would replace defective iPhone 4 and 4S models with entirely new phones rather than repairing or replacing components while keeping old casing as it had been doing. It also said it would offer one-year warranties for any phone that had been replaced.

In comparison, within the U.S. Apple offers a 90-day warranty on repaired or replaced phones if that time period is longer than what the customer has left on an initial warranty.

The apology has been welcomed by state media. The official Xinhua news agency said in a commentary that the apology “should have come earlier, but it is not too late for it to rebuild Chinese consumers’ trust.”


Write to Laurie Burkitt at laurie.burkitt@wsj.com and Paul Mozur at paul.mozur@dowjones.com

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