IBM shutters R&D in China, Plus Beijing cracks down on mutual funds -- China Boss News 8.30.24

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What happened

IBM is shutting down most of its research and development in China, reducing over 1,000 jobs in offices across various Mainland cities.

According to the Financial Times, Jack Hergenrother, an IBM executive, mentioned tougher competition as he communicated the layoffs to staff, explaining that the company was relocating R&D work to be closer to customers outside the country.

But IBM's decision to reduce its R&D workforce is not an isolated incident. A similar shift to downsizing by American companies, especially tech firms, is currently rippling through global business.

Their turn away from China comes amid increasing geopolitical tensions as the US continues to limit the Chinese military's access to sensitive technologies.

Earlier this summer, Microsoft "asked as many as 800 [local] employees" who worked in the firm's cloud and artificial intelligence departments "to consider relocating out of China."

"In recent years, IBM has been continuously reducing their presence — part of the decoupling," one former employee told FT.

Why it matters

PDD founder loses $14b

IBM's decision to reduce its R&D workforce has thrown salt in the wounds of a nation reeling from a sharp rise in unemployment and reduced wages.

Barron's last week reported on "China's youth burn-out" and "the lack of jobs," with a headline that read, "Things are worse than ever."

Barron's said the struggle to afford a house and a car on a middle-class income is particularly harrowing in China "because of the height from which the economy has fallen," especially for youth aged 16-24.

More graduates from prestigious schools have to take manual labor positions due to their cohort's high unemployment rate, as online discussions center anxiously around stories of young professionals starving to death while job-seeking.

Sadly, Beijing doesn't have much of a solution beyond hiding statistics.

When the unemployment rate reached 21.3% in June 2023, the Chinese authorities stopped publishing the data. Although Beijing has begun publishing job information again, it's using a new metric that excludes students, which only moderately improves the number set.

Chuin Wei Yap at the Hinrich highlighted the doldrums for jobseekers in a melancholy post on LinkedIn. He described a significant flux in over-employment and underpaid work among experienced professionals and recent graduates.

"Foreign markets and policymakers worry about Chinese domination; they don't realize it comes at the steep cost of a brutal price war among Chinese producers at home - and the employees are the ones taking the brunt,'" Yap said.

On Monday, however, alarm bells over the state of the Chinese economy rang even louder when Forbes reported that the founder and former chairman of China's e-commerce goliath PDD Holdings lost $14 billion, which amounted to nearly 30% of the company's stock value, after reporting "diluted" profits and sales.

The drop has sent shockwaves through the business community, raising concerns about the stability of the Chinese market.

PDD has more than 17,000 employees, which, when viewed against the vast numbers of Chinese workers, doesn't seem like much - unless you see it as the canary in the e-commerce coal mine, alongside other giants like Alibaba and Tencent, who also have workers that skew young.

Pianos and private equity

According to Bloomberg, news of PDD's troubles is particularly nervewracking for investors because it was "one of the last remaining bright spots for Chinese consumption" that is "rapidly fading."

The company was seen as the primary beneficiary of a Chinese "consumer downgrade," with a low-price approach to online retailers. Pinduoduo within China and Temu, its international subsidiary, were designed to attract budget-conscious consumers during economic volatility.

Although PDD's drop captured more headlines, additional signs of economic strain are also flashing.

Earlier this month, the French paper Le Monde revealed that China's declining piano market suggests the middle class has stopped spending on the luxuries they once esteemed.

"Once a status symbol for middle-class families, making China the world's largest piano market, the prestigious instrument has fallen out of favor, victim to the prevailing economic gloom," news staff said.

Further depressing are reports that some of the world's largest equity firms, like Blackstone, KKR, and Carlyle, have "put brakes on China dealmaking."

Han Lin, The Asia Group's country director for China, told FT, "[g]eopolitical constraints such as outbound investment rules make China increasingly look radioactive as an investment market despite its opportunities."

Western airlines, including DELTA, who announced it was delaying plans to restart flights from LA to Shanghai last week, are also forgoing their China market shares for other more profitable ventures.

The South China Morning Post said even US legislators and their staff are sitting out congressional visits to China, which once filled their August agendas.

Analysts attributed the absence of legislator travel to rising tensions and the end of participation in Chinese government-sponsored programs under the Trump administration.

But travel programs, which often involved cultural exchanges and business partnerships, were a significant part of US-China relations, and their end foreshadows further deterioration in investments.

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