Volkswagen and BASF will (finally) leave Xinjiang, Plus Biden to invest billions in US port security over China fears -- China Boss News 2.23.24

Newsletter

What happened

Volkswagen and BASF, “are reassessing their activities” in China’s Xinjiang region “following new international scrutiny of forced labor,” New York Times said last week.

Volkswagen said “it was in discussions with one of its main joint venture partners in China, the state-owned Shanghai Automotive Industry Corporation, and that “the future direction of the J.V.’s business activities in Xinjiang” was under examination.

BASF “disclosed on Feb. 9 that it began moving late last year to divest its stakes in two manufacturing joint ventures in Xinjiang,” and “‘recently published reports related to the joint venture partner contain serious allegations that indicate activities inconsistent with BASF’s values,’” NYT staff said.

New findings also show VW has direct exposure to forced labor after German newspaper Handelsblatt reported that forced labor had been used by the firm’s local state-owned partner to construct its test track in Xinjiang.

Why it matters

Too close to Beijing

In a Financial Times opinion piece, Patricia Nilsson recounted how VW had previously failed to placate human rights groups and regulators with supply chain audits when “the German consultancy behind the review, publicly distanced themselves from the findings.”

“Company insiders have previously said it would be impossible for the company to pull out of Xinjiang, as it would anger its joint venture partners which are owned by the Chinese government. That connection to Beijing raises a broader point. With the Chinese government accused of repression in Xinjiang, VW could still face questions over its operations in the country even if the Xinjiang venture is unwound,” Nilsson said.

Both foreign and local companies have spent unimaginable sums, accounted for and otherwise, chasing elite influence in China’s top-down system.

In the proverbial catbird-seat, officials in Beijing played the world’s largest firms, both to enrich themselves and to consolidate political power via massive patronage networks.

The risk for foreign companies, however, was always in the different set of legal and reputational expectations waiting for them back home. For a while, some seemed to manage by co-opting China’s “opaqueness.”

But that, for a number of reasons - and the global pandemic that originated in Wuhan is surely one - appears no longer possible.

Everyone is a China watcher, these days, and what they’re noticing about the Chinese government’s oppressiveness is truly ghastly.

China and Germany no longer ‘complimentary’

That said, Volkswagen and BASF are not particularly known for their squeamishness when it comes to human rights.

More likely, as FT's international business editor wrote earlier this week, “a rare window of opportunity has opened to exit uncomfortable investments in China.”

Max Zenglein, chief economist at Berlin-based China consultancy MERICS, told her that China’s record-low levels of foreign investment provide some shelter to its major investors.

“This is a very opportune time to get out. This is a chance for companies to stop saying nothing is going on in Xinjiang,” Zenglein said.

But Noah Barkin and Gregor Sebastian at Rhodium Group argue that the relationship between China and Germany is fundamentally changing and that their two economies are no longer “complimentary.”

The expansion of VW’s and BASF’s China investment has meant cutting many German jobs, which is also fueling controversy over their business with Beijing, just as “their market shares in China erode” and they face “significant pressure from Chinese competitors at home,” say Barkin and Sebastian.

“Against the backdrop of a stagnating German economy and more volatile political environment, job losses in key German industries could trigger a backlash that has been largely absent until now, even as the government line on China has hardened,” they wrote.

Meanwhile, Fortune reports that German companies “are committing record levels of capital to the U.S.,” as they seek refuge from Germany’s poor economic performance and China’s lightning-rod geopolitics.

VW is even eyeing the American electric vehicle market. It has announced a $2 billion investment in a South Carolina production plant - where it is unlikely to face stiff competition from China’s EV automakers since Washington is doing what it can to keep them out.

But there’s a familiar glitch that the firm’s compliance staff need address beforehand.

According to the Financial Times, “[t]housands” of VW imports - “including Porsches and Bentleys” — are “held up at US ports” because they contain a “Chinese-made component” that a supplier manufactured with forced labor from Xinjiang.

This Week’s China News

The Big Story in China Business

BIDEN TO INVEST BILLIONS INTO US PORT SECURITY: “Biden Administration officials said more than $20 billion would be invested in port security, including domestic cargo-crane production, over the next five years,” Wall Street Journal reported last week.