IBM Gets the Message and Decides to Reduce Its Exposure in China

IBM has decided to follow the example of what has become a long list of American brands and close some of its operations in China.
Although management has remained very business-like in its statements, it has clearly read the same writing on the wall as other American firms. If this is an inconvenience and an expense for the firms moving away from sometimes decades-long arrangements, it hardly helps China to lose the expertise and business acumen of these operations.
The question that arises then is this: Can Chinese leader Xi Jinping read this writing on the wall?
In the waning days of August, an IBM executive held a virtual meeting with the China-based employees in its research and development functions. He told them that the company would move its functions to other countries. To pick up the slack, IBM intends to add researchers and engineers in India. It is not quite clear how many Chinese employees received invitations to move with the firm.
It has been four decades since IBM began business in China. It once considered China a major growth market. For a while, IBM was one of the country’s biggest telecommunications carriers, with major Chinese banks and energy companies as clients. But recently, the business has slipped. Revenues have fallen for two years.
On making the announcement, management explained that the decision to leave China is less about falling revenues than about client service. Of course, management behind all corporate decisions claims improved client service as a reason. There are likely others, those shared by other foreign firms leaving China in one way or another.
For one, staffing costs in China have risen much faster than in India and elsewhere in Asia. Also, Chinese competition has taken market share away from many, including IBM, in recent years, in part because this competition has become much more sophisticated technologically but more because Beijing, under its “delete America” campaign, has ordered state agencies and state-owned firms to replace foreign-owned equipment with domestic products.
Meanwhile, Beijing’s growing obsession with security has brought more state intrusions into the Chinese operations of foreign firms and raised business costs accordingly. While these impediments have arisen on the Chinese side, Washington has increased its scrutiny of American firms doing business in China, especially in strategic areas such as artificial intelligence. More generally, the rising tension between Washington and Beijing has increased uncertainties.
With IBM’s move, the firm joins a long list of U.S.-brand companies that have closed some or all their Chinese operations and moved them elsewhere, usually in Asia. Among these are household names such as Black & Decker, Nike, Hasbro, L.G. Electronics, and Sharp. More significant is the number of leading technology firms that have downgraded their Chinese operations, including Apple, Dell, Hewlett Packard, Intel, Google, Oracle, and Quanta Computer. And this is just a sample. In total, almost 30 U.S.-brand firms have made a complete or partial move away from China. Each has made it for its own reasons, but all share the pressures mentioned above.
These departures have taken something away from Chinese economics, something that China’s deeply troubled economy could otherwise use. Since most of the reasons for these departures have something to do with Beijing’s behavior, one must wonder whether Xi can see the harm that his policies have done to China.