In China, the Police Came for the Consultants. Now the C.E.O.s are Alarmed

Foreign businesses, a top Chinese official said in March, “are not foreigners, but family.” Then came a crackdown on firms with foreign ties.

· China has always been risky for foreign businesses. During its rise to becoming the world’s second-largest economy, companies disregarded many red flags. But now, with growth stagnating and risks multiplying, the calculation is different.

· money flowing out of China underscored the need to seek countries that are more pro-business.

· For manufacturers, no other country can challenge China’s infrastructure and the size of its skilled work force. Companies with products to sell are reluctant to walk away from a market with 1.4 billion potential consumers.

The China Development Forum, a high-profile, government-hosted conference with a who’s who of international executives in attendance, was a moment for Beijing to renew its efforts to win over foreign businesses.

Businesses from outside China “are not foreigners, but family,” said Wang Wentao, China’s commerce minister. State media reported that the chief executives of Apple, Pfizer and Procter & Gamble were at the forum, held in late March. Many of the dozens of business leaders there were on their first trip to China since the country had closed its markets to the world and derailed its economy with harsh Covid policies.

Mr. Wang pledged to remove obstacles preventing firms from investing more — 2023, he declared, was “Invest in China year.”

The good will did not last long.

The recent targeting of consulting and advisory firms with foreign ties through raids, detainments and arrests has reignited concerns about doing business in China. Executives, whether at midsize manufacturers or large corporations, are exploring how to reduce the threats to their businesses and protect their employees.

Over the last few years, as China has grown less business-friendly, some companies and investors were already starting to consider, for the first time in decades, whether the risks of investing in the country might outweigh the potential benefits.

The supply chain disruptions wrought by “zero-Covid” awakened companies to the downside of reliance on China. The geopolitical standoff between Washington and Beijing elevated the risk, forcing many multinationals to draft contingency plans for an alternative to China and to find ways to “decouple.”

And as Xi Jinping, China’s top leader, demands that Beijing bolster its national security and limit information to foreign governments and companies, some businesses are taking action.

Dan Harris, a Seattle lawyer who works with foreign companies in China, said he has heard from an unusually large number of businesses in recent weeks looking for ways to reduce their presence in China without leaving the market altogether.

One of his clients, a U.S. furniture manufacturer, is working on a deal to distribute its products through a Chinese firm so it can remove its American employees from the country. A U.S. education company, also a client, is shutting its China units and licensing its technology to its current Chinese employees. He declined to offer more detail, because he advises clients not to discuss leaving China until they are gone.

“The government in China is accelerating decoupling rather than trying to slow down,” said Andrew Collier, managing director at Orient Capital, an economic research firm based in Hong Kong. “If corporations feel that their operations are constantly open to incursion, they’re not going to be comfortable operating within that environment.”

Reports of raids or official security visits at prominent consulting firms in the last few months, including American outfits such as the Mintz Group and Bain & Company and most recently Capvision Partners, a consulting company with headquarters in New York and Shanghai, have raised alarm. Such firms help foreign businesses assess investments before they sink money into a company. They play a particularly crucial role in China, where reliable information is hard to secure and can come with a premium. Capvision disclosed in a regulatory filing two years ago that most of its expert researchers were paid about $200 per hour, with some making as much as $10,000 an hour.

Revisions approved last month to China’s counterespionage law deepened the uneasiness because they formally broadened the law’s already sweeping definition of what constitutes spying. Employees at foreign companies in China could be targeted as spies for normal business practices such as gathering information on competitors, markets and industry.

At a conference on China hosted by the U.S. Chamber of Commerce in Washington on Wednesday, Suzanne Clarke, the chamber’s chief executive, said the new counterespionage law and crackdown on consulting firms “have ratcheted up risk and uncertainty in the market.”

At a meeting of finance ministers of the Group of 7 in Niigata, Japan on Thursday, Treasury Secretary Janet L. Yellen said many G7 members were also concerned by China’s actions and “looking to see what we could jointly do to try to counter this kind of behavior.”

Liu Pengyu, a spokesman at the Chinese embassy in Washington, said that China welcomed foreign companies. “China is a law-based country,” he said. “All companies in China must operate in accordance with the law.”

China has always been risky for foreign businesses. During its rise to becoming the world’s second-largest economy, companies disregarded many red flags. But now, with growth stagnating and risks multiplying, the calculation is different.

Deal making in China has slowed. U.S. companies announced 25 business deals in China in 2022, down from 56 the previous year, according to the data service firm Dealogic.

Advisers to businesses looking to invest say that new areas of focus include Japan, South Korea and Singapore. Last year, U.S. deal makers announced 28 deals in Singapore, 24 in Japan and 21 in South Korea — all about the same or slightly more than the year before.

At the chamber’s event this week, Heather Clark, a lobbyist with the drugmaker Eli Lilly, which first opened an office in Shanghai in 1918 and again in 1993, said money flowing out of China underscored the need to seek countries that are more pro-business.

“Every company in this room is re-evaluating their China strategies,” said Ms. Clark during a panel discussion with the two leaders of the House Select Committee on China, which has been holding hearings on China’s economic and security threat to the United States and will make recommendations to Congress.

“So where is that investment going to go in the future? It’s going to come back to the United States, and it’s going to go to other friendly countries,” she said.

While companies and investors may think deeply about putting new money into China, a divorce from China is unlikely — at least in the short term.

For manufacturers, no other country can challenge China’s infrastructure and the size of its skilled work force. Companies with products to sell are reluctant to walk away from a market with 1.4 billion potential consumers.

James McGregor, the chairman for Greater China for the advisory firm APCO Worldwide, said the formula for U.S. businesses remains “you can’t not be there.”

An executive with operations in China said many C.E.O.s of client companies are now asking if their goods can be made somewhere else — but it is often the same companies’ operations or engineering staff who insist it’s impossible to achieve the required quality elsewhere. The executive asked not to be identified because there is so much sensitivity around China.

“Nobody that I know of is actually leaving China,” said Michael McAdoo, a partner in the global trade group at Boston Consulting Group. “They’re just maybe looking at other places where they can balance that investment they’ve made historically there.”

By extending new security measures throughout the economy, China is amplifying what was already one of the biggest risks of investing in China: lack of transparency.

“It’s going to backfire,” said Mr. Collier of Orient Capital, who has done due diligence work in China. “Anybody who wants to build a $50 million plant is not going to be comfortable doing it because they won’t be able to do any investigation of the location, the land involved, the partners or anything.”