The new risk in boardrooms is a five-letter word -- China

The nature of China’s activities is disrupting the manner in which goods and services have come together in a globalised process that enriched and served these processes. Overnight, well-planned blueprints are having to be cast aside. Until yesterday, the boards signed on to best quality inputs at the most competitive price points. Today, the lowest price offerings carry high embedded costs — one that diminishes national security. Relations between peaceful nations seeking trade and prosperity and an aggressive China relentlessly pursuing real and virtual expansion are impacting corporate decisions like never before.

This malign Chinese behaviour can be arranged into four neat yet overlapping categories. First, physical intrusions and coercion around its borders through military means. These include but are not restricted to Bhutan, Japan, nations in the South China Sea and India. Second, psychological intrusions through information warfare in democracies, using the tools that serve communications, transparency and accountability in democracies. Their public sphere and institutions are seen as handy sharp instruments serving China’s designs. This, even as it builds and walls that prevent any participation in its own public sphere. Third, technological intrusion through its corporate arms such as Huawei and ZTE, which by the virtue of being incorporated, designed and operating under the National Intelligence Law collect intelligence and information for the benefit of the Communist Party of China from the countries in which they operate. Fourth, controlling multilateral arenas through capture of international institutions such as the WHO as the Made in China pandemic so clearly brought out.

What China does at Ladakh influences boardrooms in India. On June 30, Bharti Airtel CEO Gopal Vittal said the company will comply if the government decides to ban Chinese vendors such as Huawei and ZTE — that it will comply is a legal necessity; that it says it will gives a boost to the expected ban. On July 1, Mahindra Group Chairman Anand Mahindra said India will rise to the occasion to counter Chinese provocation. On July 2, steelmaker JSW Cement Managing Director Parth Jindal said the group will bring down $400 million worth of imports from China to zero over the next 24 months. While ‘no more China’ voices from corporate India are rising in number and fervour, they are mirroring the actions of other economic actors. On June 11, for instance, the Confederation of All India Traders representing 70 million traders and 40,000 trade associations announced that it will boycott 3,000 Chinese products.

There’s a lot that goes into these decisions. Economics, for instance. Companies sourcing raw material, equipment or capital goods from China will have to pay more. While each commodity will have its unique pricing mechanisms, this will impact corporate balance sheets in the short term through investments that could be 20-30 percent higher. However, amortised over a decade or two, the annual impact on the profit and loss statement, and the resultant valuation on stock markets would be less affected and spread out. With Chinese aggression serving as a political unifier, citizens are consciously discarding Chinese goods in favour of Made in India labels. Consumers are making the case as well. Here, Indian companies need to up their game, at least on quality if not on price. Apple’s Made in India iPhone 11 is in the market, while its SE2 range is expected in September. The two, economics and consumer behaviour, are linked.

India’s boards are not alone. Conversations of decoupling are happening across the world. The US may want to use its own economic-hegemonic extensions to prevent Huawei from entering Brazil, for instance. However, the real decision to keep Huawei out comes from 9,000 km away, in the boardroom of Telecom Italia, which has excluded Huawei from its core network in a 5G tender; this exclusion applied to the company’s operations in Italy as well as Brazil. On July 14, three Portuguese telecommunications firms — NOS, Vodafone and Altice — that cover the country said they would not allow Huawei equipment in the core systems of their 5G networks.

To the East, the Japanese government will be paying Japanese companies to move their factories out of China to Japan or Southeast Asia; putting its money where its mouth is, the government has budgeted half-a-billion dollars for this transition. This would be the paramount agenda for the boards of 57 companies that expect to receive this money. To its west, South Korean tech giant Samsung has decided to end production in its last computer factory in China — China will remain a market but not a production hub anymore, the company said.

Not always are boardrooms in tune with government decisions. In Germany, for instance, while the government has not decided on whether to ban Huawei and while Huawei has asked the government that it not be excluded from the country’s 5G rollout, the company in focus is Deutsche Telekom, which opposes the ban on Huawei. Quoting analysts and industry sources, a Reuters report stated that Deutsche Telekom is seeking to pre-empt such an outcome by rolling out most of its 5G network before a political decision is taken by September.

Complicating the political and boardroom manoeuvres, is the fact that consumers are rejecting the Made in China label, initially in countries facing direct assault of China — an expanding list that includes but is not restricted to India, Bhutan, Vietnam, Indonesia, Australia and Japan — which will slowly permeate towards those countries that do not share borders or are a brunt of direct aggression. For a board to go against its own government may be seen to be virtue signalling; for it to work against its consumers would be corporate suicide.

In other words, the new risk in boardrooms is a five-letter word called China. Democracies are willing to let go of Chinese value chains and nudging their corporations and consumers to pay more rather than succumb to Chinese threats. After successfully weaponising trade in the WTO, health in the WHO, investments along the Belt and Road Initiative (BRI), debt through its debt trap diplomacy, narratives through information intrusions, China is now on way towards weaponising data, using companies such as Huawei and ZTE as the tip of its digital spear. As global wealth shifts from oil to data, the latter’s protection becomes a national security issue, just as the protection of oil pipelines and storage is part of every nation’s energy security.

Once a company is seen to be a national security threat, the decision to use its products will become financially debilitating. That the US, in its own interest, has decided to ban Huawei and is now pushing Europe to do the same has more to do with a technological decoupling from China than Huawei itself. India must ban Huawei in its own interests, irrespective of what the US does, as has been argued earlier.

China is going to be the biggest disrupter of corporate-government relations. Company boards that were functioning in predictable B2B (business to business) or B2C (business to consumers) environment are confronting a new G2B (government to business) setting. This is particularly so for vendor choices and their management. The notion that governments are driven by politics and companies by economics sounds like a quaint page from pre-2020 history.

The 2020s will see a new coming of age for both these actors. It will be increasingly shaped by geopolitics. It will be driven by political and economic interests and indeed governments will set no-China boundaries for corporations. As citizens reject products from China, boardrooms will have to account for more than just their bottom-line.

(This article first appeared in the ORF)

Gautam Chikermane is Vice President at the ORF. His area of research is international and Indian economic policy. Views are personal.