TSLA Tesla Inc

By Trefor Moss 

SHANGHAI--Relations between the U.S. and China are at their lowest point in decades, and the Covid-19 pandemic has rattled consumers the world over. U.S. companies and brands are doubling down on China anyway.

To understand why, look no further than the hundreds lined up around the block in central Shanghai, many of them defying coronavirus social-distancing advice, to get their hands on chicken sandwiches from Popeyes Louisiana Kitchen.

Popeyes, the latest U.S. brand to plant its flag in China, opened on Friday, the first of 1,500 planned locations in China.

"Chinese people still like America and American brands," said 18-year-old Oliver Kong, one of those waiting in line outside the new Popeyes. " McDonald's is my favorite, but I'm excited to try something new."

From Popeyes to Walmart Inc., Tesla Inc. to Exxon Mobil Corp., companies are betting that the country's long-term growth potential still outweighs the mounting case against further expansion--including geopolitical tensions and slowing growth. While the pandemic has spurred businesses to rethink supply chains to reduce dependency on China, companies that are producing in China for Chinese customers are bulking up their local presence.

Concern about China's own rising domestic players is an increasingly important factor, too. Yet China bulls argue that committing resources to the country is still worth it.

"If you're not active in this market, then China will come to your market. It's better to battle them here than wait until they show up on your doorstep," said Jörg Wuttke, president of the European Union Chamber of Commerce in China. Though some companies would halt China investments until the long-term picture becomes clearer, "we have to be optimistic about investing," he said.

The Chinese economy shrank 6.8% in the January-March period, its first contraction in four decades as the country reeled from the coronavirus. Economists warn the recovery will be shaky, marked by surging unemployment and dwindling consumer confidence.

The political risks of operating in China--which have risen as leader Xi Jinping reasserts the state's grip on society--have been ratcheted up further by the two-year trade war between Washington and Beijing, and more recently by public recriminations over the origins and handling of the coronavirus crisis. Speaking on Fox News last Thursday, President Trump said the U.S. "could cut off the whole relationship" with Beijing.

On Friday, the Global Times, a state-run tabloid, said China was ready to target U.S. companies such as Apple Inc. and Boeing Co. in retaliation for U.S. moves to curb Huawei Technologies Co.

Business has in many ways remained largely insulated from the political fireworks. Eager to attract foreign investors, China continued courting U.S. companies during the pandemic. Early this year, China introduced a foreign-investment law setting out protections for brands and intellectual property, and promising greater regulatory transparency.

Aside from a few flare-ups, most notably with the National Basketball Association, there has been little lasting consumer backlash against American products and brands.

"China's government welcomes companies that align with their strategy and support the industries of the future," said Ker Gibbs, president of the American Chamber of Commerce in Shanghai. Some foreign business executives in China privately admit they fear that could change if the U.S.-China relationship continues to unravel. But in most cases, U.S. companies remain committed to China, Mr. Gibbs said.

On Monday, Zhong Shan, China's commerce minister, told reporters he wasn't worried about foreign companies leaving. "Smart companies won't give up the huge China market," he said.

U.S. foreign direct investment in China has been stable for the past decade, averaging $14 billion a year, equivalent to between 10% and 12% of China's total inward FDI, according to official data.

Some slowdown in investments is likely as companies grow more bearish on China, according to Rhodium Group. In an April survey of U.S. companies by the American Chamber of Commerce in China, 40% said the uncertainty resulting from the Covid-19 pandemic would decrease their planned investments here, while 36% said they would stick to investment plans.

Yet the lure of China and its unrivaled pool of 1.4 billion consumers is undimmed for some.

Tim Hortons, a coffee chain that, like Popeyes, is owned by Canada's Restaurant Brands International Inc., said last Tuesday it would open 1,500 coffee shops in China, up from just a few dozen today. "China is our fastest-growing market," said Sami Siddiqui, president of RBI Asia-Pacific, and "will become even more relevant" in the future.

Retailers see similar opportunities to tap into the Chinese middle class's appetite for new experiences and affordable quality. Walmart said last month that its plans to more than double its footprint in China, by opening around 500 new stores over the next five to seven years, remain unchanged since their announcement in 2019. Costco Wholesale Corp. is preparing to open at least two new China stores, having opened its first in Shanghai last year to a warm welcome.

Meanwhile, Tesla is rapidly expanding its Shanghai factory--which started building the Model 3 sedan in December--as it prepares for local production of the Model Y compact crossover vehicle. A May 7 drone video of the factory site posted on YouTube showed several new structures under way at the site of the $2 billion plant. The company didn't respond to questions.

In a sign of continuing Chinese government support for Tesla, the auto maker recently secured a $563 million loan from the state-run Industrial and Commercial Bank of China, according to a May 7 regulatory filing, to fund the expansion. The company had borrowed $492 million from Chinese banks last year.

Chemical producers have been moving to take advantage of a recent rule change allowing foreigners to wholly own chemical plants in China for the first time. Exxon held a ceremony with government officials in the southern city of Huizhou last month to mark progress in talks to build a chemical plant there that the Chinese have said is valued at $10 billion--though a company spokesman said details had yet to be completed and that the timing of some expansion plans are being adjusted due to market volatility.

Though the pandemic has severely hit demand for leisure and travel in China, a spokesperson for Universal Parks & Resorts said the company is sticking with plans to open a $6.5 billion theme park in Beijing next year.

Write to Trefor Moss at Trefor.Moss@wsj.com

(END) Dow Jones Newswires

May 19, 2020 05:44 ET (09:44 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.