A window of opportunity for Western companies to quit Xinjiang

When Volkswagen decided more than a decade ago to build a plant in China’s Xinjiang region with Chinese partner, SAIC, the aim was not primarily to sell cars to the local market. It was also to appease Chinese authorities who demanded the joint €170mn investment in return for approving VW’s plans to expand in Guangdong, as someone acquainted with the discussions over the plant recently told me.

Now the German auto group is learning the hard way that politically-driven investments have the potential to become hefty financial and reputational risks. The company has been disqualified by Germany’s Union Investment for its sustainable funds after media published claims that forced labour had been used by the joint venture to build a test track in the region. 

Forced labour has been a feature of the government’s crackdown on the mainly Muslim Uyghur population and other minorities. Human rights groups have estimated that more than 1mn Uyghurs and other Muslims were detained over a period of several years, while thousands have been reported to have been transferred out of the region to work in factories, some supplying global brands.

After Handelsblatt published the allegations on the test track, VW announced that it was reviewing the future of its partnership there. VW’s review came just days after BASF revealed it would sell stakes in two Xinjiang chemical plants following separate allegations of human rights abuses involving its joint venture partner. 

Is it just coincidence that, after years of refusing to disinvest for fear of angering Chinese authorities, two of Germany’s biggest industrial companies are now willing to brave a political backlash by calling into question the future of their investments there? 

Not likely, according to several people with long experience of working in China. Each company has specific reasons, but it may also be that a rare window of opportunity has opened to exit uncomfortable investments in China — at least for those companies still publicly demonstrating their commitment to the country. 

This week Beijing reported that in 2023 China attracted the lowest level of foreign direct investment for 30 years. Investor confidence has been shaken by trade tensions with the US, slowing economic growth, a continuing property crisis and industrial overcapacity. In response, the government wants to revive growth by winning foreign investors back.

So punishing two of the country’s biggest foreign investors for reviewing or selling insignificant investments in Xinjiang would be the wrong signal to send, says Max Zenglein, chief economist at China consultancy Merics. VW is pouring €5bn into China’s electric vehicle sector, while BASF is spending €10bn on a state of the art chemical plant.

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

One executive who has lived and worked in China for more than 20 years also believes that for VW and BASF, at least, the timing is propitious. China “wants the foreign investment. Officials are very explicit about the economic challenge . . . Do you really want to punish those guys that are still pouring money into the economy when everyone is running for the exit?” 

Meanwhile, it is clear that western regulations demanding clean supply chains are beginning to bite, he adds. Ensuring traceability is difficult in most parts of the world, but particularly in China. VW found this out to great cost. Thousands of its cars have been held up in US customs because the company unwittingly violated the Uyghur Forced Labour Prevention Act when a small supplier used tiny components from Xinjiang. 

In Germany, companies found to have violated the country’s new supply chain laws, which also ban forced labour, face fines of up to 2 per cent of global turnover. 

Beijing may hotly deny allegations of human rights violations in Xinjiang. But it also wants foreign investment. Perhaps that means that VW and BASF can finally extricate themselves from Xinjiang without a political backlash. If so, that would be good for their shareholders. It may also encourage other companies to move faster to quit the region. But the departure of two such high profile names could also mean less access to international working conditions, and less scrutiny of operations. “It feels bad,” the executive said. “No one there will care any more if there is forced labour.”

peggy.hollinger@ft.com