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American Entrepreneurs Who Flocked to China Are Heading Home, Disillusioned
Worsening costs, taxation, tech transfer and regulation prompt foreign-owned businesses to throw in the towel
By James T. Areddy
Dec. 7, 2018 10:37 a.m. ET
SHANGHAI—Fifteen years ago in California, a tall technology geek named Steve Mushero started writing a book that predicted the American dream might soon “be found only in China.” Before long, Mr. Mushero moved himself to Shanghai and launched a firm that Amazon.com Inc. and Alibaba Group Holding Ltd. certified as a partner to serve the world’s biggest internet market.
These days, the tech pioneer has hit a wall. He’s heading back to Silicon Valley where he sees deeper demand for his know-how in cloud computing. “The future’s not here,” said the 52-year-old.
For years, American entrepreneurs saw a place in which they would start tech businesses, build restaurant chains and manage factories, making potentially vast sums in an exciting, newly dynamic economy. Many mastered Mandarin, hired and trained thousands in China, bought houses, met their spouses and raised bilingual children.
Economic Chill
Foreign direct investment growth in China has cooled, and company formations are off their peak. [charts in original]
Now disillusion has set in, fed by soaring costs, creeping taxation, tightening political control and capricious regulation that makes it ever tougher to maneuver the market and fend off new domestic competitors. All these signal to expat business owners their best days were in the past.
The Trump administration is making a hard-nosed challenge to China using trade tariffs, investment controls and prosecution of technology thieves, and many in American business are cheering, if silently, having soured on the market after years of trying.
At a curry luncheon hosted a few times a year by Steven Bourne, a law professor and 13-year resident of Shanghai from Massachusetts, guests these days chew over shrimp samosas and exit plans. On a recent Friday, a Swedish maker of beauty products said he would move his family to Hong Kong, where regulations are clearer and taxes are lower. An American art dealer who suffered when his rich clients got pinched by currency controls was headed to California.
Another, Jack Tung, a 47-year-old who grew up near Philadelphia and had the costumes made for Hollywood movies like “The Painted Veil” and “The Great Wall,” said absorbing a sixfold rise in tailoring rates since 2003 changed China into a high-cost, low-profit, stressful hardship. He lost the feeling “it’s all happening” in Shanghai and will try Thailand.
Expats always ebb and flow, said Mr. Bourne, but for entrepreneurs “it’s harder for them to live here now.”
Bob Boyce at the opening party for one of his Blue Frog restaurants in Shanghai in 2007. PHOTO: CHARLIE XIA
Relocations firm Santa Fe Group A/S said it moves more families out of China than into it these days. Enrollment at Shanghai American School—where annual tuition tops $30,000—is nearly 17% off its peak five years ago. The American Chamber of Commerce in China said 75% of its members are feeling less welcome. Its Shanghai chapter lost over 600 members in recent years, while a poll of U.S. businesses by the organization in manufacturing-heavy Guangdong found 70% may delay China investment or shift it overseas.
“How can it be that those who know China best, work there, do business there, make money there, and have advocated for productive relations in the past, are among those now arguing for more confrontation?” former U.S. Treasury Secretary Henry Paulson asked at a November conference in Singapore.
Many mark a turn in the climate for foreign businesses at around 2012. China was reckoning with how boom times had weighed it down with debt and overcapacity plus widespread corruption and appalling pollution. When Xi Jinping became Communist Party leader, he used the power of the state to shore up employment and living standards. Government-owned companies shielded from daily business hassles were in favor.
Authorities stepped up scrutiny of visas and actively enforced pollution controls. A new social security law lifted local wages and made it tough to fire workers, so much that some employers called the policy a modern “iron rice bowl.” Mr. Xi reinforced China’s Great Firewall of internet controls; big domestic tech firms thrived while laws excluded foreign rivals or pressured them to share technology.
About 20 years ago, when China fever was building, Bob Boyce’s hankering for an affordable beer and burger in Shanghai prompted him to “jump into the sea,” as locals then called starting a business. The Montanan’s bar and grill featuring $5.80 burgers proved an immediate hit.
“It was a time in China if you made some effort, people responded well and you could figure things out,” said Mr. Boyce.
Mr. Boyce targeted China’s white collar crowd, which was taking off along with the economy. The Beijing Olympics in 2008 seemed to crystallize China’s ascendancy. Money was pouring in. Foreign direct investment topped $100 billion for the first time in 2008, helped by new spending by Boeing Co. , Goodyear Tire and Rubber Co. and Microsoft Corp.
Mr. Boyce at the construction site for a Blue Frog restaurant in Chengdu, China, around 2014.PHOTO: BOB BOYCE
Over the years, Mr. Boyce expanded his single burger joint into a 10-city, $70 million chain of restaurants under the names Kabb and Blue Frog. He figures they employed a total of 12,000 over the years, some of whom went on to launch their own restaurants.
Still, he said, “the label of ‘foreigner’ is always on your forehead.”
Health inspectors were initially so unfamiliar with Western kitchens that he said they nitpicked—he was cited for out-of-date dried oregano—then new rules started cropping up. Officials required restaurants to dedicate a separate space of exactly 8 square meters to prepare salad, not a staple of Chinese cooking. After a retired Chinese leader moved in near his original Blue Frog outlet, police checked noise levels nightly and the restaurant closed in 2012.
“China started to become less clear about what the endgame was for foreigners,” said Mr. Boyce. Last year, he decamped to Seattle after selling his chain to a European company.
From Silicon Valley in 2003, Mr. Mushero felt China’s rumblings and started writing his book, “Off-Shoring the Middle Class.” He saw U.S. companies save money by shifting accounting, X-ray evaluations and other technical jobs overseas. China, he thought, was becoming globalization’s “one-stop-shop” for manufacturing, basic tech work and advanced research.
He predicted a broad shift to China of not only factory work, but U.S. white collar jobs, too. “Imagine these people’s surprise to be out of work, having lost their job to a young Chinese girl earning 25% of their salary,” he wrote.
In 2004, he ran into a friend working at International Business Machines Corp. who asked: “Have you thought about living in Shanghai? We’re hiring like mad.”
An Alibaba office at the internet giant’s headquarters in Hangzhou, China. PHOTO: WANG HE/GETTY IMAGES
By September 2005, he was in Shanghai to pursue consulting leads. His first night, Mr. Mushero was on the terrace of a riverside nightclub chatting with his mother by mobile phone when a burst of fireworks lighted the skyline. “Awesome, they’re celebrating my arrival,” Mr. Mushero told her.
A few evenings later, Mr. Mushero attended an American Chamber of Commerce mixer where he met two future business partners: an American techie, James Eron, and a local businesswoman, Gu Yinan, whom he would marry.
The first foreigner hired at a video sharing service called Tudou.com, a China version of YouTube, Mr. Mushero got a fast education about keeping a site functioning on China’s rough-and-tumble internet. One duty involved locating clips of pornography hidden in uploaded cat videos.
He wondered: “What is everybody else doing?”
At a Starbucks in mid-2008, he sketched out “a napkin business plan” for a new company called ChinaNetCloud (Shanghai) Co. with Mr. Eron. China was overtaking the U.S. as the biggest internet market, and the partners would trail-blaze into cloud services by managing the online operations of local businesses. To a Silicon Valley investor named Dave McClure known for early bets on tech trends, ChinaNetCloud was a proxy for “the exploding Chinese internet market,” he said in a 2010 blog, and he pumped in $200,000 for his first China investment.
Companies such as Alibaba and Tencent Holdings Ltd. soon harnessed cloud technology and today deliver on-the-go shopping, gaming, payments and other consumer services. When Alibaba and Amazon Web Services began selling enterprise cloud space in China, each certified ChinaNetCloud to configure and monitor software for their corporate clients.
Tougher regulations and competition deterred foreign players. China’s reputation for technology theft kept many out of the market, which reduced the number of Mr. Mushero’s potential clients. In 2013, the American Chamber of Commerce said only 10% of its members trusted data security enough to consider cloud services in China.
A night view of Shanghai in 2005, when new companies launched by foreigners were soaring. PHOTO: CANCAN CHU/GETTY IMAGES
Walt Disney Co. tapped ChinaNetCloud to manage the computers hosting some interactive games in 2012, including one based on its hit movie “Frozen.” Mr. Mushero looked forward to more work with the U.S. entertainment giant, but Disney scrubbed the gaming push in mid-2014. Disney declined to comment. Online gaming in China is dominated by big domestic tech companies; it is derided by regulators as chaotic and harmful and hit regularly with new rules.
Soon another customer, British online retailer ASOS PLC, pulled out of China after three years trying to compete in a market dominated by giants Ailbaba and JD.com Inc. ASOS didn’t respond to questions.
Mr. Mushero pushed on, setting his sights on taking ChinaNetCloud public, after Alibaba’s $25 billion initial public offering in 2014 boosted investor enthusiasm for Chinese tech.
ChinaNetCloud lifted staffing to 125 and fancied up its offices in a high-tech zone with a second floor that featured colorful wall-size monitors Mr. Mushero likened to the Starship Enterprise. He hung up the napkin business plan and hired lawyers, figuring the company was worth $60 million.
Mr. Mushero in 2008 at ChinaNetCloud. PHOTO: STEVE MUSHERO
As a foreign-owned company, ChinaNetCloud couldn’t easily raise money from local investors, and rules blocked listed Chinese companies from buying it before it was profitable. Foreign investors, meanwhile, were uneasy about China’s tightly regulated internet sector. “We were too Chinese for the Americans and too American for the Chinese,” said Mr. Mushero.
When China’s stock markets crashed in mid-2015 so did ChinaNetCloud’s fundraising hopes. The setback left Mr. Mushero and his co-founder, Mr. Eron, personally liable for a $6 million loan from local firms. Mr. Eron quit and returned to the U.S.; he declined to comment.
Lacking funds, ChinaNetCloud later restructured into Shanghai YunChang Network Technology Ltd. to become a fully China-registered company instead of a foreign enterprise. Mr. Mushero’s wife, Ms. Gu, took over as chief executive, while he stuck to technology.
In August 2017, Ms. Gu appeared on the season finale of China’s version of Shark Tank, a TV show where entrepreneurs try to sell famous investors on their business plan. Ms. Gu raced through the story of the company’s early success and more recent money challenges. When a panelist asked about juggling family and work, Ms. Gu broke down in sobs.
“We have been struggling for nine years. Nine years,” she said. The panelist leapt up to hug a trembling Ms. Gu. Soon, all five investors were wiping away their tears as they pledged Ms. Gu the equivalent of $1.5 million. “We’re very touched by your story,” one said.
Still only occasionally profitable and down to about 40 employees, the company in October fled the tech-zone for a cramped office near a railway station. The Shark Tank funding wiped away Mr. Mushero’s debt but slashed the company’s valuation.
On a recent drizzly afternoon, flanked by framed commendations from Amazon and Microsoft for his firm’s achievements in China, Mr. Mushero said that after New Year’s he will head back to California, where he sees burgeoning demand for corporate online services, to market the company’s cloud-management tools. China is big, messy and complicated, he said. “We have been out there in the trenches for many years.”
Worsening costs, taxation, tech transfer and regulation prompt foreign-owned businesses to throw in the towel
By James T. Areddy
Dec. 7, 2018 10:37 a.m. ET
SHANGHAI—Fifteen years ago in California, a tall technology geek named Steve Mushero started writing a book that predicted the American dream might soon “be found only in China.” Before long, Mr. Mushero moved himself to Shanghai and launched a firm that Amazon.com Inc. and Alibaba Group Holding Ltd. certified as a partner to serve the world’s biggest internet market.
These days, the tech pioneer has hit a wall. He’s heading back to Silicon Valley where he sees deeper demand for his know-how in cloud computing. “The future’s not here,” said the 52-year-old.
For years, American entrepreneurs saw a place in which they would start tech businesses, build restaurant chains and manage factories, making potentially vast sums in an exciting, newly dynamic economy. Many mastered Mandarin, hired and trained thousands in China, bought houses, met their spouses and raised bilingual children.
Economic Chill
Foreign direct investment growth in China has cooled, and company formations are off their peak. [charts in original]
Now disillusion has set in, fed by soaring costs, creeping taxation, tightening political control and capricious regulation that makes it ever tougher to maneuver the market and fend off new domestic competitors. All these signal to expat business owners their best days were in the past.
The Trump administration is making a hard-nosed challenge to China using trade tariffs, investment controls and prosecution of technology thieves, and many in American business are cheering, if silently, having soured on the market after years of trying.
At a curry luncheon hosted a few times a year by Steven Bourne, a law professor and 13-year resident of Shanghai from Massachusetts, guests these days chew over shrimp samosas and exit plans. On a recent Friday, a Swedish maker of beauty products said he would move his family to Hong Kong, where regulations are clearer and taxes are lower. An American art dealer who suffered when his rich clients got pinched by currency controls was headed to California.
Another, Jack Tung, a 47-year-old who grew up near Philadelphia and had the costumes made for Hollywood movies like “The Painted Veil” and “The Great Wall,” said absorbing a sixfold rise in tailoring rates since 2003 changed China into a high-cost, low-profit, stressful hardship. He lost the feeling “it’s all happening” in Shanghai and will try Thailand.
Expats always ebb and flow, said Mr. Bourne, but for entrepreneurs “it’s harder for them to live here now.”
Bob Boyce at the opening party for one of his Blue Frog restaurants in Shanghai in 2007. PHOTO: CHARLIE XIA
Relocations firm Santa Fe Group A/S said it moves more families out of China than into it these days. Enrollment at Shanghai American School—where annual tuition tops $30,000—is nearly 17% off its peak five years ago. The American Chamber of Commerce in China said 75% of its members are feeling less welcome. Its Shanghai chapter lost over 600 members in recent years, while a poll of U.S. businesses by the organization in manufacturing-heavy Guangdong found 70% may delay China investment or shift it overseas.
“How can it be that those who know China best, work there, do business there, make money there, and have advocated for productive relations in the past, are among those now arguing for more confrontation?” former U.S. Treasury Secretary Henry Paulson asked at a November conference in Singapore.
Many mark a turn in the climate for foreign businesses at around 2012. China was reckoning with how boom times had weighed it down with debt and overcapacity plus widespread corruption and appalling pollution. When Xi Jinping became Communist Party leader, he used the power of the state to shore up employment and living standards. Government-owned companies shielded from daily business hassles were in favor.
Peak Membership
Americans are leaving Shanghai, one of China's most internationalized cities. [charts in original]
Americans are leaving Shanghai, one of China's most internationalized cities. [charts in original]
Authorities stepped up scrutiny of visas and actively enforced pollution controls. A new social security law lifted local wages and made it tough to fire workers, so much that some employers called the policy a modern “iron rice bowl.” Mr. Xi reinforced China’s Great Firewall of internet controls; big domestic tech firms thrived while laws excluded foreign rivals or pressured them to share technology.
About 20 years ago, when China fever was building, Bob Boyce’s hankering for an affordable beer and burger in Shanghai prompted him to “jump into the sea,” as locals then called starting a business. The Montanan’s bar and grill featuring $5.80 burgers proved an immediate hit.
“It was a time in China if you made some effort, people responded well and you could figure things out,” said Mr. Boyce.
Mr. Boyce targeted China’s white collar crowd, which was taking off along with the economy. The Beijing Olympics in 2008 seemed to crystallize China’s ascendancy. Money was pouring in. Foreign direct investment topped $100 billion for the first time in 2008, helped by new spending by Boeing Co. , Goodyear Tire and Rubber Co. and Microsoft Corp.
Mr. Boyce at the construction site for a Blue Frog restaurant in Chengdu, China, around 2014.PHOTO: BOB BOYCE
Over the years, Mr. Boyce expanded his single burger joint into a 10-city, $70 million chain of restaurants under the names Kabb and Blue Frog. He figures they employed a total of 12,000 over the years, some of whom went on to launch their own restaurants.
Still, he said, “the label of ‘foreigner’ is always on your forehead.”
Health inspectors were initially so unfamiliar with Western kitchens that he said they nitpicked—he was cited for out-of-date dried oregano—then new rules started cropping up. Officials required restaurants to dedicate a separate space of exactly 8 square meters to prepare salad, not a staple of Chinese cooking. After a retired Chinese leader moved in near his original Blue Frog outlet, police checked noise levels nightly and the restaurant closed in 2012.
“China started to become less clear about what the endgame was for foreigners,” said Mr. Boyce. Last year, he decamped to Seattle after selling his chain to a European company.
From Silicon Valley in 2003, Mr. Mushero felt China’s rumblings and started writing his book, “Off-Shoring the Middle Class.” He saw U.S. companies save money by shifting accounting, X-ray evaluations and other technical jobs overseas. China, he thought, was becoming globalization’s “one-stop-shop” for manufacturing, basic tech work and advanced research.
He predicted a broad shift to China of not only factory work, but U.S. white collar jobs, too. “Imagine these people’s surprise to be out of work, having lost their job to a young Chinese girl earning 25% of their salary,” he wrote.
In 2004, he ran into a friend working at International Business Machines Corp. who asked: “Have you thought about living in Shanghai? We’re hiring like mad.”
An Alibaba office at the internet giant’s headquarters in Hangzhou, China. PHOTO: WANG HE/GETTY IMAGES
By September 2005, he was in Shanghai to pursue consulting leads. His first night, Mr. Mushero was on the terrace of a riverside nightclub chatting with his mother by mobile phone when a burst of fireworks lighted the skyline. “Awesome, they’re celebrating my arrival,” Mr. Mushero told her.
A few evenings later, Mr. Mushero attended an American Chamber of Commerce mixer where he met two future business partners: an American techie, James Eron, and a local businesswoman, Gu Yinan, whom he would marry.
The first foreigner hired at a video sharing service called Tudou.com, a China version of YouTube, Mr. Mushero got a fast education about keeping a site functioning on China’s rough-and-tumble internet. One duty involved locating clips of pornography hidden in uploaded cat videos.
He wondered: “What is everybody else doing?”
At a Starbucks in mid-2008, he sketched out “a napkin business plan” for a new company called ChinaNetCloud (Shanghai) Co. with Mr. Eron. China was overtaking the U.S. as the biggest internet market, and the partners would trail-blaze into cloud services by managing the online operations of local businesses. To a Silicon Valley investor named Dave McClure known for early bets on tech trends, ChinaNetCloud was a proxy for “the exploding Chinese internet market,” he said in a 2010 blog, and he pumped in $200,000 for his first China investment.
Companies such as Alibaba and Tencent Holdings Ltd. soon harnessed cloud technology and today deliver on-the-go shopping, gaming, payments and other consumer services. When Alibaba and Amazon Web Services began selling enterprise cloud space in China, each certified ChinaNetCloud to configure and monitor software for their corporate clients.
Tougher regulations and competition deterred foreign players. China’s reputation for technology theft kept many out of the market, which reduced the number of Mr. Mushero’s potential clients. In 2013, the American Chamber of Commerce said only 10% of its members trusted data security enough to consider cloud services in China.
A night view of Shanghai in 2005, when new companies launched by foreigners were soaring. PHOTO: CANCAN CHU/GETTY IMAGES
Walt Disney Co. tapped ChinaNetCloud to manage the computers hosting some interactive games in 2012, including one based on its hit movie “Frozen.” Mr. Mushero looked forward to more work with the U.S. entertainment giant, but Disney scrubbed the gaming push in mid-2014. Disney declined to comment. Online gaming in China is dominated by big domestic tech companies; it is derided by regulators as chaotic and harmful and hit regularly with new rules.
Soon another customer, British online retailer ASOS PLC, pulled out of China after three years trying to compete in a market dominated by giants Ailbaba and JD.com Inc. ASOS didn’t respond to questions.
Mr. Mushero pushed on, setting his sights on taking ChinaNetCloud public, after Alibaba’s $25 billion initial public offering in 2014 boosted investor enthusiasm for Chinese tech.
ChinaNetCloud lifted staffing to 125 and fancied up its offices in a high-tech zone with a second floor that featured colorful wall-size monitors Mr. Mushero likened to the Starship Enterprise. He hung up the napkin business plan and hired lawyers, figuring the company was worth $60 million.
Mr. Mushero in 2008 at ChinaNetCloud. PHOTO: STEVE MUSHERO
As a foreign-owned company, ChinaNetCloud couldn’t easily raise money from local investors, and rules blocked listed Chinese companies from buying it before it was profitable. Foreign investors, meanwhile, were uneasy about China’s tightly regulated internet sector. “We were too Chinese for the Americans and too American for the Chinese,” said Mr. Mushero.
When China’s stock markets crashed in mid-2015 so did ChinaNetCloud’s fundraising hopes. The setback left Mr. Mushero and his co-founder, Mr. Eron, personally liable for a $6 million loan from local firms. Mr. Eron quit and returned to the U.S.; he declined to comment.
Lacking funds, ChinaNetCloud later restructured into Shanghai YunChang Network Technology Ltd. to become a fully China-registered company instead of a foreign enterprise. Mr. Mushero’s wife, Ms. Gu, took over as chief executive, while he stuck to technology.
In August 2017, Ms. Gu appeared on the season finale of China’s version of Shark Tank, a TV show where entrepreneurs try to sell famous investors on their business plan. Ms. Gu raced through the story of the company’s early success and more recent money challenges. When a panelist asked about juggling family and work, Ms. Gu broke down in sobs.
“We have been struggling for nine years. Nine years,” she said. The panelist leapt up to hug a trembling Ms. Gu. Soon, all five investors were wiping away their tears as they pledged Ms. Gu the equivalent of $1.5 million. “We’re very touched by your story,” one said.
Still only occasionally profitable and down to about 40 employees, the company in October fled the tech-zone for a cramped office near a railway station. The Shark Tank funding wiped away Mr. Mushero’s debt but slashed the company’s valuation.
On a recent drizzly afternoon, flanked by framed commendations from Amazon and Microsoft for his firm’s achievements in China, Mr. Mushero said that after New Year’s he will head back to California, where he sees burgeoning demand for corporate online services, to market the company’s cloud-management tools. China is big, messy and complicated, he said. “We have been out there in the trenches for many years.”
