A window of opportunity for Western companies to quit Xinjiang

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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…