BUSINESS WITH CHINA: SHOULD I STAY OR SHOULD I GO?
BUSINESS WITH CHINA: SHOULD I STAY OR SHOULD I GO?
Guest Speaker's Corner - Andrew Cainey for Special China Issue
This week, we offer a sneak preview of our upcoming issue on China with a guest column from Andrew Cainey, who will be visiting the U.S. for the next ten days to promote his new book “Xiconomics: What China’s Dual Circulation Strategy means for Global Business.”1
Andrew is currently a senior associate fellow at the Royal United Services Institute with over twenty years’ experience in China, including as Managing Director at Booz & Company. In Xiconomics, Andrew and his co-author, Christine Prange, explain what is happening in China and how this affects its relations with other countries. They identify what foreign companies need to do, how strategies need to change, and what this all means for managing the China business as part of a global portfolio, under a range of geopolitical scenarios.
In May 2023, Ford announced plans to scale back in China and put “less capital at risk”. This follows decisions by The Gap to exit, and by Stellantis to cease local Jeep production. In contrast, VW announced a new $1Bn development and procurement center in Hefei. Starbucks, Unilever, Astra Zeneca and LVMH, among others, continue to place a high priority on the China market.
Should I stay or should I go? This is the fundamental question that faces business in China. In the song, The Clash conclude wearily: “If I go there will be trouble, and if I stay it will be double”. Is the same true for companies? Or will the double trouble come instead from a misjudged China exit?
Seven facts about the new China business environment can help companies decide.
Under Xi Jinping the China business environment has markedly changed. The Communist Party of China leads everything – and Xi definitively leads the Party. Matters of national security – very broadly defined – and ideology rank alongside, and sometimes outrank, economics. Chinese leaders declare a warm welcome for foreign business, state support for Chinese private business, and want more growth in the world’s second-largest economy. Yet actions can seem to contradict these messages. Getting reliable information is increasingly difficult. How far national security encroaches on business is uncertain. Making business decisions with confidence is much tougher.
After decades pursuing the benefits of integration and interdependence, policymakers everywhere now focus on the risks of ‘dependence’. China too wants to reduce its dependence on others, by upgrading its capabilities and creating stronger Chinese companies. It wants to increase the dependence of others on China so it can respond to the actions of the US and others and apply pressure to those with whom it has diplomatic disagreements. This weaponization of interdependence turns benefits into risks. It sits uneasily with the logic of cross-border multinational business.
China risks are now outside of China as much as inside China. Stakeholders once welcomed companies’ plans to expand in China. Now investors, policymakers, employees and customers may all have concerns about China activities. Activity is more regulated – back at headquarters not just in China. Compliance is more in the spotlight just as it has become more difficult. Some question the ethics of doing business in China, and the inevitable need to comply with all Chinese laws. These issues now form part of the risk-return calculation for the China business.
The menu of strategy options to adapt to a changing China is clear.
Companies that already have a strong China presence are localizing further, bringing all parts of the value chain into China and empowering local management. However, as the China market diverges and grows further, it requires greater investment and management commitment. More than ever it’s now a question of ‘Go big or go home’.
Those manufacturing in China for export are diversifying risk to countries such as Vietnam and India (the “China + 1 strategy”) and repositioning their Chinese plants to serving China alone. Others, especially in the EV sector, are shifting manufacturing into China to take advantage of its growing capabilities.
Those exporting to China are increasingly shifting some production onshore to serve the China market – or diversifying into other export markets.
Others continue to steer clear of business in China – though some, especially in the finance sector, are reassessing the opportunity as deregulation promises new opportunities.
You may not be interested in China, but China is interested in you. China continues to develop and innovate rapidly at massive scale. In renewables, EVs and many aspects of digital technology, China is in the lead. And companies are taking these capabilities global. China is now the world’s largest car exporter, made by the Chinese and foreign companies alike. It is the largest trading partner for over 100 countries and a major source of global investment. Multinationals will encounter China around the world – regardless of what they decide to do in China.
For all the talk of ‘deglobalization’, connectivity between countries still matters greatly. This is true for flows of trade, investment, people, data and intellectual property. What has changed is that these flows are now more scrutinized, more managed. Connectivity lies at the heart of why multinationals exist – they deploy business models from one country to another; they share learnings; they gain the benefits of global scale. Companies continue to have an important, even enhanced, role here. But they need to take a fresh look at new constraints, where connectivity now creates value, and how organization design can bolster this.
Greater divergence between the business environment in China and western markets requires a form of organizational ambidexterity: companies need to adapt and localize more everywhere. But there are limits to this ambidexterity. Companies cannot be all things to all people all the time. Chinese consumers want Xinjiang cotton in their sportswear; Western consumers do not (even where it is legal to use it). Multinationals should strive to be ambidextrous, while maintaining close oversight and company-wide compliance. But they also need to recognize when this can’t be done – and in such cases, they need to choose.
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As ever for business in China, it’s complicated – indeed, more complicated than before. China demands greater management attention and poses greater risk. Yet the market remains massive and a growing source of innovation. Making a profit requires clear, sustainable competitive advantage and the commitment and ability to do whatever is needed to compete. But for those with weaker competitive positions and limited resources, China risks becoming a distraction or worse.
So, all things considered, should you stay or should you go?
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