HomeChinaForeign Companies in China Face an Increasingly Limited Future

Foreign Companies in China Face an Increasingly Limited Future

Foreign Companies in China Face an Increasingly Limited Future

Louis Brennan is a professor in business studies at Trinity Business School in Ireland, a senior research fellow at the Wong MNC Center, and the Ireland representative at the China in Europe Research Network

Remember the days when companies demanded of their suppliers their “China Price.” Having one became a competitive imperative as it was, in effect, an order qualifier.

The past few years have seen a dramatic change from the days when the competitive imperative of having a response to “What’s your China price?” drove foreign companies into China to the more recent “China plus one” strategy. This new strategic approach serves as a response to the vulnerabilities of single sourcing from China experienced during the pandemic, and to the highly fraught relationship that has developed between China and the U.S. and its allies.

China plus one aims for companies to diversify beyond China as their supply base when serving overseas markets, while at the same time maintaining a presence in China that exploits its large marketplace and serves as a base for knowledge acquisition in those sectors where China now operates as a lead market. A more restrictive “China for China” strategy has operations there focused exclusively on the local market.

Yet how realistic is it to suppose that the China part of those strategies has a sustainable future?

This past autumn, American and European companies reported their most negative outlook in decades as far as operating in China is concerned. The European Union’s Chamber of Commerce in China has listed over 1,000 actions that are needed to address market barriers. Companies are increasingly challenged by the capriciousness with which new regulations and security restrictions are being introduced, some of which hamper standard commercial operations in terms of gathering and sharing market information. There is also the risk of products being excluded from customer segments, as in the recent cases of Apple and Micron.

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Jens Eskelund, president of the European Union Chamber of Commerce in China, speaks at a press conference in Beijing in May. The chamber has listed over 1,000 actions that are needed to address market barriers.    © AP

The large but highly dynamic and innovative market in China is proving an increasingly competitive and challenging place for foreign firms to operate in, even for companies from other East Asian economies such as Japan, South Korea and Taiwan that have long invested in China. Some Japanese and South Korean auto manufacturers have been pulling back there in recent years, while Taiwanese investors are increasingly turning away from China and toward investing in Southeast Asia.

This is in part because of the emergence of formidable Chinese players that benefit from local advantages, including explicit and implicit state support, that give them an edge against their foreign rivals. As China has moved up the value chain and benefited from first-mover advantage in green technologies, there are fewer sectors in which foreign firms have unchallenged dominance.

Chinese officials from President Xi Jinping down hold the strong belief that Western countries led by the U.S. have implemented comprehensive containment, encirclement and suppression against China. This view has reinforced the aggressive pursuit of the “dual circulation” strategy which seeks to leave China with as little reliance as possible on foreign resources and technology.

Even in areas such as chipmaking equipment where it is highly dependent on overseas suppliers and where it is now facing restrictions, China is making rapid strides, with local sources delivering impressive gains in market share. And while it is still some distance from achieving self-sufficiency in the most advanced chipmaking equipment, China has proved over the decades to be an assiduous acquirer of knowledge and a very fast learner.

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In short, even in those areas where China is still in catch-up mode and foreign companies still have an advantage — and hence continue to be welcome in China — the window of opportunity in the market is likely to be short lived.

Even for companies such as Apple and Volkswagen that have had considerable success in China, the rapidly changing competitive, regulatory, and technological environment suggest increasing vulnerability in the future. Rather than allocating additional capital and resources to that market in the hope of gaining or maintaining market position over the long term, maximizing returns from present commitments seems a less risky strategy. Goldman Sachs Chief Executive David Solomon recently said that a growth-at-all-costs strategy for China was no longer sensible for his company, which has reduced operations there.

But many foreign companies remain committed to China, given that it is now a lead market in an increasing number of sectors and is certain to be more so into the future. Having a presence there is a no-brainer in terms of information and knowledge acquisition, and the opportunity for learning. Even so, the changing regulatory and security environment in China suggests that such normal commercial activities run the risk of being deemed contrary to China’s security interests, thus undermining the potential benefits of operating there.

JPMorgan Chief Executive Jamie Dimon highlighted at Davos in January that the risk-reward calculation has changed dramatically with respect to China. All the omens suggest that this calculation will become more challenging into the foreseeable future.

With fewer and fewer exceptions, the future for foreign companies in China is looking increasingly finite.

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