US President Joe Biden (R) and Chinese President Xi Jinping hold a meeting on the sidelines of the G20 Summit in Nusa Dua on the Indonesian resort island of Bali, November 14, 2022. (Photo by SAUL LOEB / AFP) (Photo by SAUL LOEB/AFP via Getty Images)
Saul Loeb | Afp | Getty Images
There is a long history of CEOs chasing short-term profits, giving precedence to quarterly earnings objectives and share prices, at the cost of establishing a sustainable long-term approach. In an era defined by profound global transformations, it’s remarkable that many CEOs continue to let this approach dictate their China strategy.
For much of the past two decades, defined by blockbuster growth in China and a benign geopolitical environment between the U.S. and China, this short-termism proved viable for many companies. However, in the current and future environment, this myopic perspective among corporate leaders carries extensive repercussions.
In fact, it’s well past the point when CEOs should have started recalibrating their approach to China. The risks in today’s environment began to show up as early as 2015, when China’s “major power” rejuvenation strategy began to take shape. Warnings have surfaced since in the form of several exogenous shocks — climate change-related droughts and floods in China, the U.S.-China trade war triggered by President Trump’s Section 301 tariffs, and finally the Covid pandemic.
These events forced corporate leaders to consider their overexposure and lack of viable, sustainable, and commercially competitive alternatives to China. It was only then that some companies began to get serious about supply-chain diversity and geopolitical de-risking. But when it comes to de-risking, there is now the risk it’s one more race where we risk falling behind to China.
For many years, the prevailing theory has been that China is too big to ignore and that, at any rate, China would necessarily hew to a pragmatic and prudent policy course so as not to jeopardize its continued access to foreign investment, U.S. capital markets, and foreign innovation and know-how. However, the inconvenient truth is that China has long understood its own vulnerabilities at home and abroad. The growth-at-all-costs approach that produced the political and economic successes of the past has also left China’s economy grossly unbalanced, weakened the party’s central authority as corruption and rent-seeking have run amok and — most concerning to Xi Jinping — resulted in China’s over-dependence on foreign technology, trade, and investment.
Xi Jinping’s long-term goal of self-reliance
China’s leaders have been pursuing greater self-reliance and quietly de-risking their own vulnerability to perceived foreign economic dependence and U.S. geopolitical global dominance across various sectors for many years now. While China sees the utility of foreign investors, businesses, and expertise, its leadership’s long-term vision is focused on a self-reliant, party-centric, and state-driven approach to the economy. To be clear, Xi Jinping’s near-term goals set up his long-term goals of self-reliance, as outlined in his well-known “Dual Circulation” strategy, which is simple: China must advance its autonomous development by reaping the benefits of global engagement while managing the potential shorter-term downsides of foreign influences and economic overdependence.
There’s a limited window available for foreign businesses in China’s market to de-risk in a way that protects their shareholders’ interests. Timing a company’s presence to seek maximum gains while not overstaying your welcome is a delicate balance for China and includes a grave risk: misjudge the political and economic environment and a company may be displaced by a domestic Chinese competitor.
On multiple occasions, we’ve witnessed foreign companies get this calculus and timing wrong. They get addicted to the profits. They get arrogant and overconfident. They fail to see a need to evaluate the economic and political environment on a constant basis. In short, foreign companies often underestimate the complexities of entering and succeeding in the Chinese market and frequently they overlook the intricacies of domestic politics, local conditions, and the influence of national pride and nationalist sentiment. Some company CEOs assert they stay focused on the numbers and avoid becoming entangled in domestic and (geo)political matters.
Recent retreats by Western corporates
The eyes-shut approach can prove costly. For instance, Uber’s venture into China lasted just 25 months before the company decided to exit, selling its operations to Didi Chuxing, which held an 80 percent market share. Uber’s difficulties in China can be attributed to a combination of factors, including fierce local competition, regulatory hurdles, and a deep lack of understanding about the local market dynamics that native companies like Didi Chuxing possessed.
There are many other cautionary tales such as Amazon’s 176-month competition with Alibaba and Yahoo’s 265-months presence before finally losing out to Baidu.
The allure of China’s vast population and economic strength can be misleading, as not all Chinese consumers seek or can afford foreign products, and Chinese companies often provide comparable alternatives. Today, industry leaders such as Tesla must contend with robust competition from domestic firms like BYD, while Apple’s iPhone 15 now faces fierce competition from Huawei’s Mate 60 Pro. These examples underscore the risk of underestimating the complexities of the Chinese market and losing ground to local competitors over time.
People queue up for hours outside Huawei’s flagship store in Shanghai on September 25, 2023, hoping to be able to buy the tech giant’s latest Mate 60 Pro mobile phone. (Photo by REBECCA BAILEY / AFP) (Photo by REBECCA BAILEY/AFP via Getty Images)
Rebecca Bailey | Afp | Getty Images
China’s companies are not thinking short-term — they are focused on longer-term goals, many that align closely with the Chinese party-state, that focus on learning what they can, competing hard, getting as much of a boost from the state as possible, and beating foreigners in China and even in the home markets of overseas rivals. Increasingly, Chinese companies are operating globally. For example, the competition faced by European electric vehicle manufacturers from the likes of BYD is just the beginning. Despite mounting evidence that China has evolved into a hyper-competitive and occasionally hostile market for many foreign companies, numerous enterprises are reluctant to adjust their strategies. This is worse than short-term thinking. This is retrograde thinking.
Overly optimistic economic guidance and projections by international institutions like the IMF don’t help. Nor do business consultants with a vested interest in keeping China a “hot” story to protect their revenue streams, and Wall Street banks that stand to gain from selling China to clients. But many CEOs themselves have outdated thinking about China and continue to push corporate strategies based on the reform and “opening up” period from 1992-2001, or the post-WTO accession period from 2001-2015, when growth skyrocketed. By 2015, China’s political system was undergoing a drastic change, while additionally, the economy was already showing signs of dangerous debt levels and severely unbalanced growth. By 2017, the miracle was all but done. The Covid era killed the remaining vitality of the old China model — the little bit that was left.
Yet foreign hopes and dreams about making outsized profits in China — many based on outdated and unfounded myths about China, persist. One such myth is the idea that China’s vast population ensures a large easily exploitable market. China’s market is not as large as it might appear, after right sizing for significant income disparities, regional preferences, and varied consumer behaviors.
Another misconception is the belief that all of China’s middle class favors foreign products. While true for some brands and luxury goods, it doesn’t apply universally. Chinese consumers often opt for competitive local alternatives. Additionally, the notion that Western products inherently offer superior quality and technology is outdated, as Chinese companies have caught up or surpassed foreign counterparts in various sectors.
Lastly, the myth of China’s unceasing economic growth has been challenged since 2018, as the country faced internal and external challenges. These misconceptions sometimes led businesses to wait for cyclical changes or economic “reforms” to materialize.
No business is too big to avoid scrutiny
The traditional foreign engagement approach, which often harks back to outdated perspectives, must be reconsidered. In the present geopolitical climate, a company’s products, services, or even its nationality might not resonate as positively with the Chinese consumer as it once did. This shift is exemplified by instances such as Carrefour, Canada Goose, H&M, the National Basketball Association (NBA), Adidas, and several other companies facing repercussions for actions or views deemed unfavorable to China’s Communist Party leadership, or for making statements or adhering to policies in their home country concerning regions like Tibet, Taiwan, Xinjiang, and, more recently, Hong Kong.
Counterarguments that are frequently made by CEOs emphasize an “all-in approach to China” or an “in China for China strategy.” They assert that their brand’s popularity and extensive employment in China insulate them from government pressure. Apple is an example of a company that has maintained a significant presence in mainland China despite geopolitical tensions and has worked hard to toe the party line. It is also a stark example of the fact that no business is too big or too essential to be brought under control, and no product or service is too vital to threaten the stability or survival of the Chinese Communist Party.
Over the past few years, Xi Jinping has demonstrated that even prominent Chinese companies like Tencent, Alibaba, and Didi, once believed to be too crucial to face discipline can indeed be subjected to government intervention.
The era of doing business in China as Western companies once knew it has fundamentally ended, but this doesn’t mean leaving China. It could mean encouraging more product innovation and knowledge of Chinese consumers, more knowledge of local conditions and preferences, and a deeper appreciation and awareness for geopolitical factors that could help or harm the business bottom-line. It means learning how to stay ahead of the domestic Chinese competition. Companies operating in China can learn a lot from peers — businesses that have successfully navigated, and those that have failed miserably, in the evolving Chinese landscape. U.S. market leaders can overcome the short-term thinking that has plagued many CEOs, but only if they prepare the right way for an ever-changing, highly competitive, and rapidly evolving Chinese and global market.