Chinese Market: Current opportunities and risks for MNCs
Ashutosh K.
Ex banker, Now self-employed, MD &CEO of Kumar Group of companies, Author of many books.
THE CHINA IMPERATIVE FOR MULTINATIONAL COMPANIES
INTRODUCTION
?MNCs operating in China must reconfigure for opportunity and risk. Over the past 30 years,?multinational companies (MNCs) have enjoyed an increasingly open world. Taking advantage of a unipolar globe with relatively free flows of capital, trade, and ideas, MNCs tapped capital from wherever they chose, built businesses optimized for global supply and global demand, and served increasingly globalized customers. That may no longer be possible. In a world reshaped by the coronavirus pandemic, rising geopolitical tensions, renewed inflationary pressures, and war, MNCs must reassess, reevaluate, and reconfigure their businesses for a new era. China is a country with some of the most melodramatic reconfigurations means the act or process of reconfiguring a system, organization, etc. But it is very difficult. ?The complete size and complexity of the Chinese market may mean that concepts of outright decoupling are simplistic; moreover, we continue to live in a world interdependent by those?global flows?of capital, trade, and ideas. This period describes MNCs have to tackle a more problematic authority: sustaining access to China’s upsides while managing gradually complex risks. It is a challenge?that will define the next era for MNCs, and those adept to sustain the future ahead. China and MNCs made invigorated a mutually beneficial relationship during the past few decades. Between 1990 and 2019, China’s real GDP grew at an average of 10% per year, providing more than a quarter of global GDP growth, and average household income rose from about $750 to $13,000. That dynamism was an electromagnet for MNCs, which congregated to China to earn part of the growth. At its peak point, MNCs employed 16 million people and measure up to half of China’s exports. They also helped carry best practices to China, bolstering the economy’s productivity in such industries as chemicals and cosmetics.
But MNCs have started reassessing their relationship with China. A recent survey found that the share of US MNCs observing China as one of their top three investment priorities dropped from 77 percent in 2010 to 45 percent in 2022. Though many MNCs are continuing to invest in China, some are limiting their operations there to restore and rebalance their allocations of investments toward other countries, and a few are existing from China in total. The reassessment may seem amazing, considering that MNCs’ prospects in China continue intact and immense. In a progressively multipolar world, China has developed as a major extremity. Its GDP is now 18 % of the global total—a share equal to the entire EU’s and second only to that of the US (with 24%). With advanced technology, such as AI, advanced connectivity, and space technology, China is charming as a world leader. China’s climate transition will require investments worth many trillions of dollars, which are likely to signify a substantial window of business opportunities. China is also one of the world’s largest producers of renewable energy products, such as solar panels and battery components for EVs. Nevertheless, China also carries MNCs with unique risks. Rising tensions with the US and EU have the potential to interrupt global value chains, especially in crucial sectors. China is aging at the fastest pace among the world’s emerging economies, stroking descendant pressure on its labor supply. China’s investment exposure to rising real estate prices is driving risk too. The country’s ratio of debt to GDP historic peak at 274 %.
MNCs are now earnestly asking themselves if they have the right strategies to succeed in China. Factually, many are losing ground as the gap widens between the high- and low-performing. ?MNCs that grew the most rapidly from 2010 to 2021, bottom-line grew by 20% per year during the last 2 years of the period—a pick up from their 16% per year during the first 9 years. Simultaneously, openings for low-performing MNCs are attenuation: those whose revenues contracted the most swiftly between 2010 and 2021 saw faster revenue loss after the pandemic started (5% per year) than before (3%). Moreover, Chinese companies are competing with the MNCs more aggressively for market share in many industries. For instance, MNCs’ share of all revenues earned in China weakened from 16% to 10% from 2006 to 2020. Local companies selling portable electronics, groceries, and 5G structures have gained 20 to 40% points of market share over the past decade. The R&D expending of China’s largest public companies grew thrice as quickly as that of non-Chinese Fortune 500 companies between 2017 and 2021. In this respect, MNCs are changing the course of their China strategies. Their most demanding question can be put frankly: stay or leave? The answer depends on at least two more questions. First, what is at stake? For example, China sums up 25 to 40% of the global market in some sectors, such as cars, luxury consumer goods, and industrial equipment; can companies in those sectors afford to lose the China market? Likely, can companies that hinge on supply chains in China or derive major important shares from R&D facilities afford to leave? Even if they resolve to go, how will they reconcile Chinese players in markets elsewhere?
Second, how can MNCs secure business in China? In the following six areas, they will face a variety of adoptions that define China as overbearing:
The MNCs that flourished in a swift shifting China will be those that select wisely in those six areas. The challenge is arduous, but the benefit is huge.
MULTINATIONAL COMPANIES’ OPPORTUNITIES AND RISKS IN CHINA
Over the last 30 years, the Chinese government has at times opened the door wide for foreign companies to participate in its domestic economic growth which was strictly restricted. ?This is represented by more than 76% of assets being Government-owned in China. However, China has progressed and become the world's 2nd largest economy, and forecasted by global experts, it will soon be the largest economy, before the turn of the century. If anything, this demonstrates how much research a foreign company and/or investor ought to conduct before going into the Chinese market. They need to methodically study the potential risks and rewards of entering the market.
PROS AND CONS IN CHINA
领英推荐
Digital Reward
?China offers some of the world’s largest, most effective, and most innovative internet-based companies, e.g., Alibaba and Baidu. In the middle of 2018, 9 out of 20 of the largest tech companies in the world by valuation, had HQ in China, with the other 11 based in the U.S. To attract consumer-facing business in China can only succeed lacking an online and offline strategy now. The reason is consumers are still new to traditional Western ways of shopping or banking but are willing to embrace online shopping. In China, 600 million people use their phones to make mobile payments at the start of 2019, and about 550 million people regularly use their phones to shop online. As online firms keep on growing, they are possibility of progressively more success in China. The value of mobile payment transactions in China reached more than $20 trillion now. In comparison, the US achieved a few trillion dollars. The largest size of China’s markets, and users’ adoption due to curiosity to experiment with new ideas, was made the place choice for introducing new digital concepts. A final point to consider within the digital sector is how Chinese companies view IT services. Finding the CIO in a Chinese company is often hard, especially in a state-owned enterprise. A typical Chinese company spends only 2% of its revenue on IT versus international benchmarks of around 4%. As these companies struggle to bring technology into the core of their operations, they need massive amounts of help to do so. The cost of good IT talent is already soaring. Most Chinese companies will be unable to solve their technology challenges for themselves.
?Employment Risk & Reward
?Whilst having done little to address the issue of diminishing white-collar jobs, China has grown its pool of medium and high-skilled workers by investing in universities. However, of the 7 million graduates each year, maybe only 3 million find jobs that require a degree. Like graduates all over the world, they largely lack workplace-relevant skills. Once graduates are hired, retention of high performers often depends on a highly variable compensation structure and dismissing underperformers. These remainders who are unemployed or dismissed are a growing segment of society and will be becoming increasingly unsatisfied and disenchanted with the nature of employment. This presents a great opportunity for foreign companies and investors in the Chinese market. However, it is worth remembering that, unlike, in its Asian counterpart Japan, loyalty to an employer is often low on an individual’s priority list. As such, turnover will likely be high and should be planned for. It is no secret that manufacturing processes are shifting to surrounding countries, like Vietnam and Bangladesh, due to rising wages in China. Nonetheless, China still enjoys cost advantages in two major talent categories: R & D and marketing & sales. However, it is becoming increasingly common practice to hire mid-career executives in almost all industries. As such, there is an ever-deepening pool of talent available for such industries. Both Chinese and global search firms have rapidly growing businesses that serve local and international companies to address this issue. China also offers many incentives for overseas Chinese to come back. Having a population of over 1.3 billion and a rising dominant language in Mandarin (nearly 1 billion speakers), coupled with a fast-growing economy and a rising middle class – by 2022 more than 50% of urban households should be in the middle class, an increase of more than 100 million households – the result is a vast local market with exposable income.
?Governmental Risk & Reward?
As more than 76% of assets in China are owned by the government, meaning people own less than a quarter of assets. This means that if you wish to do business in China, so they have to negotiate with the state. The bureaucracy involved in negotiating with the state can slow down the pace of business ventures. Joint ventures are difficult to establish because they have big government involvement. Legal matters absent consistency as it to be changed at the will of the Chinese government. However, in recent years they are trying to upgrade legal protections making the business environment more enticing to foreigners. If regulations require having a joint-venture partner and a minority position today, it is best practice to assume it will be that way forever in the core business activities. . Organizations must closely follow the evolution of government policy and align with stated intent with such policy as far as possible. Using the words from the government statements in our own statements communicates our commitment to China. It is important to be clear if we are in China for the opportunity in China or if we are there for the opportunity that China creates for us in the rest of the world. All the while it is best to bear in mind that corruption in China has certainly become more of an issue as the Communist Party of China’s policies, institutions and norms have clashed with recent market liberalization. Bribery, kickbacks, theft, and misspending of public funds cost at least 3% of China’s GDP each year. Because the Chinese government owns the majority of China’s assets, they have the ability to spend without much oversight of the budget process. Recently there has been a crackdown on corruption and many high-profile political figures, such as Sun Zhengcai, have been jailed for getting caught up in the net of bribery, abuse of power, and other corrupt practices.?
Geopolitical Risk
?The arrest of Huawei’s CFO, Meng Wanzhou, in Canada at Washington’s request immediately raises the prospect of like-for-like retaliation against executives from North American companies, a fear reinforced by the arrests of a former Canadian diplomat turned NGO researcher and a Canadian businessman. Western business people are ensnared in low-level court proceedings in China far more regularly than is reported in the West, however, the risk remains low of a retaliatory move against a Western executive of similar status to Meng. For every U.S. tech company and Western multinational, especially those critically reliant on Chinese sub-contractors, their value chain is now actively at political risk. Local suppliers and their sub-contractors are susceptible to pressure to behave ‘patriotically’ when authorities convey the message, however tacitly, that lack of cooperation with foreign multinationals is in the national interest. Companies need to take urgent steps to measure their potential exposure to these risks. Doubling up value chains, including alternatives outside China, would mitigate the risk of political and regulatory disruption.
?Additionally, when we couple this with Trump’s isolationist ‘America First policy, Chinese companies e compelled to seek alternatives to the U.S. in response to Trump’s tariffs, further accelerating the changes to regional trade and the value chains that support it. The overall effect was that more value chains will begin and end in China rather than beginning in China and ending in the U.S. Burgeoning middle classes in China and South & Southeast Asia provide a growing market for China’s consumer and industrial goods. There are fewer global value chains and more regional ones. Regional value chains do have an advantage: they are shorter than global ones. As global value chains have gotten longer and leaner, they have grown more fragile, just as the pressures on them are increasing from the technological change. The Trump administration’s trade policies provided new impetus to the developing patterns of multiple, shorter regional value chains.?In the longer term, it is worth noting the increasing Chinese military power. Until recently, China had never been a naval power – with its large land mass, multiple borders, and short sea routes to trading partners, it had no need to be and, as a consequence, it has rarely been ideologically expansive. However, this is all changing in front of our eyes.
?China has been laying the groundwork for superpower confrontation in the South China Sea. In 2017, China constructed 290,000 sq. m. of dual-use civil-military facilities on the Spratly and Paracel Islands in the South China Sea. On the face of it, this may seem to be a local dispute over fisheries and oil fields but in actual fact, it has much broader implications. Each year $5 trillion in commerce – nearly one-third of global trade – passes through the South China Sea. China’s military build-up now allows it to project power across those sea lanes, challenging the freedom of navigation guaranteed by the U.S. Navy for the better part of a century. When we consider an incident in 2006, it is easy to understand why tensions have been building up for some time. U.S. Navy ships were situated in the East China Sea in preparation for the visit of a U.S. Commander and an undetected Chinese submarine surfaced within 5 miles of the 1,000 ft. USS Kitty Hawk. This incident and the build-up of civil-military facilities are a signal of expansionist intent from the Chinese – “We are now a maritime power; these are our seas”. Without a code of conduct or an established mechanism for de-escalation in place, saber-rattling in the seas neighboring China could spiral into full-scale conflict. This would immediately disrupt the international supply chains on which modern manufacturing depends, causing shortages for many companies.
?China is still at least a couple of decades off challenging the greatest maritime power in the world, the U.S. Navy, so any threat of conflict is not entirely imminent. However, China must secure the routes through the South China Sea, both for its goods to get to market and for the items required to make those goods get into China. As such, political tensions in relation to naval passages are likely to increase in the upcoming decades. To mitigate these risks, companies ought to assess these factors when entering the Chinese market and may benefit from looking at the potential for regional rather than global value and supply chains. Moving from sea to land, it is important to consider the construction and implication of China’s Belt and Road infrastructure initiative – the creation of an ocean-going highway for goods and a land-based route formed from the old Silk Road route. As Belt and Road expand in scope so do concerns it is a form of economic imperialism rather than an attempt to improve global networks – the geopolitics of fear.?Considering that, increasingly, China’s mindset is that there are fewer and fewer things to learn from foreign partners and they’re more attracted by how a partner can help them expand internationally, these concerns may be legitimate. The economic strategy of ‘one belt, one road’ is worth keeping an eye on to see how other nations respond to its initiatives and whether they view it as Chinese friendliness or expansionism which, in turn, will affect potential value and supply chains.
?CONCLUSION
?It is common for Western businesses to move operations overseas to save on operational costs. However, in China, operational costs are getting more expensive. Companies are also becoming alarmed by industrial overcapacity. Subsidies have encouraged some firms to continue production even with dropping demand and then sell their products overseas. Increasing salaries and growing turnover is also a trend around China, especially in second and third-tier cities. In spite of this, China’s population allows great potential for productivity and potential for demand. As wages continue to increase, so does the purchasing power of Chinese workers. Even with increasing costs, having a business presence in China represents a large opportunity for growth. Much of the current attention is on the trade disputes between the U.S. and China, but this should not distract from the potential long-term benefits for U.S. companies to engage with China. Even though, when implementing a long-term plan for Chinese market investment, it is vital to keep an eye on the developing disputes between the U.S. and China, whether they develop into fully fledged conflicts or not will make or break a business plan, no matter how meticulously planned out it is. re information