The End of the China Gold Rush

“We would do anything to access the China market and its potential billion consumers. We would do joint ventures, give away intellectual property, tie ourselves in knots to fit in what was demanded of us, anything.”

That is what a C-Suite executive in a major European multinational once said to me. China was the land of infinite gold, and everyone rushed to collect. The potential seemed endless.

How things have changed.

Five major developments have upended the previous calculus. And all of them have been predictable for some time, even though many closed their eyes to them as they banked the latest quarterly profits.

The first was the authoritarian turn that emerged under President Xi. As I argued in a previous article, corporations, and particularly foreign corporations, do not have the same status in authoritarian regimes as they have in Western style democracies. Their primary value is as mere tools for the interests of the state. For China, the main value of foreign corporations lies in the transfer of know-how and intellectual property, in foreign direct investment to develop an industrial base and employment, and in providing routes to access foreign markets. All of which are very clearly wasting assets as more gets transferred to local corporations – preferably state-owned or state-directed.

Authoritarian leaders’ actions are also often unpredictable to Western eyes. Actions that we would consider extreme and unreasonable – even inconceivable – in the context of a Western democracy are possible, maybe even likely, in certain circumstances. This seems to have taken many corporations by surprise.

Second is the inevitable rise of geopolitical rivalry. Many may dream of a world where geopolitics don’t get in the way of business. That will remain just that – a dream. As we struggle with the semantics of ‘decoupling’ versus ‘de-risking’ or any other words still to be dreamt up, trade with China will continue to become ever more challenging.

Third is the backlash against unfettered globalisation – a process that has had significant negative distributional consequences for developed countries and for which China has become the poster child for the narrative of ‘unfair competition destroying Western jobs.’

Politically, the drift towards tariffs, export controls on goods, services and technologies considered ‘sensitive’, and a plethora of other trade management measures intended (whether successfully or not) to achieve re-shoring is, for the moment, largely unstoppable. There are few Western countries where hugging the panda is currently likely to result in electoral success.

Fourth, we underestimated just how quickly China could innovate and travel along the journey of industrial development beyond being the low-cost sweatshop of the world. As recently as five years ago, anyone suggesting that Chinese companies in the infant electric vehicle sector would be able to produce significantly better products at lower cost than any Western automobile company, they would have been laughed out the door. Just like, decades ago, complacent Western automobile companies laughed out the door suggestions that Japanese car manufacturers would eat their lunch.

Finally, the combination of all of the above was inevitably going to drive a nationalistic turn in the Middle Kingdom. The ‘Made in China 2025’ initiative, the latest CCP long term plan, and the rise of trusted Chinese brands concomitant with increasing nationalism among consumers all drive towards a less promising future market for Western products, services and brands.

During the recent European spat around tariffs on Chinese electric vehicles, the French were supportive while German manufacturers lobbied against such tariffs fearing the impact on their sales in the Chinese market should China retaliate. What would those arguments look like if the underlying assumption was that significant shrinkage was the default future for Western brands in China?