Future-proofing your China strategy and business operations
Future-proofing your China strategy and business operations
‘The China opportunity’ is looking like an increasingly frayed and ragged sub-heading in the foreign investor's handbook. Even five years ago, ‘opportunity’ was the only lens foreign companies wanted to look through. Now op-ed sections and White House statements are all about ‘the rise of China’, ‘the New China’ and, increasingly, ‘the threat posed by China’. Anecdotally, at least, it seems a lot of foreign investors are taking the new negative China discourse seriously. Perhaps they should.
China’s threat is structural
彩票合作平台,7天彩票平台,彩票18元The growing trade war between the US and China may be the current focus, but the China opportunity is facing a more fundamental threat. The Made in China 2025 (MiC) policy is a central plank of President Xi Jinping’s economic plan for his country and much of it is not good news for foreign companies. MiC is conceived to challenge their dominance in ‘strategic’ sectors; demand they turn over intellectual property (IP) in others; and use regulators to expedite this change with anti-bribery, anti-monopoly, environmental and food safety probes. President Donald Trump’s administration – and US politics across the spectrum – is already moving on from the simple binary of too many Chinese exports versus US ones, to focusing on MiC structural threats to foreign business in China. Contrary to what a lot of Beijing officials think, this focus is not the product of personality politics; the US position on the Chinese economy is now structural.
MiC is just the buckle on the belt (and road) of Xi Jinping’s economic blueprint for China. Those keeping faith with the China opportunity must contend with things like the 2017 Cyber Security Law (CSL), which subordinates companies to the immense data state the Communist Party of China (CPC) is creating. The CSL is just one of many laws being created to bludgeon fundamental change into stubborn sectors like healthcare and facilitate the reinsertion of the CPC into the heart of everything. MNCs must also now consider how to facilitate the creation of Communist Party cells inside their businesses; they always should have done, but now it’s serious.
Yet, in the face of all that, China today sits on foreign direct investment inflows accounting for nearly a quarter of its GDP. Actual foreign direct investment into China from January to August this year totalled USD 86.5 billion, up 6.1% during the period. Wall Street titans are viewing Beijing’s ongoing liberalisation of the financial services sector with deep interest. While Chinese consumers have slowed some of their purchases, foreign companies in the automotive, consumer and food service sectors continue to invest heavily in China. For many, the China opportunity very much remains.
Survival among the disruption
The ‘quiet rise’ of China advocated by Deng Xiaoping, and then Jiang Zemin and Hu Jintao, was a simple one: ensure the ‘red carpet’ was out for foreign investors to propel China’s transformation, while keeping their governments pliant by not rattling the sabre. Xi Jinping seems to be different: China is not rising, it has risen and he’s being very noisy about it. Abroad that looks intimidating – he has turned frozen territorial conflicts in the South and East China seas into uncomfortably warm ones. At home, the ‘risen China’ mantra looks honest. The message to MNCs is clear: China is no longer a red carpet economy for foreigners. It is now a place where MNCs are welcome – but only on terms subordinate to the broader state-led master plan. Many MNCs will look back on the ‘quiet rise’ era as a golden age of opportunity in China. They are probably right. Xi Jinping’s China is at an extremely disruptive phase of its development for all businesses – foreign and domestic. Only the nimble will survive and fewer still will prosper.
Know who you are
The reality is corporates operating in China have little influence over the Chinese state’s growth strategies and tactics. What companies can have is an insight on those strategies and tactics, and a plan to respond to them.
彩票合作平台,7天彩票平台,彩票18元Three broad attitudes characterise foreign firms and their views on the ‘New China’:
1. Red carpet China rolls on - Some company executives don’t see any reason to change their approach to China in the face of the challenges outlined above. These companies typically came into China decades ago, succeeded and gained market leadership. They believe their technological advantage is unassailable; their business model is proven. As one executive explained, “I can’t imagine a situation where we are not welcome in China or stay a market leader. Why should I consider any other scenario?”
2. Change score-keeping - Seeing a decrease in market size and increase in competition, this type of company acknowledges change is underway, but simply changes the KPIs it uses to decide what it means to be successful in China. This firm might stay at the premium end of the market, but accept lower volumes to maintain a high margin; or they might reduce price to maintain volumes, accepting a lower margin. A company like this fundamentally believes its market opportunities in the New China will eventually end; they’re just trying to hang on for as long as they can.
3. Accept the changes and adjust business models - This type of company believes the changes in China will fundamentally challenge the assumptions it had when it first came in, but is willing to challenge its business models and ways of operating. This is ‘New Opportunity, New Company’. This company accepts the fact it needs to change – what it sells in the market, how it distributes, how it invests in and protects IP, and how it engages with the government.
彩票合作平台,7天彩票平台,彩票18元In the New China, these three types of companies can often exist within the same firm: a US HQ groaning at current headlines and a country management team who has seen it all before, perhaps. Or it could be, counter-intuitively (at least for foreigners), that many of the most pessimistic employees of Chinese MNCs are Chinese nationals who don’t get a break from the day-to-day of Xi Jinping thought in the way more optimistic outsiders do. So, is there a better way to assess China risk and reward?
Assess your regulatory risk
彩票合作平台,7天彩票平台,彩票18元Have a very good look at your welcome mat. There are some widely publicised cases of companies that have faced major investigations in China in recent years. The depth, pace, scope and speed of regulatory risk is growing. In a very pertinent analogy for China, you wouldn't run a crucial piece of bespoke cyber IP without penetration testing its defences to destruction. Extend that defence to your business as a whole and ‘white-hat' your regulatory risk.
Test your business against the following questions:
This exercise often throws up interesting results, revealing vulnerability in places least imagined. White-hatting your regulatory risk will challenge assumptions and often quell tribal attitudes to China risk that pervade your office.
Being local with Chinese characteristics
彩票合作平台,7天彩票平台,彩票18元MiC is focused on the localisation of technology and high-tech manufacturing. But you are only as local as China deems fit and figuring out what local means in your industry niche will be critical to future-proofing your operations.
彩票合作平台,7天彩票平台,彩票18元MiC defines ten sectors where the Chinese government wants to encourage the growth and independence of local players. But, in reality, these sectors cover anything from industrial vacuum pumps to consumer electronics suppliers. Even if you source parts in China and technically have produced it in China, you still may not be considered ‘local’ if Chinese firms around the corner or in other provinces are nipping at your heels. Conversely, if your product (for now) is critical to the China market, that in itself may be enough to provide you with local status and even grants from the Chinese government.
Follow the money. It is becoming increasingly clear where MiC grants and even preferred procurement from state-owned enterprises (SOEs) are going. If you are a foreigner manufacturing in a supply chain where the Party is telling your Chinese customers to localise their supply chains, it might be time to consider getting out.
Remember, data is national security
彩票合作平台,7天彩票平台,彩票18元‘Business is data’ as the saying goes. There is data and then there is China data. The growing chokehold over information flows and the technology that delivers is pushing foreign MNCs in China to be 'all in'. This means IT personnel, operations and data increasingly need to localise to China – including, for example, hiring China data protection specialists, procuring domestic technology, and localising IT security policies, content and crisis management plans. For many companies, this will result in significant costs, but will also bring key benefits: being compliant with the strict cyber regulatory regime; providing local teams the autonomy to respond quickly to shifting requirements; and finally, ensuring the company's global IT systems and data are walled off from insecurities brought on by having to use domestic technologies and submitting to government and other local third-party audits.
彩票合作平台,7天彩票平台,彩票18元Most companies are used to Western cyber laws that are primarily focused on data privacy. The Chinese authorities are as concerned with the content that is on your networks. Recently, Chinese authorities cracked down on travel and airline companies for not identifying Taiwan on website drop-down lists in the way that the Party thought it should be identified. The unspoken ultimatum was a shut-down in business in China if the companies didn’t comply and make changes.
Get to know your friendly neighbourhood über-regulator
Regulators in China are often anxious to better understand the industries they are regulating and discuss with company management how best to operate in China. The new raft of super-regulators and investigators, like the newly formed State Administration for Market Regulation, are no different. Managing well in government affairs work mitigates the risks associated with everything that has been discussed. In Xi’s China, however, the aim of your government affairs department will not only be about ‘market access’: processes such as getting approvals and licences, promoting solutions among government entities, and building relationships with SOEs to create sales channels. This was a government relations function for the red carpet years – not 2018 onwards. A wise company would identify its regulatory threats, find the regulators responsible for them and then communicate with them – government affairs for risk management. This can occasionally lead to collaboration on the development of best practice.
Bang a gong, get it on
彩票合作平台,7天彩票平台,彩票18元In 2017, Xi Jinping famously said, “The rejuvenation of the Chinese nation is no walk in the park or mere drum-beating or gong-clanging.” That statement captured the challenge behind everything from his desire to reform state healthcare, to fixing Chinese air quality, to his plan to effect a tectonic shift in the structure of the Chinese economy. The role that foreign businesses have and will continue to play in that rejuvenation will be pivotal. Opportunity remains. The walk in the park bit of doing business in ‘rising China’ has gone. In Xi Jinping’s ‘risen China’, intelligence – gathering and exhibiting it – will be crucial to understand and navigate the new rules of the game.