Building a business in China has never been for the faint of heart. However, the stakes and obstacles to operating in the PRC have recently become more acute.
Management consulting giant McKinsey has reportedly trimmed its team on the mainland after drawing heat from US lawmakers over its Chinese government arms contracts. Its main competitor, Bain & Company, has said it is reducing work in “sensitive industries” after Chinese authorities raided their Shanghai offices last year. General Motors (NYSE: GM ) has seen its China operations slide toward a loss this year, while the CEO of rival Ford (NYSE: F ) has labeled Chinese EV brands “an existential threat” to markets like China as well as in the USA.
In a report released by business intelligence firm Strategy Risks, Ford was identified as the major U.S. company most at risk from its exposure to China, along with Carrier (NYSE: CARR ), Apple (NASDAQ: AAPL ), Coke -Cola (NYSE). : KO), and Tesla (NASDAQ: TSLA ). With no immediate prospect of an easing of geopolitical tensions, foreign direct investment in China has continued to decline by over 30% in 2024. FDI is now just 12% of its peak of $344 billion in 2021.
TOPSHOT – A man walks past portraits of late Chinese Chairman (LR) Mao Zedong and former Chinese … [+]
Isaac Stone Fish, CEO of Strategy Risks, explained that companies with significant exposure to China need to think about how they “navigate within China with the Communist Party and how they do it ethically, which can often be quite challenging from a perspective global… you ensure the stability and sanctity of your supply chain? How do you protect the safety of your employees working on China affairs? And what is your plan for a massive geopolitical convulsion?”
Stone Fish says his firm chose to highlight these risks as they can often be discounted by investors in multinational giants and push for transparency so investors can make more informed decisions.
James Tunkey, Chief Operating Officer of I-OnAsia, has decades of experience advising US executives on managing the risks of operating in China and other Asian regions. His firm has conducted over 20,000 investigations to screen potential purchases, clean up supply chains and investigate fraud and corruption. “Many of our clients have invested billions in China over the years,” he said. But on more than one occasion, multinationals have walked away from transactions based on information his firm has uncovered.
“Our customers’ main concern is whether they have the right local partner to succeed in China. They are looking for professional counterparts who have a strong business reach, solid networks in China and an untainted brand,” he said.
Tunkey said businesses and investors now need to pay more attention to emerging regulatory trends to avoid being caught flat-footed. While he believes there is perhaps less risk of engaging in fraud today, the policy environment has become more challenging.
“There are strategic barriers unique to every industry in every country, but many companies have not missed those changes, whether in management consulting, e-cigarettes, tutoring services or electronic games,” he explained. If they fail to monitor changes in regulations and civil society, management may face the extinction of their business almost overnight.
Stone Fish, whose clients include hedge funds and private equity investors active in the PRC, observed that: “Many of the top Chinese investors, although they don’t talk about it publicly and rarely talk about it privately, they understand how crucial political risk is and who’s up and who’s down is so key to the business decisions they make.”
Tunkey thinks business risks are just as likely to emerge from regulators and politicians in multinationals’ home countries as tensions over trade imbalances and national security concerns continue to rise. “Are their new sanctions, export restrictions and rule-making against China? Businesses don’t invest abroad if there is uncertainty in the country,” Tunkey noted.
Companies have adopted various risk management strategies, including localizing data management, splitting their operations in China, and diversifying their supply. Recently, HSBC (NYSE: HSBC ) announced that it would spin off its Greater China business into a separate unit managed from Hong Kong to better overcome conflicting regulatory regimes.
Rockfish shows YUM! Brands (NYSE: YUM ), a company that relatively early decided to spin off its PRC business into separately listed Yum China Holdings (NYSE: YUMC ), has had success with that strategy. It advises companies to protect their China-based employees and process integrity by conducting some sensitive compliance work outside of China.
Stone Fish says companies should consider complex risk versus cost calculations when considering their supply chains. In general, “importing from China is twice as fast and half the price. So what would it do to my business if I just couldn’t get this particular item? Or if the supply chain shuts down or if there is a heavy toll on it? Or if I had to perform certain political machinations to continue to access that article?”
Tunkey believes China’s economy is undergoing a seismic shift as it moves from reliance on property and investment to more high-tech and hard-tech industries.
When asked why Western companies are losing out in China, Tunkey said: “Companies with profitable businesses often fail to innovate and change with the times. They don’t invest enough in building an agile and sustainable legacy. It is natural for fragile companies to become complacent and then fail when there is a structural change,” he opined.
However, Tunkey believes the withdrawal from the Chinese market may pose an even deeper risk.
“Companies that shy away from China today will be blindsided by Chinese competition tomorrow. The only way to maintain your edge is to go deeper and empower your local partners to a degree that they may not have done in the past,” he said.
Stone Fish said that, in his view, the companies that do the best job of managing their relationship with China usually don’t appear on lists, including his firm’s, because “they do it in a low-profile way which brings them benefits and benefits. Beijing.”
“One could argue that Starbucks (NASDAQ: SBUX ) or Apple or Microsoft (NASDAQ: MSFT ) have done a very good job of managing their relationship with the Communist Party, but those companies are also often criticized for the closeness of that relationship in the U.S. United,” said Stone Fish. “And so of course it’s a double-edged sword when you do it publicly.”
In this sense, some of the best advice for companies hoping to succeed in China may have come from how Deng Xiaoping once described China’s approach to the West: “Watch calmly, secure our position, deal with affairs with keep calm, hide our capabilities and bide your time, be good at keeping a low profile and never claim leadership.”
Tough advice for a typical, bold American CEO to follow, but wise advice in troubled times.