As the economic and political landscape in China becomes increasingly challenging for foreign companies, many are left wondering what the best course of action is: should they divest from China, decouple their operations entirely, or double down on their investments in the country? The answer, as with many complex business decisions, is that it depends.
1. Challenges for Foreign Companies in China
It’s no secret that China has become a difficult place for foreign companies to do business, with diplomatic spats, consumer boycotts, COVID-19 lockdowns, and riots by Chinese workers all contributing to a challenging operating environment. Additionally, there are increasing risks associated with China’s commitment to taking over Taiwan, either by military means or through economic blockade.
2. Divesting from China
As a result of these challenges, some companies are choosing to spread their production to other countries, such as Vietnam, India, Bangladesh, Malaysia, Mexico, Colombia, Turkey, Thailand, and Pakistan, where wages are lower and the operating environment is more stable. In some cases, foreign companies are choosing to sell their China operations to local Chinese retailers, as was the case with French supermarket chain Carrefour in 2019 and Gap Brands earlier this year. This can be a good option for companies that have lost their edge over domestic rivals and can afford to leave the Chinese market.
3. Doubling Down on China
However, for many companies, China is more than just a cheap place to manufacture goods; it is also a massive market for selling those goods. The viability of selling into the Chinese market varies widely for foreign companies, with some finding success while others are caught in the crossfire of deteriorating relations between China and the West. Even companies operating outside of so-called strategic sectors are developing contingency plans in case they are targeted by the Chinese government.
4. Decoupling from China
The concept of decoupling, or reducing economic dependence on China, has gained traction in recent years as tensions between China and the West have escalated. While it may be tempting to try to reduce reliance on China, the reality is that it is difficult for many companies to completely sever their ties with the country. This is especially true for companies that have spent decades building up their supply chains and customer bases in China, as well as for small and medium-sized enterprises (SMEs) that may not have the resources to quickly shift their operations to another country.
5. The Right Strategy for Your Company
Ultimately, the best strategy for your company will depend on a variety of factors, including your business model, the importance of the Chinese market to your revenue, and your ability to pivot to other markets or manufacturing locations. It’s important to carefully consider all of these factors and seek expert guidance before making a decision on how to navigate the complex business environment in China.
6. Other Considerations
In addition to the strategies of divestment, decoupling, and doubling down, there are other factors that companies should consider when deciding how to approach the Chinese market. For example, companies may choose to invest in local partnerships or joint ventures as a way to navigate the challenges of doing business in China and tap into local expertise and networks. Companies may also choose to adopt a hybrid approach, maintaining some operations in China while also diversifying into other markets.
7. Conclusion
Deciding how to approach the Chinese market is a complex and nuanced decision that requires careful consideration of your company’s unique needs and circumstances. While divesting, decoupling, or doubling down may be viable options for some companies, they may not be the right fit for all businesses. It’s important to thoroughly assess your company’s goals, capabilities, and resources before making a decision on how to best navigate the challenges and opportunities of doing business in China.
At Wolster & Co., we often recommend lightening one’s footprint in China as a way for our clients to maintain or even increase their China product offerings while minimizing their China risks. This approach strikes a balance between staying engaged in the China market and protecting against potential challenges.