The framework of doing business in China has changed fundamentally. Business models that were successful in the past may not work in the future as the “Old China Story” is over. AHK Greater China is cooperating with Roland Berger to help foreign companies successfully navigate the “New China Story” and leverage it to their advantage.
The “Old China Story” is Over
In the past decades, China’s core competitiveness was driven by low labor costs, lax environmental regulations, and high capital productivity. These advantages are slowly disappearing. Last year, China’s market attractiveness was further challenged by geopolitical tensions and the effects of the country’s response to COVID-19. Where does China go from here?
The “New China Story” is Being Written
China currently faces significant economic challenges and is lagging in certain areas. However, the country remains an attractive market with a superior industrial cluster and acts as an innovation hub for most multinational companies. Even though it is unlikely for China to replicate past booming decades, its key fundamentals remain robust and unique compared to many other markets.
China is in the process of building new engines to transform its economy. If the country holds its promise of opening up, foreign companies will be able to contribute to China’s industrial modernization and decarbonization goals as well as benefit from the purchasing power of the growing middle class.
How Can Foreign Companies Adapt to the “New China Story”?
Adapting to the “New China Story” means anticipation and mitigation of risk, and occasional evolution of the business model. Common risks that multinational companies are facing include sanctions and compliance with the latest regulations. Companies within business segments that are strategic to China inherently carry more risk.
Three Strategic Options
a. China-Plus-One Strategy
Supply chain disruptions and geopolitical tensions increase the need for a balance between market potential, cost efficiency, and supply chain resilience. One way to balance those factors is to extend the footprint within the region. Remaining in China while adding operations elsewhere – serving the global market from only one facility might be too risky in the future.
b. Develop a Winning Value Proposition Through Innovation
Through collaboration with local partners who are part of China’s innovation ecosystem, foreign companies can stay competitive. Innovative optimization of existing products helps create new value propositions for integration into their global portfolios. Faced with rising local competition, foreign companies need to accelerate local innovation while leveraging their existing global competencies to keep an advantage for further development and growth.
c. Local-for-Local strategy
The Local-for-Local strategy is a key success factor for foreign companies looking to strengthen their positioning and competitiveness in China. It calls for a new decentralized system separated from the centralized EU or US based global R&D, production, supply chain logistics, and even including sales or services. The local-for-local strategy can empower foreign companies' China operations to act faster, be more customer-oriented, and cost efficient, while increasing the resilience of the supply chains for the local Chinese operations.