The difficulties faced by foreign companies in the past few years in China are making them reconsider the viability of maintaining a presence in the country. Many are thinking about their future in China, what it would look like and if there is a future there at all.
Multinational firms are finding it hard to decide what to do: if they want to remain in the country but with a smaller footprint, if they want to leave completely or if they should actually increase their China exposure.
There is no right or wrong answer. It all just depends on every company’s specific situation.
The trade tensions with the United States, the war in Ukraine, consumer boycotts, China’s zero-covid policy and the lockdowns, as well as recent rioting by Chinese workers, have all made the country inhospitable to foreign managers.
Another source of risk for foreign companies is China’s determination on taking over Taiwan, by means of war or blockade.
Companies such as Apple and Hasbro are spreading production to Vietnam and India, lured by lower wages and a friendlier business environment. Bangladesh and Malaysia are also becoming more attractive to clothes-makers.
Other multinational firms are also moving their operations from China to Mexico, Colombia, Turkey, Thailand, and Pakistan, among others. The reason many small and medium enterprises (SMEs) are still debating what to do and where to go, is that they are trying to figure out what country makes the best sense for each company.
Foreign entities are also considering selling part or all their business to a local company. In 2019, the French supermarket chain, Carrefour, sold 80% of its China business to a local retailer, after more than two decades in the country.
Taking action when the business is still worth something could be an option favored by many. Companies want to avoid a Russia-like situation where they are forced to sell their China business later at fire-sale prices.
However, there are many international firms that not only are making profits in China but are thinking of increasing their presence, since they recognize the vast potential of this market. With over 1.4 billion people, China is a country with an enormous consumer base and an ideal place to sell products.
Companies which decide to stay, may have to face the risk of being “caught in the geopolitical crossfire” as relations between China and the West continue to deteriorate.
Though the rewards of staying in China may be plentiful, foreign business are increasingly facing growing competition from local firms, as Chinese consumers favor local brands.
Despite the risks, there are foreign companies choosing to double-down on China, such as the German conglomerate Siemens, which recently announced that it is ramping up investment and shifting a significant share of research and development to China in order to “beat the local champions”, according to Roland Busch, the company’s boss.
Last October, VW informed that it would invest 2.4 billion Euros to establish an autonomous-driving joint venture with Horizon Robotics, a Chinese firm.
But for enterprises looking to leave China, this may be extremely difficult and costly. Moving manufacturing operations to another country can increase costs and hurt competitiveness.
Downsizing a company’s footprint could be a better solution, an ideal mix between maintaining (or even increasing) their China products, and at the same time reducing their China risks.
Before deciding to shut down operations in China, entities can lighten their footprint by licensing their brand name or their technology to a Chinese company, or even manufacturing outside China, but using a Chinese company to act as their product distributer in the country.
To learn more about our services in China, contact our Head of Business Advisory - Ms. Kristina Koehler-Coluccia at kristina@woodburnglobal.com.
DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.