Building a business in China has never been for the faint of heart. However, the challenges and obstacles to operations in the PRC have recently grown more acute.
Management consulting giant McKinsey has reportedly downsized its team on the mainland after drawing heat from US lawmakers over its arms deals with the Chinese government. His first competitor, Bain & Company, said it reduces the work in “sensitive industries” after the Chinese authorities raided their offices in Shanghai last year. General Motors (NYSE: GM ) has seen its operations in China swing at a loss this year, while the CEO of rival Ford (NYSE: F ) labeled China’s EV brands “a existential threat“to markets in China and the United States
In a report published by the business intelligence company Strategy risksFord has been identified as the great company of the United States the greater risk from its exposure to Chinaalong with Carrier (NYSE: CARR ), Apple (NASDAQ: AAPL ), Coca-Cola (NYSE: KO ), and Tesla (NASDAQ: TSLA ). With no immediate prospect of easing geopolitical tensions, foreign direct investment in China has continued to decline by more than 30% in 2024. FDI is now only 12% of its peak of $344 billion in 2021.
TOPSHOT – A man walks past portraits of (L to R) late Chinese President 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 China with the Communist Party and how to do this ethically, which can often be quite challenging to a global perspective… How do you ensure the stability and sanctity of your supply chain? How do you protect the safety of your employees on China’s issues? ?
Stone Fish says his firm chose to highlight those risks as they can often be overlooked by investors in multinational giants and to push for transparency so investors can make better informed decisions.
James Tunkey, Chief Operating Officer of I-OnAsiahas decades of experience advising US executives on managing the risks of operating in China and other Asian regions. His firm has conducted more than 20,000 background screening searches to vet potential acquisitions, scrub 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, the multinationals have moved away from transactions based on the information that their firm has discovered.
“The first concern of our clients is whether they have the right local partner to achieve success in China. They are looking for professional counterparts who have a strong business reach, solid network in China, and an unblemished brand,” he said.
Tunkey said companies and investors must now pay more attention to emerging regulatory trends to avoid being caught out. While he believes that there is undoubtedly less risk of becoming cheated in fraud today, the policy environment has become more challenging.
“There are unique strategic guardrails for every industry in every country, but many companies 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 can face their business disappearing virtually overnight.
Stone Fish, whose clients include hedge funds and private equity investors active in the PRC, observed that: “A lot of top Chinese investors, although they don’t talk about it publicly and rarely they talk privately, they understand how crucial the political risk is and who’s up and who’s down is so key to the business decisions they make.”
Tunkey feels that 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 anti-China rules just around the corner? Companies don’t invest abroad if there’s uncertainty at home,” Tunkey observed.
Companies have adopted various risk management strategies, including localization of data management, separation of their operations in China and diversification of their supply. Most recently, HSBC (NYSE: HSBC) announced that it would split its Greater China business into a separate unit managed to get out of Hong Kong to better ride out conflicting regulatory regimes.
Stone Fish indicates 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 performing sensitive compliance work outside of China.
Stone Fish says companies must consider complex risk versus cost calculations when considering their supply chains. In a very general way, “import from China is twice as fast and half the price. So, what would it do to my business if I could not get this particular item? Or if the supply chain stops or s Was there a heavy fee on that? Or did he have to do some political machinations to keep accessing that item?
Tunkey believes that China’s economy is undergoing a seismic shift as it moves away from reliance on property and investment towards more high-tech and hard-tech industries.
When pressed on 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 to build an agile and durable legacy. It’s natural for fragile companies that were built and then failed when there was a structural change,” he opined.
However, Tunkey believes that the withdrawal from the Chinese market could be an even deeper risk.
“Companies that move too far from China today will be blinded by Chinese competition tomorrow. The only way to keep your edge is to go deeper and skill your local partners to a degree they don’t have not 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 do not usually appear on lists, including those of his firm, because “they do it in a small way profile that benefits them and Beijing.”
“One could argue that Starbucks (NASDAQ: SBUX) or Apple or Microsoft (NASDAQ: MSFT) has done a good job of managing the relationship with the Communist Party, but these companies are often criticized for the closeness of that relationship in the country. United States,” Stone Fish said. “And so it’s definitely a double-edged sword when you do it publicly.”
In this regard, some of the best advice for businesses hoping to succeed in China might come from how Deng Xiaoping once described China’s approach to the West: “Observe calmly, secure our position, face business quietly, hide our abilities and wait for our time, be good at keeping a low profile, and never claim leadership.”
Difficult advice for a typical, brazen American CEO to follow, but wise advice in turbulent times.