“Double down your bets”, foreign companies in China
While claiming to diversify the supply chain, they are secretly increasing the number... Why are foreign companies in China so "contradictory"? Thomas Zhang, head of the Greater China region of the American company "Frontier Perspectives", analyzed this in an article "Despite the clamor for "decoupling," some multinational companies are still doubling down on China" published on the American Diplomat website on May 3. . The full text is excerpted as follows:
There has been a focus on diversifying supply chains away from China since the outbreak of the coronavirus, but new research shows that a large number of large multinationals with a strong presence in China are still choosing to stay in the country. In fact, many companies are increasing investments, especially to gain a larger share of the Chinese market. This is happening despite growing geopolitical tensions.
This trend is the key finding of recent research conducted by Asia experts at my firm, Frontier Views. Frontier Views provides consulting services to the world's leading multinational companies. When our clients were asked where their next big investment would be, 20% said China. This number is down compared to previous years, but surprisingly high considering the current talk of companies relocating to Southeast Asia and even nearshoring.
In fact, our research shows that more than a quarter of multinational companies have made additional investments in production capacity or supplier relationships in China over the past three years.
For many large companies that have been operating in China for a long time, their business in China is almost too big to fail—that is, it accounts for a huge proportion of revenue and contributes hugely to revenue growth. Among these companies, there are few signs that they intend to close factories or move production outside of China. While some companies are channeling new investments into supply chain diversification, overall they are doubling down on their business activities in China. This is particularly evident among European companies, which are not as affected by the U.S.-China trade war as their U.S. counterparts.
In fact, what we are seeing is that large multinational companies are localizing more of their supply chains in China, in large part to increase local market share. In doing so, they rely less or not at all on expensive product parts imported into China, resulting in better price competitiveness. This is important because domestic Chinese companies are now able to offer products of the same quality and cost as Western companies. Initiatives to improve economies of scale were already gaining momentum before the coronavirus pandemic disrupted business, and they are even more pronounced now.
Interestingly, we found that some large companies have chosen to diversify parts of their supply chains to minimize the impact of the US-China trade war without investing in new production plants. These companies have chosen to work with long-term Chinese manufacturing partners, who are happy to supply them from Southeast Asia through new or existing subsidiaries in Vietnam and Indonesia.
Given these trends, it is likely that fewer new companies will enter the Chinese market in the future, while companies with established operations in China will become larger, stronger and more focused on serving Chinese consumers and businesses. But the transition is by no means smooth sailing, and corporate boards are likely to increase scrutiny of investments in new coverage areas in response to the growing political and regulatory risks faced by Western companies that continue to work with China.
Given the scale of their operations and revenue-generating potential in China, it is almost unthinkable for Western companies to exit China.
Encouragingly for foreign companies, China has said it remains open to Western manufacturing investment despite ongoing tensions with the United States.
Currently, most of the multinationals we work with appear to be doubling down on China, as the rewards of expanding operations in China appear to far outweigh the risks. New opportunities are emerging. Geopolitical concerns may eventually prompt corporate boards to slow down business growth in China, but for now, at least for some companies, China operations are effectively too big to fail.
▲On April 14, people visited the German brand Porsche booth. It is reported that 13 German companies participated in the 4th China International Consumer Goods Expo held in Hainan Province.
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