In recent years, China has been a hot spot for multinational corporations (MNCs) aiming to expand their businesses and tap into the country’s enormous market potential. But ever since the outbreak of COVID-19 last year, many companies have been hesitant to make big decisions about their China strategy. From trade tensions and rising costs to unpredictable regulations and geopolitical risks, MNCs are facing a host of challenges that are making them cautious about their next moves. In this article, we explore the reasons behind MNCs’ reluctance to invest in China and the potential implications for both the Chinese economy and the global business landscape.
When China lifted most Covid-19 restrictions in December 2022, there was hope that the country’s economy would bounce back to its pre-pandemic level. However, the recent announcement of a 5% growth target for 2023, the lowest since 1991, has dampened these hopes. In the current political climate, advocating engagement with China carries reputational risks. Nonetheless, expatriate and Chinese top executives working for multinationals in China remain optimistic about the country’s potential for growth. Reports suggest that if China’s economy were to grow by 5% between 2021 and 2030, it would expand by the equivalent of the combined GDP of Japan, India, and Indonesia in 2021.
Many Western multinationals have invested in China since its economic liberalisation in the 1980s and its ascension to the World Trade Organization in 2001. They have achieved billions of dollars in sales, and profits at their China operations have, in many cases, exceeded those at home or in other markets. However, the souring of ties between China and the United States in recent years has led to discussions of decoupling and deglobalisation. Despite this, China’s exports and imports of goods have continued to grow significantly, reaching an all-time high last year. Investment flows into China also remain robust, with European companies’ funds spiking by 92.2% last year. Nonetheless, the Western attitude towards China has had a significant impact on the leadership at multinationals, and few headquarters are prepared to expand their operations in China at their next investment committee meeting.
Now, many multinational corporations are adopting a “China-plus-one” strategy, aiming to develop activities in at least one other country to reduce their dependency on China. For example, Apple and Foxconn are building operations in India and Vietnam, while Siemens is looking towards Southeast Asia. Adding to supply chain optimization, reliability and trade rules are now also essential considerations. Relocating substantial operations from China is challenging due to a shortage of skilled workers and weaker ecosystems of suppliers and service providers. However, multinationals may begin shifting from low-skilled and low value-added industries such as shoe and garment manufacturing to lower-cost countries like Bangladesh.
The big decisions on China are on hold for most Western multinationals for now. The sudden end to zero-Covid lockdowns may not be enough to change this. Should companies choose to leave China, it would have significant implications for their global market position, similar to the breakdown of Western multinationals’ exit from Russia. China may still present a significant opportunity for growth, but it remains uncertain when the ice will melt for Western multinationals to make big decisions concerning China’s market.
