By Denis Depoux and David Born
China – still the place to be for multinational companies?
Is China still the most important growth engine of the global economy, as it has been since the early 2000s, following a series of economic reforms and its accession to the WTO in 2001? Or is it a falling star – just one of many options for multinational looking for sales opportunities, suppliers and production locations? What consequences does the answer to this question have for the success of your business in China?
"Since 2010, China’s GDP growth has been on a path of normalization. This can be viewed as the typical development trajectory for a more mature economy."
At the end of last year, headlines in the international press cast doubt on China’s future growth prospects and, consequently, on the rationale behind many multinational companies’ investments in the country. The Wall Street Journal posed the question, “China’s 40-year boom is over. What comes next?”. CNN reported, “China’s economy is in trouble. Here’s what’s gone wrong”, while the Financial Times queried, “How much worse can China’s economic slowdown get?” at the beginning of this year.
The answer to these questions requires companies to understand the difference between the “old China story” and the “new China story. Only if you have a clear view on both the structural reasons for China’s boom between 1990 and 2008 – the old China story – and the current growth numbers – the new China story – you will be able to develop the right strategy for your operations in China.
The old China story with extraordinary GDP growth rates of 14,2 % both in 1992 and 2007 is over. This success story was driven by low labor costs, lax environmental regulation, high capital productivity and limited total factor productivity.
Since 2010, China’s GDP growth has been on a path of normalization. This trend continued even through the erratic periods of the pandemic and can be viewed as the typical development trajectory for a more mature economy.
However, if we compare China’s GDP growth in 2023 (5,2 %) with that of the Euro area (0,4 %), the US (2,5 %) and the world economy (3,2 %), China has demonstrated solid growth. The IMF expects this robust growth rate to continue over the next two years, forecasting a GDP growth rate of 4,6 % for 2024, and 4,1 % for 2025. These are macroeconomic prospects the US and the Euro area could only dream of. Nevertheless, China is now markedly lagging behind the growth of other South East Asian Countries like Vietnam, India, the Philippines, and Indonesia.
There is no need for any kind of pessimism, however. China’s growth prospects for the near future indicate resilience amid divergence: a slow but steady growth path in the future.
"Our China Competition Readiness Index and the corresponding offer of a China Power Hour Roland Berger assist clients in navigating and optimizing their business strategies in China."
These numbers suggest that the sensationalism of the international financial press mentioned at the beginning of this article might be somewhat premature. For multinational companies, China remains simply too big to ignore.
China’s fundamental economic data are resilient and will be resilient in the near future. The country’s industrial modernization will necessarily imply a low-carbon transition, presenting significant opportunities for leading companies in this sector. Moreover, there is substantial untapped consumption potential in China, fueled by a rapidly expanding middle class and ongoing urbanization. However, this potential must be weighed against escalating uncertainties stemming from global economic risks, geopolitical tensions, and domestic risks within China.
Multinationals must adapt to the ambivalence of this new China – a huge market with strong economic fundamentals on the one hand, a new era of uncertainties on the other – by (a) evolving their business models to align with a changing market environment and by (b) mitigating risks associated with increasing uncertainties. Consequently, two fundamental questions arise:
To answer these two questions, i. e. to assist companies in adapting their business models and comprehending new risks, Roland Berger has created the China Competition Readiness Index? This Index helps you to understand the resilience of your existing business and operating model, as well as identify your exposure to economic slowdowns and geopolitical risks.
The Index covers seven key aspects: business model, supply chain, innovation/ R & R, marketing & sales, people, data & IT, organization & ownership. Each aspect addresses critical issues through key questions. The result is a diagnosis and in-depth analysis necessary for developing future plans and recommendations.
Through this diagnosis multinational companies can implement various measures to strengthen their resilience and competitiveness. From a systematic perspective, we distinguish between four strategic options for companies: exit, de-coupling, de-risking, and doubling down, each suited to different situations and contexts. For most multinational companies operating in the Chinese market, de-risking and doubling down are likely to be the appropriate strategies for the future.
De-risking involves adjusting the business model, diversifying the supply chain, strengthening intellectual property (IP) protection, and reducing exposure to risks by establishing strong shields through partnerships.
Doubling down entails increasing investments, enhancing localization efforts, adopting more direct-to-consumer approaches, and gaining full command of the Chinese digital ecosystem.
Here are some noteworthy use-cases of leading multinational companies adjusting their China strategies by integrating de-risking with doubling down be mentioned. Danaher launched an ambitious “8080 Localization Plan” which aims to have 80 % of its future product sales in China manufactured locally. Additionally, 80 % of the entire supply chain and sourcing activities will also be based in China as well.
ZF, a global automotive supplier, implemented robust IP protection measures as part of its strategy to localize its supply chain in China. By safeguarding intellectual property throughout its operations, ZF strengthens its competitive edge and mitigates risks associated with technology transfer.
BASF, a leading chemical company, adopted comprehensive measures to manage risks within its China supply chain. This includes addressing Environmental, Social, and Governance (ESG) factors, Intellectual Property Rights (IPR), compliance standards, quality control, and service reliability. BASF's proactive approach enhances trust with stakeholders and supports sustainable growth in the Chinese market.
These examples demonstrate how multinational corporations are strategically combining de-risking measures, such as localizing manufacturing and supply chains, with doubling down actions, including IP protection and comprehensive risk management, to optimize their operations and capitalize on opportunities in China's evolving market landscape.
Our China Competition Readiness Index and the corresponding offer of a China Power Hour Roland Berger assist clients in navigating and optimizing their business strategies in China:
Through these offerings, Roland Berger enables multinational companies to proactively address challenges, capitalize on opportunities, and achieve sustainable growth in the dynamic and evolving landscape of China's economy.
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Is China still the top choice for multinational companies, or has it lost its appeal as a business market? The answer has significant implications for your success in China.
