In times of post-covid uncertainty and rising geopolitical tensions, should western companies continue with their strategy of business with China? Scott Brown, Asian Insiders Partner in China, examines the risks and opportunities.
China has comprehensively modernised over recent decades, and this growing capacity was well utilised by western companies as a source of cheap labour and for its vast economies of scale. However more recently China’s allure has started to shift, under pressure from the pandemic and due to rising global tensions. China continues to expand its rail, road, port and digital infrastructure internally and regionally and its consumer market is now the world’s second largest. However Chinese labour is no longer the cheapest in Asia. Clothing and low-tech manufacture have been moving away from China for some years, even by Chinese companies themselves, chiefly to Southeast Asia.
While China continues to urbanise, the population is aging at a faster rate putting downward pressure on the labour market. At the same time, education standards are rising, especially in the technical fields and this rising skills-base comes at a higher price. This means that the quality of Chinese design and production is improving with Chinese brands now starting their climb towards a positive global reputation, as did Japanese and Korean brands before them. Business with China is no longer as simple as it was, and multinational companies need to evaluate their engagement with China and where it sits in their production line.
China is becoming a global leader in innovation and has nationally identified several key areas of technical specialisation in which it seeks to lead. China excels now in many areas of consumer technology while continuing to develop in the deeper technical fields such as AI, advanced communications and connectivity, automation and aero and space technologies.
China currently is pursuing deeper levels of cooperation and economic interconnectedness, particularly with their Asian neighbours who feel the increasing gravitational pull of its huge partner. China’s One Belt and Road initiative, the largest infrastructural development plan in the history of the globe, will eventually fully embrace all the Asian continent and across to Africa, securing China’s supply lines, economic markets and political influence across these regions.
This, along with other recent political events have led to a growing unease amongst western political leaders, with some calls for companies to reduce or even decouple business with China. Western companies are being advised to maintain a watchful vigilance on their strategy for business with China to ensure it aligns with present geopolitical realities. However, Asian Insiders believes that entirely withdrawing from China is unwarranted, would be expensive and lead to major loss of opportunity. China isn’t going away, will continue to evolve, and under the influence of covid has made some very deliberate efforts to become more self-sustainable and less reliant on its global exports. China continues to invest significantly in infrastructure, far exceeding the economic aspirations of any other Asian nation. Today China offers one of, if not the most well developed and effective supply chains in the world. As China reopens post covid, economic and GPD growth remain critical to social stability, the key goal for China’s leadership. Due to its unique methods of state planning, China will rebound swifter than others and soon will lead the world in economic growth capturing again the attention of the world’s corporations.
China remains a majority supplier of various raw or manufactured resources and materials for western supply chains and is still the most efficient producer of large volume consumer goods. Continuing to do business with China allows access to the world’s fastest growing consumer market, especially online, as well as the increasingly interconnected markets of nearby countries. There remain considerable benefits to maintaining business with China, and in continuing to engage with partners there. At the same time, it is prudent to ensure diversification and to ensure adequate backup supply lines. Asian Insiders has vast experience in working with China and is available for a considered planning session on present vulnerabilities and plans to manage risk.
For a no-obligation call please contact Managing Partner Jari Hietala, jari.hietala(at)asianinsiders.com or Scott Brown, China Partner scott.brown(at)asianinsiders.com.