McKinsey has created discussion paper about “The China imperative for multinational companies. Reconfiguring for opportunity and risk”. Our main findings from the research made by Mc Kinsey.
Over the past three decades, multinational corporations (MNCs) have enjoyed an increasingly open world. Taking advantage of a unipolar world with relatively free flows of capital, trade and ideas, multinationals can source capital wherever they want and build businesses optimized for global supply and demand, served an increasingly global clients. This may no longer be possible. In a world reshaped by the COVID-19 pandemic, rising geopolitical tensions, new inflationary pressures and war, multinationals must reassess, reassess and reconfigure their operations for a new era. there is. And some of the most dramatic changes could occur in China.
“China is changing and presenting MNCs with a challenge: how to take advantage of significant opportunities while managing emerging risks. By reconfiguring in these six areas, MNCs can start to answer the challenge and capture greater value in China.
Main Questions for Multi National Companies
— Capital and ownership. Can MNCs tap into Chinese and global capital and build self-funding business models? Should they go further and spin off China subsidiaries?
— Supply chains. What should MNCs localize and what should they diversify? How much concentration in each step of the value chain is reasonable, not just in China but globally?
— Innovation. How much innovation, both in process and products, should take place within China and how much elsewhere?
— Branding. Can MNCs build brands appealing to local customers while taking advantage of the power of their global brand?
— Talent. How should MNCs hire employees from China’s increasingly skilled talent pool while still benefiting from global talent flows?
— Technology and data. How can MNCs localize their data and technology infrastructure in accordance with evolving Chinese law while conforming with global security protocols?
Growth of China
China’s size ensures that it retains MNCs’ attention. Its GDP is now 18 percent of the global total, a share equal to the entire European Union’s and second only to that of the United States (with 24 percent).2 China’s real GDP may grow between 2 and 5 percent per year over the coming decade, depending on which of various scenarios proves accurate. Even if it grows at 2 percent, the additional GDP over the 2021–30 period alone will be larger than India’s total GDP in 2021. If 5 percent growth takes place, the additional GDP will be as large as the 2021 GDP of India, Indonesia, and Japan combined. China’s markets will thus be too large for many MNCs to ignore. In some industries, such as cars, luxury goods, and industrial equipment, the China market already represents 25 to 40 percent of global revenues, and MNCs in those industries will have no choice but to compete there
China is an attractive opportunity for MNCs serving emerging markets in Asia. Its trading relationships with regional partners are strong; for example, it has been the top trading partner with the countries of the Association of Southeast Asian Nations ((ASEAN) Brunei Darussalam, the Kingdom of Cambodia, the Republic of Indonesia, the Lao People’s Democratic Republic, Malaysia, the Union of Myanmar, the Republic of the Philippines, the Republic of Singapore, the Kingdom of Thailand and the Socialist Republic of Viet Nam) since 2009, and as of 2021, it was contributing 20 percent of all trade with those countries, up from 12 percent in 2010.6 The reverse is true as well: the ASEAN countries have become China’s leading trading partner, having seen their share of China’s trade rise from 10 percent in 2010 to 15 percent in 2022.
Climate transition till 2060.
China’s climate transition will present MNCs (as well as local companies) with further opportunities. In 2021, China declared the goals of hitting peak CO2 emissions before 2030 and achieving
carbon neutrality before 2060.11 Those goals will require massive investment. A World Bank model indicates that to reach the 2060 goal, China would need to invest an additional $14 trillion in the power and transportation sectors alone.12 The opportunities for MNCs that could participate in decarbonization in key carbon-heavy sectors—such as power, industry, agriculture, transportation, and construction—are clear.
In an annual survey conducted by the American Chamber of Commerce in China, the share of MNCs perceiving China as one of their top three investment priorities dropped from 77 percent in 2010 to 45 percent in 2022.
China’s influence has grown, others have increasingly seen it as a rival. In a resolution passed in 2021, the European Parliament said that China was “asserting a stronger global role both as an economic power and as foreign policy actor, which poses serious political, economic, security and technological challenges to the EU.” In 2022, the US government called China “the only competitor with both the intent to reshape the international order and, increasingly, the economic, diplomatic, military, and technological power to do it.”
Public sentiment toward China is changing. In a recurring survey, the Pew Research Center asks people in developed countries whether their view of China is favorable or unfavorable. In 15 of the 17 regions surveyed in 2021, more than half of the respondents answered “unfavorable”—a sharp increase from 2010, when respondents in only five of the 21 regions surveyed gave that answer.18 Such increasingly negative sentiment may create complications for MNCs operating in China.
Possibility that regulatory changes and geopolitical tensions disrupt their activities in technology sectors. Although investment in domestic research and manufacturing is increasing, parts of
China’s technology value chain still rely on imports, and those areas are especially vulnerable to disruption. Semiconductors are an obvious example. China was the largest importer of equipment
for manufacturing semiconductors in 2021; it imported $41 billion of such equipment, a jump from $13 billion in 2015.19 But in October 2022, the United States announced new restrictions on exporting advanced computing and semiconductor manufacturing items to China.20 Such changes could pose uncertainty for MNCs’ global value chains.
China is aging at the fastest pace among the world’s emerging economies. By 2030, its population will probably have reached the third of three “peaks,” each of which represents a challenge for MNCs.
MNCs in China are exposed to risk from climate change – flooding and heat waves are affecting companies’ productivity and operations.
China’s economy presents risks as well. In September 2022, China’s ratio of debt to GDP rose
to a historic high of 274 percent.27 As recently as 2007, it stood at just 145 percent. Most of the increase in China’s debt between 2007 and 2017 came from corporate debt, particularly in the real estate and construction industries.
Growing competition from local companies. Local Chinese companies are ramping up their R&D spending more quickly than multinational companies are. Meanwhile, within China, local consumers increasingly prefer local brands.
Regulations from government
The ground beneath MNCs is also shifting because of regulation. In areas such as income distribution, sustainability, and technology, the Chinese government is regulating more actively, and MNCs aiming to succeed in China will need to take note and adapt.
China has recently introduced or revised a series of laws related to technology and innovation. The Data Security Law was passed in 2021 to promote a categorized and classified system to manage data collection, storage, and transmission. The Personal Information Protection Law, also passed in 2021, regulates the protection of personal information. Another important trend is that China is tightening its legislation governing the protection of intelectual property and improving its overall IP system. As China continues to make those efforts, MNCs may have more potential both to bring IP into China and to create IP there.
China has gradually been making progress in opening its markets to foreign investment. The number of subsectors in which foreign investment is restricted or banned fell from 93 in 2015 to 31 in 2021. In 2020, China removed limitations on foreign ownership for securities and fund- management firms, allowing them to set up wholly owned units in the country, and it did the same for passenger-vehicle manufacturers in 2022.42 It also now allows approved institutional investors from other countries to invest as much as they want in the Chinese stock and bond markets.
The ongoing reforms could help improve the business environment and expand MNCs’ ability to attract investment.
MNCs need to reconfigure their China strategy
- Opportunities. How big a share of the global market does China represent for our sector? What are our growth targets for revenues, margin, and market share in China, in the short run and in the long run? Do we expect to overperform in China in relation to our broader footprint and therefore have a growing exposure to China in the future? What role should China play to drive value for us: an R&D center, a sales market, or a supplier? What expectations for performance in China are embedded in our market capitalization?
- Risks. How much risk are we willing to take in China, and what types of risk will we be exposed to? How do those risks affect our finances and operations in China and globally? How should we manage public and investor sentiment about our operations in China?
How to derisk?
Capital and owner ship.
MNCs’ choices about capital and ownership include such options as using only local sources of funding, using funding from both local and global capital markets, and having just one global source of capital.
MNCs have a spectrum of options for managing and deploying their supply chains, including implementing an “in China, for China” strategy (in which components are produced in China for domestic production and sales), building a regional supply chain for both China and nearby markets, and maintaining a global supply chain of which China is one part.
Local supply chains can enhance efficiency, agility, stability, and end-to-end testing capabilities, and they can reduce the time it takes to respond to changing demand.
Diversified global supply chains allow companies to allocate resources dynamically and comply with regulatory requirements. Furthermore, localizing supply chains and concentrating production in one place increase risk, whereas building a more regional or global supply chain could enhance MNCs’ resilience, as many discovered during the pandemic. For instance, in 2021, Intel invested $475 million in its Vietnam assembly and manufacturing facility. In a November 2022 survey about supply chains, more than half of Japanese manufacturers said that they were planning to reduce their dependence on Chinese suppliers.
MNCs likewise have many options for innovation. They could heavily invest in their China-based R&D capabilities to mainly serve the China market, use China-based R&D capabilities to serve global markets, or tap into opportunities in China without major investment in local R&D units.
MNCs establish local R&D centers to stay close to local market needs and consumer insights. Those centers can design products tailored to Chinese consumers and get them to market more quickly.
Others have created R&D centers in China whose innovations can be replicated elsewhere. Those centers also ensure flows of knowledge around the world, enabling Chinese branches to participate in global R&D efforts.
MNCs’ branding choices include localizing their branding and their distribution channels (such as China-specific e-commerce apps); localizing while maintaining a consistent global brand story and distribution channels similar to those in other countries; and retaining a global image and mostly traditional distribution channels.
Chinese consumers increasingly prefer local brands , as we pointed out earlier. In a McKinsey survey, 49 percent of Chinese consumers deemed the quality of Chinese brands better than that
of foreign brands; only 23 percent said the reverse. Some MNCs could therefore improve their presence with a local brand image that resonates with local customers. For example, L’Oréal acquired domestic beauty brand Magic Holding to expand its brand portfolio in China and reach new Chinese customers.
But high performers tend to adapt to Chinese consumers’ increasing preference for local products without discarding their global story. An example of that approach is Gucci’s recent release of a collection of tiger-themed clothing and accessories to celebrate the Year of the Tiger. Often, such companies use digital channels, precision marketing, and the adoption of local cultural elements, and many premium brands use digital advertising and brand ambassadors to preserve alignment with their global image.
MNCs could develop localized talent pipelines and fill most critical roles with local hires, draw leaders from China and abroad, or reserve key positions for international executives. How much to empower local managers by giving them responsibility for finances and flexibility with decision making is also a critical choice.
China’s talent pool is expanding, localizing, and improving. In a 2021 survey, more than 31 percent
of overseas students said that they planned to return to China immediately after obtaining their degrees, an increase from 13 percent in 2015.
Technology and data
Several Chinese laws, such as the Personal Information Protection Law (2021), the Data Security Law (2021), and the Cybersecurity Law (2017), require MNCs to locate their data-storage and technology infrastructure in China. High performers are agile at both following local cybersecurity laws and complying with global data security requirements. For MNCs trying to decide how local they should be, another consideration is cost: installing new systems in China requires investment.
Companies may choose various paths to manage that trade-off. For example, Apple complied with local regulations by migrating its Chinese customers’ data to a data center in Guizhou.64 Siemens partnered with a local company to work on the industrial Internet of Things in China while keeping
its general enterprise software and other operational data in cloud storage supplied by a global provider.65 Partnering with local digital players could allow MNCs to upgrade traditional value chains, accelerate the digital transformation of their infrastructure, or offer customers their products on more platforms. “