Rethinking China Business Strategy: Five Lenses, Two Imperatives

To the outside world, China is at once too big to ignore or sideline and deeply complex and difficult to fathom. The nation evokes that famous quote from Winston Churchill about Russia: “a riddle, wrapped in a mystery, inside an enigma.”

Recent developments certainly reflect some of this mystery. After almost three years of being relatively hermetically sealed from the outside world—including to its own economic detriment—China burst back onto the global economic scene when President Xi declared in early December 2022 that the country’s zero-COVID lockdown policy was over. As he dramatically reversed course at home, Xi also began a new international charm offensive and lifted domestic and international travel restrictions.

A Geopolitical and Geo-economic Inflection Point

In addition to the COVID-19 pandemic, there have been a series of international and national developments over the past couple of years that have led to a geopolitical and geo-economic inflection point in US-China and European Union-China relations. This in turn has major and significant implications for international companies’ business plans and strategy vis-a-vis China.

Chief among the complex, interconnected, ongoing developments contributing to this geopolitical and geo-economic inflection point are:

• The Russian invasion of Ukraine and China’s continuing apparent support of Russia.

• The Chinese Communist Party’s continuing crackdown on Chinese technology billionaires and their companies within China.

• The continuing crisis in China’s real estate market.

• China’s increasingly harsh crackdown on Hong Kong’s democracy.

• The growth of the Chinese surveillance state during COVID-19 as an already highly developed individual digital information gathering, tracking, and control system has been turbocharged in the name of health and safety.

• The distinct change in tone and policy toward China under the Biden administration.

• Increased US-China and China-Taiwan tensions most vividly exemplified during and after US speaker of the house Nancy Pelosi’s trip to Taiwan in mid-2022.

• A growing democratic world backlash against China’s technology companies and digital belt and road global policy, triggering deeper and broader national security concerns and investigations against companies such as Huawei Technologies Co. and TikTok.

• The evolving and fluid Global South-Global North geopolitical divide and the role of China (and Russia) in it.

• A portion of China’s population—especially young people—taking to the streets to not only protest the lockdowns but also protest the absence of personal and political freedoms.

• The surveillance balloon situation.

Here’s the thing: these events, twists, and turns are becoming the norm, not the exception, not only in China but everywhere. We live in a world of poly-crisis as the World Economic Forum Global Risks Report underscored this year. The ongoing turbulence requires a more nimble, savvy, and hedged approach to doing business in or with China.

China Strategy Whiplash: To Pivot or Not to Pivot?

So, what are companies—especially larger multinationals with deeper investments directly or indirectly in China but also smaller and medium-sized businesses with China-reliant global supply chains—to do?

Depending on where a company sits on the spectrum of business activity in or with China, management and the board should be asking themselves the following questions:

• The company has never been in China before. If we never had a business connection in or with China, is now a good time to enter China? Why or why not?

• The company left China during the pandemic. If we largely left or suspended operations or our presence in China during the pandemic, should we reenter the country? If so, under what circumstances? If not, where else should we consider going—India, Indonesia, Malaysia, Vietnam, elsewhere? Should we consider “onshoring” or “nearshoring” alternatives?

• The company has been in China all along but is considering leaving. If we’ve been in China all along, is it now time to reduce our presence there or leave altogether, given the various geopolitical and geo-economic pressures and uncertainties? If so, what are our alternatives?

• The company has been in China all along and will stay. If we were there all along through the pandemic, what other or new considerations should we factor into our strategy of remaining that we haven’t considered before?

Five Lenses and Two Strategic Imperatives

Below are five lenses and two strategic imperatives companies should apply to their situation. While every business is different, these lenses and imperatives will help answer some of the foregoing difficult questions and frame a path forward.

Businesses looking at or already doing business in or with China should analyze and answer relevant questions through the following five lenses:

Lens 1: Economic.What are the economic and financial implications of continuing to do, beginning to do, or cutting off business relationships in or with China?Among the factors to be considered in this analysis are assets; facilities and real estate located in China; labor sources and cost considerations; supply chain complexities; logistical, production, and transportation efficiencies; financing opportunities and options; and the cost of crisis management, business continuity, and data protection.

Lens 2: Geopolitical.Geopolitical tectonic change is taking place as we speak with the world moving into some new form of world order that we haven’t quite figured out yet. Some are calling it a “new Cold War” between China and the United States, others are not, while yet others are concerned about or pushing for a hotter war revolving around the protection of Taiwan. The Taiwan conundrum hangs like a sword of Damocles over Asia and the potential ramifications of what could happen there could become existential overnight. Companies directly or indirectly present in China would be wise to develop contingency plans—yesterday.

Lens 3: Legal.The next critical lens is how the Chinese legal system—and all its governance, contractual, regulatory, compliance, and corruption implications—will treat your company when you have an issue or someone else has an issue with you. What is the status of your rule of law protections, contractual remedies, and the fairness of the judicial system? Deeply related and important are the ethics and legality of human rights and labor rights issues and abuses.

Lens 4: Technological.Technology issues, risks, and opportunities provide another key set of lenses that a business needs to analyze, whether considering protection of existing intellectual property, use or theft of technology, the effects of new export control regulations in multiple jurisdictions, multiple sources of surveillance (biometric, software-based, smartphone-based, video, audio, or other), social engineering, cybersecurity, safety and ethics in the metaverse, the use and abuse of artificial intelligence, and more.

Lens 5: Reputational. How will your company’s continuing or new business activities in China—or abrupt departure therefrom—affect your stakeholders’ expectations and perceptions of your company? If you stay and the geopolitical or domestic conditions become more fraught, are you prepared to protect people, assets, and purpose? If you stay, and are committed to a variety of sustainability or environmental, social, and governance (ESG) standards, are you ready to deal with adverse developments? If you leave, have you sufficiently protected your local stakeholders including employees, consumers, and communities from the downsides that might affect them? As a thought experiment think about what happened when western companies left Russia after Vladimir Putin’s invasion of Ukraine.

While these lenses will help construct an overall approach to doing business in China, there are two overarching strategic imperatives that also apply:

Strategic Imperative 1: Construct a long-term China strategy. Whatever else you do, you must construct a long-term China strategy. This strategy must incorporate the findings from discussions about the five lenses approach described above, subject to a serious risk and opportunity analysis. The China strategy must place geopolitical situational awareness at its core and include a deeper and broader diversification strategy (depending on the company’s business) that looks at sourcing labor, raw materials, or manufactured goods from other or multiple markets with well configured contingency arrangements. The strategy must be reviewed regularly for continuous improvement and the incorporation of new developments in this poly-crisis world.

Strategic Imperative 2: Build organizational resilience. Organizational resilience not only builds preparedness and the ability to survive, it helps organizations distinguish themselves, build competitive advantage, and thrive in the long term. This requires a systematic approach to effective risk management, crisis management, business continuity, data protection, and reputation management.

Executives and boards who do not rethink how and why they do business in China today will suffer the more serious consequences of being unprepared when the next foreseeable or unforeseeable crisis erupts, whether it’s a kinetic or virtual Chinese takeover of Taiwan, a new international security incident perhaps in space, or the arrest of one of your China-based executives for corruption. Continuous situational awareness and resilience is the new name of the game.