For decades, China had been the crown jewel for multinational corporations seeking growth, profitability, and market dominance. From rapid industrialization to the explosion of the middle class, China in itself had become synonymous with opportunity. In fact, since its entrance into the WTO in 2001, China has rapidly emerged as the world's second-largest economy, with an infrastructure that has global companies seeing boundless possibilities.
But all that has changed now: the era of exponential growth and easy returns. The post-pandemic recovery of China, expected to take off after the country lifted its rigid zero-COVID policy late last year, has failed to materialize as was widely expected by many. Cracks instead have appeared in the country's economic model, exposing deep-seated imbalances that range from overreliance on exports, excessive credit, to an investment-heavy approach. These structural problems have forced many multinational corporations to go back to the drawing board as the firms rethink their strategies of relevance and profitability in China.
Price-Conscious Consumers
Perhaps the most unmistakable evidence of the new market behavior in China can be ascertained from the way in which consumers are now behaving. Both individuals and businesses alike are becoming price-conscious. Whereas in the past, Chinese consumers were more than ready to pay a higher price for foreign brands and a taste of luxury, with slowing economic growth, they're now moving to cheaper alternatives. Companies like Xiaomi and Vivo have beaten some of the international giants like Apple and Samsung by providing very affordable, high-quality smartphones that meet the needs of the very budget-conscious consumer [1].
They cut prices aggressively to capture as large a share of this spending as possible, fully attuned to the needs of the market. Most of such firms operate in China, where, in many instances, they also sacrifice profit margins in order not to lose out in competitiveness. This shift requires that multinational companies move very fast because it changes everything at least in categories such as electronics, consumer goods, and retail.
Challenges from Geopolitical and Regulatory Directions
Multinationals are having to cope with not only changing consumer behavior but also increasing regulatory and geopolitical challenges in China. The new political tensions between China and the West, especially the US, create fresh barriers for foreign businesses operating there. Sanctions, tariffs, and geopolitical uncertainties have made global supply chains more complex and complicated, making it tough to plan long-term business.
National security policies in China have also tightened. Multinationals now have to navigate the increasingly complex regulatory environment, with rigorous cybersecurity and data privacy laws adding to the pain. Companies in the crossfire of growing Sino-Western tensions face not only operational disruption but also reputational damage. For instance, American companies operating in China have come under fire from both sides of the geopolitical divide, as consumers rapidly grow suspicious of foreign brands. [2].
The Risk of a Wait-and-See Approach
Many multinationals seem to adopt the wait-and-see approach and hold the most significant investments in the country, pivoting more or less to the rest of Asia. But that may be risky. The cooling of China's economy is not some sort of spike but rather a consequence of some pretty deep-seated structural imbalances. Such factors as the slowdown in the housing market, growth in debt, and an aging population are unlikely to solve themselves in a short period of time [3].
Besides, delay will lead to the loss of valuable market share. Domestic competitors are innovating fast and house consumer attention. Hesitation will render companies irrelevant in the very competitive China market. Despite challenges, China still is the largest middle-class market in the world, with an increasing count of high-income consumers. Over 100 million people are considered upper-middle-class and rich in China; a huge opportunity if companies can shape up [4].
Strategic Recalibration: Treating China as a Mature Market
Multinationals must reboot their strategies in this environment, treating China less as a high-growth investment destination and more as a mature, competitive market if they are to survive, let alone thrive. Indeed, that would mean reassessing growth expectations, profitability, and risk tolerance. The companies that cannot readjust their strategies also risk falling behind not just in China but globally.
The next step in this process of recalibration is to optimize the cost structure. Multinationals should now focus on core competencies and cut any unnecessary expenses. Business segments that no longer can add value in China have to be downsized or axed. Operating leaner will allow companies to maintain profitability while remaining competitive in China's price-sensitive market.
Additionally, companies coming from abroad need to empower their teams in China to adapt products and services to local tastes and preferences. The preferences of Chinese consumers have already become quite specific, and any company incapable of responding to these demands cannot remain competitive. This can enable multinationals to differentiate from domestic competitors by empowering local management with resources and authority to develop products that will strike a chord with the Chinese market.
Leverage Chinese Technological Innovations
The first significant opportunity that multinational firms can harness in China is the advanced technological landscape. China ranks among the best globally in many sectors, including e-commerce, artificial intelligence (AI), and new-energy vehicles (NEVs). Indeed, tech companies like Alibaba and JD.com have enabled Chinese consumers to experience seamless, very well-personalized digital experiences. In this regard, multinationals can be empowered through entering wide e-commerce networks and increasing their customer interaction with these companies.
Indeed, a number of foreign automakers are building stronger NEV capabilities in China to take advantage of the country's dominance in this very fast-growing sector. Indeed, China at present is the largest market in the world for electric vehicles, and firms that invest in local production facilities and supply chains there are also the best-placed competitors globally. For example, Tesla has scaled up its production in China by leveraging the advanced manufacturing capabilities and the comprehensive network of supplies for low-cost but high-quality electric vehicles [6].
This integration of Chinese innovations is crucial to a long-term success. "Companies that can harness China's strengths in digital commerce and advanced manufacturing will thrive not only in China but also become more competitive in global markets.".
The Disconnect Between Headquarters and China-Based Teams
Despite the enormous opportunity that China's advanced technological landscape has created, in many cases a disconnect between headquarters and China-based teams still exists. Most multinationals do not make the necessary resources available to China-related innovations; hence, they can't keep pace with demands from the domestic market. According to a recent McKinsey survey, almost half of China-based executives said that their companies were underinvesting in China [7].
The lack of alignment between global and local teams can be one of the single biggest barriers to success. Multinationals need to begin bridging this gap by nurturing deeper communication and collaboration between headquarters and local teams. Equipped better with resources and more freedom, China-based executives will allow their people to devise creative products and services which can answer local consumers' needs; thus, this will enable them to reinforce their lead in China.
A New Competitive Reality
The Chinese market has indeed matured, and while many opportunities still abound, multinational corporations have to adapt to this new reality. Though the days of exponential growth may indeed be over, it is still possible for a company to be successful in this country if only it recalibrates its expectations and strategies. Treating China as a mature market, optimizing cost structures, leveraging local innovations, and empowering China-based teams will be critical to remaining competitive.
Failure to do so may have consequences that reverberate worldwide. In the words of one CEO: "China may no longer be a place of big money, but it can still deliver good money." Those that don't recalculate their approach risk losing share not just in China's market, but in the global playing field.
For further reading on China's fast-changing economy, read Harvard Business Review's piece on What Western Companies Get Wrong About China.
Useful Links:
- Xiaomi vs. Apple: A Battle for China's Smartphone Market
- [Geopolitical Risks for US Companies in China](https://www.ft.com/content/6f1