Decouple, diversify or all-in: choices for foreign executives in China

How should senior managers of foreign firms doing business in or with China plan, invest, hire, delegate and execute differently in today’s turbulent environment? This is what we discussed at the latest East-West Leadership webinar on 6 April, entitled “New China strategies from global think-tanks to managers". Based mainly on this paper by Roland Berger and this one by McKinsey, we saw three main directions to follow, both on the strategic and tactical levels, meaning issues decided by global headquarters as opposed to ones handled by managers in China or Asia branches. Companies can:

• Decouple: Withdraw from China entirely to avoid risks that firms can neither predict nor control,

• Diversify or “de-risk”: Stay committed to the China market in selected areas, while withdrawing in others,

• China-for-China: Try to ride another growth wave of the country’s economy by investing in localised solutions.

Of course, the spoiler alert is that these are not really alternatives, whatever CNN says. Most foreign firms with experience in China combine these strategic elements one way or another to minimise risk but also benefit from China’s ever-crashing but ever-rejuvenating markets. But while such big-picture strategic guidance makes perfect sense, many managers I coach and train must figure out how to apply it to actual, day-to-day leadership situations while running multinational businesses in China, or ones with significant China exposure. This is what we discussed at the webinar, and will probably keep discussing at upcoming ones focusing on further publications by think-tanks. Decouple The sad situation these days is that managers running foreign firms in China (including Chinese managers promoted to international roles due to ‘management localisation’ policies) often find themselves caught in political crossfires. On one side is COVID-related restrictions, Beijing’s growing preference for indigenous technology and long-standing restrictions on global IT solutions. On the other are ebbing patience, suspicions and restrictions from the firm’s home government, be it the US, the EU or Japan. On bad-hair days multinational executives can be forgiven for buying into the doomsday scenario that globalisation is falling to pieces.

But they must remember that the allure of black-and-white narratives lie in their simplicity, while reality is complex. On one hand, not everybody feels like decoupling. The McKinsey paper shows the growing gap between foreign firms that fail in China and the ones that succeed. There are some regularities too. Older firms with longer experience in China in promising industries like pharmaceuticals and high-tech typically do well and remain. Smaller, recent arrivals in troubled sectors like automotive and retail increasingly lose their China profits: half of AmCham member firms recently reported losses in China. Managers must also remember difficulties to define what “one firm” is in China: most multinationals have built a Jenga-tower of incorporated entities over the years. Therefore, they can “decouple” some business units and projects while the firm remains committed to China, and individual managers can play important roles in such decisions.

Diversify When it comes to separating what will be profitable in China from what probably won’t, I found that the biggest challenge lies in making emotional decisions. Reliable information from China is scarce these days, and what remains is highly polarised. Ultimately, entire investment strategies can turn course because one Director watches the wrong TV channel or another has a Chinese spouse and home in a local city, and wants to stay close to both. Such factors are acceptable among humans as long as decision-makers are aware of their nature, but they are risky when cloaked under seemingly objective arguments.

When needed, both China-bashers and China-fans can wave predictions, but as the Roland Berger paper argues, leadership teams are better off if they “peel” layers of manageable and less manageable risks and make their decisions in alignment with both rational and emotional factors. Strongly committed leaders can succeed even under harsh conditions. Defensive ones can stop them if they think they are making perfect sense in defence of the firm’s long-term interest. Here is Roland Berger’s onion-layer analysis of risks. In full know knowledge of risks and options, they can align like gas and break pedals. China-for-China Executives committed to the China market make a strong point when they point out how much of the profit and growth of global firms came from the single country recently, and that China isn’t half done developing. They coined the term “China-for-China”, which assumes that foreign firms must essentially become local players in the Chinese market. But global think-tanks caution something similar as I have said to foreigners who asked me to “teach them to do business the Chinese way”: there is enough of that in China, they don’t need foreigners to act Chinese. Two important points from the papers support that view. The first is that multinational firms have been essential hinges of China’s success story: Roland Berger shows that while China is the largest exporter of robots, 70% of their robotics products rely on foreign design. The other is that “China-for-China” has its own risks, it makes more sense in one area than in another, and China-based managers must weigh several factors before they go all-in with the market they love. In data storage and processing, for instance, there is no choice: PRC law forces foreign firms to steadily develop “China-for-China” practices. In other areas towards the bottom-left of this Roland Berger chart, China-based managers must make effort to stay connected to the value of international know-how, talent, partnerships and technology.

There were calls among participants to continue the discussion at another free East-West Leadership webinar, where we will probably discuss business confidence reports by international chambers and perhaps analyses by Deloitte and MERICS. Sign up to my updates on this page to join us. Until then, to see the full recording of this webinar and previous ones, sign up to my Patreon community. As a member you can also participate in Live Mentoring events free of charge: https://www.patreon.com/DragonSuit See my coaching page if you or one of your managers wants to improve their leadership skills for an East-West intercultural context, whether they work between continents and time zones in person or online: https://www.holch.biz/coach