Commentary on Political Economy

Tuesday 26 September 2023


China ‘de-risk­ing’ strategies start to take shape

Some west­ern groups are pulling out as ten­sions build, while oth­ers seek to pro­tect them­selves by loc­al­ising oper­a­tions

Volkswagen has announced €4bn worth of investment in China in the past year but toymaker Hasbro is among businesses in retreat

West­ern com­pan­ies are slowly insu­lat­ing their China oper­a­tions from mount­ing ten­sions over trade and geo­pol­it­ics between Beijing and the west, as gov­ern­ments call for increased “de-risk­ing”.

The notion, which has replaced the rad­ical “decoup­ling” as a dip­lo­matic buzzword this year, is a sign that the west is seek­ing a less ant­ag­on­istic approach to man­aging rela­tions with China. But busi­nesses have yet to for­mu­late clear strategies to give it sub­stance, ana­lysts say.

While a small num­ber of com­pan­ies such as US toy­maker Has­bro have announced plans to quit man­u­fac­tur­ing in China, the vast major­ity are still weigh­ing up options, which range from par­tial divest­ment to delayed spend­ing decisions and ways to make China oper­a­tions dis­rup­tion-proof by hav­ing them serve only the Chinese mar­ket.

“Europe is still think­ing about what de-risk­ing is and how to imple­ment it in prac­tice,” said Agathe Demarais, senior policy fel­low at the European Coun­cil on For­eign Rela­tions. “Over the past year there’s been much more private sec­tor talk of loc­al­isa­tion strategies as a form of de-risk­ing, but it takes sev­eral years for invest­ment to come to fruition.”

Beijing’s pan­demic lock­downs and Moscow’s assault on Ukraine have intens­i­fied the sense of urgency as west­ern lead­ers fret about China’s dom­in­ance of key sup­ply chains, the poten­tial for a clash over Taiwan, and trade hos­til­ity between Wash­ing­ton and Beijing. Yes­ter­day, EU trade com­mis­sioner Valdis Dom­brovs­kis was due to meet Chinese offi­cials to dis­cuss the EU’s grow­ing trade defi­cit with China and the EU anti-sub­sidies invest­ig­a­tion into EV imports.

There are emer­ging signs of longerterm shifts in pro­duc­tion. A report this year by the European Cham­ber of Com­merce in China found that 11 per cent of European busi­nesses sur­veyed had already real­loc­ated invest­ments out of China, while 22 per cent had decided to or were con­sid­er­ing such a shift. For the first time since 2016, less than half of respond­ents planned to expand their oper­a­tions in China this year.

The Amer­ican Cham­ber of Com­merce in China found this year that 12 per cent of US groups sur­veyed were con­sid­er­ing relo­cat­ing sourcing out­side China, with another 12 per cent already doing so.

“Most com­pan­ies have no altern­at­ive to China”, said Trey McArver at con­sultancy Trivium China, but “they have to find strategies for oper­at­ing in an envir­on­ment of much higher risk”.

Apple and Intel have alloc­ated future invest­ments to other loc­a­tions includ­ing India or south-east Asia while main­tain­ing their China plants, in a hedging strategy known as “China plus one”.

But the most con­tem­plated strategy is “China for China”, whereby China oper­a­tions are reor­gan­ised so they pro­duce goods only for domestic con­sump­tion.

Anglo-Swedish drug­maker AstraZeneca is draw­ing up plans to spin out its China arm and list it in Hong Kong, partly to insu­late it against reg­u­lat­ory moves against for­eign groups. Gov­ern­ment pro­cure­ment guidelines mean state bod­ies, includ­ing hos­pit­als, must increas­ingly buy from Chinese brands.

“China for China” also involves loc­al­ising sup­ply chains. Ger­man phar­ma­ceut­ical com­pany Merck said in May it would expand its Chinese sup­ply chains to reduce reli­ance on raw mater­i­als from out­side China, par­tic­u­larly the US, which are vul­ner­able to sanc­tions.

Ger­man machinery asso­ci­ation VDMA has found that more than a third of its mem­bers are look­ing for altern­at­ive sup­pli­ers so they can ser­vice both the US and Chinese mar­kets with “neut­ral” products without Chinese or US com­pon­ents.

Volk­swa­gen, which relies on China for about half its profits, has announced €4bn worth of invest­ment in the coun­try in the past year. The move would give “more autonomy and decision­mak­ing powers in China than ever before”, said Beijing-based board mem­ber Ralf Brandstätter. The Chinese busi­ness was “gradu­ally becom­ing a second headquar­ters” for the global group, he added recently.

While the US, Neth­er­lands and Japan have imposed sanc­tions on exports of high-tech chip­mak­ing equip­ment to Chinese groups, some Chinese cli­ents want products without for­eign-made com­pon­ents in order to future-proof them­selves against fur­ther meas­ures, accord­ing to exec­ut­ives.

French-Italian chip­maker STMi­croe-lec­tron­ics in 2021 sep­ar­ated its Chinese sales and mar­ket­ing func­tions from the rest of its Asia-Pacific divi­sion, along with its payroll, staff man­age­ment and report­ing struc­tures, accord­ing to two people famil­iar with the com­pany.

The decision was partly aimed at mak­ing it easier for the com­pany to carve out its China arm should it need to, they said. The reor­gan­isa­tion is designed “to bet­ter bal­ance our cus­tomer focus and sup­port”, STMi­cro­elec­tron­ics said. A focus on local hires had already star­ted dur­ing the pan­demic, as Beijing’s zero-Covid policy pre­ven­ted mul­tina­tion­als from send­ing expat­ri­ates to their Chinese busi­nesses.

For some for­eign exec­ut­ives who had been in China for the long haul, mak­ing a life there has also become harder.

“The anti-for­eigner sen­ti­ment is the worst in the 30 years I’ve been in China,” said one European tech exec­ut­ive, who is mak­ing plans to leave. “I see con­stantly this sen­ti­ment in the news, in social media com­ments, when speak­ing with people and cus­tom­ers. I can’t shut my ears to this.”

Con­sultan­cies such as McKin­sey and Boston Con­sult­ing Group are among busi­nesses sep­ar­at­ing their Chinese IT sys­tems. This is a res­ult of increas­ingly strin­gent anti-espi­on­age and data pro­tec­tion laws that mean com­pan­ies require reg­u­lat­ory approval to trans­fer large amounts of data out of China.

“The “risk” is com­ing from many dir­ec­tions, said Samm Sacks, an expert on global cyber policy at Yale Law School’s Paul Tsai China Cen­ter. She cited “uncer­tain­ties in Beijing’s new data regime but also as a response to USChina ten­sions as well as Taiwan crisis con­tin­gency plan­ning”.

In order to com­ply with Chinese laws, as well as headquar­ters’ con­cerns over data theft, com­pan­ies have turned towards cre­at­ing China-spe­cific IT sys­tems — often mean­ing teams can­not use the same plat­form to work together across bor­ders.

“China is increas­ingly treated as a spe­cial mar­ket, includ­ing for host­ing of data, export­ing of data, and expos­ure for exec­ut­ives vis­it­ing — includ­ing the devices they take with them,” said Duncan Clark, head of con­sultancy BDA China.

“If China is a silo,” added the European tech exec­ut­ive, “it’s much more easy to con­trol what info enters and what leaves: you just need a few doors on the silo to con­trol.”

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