Global businesses still wary of China, 16 months after the reopening
In the 16 months since Beijing swung its doors back open and started rolling out the red carpet for global business leaders to perform on-the-ground assessments after three years of coronavirus lockdowns, scars linger, while fresh cuts have further blemished China’s draw for multinationals.
A widening information gulf and aggressive “de-risking” moves by strong trade partners have compounded a worrisome sense of hesitation among foreign firms and businesspeople over investing more in the country.
And now executives with foreign firms’ China operations say it has become increasingly difficult to influence operational and investment decisions made by overseas management, as global supply-chain shifts and non-business factors such as national security concerns are having an outsize influence on such decisions.
In a new report, the EU Chamber of Commerce in China has flagged a sharp rise in member firms experiencing a “decoupling” between their headquarters and China operations over the past two years.
And it said this had triggered “a slowdown in existing operations and a reduced ability to capitalise on new projects or investment plans”.
“This is especially the case as, while European companies’ China operations might still see opportunities to expand their presence in China, they find it increasingly difficult to convince their headquarters,” said the report released yesterday. It cited responses from 529 companies in January and February.
Despite Beijing’s best efforts to retain its allure for foreigners, direct investment from overseas into the country during the first quarter of this year fell by 26 per cent from the same period last year, to 301 billion yuan (HK$325 billion), according to official data.
China has not released FDI data in US-dollar terms for more than a year.
Ker Gibbs, former president of the American Chamber of Commerce in Shanghai, pointed to fewer expatriate employees in key positions of China operations, noting how this had hindered communication with headquarters and resulted in a fuzzier picture of what was actually happening in the country.
“Information and investment go together. You’re not going to find a lot of investors who are willing to deploy capital without confidence in the information they are working with,” said Gibbs, who is now an executive-in-residence at the University of San Francisco’s China Business Studies Initiative.
“China’s decoupling from the West seems to be accelerating, with policies from Beijing and Washington pushing in that direction. This is not what the business community wants, but people are reacting to policies and the overall climate.
“The restrictions on foreign business journalists also haven’t helped. We’re getting fewer stories out of China, and [these are] often reported by people from Seoul or Singapore, not from inside China. The restrictions on economic data haven’t helped, either.”
Gabor Holch, an intercultural leadership consultant and author of Dragon Suit: The Golden Age of Expatriate Executives In China, has been vocal about the risks of excessive “localisation” – replacing foreigners with local managers. His book, published in
August, was based on interviews with executives over five years.
Reached by the Post, he stressed the need for corporate decision-makers to carefully “rely on data that both reflects China’s actual situation and places it in a wider regional or global context”.
But doing so, he said, had become difficult over the past several years as information flows had been heavily curtailed, noting that “working with China’s shielded digital ecosystem takes a surprising amount of manual data transfer”.
“The last decade widened the
gap for many reasons,” he added. “Scrutiny increased on published content in China, and international researchers lost access to local sources. Local managers replaced expatriate leaders, but they have limited access and sceptical attitudes to internationally published data.
“Headquarters rely on global news sources and research whose authors often lost their access to China for political reasons, and consequently tend to overestimate risks. Executives in China are exposed to sources curated by local media and therefore mostly see opportunities.”
Executives on both sides “must work hard to overcome both unrealistic fears about China and politically motivated information from China itself”.
Apart from the perceived challenges of accessing and relaying quality information, Zak Dychtwald, founder and CEO of Shanghai-based consulting firm Young China Group, said companies had to revisit their approach to the country as their boards had become “more skittish than ever”, and as localisation strategies adopted in China operations could have unforeseen implications.
“The ability to have a local team used to be key for success in China,” Dychtwald said. “As we’ve seen the number of foreigners go down, for the first time in a long time, I’m realising the value of having expats on teams, which is to be a bridge for trust, to communicate in a way that headquarters can understand and receive. There is higher value in having expats now versus three years ago – for understanding the strategy, being here on the ground, being a part of the execution and then being responsible for the communication.”
Beijing has unveiled measures to attract foreign investment while also loosening visa policies, but overseas firms have nonetheless flagged challenges in recruiting expats for China operations.
Amid the de-risking shift away from China and growing divergence in national security regulations between the country and its Western partners, more foreign companies have separated their China operations from the rest of their global business.
And in that respect, a drop in the number of Europeans employed by firms’ China operations had been a key factor behind the decoupling trend, the EU chamber warned, adding that this had contributed to a loss of mutual understanding and trust.
As a result, 26 per cent of companies polled in the chamber’s survey said they were having to adapt or modify products or services, while another quarter said they needed to develop alternative supply chains for China and for Europe or third markets.
The need for Beijing to make concrete progress in restoring foreign confidence “is becoming increasingly urgent”, the chamber report said.