Make Some Tweaks in Your China Business Strategy

This past year has created havoc for Western companies purchasing raw materials, furniture, high-tech components, auto parts, and power tools from China. And the rocky relationship continues into 2019 as both countries continue to negotiate while kicking the can down the road toward a new March 1, 2019, deadline. But what exactly will happen in March? How will supply chains be affected? What are the long-term ramifications?

I’ll make some bold predictions and advise on how Western companies should handle their China supply chains.

Truce declared

President Trump and President Xi Jinping have pushed their game of chicken to the brink of disaster. Both countries’ stock markets spiraled downward in the fourth quarter of 2018, while 2019 GDP growth predictions have been downgraded for the two superpowers.

However, cooler heads will prevail, and I fully anticipate that both countries will come to a compromise. Expect China to continue to give in on some of Trump’s demands: better enforcement of intellectual property protection, a promise to purchase more U.S. goods, less government-sponsored cyber attacks, billions of dollars’ worth of tariff reductions, and a promise to allow Western companies more access to China’s domestic market—particularly in the auto, finance, and insurance industries. We’ll get some details from the Chinese about these concessions, but most of it will be long-term, vague promises and feel-good lip service.

In return, Trump will drop all the previously levied tariffs on Chinese goods, ease up on some of the geopolitical rhetoric, and allow Chinese students and investments back to the United States. So, both countries appear to give and get a little, making it a win-win situation. China wins because the deal buys more time before the 2020 elections, when it hopes Trump will be voted out of office; the United States wins because the deal should significantly reduce the almost $400 billion trade deficit.

So, everybody’s happy, and things will go back to normal. Or will they? They won’t. Too much irreversible damage has already occurred for the U.S.-China relationship to return to the pre-Trump days—and even then, the marriage was a rocky one.

Bottom line? Expect more chaos from the relationship and the possibility of a full-blown economic cold war breaking out during the next three to five years.

A cleaner and greener China

China is literally cleaning up its act. It no longer wants to be the world’s garbage dump, which it emphasized by announcing last year that it will stop purchasing 45 percent of the world’s plastic waste imports. Similarly, President Xi, through his Made in China 2025 initiative, wants to move higher up on the world’s supply chain. The days are limited for China continuing to make “dirty” stuff like laminated floorings, industrial chemicals and paints, electronic components, and plastics.

I remember inspecting a Chinese cooling tower manufacturer a few years back. I noticed something strange about all the workers, mostly men, who were laminating fiberglass pieces of cooling towers. They all had red or green hair, which I assumed was the result of exposure to the toxic odors. I asked one of the workers if he was worried about his red hair. He replied, “No, not at all. In fact, my kids love it. It makes me look younger.” These factories and others like it are all being closed down and replaced with bioengineering, artificial intelligence, software, and robotics companies.

As a result, Western companies are now looking elsewhere—Vietnam, Cambodia, Indonesia, and the Philippines—for their low-cost products and components.

More risk to come

Though I’m predicting the tariff war will wane, it will leave scars for both countries for years to come. Moreover, geopolitical risks in the South China Sea, an arms and space race, and a potential raw materials shortage all remain on the table. All this built-up tension has begged the question, “Do we really want to work in a country that has an adversarial relationship with us?”

During the 1990s, I was assisting companies to set up in China. Now, I’m asked to negotiate joint-venture buyouts, employee terminations, and early rental agreement exits. The owner of an auxiliary power-supply company in Shenzhen recently told me, “These China-U.S. tensions are real, and it’s a long-term problem I don’t want to deal with. I want to find other suppliers in other countries and even completely move to another country for manufacturing. It’s just not worth the long-term risk anymore.”

Regional isolationism

All this nationalism and protectionism, however, is creating some opportunities, if one can stomach the risks. China is commencing its One Belt One Road initiative and building highways, ports, rail lines, and other infrastructure to economically link more than 70 countries throughout Africa, the Middle East, Asia, and Eastern Europe. This is all part of China’s plan to divest its interest away from the United States and into emerging countries, where it can wield both political and economic influence.

This new, modernized Silk Road will create two regional trading zones. One zone will link China as the hub to all of Africa and Eastern Europe, the Middle East, and several countries in South America and Asia. The United States will serve as the center of the other regional trading alliance, along with Canada and Mexico, most of South America, Western Europe, and pro-U.S. Asian countries.

This means that supply chains and manufacturing will have to have two headquarters, one for each trading zone. One center should be located in China, where it will service China’s sphere of influence, and the other placed in North America. Though this complicates logistics, it will also open up new markets for Western companies. Who would ever think that your China operation would soon be exporting to such countries as Uzbekistan, Pakistan, or Nigeria?

Stay the course, but make tweaks

Even with all this China turmoil going on, I’m confident that China is still the place to be. The reasons to be there, however, may change because it’s no longer the lowest-cost supplier or manufacturing source; other Asian nations have taken its place. But where else can you make a product and sell it to more than 1.3 billion people? Where else is the middle class growing at 20–30 million people per year? Only in China.

So, I continue to tell Western businesspeople and China doubters as I have for the past 20 years that you must stay in China. But that doesn’t mean you should stick with your original plans or strategies. As China changes, so should your short-term goals. Make tweaks during the coming months and years, but remain hard and fast in your long-term China goals.

 

About The Author