Strict Zero-Covid-Politics, lockdowns, geopolitical tensions, decoupling and the consolidation of General Secretary Xi Jinping’s singular political power - after a more than turbulent and eventful last year the convergence of all the disruptions and challenges added pressure and raising a debate on the resilience of the Chinese economy. Now the important question arises for many, especially for companies: What will happen next in the “Year of the Rabbit” 2023.

No real calm on the horizon

2023 is a year of great expectations for China. The recent pivot from the strict Zero-COVID policies is a very welcome development, fueling hopes of a strong economic recovery, but this is by no means a foregone conclusion.

Link: Why are foreign companies decreasing their dependency on Asian giant?

Rather, the crisis year 2022 once again catalyzed the long-standing trend towards increasingly difficult Chinese market conditions. In addition to the regulatory environment, which is becoming more and more complicated anyway, and competition with local companies, which is perceived as unfair, the lockdowns and logistics bottlenecks of 2022 have raised the question of supply chain stability and the reliability of China as an investment location.

On the political stage, especially against the background of growing tensions between the two most powerful economies (USA vs China), the assessment of China in the triad of a cooperation partner, an economic competitor, and a systemic rival is now a consensus among political stakeholders in Germany, the EU, and among German businesses.

In response to the level of uncertainty and shifting world states, the difficulties faced by foreign companies in the past few years are making them reconsider the viability of maintaining a presence in China. Many are thinking about their future in China, what it would look like and if there is a future there at all. There is no easy right or wrong answer. It all just depends on every company’s specific situation, the importance of the Chinese market and the company’s resources and capabilities.

The ”best” China-Strategy

With the recent drastically shifting landscape, it is crucial for foreign businesses to develop a sound China strategy, executable measures and action plans. While the right approach for each company is highly individual, a few broadly applicable strategic responses have emerged:

In China for China – Doubling Down on China

• Developing products in China for the Chinese market and establishing supply chains customized for China market
• Enhance onsite R&D capability and/or joining efforts with Chinese players
• Increasing investment & commitment in complying with Chinese regulations & standards

China plus 1, 2, 3 - Diversifying Risks

• Setting up of additional/alternative production sites & supply chains outside China (China plus 1, 2, 3 strategies)
• Thereby, expanding the company’s footprint in growth markets especially in other SEA countries
• Replacing and insourcing of critical components

Strengthen Resilience

• Streamlining the organization structure and exploring cost optimization within the supply chain
• Divesting non-core business and assets
• Finally: Relocating to other regions and countries by exiting China via trade sales and/or voluntary liquidation

The future is…

Despite a rather bleak outlook for the future, the goal shouldn't be to break away from the Chinese market altogether. German and European companies should also keep in mind that the importance of the German/European market for the Chinese economy is of great importance, with China's growth expected to be supported by exports for the foreseeable future and US-China tensions rising, China's willingness to risk undermining its relationship with a second key trading (EU) partner is likely limited. The “Year of the Rabbit” will show to what extent European and German politics are able to enforce more leeway and fairer conditions on the Chinese market.

Link: Calibrating interdependence with China

Dirk Müller
VBU Partner Shanghai

The author is a management consultant for strategy and strategic marketing. As the VBU Partner in Shanghai / China, he supports small- and medium-sized companies on their way to China and to be successful on the Chinese market - through trend and market analyses, strategy development, project support, intercultural competence, and a broad on-site China service network.

(Photo: D. Mueller)