For business, breaking up with China is hard to do

The news this week that a senior Nomura banker, Charles Wang Zhonghe, has been barred from leaving mainland China has sent ripples through foreign companies and investors in the country. The circumstances behind the ban remain murky, though it may be connected to a long-running probe into China’s top tech sector dealmaker Bao Fan, who disappeared in February. But it is a reminder of just how unpredictable the environment has become for overseas businesses.

The ban follows mounting scrutiny of foreign firms in China, including raids in May on the US consultancies Capvision, Bain & Company and Mintz, which were accused of ignoring national security risks and passing on sensitive information abroad.

The increasing uncertainties of operating in China only add to pressures on businesses from their own governments to “de-risk” their ties amid escalating geopolitical tensions, and to reduce vulnerabilities exposed by the pandemic. Many are opting to relocate operations overseas, or hive off Chinese operations into standalone units.

Yet de-risking is proving hard to do, especially for manufacturers. There are few easy overseas substitutes for China. Multinationals rely on networks of China-based suppliers which can often produce inputs at lower prices than anywhere else in the world. Scaling back manufacturing bases in China often involves higher production costs and a loss of competitiveness.

One option is hedging bets via a “China plus one” strategy: maintaining Chinese plants but directing new investments to India or south-east Asian countries such as Vietnam. Apple, building its latest iPhone 15 in India as well as China, is a leading example. Yet Apple’s efforts to diversify manufacturing to India has hit snags, including quality control and efficiency issues.

A growing recent trend — driven as much by China’s own behaviour towards foreign businesses as western government pressure — is “China for China” strategies, or reconfiguring Chinese operations to serve only the vast domestic market. This potentially insulates international groups against Chinese regulatory actions. Localising supply chains can also reduce dependence on raw materials from outside China which might be disrupted by US sanctions. But for manufacturers, creating separate supply chains for Chinese and non-Chinese businesses is costly, even if it can be done.

Service companies, especially those that utilise data in areas such as finance, consulting, or IT, may have little choice but to move towards “China for China” strategies. Their life became more difficult after Beijing this summer put into effect an expanded anti-espionage law that restricts international sharing of data deemed sensitive. Sequoia Capital, the venture firm, said in June it would split its China business into a separate entity, citing US-China tensions, followed this week by its counterpart GGV Capital. IBM’s former IT services unit Kyndryl also plans to split off its China business.

The danger, however, is that hived-off Chinese units become detached from group oversight — and more vulnerable to official influence or being sucked into opaque Chinese ways of doing business.

Foreign businesses have few straightforward options, then, to reduce exposure to China. So while Beijing should be wary of pushing out companies that have brought vital investment and knowhow, US and European governments should recognise that their own rapidly shifting stances are causing real stress to businesses. Boards need more clarity on the future direction of China policy so they can plan for the long term. “De-risking” may be unavoidable, but it will not be quick or easy.






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