With China pushing to strengthen its standing in the global market, now is the time to scrutinise your strategies if you have interests there, writes John Jullen for Strategy+Business.
There’s no clear indication how the world’s growing political shift towards economic nationalism – including Brexit and Donald Trump’s America First platform – is going to affect international trade and innovation.
Nor can we accurately predict how broader shifts in political and environmental terms, such as global climate change, automation and digitisation and the removal of nuclear weapons from North Korea, could impact on trade with China.
GET READY FOR ANYTHING
Leaders of multinationals can’t afford to wait for answers, according to Jullens, an expert on globalisation and emerging markets who was based in Shanghai for five years until 2015. He says precautionary action is essential to preempt any disturbance to Chinese sales and operations.
To help leaders review and update attitudes, policies and operations in the light of prospective disruption, Jullens has devised this five-step plan.
1) Rethink strategic planning methods. The chances are that you have a fairly narrow process when considering the path from today until, say, five years down the line. It is unlikely to be focused towards the level of unpredictability that firms, US ones in particular, could now face in their dealings with China. It’s time to build in consideration of outcomes that might range from minor change to enormous disruption.
Jullens advises examining “alternative strategic postures, and developing a portfolio of strategic actions that may include no-regret moves, real options, and big bets”.
Consider each potential sequence of events to forecast possible profit, tax and transfer pricing ramifications.
For US concerns there will almost inevitably be effects on international trade policy and tax rules following withdrawal from the Trans-Pacific Partnership.
2) Undertake a thorough risk assessment. Jullens says China is vulnerable to “a range of high-risk events, such as limited international trade, currency devaluation, military conflicts, a domestic financial crisis or a full-blown avian flu epidemic”. Leaders need to consider the impact of those scenarios and prioritise them in terms of risk exposure, financial impact and ease of application.
“Company leaders should map their geographic footprint and operations, including supply chains, channel partners and customers, and try to identify all events that could result in major demand shocks or supply chain interruptions.” The sort of questions you could be asking include:
- What if Chinese companies and consumers were warned against buying products and services from businesses in your country?
- What would be the impact if China decided to ditch some of its massive holdings of US Treasury securities and other financial assets?
3) Re-examine the footprint of your operations. This applies both in terms of China’s changing geographical demand and its rising labour costs.
“It is important to make major footprint decisions from a cross-functional perspective, including not just the typical tradeoffs between operational efficiency and organisational resilience, but also tax, IP and transfer-pricing considerations.”
These are some elements he advises re-evaluating if you want to avoid expensive errors:
- The cost efficiency of your company’s manufacturing – could parts be made more economically by domestic Chinese suppliers, for example?
- Could you benefit from new markets emerging inland, away from China’s main coastal hubs of Beijing and Shanghai?
4) Look at how useful your partnerships are. Since China joined the World Trade Organisation in 2001 it’s no longer necessary for Western companies to be in a joint venture with local businesses; most US firms have opted instead for wholly foreign-owned enterprises, which now have a record for better performance.
“Keeping in mind that some industries, such as automotive assembly, remain subject to significant ownership restrictions, it may be time for MNCs to rethink their Sino-foreign partnership strategies.”
In industries where heavy regulation is anticipated, multinationals could be wise to foster partnerships with local Chinese firms to shield themselves.
5) Communicate with governments. Ensure that your own government officials and their Chinese equivalents are made aware of the effect their decisions have on the economics of businesses in terms of interest rates, inflation and employment.
It’s equally important to keep talking with business leaders and local authorities in areas of China that are encouraging overseas investment and commerce.
Doing business in contemporary China is a shape-shifting scenario with multiple potential outcomes. But multinationals can prepare and protect themselves by employing Jullens’ five-pronged plan immediately, rather than reacting to changes as they unfold.