China’s robust economic development, coupled with the size of its domestic market, were for decades key factors attracting many European companies to invest in the country. For those who decided to bring their manufacturing to China, the size and scope of its industrial clusters were a crucial selling point.

While a large number of foreign-invested enterprises (FIEs) may have originally put up production lines in China in order to reduce the costs of manufacturing and labour, the substantial increase of Chinese customers’ buying power resulted in a shift in approach. Many FIEs began increasingly trying to tap into domestic consumption, and in turn found themselves having to adapt to divergent demands from Chinese consumers. For example, the differences in demand can be well traced in the automotive industry, where the average age of high-end car buyers is substantially lower in China than in Europe or in the United States, leading to increased demand for more new technologies and onboard features.[1]

To meet these expectations, many FIEs also set up research and development bases in China, and found that the quick pace of commercialising innovation results  helped them accelerate the process of bringing new or updated products to market.

As China’s economic development advanced, European companies increasingly saw the advantages of being in China for China, both to access local customers and for exposure to pioneering private Chinese firms. And even though persistent market access barriers, coupled with a growing sense of unpredictability stemming from ambiguous regulations, made operating in China a challenging experience, many European businesses remained committed to the Chinese market.

However, heightening geopolitical risks have led companies to to pay an unprecedented amount of attention to risk assessments and take steps to build supply chain resilience. While risk considerations compelled some European companies to reconsider their investments originally planned for China, the Chinese Government’s ongoing technological self-reliance campaign has been pushing FIEs to further onshore their production and technologies into the country. This trend might put the ‘in China, for China’ approach in a new light for businesses, as instead of a choice it might become a condition for some to maintain their profitability–or even their presence–in China.

While European companies’ China operations might be more inclined to see the advantages that this approach can bring, especially for their bottom lines, in Europe it is meeting an increasingly mixed reception among home-country governments and consumers. A key reason behind this is that when it comes to investments, the European Union (EU)-China relationship is still rather lopsided in terms of job creation. As European companies frequently opt for greenfield investments in China, they have been creating a large number of jobs and therefore tax revenue in the country, whereas Chinese companies investing in the EU tend to buy into already existing jobs through acquisitions. While 2022 was the first year since 2008 to see the levels of Chinese greenfield investment overtake those of mergers and acquisitions,[2] it remains to be seen whether this trend will continue in the longer term. In the meantime, it is likely that complexities associated with companies following an ‘in China for China’ strategy will increase.

[1] Li, Fusheng, Youth driving sales in China’s vehicle market, China Daily, 20^th February 2023, viewed 20^th June 2023, <https://www.chinadaily.com.cn/a/202302/20/WS63f2ac16a31057c47ebaf9ed.html>

[2] Kratz, Agatha, Zenglein, Max J., Sebastian, Gregor & Witzke, Mark, EV battery investments cushion drop to decade low: Chinese FDI in Europe 2022 Update, Rhodium Group & MERICS, 9^th May 2023, viewed 20^th June 2023, <https://merics.org/en/report/ev-battery-investments-cushion-drop-decade-low-chinese-fdi-europe-2022-update>