Foreign firms must prepare for business in China with fewer foreign managers

Are all foreigners leaving China or is an ‘expat exodus’ only malicious fiction? Intercultural leadership consultant Gabor Holch of Campanile Management Consulting seeks answers in recent demographic data, and examines the practical implications for European firms in China.

What is happening?

Before plunging into arguments about China’s ‘expat exodus’, it is worth considering the meaning of both words. A narrow definition of ‘expat’ refers to foreign workers in a country whose home employer covers their income and expenses. A broader understanding of the term is all foreigners in a country for work purposes, whether they are employed by foreign or local firms, self-employed or otherwise. As for ‘exodus’, the most common reference is the Old Testament, which suggests a complete evacuation of a certain population from a given place. Another is the Greek word ‘exodos’ (έξοδος), which simply means ‘exit’—as tourists often realise seconds after they missed their intersections on Greek highways.

Consequently, an ‘expat exodus’ could mean that all foreigners summarily evacuate China, or that some of them leave suddenly, or that some leave over a certain period of time. But which one is happening in China? In fact, European Chamber members for its annual Business Confidence Survey have opined since 2014 that “the golden age for foreign business in China” is over. During that time, the European, American and Benelux chambers have consistently reported decreasing numbers of expatriate employees at multinational firms. That seemed to contrast with optimistic guesstimates that, since the 2010 national census, the number of foreigners in China must have risen from around 750,000 to a million. The 2020 census dashed those expectations: there were no more than 850,000 foreigners in the country, roughly the same number as in Norway or Serbia.

The 2020 census also revealed that the majority of foreigners in China are not strictly defined as ‘expats’, but are workers from Myanmar (about 40 per cent) and Vietnam (nearly 10 per cent), and students from Pakistan and other developing countries in the Belt and Road Initiative. The largest Western population in China is over 50,000 United States citizens, who account for 6.5 per cent of foreigners in China but include thousands of naturalised Chinese returnees. In such limited expat communities, every departing family shrinks the comfort zone of all remaining expats, adding to the panicked perception of an ‘exodus’.

Of course, some leave and others arrive. As the Chamber’s Business Confidence Survey has revealed for several consecutive years, foreign firms still consider China one of the most profitable and promising markets. Management localisation and returnee talent reduced the need for traditional expats, and thus the interest among candidates. But a determined minority still brave ‘zero-COVID’ restrictions, manage to buy tickets and enter the country. Once there as an employee, staying is administratively easy, and physically pretty much the only option.

The ’expat exodus’, therefore, is a steady outflow of ‘expats’ in the narrow legal sense, coinciding with an inflow of foreigners (‘expats’ in a wider sense) from different backgrounds, resulting in a marginal year-on-year net growth. Exit highly educated multinational workers and entrepreneurs from rich countries; enter skilled and unskilled labour, students and junior workers from developing economies. Both sides are right: expats from Europe, North America, Japan and Australia justifiably lament China’s waning cosmopolitanism while the number of foreigners in China continues to sluggishly approach the previously projected one million. Neither situation suits the purposes of the Chinese Government’s vision for a globally competitive value-added economy, or the multinational firms whose strategies rested on China’s deepening integration into global supply chains, investment and talent markets. But business thrives on risk, at least, as long as executives properly assess and manage it.

What should foreign companies expect?

While scanning future horizons, foreign executives must remember that ‘zero COVID’ is not the only reason why expats leave. Local competition, the automation and digitalisation of management, localisation of expat jobs and the end of China’s double-digit gross domestic product bonanza will continue if and when the country reopens. The demographic trend of immigrants from developing nations replacing rich-country expats will also continue. The fewer classic ‘expats’ remain, the less attractive China becomes for highly skilled international talent, especially those with families. Typical new expats from rich nations will be either early-career young singles nurturing unspecified ‘China dreams’, or senior experts and executives on short-term missions.

Meanwhile, another important trend will intensify: senior managers, executives, entrepreneurs and investors will prefer to conduct business in countries around China rather than inside it. Singapore, Bangkok, Seoul, Taipei and to some extent Hong Kong are already developing into remote hubs for running China operations away from ruthless ‘zero-COVID’ restrictions.

What can foreign companies do?

One lesson of the last quarter century of engagement between China and the world has been that foreign governments and corporations have little influence over trends and targets set by China and the Communist Party at its helm. Foreign firms have had more success in learning how to navigate these political currents than in protesting against them. Beijing’s ‘Made in China 2025’ programme, ‘self-reliance’ and ‘dual circulation’ strategies, as well as the recent clampdowns on the technology sector in the name of ‘common prosperity’, caused initial panic among investors and planners. But eventually, resilient firms with viable China strategies figure out how to turn such barriers into opportunities. The unmatched scale and profitability of the Chinese market will inspire the same international executives to cope with the country’s changing expat landscape too. Industry feedback indicates that the following are ways that smart foreign firms have overcome the risks arising from recent changes in China.

• Accept extreme volatility: Many firms declared the pandemic over and dusted off previous plans and targets too early. Now they are re-planning for a new China whose market and political environment scarcely resemble pre-COVID realities.
• Foreign firms can scale walls: With recently enhanced state scrutiny on Chinese firms receiving foreign investment or investing abroad, as well as internet traffic, and travel both in and out of the country, China needs foreign firms and experts more than ever to realise its dream of a globally relevant economy.
• China branches will drift away: After decades of management localisation, multinationals must anticipate that their local branches and executives in China will operate according to values that differ from global corporate principles, and re-design their operations accordingly.
• Fewer expats, more business: Still, China will remain a key market for multinationals, so firms must carefully fill certain key roles with expats who can mediate between ‘more Chinese’ local branches and headquarters (HQ), especially where money, compliance and data are concerned.
• Nurture globally agile Chinese managers: The same firms must carefully localise expat jobs for Chinese managers who can speak foreign languages, align with global plans and eventually play an international role, especially as much-needed China specialists at HQ.
• Combine ‘in-China’ and ‘near-China’ options: Firms must accept that some senior expats and families do not consider China a suitable location anymore, and give such talent the option to manage China operations from alternative locations in the region.

Finally, decisionmakers must remember that this is not the first crisis in history. Many global firms whose current managers are franticly redrafting their China strategies had a presence in the country before the People’s Republic existed. They have also weathered hot and cold wars, and collapsing markets and states, somehow surviving and often thriving. Meanwhile, they managed to engage with nations governed according to a dizzying array of ideologies: former Communist countries in three continents, religious monarchies, revolutionary theocracies and governments in various states of disrepair. Somewhere in corner offices and databases, the lessons of those turbulent decades are available for multinational managers who are determined to deliver maximum corporate value with the minimum amount of unnecessary conflict.

Gabor Holch is an intercultural leadership consultant, coach, author and speaker who has served 100+ clients in 30+ countries. His book entitled Dragon Suit: The golden age of expatriate executives in China is forthcoming from Business Expert Press, New York, in 2023.