China has entered an extremely disruptive phase of its development for all businesses—foreign and domestic. The trade war between the US and China may be the current focus, but its domestic plays, such as the ‘Made in China 2025’ policy and the Cybersecurity Law in force since 2017, that are the real headwinds for foreign companies. Only the nimble will survive, and fewer still will prosper. While companies operating in China have little influence over the country’s growth strategies and tactics, they can have an insight into them and prepare a plan to respond. Senior Partners of Control Risks Kent Kedl and Steve Wilford explain the steps companies need to take in order to future-proof their China strategy and business operations.

China’s threat is structural

The Made in China 2025 (MiC) policy is a central plank of President Xi Jinping’s economic plan for his country and much of it is not good news for foreign companies. MiC is conceived to challenge their dominance in ‘strategic’ sectors; demand they turn over intellectual property (IP) in others; and use regulators to expedite this change with anti-bribery, anti-monopoly, environmental and food safety probes. President Donald Trump’s administration—and US politics across the spectrum—is already moving on from the simple binary of too many Chinese exports versus US ones, to focusing on MiC structural threats to foreign business in China. Contrary to what a lot of Beijing officials think, this focus is not the product of personality politics; the US position on the Chinese economy is now structural.

Yet, in the face of all that, China today sits on foreign direct investment inflows accounting for nearly a quarter of its GDP. Actual foreign direct investment into China from January to August this year totalled USD 86.5 billion, up 6.1 per cent during the period. Wall Street titans are viewing Beijing’s ongoing liberalisation of the financial services sector with deep interest. While Chinese consumers have slowed some of their purchases, foreign companies in the automotive, consumer and food service sectors continue to invest heavily in China. For many, the China opportunity very much remains.

Know who you are

The reality is that corporates operating in China have little influence over the Chinese state’s growth strategies and tactics. What companies can have is an insight on those strategies and tactics, and a plan to respond to them. So, how to assess China risk and reward?

Assess your regulatory risk

Have a very good look at your welcome mat. There are some widely-publicised cases of companies that have faced major investigations in China in recent years. The depth, pace, scope and speed of regulatory risk is growing. In a very pertinent analogy for China, you wouldn’t run a crucial piece of bespoke cyber IP without penetration testing its defences to destruction. Extend that defence to your business as a whole and ‘white-hat’ your regulatory risk.

Test your business against the following questions:

1. Which regulatory agencies are relevant to you? Many businesses in China are not fully aware of who is most interested in their business and why. “Is my data ‘strategic’ under the Cyber Security Law?” is the most asked question in foreign business circles at the moment. Many managers are surprised to hear the answer is almost always ‘yes.’
2. What jurisdictions matter the most and am I in one? Ironically, the New China narrative increasingly talks about the country as a monolithic centralised state, but how states implement policy differs markedly across China.
3. What sectors matter the most to industrial reformers and am I one of those? Healthcare, food and chemicals are almost famous for the amount of scrutiny and enforcement Chinese regulators load on them. However, this list is expanding.

This exercise often throws up interesting results, revealing vulnerability in places least imagined. White-hatting your regulatory risk will challenge assumptions and often quell tribal attitudes to China risk that pervade your office.

Being local with Chinese characteristics

MiC is focused on the localisation of technology and high-tech manufacturing. But you are only as local as China deems fit.  Figuring out what local means in your industry niche will be critical to future-proofing your operations.

MiC defines ten sectors where the Chinese Government wants to encourage the growth and independence of local players. But in reality, these sectors cover anything from industrial vacuum pumps to consumer electronics suppliers. Even if you source parts in China and technically have produced it in China, you still may not be considered ‘local’ if Chinese firms around the corner or in other provinces are nipping at your heels. Conversely, if your product (for now) is critical to the China market, that in itself may be enough to provide you with local status and even grants from the Chinese Government.

Follow the money. It is becoming increasingly clear where MiC grants and even preferred procurement from state-owned enterprises (SOEs) are going. If you are a foreigner manufacturing in a supply chain where the Party is telling your Chinese customers to localise their supply chains, it might be time to consider getting out.

Remember, data is national security

‘Business is data’ as the saying goes. There is data and then there is China data. The growing chokehold over information flows and the technology that delivers is pushing foreign MNCs in China to be ‘all in’. This means IT personnel, operations and data increasingly need to localise to China – including, for example, hiring China data protection specialists, procuring domestic technology, and localising IT security policies, content and crisis management plans. For many companies, this will result in significant costs, but will also bring key benefits: being compliant with the strict cyber regulatory regime; providing local teams the autonomy to respond quickly to shifting requirements; and finally, ensuring the company’s global IT systems and data are walled off from insecurities brought on by having to use domestic technologies and submitting to government and other local third-party audits.

Most companies are used to Western cyber laws that are primarily focused on data privacy. The Chinese authorities are as concerned with the content that is on your networks. Recently, Chinese authorities cracked down on travel and airline companies for not identifying Taiwan on website drop-down lists in the way that the Party thought it should be identified. The unspoken ultimatum was a shut-down in business in China if the companies didn’t comply and make changes.

Get to know your friendly neighbourhood über-regulator

Regulators in China are often anxious to better understand the industries they are regulating and discuss with company management how best to operate in China. The new raft of super-regulators and investigators, like the newly formed State Administration for Market Regulation, are no different. Managing well in government affairs work mitigates the risks associated with everything that has been discussed. In Xi’s China, however, the aim of your government affairs department will not only be about ‘market access’: processes such as getting approvals and licences, promoting solutions among government entities, and building relationships with SOEs to create sales channels. This was a government relations function for the “red-carpet” years – not 2018 onwards. A wise company would identify its regulatory threats, find the regulators responsible for them and then communicate with them – government affairs for risk management. This can occasionally lead to collaboration on the development of best practice.

Bang a gong, get it on

In 2017, Xi Jinping famously said, “The rejuvenation of the Chinese nation is no walk in the park or mere drum-beating or gong-clanging.” That statement captured the challenge behind everything from his desire to reform state healthcare, to fixing Chinese air quality, to his plan to bring about a tectonic shift in the structure of the Chinese economy. The role that foreign businesses have and will continue to play in that rejuvenation will be pivotal. Opportunity remains. The walk in the park bit of doing business in ‘rising China’ has gone. In Xi Jinping’s ‘risen China’, intelligence—gathering and exhibiting it—will be crucial to understand and navigate the new rules of the game.

NOTE: This is an abridged version of this article.  To access the complete text, go to: < https://www.controlrisks.com/campaigns/china-business/future-proofing-your-china-strategy >

Control Risks is a specialist risk consultancy committed to helping clients build organisations that are secure, compliant and resilient in an age of ever-changing risk and connectivity.  Clients include national and multinational businesses in all sectors, law firms, government departments from many parts of the world, NGOs and SNBs, both national and international. < https://www.controlrisks.com/ >