While China is still overwhelmingly the dominant market in the Asia-Pacific region for multinationals, long-time Asia watcher Mark Michelson argues that a much more segmented approach is needed for success across the region. And in the Association of Southeast Asian Nations (ASEAN), international business is increasingly taking a modular, portfolio approach, anticipating moving supply chains from one market to the next as demand requires. Quotes in the article are from China and Hong Kong-based regional multinational (MNC) executives.

“Despite war-disrupted energy and food markets and unprecedented monetary tightening to combat decades-high inflation, economic activity has slowed but not stalled. Even so, growth remains slow and uneven, with widening divergences.”

The International Monetary Fund, October 2023

Six plus one?

Over the past 30 years or more, multinational companies have enjoyed an increasingly open world. Taking advantage of a unipolar globe with relatively free flows of capital, trade, and ideas, MNCs tapped capital from wherever they chose, built businesses optimized for global supply and global demand, and served increasingly globalized customers.

That may no longer be possible. In a world reshaped by the coronavirus pandemic, rising geopolitical tensions, renewed inflationary pressures, and war, MNCs must reassess, reevaluate, and reconfigure their businesses for a new era. And China is where some of the most dramatic reconfiguration may take place.

Managing a region as diverse as Asia has never been easy.  But many economies shared an emphasis on exports to meet global demand.  Now that globalization – and China’s economy – have slowed, local issues have had a more significant impact on MNC performance.  And executives responsible for regional operations need to be prepared for uneven growth to become more pronounced in the region.

“There are ten countries in ASEAN, but six really matter: Indonesia, Thailand, Singapore, Malaysia, Vietnam, and the Philippines.  The fastest growing ones are Indonesia, Vietnam, and the Philippines, each with different challenges and market sizes.”

China remains primed to drive global growth for the next 10 to 15 years.  However, as China’s economy enters a more mature phase, international companies face slower growth and tough local competitors. 

The market is there, but how to earn a place in it is far from assured.  Foreign firms need to be both highly cost conscious and innovative to convince consumers to open their wallets.

“We must lower our expectations, deal with increased competition, learn how to move at China speed, optimize our organizations, and overcome inefficiencies which we previously papered over.” 

Managing complexity has always been critical for the Asia CEO, but the task will get harder as growth becomes more uneven.  To balance this growth requires a holistic approach to the region – moving people, products and resources to where they are needed.

“In the beginning, I was overwhelmed by the complexity.  Every country has a different type of consumer, a different go-to-market model, leveraging different products.  But I see now that the complexity gives me a cushion because some markets will always blow up, but then others bounce back.”

A portfolio approach may give Asia CEOs the flexibility needed to balance countries in the region.  They may focus only on their aggregate top line or profit line for all of Asia, as long as HQ doesn’t mind from which markets they are pulled.

Moving products from one market to another has been one approach; another is to transfer entire factories for adaptable supply chains.  Taking the example of ‘modular plants’ to its logical conclusion, firms may move a plant from one market to the next as demand requires.      

Transferring people, products and plants from one country, however, can be challenging and may include overcoming internal roadblocks.  The roadblocks also can come from external factors, due to regulations, such those that have created China’s unique digital ecosystem and tech stack. 

Some international companies have cut China from their traditional APAC structure to handle the ASEAN countries and China independently to enable a more focused approach:

“We retired the APAC CEO title.  If you don’t win in China, you don’t win in the region.  China is such a heavyweight globally we have a ‘China for China’ strategy, while ASEAN has complexities requiring its own attention.”

“We are two different teams.  While on the production side, we have the same platforms, the sales strategy has to be separate.”

A regional executive needs to unravel the complexities, to devise a strategic vision and then make the tough choices to support that vision.  To help do this, some of them have developed tools to grapple with complexity and better manage the opportunities. 

“I have hundreds of segments to cover with 10 divisions in six countries, each with five segments.  When I came into my role, I created a heat map tool.  Each sub-segment is shaded green, yellow or red as an average indicator of the growth rate, market opportunity, market share and current profitability.” 

Another aspect that makes the business uneven is the different levels of affluence within countries and across the region.  This means that many firms adjust pricing to suit the market.  

“Pricing is so important.  Our China and India businesses are roughly the same size.  But in India, we sell almost three times as much volume to get the same result because the pricing is low.  When you have low pricing, you have to count pennies and control the margin.  So that business is extremely complex.”

Despite energy and food markets disrupted by wars and monetary tightening to combat inflation, economic activity has slowed but not stalled. Even so, growth remains slow and uneven, with widening divergences.

This situation has helped accelerate and broaden expansion of MNC manufacturing operations in Southeast and South Asia to regionalize their supply chain.

“In the past, we had Asia for Asia and China for China.  But we are adjusting that strategy to figure out how we leverage the strengths of China for global.  Due to geopolitics, it can be challenging, but our focus is on the Global South.”

Yet these rapid developments do not generally mean that companies are pulling back from the global supply chain. Instead, it is being reframed into a greater emphasis on diversified regionalization, reflecting the uneven development and prospects of geographical markets and sub-markets.

China: One Company, Two Systems

International business leaders in China are responding by detaching from global systems in a strategically selective way. Many firms are doubling down on China and Asia as the focus for the company’s growth for at least the next 3–5-year cycle, particularly if China continues to outperform other markets.  

More of them have localized their capabilities and supply chains and are serving primarily China and, to a lesser extent, other markets in the region. They have aimed to ‘ringfence’ their China operations, but still have to contribute to global initiatives and often rely on the global supply of materials.

 Corporate executives also have had to manage expectations of their in-country teams:

“When I work with the Chinese teams to prepare their strategies for the executive team and the Board, they underestimate how much attention there is on understanding China but also the current dynamics of China-U.S. relations, what’s going on in Xinjiang, Hong Kong and Taiwan.” 

“When they sit in the middle of it, they don’t realize that in any kind of investment, geopolitics is a dimension. They ask what the problem is. This is a growth market. Why wouldn’t you be gung-ho on investment?”

How can international companies be successful in China, given the fast-changing dynamic of the market? More of them have responded by moving their center of gravity to China. For example, Unilever decided to relocate global marketing roles in China, with Chinese nationals in those positions, seeing that approach as the best way gain insights about the market. These companies are working with consultants to develop an effective model, including culture, mindset, business process, way of working, organization, accountability and Key Performance Indicators (KPIs).

Corporate governance and digital security present challenges to establishing and maintaining China-for-China organizations. Adjusting to local regulatory environments is putting some of the world’s ’good corporate citizens’ in direct conflict with their core values. 

This is resulting in increased tensions between local rules and global governance frameworks. China-based MNCs can be confronted with a difficult choice: submit to Chinese government requirements regarding censorship and state surveillance in exchange for market access. 

 The localization model of corporate governance highlights the prevalence of censorship of social media platforms. This can put civil society –from consumers to investors — in a compromised position.

The digital challenge

While some MNCs have embraced an ‘in China for China’ strategy, others are developing their digital transformation closely aligned with their corporate HQ. But the global digital map may not fully consider US-China decoupling – which usually means that local digital solutions are needed.

Digitally, China is generally different from the West, so companies feel the need to ringfence certain activities in China for China. The usual global solutions often don’t fit; they look to find a different way.

Chinese customers connect and engage in China’s digital ecosystem, which runs on a separate digital infrastructure; and China has different digital ‘clouds’ and infrastructure than the rest of the world. China’s clouds – Alibaba, Tencent and Baidu – have dominated. 

At the application level, the difference can be substantial. Chinese apps – WeChat, Pinduoduo and Alipay – run parallel to Facebook, Amazon and Apple.

Incompatibility between the two digital ecosystems is where issues arise. China’s digital-savvy customers, even for Business-to-Business (B2B), have high expectations. They aren’t patient with latency issues that forestall service or product development.

MNCs have concerns that ringfencing and localization will undercut the savings that the digital transformation is meant to deliver. But the cost of adapting to local platforms is the price of admission to the China market. 

China’s cybersecurity law and data management regulatory regime requires local hosting of important and sensitive data, and there are potential risks if the government imposes the strictest interpretation. This situation leads to localization of important and personal data hosted in China to avoid potential penalties.  Apple, for example, began] migrating Chinese iCloud data from the US to its local partner in China  five years ago to comply with local law. 

Another MNC sold its majority share in its China production operation, related to data security and the future of its products.  The next phase of its development in China and globally will mean that more data will have to be integrated into a system.  To try to ensure that the technology platform and data security is part of the MNC’s global control and framework, the company moved to separate its China operations from the rest of the world. 

Tech divergence goes beyond China. Experts see at least four regional technology blocs coalescing – North America, Europe, China and increasingly, India. A sizable home market and large trove of consumer data characterizes each block.

China teams often find that the best allies for a ringfenced approach are the global business units (GBUs). The GBUs are more likely to support this approach if they are convinced that going local will boost the top and bottom line:

“We start talking with senior leaders, but we also talk in parallel with the business units by showing them simple use cases. We show how going local opens markets, prevents the business from getting kicked out of certain areas, and benefits the business unit.”

For digital and other sectors, several options are available for international companies in the mainland. They include Global for China; China for China; and China for Global — with different roles and responsibilities required. 

A European Chamber of Commerce in China survey released in June reported that some 80% of member companies are either maintaining or increasing their supply chains in China. If the US and China continue toward more trade conflict and technological divergence, that means onshoring (in China) as much as possible for many international firms.

While some enterprises are considering the relocation of their supply chain, none at a seminar in September 2023 expressed intentions to abandon the Chinese market. As a result, the need for an optimal supply chain to efficiently transport goods from Europe’s production lines to Chinese consumers has become paramount.

“We see China coming back at fairly high levels, partly due to customers anticipating supply chain issues with Europe and North America.  So, the next few months will be key…even if growth numbers are positive but terrible from a China perspective, at least they would indicate a market going forward – markedly different from the EU or US.”