!['European Companies in China: Between Decoupling and Onshoring'](https://cdn.prod.website-files.com/5a3e922cf6b9a40001bc2d6b/62fd67a4d960fd7c6a5f7e72_CHINADebate-0.png)
BIG IDEA | ‘Instead of leaving the market, European companies are exploring ways to separate their China operations from their global ones.’
‘Following the Covid-19 outbreak, European companies in China spent the first few months of 2020 solemnly appraising their investment strategies.’
- ‘Diversification of supply chains was on everyone’s lips, and many felt that overreliance on China would force foreign companies to decouple and shift at least some investment and production elsewhere.’
‘Just a year later, decoupling is still being considered, though not in the way most expected.’
- ‘Instead of leaving the market, European companies are exploring ways to separate their China operations from their global ones.’
- ‘According to a recent survey, five times as many European companies are onshoring into China than are offshoring.’
‘By onshoring and localising, European companies are severing the cross-border links that expose them to geopolitical tensions and putting themselves on more favourable ground to survive China’s reinvigorated self-reliance campaign.’
- ‘However, they must weigh their chances of success against the risks associated with cutting ties with their global operations in certain areas.’
‘Not all companies will have the opportunity to pursue this strategy, though.
- ‘Much of China’s economy is open, and European machinery providers, clean energy technology leaders, chemical manufacturers and medical equipment producers, among others, are generally welcomed to expand investments.’
- ‘However, foreign competition is increasingly unwelcome in areas dominated by state-owned national champions, and policymakers have a clear goal to build an ICT and digital ecosystem that can go it alone, and that means limited roles for foreign providers in these areas.’
‘In addition to geopolitical considerations, China’s regulatory system is further reason for European companies to localise.’
- ‘For example, China’s evolving data governance system is making it precarious to transfer data across the border, and links to global digital systems risk non-compliance.’
- ‘Meanwhile, European companies face vague requirements for their network equipment and digital services through «critical information infrastructure» security reviews and informal suggestions that companies adopt «autonomous and controllable» technologies.’
‘These requirements negatively impact a third of European firms, with end users, including foreign ones, increasingly erring on the side of caution and choosing locally-developed technology.’
- ‘They also force foreign providers to localise their supply chains, technology stacks and R&D to stand a chance of remaining viable in a market that increasingly considers foreign-developed equipment and services «unreliable».
‘These challenges are not limited to just ICT providers, but users as well.’
- ‘Some European banks note that the expected costs of such localisation are just too high.’
- ‘As China only recently opened up to foreign financiers, there is simply not much market share up for grabs outside of a few niches.
‘Larger European banks may consider the costs of full technology localisation worth it in the long run.’
- ‘But smaller ones simply cannot justify the tens of millions of dollars that it will take when their opportunities are so scant. They will simply leave instead.
‘At the same time, European companies are being steered away from US-sourced technology, both physical and digital.’
- ‘The US-China conflict is likely to worsen, and exposure to hardware and software from American providers is considerable.’
- ‘A mere twenty per cent of European manufacturers in China report no exposure, one-third import equipment or components for which there are no viable alternatives, and the rest can find another source, albeit at higher cost, lower quality and/or with interoperability issues.’
‘As a result, European companies are aiming to onshore their foreign suppliers or find a local product they can switch to if necessary.’
‘However, at the same time that European investors are pushing through their onshoring plans, they face an increasingly politicised business environment, with the lion’s share of political pressure coming from the Chinese Government and state-run media.’
- ‘The actual costs associated with a politicised business environment is something some European apparel brands became acutely aware of in March when they were targeted for deciding to stop sourcing cotton from Xinjiang.
‘There is growing pressure coming from Europe and the US as well.’
- ‘Much of the recent pressure has resulted from human rights and forced labour concerns in China.’
- ‘As companies further onshore into this market, they will have to find a way to navigate an increasingly dense political minefield while upholding their European principles.’
‘’Ironically, the push and pull of competing political forces mean that European companies must develop their own self-reliance strategies as they are compelled to localise operations as much as possible and build resilient supply chains.’
- ‘However, as tensions continue to rise, making the requisite investments to expand in China will only become more difficult, so for many companies it is a case of now or never.’