The Decoupling Has Begun – The Great Dilemma of Western Companies Regarding China.
Doing without China altogether is impossible, but the big companies will limit their exposure as much as possible.
Due to the COVID-19 pandemic, the Davos forum was exceptionally held in May this year. The snow was missing. The hundreds of participants from the Chinese delegations were also missing. The atmosphere was transformed. It was a bit like a New Year's Eve party in which the in-laws and the patches could not participate.
Aren't we good here, among ourselves, like before, in the old world? Like before, or like tomorrow?
Large companies are asking themselves: does the future of a multinational company still necessarily involve China, the world's future largest economy? The year 2022 has shaken up the analysis.
Xi Jinping's Zero-Covid policy will leave its mark
The first shock was the Chinese confinement, which occurred at a time when the rest of the world was reopening its doors, even if it meant letting itself be crossed by the waves of the Omicron variant. Xi Jinping's Zero-Covid policy is causing immense short-term disruptions in global production chains. And a huge, more lasting shock of distrust.
Western groups who found themselves forced to make their teams sleep at the factory for weeks did not like it. Expatriates under home confinement shuddered at every test that they, or worse, their children, would have to go into isolation. Many have left the country, and will not return. There is not a single Western boss left to praise, with a touch of cynicism, the efficiency of the authoritarian regime in Beijing. It is a feeling of insecurity that now dominates.
The second shock is the war in Ukraine, which has, overnight, wiped Russia off the economic map under the effect of sanctions. Geopolitics dictates the agenda. Tomorrow, will the strategic confrontation between the United States and China force companies to choose sides?
This is a question that is on the minds of the top management, even if few leaders dare to say it out loud, because it is so huge. China is not Russia. The collateral damage caused by the banishment of the latter from Western trade - the explosion in the price of energy and other raw materials - is negligible compared to the consequences of a possible break with the former.
Decoupling has started, but the Middle Kingdom is still a must
The Middle Kingdom is unavoidable.
In all electronic, computer, textile, and electrical goods sold in the world outside of China, there is a fifth of the value that was produced there (OECD figures for 2018). “By 2030, China will have a global market share of about 50% for chemicals. A global company like ours cannot do without half the world market,” notes BASF boss Martin Brudermüller.
The risk of decoupling does exist, however. It has spectacularly manifested itself at HSBC. Ping An, a Chinese insurer and major shareholder of the British bank, is demanding that it split its Western and Asian activities. In the East, a Chinese-compatible bank could thus be born from the break-up of the old HSBC financial empire.
In many large groups, the China issue is currently being dealt with in a low-key way. “The flow of investments to and from China has dried up,” says an investment banker. Many industrialists have already shelved plans to set up research and development centers in China. Insurers are quietly reducing their financial exposure.
Apple is said to be diversifying the production chain of its iPads, currently 100% Chinese, to Vietnam. Samsung has already been following this strategy for a while.
Having very limited exposure to China becomes a strength for large Western groups
Some industrialists even explain that the real turning point took place in 2019 when Xi Jinping's policy became openly rigid. Many industrialists then decided to cap the proportion of their turnover that they make in China.
All new investments by large groups in the Middle Kingdom are now evaluated based on a shortened profitability horizon. There is no longer any question of locating the most advanced technological productions in China. I'm fed up with ending up in Chinese management magazines, in the chapter on “copying methods”, like a large French group that discovered that it had been cited as an example.
At the very least, realpolitik recommends producing in China for China. “It used to be for the exchange rate risk. Now it is also the right thing to do for geopolitical and trade policy reasons,” says Martin Brudermüller.
For Stellantis, the former PSA Peugeot-Citroën, China has long been synonymous with commercial failure and heavy losses. Its boss Carlos Tavares can now turn the argument around. Asked by Frankfurter Allgemeine Zeitung about this handicap, he says: “What would happen if there were cross-sanctions between the US and China? Who would then have the biggest problems? We earn a good living in the Western world,” says Carlos Tavares.
For the first time since the beginning of this century, not being strong in China is becoming a communication argument. The situation is changing. It remains to be seen whether this trend will continue in the months and years to come.
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