In this article, you will learn and understand
Our suggestions for your success:
Choice of location:
[1] https://www.ey.com/...
[2] https://institutdelors.eu/...
[3] https://www.bcg.com/...
[4] https://www.ey.com/...
[5] https://www.rolandberger.com/...
[6] https://www.controlrisks.com/...
[7] https://merics.org/... report_EN.pdf
- Governments are only willing to buy foreign products when local technology cannot meet their needs.
- The Chinese market naturally requires a uniquely designed local strategy.
- R&D done in Europe combined with a global manufacturing strategy will not work for the Chinese market.
- Your business against industrial reformers
- Your business against new regulations
- Your business against geopolitical tensions
- Offer customized products to Chinese customers
- Re-evaluate current position and local facilities
- Offer one set of products for China and another for the rest of the world
- Leverage China as a source of innovation
- Comprehensive strategy with partnerships with Chinese companies
- Foreign companies need to reshape and reconfigure their entire supply chain strategy to reflect the change.[1]
- Companies need to monitor policy developments in regulatory development and enforcement and make continuous adjustments to stay safe.
- Establishing local R&D
- Protecting your IP
- Site selection
- When bidding on local projects, governments may be inclined to choose local companies if locally produced equipment is comparable to that of foreign companies. Governments are only willing to buy foreign products when local technology cannot meet the requirements.
- In addition, the size and sophistication of the Chinese market naturally requires a uniquely designed local strategy. The key to success is not necessarily price, but the ability to adapt to local needs in a timely manner and provide customers with high-end solutions. The key is to keep up with the need for speed and the demands of local customers, and to ensure that you can add value to the market.
- Although many foreign players have a manufacturing base in China, they take care of the production and assembly of various products designated by the headquarters, including revolving doors and speedway products. Research and development, however, takes place in Europe. Combined with a global manufacturing strategy, this advocates fewer variations in production lines, limiting the number of adjustments for specific requests. Local competitors offer customized products to Chinese customers. It remains a challenge for foreign companies to quickly adapt to local market demands.
- Ongoing COVID uncertainty, the cooling housing market, global supply chain disruptions, currency volatility, and rising power costs have led to consumer and business uncertainty, supply chain disruptions, operational delays, the cancellation of many investment projects, declining sales, and the closure of many SMEs, and have affected consumer confidence in China. As domestic consumption is a key element driving China's economic growth, this is a critical issue. However, foreign players need to think of China as a large regional market. China's domestic market is large enough to have its product options and local market adaptation.
Our suggestions for your success:
- Assesses current position: Careful strategic planning to map out where your company sits in the broader ecosystem (business, economic, or cargo hold) is an important first step in determining if/how much your company should invest in R&D activities in China.
- Differentiation: Offering one set of products for China and another for the rest of the world to avoid running afoul of Chinese and U.S. regulations. Companies with a large share of global sales in China can set up a specific supply chain and R&D system for the local Chinese market in parallel with the system for the rest of the world: this is the "dual system" approach. Alternatively, they can adopt a "flexible architecture," locating in China only what is strictly necessary to comply with new Chinese regulations.[2]
- China as a source of innovation: As China's indigenous R&D and product innovation capabilities grow, more MNCs will need to shift their focus from "transferring" technology to Chinese partners to absorbing new know-how that can be applied globally. Chinese partners can be valuable providers of intellectual property in areas such as AI, blockchain, and Industry 4.0 manufacturing processes. The benefits of developing customized, cutting-edge offerings for China's increasingly affluent consumers often outweigh the risks and can create immense value.
- China can be viewed as a source of innovation and a competitor in third markets. Introduce products and go-to-market strategies tailored to the tastes, preferences, and needs of target consumer segments. They must meet the growing quality expectations of Chinese consumers and calibrate the right degree of localization based on their particular technology, intellectual property, and market position. MNCs must also learn to win in China's digital realm.
- Re-evaluate local sourcing: Reevaluate their manufacturing and sourcing footprint in light of higher tariffs and expanding non-tariff barriers. For products where rising labor costs change the economics of serving distant markets from China, companies should consider more regional supply chains, with more goods produced in low-cost locations closer to end users. Global companies will also need to consider the carbon costs associated with goods produced in China.
- Comprehensive strategy: Responding to the Chinese challenge in strategic markets requires a comprehensive strategy and a proactive mindset. Win the loyalty of future generations of middle-class and affluent households by competing on price and partnering with other Chinese companies.[3]
- Chinese cities are divided into four tiers, so companies need to think carefully about their target cities to maximize their market presence. MNCs cannot rely on global legacy systems, processes, and product strategies. Instead, they must redesign and reconfigure their entire supply chain strategy to reflect this change.[4]
- Strategy anticipates policy: Companies should first map their current and future positions against Beijing's strategic goals, and then determine how to maximize the opportunities of a vibrant innovation ecosystem while minimizing the risks of leakage and theft that may result from a larger or more extensive R&D footprint in the market.
- Disinterest in either participating in government-sponsored innovation projects or seeking government support through research grants and subsidies. One company has a dedicated scouting team for government support, which it has found to be highly productive and worth the investment. Another outsourced this task to a Chinese consulting firm, which helped them identify and obtain the most relevant support for their business.
- Recognize this "blueprint" as a work in progress. Companies need to monitor policy developments in regulatory development and enforcement and make ongoing adjustments to stay safely in the middle and well away from the "edges of the box. And don't just watch what the regulators are doing.
- Companies need to go beyond the rules and understand how (and why) those rules are being enforced in China at different local levels, recognizing which drivers are geopolitical and which are mostly local, who the enforcement targets are, and what the regulators are asking for. Insight into what "compliance" means, but also a roadmap of how and where the authorities are starting to enforce. Companies can then assess how their business, with its unique strategy and operational footprint, may be exposed to, but also aspire to, these political and regulatory risks.
- Increasing politicization of business and a single market that is growing in size and importance.[5]
- Multinationals are welcome, but only on terms that are subordinate to a broader state-led master plan around Xi's personal vision, first for the Communist Party and second for the country. So, this "box" is highly politicized, increasingly based on the preferences of an individual, and changing rather quickly.[6]
- Which sectors are most important to industrial reformers?
- What regulations are the focus of government enforcement in our sector?
- Where are we most vulnerable to these regulations?
- Will geopolitical tensions increase scrutiny?
- Regulatory guidance
- Who enforces the regulations?
- What are the main enforcement concerns?
- The government encourages multinationals and foreign research institutions to establish local design and talent training centers, demonstration factories, and collaborations with Chinese companies.
- For those who see good reasons to conduct significant R&D in China, it is also imperative to decide whether to adopt an "all-in" or a "hedged bets" strategy. In areas where Chinese firms are at or near technological parity with your company, the all-in approach may be necessary to compete. In areas where Chinese firms are still lagging, it may make more sense to keep some of your most critical R&D work in your home market to mitigate leakage risks. Despite the limited R&D they do in the Chinese market, they have a technology scouting team that identifies local researchers and innovative companies to partner with for their global offerings - effectively minimizing technology flows to China and maximizing technology flows from China.
- Some companies have downplayed the value of establishing R&D centers in China's high-tech and innovation zones, largely on the grounds of limited interest due to the marginal benefits of locating there. However, this may be overlooking certain developments:
Choice of location:
- The number of IP zones and the resources devoted to them have increased dramatically in recent years. Companies not interested in these zones may be operating under assumptions about earlier zones that may not apply to more recently developed zones.
- These zones are attracting a growing number of highly innovative Chinese companies of all sizes. Set up small R&D centers in relevant zones, not so much for the support programs, but more to explore the local ecosystem and find collaboration partners.[7]
[1] https://www.ey.com/...
[2] https://institutdelors.eu/...
[3] https://www.bcg.com/...
[4] https://www.ey.com/...
[5] https://www.rolandberger.com/...
[6] https://www.controlrisks.com/...
[7] https://merics.org/... report_EN.pdf
