Doing business in China today: opportunities and constraints for foreign companies

Executive Director of the British Chamber of Commerce Shanghai on doing business in China as a foreign company

China is a very different market for foreign businesses than it was a decade ago. It is more complex, more regulated and, above all, much more competitive. But that does not mean the opportunities for foreign companies have disappeared. It means the advantages they once relied upon are no longer enough.

Ten or 15 years ago, China was a considerably less mature market. Western companies often arrived with more advanced technology, strong international brands and relatively little local competition. E-commerce was only beginning to transform retail and livestreaming had yet to emerge as a major sales channel.

That environment has changed dramatically. Chinese companies today operate at world-class levels across sectors including manufacturing, retail and technology. They are also extremely good at listening to consumers and turning that feedback into products.

Xiaomi is a good example. Its approach is not simply to sell a car or a phone, but to create an ecosystem around the consumer’s lifestyle. It constantly gathers feedback, adapts its products and creates a cycle in which the company becomes increasingly responsive to what Chinese customers want.

Foreign companies therefore cannot expect to succeed simply because they are foreign. Chinese consumers are no longer necessarily looking for imported products, or even products designed internationally. Increasingly, they want products that are relevant to them.

The foreign companies succeeding in this environment are those that have understood this shift and localised accordingly.

British and other Western consumer companies such as Reckitt, Haleon and Unilever illustrate the opportunity. Consumers may not necessarily know the corporate names, but they know their products. These companies have localised their offerings, invested in R&D and developed ranges appropriate for Chinese consumers.

There can still be value in the Western element of a product, particularly in areas associated with quality, safety, children and the household. But the proposition has to be relevant locally. The days when foreign heritage alone was enough are largely gone.

China as a corporate fitness centre

This more competitive environment can itself be an advantage. I often describe China as a fitness centre for multinational companies. If you can compete and succeed here, it can improve the efficiency and capabilities of your business globally.

A company may not necessarily make enormous profits in China, but operating at Chinese scale can reduce global costs, provide access to new trends and create opportunities for R&D. China can become part of a company’s wider global network rather than simply another market in which to sell products.

R&D is particularly important. China has invested heavily in building its capabilities, and foreign companies are increasingly using the country not simply to adapt international products for Chinese customers, but to develop products with global potential.

China offers an enormous volume of highly trained engineering and R&D talent. The particular strength of the system is often not necessarily creating the initial breakthrough, but adapting breakthroughs, developing them quickly and commercialising them at scale.

That creates an opportunity for British businesses. The UK remains extremely strong in education, science and technology. There is a potential model in which startups and ideas emerging from the UK can use China’s scale and capabilities to commercialise and expand.

That is a very different proposition from the China strategy of 15 years ago. It is not about bringing a superior Western product into an underdeveloped market. It is about combining different strengths.

British businesses need a niche

There are still sectors in which British companies have particular advantages. Healthcare and biomedical industries offer significant opportunities, as does high-tech manufacturing. Marine technology is another area in which British companies have considerable expertise, particularly around sustainability.

But more than ever, companies need a niche. One obvious area is ultra-luxury and heritage. Consumer confidence in China is weak, and people are cautious about spending. Yet there remains demand for products that offer quality, heritage and something distinctive.

Britain has an advantage here that is difficult to reproduce. A company cannot manufacture a hundred years of history overnight.

That matters for traditional British products such as tailoring, shoes, jewellery and other heritage goods. These products offer a tangible story. They allow consumers to buy something distinctive without necessarily engaging in the forms of conspicuous consumption that have become less attractive.

The same principle extends beyond physical goods. British culture itself is a product. Sport, theatre, museums, exhibitions, orchestras and other cultural experiences all have potential in China. We are seeing demand for these kinds of experiences increase.

This reflects a wider change in the consumer market. China is increasingly becoming an experience economy rather than simply a transactional economy. Consumers do not necessarily want another conventional shop selling another handbag. They want an experience around the brand.

That is already changing retail strategy. Rather than opening large numbers of stores, a brand might create one exceptional space—perhaps an old house in Shanghai’s former French Concession—and make that the centre of the brand experience. It becomes somewhere for VIP customers, events and social media, while distributors and online channels handle much of the actual volume.

The amount companies spend may not necessarily change dramatically, but where they spend it does. The emphasis is increasingly on creating something memorable. That plays into British strengths in heritage, culture, creativity and storytelling.

Following Chinese companies as they go global

Perhaps an even bigger opportunity lies in the opposite direction: helping Chinese companies go global.

The UK is particularly well positioned in professional services. This goes far beyond law firms and consultancies. It includes banking, communications, creative industries, architecture, urban planning, logistics, risk management and many of the other services companies require as they internationalise.

These relationships can begin from the first day a Chinese company starts thinking internationally. Companies expanding overseas need corporate structures, contracts, legal advice and banking. As they become more established, they need offices and manufacturing plants. Then come architecture, logistics, branding, multilingual communications and marketing. At later stages, they may need support with reputational risk and litigation.

Britain has been doing global business for hundreds of years. British companies have networks, people on the ground and generations of institutional experience in understanding how international business works.

That experience matters because internationalisation is not simply a question of exporting successful Chinese business model overseas. Chinese companies also have to adapt.

The companies doing this well are increasingly hiring local staff, working in partnership with local organisations and thinking about how to become part of communities rather than simply extracting profit. In many ways, they are learning some of the same lessons Western businesses had to learn when entering China 20 years ago.

Foreign companies based in China can sit in the middle of this process. They understand China, but they also have international networks and experience. That combination remains valuable.

Building a stronger British business community

Individual companies also benefit from being part of a wider business community. That is particularly important in a market as complex and fast-changing as China.

At the British Chamber of Commerce Shanghai, we have focused on three areas: advocacy, knowledge and community. The aim is not simply to provide networking opportunities, but to create a platform through which companies can understand changes in the market, share experiences and develop relationships with other businesses and government.

One of the most useful things we can do is bring together companies from different industries that are facing similar problems. A pharmaceutical company and an automotive company may appear to have little in common, but they can find themselves dealing with comparable regulatory or operational challenges. Bringing those perspectives together can reveal different ways of approaching the same issue.

The Chamber has also increasingly worked with other international business organizations. Rather than seeing different national chambers purely as separate communities, there is an opportunity for the UK to help bring those networks together. We have worked with organizations representing countries including New Zealand and India among others.

That reflects something broader about Britain’s position internationally. One of our strengths is the ability to build networks and bring different groups together.

The Chamber itself has become more diverse as a result. Many of our members are not British companies or British individuals, and four of our nine committee chairs are not British. At the same time, major British companies that disengaged during COVID are returning.

For businesses operating in China, these trusted networks matter. They provide access to knowledge and experience that no individual company can easily replicate. In a market where conditions can change quickly and where understanding context is essential, having a community in which companies can compare experiences, challenge assumptions and learn from one another is an important competitive advantage.

Experience matters when growth becomes harder

There is another advantage that established international companies should not underestimate: experience of difficult economic cycles.

Many Chinese companies have developed during an extraordinary period of economic expansion. Western companies with much longer histories have experienced recessions, wars, financial crises and repeated periods of restructuring.

Companies such as Swire and Jardine have repeatedly had to adapt their businesses to major disruptions. That creates a different institutional perspective. A difficult two or three years is not necessarily viewed as an existential crisis. The question becomes how the company adjusts, survives the period and positions itself for what comes next.

That experience could become increasingly important as Chinese companies encounter slower growth and more difficult business conditions.

None of this means foreign businesses have an easy future in China. Consumer confidence remains weak. Regulation is more complex. Local competitors are stronger, and some sectors remain difficult for international companies to access.

But the conclusion should not be that China no longer offers opportunities. The more important question is why a company wants to be here.

Businesses entering China purely because they expect quick profits should think carefully. Launching here takes time, and companies need to understand that China operates differently from other markets. Senior leadership has to invest time in understanding those differences and, crucially, trust people who understand the market.

One of the most common mistakes foreign businesses make is arrogance: assuming that a globally recognised brand, international experience or success elsewhere will automatically translate into China. Decisions are made in overseas boardrooms based on assumptions about how the market ought to work rather than how it actually works.

Understanding your purpose has to come first. Once you know why China matters to your business, you can build the strategy around it.

The opportunity for British companies therefore remains substantial, but it has evolved. Their advantage is no longer simply that they come from Britain. It lies in specific things Britain does well: innovation, science, professional services, culture, heritage, international networks and accumulated experience.

The companies that combine those strengths with China’s scale, speed and capacity for commercialisation can still build formidable businesses. China is a harder place to compete than it was a decade ago. In many ways, that is precisely why succeeding here can be so valuable.