How Western companies can stay competitive in China

James McGregor discusses China’s changing business landscape

Foreign companies in China face a radically different competitive landscape from the one they entered decades ago. As Chinese companies become faster, more innovative and increasingly global, multinationals are being forced to rethink what China means to their businesses. In this Q&A, James McGregor, author and Chairman, Greater China at APCO Worldwide, discusses why foreign companies are staying, what they can learn from Chinese competitors and how intensifying geopolitical tensions are reshaping the relationship.

Q: To what extent has the relationship between foreign businesses in China and Chinese businesses in the West has changed in recent years?

A: Foreign businesses in China and Chinese businesses in the West in the past often served as a bridge between the countries. These days they are often ending up in a battleground. One reason for this is that national economies are transitioning from globalization to weaponization. Security is now often at the center of these global power relationships. What choke points do you have? In the tech competition, the US has export controls on advanced semiconductors and China has nearly a monopoly on rare earths and the associated magnets from China. This is now at the core of the whole power dynamic between the US and China.

However, Western companies are not pulling out of China unless they have no hope that their product or service is simply not needed anymore and can be provided by Chinese companies.

Q: So why are most foreign companies choosing to stay in China despite those tensions?

A: The foreign companies I work with and talk to stay for three major reasons.

One is the size and scale of the market. Even if China averages just 3% GDP growth a year, that’s $9 trillion in new economic activity over a decade. Also, if you want to scale a product or a service, China is the place where you can do it.

The second is Chinese innovation. The Chinese business system and its entrepreneurs are hypercompetitive. Everything moves at “China speed.” Innovation is fast and constant. Some of my friends call China the “fitness center” for global business. It’s a place where you can have an idea for a product and be manufacturing it within a year, as opposed to the West, where you’re going through all kinds of tests, data reviews and legal reviews. If you want to compete, you really have to be here.

Look at what China is doing and the amount of money being put into innovation. Huawei is building a million-square-meter innovation facility in the Qingpu district of Shanghai that’s going to have something like 35,000 people. I don’t know how far along that is now, but I’d love to go see that place.

Then you’ve got all these factory robotics. Look at the Xiaomi factory up in Beijing. It’s become a tourist attraction. Everybody wants to see this robotic factory. I’ve been there a number of times myself. It is 700,000 square meters, built in 14 months, and now produces 40 cars an hour at peak capacity.

The third reason is the most recent. Foreign companies believe that their next global competitor is going to come out of China. The quality of Chinese companies is at an all-time high, and many are focused on going global. If you’re not in China, you’re not getting to know them or learning how to compete with them.

In many cases, something else is starting to happen: foreign companies are partnering with Chinese companies when they go overseas. When Chinese companies leave China, they often don’t understand the regulatory systems, they don’t have political connections and they don’t have dealer and service networks. Foreign companies can partner with them.

Q: To what extent would you say foreign companies have also lost some of the advantages they once had in China?

A: They’re losing their competitive advantage in many ways. They could once do things Chinese companies couldn’t do, so they had a lot of advantages. Those advantages are eroding, or have already eroded in many cases, because Chinese companies have grown up and learned.

When foreign companies came into China, China was focused on capability accumulation. They wanted to learn what the West was doing. They wanted to learn best practices and adopt foreign technologies. These companies came in, did joint ventures and also passed along technology. They were focused on quarterly returns—and they often did very well. So there was a trade-off of capability accumulation by China and steady profits that boosted share prices for multinationals.

That has brought us to where we are today.

Q: You’ve also argued that China is becoming increasingly important as a base for accessing markets beyond China itself. What do you mean by that?

A: Multinationals are now using China as a base to access the Global South. All of the trade sanctions and tariffs during Trump’s first term led to a slew of manufacturing offshoring. Chinese and foreign companies moved manufacturing into Southeast Asia and elsewhere as a way to get around the tariffs. It developed into a flow of products to the US and other free market democracies.

But what happened to the companies that were manufacturing in China? They increasingly focused on the Global South. China became a place from which they could access those markets.

Today, if you want to access the Global South as a manufacturer, you’ve got to be in China because more and more Chinese technology, Chinese standards and even Chinese AI are imbedded in products manufactured for the Global South. Multinationals need to be in this mix, and to compete also need to meet the China price point. Nowhere else in the world has the supply chains, manufacturing innovation and speed and quality to match Chinese prices.

So increasingly, companies aren’t in China just for the China market anymore. They’re in China for global markets.

Q: How does that change the way multinational companies need to manage their China operations?

A: Multinationals need to change the way they manage China. More and more foreign companies in China are now headed by Chinese nationals. After COVID, a lot of foreigners left, and communications became distant as travel was shut down.

Today, there’s often a divide between headquarters and the China headquarters. Multinational managers in China see opportunity while headquarters is often focused on dangers. China is worried about foreign companies leaving, and in many cases it is treating foreign companies in certain industries better than in the past. There are opportunities, and the China teams want to take advantage of them.

Meanwhile, headquarters is reading headlines and watching press releases coming out of Congress, and they’re completely worried about liability and risk. So there’s this divide.
The companies that are doing well basically give their China management a lot of freedom. They have decision-making power. They have R&D power. They are able to move quickly on innovating their own products.

This goes back to Honeywell, which was the leader in the “in China for China” approach, where you bring your R&D into China and have an almost separate operation. That morphed into “in China for the globe” because these were products for developing markets where you didn’t necessarily need all the bells and whistles.

Today, when you’re competing against Chinese companies going global, you need an operation in China that can operate at the same speed. Honeywell’s slogan was “become your Chinese competitor” in order to compete with them. More and more multinationals are adopting this.

Q: At the same time, the broader relationship has shifted from a trade dispute toward technological competition. How much of a risk does that create for businesses?

A: We’ve gone from a trade war to a tech rivalry, and that tech rivalry is very strong. Whatever your economy’s strengths are now become things that you use in a competition that has gotten pretty rough.

The US and China have both developed a portfolio of “lawfare”—all these different kinds of sanctions, entity lists and so on against each other. It’s become a hostile environment that needs to be cooled down. I don’t know how that’s going to happen.

Nonetheless, companies have to operate within that system. I think the US and Chinese governments have to find some level of trust in order to work their way out of this. If China cuts off rare earths and magnets to the U.S., it could shut down American factories very quickly—car factories and all kinds of advanced manufacturing. With chips, the US is able to slow down China. Then you bring AI into this mix.

That is where I think the real future risk lies between China and the West.

Q: To what extent would you say the source of tension is Chinese industrial overcapacity and the impact of exports on overseas markets?

A: China’s export overcapacity is looked at in many parts of the West almost as a weapon—as though this capacity was built to attack other countries’ economies. I look at it a little differently.

China has had overcapacity from day one. Somebody built a refrigerator factory in Guangdong in the 1980s, and there were five refrigerator factories within a year. It’s the way China operates.

Every time there’s a new initiative out of the central government—for electric vehicles, high-end cabling or whatever—every mayor wants to build one. Then you get overcapacity because of the way the system works.

But now we’ve got huge overcapacity in China, and I think China is headed for a global trade war. Even though exports to the US have dropped substantially, especially in the last year, they’ve gone up globally. China’s exports are bigger than ever because they’re going to the Global South, Europe and other developed countries.

Those countries are worried about losing their manufacturing base because these products come in and they’re high quality and low cost. China used to offer “good enough” technology at a low cost. Now it’s top tech at a low cost, and it’s hard to compete with that.

Q: Is the push overseas also being driven by conditions within the Chinese market itself?

A: Yes. Why are high-quality Chinese companies going global? Because they’re looking for margins. With involution, they can’t make money in China, or their profits are very limited. So they’ve got to go overseas.

But I think this is something that’s building and is very dangerous for China right now. Despite the US tearing apart its alliances, other countries are coming together to talk about how to deal with China because they’re all facing what they see as the same threat.

I’m sure the Chinese authorities are aware of this. They’re going to have to do something about it. A global pushback could really hurt China.

Q: Given how fast Chinese companies are developing, and how they’ve cracked things like e-commerce, marketing and getting products to market quickly, how can foreign companies operating in China stay competitive?

A: The way they’re staying competitive is by learning from Chinese companies. Foreign companies came in and they were the teachers. They were pretty excited about that role of being the wise man. But those days are gone.

Now multinationals in China have to learn from China, and that’s a humbling experience for the CEO of a major multinational—to have the China staff say, “You’ve got to learn from what’s going on here. We’re no longer the ones who can teach.”

I talk to a lot of companies selling into the Chinese consumer market. It took them a while, but they’re on top of online marketing and social media influencers. They’ve learned from Chinese companies how to move quickly, make decisions and scale their products for the Chinese market.

A lot of foreign consumer companies have partnered with Chinese companies or done separate listings to really free themselves from headquarters—from all the legal reviews and the accumulation of data before decisions can be made—and give themselves the freedom to move fast, make mistakes, move on from those mistakes and keep going.

Q: Given that US-China tensions are probably the highest they’ve been in a very long time, do you still see much prospect for business interaction and cooperation between the two countries?

A: On a company-to-company level, it’s not so poisonous. It’s really the politics in both countries.

When it comes to business, I think business understands China better than anybody because businesses operate at all levels. They’re in the villages, they’re in the supply chains, they’re in the factories, and they’ve got hundreds of thousands, if not millions, of people working for foreign companies in China.

Foreign companies are very deeply embedded. Diplomats, meanwhile, are behind the walls of their embassies in both countries, and their interactions are very tight now, very scripted and very nervous.

Business knows it has to be involved with China. China is a new global power in business and it’s emerging. That doesn’t mean you run away from it. It means you compete with it and cooperate with it where you can. I think that’s where business is today. Governments, meanwhile, are asking: how do we build a wall?

The lawfare between the two countries—the tit-for-tat sanctions, entity lists and all these different measures— is looking very dangerous. These two countries could really cause havoc for each other’s economies and the globe.

I think that’s why President Xi and President Trump are focused on bringing the temperature down and trying to find some happy medium and a way forward.

There’s not going to be a lot of love between these political systems, but they’ve got to find a way to bridge the differences. The difficulty is that both systems are going to have to make some changes in the way they interface with each other.

There’s also fear and distrust on either side. I don’t think there’s as much fear and distrust among businesses. They’re pretty clear on what the other side is doing and who they are.
In business, it’s worthwhile trying to find a way between the two systems. In politics, it’s much harder, especially when you have political leaders changing and facing pressures from their own domestic audiences that force them to go in different directions.