Western Companies Pursue De-Risking Strategies in China Amid Rising Geopolitical Tensions

Amidst escalating tensions between Western governments and China over trade and geopolitics, Western companies are actively pursuing strategies to de-risk their operations in China. This shift in approach, replacing the previous notion of "decoupling," reflects a desire for a less adversarial relationship with China. However, while companies are acknowledging the need for de-risking, concrete strategies are still evolving.

Several Western businesses are considering various options to mitigate their exposure to risks associated with operating in China. These strategies include partial divestments, delaying investment decisions, and reorienting their China operations to primarily serve the domestic market. It's important to note that implementing such strategies often requires a considerable amount of time.

Recent global events, such as Beijing's pandemic-related lockdowns and concerns about global supply chains, have added urgency to the need for companies to address risks tied to their China operations. Western leaders are increasingly concerned about China's dominance in critical supply chains, potential conflicts related to Taiwan, and ongoing trade disputes between the United States and China.

Some companies have already taken steps to reallocate their investments away from China, while others are actively considering such a shift. A prevalent strategy emerging is the "China plus one" approach, where companies allocate future investments to other countries while maintaining their existing operations in China. This strategy provides a hedge against potential disruptions.

Another noteworthy strategy is "China for China," in which companies restructure their operations to focus on producing goods exclusively for the domestic Chinese market. This approach not only helps address geopolitical risks but also aligns with China's growing consumer market.

One critical aspect of de-risking involves localizing supply chains. Companies are striving to reduce their dependence on raw materials from outside China, especially the United States, as these supplies can be vulnerable to sanctions. To achieve this, some businesses are actively seeking alternative suppliers to ensure their products are not reliant on Chinese or U.S. components.

Despite the challenges associated with operating in China, certain companies, like Volkswagen, are increasing their investments in the country, underscoring its importance within their global strategies. Additionally, some businesses are making organizational changes, such as French-Italian chipmaker STMicroelectronics reorganizing its China operations, making it easier to carve out this segment if necessary.

Concerns related to data protection and compliance with Chinese laws are prompting companies to develop China-specific IT systems. This approach, while addressing regulatory requirements, often results in distinct IT setups for China operations, making cross-border collaboration more complex.

As tensions persist, businesses are increasingly treating China as a distinct market, particularly in areas such as data hosting, export considerations, and managing the exposure of executives visiting the country. The quest to de-risk China operations is ongoing, and strategies will continue to evolve as companies seek to strike a balance between their interests and the changing geopolitical landscape.

By fLEXI tEAM