“In China, because of geopolitics, the juice might not be worth the squeeze.”
To get the full picture of the geoeconomics playing out between the West and China, read the following insights from Mr. Geopolitics: China’s Dangerous Exports, New US-China Tech War, Serbia’s Risky Romance, Germany’s Dangerous Dance, and Blockading China.
More than two years ago, the US automotive brand Jeep decided to leave China.
It was a surprise move. The iconic firm, owned by Stellantis, a Dutch-headquartered business that controls various automotive giants like Chrysler, Peugeot, Maserati, and Fiat, was tired of “meddling” by local Chinese politicians. And, the conglomerate did not want to be hit by “economic sanctions” if the US-China rivalry deteriorated. So, Stellantis shut down Jeep’s only factory in the world’s largest auto market, where 30 million vehicles were sold last year.
When Jeep left China, in 2022, the pandemic was waning, and talk of “pent-up” demand driving the global economy was quickly spreading. The idea of exiting China was crazy.
Yesterday, it was crazy to leave China. Today, for Western companies, it could be crazy to stay in China.
Because, as the geopolitical climate changes, the ground underneath China is also changing. The world’s second-largest economy has become a double-edged sword, requiring companies to calculate things differently. Tapping opportunities in China now requires navigating geopolitical dangers and disruptions that come embedded in those same opportunities. By the time the geopolitics is dealt with, the opportunities might be far less attractive.
In China, because of geopolitics, the juice might not be worth the squeeze.
Those who continue tying themselves to China, seduced by growth and development, inducing a certain amount of tunnel vision, could find themselves in the middle of the “geopolitical storms” Beijing is battling.
A growing number of Western firms, predominantly American, are reading the signs. Aware of the new global landscape, they are pushing away from China, following in the footsteps of Jeep.
Fearing a potential China-Taiwan war, HP is moving over half of its production of personal computers overseas and is establishing a “backup design” lab in Singapore. Big Blue (IBM) is rethinking Big Red (China), as it shudders its two main R&D labs in the country, slashing 1,000 jobs as the US and China clash over technology. British Airways is ending flights to China as Russian airspace remains closed to Western airlines, resulting in longer, costlier flights to China. Dechert, a US-based global law firm, is planning to leave China by the end of 2024, part of several Western law firms scaling back in China as fears of raids or arrests grow. AstraZeneca, the British drug company, is building a supply chain exclusively for China, a hedge against the US-China competition turning the world vertical (full of walls and barriers). Infamously, Apple has moved some iPhone production to India, where 14% of all iPhones are now made, as its key manufacturing partner, Foxconn, establishes a new manufacturing ecosystem that seeks to rival parts of what exists in China.
A “China fever” is spreading throughout the Western business world.
It is not the same fever of hunger and attraction that drew Western boardrooms to China. Instead, the new fever is causing Western executives to “rethink China” and look for safer pastures. Even those still deeply committed to the dragon are departing China’s dock to anchor in nearby waters.
For China, this is a potentially destabilizing turn of events, which on a long enough timeline, threatens to reorient Western businesses, and the huge web of partners, investors, and supply chains that come with them, away from the Chinese market.
China cannot let that happen. On some level, China will not let that happen.
As Western companies shift gears in China, a new showdown is looming.
The actions of Western businesses, partly driven by what Western capitals want, are driving new Chinese behavior on the world stage. China is meeting fire with ingenuity, complicating what Western companies are doing, and potentially checkmating the governments cheering them on.
The Big Why
The cause of Western companies leaving China - the big why - is two-fold: their own calculations about geopolitics and pressure from Western governments. This is a new outlook inside organizations, driving a rapid redesign of China’s place on the corporate map.
For now, calculations about geopolitics are around certain realities: US-China relations are at a historical low: a new united front of Beijing-Moscow-Tehran has formed; governments like EU and Indonesia are colliding with China on trade; chances of China invading Taiwan are growing.
All of these shifts make it clear to executives that remaining in China is becoming a risky play. From the geopolitics directly affecting China (i.e. new trade wars) to the geopolitics China is caught up in (i.e. like aligning with Russia against Ukraine) to the next geopolitical decisions China might make (i.e. reunifying Taiwan), fires are rapidly spreading in and around China.
This is a far cry from the past.
Just a decade ago, the big question facing companies was why they weren’t doing more in China. A decade later, that same question has been amended, as companies are asked why they aren’t doing more to shield themselves from geopolitics in and around China.
The new calculations are an acceptance that China’s geopolitics is about to get worse - significantly worse.
Because of this, many companies are taking preemptive action towards China, from HP to Dell to Apple, all designed to insulate the business from future shocks. This is a tossup, where politics beats profits.
Alongside this, Western capitals are no longer championing the global, unfettered expansion of their organizations - especially into China. They are establishing limits, incrementally, that are squeezing the business world.
The US limits around outbound investment to China; the British limits around inbound investment from China; the new focus from the EU to Japan around taking on Chinese overcapacity. And, coupled with this, are the actions the West is taking to limit China in other geographies, from the UAE (i.e. G42 divesting from China, turning to the US) to Mexico (i.e. Trump warning he will block Chinese EVs made in Mexico).
Then, there are the steps other nations are taking to realign themselves with the West, such as Argentina, which has done a total one-eighty to join the Western camp.
Just as the changing geopolitics is creating certain signals, the new tone and actions of governments are also creating certain signals. Companies are interpreting them as either concrete limits on how they operate in China, or the looming limits that will force them to scramble once lightning strikes (i.e. the West launching an economic blockade against China if Beijing invades Taiwan).
This is driving a new “exodus” from China.
As Western corporates assess various indicators, some are deciding against betting more on the Chinese market. This is a new kind of business thinking. The world’s second-largest economy represents the largest opportunity and biggest risk. The world’s second-largest economy is increasingly facing off with the world’s first, third, and fifth-largest economies (i.e. the US, Japan, and India, respectively). This represents a global economy at war, something no global company is familiar with.
Suddenly, to navigate this minefield, keeping the doors of revenue open whilst aligning with home governments, Western multinationals are operating with one foot in China and one foot out - planted back in the West or in safer bets like India and Vietnam. While this might be viewed as a hedge or a defensive move, it is actually a dangerous move, exposing Western firms to geopolitics on all sides.
As Western corporations rethink China, the “glue” that keeps the world attached to the Chinese market is loosening.
Western firms moving production overseas, especially the likes of Apple, will set the stage for others to do the same.
The foundation that Apple or AstraZeneca builds could be utilized by dozens of other companies. These companies are opening the doors and laying down a foundation that could make it significantly easier for other organizations to leave China or scale back their reliance.
For China, this is a geoeconomic crisis.
While some in Beijing, and elsewhere, like London or Berlin, might scoff at the idea of Western firms leaving China, using trade or investment data to show a counter story, such a rebuttal misses the bigger picture.
It is not that the entire Western business world is marching out of China.
That is not the scary part, because it is not realistic. Rather, it is that a growing number of Western business leaders are rethinking China, and the actions of these organizations are often mimicked by everybody else.
China’s Counter
As Western firms exit, China is not standing idle.
The Chinese, aware that the tide is quickly turning, and not in their favor, are taking steps that will create new crises for Western companies and capitals.
The biggest is to build in the West.
The current Chinese model is: build in China, export globally. But, the saga of Huawei and TikTok has taught China that this model is not effective in the new geopolitical backdrop. Increasingly, many nations are viewing Chinese exports as dangerous.
So, China has quietly developed a new model: build locally, export locally. For China, geopolitics is driving hyper-localization.
By the end of 2025, Huawei will open a European factory in France. This is the same company that remains under siege by Western sanctions and who is driving projects, like around chips, that will help Beijing challenge the West for global supremacy.
For Huawei, it has become clear that to access Western markets, it cannot export from China. Such a strategy is shot, because of geopolitics, upending decades of Chinese corporate and state thinking.
Now, Huawei is building in Europe to sell to Europe. It is localizing to escape the geopolitical prison facing many firms in mainland China, where their products and services are restricted from the get-go.
Another example is BYD, the Chinese EV giant that is also the world’s largest EV maker.
It is building its first European factory in Hungary, and could unveil plans for a second factory in Europe next year. The company wants its overseas sales to generate 50% of its revenue, driven by the network of global factories it is building. Also building a base in Europe is CATL, the world’s largest battery maker, which is investing over $7 billion in eastern Hungary, in the city of Debrecen, representing the largest foreign investment in Hungary’s history.
Green politics aside, for China, the moves by Huawei, BYD and CATL, represent a new footprint in Europe, not centered just around exporting products or importing goods, but rather, establishing a Chinese manufacturing footprint in local markets.
This is a masterstroke in Chinese geoeconomic planning.
This means, that while Western firms rethink China, Chinese firms are doubling down in the West. One side is actively walking away from a huge pool of consumers, while the other side is developing new inroads with an equally sizable pool of consumers.
This derails the entire Western logic behind de-risking or decoupling, which was to keep its companies, and economies, competitive.
Not only are Western companies leaving China, losing revenue, but Western economies themselves could be besieged by a flood of Chinese goods produced from within. This is a double-whammy for competitiveness; a strike at the heart of the Western economic wiring.
The West is effectively losing in China, while China is gaining in the West.
But, as Western capitals become aware of what is occurring, and some already are (i.e. Trump and Vance both taking aim at China’s factories in the US, like around batteries), the response is not easy.
The new Chinese investment in the West comes at a time when many Western economies are bootstrapped. The collective West faces a perplexing predicament: it has to balance geopolitics (i.e. keeping Western firms out of China’s grip) with economics (i.e. creating local jobs, potentially through new Chinese investments in manufacturing) with geoeconomics (i.e. Western firms losing out in China, while Chinese firms gain in the West).
In all this, one possibility becomes increasingly real: the West may ban many Chinese companies from building in their home markets, shaking the global economy.
Quiet Curveballs
As the West drives a de-link from China, while China drives a re-link with the West, a series of quiet, geopolitical curveballs are suddenly flying through the air, disrupting the plans of many.
One of the biggest is that, in the West, the entire business model of some companies revolves around China.
Consider that an index of Europe’s fastest-growing companies, released in March, ranked a Czech startup as number one. The entire business model of this company is to resell Chinese solar technology in Europe, from panels to equipment.
The fastest-growing startup in Europe is a reseller of Chinese technology. Talk about China having the last laugh.
This shocking state of affairs points to how far China’s penetration in Western economies goes, and how painful, even impossible, ejecting China from the West will be.
Another curveball is that China is rapidly localizing its domestic market, in a bid to phase out Western companies from critical industries.
By 2027, China wants its telecom companies to phase out Western chips. By 2025, China wants its car firms to ensure 25% of their chips are made in China. Before the pandemic, China had activated a strategy dubbed “3-5-2” where it was to replace 30% of foreign hardware and software, then 50%, followed by the remaining 20%, a strategy that some calculated would require China to purchase up to 30 million pieces of hardware.
This self-reliance overdrive means that a new race has begun: will Western firms leave China based on their own volition, as geopolitical pressures ramp up, or will they be ejected and replaced with local offerings?
An equally significant curveball is the division in the West over China.
This is not just due to major holdouts like Germany engaging in a geopolitical dance, refusing to walk away from China and instead double down.
It is also a curveball being thrown by Western companies, many of whom are reinforcing the place of China within their operations and future, like Nike, whose CEO said his firm is “a brand of China and for China” or Nvidia, who is combating American sanctions by attempting to build a new line of “sanctions proof” AI chips, or Starbucks, who is opening a new store in China every 24 hours.
The way some Western companies are leaning represents a new headache for those governments who want large, iconic companies to take action freely or proactively, in a bid to shore up economic security.
On the flip side, divergence in Western businesses, over what to do with China, is an opportunity China could capitalize on. Beijing could shift the focus from politicians to executives, in a bid to drive a wedge between Western governments and their enterprises, and in the process, disrupt dangerous projects (for China) like de-risking.
Conclusion
Decades ago, as Western firms stormed China, they did so through a “China strategy.”
This was a strategy that had two pillars. The first pillar guided how Western firms, ranging from tech to machinery, would access the Chinese market, from winning over the central government to quickly building products to rapidly building a production pipeline. It was about compliance, investment, and product-market fit.
This was the public-facing strategy.
The second pillar was about how Western boardrooms would integrate China into their global footprint. For many firms, at that time, it was mainly Western markets, from Germany to Japan, that spun the business. In that environment, China was less significant, albeit a strategic growth market, whose place and position in the business were still being contemplated.
When Western firms entered China, it was the first pillar that was most important. But, quickly, the second pillar of the China strategy became the most transformative for Western companies, and the West in general.
For many Western companies, initially hesitant to overcommit to China, in the blink of an eye, they were “China first.” The Chinese market quickly became the most important and consequential market for the world’s largest companies, sometimes exceeding the US.
This is what makes what is taking place so stunning and shocking. The Western business world is starting to do the exact opposite of what they have been doing for decades. Instead of investing further in China or putting China first, they are turning the wheel in a new direction, and accelerating away from geopolitical storms inching towards them.
But this is no easy process - for the Western businesses, for Western governments, or for China. This is a decoupling and recoupling at the same time. There is no playbook for this or precedent to fall back on.
For the West, the corporate footprint in China, which largely aided China’s rise, is no longer viewed positively. Even venture capital into China is in the crosshairs of Washington, signaling that just investing in Chinese ideas can put organizations in a geopolitical fire. But, as the West steps back from China, the dominance of Western firms hangs in the balance - and by extension, the dominance of the West itself.
For China, its strategies formed out of a kind of “geopolitical creative destruction,” have to bear fruit fast. As China builds in the West, it has to outrun nationalistic politics targeting Beijing. As China localizes domestically, it has to outplay American sanctions, throttling the very technology needed to localize. While China might have a certain edge, it is not indefinite, and if China does not move differently, replacing action oriented in history, with action oriented in future reality, it will not be able to effectively deal with the Western moves.
But for both the West and China, the bigger unknown is what the rest of the world does.
As Western firms leave China, and as Chinese firms launch into the West, as Western states limit China, and as China localizes the West, both the West and China will increasingly bet on the rest of the world.
It’s the decisions these markets make, from Serbia to Saudi Arabia to Sri Lanka, armed with a new influx of Western and Chinese capital in their hands, that could determine how quickly Western firms leave China, and how quickly China fights back.
-Abishur
Want to republish this insight? Let’s talk: abishur at mrgeopolitics dot com
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