U.S. CEOs Should Review Their China Strategy Amid Governmental, Economic Woes

For decades, the relationship between American companies and China was relatively uncomplicated: The world’s most populous country served as the best base for low-cost manufacturing of goods for the U.S. market and as a rising market for American products ranging from commodities to smartphones and other consumer goods. But this relationship has been changing rapidly, and growing more complex by the day.

Not only is more-expensive Chinese labor making offshoring less cost effective, but China’s new antiterrorism law is sticking its nose into U.S. businesses’ data and technology—a place where domestic companies would prefer it doesn’t go.

As a result, CEOs and other business leaders need to take close notice and make sure their strategies and tactics are aligned with the new outlook.

“China’s economy continues to decelerate. This could mean slacking demand for commodities supplied by American companies ranging from coal to grains.”

First and foremost is the fact that China’s economy continues to decelerate. In early March, China lowered its economic growth forecast to about 7 percent for 2015, ushering in what its leaders have called a “new normal” of slower growth in the world’s second-largest economy. That is below last year’s actual growth rate of 7.4 percent, which was the lowest in nearly a quarter century.

This could mean slacking demand for commodities supplied by American companies ranging from coal to grains. Also, some social and economic reform efforts by China’s government have complicated business for other types of western companies. Luxury-goods makers, for instance, have been feeling the effect of President Xi Jinping’s crackdown on corruption as fewer people buy expensive gifts for officials.

And more recently, reported The New York Times, some mass-market companies, including SABMiller and Lenovo, have started to show pockets of weakness in China as rank-and-file consumers react to the country’s moderating expectations.

Of course, the largest hinderance to doing business in China is the rise in labor rates. The gap between China’s rates and those of the U.S. and Mexico has been closing rapidly, meaning that China no longer is the default choice for new manufacturing sourcing. In particular, news reports say rates in Mexico have gotten within 5% of those in China. And with land borders, Mexican production poses much less of a supply-chain obstacle for American firms importing finished goods and components to for the U.S. market.

Despite all these trends, however, China is still financially attractive. As consulting firm HIS noted, even though China is projected to grow “only” by about 7 percent in 2015, “it will likely add more GDP in U.S. [dollar] terms in 2015 than it did” in each of the three previous years of higher growth rates. And even with cooling growth, China “is growing, on average, twice as fast today [as] it did in the previous decade” and so, still, “represents the greatest business growth opportunity in the world.”


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