The New Rules of Doing Business With China

Geopolitical tensions between the West and China are deepening. As a result, Western governments, especially in the U.S. and Europe, are hardening their rules toward Chinese companies.

Western governments have placed Chinese businesses in their crosshairs for three reasons. The first is that Chinese companies are becoming increasingly competitive globally.  Second, many of these innovative Chinese companies are perceived as having links to China’s Communist Party and serving as extensions of the Chinese state by supplying it with dual-use technologies (having both civil and military applications) and/or complying with laws requiring cooperation with state intelligence efforts.  Third, there is the growing realization of the West’s own declining competitiveness.

While Western policies may seem to be headed toward decoupling, identifying policies as belonging to one of the three following categories offers business leaders a more strategic perspective on how to respond to them.

Techno-Nationalism: Chinese Not Welcome.  Techno-nationalistic policies aim to build domestic technological capacity by removing Chinese companies from supply chains entirely.  Western companies facing techno-nationalistic policies might need to phase out their relationships with Chinese businesses in critical sectors sooner rather than later.  Companies in critical sectors should more proactively identify non-Chinese buyers and suppliers and reconfigure their alliances to mitigate such risks. Even open-source technologies overseen by Chinese companies need to be cautiously adopted.  In terms of nonmarket strategies, organizations should proactively lobby for greater transatlantic harmonization on policy toward Chinese companies. After all, Western companies on either side of the Atlantic may lose out if they are the only ones reshuffling their relationships in sensitive industries’ supply chains.

Techno-Localism: Playing Hardball on Market Access.  Unlike techno-nationalistic policies, which aim for the complete exclusion of Chinese companies, techno-localistic policies seek to keep critical technologies — whether foreign or domestic — within one’s domestic borders. These policies often involve a quid pro quo with foreign businesses: Access to Western markets or even government support is allowed in exchange for technology localization.  On the one hand, Western companies may be able to use techno-localistic policies to their advantage. Such rules may indeed facilitate access to new technologies and/or otherwise enable businesses to negotiate favorable terms for technology transfer.  On the other hand, caution is warranted.  As the transfer could be in non-critical areas.  So Western businesses should be wise enough not rely on them as a long-term solution to more deep-rooted competitive disadvantages.

Protectionism: Imports (but Not Foreigners), Go Home.  Protectionist policies do not explicitly target technology transfers or the removal of Chinese companies; rather, they focus on limiting imports to protect domestic industries. These policies apply to imports from foreign and domestic companies’ operations abroad.  Western businesses cannot bank their success on protectionist policies; rather, they must ramp up investments locally and carefully consider partnerships with Chinese companies. While protectionist measures can offer short-term advantages to Western businesses by shielding them from competition, complacency is risky. Some Chinese companies have shown resilience to protectionist policies by significantly increasing their investments abroad and adapting through local partnerships, impression management, and innovation. Western businesses should respond by increasing their own investments in R&D, production, and marketing. It may also behoove them to consider strategic alliances on their home turf with politically savvy Chinese companies that have the right technology, know-how, or production capabilities.

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