Innovation, speed, and entrepreneurial agility are needed in China; foreign firms must adapt or lose ground, McKinsey & Company Greater China Chairman Joe Ngai told the South China Morning Post. Foreign executives used to come to China to study shoppers. Today, many come to study their future competitors. That shift says almost everything about how China’s role in the global economy has changed. For much of the past two decades, China was the market multinationals could not afford to miss. The formula was often straightforward: enter the market, ride the growth of a rapidly expanding middle class, and capture a share of the world’s largest consumer base. However, that playbook is now becoming harder to execute. Economic growth has slowed while consumers have become more selective about how they spend. Many foreign companies that once enjoyed comfortable positions are seeing their market share shrink and profits come under pressure.
“The market has become harder. Twenty years ago, if the tide was rising, everybody got a share of it. Today it’s different. In the past, many companies came to China with a product and a business model that had already worked elsewhere. Today, that’s not enough,” Ngai said. The business environment became tougher amid Covid and rising geopolitical tensions. During the past few years, global supply chain strategies have lurched from “China Plus One” – searching for alternative manufacturing hubs – to something more drastic: Anything But China. Geopolitical tensions, tariffs, and pandemic disruptions accelerated the search for alternatives by many foreign firms. But now, some companies have discovered that leaving China is easier said than done because finding a replacement is challenging. Many of the CEOs who explored alternatives eventually found how difficult China’s industrial ecosystem was to replicate.
Ngai, who leads the global consultancy firm’s Greater China business and recently co-authored “The Next China Is Still China” with Senior Partner Nick Leung, has spent much of the past few years fielding a question that once dominated boardrooms from New York to Frankfurt: if companies need an alternative to China, where should they go? “The next China is still China” was the answer Ngai eventually arrived at. “But it’s a different China,” he added, noting that when many foreign firms returned to the country, they realized they had taken the country for granted. China’s competitive advantage, Ngai argues, is no longer cheap labor or even market size. Rather, it is the density of its industrial ecosystem – suppliers, engineers, logistics networks, manufacturers and entrepreneurs operating at a speed that remains difficult to replicate elsewhere. However, that speed comes at a cost. China’s business world has become defined by involution, relentless competition that squeezes margins and leaves companies fighting for their survival.
Many executives, as well as the authorities, see it as a warning sign, while Ngai described it as “the world’s toughest gym”. “You are fighting 24 hours a day. Even when you become the best fighter, you can’t rest because there is always somebody lining up to challenge you.” The casualties are real as companies burn through capital, price wars destroy profits and entire sectors become overcrowded. “There is a lot of blood spilled in that gym,” Ngai said. Yet it is these very same forces that have helped produce some of China’s most formidable and successful companies. Chinese AI and robotics firms are now drawing foreign executives to Shenzhen and Hangzhou as often as Silicon Valley. The result is that many foreign executives now visit China for very different reasons than a decade ago. Instead of touring shopping malls, they ask to visit factories, robotics companies and research labs. “They want to understand why these companies are so competitive,” Ngai said. For multinationals already operating in China, the challenge is becoming even more urgent. The keyword is innovation,” he said. “If you believe technology will drive the next 10 years, then you can’t ignore China,” he told the South China Morning Post.
