8 min read

🇨🇳 Hedging the economic cold war China

In this article, I'd like to connect many dots I've been laying out regarding the future of China and what it now strategically implies for us in the West. You might have read a few things I wrote on this already, but I believe that the global picture is now apparent.
🇨🇳 Hedging the economic cold war China
Photo by Burgess Milner / Unsplash

Since 2012, when the Obama administration decided to invest in global trade and multilateralism, China has been easy money for international brands. The core U.S. doctrine was that if a foreign country eats Big Macs, they were not so likely to oppose Western values. China did play ball too. Reinforcing special investment zones for foreign companies, reigning in (to some degree) the most apparent copycats and IP infringements, and developing a taste for capitalism, if not a completely free market. Fast forward to 2016, and China, second only to Canada, weights 15% of America’s exports.

Overcoming our lagging perception of China

But for some time now, and indeed accelerated by Trump's presidency, many weak signals and then no-so-weak signals are starting to point at a different logic. First off, Americans realized that China is not on track to being a distant fourth global power.

With its advancements in new mobility, China is positioned to contest U.S. leadership in various technologies. The Chinese government has prioritized development of new energy vehicle (NEV) technology through extensive subsidies and protectionist policies while capturing every stage of the supply chain for NEV batteries. In autonomous and connected vehicles, global competition is increasing as Chinese companies are engaged in pursuit of international markets. - 2021 U.S. Annual Report to Congress

Not that the Chinese Central Party (CCP) was not clear about where they were going. The 2025 Made in China initiative (中国制造2025) did lay out a clear plan to dominate ten industries worldwide, from advanced information technology to aerospace and aeronautical equipment.

What is evident is that our preferred export market will not need us so much for anything really critically difficult to invent, design, or manufacture within the next three years.

China innovation now leads the planet, not California – Innovation Copilots
Among other things, China innovation now leads the on-demand mobility revolution with more and more electric vehicles and… bikes. (Mary Meeker’s Internet Trends Report 2018)While I was already forewarning my customers in luxury, automotive, energy and retail for years, this is now hopefully obvious…
Past, present and future: The evolution of China’s incredible high-speed rail network
Over the past decade, China has built the world’s largest dedicated high-speed rail network, revolutionizing long-distance travel across this vast and diverse nation. Find out how they built so much so quickly.
How China May Soon Lead the Bio-Revolution
Beijing has poured billions of dollars into biotechnology as the sector undergoes a momentous expansion. AI, gene editing and synthetic biology may be the cornerstones of the next great industrial revolution, and China may lead it. (Source: Bloomberg)
👟 China is getting good at branding – Innovation Copilots
In China Nike, Adidas, Mercedes, DolceGabana, and Dior are all losing ground in favor of national brands. These brands are the canary in the coalmine of two things I’ve been explaining since Trump’s election in the U.S.: 1️⃣ The Chinese consumer is getting more and more proud

And, if part of the plan is not yet entirely effective (Sinovac is admittedly not on par with Western mRNA vaccine technologies), those of us that are still lagging should undoubtedly change how they perceive China.  

Who needs who, again?

More importantly, by any PESTEL metric you'd like to take, China has had long-term interests in disconnecting itself from the global economy. For reference, in 2019, I was already writing:

- The birth of « RED 2 » as a second web fully self-sufficient (arguably faster and more powerful in so many ways) and insulated from the rest of the world, was June 2019 (Trump, Huawei). Things will move slow front-stage, not back-stage. Dramatic announcements will be made before 2022 even if Trump is not reelected.
- Part of the digital isolationist strategy will involve onboarding Africa in RED 2 (and maybe India?).
- China sees innovation as a long road going up to give the country its deserved #1 rank in the world. It can only be driven by the central government, leaving some freedom on bumps along the way. The optimistic consensus is that people will follow along quietly.

At the time, RED2 was my pet name for an entirely disconnected Chinese digital network, which doesn't seem to be that far away anymore. And I'm not writing that just because I was warned just a few days ago that no foreign cloud streaming services would be allowed to teach MBA classes online in China anymore...  

Cautionary tales about Western companies getting shafted out of China overnight might not just be on the rise but a new normal for the next five years while China insulates more and more and builds an economic great wall on top of its great firewall.  

The war for coffee
The war for coffee supremacy has been fierce for many years in China, and it’s still heating up. Whether you’re in the food market or not, this is one of the best proxies to understand Chinese consumers and our global economy.

In our recovering economies, the vision of a self-sufficient China, exporting cheap manufacturing to Africa and India while just needing the U.S. and Europe for tourism should be sobering.  

3 Strategic moves for a new economic cold war

More than ever, this now requires having a clear strategic vision of China as a market, not just taking care of some degree of cultural relativism. The many lessons to be learned from recent failures should be read with even more acuity:

How Samsung Lost China – Innovation Copilots
While being the uncontested leader in 2014, by 2020, Samsung lost China entirely. From an 18% market share of the Chinese mobile phone market in 2014 to a measly 2% in 2018, by 2020, Samsung virtually disappeared from the Chinese mainland market. What went wrong, and why should you care?

But then again, what are our options? Staying or getting out of China seems to be a Kobayashi Maru scenario. Damn if you do, damn if you don't.

The relatively good news is that the CPC is never in a hurry; it plays a long and steady game. This means that an overnight closing down of China would not only be utterly surprising but just vastly inefficient in the eye of the CPC. Things will happen in due time around 2030. For global brands and industries, the roadmap on paper is simple. It's about strategically divesting and keeping China in sandbox mode. But what could this mean in practice?

Here are three key moves I'd find wise to consider:

1) Keeping an even keel while making your investments in China extremely liquid.

This is what strategic divesting is all about. Keeping your presence and investments in China relatively even, but reallocating their organization drastically. For a global consumer brand, that would mean reinforcing market regionalization and digital consumer-facing relations while forfeiting critical infrastructures and brick-and-mortar investments. Sales might be hurt, but with higher gross margins, aiming for flat EBIDTA performances.

I understand it's never a sexy pitch to an executive committee. Still, it also means if it gets to the worse, your brand can exit this market in a matter of months without leaving too much behind (let what is going on in Russia be another cautionary tale in that regard).

2) Follow the great leader (seriously).

Another way to reduce long-term business exposure might be following what Xi Jinping wants to achieve anyway. Such as making per capita income of Tier 3 cities and beyond catchup with Tier 1 and 2 cities.

Knowing that the CPC will have to push economic development to the poorest parts of China before potentially being self-sufficient is a key insight. No matter what, for the next ten years, an opportunity window will still be open; it's just not about Shanghai, Beijing, or Shenzhen anymore. And because opening thousands of sales points in the (for now) poorest parts of China doesn't make any sense, this translates into a reinforced regional digital presence. Which perfectly fits with our previous point of strategic divesting.  

3) Bite the bullet, subcontract some key activities to national companies.

Lastly, I would consider progressively transferring all heavy infrastructure operations to local giant companies, whether they are Tencent, Alibaba, or Huawei.   You will not catch up anymore with their capabilities because of their critical mass headstart or simply the direct support they have from the government in many cases.

Alibaba, the Retail Operating System – Innovation Copilots
Even more aggressively than Amazon, Alibaba positions itself from an e-commerce platform to a full-fledged retail operating system. This is not so much about the shiny tech toys embedded in flagship automated stores but absorbing every mom and pop store by a fully integrated OS. This paints a future…

Playing ball with them will allow you to concentrate on the consumer side of your business while leaving a lot of data to them. Data you would haven't had the capability to protect and keep anyway for too long anymore.  

In conclusion...

As someone working in China since 2008, I have considered for more than two weeks writing this article or not. I will probably have some professional backlash to deal with. But eventually, even if I might sound a bit pessimistic, I believe that the golden era of doing business in China is coming to a term. We just need to read the writings on the wall and still enjoy what we can achieve in this tremendous and oh-so culturally foreign country while we still can.

Further readings

As an addendum here is a fascinating report from Inter China Partners called “China for China + Decoupling” addressing the very same concern (thanks Michel for the link):