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WHY HAVE A CHINA "PLAN B"?

While the China market remains highly opportune from a demand perspective, questions about the future playing field there loom large.   Companies need robust, future-ready business development plans.  More importantly, they need contingency plans in case market access is choked off due to US restrictions or Chinese national security concerns or both. This low-probability scenario is increasingly plausible. It should not be ignored. Companies need a Plan B.

APAC Ventures helps medium-sized companies with significant business interests in China navigate through the current turbulence and create solutions that plan for all scenarios.

CONTEXT

Over the past year, and especially in the last 3 months, we have seen a dizzying array of crack-downs by the Chinese government across a number of private sector industries, from ecommerce to education to media. 

The Party Line proclaims that these actions are aimed at rectifying the extreme wealth inequality that’s arisen from four decades of “disorderly capital expansion” and “unfettered capitalism”.  In the background, it is clear that the Chinese Communist Party (CCP) and its leader Xi Jinping wants to reign in the power of the new elites and reiterate the CCP’s commitment to ideological conformity and intolerance of regime challenges.

While the crackdown has focused on domestic companies, there is no doubt that the new regulations and enforcement practices imposed on the private sector will have widespread impacts on foreign businesses operating in China. Firms will face higher scrutiny from regulators regarding their alignment with government goals and attendance to national security concerns. All these changes are happening at the same time that tensions between the United States and China continue to intensify.  Explicit and implicit demands for companies to choose sides loom large. It may not be possible to operate status quo and play both sides for much longer. 

DE-RISKING CHINA

Most major multinational companies are working hard to de-risk their China operations. Indeed, it’s a continual work-in-progress. While for some, it involves building supply chain resiliency outside of China or prioritizing other markets; for most, it involves investing significantly in “China for China” localization.  It may not be enough. If US-China relations seriously worsen, companies may need to engage in new partnerships and structures to effectively separate and autotomize their China business.

 

Equity partnerships with Chinese funds and/or licensing arrangements with Chinese brands or channel partners are possible solutions. Companies like Disney and Tesla have created innovative structures like these, albeit mostly to offset capital risks at the time they were conceived. But these and other precedents provide pathways to a potential business setup that could prospectively endure a large-scale breakdown in Sino-western relations, and even create huge capital gain opportunities in Chinese capital markets. 

 

We assert that companies should have an archetype for this advanced stage of localization ready if circumstances call for it - a Plan B per se. It will involve many considerations; and, as seen in the case of ARM, the risks of misstep are significant.  It shouldn’t be designed on the fly. Companies should do their Plan B planning now.