Not all foreign companies in China want to leave, some are doubling down on investments

China remains globally important not only as a base for manufacturing, but increasingly for its strengths in research and innovation
Foreign firms know this, and despite their frustration at China’s zero-Covid policy, many are not seriously considering leaving the country

Edward Tse

Published: 9:30pm, 21 Oct 2022

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The view that foreign companies are not investing in China any more and that those who have are leaving seems to be persisting.

The proportion of EU companies considering moving current or planned investments out of China more than doubled to 23 per cent between January and May, according to a survey by the EU Chamber of Commerce in China. The principal reasons include China’s Covid-19 policy and the Russia-Ukraine war, besides major logistics challenges.

In the same period, US companies reported lower production due to an inadequate workforce and input supply constraints.

However, recent inward foreign direct investment data tells a different story. Between January and August, actual inflow of FDI in China rose 16.4 per cent year on year to US$138.41 billion, while exports were up 7.1 per cent at US$314.92 billion.

Major auto companies are doubling down on China. Volkswagen has announced plans to invest US$2.3 billion in a joint venture to build best-in-class autonomous driving capabilities. BMW has invested US$2.2 billion in a new electric vehicles plant in Shenyang and is reportedly going to move production of its electric minis from the UK to China. Tesla is mulling a second “Gigafactory” in Shanghai and Ford is incorporating a new company for electric vehicles in China.

Elsewhere, German chemicals giant BASF has commenced production in Guangdong, and a further investment of about 10 billion euros (US$9.5 billion) in heavy chemicals is expected by 2030.

Materials developer Covestro plans to build two plants for producing polyurethane dispersions (PUDs) and elastomers. Intuitive Surgical of the US is to build a 700 million yuan (US$97 million) manufacturing and innovation base in Shanghai for robotics that assist surgery.

A worker inspects a car frame at BMW’s plant in Shenyang on February 17, 2020. Photo: Xinhua

There is negative news too. For example, US retailer Gap has closed stores in 15 cities since 2022 and Sweden’s H&M, which refuses to use Xinjiang cotton, closed its flagship store in Shanghai in June, though it has reportedly resurfaced through online platform Tmall.

Much talked about these days is the semiconductors sector, wherein the global value chain built over decades is being disrupted by geopolitics. This would certainly have a major impact on the scale of foreign investment in China.

Nevertheless, it is obvious that investments are increasingly coming from a few large companies. According to the research firm Rhodium Group, the top 10 EU investors in China accounted for nearly 80 per cent of all FDI from the EU in the last four years, with Volkswagen, BMW, Daimler and BASF accounting for a third.

Many large foreign companies now consider China an important source of knowledge, inspiration and innovativeness. A combination of policies, technology and changes in demand patterns have (re)defined many industry segments. Sectors such as new energy vehicles, renewables, sustainability, intelligent manufacturing, advanced medical equipment and fintech are growing rapidly and China’s global presence in these sectors has become palpable.

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While investments in the past mostly went towards building manufacturing facilities, FDI is now flowing into local research and development. Volkswagen’s joint venture with Horizon Robotics aims to expand capabilities in autonomous driving. Daimler is investing US$140 million to expand its R&D in China and Intuitive Surgical is to build an R&D centre in Shanghai to develop local innovation.

Some pundits continue to say that China’s Covid-19 control measures are too harsh, causing foreign companies to leave the country. While these measures have certainly caused businesses anxiety, inconvenience and even frustration, they are felt more at the personal level and equating individual feelings with institutional decisions is probably a stretch.

Most foreign companies are considering risk mitigation measures for functional supply chains rather than outright exit – unless they are forced to, for example, in the semiconductor sector. A working supply chain often depends upon clusters of suppliers which take a long time and a lot of skill to build.

I have identified three types of foreign companies in China. There are those which came and tried but couldn’t succeed and therefore either downsized or simply withdrew. Then there are those which trespassed, knowingly or unknowingly, the government’s “red lines”, prompting Chinese consumers to shift their loyalty to other brands. Some of these foreign brands are trying to come back, but some may quit altogether.

The third group recognises that China is important for their global performance and competitiveness. Some of these, especially the smaller ones, will wait and see how things evolve. They know they must remain committed to China, lest they lose overall competitive advantages and market positioning.

So, how foreign companies view their investments in China depends a great deal on their circumstances and the sector they belong to. For many, a presence in China is indispensable and will be even more so going forward. While we cannot ignore the possibility of future black swan events that could dramatically affect China and the world, I believe that for most companies, it is ultimately business logic that counts.

So, will foreign companies stop investing in China? Will they move their existing investments out of China? I don’t think so.

Edward Tse is the founder and CEO of Gao Feng Advisory Company, a strategy and management consulting and an investment advisory firm