The Upsides of Economic Downside in China

12 October 2023 / Report

Economic transition in China, and the slowdown it entails, will create familiar growth and profitability challenges common to any slowing market. However, the slowdown is also likely to yield some important improvements in the MNC operating environment in China.

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The negative sentiment expressed by Western media regarding China’s evolving growth slowdown ignores the observation that topline GDP growth has typically not been a primary driver of opportunity for most Western MNCs in China. Market access, regulatory treatment, and fair competition conditions tend to matter more. Low growth pressures are, counterintuitively, likely to trigger improvements across these three factors for MNCs in China.
Even in a low- or negative-growth macro environment, most MNCs have sizeable opportunities in China. Most have small shares in their respective markets in China. Low growth conditions in China should avail opportunities for market consolidation and share gain by high-performing firms, geopolitical and related national security constraints permitting.
Many local competitors may be vulnerable to share loss because they have less experience with economic slowdowns, certainly prolonged ones. And many have impaired balance sheets that will be tested as “lowering (economic) tides reveal unseaworthy boats”.
Looking out longer-term, economic history tells us that prolonged low-growth periods typically provoke helpful policy adjustments – if not reforms – flush out many weak players, and generally yield a more rational competitive environment. This logic, we assert, should apply to China too.
The major question is about timing, specifically: How long will the Chinese political economy bulwark against a major economic reset endure? Much will depend on the breadth and depth of the unfolding slowdown. Reset, as and when it does come, is very likely to vary by sector, with sectors of less national security concern likely to warm to foreign investors earlier in the timeline.
Some potential positives from economic downturn notwithstanding, the declines in consumer and corporate spending, the shift toward savings, high unemployment, government support of favored local players, and other dispositive consumption trends related to the slowdown are highly relevant. The localization of product based on a keen understanding of Chinese buyers, together with superior execution of “Chinese-style” go-to-market practices and customer relationship management, will remain critical drivers of MNC success in the marketplace and to realizing the share-gain opportunities that “down market” conditions may present.