U.S. CEOs must change their approach to China (2024)

Business leaders in general are almost certain that China will surpass the U.S. to be No. 1 in GDPat some point in thenearfuture,andtheyfeel compelled to sustaintheirrelationshipsthere.China is already the second- or third-largest market for many American companies,includingApple, Starbucks, and Amway. Texas Instrumentsand Qualcommeach derivedmorerevenuesfrom Chinain 2020 than from any other country.Given the size of the opportunity,the CEOs and board members who are in denial tell themselves, their companies can’t affordnotto be in China.

But deep down the leaders of these businessesknow thatChina’srelentless drive towardself-sufficiencyis likely tosomeday harm them.An American corporation isneeded in China onlyuntila Chinese company has the capability to beitsmost ardentglobal competitor.In many cases, sharing technology and intellectual property with a Chinese “partner”under thewatchof the Chinese Communist Party is a precondition for a U.S. company’s entry into the market.Whenthe CCP relaxes that requirement, as it has for Tesla,BlackRock, and Goldman Sachs, it is likely only a temporary reprieve.

The ongoing flow of technology, know-how,trade dollarsand direct investment from the U.S. to ChinahelpsAmerica’seconomicrivalachieve its goal faster.

U.S. corporate leadershavetotake off their blindersand facetherealityofwhat is making China more powerful and accelerating its dominance: They are! Efforts to stem the flow of technology and reduce the trade deficit have fallen far short, partly because of fragmentationin policymakingbut alsobecause of what corporate leaderscontinue todo.

There are signs that more business leaders are acknowledging the problem. Ina survey of Fortune 500 CEOs, conducted in early May, 61% of those whose companies were involved with the Chinese market said they were looking to reduce their exposure to China.

Still, dealingwith realityputs U.S. companies on the horns of a dilemma. If theystop or phase outtheflow of technology,know-how, and U.S.dollars,howcan they deal withthe damage to shareholdervaluethat isalmost certainto occurin the short run as they forgo revenue in China?

The time isnowforU.S. companiesto face up to the problem. Their leaders must be preemptive, and preparetochange their business models or global footprints to counteract any hits they may take from the loss of business in China.

Business leaders should start by taking these urgent steps:

1. Acknowledge the party’s power.Face the reality that participation in China’s growing marketis subject to the power of the CCP.TheCCPcan—and does—change the rules without warning, forcing non-Chinese companies toeitherleaveorsee their business reduced to a meaningless volume, as has happened to Ericsson and Nokia.The CCP can also takea range of actions that cause a precipitous drop ina company’s market value, including for Chinese companies with a wide range of Western investors, as happened with the gaming arm ofTencent, Ant atAlibaba, and ride-share companyDidi.

CEOs and boards should prepare for this tail risk.Investors will begin to factorthatrisk into their evaluations.​

2. Diversify sources of revenue.Openly discuss the revenues and profits from China that are vulnerable; then work on creating a Plan B that reduces your dependency on those revenues. For companies that rely on China for a high percentage of their revenues, the dilemma is where else to find equivalent growth.I know of one large heavymanufacturing company that gets 20% of its revenues from China but is planning to exit over the next several years.My research suggests that this company is well ahead of others.

Have those conversations. Focus on countries whose economies are projected tohave sustainablegrowth, even if they are small.These will be the battlegrounds between you and the competitor you’re creating in China.

Beware of countries that have a record of coming close to debt default and bankruptcy.The Chinese are courting them to get their vote on competitive agenda items like standards setting (for example, for5G). That createsa competitive impediment for you.

Appleis movingahead of the curve. Having depended heavily on the Chinese market and supply chain,it is developingboth the market andsupply chain in India.Its cell phonesare in the Indianmarket at a price point that keepsthe iPhonepremium butisappropriate for Indian incomes.Apple’scell phone sales in China peaked at some 71 million in 2015 anddeclined tojust 35million in 2020.

Along with a few of its ecosystem partners, likeFoxconn, Apple has also been building its supply chain in India.Its leaders have discovered that India’s greatest asset is talent, some of which needs to be developed. They are contributing to India’s know-how and providing training.Companies like Apple andFoxconnare getting a tremendous welcome from theModi government.

3. Bring your supply chain closetothe customer. The U.S. can make almost anything it currently imports from China, thereby eliminating dependence on Chinese supply chains. Those supply chains in China were built with know-how from the U.S. and its allies in the first place. Nowa wide range of new technologiesare available tomakesupply chainsmore efficient and more tightly linked to customers than ever.

The movement of supply chains to India will likely accelerate.Inthe last six weeks, there hasbeen awave ofheads of countries visitingIndiato discussbuildingtheirsupply chainsthere.Japan hasmade India a strategic countryand isone of the largest investorsinIndia, and Dubai’s IHCfund has made a multi-billion-dollar investment agreement withIndia’sAdaniGroup.

Through my work with client companies, Ihave personally witnessed and verified the benefitsof moving production close to the customer. With the use of new technologies and taking the total end-to-end cost into account, creating products close to the customer is generally more competitive.

The U.S. will benefit from helping countries to increase the purchasing power of their population and spur their GDP growth. It would be useful for the State Department to publish a list of items the U.S. must buildin Americato eliminate dependency on China for critical materials, but companies can act on their own.

4.Focus on yourtruecompetitive advantage, in your company andindustry. Don’t assume the low price of Chinese goods is a sign of superior competitiveness. My own experience and research has shown me, repeatedly, that without access to U.S. technology,and after stripping outthe effects ofmanaged currency, tariffs, subsidies, and risk insurance, Chinese companies are generally not cost-competitive. The real cost calculated on the basis of purchasing power parity shows that China is a high-cost producercompared with its U.S. counterpartsin many subsectors.

Analyzethe real, end-to-endcostfrom Chinaversus your othersupply chainoptions. Do data analysis ofyourindustryand make the case to Washington about what needs to be changed in terms of trade policy. After all, theChinese have been lobbying Washington to keep U.S. funds and technology flowing; it’s your right and duty to act as a counterweight.

U.S. companiesshould be confident, keep honing their advantages, and protect their strengths from being conscripted by their rival.

China is deadly serious about its intention to surpass the U.S. and other democratic countries. It has clearly shown its willingness to intertwine economic and political warfare.

CEOs and boards should take the difficult steps needed to help protect not just their own companies’ futures but also democratic principles and free and fair trade.Business leaders have a central role to play to preserve democracy.Let us muster the will and urgency to see the bigger picture and to act.

Ram Charan is an adviser to CEOs and boards of directors worldwide. He has written 33 books and multiple feature and cover articles inFortuneand other publications.

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