10 Priorities for Every Business Operating in China in 2025

Steve Odland: Welcome to C-Suite Perspectives, a signature series by The Conference Board. I'm Steve Odland from The Conference Board and the host of this podcast series. And in today's discussion, we're going to talk about the top 10 issues for multinational companies doing business in China today. 

Joining me is David Hoffman, the China Center leader and senior advisor in Asia. David, welcome to the program.  

David Hoffman: It's great to be here, Steve. Thanks for having me.  

Steve Odland:So David, you've been in the region for a very long time. You're a renowned China expert, and it's just so nice to have you today on the program talking about these priorities. And these priorities will be apropos to anyone who's trying to do business in China. You are the leader of our China Center, which focuses on just that. 

Sowe're going to go through, for our listeners, we're going to go through, in inverse order, David's top 10 priorities for doing business in China today, starting with number 10. So David, number 10 on your list of priorities is? 

Priority Number 10: Reconfiguring Supply Chains 

David Hoffman: So what I've written down here is cost-competitively reconfiguring supply chain, Steve. This might surprise listeners to be number 10, but it's true to say that most of our members, large Western multinational companies and Asian multinational companies, have done a lot already to build resilience into their supply chains. But it is a cost and productivity challenge. 

So, supply chains are moving from China, or at least being built adjacent to China, to have appropriate redundancy and resilience. And this adds cost, and it also adds complexity and efficiency issues. And figuring out how to plug those efficiency gaps with a more complex supply chain, selecting new locations that make sense. Many countries around the world where we might locate supply chains have uncertain policy environments. 

These are all difficult questions to manage, and that's why doing this cost competitively is really the operative word here. It's not hard to move things to other places or build more redundancy, but it's hard to do it cost effectively. 

Steve Odland: And what you're talking about, David, is the supply chain that is used to export to other countries. It doesn't really apply to the supply chains that are in China for people producing for the Chinese consumer, correct?  

David Hoffman: Well, that's correct. I mean, more and more large multinational companies are building supply chains that are expressly China for China, usually with some export component and often an export component to Asia and or the Global South, much less so from China to America or Europe. And again, that's a great structure, but it's hard to do cost effectively.  

Steve Odland: Yeah. And so, essentially, multinationals are dealing with almost two supply chains because you have the supply chain that's manufacturing in China, taking advantage of labor arbitrage and the low cost of manufacturing for export to other countries, Western nations, US, and then the China for China thing. So they got to be thinking about both, which really increases the complexity.  

David Hoffman: Well, it does, and I guess having two increasingly separated supply chains, one for China and its sphere, and one for the West, it does make sense, but you have reduced scale. And that means you'll be less efficient, less cost efficient, and you need new solutions, productivity solutions, IT solutions, management approaches, et cetera, to do it well.  

Priority Number 9: Managing IT Environment Bifurcation 

Steve Odland: Number nine, on priorities for multinationals in China.  

David Hoffman: Managing IT environment bifurcation. And let me explain what bifurcation means. This basically means separation. And beginning, actually, quite some time ago in China, we began to see a very different internet environment. And you essentially there have an entirely separated internet environment. Google and other large US and Western apps and systems don't actually work there. They might not even be allowed, in Google's case, for example. So Western companies, foreign companies need to deal with an increasingly different IT environment. 

We see this especially on the front end, in market operations. Instead of Salesforce and these other CRM systems, SAP, Oracle, and others that are used in the US and Europe, they have a whole different set of vendors, a whole different set of apps. The apps are very mobile-oriented, much less so desktop-oriented. 

And we're seeing that move all the way backwards, Steve, now into enterprise IT systems, as US-China strategic competition heats up and countries more and more, not just the US and China, get concerned about control of data sovereignty and so forth. And this creates a really interesting and big challenge. I mean, essentially companies are going to have to have an altogether different IT stack for China, eventually. That writing is on the wall. It's debatable how fast we're going to get to full separation, but it's in the works.  

Steve Odland: One aspect of IT is the systems themselves. The other aspect is how they govern the IP in a company. And with AI now as part of all of that, it especially becomes not only cumbersome and expensive, but also really important to the security of their assets.  

David Hoffman: Absolutely. In fact, in our upcoming China CEO Council, Steve, on June 19, we're looking at Chinese AI, specifically, and what trajectory development there is on, what the differences mean to foreign companies active in China, and how they're going to need to adapt to a very different AI application environment, as well. 

Priority Number 8: Ensuring Resilience 

Steve Odland: All right, so moving on. Number eight in your list of priorities for companies doing business in China.  

David Hoffman: Cost competitively ensuring resilience. And I use cost competitively throughout, or at least in a few places here, because that's really the challenge. And the China business for Western MNCs is now vulnerable to trade conflicts to tariff pressures to IT bifurcation issues to supply chain complexity issues and so forth. And in this more complex business structure, the resilience issues are more. 

And so companies need to really be thinking about how to make sure you know that wherever geopolitical, tensions might impact their business, where export restrictions on the China side or the US side or the Europe side, or new tariffs, or what have you could impact resilience. And they need to be thinking very carefully about how to make sure that the key functions essential to their business are resilient. 

Steve Odland: And we used to think about resilience in a number of ways. Certainly, weather-related resilience, but more increasingly, policy, trade, regulatory. But there is a risk out there of potential war or military conflicts and the need for resilience around something even more dangerous like that. 

David Hoffman: The diversity and breadth of the scenarios involved today, Steve, are really wide and complex. Complex is an important word to maybe even underscore here because it's more than complicated. Business is good at managing complicated stuff cause you can do that with process. Complexity is harder, because any event that occurs might have unknowable or imponderable knock on an impact. 

So nobody can consider every single permutation about, like, for example, how maybe a blockade in the Taiwan Strait situation could evolve to impact your business. And I've actually pulled geopolitical risk management up higher in this list, but that's where the scenario planning comes in. 

Priority Number 7: Consensus Planning and Scenarios 

Steve Odland: OK. Moving on, then, to number seven on your list of priorities.  

David Hoffman: Forming consensus planning views and scenarios. What I've been describing hopefully begins to paint a picture of all the complicatedness and complexity and nuance involved now in China operations for multinational businesses. And this actually makes forming a view on what the future holds very difficult. And I see many companies struggling to get the right people around the table to use the right facts, the right data points, the right information inputs to form a view about the long view on China, the near view on China, the medium-term view on China. 

Now, of course, I just mentioned in another remark that the scenarios are very wide, but even agreeing on what the scenarios are and what they imply for business is a real challenge for companies because the views from China and one's China team there on the ground, and the views at corporate headquarters in America or Europe, can be very different, with very different people having different information sources and beliefs. 

It gets into, there can be cultural issues involved. It's hard to form a view, and being a strategist and planner yourself, you really have to analyze the situation. Do the best you can with the information you have, and eventually form a view with assumptions that you can plan on. 

Steve Odland: Increasingly it used to be the black swan events, which are, by definition, events that were once in a lifetime, essentially, and unforecastable. These are the kinds of things that are massive, either regional or global events, they move markets, you can't forecast them. 

But they seem to be happening so often that there's a new term out there, which is gray swans, which are very unlikely to happen, but you have to take them into account in your scenario planning so that you can at least then test your resilience in your supply chain, in the IT environment and your supply chains, all the things that you've already spoken about. This comes to bear here in making sure that your scenario planning is robust.  

David Hoffman: Well, that's right. And what I see missing oftentimes here is that the top of the house, the CEO, actually needs to be involved in bringing the right people together and the right information base to form a consensus view. 

If you have an organization where everybody kind of has a different view, and nobody really says what they really think, or something like that, you get a lot of dissonance and discord in the organization. 

Priority Number 6: Deflecting Regulatory Predation 

Steve Odland: OK. Moving on to number six in your set of priorities.  

David Hoffman: So here, I've put a specific China issue, which is deflecting regulatory predation, and maybe a better word would be harassment or negative engagement. But basically, foreign companies in China always need to manage their regulatory stakeholders proactively. And Chinese regulators and authorities can be very sensitive to what is being said and done in the United States and Europe and elsewhere politically. And they can then maybe swing negatively towards a company in China, and you have to be working your regulatory relationships all the time. 

And most major multinationals have very savvy and sophisticated government affairs functions, but those functions need to work really well in China now in order to get in front of the regulators to explain the company's position and value proposition, to avoid blowback that may occur if regulators in China get irritated about something and seek to take it out on a company or two to show an example. For example, through some sort of retaliation. This can be deflected if you know how to do it.  

Steve Odland: And this comes back, I mean, we're people, wherever we are on the globe, and it all comes down to relationships and engagement with people and building those conversations. And what I hear you saying is critically important in China, but it's critically important everywhere. We can't forget the human element here. 

David Hoffman: Absolutely. I think it'svery true. I mean, just maybe a pin to put in this point, I think it's also very true that in the US now, American companies need to do a better job explaining to US regulators why their presence and activity in China isn't posing a national security risk for the US or is against the public interest in the US. That is a government affairs type of engagement that is very new for many companies, but in my view, really needs to be done.  

Steve Odland: We're talking about the top 10 priorities for companies doing business in China. We're going to take a short break and be right back. 

Welcome back to C-Suite Perspectives. I'm your host, Steve Odland, from The Conference Board. I'm joined today by David Hoffman, China Center leader and senior advisor in Asia for The Conference Board.  

Priority Number 5: Leading in Chinese-Style Digital Transformation 

Steve Odland: OK, David, here we go, the top five. We're coming around the horn here. What is the number five priority for companies doing business in China?  

David Hoffman: OK, number five is leading in Chinese-style digital transformation. And I had mentioned an earlier point about managing IT environment bifurcation, but in China, the digital realm, whether it's marketing or engaging consumers or plugging into the internet of things in China to manage your market operations or your supply chain—China is developing in the digital space at light speed, really. They've got an amazing digital environment. I would say in many ways, it's more interconnected than it is in the US, Steve, and this is because some of the mega apps like Alibaba or Tencent, with its systems, touch so many points, whereas we tend to be a little bit more verticalized here in the US. 

But it's just a really amazing digital environment and Chinese companies, Chinese competitors are very quick to integrate the latest, greatest features in China and the digital environment. Things like livestreaming, which we really don't have in the US. And these can be very foreign for the average Western company, but you've got to get ahead of it, and you've got to be great at it, actually. 

And this requires talent. I mean, the talent that's in this kind of space in China won't speak English. You're talking about really young programmers who are quite different from your normal corporate person.Sothere's a huge amount of work to do here to be able to be competitive. And that's at number five. 

Priority Number 4: Innovating for Product Competitiveness 

Steve Odland: OK. Moving on to number four in your list of priorities.  

David Hoffman: So again, related to the digital transformation point, innovating to maximize product competitiveness. So, we all know that market conditions are tough in China. It's a slowing business environment or a slowing economy, naturally. But innovation really is the key to winning in down markets. It's the key to winning always, actually. 

And what we found is that very few companies have localized their innovation functions for China. Sothey're localizing supply chains. We touched on that. China for China. They're localizing personnel with China teams and more empowerment on decision-making. But innovation functions tend to be tightly held at headquarters for a range of reasons, but IP protection tends not to be one of the main ones. The main one tends to be institutional inertia, like it'salways been done this way at the company. The innovations always come out of HQ and Switzerland, and that's how it's done, and we're not changing. 

But Chinese competitors are moving very fast. They're very innovative, and Western companies' cycle times on new product introductions and things tend to be too slow to keep pace with the market. This is a big one. 

Steve Odland: Yeah. It is huge. And you say product, but you also mean services. Those listeners who are in the service business, it's the same thing. But what I also hear you saying is, look, the Chinese market can be different. Well, every market's different, and the opportunities are different. And so you can't just take what is invented elsewhere. You've got to customize it and hone it to be apropos to that market. You also then have to, even if you're exporting from the market, you have to be apropos for the market in order tooperate there. So there are multiple facets to this point.  

David Hoffman: Absolutely. So many facets to this point. But what is true to say now, Steve, though, is the companies that do it well in China tend to hit new price points with product that then renders their product globally competitive in a major way. So there are real benefits of doing this in China. You need to do it to keep up with a local competition. But if you compete and win in China in such an intensely competitive market, those innovations are actually incredibly valuable, if not essentially globally.  

Steve Odland: Yeah, and you and I have talked about this in the past, but you've got the ABCDE aspect to the demographics, too. So if you can engineer products and services that fit with D and E, fit with C, fit with A/B, you then have covered essentially every market in the world in terms of a value or a price point that can work elsewhere. So China becomes an important proving ground.  

David Hoffman: Absolutely. Many of our members have appropriately called it a sandbox where you can innovate at scale in a way that actually no other market really enables. 

Priority Number 3: Executing to Win in Down Market Operating Conditions 

Steve Odland: All right, we're coming down to the last three. Number three on the list of priorities for companies doing business in China.  

David Hoffman: Related to the last point, I would say executing to win in down market operating conditions. So the Chinese economy is slowing. This is a structural downshift, it's significant, it's China big. There's a lot of overcapacity in the market, so there's a lot of price competition. Chinese competitors treat their home market as their home market, of course, and they're willing to fight to the bitter end there to survive. And foreign companies need to be able to do the same, to protect their presence. 

We all know that down markets happen. But it's a new thing for China. This hasn't happened for some 40 years. And winning in down markets means innovating, to my last point. But it means controlling cost, it means not making execution errors in the market, and so forth. It is a certain kind of experience that most multinationals have in their DNA from their overseas operations, but they may not have in China. 

And bringing the right people with that capability who know how to execute in down market conditions, cause the point here is, Steve, if you execute well in down market conditions, you're going to survive and enjoy the benefits of a more consolidated market on the other side. This is where winners are made, but you've got to know what you're doing.  

Steve Odland: Yeah, and you talked about the product aspect of it and the value aspect of it, but there's also good old-fashioned marketing communications.  

David Hoffman: Absolutely.  

Steve Odland: Yeah. And so you have to be thinking, and China's complex because you have many languages. People think, "Oh, you, you speak Chinese." Well, there isn't one Chinese. There are a lot of different languages, a lot of different demographic factors, a lot of different regions. It covers half a continent. It'svery complex, and so it comes down to communicating in a way that's the most salient and figuring out what that is. 

David Hoffman: Absolutely. That's a critical component of all this. 

Priority Number 2: Managing Geopolitical Risks 

Steve Odland:Yeah. OK. Moving on then to the number two priority.  

David Hoffman: Effectively managing geopolitical risks. So Steve, earlier you mentioned black swans and then gray swans. And you're very right in pointing out that most multinationals haven't actually really planned for geopolitical risk. In the past, it's always been kind of a little thing that they had in their annual ERM process updates, but it was never actually taken that seriously. 

Some of the oil majors have done it seriously and for a long time because they'veoperated in difficult markets, many of which had political or military instability. Sothey've been doing it, but your average multinational in a consumer product category has not. So this is new space. And there's a lot to manage. You have the gray swans that you can kind of codify on one hand, and you need to think through how those might impact your business. And there is a method to this, and it needs to be process-driven. 

And we'veactually developed at the China Center an impacts-based approach to geopolitical risk management, where you can identify the five or six key impacts to your business. Let's say the shortage or unavailability of a certain component, or the tariff at a certain level on a certain category. And you can plan from the bottom up for the impacts, so that irrespective of how you reach them geopolitically, through what events happen on the top, you're ready for them if and when they come. 

But this is a big process. It can't just be given to risk planning,it's multifunctional, it's cross-functional. It needs to engage both headquarters and the local operation and maybe other supply chain nodes around the world. It needs to be managed.  

Steve Odland: And you need to be thinking in terms of black swan events. I mean, if there's a blockade of Taiwan and you can't get chips out, or it basically shuts down trade between countries or movement of goods between countries, that can be catastrophic. And so it doesn't mean that you go willy-nilly cause not all companies can afford to completely move supply chains or react that fast. But you have to at least think through the possibilities here and be honest about it. 

I think you said before, to make sure that the voices are being heard. You've got to be willing to put it on the table and just discuss it. It doesn't mean that you have to plan for that as the base case but the "what ifs" become really important here.  

David Hoffman: Really important, and you may even need insurance, Steve.Solet's say you're a company and, if you had a blockade in the Taiwan Strait, it would disrupt a certain component supply to you. What could you do about it? You could stockpile the component. You could redesign your product to remove the component. You could look for substitute sources. 

All of those approaches will cost something, and the C-Suite needs to know what those approaches are, and they need to make a decision about whether to take the insurance or not. And that requires a process to get to it. That needs to be part of this.  

Steve Odland:Yeah. Lots of pieces to geopolitical risk. 

David Hoffman: Absolutely. 

Priority Number 1: Aligning with Headquarters 

Steve Odland: All right, this is it. The number one priority for companies doing business in China in 2025 is?  

David Hoffman: Aligning effectively with headquarters. 

Steve Odland: Now that just doesn't seem right, cause that seems like it should just, I mean, isn't everybody aligned with their headquarters? 

David Hoffman: Well, in our case, Steve, we're perfectly aligned, of course. But you know, when you think through everything I've gone through here, you realize that there are a lot of moving parts, a lot of moving pieces, a lot of difficult issues that are hard to form consensus views on. And the thing that pulls this all together is very strong alignment between headquarters and the China organization. And in many cases, the headquarters simply don't have the required brain function at headquarters. 

So for the longest time, Steve, you might recall, I would visit US-based C-Suites or European C-Suites and I'd talk about China, but they'd all kind of say, "Oh, my China teams great. They do all that. We visit a few times a year for planning meetings." It needs to be so different now. Headquarters needs to understand the issues and have a committed team at the headquarter level that keeps up the learning curve there. And the China organization needs to be really good at communicating what's going on the ground. 

And these can sometimes be sensitive issues, right? Soyou've got to bring a lot together here to be aligned. And it can be done, but it requires top-of-the-house commitment from the headquarters side, it requires some resource allocation on the China side and a commitment to open and fact-based communication. But this is the thing that pulls all the other things together, and that's why I put it at number one. I thought a lot about that.  

Steve Odland: Yeah. And it's not that headquarters doesn't have the brain, but they don't have the experience. They're not on the ground. They don't see what's going on. 

So therefore, what you're saying is the other nine need to be what comes together. And there needs to be collaboration between the group accountable for doing business in China and the people doing business elsewhere. And it needs to all blend, and there needs to be a consensus on what the right approach is. Cause you don'toperate in a vacuum is your point. And there are geopolitical tensions with China and wherever the home office is, but there are geopolitical issues between that home office and everywhere else, too. So they got to balance all of it. 

David Hoffman: Well, absolutely. And what I mean by brain function is really just a commitment to understanding what's going on in China. The members of ours that we find that are the best at this typically have a CEO or a C-Suite member who is formerly been posted in China, spent years on the ground there. 

And that obviously makes the connection between the EXCO or the board and the China organization much tighter. So you need to kind of replicate that, and that requires really good communication and a platform to do it. It can't just be a part-time job for the China organization to try to explain things to headquarters. And it can't be for headquarters just a part-time job to occasionally read up on China issues. It actually needs to be more systematic. And if you get this right, everything else works better.  

Steve Odland: Well, it certainly makes it a more integrated plan around the world. So, critically important. David Hoffman, thanks for being with us today.  

David Hoffman: Thank you for having me. This was fun.  

Steve Odland: Yeah. And thanks to all of you for listening in to C-Suite Perspectives. I'm Steve Odland, and this series has been brought to you by The Conference Board.