Despite escalating efforts from the United States and its allies to clamp down on trade, international companies with an interest in the still-sizeable Chinese market are adopting a new plan of action to stay engaged while keeping themselves insulated from unexpected geopolitical shocks, analysts said.
The strategy, dubbed “in China for China”, is an integrative process by which foreign businesses design, develop and produce wholly within the country to sell to local clients.
It is becoming one of few viable choices for many multinationals – particularly those in tech and manufacturing – said Xin Qiang, a professor at Fudan University’s Institute of International Studies in Shanghai.
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“It is not an option for many to give up the Chinese market. Going forward, many foreign firms will, to some extent, segregate China from their other operations,” he said.
The Dutch firm NXP – a major supplier of semiconductors that counts China as one of its key revenue sources – is the latest business to join this trend, as more US restrictions on tech exports enter into force and Donald Trump’s second term in the White House draws near.
The company is mulling the construction of China-specific chip supply chains as it juggles compliance requirements from Western governments and its commitments to the world’s second-largest economy, according to reports by Bloomberg and others. Andy Micallef, NXP’s executive vice-president, was quoted as saying the company will build a fully local supply chain with customers that want domestic manufacturing capacity.
Analysts said this localisation, already in place for other fields like chemicals, pharmaceuticals and automotives, could be an effective way for tech-focused foreign firms to restructure their business – but also carries limitations.
“This strategy is to ensure China treats their products as locally made ones and can help Beijing deflect any arguments that China manufacturing is for export to the US,” said James Zimmerman, former chairman of the American Chamber of Commerce in China and a current partner at international law firm Loeb & Loeb in Beijing.
“If companies in China have a choice between an American product vs a product made locally or from a friendlier jurisdiction, they may go with the alternative. But if they can’t source locally, they still need to source globally.”
On Monday, the US imposed restrictions on the export to China of 24 types of chipmaking equipment and three categories of software, with a focus on the high-bandwidth memory chips vital for artificial intelligence (AI) applications. The curbs are intended to prevent Beijing from expanding its AI capabilities for military use.
One day later, four Chinese trade associations urged their members to exercise caution when procuring American chips. Whether produced by a Chinese company or a foreign one, the associations encouraged members to favour products manufactured domestically.
Zimmerman warned that US companies could be at a disadvantage compared to Chinese firms or those from a third country that are not bound by the limitations of export bans or sanctions.
“If sanctions don’t apply to competitors like local Chinese firms, they will fill the gap at a loss to American companies and workers,” he said.
Still, few are contemplating leaving China. Despite the intensifying conflict over tech dominance between the two countries, China remains a major market for US firms.
California-based Qualcomm said in its most recent financial report last month that as much as 46 per cent of its revenue came from customers with headquarters in China, its biggest market. This marked an increase from the 37 per cent it reported in 2023. Nvidia, whose chips are helping to power the AI wave, counted on China for 15 per cent of its revenue for the three-month period ending October 29 – and 27 per cent of company revenue for the whole of 2023.
Digitimes Research analyst Jim Chien estimated the proportion of direct imports from the US in China’s total chip imports fell below 3 per cent in 2023. China’s total semiconductor imports in 2024 are tipped to grow 5.2 per cent year on year to US$320 billion, with its chip trade deficit set to rise 3 per cent to US$238 billion.
Although Xin of Fudan University warned such segregation will affect China’s use of the most cutting-edge Western technology, it is still preferable to a total exodus by foreign firms.
“China understands the rising geopolitical challenges facing multinationals and will strive to improve the business environment. This strategy may not be what Beijing wants, but at least those foreign firms that are adopting the strategy are not leaving.”
More from South China Morning Post:
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