Domestic Market Constraints Prompt Chinese Firms To Reconsider ‘Going Out’ – Analysis

By He Jun

The “internal circulation” and “national unified large market” are two crucial concepts proposed in China in recent years. After recognized by the country’s central government, they not only became goals in China’s economic development but also strategies to respond to new international situations and environmental changes. Hence, such concepts have now become policies that have significant impacts on business development.

The shift from the past emphasis on being the “world’s factory” and “going out (i.e., expanding in overseas)” to the current “internal circulation” and “national unified large market” represents a significant change in China’s participation in the world economy. This is related to the background of the rise of deglobalization and the intensification of international geopolitical competition. The macro changes witnessed in the past forty years have brought tremendous changes to the survival and development of Chinese enterprises.

In the past, China acted as the “world’s factory”. During that time, the economic situation between the country and the rest of the world is that “China produces, the world consumes”. Chinese enterprises participated in the global supply chain, occupying the lowest-profit segment of the “smile curve”. In foreign trade, Chinese enterprises engaged in large-scale exports, relying on them to achieve “primary accumulation”, pursuing trade surpluses, and earning foreign exchange. The development of Chinese enterprises in production capacity, technological level, and management capabilities has benefited from the development and progress under this logic.

As Chinese enterprises developed to a certain extent, with significantly increased production capacity and continuously accumulating wealth, they began to “go global”. In addition to continuing to participate in traditional foreign trade, Chinese enterprises started investing in overseas factories or engaging in capital investments abroad. The proposal of the Belt and Road Initiative provided a grand new framework in this regard, where some Chinese enterprises are essentially following the development path of multinational companies investing in China in the past.

Yet, under the new circumstances, the market logic established during the time of globalization no longer applies. Instead, it is now being replaced by geopolitical logic. Multinational companies have shifted their production and manufacturing focus to places closer to consumer markets and with geopolitical security considerations. In recent years, foreign investment in countries such as Mexico, Vietnam, and India has increased significantly, reflecting the results of these changes. Additionally, after several years of effort, investment in advanced manufacturing industries in the United States has begun to rebound, a manifestation of industrial investment relocation. The manufacturing industries that were previously offshore are now concentrating in regions closer to the market, forming what ANBOUND refers to as a “close produce” layout.

Under such a backdrop, Chinese enterprises are facing a somewhat awkward situation. With the continuous push by the U.S. and some of its allies to decouple from China, the separation of China from the global market continues to occur. As deglobalization intensifies and global supply chains are being restructured, there have been significant changes in the external development environment for Chinese enterprises, leading to the loss of many orders in overseas markets. With the establishment of the “close produce” pattern, if Chinese enterprises want to continue participating in the global supply chain, they must follow leading and end-user enterprises to move production overseas. Otherwise, they will be left to participate in various internal competitions in the Chinese market.

Such a situation compels policies within China to undergo changes. In recent years, China has put forward the idea of forming the development pattern with the domestic circulation as the mainstay, with domestic and international circulations as the drivers to each other. In addition, there is also the goal of building a unified national market. The essence of these concepts is to support the development of Chinese enterprises by expanding, tapping into, and utilizing the super-large-scale domestic market. On the surface, this shift from external to internal focus seems to be logical and reasonable. With a population of 1.4 billion, China is indeed a super-large-scale market. Many multinational companies have valued this market in the past, and Chinese enterprises themselves can naturally make full use of and rely on the domestic market.

However, we believe that although China’s own market can provide considerable demand and absorb some of the capacity of domestic manufacturing enterprises, its scale is actually limited. Hence, it can only solve some of the problems and meet the market demands of some enterprises. If these enterprises want to develop better, they still need to participate in the global supply chain and rely on the international market. For many Chinese enterprises participating in globalization, their development is oriented towards the global market. All the same, in many industries, Chinese businesses have long been serving the global market and participating in the global supply chain. Hence, without the international market, many of these Chinese enterprises may find themselves unable to grow even if they are surviving.

In their studies, researchers at ANBOUND noticed that many Chinese enterprises are now facing the practical issue of locating international markets. This is especially true for high-tech enterprises in economically developed regions, where they generally face the problems of insufficient market and demand. It is rather challenging for them to survive solely on the domestic market, and the future prospects are not exactly optimistic. Therefore, many regions in China are now re-considering to “go global” and on expanding international markets in the new situation.

In any case, Chinese enterprises now face a much more complex environment when “going out” compared to the past. Due to the U.S. push to suppress many of the Chinese firms, a number of them, especially in advanced manufacturing are on the U.S. sanctions “entity list”. These enterprises, wanting to embark on a second round of “going out”, especially those aiming to enter the European and American markets, will face significant difficulties. Generally speaking, the European and American markets are lucrative markets for Chinese companies. Now, with the suppression they are facing, these enterprises can only turn to some low-profit developing markets as a second choice.

In today’s world, Chinese enterprises embarking on another round of “going out” will face different challenges from the past. Previously, when Chinese enterprises “went out”, they mainly faced market competition, tariffs, and other “market-related” issues. However, in the process of this second round of “going out”, Chinese enterprises will encounter various “non-market issues” and geopolitical risks. How to avoid various risks when entering international markets is a systematic challenge for Chinese enterprises. As it stands, they can consider whether to rely solely on themselves. Alternatively, they can use various platforms and supply chain relationships or to collaborate with several partners.

Final analysis conclusion:

Overall, Chinese enterprises in the second phase of “going out” face serious geopolitical maneuvering and challenges of deglobalization. For these enterprises to achieve further sustained and stable development, the difficulties they face are even greater than before. In a geopolitically charged world, this situation may persist for five, ten, or even longer years.

He Jun is a researcher at ANBOUND