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Most people are already familiar with the idea of “de-risking” or “decoupling” as the United States and the European Union try to diversify from China in strategic industries.
Less well known is a more subtle form of decoupling that is affecting Corporate Chinaparticularly international companies in the country: lack of expatriates.
Foreign companies in China report that the number of expatriates who want to live and work in the world’s second-largest economy remains low compared to before the pandemic and there are few signs it will fully recover soon.
Why should international companies care? After all, “localization” – appointing local staff rather than expatriates – is advancing in China as geopolitics complicate the environment and more companies move parts of their supply chains to other countries.
Localization also suits those multinationals that sell in the Chinese domestic market and need to better adapt their products to local customers: the so-called “in China for China” strategy.
But having too few international employees can also have unintended consequences for foreign companies in China. Without employees coming and going from headquarters, opportunities can be missed due to gaps in communications. Proof of the latter is how many foreign automakers were caught off guard by the sudden rise of Chinese EV makers during the pandemic.
For multinationals, ensuring a constant flow of employees between headquarters and their operations in different countries is also important to instill a global corporate culture.
“In an environment where there is not a very regular exchange of personnel for long-term assignments between headquarters and China (in both directions), it is really difficult to preserve corporate culture,” says Sean Stein, president of the American Chamber of Commerce of China. “And once corporate culture starts to weaken, the gaps between headquarters and China start to expand.”
Executives also say that by increasing the number of people at corporate headquarters with significant experience in China, companies can reduce “friction” in communications with their operations there.
Precise data on expatriates in China is scarce. Chinese authorities have said the country issued permits to 711,000 foreign residents last year, compared with 846,000 in 2020, the most recent previous comparison available. The European Chamber of Commerce’s business confidence survey in China published in 2023 found that 16 percent of respondents did not employ any foreign nationals at the time and that expatriates made up 10 percent or less of the 78 percent staff. hundred of them. This was slightly more serious than the survey published the previous year.
Both surveys, however, reflected the worst effects of the pandemic. Executives report that things have improved since then, but there are no signs of a return to pre-Covid levels or even the heyday era before the spike in US-China trade tensions starting in 2018.
Whereas once high-level executives would have gladly worked in China, today the position seems more problematic. In addition to geopolitical concerns, there is extreme business competition in the country. In its recent business climate survey, Amcham China found that a third of respondents reported that their profit margins based on earnings before interest and taxes in China were below their global average, while only 19 percent percent were above the global average.
Solving the expat gap will be complex. Companies’ global headquarters will need to offer additional incentives both to high-performing employees outside China to do a stint in the country and to local staff in China to accept overseas assignments.
This is important partly because of the need to seize promising opportunities but also because of compliance. In China, as elsewhere, things can go seriously awry when a global company loses close oversight of its subsidiaries. Expats won’t solve this alone, but they are a channel for instilling global compliance standards. After all, China’s business history is littered with foreign companies caught in disputes with their local partners or embroiled in localized corruption cases. That’s the kind of decoupling that no company wants.