August 21, 2025 • 28 mins
Doing business in China increasingly requires an entirely different approach to supply chain, IT, government relations, and innovation. How can multinational companies operating in China evaluate the risks and opportunities—including gray swans and even black swans?
Join Steve Odland and guest David Hoffman, China Center Leader and senior advisor for Asia at The Conference Board, to explore the difference between “complicated” and “complex,” how to win in down market operating conditions, and why managing geopolitical risks requires both the local operation and your global headquarters.
For more from The Conference Board:
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Steve Odland (00:00):
Welcome to C-Suite Perspectives, a signature
series by The Conference Board.
I'm Steve Odland from The ConferenceBoard and the host of this podcast series.
And in today's discussion, we'regoing to talk about the top 10
issues for multinational companiesdoing business in China today.
Joining me is David Hoffman, the ChinaCenter leader and senior advisor in Asia.
(00:22):
David, welcome to the program.
David Hoffman (00:24):
It's great to be here, Steve.
Thanks for having me.
Steve Odland (00:27):
So David, you've been in the region for a very long time.
You're a renowned China expert, and it'sjust so nice to have you today on the
program talking about these priorities.
And these priorities will beapropos to anyone who's trying
to do business in China.
You are the leader of our ChinaCenter, which focuses on just that.
(00:48):
So we're going to go through, forour listeners, we're going to go
through, in inverse order, David's top10 priorities for doing business in
China today, starting with number 10.
So David, number 10 onyour list of priorities is?
David Hoffman (01:02):
So what I've written down here is cost-competitively
reconfiguring supply chain, Steve.
This might surprise listeners to be number10, but it's true to say that most of
our members, large Western multinationalcompanies and Asian multinational
companies, have done a lot already tobuild resilience into their supply chains.
(01:25):
But it is a cost andproductivity challenge.
So, supply chains are movingfrom China, or at least being
built adjacent to China, to haveappropriate redundancy and resilience.
And this adds cost, and it also addscomplexity and efficiency issues.
And figuring out how to plugthose efficiency gaps with a more
(01:49):
complex supply chain, selectingnew locations that make sense.
Many countries around the worldwhere we might locate supply chains
have uncertain policy environments.
These are all difficult questionsto manage, and that's why doing
this cost competitively isreally the operative word here.
(02:09):
It's not hard to move things to otherplaces or build more redundancy, but
it's hard to do it cost effectively.
Steve Odland (02:17):
And what you're talking about, David, is the supply chain that
is used to export to other countries.
It doesn't really apply tothe supply chains that are in
China for people producing forthe Chinese consumer, correct?
David Hoffman (02:31):
Well, that's correct.
I mean, more and more large multinationalcompanies are building supply chains
that are expressly China for China,usually with some export component
and often an export component to Asiaand or the Global South, much less
so from China to America or Europe.
(02:53):
And again, that's a great structure,but it's hard to do cost effectively.
Steve Odland (02:58):
Yeah.
And so, essentially, multinationals aredealing with almost two supply chains
because you have the supply chainthat's manufacturing in China, taking
advantage of labor arbitrage and thelow 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 (03:18):
Well, it does, and I guess having two increasingly separated
supply chains, one for China and itssphere, and one for the West, it does
make sense, but you have reduced scale.
And that means you'll be lessefficient, less cost efficient, and
you need new solutions, productivitysolutions, IT solutions, management
(03:42):
approaches, et cetera, to do it well.
Steve Odland (03:45):
Number nine, on priorities for multinationals in China.
David Hoffman (03:50):
Managing IT environment bifurcation.
And let me explain what bifurcation means.
This basically means separation.
And beginning, actually, quite sometime ago in China, we began to see a
very different internet environment.
And you essentially there have anentirely separated internet environment.
(04:12):
Google and other large US and Western appsand systems don't actually work there.
They might not even be allowed,in Google's case, for example.
So Western companies, foreigncompanies need to deal with an
increasingly different IT environment.
We see this especially on thefront end, in market operations.
(04:35):
Instead of Salesforce and these otherCRM 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 waybackwards, Steve, now into enterprise IT
(04:58):
systems, as US-China strategic competitionheats up and countries more and more, not
just the US and China, get concerned aboutcontrol of data sovereignty and so forth.
And this creates a reallyinteresting and big challenge.
I mean, essentially companies aregoing to have to have an altogether
different IT stack for China, eventually.
(05:20):
That writing is on the wall.
It's debatable how fast we're going to getto full separation, but it's in the works.
Steve Odland (05:27):
One aspect of IT is the systems themselves.
The other aspect is how theygovern 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 importantto the security of their assets.
David Hoffman (05:45):
Absolutely.
In fact, in our upcoming China CEOCouncil, Steve, on June 19, we're looking
at Chinese AI, specifically, and whattrajectory development there is on, what
the differences mean to foreign companiesactive in China, and how they're going
to need to adapt to a very differentAI application environment, as well.
Steve Odland (06:08):
All right, so moving on.
Number eight in your list of prioritiesfor companies doing business in China.
David Hoffman (06:15):
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 WesternMNCs is now vulnerable to trade
conflicts to tariff pressures to ITbifurcation issues to supply chain
(06:40):
complexity issues and so forth.
And in this more complex businessstructure, the resilience issues are more.
And so companies need to really bethinking about how to make sure you know
that wherever geopolitical, tensionsmight impact their business, where export
(07:02):
restrictions on the China side or the USside or the Europe side, or new tariffs,
or what have you could impact resilience.
And they need to be thinking verycarefully about how to make sure
that the key functions essentialto their business are resilient.
Steve Odland (07:18):
And we used to think about resilience in a number of ways.
Certainly, weather-relatedresilience, but more increasingly,
policy, trade, regulatory.
But there is a risk out there ofpotential war or military conflicts
and the need for resilience aroundsomething even more dangerous like that.
David Hoffman (07:38):
The diversity and breadth of the scenarios involved today,
Steve, are really wide and complex.
Complex is an important word tomaybe even underscore here because
it's more than complicated.
Business is good at managing complicatedstuff cause you can do that with process.
Complexity is harder, because anyevent that occurs might have unknowable
(08:04):
or imponderable knock on an impact.
So nobody can consider everysingle permutation about, like, for
example, how maybe a blockade inthe Taiwan Strait situation could
evolve to impact your business.
And I've actually pulled geopoliticalrisk management up higher in
this list, but that's wherethe scenario planning comes in.
Steve Odland (08:25):
OK.
Moving on, then, to number sevenon your list of priorities.
David Hoffman (08:29):
Forming consensus planning views and scenarios.
What I've been describing hopefullybegins to paint a picture of all
the complicatedness and complexityand nuance involved now in China
operations for multinational businesses.
And this actually makes forming a viewon what the future holds very difficult.
(08:54):
And I see many companies strugglingto get the right people around the
table to use the right facts, the rightdata points, the right information
inputs to form a view about thelong view on China, the near view on
China, the medium-term view on China.
Now, of course, I just mentioned inanother remark that the scenarios are
(09:16):
very wide, but even agreeing on what thescenarios are and what they imply for
business is a real challenge for companiesbecause the views from China and one's
China team there on the ground, and theviews at corporate headquarters in America
or Europe, can be very different, withvery different people having different
(09:36):
information sources and beliefs.
It gets into, there can becultural issues involved.
It's hard to form a view, and beinga strategist and planner yourself, you
really have to analyze the situation.
Do the best you can with the informationyou have, and eventually form a view
with assumptions that you can plan on.
Steve Odland (09:58):
Increasingly it used to be the black swan events, which are, by
definition, events that were once in alifetime, essentially, and unforecastable.
These are the kinds of thingsthat are massive, either regional
or global events, they movemarkets, you can't forecast them.
But they seem to be happening so oftenthat there's a new term out there,
(10:19):
which is gray swans, which are veryunlikely to happen, but you have to
take them into account in your scenarioplanning so that you can at least
then test your resilience in yoursupply chain, in the IT environment
and your supply chains, all the thingsthat you've already spoken about.
This comes to bear here in making surethat your scenario planning is robust.
David Hoffman (10:42):
Well, that's right.
And what I see missing oftentimes hereis that the top of the house, the CEO,
actually needs to be involved in bringingthe right people together and the right
information base to form a consensus view.
If you have an organization whereeverybody kind of has a different
(11:02):
view, and nobody really says whatthey really think, or something like
that, you get a lot of dissonanceand discord in the organization.
Steve Odland (11:12):
OK.
Moving on to number sixin your set of priorities.
David Hoffman (11:16):
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 inChina always need to manage their
regulatory stakeholders proactively.
(11:37):
And Chinese regulators and authoritiescan be very sensitive to what is being
said and done in the United Statesand Europe and elsewhere politically.
And they can then maybe swingnegatively towards a company in
China, and you have to be working yourregulatory relationships all the time.
(11:59):
And most major multinationals have verysavvy and sophisticated government affairs
functions, but those functions need towork really well in China now in order
to get in front of the regulators toexplain the company's position and value
proposition, to avoid blowback that mayoccur if regulators in China get irritated
(12:24):
about something and seek to take it outon a company or two to show an example.
For example, throughsome sort of retaliation.
This can be deflected ifyou know how to do it.
Steve Odland (12:35):
And this comes back, I mean, we're people, wherever we are
on the globe, and it all comes downto relationships and engagement with
people and building those conversations.
And what I hear you saying iscritically important in China, but
it's critically important everywhere.
We can't forget the human element here.
David Hoffman (12:51):
Absolutely.
I think it's very true.
I mean, just maybe a pin to put inthis point, I think it's also very true
that in the US now, American companiesneed to do a better job explaining
to US regulators why their presenceand activity in China isn't posing a
(13:12):
national security risk for the US or isagainst the public interest in the US.
That is a government affairs typeof engagement that is very new
for many companies but, in myview, really needs to be done.
Steve Odland (13:27):
We're talking about the top 10 priorities for
companies doing business in China.
We're going to take a shortbreak 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.
OK, David, here we go, the top five.
(13:48):
We're coming around the horn here.
What is the number five priority forcompanies doing business in China?
David Hoffman (13:54):
OK, number five is leading in Chinese-style digital transformation.
And I had mentioned an earlier pointabout managing IT environment bifurcation,
but in China, the digital realm, whetherit's marketing or engaging consumers or
plugging into the internet of things inChina to manage your market operations or
(14:17):
your supply chain—China is developing inthe digital space at light speed, really.
They've got an amazingdigital environment.
I would say in many ways, it's moreinterconnected than it is in the US,
Steve, and this is because some of themega apps like Alibaba or Tencent,
(14:39):
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 digitalenvironment and Chinese companies,
Chinese competitors are very quick tointegrate the latest, greatest features
in China and the digital environment.
Things like livestreaming, whichwe really don't have in the US.
(15:03):
And these can be very foreign for theaverage Western company, but you've
got to get ahead of it, and you'vegot to be great at it, actually.
And this requires talent.
I mean, the talent that's in this kindof space in China won't speak English.
You're talking about really youngprogrammers who are quite different
(15:23):
from your normal corporate person.
So there's a huge amount of work todo here to be able to be competitive.
And that's at number five.
Steve Odland (15:32):
OK.
Moving on to number fourin your list of priorities.
David Hoffman (15:37):
So again, related to the digital transformation point, innovating
to maximize product competitiveness.
So, we all know that marketconditions are tough in China.
It's a slowing business environmentor a slowing economy, naturally.
But innovation really is thekey to winning in down markets.
(15:58):
It's the key to winning always, actually.
And what we found is that veryfew companies have localized their
innovation functions for China.
So they're localizing supply chains.
We touched on that.
China for China.
They're localizing personnelwith China teams and more
empowerment on decision-making.
(16:19):
But innovation functions tend to betightly held at headquarters for a
range of reasons, but IP protectiontends not to be one of the main ones.
The main one tends to be institutionalinertia, like it's always been
done this way at the company.
The innovations always come out ofHQ and Switzerland, and that's how
it's done, and we're not changing.
(16:41):
But Chinese competitorsare moving very fast.
They're very innovative, and Westerncompanies' cycle times on new product
introductions and things tend to betoo slow to keep pace with the market.
This is a big one.
Steve Odland (16:55):
Yeah.
It is huge.
And you say product, butyou also mean services.
Those listeners who are in theservice 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, andthe opportunities are different.
And so you can't just takewhat is invented elsewhere.
You've got to customize it and honeit to be apropos to that market.
(17:15):
You also then have to, even ifyou're exporting from the market,
you have to be apropos for themarket in order to operate there.
So there are multiplefacets to this point.
David Hoffman (17:24):
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 withproduct that then renders their product
globally competitive in a major way.
So there are real benefitsof doing this in China.
You need to do it to keepup with a local competition.
(17:47):
But if you compete and win in China insuch an intensely competitive market,
those innovations are actually incrediblyvaluable, if not essentially globally.
Steve Odland (17:58):
Yeah, and you and I have talked about this in the
past, but you've got the ABCDEaspect to the demographics, too.
So if you can engineer products andservices that fit with D and E, fit
with C, fit with A/B, you then havecovered essentially every market in
the world in terms of a value or aprice point that can work elsewhere.
(18:19):
So China becomes animportant proving ground.
David Hoffman (18:22):
Absolutely.
Many of our members have appropriatelycalled it a sandbox where you can
innovate at scale in a way thatactually no other market really enables.
Steve Odland (18:34):
All right, we're coming down to the last three.
Number three on the list of prioritiesfor companies doing business in China.
David Hoffman (18:40):
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 overcapacityin the market, so there's
a lot of price competition.
(19:01):
Chinese competitors treat theirhome market as their home market, of
course, and they're willing to fightto the bitter end there to survive.
And foreign companies need to be able todo 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.
(19:21):
And winning in down markets meansinnovating, to my last point.
But it means controlling cost, itmeans not making execution errors
in the market, and so forth.
It is a certain kind of experiencethat most multinationals have in their
DNA from their overseas operations,but they may not have in China.
(19:45):
And bringing the right people with thatcapability who know how to execute in
down market conditions, cause the pointhere is, Steve, if you execute well in
down market conditions, you're going tosurvive and enjoy the benefits of a more
consolidated market on the other side.
This is where winners are made, butyou've got to know what you're doing.
Steve Odland (20:05):
Yeah, and you talked about the product aspect of it and the value
aspect of it, but there's also goodold-fashioned marketing communications.
David Hoffman (20:12):
Absolutely.
Steve Odland (20:14):
Yeah.
And so you have to be thinking,and China's complex because
you have many languages.
People think, "Oh, you, you speakChinese." 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's very complex, and so it comes downto communicating in a way that's the most
salient and figuring out what that is.
David Hoffman (20:35):
Absolutely.
That's a critical component of all this.
Steve Odland (20:40):
Yeah.
OK.
Moving on then to the number two priority.
David Hoffman (20:45):
Effectively managing geopolitical risks.
So Steve, earlier you mentionedblack swans and then gray swans.
And you're very right in pointing outthat most multinationals haven't actually
really planned for geopolitical risk.
In the past, it's always been kind ofa little thing that they had in their
(21:06):
annual ERM process updates, but it wasnever actually taken that seriously.
Some of the oil majors havedone it seriously and for a long
time because they've operated indifficult markets, many of which had
political or military instability.
So they've been doing it, butyour average multinational in a
(21:27):
consumer product category has not.
So this is new space.
And there's a lot to manage.
You have the gray swans that youcan kind of codify on one hand,
and you need to think through howthose might impact your business.
And there is a method to this,and it needs to be process-driven.
And we've actually developed at theChina Center an impacts-based approach
(21:50):
to geopolitical risk management,where you can identify the five or
six key impacts to your business.
Let's say the shortage or unavailabilityof a certain component, or the tariff at
a certain level on a certain category.
And you can plan from the bottom up forthe impacts, so that irrespective of how
(22:11):
you reach them geopolitically, throughwhat 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 riskplanning, it's multifunctional,
it's cross-functional.
It needs to engage both headquartersand the local operation and maybe other
(22:32):
supply chain nodes around the world.
It needs to be managed.
Steve Odland (22:36):
And you need to be thinking in terms of black swan events.
I mean, if there's a blockade of Taiwanand you can't get chips out, or it
basically shuts down trade betweencountries or movement of goods between
countries, that can be catastrophic.
And so it doesn't mean that you gowilly-nilly cause not all companies
can afford to completely movesupply chains or react that fast.
(22:58):
But you have to at least think through thepossibilities here and be honest about it.
I think you said before, to makesure that the voices are being heard.
You've got to be willing to put iton the table and just discuss it.
It doesn't mean that you have to planfor that as the base case but the "what
ifs" become really important here.
David Hoffman (23:16):
Really important, and you may even need insurance, Steve.
So let's say you're a companyand, if you had a blockade in the
Taiwan Strait, it would disrupt acertain component supply to you.
What could you do about it?
You could stockpile the component.
You could redesign your productto remove the component.
(23:36):
You could look for substitute sources.
All of those approaches will costsomething, and the C-Suite needs to
know what those approaches are, andthey 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 (23:55):
Yeah.
Lots of pieces to geopolitical risk.
David Hoffman (23:58):
Absolutely.
Steve Odland (23:58):
All right, this is it.
The number one priority for companiesdoing business in China in 2025 is?
David Hoffman (24:06):
Aligning effectively with headquarters.
Steve Odland (24:09):
Now that just doesn't seem right, cause that seems like it
should just, I mean, isn't everybodyaligned with their headquarters?
David Hoffman (24:15):
Well, in our case, Steve, we're perfectly aligned, of course.
But you know, when you think througheverything I've gone through here,
you realize that there are a lot ofmoving parts, a lot of moving pieces,
a lot of difficult issues that arehard to form consensus views on.
And the thing that pulls this alltogether is very strong alignment between
(24:40):
headquarters and the China organization.
And in many cases, the headquarterssimply don't have the required
brain function at headquarters.
So for the longest time, Steve, youmight recall, I would visit US-based
C-Suites or European C-Suites and I'dtalk about China, but they'd all kind
(25:02):
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 understandthe issues and have a committed
team at the headquarter level thatkeeps up the learning curve there.
And the China organization needsto be really good at communicating
(25:23):
what's going on the ground.
And these can sometimes besensitive issues, right?
So you've got to bring a lottogether here to be aligned.
And it can be done, but it requirestop-of-the-house commitment from
the headquarters side, it requiressome resource allocation on the
China side and a commitment toopen and fact-based communication.
(25:46):
But this is the thing that pullsall the other things together, and
that's why I put it at number one.
I thought a lot about that.
Steve Odland (25:53):
Yeah.
And it's not that headquartersdoesn'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 theother nine need to be what comes together.
And there needs to be collaborationbetween the group accountable for
doing business in China and thepeople doing business elsewhere.
And it needs to all blend, andthere needs to be a consensus
(26:16):
on what the right approach is.
Cause you don't operatein a vacuum is your point.
And there are geopolitical tensions withChina and wherever the home office is,
but there are geopolitical issues betweenthat home office and everywhere else, too.
So they got to balance all of it.
David Hoffman (26:31):
Well, absolutely.
And what I mean by brain functionis really just a commitment to
understanding what's going on in China.
The members of ours that we find that arethe best at this typically have a CEO or a
C-Suite member who is formerly been postedin China, spent years on the ground there.
(26:53):
And that obviously makes the connectionbetween the EXCO or the board and
the China organization much tighter.
So you need to kind of replicatethat, and that requires really good
communication and a platform to do it.
It can't just be a part-time jobfor the China organization to try
(27:14):
to explain things to headquarters.
And it can't be for headquartersjust 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 (27:30):
Well, it certainly makes it a more integrated plan around the world.
So, critically important.
, Thanks for being with us today.
David Hoffman (27:37):
Thank you for having me.
This was fun.
Steve Odland (27:39):
Yeah.
And thanks to all of you forlistening in to C-Suite Perspectives.
I'm Steve Odland, and this series has beenbrought to you by The Conference Board.
Welcome to C-Suite Perspectives, a signature
series by The Conference Board.
I'm Steve Odland from The ConferenceBoard and the host of this podcast series.
And in today's discussion, we'regoing to talk about the top 10
issues for multinational companiesdoing business in China today.
Joining me is David Hoffman, the ChinaCenter leader and senior advisor in Asia.
(00:22):
David, welcome to the program.
David Hoffman (00:24):
It's great to be here, Steve.
Thanks for having me.
Steve Odland (00:27):
So David, you've been in the region for a very long time.
You're a renowned China expert, and it'sjust so nice to have you today on the
program talking about these priorities.
And these priorities will beapropos to anyone who's trying
to do business in China.
You are the leader of our ChinaCenter, which focuses on just that.
(00:48):
So we're going to go through, forour listeners, we're going to go
through, in inverse order, David's top10 priorities for doing business in
China today, starting with number 10.
So David, number 10 onyour list of priorities is?
David Hoffman (01:02):
So what I've written down here is cost-competitively
reconfiguring supply chain, Steve.
This might surprise listeners to be number10, but it's true to say that most of
our members, large Western multinationalcompanies and Asian multinational
companies, have done a lot already tobuild resilience into their supply chains.
(01:25):
But it is a cost andproductivity challenge.
So, supply chains are movingfrom China, or at least being
built adjacent to China, to haveappropriate redundancy and resilience.
And this adds cost, and it also addscomplexity and efficiency issues.
And figuring out how to plugthose efficiency gaps with a more
(01:49):
complex supply chain, selectingnew locations that make sense.
Many countries around the worldwhere we might locate supply chains
have uncertain policy environments.
These are all difficult questionsto manage, and that's why doing
this cost competitively isreally the operative word here.
(02:09):
It's not hard to move things to otherplaces or build more redundancy, but
it's hard to do it cost effectively.
Steve Odland (02:17):
And what you're talking about, David, is the supply chain that
is used to export to other countries.
It doesn't really apply tothe supply chains that are in
China for people producing forthe Chinese consumer, correct?
David Hoffman (02:31):
Well, that's correct.
I mean, more and more large multinationalcompanies are building supply chains
that are expressly China for China,usually with some export component
and often an export component to Asiaand or the Global South, much less
so from China to America or Europe.
(02:53):
And again, that's a great structure,but it's hard to do cost effectively.
Steve Odland (02:58):
Yeah.
And so, essentially, multinationals aredealing with almost two supply chains
because you have the supply chainthat's manufacturing in China, taking
advantage of labor arbitrage and thelow 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 (03:18):
Well, it does, and I guess having two increasingly separated
supply chains, one for China and itssphere, and one for the West, it does
make sense, but you have reduced scale.
And that means you'll be lessefficient, less cost efficient, and
you need new solutions, productivitysolutions, IT solutions, management
(03:42):
approaches, et cetera, to do it well.
Steve Odland (03:45):
Number nine, on priorities for multinationals in China.
David Hoffman (03:50):
Managing IT environment bifurcation.
And let me explain what bifurcation means.
This basically means separation.
And beginning, actually, quite sometime ago in China, we began to see a
very different internet environment.
And you essentially there have anentirely separated internet environment.
(04:12):
Google and other large US and Western appsand systems don't actually work there.
They might not even be allowed,in Google's case, for example.
So Western companies, foreigncompanies need to deal with an
increasingly different IT environment.
We see this especially on thefront end, in market operations.
(04:35):
Instead of Salesforce and these otherCRM 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 waybackwards, Steve, now into enterprise IT
(04:58):
systems, as US-China strategic competitionheats up and countries more and more, not
just the US and China, get concerned aboutcontrol of data sovereignty and so forth.
And this creates a reallyinteresting and big challenge.
I mean, essentially companies aregoing to have to have an altogether
different IT stack for China, eventually.
(05:20):
That writing is on the wall.
It's debatable how fast we're going to getto full separation, but it's in the works.
Steve Odland (05:27):
One aspect of IT is the systems themselves.
The other aspect is how theygovern 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 importantto the security of their assets.
David Hoffman (05:45):
Absolutely.
In fact, in our upcoming China CEOCouncil, Steve, on June 19, we're looking
at Chinese AI, specifically, and whattrajectory development there is on, what
the differences mean to foreign companiesactive in China, and how they're going
to need to adapt to a very differentAI application environment, as well.
Steve Odland (06:08):
All right, so moving on.
Number eight in your list of prioritiesfor companies doing business in China.
David Hoffman (06:15):
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 WesternMNCs is now vulnerable to trade
conflicts to tariff pressures to ITbifurcation issues to supply chain
(06:40):
complexity issues and so forth.
And in this more complex businessstructure, the resilience issues are more.
And so companies need to really bethinking about how to make sure you know
that wherever geopolitical, tensionsmight impact their business, where export
(07:02):
restrictions on the China side or the USside or the Europe side, or new tariffs,
or what have you could impact resilience.
And they need to be thinking verycarefully about how to make sure
that the key functions essentialto their business are resilient.
Steve Odland (07:18):
And we used to think about resilience in a number of ways.
Certainly, weather-relatedresilience, but more increasingly,
policy, trade, regulatory.
But there is a risk out there ofpotential war or military conflicts
and the need for resilience aroundsomething even more dangerous like that.
David Hoffman (07:38):
The diversity and breadth of the scenarios involved today,
Steve, are really wide and complex.
Complex is an important word tomaybe even underscore here because
it's more than complicated.
Business is good at managing complicatedstuff cause you can do that with process.
Complexity is harder, because anyevent that occurs might have unknowable
(08:04):
or imponderable knock on an impact.
So nobody can consider everysingle permutation about, like, for
example, how maybe a blockade inthe Taiwan Strait situation could
evolve to impact your business.
And I've actually pulled geopoliticalrisk management up higher in
this list, but that's wherethe scenario planning comes in.
Steve Odland (08:25):
OK.
Moving on, then, to number sevenon your list of priorities.
David Hoffman (08:29):
Forming consensus planning views and scenarios.
What I've been describing hopefullybegins to paint a picture of all
the complicatedness and complexityand nuance involved now in China
operations for multinational businesses.
And this actually makes forming a viewon what the future holds very difficult.
(08:54):
And I see many companies strugglingto get the right people around the
table to use the right facts, the rightdata points, the right information
inputs to form a view about thelong view on China, the near view on
China, the medium-term view on China.
Now, of course, I just mentioned inanother remark that the scenarios are
(09:16):
very wide, but even agreeing on what thescenarios are and what they imply for
business is a real challenge for companiesbecause the views from China and one's
China team there on the ground, and theviews at corporate headquarters in America
or Europe, can be very different, withvery different people having different
(09:36):
information sources and beliefs.
It gets into, there can becultural issues involved.
It's hard to form a view, and beinga strategist and planner yourself, you
really have to analyze the situation.
Do the best you can with the informationyou have, and eventually form a view
with assumptions that you can plan on.
Steve Odland (09:58):
Increasingly it used to be the black swan events, which are, by
definition, events that were once in alifetime, essentially, and unforecastable.
These are the kinds of thingsthat are massive, either regional
or global events, they movemarkets, you can't forecast them.
But they seem to be happening so oftenthat there's a new term out there,
(10:19):
which is gray swans, which are veryunlikely to happen, but you have to
take them into account in your scenarioplanning so that you can at least
then test your resilience in yoursupply chain, in the IT environment
and your supply chains, all the thingsthat you've already spoken about.
This comes to bear here in making surethat your scenario planning is robust.
David Hoffman (10:42):
Well, that's right.
And what I see missing oftentimes hereis that the top of the house, the CEO,
actually needs to be involved in bringingthe right people together and the right
information base to form a consensus view.
If you have an organization whereeverybody kind of has a different
(11:02):
view, and nobody really says whatthey really think, or something like
that, you get a lot of dissonanceand discord in the organization.
Steve Odland (11:12):
OK.
Moving on to number sixin your set of priorities.
David Hoffman (11:16):
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 inChina always need to manage their
regulatory stakeholders proactively.
(11:37):
And Chinese regulators and authoritiescan be very sensitive to what is being
said and done in the United Statesand Europe and elsewhere politically.
And they can then maybe swingnegatively towards a company in
China, and you have to be working yourregulatory relationships all the time.
(11:59):
And most major multinationals have verysavvy and sophisticated government affairs
functions, but those functions need towork really well in China now in order
to get in front of the regulators toexplain the company's position and value
proposition, to avoid blowback that mayoccur if regulators in China get irritated
(12:24):
about something and seek to take it outon a company or two to show an example.
For example, throughsome sort of retaliation.
This can be deflected ifyou know how to do it.
Steve Odland (12:35):
And this comes back, I mean, we're people, wherever we are
on the globe, and it all comes downto relationships and engagement with
people and building those conversations.
And what I hear you saying iscritically important in China, but
it's critically important everywhere.
We can't forget the human element here.
David Hoffman (12:51):
Absolutely.
I think it's very true.
I mean, just maybe a pin to put inthis point, I think it's also very true
that in the US now, American companiesneed to do a better job explaining
to US regulators why their presenceand activity in China isn't posing a
(13:12):
national security risk for the US or isagainst the public interest in the US.
That is a government affairs typeof engagement that is very new
for many companies but, in myview, really needs to be done.
Steve Odland (13:27):
We're talking about the top 10 priorities for
companies doing business in China.
We're going to take a shortbreak 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.
OK, David, here we go, the top five.
(13:48):
We're coming around the horn here.
What is the number five priority forcompanies doing business in China?
David Hoffman (13:54):
OK, number five is leading in Chinese-style digital transformation.
And I had mentioned an earlier pointabout managing IT environment bifurcation,
but in China, the digital realm, whetherit's marketing or engaging consumers or
plugging into the internet of things inChina to manage your market operations or
(14:17):
your supply chain—China is developing inthe digital space at light speed, really.
They've got an amazingdigital environment.
I would say in many ways, it's moreinterconnected than it is in the US,
Steve, and this is because some of themega apps like Alibaba or Tencent,
(14:39):
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 digitalenvironment and Chinese companies,
Chinese competitors are very quick tointegrate the latest, greatest features
in China and the digital environment.
Things like livestreaming, whichwe really don't have in the US.
(15:03):
And these can be very foreign for theaverage Western company, but you've
got to get ahead of it, and you'vegot to be great at it, actually.
And this requires talent.
I mean, the talent that's in this kindof space in China won't speak English.
You're talking about really youngprogrammers who are quite different
(15:23):
from your normal corporate person.
So there's a huge amount of work todo here to be able to be competitive.
And that's at number five.
Steve Odland (15:32):
OK.
Moving on to number fourin your list of priorities.
David Hoffman (15:37):
So again, related to the digital transformation point, innovating
to maximize product competitiveness.
So, we all know that marketconditions are tough in China.
It's a slowing business environmentor a slowing economy, naturally.
But innovation really is thekey to winning in down markets.
(15:58):
It's the key to winning always, actually.
And what we found is that veryfew companies have localized their
innovation functions for China.
So they're localizing supply chains.
We touched on that.
China for China.
They're localizing personnelwith China teams and more
empowerment on decision-making.
(16:19):
But innovation functions tend to betightly held at headquarters for a
range of reasons, but IP protectiontends not to be one of the main ones.
The main one tends to be institutionalinertia, like it's always been
done this way at the company.
The innovations always come out ofHQ and Switzerland, and that's how
it's done, and we're not changing.
(16:41):
But Chinese competitorsare moving very fast.
They're very innovative, and Westerncompanies' cycle times on new product
introductions and things tend to betoo slow to keep pace with the market.
This is a big one.
Steve Odland (16:55):
Yeah.
It is huge.
And you say product, butyou also mean services.
Those listeners who are in theservice 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, andthe opportunities are different.
And so you can't just takewhat is invented elsewhere.
You've got to customize it and honeit to be apropos to that market.
(17:15):
You also then have to, even ifyou're exporting from the market,
you have to be apropos for themarket in order to operate there.
So there are multiplefacets to this point.
David Hoffman (17:24):
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 withproduct that then renders their product
globally competitive in a major way.
So there are real benefitsof doing this in China.
You need to do it to keepup with a local competition.
(17:47):
But if you compete and win in China insuch an intensely competitive market,
those innovations are actually incrediblyvaluable, if not essentially globally.
Steve Odland (17:58):
Yeah, and you and I have talked about this in the
past, but you've got the ABCDEaspect to the demographics, too.
So if you can engineer products andservices that fit with D and E, fit
with C, fit with A/B, you then havecovered essentially every market in
the world in terms of a value or aprice point that can work elsewhere.
(18:19):
So China becomes animportant proving ground.
David Hoffman (18:22):
Absolutely.
Many of our members have appropriatelycalled it a sandbox where you can
innovate at scale in a way thatactually no other market really enables.
Steve Odland (18:34):
All right, we're coming down to the last three.
Number three on the list of prioritiesfor companies doing business in China.
David Hoffman (18:40):
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 overcapacityin the market, so there's
a lot of price competition.
(19:01):
Chinese competitors treat theirhome market as their home market, of
course, and they're willing to fightto the bitter end there to survive.
And foreign companies need to be able todo 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.
(19:21):
And winning in down markets meansinnovating, to my last point.
But it means controlling cost, itmeans not making execution errors
in the market, and so forth.
It is a certain kind of experiencethat most multinationals have in their
DNA from their overseas operations,but they may not have in China.
(19:45):
And bringing the right people with thatcapability who know how to execute in
down market conditions, cause the pointhere is, Steve, if you execute well in
down market conditions, you're going tosurvive and enjoy the benefits of a more
consolidated market on the other side.
This is where winners are made, butyou've got to know what you're doing.
Steve Odland (20:05):
Yeah, and you talked about the product aspect of it and the value
aspect of it, but there's also goodold-fashioned marketing communications.
David Hoffman (20:12):
Absolutely.
Steve Odland (20:14):
Yeah.
And so you have to be thinking,and China's complex because
you have many languages.
People think, "Oh, you, you speakChinese." 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's very complex, and so it comes downto communicating in a way that's the most
salient and figuring out what that is.
David Hoffman (20:35):
Absolutely.
That's a critical component of all this.
Steve Odland (20:40):
Yeah.
OK.
Moving on then to the number two priority.
David Hoffman (20:45):
Effectively managing geopolitical risks.
So Steve, earlier you mentionedblack swans and then gray swans.
And you're very right in pointing outthat most multinationals haven't actually
really planned for geopolitical risk.
In the past, it's always been kind ofa little thing that they had in their
(21:06):
annual ERM process updates, but it wasnever actually taken that seriously.
Some of the oil majors havedone it seriously and for a long
time because they've operated indifficult markets, many of which had
political or military instability.
So they've been doing it, butyour average multinational in a
(21:27):
consumer product category has not.
So this is new space.
And there's a lot to manage.
You have the gray swans that youcan kind of codify on one hand,
and you need to think through howthose might impact your business.
And there is a method to this,and it needs to be process-driven.
And we've actually developed at theChina Center an impacts-based approach
(21:50):
to geopolitical risk management,where you can identify the five or
six key impacts to your business.
Let's say the shortage or unavailabilityof a certain component, or the tariff at
a certain level on a certain category.
And you can plan from the bottom up forthe impacts, so that irrespective of how
(22:11):
you reach them geopolitically, throughwhat 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 riskplanning, it's multifunctional,
it's cross-functional.
It needs to engage both headquartersand the local operation and maybe other
(22:32):
supply chain nodes around the world.
It needs to be managed.
Steve Odland (22:36):
And you need to be thinking in terms of black swan events.
I mean, if there's a blockade of Taiwanand you can't get chips out, or it
basically shuts down trade betweencountries or movement of goods between
countries, that can be catastrophic.
And so it doesn't mean that you gowilly-nilly cause not all companies
can afford to completely movesupply chains or react that fast.
(22:58):
But you have to at least think through thepossibilities here and be honest about it.
I think you said before, to makesure that the voices are being heard.
You've got to be willing to put iton the table and just discuss it.
It doesn't mean that you have to planfor that as the base case but the "what
ifs" become really important here.
David Hoffman (23:16):
Really important, and you may even need insurance, Steve.
So let's say you're a companyand, if you had a blockade in the
Taiwan Strait, it would disrupt acertain component supply to you.
What could you do about it?
You could stockpile the component.
You could redesign your productto remove the component.
(23:36):
You could look for substitute sources.
All of those approaches will costsomething, and the C-Suite needs to
know what those approaches are, andthey 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 (23:55):
Yeah.
Lots of pieces to geopolitical risk.
David Hoffman (23:58):
Absolutely.
Steve Odland (23:58):
All right, this is it.
The number one priority for companiesdoing business in China in 2025 is?
David Hoffman (24:06):
Aligning effectively with headquarters.
Steve Odland (24:09):
Now that just doesn't seem right, cause that seems like it
should just, I mean, isn't everybodyaligned with their headquarters?
David Hoffman (24:15):
Well, in our case, Steve, we're perfectly aligned, of course.
But you know, when you think througheverything I've gone through here,
you realize that there are a lot ofmoving parts, a lot of moving pieces,
a lot of difficult issues that arehard to form consensus views on.
And the thing that pulls this alltogether is very strong alignment between
(24:40):
headquarters and the China organization.
And in many cases, the headquarterssimply don't have the required
brain function at headquarters.
So for the longest time, Steve, youmight recall, I would visit US-based
C-Suites or European C-Suites and I'dtalk about China, but they'd all kind
(25:02):
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 understandthe issues and have a committed
team at the headquarter level thatkeeps up the learning curve there.
And the China organization needsto be really good at communicating
(25:23):
what's going on the ground.
And these can sometimes besensitive issues, right?
So you've got to bring a lottogether here to be aligned.
And it can be done, but it requirestop-of-the-house commitment from
the headquarters side, it requiressome resource allocation on the
China side and a commitment toopen and fact-based communication.
(25:46):
But this is the thing that pullsall the other things together, and
that's why I put it at number one.
I thought a lot about that.
Steve Odland (25:53):
Yeah.
And it's not that headquartersdoesn'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 theother nine need to be what comes together.
And there needs to be collaborationbetween the group accountable for
doing business in China and thepeople doing business elsewhere.
And it needs to all blend, andthere needs to be a consensus
(26:16):
on what the right approach is.
Cause you don't operatein a vacuum is your point.
And there are geopolitical tensions withChina and wherever the home office is,
but there are geopolitical issues betweenthat home office and everywhere else, too.
So they got to balance all of it.
David Hoffman (26:31):
Well, absolutely.
And what I mean by brain functionis really just a commitment to
understanding what's going on in China.
The members of ours that we find that arethe best at this typically have a CEO or a
C-Suite member who is formerly been postedin China, spent years on the ground there.
(26:53):
And that obviously makes the connectionbetween the EXCO or the board and
the China organization much tighter.
So you need to kind of replicatethat, and that requires really good
communication and a platform to do it.
It can't just be a part-time jobfor the China organization to try
(27:14):
to explain things to headquarters.
And it can't be for headquartersjust 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 (27:30):
Well, it certainly makes it a more integrated plan around the world.
So, critically important.
, Thanks for being with us today.
David Hoffman (27:37):
Thank you for having me.
This was fun.
Steve Odland (27:39):
Yeah.
And thanks to all of you forlistening in to C-Suite Perspectives.
I'm Steve Odland, and this series has beenbrought to you by The Conference Board.
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