China’s expat gap problem

Most people by now are familiar with the idea of “de-risking” or “decoupling” as the US and EU try to diversify from China in strategic industries. 

Less well known is a more subtle form of decoupling that is afflicting corporate China, particularly international businesses in the country — a lack of expatriates. 

Foreign companies in China are reporting that the number of expatriates who want to live and work in the world’s second-largest economy is still low compared with before the pandemic and there are few signs that it will fully recover soon.

Why should international companies care? After all, “localisation” — appointing local staff in the place of expatriates — is advancing in China as geopolitics makes the environment more complicated and more businesses shift parts of their supply chains to other countries. 

Localisation also suits those multinationals that are selling into the Chinese domestic market and need to better tailor their products for 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 going back and forth from headquarters, opportunities can be missed in communications gaps. Exhibit one of the latter is how many foreign automakers were caught out by the sudden rise of China’s electric-vehicle manufacturers during the pandemic.

For multinationals, ensuring a constant to and fro of employees between headquarters and their operations in different countries is important for instilling a global corporate culture too.

“In an environment where you don’t have this very regular exchange of personnel for long-term assignments between headquarters and China — going in both directions — then it’s really hard to preserve the corporate culture,” says Sean Stein, chair of the American Chamber of Commerce in China. “And once the corporate culture starts to weaken, gaps between HQ and China start to expand.”

Executives also say that by increasing the number of people in corporate headquarters with meaningful China experience, 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 for 711,000 foreign residents last year compared with 846,000 in 2020 — the most recent prior comparison available. The European Chamber of Commerce in China’s business confidence survey published in 2023 found that 16 per cent of respondents did not employ any foreign nationals at the time and that expatriates accounted for 10 per cent or fewer of staff for 78 per cent of them. This was slightly more severe than the survey published the previous year.

Both surveys, however, reflected the worst effects of the pandemic. Executives report that things have picked up since then but there is no sign of a return to pre-Covid levels or even the heyday era before the pick-up in US-China trade tensions from 2018.

Whereas high-flying executives would once have gladly done a stint in China, today the posting looks more troublesome. Apart from geopolitical concerns, there is the extreme corporate competition in the country. In its recent business climate survey, Amcham China found that one-third of respondents reported that their profit margins based on earnings before interest and tax in China were below their global average while only 19 per cent were above the global average.  

Fixing the expat gap will be complex. Companies’ global headquarters will need to offer extra incentives both to high-performers outside China to do a stint in the country and to local staff in China to accept assignments outside.

This is important partly because of the need to grasp promising opportunities but also compliance. In China, as anywhere, things can go badly off course when a global company loses close oversight of its subsidiaries. Expatriates will not by themselves solve this but they are one channel for instilling global compliance standards. After all, China’s corporate history is littered with foreign businesses caught up in disputes with their local partners, or embroiled in localised corruption cases. That is the kind of decoupling no company wants. 

joseph.leahy@ft.com

Letter in response to this article:

One expat’s frustrations about working in China / From Thomas Olsen-Boyd, Sydney, NSW, Australia