ISSUE 2: THE GREAT EXPAT EXODUS

Coming/Going July 2022

Please note all content is personal opinion only and does not reflect the opinion of my employer or indeed anyone else. Indeed, it may not even reflect my opinion later today.

Shanghai’s experience at the hands of China’s dynamic COVID Zero Policy has resulted in many claiming we are on the brink of an imminent exodus of expatriates.

Is it true that a lot of foreigners will leave Shanghai?

Yes … and it will be noticeable.   Over the years foreigners have come in waves (i.e. staying for 3 to 4 years) and when there term ended others would replace them. But in the last 3 years the stock of foreigners has not been replenished – creating a veritable foreigner drought and now those remaining fall in one of the following, ahem, camps (not COVID camps):

The Biden Afghanistan Exit - these guys are ready to pack up and return home/go somewhere/go anywhere else NOW! RMB 5000 taxi to airport – NO PROBLEM – only flight is with Air Egypt with three stop-overs – I GET TO SEE THE WORLD – NO PROBLEM – ticket is RMB 50,000 for economy – BARGAIN – NO PROBLEM – GET ME OUT OF HERE NOW.

The Controlled Exit – a lot of large multinationals have been highly concerned and supportive – offering to move expats to other locations such as Singapore or back to the home office. Generally, expats in this situation are with school aged children and were never going to stay in Shanghai for the long term anyway so they are deciding to leave a year earlier.

Time for a Time Out – expats with their own business or their whole careers in Shanghai are very tied to the city. For them: 1) China is likely to be problematic until next March; and 2) summer in Shanghai is never great – especially not if locked in with no central aircon. So it is a good time for an extended 6 month “business development” trip overseas or a stint of remote “working” from Phuket (and has an international school accepting anyone who can pay).  Personal experience of moving to London in 2018, it is humbling to realize that your physical presence is not really required for the business to continue. Indeed, some of my colleagues have commented that my absence has been an absolutely blessing.  Anyway, these expats are not really leaving … they are just on an extended leave of absence and will be back.

The Committed – there are some who just are not going anywhere. Some will stay as their Chinese passport holding family members cannot leave the country. Others feel they cannot leave their business or job. One friend is unwilling to leave until there is no quarantine upon return. I would have thought after 50 days of hard lock down one could easily sit out a 10 day stint but they disagree.

Predictions

The highly scientific SCHAUB PROGNOSTICATION AI-INTUITION FORMULA (SPAFF) estimates about 60% of foreigners in Shanghai will leave this summer – but my further guess is that probably half of them will return within a year. But it will have an effect.

London, Paris, New York, Shanghai? Really? The Shanghainese have always embraced the foreign element to some degree and pride themselves on being China’s international city – but can you really be international without any foreigners? Even before COVID Shanghai’s foreign born population was around 0.1% compared to 37% in London or 36% in New York. What is Shanghai’s alternative to being Paris of the Orient?  Dalian on the Huangpu?

Some Sectors will be Hit Hard by Foreigner Departures – the loss will be felt to varying degrees. International schools will need to re-invent themselves as their already dwindling stocks of students are set to be sharply reduced further. Hotels and hospitality will feel the loss as well. The Avocado Lady may need to increase sales to local customers.

Increased Localization – a hot topic since the late 1990s (when there were actually hardly any foreigners) will morph. In the past it was primarily a cost issue – now it will become a supply issue – can you find foreigners? Will they be able to get a work permit?

Increased HQ’s Fear of Losing Control – Since the start of COVID we have seen more and more cases of HQ struggling to control their China entities. HQ visits are virtually nil and management feels remote from their China operations. This can lead to issues as to how the business is conducted. On the one hand HQ may have concerns about compliance and operations. On the other China management wonder if HQ still gets China and fails to appreciate the pressure they feel from domestic and international rivals.

More Talk on Diversifying Supply Chain - The lockdown may speed up efforts by some international business to diversify some of the supply chain away from China. Personally, I think this will be more planned than executed. Over the years the only manufacturing I have seen move from China was limited and due to cost reasons not geopolitical concerns.

New Ways of Doing Business – COVID is deadly to the vulnerable – this applies to businesses as well as people. In the West some businesses were hit hard but bounced back quickly. In the West COVID sped up the demise of old-fashioned retail, chain restaurants past their prime and often small businesses.  At lot of these businesses had already lost their way and COVID just sped up the inevitable. For a long time, I have wondered whether foreign invested enterprises in China needed a shakeup. Many have been shielded by being in a growth market (but now being squeezed by competitors), having a profitable niche (but these niches are now also becoming battlegrounds), headquarters knowing China is too important to ignore but also a tough market on which they are not willing/able to spend their time on but also unwilling to fully empower the local management.

For many Western businesses the question going forward will be is can you continue to succeed in a dynamic market like China if management on the ground cannot take decisions dynamically? Can you survive against more agile competitors? Does it make sense to still be in the Chinese market.

What Happens in 12 Months?

People are resilient, Shanghai is resilient. In the past, if there was a crisis anywhere in China the first people you sent to fix it were the Shanghainese cadres.  This episode will take a little time to recover. However, I am confident that Shanghai will bounce back and will once again be a magnet for international business and foreigners seeking their luck. It probably will just be a little different this time around.

What to Read this Week

China Slowdown Not Good for Anyone – China has been the engine of global growth for the last two decades and also its products have helped Western consumers obtain quality products at a low price. Despite this many in the West celebrate China’s current travails – this article sees the downsides Guardian

40% of Expats Eye Shanghai Exit – a surprisingly balanced article from Voice of America – a little old but holds up well. VOA

Despite Lockdowns is there also Loosening? Chinese embassy in Singapore announced it will be easier for Singaporeans to visit China. It is interesting as it shows a roadmap of new ways that travel will be eased going forward (although they have a mistake that say minimum 2 weeks quarantine – this has been eased to 10 days). Straits Times

Next Issue: HQ Oversight vs Local Dynamic Management

How will HQ balance oversight and local management? Will they be able to balance the books afterwards? What are the common issues we are seeing at the local level? Do we have solutions? Spoiler alert: No.

Would be delighted to hear any of your comments or suggestions or constructive criticism. I have regretted encouraging abuse as some people became too energized.

Cheers,