Should You Still Be in China?
The China Business Crossroads
What does it take to succeed in a $17 trillion economy burdened by geopolitical volatility, rising regulatory barriers, and systemic IP risks? For U.S. companies operating in China, this question is not theoretical—it's strategic, urgent, and deeply consequential.
Some companies see China's enormous consumer base as irreplaceable. Others are scaling back or exiting entirely due to data security laws, market unpredictability, geopolitical concerns, or mounting pressure from stakeholders to de-risk. But this is not a binary decision. Many businesses are walking a fine line—balancing opportunity with operational and legal exposure.
This guide breaks down the core reasons why some companies stay, why others diversify or exit, and how to strategically manage your presence—especially through joint ventures (JVs), one of the most common and risky engagement models in China.
Why Stay in China? The Case for Remaining
Despite the geopolitical headwinds, China remains an essential growth engine for many U.S. firms. Key reasons include:
- China's Market is Unmatched: With the largest middle class in the world and increasing urban consumption, China continues to be a top global market for electronics, fashion, beauty, and food & beverage brands.
- Deep-Rooted Business Ecosystems: Many companies have spent decades building China supplier, distributor, and partner networks that would be difficult and costly to replace.
- Skilled Talent Pool: China's workforce offers unmatched manufacturing and technical expertise in sectors like electronics, EVs, and consumer products.
- Prohibitive Exit Costs: Liquidating assets, paying severance, exiting contracts, and navigating foreign exchange controls often make leaving China more disruptive than staying.
- Lack of Viable Alternatives: Returning home or shifting to Vietnam, Thailand, or Mexico is not always technologically or economically feasible—especially for companies that rely on China's advanced logistics and supplier depth.
However, the decision to stay demands more than just inertia—it requires strategic rigor and risk awareness, particularly regarding intellectual property and joint venture governance. See Why NOW Is a Good Time to Double Down on Doing Business in China.
Why Leave or Diversify? The Case for De-risking
On the flip side, growing risks have compelled many companies to reduce their China exposure or exit altogether:
- Escalating Geopolitical Tensions: U.S.-China trade disputes, tech bans, and sanctions have made market access unpredictable.
- Persistent IP Risks: Forced tech transfers, weak enforcement, and copycat competitors continue to plague IP-heavy industries. See The Four Best Ways to Protect Your IP from China.
- Regulatory Complexity: China's Data Security and Cybersecurity Laws are game-changers for foreign firms.
- Fragile Supply Chains: COVID-19 and regional lockdowns showed how overreliance on China can cripple global operations.
- Reputation and ESG Pressure: Public scrutiny, shareholder activism, and political backlash in the U.S. are pushing companies to diversify for ethical and strategic reasons.
- Rising Operating Costs: China's labor and regulatory costs have climbed, often wiping out the low-cost advantage that brought companies there in the first place.
For many, the conclusion is clear: a "China Plus One" strategy or full exit is not only prudent but necessary.
Real-World Examples: Success Beyond the Giants
One of our clients, a mid-sized U.S. entertainment technology company, recently explored a joint venture with a Chinese media firm to localize and distribute their proprietary entertainment platform. Instead of transferring core tech or equity, we helped structure a fee-for-service distribution deal, paired with a tight IP licensing agreement and usage tracking requirements. Our client retained ownership over the core assets, avoided Chinese operational liabilities, and set up a lucrative revenue stream—without ceding control or taking on local risk.
This kind of arrangement is increasingly viable for SMEs seeking access to the Chinese market without exposing their most valuable assets. As a follow-up to this post, I'll do a new post on the many ways companies can sell into China without needing a local entity or on-the-ground personnel.
Smart Ways to Stay in China—Without Losing Control
The success of our entertainment tech client wasn't accidental—it was the result of strategic structuring, careful risk management, and deep familiarity with China's legal terrain. We've seen similar outcomes across sectors where companies were thoughtful about how they engaged with China—not just whether they did.
If you decide that staying in China is the right move for your business, here are key principles to follow to minimize risk while maintaining market access:
- Avoid equity JVs when possible. A fee-for-service or licensing structure can generate revenue while keeping you in control and out of the regulatory quicksand.
- Own or tightly license your IP. Never transfer core technology or brand assets without strict terms—and a fallback plan.
- Control the chop. In China, whoever holds the company seal (chop) can bind the business. Make sure it's you or someone you legally control.
- Use favorable dispute resolution clauses. When feasible, specify arbitration in a neutral jurisdiction like Singapore or Hong Kong.
- Be deliberate about asset location. Know where your IP, cash, and key contracts reside—and what legal system governs them.
You don't need to go all-in to win in China. But if you stay, structure your presence with the same strategic care you'd use in any high-stakes environment.
Conclusion: Should Your Business Stay in China?
There's no one-size-fits-all answer. The decision to stay, leave, or diversify must reflect your industry, your risk tolerance, and your strategic vision.
Ask yourself:
- Do you have unique IP or product advantages that are hard to replicate?
- Can you trust and verify your local partners?
- Is your China operation structured to limit your legal and financial exposure?
- Is your supply chain or customer base too dependent on China?
Many of the companies we work with are doing what they can to continue profiting from China—while simultaneously working to lighten their footprint there. For some, that means simplifying their legal structures, outsourcing more functions, or shifting ownership of key assets out of China.
Our China lawyers perform regular China legal risk assessments—sometimes annually, sometimes quarterly—for clients specifically aiming to reduce their exposure and enhance their flexibility. These audits are increasingly becoming a core part of staying in China on your terms.
If you're unsure—or want to future-proof your strategy—it may be time for a personalized China risk assessment. Schedule a confidential strategy call today—before the next policy shift puts your China operations at risk.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
