When Joe Ngai, McKinsey’s Larger China chair, first started to test-drive his level that “the next China is still China” on social media, the world’s second-largest economy was in a post-COVID stoop. Sluggish consumption and a property market crash had been still dragging down the nation’s economy, whereas overseas firms had been rethinking their funding in China as each a shopper market and a producing hub—and asking the place the “next China” could be.
“You heard all these items. We’re attempting to diversify away from China. We’re attempting to de-risk from China,” Ngai tells Fortune in McKinsey’s Hong Kong workplace. “You can’t discover one other China. There’s no different China on the market now.”
Ngai’s remark is now a guide, The Next China is Still China: An Insider’s Playbook for Successful in the New Period, coauthored with Nick Leung, director of the McKinsey Global Institute and Ngai’s predecessor as Larger China chair.
The narrative on China’s economy is shifting. New advances in AI have reset the dialog about China’s capability to innovate, and Chinese merchandise are actually profitable converts in abroad markets. The U.S.-China relationship is not in free fall following U.S. President Donald Trump’s state go to to Beijing in Might, the first by a U.S. chief since Trump’s final journey in 2017.
However for global multinationals, Ngai and Leung argue that China stays a “onerous, aggressive, and oversupplied” market that requires a shift in company technique. As soon as-dominant manufacturers like Nike, Starbucks, and Volkswagen are actually struggling amid fierce competitors from hungry Chinese firms. But China possesses each a large shopper market and a deep manufacturing sector, which economies like Vietnam or India still can’t wholly change.
“As a board, as a CEO, you can’t simply ignore China or discover one thing else,” Ngai says. “You want a Chinese technique.”
The world’s ‘hardest fitness center’
Of their makes an attempt to explain the success of Chinese firms like BYD, Western governments and commentators typically blame authorities subsidies. The argument is that China intentionally manufactures greater than it might soak up and dumps the surplus abroad, both to demolish native competitors or simply as a result of it wants to dump the items someplace. That “overcapacity” argument has motivated commerce protectionism in the U.S., Europe, and even some creating markets like Vietnam and Indonesia.
Ngai and Leung push again towards that framing. First, they level to the preliminary interval of reform beginning in the Nineteen Eighties and the way it incubated dynamic entrepreneurs like Alibaba founder Jack Ma and Xiaomi founder Lei Jun. Second, they notice that China’s monetary system and competitors between provincial governments provided low cost credit score to native companies, permitting the development of (maybe too many) native champions.
Extra just lately, Chinese customers have proved fast to change to no matter delivers the greatest product at the lowest worth. “In China, they all the time offer you a shot,” Ngai says. “When you’ve got a greater factor, the market will reply.”
Ngai finally describes China as “the world’s hardest fitness center,” coaching hyper-competitive firms.
“This is precisely the argument Europeans used to deploy after they had been America,” Leung says. “They’d name it cowboy capitalism. China is simply an much more intense model of that excessive entrepreneurism.”
Courtesy of McKinsey
One symptom of that depth is a near-endless collection of worth wars. BYD, the world’s largest EV producer, has repeatedly slashed costs to seize extra market share from its rivals, resulting in a 55% drop in internet revenue in the first quarter of the yr. One other instance is meals supply, the place JD.com’s resolution to interrupt right into a market dominated by Meituan and Alibaba led to all three devoting over 100 billion yuan ($14 billion) to subsidies and reductions over simply two quarters. Meituan, the market chief, has now posted three straight quarters of internet losses.
Beijing has complained about what has been termed neijuan, or “involution,” the place relentless competitors erodes earnings for a whole trade. “Your complete trade has fallen right into a vicious cycle of dropping cash in an try to seize market share, finally dragging down the broader development of consumption restoration,” state media outlet Financial Each day wrote in March, referring to the meals supply worth battle.
“The competitors is at 11 proper now,” Ngai says. “If you may get it to an eight, or a seven, there’ll be much less wastage and much less capital being destroyed.” Still, China’s capital controls imply that buyers are compelled to bear decrease returns, as a result of cash has nowhere else to go. “It may be at ten-and-a-half for a really very long time,” he admits.
Multinationals in China
For twenty years, overseas manufacturers loved a structural benefit in China: Customers had been keen to pay a premium for global merchandise that had been higher than what home producers might make.
That’s not the case now. Apple contends with Huawei and Xiaomi. Nike is dropping share to Li Ning and Anta Sports activities. Basic Motors, Honda, and Volkswagen are scrambling towards BYD and Geely.
“The German automotive firms made more cash in China than they made anyplace else in the world, put collectively, for years,” he provides. “When you might have an entitlement and you’re taking it away? Folks get very upset.”
“Multinational firms felt they’d a proper to print cash in China without end,” he provides. “And what occurred? Competitors occurred.”
Ngai factors out that Chinese entrepreneurs could make market choices instantly whereas global multinationals should work by way of approval chains stretching again to Tokyo, Stuttgart, or New York. “When you might have company executives preventing towards native entrepreneurs who don’t have anything to lose,” he says, “it’s a really powerful battle.”
A couple of Western manufacturers, like Coach and Logitech, are managing to show issues round by giving autonomy to native executives and designers in a “China for China” technique. Different multinationals, like Volkswagen and Stellantis, are selecting to companion with Chinese firms to undertake their manufacturing and design practices. Others still, like Starbucks and Basic Mills, are as an alternative promoting their China companies to native buyers.
“These firms that handle to reimagine their China business as a business in itself—all the method from capital, possession, administration construction, and be as attentive to Chinese customers as Chinese firms are —preserve their competitiveness,” Leung says. “People who stay global multinationals discover it onerous to maintain up.”
Going global, and getting caught
China’s “fitness center” may need higher ready its firms to win abroad. Chinese companies are already taking market share in Europe, Southeast Asia, and Latin America, competing on each high quality and worth. BYD, for instance, bought a couple of million automobiles abroad in 2025.
Nonetheless, Chinese firms still wrestle to determine methods to attraction to overseas customers. In China, firms promote their items by focusing on options, however a global strategy requires constructing an emotionally compelling model. “Chinese firms produce improbable merchandise, however don’t place them accurately,” Leung says. He invokes Coca-Cola, whose worth is nearly solely its model. “Consuming Coke makes you cool,” he says. “It’s the emotional connection between the particular person ingesting Coca-Cola and the drink itself.”
Christian Monterrosa—Bloomberg through Getty Photographs
Some Chinese firms are beginning to tentatively discover methods to construct a model premium. MiHoYo, the Shanghai-based sport developer behind Genshin Impression and Zenless Zone Zero, has damaged into the notoriously troublesome Japanese and U.S. gaming markets. Extra just lately, Luckin Espresso has opened retailers in New York Metropolis and used viral social media campaigns and localized merchandise to muscle into the metropolis’s espresso scene. Li Ning, the Chinese sportswear model, just lately signed an endorsement cope with basketball star Steph Curry.
The next frontier could also be AI. Chinese AI firms like DeepSeek, Moonshot AI, and MiniMax have launched open-source fashions whose flexibility and top-tier efficiency are profitable converts throughout the world, together with in Silicon Valley.
“The next export from China that the U.S. hasn’t discovered methods to tariff is truly tokens,” Ngai says, referring to the items of information processed by AI fashions. Chinese AI tokens have already overtaken U.S. tokens on some global marketplaces.
McKinsey’s personal China take a look at
McKinsey’s historical past in China begins in 1993, when the U.S. consulting firm put 4 companions in Beijing and Shanghai, years earlier than its rivals did. It needed to clarify to Chinese purchasers what consulting truly was and its slide decks had been generally photographed and bought outdoors the constructing for as little as 10 renminbi.
Leung, who has Swiss and Chinese heritage, joined McKinsey’s Zurich workplace in 1993 earlier than transferring to Hong Kong in 1997. He served as McKinsey’s Larger China chair for greater than a decade earlier than turning to steer the McKinsey Global Institute, the agency’s financial analysis arm, in 2011. Ngai, who took over as Larger China chair that very same yr, has run the area since then.
McKinsey has had its personal issues in China. In October 2024, the Wall Avenue Journal reported that McKinsey had reduce roughly 500 jobs in Larger China, roughly a 3rd of its regional workforce, after scaling again its shopper base. Companions reportedly debated whether or not the agency ought to proceed to do business in China in any respect, given the deteriorating state of U.S.-China relations.
The agency has pulled again from serving state-owned enterprises, a sector that had turn out to be each politically fraught for a U.S. firm and merely tougher to serve nicely. “Is that development the similar as what we had been serious about in the early 2010s?” Ngai asks. “It’s in all probability extra mature.”
“Our addressable market has turn out to be narrower,” Leung provides, “however we’re addressing a fast-growing market even inside that slim band.”
A ‘chilly peace’
China’s economy, whereas bettering, still hasn’t returned to the heady days of the 2000s and 2010s. Retail gross sales grew simply 0.2% in April, the slowest price since December 2022, the depths of the COVID pandemic. Industrial output rose 4.1%, under expectations.
“We’re in a longer-term 4% or 5% development situation, and we’re trending decrease,” Ngai says. But he sees the shift as “wholesome,” setting extra sensible expectations about the nation’s economy.
“We’re still mid-reset,” Leung provides. “It’s not a structural slowdown or structural demise. It’s not the next Japan.”
Trump’s Might go to to Beijing, the first such go to in almost a decade, ended with out main commerce breakthroughs. The largest success was a deal for China to purchase 200 Boeing planes, fewer than an anticipated 500-jet order.
Yan Yan—Xinhua through Getty Photographs
“Business situations aren’t contingent on the two presidents assembly,” Ngai admits. “Geopolitical calm is good, but when I’m a multinational, the China market stays freaking onerous. That’s not going away anytime quickly.”
Still, even simply setting a ground beneath the U.S.-China relationship is higher than nothing, even when company and commerce developments will take longer to reach.
“A chilly peace is higher than no peace,” Leung says.
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