Site development in China – Christoph Hupays

1. choice of location China and strategic objective

What role does China play in the footprint of German industrial companies today?

China has changed fundamentally in recent decades – and this development explains why it now plays such a central role in the global footprint of German companies. Originally, market entry began with simple sales offices: The aim was to establish a presence and build up initial customer contacts. However, many companies quickly realized that they could not only reduce costs through local production, but also react more quickly to the market. This phase was strongly characterized by labor cost advantages and the goal of serving the sales market efficiently.

However, the picture has changed again in the last five to ten years. China has long since ceased to be a pure production location and has become a development and innovation center. Companies are investing in R&D units in order to adapt products to the specific requirements of the dynamic and highly competitive market. This has given rise to the “China for China” concept.

I can now even see a movement towards “reverse innovation”: technologies and products that are developed in China are finding their way back to Europe or other markets. This is particularly true in sectors such as electromobility or e-commerce, where China is now a global technology driver.

I find it particularly interesting that many local companies now refer to China as a “gym”: If you can hold your own here – against local competitors, in terms of costs, speed of innovation and adaptability – you can make it anywhere in the world. For SMEs, this means a clear shift: the China location no longer serves only to supply the market, but also to strengthen global competitiveness. At the same time, the need to actively manage risks is increasing. Trade barriers, export controls and geopolitical tensions are forcing new footprint strategies. This is why many companies are opting for “China+1” or the even more far-reaching “dual footprint” variant – i.e. more or less autonomous local structures for China depending on the specific company, supplemented by additional locations in South East Asia or India to reduce dependencies.

Which location factors are typically decisive for the specific location?

In my experience, the classic criteria such as technical infrastructure, logistical connections and the availability of qualified workers also apply in China. But there are special features that make the difference. The politically supported industrial clusters are key. The government has specifically created hubs, for example for automotive, electromobility, semiconductors, renewable energies and chemicals. Those who invest there benefit from a functioning supplier network, special infrastructures and often also from substantial funding programs. These clusters are therefore not just a location factor, they are often the ticket to the market.

A second important point is the differentiation between OEMs and SMEs. In the past, large OEMs were often forced by joint venture requirements to establish themselves at the partner’s location. Today, they have more freedom, but proximity to established supplier networks remains crucial. Medium-sized companies often take a different approach: I have often seen that they are strongly oriented towards references, i.e. where other German companies are successfully located. Networks, personal contacts and the experience of other entrepreneurs often outweigh a purely number-driven location analysis.

A third factor is the role of local business development. Medium-sized companies in particular depend on the local authorities to provide active support – be it through training partnerships, fast approval procedures or individual support. Without this support, establishing a location quickly becomes a challenge.

The proximity to major international cities should not be underestimated. Locations in the vicinity of cities such as Shanghai are particularly attractive because international specialists and managers who are looking for proximity to major cities or live in them can be settled there. It also facilitates the integration of Western experts, who are typically seconded for the set-up and start-up phase.

Interestingly, transportation costs within China are not a decisive factor in my view. Unlike in Eastern Europe, where costs are determined not only by labor costs but also by proximity to the sales market, the country has a well-developed logistics network. Whether by rail, truck or air freight – practically every region can be reached efficiently.

What role do regional industrial policies and subsidies play in the choice of location?

Industrial policy in China follows central guidelines from Beijing, but the specific form it takes varies greatly from region to region. Provinces and cities compete for investment, which is reflected in a broad range of support instruments. These include subsidized land prices, tax breaks, direct investment grants and talent development programmes. Such measures can bring considerable financial benefits, especially in the start-up phase – be it for the acquisition of land, the purchase of production facilities or the recruitment of qualified employees.

However, I have also learned that subsidies in China are not a sure-fire success and can harbor risks: Commitments can be delayed if local funds are tight, and contracts are often formulated in less detail than in Europe. This leaves room for interpretation. In practice, this means for me that relationships with the authorities are at least as important as the written agreement. The Chinese concept of guanxi – trust, respect and long-term mutual relationships and obligations – determines how reliably a grant is implemented in the end.

Companies that involve top management at an early stage, present their technological expertise and demonstrate the long-term added value for the region have clear advantages. Those who can show how many jobs will be created, what tax revenues can be expected and what level of technology will be brought into the country not only receive subsidies, but also faster approvals and pragmatic support in operational matters.

2. set-up and start-up phase – project management on site

What are the success factors and typical pitfalls when setting up a location in China?

Success factors and pitfalls are often very close together in China. A key success factor is a clear strategic objective: why are you going to China, what role should the site play in the long term – pure production, R&D or both? If you define this from the outset, you can plan the plant flexibly and better integrate subsequent expansions. An intercultural core team is just as important. It is not realistic to manage a plant from Germany alone. Local expertise is indispensable, be it for contacts with the authorities or for understanding cultural customs.

Local presence is another key. Neither exclusive management from the head office nor blind trust in external service providers works. In-house representatives – ideally from the head office and the local organization – must accompany the development and actively help shape decisions.

One of the biggest pitfalls lies in the construction phase. General contractors and EPCM service providers sometimes have their own objectives, which do not correspond to those of their customers. Those who rely solely on the cheapest provider will pay dearly through change orders. There is also the risk of subcontracting and non-transparent franchise structures. The following therefore applies: check references, get to know the construction team personally, provide budgets with a buffer and consistently monitor quality.

Other risks include weather-related delays, for example due to typhoons or long rainy seasons, as well as opportunistic behavior on the part of construction companies, where delays are deliberately used to renegotiate. Cultural differences, for example in the way criticism is expressed, can also lead to misunderstandings.

How did you work with local authorities, service providers and general contractors?

Cooperation with the authorities is of central importance in China. The aforementioned concept of guanxi plays an important role. Decisions are often not made in the meeting room, but separately afterwards or over a meal together. It is important to show respect for the representatives of the authorities and to give them a “face”, for example by meeting with the company’s top management in person. The exchange should be maintained on a regular basis, also because positions on the authorities’ side can change and new networks need to be established.

Cooperation with service providers and consultants is usually more contractually regulated, but the following still applies: close control, clear communication and written agreements are necessary. If possible, criticism should not be voiced in large groups, but in personal discussions, otherwise there is a risk of losing face.

The situation is more complex for general contractors. Quality, transparency and continuity often depend on the specific construction team, not just the company name. You should therefore check references, get to know the teams personally, contractually stipulate their composition and ensure that subcontracting is kept to a minimum. Trust alone is not enough – constant presence and consistent project management are crucial.

How did you experience dealing with cultural differences in planning, construction, commissioning and personnel management?

Cultural differences shape the entire course of the project. In Germany, we are used to planning sequentially and in detail, identifying risks at an early stage and clearly documenting processes. In China, I have come to understand things differently: decisions are made more quickly, processes are more iterative, flexibility and pragmatism are paramount. Risks are often only addressed when they actually occur – but then with remarkable speed and a solution-oriented approach.

Communication is particularly important. You rarely hear a direct “no” in China. Instead, it is important to read nuances and recognize early on when promises are not realistic. The only thing that helps here is a local presence and the ability to understand between the lines, ideally in Mandarin. German directness can lead to a loss of face in China, so criticism and corrections should be made in a trusting environment.

In my experience, the tandem approach has proven itself in project organization: Local Chinese and central European teams work together in pairs – engineering with engineering, production with production, etc. This creates ownership, facilitates the transfer of know-how and ensures that both sides communicate on an equal footing.

There are also differences in personnel management. In China, authority is expected, personal responsibility is less pronounced. Clear guidelines work better than too much freedom. Managers should be carefully selected and retained in the long term through financial incentives, development programs and headquarter loyalty. Training at the home plant or stays abroad are particularly effective in strengthening both professional competence and emotional loyalty.

What does “China Speed” mean in concrete terms – and what can German companies learn from it?

I would translate the term “China Speed”, which is often mentioned in the press, as impressively high implementation speed. It is based on pragmatism, a high degree of flexibility, fault tolerance, high availability of manpower and the ability to scale up quickly. Decisions are often made on site, service providers work in two or three shifts, even seven days a week. There are hardly any annual vacations or summer breaks as we know them – only the Chinese New Year leads to significant downtime.

If you are based in China, “China Speed” means that you need to be fast as a company to be successful. Chinese companies are very good at scaling business models in the country if the product or service works. If you don’t keep up the pace, someone else will overtake you and take your business.

However, this high speed also has its price: quality assurance is more challenging, documentation is less strict and risks are only addressed when they occur. Nevertheless, it shows how much is possible through consistent focus, clear goal orientation and a willingness to find pragmatic solutions. I am convinced that German companies can learn from this approach – for example through faster decision-making processes, iterative project structures and greater fault tolerance. There are limits where regulatory requirements and technical excellence take precedence.

3. supply chain integration and localization

What are the opportunities, challenges and risks in building local supply chains?

Local supply chains are both an opportunity and a challenge in China. I see opportunities in the reduction of costs, shorter delivery times and greater independence from global trade barriers. In times of increasing export controls and geopolitical tensions, this aspect is becoming enormously important.

The challenges lie in quality assurance and/or EHS requirements: Local suppliers are often efficient, but not always up to the standard that European companies are used to. This is why intensive audits, clear standards and continuous development partnerships are necessary. I also see a risk in dependencies – especially for critical components. If a supplier fails, alternatives are not always available at short notice. Particularly in the case of single sources in geopolitically sensitive regions, dependency quickly becomes a strategic risk, whether due to export controls, regulatory intervention or operational disruptions.
Sector-specific regulatory requirements for localization must also be taken into account, which can put companies under pressure, even if quality or costs are not optimal.

What were the critical localization requirements of the Chinese government?

The Chinese government is demanding increasing local value creation in many sectors. Key components, software and data are particularly sensitive. There are requirements for local data storage or minimum proportions of local suppliers. Companies that do not meet these requirements risk competitive disadvantages or even losing market access. At the same time, opportunities open up: those who build up and develop local suppliers benefit from support programs and improved market access.

I think it is important to maintain a balance here: On the one hand, to fulfill the regulatory requirements and, on the other, not to neglect global standards and quality requirements. In sensitive areas such as semiconductors, the tension is particularly high. A clear roadmap is therefore important: What can be localized, where do global structures remain essential, and how do you communicate this to the authorities? Localization is not a side issue in China, but an integral part of industrial policy. Last but not least, Chinese customers are also demanding strong localization in order to prevent supply risks from abroad.

How do you strike a balance between a global corporate structure and local requirements?

In terms of business theory, this is one of the most exciting points for me in this context. I am convinced that balance is achieved through a clear distribution of roles and trust. Global standards – in quality, compliance, IT security – are indispensable and must be consistently maintained. At the same time, local freedom is needed to pragmatically implement regulatory requirements and market demands. Success comes to those who set up structures in such a way that local teams take responsibility and identify with the unit. Tandem models also help here: global experts work closely with local employees to ensure standards and make local adjustments realistically. Communication is key – processes must be documented in two languages and kept transparent.

I believe that mutual understanding is just as important: the head office must not view local requirements as a deviation from the standard. It is simply part of the reality in China. Conversely, the local team must understand that certain standards are non-negotiable. In this way, a balance is created by reconciling interests, which neither tips towards pure central control nor towards complete self-sufficiency.

4 Political and regulatory environment and strategic implications

How do companies deal with regulatory requirements?

Regulatory requirements in China are complex: from joint venture obligations in the past to certifications, export controls and data protection requirements through to local environmental regulations.

The key to dealing with this is twofold: firstly, a forward-looking compliance strategy that takes scenarios into account as early as the planning phase. Secondly, close cooperation with local authorities in order to make pragmatic use of the scope for interpretation. Certifications or approvals often take longer than expected, but can be accelerated through early involvement and good relationships. Data and export specifications require technological solutions, such as local data centers or dedicated supply chain structures.

However, I would advise you not to underestimate the complexity: Regulations often change at short notice, the specific local implementation of central requirements from Beijing can differ depending on the location and the binding nature is less pronounced than in Europe. Flexibility and active stakeholder management are therefore crucial in order to manage regulatory risks and remain capable of acting.

To what extent is localization necessary?

Suppliers, personnel and administration must be strongly anchored locally in order to remain capable of acting. A pure expat model does not work – the organization needs local managers who understand the market and bring in networks. The same applies to supply chains: companies that only import come up against regulatory limits and lose competitiveness.

Localization is also required in administration, from HR to finance to IT, not least for reasons of data storage. At the same time, integration into global structures remains important. The goal at the moment, at least, is not complete independence, but an interlinking geared towards reducing dependencies: deeply rooted locally, connected globally.