Top U.S. Consultancy Firms Falling Short in China Amid Crackdowns

The Lede: According to insiders, three of the top U.S. consultancy firms have been experiencing loss of work and are shifting their practices in anticipation of uncertain business conditions throughout their China-based operations after Beijing's ramp-up of anti-espionage scrutiny in recent months.

What We Know:

• Bain & Company, McKinsey, and Boston Consulting Group have been encountering challenges in their China-based operations. All three top-tier U.S. management consulting firms will delay start dates for their new recruits. Yet, Bain and McKinsey have denied rumors that they were considering pulling out of China.
• Bain & Company is instructing new hires in China to wait until as late as 2025 to start their jobs. Chinese clients have been backing away from doing business with Bain. Mengniu, a state-backed manufacturer and distributor of dairy products, has allegedly called off a project that was started in May to survey global competitors and improve milk branding.
• About half of McKinsey staff have no paid client projects to work on. Some staff have been working on proposals or on other work that cannot be billed to clients.
• According to people close to the firms, Boston Consulting Group’s team in China has conducted strategy sessions among its executives to discuss how to boost their low business activity following the company’s failure to meet internal revenue projections in the first half of the year.

The Background: Increasingly tense relations between the U.S. and China, as well as heightened attention in Beijing surrounding foreign spying fears, have formed difficult business conditions for foreign firms. The Chinese government broadened anti-espionage laws in April that lump in any documents, data, materials, or items related to national security and interests. That month, Chinese police confiscated devices and interrogated staff at Bain’s headquarters in China in a probe regarding sensitive information passed to the firm from an outside expert hired through Capvision who worked at a state-owned enterprise. The project in question was said to have been semiconductor-related and involved a South Korean company. Earlier this year, Bain & Company offered voluntary six-month partially salaried leave periods to its China-based staff.

Likely Outcomes:

• These results fall in line with expectations following the sharp tightening of the Chinese regulatory environment on foreign firms in recent months. American companies and those aligned with the U.S. will likely continue to reassess the risks of doing business in China, how their business is conducted in the country, and the information that they interact with in the country. Moving forward, multinationals will trend toward reducing their business ventures or withdrawing entirely from China if risks run prohibitively high. Employees, staff, and new hires are likely to prefer not to operate in China on behalf of these firms.
• Chinese firms may also seek to do business with countries outside of the U.S. and Western orbit in order to mitigate risks on their side to avoid running afoul of Beijing’s increasingly strict anti-corruption measures. Companies in other countries may see opportunities and deals open up in the spaces vacated by Western firms and move in on the China market. Correspondingly, foreign firms impacted by Chinese scrutiny may look toward increasing their presence and business activities in alternate countries that have more conducive laws.
• Nevertheless, the Chinese government continues to insist that the country prioritizes fostering friendly business relations with foreign companies. The state will likely keep up this seemingly contradictory rhetoric despite the deteriorating sentiment.

Quotables:

“Jing’an District puts companies first and as always will do a good job in providing services and work to create a first-class business environment fostering their development.” – Yu Yong, party secretary of Shanghai’s Jiang’an district

“Being at McKinsey China feels like being on a sinking ship.” – anonymous junior consultant at McKinsey.

Good Reads:

Work dries up for US consultancies in China after national security raids (FT)

Foreign Companies and Employees Worried by Latest Chinese Probes (The China Paper)