McKinsey Leaders Argue China Avoids Japan-Style Stagnation Despite Challenges

China is not headed for Japan-style stagnation — or about to see major decoupling from the U.S., McKinsey's Nick Leung and Joe Ngai wrote in their new book, "The Next China Is Still China: An Insider's Playbook for Winning in the New Era."

They offer a business framework quite different from current assessments: a sluggish Chinese consumer, a prolonged real estate drag and supply chain diversification.

A key factor? China's global manufacturing dominance and spending to catch up on frontier technology, they said. In many ways it seems that the party has ended for many U.S. and European corporations that once enjoyed a big advantage in China.

What multinationals need to realize is their disappointment today is a result of a contrast — 20 years of market share dominance in China, sometimes bigger than in other foreign markets, Ngai, senior partner and chairman of McKinsey's offices in Greater China, told me last week.

Local Chinese rivals are also often disappointed, he said, pointing to hyper-competition, or involution, in the slowing economy.

Winning longer term, Ngai said, requires investing in China to stay relevant in a giant consumer market — and consequently competitive in other countries where Chinese companies are expanding.

AI-powered educational products is one area. Lingverse COO Anita Wang told me the company plans to officially launch its owl-themed reading companion in the U.S. this fall. She said the team is also speaking with some Florida school districts to use its AI-powered learning device during field trips and other activities.

Chinese companies also face significant challenges despite rapid global growth. Beverage and budget drinks chain Mixue has quickly opened four times the number of stores as Dunkin Donuts. But shares tumbled last week after cost of sales grew faster than revenue, for a 14.7% profit drop in the first half of the year.

Since the pandemic, China's retail sales have grown at less than half the pace seen in years prior. Starbucks has sold a majority stake in its local operations, while other U.S. giants have downsized amid geopolitical tensions.

Ngai said many foreign businesses are speaking with Chinese private equity firms about local partnerships, but right now there are "more discussions going on rather than deals being struck."

Every industry is different, with areas like tech more sensitive than others and requiring their own guardrails. But McKinsey's regional leaders write that the conclusion for many business executives — after a hard search for alternatives in recent years — is that China will be hard to ignore.

— CNBC's Jenny Lee contributed to this report.

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