Over dinner at the legendary Da Dong Roast Duck Restaurant in Beijing, a Chinese retail executive set down his chopsticks, leaned forward, and asked Joe a question we haven’t heard in decades: “How do you set a budget when revenues keep going down?”

By 2024, for the first time, revenues in consumer categories such as cosmetics and beauty products were shrinking, and margins were disappearing even faster. Joe’s retailer dinner companion genuinely didn’t know how to plan for it: Shutter weaker stores? Drop unprofitable channels? Cut product lines? He’d done all these things before, but always in bits and pieces and never at this scale. This felt like a defeat.

We’ve been having these types of conversations for the first time in our China careers. Sometimes we joke, “Welcome to the rest of the world.” In Europe, Japan, and the US, McKinsey has been running cost-efficiency programs for decades; in China we’ve only been doing so in the last two years.

China has repeatedly reinvented itself, shifting from low-cost to advanced manufacturing, rewiring life around digital super-apps, and urbanizing at a remarkable pace. Growth hasn’t always been smooth, but even when we saw hiccups in the infrastructure build-out, a lull in consumer demand, or crashes in stock or real estate prices—any economic consequence typically righted itself before long. “In the past, you could just wait it out, and growth would invariably come back—you could grow your way out of trouble,” says Yonglin Xie, co-CEO of Ping An Group, one of the largest financial groups in China.

Yet this moment feels very different. “Consumer confidence has been subdued—the longest slump we’ve seen—though it’s beginning to stabilize after a long period of uncertainty,” says Daniel Zipser, a McKinsey senior partner and co-leader of the Asia consumer and retail practice. The post-COVID rebound never came. Property prices have fallen significantly with little sign of a short-term recovery. Digital economy firms, once a surefire landing spot for graduates, have cut staff. White-collar salaries in cities like Shanghai and Shenzhen stagnated and for some declined for the first time.

It’s increasingly clear that the next era won’t replicate the old pattern of growth. “The playbook is changing,” says Bob Sternfels, McKinsey’s global managing partner. “But China will continue to export innovation to the rest of the world, and its market is massive and continues to be relevant. From a global point of view, companies will need to have a model that works there.”

Multinationals no longer view China as a hyper-growth market. Global boards, especially those in North America, are debating whether China remains “investable”—not because of any single shock but due to concerns about geopolitics and regulatory moves that can be hard to predict. As one Canadian institutional investor told Joe in 2024, “If I put more capital into China today, I have to answer so many questions. If anything goes wrong, I risk my job. If I wait and see, I’m just being conservative like everyone else.”

This doesn’t mean multinational companies are naive, passive, or standing still. On the contrary, many executives are deeply sophisticated, understand the China market well, and are actively fighting to adapt. For years there was strong alignment and mutual benefit: multinationals brought capital, technology, brands, and management expertise, and China welcomed them in. Revenue and profits would then flow—often, the country would become their largest growth market overnight. That honeymoon is now over.

Many are meeting this moment head-on. Some clients are doubling down on their footprint and investments in China today, while others are recalibrating more cautiously. What’s clear is that the next phase will require a new set of “firsts.” McKinsey has spent more than thirty years in China, often pioneering new approaches. Today’s environment demands another reinvention of the operating playbook—one designed to thrive in a very different environment.

For multinationals, exiting might seem to reduce exposure to risk in the short term, but companies are finding no replacement for the volume that China provides. As one client puts it, “No place in the world has as many people willing to pay tens of thousands for a previously unknown brand of electric vehicle, much less the ecosystem to bring to market an even newer and better car in twenty-four months which people might test-drive or buy. Europe and the US don’t have this. Other countries might be too small or lack growth.”

More important, step away from China, and you not only lose the Chinese market but also your ability to compete globally, particularly in high-value industrial sectors. As Mingyu Guan, a McKinsey senior partner leading China’s automotive practice, says, “China is now offering a spectrum of possibilities that multinationals can benefit from. Rather than just selling into China, it’s now a market that will be driving cutting-edge change—millions of engineers and a consumer base that continues to rise. If you can ‘get fit’ here in China, you’ll be fit globally.” That logic extends across sectors that depend on complex, high-value products. And no CEO wants to be the first in their sector to give up on China. Therefore, outside of a few cases that make sensational headlines, very few notable multinationals are completely pulling out of China.

Pausing investment or taking a “wait and see” approach may feel safer—and many American, European, Japanese, and Korean companies are doing exactly that. This choice is often frustrating for local China teams, for which needs on the ground feel endless, from re-investing in operations to funding local R&D and technology upgrades. Yet committing new capital to China today is rarely straightforward, leaving many boards divided and hesitant. As Jeongmin Seong, a McKinsey Global Institute partner, puts it, “China is a market where companies feel pressure to keep investing just to stay competitive. If you don’t do that, you’ll struggle, but if you do, the payoff is harder to predict than before. This creates a feeling of strategic limbo.” Yet in a market that moves this fast, standing still means falling behind. Chinese competitors are well funded and moving quickly. Product cycles that once took years now unfold in months. Local firms don’t have the option to exit—so they continue investing and innovating.

What we recommend is a pivot. Firms must rethink how to compete in China. Tighten up your cost base, team up with the right local partners, find efficiencies you may not have needed before, and get comfortable with faster, more value-for-money innovation. We’re seeing these moves everywhere: chemicals, consumer goods, food and beverage, industrials—you name it. Companies are forming joint ventures, engaging with Chinese private equity to fund the next stage of growth, or shifting to an “in China, for China” model whereby products, processes, and decisions are built for the speed of this market. Dozens of multinationals are also considering the “in China, for global” strategy.

At the same time, we’re seeing a new class of investors rapidly increase their exposure to China. Many Middle Eastern clients are expanding their China teams, opening new offices in Hong Kong and Shanghai, and crowding flights to China from Abu Dhabi, Dubai, and Riyadh. With the recent surge of Chinese IPOs in Hong Kong, private family offices are accelerating investment activity—hunting for the next CATL or Pop Mart.

It’s not only multinationals that are facing challenges. Many of our Chinese clients—long accustomed to prioritizing scale and speed—are suddenly considering operating disciplines that German or Japanese firms have practiced for decades. Founders say the past decade rewarded growth, while the next will demand sharper execution and a deeper look at cost structures. The abrupt shift has caught many entrepreneurs off guard.

We often console our clients: “China is still growing at 4 to 5 percent this year. Remember, Europe has been growing at 1 to 2 percent for years, while Japan has endured decades of less than 1 percent growth. If you think that it is difficult now, what will you do when one day China grows at 3 percent?”

The pressure is real. Companies across China are freezing salaries, cutting pay, and shutting business lines. Layoffs are hitting both internet platforms and traditional industries, and even some state-owned enterprises are trimming compensation. “Cut costs and boost productivity” has become the new mandate.

Where will growth come from? For the first time in their business careers, Chinese entrepreneurs must actively search for it. In the past, opportunity seemed to be everywhere; the challenge was focus. Now, with domestic markets slowing and the competition intensifying, global expansion is becoming a serious consideration—just as geopolitical complexity reaches generational highs.

A more nuanced picture of the “next China” is taking shape.

The China market is no longer a tide that lifts all boats—the era of breakneck growth is behind us. Competition has shifted from how fast companies can grow to how well they can endure; from growth papering over inefficiencies to an environment demanding productivity, discipline, and profitability.

Michael Hui of Bain Capital puts it bluntly: “Ten years ago, all you needed was access and the courage to invest, and the market carried you. Now you need real techniques and investing discipline. If you look at the top line, there’s much less to celebrate these days—but look ‘bottom-up,’ and there’s a lot of very interesting things happening.”

Exiting or pausing is not an option for Jebsen Group, distributor of Porsche, Dyson, and Blue Girl Beer in China. “If you surrender now, the problems you have in China will come to your home markets in five years,” says its CEO, Alfons Mensdorff-Pouilly. “It’s investment time right now, and then by 2029 or 2030, it will be harvesting time again. If you tap some entrepreneurial guts and think outside the box, the market can still be as rewarding as it was ten or fifteen years ago.”

China’s business landscape is too big, too fast, and too varied for any single strategy to be exhaustive or for prescriptions to apply uniformly across sectors, competitive positions, and company sizes. What we offer instead are signposts to help leaders chart their own path.

Over the past decade, multinationals have been steadily losing market share to local competitors in China. There are plenty of reasons for this; Chinese firms will have built-in advantages around localization, cost structures, and deeper insight into the consumer. But we maintain that the biggest problem is around governance, incentives, and organization.

At the core, China subsidiaries of global multinationals tend to be led by executives operating within large, complex organizations, while competitors are typically entrepreneurs fighting as though everything is on the line. One side is navigating global structures; the other feels like they’re locked in a battle for survival. The trick is to unleash the same entrepreneurial energy inside multinational teams and equip executives to compete with speed, agility, and hunger.

McDonald’s and other corporations have adopted private equity–style ownership models to sharpen incentives and enable more local decision-making. Yet not every multinational has to give up control or majority ownership to make itself sturdier. For example, the Swiss dental technologies company Straumann Group localized its product portfolio.

Ultimately, multinationals must treat China not just as a market to be served but as a business to be built to sustain over cycles—with local autonomy, accountability, and entrepreneurial drive. Without this, the advantages that once helped them succeed will continue to erode as the market matures. The competition in China’s “gym” is relentless, and multinationals must learn to match the hunger, resilience, and adaptability of the rest of the market.

China has long been defined by scale—bigger factories, larger markets, faster growth. But the old “land grab” mentality, which once rewarded speed and size at any cost, now no longer ensures strength. As growth becomes costlier, scale must be paired with strategic focus, operations excellence, structural advantage, and a clear path to profitability. Companies that build regional or technical moats are far more likely to achieve durable, sustainable returns. Alibaba used its broad user base and data assets to double down on its core e-commerce and “cloud + AI” businesses. Luckin Coffee turned its massive store network and tightly integrated bean-to-cup system into cost discipline, which enabled innovation and pricing power that competitors struggled to match.

Crucially, sufficient scale isn’t about being the largest overall, but about dominating a specific segment. Concentrated market power can help create pricing power, supply chain leverage, and defensible margins; Shuanghui, for example, may be smaller than Muyuan and other players overall, but it has created a “black hole” in the sausage category, where it is three times the size of its nearest rival, with more than 50 percent share. That level of concentration yields high, stable margins. Companies that dominate a single segment often achieve better profitability and resilience than larger players spread across multiple businesses.

In the next China, rapid scaling must be matched with focus, quality, and a line of sight to profitability. Scale still matters, and remains a core reason for multinationals to compete in China, but its value now lies in supporting cost efficiency, brand strength, access to talent, supply chain leverage, and operational synergies.

Top-line numbers won’t dazzle the way they once did, so winning in the next China requires looking past the averages to uncover real opportunities. McKinsey colleagues published the book The Granularity of Growth: How to Identify the Sources of Growth and Drive Enduring Company Performance in 2008 for Western audiences, and China’s market has now matured to the point that those concepts apply here as well. And there are plenty of ways. China isn’t a monolith; it’s a mosaic of regions, income bands, demographics, and tastes, and growth will come from identifying and quickly capturing these micro-pockets of opportunity.

We see openings everywhere we look: resilient consumers in lower-tier cities, Gen Z leaning into experiences, even outdoor enthusiasts lifting a flat apparel market. PepsiCo, for instance, approaches snacks with a 3D “Rubik’s Cube” strategy, segmenting by city tier, occasion, consumer cohort, and channel, to name just a few. China’s baijiu liquor producers—including the world’s largest, Moutai—are toying with alcohol content and repackaging for new occasions. Remember that in China, even a “niche” is enormous. For example, China’s express delivery sector in 2024 generated 1.4 trillion RMB ($200 billion).

China’s innovation engine has shifted decisively—from imitation to iteration and increasingly toward originality in select fields. In other words, Chinese companies are evolving from copycat to innovator, from fast follower to global originator. Breakthroughs in EVs, batteries, AI, biotech, and new models of online retail and social commerce are no longer merely adapted in China—many are now conceived, tested, and scaled there. Innovation is no longer a one-way flow from West to East—it’s circulating through dense ecosystems of engineers, suppliers, researchers, and demanding consumers at speed.

Global companies are already plugging into this system. Merck and AstraZeneca are licensing and co-developing innovative new therapies with Chinese biopharma companies. Mercedes-Benz is rebuilding the Smart brand by tapping into Geely’s massive EV supply chain, engineering ecosystem, and rapid iteration speed. L’Oréal uses its China R&D center to design skincare and makeup formulations with local partners, with some products heading for global markets.

In the next China, innovation is not just about invention but about who can learn, optimize, and scale fastest—and who can harness China’s ecosystem without being outpaced by it.

The real question for companies goes beyond whether China is rising or stalling but where and how companies can still compete. “It’s foolish to get too positive or too negative—instead, companies must build a business model that’s resilient to all kinds of outcomes,” notes Bob Sternfels, McKinsey’s global managing partner. After three decades of working alongside companies navigating a variety of challenges in China, we know that success will be possible only for those willing to adapt, learn, and relearn. And do it all over again.