China is poised to win the largest market competition of all time, putting Western companies at risk: Op-ed.

• On Tuesday, the White House declared that President Biden will have a meeting with Chinese President Xi Jinping in November during the APEC summit in San Francisco.
• Beijing hosted China's leaders for the second day of The Central Financial Work Conference on Tuesday, which occurs every two decades to strengthen Xi's control over the country's economy and financial sector.
• The past seems to be holding many foreign companies back in the current era of blockbuster growth in China and a favorable geopolitical environment for Western businesses.

Despite the global transformations, many CEOs still prioritize short-term profits over a sustainable long-term approach in their China strategy.

In the past two decades, many companies thrived due to rapid growth in China and a peaceful relationship between the U.S. and China. However, this short-sighted approach among corporate leaders could have severe consequences in the current and future environment.

Since 2015, when China's "major power" rejuvenation strategy began to take shape, risks in today's environment have become apparent. Warnings have emerged in the form of several exogenous shocks, including climate change-related droughts and floods in China, the U.S.-China trade war triggered by President Trump's Section 301 tariffs, and finally the Covid pandemic.

The events compelled corporate leaders to reevaluate their overreliance on China and explore sustainable, viable, and commercially competitive alternatives. However, de-risking presents a new challenge, as it may result in falling behind China in the race for global dominance.

Despite the long-held belief that China's size makes it impossible to ignore and that it would always adopt a pragmatic and cautious approach to maintain access to foreign investment, US capital markets, and innovation, the truth is that China has long recognized its vulnerabilities both domestically and internationally. The growth-at-all-costs approach that led to political and economic successes has also left China's economy imbalanced, weakened the party's central authority due to rampant corruption and rent-seeking, and most concerning to Xi Jinping, made China overly dependent on foreign technology, trade, and investment.

Xi Jinping’s long-term goal of self-reliance

For many years, China's leaders have been working towards greater self-reliance and reducing their dependence on foreign economic ties and U.S. geopolitical influence. While they recognize the value of foreign investment, businesses, and expertise, their long-term vision is centered on a self-reliant, party-centric, and state-driven approach to the economy. Xi Jinping's near-term goals are aimed at achieving self-reliance, as outlined in his "Dual Circulation" strategy, which involves advancing autonomous development through global engagement while managing the potential risks of foreign influences and economic overdependence.

In China's market, foreign businesses have a limited time to de-risk while protecting their shareholders' interests. Balancing the timing of a company's presence to maximize gains while avoiding overstaying is a delicate balance in China. Misjudging the political and economic environment can result in a company being displaced by a domestic Chinese competitor.

We have observed foreign companies frequently misjudging the calculus and timing when entering and succeeding in the Chinese market. They become overconfident and arrogant, failing to assess the economic and political environment regularly. In essence, foreign companies often underestimate the intricacies of the Chinese market and overlook the influence of national pride and nationalist sentiment. Some CEOs claim they focus solely on the numbers and steer clear of domestic and geopolitical issues.

Recent retreats by Western corporates

The eyes-shut approach can be costly, as seen in Uber's failed venture in China, which lasted only 25 months before the company decided to exit, selling its operations to Didi Chuxing, which held an 80 percent market share. Uber's difficulties in China were due to a combination of factors, including fierce local competition, regulatory hurdles, and a lack of understanding about the local market dynamics that native companies like Didi Chuxing possessed.

Numerous cautionary tales exist, including Amazon's 176-month competition with Alibaba and Yahoo's 265-month presence before finally losing out to Baidu.

The Chinese market may seem attractive due to its large population and economic power, but not all Chinese consumers desire or can afford foreign products, and domestic companies often offer comparable alternatives. Companies like Tesla and Apple now face competition from local firms such as BYD and Huawei, respectively. These examples highlight the danger of underestimating the intricacies of the Chinese market and losing market share to local competitors in the long run.

Chinese companies are not just thinking short-term; they are focused on long-term goals that align closely with the Chinese party-state. They are learning, competing hard, and taking advantage of state support to beat foreigners in China and overseas markets. While some Chinese companies are operating globally, others are reluctant to adjust their strategies despite mounting evidence of a hyper-competitive and occasionally hostile market for foreign companies. This is not just short-term thinking; it is retrograde thinking.

International institutions like the IMF and business consultants with a vested interest in China's success have provided overly optimistic economic guidance and projections. However, many CEOs continue to push corporate strategies based on outdated thinking about China, which has led to dangerous debt levels and severely unbalanced growth. By 2017, the China model was all but dead, and the Covid era killed the remaining vitality of the old model.

Despite the widespread belief that China's large population guarantees a lucrative market, this is not entirely accurate. In reality, China's market is smaller than expected due to factors such as income disparities, regional preferences, and diverse consumer behaviors.

The belief that all of China's middle class prefers foreign products is a misconception. While some brands and luxury goods are popular among Chinese consumers, they often choose competitive local alternatives. Furthermore, the notion that Western products are inherently of superior quality and technology is outdated, as Chinese companies have caught up or surpassed foreign counterparts in various sectors.

Since 2018, the myth of China's unending economic growth has been questioned as the country faced both internal and external challenges. This has led some businesses to delay their actions, waiting for cyclical changes or economic "reforms" to occur.

No business is too big to avoid scrutiny

The traditional foreign engagement approach, which is often rooted in outdated perspectives, must be reevaluated in light of the current geopolitical climate. In today's market, a company's products, services, or even its nationality may not resonate as positively with the Chinese consumer as they once did. This shift is demonstrated by examples such as Carrefour, Canada Goose, H&M, the NBA, Adidas, and other companies facing consequences for actions or views that are unfavorable to China's Communist Party leadership or for making statements or adhering to policies in their home country concerning regions like Tibet, Taiwan, Xinjiang, and Hong Kong.

CEOs often argue that an "all-in approach to China" or an "in China for China strategy" is necessary to maintain their brand's popularity and extensive employment in the country. They believe that their significant presence in mainland China protects them from government pressure. Apple is a notable example of a company that has maintained a significant presence in China despite geopolitical tensions and has worked hard to toe the party line. However, this also highlights the fact that no business is too big or essential to be brought under control, and no product or service is too vital to threaten the stability or survival of the Chinese Communist Party.

In recent years, the Chinese government has shown that even major Chinese corporations like Tencent, Alibaba, and Didi, which were previously thought to be too significant to be disciplined, can still be subjected to government intervention.

The traditional approach to doing business in China is no longer effective, but leaving China is not the only option. Instead, companies should focus on product innovation, understanding Chinese consumers, and being aware of geopolitical factors. They can learn from peers who have successfully navigated the evolving Chinese market, as well as those who have failed. U.S. market leaders can overcome short-term thinking by preparing for an ever-changing, highly competitive, and rapidly evolving Chinese and global market.

Longview Global's managing director and senior policy analyst, Dewardric McNeal, is a CNBC Contributor.