McKinsey cuts hundreds from China workforce

To reduce security risks associated with doing business in China, the U.S.-based consulting firm has been separating its China operations from other global operations, people familiar with the matter said—a practice increasingly popular among multinational companies.

Western businesses with decades of experience in China—both McKinsey and those it advises—are facing some of their most challenging times because of geopolitical tensions and the slowing Chinese economy. McKinsey has been facing scrutiny in Washington over work linked to the Chinese government, while some Chinese clients have been shifting to local rivals.

Over the past two years, McKinsey’s workforce in Greater China, which includes Hong Kong and Taiwan, has shrunk by hundreds of employees, people familiar with the matter said. McKinsey in June 2023 referred to having nearly 1,500 employees in the region on its Greater China website. Joe Ngai, the head of McKinsey’s China business, said the company’s employee-attrition rate in the country has been at its historic average of around 20%, but it has slowed hiring. McKinsey still has more than 1,000 employees in Greater China, he said.

It has stopped working with Chinese local-government clients and cut back on state-linked projects, which used to account for a significant portion of its projects. Its latest strategy calls for helping multinational companies navigate China’s changes, advising Chinese companies that want to expand overseas and working with Chinese companies going through executive transitions, said Ngai.

“Our clients all face challenges. We have to help them face up to these challenges," said Ngai in an interview. In a difficult and slow-growth market, “many of McKinsey’s core skills and capabilities are actually more important than ever," he said.

McKinsey’s reshaping of its China business comes as rival consulting firms continue to undertake extensive work for government agencies and state-controlled companies.

Shrinking presence

McKinsey first opened in mainland China in 1993 and grew quickly alongside the nation’s economy, with both Chinese and multinational clients. Dominic Barton, global managing partner from 2009 to 2018, had earlier worked in Shanghai, and his successor, Kevin Sneader, had worked in Hong Kong.

McKinsey was known for winning business from China’s biggest state-owned firms, which play a central role in the economy. These have included China Construction Bank and China Telecom, which McKinsey advised on digitization and operation management projects. Another big client was privately owned insurer Ping An.

Ngai told Chinese news website Sohu Finance in 2020 that about 80% of the clients in McKinsey’s China business at the time were domestic companies, with half of those being state-owned firms. The remaining 20% were multinational firms, he said. Ngai and a McKinsey representative didn’t give a client breakdown for past years or today.

While consulting fees in China tend to be lower than in the U.S., an issue that led to some tension within McKinsey, the firm generally was willing to overlook it in pursuit of growth, said people familiar with its strategy.

That strategy has changed.

In Washington, American lawmakers have been criticizing McKinsey for advising the U.S. government—including on defense-related projects—while also consulting for the Chinese government or affiliated organizations. Its global managing partner, Bob Sternfels, was grilled in Congress about the subject this year.

In the wake of the scrutiny over conflicts of interest, McKinsey has been revising its client list and cutting back on certain projects in China. A McKinsey representative said that the central government of China isn’t, and to its knowledge has never been, the company’s client.

Asked about McKinsey’s current work with Chinese state-owned companies, Ngai said the management consulting firm selects clients rigorously and follows strict protocols to prevent conflicts of interest.

Within China, the biggest challenges include economic sluggishness and Beijing’s clampdown on the business of due diligence and information-gathering by foreign consultancies. Last year, police visited Bain’s Shanghai office and separately raided the offices of Capvision, a consulting firm that connects investors with individual experts who provide industry intelligence.

McKinsey also faces price competition. Some Chinese companies in the market for advice are turning to less-expensive domestic alternatives to American brands.

Companies with names little-known abroad—among them Allpku Management Consulting, China Stone Management Consulting and StratOp Group—are picking up clients, as are local technology giants such as Alibaba Group and Huawei Technologies for projects involving digitization.

Last year, foreign consulting firms’ revenue in China fell 6.3% while local consultants increased revenue slightly, according to Chinese consulting market-research firm Shensixing. The foreign firms held a roughly 40% share of the $7.7 billion market, Shensixing said.

McKinsey, whose global revenue was around $16 billion in 2023, doesn’t disclose its revenue or profitability in China. Globally, the company has about 45,000 employees.

Separating systems

This summer, some of McKinsey’s senior consultants gathered in Singapore, where Ngai briefed them about McKinsey’s three-year China strategy running through 2026, people familiar with the event said.

Among its work with Chinese businesses seeking to go overseas, McKinsey has advised on projects aimed at selling Chinese electric vehicles abroad, especially in Southeast Asia, people familiar with the matter said.

Meanwhile, McKinsey has taken some steps to separate its China operations from the rest of the world. Its global computer systems are being divided, with mainland China-based employees already or set to be cut off from accessing certain internal knowledge databases and documents, people familiar with the matter said.

The idea of siloing China operations has been spreading among multinational companies to keep Chinese operations going while coping with geopolitical tensions as well as China’s tougher national-security rules and its tightened data-security requirements.

Over the past year, McKinsey’s job interviews in the Asia-Pacific region have included questions designed to test candidates’ understanding of the risks of doing business in China, and a case study about a Chinese company seeking to expand or make acquisitions overseas, some of the people said.

And senior managers have been told to be careful when working with state-linked clients and handling projects involving sectors that China considers sensitive, including semiconductors.

Write to Yoko Kubota at yoko.kubota@wsj.com and Raffaele Huang at raffaele.huang@wsj.com