The Flanders-China Chamber of Commerce in partnership with The Conference Board organized a webcast on “China for China: What is the shape of things to come for EU businesses in China?” on June 1, 2021.
Ms Gwenn Sonck, Executive Director of the Flanders-China Chamber of Commerce and the EU-China Business Association, welcomed the participants to the annual joint webcast with The Conference Board. Many European companies perceive China operations to be at an inflection point. The long-term China opportunity is considered to be strongly positive and an essential pursuit. But there are myriad changes in the business environment and risks, complexities and adaptation requirements are profound. The growing trend points to localized, increasingly autonomous China operations, which many describe by the phrase “China for China”. In 2020 China became the EU's biggest trading partner overtaking the U.S. China also regained the title of top destination for FDI and will also be one of the main drivers of the world's growth this year. In the first four months of this year the EU's actual investment in China reached USD1.95 billion, up 12.4%, while China's direct investments in the EU reached USD1.69 billion, up 70%. According to a recent survey of EU companies in China, European companies state that they continue to see China as a top or top-3 destination for present and future investments. According to the IMF China's growth will be 8.2% year, which is the highest in 10 years.
David Hoffman, Senior Vice President Asia and Managing Director of the China Center for Economics and Business of The Conference Board, has more than 30 years experience as a resident analyst and business developer in China. He is a strategy adviser and top management consultant on a wide range of China and Asia business developments. Prior to joining The Conference Board, David led the technology advisory practice of Pricewaterhouse-Coopers in China for 21 years. He is a life-long student of contemporary Chinese political science and economics and he is a graduate of Chinese studies from the University of California San Diego.
Mr Hoffman went trough the recent research of The Conference Board on the China for China topic, the context, the dynamics, the challenges and issues involved. The China Center for Economics and Business is based in Beijing but includes global resources working on China. What does the multinational business environment looks like in China today? It is in many ways a perfect storm, including pressures, opportunities and risks. There is a lot of pressure building around geopolitical tensions and policy uncertainties. Meanwhile, China's economy is performing on a stand out level compared to other economies around the world. The Covid containment response has been incredibly strong and effective. Concerning the risks, we have policy issues emerging from Beijing and globally that bring into question the future of European, American and Western multinational business in China. There is a very difficult set of circumstances. Mr Hoffman mentioned that in his 35 years of experiences he had never met such a set of intermingled and contrary factors shaping the business environment. Doing business in China has always been filled with challenges and for many the rewards have been great, but now is the most challenging time. The upside potential is there but it is getting more complicated to do business.
Not all of it is geopolitical. Many assume that EU-China and U.S.-China tensions and Sino-Western geopolitical tensions in general is the only story but that is not the most important point. China has always had a difficult unfamiliar regulatory environment. This requires that foreign companies adapt to it. The rule of law and regulatory environment aren't the same as in Europe and the U.S. Things shift and change with the economic growth story. Important changes are added to that, including very diverging and demanding customer preferences. Chinese consumers are maturing and their preferences and expectations are different from those in the West. There is a new set of local competitors, different local competition dynamics and very fast-moving competition. There is a willingness to experiment in real time on new products and services. There is a very divergent, very fast-paced and very unique digital environment that is having a huge impact on commercial operations.
China for China (C4C) generally means localizing to adapt to the local market characteristics. There are strong localization processes in HR, leadership, and recruiting all the way down to the lowest levels. Digital systems are localized, many MNCs have adopted the Chinese cloud and apps. Digital operations have become very independent and different from the home market. Commercial operations in general are now oriented around the Chinese digital platforms as almost everything in China is done digitally in terms of consumers and increasingly also in B2B engagement. Western goods producers are under pressure from authorities to assure that their supplies are secure and controllable. MNCs are asked to localize sourcing and production. In some cases Chinese concerns about supply security are real but in other cases local government interlocutors are latching on to this campaign theme to try to force MNCs to invest more in manufacturing capacity in China. In research and development there is strong localized product development in China for China because customer needs are changing and they respond to that with highly localized processes, which is even driving global development to first satisfy Chinese requirements. New partnerships are emerging to try to tackle localization requirements. In enterprise IT, most MNCs are struggling to figure out what they need to do in the future. Do they need a ring-fenced enterprise IT system or can they continue cross-border data IT operations?
Many MNCs are looking at new partnerships. Some are developing local companies or local brands. Chinese capital partnerships are an important issue. Foreign companies are restricted in China in a number of ways in some sectors. If they have a data-centric business model, they may not be able to have a 100%-owned operating entity. If there are concerns about supplies they might have to be more locally-owned. A Chinese capital partnership means that an MNC will spin-off an aspect of its business and instead of partnering with a strategic Chinese investor, choose an investment fund as partner. There are state and city-level investment companies or even private venture capital funds. One interesting aspect is that the Chinese partner is capital-rich and will primarily fund these ventures, which means you don't put as much of your own capital at risk. Secondly, they are very commercially oriented. Many early Sino-Western ventures featured lots of conflicts about incentives. The foreign partner wanted to develop business and make money and the Chinese partner maybe had other incentives and perhaps profitability was the least of them. The funds want returns, they have capital and connections and the skills to finesse the regulatory environment, but they don't operate. So they leave the foreign company alone to operate the business as they see fit. You can compare it to the hotel model, where a Hyatt or Novotel will operate the hotel business in a property that is owned by a financial investor. An example is the Shanghai Disney Resort which could have partnered with Dalian Wanda, the biggest theme park operator in China, but instead chose the Shanghai state-invested holding company to put up the majority of the money and leave Disney to run the park.
Investing in China for China may be undertaking new unconventional partnerships, which are not unsurprisingly uncomfortable to most headquarters. There are political issues at home. You staff up or build capacity in China and you have to reduce capacity in the home market, which is an unpopular political choice. There is a lot of strain with the investment imperatives involved in China for China. Many MNCs express that relations with headquarters have become more difficult. MNC headquarters and local organizations are often misaligned on three things: risk-management concerns, opportunity evaluation concerns and divergence and autonomy concerns. The end state of the China for China strategy might look like a very separated – even autonomous – China operation, which is very uncomfortable. How do you assure that that organization is going to have the same global mindset, corporate DNA, values and compliance standards without the traditional control that headquarters imposed on operating units around the world?
There are three things companies need to do. First, undertake a proactive trust-building process to enable requisite communications to occur. Typically the China organization does not want to talk too much about risks or policy uncertainties. They think that will dampen headquarter enthusiasm for China projects. The headquarters does not want to prod the China team too much on those issues because they think they might insult the China team or may lead to trust issues. Both sides have to get over this and need to have the hard conversations necessary to establish trust and talk about risks and rewards in a balanced way. A second thing is to establish a shared long view on China, in particular how difficult issues around things like human rights conditions in China need to be dealt with. It is a sensitive topic that needs to be worked on jointly. The global CEO needs to head this up to make sure that everybody understands how important it is. Thirdly, there needs to be a much higher commitment to risk monitoring and cross-border, cross-functional coordination. Mr Hofmann published an article on this topic that is available on the China Center website. Companies that have a long view and resource the risk management function effectively have a much higher chance of success in this very difficult environment. Doing all this cannot be the side job of the China CEO. They are busy managing lots of stuff on the ground every day.
Mr Kurt Vandeputte is Senior Vice President Government Affairs at Umicore. He has been leading the battery materials division till July 2019 and has long-term experience in China in commercial and leading positions at the local joint venture. He is also the new Chairman of the Flanders-China Chamber of Commerce.
Umicore is a global materials technology and recycling group with three main divisions: emission control catalysts, rechargeable batteries and waste stream recycling. Umicore is developing the technology of the car catalyst together with the car companies. The company is also making the core material that is going into lithium-ion rechargeable batteries. The car market is now the biggest market but in the past 20 years these batteries have been used in portable electronics. Finally, Umicore is active in metal recycling. The recycling focus is on precious metals, but also on special metals coming out of batteries. The key knowledge of the company is in chemistry, material science and metallurgy applied on metals. All activities rely on global supportive megatrends. The three most important are resource scarcity, electrification of the automobile and more stringent emission control. Umicore is also an industry leader in sustainability, applying very stringent principles in terms of sustainability.
Umicore is a global company of 10,859 people, 47 production sites and 15 R&D or technical centers. Historically Umicore is an European-based company but the biggest growth engine is Asia and more specifically China. The Chinese pronunciation for Umicore is “youmeike”, which means excellence or best quality, to beautify life or materials for a better life, and technological innovation. Forty years ago, Umicore started exploring Asia out of Hong Kong with a commercial office. In 1993 the first joint venture – Shanghai Blue Lotus – was established, linked to the cobalt powder business. Historically Umicore has always had cobalt activities in Europe and the U.S. One of the applications is using cobalt metal in the hard metal industry. As China emerged as a production hub for many businesses, the tooling industry was growing very rapidly. Demand for cobalt was increasing very fast and would be better served out of China. Umicore has about 3,000 employees in Asia of which 2,300 are in China. Production sites involve all activities of the Umicore group. Initially the company went to China to produce but gradually it adjusted the technology offering to fit the Chinese requirements and at present the output of the production plants in China is mainly used to supply local customers.
Umicore's activities are B2B, interacting with industrial partners, not individual customers. There are plenty of opportunities, in the first place greentech. China is really driving the greentech transition in many areas. The country is very technology-savvy. The Chinese are very far advanced in many areas. Umicore believes that the development in China is an accelerator for the global strategy of the company. Among the challenges are being forced to duplicate certain flows, which is unavoidable and on a global scale may not lead to the most efficient set up. A second challenge is the lack of transparency towards each other between China, Europe and the U.S., which is leading to distrust. We all know the political narrative, but supply chains and products that are needed to make goods and services happen on a global scale. Whether you talk about a smartphone, a car, a computer or even a household appliance, we need natural resources coming from everywhere to make those products. No region in the world will have everything in house. A level playfield is also a challenge. This is often mentioned in a standard cliché way, but it is real. We have to make sure that if you operate on a global scale, you can play with the same tools. The biggest risk for Umicore is that regulatory foresight is limited. Financial risk taking in China is still different from the Western world and should be monitored. Return expectations are different and in the long run have to be monitored as well. It is important that Umicore's technology is valorized, for which a long-term business plan is needed to recuperate the investment. This is not always straightforward in China, although in the past five years you see improvement.
It is important to define the China-position: what do you want to do in the country, is it a pure play China for China, or can you make a combined set-up? The local market is the most important driver to be present in China, combined with some global synergy. Tuning towards China and not just exporting your global solutions is very important.
Is there an increase in business as a result of Covid-19 and do you consider further expansion? Mr Vandeputte: Umicore is producing batteries for portable electronics and the Covid crisis led to a strong increase in demand for electronics and consequently more batteries were needed. The car market is booming in China, so that part of Umicore's activities will certainly further expand in China.
Has Chinese competition increased in the past years? Mr Vandeputte: Yes, you're never alone in the business, people are eager to improve. Doing business in China means making sure to stay sharp and keeping headroom on the technology side.
Are headquarters moving to China? Mr Hoffman: Some vanguard companies are moving one or a few global functions to China to tighten the connection in certain key areas. There are firms that have set up regional operating hubs in China, but it is not becoming the predominant operating model. The flow of people and capital render China a less efficient operating hub than Tokyo or Hong Kong. Having a China CEO going to regional and then to headquarters is less efficient than the China organization having a direct line to global headquarters. Mr Vandeputte: Umicore has established a regional headquarters in China early on. The Senior Vice President responsible for China reports directly to management to have a close and short line to headquarters. Umicore combines this with the business units defining their own strategy. The business units can rely on a structure that is permanently present in China. Mr Hoffman: China demands a lot of attention that is not commensurate with its relative size for many companies' global operations.
Due to Covid-19 business leaders can still not visit China. Is that hindering expansion in China? Mr Vandeputte: Yes, it is annoying, but the local team in China can continue to run the business as they used to. Relationships are very important in China and business leaders want to interact with Western counterparts. Once the borders reopen, there will be quite a lot of business travel to China.
Could you elaborate on the H&M and Tesla crises in China? Mr Hoffman: This is about managing shifting public opinion in home markets. Multinationals in China need to have an advanced monitoring system and market intelligence monitoring process to detect shifts and undertake preemptory activities that may help them avoid a public relations crisis. On March 15 CCTV has its consumer day, criticizing different brands for having failed consumers in different ways. It mainly focusses on domestic brands but every year some foreign companies are also called out. It is not an honor you want to get. Companies have learnt to manage that preemptively to make sure they're not on that list. Most companies however don't have an expanded risk function.
What is the main factor for Umicore's success in China? Mr Vandeputte: A technology offering attuned to the Chinese market. Chinese customers have always been open to adopting new technologies, increasing comfort or performance of their products or services. It is up to us to make it happen in China. We moved the development of heavy duty catalysts to China because we have to do that in a very close collaboration. Under the present conditions of no travel you can't do this from Europe or the U.S.
