The Flanders-China Chamber of Commerce organized a webinar focusing on “GETTING IT RIGHT: RETHINKING CHINA” on 15 June 2023. This event was organized with the support of Flanders Investment & Trade.
Ms Gwenn Sonck, Executive Director, Flanders-China Chamber of Commerce, welcomed the speakers and participants to the webinar. China is changing, the geopolitical situation and new and changing domestic market dynamics, as well as the emergence of start-ups and local competition require foreign companies the re-evaluate their approach to China. One of the biggest challenges for our companies is getting a real feel of the market sentiment, and in a slowing market and with local competitors scaling and the geopolitical situation running hot, it is a very challenging business environment. It is an extraordinary confluence of developments that asks of companies to rethink China and recalibrate appropriately for a possibly very different business environment looking forward. But despite this, many of our companies view it as imperative to maintain a footprint in China because of its market size, dynamism, and industrial clusters, which are not replicated anywhere else in the world.
For example, for large companies in the chemicals, cars, and machinery industries, half of their industry's global market is in China. So if they want to keep up with the technology of the future, then they must continue to invest in China. The speed of innovation in China is very fast and is keeping our companies very sharp.
As China's economy is recovering from the impact of Covid-19, this year's GDP growth is targeted around 5% and already reached 4.5% in the first quarter, which was better than expected. China remains a market which cannot be ignored and continues to be attractive for Flemish companies going there with the right product and collaboration model. There are still many sectors in which both sides can cooperate, such as in life sciences, automobile, cleantech, food & beverages, and so on. Businesses need to be well-prepared to be successful and this is where our Chamber can assist you.
The panel of experts will provide deep insights into common challenges, fresh thinking on innovation, and advice on start-up strategies. Strategic partnering and M&A options may become essential approaches in getting it right when dealing in a new Chinese business environment.
Mr Peter Buytaert, Co-founder & Exco Member Silk Road Partners introduced the topic “China’s New Business Environment: Overcoming the Pain Points”. Silk Road Partners (SRP) is a consulting firm focused on making the investments work between Asia and Europe and anything in between, helping companies with M&A strategies and also helping them to restructure and rethink the strategies for Asia, or helping Asian companies develop their strategies for Europe. What are some of the common pain points that we feel European organizations and Flemish companies in particular have in regard to China, because China is changing? It is not the China of 10 or 15 years ago, it is evolving tremendously. Geo-political challenges have complicated it even more.
Is China still the land of opportunity? It would be ignorant to say no to that. You cannot ignore China. It is a tremendous economy and whether we like it or not, we will have to deal with it. Small organizations can say “I don't need China”, “I'm localized”. Everybody has to make their judgement, but the reality is that it is a huge market. China has one-fifth of the world population, 1.4 billion people with an economy that is now equivalent to the U.S. with USD18 trillion and 18% of the world economy and growing.
Is China innovating? It is lodging more than 60% of AI patents with the World Patent Organization. There is also a tremendous boost of the innovative power of China. Having more and more protective measures in strategic areas for China will accelerate that because there will be a focus on having more innovation done in critical areas. China is also home to one-third of the world's unicorns – companies with a valuation of USD1 billion – and fostering a new one every four days, according to the Hurun Report. There is a tremendous entrepreneurial drive.
Is China clean? There are many challenges, but China has built more solar and wind electricity generating capacity than any other nation. China accounts for more than half of global electric car sales, actually about 60% this year. China's innovation score is among the highest in the world today, lagging only Germany, the U.S. and Switzerland, according to the World Economic Forum. China accounts for a quarter of all man-caused greening in the world. It is not black and white, there is much grey and many challenges. Looking daily at reports, you hardly see these numbers, but they offer great opportunities.
Where are organizations struggling? Mr Buytaert bases himself on 30 years experience in Asia, of which 20 years in China, and from interactions with clients.
• What is the mutual value for my company, but also for China? There are five-year plans and a focus on which technology China wants. If there is no value from your company or technology for China, then it is better to stay out because it is not going to work.
• Lack of deep market understanding and underestimation of local competition. It is amazing how people have trouble to really understand what is the market size for their product, in what segment they are playing. There is no other country in the world that is so dynamic and entrepreneurial where you come in and 6 months, one or two years later you have five or six competitors doing exactly the same thing.
• Being ill-prepared to deal with the volatility, ambiguity and complexity at an unprecedented pace of change. When I returned to Europe after 30 years in Asia, my biggest observation was that it is very difficult to be fast or change-driven. If in Belgium you ask somebody to move from Leuven or Mechelen to Ghent, there is a big issue of mobility. The appetite for change and movement is creating a totally different business environment in China. Ambiguity and complexity is also related to the pace of changes in regulations, especially for example in medical devices.
• Poor selection and management of business partners. Doing due diligence on the business partners and also managing them. China is looking at contracts as framework agreements which can change with the circumstances. If you don't allow changes, you are going to create friction. Many joint ventures are not working after three or four years because a lack of adaptation to the changes.
• Lack of commitment to make it work for all stakeholders, including middle management and business unit managers who don't know China as well and have a different view.
• Limited access to localized resources to optimize operational and legal structures.
• Lack of leadership to execute the HQ's strategy. How many people in the organization have experience in dealing with this complexity in China.
How to get it right?
• Value: What is Asia's value for us and vice versa?
• Strategy: How confident are we in our business model?
• Operations: Which structure is right?
• Culture: How committed, aligned and ready is our leadership?
China is a land of opportunity, but to get it right requires a lot of thinking and a deep introspective look in how we should change our structure.
Mr Jay Mitra, Professor, Essex Business School, and Leader International Entrepreneurship Forum talked about “China’s Speed of Innovation: Pitfalls and Opportunities for Foreign Investors”. We are talking about rethinking China in a context very fraught with political tension, much of it whipped up by the United States but also across Europe and certainly in the UK. The political climate in which we are doing this rethinking is very tense. My starting point really is that whenever we talk about speed, we need to talk about speed in context. A first quote is from 2019 congressional research: “China by and large represents the fastest sustained expansion by a major economy in history.” The concern really has been with the speed of change. The second quote comes from China's State Council Information Office. China's way of looking at changes is not necessarily to focus so much on speed but rather on scope. Innovation with Chinese characteristics includes the Yutu-2 lunar rover on the dark side of the moon, the fendouzhe submersible exploring the 10,000 meter deep ocean, salt-tolerant rice growing in tidal flats, and unmanned equipment guided by the Beidou satellite navigation system to boost African farmers' crop yields. Speed may be fine and we should all be worried about this, but looking at this from the Chinese side is the way that they are approaching this whole story of innovation, the context in which they are doing it is quite incredible. It's not speed along just one linear trajectory based around a few technologies, but across the field. You have a situation where they are developing technology across different sectors, but also engaging with the rest of the world in a variety of different ways. So speed matters, but scope matters too.
China's growth by and large has been studied from the perspective of imitation. China, especially during its early manufacturing days, was regarded as a global copycat, relying on the post-war baby boom cheap labor, and with this extraordinary statistic of lifting 700 million out of desperate poverty, which no other country has ever done. What we now see is a situation of Millennials and Gen Z workforce, with 81 million fewer people in 2030 than in 2015. The actual population of China is set to decline by an average of 7.6 million annually, so it is still quite huge, but declining. It's what people are doing in this kind of environment with technology. Why the technology has become such a spur in terms of the Chinese way of thinking must be seen against this backdrop of a declining population.
In 2014 there was a Harvard Business Review article on “why China can't innovate”. The conclusion was drawn at that time – only about 8 or 9 years ago – that China can't innovate. But less than two years from the time of that writing we find that eight out of 10 companies with a valuation of USD 1 billion are Chinese. China's rank in the Global Innovation Index was 34th in 2012 and 11th in 2022 and was engaged in science and technology cooperation in more than 160 countries. The underpinning common factor is that even though the population is declining, the vast population not only provides a market and this is where we sometimes go wrong. We think of the vast population but not its ability to improve herself, its ability to adapt, adopt and absorb changes that are taking place in the country itself. Adoption, adaptability and absorption is actually embedded in the speed question. You cannot necessarily live with speed if you do not know how to adapt to that change. For example, a beggar in Beijing saved enough to buy a smartphone and use QR codes to go on begging in a cashless society. Right across the spectrum from the richest to the poorest, this ability to adapt and adopt the technology says something about the attitude and cultural dimensions of people in China and hence the reason why speed is so apparent in China's development.
In mobile technology development, the U.S., South Korea and China almost started at the same point and especially using mobile technology for payments, with ApplePay in 2014, and Samsung Pay, WeChat Pay and AliPay in 2015. The timing and technology were similar, but the adoption process is very different. In 2018, ApplePay had one 1 billion transactions a month, while WeChat Pay had 1.2 billion transactions per day. In 2019 the gross expenditure via mobile apps was USD98 billion in the U.S. and USD54 trillion in China, which is 551 times more. The underpinning driving force is very much a partnership of people, government and companies. There are 700 million people under 40. The young millennials and Gen Z workforce are creating more of a national technology identity or innovation identity rather than a manufacturing identity.
The lived change index uses lifetime per capita GDP to track how much economic change a population has generated over the past three decades. GDP in China grew 32 times since 1990 as opposed to 2.7 in the U.S. China's share of global GDP increased from 2% in 1990 to 19% in 2019. Looking at food preservation, in 1990 the rural population in China had only one refrigerator per 100 households; in 2019 is was 96 per 100. In 1990 there were 5.5 million cars in China; in 2019 270 million, with a 47% share of the global electric fleet. Between 1990 and 2013, China poured more concrete than the U.S. in the whole 20th century. What we can draw from this is that we are talking not just about change in technology or organizational structures, but different ecosystems for change, which enable adoption and newness. Talking about ecosystems, we are essentially referring to connectivity between people, organizations, the wider environment and the stakeholders who work within that. Those three dimensions are driven by a need for digital first. When we talk about technology and innovation, a lot hinges on the extent to which digital technology is powering this speed and change. A lot of it is driven by serious investment in R&D. China's total R&D expenditure reached 80% of that of the U.S. in 2019. China has been the world leader in patent applications since 2011. One billion people in China are internet users, the largest digital population in the world. The context enables speed to actually happen. Speed is made possible because of the scope of the change and how the ecosystem works to enable that scope.
Looking at investments in the semiconductor industry, Taiwan has the largest manufacturing capacity, but it is in the incentives and the actual investment that we find significant differences. China is way up in incentives in the 2021-25 period, with USD150 billion.
What do we need to look out for?
• Micro factors within and between companies
◦ start-up mind set of companies
◦ externally driven creative destruction and constructive competition
◦ middle office capabilities
◦ breaking the silo boundaries between strategy, organization and execution
◦ business model innovation, combined with societal well being.
• The macro picture:
◦ Against a background of geopolitical tensions, reshoring and export controls. Is the tech industry going to be impacted by de-globalization, de-coupling and de-risking?
◦ The tech industry represents 9% of global trade and has the most globally integrated supply chain and USD700 billion in net profits.
◦ The structural trends since the 1990s – globalization, clusterization and specialization, are systematically essential tech enablers.
I am very skeptical about major change happening without China. It is just not feasible.
• Overarching trends:
◦ Omnichannel retail with on-demand economy, social economy, retail supply chain and digital payments
◦ content based e-commerce across video sharing platforms
◦ on-line services around health care and education. AI for personalized and immersive learning experiences
◦ digitization of social life
There is a need to look out for differences, possible pitfalls and necessary adjustments. What we should perhaps be looking at is not so much cultural difference, but strategic thinking is necessary in today's world. China is showing leadership not just in technological terms but in terms of strategic thinking based on this ecosystem approach to business and economic development where people are the most important factor. There are different interpretations of privacy and control, and that is where I think the biggest rub comes. We are used to notions of privacy, of legislative freedoms and control, which of course we should safeguard. We have to adapt to see how we can work to that change and that is a big area of concern.
“Strategic Partnering/M&A in China” was introduced by Mr Daniel de Blocq van Scheltinga, Managing Partner (HK), Silk Road Partners, who has been involved with China-linked M&A for 22 years and has seen what can go wrong. M&A does not have to be a 100% full-blown acquisition, it can be a joint venture, a partnership or selling part of the capital to an investor. The argument has always been that it's a huge market with a growing middle class, which is true. It is too simplistic now to say we want to be in China because it is a big market. It is even more important because of the innovation and the speed of change. If you are not physically active in China with Chinese partners, you will fall behind in technology in all the new areas. You need STEM graduates, scientists, engineers and mathematicians. There are approximately 500,000 STEM graduates in the U.S. and 6 million per year in China. That is the firepower for the future, for innovation and change. China is the most competitive landscape in the world because of the way it is structured.
Trying to do it alone won't work. If you are not Chinese, if you don't have the cultural background and history, you will fail. There are big companies with big budgets that are successful elsewhere in the world that do not achieve what they want to achieve in China. The challenges start when you look at M&A in China. My first M&A deal in China in 2005 was when one of the world's biggest petrochemical groups wanted to partner with a big Chinese SOE who had no idea how M&As worked. That has evolved. Larger Chinese companies now understand and have experience of M&A in house, but others down the ladder don't have the knowledge and experience and need to be helped by people in the West with more experience. Lack of financial transparency is also often an issue. You need to spend time to explain why, what and how.
One of the biggest mistakes western companies make is to think that their product is important to the Chinese market. Chinese companies spend a lot of money, resources and time monitoring the government, trying to keep watch from which way the wind blows, and possible changes in regulation. Chinese companies are forced to be nimble and quick because government regulations can and have changed often in the past. Most western companies completely ignore that. Western companies were surprised by President Xi's anti-corruption campaign and some luxury brands suffered as a result, but they could have known because all this was published. The luxury companies should have made contingency plans but I don't know of any who did. Sectors can be blacklisted or encouraged. The two sessions every year need to be studied and followed. When the Chinese government says something they will follow through. The role of Chinese state-owned banks is often misunderstood. They have a dual role, including to implement some of the state's policies. The role of local mayors is also often ignored. Very often municipalities will be shareholders in private companies. Mayors and officials will be shareholders, often for a short time as a way to encourage those companies and helping them get local financing. You have this grey area, when is a company private or public? A few years ago a large European listed company invested in a counterpart in China. They took a minority stake but it was still a sizable sum. The Chinese organized an official signing ceremony with the Chinese Ambassador in the European country flown over. The CEO of the European company decided to send his number 2 so as not to ruin his weekend. That was the beginning of a disaster but even those kind of things happen today.
My message is that being in China shouldn't really be a choice. You can't miss out on the innovation and the local market. Chinese partners can also do things outside China and we are seeing that more and more. There are many pitfalls, doing it without having it well thought out and without experienced advisers is a recipe for disaster.
A Q&A session concluded the webinar.
