Euromonitor International – The Future of China’s BusinessAccording to Industry Leaders

This Newsletter offers you an insight on how Chinese Industry Leaders consider the Future of China’s Bussiness. The feature is based upon an extensive survey from Euromonitor International, however done before Covid-19, but with some conclusions for the post Covid period.

The guest authors:

Julia Ren Director, General Manager — China

Connie Zhou Head of Research — China

Leo Chen Senior Analyst — China

William Wang Senior Consulting Manager — China

Anna Yang Consulting Manager — China

Zora Zheng Consulting Manager, Business Development — China

Introduction

Over the past twenty years, China has been a key contributor to global economic growth. The Chinese consumer market is sustained by a population of 1.4 billion people and according to Euromonitor International, China has witnessed a GDP CAGR of 12.7% during 2009–2019, successfully transforming itself from a low-income to a mid-income country. Today, China is one of the most attractive destinations for business and investment.

The key factors driving China’s rapid economic growth include urbanisation, globalisation and domestic consumption upgrading. Over the past two decades, the infrastructure and heavy industry has seen healthy growth. Industrial upgrading across various heavy industry sectors, such as steel, petrochemical and automotive, helped further infrastructure advancements.

In the future, the decelerated urbanisation in China is likely to slow down the demand for infrastructure and energy services and the same logic applies to the consumer market as it matures and gradually saturates. The Chinese economy is past the rapid growth phase and is now experiencing sustained growth, which leads to a few key questions: what are the key trends that will drive the Chinese economy in the next two to three years and how will business leaders across different industries interpret this new norm of sustained growth? Furthermore, how should Chinese enterprises change and adapt?

In this Euromonitor Whitepaper, we will be answering these questions based on insights gathered from surveys and interviews conducted with Chinese business leaders, including why the slowing economic growth incubates an opportunity to transform and innovate, how global merger and acquisition turns out to be a strategy to ameliorate the roadmap of development and how COVID-19 will impact business strategies. These insights will help identify trends shaping the business economy and explore opportunities for Chinese businesses.

Julia Ren Director, General Manager China Euromonitor International

Methodology

To produce this white paper, Euromonitor International surveyed and interviewed more than 60 business leaders from leading manufacturing and technology companies in China. These business leaders are senior executives at the Director level or above, with extensive experience in their respective companies and industries. The executives are from various consumer goods, service and retail industries, including but not limited to consumer appliances, beauty and personal care, apparel and textiles, food and beverage, packaging and cultural and creative industries. The data in this white paper was primarily collected between August 2019 and February 2020 through online survey and / or in-depth face-to-face or telephone interviews.

Disclaimer: as most of the surveys and interviews were conducted prior to the global outbreak of COVID-19 (namely February 2020), the survey data and corresponding analysis presented in this whitepaper do not fall under the COVID-19 context or discuss its impact. The impact of COVID-19 are discussed in an independent section —The Impacts of COVID-19.

Key Findings

Views on the macroeconomic environment in China – A “new normal” for the Chinese economy

Over the last three to four decades, China transformed from a low-income to an upper-middle-income country due to rapid economic growth. Tertiary industries replaced secondary industries as the sector driving the majority of economic growth, which laid a strong foundation for sustainable development for the future economy.

According to Euromonitor International’s macroeconomic and consumer data, China’s GDP reached nearly USD 6 trillion in 2010. China surpassed Japan to become the world’s second-largest economy, following the United States. At the same time, China achieved a compound growth rate of 9.0% per annum between 2014 and 2019, which is higher than the world average of 5.2%. Based on Euromonitor International’s macroeconomic model, China is expected to achieve a moderate rate of growth for the next five years.

Put under scrutiny, China’s economic growth has been slowing. According to Euromonitor International’s macroeconomic model and data for Q3 2019, China’s year-on-year GDP growth rate has geared down

in relative terms from a double-digit figure in 2010 to a mid-single-digit figure in recent years. Chinese business leaders are not exceedingly worried about such growth slow-down but confident that the overall economic environment will continue to develop, and will be working actively to explore future drivers to boost their business growth through innovation and a deep understanding of consumer needs.

Chinese business leaders think the future is bright

Opportunities and threats

The interviews revealed a unanimous agreement that breaking away from the previous extensive economic growth pattern to an intensive one is a positive change for the long-term development of various industries.

Those leading traditional manufacturing companies believe that the era of the reform and opening-up policy is over. As the market matures and the absolute value of market size continues to grow, structural differentiation will gradually emerge. Despite huge consumption potential, it would be difficult to obtain sustainable revenue by clinging to the stale business model launched between the 1980s to 1990s. To remain competitive, business leaders need to focus on keeping pace with new business management concepts, reforming the internal structure and procedures, controlling product quality and understanding consumer demand. In addition, leveraging the internet and big data is also critical to achieving business goals.

In contrast, Chinese technology companies have always been fighting to survive a fiercely competitive and rapidly changing environment. Leaders in this space are used to turning challenges into opportunities, which is also an important aspect of “Internet Thinking”, known as a mindset of utilising the internet to tackle industry pain points. The Chinese technology industry developed expeditiously over the past two decades and achieved a significant transaction size. Moving forward, technology companies will continue to improve and optimise areas like transaction efficiency, resource allocation and business development.

Leading manufacturing and emerging technology companies are seeking new opportunities with the aid of “Internet Thinking”. By embracing digitalisation, Chinese companies will be able to reform business and operation models and transform their supply chain, product and channel.

Where Chinese business leaders believe future opportunities for development will come from:

  • Changes in consumer behaviour (92 %)
  • New business models or innovative products (83 %)
  • New technologies (75 %)

Where Chinese business leaders believe future challenges will come from:

  • More fierce competition from peers or other industries (89 %)
  • Talent shortage (67 %)
  • New laws and regulations, or changes to existing laws or regulations (50 %)

Growth predictions

Where performance growth will come from in 2019/20, according to Chinese business leaders:

  • New product development (52 %)
  • Growing product penetration rates in existing channels (46 %)
  • Developing new channels (41 %)

Business priorities

The top three business priorities in 2020 according to Chinese business leaders:

  • Continued innovation based on an understanding of consumer trends (76 %)
  • Digitalisation (59 %)
  • Mergers and acquisitions (42 %)

Three Hot Topics for Chinese Business Leaders

  1. Overseas mergers and acquisitions (M&A) by Chinese companies

Overseas markets are becoming increasingly attractive to Chinese companies as globalisation advances

and new opportunities emerge constantly due to the Belt and Road Initiative, the Internet Plus strategy and the development of digitalisation, IoT, AI and 5G. Euromonitor International analysed Chinese overseas M&A activities alongside the exclusive information provided by Chinese business leaders to excavate opportunities in the new era.

Initiating blueprints: Objectives of overseas M&A

Chinese companies pursue M&A overseas for various reasons, all of which are on the ground of the companies’ strategic goals and are in line with the state of the macroeconomy and market. These objectives can be grouped as follows:

To access high-quality raw materials and expand the supply chain

Under the gradual maturity of the Chinese consumer market and continuous diversification of consumer demands, a variety of companies are eyeing upstream supply chain overseas to seek out both an adequate and stable supply of high-quality raw materials and to ultimately produce higher-grade products. In addition, some companies are striving to yield new revenue by extending their presence into the global upstream supply chain to transform into both raw material suppliers and end products manufacturers. In the interview with Edward Yang, Strategy and Investment Director of Bright Dairy and Director of Synlait Milk, he stated that Bright Dairy acquired Synlait to access high-quality milk sources in Australasia as the company anticipated the insufficiency of domestic milk sources posed by the climbing consumption in China and strong demands for imported milk sources ensuing the tainted milk scandal in 2008.

To enrich brand and category portfolios

Acquiring preeminent overseas brands to enrich the company’s brand and product portfolio is also one of the most common objectives. In 2009, Anta Group acquired the premium Italian sportswear brand FILA to establish a larger brand portfolio catering to a wider array of consumers globally, from mass to the high end, which helped drive rapid growth. Shandong Ruyi Group, a leading Chinese apparel company, acquired the French fashion group SMCP in 2016, which successfully incorporated “affordable luxury” into its product categories.

To break into overseas markets

To grow market share in overseas markets and broaden geographical sources of revenue, many companies pursue M&A to enter unfamiliar markets or those with high entry barriers. For instance, over the past decade, Haier Group completed multiple M&A deals in North America, Australasia and Europe to integrate GE Appliances, Fisher & Paykel and Candy into its brand portfolio and grow its brand in the global consumer appliances space. In September 2019, Mengniu Dairy announced its acquisition of Australian organic infant formula brand Bellamy’s. Later in November, the company announced another acquisition of Australasian dairy and beverage company Lion Dairy & Drinks Pty., Ltd., which possesses strong production capacity and cold-chain distribution system in Australia, as well as a global market presence in China and Southeast Asia. These two acquisitions demonstrate Mengniu’s determination to break into the global market.

To reduce cost

Land policies and industrialisation gave rise to ascending labour and land costs in China, which lead companies to turn to overseas M&A to reduce production and operation costs. According to Edward Yang, Strategy and Investment Director of Bright Dairy and Director of Synlait Milk, compared to China, the cost of dairy farming is lower in certain foreign countries with ample natural pasture resources.

As a result, acquiring overseas milk sources or ranches has become an important strategic goal for the company.

To obtain advanced technologies and talents

M&A enables a company to obtain overseas patents, technologies and talents and accordingly improves research and development and organisation management. One crucial reason Haier Group acquired GE Appliances was to utilise GE’s world-leading large cooking appliance and dishwasher technologies to upgrade their products. Analogously, Haier’s acquisition of New Zealand brand Fisher & Paykel aimed to optimise its washing machine models with Fisher & Paykel’s progressive motor technologies.

To generate returns on investment

Acquiring overseas leading players also helps Chinese companies achieve a high return on investment by improvingthe acquirees’ value in capital market and even allowing them to be competitive enough to go public eventually. In 2013, Belle Group, a well-known domestic apparel and footwear retailer, partnered with its shareholder CDH Investments to invest about CNY 700 million into the acquisition of a majority stake in Japanese fashion company Baroque Japan, which was subsequently listed on the Tokyo Stock Exchange in 2016.

Looking beyond: Key considerations for overseas M&A

Selecting the right target company is the most important process in overseas M&A. Before embarking

on overseas M&A, the acquirers need to abide by the rule of “3 Goods” — good location, good target and good price.

Good location

The definition of a good location varies but overall, the criteria to assess a M&A location can be summarised as following: macro-environment, trade policies, market factors and resource availability.

Macro Environment: Developed markets are commonly considered the best choices for overseas M&A on account of their preferred business environment in terms of subtle political risk, open economy, transparent policies, sophisticated legal systems, mature investment and financing procedures, and relatively low market entry cost.

Trade policies: On the one hand, M&A in developed countries that have signed a free trade agreement with China award the acquirers corresponding tariff advantages that reduce upcoming operating cost. Edward Yang, mentioned that Bright Dairy settled on New Zealand for M&A instead of Australia because the country previously signed a free trade agreement with China. On the other hand, developing countries that joined the “Belt and Road” initiative and Asian or African countries that are on the list of China’s foreign aid are also good candidates, given their development potential and predominant protection of Chinese companies. For example, countries in South and Southeast Asia are favoured by Chinese apparel companies for overseas M&A due to their locations at the south side of “Belt and Road” and protective policies for Chinese companies.

Market factors: The market advantage of regions usually differ. Amongst the developed markets, North America presents superior technologies and talents whereas good brand value and management expertise in Western Europe are the primary attraction to Chinese companies. Unlike developed countries, various developing countries still feature low per-capita consumption of consumer goods in multiple industries and retain remarkable growth potential, which has driven Chinese dairy players to keep a close eye on Southeast Asia, Northwest Asia and the Middle East and Africa. Gang Xi, Chairman of New Hope Dairy and President of Grass Green Group, indicated that if the company considers M&A in Europe, the main targets will be local brands whose value and management expertise can be leveraged when introduced to other markets of strong growth potential.

Resource availability: Australasia and Eastern Europe are renowned for abundant natural resources while labour resources are ample and inexpensive in Southeast Asia, which are all intriguing M&A destinations from the perspective of resource availability. Nonetheless, despite the low labour cost in Southeast Asia, the production and management efficiency in this region might not be comparable to developed markets and thus it is necessary to pay attention to the local operation.

Good targets

The essential measurements of whether a M&A target can be considered good includes strategic fit, potential synergies, corporate culture and financial indicators.

Strategic fit: The related industry, brand positioning and product strength of a good target should conform to the acquirer’s long term strategic development needs, which are also the core reason why some Chinese companies seek overseas M&A in the first place.

Potential synergies: A good target complements or strengthens the acquirer’s supply chain, technology, business operation and management. Particularly, if the acquirer intends to introduce the target to the domestic market, fundamentals should be taken into account, such as the target’s capability of adapting to the domestic market environment and achieving rapid growth and the availability of the acquirer’s resources to effectively empower the target to thrive in the homeland.

Financial indicators: Financial indicators are the most straightforward criteria in the process of target selection. Established companies with outstanding profitability in the local market help the acquirer reduce cost and risk. Thus, it is crucial to identify good targets that will achieve synergies and ultimately realise global leadership.

Corporate culture: Corporate culture is a critical constituent of a company’s core values and a catalyst to actuate successful integration. Even if the corporate culture of the target is remarkable, compatibility with the acquirer’s culture matters even more to accomplish post-M&A synergies.

Good price

It usually takes at least two years to finalise an overseas M&A deal, from strategic planning and target selection to the final transaction. Multiple third-parties are involved throughout the entire process, usually including investment banks, accountants, lawyers, exhibition organisers and market research agencies, resulting in substantial hiring cost and thus many acquirers put great emphasis on reasonable price or valuation of the target to relieve them from aggravated M&A cost.

Battling through: Challenges of overseas M&A

Macro challenges

Despite the ubiquity of the internet nowadays, Chinese companies still face plenty of uncertainty in overseas markets especially under the circumstance of strict regulation and laws, which is an indisputably significant challenge for overseas M&A.

Information challenges

Many Chinese companies still lack a profound understanding of the status quo, future trends and growth drivers of overseas markets and have limited channels to obtain trustworthy information. As a result, accessing authentic, credible and valuable information becomes a major challenge, especially when there is a lack of transparency about the state of potential targets on the sell-side when looking for a high-quality target company.

Management challenges

The post M&A management challenges primarily consist of human resources, business management and culture challenges.

Human resources challenges: Traditional Chinese consumer goods companies often recruit finance and operation departments externally due to inadequate internal talent.

However, external recruitment is time-consuming and leaves the new hires limited opportunities to completely understand the acquirers’ culture, which impedes the integration of both parties.

Business management challenges: The acquirer faces business management challenges including consolidating and allocating resources, establishing and implementing a multi-brand strategy and deciding on a centralised and localised operation. When it comes to managing a multi-brand portfolio, lacking knowledge of each brand team’s capabilities will lead to poor resource allocation and leave adverse impacts on operational efficiency, while duplicated brand positioning will give rise to cannibalisation amongst brands. Regarding the operation style, localised operation may seem to be a proper choice for certain acquirees in developed markets but can lead to insufficient systematic support from acquirers.

Culture challenges: Difference of leadership styles, objectives and directions, communication environments, employee management mechanisms along with financial and administrative systems pose challenges for organisational integration. Plus, bias against the leadership of Chinese companies still exists overseas, which makes it difficult for the acquirers to lead the cultural integration process post-M&A.

Progressing together: Case studies of successful post-M&A management

Nowadays, a growing number of Chinese companies breakthrough global markets via overseas M&A and some of the management models and philosophies set an example for potential acquirers across the globe to navigate post-M&A integration and management.

#1: The Haier Group and GE Appliances — Revitalizing a classic American consumer appliances brand with the “Ren Dan He Yi” model

GE Appliances (GEA) is one of the best-known appliance brands in the US, which covers refrigeration, home laundry and large cooking appliances and dishwashers catering to diverse consumer segments. In 2010, GEA started to witness stagnant growth due to the saturation of consumer appliances and a sluggish housing market. According to Euromonitor International, GEA’s retail volume sales CAGR during 2010-2015 in the US consumer appliances market was only 2 %.

In 2016, Haier acquired GEA for USD 5.4 billion. Haier subsequently expanded GEA’s plants in the US, established innovation centres to further entrench local operation and equipped GEA’s appliance products with built-in smart functions. More importantly, Haier replicated its “Ren Dan He Yi” model to implement far-reaching changes in the internal organisation and management structure of GEA. According to Euromonitor International, GEA registered a brand retail volume sales CAGR during 2016–2019 of about 4.2% in the US consumer appliances market, outplaying the preceding five years. Haier’s official data shows that GEA’s operating revenue also saw a CAGR of around 10% during the same period.

Haier’s “Ren Dan He Yi” model encourages employees to take concrete actions as entrepreneurs to proactively interact with customers to understand and satisfy customer demands through product improvement, brand creation and ecosystem establishment. Furthermore, the employees play a role of not only entrepreneurs but also connection points to link external talents with internal resources to maximise customer experience and value and eventually convert one-time shoppers into lifetime customers of great brand loyalty.

The “Ren Dan He Yi” model is set to promote innovation through changes in people, to enhance efficiency and to elevate employees’ income. The actions of employees are driven by the model itself rather than instructions and commands explains Hua Gang Li,Vice President and Chief Experience Officer of Haier Group.

The “Ren Dan He Yi” model touches upon changes of three aspects including organisation change, procedure change and employee evaluation change. Organisation change requires management to change from managing employees to offering assistance to employees.

Procedure change inverts the usual pyramid management style and motivates employees to directly interact with customers and ask for management support to fulfil customer demands, rather than management deciding on the support to provide based on their perspectives of customer demands. Employee evaluation change defines that employees’ performance evaluation results and rewards are no longer determined by the leaders but by the employees’ tangible actions. The actions of employees are driven by the model itself rather than instructions and commands. As a result, creativity is unleashed and a sense of ownership is invoked.

After adopting Haier’s “Ren Dan He Yi” model, GEA has shifted the focus from management value to user value and no longer considers itself a consumer appliance company but an ecosystem incubator to provide customers with one-stop and full-scenario services. Kevin Nolan, CEO of GEA summarised that giving employees freedom and removing bureaucracy are critical to surviving the era of IoT and the value of the employees should not be underestimated.

#2: Bright Dairy and Synlait Milk — “Strategic control” for mutual trust and benefits

“We seek common ground while reserve room for differences to pursue synergies and business growth for both parties,” states Edward Yang Strategy and Investment Director of Bright Dairy & Food Co.,LTD and Director of Synlait Milk LTD.

Synlait Milk LTD is a New Zealand manufacturer and B2B seller of dairy products and infant formula. The company operates one of the largest infant formula centres in the world and aims to provide customers with the complete supply chain, from farm to consumers. Synlait is the exclusive infant formula processing partner of A2 in New Zealand and China. In 2010, Bright Dairy acquired Synlait but chose not to become the sole owner but to implement “strategic control” by becoming the largest shareholder of the company. “Strategic control” comprises two crucial parts — control Synlait’s business direction and a practice people-centred management philosophy that seeks common ground while allowing room for differences.

Controlling the business direction equates to steering the company’s strategic positioning, business model, product portfolio and quality, equity and corporate governance structure to help the company transform and grow. Bright defined the positioning of Synlait as the global leading manufacturer of infant formula and an innovative international dairy company that helped Synlait shift its business focus from OEM and B2B to OBM and B2C. Bright expanded and diversified Synlait’s product portfolio, which is now dominated by high-value-added products and offers copious categories including infant formula, cheeses, liquid milk drinks and more. Meanwhile, multiple independent testing centres were set up to replace the locally prevalent third-party agencies in order to control product quality more stringently. Regarding the equity and corporate governance structures, Bright built financing platforms in New Zealand and Australia to help Synlait complete IPOs in both countries and to introduce well-known investors from Europe, America, Australasia and Asia, which led to a diverse equity structure and normative corporate governance structure of Synlait.

Besides steering the unified business direction as “common ground”, Bright also lived up to its commitment of “reserving room for difference” by hiring local management talents in New Zealand and granting the local team full trust and management power. Bright set up a gym and Chinese-style employee cafeteria to boost employees’ satisfaction and sense of belonging and offered flexible payment schedules for local dairy farmers to help them throughcash shortage. This management philosophy gained tremendous recognition from Synlait’s local team and strengthened their willingness to discuss operational details transparently and abide by the business direction proposed by Bright. In 2011, Synlait launched Pure Canterbury, a premium infant formula brand to improve the proportion of high value-added products within the product portfolio. In 2017, Synlait announced that it has become New Zealand retailer Foodstuffs South Island’s exclusive supplier of liquid milk drinks from 2019, which diversified its product portfolio to be in line with the business direction originally proposed by Bright.

According to Bright’s official data, up to 2018, Synlait’s total production capacity and output increased by 2 and 3.5 times respectively, the number of employees and dairy farmers grew by 11 times and 70% respectively and the operating revenue rose by 4.4 times. Bright Dairy’s success in post-M&A management can be attributed to the management model “strategic control”, which helped Bright overcome the cultural conflicts that arise frequently when a Chinese company acquires a foreign entity.”

  1. Innovation and Consumer-centricity

Innovation and transformation by focusing on consumers

Under China’s current economic situation, a growing number of business leaders realise that they will not be able to achieve future organic growth by relying on traditional business models. Thanks to a variety of traditional manufacturing and technology companies, China is now an innovation hub, demonstrating a profound understanding of consumers as well as industries and a spirit of entrepreneurship across organisation management, production, marketing and more.

Amidst the Industry 4.0 wave sweeping across China, Haier developed COSMOPlat which helped transform the company from a home appliance manufacturer to an ecosystem leader to achieve consumer- centric mass customisation by enabling the interconnection of each phase from producers to consumers, which is also known as an integral part of “smart manufacturing”. In the era of IoT, COSOMOPlat is geared towards the “Made in China 2025” initiative and provides full solutions for manufacturers in other industries. In Haier’s definition, production and consumption are no longer a one-to-many relationship.

With the COSMOPlat platform, seven templates, N systems (“1 + 7 + N”) and the 5G-empowered Connected Plant, Haier linked the production line with the diverse needs of individual consumers to establish consumer-based production.

Consumer-centric innovation and change are already in place among Chinese companies. The consumer, as the focus of innovation efforts and a potential engine of future growth, can help companies better understand consumer preferences, reduce innovation cost and improve response efficiency.

Understanding innovation through consumer-centricity

Consumer-centricity concentrates on consumers to lead a company’s strategy and thus allows companies to gain a deep understanding of market demand and keep a competitive edge. Even though leading Chinese companies started using consumer-centricity a decade ago, implementation has been challenging. In the past, a significant amount of human and material resources had to be invested to better understand consumers and it was costly and time-consuming to establish corresponding market strategies based on consumer insights.

Nowadays, Chinese companies are embracing digitalisation which in turn disrupts their interaction with consumers. Chinese consumers are now more connected than ever before with 854 million internet users in China as of June 2019 according to CNNIC and the digital economy is all about getting closer to consumers to unlock business potential.

With access to ecommerce data, Chinese companies can speed up the product development cycle and stimulate continuous purchases. Manufacturers and retailers need to collaborate closely to improve production and operation efficiency and to provide consumers with a convenient shopping experience. Besides, new technologies, such as big data, IOT and AI, constantly help increase the number of touchpoints between manufacturers, retailers and consumers. These technologies equip manufacturers and retailers with capabilities to communicate with consumers more effectively, understand consumer preferences and uncover hidden needs.

Consumer-centricity is not just about technological shifts. More importantly, it is about changes

in the way of thinking and generating ideas. With consumer insights stemming from big data analysis, manufacturers and retailers can capture and understand consumer needs and carry out

consumer-centric digitalisation to optimise R&D, production, operation, marketing and after-sales service. As Proya Cosmetics Co Ltd stated, “With the ‘new normal’ of the economy, changes occur very quickly and there is no precedent to refer to for the next step. Thus, companies will have to harness big data analytics to gain a comprehensive understanding of consumers and identify consumer needs. Constantly performing consumer testing is also indispensable to experiment for better solutions.”

Seeking innovation through the consumer-centric approach

Manufacturing and technology companies are shifting towards a consumer-centric model by transforming product development, the shopping experience, marketing and promotion.

The ever-changing social and economic environment has led to a diversification of consumer demands. One of the leading down jacket brand owners in China has responded to this complex and changing market environment by embracing digitalisation. The company’s digitalisation effort emphasises building up a complete supply chain and internal control system, covering raw materials supply, procedures design and production. Digitalisation has also led the company to adopt C2M model and armed it with the ability to offer made-to-order products that specifically cater to consumer needs, which results in the reduction of store inventory.

Greatview, a packaging materials supplier, also used a consumer-centric approach and a philosophy of “material upgrading” that promotes environmental sustainability.

Greatview was the first industry player to apply a unique QR code to each milk carton, which enables the brand to learn more about consumers if they scan the codes, in terms of purchase frequency and location. Other information including the time of a product moving from the plants to store shelves and finally to consumers will also be available. Behind the scenes, Greatview intends to help its clients build CRM systems to drive product innovation and marketing activities based on consumers’ actual needs. Moreover, the application of the QR code is also aimed

to improve the consumer experience. After purchasing the product, consumers can scan the unique QR code on each pack to watch a video or access production details and other corresponding information. During festivals, when a consumer purchases milk or other beverages with a gift package, they will be able to record a greeting video for relatives and friends by scanning the code, which helps enhance communication.

Luolai Lifestyle Technology Co., Ltd is another player embracing marketing innovation to interact with consumers in new ways. Luolai set up the Institute of Sleep Research to understand consumer behaviour and build a strong emotional connection (by addressing consumers’ pain point of insomnia and how to improve sleep quality with sound beddings) with consumers through its WeChat account. Luolai also actively use the popular short-video app, Douyin (TikTok) to attract consumers and increase brand awareness.

Jiusheng Board Co Ltd considers innovation as a driving force for company development. To meet the growing demand for radiant floor heating, Jiusheng made breakthroughs in solid-wood heated flooring products.

The company also seeks to draw more consumers by using new social platforms such as Douyin (Tik Tok) and the user experience sharing app, Xiaohongshu (Little Red Book).

Overall, Chinese companies are using a variety of ways to understand and keep up with changes in consumer behaviour. By listening to consumers and responding to their needs, companies can generate new product and service ideas to innovate successfully.

Enhancing innovation with a consumer-centric approach

Consumers are the foundation of innovation and their needs can be divided into two types: tangible needs that the consumers are aware of and latent needs that consumers haven’t realised yet. While tangible needs are easy to observe and satisfy, latent needs require companies to explore and excavate on the ground of innovation.

JD.com, a leading ecommerce and technology company, introduced the “Front End — Middle Office — Back End” management model in 2019 that transformed JD into a consumer-centric entity that matches products to consumers. The new structure is built on the logic of using Front-End resources to understand the market pattern and consumer behaviour through active interaction with the consumers and employing the Middle Office function to capture changes in real-time consumer data to discover consumer pain points and to continuously complement the Front End through data accumulation, iteration and modular outputs. With the Front End and Middle Office, JD can cater to the needs of various consumers. When it comes to the Back End, its core function is set to provide professional services and support to the Front End and Middle Office. Built upon the Front End — Middle Office — Back End management model, JD’s C2M retail department exploits big data to respond to consumers agilely with customised products.

Overall, companies need to innovate to survive and enhancing innovation with a consumer-centric approach will help drive sustainable growth.

  1. Digitalisation

China leads globally in digitalisation geared towards consumers

China is home to the world’s largest group of internet and mobile phone users due to large technology and infrastructure investments by the government and various digital consumption platforms built by technology giants that improve the experience of shopping, payment and logistics. In 2019, the total value of online retail sales in China exceeded CNY10 trillion, representing year-over-year growth of 16.5% and accounts for 25.8% of all consumer goods retail sales, according to the National Bureau of Statistics of China. In the consumer foodservice industry, digitalisation helps restaurants optimise the ordering process, payment and membership systems and improve consumers dine-in experience. In addition, digitalisation also allows consumers to get access to convenient, high-quality and 24/7 food delivery services. Analogously, ride-hailing, bike-sharing, public transportation and leasing by-the-hour apps provide consumers with miscellaneous travel options and the flexibility to choose the one that best fits their needs. Furthermore, leading internet service platforms are also developing online-and-offline integration to create new shopping and experiences by exerting big data and cloud computing.

Consumers are an important driver of digitalisation

In recent years, one key initiative for Chinese companies was shifting from a product-centric to consumer-centric model, and digitalisation helped make this transformation possible. China is known today as a leading digital market globally as more companies incorporate digital technologies into their business strategies to innovate.

Digitalisation has disrupted the traditional business model and simplified the brand to consumer communication by eliminating unnecessary intermediates, which means brands can respond more acutely to changes in the market and consumer preferences. For example, Haier’s industrial internet platform COSMOPlat has been leading the incorporation of consumers into the entire manufacturing process.

With COSMOPlat, Haier can customise the products within 30 days after receiving consumers requests and complete shipment across the nation within 7 days through its strong distribution network. Haier is building 5G-empowered connected plants that can transfer consumer needs to the back end and then to the plants for mass customisation.

Digitalisation is the theme of Chinese business for the next decade

As consumer demands and industry structures are changing rapidly, Chinese companies must upgrade their development patterns to survive and thrive against fierce competition. Digitalisation helps respond to consumer needs,launch competitive products and optimise operational efficiency and management models.

“Digitalisation is a matter of life and death rather than an option,” says Gang XI Chairman of New Hope Dairy and President of Grass Green Group.

Digitalisation can be driven by both consumers and manufacturers. Manufacturers commonly need a powerful digital system to successfully track consumer needs online and offline, fostering the reality that up to now, digital transformation stimulated by consumers is more prevalent and advanced than driven by manufacturers themselves in China.

However, a growing number of manufacturers are aware of the importance and urgency of self-driven digital transformation. An astute and efficient business operating system is essential to achieve manufacturer-driven digitalisation. The companies need to constantly upgrade their IT systems and improve operation efficiency by utilising IOT, cloud computing and the Middle Office. In recent years, the integration of IOT and AI have matured, laying the technological foundation for Industry 4.0.

Cloud computing helps reduce the cost of hardware, software and operation and allows manufacturers to explore new business models. The Middle Office, streamlining data analytics, technology advancements and business operations, helps optimise the organisation and internal procedures, which improves efficiency. As Chinese companies expand and diversify their business coverage, more are expected to employ new technologies and approaches including IoT, cloud computing and Middle Office to realise digital transformation and eventually reach the data-silo-connection to unleash greater industry potential. Just as what is anticipated by Jeff BI, CEO of Greatview Aseptic Packaging, “There is a massive amount of data along the industry chain. In the future, only by linking the ‘data silos’ of different companies will we be able to obtain more value.”

The Impact of COVID-19

According to Euromonitor International’s baseline scenario forecast, as a result of COVID-19, the real GDP growth of China is projected to achieve 1% in 2020 and rebound to 8% in 2021, while the world as a whole is projected to reach only -0.8% and 4.8% respectively. Generally, COVID-19 should not change China’s role as a key contributor to global economic growth.

The shock of COVID-19 has led Chinese companies to count on domestic demand

With effective containment of the virus, the Chinese economy is in the initial phases of recovery. Other countries’ responses to the outbreak by local governments, export impediments and lower consumer demand adversely impacted Chinese companies. Now, they will depend on the domestic market to rejuvenate business. The gradual rebound in consumer demand, following the initial downturn during the early outbreak, is paving the way for renewed growth of the domestic market.

Challenges also bring opportunities of transformation and innovation

On the industry level, the epidemic will help popular and agile brands gain market share, while potentially forcing others out. On the company level, the epidemic will help Chinese companies uncover pitfalls and transform their supply chain, channel and risk responsiveness. Chinese companies must think about increasing supply chain resilience and leveraging digitalisation that enables the flow of information and resources. Industrial internet and robotic logistics are also expected to rise more expeditiously. Furthermore, shifting to ecommerce and utilising social media platforms to enhance consumer communication and develop new channels are also inevitable. Lastly, Chinese companies are adopting measures such as no-contact delivery and connecting with consumers via livestream. Risk responsiveness capabilities are expected to improve and preparing for risks will be more prevalent than before.

Digitalisation, consumer-centric innovation and global M&A are still the top priorities

The epidemic increased ecommerce penetration,  digital marketing investments and popularity of O2O services in China and propelled companies to strive for a more sophisticated supply chain and omnichannel strategies, which all rely on digitalisation, especially under the New Infrastructure Project led by the government. In addition, the outbreak changed consumer behaviour, requiring business leaders to innovate based on rising consumer trends. Finally, businesses are globalizing their supply chain strategies to mitigate risk.

Although various authorities enacted anti-hostile takeover regulations, with gradual containment of the pandemic and macro policies taking effect, the global M&A market will return

to normal as time goes by and those overseas companies facing business predicaments during these difficult times are expected to be more open to global M&A than before.

Conclusion

Strategy to execution — How to win?

Opportunities and challenges in the Chinese market are changing rapidly. China’s economy is transitioning into a new normal and structural differentiation within industries is expanding. The external challenges identified by business managers include intensified competition, shortage of talent and skills and changes in the regulatory environment. At the same time, many management executives, especially industry leaders, continue to express their confidence in this new environment. Business leaders believe that the decelerated economic growth will lead companies to focus more on product and service quality and operation efficiency, which further benefits the economy, industries and consumers. Leaders at Chinese manufacturing and technology companies are seeking new opportunities. A vast majority of the management executives interviewed believe that in 2020, new business opportunities will be primarily derived from changes in consumer behaviour, new business models or disruptive new products and the introduction of new technologies.

With its global databases and custom research services, Euromonitor International helps organisations from various industries to uncover key opportunities and tackle business challenges during various stages of the business life-cycle.

Special thanks to:

  • Bright Dairy & Food Co., LTD Strategy and Investment Director, Synlait Milk LTD (New Zealand) Director — Edward YANG
  • Proya Cosmetics Co Ltd
  • Greatview Aseptic Packaging Company Limited Chief Experience Officer Jeff BI
  • Haier Group Vice President, Chief Experience Officer — Hua Gang LI
  • JD.COM Vice President of JD Retail Group and Chief of Staff
  • Chen Kai LING Luolai Lifestyle Technology Co., Ltd Vice President
  • Steven WANG Jiusheng Board Co Ltd Chairman — Kai ZHANG
  • New Hope Dairy Chairman, Grass Green Group President — Gang XI

Thank you to all other trade respondents who have contributed their ideas to the production of this white paper.

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