Summary | How Would COVID-19 Affect Your China Strategy

On March 31, Gao Feng Advisory’s CEO Dr. Edward Tse joined the CII Webinar to discuss the impact of the coronavirus epidemic on China strategy.

Many clients are thinking about COVID-19 and how it affects their China strategies. We are also reflecting it. What does it really mean for companies and their China strategies?

Key points by Dr. Edward Tse at the Webinar:

A glimpse of the New China post-pandemic

Many clients’ issues have been short-term. But for a strategic outlook, we need to look at the medium- to long-term. The world is going to look quite different post pandemic.
This pandemic is the second shock to China’s system, right after the first phase of trade agreement with the US.

The Chinese government is now rethinking its approach to the public agenda following the many challenges that COVID-19 has caused.

China’s “three-part duality” development model

For the last several decades, China has developed a unique governance system, the “three-part duality” model.
The central government orchestrates the overall agenda, like the soviet system. However, unlike the soviet system, it has also nurtured a number of strong grassroots entrepreneurs, responsible for many innovations. The uniqueness lies in the middle level, local governments. They set up local funding and provide infrastructure for companies, helping them grow and build an ecosystem both upstream and downstream.

Implications for businesses

Many businesses have been severely hit after the slowdown, but a number of business have benefited during this situation. Some of the sectors such as big health, logistics, automation, distributed working methods, entertainment, retail, education and social media.
The Chinese government will be investing heavily in upgrading towards smart cities post-pandemic. Smart cities so far have been very functionally driven (transport management, facial recognition), but I expect Chinese cities from all over will step up to invest in a much broader base of smart city applications to address the public agenda. Many public-private partnerships would be expected, including foreign company participation.

Traditional offline businesses have shifted online, e.g.， retail and education. Dingtalk, a remote working application of Alibaba. During the pandemic, its user base grew rapidly. This type of phenomena will continue.

Automation and robotics will also increase, with greater more emphasis of human-to-machine and machine-to-machine interactions.

Social media’s role will change from mostly 2C/2B to becoming a viable channel for government related (C2G/G2C) communications.

How would the post-pandemic new global order look like?

There are a number of dimensions to think about, and we need to reexamine the trade-offs.

Personal liberty vs collectivism – during the crisis it is interesting to look at countries’ different approaches and results.

Will the globalization continue? Especially with many questions about globalized supply chain. We have had a pretty globalized world for a long time, but with the election of Donald Trump, this has changed even before the pandemic. The pandemic begs the question, the virus is a global issue, in fact the most important issues such as climate change, AI ethics, are all global issues. Will we gravitate towards more globalized governance?

One world vs two systems – there has already been talk about a China system and a US one and a divergence emerging for businesses.

Many countries have been concerned with accelerated inequality, and this pandemic further highlighted this.

My stab at the future

In the short-term (to ~1 year), there will be a downturn but China will still be the engine for global economic growth and its role will only strengthen.
For the supply chain issues, China as a sophisticated manufacturing epicenter will continue.

For many products, China will continue to be the largest market, and typically manufacturing needs to be closer to where the market is.

As the pandemic recovered, much of the trade will reenergize and regain momentum, although it may not be at the same scale as previously.

As the situation stabilizes, consumption will resume and the Chinese government will take steps for this such as investment in infrastructure, not just physical infrastructure but also new/digital infrastructure.

For clients, it is important to first consider the industry. Open ones mean you must fight to win due to the level of competition. In the sectors that are in the process of opening up such as the financial sector, many foreign companies have been waiting for this. Once the market stabilizes, they will want to capture the rightful potential. The nature of the sector, its maturity and competition need to be considered.

Question & Answer

What may be the expected lockdown period in most parts of the world?

Dr. Edward Tse: It’s hard to compare long time period in China and other parts in the world. Many countries did well and many did not. Couple months will be the minimum.

What are the long term/fundamental changes to the economic outlook and structure expected as a result of COVID-19? E.g., many companies will now ensure diversified supply chains (which may mean part of the manufacturing moving out of China) and there might be policy changes to focus on specific sectors in future?

Dr. Edward Tse: I do not believe there will be a significant exodus. The majority manufacturing will stay in China. They may want to build redundancies. However, supply chain costs are high so it’s not a trivial decision.

What has been the impact in certain specific sectors like Automobiles (Commercial Vehicles in particular) and Steel?

Dr. Edward Tse: The auto industry has declined a lot. With the demand side declines, supply side, especially steel, also declines. The whole supply chain is being hit. There will be re-energization efforts, such as new government regulations including subsidies for the industry. Couple weeks ago, the government already published new intelligent vehicles regulations. On automation robotics for goods movement, autonomous driving might come soon, mainly due to demands for goods delivery with people preferring to have a non-human interface due to COVID-19.

What impact will it have on the shipping business and how will the shipping routes change in the wake of imbalance cargo movement in the event of lockdown in various countries?

Dr. Edward Tse: There’s been a huge reduction in demand side, with lockdowns meaning there is not a lot of movement. The shipping industry will follow the new global order, and how globalization will play out. The world won’t be completely flat but countries won’t wall themselves, shipping lines will reconfigure depending on new demand and supply patterns.

In this crucial time, are there potential cures? Will there be more acquisitions from Chinese companies overseas?

Dr. Edward Tse: Short term pressure will lower valuations and it is a great time to think about acquisitions. For Chinese companies with ambition and financing power, it’s a good time to go out. I know many of our clients are taking serious steps in for acquisitions.

Many companies were caught unaware and unprepared to absorb the shock, what is your advice for companies to build a strategy to insulate from future shocks?

Dr. Edward Tse: Almost impossible to guard against black swan events, I think instead of preventing it, businesses should develop a higher sense of awareness of anomalies/risks, they must leave some resources behind. This pandemic has built new opportunities and learnings, and hopefully companies can build contingencies for the future.

April 8,2020articles