The Boao Forum for Asia 2016: Pre-Conference Reflections

Business ecosystem impact in China’s New Normal: Reflections on risks and rewards

Integration. Coexistence. Transformation. Under the New Normal, the business ecosystem will have new characteristics and provide fresh opportunities for future development. Challenges and risks accompany opportunities. It was the best of times, it was the worst of times.

A brave new business community

While the economy is slowing the pace of change in the business ecosystem is accelerating under the influence of digital advances, globalization and China’s policy focus on innovation. In China’s New Normal, only those who are innovative and creative will make progress and increase in strength.

New situation and new features arising from the New Normal

With economic slowdown from a double digit to a single digit growth rate, China’s economy has gradually evolved to a new stage characterized by more advanced forms, complex division of labor, and a more reasonable structure. Characteristics include:

• Economic development slowing from high growth to medium-high growth
• Continuous optimization and upgrading of economic structure
• A transition from factor- and investment-driven to innovation-driven

Innovation has become the core driving force of the economic New Normal. Previously, Chinese enterprises mainly relied on cost advantages to compete in the global market. Nowadays, however, having broken from their cocoons and emerged as butterflies, Chinese enterprises are gradually emerging on the world stage, backed by increasingly enhanced innovative capabilities. Huawei, a well-established Chinese enterprise, was included on the list of the World’s 50 Most Innovative Companies 2016 published by Fast Company, together with enterprises well known for their innovation, such as Amazon, Apple, and Uber.

Business ecosystems in the New Normal

Business relationships have also experienced unprecedented changes in the New Normal. Technological development and the penetration of the Internet are redefining the boundaries between people, countries, and industries. Greater connectivity among business elements has transformed once clear-cut business relationships, blurring industry boundaries. With the indefinite expansion of the scope of business competition and cooperation, we are journeying towards an era of boundless competition and cooperation.

Deloitte’s analysis of financial statements of companies listed on the CSI 300 and Hang Seng 100 indicates an increasingly frequent connection between the corporate ecosystem and the outside world, with nearly 80% of enterprises reporting more external expenses (such as outsourcing, intermediaries, and consulting) than internal expenses. Meanwhile, according to Deloitte’s survey of nearly 100 enterprises regarding business ecosystem governance, more than 50% of enterprises report a high, or even extreme, dependency on partners, as compared with only less than 20% of enterprises which had previously shown a high dependency on partners.

In this context, enterprises should, instead of standing alone, leverage their own value in the business ecosystem to survive, develop and flourish in the new environment.

This ecosystem is not equivalent to simple integration and alliance. Many business owners mistakenly define “ecosystem” as constantly integrating new businesses to support and coordinate existing businesses. Ecosystem, however, emphasizes the interaction among different organizations and individuals, highlighting coexistence and interdependence. Ecosystems, in contrast to alliances which aim at bilateral and multilateral relations within a limited scope where relations among different alliances are usually separated, consider all partners as a whole.

In the lexicon of Deloitte China Enterprise Risk Services, the business ecosystem is "a dynamic economic community in which organizations and groups that have an interest compete and cooperate with each other, including clients, suppliers, major manufacturers, competitors, manufacturers of complementary products, investors, trading partners, standard-setting bodies, labor unions, governments, and public service organizations, etc."

Future development trends for business environments in the era of Business Ecosystems

Integration

Jumping out of the traditional “supply-production-marketing” value chain and introducing cross-border partner enterprises, innovation, and value mining can multiply enterprise value. Moreover, a three-dimensional ecosystem can better facilitate overlap with other ecosystems, draw out competitors from unexpected sectors, and even overtake previously leading enterprises with incredibly rapid growth. Never-before-seen models like this are appearing in many industries.

For example, Fin-Tech (Financial Technology), provides services for groups unrelated to finance by combining their financial needs such as consumption and wealth management with Internet and IT-related technologies. With a gradually increasing market share, it has sent shockwaves through the traditional financial industry.

Mint is a well-known example in the Fin-Tech sector. By connecting a Mint account with credit and debit card accounts, Mint can provide consumption analysis to tell customers how much they have spent on clothing, food, socializing, transportation, and other categories. Moreover, customers can issue their own debit cards — Mint Control Cards — to avoid impulsive shopping by setting a spending limit for each category. Since it announced it intent to extend its coverage in April 2010, Mint has formed connections with over 16,000 American financial institutions.

Another example is “ele.me,” an online food ordering platform that integrates offline food brands with online resources by positioning itself as a platform connecting “everything related to eating.” Beyond its existing food delivery business, it has expanded into other areas such as delivery services, connecting supermarkets and groceries to customers. As of December 2015, ele.me covered over 300 cities, taking more than 3.3 million orders daily, and ranking first with a 34.1% market share.

Coexistence

Value creation has promoted more cross-border integration. As market transparency improves and capital markets and technologies continue to develop, competition among enterprises in the ecosystem will intensify. Constantly emerging new price and media competition is making it very important to build a systemic and well-organized coexistence model. This is a clearly emerging trend in the rapid, iterative Internet new economy domain.

For instance, with the rapid development of DiDi and Kuaidadi as well as Uber and other new competitors’ participation, the ride-sharing market has been saturated quickly. To attract new customers, enterprises have employed various subsidy methods. DiDi is spending several hundred million in monthly subsidies at peak times. The ride-sharing market has been involved in a vicious price war of high subsidies where enterprises proactively or passively supplement cash flow through financing. On 14 February 2015, DiDi and Kuaidadi entered into a strategic merger, becoming partners instead of rivals. In addition, the merger of dianping.com and meituan.com in October 2015 and the merger of Youku and Tudou in 2012 illustrate the trend of seeking coexistence in the business ecosystem.

Transformation

Enterprises innovating at a faster pace, and new products and new business models constantly emerging are challenging regulators to keep up with these trends and adapt to the New Normal. Deloitte’s Business Ecosystem Governance Survey shows that 25% of respondents are most concerned with the lack of organization and mechanisms in practicing ecosystem governance. In addition, 17% of respondents expressed their concerns about partners’ governance and management. Regulation and compliance management of the whole ecosystem are urgently needed.

Taking the ride-sharing industry as an example, regulators want to control unreasonable pricing and consumption by including all of the ride-sharing Apps on the phone-and-online-hailing-platform. However, no substantial development has been seen yet. Taking automated driving as an example, the US government is continuously exploring levels of safety, ethics, social acceptance, and legal concerns.

In conclusion, business ecosystems in China’s New Normal are introducing new features and providing new opportunities for the future development of the whole ecosystem.

There are two top priorities for how enterprises should look at their business ecosystems. One is “value creation” — co-creating valuable things through the cooperation of enterprises; the other is “ecosystem governance” in order to better utilize customers, markets, alliances, and suppliers. To create real value continuously, enterprises should constantly extend their ecosystem, however this must be underpinned by systemic and well-organized coexistence relationships. Faced with dramatic changes to enterprises, regulators must keep up and adapt to the New Normal with their development and improvement of rules, to provide a more favorable environment for business ecosystems.

Eddie Chiu
National Managing Partner
Enterprise Risk Services
Deloitte China