2022 Q1 Deloitte CFO Express

As geopolitical tensions and pandemic lingered throughout the year, China achieved impressive GDP growth of 8.1% in 2021. But the property sector, a major economic contributor, is experiencing a clear deceleration and it will take time to identify new growth drivers to fill the gap. The Fed's nascent hawkishness has rattled US stock markets and rippled through emerging markets, and the standoff between NATO and Russia on Ukraine continues. In these circumstances, policymakers must stay vigilant about the unintended consequences of the Fed's unwinding of its multi-year easing and geopolitical risks. These factors, coupled with China’s zero COVID policy and the Winter Olympics, are driving a strong market consensus that policy should play a greater role in reinvigorating the slowing economy, not least through stimulus for small and medium-sized enterprises and those struck by pandemic prevention measures.

This issue of CFO Express features Deloitte's predictions and outlook for the TMT sector and the semiconductor industry in Asia Pacific. It also includes discussions on practices related to SPAC listings in Hong Kong, ESG considerations in M&A transactions, and tax transformation. We hope finance executives and their colleagues find these excerpts instructive.

Should China be keeping its powder dry?

Deloitte Chief Economist, Sitao Xu, shares his views on China's 2022 economic outlook. His main takeaways are:

• Inflation is a policy issue that cannot be overlooked in the global recovery. The negative impact of the Fed's higher-than-expected rate hikes on the financial market and emerging markets will be the most crucial consideration in China's risk control efforts. Consensus on the number of US rate hikes has risen from three in 2022 to four or five, as signs of the Fed's hawkish policy have rattled the US stock market and rippled through emerging markets.
• China's economy will remain resilient while facing a slowdown. As the real estate sector decelerates, which has been a major economic contributor, it will take time to identify new growth drivers to fill the gap. On the consumption front, resilience will continue given the strong consumer confidence of young people, low domestic interest rates, and ongoing consumption upgrading.
• Given China's low inflationary pressure and relatively healthy fiscal position, we suggest the central government continue to step up policy stimulus, especially for small and medium-sized enterprises and those struck by pandemic prevention measures.

TMT predictions 2022

In last year's TMT predictions report, Deloitte explored how COVID-19 has catalyzed and accelerated many changes in the TMT industry. In 2022’s TMT predictions, we identify profound trends in how technology is influencing global enterprises and consumers. The pandemic has accelerated development around connectivity and computer terminals, and deepened the “digital life” environment to create rising demand for chips.

• Subscription video-on-demand (SVOD) providers are keeping churn under control by understanding customers, developing more options for different audience segments, and offering value across an array of entertainment options
• Games consoles are starting to be integrated with smartphone apps, and continue to innovate in content, user experience, and business model
• Addressable TV advertising excels at informing mass consumers about brands, products, and services, but more work is needed on TV ad measurement and pricing standards to allow more players to enter
• Chip shortages are likely to last through 2022 and their extent will likely vary by industry. Companies should prepare for longer lead times and possible delays, and governments around the world are pushing to increase local supply to mitigate future shortages. VC investment in semiconductors is now driven by high demand for new chips 
• With abundant broadband funding, 5G promotion, and more regulators viewing wireless as an alternative to wireline connections. Operators are now considering fixed wireless access (FWA) and deploying it in underserved markets
• Wi-Fi 6 has a big role to play in the future of wireless connectivity. Designs will combine Wi-Fi 6 and 5G to cater to a blend of scenarios, satisfying users' actual needs
• Wearable technology is gaining popularity and becoming widely accepted, but users are still concerned about data quality, data accuracy, and access errors
• Improving screen flexibility and providing longer software support will help the smartphone industry achieve sustainable development targets
• Asia Pacific is taking the lead in deploying and adopting floating photovoltaic arrays as the technology advances and project economics improve 

Anchor of global semiconductor - Asia Pacific Takes off

A series of black swan events have enhanced the strategic importance of the Asia Pacific region in the global semiconductor market. The "big four" regions—South Korea, Japan, Chinese Mainland and Taiwan (China), have collectively transformed into the cornerstone of the world's semiconductor industry and now play a leading role in development of the industry from upstream to downstream. The semiconductor industry in Asia Pacific is expected to reach 62% of the global market that exceeds USD1 trillion by 2030. In addition, increasing demand for data centers, edge hardware, and IoT applications will drive demand for semiconductor products.

The main findings from our research are:

• The "big four" semiconductor regions each have their advantages: Japan has an absolute advantage in semiconductor materials, accounting for more than half of global market share. South Korea and Taiwan (China) are among the first tier in semiconductor manufacturing while the global outsourced assembly and test (OSA) industry are dominated by Taiwan (China) and Chinese Mainland markets
• Government is crucial in promoting the development of the semiconductor sector in Asia Pacific: semiconductors have become  the lifeblood of modern economies, and the semiconductor industries in Korea and Taiwan (China) constitute a large proportion of their respective GDPs. Asia Pacific countries have each released national investment plans, established tax relief policies and talent-training plans to develop their local semiconductor industries
• AI is driving the transformation of semiconductor manufacturing: emerging AI technologies are creating market opportunities and improve design and manufacturing. AI could contribute more than USD1 billion to the annual profits of global semiconductor companies over the next 10 years
• Automotive semiconductors are now the fastest growing sub-sector: pure electric vehicles going mainstream will prompt a surge in demand for power semiconductors and third-generation semiconductors. Furthermore, “internetization” will drive demand for vehicle and road test sensors and communication chips. Japan is leading the scale of the automotive semiconductor sector in the region

Crunch time series - Finance 2025 revisited

In 2018, Deloitte predicted eight finance trends in its Crunch time report Finance 2025, but now everything has changed due to the COVID-19 pandemic and digital transformation, making now the right time to revisit those predictions:

• Automation will continue, with the focus shifting from operational finance to financial insights with the help of big data, analytics, and predictive modelling
• Financial planners will bake operational components into financial models, helping to prepare for future uncertainties
• Real-time reporting will be more relevant than quarterly reporting to the decision-making by investors and management
• Finance will embrace self-service as a way to rationalize reporting requirements and special requests
• There will be more partnership and collaboration between finance and other functions, expanding cross-functional delivery capabilities 
• ERP vendors have largely staved off competition from specialized applications and micro-services, and big players will continue to embed advanced technology capacities
• Finance will double down on massive data clean-up efforts to ensure data integrity and data standardization. 
• The hybrid workplace is now popular and people are the key enabler, finance departments will hire more people who can configure and customize digital tools to generate insights

An essential guide to SPAC listings in Hong Kong

Recent stock market volatility, coupled with abundant liquidity arising from pandemic-related monetary easing measures, have led to the increasing use of special purpose acquisition companies (SPACs) as an alternative to traditional initial public offerings (IPOs). In 2021, there were 613 SPAC listings in the US, up from 248 in 2020, and the proceeds raised in 2021 almost doubled those in 2020. Given this proliferation of SPACs, the Stock Exchange of Hong Kong (the Exchange) consulted the public on developing a suitable listing regime to enhance the competitiveness of Hong Kong as an international financial center. The consultation conclusions were published on 17 December 2021 and the rules took effect on 1 January 2022.

The Hong Kong SPAC listing regime is more stringent than that of the US in terms of the eligibility requirements of promoters and successor companies, as well as fundraising size. Under the Hong Kong listing regime, at least one SPAC promoter needs to be a firm that holds a type 6 and/or type 9 license issued by the Securities & Futures Commission and hold at least 10% of the promoter shares. The successor company will need to fulfil all new listing requirements of the Main Board, including engaging an IPO sponsor and passing minimum market cap and financial eligibility tests. Furthermore, a SPAC listing must raise at least HKD1 billion and independent private investment in public equity (PIPE) investments are required for a de-SPAC transaction.

When they are approached with SPAC merger opportunities, private companies should assess their readiness to operate as a public company and capacity when negotiating the transaction terms. Unlike a traditional IPO, a SPAC generally provides less time for a target company to get ready to operate, upgrade financial reporting, and develop governance functions.

Unlocking transformative M&A value with ESG

A powerful combination of environmental, social and governance (ESG) demand is driving private equity funds and corporations to urgently transform their core strategies. Shifts in consumer awareness, spending patterns, employee expectations, and industry perception have prompted investors to reallocate billions of dollars to ESG investments. Deloitte has identified the following trends:

• ESG transformation in corporations is urgent and challenging: the operations of more than 30% of businesses are impacted by climate change, and nearly 80% of consumers are changing their buying habits in response to environmental concerns. Although ESG has been regarded as a key lever of value, investors find it highly complex to evaluate and quantify ESG risks because data is not comparable
• ESG investment considerations are being embedded into M&A transactions to help corporations realize value growth: Acquisitions and divestments help businesses build the assets necessary to unlock competitiveness and attract capital. ESG deals have surged in recent years, burgeoning in energy, industry, and transport, with several major acquisitions in the consumer, finance, and chemical sectors.

Quantifying ESG impacts are complicated due to limited data and technology support, making advanced frameworks even more important in future ESG M&A. Deloitte has developed an end-to-end ESG M&A framework that creates performance measures on material ESG issues, including carbon emissions, energy use, and water consumption, so corporations and private equity funds can make appropriate M&A and investment decisions by the assessing environmental and social value of their targets.

Tax transformation trends survey – operations in focus

As companies continue to transform their business models in the post-pandemic era, it has become a priority for tax team to adopt a new business partnering collaborative model. How should CFOs empower their tax teams to contribute more strategic value to various business functions? Deloitte has surveyed 300+ tax and finance executives to understand their latest views on tax operations, talent and technology, and taken a deep dive into the tax transformation trends based on the preliminary findings. In this first report, we share the following suggestions with operations in focus:

• Companies need to redefine the tax core and reframe tax teams' focus so that they could step up to support strategic decision-making in digital business models, supply chain restructuring, and sustainability.
• Tax departments continue to improve data management and resource allocation, and are choosing to move and outsource compliance and reporting work to shared services centers and external service providers that invest in best-in-class technology and delivery. This allows tax specialists to focus on business partnering and advising upstream in the business to provide tax insights and enhance value.
• The race towards digital tax administration brings new challenges and opportunities for compliance, adding further urgency to operational transformation.
• Next-generation ERP systems and high-level data management support tax teams to produce insights via scenario-based modeling. Effective resourcing models of compliance and reporting (e.g. outsourcing) ensures compliance efficiency and accelerate tax function to fulfill its business partnering aspirations.

Welcome to the "no normal": Exploring The Transformation Myth

Many factors drive transformation, including the COVID-19 pandemic, changing customer demands, disruptive technologies, industry convergence, and competitor actions. CFOs may need to give their people greater autonomy, encouraging organizations to foster a culture of ongoing innovation and continuous improvement to confront the next-unknown. In Deloitte’s North American CFO Signals™ survey for the second quarter of 2021, most respondents said there were a range of transformations underway at their businesses, including the digitalization of functions, supply chain optimization, integrated planning, and moving to a hybrid work model.

The Transformation Myth, a study involving interviews with nearly 50 corporate executives and thought leaders, found some of the shared traits of continuously transforming businesses. They usually excel at engaging and attracting desirable talent and investing in digitalization and IT infrastructure to ensure strategic financial and planning capability.

To lead ongoing transformation, CFOs should consider:

• Introducing new ROI metrics for transformation-driven projects: CFOs need to introduce new metrics to support projects where business outcomes are not clear in the short-term, such as implementing potentially disruptive emerging technologies. For teams to focus on investments and initiatives that accelerate transformation, CFOs also need to understand clearly how success will be defined
• Play a key role in orchestrating employees' transformation efforts: A company intent on transformation must adopt a clear purpose, as this can motivate employees in the midst of uncertainty. Aside from better understanding employees’ functions, CFOs can leverage their experience and positions to guide people through their transformation efforts