Deloitte 2023 Q1 CFO Express 

China’s recovery continues to gather momentum and Covid-19 has already become yesterday's news for most people in China, creating conditions for consumption recovery. According to a most recent issue of 'Seeking Truth' titled 'a few key issues on the economy', the most acute economic challenge is inadequate aggregate demand, and therefore policies must be optimal in unleashing consumption and investment potential, where consumption plays the fundamental role while investment is the key. The ‘two unshakables’ were again emphasized – to deepen SOE reform and to improve business environment for private enterprises. As the reopening has so far turned out to be smoother than expected, we have recently adjusted our estimate of 2023 GDP growth upward to 5.0%. Economic recovery takes time and most businesses still face the challenges of lukewarm demand and lackluster growth post pandemic. The high-quality development of the private sector will rely on businesses adopting fluid, agile operation models, constantly improving management and infusing digital technology.

The issue of CFO Express includes a 2022 review and 2023 outlook for the capital markets, banking and auto industries, and discusses the concerns organizations faced in the process of digitization and sustainability transformation, including digitized and automated finance, tax considerations of ESG strategy. It also covers leading HR trends and concepts, such as skills-based organization and exponential HR model. We hope finance executives and their colleagues find these excerpts instructive.

Policy support to unleash revenge consumption in the year of rabbit

Deloitte Chief Economist, Sitao Xu, shares his perspectives on China's economic outlook for the year of 2023. His main takeaways are:

1. China's economy experienced large fluctuations in 2022. Market confidence has significantly improved since relaxation of Covid restrictions towards the end of 2022 and stepped-up policy support to the ailing property sector. We expect that China's economy has passed its worst period and is likely to achieve 5% of growth in 2023 given sufficient policy support.
2. External demand could face a more challenging environment amid major global economic slowdown in 2023. China has set domestic demand as the top priority through promoting a consumption recovery and supporting private investment. After passing Covid infection peak, consumer sectors such as restaurants, entertainment, and tourism are all recovering, creating conditions for consumption rebound.
3. Reviving private investments is an important strategy of boosting domestic demand. The Central Economic Work Conference in 2022 again emphasized the role of the private sector, highlighting support for Chinese companies in leading development, creating jobs and competing in international markets, further bolstering market sentiment.

2022 Review and 2023 Outlook for Chinese Mainland & HK IPO markets

Deloitte China's Capital Market Services Group (CMSG) released its review of the Chinese Mainland and Hong Kong initial public offering (IPO) markets in 2022 and the outlook for 2023. The report indicates that stock exchanges in Shanghai, Shenzhen, and Korea took up the first three positions in the global IPO ranking in 2022 based on funds raised by 31 December 2022. Hong Kong Stock Exchange was at the 4th place.

In 2022, thanks to ongoing efforts to deepen capital market reform, such as introducing the registration-based regime to most markets and a multi-tier capital market, the Chinese Mainland will still have had a record-breaking year for IPO funds raised in 2022 despite economic challenges. CMSG expects that IPOs will grow steadily and proceeds may continue to rise in 2023, supported by the optimization of pandemic control measures on the Mainland and various economic measures on stabilizing the economic growth and progress.

• The SSE STAR Market should have 120 to 140 listings raising RMB305 billion to RMB340 billion in 2023.
• There could be 150 to 170 new listings on ChiNext raising about RMB185 billion to RMB210 billion.
• The main boards in Shanghai and Shenzhen are forecast to have about 60 to 80 IPOs raising RMB110 billion to RMB125 billion.
• Beijing Stock Exchange should have about 100 to 120 listings raising RMB20 billion to RMB24 billion.

Although Hong Kong showed weaker performance in 2022 amid the impact of geopolitical and macroeconomic developments, including the Ukraine-Russia conflict and US interest rate hikes, it still demonstrated its resilience by taking 4th place in IPO funds raised among global stock exchanges in 2022. In 2023, the CMSG forecasts that Hong Kong will see 110 new listings raising approximately HKD230 billion, backed by various positive factors and developments including a slowdown in US interest rate hikes and anticipated reopening of the Hong Kong and Mainland boundary. CMSG expects Hong Kong to have a slow start given it will take time for these new positive developments to develop and stimulate the economy and business activities. Hong Kong will gather momentum over time, and we believe the overall performance of the Hong Kong market will be positive in 2023 and Hong Kong will continue to be featured as a "super-connector" supporting the Chinese Mainland's connectivity with the rest of the world and vice versa.

Although more Chinese companies went public in the US in Q3, this momentum dissipated in Q4. The number of new shares and the amount raised in this market in 2022 were significantly lower than in 2021. Following the earlier inspection of the audit papers of US-listed China concept stocks in Hong Kong, CMSG looks forward to seeing the market turn more active in 2023 on improved fundamentals as US interest rate hikes slow and China's economy regains its robustness.

Deloitte 2023 auto industry trend and outlook

China achieved 25.6% penetration of new energy vehicles (NEV) in 2022, and retail penetration is expected to exceed 40% by 2025. As the NEV industry shifts from policy-oriented to market-based, purchase decisions will be based on the merits of the product itself such as driving experience and maintenance cost, instead of being driven by preferential policies for NEV license or subsidies. Additionally, price advantages brought by innovative technology and increased product diversification stimulate demand to grow steadily. In terms of NEV exports, declining demand from major export countries have limited impact on Chinese automakers, as they have obtained certain comparative advantages in product development, technology, industrial chain and operations. Auto exports are expected to remain strong and continue to grow. Future competition will revolve around product matrix and ecosystem building:

The market structure is gradually changing from "dumbbell" to "spindle", mainstream and high-end market segments are expected to be main growth drivers. The mainstream segment (RMB100,000-200,000) has the largest sales volume, accounting for 44% of total sales. The segment has a higher number of potential buyers and a variety of models, for example, more than 25 NEV models was launched during 2022. The penetration rate of the high-end segment (RMB 200,000 and above) lags behind other segments, its growth potential has prompted automakers to increase presence in this segment.

Technology, data, commercialization, and user interface have become core factors in smart car development. In terms of technology and data, autonomous driving is shifting to a data-driven model, so data security, algorithm update capability, and engineering are priorities for next product development phase. In terms of commercialization, autonomous driving companies need to find new breakthroughs related to business potential and economics of technology implementation. In terms of user interface, companies should focus more on user perspective, helping to improve experience and safety of assisted driving.

Automakers become more rational in developing their own software system. After some failed test runs, many OEMs and companies in the value chain have come to the realization that without internal software development capability, it would not make economic sense for them to develop their own software systems, or achieve any technical advantage as they originally thought. Going forward, OEMs may consider a more economical and efficient approach to build their software system, such as through cooperation or customization.

Green transformation will extend from acceleration of vehicle electrification to the industrial chain, supply-chain decarburization will become the trend. The green transformation of Chinese NEV companies will contain two parts, one regarding product development, which includes smart, connected vehicles and electrification; the other relates to transformation of value chain, which includes green supply chain, clean energy chain, and material recycling chain. NEV companies setting foot in clean energy industry to reduce carbon footprint throughout supply chain will become a main trend.

2023 banking and capital markets outlook

Since the global economy is in a fragile and fractious state, the banking and capital sectors tend to see lower profitability in the next several years. To navigate through these uncharted waters, banks should reassess traditional products, service, and industry boundaries to create new sources of value. Such opportunities may exist in a number of areas, including embedded finance, tokenized assets, financial technology, digital identity, and green finance. Deloitte's 2023 market outlook is based on 5 segments and market infrastructure of the banking and capital sector.

Retail banks focus on customer experience, emerging market potential and risk prevention. Aided by cloud migration, low-code/no-code application platform, retail banks should prioritize developing customer experience strategies that are data-driven and multi-channel collaboration, and to offer consumers personalized advice and hands-on guidance. In the long-term, they should develop inventive new applications for ESG, embedded finance, and digital assets, and find new ways to deal with operational risks and regulatory requirements, for example, transitioning away from periodic reviews to continuous monitoring.

Payment institutions break out of the payments box to expand competitive advantages. Institutions such as issuers and payment networks choose to collaborate and/or acquire fintechs to help itself expand value proposition, more specifically, issuers could offer value-added features, such as controls to limit spending, budgeting advice to manage debt, and personalized rewards. In addition, payment firms should accelerate technology system deployments to comply with regulations in the areas of consumer protection and digital assets.

Wealth management industry enhances front-to-back digitization to offer holistic solutions. Democratization of advice and convergence across domains, within and outside consumer finance, pushes wealthy managers to offer holistic solutions. The popularity of digital advice model will accelerate the pace of front-to-back digitization, which allows wealth managers use technology and data to deliver personalized advice.

Digital tools help transform client service model of commercial banking and transaction banking.  Banks redesign data architecture to bolster data quality and improve data access, to respond to corporate clients' demands for bespoke digital solutions and data-rich solutions, as well as embedding climate risk into credit risk management. In addition, transaction banking business focuses on building a modern, efficient, scalable technology platform, in order to provide data-rich insights and customized reports while solving problems with manual, inefficient processes. Digital asset custody is a clear market opportunity such as stable-coins and CBDCs.

Investment banking focuses on cost control and digitization acceleration. Investment banks continues to invest in technology, especially through cloud-based solutions, and set up a more robust data architecture. Banks should rethink strategies on attracting and retaining the talent to deal with challenges about tight labor market, and rising talent cost. Additionally, the race to net-zero has opened up tremendous opportunities for investment banks.

The market infrastructure is scaled up to accommodate rising customer expectations. Building cloud-based infrastructure and expanding the applications available through proprietary APIs should be top priority for market infrastructure providers. Cloud-enabled microservices, flexible access and pricing for real-time data feeds, and tools that automate trading workflows all appear ripe for growth. The industry should continue to build out infrastructure that can usher in transformative forces, such as the transition to the net-zero economy and tokenization of financial assets.

CFO Leadership in the Age of Digital Intelligence

In the context of accelerating digital revolution, more enterprises are looking to operate and grow in more efficient and intelligent ways. In the latest Deloitte China CFO Survey, we've collected CFO's views on business sentiment, corporate strategy, financial priorities and other critical issues from businesses in Chinese mainland, Hong Kong SAR and Macau SAR, and we also focus on finance department's digitization journey and explore how to leverage a variety of new technologies to drive digitization.

While respondents became more cautious about the outlook for China's economy, they still believe China is better positioned than other economies to recover and grow. More than 40% of respondents feel optimistic about China's economic outlook over the coming year. Recovery from the pandemic was the major external risk concern with 71.9% of respondents, up from 49% in the previous survey. More than 80% of respondents from the sectors including consumer, life sciences and healthcare, technology, media and telecommunications consider post-Covid recovery to be a major concern, higher than overall average of 71.9%. The inability to drive growth was the biggest internal risk factor, with nearly 60% of respondents increased from below 40% in the previous survey, followed by cost pressure. Respondents from consumer and life sciences and healthcare have a higher level of concern over cost pressure than average. 

Regarding digital transformation, over 80% of respondents believe that their organizations are making progress, but more than half of CFOs believe that their finance digitization is still at an early stage, i.e., process automation is still being piloted. Siloed information system and databases, inadequate awareness and a lack of skilled talent among employees are the biggest challenges of driving digitization. When it comes to digitization, finance departments need to adopt innovative technology to further automate processes and embrace a new mindset that drives digital transformation across multiple areas - from institutional processes to organization-wide talent and information systems. Deloitte suggest that enterprises set up an integrated system for their finance functions— comprising expert finance, business finance and operational finance, and clearly define these functions so that the finance department can implement digitization with priorities and focus.

Graph:  Integrated systems for finance functions 

Crunch time series: Lights Out Finance

As finance is being pushed to execute a greater volume of transactional processes while also delivering more forward-thinking, strategic insights, finance leaders should reconsider how to truly streamline operations and increase efficiencies. Lights Out Finance refers to turning the lights out on back-office, and moving from automating task-specific processes to running autonomous finance operations. Enabled by comprehensive platforms that connect data, technology, process, and people, Lights Out Finance allows businesses to autonomously run end-to-end finance operations.

Graph：Definition of Lights Out Finance

Lights Out Finance is happening in organizations across industries, such as partnering more strategically across the business and providing clean data instantly, allowing the function to answer more "what happened" questions with more "what if" solutions, so as to provide dynamic support to organizations with flexible and efficient financial operating model.

Graph: Enablers that make Lights Out Finance work

Five ways tax leaders can help achieve sustainability goals

Through a global survey of 335 tax leaders and in-depth interviews, Deloitte found that while tax departments are supporting their businesses' sustainability efforts through compliance and ESG reporting, they also need new ways to address tax implications brought by sustainability-related business changes, and to help their organizations achieve their sustainability goals. Based on survey findings and our qualitative interviews, we've identified five steps tax leaders should take today to drive sustainable transformation of organizations:

1. Identify the tax implications of your business's ESG strategy. Understand the broader ESG-related business goal and help business leaders understand the tax impact of sustainable changes to supply chains, business models, and other strategic shifts. Additionally, tax leaders should also highlight tax incentives and other sustainability-related benefits that may be available to the business.
2. Know the tax implications of your company's value chain. Meeting aggressive carbon and climate change goals often means making fundamental changes to operations. Business leader should learn about the risks and how to navigate them. It's also important to highlight to business leaders the incentives in relation to the development of green buildings and the use of renewable energy, such as credits and grants to promote carbon capture and fleet electrification.
3. Prioritize tax governance and transparency. Tax leaders should improve tax governance and transparency on ESG matters, including identifying the ESG reporting standards, regulations, ESG rating agencies, and industry standards that are relevant to the organization. Consider developing a systematic plan for improving tax governance and expanding tax transparency.
4. Transform the tax operating model as it relates to ESG. Sustainability has led to an increase in ESG-related advisory and compliance work, requiring tax function to acquire new skills such as impact assessment of new carbon-reducing technologies, potential scenarios modelling and governmental policies analysis. Tax leaders should drive changes within their operations, and become empowered advisors through upskilling and diversifying their teams' role.
5. Agree on ESG tax roles and responsibilities. Sustainability touches on many aspects of the company. Tax leaders should clearly establish who is responsible and accountable for ESG tax matters, and ensure that they have the right level of oversight on ESG-related matters, especially areas beyond the traditional mandate of the tax function.

The skills-based organization: A new operating model for work and the workforce

Organizations are moving toward a whole new operating model for work and the workforce –"the skills-based organization" that places skills, more than jobs, at the center.  Rather than confining work to standardized tasks done in a functional job, skills-based organizations decouple work from the job, focus on problems to be solved, outcomes to be achieved, or value to be created. People can be freed from being defined by jobs and can be fluidly deployed to work matching their interests. Organizations can have a scalable, manageable, and more equitable way of operating.

According to a global Deloitte survey of more than 1,200 professionals, organizations are increasingly experimenting with what they hope is a better way. Survey results indicate that fewer than one in five organizations is adopting skills-based approaches, but factors including talent shortages, digital transformation, and the need for agility will continue to drive transformation. 77% of business and HR executives said that flexibly shifting skills to work is critical to navigating future disruptions.

Graph：Four principles for operating skills-based organizations

Here are 5 things to consider in transforming to a "skills-based organizations": 1) consistent framework for varies types of work planning, arrangements, and management; 2) a word of "skills" should be considered as an array of skills, interests, preferences, career path, and more; 3) organizations should be cautious about bias that might be generated from new sources of data and AI; 4) support verified skills data to become portable across organizations; 5) provide workers with more autonomy and choice in the work to which they apply their skills, with subsequent less centralized control by the organization. 

Exponential HR: Break away from traditional operating models to achieve work outcomes

Organizations are experiencing massive changes in technology, workforce structure and the way of work, so new HR operating models are needed to support transformation and development. Based on extensive research and hands-on experience, we found that exponential HR will become a significant trend and demand reimagining work within HR and across the enterprise. This report will analyze the characteristics of this model and explore the conditions and potential roadmaps for implementation.

Organizations moving to exponential HR need to develop the following 4 characteristics: 

• Adaptable: adaptable organizations embrace changes and adjust operating and management models in response to shift customer, environmental, and market needs, and attack disruption with continuous innovation.
• Agile: deliver proactively, iteratively and frequently, promote focused team connections to identify issues with frequent reflection and refinement, and make rapid decisions with democratized data.
• Architecting: create human-centered solutions that can flex and sustain over time, and architect holistic, end-to-end solutions that unlock value and productivity through the workforce experience.
• Augmented: embrace the combination of technologies and solution providers to augment their roles and work, enhance quality and speed through human-machine collaboration and equip leaders with insights through the human-machine partnership.

Traditional HR capability models need fundamental restructuring to progress toward exponential HR. For exponential HR teams, decision-making will be far more grounded in data, which will be collected, organized, synthesized, and analyzed to detect issues, predict trends, make recommendations and implement workforce solutions to improve productivity and performance. We've listed the standout examples of emerging exponential HR superjobs and required capabilities as a reference.

Graph: Examples of emerging Exponential HR superjobs and capabilities