Deloitte 2024 Q3 CFO Express

Uncertainties in the geopolitical, economic, and regulatory environment are driving companies to undertake strategic adjustments, including building innovative partnerships, exploring the value of emerging technologies, and advancing localization strategies. Emerging technologies are rapidly integrating into business operations to meet increasingly stringent compliance requirements, for example, tax transparency expectations and sustainability disclosure standard. Moving forward, customizing technology, developing sound investment strategies, and complying with external regulatory requirements will be critical considerations for businesses.

In this context, the role of the CFO has grown more complex, extending beyond traditional financial responsibilities into areas such as technology transformation, operational resilience, and sustainability. This evolution requires multi-dimension identifying and creating value.

This evolution requires multi-dimension identifying, creating value, and focusing on the below issues.

• What disruptive trends will global life sciences enterprises face in 2024? Will these trends impact their strategic development and planning?
• How will the role of CFOs evolve in response to a more complex external macro environment? What areas should CFOs focus on in the future?
• Based on the tax compliance requirements, what should companies consider in terms of the technology transformation.
• The Corporate Sustainability Disclosure Standards (Exposure Drafts) signals a new stage of standardized and unified China’s sustainability disclosure system. How will this development elevate compliance requirements for businesses?
• The “AI generation” plays a crucial role in advancing generative AI adoption. What opportunities and challenges will present to businesses?

Balancing reform blueprint with reflation

Deloitte Chief Economist, Sitao Xu, shared his perspectives on the Third Plenum in July and China’s economic outlook for the second half of 2024:

1. The economic data from the second quarter shows a decline in GDP growth from 5.3% in the first quarter to 4.7%, and 1H growth stands exactly at the full year target of 5%. However, if the property sector’s decline persists into the next few months, then additional stimulus, which has to be more potent than what we've seen so far, would be needed in order to achieve the stated GDP growth target of “around 5%” for 2024.
2. The property sector’s weakness has affected general consumption, with retail sales decelerating visibly in Q2. On July 30, the Politburo meeting emphasized on increasing aggregate demand by boosting consumption especially those in low-income threshold. In addition to accelerate existing schemes of Cash for Clunkers (mainly appliances), additional subsidies for consumers will be expected. Meanwhile, exports remain the brightest driver, with an 8.6% YoY increase in June.
3. In the widely watched Third Plenum in July, policy makers have reiterated the growth target of around 5% in 2024 and pledged policy support, i.e., targeted monetary easing and further fiscal expansion. The People's Bank of China has cut short-term interest rates by 10 basis points (from 3.45% to 3.35% on July 22). We would advocate further reductions in short-term interest rates because inflationary risk is minimal in light of property sector woes and slacks in the labor market.
   

1H 2024 review of Chinese Mainland and Hong Kong IPO market outlook

In the first six months of 2024, New York Stock Exchange topped the global IPO ranking, hosting four of the world’s top 10 IPOs, followed by Nasdaq with two of the 10 largest listings globally. National Stock Exchange of India came in 3rd with a high volume of new listings. After completing the world’s largest IPO of H1 2024, the listing of a Spanish fashion and fragrance company, Bolsa de Madrid rose to 4th place. Shanghai Stock Exchange took in 5th, with Hong Kong Stock Exchange 9th and Shenzhen Stock Exchange 10th.

The State Council’s announcement in April of nine guidelines and related measures, have brought heightened scrutiny of A-share listing applicants and issuances in H1 2024. This prompted a slowdown in Chinese mainland IPO activity in H1 2024 that is set to affect the offering scale for the entirety of 2024. As the nine new measures and policies in 1+N documents for the capital market are being implemented, more positive impacts to the market should emerge. The anticipated results of these series of policies will eventually be reflected in future A-share IPO activities.

With a rebound in the Hang Seng Index since mid-April, market liquidity and valuations in Hong Kong improved somewhat in H1 2024. Although a continued revival of the Chinese economy will be crucial, expectations and the extent of US interest rate cut this year, will be the most critical factor in determining how far the Hong Kong IPO market can rebound and if more prominent deals are completed this year. Also, given the State Council’s nine rules and China Securities Regulatory Commission’s announcement that it will support top Chinese companies to list in Hong Kong, more A-share IPO applicants could switch their listing plans to Hong Kong.

The CMSG maintains its full-year forecast that the A-share market will have about 115 to 155 new listings raising approximately RMB139 billion to RMB166 billion. The main boards in Shanghai and Shenzhen are expected to have 25 to 35 IPOs raising RMB74 billion to RMB84 billion, followed by 35 to 45 new listings raising RMB30 billion to RMB37 billion on ChiNext. The SSE STAR Market is anticipated to have 20 to 25 new listings raising RMB28 billion to RMB35 billion and Beijing Stock Exchange is forecast to have 35 to 50 IPOs raising RMB7 billion to RMB10 billion. However, the Deloitte China’s Capital Market Services Group forecast that Hong Kong will record 80 listings raising around HKD60 to HKD80 billion.

Deloitte explores disruptive trends in 2024 Global Life Sciences Sector

In this outlook we examine what we see as disruptive trends like the impact of Gen-AI, the growth of the obesity market and treatment with GLP-1s, the IRA’s first full year of impact as well as those trends which are more evolutionary in nature- like the continued complexity around navigating globalization in an uncertain geopolitical environment or the continued advancement of more personalized patient experiences. Going forward, life sciences may still need to enhance its agility through innovative collaborations to navigate the uncertainties of geopolitical, economic, and regulatory landscapes.

Leverage strategies such as M&A, Partnerships, collaborations, new sources of capital, and shifting portfolios to achieve value creation. Some big pharma companies will continue to look to M&A to plug portfolio gaps as a result of loss of exclusivity (LoE) across various therapeutic areas. LoE is also driving market leaders to various types of partnerships, a growing trend. As capital markets tighten, many small and midsize biotech companies find alternative ways of financing, including cutting costs and private investment. Biotech companies are increasingly looking at creative collaborations. From a portfolio perspective, oncology, specialty disease, and chronic disease areas remain focal points for major pharma companies. Additionally, the GLP-1 obesity drug market has gained attention and accelerated expansion in recent years.

Extracting value from Generative AI and emerging technologies. Nearly 90% of value from the use of artificial intelligence in life sciences may be derived from three functional areas, including research and development (R&D), manufacturing and supply chain, and commercial. R&D represents the primary areas for value creation. Applying AI to novel drug identification and accelerated drug development can generate 30% to 45% value. In 2024, many big pharma companies are collaborating with tech titans on more advanced Gen AI in many areas that are constantly evolving.

Pricing pressures rising globally, threats of impacts on R&D innovation worldwide. As the use of medicines rises and calls for pricing transparency intensify, the global drug pricing and value undergoes scrutiny. In 2024, government-mandated pricing pressure and controls are expected to place significant pressure on pharmaceutical sector. For example, the US Inflation Reduction Act (IRA) is expected to have implications for how the industry makes decisions and allocates resources in both research and development (R&D) and commercial efforts with corresponding implications for access to drugs across the world.

Accelerating speed of time to value in R&D. Speed to market is only part of a success formula, companies should also be looking at their individual paths to potential cost savings and competitive advantages. As the pace of AI-enabled digital solutions accelerates, leaders should start restructuring operational models with an agile mindset. Some AI researchers call for more fundings into drug development productivity/value creation.

Integration of globalization and localization. As geopolitical tension rises, many top life sciences and medtech MNCs report they remain committed to China in 2024 but expect more regulatory scrutiny and market access challenges. In such a context, MNCs should be advancing their localization plans- to not just be competitive in China market but also to address the increasing risks surrounding supply chain disruption and technology and data sovereignty.

Achieving better patient outcomes with personalized experiences and shared decision-making. In 2024, life sciences and medtech organizations are considering novel ways to make experiences across the patient journey more customized for patients through technology. Many are experimenting with advancements in artificial intelligence (AI) all across the patient journey- from prevention to diagnosis, treatment, and monitoring. Life sciences companies are increasingly focused on “informed” decision-making to support shared decision-making. Optimizing touchpoints in the patient experience, as person-centered care continues to be a priority. 

China CFO Agenda 2024: Breaking through traditional boundaries to create value

Currently, the business landscape for CFOs has grown increasingly complex, and their responsibilities are expanding rapidly. This expansion of responsibilities is partly due to macro factors faced by companies:

• Capital markets. Fluctuations in foreign exchange and uncertainties in interest rate decisions will make it difficult for CFOs to accurately assess potential investments.
• Geopolitics. Geopolitical tension has created additional risk and complexity for businesses, such as cross-border asset protection and supply chain resilience.
• Demographics. The shift in demographics, particularly aging populations is also rising as a CFO priority. Financial chiefs may need to address product mixes that satisfy very different customer bases.
• Technology. CFOs may need to assume the role of a technologists, working with the IT department to assist C-suite leaders make informed decisions on whether or how to integrate AI into workflows.
• Environment. CFOs may look to factor sustainability into capital allocation decisions, while it is also crucial to balance the need to address climate concerns with the need to create value for shareholders.

Deloitte’s “2024 CFO Agenda” summarizes six key driving factors that CFOs are most focused on, based on the impact of performing duties by macro factors.

1. Value Creation. Building value for stakeholder requires a different lens- one that helps CFOs look beyond stock prices and return on investment (ROI) and next quarter's result. CFOs will also have to leverage advanced technologies while weighing what trade-offs and payoffs might be.
2. Talent and Culture. Many employees want hybrid work arrangements and greater work autonomy, which adds more complexities for CFOs. Therefore, CFOs may need to explore new approach to assess productivity.
3. AI & Digital Transformation: Generative AI (Gen AI) can benefit businesses in various ways, such as streamlining financial planning and enhancing forecast accuracy. However, companies should ensure the quality and integrity of underlying data and properly address data governance issues before fully embracing Gen AI.
4. Operational Efficiency & Resiliency. CFOs should work closely with procurement officers and functional leaders to help ensure the supply chains are both efficient and resilient. Additionally, they might want to work directly with Chief Information Security Officers to tackle cybersecurity challenges.
5. Climate & Sustainability. In order to achieve sustainability goals, C-suite executives may have to adjust operational models to bolster competitiveness in a low-carbon environment, while developing effective plans to safeguard facilities against extreme weather conditions. CFOs will need to consider the potential impact of climate and sustainability without losing focus on growth.
6. Enterprise Security & Risk Management. For CFOs and their boards to fulfil their responsibilities regarding risk oversight, it's incumbent on both to stay on top of changes in regulations and compliance reporting. Integrating geopolitical factors into ongoing risk-management activity is essential.

Tax in a data-driven world

Immediate access to reliable, accurate, and fit-for-purpose tax data is essential to be able to meet complex tax obligations, real-time reporting requirements, and increasing expectations of tax transparency. Deloitte's latest Tax Transformation Trends 2023 Survey¹ evaluates five trends of tax transformation and provides executives with some ideas around how to drive digital transformation (Note: The survey is conducted every two years. So far, Deloitte has been conducting research on tax transformation over 10 consecutive years). Using the results from the survey, this report explores the challenges related to technology transformation in the current tax landscape.

1. Customizing technology for global compliance. Integrating accurate and timely tax-related data across the organization is crucial for achieving compliance efforts. However, many companies find it challenging to visualize enterprise-wide tax data. According to the survey, 36% of respondents identified integrating tax-related data across the company as their second-most important challenge. Additionally, more than a fifth of respondents found challenges in having limited technology or data management expertise (23%), obtaining a comprehensive view of the total tax paid globally (22%), and not having sufficient control over technology strategy and investment (22%). Companies increasingly seek to customize their ERP system for tax purpose.
2. Deciding how to invest in technology. When resources are constrained, it is worth weighing up the investment needed for developing, buying, maintaining, and replacing technology versus leveraging the technology of an outsource service provider. Respondents to the Survey cited access to the latest technology capabilities (54%) even more often than reduced operating costs (51%) as a major or significant benefit of outsourcing. Outsourcing can provide a strategy for tax departments to acquire the technology tools and expertise that the current environment demands without incurring the significant capital investment that would be required, upfront and ongoing.
3. Internal collaboration and obtaining budget. The IT and Finance have gained greater control. In the survey, 78% respondents said technology strategy and planning was largely controlled by Finance or IT; 56% said that the tax department has input into the process, while 22% said it had little input. There were also significant regional differences. Respondents at North American companies (40%) more often said that the tax department has significant autonomy wither over technology strategy or over both technology strategy and budget than did those at companies headquartered in Europe (10%) or Asia Pacific (20%).
4. Finding the optimal implementation and maintenance program. Tax departments need to have a holistic view of the operating model and develop a technology road map to make build-or-buy decision. If the decision is made to use in-house resources, tax departments need to develop professional teams with new skills required, especially data management and technology expertise. The survey respondents most often named data analytics, data-driven strategic insights, and data management (44%) as most needed skills over the next one to two years.

¹Deloitte's Tax Transformation Trends Survey invited senior tax and finance leaders from a wide range of industries, sizes, and regions to participate in the research and interviews. The biennial updates aim to provide timely and forward-looking insights. Released at the end of 2023, the latest survey report offers valuable guidance for financial and tax transformation planning in the new era.

Deloitte interprets the Ministry of Finance's latest Corporate Sustainability Disclosure Standards (Exposure Drafts)

On May 27, 2024, the Chinese Ministry of Finance published the “Corporate Sustainability Disclosure Standards – Basic Standards (Exposure Drafts)” (the Standards). The Standards set out essential elements such as disclosure principles, scope and quality requirements, charting path to unified sustainability disclosure regulatory framework. Under the Standards, companies established in China are required to conduct sustainability disclosure and comply with reporting standards. In drafting the Standards, the Ministry of Finance drew on the international sustainability disclosure requirements issued by the International Sustainability Standards Board (ISSB) and has also taken into account China's local market conditions and characteristics. Companies should disclose current or expected financial impacts brought by relevant sustainability risks and opportunities, as well as their impacts on environmental, social, and sustainability (ESG) related governance. The consultation period will conclude on June 24, 2024, after which the Ministry of Finance plans to release the finalized draft based on feedback solicitated from all parties.

The Standards state that China’s unified system of sustainability disclosure will consist of basic standard, specified standard, and implementational guidelines:

• Basic standard: sets out general requirements for corporate sustainability disclosure;
• Specified standard: provides corporations with specific ESG disclosure requirements;
• Implementational guidelines: elaborate and clarify basic and specified standards, provide industry-specific guidelines and detailed implementation guidance of relevant standards, and establish operational provisions for key challenges.

The Standards target to roll out corporate sustainability disclosure standards and climate-related by 2027 and the unified national system of sustainability disclosure by 2030. The Standards set clear requirements for the quality of corporate sustainable information, including reliability, relevance, comparability, verifiability, clarity, and the timeliness.

The issuance of International Financial Reporting Standards 1 and 2 by ISSB has accelerated the development of sustainability disclosure standards both in China and globally. The new sustainability disclosure standard raised compliance requirements for companies and also begun to gradually link sustainable-related information with financial reporting. A wide range of stakeholders including investors and regulators are also increasingly focused on the connections, consistency, and comparability of sustainable information and financial reports. Therefore, CFOs must pay close attention and take necessary steps to understand these requirements, build a strong knowledge and capabilities to tackle this new challenge, and strive to transform this trend into a growth opportunity.

Deloitte insights: the “Generation AI” leads Gen AI adoption. What should enterprises focus on?

An analysis of more than 11,900 surveyed individuals across the region focuses on tech-savvy new generation (known as the “Generation AI”) highlights their critical role in driving generative AI adoption, presenting new challenges and opportunities for employers as they adapt to these changes. The study identified six key insights highlighting the transformative impact of gen AI on the Asia Pacific region.

1. “Generation AI” is taking the lead. Our survey revealed that 81% of university students and 62% of employees are using the technology. In fact, 43% of employees we surveyed are using gen AI for work purposes. However, half of employees using gen AI for work purposes do not believe management knows they’re using it. Businesses are looking to introduce safe and secure applications for their employees developed by technology vendors or bespoke platforms.
2. Technology landscape. Developing economies (China, India, and Southeast Asia) have a 30% higher share of gen AI users compared to developed economies. Specifically, over half (53%) of employees in developing economies felt primarily excited about gen AI technology, compared to less than a quarter (23%) of employees in developed economies. More employees in developed economies felt primarily uncertain about gen AI (36%). It’s worth noting that perceptions of how gen AI is changing lives and businesses vary across Asia Pacific economies.
3. Significant impact. We estimate that gen AI could impact 16% of working hours—more than 11 billion hours—across Asia Pacific per week. This impact could be in the form of gen AI automating some tasks, so they no longer require worker involvement or augmented tasks in a way that requires workers to use AI to complete the task. Employees expected 61% of their current tasks would be impacted by the technology in the next five years. Taking an industry perspective, finance, information and communications technology (ICT), media, professional services and education will be more transformed by gen AI.
4. Talent development. According to our gen AI survey, 80% of gen AI users said that it’s improved the speed at which they can complete tasks. On average, daily users of gen AI save approximately 6.3 hours per week. For these time savings, 54% of employees said they used it to complete other tasks while 45% invested time in additional learning or skill development.
5. Time savings. Generative AI helps employee alleviate workload and more efficiently complete routine tasks. 41% of time savers believe this time has improved their work/life balance. In addition, most gen AI users believe it’s improved the nature of their work or study (81%) and the satisfaction they feel (67%).
6. Manage risks. Despite the growing investment and adoption, many businesses are falling behind. According to our survey, only 29% of employees consider their business to be early adopters or innovators, suggesting substantial room for improvement for three quarters of businesses across Asia Pacific. Employees are also cautious about the potential for improvement within their own business.