Deloitte in the News
What the world would be like with China at the helm, or how to win over the Middle Kingdom.
Alexander Krylov, Partner and Head of the CIS department in Beijing at Deloitte China.
Just one year ago, the state of affairs across the globe today was unimaginable, and no one could have suspected that China would in many respects become one of the safest, most stable, and balanced states in the world.
It is now clear that the countries that followed China’s lead and took decisive quarantine measures early on are recovering from the crisis the fastest—Austria, Germany, South Korea, Japan, and Australia being notable examples.
The vectors of international aid and influence are changing rapidly. However, amidst all the uncertainty brought about by current events, one thing is evident: China has emerged as a leading economic and political force that is setting an example for the rest of the world.
But what is the situation like in China now? Life in China hardly differed from before the coronavirus outbreak—as if the pandemic had never happened. People were already asking themselves “what it all meant” and watching with dismay as COVID-19 continued to spread around the globe. That said, there are a number of telltale signs that things are not quite as they were. First, Chinese people continue to wear face masks, even though lockdown restrictions have been lifted in most of the country long time ago, except for in certain cities in North China.
The way China dealt with the epidemic is impressive, and its approach sets it apart from other countries. For example, body temperature screening points were set up at the entrances of all housing estates, offices, supermarkets, and restaurants. The Chinese government also introduced special apps and a QR code system very early to track population movements and monitor compliance with the mandatory 14-day quarantine for travelers arriving in the country from abroad.
The fact that the annual Two Sessions of the National People’s Congress and the Chinese People's Political Consultative Conference were held in late May was a symbolic milestone, representing yet another moral victory over the crisis.
From an economic perspective, the situation is less rosy. Many small businesses did not survive the crisis or were unable to resume their work. For large business, the winter months were especially hard, as countries were forced to shut down their production lines due to shortages of Chinese parts and components.
Thus, in the first quarter, about half a million small Chinese businesses closed their doors forever, mainly due to the coronavirus outbreak. There was also a slowdown in the opening of new small enterprises: only 3.2 million new enterprises were formed during the period, which is 29% less than the year before. That said, the economy is on a path to recovery, largely thanks to the entrepreneurial and hardworking spirit of the Chinese people.
Today, China reports that more than 90% of large plants have resumed their work, and the country is focusing on bolstering its exports and developing infrastructure. Another industry giving the country a leg up is cement production: in recent years, China has managed to build over 30,000 km of high-speed railways—the equivalent of three Trans-Siberian railways. The Chinese authorities have also announced plans to build 1,600 new airports by 2030, and it seems unlikely that a country that places such high importance on five-year plans would place infrastructure projects on hold.
During the coronavirus era, leading Chinese companies have worked to set up in-house decision centers, implemented flexible business continuity mechanisms, communicated openly and consistently with their customers, and introduced digital solutions throughout their organizations. China’s Purchasing Managers Index (PMI) has improved significantly, rising from 44.4 in April to 54.1 in July.
China is committed to supporting its citizens and the economy at all levels, simultaneously focusing on boosting domestic consumption and exports, with its package of support measures already reaching USD 840 billion. According to Premier Li Keqiang, 70% of the allocated funds will be used this year to support household income and increase consumption, which should promote employment.
Meanwhile, programs supporting the development of high technology and new energy sources remain in effect. China will invest about USD 1.5 billion in electric vehicle charging stations, and about 600,000 stations are set to be installed this year. As a result, a number of agglomerations may stop using diesel vehicles with very ambitious plans at Shenzhen and Hainan.
Restrictions on the number of weekly international flights and rules requiring all travelers who arrive in the country to spend 14 days quarantined in a hotel or hospital at their own expense should keep the flow of citizens wishing to return home to China in check. Today, many consider the country to be a safe haven that has experience dealing with COVID-19.
Because of flight restrictions, majority of foreign specialists are unable to return to China, which is turning into a “forbidden city”. For this reason, we can expect an increase in the cost of services rendered by intermediaries and foreign experts. Given the current global context, China is unlikely to open its borders before October, although certain governments may begin to transport their specialists back to China using charter flights, as Germany is doing now. Likewise, airlines able to verify that their passengers are not infected will be able to increase their number of flights.
What are the prospects for doing business in China after the coronavirus crisis ends? On the one hand, starting a business in China today is more difficult than before: the price of entry is now higher, as Chinese goods and services are swamping the market. Moreover, it is more profitable for the country to buy raw materials from CIS countries and then process, package and distribute goods itself. China is increasingly distrustful of its Western partners due to disagreements on many issues. Meanwhile, the CIS countries are doing little to promote their own products, with the unsurprising exception of hydrocarbon, ore, and steel exports. As for Central and Eastern Europe, the Czech Republic is the only country that has worked to promote its products at the state level.
On the other hand, new niches are opening up. China plans to place a moratorium on American soybean and pork imports for local state-owned companies. These represent huge volumes of goods, and many CIS countries have started exporting meat to China, albeit in small quantities.
IT companies have been frontrunners in adapting to the new conditions. This can be explained primarily by their preparedness for remote work, but also by an increased demand for software products, telecom, Internet and media services, and computer and online games. Therefore, the Chinese market of 1.5 billion consumers should be of particular interest to the IT industry.
Setting aside European, Korean and Japanese machine and auto-builders, as well as Japanese, Korean and American high-tech companies, many businesses fail to succeed in China. This can be attributed to inconsistency, poor funding, lack of local representatives, poor understanding of import bans and the certification procedure, and the unwillingness of Chinese businesses to buy foreign products without a local partner—not to mention the crucial importance of Chinese culture, language, customs, and business traditions when doing business.
Making a successful entry into the Chinese market depends on the industry and type of business, and the process is often incremental. Bolder and more proactive companies organize business trips (which will not be possible this year and possibly even at the beginning of 2021), during which they meet with partners, attend exhibitions, and look for Chinese partners or temporary representatives who speaks their language. Working with the latter is more difficult, as the identity of their partner or supplier makes little difference to them, as they are bombarded with offers from all over the world.
The next stage is to open an official representative office in China. This is a costly procedure, but Chinese partners take it as proof a foreign company’s commitment and serious intentions. The company’s next job is to build a working relationship with trusted distributors or partners.
This will make it possible to register a subsidiary company, or Wholly Foreign Owned Enterprise (WFOE). Such companies may engage in importing foreign goods or exporting Chinese goods and claiming VAT refunds.
There is also another approach, which involves first studying the market to find a potential buyer, determining which province features the lowest costs, and then finding the shortest path to market.
China will continue to develop domestic consumption. The middle class is growing, and the average monthly salary (as of the winter of 2019) in 38 major Chinese cities amounted to roughly USD 1,250. Although income inequality in China is among the highest in the world, the country mints a new billionaire every five days.
Producers from CIS countries should be paying close attention to the supply of agricultural products to China. However, they should keep in mind that domestic consumers are somewhat wary of the food industry, which means food products are thoroughly checked for excessive use of pesticides, antibiotics, and chemicals.
To make the most of investments, a long-term strategy is a must. For example, Starbucks and KFC, which developed a systematic strategy for entering the Chinese market, only achieved success after 10 years of slow growth on the local market.
Although the ASEAN region (an association consisting of ten Southeast Asian nations) is China’s largest trading partner now, the Belt and Road Initiative (BRI) offers a range of opportunities for European countries as well.