作者：admin

By Edward Tse

2021-06-30

A recent article authored by Gao Feng Advisory CEO Dr. Edward Tse was published by Caixin Global on June 30

The world now acknowledges China’s ability to innovate. But many people question why that has happened. For many, especially those in the West, China is supposed to be under an alleged authoritarian system and so by nature, it would not be able to sustain innovation or keep it vibrant. These people have been working on the paradigm that innovation can only thrive in a free enterprise system led by private initiatives with minimal state involvement or interference.

Broadly speaking there are two strands of innovation in China. One is technological innovation, which is primarily driven by the government. This includes programs such as space missions, deep sea exploration, developments in quantum computing and many others. Another strand is tech-enabled innovation in commercial applications. Prime examples are innovations in e-commerce, social commerce, “new retail”, “big health,” fintech, automation and robotics, smart logistics as well as automobiles and mobility. Private businesses play a major role in this sort of innovation, often in collaboration with local governments.

China’s innovation capabilities and entrepreneurship have come a long way since the start of the country’s reform era. China began to experiment with the elements of a market economy and has allowed entrepreneurship based on private initiatives to return since the late 1970s. After several generations of entrepreneurs who have emerged along the way, there has been an upsurge since the end of the 2000s as Chinese entrepreneurs have begun embracing the wireless internet and have leveraged it for generating business innovations that address both the pain points of Chinese society and the emerging consumer demand for new products with new technologies offering innovative features and conveniences.

Several large and successful tech companies such as Tencent Holdings Ltd., Alibaba Group Holding Ltd., Huawei Technologies Co. Ltd., SZ DJI Technology Co. Ltd., Xiaomi Corp., ByteDance Ltd., JD.com Inc., Pinduoduo Inc. and many others now dot the economic horizon of China. And companies such as Ping An Insurance Group Co. of China Ltd., Geely Automobile Holdings Ltd., BYD Co. Ltd., Midea Group Co. Ltd. and the like that started off as “traditional” have successfully transformed themselves into innovative tech companies. According to the Hurun Global Unicorn Index 2020, the number of unicorns (unlisted companies with a valuation of more than $1 billion) has grown exponentially over the years and today China has the second-largest number of them in the world — 227, compared with 233 in the U.S.

After the rather tumultuous first three decades, the People’s Republic of China began its reform under Deng Xiaoping at the end of the 1970s. While retaining the key features of its state planning system, Deng began to experiment with some elements of a market economy, including allowing the return of entrepreneurship in China.

Entrepreneurship has now become a key component of China’s economic growth and the most important source of commercially applied innovations. China is no longer just a state economy, the private sector too has become very significant.

At the same time, the central government continues to develop policies to steer the economy in the direction that it deems appropriate and help the country’s development move at a sustainable pace. Building on successful experience over a decade in driving innovation, since around the mid-2000s, Chinese entrepreneurs have played a major role in bringing to fruition the Chinese State Council’s 2014 policy on encouraging mass entrepreneurship and innovation.

More specifically, the central government has allowed two private companies — Tencent and Alibaba — to create and dominate the country’s online payment system, which shows how the central government, where appropriate, would coordinate with private businesses to put much-needed innovations to work for the country. Today, China’s third-party payment transactions have reached 280 trillion yuan (about $44 trillion), over 80% of which are handled by Alipay and WeChat Pay. The central government is now preparing to launch its central bank digital currency (CBDC) and here too collaboration with private enterprises will be essential, considering the current dominance of private sector firms in processing of online payments.

Often local governments also play an important role as a bridge between the central government and entrepreneurs. Leading local governments frequently provide funding for businesses and also select certain strategic positions that are in conformity with the directions set by the central government. Many have built their digital and smart infrastructure to support smart cities initiatives driven by the central government.

In addition to the three-layered structure comprising the central government, local governments and businesses, China is also unique in that it has a dual economic structure of both state-owned enterprises (SOEs) and privately-owned enterprises (POEs). While there are sometimes conflicts between companies from these two sectors, they also co-exist, living in a rather symbiotic relationship.

SOEs provide public goods (for example, infrastructure and environmental improvement measures) as part of their social responsibilities for the Chinese people. A good example is that SOEs were able to build a high-speed railway network from practically nothing to the world’s most extensive in just over a decade, because they do not evaluate these mission-critical infrastructure projects only on economic viability. Today, the Chinese people and businesses, including foreign companies, benefit from this infrastructure.

This “three-layered duality” approach requires constant juggling of various components to make it work. It is experimental by nature but the all participants have a strong ability for overall orchestration and they share the vision and values, which leads to an innate ability to self-adjust along the way.

Compared with the earlier generations of entrepreneurs, Chinese entrepreneurs have become younger. Many are in their 30s and some are even younger. They are omnipresent in a range of industries including those mentioned above and many of them share the commonality of leveraging technology as the basis for innovation.

As new disruptive technologies such as artificial intelligence, the Internet of Things, 5G, cloud technology and blockchain technology are emerging and finding acceptance in the world’s leading digital economies, China is entering into a new tech-enabled innovation era. In China’s 14th Five-Year Plan, technological innovation is a key theme and China is committed to becoming self-sufficient in technology, particularly in the aftermath of sanctions by the U.S. government on key supplies of core technology, products and components.

Since the U.S. government announced sanctions on high-end semiconductor chips supplies to select Chinese manufacturers, China has launched a major initiative toward self-sufficiency in high-end chips. In this case, the central government, many local governments, various SOEs and POEs are involved in a variety of ventures aimed at making breakthroughs.

During the lockdown of the city of Wuhan at the peak of China’s outbreak last year, two emergency hospitals were built in a week to 10 days’ time. China was able to achieve this because as soon as the central and local governments decided that these hospitals were necessary, a large number of SOEs together with POEs and even foreign companies quickly collaborated to contribute. The commitment to a common goal and sharing of a vision were the key motivators. Attributing this magnificent feat to an “authoritarian” government will be too simplistic and unfair to those who participated in practically overnight building of the hospitals.

Some people call this approach a “Whole Nation Approach” (举国体制) that can mobilize resources across the entire country against a certain objective and purpose. It is based on a sense of pragmatic balance between a sense of collective responsibility and that of individualism on the part of all involved. While the state drives a sense of collective purpose and responsibility, through SOEs, it provides necessary public goods for citizens and businesses, entrepreneurs based on private initiatives are allowed and in fact encouraged to succeed against a certain state-driven rules-based order.

Some people attribute this to the historical heritage of China where the literate shared a sense of collective responsibility that comes from a lineage of vast and multiple strands of thought, mostly in the (Han-centric) Chinese civilization that later inter-mixed with imported thoughts from Buddhism. This coupled with the purpose and governance system of modern China has somehow created an inclusive culture that addresses both the collective interest as well as individual pursuits.

This has no doubt resulted in the massive and unprecedented intensity and pace of innovation and development, as well as resilience. Innovation has become an integral part of the Chinese culture and its manifestation is becoming more profound by the day.

By Edward Tse

2021-05-14

A recent article authored by Dr. Tse was published by CGTN on May 14, 2021.

Editor’s note: Edward Tse is the founder and CEO of Gao Feng Advisory Company, a global strategy and management consulting firm with roots in China. The article reflects the author’s opinions and not necessarily the views of CGTN.

China’s role in international trade, global supply chains and the world in general is expanding alongside its growing economy. Many countries in different parts of the world are currently undergoing major changes of multiple dimensions that are causing great uncertainty and unpredictability. Chinese President Xi Jinping also stated, we are now in a period of “massive change unseen in the last millennium.”

For many foreign multinational corporations (MNCs) operating in China, the expectation is that the upside potential of the Chinese market will keep growing and China being a global supply base will become even more important. The 2021 survey by the American Chamber of Commerce in China (AmCham China) shows that 75 percent of companies are optimistic about market growth and economic recovery in the next two years. Moreover, 61 percent of companies view China as a priority investment destination and are confident that China will further open itself to foreign investment.

Many MNCs are trying to figure out what the latest policy announcements, such as the 14th Five-Year Plan and Vision 2035, really mean.

The 14th Five-Year Plan put its emphasis on the quality of development, implying that innovation and technological independence are to be treated as critical areas. The Trump administration’s restraints on exports of certain core technology products such as high-end semiconductor chips to China has triggered China’s resolve to pursue technological self-reliance. Advanced manufacturing is to be used to fix issues in areas such as key components, materials, software and fundamental systems to develop more innovative and competitive value chains with a higher “value-added”content in priority areas.

Peter Wennink, head of ASML, a leading manufacturer of chip-making equipment in the semiconductor industry, told POLITICO in an interview that Europe should not close off exports to China like the U.S. since “If you shut out the Chinese with export control measures, you’ll force them to strive toward tech sovereignty, in their case real tech sovereignty, in 15 years’ time they’ll be able to do it all by themselves, the market [for European suppliers] will be gone.”

The 14th Five-Year Plan proposes a “dual circulation” economic strategy, to push both the domestic market, as well as overseas markets, with progress in the two complementing each other. Acceleration of growth in domestic production, distribution and consumption will be the driving force, spurring technological innovation, expansion of domestic supply chains and at the same time, helping to cement China’s role in the global value chain.

The Vision 2035 lays out the social and economic development goals over the next 15 years with the target being to build a modernized economy by 2035. Continued promotion of urbanization and further strengthening of regional trade with ASEAN countries, Belt and Road Initiative participants, as well as other economies are the other principal features.

China is seeking a quicker evolution of its role in the global geopolitical environment. China’s relationships with the U.S., EU and neighboring countries are viewed as the key to the shifting geopolitical equations.

One major milestone has been the Foreign Investment Law promulgated in March 2019, which puts foreign enterprises at par with domestic companies in many ways. Another landmark reform was the Unreliable Entity List (September 2020) that protects legitimate rights and interests of all kinds of market entities. Additionally, the National Negative List has pruned the number of restrictive measures by 17.5 percent compared to its 2019 version.

These are clear signals of how China is trying to make life easier for foreign companies. Volkswagen CEO Herbert Diess told China Daily, “For me, it is easier to invest in China than China is allowed to invest in Germany or some other places.”

China is accelerating deregulation and its domestic market is expanding. Supportive policies and the growing ingenuity of local enterprises are together generating what’s possibly the world’s most competitive economy. The dynamics of competition and collaboration are highly intensive and are expected to impact growth significantly, going forward.

Though the U.S. has imposed sanctions on Huawei, ZTE and some other Chinese tech companies citing “national security”, so far, China has not sanctioned U.S. or other western tech companies in a similar manner. In July 2020, President Xi Jinping wrote to CEOs of 18 global MNCs underscoring China’s desire to welcome foreign MNCs to stay and continue to operate in China.

For global MNCs, this changing context raises a whole new set of questions and considerations:

– What explicit and salient changes are taking place in terms of market access for specific industry sectors?

– What does the evolving geopolitics mean to MNCs in China? For example, to what extent would “decoupling”take place and how?

– What are China’s “red lines” (that is, boundaries that foreign companies should not trespass)?

– How would new trade agreements such as the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive Agreement on Investment (CAI) shift the composition of the Chinese market, particularly as a hub of supply chains?

– What does “self-sufficiency in technology” mean for foreign MNCs operating in China?

– How would data sovereignty issues be addressed?

– What are the possible scenarios of the future and how should companies interpret the likely scenarios for strategic business decisions?

– Is the changing landscape likely to impact footprints of MNCs in China and their global supply chains?

– Against the evolving strategic context, how should global MNCs re-define corporate structures in China and whether they need to redefine relationships with other companies and organizations?

In many cases, organizational structure and corporate relationships were built decades ago. As the landscape and the goalposts change, these dimensions too may have to change.

Many MNCs believe China’s role in the world will continue to expand and yet externalities such as geopolitics and policy promulgations give rise to questions that need to be addressed. Company strategists need to envision and draw plausible scenarios to make tangible business decisions. However, the knowledge and information disconnect between the global headquarters and the China team of MNCs are often significant.

Foreign MNCs clearly need to ask themselves if and how they should continue to invest more in China, navigating through the path the most recent changes are likely to lead to. In the extreme case, those who don’t see a future in China need to figure out how to cash out and that can be a very tough decision to make.

Companies need to be much more sophisticated and nuanced in sorting out these questions, guarding against risks and keeping growth options open. China is not simply a market or a global supply base. It is fast becoming a platform where the best strategic thinking is being developed and institutionalized. Companies operating in China can now find and acquire global competitive advantages.

China’s Importance to Multinationals Means They Must Approach It With Greater Nuance

By Edward Tse

2021-05-05

Originally published on Caixin Global on May 5, 2021.

Many multinational corporations (MNCs) have China at the top their minds these days. China has become an important, if not the most important, market for many MNCs.

Then there are those who are just entering China or have recently expanded their operations in China. These companies are trying to figure out ways to capture the upside of the China market. And of course, some who have been affected by geopolitical issues like Xinjiang cotton are pondering over what to do next.

China’s economy is not stagnant and continues to evolve. GDP grew 2.3% in 2020 despite the pandemic and was up an incredible 18.3% in the first quarter this year, indicating a strong recovery. GDP growth for the whole of 2021 is expected to be 6%. FDI inflows in 2020 at $163 billion was the highest in the world and external trade continues to be vibrant. Two-way trade with the U.S. shot up to $659.5 billion and that with the EU was $710 billion in 2020.

A recent study by the American Chamber of Commerce has shown that 70% of US companies are planning further investments in China, and according to the “Business Confidence Survey” released by the German Chamber of Commerce, 72% of respondents are planning further investments in China.

Despite the antagonism during the Trump era, China has continued to tread the reform path and expand market access to foreign companies.

One example is opening of the previously rather restricted financial services sector. BlackRock is to set up a wholly-owned asset management business in China and in January, PayPal became the first third-party payment platform with 100% foreign ownership in China.

Foreign automakers are no longer required to form joint ventures with local companies. Tesla has its Gigafactory in Shanghai and Volkswagen has raised its stake in its joint venture with local automaker JAC to 75%.

A major reform milestone was the Foreign Investment Law promulgated in March 2019 which puts foreign enterprises at par with domestic counterparts in many ways. Another landmark piece of reform was the Unreliable Entity List announced in September 2020 to protect legitimate rights and interests of all kinds of market entities. Besides, the National Negative List has pruned the number of restrictive measures by 17.5% compared to its 2019 version. These are clear signals of how China is trying to reduce barriers to foreign companies.

The new 14th Five-Year Plan stipulates that quality of development will be a top priority for China through 2025, making innovation and technological independence even more critical. Advanced manufacturing shall be used to fix issues in areas such as key components, materials, software, and fundamental systems while developing a more innovative and competitive value chain with a higher “value-added” content in priority areas. External and internal components are expected to complement each other.

In addition, Vision 2035 lays out social and economic development goals for the next 15 years, the target being to build a modernized economy by 2035. Continued promotion of urbanization and further strengthening of regional trade and investment partnerships with ASEAN, Belt and Road participants, as well as other economies are the other principal features.

China’s goal to achieve carbon neutrality by 2060 is massive, ambitious and challenging. It will require close collaboration with many stakeholders.

While a range of new business models have already emerged in China during the pandemic. The above major initiatives will inevitably create many more major opportunities across the board and for some, potential risks.

China is accelerating deregulation and its market is expanding. The right government policies and the growing ingenuity of local enterprises are together generating what’s possibly the world’s most competitive economy. The dynamics of competition and collaboration is highly intensive in China and is expected to stay intensive going forward.

As innovation continues to progress rapidly, the ability of foreign MNCs to participate in China’s innovation game is both an opportunity and a challenge. Opportunity — because innovation implies new sources of value creation. Challenge — because others too will innovate. MNCs who were earlier into copying products from home and pasting them in Chinese markets are now trying to tailor products for the Chinese customer. They are learning from China and are innovating in and for China.

It’s been a cliché to say that the great majority of foreign MNCs cannot ignore China. It is even truer these days because of China’s vital importance in MNCs’ global value chains as both a market and a supply base, besides a source of inspiration for knowledge and ideas.

Going forward, China’s major initiatives are providing more opportunities for businesses local and foreign. However, to capture the upside, MNCs need to approach China in a much more sophisticated manner, knowing where and how the risks will manifest and how they can be handled.

One source of risk is geopolitics which have seeped into all walks of life. The recent imbroglio about Xinjiang cotton suggests that MNCs need to understand that like many other markets, there are some “red lines” in the Chinese market too and these have to be carefully taken into account when making decisions. CEOs need to have greater clarity of thought for effective strategic decision-making.

Companies need to communicate with their target consumers in a manner aligned with the evolving consumer needs and technological changes. A digital mindset and approach can be very critical when determining the winners. Brand winners in China will increasingly be those that can tick as many of the relevant success factor boxes as possible, whilst not crossing the Chinese consumers’ red lines. It is a function of a (foreign) company’s understanding of and capabilities in the China context.

Geopolitics would impact how the future interplay between globalization and deglobalization would evolve and the role of China in this interplay. It will in turn impact issues such as global governance, technology, data sovereignty and local requirements. These issues and people’s needs embody implications for strategic plans for MNCs’ operations in China or for that matter their global strategies with China at the core.

MNCs need to develop different ways of capturing China’s upside while responding to different risks and they must always know where the red line is. The right strategic evaluation of plans and actions is mandatory for all multinational companies who aspire to stay relevant in the global ballgame. China offers MNCs lots of upside but approaching China will also require more sophistication.

By Edward Tse

2021-04-09

Originally published by Caixin Global on April 9, 2021.

The recent row over Xinjiang cotton has caused much debate and discussion on whether this controversy constitutes an opportunity for local Chinese brands in apparel and sportswear to capitalize on the situation as Chinese consumers boycott foreign brands like H&M, Nike and others.

Some observers suggested that Chinese consumers are shunning foreign brands due to nationalistic inclinations, and so local brands now have the upper hand.

Some say foreign brands don’t have a chance in China anymore. They should get out soon. So, do foreign brands have a future in China?

In apparel and sportswear, as in other consumer product categories, competition in China has been fierce for some time with a wide range of foreign and local brands fighting it out in arguably the world’s most competitive and fastest growing market.

For a long time, foreign brands have led in this competition, especially major players such as Nike and Adidas. However, local brands are catching up over the years, narrowing the gap between the two groups. The recent Xinjiang cotton episode has given these local brands a further boost. For example, Li Ning’s share price on the Hong Kong Stock Exchange surged about 10% on March 25th, while Anta’s rose about 7.8%.

According to the latest financial report, Anta earned a net profit of $794 million in 2020, surpassing Adidas’ net profit of $504 million for the first time.

The cotton episode has certainly given local brands a chance to increase their market share at the expense of foreign brands. But, what’s the real interplay between local and global brands in China? To understand this, we should also look at some other sectors.

In the auto sector, foreign brands, particularly leading German and Japanese brands have traditionally dominated the premium segment. More recently, American brands such as Cadillac and Lincoln have also expanded their presence in this segment.

On the other hand, local brands dominate in the mid-to-lower tier segments, but some foreign brands are also active.

In the electric vehicles sector, U.S. brand Tesla is the front runner, with the Chinese “new force” brands such as Nio, Xpeng, Li Auto and others all trying to get a piece of the action.

At the same time, incumbent OEMs, whether foreign or local, are also offering electric vehicles while other players such as internet giants Xiaomi and Baidu, mobility player Didi Chuxing, contract manufacturer Foxconn, and real estate developer Evergrande have all entered the race.

The EV market is sure to become ultra-competitive and, so far there is no clear winner in the auto-and-mobility sector.

In smartphones, local brands Xiaomi, Oppo and Vivo are the market share leaders. Huawei, severely hit by U.S. sanctions on its chips supply, remains popular among Chinese consumers despite an appreciable drop in its market share. And Apple is still popular among Chinese consumers especially at the top end of the market.

In the cosmetics sector, Western brands such as Guerlain, Chanel, and Lancome have dominated the premium and luxury segments for years, accounting for about 50% of the total cosmetics market. Japanese brands such as Shiseido and Korean brands such as Sulwhasoo and Whoo are also quite popular in the middle segment. In the mid-to-lower tier segments, local brands, including Pechoin, Perfect Diary, and Herborist have registered huge growth in recent years. According to a joint report issued by Tencent and Kantar released in May 2019, local cosmetics products accounted for 56% of the market in the mid-to-lower tier segments.

In the appliances sector, Chinese brands now dominate the market. Leading brands include Midea, Gree and Haier, all local. However, foreign brand Dyson has carved its own niche position given its innovative image and great reputation in China.

There’s no question that the quality and quantity of Chinese brands have taken large strides over the years. Incumbent players in general have become more competitive, while new players have emerged all over, with some dropping out along the way but some growing into major competitors in their own right. They have increasingly shed the image of being of low quality and cheap, and have built their respective brand positions.

Surveys such as the Prophet Brand Relevance Index have shown that over the years there has been a marked shift in consumer preference for local brands over global brands. In the 2019 Prophet Brand Relevance Index, seven of the top 10 relevant brands are local whereas a decade ago, the top 10 would have been predominantly, if not entirely, foreign brands.

Chinese consumers are also evolving. As their incomes increase, they are becoming more health, lifestyle and quality conscious, especially those who reside in upper-tier cities. They have also become more confident and more knowledgeable across the board as access to the world has become easier.

For brands to connect with their target consumers, their go-to-market techniques are also becoming increasingly more critical as Chinese consumers are becoming more digital savvy. Social commerce, for instance, has become an important way to connect.

To this end, Chinese brands are often leading the trend as these brand operators are often closer to the dynamism of Chinese consumers. Foreign brands, on the other hand, typically tend to play catch-up.

Pundits have long asserted that nationalism plays a significant role in Chinese consumers’ brand preferences. There is possibly some truth in that, but to assume that it is the only, or the predominant factor affecting the choice of brands is overly simplistic. However, this has often been used by failing foreign brand managers as an excuse for losing out to local brands.

The impact of the Xinjiang cotton episode will likely evolve over time in a manner similar to that of the NBA episode in 2019. (Chinese NBA fans reacted strongly to the then Houston Rockets General Manager Daryl Morey’s tweet on Hong Kong’s politics and China’s CCTV suspended broadcasts of NBA games which returned to the Chinese TV screens only after about 15 months). However, incidents of this kind simply highlight the fact that there are “red lines” in the Chinese market (as in many other markets) that companies need to fully understand and carefully take into account in their decision-making process.

Company executives understand the importance of “putting the customers first,” a basic tenet to doing business. As geopolitics have seeped into all business sectors these days, CEOs need to have sharper clarity of thought in the process of strategic decision-making. Any compromise with the basic tenet must be made in face of clear tradeoffs between its pros and cons.

So, we must to go back to the basics of business. Brands who will win in China are those who understand the quickly evolving consumer needs, can anticipate and properly interpret Chinese government’s policies, and how technology’s evolution would impact both the demand side and the supply side of the picture.

Importantly, companies need to better understand how to communicate with their target consumers in a manner that is commensurate with the evolving consumer needs and technological changes. A digital mindset and approach are increasingly critical in determining the winners. Foreign companies which are structurally behind the local companies in this regard must figure out an approach that is closer to the real happenings in the market to prevent themselves from losing out on this.

In the end, brands winning in China will increasingly be those that can tick as many of the relevant boxes in key factors of success as possible while making sure not to cross the Chinese consumers’ red lines. It is a function of the company’s capabilities in the China context, where its leadership plays a major role. Ultimately, whether your brand is foreign or local is probably not the most important factor.

What Lessons Can Foreign Companies Learn from Xinjiang Cotton Episode?

By Edward Tse and Gao Yanping

2020-04-01

A recent article authored by Dr. Tse was published by CGTN on April 1, 2021. It was co-authored with Gao Yanping.

Editor’s note: Edward Tse is the founder and CEO of Gao Feng Advisory Company, and Gao Yanping is a researcher and a former senior editor of Guancha.cn and a business journalist at Oriental Outlook and Xinhua News Agency.The article reflects the author’s opinions and not necessarily the views of CGTN.

Several multinational retail brands including H&M, Nike, Adidas, Gap, New Balance, Burberry and Uniqlo are being criticized by Chinese consumers over their stance on alleged “forced labor” in China’s Xinjiang Uygur Autonomous Region.

These companies have launched statements on their position on Xinjiang’s affairs and would not use Xinjiang’s cotton in their products. The statements were based on a report released by the Better Cotton Initiative (BCI), a non-governmental organization that claims to promote better standards in cotton farming and practices across 21 countries.

This series of events enraged Chinese netizens who have called for boycotts of these brands. Chinese business partners of the brands have moved quickly to cut ties with them. From popular Chinese celebrities who have called off their endorsement deals to shopping malls taking down H&M’s billboards, to online shopping giants dropping H&M products, to mobile phone app stores removing H&M apps, Chinese responses have been overwhelming. Chinese netizens’ reaction has been contagious on social media. On Weibo, one of China’s most popular social media platforms, the hashtag “I support Xinjiang cotton” has been the top trending topic on Weibo with more than 7.11 billion hits by March 30.

Unlike Apple which removed a police-tracking app during Hong Kong’s protests last year and admitted “the app violated its rules,” these retail companies seem to be indifferent to the public mood so far. H&M released a statement saying that it “respects Chinese consumers as always” and that it “does not represent any political position.”

It’s very clear that today, geopolitics has seeped into businesses big time. Geopolitics has always been a major role historically in some industries like oil and gas where the location and quality of resources are intricately tied to the national sovereignty of countries.

But since the former Donald Trump administration exercised American foreign policy especially on China, geopolitics has become the center stage for many businesses.

Tech companies like Huawei and ZTE were sanctioned by the U.S. government on national security grounds. Chinese tech companies includin the likes of SenseTime and DJI were placed on the “Entity List” of the U.S. government as the U.S. believes they pose a national threat. Companies on the “Entity List” are subject to U.S. restrictions in the export and transfer of certain sensitive technologies.

But it’s not only tech companies that are affected by geopolitics. The argument over “forced labor” on Xinjiang cotton-picking shows that industries such as apparel and sportswear can also be sucked into such a swirl.

In a way, this is unfortunate because it does not need to be so complicated but external forces seem to be driving businesses in that direction and it seems like geopolitics has become a part of normal strategic decision-making for company executives. No longer can company executives only focus on business operations per se, they also need to incorporate institutional capabilities to address issues that go beyond day-to-day business operations.

Company executives should exercise common-sense judgment before they make decisions that could have serious implications. In this case, a simple check on the level of mechanization of cotton harvesting in Xinjiang would cause the CEO of any large multinational company to double-check if the alleged “forced labor” in Xinjiang is true.

According to the Department of Agriculture and Rural Affairs of Xinjiang Uygur Autonomous Region, more than 90 percent of cotton picking in northern Xinjiang is highly mechanized, while southern Xinjiang has raised its mechanization rate to around 40 percent, resulting in an overall mechanization rate of over 75 percent. Paradoxically, BCI’s Shanghai office has issued a statement saying that after careful audits, they did not find any use of forced labor in cotton picking in Xinjiang, a position that is contradictory to that of BCI headquarters.

Beyond cotton picking, the claim that “forced labor” is used in Xinjiang is controversial and for many, has not been substantiated. While there are plenty of allegations, there are also plenty who have pointed out that the claims are not substantiated, with the alleged evidence unfounded or manipulated.

Foreign companies’ CEOs need to think carefully about the implications of their actions. What reactions would be generated among the Chinese consumers? How would the competitive landscape shift in particular in favor of the local brands, whose competitiveness has been improving anyway? What would be the financial implications to the company because of the action taken, not only within the China market, but also outside?

Companies’ CEOs like to say, “We always put our customers first.” However, the Xinjiang cotton episode has shown that many CEOs don’t necessarily abide by that rule with respect to Chinese consumers – arguably one of the most important consumer groups in the world. At least the business leaders haven’t shown they have explicitly and carefully gone through a thought process of making sure they understand the full implications of what they do.

We are not advocating that foreign companies must kowtow to China because of the financial implications to their businesses. We are suggesting that companies’ CEOs should have clarity in their thought processes in matters of such critical importance and to always keep the basic value of any business, which is to put its customer value as a top priority, in mind. Any compromise of that basic tenet must be weighed carefully against the trading off between its pros and cons.

By Edward Tse

2021-03-13

Gao Feng Advisory’s CEO, Dr. Edward Tse’s latest op-ed on CGTN on Hong Kong. He pointed out that there are actually two Hong Kong’s- an “Elite HK” and a “Mass HK.” And there is little trickling down from top to bottom. HK needs to address these deep-rooted issues. It will take some time and won’t be easy but with boldness, skills and commitment, Hong Kong can do it!

Editor’s note: Edward Tse is the founder and CEO of Gao Feng Advisory Company, a global strategy and management consulting firm with roots in Greater China. He was born and raised in Hong Kong and lives in the HKSAR. The article reflects the author’s opinions and not necessarily the views of CGTN.

With the enactment of the national security law in June 2020, the situation in Hong Kong is finally stabilizing and slowly returning to order. The riots and unlawful protests that have prevailed for over 12 months created major havoc to the entire Hong Kong community.

On March 11, China’s National People’s Congress approved the decision to improve Hong Kong’s electoral system, enforcing the notion of “patriots governing Hong Kong” which will in turn ensure the long-term viability of “One Country, Two Systems.” These changes were needed as radical politics in the past had severely hindered the operations of Hong Kong’s legislative process, causing for some time an almost “ungovernable” situation.

What’s the root cause of Hong Kong’s demise?

Wendy Hong, head of research of a large Hong Kong conglomerate group, pointed out that Hong Kong actually consists of “two Hong Kongs.” I agree with her assessment.

For a long time even before the handover, Hong Kong has suffered high levels of income inequality. This situation has become worse over time, resulting in two different Hong Kongs.

One Hong Kong – let’s call it “Elite Hong Kong” – is where Hong Kong’s businesses and professionals ruled. They are mostly in financial services, property development and high-end services sectors. They roam in Central, Admiralty and West Kowloon. With Hong Kong’s strong position as a regional financial hub, people and businesses engaging in this Hong Kong were doing very well financially. In fact, many of these people are recent returnees of highly educated people from the Chinese mainland or expatriates.

The other Hong Kong – let’s call it “Mass Hong Kong” – is where most Hong Kongers are and they are prevalent in sectors such as retail, food, construction, low-end services and others. The living standard of people in “Mass Hong Kong” has not improved much over the last couple of decades, while the general housing prices in Hong Kong have risen significantly in the meantime – thanks to a large part to the “Elite Hong Kong.” Many people in this Hong Kong live in poorly-conditioned sub-divided flats and many young people were disillusioned about their future.

There is little “trickling down” from “Elite Hong Kong.” People in “Mass Hong Kong” feel that they have been left behind. Most of them are local Hong Kongers or descendants of recent “single entry permit” immigrants from the Chinese mainland. When they saw people in “Elite Hong Kong” or even well-off visitors from the Chinese mainland buying high-end properties in Hong Kong, they placed their anger on anything and everything that was “mainland” or what they viewed as vested interest groups.

While the Chinese mainland has lifted 98.99 million poor rural residents out of poverty over the past eight years, Hong Kong has a poverty population of close to 1.5 million as of 2019, according to the Hong Kong Poverty Situation Report, in a city of population that is less than eight million.

There are a number of reasons for this.

Since the mainland’s opening up over 40 years ago, Hong Kong’s manufacturing has been hollowed out. Even though most of Hong Kong’s manufacturing back then wasn’t really sophisticated, it was a key source of employment for local people. Since then, many people were deprived of decent-quality job opportunities.

The land supply has chronically been limited to both real and man-made reasons. It has been a major reason why the housing prices have gone up so rapidly over the last several decades. Also, the small percentage of people in “Elite Hong Kong” who were able to afford the top-end Hong Kong properties was viewed as villains by many Hong Kongers who saw that home ownership is increasingly out of their reach.

Hong Kong’s government has a long-held approach of non-intervention, believing that market forces by themselves can sort everything out. This is a legacy left behind from the British colonial days and the administrative officers of the Hong Kong SAR government simply inherited that approach without seriously reflecting on the effectiveness of it as the general context evolved.

With the national security law now in place and the integration of the Greater Bay Area underway, we now have the opportunity to address these fundamental issues.

1. The Hong Kong government should be much bolder in creating new sources of land supply through “combined punches:” revitalization of “brown land,” including allocating a very small percentage of the most fringe areas in the parks for housing and a reasonable amount of reclamation in appropriate locations.

2. Hong Kong should leverage the Greater Bay Area which offers much more capacity in technology innovation and supply cluster bases. A lot has been written about this plan already and much of the focus will be on how Hong Kong should participate in the area’s technology and innovation development, leveraging especially Hong Kong’s capacity in universities and other higher institutions in research and development.

3. Hong Kong needs to cultivate new growth through what Wendy Hong calls “Industry 2.5.” Capitalizing on the strengths of Hong Kong’s services industries, “Industry 2.5” transforms the services industries by combining them with manufacturing-based industries, with areas such as luxury fashion, medical devices and aircraft parts services prime for the development of Hong Kong. The process will allow greater industrialization and diversification in Hong Kong’s economy, create more varied investment options and provide fresh employment opportunities.

4. Hong Kong should build investment funds investing in companies of various sizes. Hong Kong can undertake some of these funds by itself and some in collaboration with other cities in the Greater Bay Area. In fact, Shenzhen, for example, has been leveraging their own funds to nurture a large number of tech companies over the last several decades, transforming the city into a leading tech hub. By investing into portfolio companies, these companies can also be a source of innovation and “re-manufacturing” to Hong Kong and a source of employment for Hong Kong people.

5. Hong Kong should find a much better way to balance the interests between the big businesses and the masses. An extreme form of capitalism has been manifesting in Hong Kong for a long time, causing a structurally close relationship between certain big businesses and the local government. This imbalance is the root cause of many of Hong Kong’s deep-rooted issues and it should be rectified.

The incredible economic growth of the Chinese mainland over the last several decades was epitomized by how the government and businesses, big and small, state-owned and non-state-owned, synchronize in a rather sophisticated manner. The Hong Kong SAR government should learn from it about what works and evolve itself into an appropriate strategic position that will make the entire Hong Kong work.

From chaos to order, it’s now time to close the divide between the “two Hong Kongs.”

By Edward Tse

February 16, 2021

Originally published by Caixin Global on February 16, 2021.

Significant and fundamental changes are happening in the business sphere in China. Instead of leaving China as some asserted at the peak of the pandemic in China last year, multination corporations (MNCs) are doubling down in China. In fact, China’s foreign direct investment in 2020 rose by 4%, while in the U.S., it declined 49%, making 2020 the first year China has overtaken the U.S. as the top foreign investment destination.

Recent data from MNCs in China echoes similar sentiments. The American Chamber of Commerce in South China’s 2021 studies showed that over 70% of US companies surveyed have budgeted to reinvest and expand their businesses and market share in China this year. In the “Business Confidence Survey” released this month by the German Chamber of Commerce in China, 72% of respondents are also planning further investments in China.

Despite the pressure applied throughout the Trump era from the U.S. causing major antagonism towards China, China has continued on a path to reform and open up market access to foreign companies. For example, China has started to open up the previously rather restricted financial services sector.

BlackRock has approval to set up a wholly-owned asset management business in China and earlier this month, PayPal became the first third-party payment platform with 100% foreign ownership in China.

China has also abandoned the policy requiring foreign automakers to form 50-50 joint ventures with local companies. Tesla quickly took advantage of this change and built its state-of-the-art “gigafactory” in Shanghai, while Volkswagen raised its stake in its joint venture with local partner JAC Motors to 75%.

With China accelerating deregulation, the size of its market coupled with the government policies and the ingenuity of local enterprises are generating what’s possibly the world’s most competitive sectors at this moment. MNCs have largely awakened to the fact that China is innovative and for them to compete effectively, they will need to learn from China and create the best innovative approach for the China market.

For example, when the Chinese government push for new energy vehicles, Tesla is just one competitor, other Chinese players such as Nio, Xpeng, and BYD are also active in the same space.

Furthermore, connectivity and autonomous driving technologies are all being incorporated into vehicles, requiring automakers to consistently and continuously to innovate. In order to remain competitive, large incumbent foreign automakers are trying to innovate, but also adopt China-specific products and service models. Herbert Diess, CEO of Volkswagen, recently said “China is a huge opportunity. China is also technologically advancing fast.”

In the consumer sector, local companies are also challenging the fast-moving consumer goods giants like Procter and Gamble, Unilever and L’Oreal with innovations in areas such as social commerce. The use of key opinion leaders (KOLs) has revolutionized the entire shopping experience by creating powerful social interactions with consumers through popular apps including Douyin (the Chinese version of TikTok), Billibilli and Kuaishou. Chinese beauty brand Perfect Diary has mastered the use of KOLs, activating the entire spectrum of KOLs (celebrity, top-tier, mid-tier, micro and key opinion consumers). From January 2019 to September 2020, Perfect Diary was the only color cosmetics brand on leading Chinese e-commerce platform Tmall, to achieve over 100 million yuan ($15.4 million) in monthly sales.

MNCs are increasingly finding that innovations developed in China have further potential in other parts of the world. When Panasonic developed a sterilization function for their washing machines specifically targeted for Chinese consumers, the same function was adapted to refrigerators for Japan’s consumers. Many Western retailers are now actively studying the omni-channel constructs and fulfillment models of local e-commerce pioneers like Taobao and JD.com.

The China head of a large U.S. industrial company once told me he thought he came to China to teach but after some time, he recognized he was in China to learn. Another large U.S. client told me their board of directors instructed the China team to seek how to leverage the China knowledge to help businesses in other parts of the world. BMW has taken its Munich-based Startup Garage program to China in order to gain exposure to new innovative technologies, such as electrification and automation, from a more advanced local ecosystem.

These latest views indicate a material change in the MNCs’ perspective on China. China isn’t just about a source of hard power (market size, profit and supply chain), it’s also becoming a source of soft power (innovation, knowledge and inspiration). This is due to China’s innate capabilities built by rigorous experimentations via the country’s governance approach — a combination of efficient top down planning by the central government alongside an incredibly dynamic entrepreneur class. Local governments help provide the glue between these two as they implement the central government’s policies while supporting businesses to grow.

MNCs and their lobbyists have long complained about problems with operating in China, e.g., intellectual property theft, lack of market access, unfair competition and lack of transparency. While perhaps some of these might indeed be — or have been — problems, in the larger scheme of things, they are no longer the defining factors.

MNCs are now coming to realize this fundamental shift, that China’s growth and resilience have been driven largely by an internally-driven momentum and governance approach, aided by its connectivity with the rest of the world through international trade. MNCs can benefit by being a part of the game and strengthening their own overall competitive advantages, or end up being marginalized if they choose not to participate.

So, what does this mean to the new U.S. administration team? By now, people should realize that some form of collaboration while competing with China would generate the best return. The big question is how.

I believe the key is to accept that China has gone through rounds of material changes over the last several decades. The new reality renders the assertions of the “coming collapse of China” and the “Thucydides Trap” not helpful as policy guidelines. The Joe Biden team should also get out of the aggressor mentality and the blame or mockery mindset that have plagued many U.S. policymakers and influencers over the past four years. Instead, a better approach would be to develop an objective view and a deeper understanding of why China works, or doesn’t, and learn from the Chinese experiences, not simply brush aside everything that China has done due to ideological differences.

The U.S. shouldn’t just follow the old game book. It needs to find a new game, but that new game should probably start from within.

On March 3,  Gao Feng Advisory’s CEO Dr. Edward Tse was interviewed by CNBC on the implications of the coronavirus epidemic on China’s businesses and governance.

The COVID-19 outbreak will spur China’s central and local governments to improve information sharing going forward, says Edward Tse, CEO of Gao Feng Advisory Company.

Please click 阅读原文 (Read More)  at the bottom to watch the show.

https://www.cnbc.com/video/2020/03/03/coronavirus-crisis-is-a-big-wake-up-call-for-chinas-government-in-information-transparency-strategist.html

Originally published by Caixin Global with title, “Make Careful Supply Chain Decision for the Future, Not the Past” on March 5, 2020. All rights reserved.

The coronavirus outbreak has wreaked havoc on supply chains. Corporate operations around the world have been disrupted, with China at the epicenter of both the virus and global supply chains for many companies.

A recent report by The Economist says that most multinational firms have been caught off guard and suffered from temporary closures of their mainland-based suppliers. Big firms will try to ramp up production quickly, but it is unclear how soon factories can get back up and running at full capacity. Even though plants are restarting, logistics around and out of China will remain difficult.

According to the Wall Street Journal, tech giant Apple is expected to ship 5% to 10% fewer iPhones this quarter since its largest outsourcer, Foxconn, delayed resumption of work. Leading Korean auto manufacturer Hyundai had to shut down all its factories in South Korea due to lack of auto parts from China-based suppliers, and these factories have only partially re-opened, automobile industry news site Just-auto said. In Japan, several Nissan vehicle manufacturing factories in Kyushu were forced to close for the same reason.

A Shanghai American Chamber of Commerce survey of 127 foreign multinational corporations in China revealed broad concerns. The results show that only 13% of the respondents expected the coronavirus not to impact their revenue in 2020, and most respondents agreed supply chain adjustments would have to be taken into consideration. Some said the outbreak increased their determination to move business out of China, to places such as India.

However, supply chain shifts vary by business, sector and value chain segment. For companies in labor-intensive sectors, many had already been moving out of China to Southeast Asia or other lower-cost countries well before the outbreak due to increases in tariffs and other costs. For companies with large U.S. market exposure, some have moved their manufacturing operations closer to their U.S. customers by building plants in the U.S. Some are moving to other locations with lower U.S. tariffs than China.

For those companies for which China is an overwhelmingly important market, moving their entire supply chains out of China is difficult and doesn’t make strategic sense. This is especially true in industries with complicated supply chains linking myriad suppliers in geographically concentrated clusters and where “just-in-time” supplies are crucial to manufacturing operations. Consumer electronics, cars and advanced machinery all fall into this category.

Supply chain design and management are complicated and delicate issues. Over the last couple of decades, many companies have been deploying their supply chain globally to achieve an optimal combination of quality, cost and speed.

But consecutive external shocks from the U.S.-China trade war and Covid-19 have created a huge stress test. In the short term, supply chains have been severely affected. Many companies are now scrambling to roll out stopgap measures to minimize the impact.

Global CEOs must address the medium- and longer-term question of what to do. They will need to answer several fundamental questions:

1. How will global demand patterns for my products shift after the epidemic?

2. What will be my product-market strategy to address the changes?

3. What is my best guess of the key variables that could affect how I should think about my new supply chains, e.g., trade tariffs, non-economic trade issues such as “national security” concerns, my supplier base, costs, quality, agility and responsiveness? What scenarios are possible, and how can I respond to “black swan” events?

In order to help bring China’s economy back on track, Beijing is likely to make a major push on infrastructure development. It will also likely implement industry incentive schemes, further open market access for private and foreign companies, and provide fiscal stimulus. For example, on Feb. 24, Beijing issued a new policy paper on “the Strategies for Innovative Development of Smart Vehicles” supporting the development of the smart, connected automotive industry in China.

We expect a wholesale upgrade of smart cities across the country. These next-generation smart cities will not only address safety and security issues, but more importantly will also address broad public management agendas like public health. This will involve construction of much more connectivity infrastructure across China. As such, it will also enhance the efficiency and effectiveness of Chinese supply chains in the future.

More innovations will emerge as a result. Traditional offline-driven business models are increasingly moving online in areas such as remote working, education, entertainment, retail and health services.

The performance of online communications platforms such as Zoom and DingTalk exemplifies this trend. Compared to last year’s Lunar New Year break period, DingTalk acquired more than seven times as many newly registered users this year, while Zoom’s daily active users increased nearly five-fold. Automation and robotics will become much more prevalent, and human-to-machine and machine-to-machine interactions will exponentially increase. Smart manufacturing and robotic “last-mile” delivery powered by autonomous vehicle technology will grow more widespread soon.

Deciding on shifting a company’s supply chain is not trivial. It could have major impacts on the effectiveness of the company’s strategy, competitiveness and economic performance. While short-term disruptions in China due to the coronavirus epidemic are painful, thinking through longer-term strategy requires careful deliberation. This will require a deep understanding of China and the dynamics of the world. Linear extrapolation from the past is not sufficient: the right answers will need to come from a perceptive view of the future.

By Edward Tse
January 2020

Gao Feng Advisory’s CEO Dr. Edward Tse’s article was published in his regular column on Brazil’s HSM Management Magazine in January 2020 issue. In this article, Dr. Tse discusses the “working hard” culture of the Chinese businesses.

English Version

After decades of tremendous growth, China is now an upper-middle-income nation, according to the World Bank. Its reputation as an innovative economy is increasing. Along with its economic growth, China’s productivity too has been growing well.

The growth of China’s productivity during the last few decades is mainly due to the opening-up and reform policy implemented from 1978 onwards, its labor intensive exports driven manufacturing and investment-led growth model underpinned this extraordinary progress. Yet some strains associated with that approach have become evident in the last one decade or so as these economic drivers seem to be running out of steam.

China stepped into the innovation wave after the wireless internet (together with smart phones) became prevalent. Chinese entrepreneurs have leveraged this technology to create a range of new business models and products that cater to the evolving consumer and business needs. In the race against time and in the midst of hyper-intensive competition, Chinese entrepreneurs have to be fast, agile and adaptive in order to remain ahead of others. They often don’t mind using the market as a test bed for experimentation as they fine-tune their business models along the way. Quick experimentation often becomes the core part of the very culture of Chinese companies. Speed, rhythm, intensity and multi-tasking have become parts of the DNA of many Chinese companies. On top of this, evolving government policies and regulations are often a source of uncertainty and they keep Chinese entrepreneurs persistently and highly alert and vigilant.

As a result, many Chinese businesses have formed a culture of “working hard.” This is the now widely known as “996” schedule – which means working from 9am to 9pm, six days a week. This has become common place among Chinese entrepreneurs, particularly among large internet-based businesses. The 996 schedule was initially applied in order to improve overall productivity of companies by increasing working hours.

Source: Baidu

However, the notion of “996” has become somewhat controversial. Alibaba’s founder Jack Ma is a vocal supporter of the gruelling working hours commonplace in China’s tech and internet industry. He once said at an internal meeting that this is, “a huge blessing that many companies and employees do not have the opportunity to have,” according to a transcript published on Alibaba’s official WeChat account. Richard Liu, CEO of JD.com, a leading e-commerce company, responded to the recent layoffs saying that JD.com would never force employees to work in a 995 or 996 schedule, but every staff of JD.com must “have a competitive spirit!”

Besides the 996 schedule, many Chinese companies, including both state-owned enterprises (SOEs) and privately-owned enterprises (POEs), are actively seeking multiple ways of improving productivity. More and more companies, especially SOEs and some internet companies, are beginning to provide free meals to their employees in order to reduce the amount of time spent on purchasing and eating meals. Moreover, employees’ dormitories and free buses are also being offered as perks to simplify the lives of employees and make sure they can get to work on time. In some companies, a military-style management has also been deployed to improve the efficiency and productivity of their staff’s work.

The “working hard” culture of the Chinese businesses probably won’t go away any time soon.

Source: Baidu

These days, the news is dominated by the impact of the Coronavirus and how China is coping with this latest shock. Consumer demand for goods and services is declining in China; sectors such as retail, travel and leisure are the most directly impacted as businesses have closed or are semi-closed throughout the country. The Coronavirus has challenged China, exposing some crucial gaps, but it will also potentially create new opportunities. Attention will be focused on improving China’s entire public agenda, not only one or two vertical areas.

In the aftermath of the crisis, one would expect China’s governance system to become more transparent and there will be more accountability. In order to ensure its public agenda is advanced properly, a lot more effort and resources will need to be put in by the central government as well as local governments at the provincial, city and township levels. State-owned enterprises (SOEs) and non-state-owned enterprises, including both Chinese privately-owned enterprises (POEs) and foreign companies, will be able to better leverage their respective strengths and capabilities. As a case in point, two new specialized hospitals were built in Wuhan – one in 10 days and one in 14 – through the combined efforts of SOEs, POEs and foreign companies. That was quite a feat.

Comprehensive data has always been collected throughout China and surveillance too, was prevalent, and yet China wasn’t able to fully track those who might have contracted the virus. In the aftermath, surveillance and monitoring will become even more important for ensuring their utility for the people.

China’s socioeconomic pattern is also changing as consumer behavior shifts and technology continues to develop. Consumption is shifting increasingly from offline to online. New commercial applications of technologies such as 5G, AI and IoT are also developing faster because of the epidemic. We will see innovative business models and changes in the ways that humans interact with each other and with machines in the future.

Source: Baidu

What trends could possibly drive future business opportunities in the aftermath of the Coronavirus?

1. A major nationwide effort would be made towards creation of a safer and more health-conscious living environment.

2. For public health: early detection, prevention, advanced treatment, and diagnostics would receive much more attention and a more comprehensive public health management system would evolve.

3. There would be more Public Private Partnerships (PPP). Collaboration between private and public sectors to create solutions addressing public agenda issues going forward.

4. The development of a more ubiquitous, connected and intelligent society will accelerate, leveraging new disruptive technologies such as IoT, AI, 5G and blockchain.

5. Big data will become even more prevalent with more data sharing across the board for more effective public agenda management.

6. A rise of new modes of interactions will be imminent. Although human-to-human touchpoints will still remain, other forms of interactions, such as human-to-machine and machine-to-machine will grow exponentially.

7. While entrepreneurship and innovation have already been rising in China over the last several decades, they would further accelerate going forward for addressing the pain points that were exposed during the Coronavirus crisis.

The virus has exposed China’s many problems and created challenges. In the short run, it has added more uncertainty to businesses operating in and with China from manufacturing, supply chain and consumer demand perspectives. In the medium to longer-run, we can expect a huge potential shift as China re-invents itself, making the improvement of its public agenda management a top priority. Collaborations across governments, SOEs, POEs and foreign companies to foster synergies, while at the same time, new consumer patterns and innovative use of technology and business models will come along.

Another new article authored by Gao Feng Advisory’s CEO Dr. Edward Tse was published, where he discussed china’s shift into industrial automation. Dr. Tse said robots will become a strategically important constituent in China’s labor force going forward.

China’s labor market is evolving from a mass of unskilled labor into one featuring an increasingly sophisticated labor force. Now, it is transforming as automation and the use of robotics in manufacturing or logistics sectors are rising fast.

Cheap labor has long been considered as one of the main factors propelling the country to the status of the word’s factory, which shifts global supply chains and attracts thousands of companies in other countries moving their plants to China. However, economic growth during the past 20 years has led to a rapid increase in wages. China’s average wage increased by 8.2 percent annually in the decade, much higher than the global growth rate, according to the International Labor Organization report. In the report, it also mentioned the average real wages of China has almost doubled between 2008 and 2017. That’s the result of an economy that’s been growing by high single digits to double digits annually for two decades.

In 2008, Beijing updated its Labor Contract Law to improve the labor contract system by defining labor right, reducing working hours and improving the welfare benefits and working environment. Labor conditions have largely been improved since that time. At the same time, there are an oversupply of educated workers and a shrinking low-cost labor force as more high school graduates go on to obtain university degrees. With increased labor union activities, better wages and higher levels of education improving the plight of workers, manufacturing becomes less profitable before the country can shift to less labor-intensive and more value-added industries.

“Made in China 2025”, a strategic plan of the People’s Republic of China issued by Premier Li Keqiang and his cabinet in May 2015, aims at rapidly moving from being a low-end manufacturer to becoming a high-end and high-tech producer of goods. Under the plan, the number of industrial robotics operating in China is targeted to expand tenfold to 1.8 million units by 2025. As part of its effort to upgrade its manufacturing sector, the Chinese government started a campaign in 2014 with the overall aim to gradually replace manual labor with robots, with the heavily industrialized provinces of Jiangsu, Zhejiang, and Guangdong among those introducing the new technology on a massive scale.

According to the World Robotics 2019 report released by International Federation of Robotics (IFR), China has been the world’s largest industrial robot market since 2013. The city government of Dongguan, in the heart of the Guangdong province that is known as China’s industrial and export hub, has allocated 385 million yuan (US$56.8 million) to boost automation in factories last year alone. Foxconn, the Taiwanese electronics giant which makes half of the world’s iPhones, plans to fully automate 30 per cent of its production by 2020. In the logistics sector, robotics is also changing the whole industry. Cainiao, one of China’s leading logistics players (~63% owned by Alibaba), has opened China’s largest and most efficient robot-operated warehouse in 2018, with the application of nearly 700 robots, including robotic arms and unmanned drones.

China began its economic ascent as the “world’s factory” over the past several decades by taking advantage of cheap labor. Now, a robot revolution is under way and robots will become a strategically important constituent in China’s labor force going forward.

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This is a new article authored by Gao Feng Advisory’s CEO Dr. Edward Tse, in which he discusses the culture of “working hard” —”996″ schedule of the Chinese businesses.

After decades of tremendous growth, China is now an upper-middle-income nation, according to the World Bank. Its reputation as an innovative economy is increasing. Along with its economic growth, China’s productivity too has been growing well.

The growth of China’s productivity during the last few decades is mainly due to the opening-up and reform policy implemented from 1978 onwards, its labor intensive exports driven manufacturing and investment-led growth model underpinned this extraordinary progress. Yet some strains associated with that approach have become evident in the last one decade or so as these economic drivers seem to be running out of steam.

China stepped into the innovation wave after the wireless internet (together with smart phones) became prevalent. Chinese entrepreneurs have leveraged this technology to create a range of new business models and products that cater to the evolving consumer and business needs. In the race against time and in the midst of hyper-intensive competition, Chinese entrepreneurs have to be fast, agile and adaptive in order to remain ahead of others. They often don’t mind using the market as a test bed for experimentation as they fine-tune their business models along the way. Quick experimentation often becomes the core part of the very culture of Chinese companies. Speed, rhythm, intensity and multi-tasking have become parts of the DNA of many Chinese companies. On top of this, evolving government policies and regulations are often a source of uncertainty and they keep Chinese entrepreneurs persistently and highly alert and vigilant.

As a result, many Chinese businesses have formed a culture of “working hard.” This is the now widely known as “996” schedule – which means working from 9am to 9pm, six days a week. This has become common place among Chinese entrepreneurs, particularly among large internet-based businesses. The 996 schedule was initially applied in order to improve overall productivity of companies by increasing working hours.

Source: Baidu

However, the notion of “996” has become somewhat controversial. Alibaba’s founder Jack Ma is a vocal supporter of the gruelling working hours commonplace in China’s tech and internet industry. He once said at an internal meeting that this is, “a huge blessing that many companies and employees do not have the opportunity to have,” according to a transcript published on Alibaba’s official WeChat account. Richard Liu, CEO of JD.com, a leading e-commerce company, responded to the recent layoffs saying that JD.com would never force employees to work in a 995 or 996 schedule, but every staff of JD.com must “have a competitive spirit!”

Besides the 996 schedule, many Chinese companies, including both state-owned enterprises (SOEs) and privately-owned enterprises (POEs), are actively seeking multiple ways of improving productivity. More and more companies, especially SOEs and some internet companies, are beginning to provide free meals to their employees in order to reduce the amount of time spent on purchasing and eating meals. Moreover, employees’ dormitories and free buses are also being offered as perks to simplify the lives of employees and make sure they can get to work on time. In some companies, a military-style management has also been deployed to improve the efficiency and productivity of their staff’s work.

The “working hard” culture of the Chinese businesses probably won’t go away any time soon.