Tino Si, Head of SXL Research, the Market Research & Intelligence Business Unit at Aventura, brings over 10 years of experience in market research and strategy consulting focused on China.
During his career, he has consulted with some 500 odd multinationals and international brands on China market entry strategies, partner selection, product positioning, pricing tactics, and general market dynamics.
We sat down with Tino to gain an understanding of what foreign investors can expect as China emerges from the Covid-19 pandemic.
What happened during Q1 in China? What was the impact on foreign investors?
First and foremost, while China’s de-facto status as the “The Factory of the World” will not change over-night, Covid-19 is likely to permanently alter China’s position in global production networks and supply chains.
Until very recently, global firms relied on China as their global production base, supplying markets across the world. The focus was on costs management and supply chain efficiencies, with little concern for potential risks of unforeseen shocks to the system.
That all changed with Covid-19. As the epidemic hit with full force in mid-February, the Chinese economy was in effect put on hold. Factories shut down and output plummeted. Migrant workers did not return from the countryside after the obligatory trip back home during the Chinese new-year holidays. Without notice, international companies across the board were forced to readjust their supply chains, shifting their attention to alternative sources outside of China.
We believe this trend will accelerate in the post-Covid-19 era. In fact, many of our clients have already taken steps to permanently diversify their supply chains outside of China. This trend will create new opportunities for new suppliers and alternative markets, in particular South East Asia.
Does this mean that China’s position as the world’s largest recipient of Foreign Direct Investment (FDI) has come to an end?
Not quite. Granted, beyond Covid-19, international firms must assess multiple factors in developing their future China strategies, including macro-economic and geopolitical uncertainties, in particular tensions between China and the US. But, while there are anecdotal evidence suggesting that some firms – in particular US ones – have put investment projects on hold, many others are “doubling down” on China.
On balance, we believe that Covid-19 will be the ultimate watershed for the emergence of China as the world’s largest consumer market. This will precipitate a new wave of FDI, led by firms seeking to sell into the domestic market.
You highlight the consumer sector. Did not consumer related business take the brunt of the pain during crises?
This was indeed the case, especially so with sectors such as travel, hospitality and restaurants, where sales may decrease by up to 50% year on year. Similarly, tourism industry was extremely hit hard; it remains to be seen how travel restrictions may impact the sector going forward.
On the other hand, the outlook for the retail, and consumer discretionaries more generally, is much more positive. We have seen a healthy rebound in Q2 and expect to see a stronger recovery in the second half of the year.
What about domestic firms? How did they respond to the crises? What lessons may be learned?
Overall, domestic firms moved quicker, not only in responding to the threat during the peak of the outbreak, but also in repositioning themselves for a recovery.
Most Chinese firms, in particular in the professional and business support sectors, swiftly enabled remote workforce routines to ensure business operations.
More interestingly, after an initial focus on staying afloat during the early days of the outbreak, we have seen industry leaders taking advantage of the new “new normal” in reducing structural costs, increase flexibility in their organizations, and reinventing their business models.
What does that mean in terms of future investments trends? Where do you see the challenges and opportunities for foreign investors in the years ahead?
In one sentence: accelerated digitization across sectors and industries.
In the consumer space, we see this in the form of adoption of new technologies and business models, increasingly blurring the lines between off-line and online channels.
While locked up at home, Chinee consumers had little choice but to adopt new habits. They turned to technology, not only to deal with the necessities of daily life, such as ordering food and engaging with colleagues and friends, but also in terms of discretionary spending and entertainment.
Companies will have to adapt to this new normal, specially consumer’s new purchasing patterns. Digital transformation will be key in this regard, in particular so for retailers and brands seeking to sell to Chinese consumers.
But the digitalization will not be limited to the consumer space. It is only a matter of time until the digital transformation extends into other traditional industries, such as manufacturing and business support services.
What is your outlook for the rest of 2020/2021 and beyond?
The outlook for 2020 and first half of 2021 is still uncertain at this point. One should not underestimate the risk for a second wave of infection. The developments in Beijing over the last few weeks is a case in point.
In all likelihood, though, outbreaks are likely to be contained in regional cluster, not result wide-spread contagion that precipitated the nationwide lock down we saw in Q1. Nonetheless, over the next 6 to 12 month, lingering uncertainties will likely shape investment and consumption patterns of both firms and consumers, with resulting effects on aggregate investment and consumption.
All the same, the structural foundations for China’s economy are sound. The Chinese government has the policy instruments at their disposal and the political will required to kick the economy back into gear. Consumers have discretionary incomes to spend, and the middle class is expanding year on year, so while it is hard to gauge what the next couple of quarters have in store, we are rather bullish on the outlook for second half of 2021 and beyond.
About the Interviewee
Tino Si, Head of the Market Research & Intelligence Business Unit at Aventura, is a senior research and consulting professional with broad sector experience. Graduated at Jiaotong university (Shanghai), Tino holds a degree in Civil Engineering and an MBA. He is well-versed in both qualitative and quantitative research methodologies through 100+ delivered projects.