CIIE unlocking market potential through trade transformation
EY today releases New era of China’s opening-up
Shanghai, 7 November 2018
As a Vice Chairman and the only Advisor for the Enterprise Alliance of the China International Import Expo (CIIE), EY today released the report New era of China’s opening-up—Unlocking market potential through trade transformation. CIIE is seen as a milestone event that marks the transformation toward an economy driven by consumption growth, and will help companies in all sectors seize new opportunities in China’s consumption upgrade, further opening up and digital economy.
EY believes that the CIIE, as part of the Government’s campaign to stabilize the economy and create sustainable growth, is conducive to building a larger and more differentiated retail market to unleash the potential of consumer spending, and to facilitating adaptation and showcasing technology breakthroughs to support China’s upgrade.
Albert Ng, China Chairman and Greater China Managing Partner, EY says, “Hosting the China International Import Expo (CIIE) is a significant move for the Chinese Government to show great support for trade and economic globalization, recognizing the role that it needs to play by opening up its own market. The CIIE is also a concrete action of the Belt and Road Initiative (BRI) that has been made possible through considerable international cooperation. The CIIE is not only an occasion to focus on goods and services trade, but is also a chance to present China to the world and create a platform to examine critical issues that have global impact. There are opportunities for a wide range of participants to voice their views, contributing to the progress of globalization and a more open, inclusive and balanced future for the benefit of all.”
The CIIE is a priority of the Government to transform the economy from being the factory of the world to being a global marketplace. It is also part of the Government’s efforts to stabilize the economy through the pursuit of technology advancement and having more consumption-driven growth. With the second session of the CIIE already in preparation, EY expects the CIIE to become a flagship event to symbolize China’s successful transformation in the years to come.
Walter Tong, EY Greater China Key Accounts Leader says, “For many multinational corporations (MNCs), China has already been their largest market and key growth center, as they rode along the rapid growth of China’s consumer market in the past decade. With rising affluence and greater sophistication among the Chinese public, the ‘consumption upgrade’ is nevertheless about to open up a range of new opportunities especially for imported goods and services. For businesses ready to explore these new opportunities, the CIIE is an excellent starting point to plan their expansion.”
The New era of China’s open-up report shows that in 2017, China’s commodity imports increased by 15.9% year-on-year, the largest increase in six years. China is set to overtake the US soon as the world’s largest retail market, against the backdrop of rapid and significant growth in household income and asset values, as well as support from positive measures implemented by the Government to promote consumption-led growth. This market has massive potential for a wide range of importers as Chinese families are increasingly looking for higher quality and more customized products.
As the market continues to open up, more regulatory framework and cross-border market liberalization policies can be expected. In June this year, the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) released an updated “negative list”, further relaxing restrictions for foreign direct investment in China. We expect further market opening to take place as China deepens its reforms.
The report explores the automotive, financial services, technology, media and telecommunications (TMT), life sciences and consumer products sectors, which are the major fast-evolving sectors as China deepens its reforms and opens up further. These insights will help CIIE participants and the wider market understand the opportunities that exist.
China is already the largest automotive market in the world as it boasts the highest number of new car sales. Meanwhile, the “Internet Plus” national strategy is enhancing efficiency and driving innovation, bringing about a revolution in consumption, manufacturing and distribution. Electrification, connectivity, smart technology and resource sharing are all developing trends that are propelling China’s automotive industry toward a disruptive transformation. For both domestic and foreign automotive enterprises to compete and win in the automotive sector, the first step in realigning their market strategy is to gain a thorough understanding of the digital transformation currently defining the industry in the country.
Digitization has enhanced operating efficiency, improved customer experience and streamlined business models. Product innovation in the digital era is more customized, increasingly transparent and conducted over a shorter cycle. Digital technology has boosted productivity and the ability to deliver consistent quality. The fast-growing sharing economy is spurring innovative business models such as ride- and car-sharing. This will potentially encourage shifting the traditional business-to consumer (B2C) business model to a customer-to-business (C2B) one that is consumer-driven. For the channels of car sales, with the help of big-data-enabled AI technology, it is possible for the automotive sector to move the whole process of car sales online.
Peter Mao, Greater China Automotive Leader, EY1 says, “Digitization has set the global automotive industry on a new trajectory. The ongoing opening-up and growth of the China market, with the support of policy and a huge consumer base, require automotive enterprises to actively redefine the industry chain, and innovate product distribution and usage. Domestic and foreign automotive enterprises in the sector should embrace the opportunities in digital transformation and consider consumer needs first and foremost when they formulate their strategies. Only by refocusing on customer needs and innovation will they continue to succeed in this market.”
In recent years, the opening up of China’s financial sector is evidenced in many ways, in particular the relaxation of restrictions on the structure, location and scope of business for foreign financial institutions (FFIs). Since the second half of 2017, the Chinese Government has ramped up efforts to open this important sector. The relevant domestic financial regulators have followed this move by issuing new policies, creating greater opportunities for the development of FFIs.
EY believes that the major development opportunities for overseas investors in the Chinese market include the rapidly growing market, full liberalization of controlling shareholding ratio, full opening-up in permitted business activities, more mature and rational investors and the rapid growth in the investor demand for overseas assets in their portfolios. But to balance these considerations, foreign investors should also be prepared to face some challenges, including competition with domestic enterprises, the need to cope with China’s legal environment and requirements on compliance and risk control, the localization of relevant systems, recruitment and cultivation of employees in line with local business development needs, and foreign company culture.
Alex Jiang, EY2 Financial Services Partner and Japan Business Services Leader, Financial Services, EY Greater China says, “With the acceleration of the industry, more and more FFIs are expected to enter the China market. They will contribute by introducing more international experience and, to a certain extent, will increase the level of competition within the industry. EY believes that the future Chinese market will provide a broader stage for FFIs. Domestic and foreign FIs should pay close attention to regulatory development and market trends in order to understand better the impact of the new and future policies that are driving the opening-up of the market.”
Technology, Media & Telecommunications
As disruptive technologies propel changes in production and ways of life globally, innovation has become the new driving force behind China’s stable economic growth. Since June 2018, the State Council has unveiled a raft of measures to improve market access for foreign investors. A number of local governments are also putting in place measures to encourage high-tech sectors such as advanced equipment manufacturing.
The CIIE is an opportunity for the world to showcase the latest technological advancement, including 5G, AI, cloud computing, and VR/AR technologies with great market prospect. In addition to being an opportunity for importers to diversify sources, manufacturers may also take the opportunity to further their transformation in the digital economy. To emerge as winners in these growth sectors, EY believes domestic enterprises or foreign enterprises seeking to enter the China market need to make breakthroughs in technology, ecosystems and commercial models.
Paul Cheung, Partner of Technology, Media & Telecommunications for EY3 Greater China says, “We believe more imports from the TMT industry can bring more mutually beneficial technological transfer to China and as a result help transform and upgrade the domestic industries to be competitive internationally. This year marks the 40th anniversary of China’s market opening-up and commencement of economic reforms. As disruptive technologies continue to propel changes in production and ways of life globally, EY believes that China will spearhead an innovation driven growth model. The TMT industry is set to play a more important role in driving innovation as it is facing new challenges and opportunities brought about by a more open market.”
China’s pharmaceutical market is experiencing a phase of rapid growth. Favorable policies and growing investment have boosted the development of original new drugs, as well as high-quality generic drugs. Eying the increasing demand and huge market potential, foreign pharmaceutical companies are increasing their presence in the China market through multiple channels. At the same time, the Belt and Road Initiative (BRI) is offering opportunities for countries along the route to take part in this booming sector in China.
The development of foreign pharmaceutical companies in China has gone through several phases in recent decades, from establishing joint ventures with Chinese companies at their first entry, and setting up manufacturing bases in China to capture the cost advantages of developing their products, to the more recent focus on M&A and product licensing. In the future, as China encourages health care innovation, EY predicts that investment will be channeled to various sectors, such as AI, medical equipment and hospital development. In addition, with the rollout of the Healthy China 2030 blueprint, covering five major areas - drug safety, public health services, environmental management, food safety and the healthcare industry – the Government will commit further resources to improving the country’s public health and hygiene to be on a par with developed countries.
John Lin, Partner of Transaction Advisory Services for Life Sciences and Healthcare of EY4, said the whole health care ecosystem in China is expected to flourish with new opportunities and growth prospects. There will be multiple channels and formats through which foreign players can participate in this exciting period of growth. On the other hand, the increased level of participation by foreign pharmaceutical and healthcare companies will help boost innovation and quality among their Chinese peers. Leveraging this unique relationship, Chinese and foreign players alike will be able to benefit from the growth of the sector.
The rapid development of consumption within the China market, characterized by the shifting and growing demand of its consumers in terms of brands, products, services and channels, has given rise to one of the most complex markets in the world. Urbanization and a booming middle class in China has resulted in the pursuit of better material and spiritual wealth of its population, characterized by this upgraded demand for goods and services. There are changes in traditional consumption as individuals are buying greener and healthier food, better and smarter home appliances, stylish and customized clothing. On the other hand, emerging consumption areas such as culture, education, entertainment and healthcare only account for a relatively low percentage of the total consumption but these areas present huge market potential and a rapid growth in demand is expected.
With the rising of many Chinese local counterparts, EY believes foreign enterprises and brands that import goods and services should more accurately identify target consumer segments. They have to review the plans for and implementation of their China strategy in order to stand out from the competition while meeting market demands.
Jerry Bao, Partner of Strategy, Advisory Services of EY5, says that for domestic and foreign enterprises alike, the BRI, as well as the national strategy of further opening up have created an unprecedented political, economic and business environment favorable for China consumption and global supply. Industry players, regardless of where they are from, need to learn from their peers’ success in product, service, market and sales innovation. The shared goal is to develop and win in China’s consumption market which ultimately is big enough for all to thrive.
EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.
EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com.
This press release is issued by the EY China practice, a part of the Ernst & Young global network.
1 Ernst & Young (China) Advisory Limited
2 Ernst & Young (China) Advisory Limited
3 Ernst & Young (China) Advisory Limited
4 Ernst & Young (China) Advisory Limited
5 Ernst & Young (China) Advisory Limited
EY partners attended the press conference, sharing insights about the CIIE and various industries.
EY partners interacted with reporters during the press conference Q&A session.