7 minute read 29 Oct 2020
women walking escalator

Transformation and opportunities – How Chinese enterprises go abroad amid the new normal of COVID-19?

By Loletta Chow

EY Global China Overseas Investment Network Leader, EY Belt & Road Task Force Leader and Asia-Pacific EY Private Leader

Seasoned in China outbound investment and Belt and Road Initiative.

7 minute read 29 Oct 2020

Show resources

  • China Go Abroad (10th Issue):Transformation and opportunities-How Chinese enterprises go abroad amid the new normal of COVID-19

The new normal characterizing the post-COVID-19 economy and impacts that are reframing the future of Chinese enterprises going overseas.

The COVID-19 outbreak since early 2020 is one of the most serious global public health crises in nearly a century and has led to a profound impact to international politics and economics. Rising geopolitical risks and regional uncertainties are reshaping globalization. The pandemic has also made our lives more digitalized in the way we work, live and seek medical assistance. Businesses have to respond fast and reframe their strategy to survive and thrive: How to navigate the new global trade landscape? How to integrate new technology into traditional industries? How to generate long-term value in the fast-changing environment? How can multinationals make their supply chains more resilient while maintaining the talent value chain?

China is working to establish a new development pattern known as “dual circulation”, in which the domestic and international markets can boost each other. The country continues holding onto win-win cooperation and multilateral development to build an open world economy. The pace of going abroad by Chinese enterprises has slowed down as the pandemic continued to spread. In the longer run, as Chinese enterprises increase their competitiveness, they will be participating in the adjustment of the global industrial chain and supply chain more broadly. The long journey to globalize Chinese enterprises may not be smooth, but they will keep growing at home and overseas with a global vision: “going abroad” remains a compelling trend ahead.

In this report, we looked into the new normal characterizing the post-COVID-19 economy and their impacts that are reframing the future of Chinese enterprises going overseas. We have identified five emerging trends as well as their underlying factors and consideration:

  • Focus on digitalizing traditional industries
  • “China + N" model for supply chain development
  • Traditional and new infrastructure drives Chinese companies to “go abroad”
  • New energy – new opportunities for outbound investment
  • Geopolitical risk prevention and control has become the “new normal”

Download our latest China Go Abroad report

Our full report provides deeper analysis and insights into Chinese outbound investment, supported by comprehensive data.

Read the report

1. Focus on digitalizing traditional industries

As part of the efforts to reset the economy, governments are increasingly looking to technology and innovation. New applications and integration of digital and real economic activities will become the focus. Looking ahead, enterprises in traditional manufacturing and consumer goods will accelerate their digital transformation, smart factories will become more popular, smart home and smart wearable products will penetrate into people’s lives. The Internet of Things (IoT) and Industrial Internet will usher in rapid development. Although many overseas countries have introduced stricter screening mechanisms and stringent measures on investment in cutting-edge science and technology, there are investment opportunities in less sensitive areas driven by digitalization, such as advanced manufacturing and apps/ software development. They could become one of the hot spots for outbound investment by Chinese enterprises in the future.

2.  “China + N" model for supply chain development

The pandemic has propelled countries to reflect on the security and agility of global supply chains, which should be designed with better responsiveness and resilience. The global supply chain will be constructed with multiple blocs toward regionalization. In view of the mounting geopolitical risks, it is critical for Chinese enterprises to explore a two-pronged response. Firstly, the security of the supply chain needs to be guaranteed and they need to build up domestic capacity with high technological independence. Secondly, flexibility is also significant especially for export-oriented enterprises, and both domestic and overseas markets are important. Then the “China + N” model could be an ideal approach. The “N” represents extended supply chain network out of China. When selecting “N”, developing countries with a younger population, ample growth potential and proximity to mature markets could be preferred. A number of eligible countries are located along the Belt and Road (B&R). The Belt and Road Initiative may play a more active role in re-shaping overseas supply chain networks of Chinese enterprises. It is expected that Chinese enterprises will speed up the deployment of regional supply chain centers in B&R countries and regions.

3. Traditional and new infrastructure drives Chinese companies to “go abroad”

A number of countries are hoping to boost their hard-hit economies by increasing infrastructure investment, particularly in traditional infrastructure, represented by transport construction; and new infrastructure, represented by medical facilities and information infrastructure. Taking transportation as an example, the pandemic has disrupted traditional cross-border transport modes such as aviation and shipping, posing a severe challenge to logistics stability and efficiency. The China-Europe Railway Express, with support of the Chinese government, was found highly efficient, safe and stable, and recorded a total of 5,122 trips carrying 460,000 TEUs (twenty-foot equivalent units) of containers in the first half of 2020, up 36% and 41% YOY respectively1. The cross-continent Railway Express helped ensure smooth freight transportation and stable supply of materials to countries along the route during the pandemic. This project also helped spur investment of connected transportation projects in B&R countries. In the first three quarters of 2020, amid the challenging external environments, the value of China’s newly signed overseas engineering, procurement and construction (EPC) contracts reached US$150.2 billion, recording a steady YOY increase of 2.4% 2.

Chinese infrastructure constructors have delivered projects overseas and are highly regarded for their operation and cost efficiency in the market. They have also improved the quality in technology, operation and management. China has been able to provide a world-class level of some new infrastructure (e.g. satellite navigation and telecommunications).

Information infrastructure is the backbone of the digital economy. Looking forward, countries around the world are increasing investment for developing information infrastructure, especially satellite navigation and telecommunications. This may bring remarkable “going abroad” opportunities for relevant Chinese companies with leading advantages.

4. New energy – new opportunities for outbound investment

Since 2020, extreme weather and natural disasters have caused serious damage to people and lives on the planet. Meanwhile, the lockdown measures of COVID-19 made people see more clearly how human activities impact the environment. EY believes this can foster new possibility for more sustainable use of energy. Green initiatives and recovery will be key to lasting sustainability. According to the energy consumption structure target issued by the Chinese government, non-petrochemical energy will account for over 50% of the total energy consumption in the country by 2050. In addition, China will proactively promote the use of green, clean and renewable energy, and the new energy sectors outside China can become attractive to Chinese investors: 1. Investing in advanced technologies in overseas new energy fields (e.g. solar, wind, geothermal and nuclear energy, etc.), strengthen technology cooperation with advanced countries, and actively explore diversified cooperation methods; 2. Promoting the "going abroad" of Chinese enterprises’ production capacity and equipment in the new energy fields; 3. Boosting the development of new energy automobiles by investing in and working with companies along the upstream and downstream of overseas industrial chains.

5. Geopolitical risk prevention and control has become the “new normal”

Geopolitical risks were exacerbated by COVID-19 that corporate management must now consider and could be a long-standing hurdle to Chinese companies going global. Geopolitical risk prevention and control has become the “new normal” for Chinese enterprises with foreign footprints. Extra attention in changes of FDI policy is required in the pre-deal stage, while risk management and compliance should be taken seriously afterward. This would be particularly relevant for players in the emerging digital industries where industry standards and regulations are being defined by the authorities and new compliance policies and requirements are being developed. Enterprises need to increase the frequency of risk assessment and timely identify issues to facilitate quick response. Furthermore, Chinese investors need to understand the impact of cultural differences on corporate operations. They also need to pay more attention to the cultural understanding of the host countries, enhance corporate social responsibilities, build trust with local governments and the public, and work on a mutually beneficial partnership with the host countries.

  • Show article references

    1. Source: Regular press conference of the Ministry of Foreign Affairs, PRC 
    2. Source: The Ministry of Commerce, PRC

Summary

The COVID-19 pandemic has reframed the future of Chinese enterprises and slowed down their pace of going abroad in the short term. As Chinese companies become increasingly competitive, they will be involved in the adjustment of the global industrial chain and supply chain more broadly. Going abroad will remain as a compelling trend for Chinese enterprises in the long run.

About this article

By Loletta Chow

EY Global China Overseas Investment Network Leader, EY Belt & Road Task Force Leader and Asia-Pacific EY Private Leader

Seasoned in China outbound investment and Belt and Road Initiative.