Chinese companies remain confident in long-term opportunities post-COVID-19, driving investments in business transformation and M&A

EY released the COVID-19 special edition of Global Capital Confidence Barometer (CCB) today. The report indicates that despite severe near-term impacts on businesses, Chinese respondents are still generally cautiously optimistic about the prospects for the domestic market. In order to adapt to the crisis, over three-quarters of companies are undergoing transformation programs, which includes reassessing their supply chains, use of automation, digital transformation, workforce management, and other transformation considerations. Compared to the same period last year, expectations around both global and Chinese M&A market activity have declined significantly. However, due to the global spread of COVID-19, among other factors, sentiment has rebounded in later February, with over 60% of the respondents predicting dealmaking will increase in the coming year, both globally and in China. 57% of Chinese respondents expect their company to pursue M&A in the coming 12 months, highest level in the recent years.

The CCB report gauged corporate confidence in the economic outlook, identified boardroom trends and practices in the way companies manage their Capital Agendas, and examined how companies can future-proof their business. More than 2,900 senior executives were surveyed from February to early April 2020. They represented 14 industries in 46 countries with 170 respondents from China, and 1,760 CEO, CFO and other C-level executives. In addition, more than 50 in-depth interviews with China-based leaders were also conducted to gauge their assessment of, and response to, the crisis.

On a macro-level, although there are broad expectations that global economic activity will likely be depressed for the remainder of the year across all major regions, positive sentiments are reappearing in China. Erica Su, EY Greater China Strategy and Transactions Leader, said, “As China gradually emerges from COVID-19, most China-based respondents are cautiously optimistic about the domestic market’s recovery.”

According to the CCB feedback across several dimensions, executives believe that M&A activity in the China market will remain robust in the coming 12 months, likely driven by lowered valuation expectations and the intention to leverage M&A as a means to cement market leadership or to expand into adjacent markets. Erica added, “History proves that often times the investments made during economic downturn turn out to deliver the highest return, but the key is whether or not companies can identify the markets, industries and targets that are poised for long-term growth.”

From an industry perspective, Oil & Gas (83%), Mining and Metals (83%) and Advanced Manufacturing (75%) are the sectors in China where companies will be most active in terms of M&A activity. In terms of investment destination, China will continue to be the largest destination country for Chinese investors, followed by Japan, Singapore, the UK and France.

Given the rapidly evolving environment in the past few years, transformation programs were already high on the agenda prior to COVID-19, but they are now being carried out with a heightened sense of urgency as companies prepare for post-COVID-19. Given the timeline and evolution of the outbreak, we note that Chinese respondents are already taking steps to mobilize for the future, while many companies in the rest of the world are still struggling to ensure continuity of their day-to-day operations. Ignatius Tong, EY APAC Strategy & Operations Leader, said, “In terms of the COVID-19 development curve, China is one to two months ahead of other regions, which forced executives to recognize the imminent need for transformation, and therefore begin to mobilize for this once their day-to-day operations were back in order”.

Along these lines, 50% of Chinese executives surveyed have utilized new technology as a way to mitigate the impact of the crisis on their business. Within this, 47% reported using new technology to allow employees to work remotely, 32% mentioned they had leveraged automation, and 21% mentioned that new uses of both big data and AI had been applied in their businesses. Ignatius explained, “China’s innovation-conducive environment and global leading positions in areas such as AI have led to firms here having very positive and open attitudes toward the adoption of new technology.”

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This press release is issued by the EY China practice, a part of the Ernst & Young global network.