Matthieu David: Hello everyone, today we are going to look into the beauty sector in China, and the report we published a few days ago, maybe two weeks ago about how Covid-19 impacted the beauty sector in China. How it impacted during the epidemic and after the epidemic. I’m here to talk about the report with Allison Malmsten who has worked on the report and we will like to share today with the audience a few conclusions we had on the report, especially Alison you mentioned, an overview of the beauty sector before Covid-19 and some of the trends which came out of this and which were a change in the sector. What kind of changes and differences did you see before Covid-19 and just after Covid-19 in China.

Allison Malmsten: Right, hi – so I am Allison, one of the marketing managers at Daxue Consulting. So, first, China’s beauty market is by no means small, it’s the second-largest in the world at over 300 billion renminbi in annual revenue. Skincare taken 54% of the beauty sector in China and some trends that we saw before Covid-19 were – 1] the high-end segment was growing proportionately faster, so high-end brand segment was growing at 18% year on year while the mass brands were only growing at 5% year on year. 2] Second is that social commerce is blossoming, this is Xiaohongshu and also WeChat has its own platform called 有赞 (youzan) and what we saw is on these platforms, especially for the beauty sector in China the conversion rate is pretty high, and so this is kind of a new way of shopping and the year on year growth for Xiaohongshu was double in 2019. Lastly, there’s a rising preference for a domestic brand. Looking at the top 20 beauty brands in China, in 2012 only 7.6% of them were Chinese while in 2018 14% of the top 20 beauty brands in China were domestic Chinese brands, so this growth is pretty significant.

Matthieu David: Very interesting, it seems that the Covid-19 accelerated some trends which were already happening before such as social commerce, Xiaohongshu being one example, that’s what existed before, and the epidemic was let’s say a time where people had more time to spend online and to do social commerce. Do you have the same analysis at the trend that is not necessarily new, whether they have been accelerated with Covid-19?

Allison Malmsten: Right so out of the three trends I mentioned, yes, the social commerce is definitely even more significant now because obviously during the pandemic people were less willing to go to offline stores and they were doing more live stream shopping and more shopping on Xiaohongshu and KOL marketing is definitely very important during this time. There is one trend that might take a turn and that is the high-end segment was growing very fast before and we might see the slowdown as people will be preferred – they’ll be looking more at ingredients and less at brand names, so this could give a chance to any brands that focus on natural ingredients and focus on skin health and skin repair.

Matthieu David: Very interesting to see indeed, in the report we mentioned that Chinese consumers online were looking at the ingredients and at the quality of the beauty product they were buying, more than before and I think within the report we found out that not all the categories went up and for instance make up went down if my memory is correct and specifically some beauty products and financing on natural ingredients grew faster.

Allison Malmsten: Yeah so, cosmetics were hit the hardest. A McKinsey survey showed that 44% of respondents purchased less make up, while 31% purchased less skincare but then also 25% of people purchased more skin care so it’s kind of balanced out but yeah and then within makeup, obviously lipstick pretty much because everybody is wearing a mask, so there’s a beauty style now called the ko [inaudible 05:00] its makeup for wearing masks, so the focus is really on the eyes and also the skin and so the skin care sector, it did take a bit of a hit but it’s also doing pretty okay and a lot of the focus when people are at home – our social listening showed that a lot of people are talking about its time to be at home and they’re wearing less makeup so they see that their skin is getting healthier so they’re very excited about those results and it inspires them to purchase more skincare products, while at the same time wearing a mask for a long time can be very damaging to the skin, so a lot of people are searching for products that have skincare repair functions and also skin sensitivity is a big keyword now. A lot of people are finding that they have sensitive skin and they’re looking for skincare products that can help repair their skin damage from wearing a mask including anything like natural ingredients are really popular right now.

Matthieu David: And some of the comments we found online through social listening were saying that people were switching from makeup to skincare instead of putting makeup to take more care about their skin with specific products, I would say more natural products. I’d like to go back on the Chinese brands – you mentioned that Chinese brands took off during the Covid-19 lockdown and after the Covid-19. Do you see here long-term trend or it’s just short term and was during the epidemic, or do you see a substantial change which is going to stay?

Allison Malmsten: I think that this is going to – the preference for domestic brands, I think this is going to be a long-term trend. I think this is a trend that was accelerated from Covid-19 and the reasons are 1] because patriotism is a very high right now in general, 2] because also domestic brands really understand Chinese consumers and they understand how to reach them. They’re usually very proactive about social commerce and also, they are familiar with like some Chinese herbal ingredients that are very in right now and so they include those in their ingredient list and yeah, I think that a lot of Chinese brands are gaining momentum right now.

Matthieu David: And we looked into a very specific brand called Perfect Diary in the past and it’s a very, very Chinese company which is doing very well. In a topic, we’d actually like to talk about which is product traffic and Perfect Diary has been an example of being very good at product traffic. Product traffic being something very specific to china where e-commerce started with marketplaces like Taobao and then Tmall and then JingDong and many other marketplaces where having your own website and selling through your own website was not mainstream and now its becoming more the case – not selling through your own website, but your website, your WeChat groups, your WeChat channels and your live streaming. So, using a marketing platform to convert on your own asset, your own digital asset, and not through a marketplace. What did you see in terms of digital changes during the pandemic and after?

Allison Malmsten: So, I saw some digital changes, one like you mentioned private traffic and then two is also live streaming. Live stream obviously ballooned under lockdown, while everybody was at home they spent more time on their phone and inevitably they spent a lot of time shopping on their phone or looking at products and so some statistic for that was that as of February 18th, the monthly number of live streaming events on Taobao ballooned by a 110% year on year. Also, Douyin, also experienced around 70 to 100% growth during the lockdown period, so a lot of brands are using live streaming now. And then also one case, in particular, is [inaudible 09:10] which is an Australian beauty brand, during the coronavirus they directed its offline stores to all sell on WeChat, so that is over a 1000 stores that would normally have offline sales, offline staff, they all went online during that period and they actually had sales of 6.3 million renminbi during a live stream event that happened during the coronavirus lockdown in china.

Matthieu David: I believe that the next step is to see those trends now continuing or if it was just a short-term trend during and after the pandemic.

Allison Malmsten: Right, yes that will be very interesting to see because once stores open up, I’m sure people are very eager to go out shopping again but at the same time they might be a little bit more cautious to hit the stores.

Matthieu David: Thank you, everyone, for listening and we will continue with new reports, we will go through together online.

Find the full beauty sector in China Report 

This article Market Tidbits transcript #1: Major changes in the beauty sector in China after COVID-19 is the first one to appear on Daxue Consulting - Market Research China.

Meituan officially launched its own ride-hailing APP Meituan Dache (美团打车Meituan ride-hailing) for Shanghai and Nanjing’s markets.

Meituan Dianping is a Chinese website and APP for food delivery services, consumer products and retail services. As a very typical representative of mobility in China, Meituan Dianping was originally called Meituan. After merging with Dazhong Dianping it changed its name to Meituan Dianping.

As a leading food delivery APP, Meituan also started to develop its ride-hailing service in China, which is a significant step of its business strategy to improve the system of mobility in China. Meituan Dache, Meituan’s ride-hailing app in China, ranked third in the App Store Free download list after its official launch in Shanghai for a week in February, 2017.

On March 21, 2018, Meituan officially announced its first batch of expansion cities of new ride-hailing business, including Beijing, Shanghai, Hangzhou, Xiamen, Chengdu, Fuzhou and Wenzhou. Also, Meituan began to recruit drivers in these cities. However, the plan was not implemented after a year-long period of stagnation.

Challenges for Meituan: Competition and regulations

After entering Nanjing, Meituan heavily subsidized the drivers to grasp more opportunities to compete with Didi. Also, Meituan divided the drivers into three levels and gave different subsidies accordingly. For instance, at the beginning, the standard earning for new drivers was 2,200 yuan per week. After reaching the standard, the drivers can get 800 yuan extra bonus per week.

Hence, the cost associated with its ride-hailing drivers increased exponentially, from 290 million RMB in 2017 to 4.46 billion RMB in 2018, with an average monthly investment of 370 million RMB in 2018.

Date Source: Meituan Dianping 2019 annual report – Meituan’s ride-hailing driver related costs (million RMB)

In order to expand the market share quickly, Meituan launched a price war against Didi through subsidies in Shanghai and Nanjing. But the war did not last long since Meituan cut its subsidies shortly after. To maintain its market share in Nanjing and Shanghai, Meituan lost 50 million dollars per month. Additionally, the transportation sector intervened and warned Meituan against disturbing social order by starting price wars.

The Meituan Dache APP drained Meituan’s finances

According to the Q1 2019 financial report released by Meituan, the new Meituan business, including the travel business, spent 31.3% of the sales cost but only contributed 20.8% of the revenue. This added to a total loss of 439 million RMB in Q1 of 2019.

The cost of sales of Meituan new business decreased from 5.2 billion RMB in Q4 2018 to 4.4 billion RMB in Q1 2019 and the revenue also decreased from 4.2 billion RMB in Q4 last year to 3.9 billion RMB in Q1 2019.

As for the two financial figures, the report explained that it was mainly due to the significant reduction of subsidies for ride-hailing services in China in Q1 2019 and improved profit margins of new businesses and other divisions. Meanwhile, Meituan will continue to restructure mobike’s overseas business in order to reduce the loss of the bike-sharing business.

Merged to Meituan APP from Meituan Dache APP

Since late April 2019, although Meituan’s ride-hailing endeavor has once again been launched in Nanjing, Shanghai and other 17 cities, it is no longer the former Meituan ride-hailing APP. Meituan Dache was transformed from the self-management team to an aggregation platform.

The new Meituan ride-hailing APP in China provides travel services for users by accessing travel service providers such as Caocao travel service, Shouqi car-hailing service and Shenzhou special car service. This means that Meituan no longer did its own business, but instead became an aggregation platform.

Users can go directly to ‘ride hailing’ from the restaurant booking page, which allows them to call a car in real time or for reservation. Meanwhile, users can choose from a menu of car types including taxi, economy, comfort, business and luxury by Shouqi Taxi, Caocao Taxi and Shenzhou Private Car.

Source: Meituan App open interface

If the users of Meituan ride-hailing want to call a cab to a restaurant, they can also directly click the ‘ride-hailing’ button on any restaurant business page in the Meituan APP. The system will identify the location of the user and the address information of the restaurant, automatically fill in the starting and ending address. As a result, Meituan created a ‘one click’ solution to call a car directly to the restaurant, all within the same app.      

Didi Chuxing started its food delivery business in China

Source: losborgia.com – Didi launched the food delivery business in China

Didi Chuxing Technology Co., formerly named Didi Dache, is a Chinese transportation company. As the leading company in ride-hailing in China, Didi Chuxing (滴滴出行) launched its food delivery service locally. On March 6, 2018, the first 9 cities to launch Didi Takeaway (滴滴外卖) were Wuxi, Nanjing, Changsha, Fuzhou, Jinan, Ningbo, Wenzhou, Chengdu and Xiamen. Didi Takeaway wanted to win the first batch of merchants and users by reducing commission and issuing rewards. Wuxi city was the first target city for Didi, in June 2018, and then Didi entered Nanjing, Taizhou, Chengdu and Zhengzhou in July. Didi Takeaway has posted their discounted information on the platform, such as 1 RMB ice cream, 2 RMB tofu pudding and 2.5 RMB barbecue. These discounts have helped Didi attract many users in a short time. However, Didi failed to enter the sixth target city, Ji’nan, due to the low profitability in previous five cities.

So far, Didi has not entered a sixth city and the previous five cities are still operating normally. Nevertheless, according to consumers, because the subsidies lasted only a short time and there were only a few merchants in the app. Additionally, some said Didi poorly designed the interface of the takeaway platform, hence Didi delivery was largely forgotten in the market.

Didi has invested 1 billion rmb in food delivery service in China in 10 months

In December 2017, Didi launched their food delivery business in China. Some people think that as Meituan entered the ride-hailing market in China, Didi fought back by entering the food delivery Chinese market.

There have also been media reports that profitability of UberEats, a food delivery business run by its international rival Uber,  inspired Didi.

However, although Didi invested more than 10 billion rmb in food delivery business in China, the result wasn’t as good as expected. On 15^th February 2019, Cheng Wei, founder and CEO of Didi Chuxing, announced that Didi will focus on its most significant ride-hailing business in China, continue to increase investment in safety and compliance while improve efficiency, so the non-core business may be closed.

Didi will shift the market for its food delivery business abroad

Mobility in China is becoming more mature and competitive. As a result, companies try to develop into overseas markets. Didi launched its food delivery service ‘Didi food’ service in Osaka, Japan in April 2020.

Source: Twitter.com – Commercial of Activities by Didi post on twitter in Japan (Summer delicacies for you to eat! Activities in progress)

Meanwhile, DiDi Food announced its expansion to Aguascalientes, Toluca, Chihuahua, Torreón, and Saltillo in Mexico on 22th April, 2020. So far, the company has already been operating in Mexico City, Guadalajara, and Monterrey. The mobility in Mexico is still in its infancy compared to the mobility in China.

Additionally, Didi has expanded restaurant delivery service from convenience stores and pharmacies to encourage people to stay at home during the COVID-19 epidemic.

87% of restaurants in the Didi app are small and medium-sized enterprises. Sales of these partner restaurants have risen 45% since the lockdown began. So far, restaurant enrollments have increased to 75% per week, while delivery partner enrollments have increased to 250% per week.

Source: kr-asia.com – Didi wants to challenge Uber by bringing Didi Food delivery service to Mexico City

The challenges that Meituan and Didi are facing

Didi and Meituan are definitely the giants of mobility in China. However, there are still big challenges as they try to overlap the ride-hailing business and food delivery business in China.

As an instrumental APP, the simple platform of Didi is far from being a life-oriented aggregation platform, as it focuses primarily on ride-hailing. At present, users have not yet cultivated the habit of ordering food from Didi, since users are used to the aggregation platform like Meituan or Ele.me (an online food delivery service).

Different from the ride-hailing business in China, which basically needs only online operation and maintenance, Didi needs a large offline business develop team to expand its food takeaway market.

Also, it’s not easy for Meituan. The transportation bureau intervened and warned Meituan against disturbing social order by starting price wars on the day Meituan launched in Shanghai. They announced that all registered cars and drivers of Meituan ride-hailing business in China must obtain the relevant business license for online ride-hailing in Shanghai and the relevant data need be connected to the regulatory platform.

In addition, the Shanghai Municipal Commission of Communications, Municipal Public Security Bureau, Market Price Bureau also warned Meituan that they shall not disrupt the normal market order for the purpose of crowding out competitors or monopolizing the market by operating at a price lower than the cost. Meituan’s should change its advertising slogans such as “starting with one yuan”.

Wang Gang, CEO of Didi analyzed that the competition between Meituan and Didi is not just about ride-hailing business and food delivery business, but “a battle for access to secondary traffic”. Whether Meituan is involved in ride-hailing service in China or Didi is involved in food delivery service in China, both parties can take good use of their users’ consumption scenarios as the basis and form a data circulation system about their users’ consumption preferences for ‘basic necessities of life’. If successful, it will greatly enhance the development of mobility in China.

Author: Qing Zheng

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This article Mobility in China: Opportunities and challenges of when ride-hailing meets delivery is the first one to appear on Daxue Consulting - Market Research China.

World Health Organization described China’s response to COVID-19 outbreak as the “most ambitious, agile and aggressive disease containment effort in history”. China’s early isolation and the resulting drop in contact between people helped to reduce cases. The government is not the only body to take swift actions, businesses, schools and individuals also played important roles in preventing the spread of COVID-19. Hence, the learning points are widely applicable. That is why Daxue Consulting examined 50 measures of how China suppresses COVID-19.

NO AND LOW CONTACT

1. SEPARATING STUDENTS IN DINING HALLS

In schools, students had plastic dividers during school meals to prevent cross infection. Some schools divided students lunch periods so fewer students eat at a time.

2. ENFORCED SOCIAL DISTANCE IN SCHOOL

Some primary schools used a creative way to enforce social distancing between students. They had students wear ‘distance hats’ to maintain a distance of one meter from one another.

3. MASKS IN PUBLIC TRANSPORTATION

During the epidemic, the National Health Commission required people to wear masks on public transportation. In addition, the National Health Commission suggested people disinfect their hands after using public transportation.

4. MASKS ARE REQUIRED IN SHOPPING CENTERS

All the employees in shops must wear masks when they are on duty. Guards check consumers’ masks and health code at the door.

5. MASKS ARE REQUIRED BY RESTAURANTS

People without masks cannot enter most restaurants during the epidemic. This measure helped Chinese people to form the habit of wearing masks every day.

6. RESTAURANTS PROVIDE ENVELOPES TO PUT MASKS IN

To prevent masks from getting contaminated on restaurant tables, many restaurants provide envelopes for customers to set their masks down.

7. LIMITED NUMBER OF PEOPLE ALLOWED ON ELEVATORS

It is easy to spread COVID-19 in elevators. Hence, many Chinese office buildings limited the number of people in elevators at one time. Also, plastic is used to cover elevator buttons and the plastic is changed every day. Some office buildings even provide toothpicks or tissue for people to press elevator buttons.

8. BANKS OFFER DISPOSABLE TISSUES TO TOUCH DOOR HANDLES OF ATM

During the epidemic, many banks offered tissues outside each ATM’s door for clients to use when touching door handles.

9. DIDI’S TAXIS PROTECT PASSENGERS BY INSTALLING PLASTIC FILM

From early February, Didi installed protective plastic film in the back of taxis to protect both drivers and passengers. Simultaneously, both passengers and drivers need to wear masks in the car.

10. DELIVERY PEOPLE NOT ALLOWED IN RESIDENTIAL BUILDINGS

According to the policy of local governments, residential areas have a designated area for temporary package storage. Customers shall pick them up by themselves. Contactless delivery reduces the risk of contagion.

11. ONE METER DISTANCE BETWEEN PEOPLE IS REQUIRED WHEN STANDING IN LINE

In correspondence with local government’s regulations during COVID-19, shoppers need to keep 1-2 meters distance from each other when standing in line. To nudge consumers into standing at least one meter apart, stores labeled standing spots.

12. OFFICES ALLOW FLEXIBLE WORK SCHEDULES

Many Chinese companies allowed flexible work plans during COVID-19.  When the situation was serious, only a few employees worked at their offices. Besides, during the epidemic, many companies required employees to work remotely in China. As the situation improved, more employees could work from offices.

Source: Daxue consulting and Dragonfly Group, Impact of the COVID-19 epidemic on the organization and HR within French and French-speaking companies established in China

13. NO SHAKING HANDS IN BUSINESS SETTINGS

To abide by the recommendation to stay 1 to 2 meters from each other, the member of CPPCC National Committee, Yang Zhaoming, advocated that people should use the Chinese traditional greeting way to pat each other on the back or bow instead of shaking hands.

Source: Oriental Daily, How China suppresses COVID-19 report by daxue consulting. Members of the CPPCC National Committee greet each other.

14. THE CENTRAL BANK ENCOURAGED NO CASH PAYMENT

Cash can spread the virus easily. Thus, the People’s Bank of China advised people to use more non-cash methods, especially mobile payments.

15. IMPLEMENTING LOW-CONTACT MEASURES IN RESTAURAUNTS

Another way of how China suppresses COVID-19, was shortening the opening time of restaurants to reduce the crowded traffic. Some restaurants in China offer public chopsticks and spoons to use on shared dishes.

MASS DISINFECTION

16. DISINFECTING PUBLIC TRANSPORTATION

In terms of public transport, the way of how China suppresses COVID-19 included disinfection of public transportation vehicles once a day after operation. Besides, in buses and subway, commonly touched hard surfaces also were disinfected.

17. DISINFECTING COMMERCIAL STORES

In retail industry in China, the disinfection of commercial stores, focusing on the surface of tables, door handles, ground, and walls was obligatory.

18. DISINFECTING COMMUNITIES BY COMMUNITY STAFF

Following the guideline released by Beijing Center for Diseases Prevention and Control (疫情防控中心), commonly touched objects such as stair railings and door handles should be disinfected by chlorine concentration of 250-500mg/L or 75% ethanol once a day.

19. DISINFECTING IN SCHOOLS

The National Health Commission and the local Municipal Health Commission required teachers and staff to disinfect schools.

Source: Sina news, How China suppresses COVID-19 report by daxue consulting. Schools in Miyun thoroughly disinfected every classroom

20. HAND SANITIZER AVAILABLE IN PUBLIC PLACES

People can disinfect their hands in some public places with free sanitizer.

21. SANITIZING PHONES IS ADVOCATED

As people use mobile phones every day, it is easy for the virus to adhere to the surface. Medical experts suggested people to disinfect phones 2-3 times a day by disinfectant wipes.

22. CARRYING DISINFECTING WIPES IS RECOMMENDED

Chinese medical experts suggested carrying some disinfecting wipes every day so that they could sanitize their hands at any time

EDUCATE, TEACH, AND ENCOURAGE

23. PUBLIC ANNOUCEMENTS TO ADVOCATE SELF-PROTECTION

It is quite common in China to see the posters in streets to advocate mask wearing and hand washing. The purpose of the measure is to generate a strong awareness of self-protection.

24. POSTERS WITH HAND WASHING INSTRUCTIONS

In many public places, there are posters released by the local Municipal Health Commission to show hand washing instructions to teach the scientific way of washing hands.

25. PROPAGANDA ON HOW TO DISPOSE OF USED MASKS

People have the awareness of wearing masks which is an effective way of self-protection, as well as protecting others. However, how to deal with the waste masks is also a major issue. If used masks are not disinfected before being discarded, it could contaminate hands again.

26. DISSEMINATE THE KNOWLEDGE OF COVID-19 BASICS AND PREVENTION

Local governments propagandized the prevention measures of coronavirus by street posters that include:

• Introduction of COVID-19
• How the coronavirus spreads and prevention
• COVID-19 symptoms
• What to do if you show symptoms

27. DAILY TEMPERATURE CHECKS FOR PUBLIC TRANSPORTATION STAFF

In terms of public transportation, the way of how China suppresses COVID-19 was measuring of employees’ temperature. Besides, wearing masks and disposable gloves was obligatory. However, the duration of enforcing this measure differs city by city based on the severity of the local outbreak.

28. SCHOOLS RELEASED ONLINE COURSES

During the epidemic, all Chinese schools were closed for 2+ months and students had to stay at home. In order to make sure that course progress would not be disrupted by COVID-19, the Department of Education released a policy which required  schools and universities to launch online courses.

29. OVERSEAS CHINESE DONATED MASKS TO CHINESE HOSPITALS

When the epidemic was arising in China, the amount of masks available was inadequate. International students donated money and masks to China.

30. CHINESE EMBASSY ARRANGED AIR LINES TO BRING INTERNATIONAL STUDENTS HOME

Due to the coronavirus outbreak overseas, many flights were cancelled. This led to a large quantity of Chinese travelers stuck in foreign countries. Thus, the Chinese embassy arranged flights to bring them home.

31. AUTOMATIC VISA EXTENSION FOR FOREIGNERS

The Chinese government took foreigners in China into account as well. As traveling became unsafe during the pandemic, the Chinese government automatically extended all visas for two months if they expired.

POPULATION CONTROL

32. PEOPLE WHO REJECTED EPIDEMIC PREVENTION MEASURES WOULD BE PROSECUTED FOR LEGAL LIABILITIES

People who have been in an epidemic region/city or closely contacted people with suspected/diagnosed cases had to accept temperature tests and centralized or home-quarantine for 14 days. If someone refused to give their information or accept body temperature tests, it would count as a crime of endangering public safety.

33. LOCAL GOVERNEMNET LAUNCHED HEALTH CODES

Citizens could generate the personal health code through mobile apps in China, WeChat public account and QR code. The health code served as an electronic voucher for individuals to enter or leave cities. There are 3 types of them:

1. Red: Need to be quarantined for 14 days
2. Yellow: Need to be quarantined for 8 days
3. Green: No need quarantine and free to enter any public places.

34. RESTAURANTS AND ONLINE FOOD DELIVERY PLATFORMS SHOW THE BODY TEMPERATURE OF STAFF

Restaurants and online food delivery platforms in China launched many measures to ensure the food safety.

Temperature tests for delivery people and restaurant employees twice a day, disinfection of delivery boxes, wearing masks at work and contactless delivery service were very important during the epidemic. These measures had a great contribution to how China suppresses COVID-19.

35. MEASURES IN RESTAURANTS, BARS, NIGHTCLUBS REQUIRED BY LOCAL GOVERNMENT

The main measures of how China suppresses COVID-19 in public places were: limiting the number of tables and diners, reducing the placement of tables and chairs, and increasing the distance between tables. Testing the body temperature of every consumer was also obligatory.

36. BODY TEMPERATURE CHECK AND PASSES ARE REQUIRED BY OFFICE BUILDINGS

Guards check body temperatures at the entrance of office buildings in China. Delivered goods are in designated places at the entrance under the unified management and control. The air conditioning system in office buildings was turned off during the epidemic. All employees working in office buildings need to apply for passes, people from outside need to register personal information at the entrance.

37. LIMITATING THE NUMBER OF TOURISTS

Online booking tickets helped to control the number of tourists in China in certain time period. The number of tourists in every scenic spot could not exceed 30% of its largest capacity. Tour groups cannot have more than 30 people. Indoor tourist sites were all closed.

38. BAIDU LAUNCHED CORONAVIRUS INFECTION MAPS

Chinese search engine, Baidu launched the “fight against pneumonia” map to let users know the latest and accurate information in real time. People can have a better understanding of the of the epidemic situation in each city by using the map

39. MEASURES TO MANAGE ACCESS/EXIT OF COMMUNITIES

When people come from other provinces or countries, they have to register travel info in their communities. Before entering a community, guards measure the temperature of every individual according the regulation of local governments. Some communities required residents to apply for pass codes on WeChat mini program.

40. CHECKING BODY TEMPERATURE BEFORE ENTERING STORES

According to local government’s policy, testing body temperature before entering stores is important to protect customers and employees’ safety.

41. MEASURING PASSENGERS’ TEMPERATURE BY THERMAL CAMERAS IN TRANSPORTATION STATIONS

Transportation stations, including subways, railways, and airports, have infrared thermometers. The system automatically detects the temperature of passengers when they pass security checkpoints.

42. MINI PROGRAM TO TRACK PEOPLE’S TRAVEL HISTORY

The China Academy of Information and Communications Technology (CAICT) launched a mini program to track everyone’s travel history in past 14 days to see if they have been places seriously affected by COVID-19.

43. REGISTERING ON A “HEALTH CLOUD SYSTEM” BY QR CODE TO ENTER SHANGHAI

Passengers who entered Shanghai shall apply for on-line health registration on the “health cloud” system.

44. QR CODES TRACK PEOPLE’S POTENTIAL CONTACT WITH THE CORONAVIRUS

After scanning the QR code, passengers would know if they had close contact with suspected cases. They get the information by text messages to self-quarantine at home if they had.

QUARANTINE MEASURES

45. ARRANGING CENTRALIZED QUARANTINE IN HOTELS FOR PEOPLE FROM FOREIGN AND DOMESTIC EPIDEMIC REGIONS

According to the Chinese government’s policy, people coming from domestic epidemic areas and all overseas areas should stay under the quarantine in hotels for 14 days. Doctors record their body temperature twice a day during quarantine. On the thirteenth day, they need to take a virus test. If their test results are negative, they can return home.

46. IMPLEMENTING HOME-QUARANTINE FOR PEOPLE FROM HIGH-RISK REGIONS

People from overseas and domestic high-risk regions should stay under the quarantine for 14 days at home.

 Groups which meet the requirement of self-quarantine at home:

1. Over 70 years old
2. Children
3. Pregnant women
4. Living alone

Doctors and police measure their body temperature twice a day. Also, there are door trackers on their doors. If doors open over 1 cm during the home-quarantine period, the police will be notified.

Source: Laiyuan, How China suppresses COVID-19 report by daxue consulting.

47. LOCAL GOVERNMENT GIVES OUT GUIDELINES IN DIFFERENT LANGUAGES

China’s local governments gave out guidelines in different languages, so every foreigner in China understood what rules they should follow. Besides, the National Immigration Administration of the PRC gave out Chinese-English bilingual handouts of Laws observed by foreigners in China.

48. DISINFECTING THE TRASH OF QUARANTINED PEOPLE

Every community set up a temporary garbage collection point to place garbage generated by quarantined people. The local Landscaping & City Appearance Administrative Bureau sent staff to disinfect the garbage before delivering it to incineration plants.

49. MASS TESTING

In June 2020 China has completed a mass testing programme in Wuhan. Authorities in Wuhan have found more than 200 asymptomatic cases of the new coronavirus. Testing helps to find asymptomatic cases and people with an early stage of decease and put them under the quarantine.  

50. FINES FOR PEOPLE WHO DO NOT COVER THEIR NOSE AND MOUTH

Even though people must wear masks, many do it in a wrong way. Since April 2020 anyone who doesn’t cover their nose and mouth when coughing or sneezing will be fined.

KEY TAKEAWAYS

Digital technology was integral to containing COVID-19

Chinese government effectively identified cases and controlled the population by using Location Based Services (LBS) and big data technology. Also, big data platforms release real-time data about COVID-19, which is helpful to ease the public panic. At last, those technologies will continuously contribute to China’s public administration in the future.

The government & businesses educated the public on hygiene and social distancing tactics

Chinese local governments widely used signs to guide people to follow regulations during the epidemic. This nudged people on public transportation and in shops to keep a distance of 1-2 meters from one another.

Acting early was the key to contain COVID-19

Once COVID-19 was recognized as contagious, China took immediate measures to reduce population flow, such as the lockdown of Wuhan in January. Many cities and provinces took emergency control measures before discovering any COVID-19 cases. Those measures limited the spread of COVID-19 and gained time for follow-up actions. In addition, China’s capable of rapid response is important to managing public crisis.

Many COVID-19 prevention measures were decided on the city or province level

Chinese local governments took steps according to the different situation of provinces and cities. Also, the duration and enforcement are not uniform in different regions and communities. The advantage is that local governments can respond to the epidemic quickly according to the specific circumstances of each region. The downside is that China lacks a unified plan and supervision, which lead to the inefficiency of some measures.

See our report on how China suppresses COVID-19

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Two drivers of China’s counterfeit production

The counterfeits industry in China: a consequence of economic growth

The counterfeit industry in China is seen as a problem but it should also be studied as a symptom of economic growth. In 1978, Deng Xiaoping started reforming China’s economy. For the first time, foreign investments where encouraged. Many companies wanted to relocate there because of low wages and domestic potential. The industrial power grew and the country became the factory of the world as the the international production process. Global brands like Nike or Adidas have a part of a part of their production there. In many sectors, the country started to adopt new technologies.

While China’s living standards improved greatly, the new industrial power lead to counterfeits, as factories could cheaply re-create brand products. The counterfeit industry in China seems like a minor symptom of industrialization. Hence, even if it is necessary to tackle counterfeits, it was just the result of a growing Chinese industry.

China counterfeiting is linked with brand culture

Since the early 1990’s, the counterfeit phenomenon increased quickly in China. During this decade brand culture emerged as the opening of western luxury stores in country. Fashion brands became hyped, and counterfeits were a mean to obtain luxury goods without spending years’ worth wages. Since, fakes continue to progress fulfilling the domestic market of China.

In 2015, China and Hong-Kong represented 86% of the global counterfeit industry, which is around 400 billion USD every year, according to Europol. Thanks to years of relocating for foreign companies, Chinese factories now have the skills needed to copy almost everything. In Chinese stores, 60% of luxury goods are imitations and you can also find some complete fake stores who just looks like a real one. For instance, A fake supreme store opened in Shanghai. The counterfeit phenomenon highly increased following the luxury market starting in China.

Size of the market for counterfeit products in China

The global counterfeit trade for all items, from purses to electronics to software, is worth USD 461 billion, about 2.5% of all trade worldwide. That is more than the global drug trade. Despite attempts regulation, international trade in counterfeit goods has almost doubled since 2008.

According to the 2018 Global Brand Counterfeiting Report, worldwide losses suffered due to counterfeiting amounted to USD 323 billion in 2017, with handbag companies alone accounting for $20 billion of that.

80% of the world’s counterfeit goods come from China, and many of the market’s consumers are in China as well.

The market for fake goods in China

There are several distinct market segments of consumers who purchase fake goodsin China. The primary segment is buyers unaware that they are purchasing fake products. This deceptive counterfeiting is rampant, but the market for fake goods in China is largely driven by consumers who actively search for and purchase counterfeit products. 

Middle-class shoppers who value brand prestige make up a large segment of the non-deceptive counterfeit market. They can afford the occasional $500-$1000 bag, but not the luxurious $15,000 Louis Vuitton or Birkin. These aspirational Chinese shoppers purchase fake goods for the same reason the wealthy buy real products: to emulate their high-class idols, impress peers, and enhance social status. Fake goods allow shoppers to “consume” prestigious brands without actually buying the high-quality goods.

Some consumers knowingly buy counterfeit goods even though they could afford a genuine product. They have ample funds but believe that the high prices of authentic products are unwarranted, especially when they can get a similar version at a much cheaper price.

Chinese Fashionistas chasing the trends

Some wealthy buyers of counterfeit goods in China are known as “fashionistas.” These fashionistas want to buy the hottest new products, but know that another trend will replace it next season and are thus unwilling to invest the money to stay on trend season after season. Furthermore, they see counterfeit purchases as low risk, because limited-edition or recently released products are less familiar to the general public, making it more difficult to call out a fake.  

Buyers of counterfeit goods impose a hidden cost on the brand and people who buy the real thing: they make the brand less exclusive. All non-deceptive counterfeit market shoppers share one attribute: they are willing to pay for visual attributes and functions, but not willing to shop the genuine products. 

Government regulation of the fake market in China

Affected parties have previously complained that punishments for selling counterfeit goods in China are too light to deter offenders. In February 2017 Alibaba reported that of the 1,910 cases of suspected counterfeiting they passed on to authorities, only 129 people were found guilty.

In August 2018 the State Administration for Market Regulation stepped-up efforts to crack-down on the illegal production and sale of counterfeit goods in China.

The regulator announced strict punishments for online trading platforms that fail to protect the rights of consumers and trademark owners, or that do not actively cooperate with market regulatory authorities.

They demanded that other regulators such as the Shanghai Administration for Industry and Commerce launch targeted investigations into sales of counterfeit goods in China, and specifically called out offending platforms such as Pinduoduo.

The new China’s e-commerce law, which took effect on January 1^st, aims to discourage counterfeiting in China through heavier fines and places more responsibility on digital platforms to remove sellers of fake goods. The law also addressed false-advertising, consumer protection, data protection, and cybersecurity.

The new law targets three groups: e-commerce platform operators like Taobao, merchants who sell goods on sites like Taobao, and vendors with their own websites or who sell on social media. Merchants who sell exclusively on social media platforms had been previously unregulated, but now these sellers will need to register their businesses and pay relevant taxes.

In an effort to spur major e-commerce platforms to crack down on counterfeits being sold on their sites, the law makes platform operators jointly liable with the merchants selling fake goods. Previously, only the individual merchants were liable. Platform operators can now be fined up to 2 million RMB (USD 290,000) for the property infringement that comes with selling counterfeit goods in China.

E-commerce platforms crackdown on the sale of the counterfeit good industry in China

Taobao and fake goods

In 2015, Alibaba was the subject of intense state scrutiny as the State Administration of Industry and Commerce unveiled that only 37% of the luxury goods authorities examined on its Taobao platform were genuine. In a strongly worded white paper, state authorities criticized Taobao for lax internal controls, declaring that many of the products sold on the site were substandard, violated trademarks, or were just plain illegal. Chinese consumers agreed and called on the government to tighten supervision over Taobao. Alibaba declared a zero-tolerance policy towards counterfeits, and created a new 300-person team to ramp up the fight against fake good in the Chinese market.

Luxury brands were unimpressed, and in May 2015 Gucci, Balenciaga, YSL and other brands filed a lawsuit alleging that Alibaba’s negligence encouraged the sale of fake goods on its sites. A US federal court dismissed the suit, but Alibaba’s reputation as a haven for counterfeiters persisted.

In 2017, Alibaba was again under consumer and government pressure when Taobao was found to have over 240,000 vendors selling fake goods, up from 180,000 vendors the previous year. To assay consumer anger and protect investor relations, Taobao in mid-2017 launched an initiative to crack down on the fake goods being funneled through their site. That initiative has led to 95% of takedown requests and red-flagged listings being processed within 24 hours, a significant improvement in processing times. 97% of listings for counterfeit items are now deleted before transactions even take place.

How does Pinduoduo handle counterfeit items?

Pinduoduo, the third-largest e-commerce platform in China, is another site criticized for selling low-priced knockoffs. In August 2018 the State Administration for Market Regulation investigated Pinduoduo and announced that Pinduoduo should strengthen platform management and better regulate activities of third-party vendors. Pinduoduo soon removed more than 10 million fake items from its site and blocked more than 40 million product links suspected of copyright violations. It is working with over 400 luxury brands to fight counterfeiters and has created a hefty 150 million RMB account to refund consumers who were unwittingly sold fake products.  

How counterfeiters in China get around AI controls online

There are many intricate ways in which sellers of fake goods in China have evaded regulation online. One common trick is for sellers to redirects clients to separate websites, where they can browse options and place an order. Another method is to label items as “haute couture,” which consumers are aware implies ‘high-quality copy.’ Aside from this label, Taobao sellers can change the name of the brand they are copying, or display just part of it. One seller of copycat Zara clothes lists his items as ZA or Z*ra, which allows him to sneak past the filters set by Taobao.

Taobao’s AI tools are constantly upgrading to become more difficult to trick, especially with the introduction of filters against luxury products priced below a certain point. Accordingly, some sellers of fake goods will display a price for their product that is consistent with the price for the real thing, or display a price that is outrageously high. Interested customers will talk to the shop in Taobao’s private chat function, and sellers will reveal the real, much lower price.

In-person sales of counterfeit goods in Shanghai and Beijing

Counterfeit goods sold online in China work hard to avoid detection, but physical brick-and-mortar ‘fake markets’ in cities like Shanghai and Beijing are out in the open, easy to find and even reviewable on sites like Trip Advisor. Officials routinely inspect physical stores, but they may not take the job too seriously because they know local vendors rely on the income. Regulators let the stalls peddling cheap and fake goods slide, instead choosing to target merchants who lead interested buyers to unmarked apartments, back rooms, or closets full of high-quality fake Gucci, Prada, Michael Kors, and Louis Vuitton handbags.

Aside from avoiding government regulation, counterfeiters in China work hard to stay under the real company’s radar. One fake good peddler in Beijing explains: “We careful. Louis Vuitton. They send spies and they sue. So we hide.”

The emerging authentication industry in China

The prevalence of fake goods in China and consumers’ subsequent fears of being scammed into accidentally purchasing knockoffs has created a new sector: product authentication.

There are dozens of apps on the Chinese Apple iOS app store that offer to verify luxury goods. Authentication company Zhiduoshao has hundreds of thousands of users who pay 49 RMB for a product to be checked virtually by an expert. Founder and CEO of Zhiduoshao maintains that 95% of authentication requests can be answered online via photos. Authenticators tell users what kind of photos to upload, and then carefully inspect the monogram, fabric, and technique. Often, the process only takes a few minutes.

Similar app Isheyipai boasts an “expert jury” of 12 authenticators. Users upload photographs of the item in question and choose who they want to check their product. Prices range from 49 RMB for a junior authenticator to 99 RMB for senior staff. Appraisers each have areas of expertise, such as bags, jewelry, or shoes.

Private companies offer training courses that teach appraisers-in-training how to inspect a wide range of luxury brands and products, with advice about texture, logos, stitching and everything else that a counterfeiter might get wrong. A 10-day program can cost up to 40,000 RMB.

Authentication companies in China have an uneasy relationship with the brands whose integrity they claim to protect. Cartier maintains that their products should be bought only from “authorized sellers,” while Audemars Piguet states that it does not endorse any authentication app and De Beers says it is unaware of them.

Brand wariness of authentication services is rational because Chinese counterfeiters are now imitating these authenticators too. Seemingly authentic sites copy the names, website layouts, and imagery of established authentication platforms like Zhiduoshao in order to scam consumers seeking product verification out of their money. In one case, consumers discovered that an authentication app was faking reviews and authentications to sell knockoff goods.

How brands can fight back against Chinese counterfeiting

Anti-counterfeiting strategies must be brand specific to take into account the company’s target market, the types of counterfeits produced, and how the counterfeits are being manufactured, distributed, and sold. An effective strategy combines IP protection, export and customs controls, and retail market controls.

But no matter how sophisticated the anti-counterfeit strategy is, where there is a demand there will be a supply. The only surefire way to shrink the market for counterfeit products in China is to deter consumers from purchasing fake goods in the first place. However, typical deterrence strategies that luxury brands have used in the West will not work in the Chinese market.

Many consumers are aware that their purchases are counterfeit

Most consumers who purchase counterfeit products in China are well aware that the quality is not on par with the real product. When consumers buy fake goods, they do so despite the possibility that the product will fail them. Additionally, the prevalence of sophisticated fakes means that consumers can easily buy counterfeit products with nearly genuine quality. Thus, highlighting the poor performance quality of counterfeit goods is not an effective deterrence strategy for brands to adopt in China.

Where in other countries purchase of knockoff goods is a punishable crime, in China consumers are not liable for their counterfeit purchases. Deterrence of counterfeit purchases in China cannot then be fear-based.

There are two main deterrence strategies that luxury brands can adopt to dampen Chinese consumer demand for fake goods: the ethics emphasis, and the psychosocial emphasis.

Anti-counterfeiting in China: The ethical approach

Counterfeiting is not a victimless crime, and luxury brands should tell consumers who gets hurt when they buy fake products in China.

Most counterfeit goods in China are made in sweatshops by children and slave laborers who are often the victims of human trafficking. These sweatshops are overwhelmingly in low-tier Chinese cities, and these child workers are often Chinese, making the issue hit particularly close to home for Chinese consumers of knock-offs.

The Chinese counterfeit industry’s use of child labor is much more damaging than the use of child labor by companies like Walmart and Target. Corporations can beare held accountable for exploiting cheap labor: when labor abuses are exposed, companies face plummeting share prices, lawsuits, and customer boycotts. Counterfeiters face no such risk, because consumers of knock-off goods do not know who manufacturers their handbags or sneakers.

Brands can educate against counterfeiting practices in China

Additionally, brands can educate Chinese consumers about the criminals who benefit when a shopper buys a counterfeit good. Production and distribution of counterfeit goods are heavily controlled by ultraviolent Chinese triads, who traffic in narcotics and sex slavery alongside fake products.

Consumer awareness of the hidden costs associated with their counterfeit purchase can create shame and guilt that might deter some Chinese consumers from buying knock-off goods.

Anti-counterfeiting in China: The psychosocial approach

In the West, there is a shame that comes when one admits to buying counterfeit products, and luxury brands should work hard to foster that stigma in China. For some people, the regular purchase of fake goods is a normal part of life: many Chinese consumers who own fake goods assume that the luxury brands sported by their peers are fake as well.

In 2018 the Japan Patent Office launched an anti-counterfeiting campaign that revolved around embarrassing consumers who buy knock-off products.

It is too early to see the results of Japan’s shame-based anti-counterfeit strategy, but the premise is solid. Luxury brands effected by Chinese counterfeiting could emulate the approach, and work to create a social stigma against knock-offs.

Across the board, the most effective strategies to deter Chinese consumers from buying counterfeit products are shame-based.

Who is benefiting from the counterfeits industry in China?

China is responsible for more than 70% of counterfeiting according to the World Customs Organization. Where all the money from this industry is going? Alain Rodier, in his book: The Triads: the hidden threat, indicates that the counterfeiting is linked with Chinese triads. They are using the money received from counterfeiting to invest in other illegal activities. However, the money can also be legally re-injected into the country. Alain Rodier argues that criminal money is largely reinvested in the country’s legal economy: “As far as the Chinese triads are concerned, they would have a worldwide turnover of 200 billion dollars. Much of this money is reinvested in the legal economy”. For instance, the Sun Yee On triad would have largely participated in the development of Shenzen. Even though triads and other organizations directly benefit of counterfeiting, it can be noted that this money is sometimes reinvested in the legal economy.

Rethinking the fashion industry

One way of tackle the fake industry is to completely change the opinion of people concerning clothing. Trends should focus more on quality than brands. Fast fashion might also be a big issue in consumption because of its impact on the environment. If the fashion industry evolves to its simplest form, people would not be sensitive to brand image. Without the importance of brand image, there is no demand for counterfeit luxury goods anymore. Naomie Klein with its book “no logo” lead this movement in the end of the 1990s. One way to wipe out counterfeits is to educate people to consume goods differently, without being obsessed with brands.

To conclude, the counterfeit industry is a direct consequence of the industrial growth in the country combined with the value placed on brand image. It is difficult to tackle this gigantic phenomenon generating billions each year. You have both to address the production and the consumption of counterfeit goods. The counterfeit goods industry is injuring companies because it negatively impacts their brand image, consumers who are genuinely interested in the luxury products may lose faith that what they are buying is authentic.

What brands can do to avoid intermixing with counterfeits in China

For luxury brands to avoid being sold alongside counterfeits, brands can try a brand independence, or direct to consumers strategy in China. Counterfeits are sold easily on e-commerce platforms, but selling from a brand’s own website, or brand.com, is a surefire way to avoid competing with counterfeits and keep a pure brand image.

Authors: Alison Bogy & Enzio Cacciotto

Daxue Consulting helps you get the best of the Chinese market. Do not hesitate to reach out to our project managers at dx@daxueconsulting.com to get all answers to your questions.

Luxury brands in China do not have to compete with counterfeits

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[Data Source: Statista, size of the facemask market in China]

2021 estimations after COVID-19 show a slowdown of the trend, but the memory of the pandemic will still account for a significant part of the demand.

Before the outbreak, the face mask market in China was much more driven by pollution concerns than disease. Pollution alerts often led to a surge in demand on the Chinese e-commerce marketplaces. Resulting from COVID-19, an unprecedented surge in national demand for face masks pushed thousands of new manufacturers to start producing face masks, with the support of local authorities. However, the rush for N95 masks with higher filtering capabilities has largely benefited the American brand 3M, which dominates the N95 face mask market in China.

China met global face mask demand with a production boom

Since the re-qualification of the outbreak as a global pandemic, China experienced a mask-making boom. In 2020, More than 38,000 new companies registered to make or trade face masks. China was already the main market for protective masks production in the world, making half of the global output in 2019. In February 2019, the country had already risen its capacity from 20 million to 110 million. Concerns about overcapacity in the offer on the Chinese market have quickly disappeared, with China’s face masks being in urgent demand from other countries.

In April 2020, foreign governments’ ‘wild feeding frenzy’ for Chinese protective face masks brought chaos to the landscape of manufacturers. A medical supplier during the pandemic told the South China Morning Post: “mask machines are like cash printers.” To meet global demand, many factories that were making completely different products like car parts, electronic parts, or plastic toys, therefore turned to mask production. With governments fighting for ramping up their stocks, quality controls at purchase were often completely avoided in favor of shipping speed.

New regulations to prevent face mask scams

The influx of new actors to the market has led to a dilution of the quality and a surge in scams, forcing the Chinese government to change the rules. Mid-April’s new regulations from China’s customs agency require companies manufacturing PPE (Protective Personal Equipment) for export to go through a government-led process. Mask exporters also need to prove that their products meet the relevant regulatory standards of the destination country.

This move comes after a global backlash in which foreign countries were supplied shoddy products, undermining China’s position as ‘the global savior.’

As long as the pandemic doesn’t end, the Chinese face mask market will stay warmly flooded with transactions. However, foreign countries are now ramping up their own productions to be less dependent on Chinese exportations.

Thus, if the pandemic is an instant boon for the Chinese face mask market, the gold rush will soon end, and many actors may be left aside.

National issues supporting the Face Mask Market in China

The face mask market in China is largely driven by external events like epidemics and pollution. Most recently, the Coronavirus outbreak has caused face masks to sell out all over China. Originating in Wuhan late December, the 2019 new Corona Virus (2019-nCoV), has infected over 28,000 people and killed about 570  in Chinese mainland as of February 7^th 2020. – The rapid spiral in the number of identified n-CoV cases forced the Chinese government to seal cities and public transport. The Spring Festival holidays had been extended by a week, hoping to curb the spread of the epidemic. Two months before the destructive outbreak, China’s National Health Commission had already called to effectively enhance prevention measures in anticipation of the upcoming flu season, looking for a more standardized process for diagnosis and treatment.

But the 2019-nCoV is by far neither the first nor the last to appear on Chinese soil. China has always been considered by the World Health Organization (WHO) a hot spot for new influenza viruses; there is indeed no other country on earth where so many people have close contact with wild animals. Thus, the n-CoV reminds of the lethal 2002-3 severe acute respiratory syndrome (SARS), but also less widely known avian influenza A(H7N9) virus, which killed 212 people in China according to a 2015 WHO report.

In the meantime, according to the Global Health Observatory, total health expenditure per capita in 2014 in the country reached 731 USD, which is much lower than the 2014 world average of 1041 USD. This report from the OECD shows that China counted 1.8 physicians per 1000 people in 2015, which is slightly more than the World average of 1.5, but almost twice less than the OECD countries.

Pollution drives the functional mask market in China

Flu prevention is not the only health problem that China is facing. Air pollution is another one, which has become one of the most intensely discussed livelihood issues that the Chinese government focused on the 12th National People’s Congress (NPC), held in Beijing on March 5, 2016. Chinese Premier Li Keqiang declared a “war on pollution” at the Communist-controlled NPC parliament in 2014.  Three years later, average particulate levels in Chinese cities still do not meet the World Health Organisation (WHO)’s standards, which considers anything over 10 PM2.5 as health hazard (maximum annual average PM 2.5 exposure). According to this infographic, in 2016, Beijing had  a yearly average of 7.3 times above the WHO’s recommended safe levels.

N95 masks in China: A shield in a war against the Coronavirus

In January 2020, Chinese President Xi Jinping declared “a people’s war against the [n-CoV] epidemic” over a governmental meeting, stressing that prevention and public awareness remain the most effective measures to fight a pandemic. Since the 2002-3 SARS, people rely on wearing surgical masks. Especially high-filtering specialized N95 masks, during illness as one of the main preventive barriers against propagation. Claimed as an effective way to protect oneself from the virus, face masks have been urgently brought to the fore as a daily necessity and a fast-moving consumer good in China, resulting in a massive gap between market demand and supply.  On January 3, 2020, just over a week after the new coronavirus outbreak, China “urgently needs” protective medical equipment while medical masks shortages were reported across the country.

 Face masks, also called ‘kouzhao’ (In Chinese口罩) usually cover the nose and mouth and include cotton masks with cute designs, surgical masks, and imported high-end filters. In 2014, officials in Shanghai considered distributing free protective masks to residents after the financial hub of China “suffered one of the worst spells of air pollution on record,” reported The Telegraph. At this time, PM2.5, fine ambient particles less than 2.5 micrometers in diameter causing cardiovascular diseases and lung cancers, rocketed to levels that were more than 20 times those deemed safe by the WHO.

Red alert in Northern China

In December 2016, northern China (including Beijing, Tianjin, and around 70 other northern Chinese cities) had been covered for weeks in thick toxic smog, composed of high concentrations of PM2.5. It is one of the worst episodes of air pollution the country has seen, affecting 460 million people.

The “red alert” was declared in 24 cities, prompting the closing of schools and airports, restricting traffic and asking citizens to stay indoors. In response, online shoppers splurged on filtration masks, and anti-pollution equipment , with e-commerce firms and brands reporting record demand, as explained by Reuters. In December 2016, Internet retailer JD.com Inc sold to domestic consumers about 15 million US-branded filtration masks through its online marketplaces. 

Face mask price inflation

The 2016 measures to counter air pollution strangely resemble the drastic measures of early 2020 to stem the spread of the new coronavirus, forcing dozens of Chinese cities to quarantine. As a result, 80 million masks were sold on Taobao over the two days of January 20 and 21. The BBC also reports that the price of a 20-mask box jumped to 1,100 yuan ($158) on Jan. 21, up from 178 yuan in November. Between December 30 and January 24, 3M, the most popular face mask brand in China, added $1.4 billion in market value. Honeywell, the American conglomerate that also sells face masks in China, added $500 million in market value, in the same frame time.

Overall, due to significant health crises, the protective face mask market in China, still dominated by Western brands that control more than half of the Chinese market, is heating up. Many budget manufacturers and low-cost producers from Japan and China are now trying to get a slice of it.

Rising demand for face masks in China

The demand volume of protective masks in China has grown continuously since 2012. State media estimate the protective face mask market in China was worth nearly 4 billion yuan ($600 million) in 2015. Along with the improvement of the living standard of people in urban areas and the rise of the middle-class, people’s awareness of pollution, germs and contaminants protection is increasing all the time, especially for young children, and will maintain rapid growth.

Protective face mask production in China

China’s protective face mask market enterprises are mainly distributed in the eastern region, and Bohai Rim, Yangtze River Delta Region, and Pearl River Delta Region are the major production areas. Shandong province serves as the center of the masks industry in China with another production hub, Dadian, dubbed the “mask village” for producing the cheapest pieces.

There are more than 300 mask processing and supporting enterprises in Dadian village, Jiaozhou City of Shandong with an annual production capacity of nearly 1 billion pieces. Realizing about CNY 1.1 billion ($160 million) of output value, it accounts for more than 80% of market shares nationwide (data based in 2017).

Currently, common protective masks widely available in every convenient store are priced at CNY less than 1 or 2 ($0.15 to 0.40) to CNY 30 or 40 ($4.5 to 5.8), and they are made from cotton yarn, activated carbon, and other materials. Along with the continuous increase of Chinese residents’ incomes and the improvement of people’s living standard, people have a stronger awareness about the environment and health. As a result, consumers are willing to pay more to protect themselves from health crises’ effects. They look for more comfortable and effective masks, such as Vogmask or Cambridge masks, which generally range in price from CNY 120 to 245 CNY ($19 to 37, based on 2019 Tmall/Taobao prices and currency exchange rates).  To meet growing demand in China, new market entrants like Airinum focus on the high-end market, with stylish design and high-quality replaceable filters.

Collectivism and Chinese consumer psychology 

“In China, people just pretend or assume that it is useful. It’s a mass behavior,” indicates Wong Chit Ming, a researcher at Hong Kong University’s school of public health. “You may feel a little better…but there’s no real evidence this might help.” This is collective consumer psychology among the Chinese who are entirely concerned about the threat of air pollution and germs during flu season. For him, Chinese people have the impression that this could resolve the problem of air quality and they should, therefore, do something to protect themselves from the harmful air, which will comfort them emotionally regardless the practical effect.

Different style and functions for the Face Mask Market in China

China Textile Commercial Association officially released ‘the community standards of PM2.5 protective masks’. The standards were implemented on March 1, 2016. Before this date, China had no quality standards for face masks for personal use, and the majority masks available claiming to reduce particulate matter by 99% on the market were not protecting against PM2.5.

According to the FDA, “Face masks and N95 respirators protect the wearer from liquid and airborne particles contaminating the face. They are one part of an infection-control strategy.” While face masks like medical and surgical masks are meant to block large-particle droplets, splashes, sprays or splatter that may contain germs from reaching your mouth, they are more loose fitting than N95 masks which are meant to achieve very close facial fit. The ‘N95’ designation means that the mask blocks at least 95 percent of very small (0.3 micron) test particles. Properly fitted, N95 respirators’ filtering capabilities exceed those of face masks, making N95 masks the most popular choice in times of pollution and influenza season. Currently, the N95 mask market in China is dominated by the giant 3M, as it is the only brand to be N95 approved by the Center for Disease Control and Prevention (CDC).

[Source: South China Morning Post ‘3M N95 Masks in China’]

Choosing the most effective mask

At present, the variety of types of anti-dust and anti-contamination masks sold in online shops and outlets have contributed to the disorder of this market. Those most popular kinds of masks are always those masks which have a relatively simple wearing process. Still, the vast majority of Chinese residents use cheap cotton masks that offer little protection. Also, expensive specialized N95 masks aren’t made to fit Chinese faces well, according to a study from Wuhan researchers. Even those benefiting from China’s Kou Zhao boom admit that their masks can only do that much.

Except for the most common cotton masks, active carbon mask which can be recycled and praised for  its adsorption force becomes another hot choice in China market. As some researchers analyze, China’s functional mask market has not been arousing general consumption groups’ attention due to its late start. But now it has garnered significant attention.

Division of the Chinese Mask market

Simple market research shows that on Taobao/Tmall, the top-selling mask brands are replicas of each other. Top brands sold in Dec 2018 to Jan 2019 are listed in the graphic below:

Lack of diverse options in China’s mask market

These brands and their products are the same in almost all aspects including materials, designs, promotional strategies, pictures used online and textual description. It is very likely that these masks are produced by the same producer. However, there is no trace showing the actual manufacturer of the products, and thus unable to identify whether the domestic mask product is highly concentrated or not.

Based on Xinhua.net, the overall face mask market in China is mostly controlled by the international giants 3M, which occupies almost 90% of all the market share, followed by Honeywell and Ludun 绿盾 with less than 5% respectively. Other brands such as Uvex and Hakugen have a non-significant market segment of less than 1% respectively.

To be noted that, among all these brands, only Ludun 绿盾 is produced by Chinese domestic company Sinotextiles Corporation Limited, other brands are all international based.

Another market analysis renders different views on the masks industry in China. According to a market report, four major domestic mask producers own 7 major brands. The largest domestic mask manufacturer is Shanghai Dragon Corporation 上海龙头股份 (market share 6.52% with 2 brands) followed by Shanghai MNP Inc 上海美科 (market share 7.14% with 3 brands), Teda Tianjin 天津泰达 (market share 5.90% with 1 brand) and Dongguan Rongxin 东莞容鑫防静电技术 (market share 1.00% with 1 brand) in a descending order.

The future of the Face Mask Market in China

There is an increasing demand for both functional and comfortable masks, so much improvement has been achieved in protective measures, what’s more, these functional masks are equipped with high technological contents. Thus, the additional value increases correspondingly. For example, masks for controlling bacteria and protecting virus should carefully suit with people’s facial form. Obviously, such a malignant environment we are living in is difficult to be improved thoroughly in a short time. Therefore, self-protection measure appears to surge high unprecedentedly, bringing vigor to the protective face mask industry in China.

New market studies in late 2018 found that ‘smart’ masks are now more welcomed than traditional protective face masks. Now major mask buyers in China not only consider the function of filtering but want to buy smarter equipped masks. With some AI microchips implanted into masks, those new products can both monitor the filtering function and other rates affecting human body performances including heart rates, air pressure, humidity and other air-related live data. Some other products even developed a replaceable filter with AI function, and these products are more like sports equipment than simply anti-pollution masks. Their filters can be replaced to imitate different air pressure levels and add on training difficulties when people try to exercise under a thin-air condition and to improve cardio abilities. Most buyers of this new type of AI-based masks are female, and 53% of the buyers are less than 30.

Many investors have seen this opportunity; it is estimated that the production value of China’s functional mask market will grow up to CNY 10 billion in the next five years.

Author: Maxime Bennehard

The ultimate Coronavirus economic impact in China report

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While the epidemic is expanding globally, Chinese economy is gradually emerging from its lethargy. After the country’s quarantine has just ended, Chinese consumer behavior is no longer the same as before. During the epidemic, we have seen giant brands cutting down their operation like Ikea, Starbucks, and McDonald’s. The chain of events leads to the need of Coronavirus crisis management in China.

Crisis management in China have never been more critical for brands, which had to adapt their operation strategies to protect their employees and customers from contamination to stay afloat. From fast food to e-commerce, including AI and transport, here is an overview of the measures taken by leading brands in these industries to handle the coronavirus crisis, and how they bounced back

Didi’s Coronavirus crisis management in China: Keep driving through the epidemic

Reports of multiple drivers being diagnosed with the coronavirus affected China’s ride-hailing service market, while travel restrictions across the country had already hit the industry hard. Concerns have arisen over potential infections after a driver on Didi Chuxing, China’s largest ride-hailing company, was diagnosed with the coronavirus in early February. Under these not-so-favorable circumstances, Didi Chuxing has taken strategic steps for Coronavirus crisis management  in China.

A special fleet for medical workers and citizens

After shutting down service provision in a range of cities including Wuhan and Beijing, the company has deployed two exclusive fleets of drivers dressed in protective uniforms with regularly disinfected vehicles. The 1,336 volunteer drivers operated in Wuhan, the epicenter of the outbreak, and in Shanghai to provide free transportation services to all hospital staff. Didi’s special fleet is said to have transported more than 9,500 medical workers in Wuhan and Shanghai. This measure is the first one to be listed in the “Didi on the frontlines, Didi in action” feature, directly accessible on the Didi application. The company also said to have RMB 200 million (around USD 28 million) mobilized for protective medical supplies and allowances for these fleets.

[Source: Didi, Weibo – The special fleet for medical workers in Wuhan]

The in-app feature is entitled ‘Your ride is protected, travel with peace of mind’, detailing rules to be followed by both drivers and riders to protect themselves from contamination including standards for masks, ventilation, and vehicle cleanliness. The ‘Safety Center’ of the application has been updated to include these safety rules. The company’s main communication channels, the Didi app and the Weibo social media account, followed by 3 million people, are mobilized to spread the messages from the company to the community. During the outbreak, Didi has posting daily on its Weibo account.

[Source: Didi app – Coronavirus crisis management in China]

Special measures for special drivers

In the boring-at-home times where scrutinizing and reacting to the news has become the main Chinese consumer behavior, an agile communication strategy in China is vital to keep control over one brand’s image. On February 4, Chinese social media Weibo ignited after a Didi driver was diagnosed with the Coronavirus. “Didi is in touch with the driver and will provide extra subsidy for him during the treatment,” the company said in a quick reaction on February 6. “We have provided relevant information to the local government and are working closely with them on virus prevention and control.” Following this measure, the company released a special insurance program providing a daily allowance up to RMB 30,000 (USD 4,300) for any driver who is hospitalized for the Coronavirus.

To enhance the safety of the drivers and passengers, the ride-hailing company opened ‘driver epidemic prevention service station’ in 106 cities across China to distribute face masks, disinfectant, and other anti-epidemic materials to the drivers.

[Source: Didi, Weibo – one of the 106 ‘driver epidemic prevention service station’]

As the number of passengers drops during the epidemic, Didi wants to showcase that its cars remain the safest means of transportation. In order to further safeguard citizens’ safety on the road, DiDi introduced the “epidemic prevention” QR code, which includes the sterilization records and register information of each car. On the Weibo account, numerous pictures illustrate the disinfection of vehicles by the drivers.

The results of Didi’s crisis management in China

DiDi’s timely Coronavirus crisis response received positive feedback from society, strengthening DiDi’s brand awareness in China. The Huhhot government reported DiDi’s response to the coronavirus epidemic on February 29^th, and praised its actions on preventing and control the disease.

[Source: Didi, Weibo –Positive social reaction]

After DiDi announced to take actions to prevent the spread of the virus, a Weibo post about DiDi’s handling of the crisis went viral. Many Chinese netizens praised DiDi’s efforts to act as a socially conscious company. As of early March, since the virus has been under control in mainland China, resident trips in major cities has increased by more than 30%.

McDonald’s coronavirus crisis management in China: Safeguarded meals

“China is a critical market for us, and we’re very concerned about the situation over there” CEO of McDonald’s said late January. Adding its name to the list of global companies bracing themselves for the impact of the coronavirus outbreak, the American fast-food chain decided to shut about 300 restaurants localized in areas where the spread of the epidemic was significant. With 3,000 restaurants still in operation across China, what measures have been taken to ensure the safety of both employees and customers?

A special Coronavirus crisis management team to deal with the outbreak

McDonalds was checking the temperature of customers as early as January 2020. While the coronavirus crisis was in its infancy, the company was already well prepared to protect the health of its employees and customers. Thus, strict in-store prevention measures were taken such as equipping stores with hand sanitizer for customers and disinfecting frequently touched surfaces

According to its CEO, the American company decided to set up a special crisis unit to deal with the outbreak. Handling Coronavirus crisis management, the unit’s work has been witnessed through a specific communication strategy with a campaign called ‘放心送’, meaning ‘worry free deliveries’. Indeed, Chinese consumer behavior during the outbreak involves ordering delivery rather than going outside for lunch.

[Source: Eleme饿了么 – McDonald’s ‘放心送’ campaign to adapt Chinese consumer behavior during the epidemic ]

Contactless delivery during the Coronavirus outbreak in China

On February 1st, McDonald’s launched a contactless delivery service available on food ordering platforms such as Meituan美团, Eleme 饿了么, and its own application. As people rely massively on Meituan美团 and Eleme饿了么 to order meals, the company’s communication strategy in China has paid attention to get visibility on these third-party platforms. Following six epidemic prevention principles, the contactless delivery service aims to ensure the delivery of safe meals. Temperature is systematically checked, from the cook to the delivery person, restaurant and kitchen are regularly disinfected as well as the delivery box and the delivery bike. Employees are required to wash their hands and wear a mask. The meal is dispatched in front of the residences as deliverers are not allowed to make door-to-door deliveries. All delivery orders are accompanied by a ‘Safety Delivery Card’, which indicates the name and temperature of the prep and delivery staff.

[Source: daxue consulting ‘Safety Delivery Card’]

Free meals for medical staff

Following Didi’s strategy to be present on the frontlines directly offering its core services, McDonald’s is offering free meals to medical staffs fighting against the coronavirus. One week after the opening of a dedicated restaurant in Wuhan, on February 3, the company announced on Weibo to have delivered around 3,500 free meals to support the battle.

[Source: McDonald’s Weibo – Free meals distribution to medical workers in Wuhan, a key component of their Coronavirus crisis management strategy.]

The result of McDonald’s crisis management in China

Due to McDonald’s quick strategy adaptions, around 3,000 offline stores operated as usual during the coronavirus outbreak, which have minimized financial loss. To further support its customers, the company introduced a Big Mac Burger combo and named it as “助你一BIG之力” (‘spare no effort to help you’.) The combo only costs 20 RMB and was available from March 4 to March 24. To convey positive energy, McDonald’s started a topic called “助你一BIG之力” on Weibo, encouraging consumers to create DIY “cheer up” cards.

The company has won respect and support from Chinese consumers, evidenced by their engagement to support the brand on the Chinese social medias. Under one of McDonald’s WeChat posts with 100k+ reads, one reader said she is greatly moved by learning the news that McDonald’s delivered free meals for medical workers, and she will continue to support McDonald’s.

McDonald’s once again proves that beyond the name and the symbol, it embodies the concept of Globalization: think global, act local. Indeed, its Coronavirus crisis management and communication strategy in Chinaare testimony to the brand’s capacity to successfully adapt to local market constraints.

Baidu’s crisis strategy – AI for a safer world

BBaidu, the tech giant that operates the country’s largest search engine, spares no effort to help those working to stop the Coronavirus outbreak. Predicting that the turnover in 2020 Q1 would fall by 5% to 13% compared with the same period last year, Baidu’s online advertising and marketing service sector is badly affected by the epidemic.  However Baidu’s internet search solutions may benefit from the situation, since people are much more likely to do research and stay informed of new developments. Thus, from January 21 to 24, more than 1 billion people on average searched or browsed information on 2019-nCoV on Baidu every day.

Baidu’s crisis strategy during the Coronavirus involves  AI and big data. In 2017 the company made no secrets of its ambitions to become the first global company in the Artificial Intelligence sector. Well, it seems that Baidu brilliantly took advantage of the recent events to show off its AI-fueled muscles, aiming to improve its brand awareness in China and beyond, in this specific field.

Baidu uses AI to predict virus’ secondary structure

On January 30, Baidu Research Institute opened up ‘LinearFold’, its RNA prediction algorithm, to global genetic testing agencies, epidemic prevention centers, and scientific research institutes, for free. The ‘LinearFold’ deep learning tool only takes 27 seconds to solve the RNA secondary structure of the 2019-nCoV — 120 times faster than the top classic algorithms. This tool, which could appear to the uninitiated as a gadget for biologists, is one of the latest breakthroughs in the medical field and an opportunity to better understand the virus and develop targeting vaccines.

New features to spread knowledge

On its search engine and map applications, the tech company has set up a powerful information center closely following the reported new cases and providing insightful trend data. The application menu shows real-time infected cases at several scale levels, evolution curves, location of the nearest hospitals, top researches of netizens on the virus, as well as options to take free online courses. The platform displays the number of visits to the information center, which reached more than 2.5 billion views.

[Source: Baidu app – Information center about COVID-2019 m]

Among others, a new self-testing feature using AI and big data is available from February 11. After the user has entered basic information about his state of health, the tool reviews a new coronavirus pneumonia diagnosis and treatment scheme and combines many online consultation cases. For the better or worse, it gives diagnostic probabilities of infection.

Big data powered maps

The tech company has also integrated the coronavirus outbreak into its Map app, making it easier for people to avoid contaminated areas. The company had built a special ‘epidemic map’ which shows the location of both confirmed and suspected coronavirus patients in real-time.

[Source: Baidu Map App – The ‘epidemic map’]

Another interesting tool is the ‘Migration Trend Map’ feature. People can check the migration status of all Mainland cities from the first day of the Spring festival to now. In 2018, it was estimated that Chinese travelers made around 3 billion trips during the 40-day Spring Festival period. The feature is useful when it comes to making travel plans to go back home at the end of the Chinese New Year and avoid the rush. After entering Baidu’s migration platform, people can select the ‘migration destination’ or ‘migration source’ of a city and view the graph of migration trends compared to last year’s one. While it’s not clear how the epidemic map collects data to ascertain the locations of the patients, the migration map is powered by the positioning data from users of the standard Baidu Map service, which has been densified to ensure privacy.

[Source: Baidu ‘Migration Trend Map’]

The result of Baidu’s crisis management in China

By being a resource for real-time information, the value of Baidu as an information portal has been highlighted. Since the coronavirus outbreak, over 1 billion people searched and read coronavirus related information through Baidu every day. As of March 20th, 651.6 million people had visited the “online diagnose” platform powered by Baidu health, and over 30 million people had consulted the platform. Therefore, recognized as a reliable information portal, the average daily active users of Baidu APP exceeded 20 million, a 10.4% growth compared with the same period in 2019.

JD.com – an opportunistic déjà vu

Just like nowadays, when the SARS virus swept through China in 2002-2003, it resulted in millions of workers isolating themselves in their homes. This phenomenon turned out to be pivotal for several now dominant e-commerce companies, such as JD.com.

The company was created in 1998 by Richard Liu, and initially sold magneto-optical products in the Zhongguancun High-Tech Industrial Park region of Beijing. By 2003, the company was thriving with 12 physical stores. However, the severe SARS outbreak threatened Jingdong’s future. Recognizing this as an opportunity to pivot the business, Liu quickly reconsidered his brick-and-mortar storefront and the possibilities for the same idea using an e-commerce model. The e-commerce platform became a big hit almost immediately, and JD.com was born.

The coronavirus outbreak hovers like a deja-vu for China’s biggest online retailer. Following a similar scheme as 15 years ago, JD.com is taking advantage of the epidemic to implement a based-on-innovative Coronavirus crisis management strategy.

Deliveries by drones and robots

It’s a unique opportunity for the company to soar above its competitors. JD reported its first successful delivery via drone in Hebei province on February 7th. The drone completed a delivery to a remote village, which delivery people used to reach with a boat, a route temporarily closed because of the outbreak. The day before, on February 6, JD’s autonomous delivery robot successfully made its first delivery to Wuhan Ninth Hospital, a designated hospital for the treatment of the novel coronavirus pneumonia in the epicenter of the outbreak. “JD autonomous delivery robots can help reduce human-to-human contact making them an ideal solution for last-mile delivery solution in Wuhan” said Qi Kong, Head of Autonomous Driving at JD Logistics

[Source: Freight Waves – JD’s drone completing delivery test]

Deliveries by drone and autonomous robots are not a brand-new service from JD.com, which already began daily operation in two test cities last year. These exploits, beyond its practical and beneficial effects to avoid contamination, are a part of a well-established communication strategy in China to exhibit the brand capabilities. The e-commerce company made videos of the two deliveries that are frequently shared on Chinese social media, as well as Twitter, LinkedIn, and Facebook.

Special measures for special deliveries

JD’s corporate website, Weibo and social media accounts detail other individual steps taken against the coronavirus. Like Baidu, the online player sometimes posts more than five times a day virus-related content on Weibo. Grateful to its delivery couriers, the company released the portraits of some of these ten thousand ‘heroes in red’ who were still working during the peak of the epidemic to meet consumer demand in China. Similar to Didi, the company stepped up the allocation of emergency materials for epidemic prevention, such as masks, thermometers, protective glasses and clothing, disinfectant, and a special insurance plan for its employees on the frontlines.

The Coronavirus crisis management of JD.com also welcomes AI as a powerful instrument to join the fight. On February 4, JD implemented its ‘smart epidemic assistant’ into the Wuhan Mayor’s Office WeChat account. The smart assistant, relying on AI capabilities, including semantic and syntax understanding, can automatically answer a wide range of questions from the Wuhan’s dwellers. Currently, it provides functions including epidemic self-screening, medical guidance, and even a way to inquire if a user’s flight or train had a coronavirus patient on it. Cloud and AI branches of the e-commerce giant also launched the ‘Emergency Resources Information Platform’ which provides municipal and medical institutions direct access to 3,000 online medical suppliers. As of February 4, the platform has performed the sourcing of more than 19 million protective face masks.

The result of JD.com’S crisis management in China

During the outbreak, JD.com made great contributions to ensure the stable operation of front-line assistance. Social responsibility and impressive logistics management allowed the brand to receive positive comments and obtain good reputation. For example, Dr. Zhong Nanshan – who discovered the SARS and is therefore widely recognized in China – wrote a thank-you note for JD’s “frontline medical assistance and urgent delivery of medical supplies to Wuhan.”

On March 2nd, JD.com published its 2019 Q4 financial report. After seeing the initial impact of the virus, JD.com still estimated an increase of more than 10% of the net income year-on-year in 2020 Q1. As JD.com continued increasing technology development, its anti-risk capabilities of the supply chain and logistics system have improved significantly.

Proper Coronavirus crisis management will improve brand awareness in China

Throughout the crisis, brands operating in China have demonstrated that they have a significant role to play in these times of public health challenges. Many of the brands have put robust measures to ensure the safety of their employees to ensure the business continuity – sometimes with great financial consequences. Overall, brands’ communication strategy in China show an understanding, caution, and optimism, which reflect trust in the future.

It’s precisely because there will be a future that brands, dare to innovate by engaging their core competencies in their China crisis strategies. Seizing crisis as an opportunity to show to the world that they not only have social duties, but also an increasing positive social impact. As China’s economic recovery from COVID-19 continues, it is now in the hands of other countries to figure out the best crisis management strategies.

Author: Maxime Bennehard

The ultimate Coronavirus economic impact in China report

Everything you need to know about the coronavirus by daxue consulting from Daxue Consulting

This article Coronavirus Crisis Management | Four brands that have done it right is the first one to appear on Daxue Consulting - Market Research China.

Our research on crisis management in China has already suggested the most important strategies to ensure business continuity include; embracing social responsibility, adopting technology, caring for employees, and adapting your purpose to new market demands. However to take our research one step further, we asked some outstanding China entrepreneurs from our China business podcast, China Paradigms about their experience of management during the Coronavirus in China. This is what they have to share with the rest of the world.

Think before you leap: Make a hypothesis before taking action

Hypothesis before action

Geoffrey Handley, co-founder and general partner of Haitao Capital recommends bracing your business with a worst case scenario hypothesis. This way, entrepreneurs can make principle-based business decisions rather than blindly rushing into changing X or stopping Y. Chinese founders started with a big scary base hypothesis and set of assumptions. One possible hypothesis would be, “we will have a 100% hit to our revenue for at least 3 months, then 80% for 2nd quarter. Will take us 3 quarters to get back to where we are now”. Once this hypothesis has been taken into account, then businesses can take steps on management during the Coronavirus.

No sacred cows, nothing is off limits.

When working through hypothesis scenario planning, it was evident that nothing was off limits. The guiding principle I could see in action from our portfolio co-founders was “for the benefit of the company, we, not I or me”. 

Focus on what is in demand

No doubt the Coronavirus changed Chinese consumer demands. While some products and services saw no demand, others were incredibly undersupplied. Stephane Choury, Co-founder of HI-COM ASIA capitalized on what he knew would be necessary during the outbreak. “I have realized that many people were in need of urgent legal document translation and medical related translation. We had shortlisted a few services that could be useful to people at this time and concentrated on those.”

Nicolai Peiterson, Excecutive Chairman and Co-founder of Wikifactory, a collaborative platform for the production industry, says they have focused on medical innovation. “We are rallying the global open-source hardware community, as well as established product companies, to build and submit projects for medical supplies, devices, components and equipment on Wikifactory’s open source social and collaborative platform.”

Peiterson continued, “We have over 1000 projects on our platform across 187 countries and we now encourage product companies working on Covid-19 to pool their knowledge and publish their designs on our open-source platform to accelerate the success of their work.”

Mind-boggling speed of action

Handlley witnessed how mind-blowingly fast decisions were made and implemented during the Coronavirus outbreak in China. “Just look at the factories that shifted in less than 10 days to produce PPE and face masks from something completely unrelated.”

Show employees and clients you care about their safety

Safe office, safe business

According to founder Bruno Lhopiteau, as many other companies did, Siveco initiated an action plan ‘Safe Office, Safe Business’ on January 26, aiming to take proactive measures. Support services continued throughout the holidays and full operation resumed at the beginning of February, with most staff working remotely.

Over-communicate with employees

An important tip of management during the Coronavirus is communication with the team. “In a time of crisis, proactively over communicating to provide guidance and security for employees is more important than ever. With the plethora of media reports coming out with differing views and advice, it’s hard not to be confused and feeling in-secured, the over-communication can certainly help to provide clarity and consistent information and overall direction,” said Lhopiteau.

Safety and hygiene means consumer loyalty

Mike Hofmann, Managing Director of Melchers China, emphasizes the newfound relation between consumer loyalty and hygiene. Together with their brand partner, a luxury watch brand, they provided over 20,000 masks to retail employees and store visitors. “When re-opening our retail stores, it was important to ensure our staff’s and customer’s health and regain their trust that you as brand don’t solely focus on profitability. We implemented hygienic measures at all stores, handed free masks to visitors and keep in touch with our luxury VIP customers through digital tools to foster the relationship in these unprecedented times. Product orders were reserved for pickup after the situation relaxed.” Hofmann states that they went beyond government requirements in order to show their dedication to customers.

Use the extra time for training

Choury stated, “Some of our clients used the manufacturing slowdown to prepare for the upcoming seasons by taking care of their documentation, marketing materials and website translations. So, we have actively contacted those, which also brought us business.”

As an HR Tech company in China, the CEO and Founder of ATIOM, Matthew Spriegel, says,  “During the past couple of months, we have seen a lot of companies move their day-to-day work activities online. As a company in the HR tech space, we have always had some of our key team members working remotely. Having daily and weekly huddles online have always been essential for aligning our team objectives, but also an effective way to maintain team morale, even during the tough times in launching a start-up.” Spriegel continues, “For our clients, we have seen a huge spike in their activity in using our learning and engagement mobile app, ATIOM. They have fully utilized ATIOM to ensure everyone is up-to-date on COVID-19 prevention and health procedures in the workplace. I believe that once the dust settles, we will see many companies using a more blended approach, combining online and offline activities, to their teams’ up-skilling, skills-gap analysis and most importantly, risk mitigation.”

Lhophiteau also says some of his clients used this time to prepare ahead. A large multi-site environmental utility has accelerated their usage of the bluehoney online training course, as many of their maintenance staff now have free time to study maintenance and asset management theory and best practices.

Hofmann also used the time for internal reflection. “We used the slowdown of economic activities to enhance the skillset of our workforce through remote and digital training engagements. In addition, we leveraged the downtime to reassess our business strategy and engaged in a systematic thorough industry and customer research.”

Now is the time to get digital

The most adaptable business will survive

Claudia Masueger, the Founder and CEO of CHEERS Wines, a wine chain franchise, says managing during the Coronavirus reminds her of a Charles Darwin quote: “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.” Masueger quickly adjusted her management during the Coronavirus. As soon as the crisis started, she restructured her teams and workflows, and put more attention into online and social marketing.

During the COVID-19 outbreak in China, Aurelien Rigart, Co-founder of IT Consultis, helped clients by better planning their investments in digital transformation on the long run. Rigart says, “Many companies did realize throughout this moment that they were not digitally ready and relying too much on their retails, or third party apps. Most of them now are insisting on the importance of their digital transformation and Direct to Consumer strategy.”

Everything is now digital in China

Laurent Cibot, the CEO of the Imported Health Supplements Division at OMEY Group says, “With the COVID-19, it’s like China did an other big jump into the future; the online retail is now stronger than ever. Here, all the companies are going Digital. It has been a Digital Tsunami, even in our personal lives. My son has been following online school these past couple of months. And my wife is now buying EVERYTHING on e-commerce platforms”  

O2O is the future, even more than before

Miro Li, Co-founder of Double V. Consulting says she’s seen retail businesses face serious challenges. She has been there to help them transfer to a digital model, “As an agency, we are helping offline businesses set up online shops and start training offline sales representatives to use online tools, such as live streaming and online distribution, allowing our sales people to manage their private traffic and get products sold while staying at home.”

Spriegel believes we will see many companies using a more online-offline blended approach to team training and risk mitigation. Li agrees that O2O will be even more important in the future, saying an omni-channel sales strategy is a must.

China will continue to be worth investing in

While this black swan event becomes global, China may be one of the economies that keep its head above water. Although it has not escaped the Coronavirus economic impact, there are already signs of post-COVID-19 economic recovery.

“China Economy didn’t seem to be affected by the virus; a recent study showed that 66% of Chinese companies are optimistic about the business in 2020; and I have to say that we didn’t felt any slowdown in OMEY. It would be the perfect time for foreign brands in healthcare and beauty to enter China market, as healthy living environment is now considered by Chinese more important than economic growth” says Cibot.

These tips of management during the Coronavirus are transferable across national borders. To learn more advice from China entrepreneurs, check out our podcast China Paradigms.

Let China Paradigm have a positive impact on your business!

Listen to China Paradigm on iTunes

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This article Tips on business management during the Coronavirus from entrepreneurs in China is the first one to appear on Daxue Consulting - Market Research China.

Full transcript below

Hello everyone, this is China Paradigm where we, Daxue Consulting, interview seasoned entrepreneurs in China.

Matthieu David: Hello everyone, I’m Matthieu David the founder of Daxue Consulting and its China paradigm podcast. Today, I am with another podcaster and the editor in chief of TechNode – John Artman. You’ve been in China for 12 years now and you have been with TechNode for more than three years – correct me if I’m wrong about the timing but that’s what I got from your LinkedIn. You are also managing two podcasts on the tech industry in China, maybe three if you have hidden one, but the two that I know are China Tech Talk and China Tech Investor. I’m a listener of them, I think they’re a great resource to understand the Tech scene in China and I’d like to talk about those two activities you have, being editor in chief of TechNode a tech media in China for westerners, and covering China tech through TechNode, but also through Chinese podcasts. Thanks for being with us today, and my first question is going to be a question you ask every person – what’s your China story?

John Artman: Yeah, so it’s a bit of a long one. So, I moved to China in 2008, previously I had visited here twice, so once in 2004 and once in 2006 with my university. I started studying Chinese in 2003. I went to a small public university in North Carolina called Appalachian State and we had a small Chinese department, but I was very lucky to have a great Chinese teacher who was visiting from Sojo University. She gave me my Chinese name and really inspired me to keep studying. So, anyway I graduated in 2006 with a degree in psychology and philosophy and a minor in Chinese language and then I worked for about 9 to 10 months at a mental health facility for children, which was very, very stressful and then – 

Matthieu David: In China?

John Artman: No, no in the US, near my university. And then didn’t know what I wanted to do, I guess I was trying to figure something else out. A bunch of my friends has moved to Nashville, Tennessee. They were artists, musicians and, writers so I was planning on moving there as well, but before I actually moved I had Christmas with my father’s side of the family, and my uncle used to live in Beijing, and he was like: “John, you could go and mess around with your friends whenever you want, or you could go to China, you already have the language skills. You can go to China and you can figure, and you can ride the wave”. I thought that it was a really good idea. So, he put me in touch with an English teaching school, like a private training center for adults. I was able to get a job there, came to China in 2008. I had a one-year contract to teach English and that was basically going to be it. Come here, teach English for a year and then probably come back and do something else.

It ended up that I met my now wife. We dated for a while, we have two kids now and I ended up working at China Radio International for about five and a half years, started off doing research and guest booking, then I worked in pre-recorded weekend shows lifestyle kind of silly stuff mostly, but then the last couple of years that I was there, I was very fortunate to help design and host a program called Round Table, and if you listen to China Radio International – Easy FM is the name of the station – in Beijing, it’s 91.5, that show is actually still going, more than 4 years after I’ve left. It’s a very popular format, but basically, it was a one-hour show where we discussed Chinese social issues, and so we used mostly Weibo as well as public forums for inspiration, news and things like that. Funny enough, TechNode and its discussions on Chinese tech company, both for that show as well for some technology reporting that I was doing, was actually a pretty big resource for understanding what was happening.

So, I was there for about five and a half years, reached the bamboo ceiling as it was – it’s a state-run media so there’s not much room for a foreigner to grow. Also, this was a few years after the present leadership gained power, so everything was becoming a bit more politically correct. And so, I worked in localization for a year and a half, mostly servicing Huawei and their translation services center. I helped to build a team of English native writers and editors to help Huawei – a Chinese tech company – with their technical documentation and then I saw that TechNode –this was maybe early 2016 – was looking for a managing editor. I had been out of tech and media for 2 years at that point and I was really kind of missing it. Being part of a public discussion, having impacts, helping people understand certain issues were really important for me and so I applied. My now-boss and CEO Lu Gang and I had conversations over the next few months, trying to feel each other out, get a sense of what we wanted and what the organization needed. So, I joined in November 2016. When I joined there was me and there were two other reporters, and now fast forward to almost the end of 2019, we’re 15 writers and editors, we launched a membership program called TechNode Squared, in May earlier this year. We’ve got about 250 members that want to understand the Tech scene in China right now and we’re just building up momentum and pushing forward. Really focusing on unbiased factual reporting about Chinese tech companies and Western tech companies in China and then also offering analysis and insights into what’s happening on the ground.

Matthieu David: How do you organize the editorial line of TechNode, as an editor in chief? I feel for tech media in China for westerners there’s a lot of hot news, breaking news, so I think it’s all the more difficult actually to have an editorial line. So, how do you combine those two aspects of getting a lot of breaking news, some companies need to raise money, some changes in technology and so on, on the other hand, to have an editorial line?

John Artman: Yeah so, I mean, I think that first of all, we have a very strong team of editors. So, we have a news editor, we have our senior editor who does a lot of different things and then we have our commentary editor. We have specific people in management and editing roles to make sure that things are getting done in kind of the way that we want them to. At the end of the day, reporters are responsible for not only covering news but then also making sure that they’re working on their feature stories. Then you know, we have three different newsletters right now as well, so we are all quite busy I would say, but at the end of the day, it’s really all about passion. We’re a team of I would say 60% local, 40% international and we’re all just very passionate about what we do. I think that TechNode is a very unique tech media in China for westerners. Where it is a media company,  it’s more than a media company and we get a lot of opportunities to talk with executives and people on the ground to really figure out what’s going on, and I think that’s really what it’s about, it’s about figuring out what’s going on and then writing a story to explain that to our readers.

Matthieu David: How do you pick the topics? When I listen to your tech industry podcasts in China – another part we’re going to talk about – I feel there are topics coming from time to time, more recurrent than others like the mention of ByteDance for instance, as a third player compared to Tencent and Alibaba. It seems that it is a topic you went into deeper than other topics. So how do you pick a topic? How do you assess that this is going to be the topic which is going to become important, the topic you want to go in-depth? How do you do that in an environment where you have so much news which can actually be weak signals and change actually the environment and also the noise, and that’s a difficulty?

John Artman: So yeah, that’s a very good question. I think that at the end of the day it’s really just about us – because a large part of our job is talking with people on the ground, talking with people who work with these Chinese tech companies or Western tech companies in China, talking with people who run their successful business in China on these companies platforms, analysts, investors. So, I think, it’s really just kind of about sounding things out. So, getting a sense of what’s going on and then kind of making some guesses about what we think is important. Also, we get a lot of signals as well from our readers as well as from our members, so we get direct feedback from both groups, but then also we have a very clear page view metrics, so a lot of it is like: “okay, so this story got a lot of page views, so this is something that we should follow up on”. I think that one good example of that actually is our coverage of automated vehicles and electric vehicles. We started reporting on that specific sector of the Chinese tech companies earlier this year, or should I say taking that sector seriously earlier this year. We just saw a lot of great feedback, people wanted more. There was a lot of demand for more interest, for more content about this industry and so, we went the whole hog. So, now we have two reporters. One reporter who covers it full time, one reporter who covers it part-time and then we have a whole newsletter dedicated to that industry. So, I think, as a product manager for a tech media in China for westerners, I’m looking at the following: who are our users? what do they need? Then trying to create products to fill that needs, but our product is of course content and different kinds of content. 

Matthieu David: Okay yeah. I know you have a link with TechCrunch and I know it certainly has been a source of inspiration, certainly also a comparison. How do you compare them with their work? How do you compare with managing a tech blog, a tech media now, a big one in the US, an influential one as well in China? How do you compare them? How different it is and how similar it is?

John Artman: Yeah so, I missed part of the introduction to that question but just to clarify, TechNode and TechCrunch are two separate companies. TechNode is the exclusive China partner of TechCrunch. We’ve been friends with them since 2011. We helped them to bring the first TechCrunch to disrupt if I remember correctly in 2012 to Beijing. Actually, I was working at CRI then and I went and that was very exciting. And we’ve been helping them to do TechCrunch events in China ever since then and we also manage TechCrunch.cn which is Chinese translations of their English content. 

So, what’s the difference? I think one of the biggest differences is that we’re a lot less bloggy than they are. You have to remember that both TechCrunch and TechNode have been through a lot of changes over the years. TechCrunch got started with Michael Arrington back in the early 2000s and he was just an investor, a guy in Silicon Valley, as you know there’s a lot of bullshit – excuse me my bad words – but there’s a lot of nonsense going on in Silicon Valley. No one’s writing about it. I am going to write about it and Arrington was never shied away from controversy. So, doing something like TechCrunch was a good way for him to amplify his own voice as well as agitate for change. Journalism is activism to a certain degree, but then you know, TechCrunch was eventually bought by AOL, now its owned by Verizon and so I think that really kind of what we’re seeing is different generations of writers. So, even TechCrunch started off as very bloggy, very personal, a lot of personal opinions and now you have a lot of young and intelligent writers, so they still insert some of their opinions but at the end of the day, it is in general much more professional than it used to be. For TechNode we had very similar beginnings as well. Lu Gang started writing actually. It was called Moby Node at the time; he was in the UK getting his Ph.D. in telecommunications engineering and he started writing just a personal blog about kind of whatever. A little bit of tech and then came back to China and saw that there were not really tech media in China for westerners. So, he started doing that as well, following the Michael Arrington TechCrunch model.

Now when I came on board, I had been out of media for a little while and part of my onboarding process was kind of taking the measurement of the landscape and you look at the kind of where we are now with media and where we were then when both TechCrunch and TechNode got started. I mean – when TechNode and TechCrunch got started, like the New York Times, Bloomberg, Reuters, they didn’t do a good job of having that content on the web. At the end of the day, people getting content from the internet wasn’t quite mainstream.

I think that looking at now, everyone’s online, everyone’s getting their news from everywhere, so I was kind of looking at that and say ok, number one, what’s our unique advantage? And how can we stay niche? I think that at the time only doing tech in China, it felt like it was going to be a bit of a challenge, that there wasn’t going to be that much interest, that it was too niche, but at the same time, when I was working in the radio, TechNode was an amazing resource. So, I wanted TechNode to stay as a great resource for people inside of China and outside of China who really wanted to understand the country and, of course, understand the tech scene in China. So, these days we are a type of content that’s competing with all other types of content and it’s not just we’re competing with other blogs or other websites who cover tech in China, but we’re also competing with Bloomberg and Reuters in the information. And so, ever since I’ve joined, my main focus has been on making sure that we are unique, that we are offering something that you really can’t find anywhere else, and if the content is similar well the formats going to be different, or the level of professionalism is going to be higher. So, that’s really kind of where our commitment to neutrality comes in.

It’s always very disappointing to see tech media in China for westerners that I respect publishing exaggerated stories about tech in China or maybe too simple stories is another way to put it. So, what we really strive to do is to stay neutral. We’re a Chinese company, I’m an American like I said – our team is 40% international, 60% local but at the end of the day we’re all committed to China in some way shape or form. I would say in terms of foreign staff, the shortest that any of our foreign staff has been here maybe like 4 or 5 years and all of our foreign staff, they’ve lived in China before they joined TechNode. So, we’re all very interested in telling the China story so that people can understand the tech scene in China, but we’re interested in telling it in a balanced way because we recognize that it’s a very complex country. The politics, the economics, the technology landscape is extremely complicated and so, rather than taking a side or aiming for what we call clickbait, we want to be neutral and just give you the facts and help you understand what’s actually happening for Western tech companies in China and Chinese tech companies. And so, we’ve kind of evolved from the bloggy style into something that’s much more professional.

Matthieu David: 50 people work in the company and this requires financing it. So, what’s your business model now? Recently, you started to adopt a subscription business model, but what are the different streams of revenue you have now?

John Artman: Yeah, so TechNode is a lot more than just our English media. So, we started off as English media but now we do events. For example, I was just in Shenzhen last week for the TechCrunch event down there. We do one of every single year. We also do the Asia Hardware Battle, which is, I think, pretty self-explanatory. We gather hardware start-ups from around the Asia region, all the way to the Middle East, in fact, so the Middle East all the way to Japan in terms of geography and then we find experts and judges to choose the best ones. So, we do the TechCrunch Asia hardware battle. We do something called China Bond, which is like an awards ceremony, kind of recognizing the best start-ups and the best innovations of the year. And then we also have our services teams. We have two teams focused on financial advisory, so one team based in Singapore, which does cross border financial advisory like helping Indian and southeast Asian start-ups get in touch with Chinese investors and then we have a domestic financial advisory service as well, that focuses on something very similar, matchmaking basically within the China market. So, all of this is to say that the English content isn’t very well monetized. We’re very much supported by the rest of the company and our membership as well as our annual Emerge event series is part of that monetization process and so ever since I’ve joined. I mean I’m pretty entrepreneurial so one of my main goals is to make TechNode English sustainable. Maybe not profitable but at least breaking even. 

Our membership and our Emerge events series are a large part of that and so right now, you go to our website and you sign up for our membership, it’s a $100 a year if you want to understand the tech scene in China. I think we give you three newsletters; we give you access to our community as well as access to some of the reports that we produce as well. That’s great value for money and it’s not always going to be a $100 per year. Then, with our Emerge events, we charge a relatively high-ticket price compared to a lot of tech events in China organized by other tech media in China for westerners for instance. We are pretty expensive, I mean not like super expensive but definitely higher than most people are used to paying, and that’s for a reason because, for a lot of companies, events are a marketing tool, it’s a way to raise awareness and kind of create an offline community. For us, it’s definitely about the offline community but the content is the producer and so we charge for that. So for example – in May we did panels on AI ethics in China, we did look at China to southeast Asia, blockchain regulation, corporate innovation and we had some pretty big names – from Walmart to WePay the thing is again, for the content offline you know, we take it very, very seriously and we just did a side stage at TechCrunch in Shenzhen. We did cloud gaming, mass customization so and we had some really great speakers there as well. We give time for the speakers to go in-depth, so a lot of times you’ll see panels or fireside chats, maybe 15 to 20 minutes and we aim for about 45 minutes for each panel. So, really kind of going in-depth and making sure that we’re covering the entire topic rather than just a small slice of it.

Matthieu David: You have not mentioned advertising which is the usual model of monetizing content. Is it because you don’t monetize through advertising or because it is too small, and you don’t worry about it?

John Artman: Yeah, so, on the one hand, compared to TechCrunch for example, our traffic is much lower than theirs. We’re very, very niche but at the same time, we have some really amazing SEO. We get some pretty decent engagement on social media, so our traffic is pretty good I think for our size. That being said, that is one of the big things that we’re going to be focusing on going into 2020 is increasing traffic.

So, on the one hand, it is a traffic problem, I mean like we don’t have millions and millions of people visiting us every month but at the same time it’s also my own kind of philosophy as well, I want the customer to be the end-user, so the reader is the customer, not a sponsor, or an ad network. Now, we do sponsored-content on our Tech media in China for westerners. That’s something that we’ve offered for quite a while. In that, we do projects with companies on a regular basis but it’s not something that we really enjoy doing or like really are very active in pursuing. My boss might not like me saying that but at the end of the day, I don’t like advertising. I have always been philosophically opposed to it. I think again that the people paying for a service or a product should be the ones actually using it and that’s why we launched our membership because this way we have a direct link to our readers and to our fans. $100 is not a lot of money if you want to understand the tech scene in China but it is a barrier, it’s a psychological barrier. So, people who choose to cross that barrier, they’re doing it because they want to invest, they want to invest in the production of news and information that’s relevant to them. We do have an ad network on our website that is a Carbon ad. So, it’s a very small network, they only have a selected group of advertisers that are on there and you’re not going to see random advertisements for your Kim Kardashian or alien babies and things like that on our website. Instead, you’ll see advertisements for things that are relevant to you, so for example, discounts on Adobe Creative Suite, discounts on Slack memberships and things like that. We’re very happy with Carbon. Carbon has been really, really good for us because again, it’s very relevant, highly targeted ads for our specific leadership.

Matthieu David: The other format you have is a China podcast. You don’t monetize the podcast if I understand because I’m not listening to any sponsor of the podcast when I listen to you. Could you share about why you started a China podcast and again, what’s the difference? I know you had actually an episode on that. What’s the difference between the West and China on podcasting, or podcasting from China to the West? You had an episode where you were mentioning that podcast is very different in China than to the West because China goes through platforms like Ximalaya and all those which wants to monetize and sell the courses whereas in the West it’s free. Would you mind sharing a bit of the reason why you started a China podcast and the differences you see with podcasting between the West and China?

John Artman: So, yeah, I’ve been podcasting for a long time. I did radio as I mentioned before and working at a radio station, I think there’s a lot of creativity left on the table. So, Charlie Custer, a long time China watcher – I think he might still have his website  Chinageeks.com – and I started a podcast called China Punks and it was just us kind of going through the news in China and giving our own young and let’s say “curmudgeon” kind of opinions on stuff. We never really promoted it and never really got huge, but it was a lot of fun to do. So, when I joined TechNode, I knew that I wanted to do a podcast, I knew that I wanted to do something in audio, because audio and conversations are just fun and I think that, for me at least, I learn through writing, I learn through talking. When you think in your head, you have the kind of swirling around, but it doesn’t really kind of come out until you’re actually trying to communicate them and having people ask you questions and getting feedback, I think, is extremely important for the creative process.

So, yeah when I joined TechNode I knew that I wanted to do a podcast on Chinese tech companies and Western tech companies in China but the talent that we had internally at the time was not quite appropriate for what I wanted to do. I was just kind of on the lookout for an appropriate co-host and I noticed that Matthew Brennon was very active on WeChat. He clearly was an influencer of sorts and also really knew his stuff, and so I reached out to him and I was like: “hey, I’m John, just joined TechNode, do you want to do a podcast?”, and funny enough, we didn’t actually meet face to face probably until about six months or even longer than that of doing the podcast. I originally pitched him to do a podcast only about WeChat, and so, every week we would do a podcast about what’s happening with WeChat, and funnily enough, he was like “no I don’t really want to do that, I don’t want to only focus on WeChat”. So, it evolved really and now we discuss many topics to help people understand the tech scene in China. So, we do some WeChat every once in a while, but we’re actually very broad when it comes to the topics that we cover. So, for example, recently we looked at the social credit system before that was private traffic, we’ve done asymmetry’s between US and China in AI, we’ve covered blockchain quite extensively although not recently and basically anything that we find to be interesting. And then, Elliot Zaagman who also is a contributor invited his friend James Hull with whom he is just having some really great conversations. So, Elliot is a writer and he also does some consulting in China and then James is a professional investor, he used to work for a state-run investment company and now he works for himself managing money for other clients. So, Elliot at one point pitched me: “hey, let’s do a podcast, James and I are having these great conversations, I want to make this a recording” and so we did and actually just the other day, it was their one-year anniversary. So, they’ve been going for about one year. Matt and I, it’s about 2.5 years now, I think.

Your other question was: “what’s the difference between podcasting in the West and in China?”. Well, the biggest difference is that podcasting in China isn’t really podcasting. Or at least the way that we think about it. So, podcasting in the West is very similar to talk radio, where you have one person talking for a long time. Dan Carlin is a great example, hardcore history or common sense, it’s just one guy talking for hours at a time. Or you have podcasts like this one, or the one that Matt and I do, which are one on one interviews or a three-person conversation about a topic, whereas podcasting in China is just audio content. So, you take a lot of the content that’s kind of popular in other formats. It’s only audio, so it could be storytelling, it could be in some case discussions but in most cases, it’s actually educational. People will pay money to basically take an audio course or to gain access to an audiobook, or something like that. It’s much less to do with talk radio, I mean again, there are some shows that are quite popular that are very similar to talk radio, but the bulk of the content that you find on platforms like Lizhi and Ximalaya are in fact more educational or can be storybooks or things like that. A lot of the audio content produced by Chinese people, you’re not going to find on the open web, so you’re not going to find it on Spotify, you’re not going to find it on Apple Podcasts, because you can’t monetize on Apple Podcasts or Spotify.

I mean you can have an advertiser, but advertising in the podcast space is quite difficult and for advertisers, the metrics are still very grey because there’s really no good platform that can give you a 100% saying: “okay; this is how many people actually listened this is how much they actually listened, this is how many people were actually exposed to your message”. In general, that kind of stuff is very difficult on the open podcasting, whereas in China, users will pay directly for the content, whether it’s a 100 RMB for a course, whether it’s like 1 RMB per audio file or something like that and so, it’s actually a lot easier to monetize and to make a business of Ximalaya and Lizhi.

That being said, we interviewed someone who is an early-stage VC based in Shenzhen a couple of months ago and he does three podcasts and all three of those are on Apple Podcast and Spotify, all in Chinese, which is interesting. I don’t think he’s making that much money from it, but then there is another podcast, a friend of mine runs a podcast called BBPark, it’s all in Chinese, it’s all for Chinese listeners, it’s available on the open web but they monetize in kind of KOL method where they actually engage in e-commerce. They have meetups that they’re able to monetize on, and they have a few other things that they do as well to monetize, but they’re very unique because they’ve been podcasting since 2011-2012 I think, so really kind of first-mover advantage, been around for a long time and it’s very, very talks radio-ish I would say. A lot of younger people who kind of grew up listening to the radio, they enjoy listening to it and its young people who host it, so they have a lot of really interesting personality, they’re able to connect directly with their listeners and create that community, but as I said, it’s very unique what they’re doing, whereas in most cases if you want to monetize it has to be on Ximalaya and Lizhi.

Matthieu David: That’s the thing actually, in China I feel that – I don’t know if you feel the same –  the words are similar since we use the word blog in China and in the West we use the word podcast in the West and in China, but actually the real product today is very different. Let’s say blog for instance. I had a very hard time explaining to a Chinese CEO of a big firm that we are getting a lot of attraction on our own blog at Daxue Consulting. He was thinking of a microblog like Weibo or twitter, right? He was not thinking about the long content or the long piece of article, where we were going in-depth, it was not in his mindset, and the ICP regulation, to get to the compulsory ICP you need to have your own website. It certainly slows down or even kills this other guide for a very long article on your own platform and you go on platforms, you don’t have your own website in China. That’s the same I believe for podcasts.

I’d like to talk about Chinese media censorship. Basically, there is Chinese media censorship when you publish content. You are publishing for the West, so, in some way, you are a bit outside of the radar, because you’re publishing in English, but on the other hand, you are in China. Is it a concern for you? Is it a concern to comply with Chinese media censorship regulations?

John Artman: Well, it’s funny because actually, I just learned a new metaphor for something like this. A Chinese tech investor did an interview about the blockchain and I think the interviewee Matthew Graham made a really interesting metaphor. Basically, the anaconda in the chandelier where there’s an anaconda in the chandelier and it’s not really doing much but you’re in a room full of other people and you don’t want to be the loudest person, right? You don’t want to be the one to draw a lot of attention to yourself, because you never know when the anaconda might strike, choosing you because you’re so obvious. So, I guess that’s a really interesting way of thinking about it. I mean, in general, we don’t touch on sensitive issues, in part because sensitive issues are actually outside of our editorial purview. We focus on technology in China, we focus on telling people what’s happening with Chinese companies and certainly, we do ruffle the feathers of the companies themselves, there have been many conversations with companies of various types, about our coverage of them, because that’s journalism.

We tell the truth as we see it or as best as we can about what’s happening inside these companies, why they’re making certain decisions and what their prospects are and so on and so forth. So, we definitely get a lot of pushback from the companies themselves, but I think to your point, we are trying to baste, we are in English, so we are I think to a certain degree under the radar, but at the same time we don’t touch on sensitive issues. I have worked at state media for five years and I think my sixth sense is pretty well developed when it comes to this kind of stuff. We basically stay away from all that stuff, and at the end of the day, it’s not to our detriment either, because again we just want to understand what’s happening, why it’s happening, so we just want to tell people the way it is, and I do think there are sometimes, like especially with my weekly column, that I write when I do have a bit more freedom to go in-depth and have my opinion, there are sometimes, I think, where it does get a bit close to some line, but at the end of the day, it’s still factual.

I’m not here to smear China, I’m not here to create fear mongering or anything like that. At the end of the day, it’s how can we best explain China to westerners through an appropriate Tech media in China for westerners, and I think that there is actually a middle ground to all of this. A lot of people in the West, they want to see China as a boogieman, as an enemy, but I don’t think that China is, and I think that if you want to understand the world, you have to take a dispassionate point of view and that’s certainly what we try to do. So, the short answer to your question is that we cover Chinese Tech companies as well as Western Tech companies in China. Tech is pretty neutral in general and then when it does come to potentially sensitive issues, we try our best to avoid those.

Matthieu David: I’d like to know a bit more about numbers, about how many – metrics about TechNode and your podcast, would you mind sharing a little bit of the audience you have? Who is reading to you? Who is listening to you? Which countries? How many people, if you can share some?

John Artman: Yeah so in 2018 we had about 4 million visitors to our website, 2019 is going to be more than that. When it comes to our podcast, we get about 7000–8000 downloads per episode for the talk. China tech investors are much more niche and so we get a little bit less than that, but in terms of audience, the largest group of people that consume our content is from the United States. So, consistently we see the largest group is from the US, and then the second largest group is from mainland China actually. Looking at kind of our analytics back end we can see that most of the people coming from China are actually English speakers, so maybe they’re European, maybe they’re from the UK, or from some other English speaking country and so when I say mainland China, I don’t mean Chinese readers. Most of them are going to be English speakers. And then I would say, so number 1 in the US, number 2 in mainland China, 3 and 4 are Singapore and Hong Kong. That kind of switch positions and then number 5 in India. We’re very international in terms of our audience but at the same time, the largest by far, I mean our website, for example, around 30% of our traffic comes from the United States, and that’s the largest of any other demographic. So definitely we can see there’s a huge amount of interest in Chinese tech companies from specifically the United States, but then at the same time, there’s also a pretty decent number from elsewhere around the world.

Matthieu David: We’re coming to the last 10 – 15 minutes and I’d like to have your view on some topics which are coming over and over in China about tech. The first one is, why are there so many failures with Western Tech companies in China? It could be a one-hour talk but I’d like your opinion and some ideas, Microsoft has been successful, but it seems to be a bit of an exception when you look deeper. Uber failed, Google for some reason failed in some way, even if they do export advertising, they’re selling ads for the Chinese companies, but they don’t operate anymore in China. So, one can see a lot of players failing in China for various reasons. Some are more political and licenses, others are purely business issues like Uber. So, what’s your take on it?

John Artman: Well, I think that first of all the Chinese market is extremely difficult. I think that even you talk to domestic entrepreneurs and most of the Chinese market is extremely difficult. It’s highly competitive and you have to move fast, extremely fast. If you’ve thought about it for more than a day, you’re probably moving too slowly. Also, for Western Tech companies in China, there is a lot of issues around localization. So, there’s the localization of the product and there’s the localization of the team. So, for example, I think Groupon is actually a really interesting example for Western Tech companies in China. So, I’m not sure if you remember, Groupon came in around 2010-2011 and all of the management in China was done by Americans. So, they flew Americans in and then tried to figure it out and it’s one of those things where the working culture is so different in China than it is in the West. China kind of lacks professional culture, and I don’t mean that in a pejorative sense. I don’t mean that there’s something wrong with it necessarily, but Chinese people don’t think of their jobs in kind of a professional way right, whereas I think that, at least in America, parents kind of trained their children to think this way.

My early bosses really kind of trained me to be this way, being conscientious, scheduling everything, making sure that everything is delivered on time, that quality issues are raised before delivery and things like that. Whereas in China, there’s a very different relationship between managers and employees. The manager is expected to be very hands-on, to kind of tell the employee exactly what to do and to give very extremely specific feedback. And so, I think as a Western manager it has been a bit difficult for me. If you’re a Western Tech companies in China trying to come into the market and you don’t find managers who know how to manage Chinese people, you’re never going to get off the ground. So, yeah, it’s the market, its company culture, and then yeah, localization of the product as well. Localization of the product, localization of the marketing and advertising in China, I think that if you look at the consumption landscape of China, people like games, they love discounts and they love their celebrities. So, these days, of course, it’s moving a lot more to online celebrities, but also it used to be traditional celebrities. I think that there’s a whole suite of different things, but then also it’s also government policy where it has been. I think they’re trying to make it easier actually, in the past couple of years where it’s easier to get a wholly foreign-owned enterprise license, but at the same time you have to know the right people, you have to know the right people to get the license, you have to know the right people to help you open markets, so finding the right managers, finding the right partners, finding the right team on the ground I think is what makes it so difficult for Western Tech companies in China.

Matthieu David: You already answered partly the question I want to ask next, which is: what are the common misconceptions about tech in China? From an observer’s point of view, when you talk to people from overseas and foreign tech.  Actually, in the West and in China, what do you feel are the main misconceptions about what’s happening in China in the tech industry? Do you find some – I’m sure there are many –, of them being podcasting, same way but it’s different, the way it’s practiced, blogging is the same but actually a very different way of doing it. Generally speaking, have you found some parts where there is a misconception on how to analyze the tech scene in China?

John Artman: Yeah, I mean I think that probably the biggest one is related to a podcast episode that we did recently on the social credit system. I think one of the biggest misconceptions is that the government wants to be involved in everyone’s life. 

I think that, historically, if we look back to the founding of the people’s republic of china and kind of the evolution of the communist system here, the government used to want to be very involved. The success of the state-led capitalist system that we see now has been in fact a part of that story. It’s been the story of the government slowly kind of receding from everyone’s personal life. It used to be that the people that you worked with are the people that you married, the people that you lived with and everything was very, very controlled on a business unit basis.

These days it doesn’t happen anymore, and so if we take a look at the social credit system, for example, number one – that system was more designed for a private company or companies, the state-owned and non-state owned. And then, over the last few years, there has been some more exploration of applying it to individuals, but a lot of it is still applying it to individuals in the context of business malpractice, of not repaying your debts. Not replying or complying with court orders and things related to business malpractice. So, if your company kills people because you created a low-quality product, then, well, your social credit score is going to be affected. So, no, the government doesn’t want to be involved in your life, I think that we are going to see probably more tracking of behavior, more analysis of behavior, but I think it’s going to be very similar to tech companies where at the end of the day the government is much more interested in aggregate behavior.

So, how are we enforcing those traffic laws? Are people following commercial laws? How are we enforcing those commercial laws and so it has much less to do with today this person bought oatmeal? Why does the government care about that? They really don’t. It’s much more about broader social management questions as well as broader economic management questions. I think for a westerner, for an American, who is raised to be very individualistic and to treasure freedom of speech and freedom of behavior, whatever that means, it’s very difficult to wrap your head around and ultimately accept. I’m not sure I’m comfortable with it. I can kind of explain it a little bit as I did before, but it still feels weird. Just because it feels weird to me doesn’t mean that it’s necessarily bad. I think that any technology is open to abuse, but at the same time what china is trying to do with a lot of their technological governance systems is really trying to solve age-old problems. There’s a phrase in Chinese that says: “the mountain is high, and the emperor is far away”. China has historically had amazing amounts of problems enforcing central government policies and even on a provincial level, and so this is just one way to leverage technology to actually implement real enforcement mechanisms and to actually create more trust in society as well as trust between individuals, trust between customer and a company. Then, also trust in the government that the government is actually going to be enforcing laws and regulations. 

Matthieu David: True, social credit I think is the example of misconception from the West in China and portraying something very new, and it’s not that new actually. My last question is concerning your industry and yourself, towards your peers. How do you stay up to date about China? How do you stay up to date about the news? You mentioned Weibo as a source of inspiration for a round table, I think. Now, what are the best sources you would recommend using, of course, TechNode and your podcast, but beyond that, what would you suggest using to be up to date on China?

John Artman: Well, I would say in the English language there are two main resources; one is Sinocism by Bill Bishop. So, Bill Bishop has been a China watcher for many, many years. He used to live in Beijing, so he does a daily newsletter. Well basically he aggregates and curates news stories about China and that’s one of the main ones that I read. Then there’s another one called SupChina. SupChina is much more focused on culture, whereas Bill Bishop is much more focused on politics and business I would say. SupChina is very focused on culture, but both are very, very good resources for keeping up to date. You spend 15-20 minutes reading these newsletters every morning and you’ll pretty much know what the big trends are, what are the big discussions going on and things like that. In Chinese, I would say there are a few resources when it comes to understanding the tech scene in China.

One is – I kind of hate saying it because it’s also our competitors in the tech media in China for Westerners industry– cn.technode.com. That’s obviously a resource, but then apart from that there’s 36Kr, so 36Kr.com – so that’s a technology media. PingWest is also one, their website is really kind of my main sources when it comes to tech news in Chinese. Hushio is a good one for kind of longer-form essays and it’s usually not just tech but it’s also business, and then, of course, there’s Tencent and others, and kind of like the news aggregators where they have huge teams, but they don’t actually do much original reporting. So, I would say those are my main sources of information about China.

Matthieu David: Thanks. Thanks very much for your time John. It was very, very interesting, and I hope you enjoyed it and hope everyone enjoyed it. Thanks for listening and thanks for participating.

China paradigm is a China business podcast sponsored by Daxue Consulting where we interview successful entrepreneurs about their businesses in China. You can access all available episodes from the China paradigm Youtube page.

Do not hesitate to reach out our project managers at dx@daxue-consulting.com to get all answers to your questions

This article Podcast transcript #88: How do media cover trends and news around Chinese tech companies? is the first one to appear on Daxue Consulting - Market Research China.

Chinese semiconductor demand exceeds production

China’s semiconductor market is the largest in the world. Annually, China consumes more than 50 percent of all semiconductors, both for internal use and eventual export. As such, the rapid growth of Chinese demand lifted the entire industry worldwide. However, domestic Chinese manufacturers are still only capable of meeting approximately 30 percent of their own demand. Therefore, to rebalance China’s reliance on external semiconductor demand, the Chinese government has urged its national champions and leading digital businesses to improve their domestic semiconductor manufacturing capabilities.

China’s State Council ‘2014 “National Integrated Circuit Industry Development Guidelines” set the goal of becoming a global leader in all segments of the semiconductor industry by 2030. In addition, the Made in China 2025 initiative maintains achieving the know-how with regards to advanced semiconductor manufacturing as a vital component of China’s future economy and society. Lastly, in the midst of shifting supply chains and macroeconomic policy, the Chinese government is spending aggressively in semiconductor investment, acquisition, and talent recruitment to uplift the industry by on-shoring chip manufacturing equal to those of the world’s top foundries.

[Sources: PwC; SIA; IC Insights, Gartner; CCID Consulting, Statista. China’s semiconductor consumption is around 60% of global consumption.] 

What drives the Global Semiconductor Market

In the figure above, China has witnessed a trajectory of steady growth in the global consumption market, far outweighing the Americas, Europe, Japan, and the rest of the world. Simply stated, the growing demand for smartphones, tablets, digital televisions, wireless communications infrastructure, network hardware, computers and electro-medical devices is stimulating global demand of semiconductors.

However, the global semiconductor industry is expected to witness low growth in the near future, paving the way for industry consolidation via mergers and acquisitions. On the other hand, the Chinese semiconductor industry is expanding in terms of domestic manufacturing in order to bridge the gap between the consumption and production of semiconductors domestically. With the emergence of China as the largest supplier of electronic devices, the consumption of semiconductors has grown drastically in the last decade. However, China’s ability to manufacture semiconductors is still far lesser than domestic demand. Therefore, several Chinese semiconductor industry acceleration plans are being initiated by the government, creating great potential and opportunity for relevant firms to maximize on.

China’s Agenda for Semiconductor Dominance

Many Chinese companies are designing specialized semiconductors for AI, as well as chip architectures that are at the bleeding edge of the mobile smartphone industry. Due to the strong coordination between state and domestic manufacturers, China wields a great deal of capital strength to advance its interests. MIC 2025 and the National IC Plan represent China’s most prominent plans for semiconductor industrialization and manufacturing. Taken together, these two strategies encourage China’s semiconductor industry players to adopt a “fast-follower” approach. This scenario calls for the industry to leapfrog several generations ahead to catch up with international competitors at a time when the decay of Moore’s Law is slowing the ability of leading firms to win the innovation race simply by building faster and more powerful chips.

The Chinese government’s commitment to building up its local semiconductor industry by offering huge capital and tax incentives to IC makers is expected to be the major driver of the market. However, China still depends on various countries to meet its semiconductor demand. Nonetheless, the Chinese government aims to reduce these imports, shrink the sizable trade deficit, and achieve self-sufficiency for its semiconductor needs.

Specifically, China has formally created a $29 billion state-backed fund to invest in the semiconductor industry, advancing its goal of reducing a dependency on U.S. technology. China is the world’s biggest chip importer, and the long-awaited 204 billion yuan ($28.9 billion) fund will fuel Beijing’s efforts to forge its own semiconductor supply chain from chip design to manufacturing. It will play a key role in steering the overall strategy and investment in the integrated circuit sector, which includes processors and storage chips used in smartphones and data centers.

[Source: Deloitte, players in China’s semicondutor industry.]

Major Players in the Chinese Semiconductor Market

China’s Strategy for Chip Manufacturing

The figure above made by Deloitte provides an organized picture of the major players in the Chinese Semiconductor Market. From this, we can say, in essence, that China’s ambitious goal is to create national champions in each semiconductor market segment. At the low end of the market, they have had considerable success. China now supplies more than half of the world microelectronics and hopes to build on this to create similar success in memory, CPU, and AI chips. But China has had embarrassing failures in its efforts to make logic chips. Memory chips are less complex and less expensive to manufacture. There is a huge global market for them that China, building on its strong microelectronics sector, hopes to use as a stepping stone to more sophisticated products. Memory chips will likely be the first major market sector that Chinese semiconductor policy will disrupt.

Chinese firms are becoming competitive in memory chips but face difficulties in manufacturing CPUs or other specialized chips that are globally competitive in price and performance.  China still relies on U.S. suppliers for high-end products. Making advanced semiconductors requires more than sophisticated production machinery and advanced designed. It requires “know-how,” knowledge and skills built up with years of experience. Even if China gains access to advanced manufacturing equipment, there is still a need for know-how when it comes to making high quality chips with consistent performance at a competitive price.

Industry Disaggregation

Here we can see just how broad and yet intricate the semiconductor industry is. In essence, semiconductor manufacturing has been reshaped by disaggregation, as firms have divided along the stages in the manufacturing process into design houses, wafer production, foundries, assembly houses, and testing houses. This “horizontal segmentation” has led to a “fabless” approach to semiconductor manufacturing, which now accounts for about 17 percent of semiconductor production and continues to grow. Horizontal segmentation makes it easier for firms in China to find a place in the production cycle of the semiconductor industry.

[Source: SIA, “Beyond Borders,” May 2016. Operating models in the semiconductor industry]

The disaggregation of chip production and the increase in fabless chip production means that design, fabrication, and testing is spread among different countries, including China. China is more likely to develop indigenous chip supplies if it relies on Chinese design houses (of which there are more than 1,000) and then contracts out production to a dedicated semiconductor foundry, such as the Taiwan Semiconductor Manufacturing Company (TSMC). The dilemma so far for China in using a fabless approach is that these chips are designed to meet Chinese standards. This can make them less valuable for the global market.

The ability to manage this global supply chain is one of the keys to profitability. Disentangling this integrated supply chain, created under different and more favorable political conditions, will be difficult if not impossible. This creates opportunities for China in the acquisition of semiconductor technology, but it also creates obstacles in trying to build a purely national industry since competitive advantage lies with the international supply chains. China is still dependent on foreign expertise for semiconductor production, particularly from Taiwan and the United States. Imports of both chips and technology will be the norm in China for many years to come.

China’s semiconductor industry’s Achilles Heel

Despite decades of efforts to develop a robust domestic semiconductor industry, China remains weak in the design and fabrication of leading-edge memory and processors. This weakness is particularly grave for fabrication, where SMIC and other Chinese players continue to lag years behind in leading-edge process nodes.

Of particular concern is the persistent gap between semiconductor consumption and production. China has been the largest market for semiconductors since 2005. Yet only slightly more than 15 percent of China’s total semiconductor consumption was supplied by China-based production in 2018. Additionally foreign companies with fabs in China may account for almost half of that domestic fab capacity.

While the U.S. semiconductor industry has consistently retained nearly half of the global market, China-based production has only around 5 percent. Other well-documented weaknesses are in leading-edge multi-core processors and memory devices, and China’s embryonic stage of development in semiconductor equipment and design tool services.

Noteworthy achievements of China’s semiconductor industry include optical devices (especially LED), low-power embedded processors, sensors, and discrete devices, with China now approaching self-sufficiency. Equally important is the surge of China’s semiconductor assembly, packaging, and testing (APT) industry, which has moved ahead of Taiwan and Japan.

Segmenting the Chinese Semiconductor Industry & Market

China’s semiconductor market comprises the total consumption of semiconductors in China. This includes both the production of semiconductors in China, and the semiconductors imported from foreign countries. China’s semiconductor industry denotes the total semiconductor manufactured in China. It includes the semiconductors manufactured by foreign players in China and the semiconductors manufactured by the domestic players

[Source: daxue consulting, China’s semiconductor market vs industry]

What drives the growth of China’s semiconductor industry

The major factors driving the growth of the Chinese semiconductor industry are the increasing demand for semiconductors from major end-use verticals and government initiatives to promote domestic manufacturing. The market for various end-use verticals such as data processing, communications, consumer, and automotive is growing due to continuous technological advancement and development and intense competition. Consumer electronic devices in China have shown tremendous growth in recent years. Furthermore, the aims of the Chinese government, as stated in the 13th Five-Year Plan, for improved national optic fiber coverage as well as the full roll-out of 4G mobile communication technology will also drive the market. Similarly, the increasing electrification of vehicles is expected to boost the demand for semiconductors in the automobile vertical.

However, China remains a net importer of technology. At present, China depends on imports for 84 percent of its semiconductor requirements. Because of its ever-increasing purchase and import demand for semiconductors, it remains a key market for global businesses operating in different technology sectors.

China is the largest market for semiconductors in terms of consumption, and each of the top 10 worldwide firms in 2018 had a presence in China ranging from R&D centers to fabrication facilities. This is due to the large and growing demand for chips used in goods that China produces and consumes domestically. According to various estimates, 90 percent of the world’s smartphones, 65 percent of personal computers, and 67 percent of smart televisions are made in factories located in mainland China, though some of this production is done in facilities operated by non-Chinese-headquartered firms.

The Central Government wants to push China’s semiconductor industry forward

Yet, in spite of this reliance on chips and chip-enabled goods, Chinese-headquartered semiconductor firms supply less than 5 percent of the worldwide market and remain at least two generations behind international competitors in their ability to produce semiconductors that are incorporated into consumer electronics. Though Chinese firms lack worldwide market share, the semiconductor industry has had a long presence in the country. China’s central role in the global electronics value chain has prompted many of the leading chip firms to establish back-end assembly, test, and packaging facilities in the country to take advantage of low labor costs and proximity to the Chinese market.

Thus, developing and strengthening the industry is a high priority for the Chinese government. China wants to move “up the value chain” from assembling final products from imported components to creating advanced technology in China itself. Despite this inclination, imports of chips and technology will be the norm for years to come. Today, only 16 percent of the semiconductors used in China are produced in-country, and only half of these are made by Chinese firms. China is very dependent on foreign suppliers for advanced chips. In 2015, China introduced the Made in China 2025 initiative to achieve technological self-reliance in sectors such as robotics, IT, and new energy vehicles. With this initiative, the Chinese government aims to produce 40 percent of its semiconductor requirements by 2020 and 70 percent by 2025.

Market Opportunities

• China is the largest and fastest growing semiconductor market in the world, representing 29 percent ($100 billion) of the $335 billion global market in 2015.

• China, in particular, commands almost half of overall market value, split roughly 50-50 between domestic demand and Taiwan-based, world-leading ODMs (e.g. Foxconn and Quanta) or foundries (e.g. Taiwan Semiconductor Manufacturing Company TSMC) serving global clients.

• China has become a source of income for top global semiconductor companies, many of which generate over half of their revenue from China.

• Near-term prospects for China’s overall market seem favorable and stable for many sectors, including high-end ICT goods and services.

• Domestic consumption is mainly being driven by data processing and communications applications sectors, with consumer electronics also being a significant contributor.

• China’s appetite for semiconductors is so great that domestic production only counts for 9 percent of consumption – leaving 91 percent of China’s demand to be satisfied by imports.

• Demand is growing for high quality semiconductor devices.

• Expected increases in Chinese spending on semiconductor manufacturing equipment to equip and upgrade fabrication (fab) facilities.

• China’s integrated circuit design sector continues to be the fastest growing part of China’s semiconductor industry.

[Source: daxue consulting, SWOT analysis of China’s semiconductor industry]

China’s Semiconductor Manufacturing Industry

The Semiconductor Manufacturing industry manufactures semiconductors and electronic devices, including diodes, triodes transistors, power transistors, transducers and sense devices. Industry firms may also manufacture special parts for these electronic devices.

Semiconductor manufacturing requires experience, ownership of (or access to) a substantial amount of IP, managerial skills, a highly-skilled workforce, and a close connection to scientific research. It also requires a close understanding of the market and the product in which the chip will ultimately be used, an area of “know-how” where China has lagged. Currently, the United States leads in chip design, followed by Taiwan.

The major players in China’s semiconductor manufacturing industry are:

• On Semiconductor Corporation (China)
• Fairchild Semiconductor (China)
• NXP Semiconductors (Guangdong) Co., Ltd
• Infineon Technologies (China)
• ST Microelectronics (China)

The majority of semiconductors manufactured by Chinese enterprises are low-end products with low technology. To better satisfy domestic demand, domestic manufacturers will have to enhance their research and development (R&D) capabilities and expand output. In the next five years, industry revenue will increase 2.2 percent annually to $83.5 billion in 2023. The main drivers of industry growth will be steady increases in overall demand, gradual growth in demand from downstream domestic industries and increasing demand for the industry’s exports. The main markets for semiconductor devices will remain the computer and peripheral equipment manufacturing industries and the network communications industries.

Moving Forward: Industry Outlook

The Chinese semiconductor manufacturing industry is in the growth phase of its life cycle. Contributing to the industry’s development phase has been the rapid rate of technological change occurring within the industry. In recent years, foreign manufacturers have introduced new advanced technologies and management knowledge into the local industry. At the same time, domestic manufacturers have experienced a high level of development, which is expected to continue as they expand their local operations. In addition, given the size of the domestic market, there still exists considerable potential for demand growth for high quality semiconductor devices.

What are the Major Markets for Semiconductor Manufacturers in China?

Computer and peripheral equipment manufacturers: Demand from this market segment is increasing due to the development of the computer and peripheral equipment manufacturing industries, which is being driven by demand for products such as memory boards, personal computer modems, loaded computer boards and peripheral controller boards.

Network communications firms: In line with the strong development of the communications sector in the past five years, there has been increased demand for semiconductor devices to be used in telegraph transformers, fiber-optic connectors and wireless communication terminal equipment.

Electrical lighting manufacturers: Indicator lights and LED displays and lighting.

Consumer electronic goods manufacturers: China is one of largest producers of household electrical goods, which is reflected in the high level of demand for semiconductor device products from consumer electrical goods manufacturers.

Automobile electrical equipment manufacturers: This segment is expected to grow in the next few years due to the development and expansion of China’s Automobile Manufacturing industry.

What are the key success factors for succeeding in China’s Semiconductor Market

• Having links with suppliers
• Access to highly skilled workforce
• Ability to quickly adopt new technology
• Establishment of export markets
• Economies of scale
• Effective quality control
• Undertaking technical research and development
• Having a good reputation

No One-Size-Fits-All Solution for Market Entry

Multinationals trying to access the Chinese market should consider a multitude of factors such as policies, technologies, marketing, logistics and global strategies. It is also important for multinationals to realize the position they are in before entering China to come up with the best entry strategy. Obviously, there is no one single correct method, but in general, MNC’s technology status as well as China’s domestic technology status play a crucial role.

Domestic demand from China will still be a growing source of revenue for foreign semiconductor manufacturers over the next few years. This encourages MNC’s to continue targeting Chinese consumer electronics, data processing and communications companies manufacturing in China. However, semiconductor firms, in addition to providing chips, must find ways to either monetize new technologies beyond the actual chips themselves or expand into new business models enabled by those technologies. Companies that do so will thrive. Those that don’t will be overtaken by more agile competitors.

When an MNC has the upper hand in technology, it has higher bargaining power and will have less incentive to share intellectual property. However, MNCs might altogether avoid cases where domestic players are already strong. For instance, China is relatively weak in the high-end design of semiconductors and manufacturing, and competition is not high, so MNCs typically need to set up regional offices or a wholly foreign-owned enterprise (WFOE) to access the market. In areas where China is relatively strong such as packaging, testing and low-end design, MNCs may opt to setup a JV or avoid the market altogether.

Author: Jeffrey Craig

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This article China’s Semiconductor Industry: 60% of the global semiconductor consumption is the first one to appear on Daxue Consulting - Market Research China.

We observed Chinese consumption during the Coronavirus and witnessed a radical shift from brick and mortar physical services towards online services in China. Given the number of people self-quarantined in their homes, those that frequented physical stores, gyms, and workplaces, are now trying out virtual offerings. Newcomers such as remote work platforms are emerging from the depths of the APP store. Understanding the changes in Chinese consumer demand during the Coronavirus allows seeing new occasions through the fog. Here is a peek at what China needs more of during the Coronavirus outbreak.

Pet owners are looking for pet sitters

While many Chinese people remain stranded in their hometowns, an invisible but significant number of furry friends are left alone at home, far away from their beloved owners. The Coronavirus outbreak boosted the pet sitting market in China, so we spoke with a pet-sitting business owner to get more insight.

Two years ago, after struggling to find someone to take care of her puppy when she was travelling abroad, Julie Chanal, a white-collar worker in China, had the idea to launch her own platform to link pet sitters and pet owners.

“At that time, I could not have imagined letting my rescued dog Polo alone or entrusting it to friends since my little one was young and a little crazy.” In December 2018, Julie decided to launch HappyNest, “A pet lover community to take care of your furry friend the time you need.” In slightly more than a year, the platform already reached around 150 pet sitters located in Shanghai.

[Photo Source: HappyNest, a pet sitting platform in China that has seized Chinese consumer demand during the Coronavirus]

Surge in pet-sitting demand during Coronavirus outbreak

During the outbreak, the platform registered a surge in demand for pet sitting. “We had a lot of booking of sitters, and some pet owners wanted to extend the duration of their pet sitting because they were extending their holidays as well.” Chanal says the outbreak also creates trouble for her business, “On the other hand, the epidemic is putting a strain on our community, with people meeting difficulties to get out of their homes to take care of other’s pets.” The time remains challenging for the young entrepreneur who is continuously seeking to extend the pet sitters community to fulfill the growing demand. Anyway, with or without the Coronavirus, HappyNest aims to double its community by the end of 2020.

Chanal is likely to achieve her goal. According to China Pet Market, it is not only a new Chinese consumer demand during the Coronavirus, since the pet population is expected to reach 755 million in 2022, with an 8.2% compound annual growth rate. The growing middle class, a massive move to cities and other demographic changes – such as having children later in life – also explain why pet owners in China would spare little expenses to make their loved ones happy. Chinese consumers are set to spend 46.3 billion yuan ($7 billion) on their pets by 2022, up from 17.5 billion yuan ($2,5 billion) in 2017.

The need to work and study online: a new model of Chinese consumption during the coronavirus

Despite offices remaining closed, Chinese companies are eager to start operations. Remote work APPs  are booming on the back of the Chinese demand during the coronavirus to study and work from home.

Tencent Meeting and Alibaba’s DingTalk apps are here to make you keep working at home while keeping in touch with your colleagues. From nearly zero downloads before the outbreak to more than 500,000 daily downloads as of late February, the two apps skyrocketed to the very top of the Appstore in a matter of days.  

[Data Source: Qimai, iOS downloads of Tencent Meetings and DingTalk show the Chinese consumer demand for remote work APPs during the Coronavirus outbreak]

The trend also extends to students whose schools rely on such tools to deliver online lectures amid the epidemic. However, Chinese students don’t see it that way. These digital natives are massively giving one-star ratings to the most downloaded applications in hopes of making them deleted from the Appstore.

[Photo Source: Apple Store – DingTalk ratings, behind the scenes of Chinese consumption during the coronavirus]

Despite some angry reactions from the young ones, the intensive use of online office tools by companies in recent weeks is expected to continue even after offices reopen. China’s remote-working solution market could reach $477 million by 2024, up from $169 million last year.

Live-streaming platforms to relieve offline businesses

While local authorities closed gyms across the country, the Chinese are looking for ways to stay in shape. Mobile fitness apps are seizing the new Chinese consumer demand during the Coronavirus to make people do exercise at home.

That’s the perfect example of an entire industry switching from offline presence to online interactions, promptly following Chinese demand during the Coronavirus. Keep, one of the most popular fitness brands in China, smartly used the Douyin live-streaming feature to move the classes online, boosting its followers by 185% from the start of the Chinese New Year. The company releases daily fitness class schedules via Weibo and WeChat, driving traffic on Douyin, ByteDance’s Chinese version of TikTok.

Clubbing from the safety of your livingroom

The Keep moving phenomenon doesn’t stop there, with clubs deciding to live-stream mixing performances on Douyin. A five-hour set at OneThird, a nightclub of Beijing, brought back to the club $285,000 in tips donated by the viewers on the short video platform. Banking on the trend, Douyin’s short video rival Kuaishou is now making deals with clubs across China to stream their shows.

[Photo source: Bloomberg, One Third – A DJ performs to a live stream audience at OneThird in Beijing]

Live-streaming and short videos are an answer

Industries are focusing their efforts to answer the Chinese demand during the coronavirus towards online services in China, sometimes accelerating existing trends. One example is this shift towards live-streaming, which already exploded in 2018, with a 745% growth year on year, thanks to improved connectivity and video maturity.

[Data source: Statista, China short video market revenue]

Outside of partying and staying fit, the Chinese are also extensively using video platforms as a way to stay informed and share their feelings during the epidemic. The Chinese demand during the Coronavirus turned to the news on the outbreak, or life hacks to fight boredom. According to Forbes, between January 20 and February 2, 574 accounts on Douyin and Kuaishou each gained between 100k-500k new followers.

Given Chinese consumption during the coronavirus of short videos and live-stream contents, there are obviously no better times to become influencers on Chinese video platforms. Sleeping in front of the camera could even make you rich!

A chance for the gaming industry

The Chinese demand during the Coronavirus for mobile games has never been so important with Tencent’s Honor of Kings, a multiplayer arena battle game, reaching up to 100 million daily active users. Plague Inc. was ranked #1 in the paid game sector of the apple store in January, before being removed by the Chinese authorities on January 28.

The increase is attributed to the impact of the novel coronavirus, which led to more gamers staying at home instead of traveling or socializing outside of the home, allowing more time to play games. The craze for video games trickles on another Chinese live-streaming platform, Douyu, specialized in gaming content. On Douyu, Honor of Kings, PlayerUnknown’s Battleground and League of Legend are twice as popular than they were during Chinese New Year 2019.

On February 13, Douyin’s maker ByteDance appointed exclusive head to take care of a gaming branch, signaling its new ambitions in the mobile gaming sector. Rushing into this new consumer demand in China, the company looks to further monetize its millions of users outside of advertising, through mobile gaming.

Crisis management and market opportunity in China

In Chinese, ‘crisis’ (危机) includes the word ‘opportunity’ (机会), arguing that opportunities for growth arise during crisis. The cessation of activities caused companies to step up as leaders during Coronavirus crisis management. Chinese consumption during the coronavirus of online services in China is a game-changer for the entire Chinese economy. Anticipating the Chinese consumer demand during the Coronavirus opens new market challenges in China for those capable of thinking outside of the box. Who would have imagined virtual clubbing entertaining millions of people?

Author: Maxime Bennehard

The ultimate Coronavirus economic impact in China report

This article Changes in Chinese consumer demand during the Coronavirus is the first one to appear on Daxue Consulting - Market Research China.