How COVID-19 impacted China’s aircraft industry

The darkest period of China’s aircraft industry

The epidemic has frozen China’s aircraft industry. Chinese domestic residents were scared of the contamination during  travel. As for expatriates and Chinese students who study abroad, it was nearly impossible for them to fly back to China as Chinese authorities closed their borders and implemented the ‘Five One policy’. Hence, the sudden drop in passengers cut off China’s aircraft companies’ cash flow and exposed them to the risk of bankruptcy.

Source: daxue consulting, China’s five-one airline policy during the COVID-19 pandemic

During the Chinese New Year holiday, the occupation rate of flight seats was about 80%, which however decreased to under 60%, and even 40% after the outbreak . In February, China’s aircraft industry lost about 1.2 billion RMB in the domestic market and 300 million RMB in international market every day. If we have a look at the medium-term impact of COVID-19 on the sector, the escalating loss totaled more than 100 billion RMB until May. Thus, there is no doubt that the Coronavirus caused long-term impact on China’s economy and it will need three to five years for China’s aircraft industry to tide over this dark period.

Source: cannews, immediately following the announcement of COVID-19, the domestic flights on January 24^th to 28^th experienced a major gap in supply and demand.

The self-rescue plans of China’s aircraft companies

It was urgent for China’s aircraft companies to take measures to stop the bleeding of resources. Many companies called their jets to an emergency halt to reduce the cost of staff and fuels due to the poor occupancy rate and complicated isolation regulations. Thus, the risk of bankruptcy forced Chinese aircraft companies to implemented technical and organizational transformation. Many of them targeted live webcast to sell discounted tickets, headrests and some special products. It is surprising that the self-rescue plans worked, and they got money to compensate the loss and maintain normal operations.

The outbreak of COVID-19 boosted China’s online shopping market, and the live-streaming is the key to open the door towards Chinese netizens. Therefore, many China’s aircraft companies sold tickets by using Chinese KOLs or creating their own livestreaming rooms. For example, during China’s 6.18 shopping carnival, China eastern airlines promoted a new weekend ticket, which is valued 3,322 RMB and allows passengers to fly to any mainland city until 2021. This promotion piqued Chinese consumers’ traveling desire, and they sold more than 100,000 tickets in one single day! Through these successful self-rescue activities, China eastern airlines not only raised about 300 million RMB cash, but also increased the number of travelers. 

The private jet market has soared in China

After the epidemic has paralyzed China’s general aviation, more flexible and safer private jet has become the first or even the only option for many people, creating the busiest quarter in the history of China’s private jet market. Many wealthy Chinese students who were stuck abroad during COVID-19 chose private jets to come back to China and the price of private jet charter rose dramatically. For instance, the number of foreign private jets flying to China increased 227% during Q1 2020, compared with Q1 2019. Additionally, the price of chartering a private jet with 14 seats rocketed by 30% from 1.35 million RMB to 1.74 million RMB in March. Some student even paid an astonishing 180,000 RMB for a ticket home.

More and more Chinese wealthy choose private jet as their transport tool since it is more convenient and shows a sample of status at the same time. After the outbreak of COVID-19, private jet charter users increased by 300%, and 80% of them were newcomers. Apart from the soaring of private jet market, Chinese billionaires also squandered money on private jet purchasing. Among 466 business jets in greater China, there were 163 private jets owned by 113 Chinese billionaires, which increased by 34 from the year before. Therefore, the vice president of OHFLYER, Haiyang Wang, said that the demand of private jet in China will definitely be higher than before COVID-19.

The development of China’s aircraft manufacturing

The Chinese plane-makers’ fight back against western manufacturers’ grip on the sector

For the past decade China, has been developing its own planes to cast off western manufacturers’ cord on the sector. But the planes made by Commercial Aircraft Corporation of China (Comac), the ARJ21and the C919, have been plenty criticized. It is believed that Chinese-made jets will not rival those of Boeing and Airbus in the short-term. With only 90 seats, the ARJ21 has been rejected by the aircraft industry as inferior to planes from other aircraft manufacturers due to frequent delays and loud noise. On the other hand, the C919, Comac showed  bigger ambitions. Carrying up to 168 passengers, the C919 is designed as China’s first large aircraft to compete with Boeing’s 737 Max and Airbus’s A320neo. Furthermore, Comac is developing a third plane, the CR929, cooperating with Russia, and it is scheduled to be delivered in 2021. However, there still are some risks that Boeing and Airbus will also roll out their new high-performance planes when the CR929 entered the market.

Despite criticism, as a state-backed company, Comac is full in potential with high-tech aircraft manufacturing. It is not strategically correct to underestimate Chinese ability to penetrate the aircraft market. “The aircraft landscape is likely to shift from a European-Us manufacturing duopoly to accommodate a third part, and that’s probably the Chinese.” Shukor Yosof, founder of aviation advisory firm Endau Analytics originally told BBC.

Which markets are China’s plane-makers targeting?

As of now, Comac has received about 815 commitments for the C919 from 28 Chinese airlines and domestic leasing firms. Besides, its main partners are China’s three major airlines, Air China, China Southern and China Eastern.

Right now, only China’s aviation regulator has certified its jets to fly. As for foreign market, its jets may also operate in parts of Asia, Africa and South America that recognize Chinese certification. Then the permission from the US Federal Aviation Administration (FAA) and the European Aviation Safety Agency (EASA) are necessary for it to expand beyond those markets. However, western countries’ green light is still far from certain. Hence, turning around from international market, Comac mainly targets the greater China and foreign zones certificated with fly permission.

Challenges encountered by China’s aircraft manufactures

The main challenges of China’s national aircraft manufacturing companies, like Comac, are technological problems and high cost of components. Taking the C919 as an example, the development of the plane stemmed from 2007, cooperated with more than 200 companies and involved more than 20,000 people. Yet the engine of the C919 is manufactured by French SNEMAC and American GE. Thus, the mismatch of high-cost and low-performance makes China’s plane-makers lack of competitiveness. At the same time, getting the green light of foreign aviation regulators is also a big puzzle, which takes a long time and is full of uncertain.

As for small and private aircraft manufacturing companies in China, their biggest challenge is not about aircraft-related technology, “but getting the license from Civil Aviation Administration of China (CAAC),” Deng Chunpeng, general manager of a private aircraft producing company says. It won’t take a long time for them to solve technical problems like airframe design, the development of engine and components packaging. But the licenses including Production Certificate (PC) and Type Certificate (TC) will take years to get.

The expansion of China’s airport infrastructure

The gap between China’s economic development and airport construction

The U.S, Australia, and Canada have 20,000, 2,000, 1,200 general aviation airports respectively, but there were only 235 in mainland China in 2018. As of 2020, China has programmed and built 244 airports, with a 3.7% annual growth rate. Obviously, the development of China’s general aviation industry is not keeping pace with its overall economic advancement. As for long-term prospects, until 2025, China is planning to strengthen the air transport hub effects of Beijing, Guangzhou and Shanghai airports, and connect 93.2% cities of China.

Source : chyxx.com, The development of China’s general aviation airports

The construction of Beijing Daxing International Airport is aimed to stuff the gap between China’s economic soaring and airport infrastructure. As China’s air transport pivot, Beijing Capital International Airport had become the second airport annually receiving more than 100 million tourists, behind the United States’Atlanta International Airport. However, this airport was built in 1958, which means obsolete facilities cannot support such enormous pedestrian flow anymore.

The Beijing Daxing airport

Occupying 1.4 square kilometers and invested 80 billion RMB, Beijing Daxing International Airport has been dubbed “the 7^th wonder of the world” by the Guardian. Owning such a laurel is not merely because of its immense terminal, but also advanced facilities and user-friendly designs. It is able to annually receive 100 million passengers with four runways for large aircrafts.

As for the interior, passengers just need 8 minutes to arrive at the furthest boarding gate after passing the security check. Besides, Daxing airport’s creative layout largely reduces travelers’ transfer time: 30 minutes for domestic transfer, 45 minutes for international transfer and 60 minutes for domestic-international transfer. So far new airport subway line has been in operation, commuting from south center city in 40 minutes. Therefore, the completion of Beijing Daxing International Airport has eased the air traffic pressure of Beijing, and symbolized China’s efforts on airport construction.

The distribution of China’s aviation network

Beijing-Tianjin-Hebei, Yangtze River Delta and Pearl River Delta are the hubs of China’s aviation network. In recent years, relying on Chinese government’s strategic supports and rapid economic development, Chengdu-Chongqing and Xian account for increasing proportions. In China’s airports passenger flow rank of 2019, the top 5 were Beijing Capital International Airport (100 million passengers), Shanghai Pudong International Airport (76.1 million), Guangzhou Baiyun International Airport (73.4 million), Chengdu Shuangliu International Airport (55.8 million), and Shenzhen Baoan International Airport (52.9 million).

Although the Chinese government suspended all flights to Beijing due to the second outbreak of COVID-19 in mid-June, China’s aviation network won’t change noticeably for the long-term.

Takeaways of China’s aircraft industry post COVID-19

The COVID-19 outbreak is the bust of the century for the global aircraft industry, and China, of course, cannot escape from the misfortune. The shock caused by the epidemic on the sector will need three to five years to adjust. On the positive side, the huge potential market will definitely boost China’s aircraft industry recovery. Besides, thanks to their successful self-rescue plans, many Chinese airlines maintained their cash flow’s normal operation and stimulated people’s traveling desire.

However, China’s aircraft manufacturing and airport infrastructure didn’t follow the pace of economic advancement. China’s plane-makers need to implement technological transformation to improve their aircrafts’ competitiveness, and Chinese government need to speed up the airport construction. If you want to get more information about China’s market, please email dx@daxueconsulting.com

Author: Olivier Liu

Listen to 100 China entrepreneur stories on China Paradigms, the China business podcast

Listen to China Paradigm on Apple Podcast

This article A look at China’s aircraft industry after COVID-19 is the first one to appear on Daxue Consulting - Market Research China.

Measures taken by foreign companies since the beginning of the outbreak

Remote work

95% of the surveyed companies set up remote work tools to ensure the continuity of their operations as soon as the Chinese New Year holidays ended, in early February 2020. However, they encountered several challenges like inability to work from home for employees of factories, workshops and construction sites. Furthermore, support functions working remotely also need the necessary IT tools. Thus, relative solutions are sending tools and components to assemble at home, providing VPN access, sending new computers through the IT team and adopting software to facilitate remote work. Moreover, during the pandemic, the top 3 used collaborative tools are WeChat, DingTalk and Zoom.

Flexible work and more flexible hours

49% of the companies surveyed decided to implement a staff turnover policy to reduce the risk of contamination at work, and it was used more often in medium-sized enterprises and large enterprises, whose payroll increased the risks significantly. For these companies, staff turnover took effect at the end of the remote work period, allowing a smoother and safer return to work. Hence, it generally started from the end of February until the end of March. Most chose a system of two teams (A and B), which shared a week each.

Source: daxue consulting, The impact of Covid-19 on the organization and HR of foreign companies in China.

In order to avoid peak hours in public transit, companies reorganized working hours. Employees had departure and arrival time slots, based on their preferences in a 3-hours slot. Furthermore, 5 companies mentioned the provision of rental cars and Didi 滴滴for employees who had to use public transit.

Specific measures to avoid the risk of contamination at work

100% of LEs, MSEs and SEs, and 75% of MEs implemented specific health measures by the end of the Chinese New Year holidays in early February. In factories, the sanitary measures became stricter: reorganization of the changing rooms, footbath at the entrance, more masks supplied per day, and a quicker pace of staff turnover. Additionally, in order to avoid physical contact as much as possible, canteens and meeting rooms were prohibited or fitted to respect the principle of social distancing.

The digital health passport (suishenma 随申码) has been deployed on the Alipay 支付宝 mobile payment app across China since late January. It tracks the movement history of individuals, coupled with the geographic data of the pandemic. Sequentially, it delivers its conclusions in three colors as illustrated below.

Employees’ temperature was regularly checked by digital infrared thermometer at the entrance of the buildings. Furthermore, nominative cards at the entrances were distributed to employees to enter the buildings, and employees were required to keep a physical distance of at least 1 meter in access lines. Beyond these, enterprises distributed masks and hydroalcoholic gel to employees in the office and implemented disinfection protocol every 2 hours.

Undoubtedly,  China’s measures to suppress the spread of the Covid-19 have achieved significant success. Meanwhile, these technological and organizational transformations enabled developments in working remotely, tracking population movements and establishing QR tracking

Operations resumption

The companies surveyed had largely resumed their operations by February 10^th. Authorizations to restart the activity were issued for 88% of small and micro enterprises, compared to 75% of large and medium-sized enterprises.

According to the company’s activity sector, the full recovery is very contrasted, mainly assessed on a case-by-case basis by local authorities. Thus, companies whose areas are considered strategic, such as health or chemicals, have not encountered any difficulty. On the contrary, business sectors based on physical stores suffered a slower recovery, especially those in physical retail.

Check out our pages about how China is recovering from the Coronavirus outbreak and the Coronavirus China economic impact report by Daxue Consulting.

Main HR challenges met by French-speaking companies in China after the outbreak of the Covid-19

Employee motivation and involvement

In early February, the motivation of employees was divided between the desire to resume normal work and the risk posed by contamination in the office. At the end of February, employees’ motivation was affected by the remote work, emphasing the importance of “social work ties” over time. However, the comments of the respondents remained appreciative towards the state of mind of their employees during the crisis and 80% of surveyed companies considered their employees motivated during the crisis.

Assuming that most of the respondents believed that their employees were motivated, the comments showed that it is more the respondent’s state of mind that prevailed in answering this question. Thus, a respondent who is somewhat optimistic about the evolution of the situation will tend to say that his employees were motivated.

To successfully identify the feelings of employees during the crisis and determine their needs, several companies conducted internal surveys at different times during the crisis.

Employee’s feelings

70% of companies surveyed find their employees concerned, especially during the month of February. Fears were mostly fueled by the following causes:

• Staff were worried about potential issues around salaries and job security.
• Fear of contamination during transportation to work and at work.
• Concerns about the return of other employees from high-risk areas.
• Fears on current activities and projects.

Additionally, employees were also curious about following questions:

• What was the financial impact for the company?
• What were the legal and economic repercussions on employment?
• How would the recovery be organized?

Thus, knowing how to assess the mental wellbeing of employees during Covid-19 disruption became nonnegligible for companies. It is notable that short- and medium-term business fears were not necessarily correlated with the size of the business on its pre-crisis financial health. Similarly, subsidiaries of large groups and midcaps in China were not spared from these concerns.

Crisis communication and leadership

While facing these different challenges, leaders and managers insisted on their role in the communication process to answer the questions concerning the business’s economic future, job security, and organizational changes. Regular crisis communication brought visibility and transparency to employees. These methods were necessary to reassure and reduce feelings of anxiety among the employees.

Some comments highlighted the importance of leadership in helping employees get through the crisis. Companies cited decision-making and responsibility as essential leverage for organizing remote work and resuming activities.

Many employees were stranded in high-risk areas and the bottlenecks were long-term since they were unable to reach their workplace from January to April. Some workers were denied entry to their dorms, or were no longer travelling between provinces, according to local regulations. As for the solutions to overcome these issues, remote work remained the leading one.

Source: daxue consulting, Covid-19 impact on the organization and HR of foreign companies in China. Many companies had employees stuck in high-risk regions like Wuhan.

With the global expansion of the pandemic in March that forced the Chinese authorities to close their borders, some expatriates were stranded outside of China. Thus, French-speaking companies in China expected difficulties, particularly for visa renewals and expatriate family life.

Work-life balance

Isolation impacted the work-life balance, which was becoming increasingly difficult to maintain, causing more fatigue and burn-out among employees. Concentration difficulties were sometimes linked to the lack of peace at home, the presence of young children, or the absence of a formal working environment. In fact, 45% of companies believed that children’s education from home has had an impact on the availability of employees. Hence, for some employees, the home work environment resulted in a lower level of productivity.

HR policies implemented by French-speaking companies in China to ride out the crisis

Salaries

Overall, there have been several cases of wage cuts or deferrals during the crisis. However, we observed a clear cap between companies of more than 5,000 employees in China and the rest of the landscape of French-speaking companies interviewed. 50% of LE s decided to act immediately on employee salaries, compared to 17% of SEs. Generally, the wage cuts targeted the executives and the companies’ highest wages. Otherwise, they were linked to a significant impact of Covid-19 on foreign company’s activity area.

35% of the companies surveyed were likely to freeze or cut wages in the short-term, no matter the size of their workforce. Besides, comments showed that future freezes or reductions would be subject to many uncertainties, and linked to the difficulty of anticipating a return to normal activity. Again, some comments indicated that these freezes or cuts would generally affect the highest salaries.

Source: daxue consulting, Covid-19 impact on the organization and HR of foreign companies in China. Large enterprises were more likely to reduce wages during COVID-19 in China.

Layoffs and recruitment freezing

9% of the companies surveyed carried out at least one layoff during the crisis. In the sample surveyed, theses layoffs affected small enterprises. With less financing than subsidiaries of medium-sized companies and large groups in China, small enterprises were hit hardest by the crisis, and were sometimes forced to fire employees. However, it was unclear whether the 9% of layoffs were all directly related to the crisis or not since several comments referred to restructuring plans implemented before the crisis to justify the layoffs.

On the other hand, recruitment was frozen. Overall, there were fewer recruitments during the crisis, except for strategic positions. Store sales, support of customer service positions, directly affected by the crisis, were impacted by the freeze. As for strategic positions maintained, were mainly digital ones, directly related to the good performance of online services during the crisis. Comments showed that IT and social media positions were strategic during the crisis. Here is more information on how the e-commerce industry in China is changing during Covid-19.

New recruitment methods and organizational adjustments

Several French-speaking companies in China added that they encountered difficulties in the process of recruiting new candidates in China during the epidemic. These challenges stemmed from the inability of recruiters to meet candidates in person. As a result, interviews by videoconference were mentioned to facilitate the process, as well as the use of psychometric tests as additional decision support.

Also, companies wondered about a potential change in the professional aspirations of candidates: “Will the epidemic push some candidates to look for work closer to their homes?” and thus never leave their province of origin…

As for organizational adjustments, a few companies reported using the “zero-based budgeting” method to adapt their HR policies during the crisis. The zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period to focus on cost containment. This budgeting method is contrary to incremental budgeting, which applies additions or deductions to the last period’s actuals.

Future prospects of French-speaking companies in China after the Covid-19

Forecasting the recovery

Most of the French-speaking companies in China do not forecast a full recovery until Q4 2020 or Q1 2021. Indeed, the epidemic still impacting Europe and North America and will affect the visibility of the companies whose operations are globalized. According to them, three indicators need to be closely monitored: order book, cash and the working capital requirement (WCR). Conversely, French-speaking companies in China whose operations are based exclusively on the Chinese domestic market have seen their activities restart at a quick, sometimes surprising pace.

An example of a respondent’s foresight of his operations’ recovery: From April to May, in the short term, slight impact of Q1 very easily absorb-able on Q2; From June to December, in the medium term, a possible violent reversal; On January 2021, in the long term, operation recovery will depend on the possible relocation of customers, the US election results and the international situation as a whole (political, economic and financial).

Some strategic changes and experience from the Chinese subsidiaries

To cope with the impact of the Covid-19 on foreign companies in China, decision makers are taking advantage of the momentum of online services to develop their digital activities. Others have made complete strategic changes to survive the crisis.

The French-speaking subsidiaries in China, whose headquarters are located abroad, transferred the experience in China. The questions are mainly related to the necessary protective measures to be taken for the work resumption and the end of isolation. Main tips are the followings:

• The Chinese team in support of the group’s crisis unit.
• Implementation of China’s best practices for the French headquarters.
• Toolbox for the crisis management experience sent to headquarters and global teams.
• Online webinar with the subsidiary: The impact of Coronavirus on the Chinese markets and its innovations.

We are still far from having drawn all the conclusions from the health crisis since the world has switched to an economic one. This study initiated by daxue consulting and Dragonfly Group provides a solid outline to understand the operational and organizational transformation in which the international companies have engaged in China. We are grateful to those companies which agreed to participate in this survey and their contributions are definitely significant. If you have any question, please feel free to contact us.

See how companies in China responded to the COVID-19 crisis in our Crisis Management Report

Listen to 100 China entrepreneur stories on China Paradigms, the China business podcast

Listen to China Paradigm on Apple Podcast

This article The impact of the Covid-19 pandemic on the organization and HR of foreign companies in China is the first one to appear on Daxue Consulting - Market Research China.

Work Area: Research and marketing

Expected Travel: 0 –5%

Employment Type: Regular Full Time

Base: Shanghai

Key Responsibilities

1. Show leadership to suggest, plan, monitor and validate content creation
2. Help with marketing strategy and content promotion.
3. Lead the creation of reports on the Chinese market
4. Use creative ways to find data and display data and information clearly
5. Report to the top management the status of content creation processes on strategic topics
6. Run online research and collect data to improve the content creation process. It includes extraction of data on digital software and platforms developed by Daxue Consulting
7. Track results of posts on social media to continuously improve strategy
8. Discover new ways to collect insightful data which show societal and economic trends

Key requirements

1. Professional English in both speaking and writing;
2. Be interested in writing, exploring and understanding markets;
3. Have good knowledge of business and marketing concepts;
4. Be result-oriented, proactive, confident and analytical.
5. Be creative, curious and research-oriented at the same time
6. Must be able to work in a multicultural environment

If you are interested, please send your cover letter and resume in English to jobs@daxueconsulting.com

When you become marketing research manager, you will lead the creation of reports like the ones below

This article Marketing Research Manager is the first one to appear on Daxue Consulting - Market Research China.

History of Volkswagen in China

On March 28^th, 1937, ‘Gesellschaft zur Vorbereitung des Deutschen Volkswagens GmbH’ was founded in Germany. Later on Sep 16^th, 1938, it got a name ‘Volkswagenwerk GmbH’. It is now one of the world’s largest international automobile companies, which produces and sells automobiles throughout the world. Today, the German company owns several world-known car brands such as Audi, Skoda, Lamborghini, Bentley, Porsche, Bugatti, Seat, and Scania.

In 1978 Volkswagen (VW) became one of the first international automobile manufacturers to enter the Chinese market. At that time, the development of the Chinese automotive industry was still in its infancy. In October 1984, Volkswagen Automotive Co., Ltd. established as the first Volkswagen Group joint venture in China. Today, the Group has 16 representative companies in the country, undertaking parts delivery and service provision for both customers and industry in addition to vehicle production and import. The Chinese market is one of the main markets of the Volkswagen Group. Operations of Volkswagen in China include the production, sales and services of whole cars, parts and components, engines and transmission systems.

China is the new center of power

The Chinese auto market is a special one in several respects – not only for its size and rapid growth. Government incentives and regulations play a role in controlling sales. For example, in 2015 the Chinese authorities temporarily cut taxes on cars in half with displacements of up to to stimulate sales for this class of vehicle.

Among the German carmakers, the Volkswagen Group has been a pioneer on the Chinese market. China is the biggest single market for the Volkswagen Group. Volkswagen in China produces and sells Volkswagen (e.g. Polo, Touran, Passat) and ŠKODA (e.g. Fabia, Superb, Kodiaq among others) brand models. Additionally, there are vehicles purposefully designed for China such as the Teramont SUV and the Phideon luxury sedan.

[Data Source: Volkswagen Group report 2018, ‘VW volume in deliveries to customers’]

Volkswagen in China: Demand for SUVs continues to grow

China’s automobile market is undergoing a period of slow growth as China’s economic growth slows down slowly recovers from the COVID-19 pandemic. However, the high growth rate of the SUV (Sport Utility Vehicle) market has attracted the attention of many automakers. From 2013 to 2017, SUV sales grew rapidly in China, with the growth rate reaching 27%. The share of SUV in the Chinese market continues to grow.

[Data Source: Statista, ‘SUVs share in China’s passenger car sales from 2014-2018’]

Teramont and Phideon reflect the major trends on the Chinese car market. The Teramont answers the growing demand for SUV-class vehicles. Around four in ten newly registered cars in China are currently SUVs, and that figure is rising. The Volkswagen brand alone will have more than ten models on the SUV market by the end of 2020. The year 2018 saw the launch of the Tharu, Tayron, Touareg and T-Roc. In 2021 Volkswagen plans to invest more than $4.4 billion to add more SUVs to its lineup.

Volkswagen in the battle for China’s green vehicles market

China has an important role as the world’s trendsetter and largest market for e-mobility. It alone accounted for 60 percent of worldwide demand for electric cars and plug-in hybrids in 2018. In 2018 around one million passenger cars with electric drives found buyers in China. That figure rose by 50 percent in 2019.

[Data Source: Business insider, ‘Electric vehicle sales in China forecast’]

The government is giving much attention to the field of electric mobility in China. By 2020 the fleet average fuel consumption is supposed to lie at five liters per 100 kilometers. To further advance e-mobility, the Chinese government introduced an electric car quota. Manufacturers that sell more than 30,000 cars a year in China must ensure that 10% of them are electric. All cars in the quota category receive credit points.

Volkswagen plans to invest in EV in China

The Volkswagen Group wants to lead the EV trend with a model campaign. By 2020 Volkswagen in China seek to bring 30 new fully electric and hybrid vehicles. By 2025 sales of electric models should reach 1.5 million units. Volkswagen China plans to invest more than US$12 billion in building and developing new-energy vehicles. It is the latest sign that competition for green cars in the world’s largest auto market will escalate. In 2019 Volkswagen claimed that it will introduce a new-energy vehicle portfolio of 40 locally produced models in China by 2025. Volkswagen in China has also teamed up with Anhui Jianghuai Automobile Group for a third joint venture. The joint venture will help the company to reach its goal of setting up a portfolio of pure battery cars.

Volkswagen – auto market leader in China

According to Volkswagen financial report 2019, the total profit of Volkswagen in the Chinese market was EUR 3.33 billion. By 2018 the Volkswagen Group built seven new plants in China. By then, the annual production capacity rose from 2.6 million to over 4 million. Volkswagen has the largest market share in the Chinese market during many years. In 2019 it was 14.6%.

[Data Source: carsalesbase.com, ‘China’s auto market 2019’, VW has the largest market share in China’s auto market]

Volkswagen in Shanghai

Volkswagen entrance into China formally began in March 1985, when it established its first facility in Shanghai (上海). Shanghai Volkswagen is a jointly-owned enterprise, with China and Germany each holding half of the initial investment. It is now the biggest modern automobile production base in China. Under the two major brands, Volkswagen and Skoda, it is covering markets of A0, A, B and SUV.  Despite its success, it also faces competition from other foreign automobile manufacturers. For example, Santana Motor, a Spanish car manufacturer, has experienced country-wide success since it entered the country nearly 30 years ago in 1984.

Volkswagen in Changchun

With the success of Shanghai Volkswagen, the company turned its eyes to northern China and founded FAW-Volkswagen in Changchun (长春) in the Jilin(吉林) Province. By 2019, the company had more than 100,000 employees working there. After the establishment of its facility in Changchun (长春), the company created another two branches in China: one in Chengdu (成都) and one in Foshan (佛山). The Changchun plant of Volkswagen FAW Engine is an important powertrain production base for the Volkswagen Group. The annual production capacity is 300,000 units of the EA 888 engine.

Volkswagen in Tianjin

To keep up with demand for both SUVs and electric cars, Volkswagen in China opened three new factories in 2018: in Qingdao, Foshan and Tianjin. Tianjin plant produces electric vehicles based on the MQB platform. The factory in Tianjin also make high numbers of new models from FAW-Volkswagen, especially SUVs. Volkswagen Tianjin Plant will produce SUV models for both the Volkswagen brand and the Audi brand. The facility’s daily production capacity will be 1,200 units, with an annual production capacity of 300,000 units.

As a green factory, the new Tianjin plant will introduce a number of state-of-the-art sustainability measures. It includes world-leading volatile organic compounds (VOC) emissions control technologies and solar photovoltaic technologies. The facility will also focus on reusing water, with a reuse rate of 98%. By recycling and utilizing the waste water, the Tianjin plant will save up to 300,000 tons of water annually.

The location of the new plant near the Volkswagen Platform Tianjin Branch and Volkswagen Automatic Transmission Plant Tianjin will reduce delivery times, resulting in lower supply costs and CO2 emissions in the supply chain. 

[Source: Volkswagen Group, ‘Volkswagen group in China’]

Competition in the Chinese auto market

Tesla and Volkswagen: EV price competition

Manufacturers such as Tesla and Volkswagen are ramping up operations in China to nab a piece of growing EV market. Volkswagen is readying two Chinese factories to build electric cars in 2020. The Chinese plants will have a production capacity of 600,000 vehicles. This will enable Volkswagen to leapfrog Tesla and make China the key battleground.

Tesla in China is still trying to reach its goal of making more than 500,000 cars a year by building a factory in Shanghai. VW relies on an established workforce in two of its plants in Anting and Foshun to build zero-emission cars.

Tesla’s cars have a sophisticated software algorithm to control how much electricity goes to the electric motor, air conditioning, seat heaters. Volkswagen China  uses price and massive economies of scale to gain a competitive advantage.Volkswagen’s lower price comes from the car maker’s ability to place large orders.

[Data Source: Cleantechnica, ‘China Electric Vehicle Sales April 2019’, VW EV car sales surpass Tesla’s EV car sales in China’]

Battle between GM and VW

General Motors run of strong sales in China recorded its highest September sales result ever. In 2017, GM’s sales jumped 6.3% year over year as key rivals lost some ground. General Motors’ strongest non-Chinese competitor in the market is Volkswagen Group.  Despite posting a similarly strong with deliveries rising 7.5%, VW’s volume was just around 315,000 vehicles in 2017. The driving force for GM’s gains was SUV sales. From 2018 Volkswagen in China continues to outperform General Motors, as GM posted another double-digit decline in volume. 

[Data Source: Volkswagen Group, General Motors reports, ‘VW and GM annual sales 2017-2019’]

COVID-19 impact on Volkswagen in China

The COVID-19 outbreak has exposed several challenges for the automotive sector in China. 80 percent of automotive and related companies report that coronavirus will have a direct impact on their 2020 revenues. 78 percent of companies do not have enough staff to run a full production line. In February 2020 China’s car sales plunged by 18 percent. Automotive plants in China remained closed until mid-March 2020. 

[Data Source: Bloomberg, ‘Change in China’s auto sales’, Sales drop in the Chinese auto market due to COVID-19 impact’]

Volkswagen in the Chinese market saw dropped car sales by 23% in the January to March 2020 period. The decline in sales in April 2020 was between 15% and 20% from a year earlier, while the drop in March, at the height of the pandemic, had been 40%.

Volkswagen factory in Changsha resumed operations in March, putting all but one of VW Group’s 33 car and component plants in China back in business. Volkswagen claimed showroom traffic in the end of March had rebounded to year-earlier levels. However, in 2020, Volkswagen in the Chinese market expects a decline of 3-15%.

Author: Valeriia Mikhailova

Listen to 100 China entrepreneur stories on China Paradigms, the China business podcast

Listen to China Paradigm on Apple Podcast

This article Volkswagen in China: Market analysis of the nation’s #1 car brand is the first one to appear on Daxue Consulting - Market Research China.

About Lexus

Lexus is the luxury vehicle division of Japanese automaker Toyota Motor Corporation. First introduced in 1989 in the United States, Lexus is now sold globally and has become Japan’s largest-selling make of premium cars. The Lexus marque is marketed in over 70 countries and territories worldwide, and ranks among the ten largest Japanese global brands in market value. Lexus is headquartered in Nagoya, Japan. Operational centers are located in Brussels, Belgium, and Torrance, California, United States. Since officially entering the Chinese market in 2004, Lexis has been in China for over 15 years and the demand for Lexus China is strong during the period.

Since its inception, Lexus has advertised its products to luxury consumers using specific marketing strategies with a consistent motif of luxury. Industry observers have attributed Lexus’ early marketing successes to higher levels of perceived quality and lower prices than competitors, which have enabled the marque to attract customers upgrading from mass-market cars. Lexus’ marketing efforts have also extended to sporting and charity event sponsorships.

Lexus in the Chinese car market

The Chinese car market is shrinking while the revenue of luxury auto brands continues increasing

The Chinese car market the world’s largest car market, saw consecutive drop after decades of growth in 2018 and 2019 because of a cooling economic and trade war pressures. According to data released by the China Passenger Car Association, the number of passenger vehicles sold in China dropped to 20.7 million in 2019, decreasing for 7.4% from 2018. That exceeded the 3% drop in 2018. However, the sales and revenue of luxury car market in China showed a stable upward trend in recent years. In the period from Jan. to Nov 2019, the market share of luxury car brands in China reached around 10.8%, increased steadily from 6.1% in 2015. The sales of luxury cars amounted to 200.24 thousand in the September of 2019, with a 18.6% year-by-year rise.

[Data source: huaon.com, Luxury car market in China growth]

Lexus China saw strong sales in recent years

Despite the downward pressure in the Chinese car market, Lexus reported 148,976 sales in China from January to November 2018, up 24% year over year. In 2019, Lexus China maintained double digit sales growth of 25% and delivered 200,521 vehicles in China. 2019 was the third year that Lexus has a sales growth of more than 20% and was the year in which Lexus sole its millionth vehicle in China. Lexus was the fifth-largest luxury car brand in China in 2019, following BMW, Mercedes-Benz, Audi and Cadillac. Lexus accounted for approximately 5% of the Chinese luxury car market and wished to occupy 10% of the market by the end of 2020.

The market strategy of Lexus in China

Create a strong brand image

Breaking away from Toyota’s brand system, Lexus has committed to establishing its unique brand values ​​and propositions in order to be recognized as a luxury lifestyle brand. The core brand value of Lexus, the luxury vehicle division of Toyota corporation, is comfort, luxury and pursuit of perfection, which contradicts that of Toyota. So, Lexus creates its own brand culture as well as the matching marketing strategy.

For brand identity, while Mercedes Benz always tries to convey that it is a matter of pride and prestige to own a Mercedes and BMW emphasizes “the pure driving pleasure”, Lexus lays emphasis on its “3S” spirit (SEIKAKU +SHINSETSU=SHINRAI) when marketing. It is wise for Lexus to emphasize “customers first” since it satisfies customers’ increasing demand for high-quality service in the background of consumption upgrades. The core marketing philosophy helps Lexus build a positive brand image among Chinese customers.

Word-of-mouth marketing

In the new era of consumption, brands must try their best to create word of mouth among their fan groups. Lexus attaches great importance to the user experience, and perform word-of-mouth marketing based on user experience. For example, Lexus China invited well-known designers to create five-star 4S stores as well as generally praised exhibition hall, and it launched a Mysterious Visitor Plan in order to increase customer satisfaction. Also, to ensure the customer loyalty, Lexus focus on building fans communities. Since 2006, Lexus in China has implemented a maintenance plan, launching a series of campaigns such as golf tournaments, concerts, tree planting, and environmental protection days. Through the building of communities, Lexus is able to established emotional resonance with its customers and thus deepen the connection between the brand and the customers in China.

New marketing

[Source: Lexus China weibo account, “Lexus’s film – ‘Life Movie’”]

Lexus China has launched its new marketing strategy and held a series of diversified and creative campaigns including crossover marketing (IP marketing) and microfilm marketing. Lexus officially launched the Lexus UX into China’s market on January 23 and held the conference for this brand-new model teamed up eight other brands: ThinkPad, Kindle, New Balance, Godiva, Monster, Visa, 3M and Coca Cola. Jointly designed poster as well as the brand windows of all brands displayed at the press conference aimed to convey the common concept “Attention to details”. In this case, Lexus’s brand image of obsessing over details is more well-known among Chinese consumers. Also, Lexus successfully attract the young and sophisticated urban consumer with this crossover marketing campaign since all these brands are targeting the same consumer group.  

Another example is the launch of Lexus’s film to promote RX line of luxury SUVs in October, 2019. The short film, one of Lexus “Life Movie” series films, explores intergenerational conflict and the power of music with the thesis of musical nostalgia. Yu Qian, a popular Chinese crosstalk performer, and Huang Bo, a famous Chinese actor, played two main characters. The nostalgia-driven film successfully appealed to Lexus’s target consumers, relatively older, affluent people by evoking a feeling of sentimentality. The film got more than 3 million views on Weibo, and received numerous positive feedbacks, which showed the success of the new market strategy of Lexus in China. 

Under the spread of coronavirus: Impact on auto manufacturing in China caused a crisis for Lexus

Toyota opposed producing its premium Lexus cars in China for years because of concerns over quality and profitability. However, this may lead to great troubles of Lexus under the spread of coronavirus.

On the one hand, as the first country to break out of the epidemic, China has made achievements in the fight with the virus, and reopened Wuhan after a 76-day lockdown, which means all the country is able to resume work. At the same time, Japan declared a Coronavirus Crisis on April 7 and is still struggling to contain the outbreak. Since all the Lexus cars in the Chinese market are built in Japan, the production of Lexus might be affected due to the possible shutdowns. On the other hand, the competitors of Lexus in China, like Mercedes and BMW, reopened their Chinese factories and resumed production in February. In this case, the gap between Lexus and its competitors may widen due to the shortage of production capacity.

From a demand-side perspective, the negative impact of COVID-19 on the Chinese economy may last for a long time and there will be a fall in demand for luxury cars. In addition, the price-fixing on Lexus cars last year harmed Chinese customers’ rights and caused complaints among consumers, causing a decline in the reputation of Lexus cars. So, a decreased demand for Lexus cars in the Chinese market this year is expected.

Overall, under the spread of coronavirus globally, Lexus in China is facing crisis. However, if Lexus can come up with good solutions to ensure its production and continue taking advantage of marketing, it may succeed in the luxury car market in China again.

Listen to 100 China entrepreneur stories on China Paradigms, the China business podcast

Listen to China Paradigm on Apple Podcast

This article Lexus in China: Past success and recent crisis is the first one to appear on Daxue Consulting - Market Research China.

Economic recovery is uneven across regions

There is not a direct correlation with the number of cumulative cases and pace of economic recovery. Rather, it could be explained by the main industries of provinces. Inner Mongolia and Qinghai, where mining is an important part of the economy, seemed recover a bit slower due to decreased energy demand. Tibet, visited by over 30 million tourists a year, is second slowest to recover, despite only having one reported case. However, with the exception of Tibet and Hubei, all provinces are only a few percentage points, or fractions of percentage points away from regular output.

[Data sources: Trivium China, National and provincial health commissions, daxue consulting analysis]

Industries most hit by Coronavirus

As of April 10th, 95% of large companies have resumed operations. However, most companies are not yet at full production. Large corporations have been around the 80% mark since the last week of March, and may linger for a while until demand returns to normal. The service industry and SMEs are bearing the brunt of the impact, especially those in the tourism, catering, and transportation. SME’s, have been trailing behind large corporations in their recovery.

Manufacturing: may see some irreversible changes

Motor vehicle manufacturing was the most impacted according to China’s national statistics. General Motors, Nissan, Renault, and PSA (the owner of Peugeot) all have factories in Hubei province. After factories re-opening, China’s auto manufacturers may still face a decreased demand. According to China’s Association of Automobile Manufacturers estimations, car sales will be down 10% in the first half of 2020, and down 5% during the whole year. This is assuming the outbreak remains under control.

Many computer and electronic manufacturing is also concentrated near Hubei, the epicenter of the outbreak. 290 out of 800 plants named in Apple’s global supplier list were located in regions in China that had major delays in returning to work.

[Daxue Consulting CEO, Matthieu David-Experton, interview with FranceTVInfo.com on China’s economic recovery after COVID-19]

The delayed impact of supply chain

Supply chain delays may be felt up to five weeks after manufacturing plants re-opened. Shipment between Asia and Europe or the US can take around a month, meaning that we are not yet finished with the delays despite plants in Hubei opening up again. Additionally, many factory workers are migrant workers, and were not able to return to their jobs for an extended period, even if operations had resumed.

Many countries interpreted the COVID-19 supply chain impact as a sign that they had put all their eggs in one basket. The Japanese government announced that it would provide $2 billion in loans for companies shifting production back to Japan.

Back in 2019, an AmCham survey results showed 39.7% of companies were either considering or actively moving their supply chains out of China. In the midst of the trade war, the pandemic may be a nudge for companies to move manufacturing.

None the less, Chinese factories are resuming operations. According to a Bloomberg report, Apple’s iPhone 12 will be released on time, contrary to early rumors. The phone was not scheduled to start being manufactured in China until May. Assuming there is no second rise in the pandemic, China’s factories will in the clear by then.

Logistics: continued positive trend for container volumes

The logistics industry is reflective of China’s recovery from the Coronavirus. In the first week of March, Chinese ports had a 9.1% jump in container volumes. Among them, the growth rate of Dalian, Tianjin, Qingdao and Guangzhou ports was 10%. However, the ports in Hubei are recovering slowly and face a lack of staff and workers. Apart from ports in Hubei, the epicenter of the virus outbreak, other ports along Yangtze river have returned to normal operation. The cargo throughput of three major ports at Yangtze river, Nanjing, Wuhan (in Hubei) and Chongqing increased 7.7%, while the container throughput increased 16.1%.

Shipping rates have increased 20-fold

Freight shipping rates for dry bulk and crude oil have begun to show early signs of recovery as Chinese industries recover from Coronavirus. The Baltic Dry Index, which is a proxy for dry bulk shipping stocks and the general shipping market, has risen by 50 percent to 617 on March 6, while on February 10 it was 411. Charter rates for very large crude carriers have also regained some footing in recent weeks. It forecasts daily rates for Capesize ships, or large dry-cargo ships, to rise from about US $2,000 a day in 2020 first quarter, to US $10,000 in the second quarter, and to more than US $16,000 by the fourth quarter.

[Data Source: sofreight.com, China’s recovery from Coronavirus Report by Daxue Consulting, growing BDI in March 2020]

Daily charter rates for the VLCC tankers from the Persian Gulf to China have risen to US$28,816 per day on March 5th from US$12,500 the previous month. A March 2nd report by IHS Markit noted that as Chinese industries recovering from Coronavirus, the final week of February saw a resumption of industrial production in China. Container cargo lines may have to wait longer for resumption, as it takes time for manufactured goods to roll out of factories for export. It is expected that the recovery time will be in the second or third quarter.

[Data Source: China Ports Association, China’s recovery from Coronavirus Report by Daxue Consulting]

While Chinese industries recover from Coronavirus, highway logistics also getting on track to recover.  From March 16 to March 20, 2020, the China Highway Logistics Freight Index, was 984.41 points, up from last week; the LTL light cargo index was 967.94 points, an increase of 0.01% from last week. From March 23, the demand for highway logistics is stable and the highway freight index rebounded slightly. From the perspective of later trends, the demand for highway logistics is expected to rise steadily, and the freight index may fluctuate and rise.

[Data Source: China Federation of Logistics and Purchasing, China’s recovery from Coronavirus by Daxue Consulting, growing China’s highway logistics freight index]

Retail and restaurants: customers return to shops

The Coronavirus impacted Chinese consumption in the long-run, and many of those impacts are still unfolding. However, during the pandemic, we are saw retail sales in China shrink by a fifth in the first two months of 2020, compared to a year earlier. In terms of China’s recovery from the Coronavirus, offline retail has a large uphill climb ahead of them. However, restaurants and supermarkets are indicators of the positive trend ahead.

[Data source: qianzhan, China’s recovery from Coronavirus by Daxue Consulting]

Offline restaurants and shops reopening

The Chinese offline retail industry is recovering from Coronavirus, on March 13^th all 42 official Apple retail stores opened for hundreds of shoppers. IKEA, which opened three of its Beijing stores on March 8, also saw high visitor numbers and queues. Earlier, on February 27 Starbucks opened 85% of its stores.

[Source: daxue consulting, Starbucks coffee shop in Shanghai, China enforcing social distancing by blocking off chairs]

Some restaurants narrowly avoided disaster

Had the pandemic shutdowns lasted two months longer in China, many more restaurants would have been in serious trouble. Over half of restaurants in China reportedly do not have enough cash to cover operating costs for more than six months. Normally, the restaurant industry makes 15% of their annual revenue during the lunar new year holiday. But this year, the China cuisine association reported that the restaurant industry lost 78% of revenue during the 2020 lunar New Year season.

Although China has a sophisticated meal delivery ecosystem, which has measures to ensure sanitary and contactless delivery, delivery alone was not enough to save the F&B industry. 65.8% of restaurants reported to the World Federation of the Chinese Catering Industry that their revenue reduced dramatically compared to the lunar New Year period of 2019. However, 15.1% of restaurants actually experienced a revenue increase.

[Data source: World Federation of the Chinese Catering Industry, daxue consulting’s Coronavirus economic impact in China report]

As of March 24^th, Yum China reported 95% of its stores were either partially or fully open. Around 10-20% of stores either with restricted hours or serving delivery only. Also as of March 24^th, Starbucks had also opened 95% of its stores in China, after being closed for 40-60 days.

Super market chains

As of February 20th, the average opening rate of large-scale supermarket chains nationwide exceeded 95%, and the average opening rate of convenience stores has also been around 80%. However, large-scale shopping malls such as department stores and shopping malls currently have a relatively low opening rate of about 50%.  

Baidu search statistics show that after a month-long lockdown, China’s consumer demand is increasing. At the beginning of March, information on “resumption” on the Chinese search engine increased by 678%.

China’s recovery from Coronavirus in the travel industry: surge in domestic tourism

The tourism industry felt the most immediate impact of the epidemic. According to our Coronavirus economic impact in China report, the damage to the Chinese tourism industry was equivalent to a loss of 1 trillion yuan GDP.

Despite only having one reported COVID-19 case, Tibet Autonomous Region has the second lowest economic resumption rate after Hubei. Tibet’s economy, growing a double digit speed for twelve years straight, is largely dependent on tourism. According to China Daily reports, in 2018 Tibet’s tourism revenue was nearly 50 billion yuan, constituting around 30% of the province’s GDP.

Plane tickets are selling again

From March 1^st to March 8^th, more than 300 Chinese scenic areas reopened. In Hainan, tourism contributed to around 20% of the local GDP in 2018. Since the Hainan tourist sites’ reopening, they have received over 74 thousand tourists and 23 thousand tourism workers have returned to work.

As more and more places have no new reported cases, the domestic tourism market is accelerating the pace of recovery. Qunar and Ctrip, two of China’s biggest online travel service providers, have resumed bookings for travel packages and attraction tickets after a two-month hiatus.

Ctrip started selling travel packages and attraction tickets on its app last week as the country accelerated the pace of reopening parks and tourist spots. As of March 17, tickets to 1,449 well-known tourist spots across the country could be bought online while 40 percent of China’s top national tourist spots have reopened, according to Ctrip. Results from a recent Ctrip online survey of nearly 15,000 netizens showed that 78 percent expressed willingness to travel in the near future.

[Data Source: China Institute of Travel Studies, Ctrip, China’s recovery from Coronavirus Report by Daxue Consulting, Chinese people are willing to start traveling in late spring and summer]

Where Chinese tourists are itching to travel after the Coronavirus outbreak

According to Ctrip Global Play Platform statistics, as of March 11, the number of scenic spots reopened and resumed on the Ctrip platform has exceeded 1,000, and the resumption rate is more than 25%. There are more than 100 scenic spots open nationwide.

[Data Source: China Institute of Travel Studies, Ctrip, China’s recovery from Coronavirus Report by Daxue Consulting, growing demand for domestic tourism in China]

Additionally, Chinese customers can now book presale travel packages for April and May on Qunar’s app and website. Qunar is now offering 1,000 domestic travel packages for regions including Shanghai, Xinjiang and Sichuan, based on the respective local government guidelines for the resumption of tourism. According to Qunar’s data, as of the end of February, more than 90% of hotels in China (excluding Hong Kong, Macao and Taiwan) have resumed operations.

Qunar claimed that online searches for China’s upcoming May 1st holiday soared 76 percent at the beginning of March compared to the previous week. The words “scenic area”, “museum”, “tourism” and “landscape” have become the key words of the national tourism industry network information in February.

For the full year of 2020, Analysys is forecasting that the proportion of domestic tourism in the country’s travel market will increase from 47% last year to 60%. However, that number depends on how long international travel restrictions remain in place.

Industries that may explode post Coronavirus outbreak

Online retail: outbreak encouraged the rapid movement from offline stores to digital

Since the outbreak of the Coronavirus epidemic, most people in China spend more time at home. Even consumers living in third to fifth tier cities are becoming keen to shop online. Surveys show that this group made twice as many online purchases for the first time during the epidemic than consumers living in first-tier cities. According to the GfK China Consumer Confidence Study of February 2020, more than 40% of consumers use online shopping more frequently, resulting in a surge in demand for online shopping and home delivery. More and more consumers are also shopping for the first time through platforms such as third-party apps, official brand websites, and WeChat communities.

[Data Source: qianzhan, China’s recovery from Coronavirus Report by Daxue Consulting, more people choose online shopping during the epidemics]

Carrefour reported vegetable deliveries growing 600 percent year-over-year during the Lunar New Year period and JD.com saw an increase of 215 per cent in online shopping grocery sales to 15,000 tons in just the first 10 days of February 2020. According to the Mob data center, from January 22 to February 6, 2020, the number of new users in Hema Fresh, Daily Fresh, and Ding Dong’s continued to grow.

[Data Source: qianzhan, China’s recovery from Coronavirus Report by Daxue Consulting]

As for online shopping in the future, half of consumers look forward to home delivery, and 40% of the respondents (mainly younger and wealthier consumers) want environmentally friendly packaging for their products.

Great potential of online catering industry

The food delivery market in China experienced high growth from the end of February to the end of April. More and more customers choose to order food home instead of eating out.

The survey shows that among the merchants that were in business in early February 2020, more than 70% of orders from their restaurants and shops accounted for online food delivery. In the short term, online food delivery has become an important driver for catering businesses to survive the crisis. Whereas in the long run, the epidemic has accelerated the digitalization of the catering industry.

In January 2020 Meituan Waimai announced in-app feature for contactless delivery, allowing the courier to leave an order in a convenient spot for the customer to pick up without interaction. So far Meituan Waimai claimed that contactless delivery has been launched in 184 cities across the country and is expected to cover the whole country.

As some food enterprises gradually recover their food delivery services, hoping to compensate some financial losses, contactless food delivery in China growth will last for a period of time

The demand for epidemic prevention drives the demand of the cloud video industry

During the new Coronavirus epidemic, many companies and schools adopted remote office work and online teaching. It is expected that telecommuting at this stage will help to increase the recognition of video conferencing.

[Data Source: qianzhan, China’s recovery from Coronavirus by Daxue Consulting]

At present, the domestic software market represented by cloud video conferences is  US $173 million, but the growth rate is considerable, with a CAGR of 25% in the next five years. It is estimated that the size of the domestic software video conference market in 2023 will reach 537 million US dollars, which is three times more than current one.

[Data Source: qianzhan, China’s recovery from Coronavirus Report by Daxue Consulting]

The demand for epidemic prevention and control is expected to drive the demand for the cloud video industry, and the industry penetration rate is expected to gradually increase. At present, the penetration rate of video conferences for about 35 million small and medium-sized enterprises in China is less than 5%. China’s video conferencing market is not the only technology to receive a boost from the virus, some AI technologies were advanced during COVID-19 as well.

Sport industry: in the long run, the epidemic will not change its’ development

One of the Chinese industries recovering from Coronavirus is sport industry. In 2018, the total scale of China’s sports industry (total output) reached 265.9 billion yuan, and the added value of the sports industry reached 107.8 billion yuan. In 2018, the added value of the sports service industry was 653 billion yuan, and its share in the sports industry increased from 57% in 2017 to 64.8%. According to the data of the State Sports General Administration, the added value of China’s sports goods and related products manufacturing in 2018 was 339.9 billion yuan, accounting for 33.7% of the total added value of the sports industry.

In the short term, the new coronavirus epidemic will have a more significant impact on the development of the sports service industry and it will be prominent in offline clusters such as sports competition performances, stadium operations, sports equipment and related product manufacturing. It has less influence on the online sports.

[Data Source: qianzhan, China’s recovery from Coronavirus Report by Daxue Consulting]

In the long run, the epidemic will not change the vigorous development of China’s sports industry. On the contrary, people will pay more attention to their physical health and increase their enthusiasm for participating in physical exercise.

China goes back to work: Signs of recovery from Coronavirus

Manufacturing: top manufacturing companies resumed production

From February 18th to 20^th 2020 China Enterprise Confederation set up a research group to conduct a targeted survey on the resumption of production. It showed that China’s top 500 manufacturing companies resumed work and resumed production at 97%. Among the enterprises that have resumed work and resumed production, the average employee turnover rate was 66%. The average capacity utilization rate was 59%.

Chinese SME’s recovery from Coronavirus

As the largest employer, China’s recovery from the Coronavirus is not complete until SME’s are back on track. SME’s are the hardest hit from the Coronavirus outbreak in China. According to a survey by Beijing and Tsinghua universities, 85% of SME’s say they would only last three months without a regular income. However, as of April 10th, SMEs are over 80% recovered.

China’s state owned enterprises recovery from the Coronavirus

In general, the indicators of state-owned enterprises are significantly better than those of private enterprises, and there are more difficulties and problems in resuming production and production in private enterprises.

In terms of different industries, technology-intensive industries, and capital-intensive industries have a higher resumption rate, while labor-intensive industries have a lower recovery rate.

From the perspective of regional distribution, Guangxi, Anhui, Jiangxi, Hunan, Sichuan, Henan, Shandong, Hebei, Shanxi have higher rates of resumption.

[Source: Xinhua, China’s recovery from the Coronavirus by Daxue Consulting]

The capacity utilization rate in labor shortage regions such as Jiangsu and Zhejiang and the Yangtze River Delta and Pearl River Delta regions is lower.

Tech supply chain is gradually recovering

As Chinese industries recovering from Coronavirus, there is a hope for the resumption of the global supply chain. For example, Foxconn Technology claimed that the company’s factories in China would be running at their normal pace by the end of March. Compal Electronics and Wistron expect that by the end of March computer components production capacity will return to the usual low-season levels. Philips, whose supply chain was disrupted by Coronavirus, is also recovering now. At present, the factory capacity has been restored to 80%.

China auto sales fell significantly. However, Volkswagen, Toyota Motor and Honda Motor resumed production on February 17. On February 17 BMW also officially resumed work at Shenyang’s world’s largest production-based subway West Plant, and nearly 20,000 employees returned to work. Tesla’s Chinese factory claimed that it has exceeded the pre-outbreak level and since March 6 more than 91% workers returned to work.

[Source: Reuters, an employee wears a face mask to work on a car seat assembly line in Shanghai]

As Apple prohibited its engineers to travel to Asian countries, the launch of Apple’s new phone may be postponed from September to October. However, Apple’s CEO Tim Cook called this “temporary condition” and suggested iPhone makers  wouldn’t make quick moves out of China.

During China’s recovery from the Coronavirus, the upstream and downstream of the industrial chain gradually link up again. Foreign firms are more and more confident in their businesses in China.

Assistant Author: Valeriia Mikhailova

Let China Paradigm have a positive impact on your business!

Listen to China Paradigm on iTunes

This article China’s recovery from the Coronavirus outbreak 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

Learn more about the Coronavirus Economic impact in China

<iframe src="//www.slideshare.net/slideshow/embed_code/key/d6udOh4zDAt9eD" width="595" height="485" frameborder="0" marginwidth="0" marginheight="0" scrolling="no" style="border:1px solid #CCC; border-width:1px; margin-bottom:5px; max-width: 100%;" allowfullscreen> </iframe> <div style="margin-bottom:5px"> <strong> <a href="//www.slideshare.net/DaxueConsulting/crisis-management-in-chinainspiring-business-cases-during-the-covid19-and-sars-crises" title="Crisis Management in China-Inspiring business cases during the COVID-19 and SARS crises" target="_blank">Crisis Management in China-Inspiring business cases during the COVID-19 and SARS crises</a> </strong> from <strong><a href="https://www.slideshare.net/DaxueConsulting" target="_blank">Daxue Consulting</a></strong> </div>

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.

The Coronavirus China Economic Impact report covers the spread of the outbreak in China, what industries are growing and which industries are severely impacted. We also zoom in on the economies of Wuhan and Hubei, as well as Coronavirus impacts on the global supply chain. Lastly we share how the Chinese government is reducing the burden on enterprises. Our Coronavirus China Economic Impact report is available for free to anyone seeking to understand the COVID-19 outbreak’s effect on businesses in China.

This report is routinely updated and contains everything businesses need to know about the economic impact of the Coronavirus in China. It is a collection of research from many respected firms and organizations combined with our own careful analysis.

Overview of COVID-19 spread in China

Coronaviruses are common causes of respiratory infections. They have previously been implicated in viral outbreaks, including SARS-CoV and MERS-CoV, but are also responsible for some common colds. From the perspective of virus evolution, COVID-2019 is more advanced type than its two predecessors. It has never been found in humans before.

How COVID-19 starting during the Lunar new year affected spread

The 2020 Spring Festival migration started on January 10 and ended on February 18. The estimated number of people who have had contact with confirmed cases gradually increased at beginning of the Lunar new year and stabilized until the end of it. That’s because flow of people participating in the Spring Festival Transport is very large, which makes the chance of cross infection increase and directly lead to the peak of the epidemic. Government restrictions on the flow of people helped to reduce the spread of the virus by decreasing contact and increasing physical distance between those who have COVID-19 and those who do not. However, within China, the confirmed cases have flattened since February 13.

How long will the coronavirus last in China?

As of early March, the number of infections in China continues to decline, with the exception of Hubei, the infection in all regions seems to be controlled. As long as no new infections appear during the duration of a full incubation period, then the epidemic can be considered to be officially over. Currently, the rate of infection is minimized by the quarantine efforts and shutting down of workplaces and public places.

What is the Coronavirus economic impact in China

Do we need to worry about the impact of coronavirus on GDP?

According to chief economist from Zhongtai Securities and Donghyun Park from Asian Development Bank, the coronavirus economic impact in China is expected to be between 1.5% and 2% in terms of GDP growth, which will not change the long-term trend of China’s economy. The epidemic has a large impact on the economic growth rate in the first quarter, or negatively affects the GDP growth rate of about 2%-3%. However, as the virus continues to spread globally, there will be many more factors to include in the coronavirus economic impact on China including global demand of Chinese goods and commodities. The largest economic impact comes from the service sector, especially the catering, transportation, hotel, tourism, and accommodation industries.

Up close on the economies of Wuhan & Hubei

The huge outbreak in Hubei province contributed a lot to coronavirus economic impact in China, as it is the most developed province in the central region of China with 3.9 trillion RMB GDP in 2018. Hubei has a large number of industrial clusters in R&D and manufacturing, such as automobile and electronics.

According to government work report of Wuhan in 2019, electronic information, bio-technology and new medical and medical appliance, and the automobile industry are the three pillars of the manufacturing industry. 

Hubei province is an important part of the global supply chain. It accounts for 9% of total Chinese auto production. German engineering firm Bosch, the world’s largest auto component manufacturer, has dozens of factories in China 2 of them are in Wuhan. Hubei also plays a significant role in the global supply chain of critical electronics components. The province is the production base of Taiwan’s PCB factories, including Taiwan Optoelectronics, Xinxing, Jianding, Nanzi Electric, and Dingying.  Industry insiders pointed out that PCB is the “mother of the electronics industry” and is an indispensable key component of all electronic products. If the PCB factory in Taiwan and the Hubei factory are obstructed, it will affect the global electronics industry.  

Hubei contributes much to the progress of the chemical industry. It is the largest province of chemical fertilizer in China, its output has reached to 596.56 tons in the first three quarters of 2019, which increased 19% compared to last year. Hubei has a high production capacity of sub industries including the phosphorus chemical industry, pesticide industry, and the vitamin industry.

COVID-19 affects industries in Hubei

Coronavirus impact on supply chain in China can be also seen in some industries in Hubei.

Electronics industry

After Wuhan postponed production of electronics, China’s supply chain of critical electronics components is facing a catastrophic disruption. About 70% of the world’s smartphones has been affected. According to Strategy Analytics, overall shipments of phones will reduce by 2% in 2020, some consultants believe that COVID-19 will cause demand side decrease. Besides, the first quarter is normally off-season of China‘s semiconductor industry, COVID-19 may further dampen the sales of semiconductors.

Automotive industry

China auto sales fell 2.8% in 2019 amidst global trade tensions, the first decline in nearly two decades, which also affect Hubei auto sales because Hubei province account for 9% of total Chinese auto production. Global automakers forecasted further sales decline in 2020, prior to knowledge of the coronavirus outbreak.

COVID-19 China economic impact: online industry growing

Due to the coronavirus epidemic, Chinese daily life goes online. For example, gaming industry experienced an unprecedented growth. While the Chinese mobile gaming industry is stimulated by the coronavirus, the development of 5G is expected to accentuate the trend and support the growth of the industry.

Coronavirus economic impact in China is also observed in short video platforms sphere. Between January 20 and February 2, 574 accounts on the short video platforms Douyin and Kuaishou each gained between 100k-500k new followers. The Coronavirus is accelerating the shift towards live-streaming, which already exploded in 2018, with a 745% growth year on year, thanks to improved connectivity and video maturity. The short video sector recorded 569 million daily active users in the post-holiday period, far exceeding 492 million on a regular daily basis.

E-commerce purchases during the Coronavirus outbreak in China

During the Chinese New Year in 2020, people were likely to purchase medical products, hygiene products and food online. To support the new growing online demand, more than 35,000 jobs were created across China from the following online retailers: Hema, Suning Xiaodian, Meicai, JD Logistics, JD daojia, and Dada.

Studying and working go online during coronavirus outbreak

Most companies have set-up remote work policies to avoid contamination at work. Hence, Enterprise Collaboration Apps facilitated remote working for 200 million Chinese workers after the Chinese New Year. To keep in touch, they use apps produced by two China’s online-giants: Alibaba and Tencent. During the outbreak, Alibaba’s Ding Talk skyrocketed to the very top of the App Store in a few days while Tencent Meeting and WeChat Work are in the second and fifth position, respectively.

The Coronavirus outbreak does not stop Chinese students from studying. Universities across the country organize online lectures to ensure the safety of their students. They rely on QQ, a Tencent streaming platform to carry out online teaching. The downloads of some education apps such as Tencent Classroom, and China University Mooc experience a significant increase. However, unlike fitness and co-working apps, the online education peak during the coronavirus may not last after the epidemic, with the return of students back to school.

Coronavirus impact on tourism in China

The damage to the Chinese tourism industry because of outbreak is equivalent to a loss of 1 trillion RMB GDP. Many travel enterprises estimated the ongoing shutdown costs the industry about ¥17.8 billion every day.

Only 2% Chinese tourism related companies felt that they had not been significantly affected after the COVID-19 outbreak. Coronavirus impact on tourism in China especially visible among travel agents, hotels, and retailers (related to tourism), as they badly need sales revenue during the epidemic. 

Chinese tourists contribute to the tourism industry in many countries. For instance, in 2018, Chinese tourists represent more than 70% total tourism in Hong Kong and Macao, similarly, more than 25% total tourism in Thailand, Japan, Vietnam and Korea. The impact on the economies of these countries will be catastrophic, if the coronavirus outbreak lasts for three to six months.

Coronavirus impact on tourism in China opened the opportunities for new online approach in this sphere. During the COVID-19 outbreak, many scenic areas and museums used live-stream to increase exposure and attract tourists, which attracted a lot of traffic. Even after the outbreak, the live-stream still can be watched by elderly and people with disabilities, it also can be used as a preview before travel.

Short-term and long-term coronavirus impact on tourism in China

Coronavirus impact on the food and beverages industry

Although many restaurants in China strengthened their delivery safety during the outbreak in China, food delivery alone is not enough to keep their profits in the positive. The Chinese New Year is usually a hot season for the F&B industry, the total revenue of Chinese restaurants in 2019 CNY has reached 724.1 billion RMB (occupied 15.5% of the whole revenue in 2019). Because of the Coronavirus outbreak, large catering brands have to reduce expense to balance their finance, such as permanently shut down some offline stores and redundancies. Many small restaurants are facing with the risk of bankrupt, since they have very fragile anti-risk capability. Many Chinese restaurants (around 62%) could not get rent reduction and they still need purchase epidemic prevention products, such as protective facemasks and thermometers.

Currently, many restaurants try to focus on delivery to get some profits, but actually revenue of online food delivery business is much less their normal business.

In order to manage the losses, some restaurants sell food materials to consumers and communities at low price and provide free food to medical staff and government units in epidemic areas. From 1^st February 2020, many restaurants temporarily lend employees to Hema (盒马鲜生) which relieved their labor costs. At the same time, KFC launched a contactless delivery service on food ordering platforms, such as Meituan (美团). Because of a lack of funds, some restaurants tried to seek investments and loans. For instance, Pudong bank offered 120 million RMB loans to Xibei (西贝) restaurant. The large food ordering platform Meituan (美团) worked with banks to finance some restaurants.

Coronavirus impact on supply chain in China: what businesses can expect

How Coronavirus will impact the Global Supply Chain by Mid-March

Most Chinese manufacturing slowly started resuming operations at the end of February, but the delays could have a devastating impact on the global supply chain.  For most companies, the inventory in stock will is enough to keep up with demand for two to five weeks. Shipping by sea to either the U.S. or Europe can take around 30 days. This implies that if Chinese plants stopped manufacturing prior to the beginning of the Chinese holiday on January 25, the last of their shipments arrived the last week of February. If lead time from China is shorter than 30 days, the disruption occurs earlier. This is already the case with Hyundai which announced on February 14^th the suspension of its production lines from its plants in Korea.

Assessing the coronavirus impact on supply chain in China, the electronics industry seems to be more affected. Intermediate products, which produced in China, are deeply integrated in the global technology supply chain.

Operations are concentrated near the affected areas (~290 of about 800 plants named in Apple’s global supplier list are located in regions that have delayed returning to work). Overall, 84% of manufacturers are concerned about delays related to the outbreak.  As the components are often heavily customized, it is challenging for factories to relocate outside of China in the short term.  

COVID-19 economic impact on Chinese manufacturing

As Chinese government shut down Wuhan and delayed the returning to work, many factories have to face the huge losses, limited supply chain and insufficient raw materials. Labor-intensive manufacturers (such as textile, clothing and plastic products) are significantly impacted, small and medium-size factories are worst-hit areas.

According to Morgan Stanley’s report in mid-February, Chinese production had only reached 30% to 50% percent of the usual levels. However, health and medicine related products have a huge demand during the COVID-19 outbreak.

Mask manufacturing demand

After the COVID-19 outbreak, the demand of masks has risen rapidly. Although many companies have started cross-border production, the shortage of raw materials could not be resolved in the short term. China contributes 50% of global mask production. Mask related manufacturers will benefit during the period, however most believe that it is a short-term demand. Expanding production would result in oversupply after the outbreak recession.

China is getting back to work

The week after 9^th February is the time for migrant workers to return to work, small and medium-sized enterprises need to resume production to boost cash flow.

Manufacturing learning points from COVID-19

Although epidemic outbreak is a black swan event in the manufacturing industry, it is likely that COVID-19 China economic impact will be positive. For example, it will promote manufacturing enterprises to strengthen the management of employees’ health and safety. The leaders of manufacturing companies will pay more attention to intelligent manufacturing. Due to online working, manufacturing enterprises will demand software such as task management, project management, and workflow management for remote collaboration. The Coronavirus economic impact in China will also be seen in science industry and smart technologies industry.

Coronavirus economic impact in China: what should exporters to China know

COVID-19 to impact China’s trading partners

After a slowdown in 2016, China’s imports and exports grew despite the trade war. Due to manufacturing and supply chain shortages during the epidemic, this growth rate is expected to slow down. A rebound in export activities may take place in April, while import activities would slow down until July. China’s top trading partners will suffer from the impact of the coronavirus on the main Chinese export products such as computers, broadcasting equipment, integrated circuits, and smartphones.

Coronavirus impact on supply chain in China is expressed in slowing shipments across the country, making transport routes congested. Currently, overall trucking supply resumed operation at around 60% and is a bit higher in the Southern areas of China. Overall intercontinental rail capacity has recovered to 60%.

How to improve supply chain during the epidemic

Government response to soften the Coronavirus economic impact in China

Policy support from the Chinese government

Production stop, isolation of staff and transportation restriction were a consequence of coronavirus China economic impact. Policy support and costs reduction are desperately needed. The Chinese local governments released some polices to relieve this situation, such as financial support of small businesses, flexible employment policies, social insurance, rent subsidy and tax concessions.

Long-term economic impact of the Coronavirus in China

The epidemic further boosted digitalization

During the epidemic, both the number of users and the time spent online had a dramatic increase. The total mobile Internet traffic increased by 36.4% compared with 2019 CNY. The number of daily active mobile shoppers grew by 14.6% during the 2020 CNY compared with 2019 CNY. In the meantime, some traditionally offline industries have turned to e-commerce to relieve losses.

Coronavirus China economic impact on the luxury market

COVID-19 is a downturn to the global luxury market. In Shanghai, Beijing, Shenzhen, Guangzhou and Wuhan, the passenger flow in large shopping malls and luxury brands stores declined more than 80% during the 2020 CNY. Also, due to the COVID-19, most Chinese consumers are more focus on healthy and rational consumption, many luxury products buyers plan to spend less on luxury goods, more on medical products and necessities. When COVID-19 is under control, this trend may still continue so long as the economy is impacted and until consumer confidence returns.

Coronavirus economic impact in China: big data innovation

During the epidemic, more than 20 provinces’ governments worked with technology companies to build “epidemic prevention system”.  The reports helped to see related data, epidemic feedback, quickly find and isolate suspected cases. The cooperation between government and big data platforms is promoting the practical application of big data in public crisis management and driving more technology innovation. Along with the development of the epidemic, more Chinese people are getting used to using big data tools in their daily lives, which speed up the process of digital life. 

Coronavirus economic impact in China: AI developments

The epidemic promoted the actual use of artificial intelligence products in medical and public safety areas. For example, in order to improve the efficiency of the diagnosis for COVID-19, Beijing Haidian hospital is using an AI assisted diagnosis system that can process 300 chest X-ray in 10 seconds. Many consumers fear the coronavirus cast a shadow over the food delivery industry. Therefore, JD launched autonomous delivery robots to reduce human-to-human contact during the Coronavirus outbreak. Besides, AI medical robots have started to work in Wuhan’s hospitals, they help doctors and nurses with disinfection, cleaning and delivering medicine.

Coronavirus China economic impact: financial assets may surpass fixed assets

Due to the COVID-19 outbreak, most Chinese people have to stay at home, real estate transactions are almost completely frozen. However, financial assets are not limited by places, the bond market has been very active since the Chinese New Year. The Chinese people have more time to invest bank financing products and bonds. Besides, growing savings may increase the demand for investments with stable income, such as bank financing and bond funds.

View our Coronavirus China economic impact report on slideshare:

This article Coronavirus China Economic Impact Report by daxue consulting is the first one to appear on Daxue Consulting - Market Research China.

The vaccine market in China has been expanding rapidly and is predicted to continue growing. The market size has grown to 25.7 billion RMB in 2017 and is expected to reach 100 billion RMB by 2030.

In part thanks to the loosening of the one child policy in China, there were 16.7 million new-borns in 2018 and the number is expected to increase. Between 2007 and 2015, the annual supply of vaccines in China went from 666 million to 1,190 million doses, most of which are produced domestically. China is one of the world’s largest producers of vaccines, approximately 700 million vaccine doses are produced annually in China. The estimated growth rate for overall vaccination market in China is 11.7%, and the growth rate for category II vaccines in China is 12.7%.

[Source: Statista  ‘Size of vaccine market in China by category I and II]

One Chinese vaccine market, two types of vaccines

China is a well-regulated producer of vaccines, but some vaccines that are important globally are not included in China’s Expanded Program on Immunization (EPI) system. Sustained and coordinated effort will be required to bring the vaccines industry in China and the EPI system into an era of global leadership.

The huge vaccine market in China appears to be easy to enter and stay. However, the Chinese vaccination system creates an uneven playground for different types of vaccines.

Category I vaccines in China

Category I vaccines in China belongs to the public sector, which means they are compulsory and free of charge. Two examples include measles and hepatitis. Six major domestic institute dominates the market of category I vaccines in China, and only very few foreign-made vaccines in China are available.

Category II vaccines in China

Category II vaccines in China such as Rabies, varicella, pneumonia, and human papillomavirus (HPV) vaccines, are a part of the private sector. They are voluntary vaccines that Chinese citizens pay at their own expense, and hence are made-for-profit. Most category II vaccines in China are foreign-made.

[Source: The Japan Times, Category I vaccines in China are free of charge for all children under 14 years ]

The Chinese government manages category I vaccines in China and provides them free of charge to all children under 14 years of age. The Provincial Center for Disease Control and Prevention (CDCs) purchases vaccine from the manufacturers and report the demand and supply data to the central government. The suppliers, which are vaccine manufacturers, have to strictly follow procurement contracts to provide category I vaccines to provincial or other CDCs.

Vaccine manufacturers could sell category II vaccines to multiple parties such as Wholesalers County or district CDCs, vaccination clinics and other healthcare providers prior to April 2016. The Chinese government later revised regulation in 2016, stating that category II vaccines in China must be procured using government procurement platforms. By integrating the two types of vaccines into one management system, the Chinese government can exercise greater control over the quality of category II vaccines in China as other channels such as the internet and wholesalers are banned. In 2017, the Chinese State Council updated the Vaccine Circulation and Immunization regulation, which requested establishment of a national advisory committee of experts to review category II vaccines in China based on safety, cost-efficiency, effectiveness and production capacity, and make recommendations for inclusion of vaccines into the current EPI system. This means more category II vaccines in China will be included in the free-of-charge category I vaccines in China, leaving less market share for foreign companies and making it more difficult for foreign-made vaccines to stay in the Chinese vaccine market.

Pricing of the vaccine market in China

In China, the contract prices for EPI program vaccines ranged from $0.1 to $5.7 US dollars per dose – similar to UNICEF prices. Contract prices for private-market vaccines ranged from $2.4 to $102.9 US dollars per dose – often higher than prices of comparable US, European, and UNICEF vaccines.

The prices for Category I vaccines in China are similar to UNICEF prices, but lower than the US and European countries. The low vaccine prices may give less incentive for manufacturers to invest in production improvement and development. Therefore, therefore, results in a lack of domestic production of large combination vaccines

The prices of Category II vaccines in China were high enough to attract more competition and thus more investment in research and development. However, the demand volumes are not large enough to achieve an economic of scale. Therefore, finding a balance between manufacturers’ profit needs and the general public’s health needs is challenging.

Leading Competitors in the Chinese vaccine market: international and domestic institutes

Although the number of Category I vaccines in China accounted for 65% of the total number of all vaccines in China, it was mainly occupied by the six major research institutes of China Biotechnology Co., Ltd. (Changchun, Beijing, Shanghai, Wuhan, Lanzhou, Chengdu). As Category I vaccines in China are dominated by the local competitors, foreign competitors can only enter the Chinese vaccine market with category II vaccines.

There are more than 30 companies in the vaccination market in China. Apart from major foreign players like GSK, MSD, Novartis, Sanofi Pasteur and Pfizer, local players such as Chang Sheng, Zhi Fei, Kang Tai, and Wo Sen are strong competitors..

Foreign vaccine companies in China’s vaccine market in China: GSK, MSD, Pfizer, Sanofi Pasteur, Novartis

GSK in China: Shingrix leading the way to expand in the Chinese vaccine market

[Source: GSK-China official website, ‘GSK-China has innovated 24 products between 2011 to 2016]

GSK has invested more than 500 million USD in China and its revenue reached almost 40  million USD in 2018. GSK products cover 250 cities in China. It has five business hubs: Beijing, Shanghai, Guangzhou, Chengdu and Hangzhou; five manufacturing hubs: Shanghai, Suzhou, Hangzhou and Tianjin; one global research and development center in Shanghai.

The growth rate of GSK vaccines in China was 12% in 2017. “I’m very confident in a long-term thriving vaccine industry in China, we want GSK to be part of it and to be a partner to bring new vaccines into the market.” said Walmsley, CEO of GSK since April 2017. She believes in prevention philosophically, in which vaccines have been the most powerful protector for human life aprart form clearn water.

Since Cervarix has entered the Chinese vaccine market, its growth rate has increased from 8% in 2016 to 65%. Meanwhile, GSK has developed Shingrix, a newly approved herpes vaccine in October 2017. This vaccine has achieved sales of £22 million in 2017, which suggests a huge market potential. Shingrix’s approval of Zostavax, which has been a monopoly in the Merck market for many years, has ushered in new competitors. It is worth mentioning that the Centers for Disease Control and Prevention (CDC) Advisory Committee on Immunization Practices (ACIP) issued a recommendation recommending Shinglix to replace herpes zoster, the vaccine Zostavax used for immunization of the elderly population aged 50 years and over. According to EvaluatePharma, by 2022, GSK will be the world’s vaccine market leader with more than $8 billion in sales with its new herpes zoster vaccine Shingrix (Sanofi second, Pfizer third, MSD fourth).

MSD in China: Explosive demand for Gardasil 9 in China

[Source: Xinhua, Merck Sharp and Dohme (MSD) introduces Gardasil 9 in China]

Merck Sharp and Dohme (MSD) is a global research-driven pharmaceutical company dedicated to putting patients first. MSD China formed in 1994 in partnership with Hangzhou Hua-dong Medicine Group Co. Ltd. From the beginning, MSD China has been a socially responsible, innovative company contributing to improved health and economic growth. With more than 5000 highly skilled, motivated employees throughout the country, MSD China is committed to bringing its high quality medicines and vaccines to the Chinese people. MSD has 10 operation areas, manufacturing plants and R&D centers. It has invested 1.5 billion USD in Beijing to establish a research center in 2011. In April 2013, it invested 120 million for MSD new plant in Hangzhou. The plant is the biggest and with most advanced technology pharmaceutical production packaging plant in APAC area.

One of the highlight products from MSD is its 9-valence cervical cancer vaccine: Gardasil 9. It has become so popular in China that there is not enough supply of vaccines to meet the demand. In 2018, MSD Gardasil 9 cervical cancer vaccine sales reached 3.15 billion USD in China. However, Gardasil 9 in China grew only by 37% due to the production capacity constraints. It is clear that in the future, China is one of the most important consumer markets for MSD cervical cancer vaccine.

Local Giants of the Chinese vaccine market: Changsheng, Zhifei, Kangtai, Walvax

Changsheng

[Source: Changsheng biotechnology Changsheng biotechnology’s vaccine products maintained good market sales]

According to the company’s annual report data, 2017 Changsheng Biological’s vaccine products maintained good market sales, achieving sales revenue growth of 51.67%. The growth is mainly attributed to the company’s significant increase in the sales revenue of category II vaccines, which totaled an operating income of ¥115 million yuan representing an increase of 59.57% from 2016. The sales of category I vaccines however decreased by 5.89%.

Zhifei

[Source: Chongqing Zhifei Biological Products Zhifei Biotech derived its sales mainly from Category II vaccines in China]

Zhifei Biotech’s revenue is mainly derived from the sales and promotion of Category II vaccines in China, including self-developed vaccines and agent-imported vaccines. According to the company’s annual report data, in 2017, Zhifei Biotech generated a sales of ¥1.263 billion yuan from vaccine products, an increase of 205.36% from 2016. Among all vaccines sold, the sales revenue of its self-developed category II vaccines has increased by 140.84%. The total sales of the Category II vaccines in China as a proxy was 274 million yuan, a year-on-year increase of 9231.67%.

From the company’s own analysis, its full-invested subsidiary Zhifei Green Bamboo’s self-produced global exclusive product: AC-Hib triple vaccine, is the most important contributor to the profit growth. At the same time, Zhifei Airport, another full-invested subsidiary of the company, successfully renewed the agency distribution contract for the 23-valence pneumonia with vaccine and inactivated hepatitis A vaccine last year, and the agent’s 4-valence HPV vaccine also successfully passed the drug registration approval, driving the company’s revenue growth.

Kangtai

[Source: Bio Kangtai Changsheng, The sales revenue of Kangtai Bio continue to grow]

Taking close to the market opportunity of the recovery of the vaccine industry in China, Kangtai Bio intensified its sales and promotion of vaccine products in 2017. According to the company’s annual report data, the sales revenue of Kangtai Bio’s vaccine products increased by 113.07% in 2017, among which, the second-class vaccine products. In 2017, the sales revenue was approximately ¥1.034 billion yuan, a year-on-year increase of 148.26%, attributing to the sales growth of its hepatitis B vaccine, Hib vaccine and quadruple vaccine. However, the sales revenue of one class of vaccine products has decreased slightly by 2.00% year-on-year.

Walvax

[Source: Walvax Biotechnology, Walvax Bio’s self-produced vaccines resumed growth]

In 2017, Walvax Bio’s original self-produced vaccine product sales resumed growth, and the sales revenue of various vaccine products increased significantly in 2017, especially the Haemophilus influenza type b conjugate vaccine and the freeze-dried AC vaccine group meningitis. The cocci-polysaccharide conjugate vaccine increased by 169.73% and 108.92% compared with 2016. At the same time,  Walvax Bio’s 23-valent pneumococcal polysaccharide vaccine annual sales was ¥102 million yuan in 2017, accounting for 15.30% of operating income.

Scandals of the Chinese vaccine market and lessons learned

Faulty Vaccines: scandals of local giants making Chinese consumers lose confidence in the domestic vaccine companies

[Source: Changchun Chang Sheng filed bankruptcy after been find making faulty vaccines]

In July 2018, Changchun Chang Sheng Biotechnology, one of China’s largest vaccine makers, was exposed for selling and distributing hundreds of thousands of faulty vaccines to the Chinese vaccines market. The number of rabies vaccines involved is about 113,000 batches. The government’s investigation showed in August 2018 that the company also produced nearly 500,000 non-compliant diphtheria, tetanus and pertussis vaccines.

As this news spreads through the country, the public is outraged as the affected vaccines are intended for babies, not to mention many Chinese families only have one child. Therefore, infant parents began to look for safer sources of vaccines by travelling to Hong Kong and Macao to take foreign-made vaccinations.

Chinese authority stepped into investigation immediately, removed dozens of senior officials and fined ¥9.1 billion yuan on Changchun Chang sheng, placing the company in a difficult situation. Changchun Changsheng announced its bankruptcy in Nov 2019 has sent a strong signal to the vaccine industry in China, indicating that it is likely to face a much stricter legal environment in the near future.

Chinese perceptions of vaccines

Are there ant-vaxxers in China?

Research in 2015 by Hangzhou’s Center of Disease Control and Prevention suggests that the media has swayed Chinese netizen perception of vaccines. Social media activity on Weibo and Zhihu do show that some Chinese netizens are hesitant to use vaccines. Although during the time of the research, some provinces showed a 30% decline in hepatitis B vaccinations, government officials quickly dispelled anti-vax sentiment. Compared to the west, anti-vaccination sentiment in China is more due to fear of contamination rather than distrust of the science of vaccines. Additionally, anti-vaccination sentiment in China tends to arise only after vaccines scandals, and more contained then in the west.

Chinese perceptions of vaccines in 2020

[Source: Zhihu, Consumer on Zhihu asking if the HPV vaccine is worthy and effective]

Although the market for the HPV vaccine in China is booming, many consumers still doubt the necessity of taking the expensive category II vaccine. There are many similar questions posted on Zhihu, a Chinese question-answer forum, asking for detailed information on HPV vaccines. This indicates that the Chinese consumers are aware of the HPV vaccine, but the amount of information available on such vaccines is fairly low. Many are still judging between the needs and the costs.

[Source: Zhihu Chinese consumers asking the necessity of taking vaccines and the types of vaccines required]

As anti-vaccination theories become increasingly prevalent, many consumers are seeking to gain more knowledge on the importance and the necessity for taking vaccines. Moreover, the above question is posted after Changchun Chang Sheng’s faulty vaccines scandal, which indicates Chinese consumers’ concern over the Chinese vaccine market.

Opportunities in the vaccine market in China

Increasing number of newborns as China’s ‘one-child policy’ loosens

In 2015, the “Population and Family Planning Law of China” was amended in which China’s one-child policy became two-child policy. This change will lead to an increase in the birth cohort size and hence an aggregate increase in vaccine demand.

Growing demand for quality vaccinations

Many common vaccines that are currently used in China has been outdated compared to international markets. To fulfil the growing demand, there are more quality vaccines developed and will replace the first generation vaccines. For example, Prevnar 13 and Gardasil 9 approved in 2016 and 2017 by CFDA. Furthermore, the concern over domestic manufacturers made many parents fly all the way to Hong Kong to get foreign-made vaccinations for their children. However, this may also serve an opportunity for foreign-made vaccines to enter the Chinese vaccine market directly.

Growth potential of the adult vaccine market in China

The adult vaccine market in China is also developing along with the aging population. Vaccine for common diseases is proven to be the one of the most effective ways to prevent elderly from getting the diseases. In China, the population of those aged 65 and older is expected to raise to 16.6% by 2030 and thus increase demand for such types of vaccines in China.

Increased purchasing power leading to higher demand of foreign-made vaccinations

With greater purchasing power, more Chinese consumers are willing to buy foreign-made vaccines in China. Disposable income is expected to increase to ¥50,900 yuan for households in the cities and to ¥22,200 yuan for households in countryside, with compound growth rates of 7.1% and 9.5%.

Loosened requirement for clinical trials allowing more room for future development

Historically, China has required clinical trials to be conducted in China before a drug can be approved for use. Reforms in the Chinese Food and Drug Administration (CFDA) in 2017 have removed this requirement and in which makes it easier for companies to receive approval.

Pfizer faced this issue when its Prevenar 7 (pneumococcal 7-valent conjugate), the only pneumococcal vaccine available in China at that time, was up for license renewal in 2015. The government did not approve the renewal, resulting in Pfizer abruptly ceasing their vaccine sales in China and prompting significant changes in the company’s operations, as well as leading to a shortage of the vaccine for Chinese children. Pfizer did not comment on why its license was not renewed, but the Beijing-based finance magazine CaiJin reported on an anonymous source who suggested that the license was not renewed in order to allow domestic pneumococcal vaccine development more time free from competition.

Companies are subject to less regulations. Therefore, the long research and development time they have go through will more likely be realized than ever before.

The vaccine market in China has a long future of growth

Overall, there is still a huge potential for the Chinese vaccine market to further expand in the foreseeable future. The increasing amount of awareness and demand for category II vaccines in China will bring more opportunities and open doors to more foreign companies to provide vaccines in China. Although competition with domestic brands is tight, there is still a displayed interest among Chinese consumers for foreign made products. Additionally, the awareness of diseases is increasing, and as the middle class grows, so will the demand for vaccinations.

Let China Paradigm have a positive impact on your business!

Listen to China Paradigm on iTunes

This article A dose of China’s vaccine market is the first one to appear on Daxue Consulting - Market Research China.

Supermarkets and hypermarkets in China are becoming more and more prevalent. A supermarket is a large form of the traditional grocery store: a self-service shop offering a wide variety of food and household products, organized into aisles. A hypermarket, on the other hand, differs slightly in that it is a superstore combining a supermarket and a department store. It is an expansive retail facility carrying a wide range of products under one roof, including full grocery lines and general merchandise. In this article, we look at the evolution of supermarkets and hypermarkets in China.

Competitors in the supermarket and hypermarket industry in China

There are a lot of large domestic and international companies in the supermarket and hypermarket industry in China, such as Wal-Mart, Metro, Carrefour, Trust-mart, Tesco, Lotus, Lotte Mart, RT-Mart, Yonghui(永辉), Renrenle (人人乐), Hualian(华联), and Watsons. Most of these chains have shares held by foreign investments. Only a few are fully domestic to China.

Smaller scale supermarket chains are also frequently seen in China. Most of these are local, and their business is limited to certain geographical regions. For example, Shanxi(山西) province has its domestic chain supermarket brand, Meet All(美特好).

Looking back at 2013, traditional forms of grocery retailers in China rarely achieved an increase in revenue or profit growth in the booming digital era. Many, have since either suffered or struggled to maintain their presence in the market over the past few years. Carrefour, with its sales continuing to plunge, sold an 80% stake of its China unit for 4.8 billion Yuan to Suning.com Co. in June 2019. Bloomberg suggests that Carrefour’s exit represents the ‘end of an era’ for traditional forms of foreign grocery retailers in China. Once a leading hypermarket chain, it failed to improve e-commerce formats against the intensive digital rival within the industry.

Although the grocery retailers in China have been facing fierce competition and stagnating sales growth over the past few years, sales recovery has resumed gradually as many foreign groceries entered the Chinese market and others’ planned to adopt new retail format tailoring to consumer needs. Traditional supermarket chain Yonghui Superstore achieved a 19.7% growth in revenue for the first half of 2019, which represents a CNY 411.73 billion in sales. Similarly, Hema Xiansheng (盒马鲜生)－the leading new retail brand, generated CNY 140 billion sales in 2018. The performance of these two brands should cast no doubt in the ability of the grocery retail industry in China to take grow in the near future.

Market Research of the supermarket and hypermarket industry in China

Legacy players in the supermarket and hypermarket industry in China:

In geographical segmentation, Hualian(华联) has its main business in North China and Mid China, but it is now expanding its business in Southeast China in cities such as Shanghai(上海). It has also opened branches along the Huning(沪宁) and Huhang(沪杭) superhighways.

RT-Mart, the Taiwanese brand which had over 100 shops in mainland China in 2013, centers its business in East China. Huarun Wanjia(华润万家), a Chinese company, centers its business in Suzhou(苏州). Wal-Mart’s main market lies in south China and southwest China, and coastal regions such as Jiangsu(江苏) and Zhejiang(浙江).

Leader in China’s hypermarket industry: Lianhua

As the leader in China’s hypermarket industry, Lianhua has established a complete goods sourcing network and the first intelligent distribution center in China. Its competitive advantage comes from its reasonable prices, the clear allocation of goods its stores, and limited waiting time for customers in line to pay. These factors all cater to the needs of its target customers—mid-income consumers around the age of 30.

Facing increased competition: Carrefour

In 2013, Carrefour operates shops in over 14 provinces and cities in China. Most of its shops are located in relatively developed provinces such as Guangdong (广东), Shanghai (上海), Tianjin (天津), Beijing (北京), and Jiangsu(江苏). Carrefour five most attractive selling points for its customers are: getting what you need with a single purchase; super-low prices; fresh products; self-selection and free parking. Among these five, the super-low prices and fresh goods make it the most competitive. However, in 2019 Carrefour has faced unforeseen challenges. With the sudden rise of online retail, Carrefour’s sales in the market fall 5.9% to $4.67 billion. China’s consumer preferences are changing, and Carrefour.

The retail revival: New entrants and New retail in supermarkets and hypermarkets in China

Players in the supermarket and hypermarket industry in China are embracing the New Retail strategy

New retail is considered as a key strategy that will lead to a new era of the grocery retail industry in China. It is a seamless approach that integrates both online and offline experiences and relies heavily on digitalization and consumer data.

The offline supermarket Hema Xiansheng, opened by Alibaba in 2016, has successfully implemented the new retail strategy that made it stood out from the fierce digital rivalry. With more digitalized features incorporated in-store, initial high labour costs associated with traditional forms of grocery retails can be significantly reduced and consumer data can be collected at ease. Hema App converges online and offline retail experience altogether to provide an omni-channel experience for its customers. They can easily scan bar codes via the App to find out product information, process payments or get products delivered to home within 30 minutes. Through the use of the App, consumer data which is considered as the most important element in redefining retail can be collected more frequently to help stores better understand and target their customers. Moreover, much less labor is required to run the stores because many human operations are now replaced by digital tools such as ‘self-checkout’ via Alipay using the Hema App or the automated distribution chain. In this way, reduced cost can contribute to much higher profit growth sustaining normal operation.

Overall, Hema’s success suggests that the new retail revival is largely dependent on the ability of grocery retailers in China to understand consumer needs to implement good service. However, since Hema’s growth began to slow down this year, grocery retailers in China will need to improve further on technology and customer experience in order to get a foothold in the industry.

Foreign giants’ attempt to break into the crowded retail grocery market in China

Despite that the miserable exit of Carrefour had casted a cloud over the future of the supermarket and hypermarket industry in China, many foreign grocery retailers such as Aldi and Costco entered the Chinese market this year with hopes to succeed.

In 2019, the German discount retailer Aldi and the US membership-based grocery retailer Costco Wholesale have both opened their first brick-and-mortar stores in Shanghai, China. Thousands of Chinese people lined up outside and waited for the stores to open for the first time. The craze for these two foreign retail brands clearly indicates that Chinese consumers are curious about new grocery retail formats and retains interest in bargains despite pursue for freshness. One large factor attributing to Costco’s success so far is that it offered luxury products such as Moutai and Hermes bags for a reasonable price at the store’s debut. However, the hyper has begun to fade as luxury products were sold out and memberships withdrawn.

Although China remains a viable potential market for foreign supermarket and hypermarket brands to grow, huge challenge lays ahead for these brands to truly grab the Chinese market facing rapid growth of online retails and intense competition of local retails.

The outlook of supermarkets and hypermarkets in China: challenges and future trends

Digitalization

In order to respond to the rapid digital growth, many brands have established future plans to improve current technologies in-store by becoming more AI-oriented. Alibaba has introduced AI-powered Hema stores recently to drive digitalization of retail industry. While the newly adopted check-out machines incorporate facial recognition payment function, the continuous upgrades of machine learning AI algorithms will match more precisely consumers’ need.

Moreover, many high-tech ‘unmanned’ grocery stores have opened recently, which implies a fully automated future of supermarkets and hypermarkets. Customers only need to scan QR code once before they enter the store. The price of the products they grab and go will be automatically deducted from their digital wallet as they walk out of the store. These stores are generally quite small in size, nevertheless is expected to further expand in the near future.

Establish stronger O2O integration

O2O is a online-to-offline business strategy that draws customers from online channels to purchase offline. The fierce online and offline competitions in the Chinese market means that a strong O2O is required for traditional forms of grocery retailers to gain a competitive position. Establishing partnership with China’s internet giants such as Alibaba, Tencent and JD.com will allow retailers the access to different tools, big data analytics, etc.

Not only traditional grocery retailers should be seeking partnerships with the big internet companies, but also should those foreign grocery retail giants such as Walmart, Costco or Aldi. In June 2018, Walmart reached strategic cooperation with Tencent. This movement by Walmart allows it to utilize the strength of Tencent to provide enhanced omni-channel shopping experiences for its customers through precision marketing, membership system upgrade, comprehensive payment services, etc.

More efforts on private labels

Despite that SKUs of private label products increased from 435 in 2016 to 633 in 2017 for the Top 100s, its sales only accounted a mere 6.4% of the total sales in 2017. Profit margin for these products are around 15% higher than those that are not. However, there is currently not enough effort being put on developing and marketing these products. Therefore, developing private label will be an effective strategy to penetrate the market as most of the leading grocery retailers in China have not yet effectively launched successful private labels.

Although many foreign retailers have already successfully launched their own private labels such as Kirkland Signature by Costco and Specially Selected by Aldi, more efforts are required to build positive brand images within consumers’ minds for these brands.

What is next for supermarkets and hypermarkets in China?

Overall, under rapid market growth, upgrades of technology and omni-channel experience is unavoidable to supermarkets and hypermarkets in China for the foreseeable future. Grocery retailers have to gain more understanding of Chinese consumers in order to maintain presence in the market and acquire more market share.

Let China Paradigm have a positive economic impact on your business!

Listen to China Paradigm on iTunes

This article Supermarkets and Hypermarkets in China: A revolution yet to come | daxue consulting is the first one to appear on Daxue Consulting - Market Research China.