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

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

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

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

Challenges for Meituan: Competition and regulations

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

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

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

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

The Meituan Dache APP drained Meituan’s finances

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

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

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

Merged to Meituan APP from Meituan Dache APP

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

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

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

Source: Meituan App open interface

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

Didi Chuxing started its food delivery business in China

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

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

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

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

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

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

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

Didi will shift the market for its food delivery business abroad

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

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

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

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

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

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

The challenges that Meituan and Didi are facing

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

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

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

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

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

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

Author: Qing Zheng

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According to White paper on mental health of Urban Residents in China, among 1.1 million people in the sample, nearly 75% suffer suboptimal levels of mental health  while only 10.3% enjoy a healthy mental status. The paper also indicates that there is a relationship between the mental health and physical health. 50.1% of people who have physical health also suffer mental health problems. Specifically, people who are diagnosed with tumours, diabetes and hypertension are more likely to have anxiety and depression.

A more recent survey by Teenager newspaper reported that in 2018, more than a third of the young adult in the age group 14-35 were at risk for depression and 10% had severe depression. The rate of young adults with no mental health issues dropped by 5.3% between 2008 and 2018. The risk of mild-to-moderate depression increased 5% (compare to 2008) and the risk of severe depression was also higher than in 2008. All the evidence points out the fact that more and more people in China are facing mental health problems. Additionally, the Chinese government announced a series of documents (Health China movement健康中国行动) to urge local school and institutions to pay more attention to children and teenagers’ psychological wellbeing. It is therefore important to understand the current development of China’s mental health care market and how it is organised.

Mental health care market in China: The growth of C2C psychotherapy online platforms

According to iiMedia research, the scale of e-commerce users of therapist services in China exceeded 20 million in 2018, and it is expected to triple in 2020. Rather than offline services, Chinese tend to choose online therapist services as it is more convenient and private. There are a large number of consumers needing a therapist for emotional setbacks as well as depression. This research suggests that with the development of user education the growth of the e-commerce market for therapist services will slow down in the next few years, and the services will refine themselves with more diversified segments.

Data source: iiMedia, Chinese go online for therapy sessions

Song Guo Qing Su (SGQS松果倾诉) and Hao Xin Qing (HXQ 好心情) are the e-commerce psychotherapy platforms that are trending. Both SGQS and HXQ use a C2C business model to deliver their service. SGQS attracts many independent yet less qualified therapists to join the platform. A client can choose either to communicate via text or a call and the therapists will charge accordingly. The price is in a wide range and usually much cheaper than the professional therapist in the hospital. However, SGQS does not guarantee the quality of the therapists. The same kind services are proposed on Tao Bao (淘宝) as well.

In contrast, HXQ is relatively more professional in terms of quality of therapists. According to HXQ website, the therapists registered with HXQ are all from public hospital psychiatry, neurology and psychology department doctors. Almost 20 thousand psychiatrists, accounting for 80% of the psychiatrists nation-wide, are registered with HXQ. HXQ uses the cloud and big data technology that share the sources with the supply chain of the medical and health products. Hence, HXQ is not only a provider of psychological consulting services but also a health supplement retailer.

Image source: Sohu new report, CEO of HXQ’s presentation about online mental healthcare market in China

Supply in the the mental health care market in China

In a China Paradigms interview, Zhang Ying Fei, a psychological therapist in China points out that the Chinese mental health market is underdeveloped. Even though many people want to become a therapist and some of them do obtain a certificate, low future income and high upfront investment are obstacles. In order to get the certificate, aspiring therapists need to invest time and money for training, which normally lasts six months to one year.

Independent therapists face unstable income and high investment in training

The supply of therapists in China is short partly due to the sacrifices that therapists must make. According to Zhang, “Even if someone has the certificate they are not going to be a therapist. Who can really be a therapist; according to what I observed are those that are really determined and so they have to sacrifice many things; their time, their current job”

See our China Paradigms episode with Zhang Ying Fei

Zhang says the length of the training is not enough to train people professionally. Therefore, extra investment of time and money is needed for more professionalism. This normally takes a few years and the student needs to be financially independent to do so. The low income is another obstacle, being an independent therapist in China does not guarantee a high income. It is quite the contrary, most of the people take this profession as a part-time job because of the low income and unstable consumer leads. The pay is around 200 to 300 yuan per hour which is a relatively low return on the prior investment. Additionally, there is time needed to manage the clients.. To summarize, there are four obstacles to become an independent therapist: high investment in time and money for training; low future income; unstable consumer leads and difficulty of self-managing clients.

Opportunities and challenges in mental health care market in China

Data driven technology to improve the service

Mr Chen, the CEO of Hao Xin Qing (HXQ) says the next step of HXQ is to strengthen the online systems and attract more registered doctors to join the platform. Due to the relatively conservative Chinese society which possesses a stigma against mental disorders, in combination with expensive consulting fees, Chinese people with mental sub-health are often not willing to seek professional help.

According to 2019 white paper on Mental and Psychological, 92% of Chinese who suffer mental health problems never receive any treatment. Problem such as depression and anxiety are often ignored. Some of them even refuse to admit they have mental problems. Providing an online platform protect patients’ privacy and reduce the cost for both sides. The white paper indicates that indirect mental treatment via online platforms costs an average of 350 Yuan while the direct treatment via off-line hospital costs 1,032 Yuan. Around 50% reduction on cost via online platforms. In the future, HXQ will consider introducing the offline services for their patients if there is need for rehabilitative treatment.

Future market entrants will have to discuss the growing challenges. First, the therapist’s certificate in China is easy to obtain. This reduces the quality of the therapists and increases the complaints from the consumers. This lack of regulatory policies in the mental health market makes it difficult for people with complaints to report.  Secondly, there is no standard fee in the industry. Companies charge differently, raising concerns about the quality of the service as well as barrier of client trust. Therefore, regulations are necessary for the future to guarantee the growth of the mental health market in China.

How did COVID-19 effect the mental health of Chinese people?

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China’s startup hype started from the central government

Entrepreneurship and innovation have always been on the mind of top decision makers

Since 2008, China’s central government has already extended a warm welcome (in the form of grants and other perks) to attract top talents back to China. Its goal is to promote high-level innovations and technological breakthroughs, which naturally contributes to employment and economy.

In 2014 in the Summer Davos Forum, the Prime Minister Li Keqiang first coined the term “Mass Entrepreneurship and Innovation”. In 2015, he kept advocating the entrepreneur spirit in the National People’s Congress and many other important occasions. Since then, the notion of starting up and being your own boss gained momentum.

Over the years, the Chinese government has focused on the youth as the main propeller of innovation

The plan called “Implementing Opinions on Deepening Innovation and Entrepreneurship Education Reform in Higher Education Institutions” issued by the State Council in 2015 further lowered the entry barriers for university graduates to start a business. All sorts of business plan competitions were put in place with generous grants to realize the winning proposals. For example, China College students’ Internet Plus Competitions are target local graduate students, while the Chunhui Cup targets overseas students. Also, startup experiences could be converted into school credits. What’s more, university entrepreneurs can extend their school years if they decide to pursue a business idea.

All those measures were established to reach the objective in 2020: a sound university entrepreneurship education system, significantly enhanced students’ innovative spirit and skills, and a significant increase in the number of students engaged in entrepreneurial practices.

Internet is transforming almost all the industries, representing great opportunity for mass innovation

The term “Internet Plus” was coined to inspire people with the prowess of information technology, and is regarded as a national-level strategy. All the aspiring entrepreneurs in China’s startup scene are thinking how to disrupt a traditional industry with the mighty internet.

Online to Offline (O2O) is a famous term born in this context. The logic is to combine the online and offline experience to facilitate life. Ride-hailing market leader Didi, food delivery platform Eleme, e-commerce giant Taobao, short-lived bike-sharing unicorn OFO are all examples of the O2O business model. The customer value chain has one part done online, usually product configuration and mobile payment, and another part delivered offline.

In addition to O2O business model, Internet Plus also gave birth to new business models in various industries. Coupled with media, it became new media, embodied by WeChat official accounts. Married with finance, it turned into FinTech, which made investing, money wiring, and short-term renting way more convenient. E-commerce is the best illustration of how internet switched the retail business online and scaled up its influence while cutting down fixed costs.

The benefit of internet spills over to non-for-profit areas too. For example, online education market leader Hujiang put forward a Corporate Social Responsibility program in 2015, with an aim to mitigate the education inequality in China. Ant Forest, a carbon-reduction program introduced by Alipay increased user stickiness by planting real trees on their behalf.

The mobilized public and the honorable badge of failure

The unwavering support from the government and the widespread of internet capabilities enabled the creative minds to unleash their potential.

According to National Bureau of Statistics, the improvement of general business environment in China has given rise to business registrations. Especially in the tertiary sector, where the legal entities registered with IT services has quadrupled from 2013 to 2018. Other booming industries include technological services, leasing and professional services, with a CAGR of 23%. Public administration and social organizations only grew 2% on an annual basis. Those figures clearly outline the confidence and concentration of digital services promoted in the entrepreneurial wave.

Data source: National Bureau of Statistics, Number of Chinese legal entities in 3 sectors

The increased ease of starting up and technological advancements propelled the establishment of enterprises. Compared to individual economic units, registered enterprises soared in 5 years, taking a whopping 75.6% of total legal entities.

Data source: National Bureau of Statistics, Number of Chinese enterprises registered has soared

Furthermore, the tide of Mass Entrepreneurship and Innovation translated into the numerous young enterprises. In 2013, SME (small and medium enterprises) represented 95.6% of the total registered companies. In 2018, they represented 98.5%, showing the liveliness of Chinese entrepreneurial energies.

Data source: National Bureau of Statistics, Young enterprises take the lead

There are many stories and lessons about startup failures, which is how 95% of startups end. But with the mainstream endorsement and regulatory privileges, failures are more and more seen as a badge of honor. For the new generation of Chinese entrepreneurs, many are driven by dreams and opportunities, some are forced to venture for lack of job prospects, yet others are blindly following suit. In 2011, only 1.7% of university graduates opted for starting up a business. This percentage peaked at 3% in 2016 then slightly dropped to 2.7% in 2018. This change implies that government promotion was effective, and that China’s startup scene is cooler headed than before.

On the one hand, it’s the government’s job to put all the necessary support in place to ensure new ideas come out alive after market selection. There are more and more incubators, governmental subsidies, and free startup resources and mentors. On the other hand, it’s entrepreneurs’ job to hone their entrepreneurial skills and think long and hard about their fundamental business logic.

The fallen unicorns made investors more cautious about the fundamental business logic

After the two roles played by the government and the entrepreneurs, the third player in China’s startup scene is the investors. Whether it’s business angels or venture capitalists or private equity firms, they are the guardians of solid business sense and financial resources.

The loudest failure in the recent history of China’s startup scene is the bike-sharing platforms. Began in 2014, OFO and Mobike had been the super stars to solve the last mile mobility issue. Even with around 8 billion RMB of investment across several rounds for each company, they had been controversial in their ability to generate profit, to respect public order, and to protect local environment. In the end, OFO filed for bankruptcy and Mobile got acquired by Meituan for merely 2.7 billion RMB.

This contrast of capital zeal and the market failure illustrate the short-term mindset of some investors. To claim the maximum market coverage, which seemed to be the key success factor in the sharing economy logic, the companies and the capital both prioritized buying bikes over risk control. The lack of a sustainable company culture and conflicts of interest at the top management level went unaddressed.

Source: Sina Finance, the mountain of abandoned sharing bikes

Such a vivid example will lead the investors to favor sound business models over those benefiting from over-evaluations of other investors. It’s good for the society because it creates less bubbles, but it also means tougher financing for the entrepreneurs. For any newcomer in China’s startup scene, there are several dangers that could be detrimental to its fundamental business logic.

Competition and acquisition from conglomerates like BATJ

It’s almost a common knowledge that once a startup is big enough, it will be bought by one of the tech giants in China. The famous Baidu, Alibaba, Tencent, JD and other rising giants like ByteDance, NetEase, Didi, Meituan won’t hesitate to make a bid to make their own ecosystems stronger.

But first of all, the startup has to survive the competition by those giants. A great dark-horse example is Pinduoduo, whose founder Colin Huang recently became the second richest person in China. The notion of Social + Ecommerce in the long tail market made this startup successful, in an era where everyone thought Alibaba and JD had occupied all the room of growth. In theory, the existing e-commerce giants could quickly take over Pinduoduo in its cradle. In practice, neither of them followed the startup to compete in lower-tier cities.

Tencent, being the social networking giant, strategically invested in both JD and Pinduoduo, to combat with Alibaba in the e-commerce arena. That’s the best outcome for the startup, with the owner taking 46.8% of the shares and 89.8% of the voting rights.

Other startups don’t have the same luck, many were bought to be dissembled into existing projects of the giant company. For example, ByteDance bought Zhaoxi Calendar, a niche time-management app, whose product team was integrated into Lark, another acquisition realized only 2 month before.

Copycats and price war

Even if a startup didn’t make enemies out of the tech giants, diligent copycats and the resulting price war could put an end to their cash inflow.

The Chinese market never lack duets. Didi and Uber China in ride-railing sector, Meituan and Eleme in food delivery online business, Mobike and OFO in bike sharing economy. When there is oligopolistic competition, the consumers are the happiest. Huge amounts of discounts are up for the taking, as long as they lead to market share. However, price wars are destructive to both competitors, as the customers attracted by low price are not necessarily loyal. Once the price incentives are out of the table, usually due to the serious drain on financial resources, the market share might shrink back.

One sure thing to note about China’s startup scene is that, there is no shortage of copycats. Demonstrating this, there are more than 20 startups which share the same shared-bike business model.

Source: Tencent news, Shu Ke Shi, 20 startups in bike sharing industry

Illegal activities that suck the margin into the shadow

Luckin coffee has made its fame by publicly stating financial fraud to SEC. Its business model was clearly unsustainable, as it had a loophole in its expansion strategy. It’s strength in marketing and storytelling did not compensate its unsatisfactory risk control department. And this Achilles’ heel has costed its healthy financial performance.

Basically, Luckin’s expansion strategy is based on customer referral. As a startup, the number of referrals is directly linked with GMV, KPI, and valuation of next financing round. It’s therefore understandable how much marketing and budgetary resources are pooled to facilitate leads conversion. However, instead of using elaborative verification methods to ensure the referred customer is a real person, Luckin only used a phone number to validate the referral. Once the referral is validated, both the referrer and the referee enjoy discounts. The result of a weak risk control is constant loss of profit due to a highly developed grey industry of fake phone numbers.

In the highly competitive battlefield as the China’s startup scene, nothing is too despicable to be true. Entrepreneurs owe it to their teams and investors to pay attention to not only the legal competitions, but also illegal activities.

In conclusion, China’s entrepreneurs keep pushing forward despite setbacks

China’s startup scene is quite lively thanks to the government’s Mass Entrepreneurship and Innovation guidelines, mobilized public and responsible investors. Even though system-level crises, industry-level fluctuations, and company-level setbacks keep striking one after another, the qualified entrepreneurs will seize the opportunity in the distressing time, fearless as always.

Author: Della Wang

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Since the issue of Honor of Kings by Tencent in 2015, the game always occupies the throne in the domestic mobile games market. At the same time, video games live-streams became a new trend, and Tencent owned over 88 percent of the video games live-stream market. Net ease also launched many popular video games like Onmyoji. Its long-term operation strategy allowed it to provide refined service for existing games, driving its increase.

Data Source: GPC, IDC, Annual Revenue of the Video Games Market in China from 2015 to 2019

Video Games Market in China:  Mobile Games Outperform

According to the classification of the CNG Games Research Center (CNG中新游戏研究), there are three main categories of video games in the Chinese market: mobile games (68.5%), PC client games (26.6%), and online games (PC browser games) (4.3%). Client games include games whose client software must be installed onto gamers’ PCs, such as Multiplayer Online Role-Playing Games (MMORPG). The revenue of client games-player games in 2019 did not have tremendous growth compared to its income in 2015.

Thus, the Chinese market for multi-player games reached a stable condition. Mobile games are growing slower in the past five years. Elimination and parkour games (parkour involves movements such as running, jumping, swinging, climbing, vaulting, and rolling while navigating obstacles) were particularly popular on mobile devices in 2016, when, for the first time, mobile gaming took a larger share than PC gaming and accounted for over half of the online gaming market. The number of mobile players has increased over the past five years, while the number of PC client gamers started to decrease.

Data Source: GPC, IDC Proportion of Sales Revenue of Video Games Market in China in 2019

The mobile gaming boom has so far produced a number of highly reputed games, enticing more players by day. Thanks to the large PC game user-base and the fast-growing mobile games sector, the video games market in China is still on the rise.  However, iResearch holds that the gaming industry urgently needs product innovation, industry integration, and international development to maintain its competitive edge. 

Government Policies Regulate the Market Development

Since 2005, the government has continually published laws and regulations to regulate the Chinese video game market. The video games industry is one of the most indispensable parts of modern Chinese culture, explaining for the Chinese government’s recent surge of interest in gaming. The government has invested a great deal in social construction and set up incentives for innovation within the video games industry so as to bolster the companies’ competitiveness. Despite former government policies to support the video games market in China, in recent years, the Chinese government attempts to regulate the fast-growing market.

To protect youth from indulging in video games, the government issued a series of laws to ask video game companies to regulate their games. Those companies need to ensure that the games’ contents are healthy and may forbid youth from using certain functions.

To quash the production of low-quality and illegal games, for instance, the government references its approval processes and requirements. (Chartboost) According to China’s Ministry of Culture, the pilot reform program begun in 2014 has been a boon for the industry, even if the manufacturers must still comply with strict regulations and ensure that the game won’t promote anything that would harm national unity.

Regulatory reform offered foreign companies a great opportunity to build their business in China, as it gave them access to the Chinese video game console market, where products like XBox, Nintendo, and Playstation were quickly injected. However, Pokémon Go, launched in Hong Kong in July 2016, was not granted the same level of access. Therefore, in order to adapt to the Chinese market, it is important to stick to their customs, laws, and regulations.         

New Trends in the Video Games Market in China

Source: iResearch Global Group, 2016

In 2016, the Chinese Internet giant Tencent bought Supercell, the Finnish maker of the popular mobile game “Clash of Clans” for $10.2 billion from the Japanese group SoftBank. The deal is believed to be the first that values a European digital company at more than $10bn, surpassing both the old-guard video-calling service Skype and music streaming giant Spotify, according to The Telegraph. Tencent also owns Riot Games Inc., the American firm behind the massively popular multiplayer online battle arena (MOBA) game “League of Legends.” Riot games is the organizer of the League of Legends World Championship, which was seen in autumn 2016 by 43 million people, according to the company.

With Tencent dominating the Chinese market, numerous small and medium-sized companies with creative gaming concepts are contending for coveted niches–proof that innovation is key to success in this market. Therefore, it is crucial to stay up-to-date with the latest industry news. According to Johnny Zou, an analyst at IDC Research, “China’s gaming industry will see further growth. While remaining closely involved with the traditional PC and mobile industries, the gaming industry will draw from artificial intelligence, wearables, virtual reality, big data, cloud service and other emerging technologies and use animation, literature, movie & TV, live broadcasting, themed amusement park and other traditional entertainment industries to create more disruptive value.”

High-quality mobile games

Japanese-style playing cards of the roleplaying game Onmyoji (阴阳师), which became a hit in 2016

Zheng Shuang (郑爽), the lead actress in LOVE O2O (微微一笑很倾城) TV series, playing A Chinese Ghost Story (新倩女幽魂) online game.

Of the revenue from top-up cards (cash cards netizens use to pay for online games), which generated more than $1.45 million in China every month of 2016, role-playing games (RPG) accounted for 66.8%, followed by trading card games (TCG, also called collectible card games) with 13.5%, as reported by the CNG Games Research Center.  

Compared with the other types of mobile games, role-playing games are still the major market-driving force. A new mobile role-playing game, Onmyoji (阴阳师) launched in September 2016 by NetEase, became an instant hit, thanks to the unique design of the cards and the game’s traditional Japanese characters. Onmyoji features exquisite graphics and 3D animations set in ancient Japan, location-based services (LBS), allowing players to socialize with nearby users, and popular Japanese voice actors to create an immersive gaming experience. NetEase’s RPG game was extremely successful with young people last year. Onmyoji was one of Facebook’s Top 3 best mobile games of 2016.

Video game-film relationship

Another growing trend in China is the videogame-film connection. Video games based on movies and TV series are becoming more popular in China. As reported by the CNG Games Research Center, the video game adaptations generated $1.29 billion dollars last year, or 10.9% of total global mobile games revenues. This trend involves the concept of IP (Intellectual Property), which companies use to adapt original PC games into mobile games. In the cross–platform game industry, the IP of a lot of original PC games were used by companies to adapt them into mobile games, such as the mobile game A Chinese Ghost Story (新倩女幽魂), adapted from an online game of the same name launched in 2012 by NetEase.

In 2016, this mobile game also achieved fame especially among young girls thanks to its product placement in the drama and the movie LOVE O2O (微微一笑很倾城), featuring the young actor Yang Yang（杨洋）and the actress ZhengShuang (郑爽). The campaign drew the attention of new and old gamers to this 4-year-old MMORPG ( the acronym for Massive Multiplayer Online Role-Playing Game). Another example is the American action-fantasy movie Warcraft: The Beginning, based on the Warcraft video games series and novels, which succeeded tremendously in China. The film grossed $433 million worldwide and is the highest-grossing video game adaptation of all time. Warcraft made over $220 million in China alone, representing more than half of its global total box office. After the movie had been released, many gamers in Mainland China started to play this old PC client game again.

Enhanced gameplay

“Social gaming” commonly refers to playing online games that allow or require social interaction between players. Social games can be operated on mobile devices and PC. Because of the 14-year-old ban on gaming consoles (2000-2014) in China, players particularly enjoy free social games. In China, traditional social games like card and chess games, allowing users to play with their friends and strangers online, were once very popular but are now on the wane.

Chinese social game Happy Farm (开心农场), called FarmVille in the West, was one of these games. The goal was to grow virtual vegetables in a farm and steal vegetables from others. More than social activities, now most players prefer good mobile games with an enhanced gameplay experience, like Clash of Clans. Released in China in 2013 by Supercell, the combat strategy mobile game Clash of Clans (部落战争) was a massive hit. Clash of Clans makes $1,847.31 per minute compared to Candy Crush Saga, also released in 2012, which earns $1,847.01 a minute.

The Video game market in China under Coronavirus

While at home during the COVID-19 pandemic, many Chinesechose to play video games to fill their time. In April 2020, Gamma data issued a report talking about the video games market in China under the epidemic. The growth rate spiked from January to March in 2020 over the same period last year, triggering the market consumption.

Video games attracted more attention during the pandemic

Since people had to stay at home, video games became an excellent tool to satisfy their social needs. Not only popular games gained more downloads, but outdated games also had increasing downloads over the same period last year. The revenue of the video games market in China kept rising, and home quarantine stimulated people to spend more time playing video games. Therefore, that aroused the payment on video games. Particularly, TechWeb pointed out that the Daily activate unites of Honor of King in China reached over 95 million, and its daily transactions were over 2 billion yuan.

Responding to the government’s call, many video games companies did not fire employees during this period

Many companies stopped their work during the pandemic, thus, numerous people lost their jobs. Also, many new graduates were unable to find jobs because limited positions were available. Gamma Data’s statistics showed that most video game companies did not fire their employees and even provided a Spring Fair to hire new employees. Tencent offered 3,000 summer internships and new graduates positions and 5,000 community recruitment positions. The number of positions this year increased 25 percent from last year. Sanqi Interactive Entertainment even set a new branch in Chengdu to hire more talents to improve their product qualities.

Video Games Market in China: What about consoles?

The console gaming market has suffered severe losses over the past few years, continuously bleeding its market share from 91.71% in 2008 to 0.3% in 2019. While mobile gaming is dominant in China, the console segment has the potential to grow higher and is “a largely untapped source of potential consumers,” according to The Verge. Not only Sony, Microsoft, and Nintendo would benefit from the lift of the 14-year-old ban on gaming consoles; Chinese indie game developers could, too.  

Niko predicted that the revenue of the console gaming market in China would surpass 1.5 billion USD by 2023. Microsoft, Nintendo, and Sony all launched devices in China in the past few years. Notably, Nintendo united Tencent to release the Switch. According to Niko’s statistics, the number of Chinese users on Steam surpassed 10 million in 2016. The evolving video games market in China is also engendering development and innovation. China’s private developer pool is deepened as the country’s economy grows, and the Chinese government can no longer ignore indie game developers. This issue was a major focus during the 2016 China Game Industry Annual Conference (2016年度中国游戏产业年会) IDC forecasts that game exports, especially to the U.S., will continue to rise, as Google finally opened its Developers Platform to Chinese developers on December 8, 2016.

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Two drivers of China’s counterfeit production

The counterfeits industry in China: a consequence of economic growth

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

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

China counterfeiting is linked with brand culture

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

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

Size of the market for counterfeit products in China

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

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

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

The market for fake goods in China

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

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

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

Chinese Fashionistas chasing the trends

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

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

Government regulation of the fake market in China

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

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

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

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

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

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

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

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

Taobao and fake goods

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

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

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

How does Pinduoduo handle counterfeit items?

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

How counterfeiters in China get around AI controls online

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

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

In-person sales of counterfeit goods in Shanghai and Beijing

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

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

The emerging authentication industry in China

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

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

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

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

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

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

How brands can fight back against Chinese counterfeiting

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

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

Many consumers are aware that their purchases are counterfeit

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

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

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

Anti-counterfeiting in China: The ethical approach

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

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

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

Brands can educate against counterfeiting practices in China

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

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

Anti-counterfeiting in China: The psychosocial approach

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

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

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

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

Who is benefiting from the counterfeits industry in China?

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

Rethinking the fashion industry

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

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

What brands can do to avoid intermixing with counterfeits in China

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

Authors: Alison Bogy & Enzio Cacciotto

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

Luxury brands in China do not have to compete with counterfeits

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China’s cosmetics market is the largest in Asia

In 2013, China overtook Japan as the world’s second largest cosmetics market, and in 2017 the market size of Cosmetics in China accounted for 11.5% of the global market, second only to the United States’ 18. 5%. In the era of people paying more and more attention to their own image and face value, cosmetics are rapidly growing in demand. According to the China Food and Drug Administration (CFDA) statistics, more than 5,319 enterprises are qualified to produce cosmetics in China, which has relatively strict cosmetics regulations.

With an increasing demand for healthy products, China has now become a new outlet for organic cosmetic brands to develop themselves and expand globally afterward. Hence, organic cosmetics in China are also becoming more and more popular.

Organic cosmetics: A fast-growing global market

The use of natural and organic products has become a global trend. Grand View Research, a U.S. market research firm, predicts that the organic skin care market will reach 110 billion yuan globally and 20.6 billion yuan in the Asia Pacific by 2020. From a global market point of view, the United States, Europe and Asia-Pacific region have more room for development. In the United States, the market value of organic personal care products is currently $2.95 billion and is expected to grow steadily at around 9.8% over the next few years; In Europe, organic personal care accounts for 30% of the market, with a compound annual growth rate of between 9.6% and 10%; the market value of the Asia-Pacific region is $2.01 billion, with a compound annual growth rate of 9.3%.

In 2012, many leading retailers began investing in organic cosmetics, and British supermarkets began using their own trademarks to sell organic cosmetics. However, most of the retail investment agents were in Germany, where even Parity Supermarket had launched certified natural cosmetics. Large cosmetics companies have been focusing on the scope of the global natural cosmetics industry mergers, acquisitions and investments.

Organic cosmetics in China: Driven by young consumer

Driven by the concept of domestic consumers, natural ingredients have become the top priority of consumer concern in China. In recent years, the discussion of moisturizing ingredients has changed from the previous “laboratory-developed ingredients” to various types of “natural extracts”. Consumers talk the most about plants, extracts and other factors in terms of the social platform’s discussion of moisturizing ingredients. It is worth noting that current users’ concern about the natural composition of moisturizing products has become a trend. 

At present, consumers purchasing organic cosmetics in China usually choose foreign organic brands, such as France’s L’Occitane, America’s Origins and Germany’s Jurlique. However, there are few well-known organic cosmetics brands in China. On the one hand, because organic cosmetics originated in foreign countries that have developed a mature sales system, technology and raw materials supply are more developed than domestic. Thus, the product is more trusted by consumers. On the other hand, China has not yet had organic certification of cosmetics, so consumers have difficulty distinguishing authenticity, which also affects the development of domestic organic cosmetics brands.

Chinese certification for organic cosmetics

High quality organic cosmetics have complex formulas and processes, short shelf lives, and easy deterioration. In order to increase preservation, anticorrosive ingredients and chemical compositions are often added into cosmetics. Therefore, it is difficult to break through the bottleneck of preserving pure organic cosmetics. This is a challenge for Chinese manufacturers in the short-term. As the production and use of organic cosmetics have stringent technical requirements, ordinary cosmetics will likely continue to be the main product consumed for a long time. However, when the techniques of producing and saving organic cosmetics mature, the market will dramatically change.

Lack of a single organic certification agency

In China, certification for organic cosmetics was canceled by the state certification and accreditation administration on July 1, 2012. There are now no regulatory agencies or standards to do organic cosmetics certification. The brand itself often finds organic raw materials to make products, but there is no third-party agency screening nor any strict market regulation management in China.

Therefore, Chinese consumers are also more in favor of organic brands with the European Union organic certification, German natural organic certification or New Zealand Natural Organic Association.

Since 2017, several of these certification bodies have been integrated into new certification body called Natural. Among the current organic certification bodies, Cosmo and NaTrue are recognized as the strongest. It is these organizations and institutions that have maintained the orderly development of organic cosmetics in Europe.

Most popular organic or natural cosmetics products in China

Franic法兰琳卡: Franic has been looking for a closer approach to natural skincare, so it is working hard to study the world’s organic skincare trends and move closer to the international concept of advanced skincare. Nearly half of Franic’s natural skincare products are developed and produced in accordance to the EU organic formula standard.

Saselomo 三草两木: Saselomo is a natural skincare brand. It gets amazing energy from nature and develops sustainable, healthy and safe skin care products. Its organic ingredients have been certified through the ECOCERT. It has its own international standard production plant and international process management to ensure the quality of its products.

Chando自然堂：From the selection of raw materials to market sales, all need to go through at least 60 different safety and efficacy verifications to ensure that the product provides safe, trustworthy, functional and high-quality products.

Pechoin百雀羚：The company is committed to creating natural and gentle quality skin care products for consumers. Their company ethics are the perfect interpretation of “China Legend, the beauty of the East.” Their main productions are skin care supplies, shampoo supplies, personal cleaning supplies, dew water and beauty cosmetics.

Organic cosmetics in China: a fad or long-term trend?

Many Chinese preferences for organic or natural ingredients is not only rooted in a desire to be eco-friendly, but also for personal health. Chinese consumers tend to be very cautious of using polluted ingredients. Since the COVID-19 outbreak, our research on beauty consumption shows an even higher awareness of natural ingredients.

Author: Celeste

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

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

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

China met global face mask demand with a production boom

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

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

New regulations to prevent face mask scams

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

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

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

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

National issues supporting the Face Mask Market in China

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

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

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

Pollution drives the functional mask market in China

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

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

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

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

Red alert in Northern China

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

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

Face mask price inflation

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

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

Rising demand for face masks in China

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

Protective face mask production in China

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

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

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

Collectivism and Chinese consumer psychology 

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

Different style and functions for the Face Mask Market in China

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

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

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

Choosing the most effective mask

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

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

Division of the Chinese Mask market

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

Lack of diverse options in China’s mask market

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

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

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

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

The future of the Face Mask Market in China

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

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

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

Author: Maxime Bennehard

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Chinese economy is bouncing back

China’s GDP contracted by 6.8% in the first three months of 2020. It is the biggest drop in nearly three decades, as the country’s factory output ground to a halt. National Bureau of Statistics of China showed that industrial output was down 8.4% from the year before.

[Data Source: Tradingeconomics.com, ‘China’s GDP growth forecast’]

In the beginning of April, State Council claimed 99% of manufacturing firms had begun working again. Besides, 84% of small and medium businesses had reopened. The economy’s performance in the second quarter will be crucial for the government to get the economy back on track. A quick rebound can happen because of the “countercyclical policies”, or pro-growth measures taken by Beijing. Chinese experts expect economic indicators to significantly improve in the second quarter, with growth returning to potential by the end of 2020 or early 2021.

Recession-proof markets in China during the epidemic

Some markets have proven that they are recession-proof during the epidemic in China. For example, people need health services even more so than usual in these hard times. In a crisis period people also visit discount stores to buy goods in bulk and at discounted rates to save money. Since people had to use nearby supermarkets during the epidemic in China, convenience stores saw good growth dynamics.

Such goods as food, hygiene products, household and baby products were always essential and did not experienced recession. The Chinese began to be more attentive to their own health, so the sale of facemasks and sanitizers also increased. Given the current situation, most companies are making their workforce remote. They are using Chinese video conferencing solutions such as  WeChat work and DingTalk. Additionally, in a recession period, people fear losing jobs, and they get insurance to be safe.

A unique characteristic about consumption following COVID-19 in China, is that digital and online tools and services came out as a recession-proof market in China. Due to being indoors, consumers spent much more time on entertainment like gaming, short videos, and streaming movies.

Higher demand for healthcare services in China

The growing healthcare sector is in many aspects a byproduct of China’s recent economic rise. Now several hundred million people have higher living standards and can afford healthcare services. This increases the demand for healthcare services. Although the medical industry is growing fast in China, the demand for further healthcare services is growing even faster.

Industry experts estimated the Chinese healthcare market will grow to 90 billion yuan by 2020. The Prospective Industry Research Institute predicts that the sales revenue of China’s pharmaceutical industry will exceed 3 trillion yuan. The industry scale will exceed 5.3 trillion yuan in 2025.

[Data Source: Sohu, ‘China’s healthcare industry market revenue’]

Healthcare is a recession-proof market in China. After the coronavirus outbreak in China has led to an increase in the demand for medical equipment. From January to March 2020, there were 87,265 new businesses with medical devices. Besides, the performance of some medical device companies increased in January, and the medical device industry sector is trending well.

[Data Source: iimedia research, ‘Share price trend of pharmaceutical device industry’]

Most experts agree that the coronavirus outbreak will lead to profound changes in China’s healthcare sector. These changes could include massive investment in disease prevention infrastructure and a re-visiting of pharmaceutical companies’ pipeline strategies. Other improvements could focus on greater emphasis on the role of community healthcare centers.

The outbreak will also most likely lead to digital technology playing a greater role in China’s healthcare. Healthcare industry will turn to digital technologies and solutions to engage markets using AI-based diagnostics and tools.

[Data Source: qianzhan, ‘China’s VR medicine market size forecast’]

Retail industry: convenience and discount stores

Convenience stores win during the epidemic

In 2019, the number of convenience stores in China is about 135,000, an increase of 10.3% from the previous year. The number of stores will be close to 150,000 in 2020. With the improvement of digitalization and supply chain, convenience stores will give consumers a more convenient and safe shopping experience.

[Data Source: chyxx, ‘Number of convenience stores in China’]

Convenience stores proved to be a recession-proof market in China. They had more advantages during the epidemic. People have reduced their outings and the scope of activities. Community convenience stores are a typical less-personal retail format. They have gradually become a centralized point of sale and their commercial value also started to stand out. Many convenience stores even started stocking fresh fruits and vegetables to better cater to Chinese demand during COVID-19.

Walmart and Costco – discount stores in China stay on track

Executives of Walmart in China claimed that sales at the company’s 430 stores had not faltered, even during the quarantine. Customers turned to the retailer to buy food and necessities. Walmart also invested in a grocery delivery venture in China that has continued to make home deliveries during the outbreak.

Report published by Costco showed that Costco’s sales accelerating in February 2020, increasing 11.7% year over year. Customers started shopping at the discount stores when the outbreak hit. Demand was so strong that Costco placed a limit on how much customers could purchase of certain items. This helped to increase second-quarter sales and it will influence third-quarter results. For the three months ended February, Costco reported worldwide revenue growth to $39.7 billion.

[Data Source: Costco Wholesale Corporation, ‘Costco revenue worldwide for the quarter ending February’]

Food products: healthy food and convenience food face huge demand in China

In the basic life needs food undoubtedly occupies the first place. That is why it is a recession-proof market in China. During the isolation period in China, people could not eat out, so they bought the ingredients for cooking at home. Downloads of the recipe apps more than doubled in February to 2.2 million at China’s app store. In February 2020, cooking and food-related content attracted more than 580 million views on Chinese video-streaming platform Bilibili.

In order to avoid contact with people, consumers choose to use food delivery in China and have the habit of hoarding food products. Healthy food and vegetables saw the growth in sales.

[Data Source: JD Data, ‘YOY growth rate of food sales during Spring Festival 2020’]

Convenience foods and quick-frozen foods have become the first choice for customers. According to ECdataway, sales of quick-frozen foods have skyrocketed from January to February. Instant noodle sales increased by 57% year-on-year, dumplings sales increased by 78%, instant hot pot increased by 144%, and meat products increased by 264%. 

[Data Source: ECdataway, ‘YOY growth rate of convenience food sales January-February 2020’]

Survey by the “Food Safety” magazine showed 5% of food companies faced  the risk of immediate bankruptcy. 8% of companies can persist for 1 month. 3% of companies can persist for 9-12 months. Roughly 41% of companies can persist for one year. 

Baby products as essential market

As babies are a part of a natural life circle, baby products are a necessity for people. The business of baby products rarely crumbles and proved to be a recession-proof market in China. As a just-needed product, diapers had greater demand than other supplies during the epidemic. The data shows that the most stocked items for pregnant women and mothers in January-February 2020 were diapers. The proportion of pregnant women who chose to hoard diapers was 29%. The proportion of mothers who chose to hoard diapers was 64%.During the epidemic, the most used channels to buy baby products in China were large supermarkets.

Sales of cleaning household products are growing

Chinese government’s recommendation to clean touched surfaces and objects frequently increased the demand for household cleaning products. According to statistics, sales of household cleaning products on Tmall surged 210% compared with the same period last year.

Alibaba released a report which stated that the sales of household cleaning products on Alibaba website increased by 316%. Moreover, consumer demand urged the promotion and application of multifunctional washing products. As household products had big demand during the pandemic, it is a recession-proof market in China.

Hygiene industry – hand sanitizer and facemasks

High demand for hand sanitizers in China

Affected by the coronavirus epidemic, the demand for hand sanitizers surged. After the outbreak, the sales of hand sanitizers increased sharply by 231%. Hand sanitizer sales on Taobao has soared to 31 million, about 11 times more from the previous year. From January 20 to February 13, 2020, JD Supermarket provided around 6 million bottles of hand sanitizer for consumers nationwide.

[Data Source: qianzhan, ‘Demand for sanitizers January-February 2020’]

Affected by the coronavirus outbreak, the growth rate of sanitizer output value will increase. The initial estimated growth rate can reach 13.7%. The annual disinfectant output value will exceed 11.5 billion yuan.

With the need for epidemic prevention and control, the demand for 75% medical alcohol has greatly increased. In 2020 it will exceed 80,000 tons.  China Chamber of Commerce estimates that the annual output of hand disinfectant will exceed 50,000 tons in 2020.

Facemasks industry is growing

Masks have become the most important goods during the coronavirus outbreak in China in 2020. In recent years, the output value of China’s face mask industry has maintained a stable trend, and the growth rate of output value has remained above 10%.  Affected by the coronavirus outbreak in 2020, the growth rate of medical masks will increase significantly, reaching 28%. The market scale of the Chinese mask industry in 2020 will have a substantial increase and reach 71 billion yuan

    [Data Source: iimedia research, ‘China’s face mask market size’]

Industry insiders pointed out that in the future, professional masks will continue to occupy the market, and the market share of low-end full-gauze masks will continue to decrease.

Distance learning and remote work tools as recession-proof markets in China

Distance learning attracts more users in China

After the government announcing to postpone the starting day of school, online learning APPs achieved dramatic growth. Statistics show that the scale of China’s online education market exceeded 300 billion yuan in 2019. It will reach nearly 500 billion yuan in 2022. The epidemic brought to online education an outstanding traffic performance. During the epidemic, the daily active users of Xueersi (学而思) online education platform exceeded 10 million.

According to the data of the “Statistical Report on the Development of China’s Internet” China’s E-education users reached 232 million in 2019. It increased on 31 million from the end of 2018, accounting for 27% of the total Internet users.  As many schools still have an online teaching, China’s online education users can reach 305 million in 2020.

[Data Source: chyxx, ‘Chinese online education market size’]

Remote work tools are getting more popular during the epidemic

During the coronavirus outbreak, the demand for online office software has risen sharply. According to the government reports, nearly 70% of the employees believe that the company needs to provide tools for employees to work online.

In 2017, the scale of China’s remote office market was about 19 billion yuan, and it reached about 23 billion yuan in 2018. In 2020 it will grow to 47 billion because of the big demand.

[Data Source: Sohu, ‘China’s remote office market size’]

The popular remote office in this epidemic were DingTalk and WeChat Work. Later Zoom, Xiaoyu Yilian and ByteDance’s Feishu subsequently joined the competition. According to statistics, there are currently about 4,500 cloud office companies in China. At present, DingTalk and Enterprise WeChat already have a certain lead in terms of user size.

After the outbreak, the probability of using these remote office tools will only increase. This epidemic has caused more people to start to understand and understand remote office software. 

Insurance market in China can resist recession risks

The outbreak will increase China’s insurance awareness and may help the long-term development of China’s insurance industry. As the world’s second largest life insurance market, China’s growth potential remains strong. During the epidemic, the willingness of enterprises to avoid man-made and natural disasters increased.

The impact of the epidemic on the insurance company’s claims is under control. Bank of China and Insurance Regulatory Commission have strict supervision on the solvency adequacy of insurance companies. Currently, the insurance industry has enough solvency to better resist risks and is one of the recession-proof markets in China. 

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Cloud computing is the storage and processing of data on remote data centers. Cloud storage reduces the burden on computers which makes possible more work flexibility. A large tech savvy population and need for data security drive the development of cloud computing in China.

China has the largest online population in the world, with over 800 million internet users. Therefore it is no surprise that China generates an enormous amount of data that must be stored securely. Cloud-based servers are more scalable, affordable, and secure than on-site servers, so they perfectly satisfy China’s huge demand for flexible data storage.

The technology is being rapidly developed in various sectors and is already generating over five billion dollars in revenue annually. Generally the three main types of business delivery models available for cloud computing are Software as a Service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (IaaS). Meanwhile, data can be stored from the public cloud, private cloud and hybrid cloud.

Sizing the Chinese cloud computing market

In 2018, the Chinese cloud computing market was second in terms of overall size. It accrued approximately $13.4 billion dollars in annual revenue compared to $53.4 billion of the US. Despite this, the Chinese government is dedicated to pushing the market to approximately $64 billion by 2020, creating major business opportunities for cloud computing providers. At any rate, China’s cloud computing industry is projected to exceed 300 billion yuan ($42.3 billion dollars) by 2023, by which time an estimated 60% of domestic companies and government agencies will be using cloud computing services.

[Source(s): Statista, IDC, China’s cloud computing market size]

According to the Chinese Ministry of Industry and Information Technology (MIIT), from 2015 to 2019 officials have been working to more than double the scale of China’s cloud computing industry. Many analysts predict that public cloud usage rates could grow more than 20% annually to 2023.

Large enterprises, government agencies and financial institutions accelerate the pace of cloud application

Furthermore, according to an interpretation of the MIIT’s Action Plan, China’s cloud computing industrial structure continues to optimize. Key technologies such as large-scale concurrent processing, mass data storage and data center energy-saving have achieved great breakthroughs in standards. Also, backbone enterprises are working to develop more strategies to improve their business categories. With many large bodies like enterprises and government institutions relying on cloud computing in China, the technology is applied into an increasingly wide range of industries.

According to data from market research firm IDC, cloud computing and artificial intelligence will more than double the rates of innovation and productivity at Chinese companies and organizations by 2021. For these reasons, cloud computing is considered a crucial infrastructural force in China’s push for an industrial upgrade as it moves to embrace new technologies like artificial intelligence, internet of things, and big data.

The graph below portrays IaaS as the segment with the biggest market share in cloud computing in China. The forecasted market size of software-as-a-service (SaaS) will continue to be the largest among the three with CRM and Mail management as the most widely used application types.

[Source: Statista, Cloud Computing in China – Statistics & Facts]

Chinese Government’s Cloud Computing Industry Development Mandate

As part of a larger development strategy for advancing Chinese software and information technology services, the Chinese government plans to continue to make large investments over the next few years to drive domestic cloud computing development.

Through the ‘Internet Plus’ strategy, introduced in 2015, the Chinese government is pushing for the development of the domestic cloud computing industry to modernize manufacturing and other domestic industries. In short, this strategy promotes the integration of cloud computing with big data and IoT.

China’s cloud computing market is still at the nascent stage; however, it is likely to witness tremendous growth across all the industry verticals with public sector, manufacturing, retail, and healthcare sectors among major adopters of cloud computing services. Also, fast pace deployment of 4G LTE mobile network across China is anticipated to support further penetration of cloud computing services among end user organizations. The cloud market has particularly strong growth potential, underpinned by government initiatives and major investment by vendors in infrastructure and human capital. A new cybersecurity law will protect local cloud and hosting players from growing international competition.

Government support for the Chinese cloud computing market will see strong growth continue. Domestic firms have been set the target by China’s Ministry of Industry and Information Technology’s goal of increasing cloud revenues by at least 50% annually over the next few years, including a focus on generating revenues for cloud services from international sources and building China’s presence in the global cloud computing market. There is also an eight-point initiative that includes the creation of a national industry data recovery center and a national safety control service center for China’s data security.

Trends in the Cloud Computing Space

The future of cloud computing looks vast, connected and increasingly fast. While the concept and initial design of cloud computing began in the United States as a way to store data, networks, intelligence and more over the Internet, the refinement of cloud-based platforms and services are spreading widely in China. From individual consumer cloud services for storing photos, to multibillion-dollar corporations that need to house intelligent data, this technology has become internationally ubiquitous in the last ten years.

Globally, the cloud computing industry is dominated by American companies such as Amazon, Microsoft, and Google, which controlled a combined 57% of the overall market in 2018. According to Wikibon Research, the global cloud market hit $237 billion in 2018 and is estimated to reach $814 billion by 2027. With mega corporations like Google, IBM and Amazon mostly running cloud systems in the U.S., it’s easy to overlook China’s market for now. Data shows, however, that companies like Alibaba (which currently ranks fifth in the global cloud computing market), Tencent and Huawei have worked their way up the ranks and are growing rapidly.

[Source: Statista, Synergy Research Group, Global market share of leading cloud providers]

China’s cloud computing market will be the largest in the world

China’s cloud market is set to become the largest in the world by 2023. But right now, it remains nascent and insubstantial compared with its respective sectors in mature economies. The Chinese market is roughly one-tenth the size of the US equivalent. The market is expanding but remains fragmented, which means that much of it is up for grabs. Domestic tech heavyweights Alibaba and Tencent, along with international players like Amazon and Microsoft, all want a piece of what will eventually become a very large pie.

Despite the challenges presented by the Chinese market, several large, well-resourced U.S. cloud providers have established operations in China through joint partnerships with local companies. For example, Microsoft has partnered with 21Vianet, a Chinese data services firm, to roll out public cloud. Other U.S. companies are also operating in China. Amazon is partnering with ChinaNetCenter to offer cloud services and IBM is teaming with 21Vianet to offer its hybrid cloud platform.

Tense domestic competition drives growth

Furthermore, in the decade since e-commerce giant Alibaba became one of the first domestic players to tap into the market in 2009, China’s internet giants have been pouring resources into building up their cloud infrastructure services. Companies like Huawei, Tencent, and Baidu are now working feverishly to deploy their own cloud computing-based services. Among Chinese tech players, the excitement surrounding cloud computing’s potential as a growth driver is real.

Thus, local competition is another significant factor to take into consideration. Several Chinese companies are well-positioned in their domestic market. E-commerce giant Alibaba’s Aliyun is already a notable competitor, servicing 1.4 million customers directly and indirectly. China Mobile, China Unicom, China Telecom, Baidu, Tencent and ZTE among others, are also well-positioned in the market.

The Chinese cloud computing market is dominated by local players

China’s cloud market is dominated by local players, with IDC figures showing Alibaba Cloud as holding 42% of the public cloud marketplace in 2018, followed by Tencent Cloud at 12%, China Telecom with 9%, and Amazon Web Services (AWS) close behind with 6%. The total market for cloud infrastructure and software in the world’s second-largest economy reached $5.4 billion in the first half of 2019.

As you can see below, they are leading in each of the four key market segments: data center hardware/software, cloud computing services, colocation and CDN.

[Source: Synergy Research Group, This graph shows the market size (greater to the right) and annualized growth rate (high growth will place at the top of the chart) for the Chinese Cloud and Data Center Market]

Where is the growth and opportunities in the Chinese cloud computing market?

China has been a frontrunner in many different tech industry verticals, from AI and the Internet of Things (IoT), to smart cars and virtual reality (VR) services. As a direct result, the Chinese government and businesses have worked to also strengthen cloud computing technologies to support the data infrastructure of many of these emerging technologies.

According to Zhang Feng, chief engineer with China’s Ministry of Industry and Information Technology, China’s overall cloud industry reached a scale of $48 billion, and the IoT industry surpassed $174 billion in 2018. In other words, there are many businesses in many industries looking to implement cutting edge cloud computing technologies. Thus, increased development by Chinese companies on their cloud services offerings will continue to support the domestic market’s growth.

Along with this, the SME market in particular continues to offer strong growth potential and will be an important driver of demand for cloud computing in China. With security being a key hurdle, Chinese SMEs will likely continue to favor Chinese cloud providers for their IT services expansion. The SME cloud market was a key area of growth over the previous years and the fastest growth rates were for hosted communication and collaboration services, but in terms of total demand, it is Infrastructure-as-a-service (IaaS) and business applications that dominated.

Chinese companies are sensitive about their data

In the past, concerns over cost, security and logistics meant many Chinese businesses were reluctant to migrate to the cloud. Chinese companies are extremely sensitive when it comes to their data, with the vast majority still preferring it to be stored in-country.

However, encouraged by decreasing costs and Chinese government policy, a growing number of Chinese firms, unhampered by decades of outdated IT infrastructure, are now adopting cloud-based alternatives to on-site enterprise hardware and software. This is especially the case with China’s burgeoning number of SMEs, which typically have smaller budgets and therefore prefer the lean business models supported by SaaS. Customer relationship management software (CRM), office automation software (OA), intelligent manufacturing software (IM) and office collaboration software top their shopping lists.

Alibaba Cloud Leads China’s Cloud Computing Market

It opened up to third-party customers in 2009 and offers a comprehensive suite of cloud services, including web hosting, elastic computing, data migration, database, storage and content delivery networks, large-scale computing, security, and management and application serves.

Alibaba Cloud is China’s largest public cloud service provider with the most advanced cloud network, including 11 data centers and more than 2,300 CDN nodes in mainland China. Although being the world’s fifth biggest player in having just 5% of the global cloud market, it holds a 40% share of China’s domestic market and provides international companies with seamless access to China through Alibaba Cloud’s

China Gateway solution. Alibaba Cloud’s ongoing focus on innovation and internationalization has allowed it to outperform major Cloud vendors in the Asia Pacific market.

[Source: Deloitte, Overview of Alibaba’s Cloud Products and Solutions]

Alibaba Cloud’s Recent Performance

In its December 2019 4Q earnings, Alibaba maintained its leadership position in the Chinese cloud computing market by developing technology and business solutions that enable the digital transformation of businesses across industries in both the public and private sectors. During the quarter Alibaba Cloud reached two important financial and technological milestones.

62% YOY growth

First, their cloud computing business generated, for the first time, over 10 billion RMB in revenue, growing 62% year-over-year. This was driven by increased revenue in its public cloud and hybrid cloud businesses.

Applying public cloud infrastructure

Second, ahead of last year’s 11.11 Shopping Festival, Alibaba Cloud enabled the migration of the core systems of their e-commerce businesses onto their public cloud. During the festival, Alibaba Cloud provided a highly scalable, reliable and secure public cloud infrastructure that handled a single day GMV of RMB 268.4 billion (US$38.4 billion). Its public cloud infrastructure and technologies enabled Alibaba to process over 544,000 orders per second at peak and 970 petabytes of data without disruption for the full 24 hour period during the festival.

The company believes that the migration of the core systems of Alibaba’s e-commerce businesses onto the public cloud is a major milestone that not only will generate greater operating efficiencies for Alibaba but also will encourage more customers to adopt their public cloud infrastructure.

Cloud computing now represents more than 7% of all of the company’s revenues as Alibaba continues to cement its cloud position in China and in the Asia Pacific region.

A Promising Future for the Chinese Cloud Computing Industry

China still has a complex regulatory environment with intense local competition. However, the market opportunity is attractive to a point where foreign firms are willing to invest heavily in the cloud sector and take necessary measures to be compliant. Massive investments from both public and private actors also support this trend as it enables higher speed connections in remote areas and better wireless connectivity in the whole country.

Huge private sector investment, strong government backing and young talent are together rallying behind the growth of China’s cloud computing industry. The thirst for big data and information on consumer trends from corporate marketing departments will likewise drive demand for cloud-based database technology.

The other primary driving force will be market demand. Given the growing appetite for on-demand video, short-videos and live-streaming, mobile gaming and online content in China, content providers will need to invest in elastic computing services, auto-scaling, content delivery networks and server load balancers in order to provide uninterrupted service and fast download speeds. Demand for cloud products will also increase as companies invest in new technologies such as O2O services, IoT integration and online payments, or expand into overseas markets.

Mobile security will be another priority for the industry. As the world’s largest smartphone market, China is regarded as a mobile-centric market, and different to PC-centric markets found in the West. China’s tech savvy population is leading the way in adopting mobile payments, O2O services, mobile gaming and designing their lives around their smartphone. While Android is the leader in powering mobile applications for the China market, its operating system also remains highly susceptible to external attacks. To address data security and the concerns of Chinese mobile users, foreign companies will need to invest in mobile security, while still offering fast load speed and high availability to users.

Public vs. Private Cloud

[Source: Technode, Mckinsey, Spending on public and private cloud computing in China]

Although Chinese businesses are beginning to ramp up investment in cloud computing, they use cloud computing services at a lower rate than companies in the United States and other developed markets. While Chinese companies generally prefer the private cloud (i.e., data is stored on a company’s intranet), rather than the public cloud (i.e., data is stored by the provider), China’s public cloud market is set to grow over 20% by 2020 as more Chinese companies adopt public cloud services.

For foreign cloud firms, the local ecosystem features several peculiarities that have so far restricted them from securing significant market share on a global level. In addition to standard regulations that prohibit foreign cloud providers, they also face a market unready for widespread public cloud adoption. Unlike more mature cloud markets, firms still prefer private cloud solutions, which allow them to maintain full ownership and control of physical resources. However, the public cloud model is slowly waking up in China and in the future hybrid cloud models will likely become mainstream as more businesses choose both solutions for different ends.

What are the opportunities and concerns for foreign businesses?

Given the growing importance of data in business operations, cloud computing is a must for MNCs operating in China. However, setting up cloud computing solutions in China presents unique challenges including legislative and technical aspects of MNC cloud options. Despite the uncertainties and challenges, global cloud providers cannot afford to ignore China’s large and growing market. Increasingly competitive domestic players are finding their niche, but multinationals still have an opportunity to shape the market. As a market player it is time to identify target segments and invest in solutions for this customer base, as China’s IT buyers decide how they will take advantage of what the cloud has to offer.

Current regulations stipulate that foreign cloud providers must partner with local Chinese companies to serve customers in China, and the cloud computing industry is still regulated. The main challenges facing cloud computing within, from or to China stem from the information security aspect. This involves issues such as data cross-border transfer, personal information protection, data processing and mining among others.

While its tech market is growing, China still needs to enhance its core cloud technologies and encourage its adoption across markets. According to a recent report by Alibaba, areas that Chinese businesses require the most cloud assistance include IoT integration, mobile security and expansion into overseas markets. However, the convergence of emerging cloud technology trends and China’s increasing demands for the use of cloud services will open cross-border business opportunities. The tech sector will benefit tremendously from collaboration and partnership initiatives between firms in China and the rest of the world.

Mastering the Cloud Economy

How to navigate your approach?

Two characteristics of China’s cloud market may help enterprise vendors navigate their approach.

• Technology providers selling cloud software, services and hardware can strengthen their value proposition by developing a better understanding of cloud economics, customer preferences, and the impact of the cloud’s ascendance in legacy and disruptive technologies.

• State-owned enterprises account for a large share of total IT spending and are highly concentrated in government, banking and financial services. In these sectors, most IT spending focuses on large, complex, highly integrated legacy systems that cannot easily move to the cloud. A large and dynamic start-up scene has emerged in China, and is spending on the cloud. However, that still represents only a small fraction of total IT spending. In the U.S., cloud providers are addressing mainstream companies across industries, but that’s more difficult to do in an economy dominated by state-owned enterprises.

Choosing a Provider

When entering the Chinese cloud market, Alibaba maintains that website load speed is crucial anywhere, but particularly important in the mobile-centric market like China. Thus, the best option to minimize latency, improve SEO visibility, and provide high availability is to host in Mainland China.

The clear local market leader, Alibaba has earned the title of trusted partner for Chinese firms expanding into European availability zones. And with the growth of China’s cloud industry and now with China Gateway, it’s looking to do the same for companies moving in the other direction. Selina Yuan, president of international business of Alibaba Cloud Intelligence says that the “primary challenges foreign organizations face are “security, connectivity and demanding cross-border digital infrastructure setup issues.”

Therefore, for any multinational vendors or business it is important to assess how your business can fit into the proper Chinese ecosystem from both a technology and business perspective.

Author: Jeffrey Craig

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This article Cloud computing in China is the first one to appear on Daxue Consulting - Market Research China.

With its emergence as a strong global economy, opportunities for mergers and acquisitions in China have increased in number and scale. However, financial, regulatory and cultural complexities surrounding Chinese transactions present unique challenges. Despite the overall global economic decline, M&A in certain sectors such as TMT and industrials remained active in 2019. The global factors impacting the future of the China’s M&A market are segmented into three scenarios.

These three scenarios include: The U.S. China trade tensions stabilizing through phased agreements. Second, China’s new foreign investment law and policy coming into play. Third, China’s planned new rules to open up certain heavily regulated industries such as automobiles and financial services. Therefore, the 2020 and 2021 the outlook for China’s M&A market be more active than in 2019, especially in those industries and particularly through inbound deals.

Looking deeper into 2020 and beyond, Chinese outbound transactions focused on strategic areas will continue to be a main driver for Chinese outbound M&A activity in the region. However, continued tensions between the U.S. and China in combination with the hurdles presented by national security reviews may dampen China’s interests in outbound activities to the U.S. and Europe. On the other hand, multinational companies in China will continue to review their domestic China market strategy and reevaluate their interests in forming partnerships with Chinese firms. As a result, this will drive support for steady deal activity. Furthermore, sponsors will remain active in Greater China with additional capital to deploy attractive valuations.

Legislation and Policy Changes in China’s M&A market

There is no single law or regulation specifically regulating M&A in China. An M&A deal may involve many laws and regulations. For example, PRC Company Law may be relevant when designing the corporate structure of the target company. PRC Securities Law and its supporting regulations may come into play in a public M&A transaction. Contract Law may govern when an asset purchase is part of the deal. Employment Law and Employment Contract Law may come into play when employees need to be transferred in the transaction. In addition, tax law is always relevant, and foreign exchange policy and regulation is important when payment of the deal needs to be made cross-border. Antitrust Law may be relevant if a deal meets a certain threshold triggering a regulatory requirement to make a filing.

The Foreign Investment Law, which took effect on January 1 2020, will replace a collection of decades old laws with a single, unified and streamlined legal and regulatory framework for foreign investment that is applicable nationwide. The Chinese national legislature passed the Foreign Investment Law with the aim of creating a better business environment for overseas investors. Inbound investment via M&A in China is expected to reach $1.5 trillion dollars over the next 10 years according to a report from Xinhua News.

The Foreign Investment Law seeks to protect the rights of foreign investors and their intellectual property, and clearly incentivizes them to invest in China. It also helps Chinese companies move up the value chain. The evolving nature of China’s consumer economy and the desire for Chinese industry to continue to move up the value chain are two particularly important drivers of economic opportunity. These factors are expected to boost inbound M&A transactions in the future.

Defining M&A: Types of Mergers and Deal Players

A merger is the process by which two or more companies merge together as one new company. Acquisition often refers to the process when a financially stronger company acquires over 50% of shares of another company and brings it into its own operation. Companies can also engage in a minority share, majority share, equal share and buyout scenario acquisition. The decision of which option to take is tied into a corporate’s strategy and growth plans. Additionally, it is important to consider acquisition structure, as each option offers varying degrees of control and various other trade offs. There are five types of mergers: horizontal, vertical, market-extension, product-extension, and conglomerate mergers.

Moreover, M&A acquirers fall under two broad categories. First are strategic investors, which are operating companies looking to buy other businesses in order to expand or defend market share and enhance profitability. The second are private equity investors (or financial buyers). Financial buyers are buyers that purchase minority stakes in start-ups, mid-growth enterprises and mature businesses using funds pooled from individual investors. Financial buyers typically aim to eventually sell out at a profit through exits such as initial public offerings (IPOs) or a sale to strategic investors.

Global M&A Market

Global M&A made a strong showing in 2019. This came as stock markets reached all-time highs, private equity firms raised record funds, and companies searched for growth and other ways to address technological and economic disruptions. This was impressive given the fears of a potential recession, stock pull-backs in certain markets, increasing trade disputes, as well as heightened national security and competition concerns.

However, global M&A value in 2019 lagged behind 2018 numbers for much of the year. But, a surge of deals in Q4 2019 drove total M&A value to $3.9 trillion dollars, just 3% lower than 2018. This made 2019 the fourth biggest year for M&A since 1980. In particular, M&A value rose for deals in the United States and Japan, but fell for deals in Europe and the rest of Asia. Healthcare, technology, and energy were the most active sectors, accounting for about half the overall volume.

[Source: IMAA analysis, Worldwide M&A and Chinese M&A statistics]

In 2019, M&A involving Chinese targets totaled roughly $170 billion dollars, but represented only 5% of all global M&A volume. This is a small share compared to M&A involving U.S. targets, which made up more than half of global M&A volume in 2019. This makes China vastly underrepresented in the global M&A market in consideration of and relation to the sheer size of the Chinese economy. GDP in China was $15 trillion in 2019 compared to $22 trillion in the U.S. Also, 2019’s volume for deals involving Chinese targets was the lowest since 2014, which has been part of a downward trend over recent years following a peak in 2015.

China’s M&A Market: Top Industries 2000-2016

From 2000-2016, China’s industry with the largest M&A activity in terms of transaction value has been the financial sector. Which has represented 16.8% of all deals with a total value of $753 billion dollars. The second most important industry by value is the materials sector with $558 billion dollars worth of transactions. The industrial industry reached the third rank with $527 billion of deals.

The industry with the largest number of transactions has been Industrials, which has represented 14.2% with a total number of over 9,737 transactions. The second most active acquirers are companies from Materials with more than 9,516 deals accounting for 13.8% of transactions. Lastly, Financials companies are the third most frequent industry in terms of consolidation with 13.8% of all deals.

[Source: IMAA analysis, Announced M&A in China and Hong Kong by Industries (2000-2016)]

At the micro level, in 2018, 2,584 takeovers with Chinese participation took place. The leading five sectors of company takeovers with Chinese involvement based on the total M&A transaction values were real estate, financial telecommunications with value-added services, energy, mineral deposits, and chemical processing. The M&A transaction value amounted to around 113 billion yuan in the real estate sector. In terms of volume, the sectors with the largest amount of M&A company takeover transactions in China were the IT, biotechnology/pharmaceuticals, mechanical engineering, finance, and electronics sectors.

[Source: Statista, PEdaily.cn, Value and number of M&A transactions with Chinese involvement by sector]

Assessing China’s M&A Market

To measure China’s M&A market in its entirety, any assessment must include the added values of 1) domestic strategic buyers, 2) foreign strategic buyers, 3) private equity deals, 4) Hong Kong outbound, and 5) China mainland outbound.

In recent years, the landscape of China’s M&A market has changed fundamentally. While the growth of inbound, outbound, and domestic M&A has been affected by global economic downswings and fluctuating Chinese growth, more and more Chinese companies will continue to seek opportunities through oversea Belt and Road M&A and domestic consolidation.  China’s leading sectors for M&A in Belt and Road countries are oil and gas, diversified industrial products, financial services, TMT, power and utilities, consumer products, mining and metals.

China’s M&A market experienced a slow start in the first half of 2019 but picked up considerably after June. Nonetheless, the market has slowed indefinitely. In particular, the principal drivers of the 14% decline in China’s M&A deal values were the domestic and outbound sectors. The drop in outbound M&A and private equity (PE) resulted in the lowest year for deal values since 2013. According to Dealogic, announced M&A deals in China amounted to $486 billion, as compared to $562 billion in 2018 and $661 billion in 2017. While inbound M&A remains stable ($30 billion in 2019, a slight decrease from $33 billion in 2018), both outbound deals ($53 billion in 2019 compared to $72 billion in 2018) and domestic deals ($368 billion in 2019 compared to $440 billion in 2018) saw a notable downturn.

[Source: JPMorgan, Dealogic, China M&A announced $ volume ($billion)]

Most M&A transactions of Chinese companies still take place in the domestic market. Roughly 80% of all Chinese M&A activity is domestic, involving both Chinese acquirers and Chinese targets. The expectation is that the bulk of M&A volume going forward will be accounted for by foreigners investing in, or acquiring, domestic companies. Also, by domestic companies merging with and acquiring each other. The key drivers here include rising purchasing power and private consumption, the government’s desire for foreign funds and expertise for SOEs as it fully opens sectors of the economy to foreign competition, and a more relaxed regulatory regime that, for example, has expanded the scope and geographical reach of wholly owned foreign enterprises (WOFEs).

The economically better developed regions such as China’s largest cities Beijing and Shanghai still lead the market. In 2018, 299 M&A transactions were completed in Beijing with a transaction value of around 207 billion yuan. In line with China’s economic reforms, foreign buyers will increase their activity in China’s M&A market in those sectors and areas favorable to making deals.

In China, especially those MNCs in consumer/retail and enterprise service sectors continued to explore strategic reviews and partnered with local players. Some of which were structured as a divestiture of a controlling stake. High-profile transactions in this category include Metro China’s partnership with Wumart, Carrefour’s partnership with Suning, and DHL’s sale of its supply chain business to SF Express. This is a continuation of a theme that has gained strong momentum since 2017, as companies such as McDonald’s, Yum! China, Heineken, and Salesforce partner with Chinese companies to strengthen their competitiveness in a fast-changing local market.

Outbound and Inbound M&A

[Source: IMAA analysis, Dealogic, Announced M&A from China to abroad (outbound) and M&A by foreign acquirers into China (inbound)]

China was not a major player in global investment until the mid 2000s. Driven by policy loosening by Beijing and favorable global conditions, its outbound FDI (OFDI) grew from next to nothing to an average of almost $50 billion per year in the late 2000s. Easy money and loosening of Chinese policy in 2014 boosted flows to more than $200 billion in 2016, eliciting both enthusiasm about fresh capital and anxiety about economic and security risks.

Since 2016 China’s outbound investment has been on a downward trajectory. Outflows dropped precipitously in 2017 and 2018 after Beijing restricted “irrational” outflows. In addition to domestic regulators, Chinese investors also were confronted with greater regulatory and political scrutiny abroad, as economies tightened investment screening regimes due to concerns about China’s compatibility with their democratic market economies.

Global outbound direct investment dropped

In 2019 this downward trajectory continued with China’s global outbound foreign direct investment dropping back to 2014 levels. Official Chinese statistics show a modest decline in outbound FDI for the year: MOFCOM reports outbound FDI at $117 billion for January-December 2019, a decrease of 9.8% from the same period in 2018 in dollar terms. The global M&A component shows a deep drop, with newly announced 2019 deals at $50 billion, versus $80 billion in 2018, amounting to the lowest level in eight years.

Thus, China’s efforts to cut debt levels combined with the negative effects from the trade war have cut into outbound deal activity by Chinese firms. China’s outbound M&A fell back relatively to 2015 levels in value terms, with various factors combining to severely curtail large sized cross border transactions. However, there is still a good amount of smaller sized outbound transactions taking place with overall deal volumes holding up.

Chinese outbound M&A players are segmented by three categories: state owned enterprises (SOEs) , privately owned enterprises (POEs), and financial buyers.

POEs remained the most active overseas buyers in terms of volume although the overall value of those deals fell with considerably fewer mega deals. Mirroring the domestic scene, outbound deal values were strongest in the industrial and consumer sectors, but larger-sized high-tech deals took a significant hit due to the various sensitivities in this vertical. Furthermore, outbound M&A in the energy and power sectors, materials, and healthcare saw relative downturns in deal value.

Smaller outbound transactions less affected

However, in terms of deal volumes, outbound activity continues to be reasonably robust with smaller transactions being less affected. China’s strategy to acquire technology know how, IP, and brand strength to put to use in the Chinese market is continuing despite the headline declines in larger deals. Therefore, Chinese outbound M&A in the high technology, industrials, consumer, healthcare, financial, and materials sectors all carried out a high number of deal volumes.

Outbound M&A with Europe

In terms of geographies, the squeeze in outbound deal values is now evident in Europe with significant declines in the bigger markets of Germany ($6.5 billion in 2019 from $11 billion in 2018) and UK ($1.4 billion in 2019 from $4.5 billion in 2018). Chinese FDI in the European Union declined for a third straight year in 2019. The combined value of completed Chinese FDI transactions in the EU fell to EUR 11.7 billion, down 33% from 2018 levels (EUR 17.4 billion). This represents the lowest investment level since 2013 and a drop of 69% from the peak of EUR 37.3 billion in 2016.

But, this drop was not specific to the EU. Chinese global FDI fell in 2019 due largely to domestic variables which made it more difficult for Chinese firms to raise funding and get approval for overseas investments. The global decline also reflected a growing political and regulatory backlash against Chinese acquisitions, particularly in the U.S., but also in Europe.

Belt and Road countries and Latin America

Outbound activity to Belt and Road countries held up reasonably well in the context of the otherwise significant declines in deal values seen elsewhere. Furthermore, despite China’s outbound volume being down y-o-y, outbound activities remained active for investments into the Asia Pacific (outside China), Latin America, and EMEA. Consistent with China’s strategic needs, outbound investments in power and utilities, technology, and industrial sectors experienced strong momentum in 2019, with notable transactions including Three Gorges’ $3.6 billion cash acquisition of an 84% stake in Peruvian electric company Luz del Sur, Beijing Auto’s acquisition of a 5% stake in German automaker Daimler, and Jiangsu Shagang Steel Group’s $2.2 billion acquisition of London-based Global Switch Holdings.

In sum, the trade war between the U.S. and China along with a tightened CFIUS approval processes made Chinese buyers increasingly cautious when considering targets with significant business presence in the U.S. The expanded CFIUS jurisdiction that is expected to be implemented in 2020 will likely generate further headwinds for Chinese investment in the U.S., particularly for targets involved with advanced technologies, critical infrastructure, or sensitive personal data.

Added to the mix were national security reviews in Europe, which further drove the decline in outbound M&A from China. Thus, the uncertainty in M&A deals increasingly came from antitrust regulators across the globe. This trend makes early planning and engagement with the regulatory bodies in the cross-border deal making process a priority.

Concerning Chinese inbound M&A, while overall deal values and volumes posted marginal annual declines of 1% each, the M&A market avoided much deeper downtrends amid trade tensions with the U.S. and economic growth uncertainties domestically. Real estate, financial services and telecoms remain the sectors where M&A transactions with the largest deal values took place.

Dealmakers in the Chinese M&A market can expect to find opportunities in industries such as AI, advanced manufacturing, Fintech and healthcare. Particularly, the industrials and technology areas amongst other sectors are showing signs of robust growth. Moreover, on the regulatory front, China has begun a campaign to ease restrictions on foreign investment as it continues to open up the market. This could result in further inbound M&A, particularly from the U.S. should there be a thaw in trade negotiations currently taking place.

Important Considerations for Navigating China’s M&A Market

1. Magnitude of investment
2. How it varies across industries and locations
3. How it compares to levels of greenfield FDI over time
4. Horizontal (market access) versus vertical (integrating supply chains) transactions
5. Mode of financing
6. Diversifying transactions versus those in the same industry
7. Patterns of control acquisition
8. Strategic versus financially motivated transactions

Takeaway: What CEOs are saying?

According to the 2019 KPMP China CEO outlook survey results, 48% of CEOs in China believe that the most important strategy for achieving their growth objectives in the next three years are forming strategic alliances with third parties and conducting M&A transactions. In that same survey 56% of CEOs are reported to having a moderate M&A appetite, with 29% having a strong M&A appetite, and 15% having a low M&A appetite. Thus, in spite of the current global economic and investment climate, CEOs are still focusing on the opportunities in the Chinese M&A market.

The primary drivers for M&A among China’s CEOs ranked (in order) are: to reduce costs through synergies/economies of scale, to diversify the business, to transform the business model faster than organic growth, to increase market share, to on-board new digital technology/innovation, to take advantage of favorable valuations, to eliminate direct competitors, and to utilize cheap financing before interest rates rise.

Thus, in M&A consideration, it is important to assess the market value and proposition for each party in the deal, specifically what benefit a foreign stakeholder may bring to a Chinese enterprise. Concerning the benefits of M&A dealmaking with foreign MNCs, Chinese participant enterprises stated that expanding brand awareness, increasing market share, improving technology and productivity, increasing margins, and reducing costs were some of the benefits of engaging with oversea businesses in M&A deals. In addition, M&A benefits include: extending their upstream and downstream industrial chains, industrial transformation and upgrading, and cross-industry diversified operations. Thus, leading overseas businesses can reference these contributions from foreign MNCs to Chinese enterprises following the M&A deal to craft their own proposition.

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This article China’s Mergers and Acquisitions (M&A) Market is the first one to appear on Daxue Consulting - Market Research China.