Author: YANG Chen (Correspondent)

Currently, the booming development of science and technology drives new changes of the global economic structure. Dialogue mechanism between China and Europe at different levels has been fully resumed. The Chinese government has formally implemented five new measures to facilitate entries of foreigners to China. On the other hand, geopolitical conflicts and the global economic downturn seem to be challenging the international relations and co-operation. Standing at the crossroads of historical development, where will China head to? How can Hong Kong, as a cosmopolitan city, play a role in this? We invited Mr. Denis Depoux, the Global Managing Director of Roland Berger, to share with us about his views and insights on the above questions based on what he has seen and heard during his more than 30 years of working and living in China.

ABOUT DEVELOPMENT

Q: Mr. Depoux, you’ve been living and working in China since 1993, how do you feel about life and significant changes in China? Are there anything impressed you the most that you would like to share with us?

Depoux: I think the magnitude of change between 1993 and today—more than 30 years ago—is immense and incredible. What strikes me the most is actually two things: the hardware side and the software side. On the hardware side, the infrastructure development in these thirty years of development really strikes me for it changes life of people, reduces distance, and makes travel a lot easier, for both people and goods. Speaking about the telecommunication infrastructure, when I was in Shenzhen in 1993, making a phone call to Europe was a one-full-day initiative, because there were not enough lines out of the place to the rest of the world. Obviously today it seems incredible to say something like this, but that was the situation and that was not so long ago. Three decades of years can nearly cover my professional life. For this country, it went from a situation where infrastructure was very limited and gradually became a place that probably now has the best infrastructure in the world. I think my colleagues in Europe always envy me when I’m basically riding a train between Shanghai and Beijing and I can still do a video conference during the train ride all the way through. Not only am I travelling by high-speed rail, but also the telecommunication infrastructure is basically seamless. That’s just one of many many examples around the hardware infrastructure side and that’s very impressive when you just think of it.

On the software side, what impresses me the most is the agility and the pragmatism. It might seem paradoxical to see in a centrally macro-control economy that everyone is an entrepreneur in a way actually. I’m always very impressed by Chinese people’s capacity to adapt to and to take advantages of new situations, to take some entrepreneurial risks and launch new businesses, although some of them work and some do not. Things are more difficult today, whereas Chinese people and the Chinese economy are still promising for the future. There is maybe a downturn and there will be more because this is simply the normal state of economy—it cannot avoid what happens anywhere. However, still I think this soft capacity to adapt, to react, to see opportunities, and to take some risks needs to be cherished, which is also a great feature of this economy. These are the two things, infrastructure and agility, that impress me the most.

Q: Roland Berger has been operating in China for many years and has helped many European companies successfully develop and gain good profits and returns. Would you talk about how China is attractive to European companies?

Depoux: First, most multinational companies in China have enjoyed great growth and profits in the past decades. Some have had downturns or difficult situations, but generally speaking when you look at year after year Business Confidence Survey of the European Chamber, which we are conducting for the last fifteen years, companies report that they grow and are profitable—sometimes more, sometimes less, but generally always positive. There are not so many markets in the world where companies can report continuous growth over several years or even decades.

This situation is slowing down because the global economy is slowing down. China’s economic growth is on a lower base as compared to 2022, but still it has 5% growth when the rest of the world is growing less than this. In other words, it does not dramatically change the feature of the Chinese economy. China is usually market number one or two for most products and services and is either the first or the second market after the U.S.. That’s true for every fields—from skin care, to luxury products, to automobile, to engineering services unit. It is a big, attractive and growth market. For a lot of companies that are looking for growth opportunities, the Chinese economy is still a very valid one—that is the second point.

China is a very competitive market. It is the place to foreign companies for premium segments of the market. It is now increasingly competitive with local companies, meaning the competitions among Chinese companies and the competitions between foreign and local ones. The latter have improved their quality, products, sophistication and can play some parts with the world leaders in some markets. This might be regarded as a difficult situation, but it is also in such markets where there are growth and opportunities for corporations to continuously improve their production processes, costs, and innovations. A simple truth: you bring new products to a market precisely because it is very competitive; otherwise you don’t bring the best products, then you don’t bring the best innovation. China has always been a “fitness” environment for companies. This is where you exercise—you’re continuously competing, which is of course difficult but also a guarantee for success. I think the condition will continue in the future.

Q: With all the changes of global economic environment, how do you think of China as a place for multinational corporations to continue their investments and business? The Chinese government has officially implemented five new measures to facilitate entries of foreigners to China, how do you think it will be of benefit to more European companies coming to China?

Depoux: The market is changing. The typical positioning was twofold for many foreign corporations here. It was going after the premium segments of the Chinese market, for consumer products or B-to-B enterprise products—this is the first point. Secondly, they leverage China as the world’s factory to serve the global markets. I think the second point remains—China was, is, and will remain factory of the world, and it’s gonna be increasingly productive, competitive, and sophisticated because of the movement of industrial modernization.

Back to the first one, I think the foreign companies in China will continue to go for premium segments, but they will face local competition, meaning even more innovation and productivity, and a change of positioning and business model. It will create a bit of uncertainty for some foreign companies on some markets. It is not so obvious that the competitive advantages on legacy that have made them so successful in China for the past twenty years will still remain down the road, e.g. in the automotive, chemical, material, and machinery sectors. As the Chinese market is slowing down and becomes more competitive, some Chinese companies are also eager to go overseas, resulting in the competition with multinationals not only in China but also at their own countries. There is no doubt that the landscape for multinationals working in China is changing, which calls for a quite radical transformation of their business model and product portfolio. But again, China is still the biggest or one of the biggest markets. There is still growth—slower but still very much growth. China is also a sophisticated market where multinationals can bring the best of their products. There are question marks related to the geopolitical constraints, but the fundamentals of the Chinese economy are good. For most companies, it is not a brainer to continue to compete in China.

ABOUT ENTREPRENEURSHIP

Q: Are there any patterns that companies can trace to navigate themselves in this innovation-driven context? What might be the “Big Thing” in China’s economic development?

Depoux: I would name two main drivers: one is productivity; the other one is decarbonization. There was probably not enough focus on productivity for many Chinese companies in the past because of so much focus on growth, which brought attention to volume as opposed to cost, efficiency, and quality. This situation has started to change and will change further, driven by industrial modernization, automation, and digitalization. The 13th and 14th Five-Year Plan have both mentioned it.

If we look at GDP per capita, which is a better indicator than GDP absolute value, it continues to increase. It takes productivity which yields better profits for companies, and hopefully gives a better income for employees and companies; better income yields more consumption—that’s how you increase the disposable income for people. At least that’s one strong fundamental driver that China needs: innovation driven, efficiency driven, continuous improvement and generation of productivity.

This process will take a long time, but has accelerated especially during the covid period when the Chinese economy actually served the world with its manufacturing where the facilities in other places of the world were not available to do that. There was a lot of investments in capacity in China to produce more cars, solar panels, plastics, materials, etc. for instance, which upgraded the degree of automation. A lot of new capacity has come online in 2021 and 2022, as a result of the investment in 2020. This capacity is much more modern and brings productivity effect. Today maybe some of this capacity is idle because the decreasing exports as a result of the slowing global economy. However, the process is cyclical and will come back. It may take some time and is gonna be painful, but it will come back.

The second driver is decarbonization because China has pledged that the carbon emissions will get to neutrality by 2060. There already are massive grassroots investments in renewable energy, pushed by central planning, which has created a condition for realization. The share of coal in the primary energy mix has gone from around 62-63% in 2015 (ten years ago) to 56-57% nowadays. This might not seem like a big number, but it’s actually a huge saving of coal. This movement will continue and has to be accelerated. The Chinese economy’s most movements of decarbonization have not started or accelerated because there’s no enough decarbonated electricity as required. The movement is very promising and brings state backing, state money, and financing to support. Decarbonization will be a source of wealth and value creation for the Chinese economy.

Then consumption picks up. Consumption is more a result than a primary factor. Decade ago, there were many official narratives regarding consumption as a primary objective, so as the share of consumption and services in GDP. This has changed now to the direction of industrial modernization and decarbonization. In my view, consumption is rather a result of increased productivity than the primary source of wealth. In order to consume, people need to have more money, then they need more disposable income—this is the chain. There are only two ways to achieve it: increasing incomes or reducing expenses. The former is driven by productivity; the latter is driven by improved social security, for example the pension system. All these need to happen before consumption picks up. Therefore in my point of view, we should not be too worried that consumption is a bit volatile or descending or flat. At least for the next few years when the fundamentals are improved to a new level, there will be more consumption.

ABOUT INNOVATION, COOPERATION & ENVIRONMENT

Q: Do you think China and Europe have space to cooperate on these two aspects? On decarbonization and social security?

Depoux: I think China is already playing a big role in the global fight against climate change. 85% of solar panels and modules in the world are made in China; probably close to 80% of the wind turbines are made in China; 35-40% of the batteries that go into electric vehicles are made in China. I could go on and on... I think no other economy is fueling so much its own decarbonization and climate performance, and at the same time the climate performance of the rest of the world. That is a fact.

From a business perspective, the fewest barriers to trade and investment, the better. Cooperation and globalization is always a positive factor, but now there are adverse factors around reducing dependency and carbon footprint of shipping. For instance, it might not be a great idea to manufacture batteries in China and send them to Europe, which causes a lot of carbon emissions during transportation. It would rather be better for a Chinese company to invest in Europe and produce locally, and that is what’s happening by the way.

If we talk about geopolitical tensions, the trend towards more economic sovereignty actually has been everywhere and has always been in China. Now America and Europe and most other countries have rediscovered and avoided to be too dependent on only one economy for strategic supplies—that’s one big lesson learned from covid. When you need masks, PPE, medicine, if they all come from one source (be China or India for medicine), you’ll be very exposed. It is not because China or India or their companies would not be able to supply, but because there is also a supply route by shipping, which goes all the way through half of the planet. In addition, we can see exactly these days that the whole shipping traffic from the Middle East to Asia, and from Asia to Europe or America is threatened due to the local war in Arabic Peninsula. It’s only fair that companies and nations look at this issue and make sure that they can manage and reduce the dependency.

There are legitimate constraints around climate performance and logistical bottlenecks where countries want to make sure that they control less remote production. In other words, the whole padding of globalization has been changed and this is driven by offshore production. Europe can work on reducing the dependency and in the meantime balance its supplies by cooperating with everyone. That’s what I would favor that Europe continues to engage and try to benefit from new group teams and diversify its supply.

Finally, I would not necessarily support “de-risking” that everybody is talking about because when you reduce one risk, you simply increase another. This is like personal saving management—to diversify your porfolio—to put one third in cash, one third in real estate, and one third in stock market for example, rather than moving all assets from one place to another.

Q: What would be the relationship between the Belt and Road Initiative and climate performance?

Depoux: I would say this is still pending. The Belt and Road Initiative (BRI) was designed in a bit of a different type before climate performance was so much of a critical objective.

So far we need to see more in decarbonization, but obviously now there is a lot more emphasis on it. I think the Chinese government has instructed the companies not to build coal-fired-power plants anywhere else, otherwise this would have been a big opportunity along the Belt and Road. That’s an example for gradually adjusting this business model of the BRI to new objectives.

The second remark I would do is whatever increases connectivity will help import or export concepts on climate performance to other countries. In a way, an emerging economy connected to the Chinese economy through the BRI is most likely to follow decarbonization of China, if it remains a very independent investment or trade wise.

HONG KONG—THE CROSSING BASE

Q: Do you consider expanding business or investments in Hong kong? Do you think that Hong Kong and Europe can go hand in hand based on their different advantages?

Depoux: We have an office in Hong Kong. We are actually expanding this capacity because we take Hong Kong as a hub since a certain number of clients locate across the region, so not only in Hong Kong but actually across Asia. Quite some companies that have either headquarters or regional offices covering at least from North Asia all the way to India are actually based in Hong Kong, so it’s very relevant for us to match this setup of our clients and take Hong Kong as an interchange hub to serve clients and teams.

On the other hand, there is quite some synergy between Hong Kong and mainland China, which we use at least on the financial side since some clients choose to use offshore financial resources for their overseas operations. Also, many clients use their companies in Hong Kong, including Chinese state-owned enterprises. We still regard this metropolitan as a gateway, especially for mainland China. For example, we operate in mainland such as cities like Beijing and Shanghai directly; we operate in the cities where our clients are located, so Hong Kong is more an interchange between China and the rest of the world. We still see Hong Kong as a very relevant base, for itself and for the Greater Bay Area, by the way that goes along with Guangzhou and Shenzhen, where we also have a lot of projects and clients. Hong Kong is one of the three or four cities where we are active in the Greater Bay Area.

(The article has been edited.)

（This article was published in the April 2024 issue of Bauhinia Magazine）