Multinationals on China | Denis Depoux: China's commitment to opening-up is praised by the world

Indeed, my first time in China was in 1993 and I lived in the Guangdong Province for three years. Then I moved out and I came back eight years ago. I think the most important change that I've witnessed over this 30 years and the last eight years is the massive development of infrastructure, which I think is very emblematic of China thanks to the planned economy and the long-term vision enabling development by providing this massive infrastructure. Of course, it's probably less massive today because there's already a lot and there's not much more that can be done, but I think that's what has impressed me a lot in the last decade.

I think this year is 45 years of so-called market reform and opening. The commitment of China to further open up, to further welcome foreign investment, foreign business, and to further integrate China in globalization is very welcome at a time when obviously there are a lot of protectionist forces ruling globalization everywhere. That's also my observation over the last eight years that the market is further and further open, that some of the restrictions that existed in financial services or in the automotive sector have been gradually removed or are being removed as we speak.

I think there is a characteristic of European business in China — most European companies are in China for the Chinese market, and increasingly so. Of course, there are also manufacturing products, equipment, and systems in China for the rest of the world, but historically a lot of European business has been in China to serve the Chinese market, and that works well today because the Chinese market is big and it's growing. Its rate of growth is higher than other markets — if you think even in China at around 5%, that's a commitment for this year, would still be probably two- to fourfold what Europe or America will experience this year according to IMF forecasts, and that's true of Asia overall. So I believe European business can still benefit and is well placed. Now, things have changed. I think China has long been and probably will remain the factory of the world, and there was an old China story based on labor productivity and massive infrastructure development. That is changing. So the new China story is around industrial modernization, is around innovation, and is around a market that is starting to have features that are different from other global markets simply by its scale and because it has taken a different direction. Think of payment systems, think of e-commerce, think of distribution channels — and for all these reasons the Chinese market is singular.

I would directly relate to the very distinctive features of the Chinese market. I think the first recommendation would be around localization. It's very important to be grounded, to be rooted in the Chinese market, and not only in the big cities, because the bulk of the Chinese market is actually rather in tier-three, tier-four cities. So it needs a local structure, it needs pretty quick decision-making, because this is also a market that is changing fast. The Chinese consumers are very interested in innovation, very interested in technology, but they adapt or reject very fast. So that's sometimes difficult, but it's also a good way to test products and then move on to something else if it doesn't work, or scale up if it does work.

Well, I see three or four sectors. The first is this incredible growth engine that is starting to accelerate — that's industrial modernization, that's automation, robotics, that's digitization of industry. China has both the most modern factories in some fields — think of solar PV or batteries — most productive factories in the world, but Chinese companies also have some pretty underdeveloped, under-automated factories, and that needs to change. So a big market going forward. Of course, the energy transition is another big market. China is at the heart of the energy revolution and is certainly leapfrogging some other countries in that respect, but I think there's still a lot of European and foreign technology and know-how that can be contributed. So energy transition as a second sector. I think the consumer sector obviously is very important. It's changing a lot. There is an imperative to grow the middle class, and to grow it by the bottom — by bringing maybe 50 to 150 million new people into the middle class, let's say from the periphery of cities, the boundary between the rural world and the suburbs. That's a market maybe with relatively low purchasing power but massive number of people. So what it tells foreign brands and foreign companies that sometimes are used to the premium market is that maybe they need to consider a different approach. And I would quote a fourth one, which is the whole healthcare environment — from pharmaceuticals to hospitals to elderly care — where Europe as a strong safety net has developed a specific industry which is very fit to the Chinese model. The model has of course a premium segment, but also is in need of the private sector to further penetrate the middle-class segment in healthcare. If you look at the pharmacological world with value-based procurement that has been putting down the price of medicine, I think that's a good example of the direction — the direction is of course for people who can afford it to serve the premium market, but the direction is also to make this available to most people and therefore to invent models. Europe is well fit to provide those models because that's part of the values of the continent.

I think there has been in the last couple of years a turning point in the Belt and Road Initiative, acknowledging that maybe not all projects were good to finance, and therefore more caution, more screening and selection was needed. That was dealing with multiple dimensions, one of them being the climate performance of these projects. Companies are actually now stepping out of coal projects — that's a good example. China is definitely the leader in market share in solar PV modules, in wind turbines. There's a considerable need for renewable energy investment and equipment in the world. That's particularly true of Asia — Asia needs close to five terawatts of renewable energy capacity. That's huge. For comparison, I think for Europe this figure is one, so that's fivefold. It's a huge opportunity for Chinese players not only to provide the equipment but also to invest directly in these projects, finance them, and therefore accelerate the energy transition. This is not just for the profitability of the project — this is key for the competitiveness of China and the Chinese manufacturing powerhouse, because increasingly the Chinese manufacturing sector is a regional sector. There are plants in China but also plants in Southeast Asia and South Asia, tapping into competitive advantage and know-how of different countries and industrial clusters. If these countries are not fast enough on the energy transition, they will lose their market share on manufacturing sites.

So far with what we have seen, it's a soft but steady recovery, and that's fine if it's sustained and steady. I think soft is not too good, but steady is better. First thing, it has to be driven by domestic consumption — it's not only consumer consumption, it's also B2B consumption — but it has to be driven domestically, simply because global demand will be slower. You have Europe, the US, anywhere between 0 and 1.5% growth according to the IMF this year, and maybe a bit more next year, so it's going to be slow. It means also that the economy needs to be supported domestically. That's all the questions.