Multinationals on China | Denis Depoux: Multinationals Drawn to China’s Innovation and Opportunities

Like you said, there is a lot of uncertainties these days. It's a daily uncertainty, particularly driven from the White House, and China and Asia is a bit of a beacon of stability in that kind of chaos for multiple reasons. First of all is stability of economic policy in China, generally in Asia. The second thing is Asia and China are huge pockets of demand through their domestic market. In a way, Asia is a sort of self-sustained economy which plays a big role in stabilizing global growth. Now, if you look at it from an even more macro perspective, Asia's growth is double and the US is double Europe. So if you take the three big blocks, it's a bit caricatural to look at it this way, but that's how it plays. And so obviously for multinationals it makes a lot of sense to focus on the Asian market.

Export demand, international demand matters a lot in China, and in those times of uncertainty, of course that demand may or may not be there at the same level this year. If you take US demand for example, we see that the versatile US policy, all the uncertainty around the US policy, is simply slowing things down. So people freeze their, companies freeze their investment, and as a result it might result in less demand addressed to the rest of the world, including China. So that's potentially a big issue for the Chinese economy.

For multinationals, I think it's very clear: China is one of the big markets. As I said, okay, it's not growing double digit or high single digit like it did for the past decades, but that's quite normal because the base has grown so big. But still, it's a very big market, it's a market not to miss. So now I think there were always two themes to be in China for multinationals. One was obviously supply chain, so leverage the manufacturing powerhouse of the world for the global supply chain of every multinational. The second was the Chinese market, and increasingly so in the last few years, tapping onto Chinese innovation and Chinese business ingenuity. And so a lot of companies now serve the Chinese market because it's big, although it's very competitive with very strong Chinese competitors, but they also want to make sure that they don't miss the next innovation that might arise here.

You know, Roland Berger has been doing for the last 15 years the business confidence survey of the European Chamber in China. I cannot disclose this year's result because they will be published in a couple of months from now, but I think there is still quite a lot of confidence. Of course, the concerns have shifted. In previous years, concerns were a lot about access to market, about protection of intellectual property, and this of course has improved. There remain problems and companies point to these problems, but now the key concern is the vitality of the growth in China and basically the Chinese economy and trying to predict what's coming next. And second point, it's competition with domestic players because the Chinese companies have leveled up their game and they are now competing on par in quite some segments of different markets. Of course in the automotive market everybody knows, but also in the chemical sector, in the pharmaceutical sector, and even in the consumer sector sometimes. And as a result, it's more difficult for European businesses. So I think that's what European companies say, which is quite healthy if you think about it. It's better to look forward to the prospect of the economy and of course to be wary of local competition as opposed to be concerned by access to market. Some concerns remain, but most of it is the predictability of the Chinese economy. And I think in a world of uncertainty, in a way, the Chinese market may not offer the same growth as before, but at least a steady and consistent policy.

I think it's a great opportunity. If you look at exports from Europe, one single item category that stands out is machinery, machine tool, production systems. So it's not only machinery, it's also software. And so these are all these companies out of France, Germany, Sweden, Switzerland that produce machine tools and all the surrounding automation systems and production systems that make the Chinese manufacturing powerhouse so powerful, because it's automated, because it can be on demand, because it can fast react to changes in demand. So this is opportunity. And when you think of new quality productive forces, that's all around innovation-driven productivity, that's all around increasing the productivity of the Chinese manufacturing powerhouse, of the supply side. And that's where still today a lot of that might is actually empowered by European machines. So that's just one example, but I could duplicate in other industries like the biotech industry, the pharmaceutical industry, where obviously you have quite some European companies that have a leading edge in some technologies or know-how and can bring that know-how to their Chinese partners and clients.

So globalization is being reshaped, and we're going to have probably a lot more multi-polar globalization, and that's enabled by technology because technology can actually create a lot of productivity without the scale, or at least with less scale than before. Then you can localize a lot of production, and that's how some countries have leapfrogged. We're dependent on intelligence, smart manufacturing, data, and we don't need so much scale anymore to do what we used to do. It's not true for every industry, I'm a bit generalizing, but I think that's what's changing, and it's a chance also for emerging countries that can integrate smart ways of producing things and create more added value through integration of technology. The question is who's going to do this, and I think Chinese companies, because they invest a lot in emerging countries and generally in the global south, will create that inclusion. You know, this is business, so they don't create inclusion only for the sake of inclusion, they create inclusion because it's creating competitive advantage for Chinese companies overseas.

Europe has always had a privileged relationship with China, has played a big role in growing the Chinese economy over the last 50 years. There are of course tensions, but we see that Europe also got a wakeup call from the current US administration that it needed to think for itself and not only by purely allying with the US. And so I see Europe getting closer to China and China getting closer to Europe because Europe and China need each other. And we at Roland Berger, we of course play a big role in bridging between Chinese companies, European companies, and that's what we've been doing for the last 40 years of our presence in China.