Der folgende Text ist ein Beitrag, den ich am 06. April 2020 in Vorbereitung auf eine online-Konferenz mit der Provinzregierung von Hebei [ ist offizielle Investitionsagentur dieser chinesischen Region] verfasst habe.

I. Welcome to the world of today – which is being destroyed.

We know that currently fewer orders from Europe or America are arriving in Asia, especially in China. The reasons you have already explained in detail in the presentations of today‘s webinar: Factories have been shut down, supply chains in Europe have been stopped – and with that, of course, global deliveries have also been stopped. This is the case today – and will continue for several days and weeks. Unfortunately, we cannot change that.

After production in the factories is up and running again in a few weeks‘ time, things will initially continue as they have been in recent years. The processes will be rebuilt in the same way as they worked almost perfectly in December 2019. You will have more orders on hand again and you will start thinking about new machines. Everything will seemingly be „in order“ again – or seemingly come back into order.

However, in our opinion, this state of affairs will continue for another 2 years at most. Then you will find that you will receive fewer orders from Europe and America again. And that will then become a permanent state! Why? A discussion is already underway in Europe today that is concerned with the global supply chains and dependencies and their real resilience in critical times. This discussion had already begun before the virus had officially arrived in Europe and America: when supplies from China became increasingly insecure due to the shutdown, European and American companies realised how great the dependence on the situation in other countries already is. In Europe and America, even before the official shutdown of the virus, individual factories slowed down or even stopped production completely, because they could not produce. There was simply a lack of supplies – also from China.

Today, in China you can see how dependent you are on the European and American markets. Even if you may not have any direct supply relationships to Europe, your products are processed into other Asian or Chinese products – which are then (or should be) finally sold to these foreign markets.

Welcome to our world today!

II. What will happen globally in the next two years?

Against the background of the findings described above, European and American companies will begin to subject their supply chains to a very precise analysis again in just a few weeks‘ time.

Even though we live in a world where profit is the ultimate goal, these purely financial aspects will no longer be as important as they have been up to now.

Why do we expect this development?

Due to the Corona Pandemic, Apple had to postpone the delivery of the new iPhone generation planned for late summer 2020. This will have an enormous impact on the company‘s profits this year – and thus also on the incomes of Apple‘s managers, as the incomes of top management are directly linked to the company‘s profits. And managers will never want to experience anything like this again!

Apple will therefore examine very carefully whether a centralised and exclusively Chinese production is the right solution for the future – or whether it would not be better to have several plants in different locations around the world – just as the world‘s largest car manufacturers are already doing today. We are confident that Apple will choose to establish multiple production sites with lower regular capacities in different countries around the world. A very likely result of this strategy will be that China and Chinese suppliers will have less sales and less profit. For such a decentralization of production, Apple will be willing to accept a smaller profit per iPhone. In return, however, Apple will have greater security for the entire company – and thus also for the income of the managers.

The decentralisation at Apple will mean that Apple will be able to increase capacity at the various locations relatively quickly if necessary. This will not only enable Apple to react to pandemics, but also to quickly reflect various national economic policy decisions in its own corporate logistics: If Bolsonaro in Brazil decides to increase taxes for products manufactured in Europe, Asia or North America – Apple could simply increase its own production in South America and thus counteract import taxes. These would be strategic side effects that are to be expected in any case.

And just as Apple is likely to do, so will all other industrial companies around the world: Supplier relationships will be scrutinized very closely and there will be massive changes.

Essentially, this is a process that has been going on for many years – the only difference is that up to now companies have been almost exclusively looking for THE cheapest location – tomorrow they will be looking for price AND security. And security will become more important.

III. What will happen in Europe in the coming weeks and months?

At the moment we are seeing very hectic politicians in Europe who are trying to use a lot of money to protect domestic companies from the expected economic dangers arising from the politically ordered shutdown. The companies receive very simple, very cheap and partly also very much money to pay the employees and to cover further running costs (e.g. energy, credit rates etc.). This money is made available to the companies quickly and with surprisingly little bureaucracy – with the aim that the companies survive the time of the economic emergency stop. In the true sense of the word: to survive.

In spite of this very cheap money, many companies will probably not manage to quickly return to their previous turnover and profit levels after the period of shutdown. There are various aspects responsible for this.

The first reason is that, among other things, the global supply chains mentioned above have to be rebuilt – a lot of money is required here, as the suppliers (including those in China) first have to „get going“ again.

Worldwide, the advance payments and thus the expected securities between the companies will first increase significantly: Supplier relationships and trust must first be rebuilt. This costs time and money.

Money that is used every day today to maintain the basic vital systems of companies – and not, as would be the case in „normal times“, to keep the „engine“ of the company, production, running. Actually, the money that has been made available to the companies should be used here. But the companies are currently using it differently – to survive.

Another reason for the expected lower sales and returns is the strategic repositioning mentioned in the 2nd section of this text. This will already become apparent in the coming months immediately after the return to „normal“ business activity – in the form of initially less or less permanent orders. Since companies are already preparing for these restructuring or repositioning measures, they will not want to commit themselves for such a long time now. This, in turn, will lead to a reduction in investment in their own production, resulting in an overall decline in output. A recession – not only in Europe – is to be expected.

Already today – in only the third week of the official shutdown – we are reading that the first companies are facing dangerous payment difficulties. There will therefore be many companies that will be able to produce on a much smaller scale than today after the current shutdown. Some companies will not even be able to „ramp up“ production from their own resources.

IV. Summary of the short and medium term future.

In our view, there will therefore be massive shifts in the global economic system in the short and medium term. Supply chains will be „restructured“, demand will shift to other regions of the world and new business models will develop even more rapidly than before. To put it very briefly and simply: Nothing will remain as it was. There will be enormous dynamics in every market. Certainties of today are the uncertainties of tomorrow.

We expect that the corona crisis will lead to further monopoly formation in all sectors. The companies that were already strong before the global shutdown will lose a lot in the beginning, but will certainly be able to survive. In contrast, we expect that many small and weaker companies will give up in the medium term. This means that in the end the big ones will collect everything around them and will be stronger than ever before. Unfortunately, this also means that they will then have even greater market power and will thus be able to further increase the price pressure on suppliers around the world.

V. What are the options for Chinese companies?

Even if this article does not read like a pleasant dream so far, the current situation is more perfect for Chinese companies than it has been for years.

Why? Well, the Chinese companies, the Chinese society and especially the Chinese state are already through the hardest time of this crisis. In China, all systems are just starting up again – while the rest of the world is still in a state of shock, standing in line like a rabbit in a snake and can hardly think for fear.

China, on the other hand, has already awakened and is in the Year of the Rat – this year, all active participants will be rewarded! So: go!

And now?

Let‘s take all the knowledge from the previous analysis and combine it with the knowledge that the Chinese economy is just about to take off… China‘s companies can now cut a big slice of the cake – and at a price that has never been lower than this and will never be lower again. On the one hand, they can now enter companies (which will only be in financial difficulties for the next three or four months) to gain access to modern technology. You can buy these companies or invest in them to gain access to the markets – and thus secure a larger share of the profits. Namely the profits that are made in Europe or America with the final product. In addition, you can also secure long-term sales markets by entering the currently financially weak companies. Finally: A company which belongs to your sphere of influence can no longer change its supplier so easily…

We are convinced that these opportunities will be abundantly available in the coming 6, 7 months. But that does not mean that you alone are active in this market. There is already a lot of movement here and many international players are looking for the particularly valuable and favourable opportunities. You should become active as soon as possible.

IndustryStock can help you – with our „Strategies for Chinese companies“.

If you simply act as you did before the Corona crisis and offer yourself to the international companies in the price and quality war as before simply as a supplier or vendor, this will not be a successful strategy for the future. If security and independence gain more importance in entrepreneurial action in the future, every Chinese entrepreneur will have to draw his individual conclusions from this!

In concrete terms, this means that the business relationship must be placed on a qualitatively completely new basis of trust. It is no longer just a matter of being ONLY a buyer or seller, but real partnerships are required.

How can something like this succeed?

1st option: company building

Prerequisite: The Chinese company has a clear idea and a concept of cooperation and is looking for a European partner.

Then the Chinese company can set up a joint venture with the European company in China or in Europe (build a factory, establish a technology partnership, establish a sales partnership, manifest a supplier network) and occupy corresponding markets.

2nd option: company merging

Prerequisite: The Chinese company has free capital or access to loans or state subsidies.

It will then be possible to participate in companies in Europe, both horizontally and vertically to the value chain, and to produce and market jointly. This can involve production in both countries (technology transfer) as well as marketing in both markets and beyond.

3rd option: company sharing

Prerequisite: The Chinese company is willing to accept and share the cultural and economic conditions of European companies

The Chinese company brings into a partnership e.g. sales competence for the Chinese market and the European company e.g. technological competence for the industry. Both companies participate in each other. The Chinese company receives shares in the European company and vice versa.

About the authors:

Carsten Willer is Head of Sales Research