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1、Ways to address challenges for industrial goods manufacturers amid turbulence in China marketTing ZhaoIndustrial Products and Services,Partner,PwC Strategy&ChinaTel:+86(21)2323 2256Email:Leon PuIndustrial Products and Services,Director,PwC Strategy&ChinaTel:+86(21)2323 2823Email:Liyang FangIndustria
2、l Products and Services,Senior Manager,PwC Strategy&ChinaTel:+86(21)2323 8381Email:1Contact us:Strategy&|Ways to address challenges for industrial goods manufacturers amid turbulence in China marketContents Foreword03Key challenges impacting MNCs China operation04Key initiatives to address operation
3、al challenges in China 12Key enablers to ensure successful execution of the initiatives 17Conclusion202Ways to address challenges for industrial goods manufacturers amid turbulence in China market|Strategy&As geo-political and other macro factors continue to evolve,the relationship betweenChina and
4、developed countries is facing increasing uncertainties,which may affectChina business of multinational companies(MNCs).On the other hand,China is stillthe worlds largest manufacturing base with tremendous growth potential.Under theturbulent market environment,MNCs need to balance challenges and oppo
5、rtunitiesfor their China operation and take necessary measures to underpin the sustainablebusiness development.PwC Strategy&has been following the evolution of global economy and other macroenvironment factors.We have developed a structure to help MNCs identify,analyse,and address the challenges in
6、China operation.MNCs China operation sees disruption challenges,we suggest MNCs shouldtreat challenges on business continuityseriously.For those continue operating,they need also pay attention to the challengesderived from unique characteristics of the Chinese market,including productcompatibility,d
7、ata security obligations,high requirements in emerging industries,and trend of local substitution,etc.At the same time,MNCs still encounter challenges under Business as usual”.Those challenges include local customers diversified needs on product offeringsand customisation,and vulnerability in supply
8、 chain.To respond to these challenges,Strategy&advise MNCs to carry out a set ofinitiatives,among which localisation of product development and manufacturing isessential to address majority of the challenges.A framework to assess relatedchallenges and work out plans to address the challenges respons
9、e would facilitatecompanies to navigate its operation and achieve sustainable development in China.Meanwhile,smart factory transformation and manufacturing footprint optimisationwould further improve operational efficiency.MNCs also need to strengthen somekeyenablerstorealisetheseinitiatives,suchase
10、co-systempartnership,streamliningdecision-makingprocesses,andlocaloperationalcapabilityenhancement.Foreword3Strategy&|Ways to address challenges for industrial goods manufacturers amid turbulence in China marketKey challenges impactingMNCs China operation4Ways to address challenges for industrial go
11、ods manufacturers amid turbulence in China market|Strategy&Since 2021,PwC Strategy&has been closely monitoring local market dynamics,and supported manyMNCs in industrial goods sector to assess their China business and operation models.We havedeveloped mature methodology and framework to help MNC cli
12、ents identify potential challenges inChina operations.By reflection on our project experiences,we have summarised a set of commonchallenges that MNCs face in China,including business continuity,challenges caused by Chinasunique market characteristicsand operational challenges in“business as usual”.I
13、mpactLikelihoodBusiness continuityChallenges caused by China unique market characteristicsOperational Challenges in“Business as usual”Key challengesData securityImport substitutionStagnation in emerging industriesSupply chain stabilityIndustrial clients affordability&product preferenceProduct compat
14、ibilityMajor challenges in MNCs China operationsSource:Strategy&analysis5Strategy&|Ways to address challenges for industrial goods manufacturers amid turbulence in China marketExport control initiatives from some countries are directly influencing MNCs business in China market.In addition,China atta
15、ches increasing importance to the compliance of MNCs business operations anddeems it as a red-line on MNCs operations in China market.Moreover,the“de-globalisation”is alsobringing potential challenges to the business operations of MNCs in China,such as supply chainissues caused by manufacturing migr
16、ation.Therefore,MNC needs to conduct in-depth review on futureoperation strategy and make strategic decision on the continuance in China market.Firstly,MNCs are exposed to challenges of business continuity in China mainly due tothe evolution in geopolitical environment.For MNCs intending to continue
17、 business in China,a comprehensive market andbusiness environment assessment is indispensable to identify challenges resultedfrom Chinas uniquemarketcharacteristics.Wehave identifiedfourcommonchallenges,including product compatibility,data security,import substitution andstagnationinemergingindustri
18、es.These challenges may result ingaps anddifficulties in product development,market access,and order fulfilmentProduct compatibilityComparing with rest of the world,China has a unique digital ecosystem with differentkey players.In software industry,some products were designed in overseas development
19、 environment,and suchproducts are often incompatible with local cloud infrastructure and software ecosystem(e.g.,openplatform,cloud,operationalefficiencyapplications,etc.).Furthermore,someoverseascloudinfrastructuresface the challenges in China market as well.6Ways to address challenges for industri
20、al goods manufacturers amid turbulence in China market|Strategy&Data securityChina has enacted several laws to strengthen management of sensitive data storage and cross-borderdata transfer.The legal requirement may also influencenormal operations of MNCs.Data Security Law(DSL)is applied to better ma
21、nage data transmission behaviour that aims atstrengthening scrutiny on cross-border data transfers,formulating obligations for building better datasecurity management systems,and requiring risk mitigation measures for cybersecurity and datatransition.Cyber Security Law(CSL)is applied to better prote
22、ct those data established,operated,maintained,and used within the territory of the PRC.Under CSL,critical and personal information collected andproduced in the mainland must be retained within Chinese territory.MNCs may need to refine data management(e.g.,database deployment,agreement on data use wi
23、thusers,etc.)and modify product design to meet local data protection regulations.Import substitutionPolicy makers have set higher target on rate of import substitution in certain industries such as utilities,aviationand aerospace,and industries dominatedby state-owned enterprises(SOEs).Import substi
24、tution requirements in different industriesLowHighAviation and aerospaceOil and gasAutoMachinery MetalClean energyUtilitiesElectronicsHealthRequirement on import substitutionSource:Strategy&analysis7Strategy&|Ways to address challenges for industrial goods manufacturers amid turbulence in China mark
25、etThe“Buy-local”policies are affecting the MNCs business in different industrial segments.Andalthough the import substitution target is mainly applied to state-owned enterprises,some large privateenterprises also tend to followthe routine and adopt similar“Buy-local”requirements.Stagnation in emergi
26、ng industriesChina is a global pioneer in some emerging sectors such as EV battery and clean energy.Driven bybooming demand,these sectors have been growing promptly in recent years,which generatedmassive market opportunitiesfor their upstream players.The development of China EV battery industryChine
27、se companies accounted over half of the worlds installed capacity of EV batteryGlobal installed capacity distribution of EV batteries in 202112.2%8.9%5.6%CATLLG ChemPanasonicBYDSamsungOtherChinese companies20.5%32.6%20.3%Rapid growth in EV battery demand in China360212025EChina installed
28、capacity of EV batteries(GWh)Source:Strategy&analysisChinese companies share of global installed EV battery capacity was 52%in 20218Ways to address challenges for industrial goods manufacturers amid turbulence in China market|Strategy&The fast evolvement in these industries also triggered high requi
29、rement on their suppliers productspecification and service level.For example,some EV battery manufacturers raised high customisationrequirement on automation solutions to meet their production demand on speed,flexibility andprecision.However,insufficient understanding on the Chinese EV battery indus
30、try and limited localR&D capability have weakened MNC automation solution providers ability to achieve promptresponsiveness to clients product development and customisation needs.Whats more,Chinese central government is actively promoting digital solutions,attempting to achievehigh efficiency factor
31、y and realise manufacturing digital transformation.High-end manufacturingproducts featured with new-generation IT technologies,end-to-end solutions and ESG concept areexpected to capture market attention and win significant advantages,which urges MNCs to enhancelocal R&D investment to seize the oppo
32、rtunities.9Strategy&|Ways to address challenges for industrial goods manufacturers amid turbulence in China marketIndustrial clients affordability and product preferenceMid-range products are embraced by Chinese industrial clients and is expected to be a key growthengine in China market.Local client
33、s are calling for more user-friendly and value-for-money productsand solutions with tailor-designed functionsand high service level.Suppliers who offer diversified product portfolio to meet different segments needs will gain uniquemarket competitiveness in the China market.Moreover,suppliers with br
34、oad service network are alsoshowing more attractiveness to mid-range customers.Product selection preference of Chinese clientsProduct performanceCost of ownershipService LevelHigh precision requirementValue-for-moneyWhole ROIUpfront cost focusedQuality drivenSpeed drivenMid-range customersHigh-end c
35、ustomersSource:Strategy&analysisHigh quality control andperformance requirement on products/solutions to ensure the market competitivenessFocus on whole life cycle ROI including both upfront and continuous investmentExpect high quality service with higher tolerance for response speedRequire fast res
36、ponse and customised service with low tolerance to delayFocused on upfront investment due to the high price sensitivityPrice-sensitive attitude toward all products/solutions,focusing on maintaining daily business operationThere are also operational challenges in“business as usual”for MNCs to meet lo
37、cal customer needs and build upreliable supply in China.Chinese customers pay greatattention to the cost performance,service level and deliverylead time of suppliers.Unfortunately,MNCs high-endproduct offerings usually triggers issues of affordability.Inthe meanwhile,importation supply model adopted
38、 by someMNCsmaycausesupplystabilityissues,whichputtogethererodesMNCsproductattractivenessandcompetitiveness.10Ways to address challenges for industrial goods manufacturers amid turbulence in China market|Strategy&Supply chain stabilitySome MNCs are currently importing their products to fulfil Chines
39、e customer needs,in which manufacturing capacity planning,production slot scheduling and allocationof finished goods are often carried out globally,leaving limited visibility and lowtransparency for local team.The supply model may eventually lead to longer productdelivery lead time and compromised s
40、upply chain predictability.Meanwhile,international transportation is also time consuming.The logistic cycles of“China-Europe”and“China-US”sea freight are around 30-45 days and 15-30 days,respectively.Considering the extra time spent on port turnaround and inlanddelivery,the overall cross-border logi
41、stics time will be further extended.11Strategy&|Ways to address challenges for industrial goods manufacturers amid turbulence in China marketKeyinitiativestoaddress operationalchallenges in China12Ways to address challenges for industrial goods manufacturers amid turbulence in China market|Strategy&
42、Localised product developmentChinese customers have numerous localised needs derived from local unique ecosystem,datasecurity requirement and evolvement of emerging industries.Localised R&D is a cornerstone to realiseagile product development and flexible product customisation,which helps in improvi
43、ng productcompetitiveness and facilitateslong-term sustainable business growth in China market.According to our project experiences,establishment of local R&D centres could shorten the time ofproduct customisation by 2050%,driving MNCs technical service level and empowering MNC topromptly respond to
44、 the market dynamics.Manufacturing localisationChinese customers requirements on fast delivery,policy makers requirements on localisation andimport substitution,and Chinas competitive edge in overall manufacturing cost are jointly urging theneeds of manufacturing localisation.Chinese customers are q
45、uite demanding on fast delivery.Manufacturing localisation would help MNCsalleviate challenges of global supply chain turbulence,reduce product delivery lead time,and ensurestability of order fulfilment.According to our project experience,localised manufacturing could shortenproduct delivery lead ti
46、me by 30-50%.MNC suppliers could also accumulate know-how throughlocalised manufacturingand improveflexibilityand timeliness to respond customer needs.On the other hand,localised manufacturing is important to satisfy“localisation rate”requirements incritical sectors and certain customer groups,which
47、 enables MNCs to compete in biddings withrequirements on localisation rate.In response to above challenges,we formulated a set ofinitiativesintermsofproductdevelopmentandmanufacturing activities,among which localisation is one ofthemostimportantinitiatives.Equally important,smartfactorytransformatio
48、nandmanufacturingfootprintoptimisation are also necessary for improving MNCs localcompetitiveness.In a nutshell,MNCs should implement anoperating model refinement to strengthen their adaptability tolocal market and underpin the sustainable business growthin China.13Strategy&|Ways to address challeng
49、es for industrial goods manufacturers amid turbulence in China marketDefinition of“local product”in ChinaLocally manufactured products by MNCs are generally seen as local productsIn addition,China has experienced robust industrial growth in the past decades,and the supplyecosystem is entering a matu
50、re stage.Along the process of Chinas industrial development,manufacturing productivity has been improved with skilled labours,intensive investment in technology&infrastructure,and deployment of world-class management practice.With these advantages,Chinais quite competitive in terms of overall produc
51、tion cost,making manufacturing localisation an attractiveoption for MNCs.Smart factory transformationTo further optimise the operational efficiency of local manufacturing,MNCs could leverage advanceddigital technologies to empower manufacturing activities,shorten product delivery lead time,andreduce
52、 manufacturingcosts.As an important part of Industry 4.0,smart factory has been adopted in many industries such asmachinery manufacturing,3C,steel,automobile,aerospace,etc.,and has generated extensive valuein manufacturing scheduling,execution,and product delivery.In manufacturing scheduling,company
53、 could leverage digital use cases such as predictive demandforecast,inventory&material visibility,etc.to build up efficientmanufacturingworkflowIn manufacturing execution,the adoption of digital solutions(e.g.,quality inspection management,predictive maintenance,etc.)could empower the management of
54、human resources,manufacturingequipment,materials,and production process to drive production efficiencyIn product delivery stage,realizing visualised and flexible order delivery could better fulfil customerpersonalised needs and improvecustomers intimacy.Local product is defined as the product produc
55、ed withinChinese territory,regardless of whether the supplier is alocal or foreign-funded enterprise-Notice on the implementation of equal treatment ondomestic and foreign companies in govt.procurement“Source:Strategy&analysis14Ways to address challenges for industrial goods manufacturers amid turbu
56、lence in China market|Strategy&Smart solutions in manufacturing sectorManufacturing footprint optimisationTo further strengthen local competitiveness,MNCs could consider manufacturing footprint optimisationfor capacity expansion,and to optimise labour costs and supply chain performance.Key considera
57、tions of manufacturing footprint optimisationHuman resourceFacility availabilityPolicies and regulationsSupply chain readinessWorkforce availabilityLabor costBasic infrastructureLand availabilityAccess to suppliersProximity to clientsIndustrial preferential policyIndustrial restriction policySource:
58、Strategy&analysis15Strategy&|Ways to address challenges for industrial goods manufacturers amid turbulence in China marketOverall planning and executionExternal inductionAnalytical EngineAutomationControl towerProduct deliveryManufacturing executionManufacturingschedulingProduction process managemen
59、tEquipment predictive maintenanceIn-process quality controlDemand forecastingIntelligent production schedulingVisualisationof raw material inventoryWarehouse logistics managementFinished goods traceabilityIntelligent order processingMNCs need to consider several factors including human resource avai
60、lability,skilled-labour reserve,supply chain readiness and facility availability beforeconducting manufacturing footprint optimisation.It is essential to guarantee theaccessibility to skilled labours with lower labour cost,proximity to key accountsand major suppliers and pave the way for potential f
61、uture capacity adjustment.Furthermore,government incentives and restrictions in targeted regions shouldalso be considered,as a manufacturing location with preferential policies couldeffectivelybring down cost and tax burdens.Outsourcing is also an effective strategy to further maximise order fulfilm
62、entefficiency.MNCs could leverage external capacity to handle some activitieswith low value added,to optimise manufacturing cost and to achieveproduction capacity expansion.16Ways to address challenges for industrial goods manufacturers amid turbulence in China market|Strategy&Key enablers toensure
63、successfulexecution of theinitiatives17Strategy&|Ways to address challenges for industrial goods manufacturers amid turbulence in China marketEstablishing ecosystem partnershipEstablishing ecosystem partnership with industrial stakeholders could effectively facilitate MNCsmarket access and new produ
64、ct development.Local industry stakeholders such as distributor and service providers are more familiar with Chinasbusiness environment and market characteristics.These players often have good relationship withlocal customers.MNCs could leverage market knowledge and commercial resources of local part
65、nersto improvethe efficiencyof market expansion.Additionally,ecosystem partnership is an effective way to accelerate new product development.Withstrategic cooperation on core IP development,partnership could help MNCs achieve product portfolioexpansion with relatively short investment return cycle a
66、nd facilitate new market and customerpenetration.Streamlining decision-making processMNCs sophisticated administration process may sometimes negatively influence local subsidiarysability of prompt market responsiveness,for example,in new product developmentand price control.As local team are more fa
67、miliar with Chinas market characteristics and unique needs from customers,an enhancement on R&D autonomy in“China for China”product development could empower localteam to better serve local needs and drivelocal competitiveness.In a high potential market like China,flexible pricing is a crucial facto
68、r to improve product attractivenessand customer intimacy,MNCs could grant more price control and decision-making power to the localteam to accelerate business expansion.Besides,equity investment in ecosystem partnership has been proven to be an efficient way to drivelocal business growth.MNCs may co
69、nsider improving local teams engagement in the investmentdecision-makingprocess to alleviate potential risks exposure and ensure investment effectiveness.Toensurethesuccessfulexecutionofaforementionedinitiatives,some key enablers should also be taken intoaccount.For example,establishing ecosystem pa
70、rtnershiphas been proved an effective lever in market expansion,productdevelopment,manufacturinglocalisation,etc.Inaddition,MNCshouldstreamlinelocaldecision-makingprocesstostrengthenbusinessoperationagilityandflexibility.Moreover,operational capability enhancement isalso crucial to improve the effic
71、iency of local businessoperations.18Ways to address challenges for industrial goods manufacturers amid turbulence in China market|Strategy&Operational capability enhancementIn the early stages of entering the Chinese market,MNCs usually concentrate on sales activity toachieve fast market penetration
72、 through establishing local sales office or trade entity.Non-salesactivities such as R&D and investment are usually remotely managed by the global headquarters.However,the growing business scale in China market is posing higher requirements on MNCs localoperation model,and the old operation model ma
73、y become incapable of supporting the continuousexpansion of Chinas business.Hence,MNCs should strength core competencies of local subsidiariesthrough enriching local operational capabilities to facilitate local operations and reinforce competitiveadvantage.For instance,MNCs could build up local R&D
74、function to support local teams for quick marketresponse and localised product development.In addition,MNCs could also build up professional teamsto take charge local partnership establishment and local investmentactivities.19Strategy&|Ways to address challenges for industrial goods manufacturers am
75、id turbulence in China marketEnterprise function expansionFront deskBack officeInvestment Local investment execution and managementClient acquisition,order processing and client managementProduct development/customisationLocal partnership development and managementProduct manufacturingManufacturingR
76、&DSalesFunction expansionEcosystem Dev.Function expansionSource:Strategy&analysisIn conclusion,China is still a high potential market with growing maturity ofindustrialisationandlotsofbusinessopportunities.Consideringtheuniquecharacteristics of China market and to secure sustainable growth in China,
77、MNCs inindustrial goods sector should build up structural methodology and framework toidentify potential challenges and develop corresponding plans based on companyslong-term business plan and competency.Despite the difference in product segmentand client profile,the same principles could apply to o
78、ther industries as well.Conclusion20Ways to address challenges for industrial goods manufacturers amid turbulence in China market|Strategy&21Strategy&|Ways to address challenges for industrial goods manufacturers amid turbulence in China marketStrategy&Strategy&isaglobalstrategyconsultingbusinessuni
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