Source: AAG Insight
We have witnessed China's rapid economic development in the duration of four decades of reform and opening. From the gradual establishment of basic industries to the booming of Chinese manufacturing; from attracting foreign investments to build factories in China to the flourish of local enterprises, the emergence of new internet economy has created several Chinese internet giants. China is a dynamic youngster who wants to cut a figure in the global economy with a bright future ahead.
However, behind the rise of China, there is vigilance from other global economies. In 2018, the United States announced sanctions against the Chinese telecommunications company ZTE. In the same year, the Trade disputes between China and the United States broke out in full scale. A batch of Chinese enterprises and institutions were listed as the trade restriction targets by the US. The list covers research institutions, technology companies, internet companies, new media companies, etc. In 2020, The global turmoil brought about by COVID-19 has simultaneously triggered a rethinking of the world's economic landscape and China's status. Since then, the term "de-globalization" or even "de-Chinaization" has been heard frequently.
In the past, the growth of Chinese companies depended on an opening-up and win-win environment. However, when the golden age of globalization and cooperation being gone, how Chinese companies would regroup and develop under the tough international situation in the future seems to be an austere dilemma to be resolved.
Throughout the history, a crisis has been nothing more than an opportunity to reshuffle the deck. It may bring a disruption for companies that are flexible to change. Therefore, in the next phase, the key to victory lies in grasping the policy environment, rethinking the solidity of the value chain, and the balance between supply and demand. Obviously, the only way to be free from restriction is to be entirely independent. Being based on this ultimate concept, recent sessions of the Political Bureau of the CPC Central Committee and China CEO Roundtable for national macro policy reiterate that the new development pattern should give priority to domestic cycle, following the double cycle of domestic and international markets to promote each other, aiming at building a complete domestic demand system, promoting the continuous upgrading of domestic market demand and supply capacity, developing the economy on the basis of openness to diversification, balance, safety, security, and efficiency. Under such backgrounds, China is bound to usher in a new round of industrial chain and consumer system reform. Enterprises need to adapt to current macro situation and actively seek change in order to stand firm in the new situation.
On the supply side, enterprises are required to ruminate how to realize localization in core technology R&D innovation, production, and link up its upstream and downstream, which means that enterprises need to emphasize on the training of talents and the accumulation of R&D capabilities, and strengthen the depth and breadth of exchanges and cooperation between local enterprises.
High-end technology and manufacturing have long been the shortcomings of Chinese companies. Among all the US’ restrictions on Huawei, the most destructive one is the cut-off of chip supply. As is known that the United States has almost a monopoly of the global high-end chip industry, with famous giants Qualcomm, Intel, and other enterprises. As small a chip can be, it yet includes entire semiconductor industry inside. No mobile phones, computers, cars, and household appliances, can be self-perpetuating without a chip. However, there have been more and more domestic enterprises to realize that it is required to conquer the difficulty of the innovation of chips. Beginning in 2015, Gree got involved in chip R&D, and its president Dong Mingzhu indicated that even if it costs over 50 billion, Gree desires the success of chip research. For the recent TSMC’s announcement of the cut-off of chips for Huawei, BYD’s CEO Wang Chuanfu responded that the chip is man-made, and never God-made. BYD enters in the semiconductor chip industry for more than a decade. Its accumulation and continued investment of BYD Microelectronics established in 2004 have made it a mature company in this industry. Such a lifeline industry of chip also will be strongly supported by national policy. The State Council recently announced Policies on Promotion of Integrated Circuit Industry and Software Industry of High Quality in New Period, and this will be regulating the industry from such fields as fiscal, investment, financing, research and development, import and export, talent, intellectual property rights, market applications, international cooperation, and other eight aspects of policy measures to promote the rapid development of the integrated circuit and software industry.
Similarly, for automotive industry, especially in new energy vehicles, intelligent connection, autonomous driving and other frontier industries, the core technologies are being the most important part of domestic high-end technology and manufacturing industry chain upgrade. We have seen the emergence of more and more named domestic enterprises in these fields, such as Alibaba Dharma Institute, which just released the world's first hybrid simulation test platform for autonomous driving few months ago, whose self-developed simulation technology can significantly improve the efficiency of training AI models; and Baidu, which developed the world's largest autonomous driving ecosystem, Apollo, which launched its vehicle-road collaboration and road coordination system. The autonomous driving solution ACE Traffic Engine points the way to the commercialization of autonomous driving in China. Baidu predicts that China's autonomous driving industry will reach an international leading level by the middle of this century. In terms of autonomous driving hardware, one of the core components on vehicles, lidar sensor, this LiDAR’s cost and technology determine the commercialization threshold of the entire industry. Recently, Huawei announced that it will use its 5G technology to develop a cost-effective LiDAR technology that will significantly reduce the current industry average cost of $400-$500 to $100. In new energy vehicle industry, power battery is a core component that accounts for more than 40 percent of the vehicle cost. NEVs’ performance, safety, and durability greatly affect the vehicle's price, sales, quality, reputation, and even future value retention. In this field, Chinese companies, led by CATL, are actively cooperating with major OEMs to tailor battery products that align with the demands of these manufacturers. The cooperation between CATL and Tesla in China, which especially marks the recognition of CATL’s batteries by the fanciest company in this industry, and realizes the transformation of Chinese battery companies from being large to being strong. We have the rationale to believe that, with the dual thrust of robust support from national policies and increasing awareness among enterprises, China will occupy a predominant position in this global high-end technology industry in a near future.
On the demand side, enterprises’ essential market shall shift to the domestic one, to dig deep into local market segments, and focus on improving their brand power. Chinese market contains huge consumption potential that cannot be ignored, and what Chinese consumers lack is recognition and loyalty to their domestic brands. In this regard, Geely Group has become an exemplary precedence for domestic companies. Involving in the automotive industry since 1997, Geely is a representative Chinese automaker. A decade ago, Geely, like most domestic brand at that time, was synonymous with cheap, low-quality cars in the eyes of Chinese consumers. Starting from the acquisition of Volvo in 2010, and going through a series of collaborations, stake purchasing, and acquisitions, as well as adjustments on product and market strategy over the past decade, Geely Group is now a global enterprise that owns Volvo, Lotus, Lynk&Co, Geely, Proton, Geometry, Yuancheng, London Electric Vehicle Company, and other brands. Geely’s successful layout can be attributed to the resolute action of its chairman and founder, Li Shufu. Geely's business strategy is undoubtedly a success, in the 2020 Fortune 500 list released on August 10, Geely Holding Group ranked the 243rd with $47.8 billion revenue. Geely has also become the "light of domestic goods" and "the pride of domestic brands". Yet Geely's success is not difficult to copy. As local enterprises pay more attention to their brand power, more brands of high quality will be born in China, and therefore, the consumption concept of Chinese people will then be further disrupted. If there was a large-scale blockade of "Made in China" in the future, China would be capable to achieve self-sufficiency and self-manufacturing as well.
As what Nietzsche said, what doesn't kill you makes you stronger. We see the difficulties as transient, which generate the stress that can instead lead to a life of resilience.
AAG Insight - the Change and Innovation in Chinese Enterprises in Chip and Automotive Industry