CFOs consider the business implications of a chill in US-China trade relations, discuss how RPA and AI will transform forecasts and analysis, and talk talent.
When the AsiaCFO group met in early November in Shanghai at a meeting hosted by Signify and sponsored by Deutsche Bank, the sentiment was that winter was coming, meaning that the long-feared hard landing for China’s economy might be imminent, due partly to US-China trade tensions. At the time, though, business growth for the majority of member companies was not yet slowing. This underscores the major tension for multinational corporations (MNCs) operating in China: how to prepare for a downturn without missing growth opportunities if the downturn fails to materialize or ends up shifting growth to other types of business. It also raises the question of which factor has the bigger influence: the growth from digitalization or the trade war. The size of the opportunity is still vast: One member noted that her firm had recently elevated China to regional status, on par with the US and the rest of Asia. Against this backdrop, the group discussed:
1) The Outsized Impact of US Policy. US policies—including tax reform, the Federal Reserve’s monetary policy normalization, and trade and tariffs—have had a big impact on China. Members are responding by monitoring anti-US sentiment and positioning themselves less as US brands.
2) Emphasizing Simplification, Standardization and Efficiency. To hedge against a business downturn, most MNCs in China are emphasizing simplification and standardization to boost efficiency, including via the use of technology.
3) Continuing to Build the Finance Function of the Future. Simplification and standardization themes fed further discussion on how to automate with bots/robotic process automation (RPA) and deploy data visualization and analysis tools (including applications using machine learning and AI) to support faster and better decisions. This will also help members continue to scale if growth continues or when it resumes.
The Outsized Impact of US Policy
Deutsche Bank capital markets strategist Tom Joyce reviewed the outsized impact US policy had on 2018 markets and the global economy. Generational tax reform, combined with a two-year spending package, created the largest late-cycle US fiscal stimulus since WWII. Against this backdrop of US outperformance (economy, markets, currency), the Fed proceeded to tighten monetary policy more rapidly than anticipated. Subsequent US dollar strength, combined with a major shift in US trade policy, drove higher volatility in markets and contributed to a larger-than-expected slowdown in the global economy.
KEY TAKEAWAYS
1) US had closing window to act on China. These positive forces for the US economy, combined with a lower reliance on exports, set the US up to execute the biggest shift to impact China: trade policy. The Trump perspective, supported by US trade representative Robert Lighthizer, is that the US has finally decided to engage in a trade war that China started decades ago. From a political perspective, it also makes sense because trade policy is something that the president can enact unilaterally, without the approval of a Congress now divided by the US midterm elections.
2) Rethinking the US-China relationship. Amid rising imbalances with China, President Donald Trump implemented a series of tariffs on nearly $250 billion of Chinese exports. Since then, the policy response on both sides has escalated rapidly. For China, corresponding tariffs, fiscal stimulus and managed support for the currency have been the primary focus. For the US, the “tough on China” escalation has expanded to multiple government branches and agencies, with a growing focus on technology protection and restrictions. Beyond a slowdown in Chinese growth, the impact on US corporate clients in China has been limited from a policy perspective, with China keen to preserve the valuable role of foreign direct investment flows and technology sharing. China’s capital outflows and corporate dividend policy will be a critical area to watch going forward.
3) Sentiment of Chinese customers is more important than trade. During a discussion on the trade situation, members suggested that the feelings of their customers toward the US was more important to their China business than tariffs. Some companies, including retailers, are internally tracking rising anti-US sentiment. Meanwhile, the communication and go-to-market strategy on how US brands are presented vs. local brands must be weighed carefully. One member noted removing items that are obviously American from stores (no flags) to avoid triggering negative sentiment, and turning to Chinese celebrities and models in advertising and marketing to be ambassadors for the brand. Branding MNCs as global or international instead of as US companies is recommended, which also makes it harder for competitors with US identifiers in their company or brand names. Also, the identity of those brands’ suppliers may be important, affecting decisions to shift supply chains to avoid tariffs. And many customers will expect a surcharge if their products show up on the tariff list.
4) Changing terms of business in China. Some members noted seeing other signals of change: At one company, it showed up in the form of new terms of business; at another, orders in the pipeline failed to materialize. One biotech/pharma company in the group said that a new drug had been approved in seven months vs. five years, and the use of global trial data was permitted if ethnicity was not indicated as a factor. Plus, the company was offered an immediate spot on the approved list for government insurance. The catch: It had to reduce pricing by as much as 70%. Another member company had been selling a consistent number of large-ticket items over the last several years but had closed no deals as of November 2018. One reason is that its chief competitor is a non-US company. So the degree to which business is affected will depend on the sector and the makeup of suppliers. One member said that almost all but one of its production inputs are sourced locally and it also produces goods locally, making it one of the top taxpayers in Shanghai. The extent to which you are a local taxpayer can help ensure that government officials (at least locally) are still friendly to your business, several members said.
Talent Management Focal Points
While the business environment is a concern, members also remain focused on attracting and retaining talent, especially at the junior manager level, which is why the annual group survey on salary increases remains important (5%-7.5% increases were planned, with 6.5% being close to the average). Here are three key talent management themes:
- Show you have a digital future. The impact of digitalization, automation and AI extends to the competition for talent. Younger generations will be most attracted to companies that appear to get digital transformation and make it exciting.
- Cut to maintain happiness. Weighed against rising cost pressures, CFOs in China will need to cut budgets so that all who remain can still enjoy a happy life. “I would rather reduce the number of people than reduce the compensation for all,” one member noted.
- Dealing with employee engagement imbalances. One member asked the group for help fixing imbalances in her company’s employee engagement scores. In her case, the immediate manager engagement score average is high, the immediate team score is OK, but the organization score is bad—likely because cross-functional cooperation is low.
OUTLOOK
Given the inflection point in both the US and Chinese economies, there is less likelihood that economic relations between the US and China will return to their former state. Both sides may agree to concessions to avoid a trade war, but China can no longer expect the US to look the other way on its approach to foreign direct investment and intellectual property transfer, for example.
Emphasizing Simplification, Standardization and Efficiency
One of the themes for this meeting as well as a special roundtable for shared-services center heads the following day was to use a potential slowdown in growth to reexamine, simplify and improve processes, impose standards and boost efficiency with technology.
KEY TAKEAWAYS
1) Simplification is the perfect hedge. One member described an initiative to drive productivity via simplification (with a bit of standardization, too). Every process is being examined to see if it can be simplified. Forecasting is one example: Management loves all the information, but it takes a huge machine and a lot of resources to produce it every month. Or, for some retail companies in the group, three times a day. Also, with strategic plans, if the company creates a three-year plan, does it really need to redo it every year if it is on track?
2) Speed up resource shifts to analysis. Simplification will allow a shift in resources toward analysis and will also speed up the ability of machines to learn and automate the forecast. Zero-based budgeting was another example cited in this context. If you force people to analyze and justify how much they need to spend to achieve a certain objective, they are less likely to hide behind what they spent in prior years with different objectives and results. This year, the resources might be better reallocated elsewhere. It’s a simple enough process that it can be repeated more frequently, too, where companies might analyze their spending each quarter or even monthly. This will allow the processes to better continue and thrive in a downturn or when the availability of talent tails off.
Stores Still Needed
With all the focus on the digital elements of Chinese growth stories, one member with a retail focus highlighted the continued importance of stores in China during a walk-through of his China real estate strategy. This highlights the value of the brick-and-mortar channel in advanced digital economies. Here are some keys to success:
- Expand surgically. The key to retail success with stores is to grow surgically with the right footprint in the right format in the right regions.
- Delineate store types and objectives. Flagship stores, for example, carry huge costs and may not be nearly as profitable as specialty or outlet stores, but they have great value as advertising vehicles and build awareness for the brand if they are in the right locations.
- Look at the data. Real estate strategy is heavily data-driven, based on the revenue and margin contribution of each store as well as an analysis of stores run by competitors. In addition, data on what stores are in proximity to yours can be highly significant. But what makes data analysis powerful is to include what you know about online purchasers. This company’s store expansion strategy, for example, is fully aligned with its e-commerce orders and the location of its highest-volume purchasers.
OUTLOOK
With rapid growth and change having been the constant, MNCs operating in China will take any winter that comes as an opportunity to become better by spring. By taking an end-to-end approach to process evaluation, they hope to make their support of the business more value-enhancing as well as efficient.
Continuing to Build the Finance Function of the Future
The rapid digital transformation of China is likely to continue despite the prospect of winter coming. Indeed, digitalization may still loom larger than US trade policy in China’s future. That’s why preparing to support ongoing digital transformation of business in China continues to be a member focal point.
KEY TAKEAWAYS
1) Inflection points call for data with time for analysis. They also shine a light on why CFOs in China want to have their teams spend less time gathering data and more time on analysis, aided perhaps by artificial intelligence (AI), to feel more confident in growth expectations when the early forecast points to winter. One member shared his US consumer sentiment data and analysis, which is provided by an external PR firm. Another member showed a case study on how it uses data in the pursuit of its China real estate strategy. “It’s all about how to learn from the past to inform strategy going forward,” the member noted. The member looks at the local wealth index, data on the location of e-commerce purchasers, foot traffic, influence of competitors nearby, store performance based on inventory, store layout, etc. He then looks at landlord co-investment, which tends to be higher in tier-three cities.
2) Building blocks to AI. Discussing how to get more technology automation into their finance operations on the road to AI, members agreed that data gathering needs to be standardized, so perhaps robotic process automation (RPA) can be used to extract data. Just getting data out of SAP and other ERPs is still too cumbersome, even with Hyperion, which is why so much data must pass through spreadsheets. “The technology is there to analyze it if you have the historical data; you just need to standardize it and impose some quality controls,” one member noted. Optical character recognition (OCR) technology can also help gather data, but the accuracy needs to be improved. RPA is helpful in that it enforces standardization and cuts back on everyone creating similar reports a different way. Shared-services centers are thus a natural focal point for standardization and progress with automation. Members cited Power BI and Tableau as commonly used data visualization tools, along with Salesforce Einstein for machine learning/AI-enabled forecasting. RPA and machine learning are here now, but true AI is likely still five to 10 years away, according to the member consensus.
OUTLOOK
Digital transformation efforts make clear that the future of finance depends on ever better analysis of ever more data. The journey to get there and support the growth of new types of businesses is challenging and remains a top priority for every member. Will winter come for China’s leadership in digitalization, too? That’s a big question on members’ minds as they contemplate their current position as finance leaders in the market where digital transformation is happening fastest.