China CEOs remain confident as focus shifts toward innovation

CEOs in China are prioritising innovation as a means of deriving growth for the coming three year period, as they seek to develop new products and services to meet the growing consumption demand in China. China CEOs remain relatively upbeat about the country’s growth trajectory; the CEOs’ major concerns for their company’s growth centres around managing technological changes, and developing the right products and services.

KPMG, as part of its 2016 Global CEO Outlook, surveyed more than 1,300 CEOs worldwide – including 129 from China – to derive insights into their strategic and investment priorities, concerns and growth strategies. One component of the research is a more detailed exploration of the sentiment of China-based CEOs.

The China CEO respondents remain upbeat about the prospects of the Chinese economy. 46% of China CEOs predicted 5% or greater growth over the next three years compared with 21% of global respondents. And almost two times as many China CEOs (40%) plan to increase headcount by more than 5% over the next 12 months than the global average (22%). Another area where Chinese CEOs are leading is gender diversity: one quarter of China CEO respondents are female compared with 8% globally.

Chinese priorities
The survey finds that the top priority for Chinese firms in the next three years is fostering innovation, which is incorporated into the business strategy of 92% of Chinese firms as part of the search for new products, while being the top agenda item for 47% of CEO respondents. A strong client focus is the second to top most cited agenda items for CEO, at by 29% of respondents. Respondents were also relatively keen to act on implementing disruptive technology and digitalising their business, coming in 4th and 5th respectively.

Innovating new products/services
One of the pillars of the latest five year economic plan for the Chinese economy, aside from a shift from investment-led growth to consumption-led growth, is innovation. Innovations, such as within the e-commerce and logistics space, are opening up wide swathes of rural China to consumption and growth, creating new business opportunities and growth. China too has emerged as the most desirable destination for R&D and innovation activities for international businesses, having surpassed Europe.

In comparison to the global CEO’s personal agenda items, the 47% for Chinese CEOs is well above that of the global response rate of 23%. Global CEOs are concerned about innovation, however, reflected in 65% of them having it within their top three agenda items. Very few respondents delegate innovation approaches to their management team, at 2% of Chinese CEOs and 10% of global CEOs, with even fewer delegating it to technology teams, at 3% and 2% respectively. 

In terms of what is most concerning Chinese CEOs surveyed, ‘whether the company is staying on top of what’s next in products/services’ is top, as cited by 74% of respondents. Second on the list is the relevance of the company’s products/services three years from now, a 73% of respondents. Both responses are related to innovation.

The respondent CEOs also believe that the current three years are relatively critical for their industry than the past 50 years – highlighting the high level of flux the Chinese market is currently dealing with. Global economic forces, from political uncertainty to economic uncertainty, too weigh on China CEOs concerns. The rise of the robots, and their potential effect on global business – and employment – was cited by 70% of respondents as a concern.

Industry 4.0, and its integration of vertical and horizontal supply chains, integration of robotics and the IIoT, is another area of concern for China’s manufacturing capacity. Innovation in this space is one on the national agenda in its ‘Internet Plus’ and ‘Made in China’ plans: the latter is China’s answer to its current decreased industrial competitiveness and by 2030 is projected to boost economic growth in China by 1.8 trillion, according to  a recent report. In KPMG’s survey, the use of data & analytics in Chinese organisations is cited as one of the key innovative areas that is integral to these technologies.

According to the China CEO respondents, 57% are leveraging data analytics to drive process and cost efficiencies, 52% are using it to manage risk, while 50% use it to develop new products and services. In addition, 48% of respondents use the technology to drive strategy and change, while 40% use it to improve financial reporting.

Additional capabilities
While new products/services is top of company strategy in China, entering new markets takes second spot. The respondents were most keen on focusing on expansion within their domestic market, cited by 68% of respondents, followed by ASEAN markets, cited by 37%, and the US, cited by 33% of respondents.

A number of methods exist to spread to new markets, including partnerships, joint ventures and M&A activity. The research highlights however that companies are much more focused on achieving expansion and growth ends through engagement with other firms than global peers. Additionally, 43% of respondents are planning to enter into M&A agreement to buy assets or capabilities from other firms.

Another recent research held among Chinese CEOs, conducted by McKinsey, found that corporate governance is constraining CEOs in the country. In terms of corporate security, China’s current operating environment, for international businesses operating in China or domestic businesses aspiring to operate globally, is problematic as businesses face an inadequate enforcement of laws and regulations surrounding Intellectual property rights, patent laws or data security breaches.