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EXECUTIVE SUMMARY

Beyond the COVID-19 Crisis in China

Mobility constraints pose business challenges that could be long lasting. China’s COVID-19 response has seen the imposition of vast local controls on mobility, essentially immobilizing hundreds of millions of people with a combination of digital tracking technology and historic methods of physical mobility control. The crisis response to basically stop commerce and mobility down to the neighborhood level effectively thrust power back into the hands of the locales and reignited the entropic forces for local autonomy. There is high plausibility that the China operating environment, post COVID-19 crisis, will see intracity mobility become more controlled and city economies become more autonomous, possibly for a prolonged period. This is likely to produce a quagmire of differing local regulations regarding business restart, business conduct, transportation, and mobility that will require renewed attention to local government relationships.

 

On the digital side, there has been a massive acceleration in the development and implementation of “Social Credit”-type apps at the local level for mobility control, together with the advancement of its enabling technologies and mass acceptance of its use. In this area, we have arguably witnessed a ±5-year step-change occur in just a few months. This advance of the state into the public sphere is not likely to reverse. Whether digital monitoring will be used progressively to enhance public trust and ethical commerce, or coercively to influence social norms and consumer behavior in favor of vested interests remains to be seen. 

 

Adherence to mobility constraints will drag on economic restart. While, in normal times, scorecards for local government officials in China would focus on economic performance, the situation now is that the risks of missteps with virus control measures far outweigh any benefits to be gained from stewarding economic performance. Therefore, the balance between barriers to movement and restarting China’s engines of growth will unquestionably err on the side of continuing to restrict mobility at the expense of the economy.

 

Location-based strategies will become an important business success factor. Tighter mobility constraints – a function of historic and contemporary social control impulses plus acute economic stress – will have major strategic implications for MNCs in China across marketing, supply chain, and workforce planning dimensions including talent availability. For foreign business in China, this power shift and control structure reversion portends a degree of re-fragmentation of supply chains, markets, and distribution channels and elevates the importance of location-based strategies that harken back to the 1980s operating environment in China. Some aspect of this fragmentation is likely here to stay for a while – not because of the lingering virus issues (which are probable), but because of the Center-Local power dynamic it has reignited.

 

For local regulators, control concerns will trump economic logic. What is important for business planners to note is that these mechanisms of mobility control, as a means of social and political control, are a force in the opposite direction from economic efficiency, and instead toward regional barriers, regional self-sufficiency, reduced mobility of the population, and knowing where everyone is, always. From the perspective of large businesses, the political interests in local economic and social control are at odds with national presence and efficiencies of scale. Over the near-term, and possibly even into the medium-term, MNCs will need to be agile in implementing business model and operating adaptations that can address regional mobility issues and different local commercial arrangements – ideally measures that can be reversed if and when mobility controls subside.

 

Regionalized strategies will be called for. Although imperatives will differ by sector, MNCs that take the initiative to explore and adapt to relevant issues in city-level labor shifts, investment incentives, and industrial policies might find opportunities to align closely with their domestic customers and suppliers as well as local officials and financial agents. This was very much the strategy-for-success for MNCs in China in the 1980s and early 1990s. In that era, foreign businesses in China built constellations of partnerships and subsidiaries to establish the required relationships to finesse the differing regulatory demands of the locales in which they sought to operate. Among other things, “location strategies” of that time involved: 

 

  1. Placing operating plants within target market locations to maximize local ties with government and across key communities, even if it was sometimes suboptimal from a scale perspective.
  2. oordinating investment and government relations activities at the local level to develop deep and broad relationships and maximize goodwill benefits across local bureaucracies.
  3. Developing a deep understanding of local addressable markets and applying locale-specific strategies to penetrate them.
  4. Using localized marketing and communications strategies to appeal to local characteristics and engender place-association loyalties.
  5. Working with local banks, regulators and investment authorities to create incentive schemes to attract and enable supporting ecosystem development. 

 

Often, local managers or advisors, people from the area with deep cultural affinity and connections, were employed to guide business development and localized business model adaptations.

AUTHORS

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Kenneth Dewoskin, Ph.D.

Senior Advisor, Chinese Services Group
Deloitte

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David Hoffman

Senior Vice President Asia and Managing Director of the China Center for Economics & Business
The Conference Board

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