How Chinese Companies Are Reviving Their Post-Covid Businesses

The major adjustment of interest is the focus by Chinese companies on reducing reliance on the global supply chain and re-orienting towards domestic sourcing, with all that implies for the global economy. JL

Nick Leung and colleagues report in McKinsey Quarterly:

Companies in China that acted swiftly and decisively are likely to emerge stronger out of the crisis, and better prepared to withstand the next major disruption.Companies pursued digital-transformation initiatives, including digitization of product offerings, customer engagement, and operations, as well as new digitally-enabled working arrangements. Many companies doubled down on their China supply chain while diversifying risk outside China. Firms refitted core assets and trained employees, while others adopted bold strategic moves aimed at shifting their competitive position
As the first country to suffer the outbreak of COVID-19, the Chinese economy was severely affected, with official statistics declaring first-quarter year-on-year GDP growth at negative 6.8 percent. Leading companies across sectors responded swiftly with a range of measures aimed at protecting their employees’ health and safety, and engaged in creative ways to protect their business. Well before the outbreak subsided and lockdowns were lifted, they worked hard to find ways to reactivate business activities, identify new platforms for growth, and position themselves to survive the crisis—and thrive beyond it. Some firms doubled sales during the crisis, while others acquired tens of millions of new customers. 

To understand what leading companies did to reactivate their business and adapt to a post-COVID-19 world, we conducted a study of more than 200 examples of initiatives taken by companies from across 15 industries in China, which we then sorted into 30 categories. These represent just a sample of the millions of microeconomic actions taken by individual companies that, when viewed in the aggregate, drove the acceleration of five major macroeconomic trends during the few months that COVID-19 “pressed the pause button” on the world’s second-largest economy: digitization, declining global exposure, rising competitive intensity, maturing consumers, and the stepping up of the role of the private and social sectors. 

Our research shows that companies that acted swiftly and decisively are likely to emerge stronger out of the crisis, and will be better prepared to withstand the next major disruption. On the other hand, companies that were slow to respond or which responded with ineffective measures were more likely to suffer a bigger hit to their business. Department stores that failed to make the shift to digital channels while their online competitors experienced a rapid expansion on the back of demand for contactless commerce, is just one example. Faced with immense pressure on their business, some firms opted for short-term solutions that backfired, such as salary cuts without proper communications that destroyed staff morale (and were leaked to the public), and price increases aimed at recouping revenue losses, but which ended up disappointing customers and turning them away. 

In our research, we also identified several enablers—most of which existed prior to the oubreak of COVID-19—that were essential to the success of the reactivation initiatives companies took. These included a “through-cycle” mindset, the ability to build a pool of financial reserves and secure required funding, sufficient management capacity, an agile organization, adaptable technology infrastructure, and teams of technology and digital experts, among others. 

For companies operating inside China, these can serve as useful reference cases based on observations across sectors. And, as other economies around the world gradually lift lockdowns and people slowly get back to work, the experience of companies in China could provide a reference for companies elsewhere in the world that are grappling with the same disruptions to their business, and thinking through similar challenges to reactivating their operations and planning for the future. 

Fast-forward trend 1: Digitization 

While digitization may have been, for some companies at least, just a widely used buzzword before the COVID-19 crisis hit China, once many cities were forced into lockdown, businesses hoping to survive discovered just how essential it was to go digital. Companies in China pursued a variety of digital-transformation initiatives, including digitization of product offerings, customer engagement, and operations, as well as rolling out new digitally-enabled working arrangements such as work-from-home and remote meetings, sharing staff with other organizations, and redeploying talent to keep them employed, productive, and safe. 

Fast-forward trend 2: Declining global exposure 

Even prior to the outbreak of COVID-19, China’s engagement with the rest of the world was undergoing a fundamental shift. As the McKinsey Global Institute identified through its China-World Exposure Index, China’s exposure to the rest of the world has declined over the past decade, while the world’s exposure to China has increased on a relative basis. The crisis has accelerated this trend with many companies doubling down on their China supply chain while others diversified their risk outside of China. 

Fast-forward trend 3: Rising competitive intensity 

While China has long been marked by exceptional levels of industry competition, the substantial decline in demand and the lockdown that gripped the nation between February and April notably increased its intensity. While some companies suffered from the drop in demand and the disruption of supply chains, other companies used this period to reposition themselves as even stronger players both during the crisis and beyond. Some firms turned the downtime into a platform for renewal and growth through refitting core assets and training employees, while others adopted bold strategic moves aimed at shifting their competitive position, experimenting with new technology, and exploring M&A. 

Fast-forward trend 4: Consumers come of age 

China has experienced a gradual shift toward a consumption-driven economy over the past decade, in tandem with the vast expansion of the middle class and the evolution of consumer behavior and attitudes, trends accelerated by the outbreak of COVID-19. Companies in China pursued several initiatives to engage and adapt to the consumer during the crisis: some firms doubled-down on serving customers, implementing creative marketing tactics to stimulate demand and acquire new customers while making sure they were retaining their most loyal customers. Others redesigned their product and service offerings and changed their business models to meet the needs of current as well as future customers. 

Fast-forward trend 5: Private and social sectors step up 

While the state sector continued to play an important role in handling the crisis, the private and social sectors expanded their roles in addressing the crisis. As employers of a large number of people with access to enormous resources, privately-owned firms pursued a range of initiatives that were essential in protecting employees, their customers, and the community at large. The private sector, along with social-sector institutions such as non-profit organizations, also worked hand-in-hand with public-sector institutions to support initiatives aimed at protecting public health and maintaining employment. 

Companies in China have proven remarkably resilient throughout the crisis. In the immediate aftermath of the crisis, scores of companies across sectors have worked hard to recover lost business, while keeping an eye trained on the future. While some firms may never fully recover from the impact of the crisis, several are, surprisingly, emerging stronger than ever. Perhaps, as the rest of the world gradually reopens and resumes work, the experience of companies in China could prove as a useful reference point for companies elsewhere.