Shared Future, Concerted Action, Common Development
BFA Annual Conference 2019 Pre-Conference Report
26-29 March 2019 Boao, Hainan Province, China About Boao Forum for Asia As a non-government, non-profit international organisation, Boao Forum For Asia (BFA) is the premier forum for leaders in government, business and academia in Asia and other continents to share visions on the most pressing issues in this dynamic region and the world at large. The forum is committed to promoting regional economic integration and bringing Asian countries even closer to their development goals.
Initiated in 1998 by Fidel V. Ramos, former President of the Philippines, Bob Hawke, former Prime Minister of Australia, and Morihiro Hosokawa, former Prime Minister of Japan, Boao Forum for Asia was formally inaugurated in February 2001. Countries across the region have responded with strong support and great enthusiasm, and the world has listened attentively to the voice coming from Boao, the permanent site of the Annual Conference of the forum since 2002.
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©2019. For information, contact Deloitte China. CQ-006EN-19 This is printed on environmentally friendly paper Contents
Preface 1 Partner profile 11 Economic Outlook in Asia Pacific 18 Asia Pacific Investment Confidence Barometer 20 Topics
Regional economic cooperation Outlook of Belt and Road International Power Cooperation 29 Digital transformation in manufacturing and service industries Industry 4.0 Readiness Survey 40 Smart Manufacturing Priorities 44 Outlook for Digital Life Service Ecosystem 55 New Retail Reinvigorates China's Imports 68 Technological innovation and application 5G: Reshaping Industries 76 The New Physics of Financial Services 90 Survey Finds Biopharma Companies Lag in Digital Transformation 112 Ten Trends in AI's Commercial Application 122 BFA Institute Founded in 2001, the BFA Institute is the intellectual arm of BFA. Its functions include: to identify the theme and sub-topics for the annual conference; to develop and provide economic forecasting on issues consistent with the goals and policies of BFA; to provide intellectual resources for BFA conferences, seminars, and workshops; to provide human resource development programs for members and other partners of BFA; to establish a virtual network and a clearing house for other research and training institutes in Asia and elsewhere.
Each year, the BFA Institute publishes 4 flagship reports, including the Annual Report on Asian Economic Integration, the Annual Report on Asian Competitiveness, the Annual Report on Emerging Economies, and the Asian Financial Report.
The BFA Institute compiles and issues the Boao Journal to members of the Boao Family – a monthly update on BFA news, people and views.
Deloitte Research Deloitte China's intelligence center and think tank, Deloitte Research (DR) provides original perspectives on the economy, industry and company management by producing and publishing thought leadership documents and other publications to build market eminence.
The DR team is committed to delivering insights via the interpretation of policies on China's economic growth, industry analysis and market predictions. DR practitioners, with in-depth expertise across an extensive range of areas including macroeconomics, public policy and eight industries: consumer, energy & resources, financial services, life science & health care, manufacturing, government & public services, real estate and technology, media & telecommunications, have contributed to more than 200 thought leadership documents. DR has also issued Measuring Value and Deloitte Perspectives commentaries under independent registered trademarks. In addition, Deloitte Research provides intellectual support to high-level international conferences including the Boao Forum for Asia, serves industry leaders with customized research, and presents impactful reports and insights by leveraging Deloitte's global network and client resources. BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Preface
Shared Future, Concerted Action, Common Development
by Ban Ki-moon, Chairman, Boao Forum for Asia
In October 2018, when the Board of Directors of the Boao Forum for Asia sat down for an internal brainstorming on the theme of the coming Annual Conference 2019, the world was at a challenging moment. It was as challenging for my colleagues at the Board to identify a visionary and forward-looking theme and set the tone for a conference that so many people have laid high hopes upon. For most of the years after the global financial crisis, the world has been struggling for ways to get the economy back on a sustainable path of robust growth. It was not until 2017 that we saw hopeful signs of strong and synchronized growth among major economies, including the United States, the European Union, Japan and emerging markets of China and India. This encouraging momentum carried on well into early 2018. In April, 2018, the IMF optimistically put its projection for 2018 and 2019 at 3.9%. Regretfully, the momentum failed to sustain. In October, IMF had to downgrade its forecast for 2018 and 2019 to 3.7%. This January, the figure continued to fall to 3.5% for 2019. There are a number of factors disrupting the momentum. Sentiments of deglobalization and protectionism that have been brewing in parts of the world loomed larger and larger from campaign rhetoric into policies and actions. Tariffs and non-tariff barriers were re-installed. Validity and effectiveness of the rules-based multilateral trading system was questioned. Global trade growth that have rebounded in 2017 slowed down remarkably in 2018, and may continue to be so if nothing is done to reverse the trend. Companies and investors were hesitant at the uncertainties and disruption trade frictions may bring to the global supply chain. There are other factors at play. The Fed interest hikes, though making sense for the US economy, had spillover effects on global financial conditions and partly incurred net capital outflows, currency depreciation and market turbulences in quite some emerging markets. Germany, France and the UK were affected by new fuel emission standards, street protest and the uncertainty around Brexit. EU as a whole would decelerate when the big three were under such stress. These disturbing developments were at the heart of the internal brainstorming my colleagues and I had last October. But we believed that it was no time for finger- pointing or pessimism. Rather, it was time to send a positive and forward-looking message to Asia and the world.
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This message is composed of three integral key words. Shared Future We are on one same planet, in the same boat and bound by a shared future. This self-evident truth, however, is often missed or ignored in good days, but when crises hit, will be more keenly felt. 10 years ago when the world was thrown into a global financial crisis, major countries realized that we were in the same boat and must take actions together. G20, as the premier platform for coordinating macro policies of both developed and developing economies, saw its golden days. G20 members consulted with one another on fiscal stimulus, monetary easing and structural reforms, and took concerted actions. This was vital in helping the world avert yet another Great Depression. However, when the difficult days were behind us, so seemed the urgency and incentives to work together and coordinate policies. The last year or two was particularly frustrating. Deglobalization, protectionism and unilateralism seemed to have overshadowed the long-term vision of a shared future. It does not take an astronaut from spaceship to appreciate how small our planet is and how fragile it could be. Climate change has time and again reminded us the need to act now, with natural extremities such as disastrous droughts, floods and storms, and everyday threats to bio-diversity and human life. If we can not fulfill the obligations under the Paris Accord, global temperature may rise out of control with devastating consequences for the survival of many islands and their inhabitants. This is a global challenge and calls for global response. No country should sit idle as we will all suffer in the end. Our economies are not separable and isolable anymore. Globalization has come to a stage where not only goods and services are bought and sold worldwide, production is also globalized. In the 1930s when the Great Depression hit, economic ties between countries were largely trade of goods. Today, international economic ties go far beyond that. The production of i-Phone is a long chain spanning more than a dozen countries and hundreds of production facilities. How can any one or any country “de-globalize” such a vast, interwoven global network of production? Imposition of tariffs and barriers not only hurts trade, but also distort and disrupt the global supply chain, and eventually backfires on whoever starts it. Financial globalization, rarely noticed by people on the street, has gone far ahead of our ability to regulate. Trillions of dollars are exchanged daily. Massive inflows and outflows of capital could erupt within a short time span, with disruptive implications to individual markets and economies.
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Goods, services, capital and people flow in and out across borders each and every day. I just don’t see how we can be “de-globalized”. The self-evident truth is that we are so interdependent that we have no other choices but a shared future, and we must work together towards a better shared future. Concerted Action The solution to our common challenges is self-evident as well: dialogue, cooperation and concerted action, be it climate change, sustainable growth or common development. The Paris Accord sets an outstanding example in global response to climate change. The G20 played a vital role in avoiding yet another Great Depression. More broadly, the United Nations Sustainable Development Goals and the 2030 Agenda lay out a framework for all countries to work together towards a sustainable future of mankind. As one long involved in international affairs and leading international institutions, I have deep faith in multilateralism and the multilateral approach to our major challenges today. The multilateral institutions we have today, such as the United Nations, the IMF and World Bank, the WTO and its predecessor GATT, were brought into being after the Second World War and based on the bitter lessons learnt from the two world wars and the Great Depression. Though not perfect, they have managed to maintain world peace and stability, and witnessed the greatest boom and prosperity in human history. In an increasingly interdependent world, the role of multilateral institutions and the multilateral approach will only grow bigger, not smaller. There is room for bilateral and regional efforts, too. High-calibre bilateral and regional FTAs take a lead in bringing cross-border trade and investment up to a new level. They are supplementary to the rules-based multilateral trading system. Deeply embedded in such multilateral, regional and bilateral efforts is the awareness that we are bound by a shared future which calls for close dialogue, cooperation and concerted action. Unilateralism is not a choice, because it is out of touch with the reality and work to the contrary in this interdependent and globalized world. Common Development I often heard complaints about globalization on the ground that it widens the gap between rich and poor. Workers in advanced countries easily target globalization as the scapegoat for their job losses. I actually see the opposite side to such complaints. I find globalization a great contributor to poverty alleviation, bridging the gap between rich and poor in a big way.
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China opened its door to the outside world in 1979 and become an integral part of the globalization process ever since. As a result, China has lifted 700 million of its people out of poverty within a mere 40 years. Its growing middle class has turned China from “Factory of the World” to “Market of the World”. China’s experience shows that globalization offers the best hope for developing countries and their people to get rid of poverty. Without globalization, it would take developing countries much longer to end poverty. But I agree that there needs to be an open, inclusive and balanced approach toward globalization and bring all countries and peoples along on the path of common development. Concerns of workers in advanced countries need to be addressed together with the wishes of people in poverty in the developing world. There is no turning back globalization, but there is room for improving globalization. I commend the Belt and Road Initiative for being such an endeavor to bring everyone along. This initiative is a global public good that a globalized world badly needs. Cross- border infrastructure has lagged far behind the needs of global trade. While many governments invest heavily in domestic infrastructure, there isn’t as much enthusiasm to extend beyond their borders. The Belt and Road Initiative is an attempt to fill the gap by pooling together countries along the route and building infrastructure across borders with costs, risks and benefits shared among them. The initiative is not just about “hard infrastructure” such as roads, railways, airports and ports. It is also about “soft infrastructure” that facilitate freer flow of goods, services, capital and people. Most of the countries along the Belt and Road Route are developing countries, but the route connects developed countries on both ends. If the initiative could come to fruition as envisaged, it will bring both developed and developing countries onto the course of common development. In this sense, the Belt and Road Initiative will make a great boost to the globalization process which has somewhat stalled today. Shared future, concerted action, common development. These three phrases constitute the core of our theme for the coming Annual Conference 2019 of the Boao Forum. I would like to take this opportunity to welcome you to this grand gathering of 2000 government, business and intellectual leaders. Let’s think, debate and act for a bright shared future of Asia and the world at large.
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Join Hands Together to Promote Regional Economic Integration and New Globalization
by Zhou Xiaochuan, Vice Chairman, Boao Forum for Asia
As a local song of Hainan goes, “It has been a long time since we last met. And I hope it will be a long time before we have to part.” Distinguished guests, dear friends, BFA family members, I want to thank you for coming all the way for our grand gathering here in Boao. It’s my belief that the exchange of insights among participants at this year’s Annual Conference will again make Asian voices resonate around the world. 2018 saw the world fraught with changes, challenges and uncertainties, with the world economy and multilateral trade mechanisms seriously threatened by unilateralism, trade protectionism and populism. In this context, the 2019 BFA Annual Conference will focus on how Asia can work with the rest of the world to promote regional economic integration, advance new globalization and facilitate social and economic sustainability worldwide. As we all know, the world economy showed a steady growth momentum in the beginning of 2018, but this trend was reversed by intensified global trade frictions, diverging monetary policies among major developed economies, fluctuating commodity prices and increasing geopolitical tension. The world economy undertook downward pressure. Some emerging economies suffered from highly volatile financial markets due to their failure to introduce timely structural reforms and remedial measures for correcting imbalances. Nonetheless, Asian economies have demonstrated strong resilience and withstood the impact of volatility in trade and financial markets. According to estimates by the IMF, Asia remained the fastest-growing economy and expanded by 5.6% in 2018, contributing over 60% of global economic growth.
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The year 2019 began with darkening skies, as is described by the World Bank in its Global Economic Prospects released in January 2019. Both the World Bank and the IMF have also revised down their forecast of world economic growth rate. According to the WTO, growth in global trade is expected to slow to 3.7% this year, below the previous forecast of 4%. Moreover, the WTO also has to deal with considerable disputes among members regarding its reform. The Appealing Body of the WTO Dispute Settlement Mechanism is already at the risk of not functioning as of end 2019. However, there are also positive signs. The trade negotiation between China and the US are moving forward. Substantial progress has been made in regional FTA negotiations, particularly the Regional Comprehensive Economic Partnership (RCEP); the US Federal Reserve now shows more patience in rate hikes; emerging markets and developing countries are under less pressure from cross-border capital flows. The international community is now looking forward to deliverables of the upcoming the G20 Osaka Summit, which is expected to reach consensus and produce positive results with regards to major issues including promoting free trade and innovation, achieving both economic growth and reduction of disparities, and addressing issues such as climate change and aging society. Against this backdrop, Asian economies need to stick with prudent macroeconomic and structural adjustment policies, strengthen policy communication and coordination and increase the sharing of expertise and good practices in common pursuit of growth and sustainable development. After the Asian financial crisis, high savings rate and investment rate, balanced current accounts and heavy investments in human capital and technology innovations have become the major drivers of economic growth for the region. On said basis, Asia should further advance intra-regional trade and investment and strengthen intra-regional economic bonds and connectivity. In turn, a more integrated Asia will be an important contributor to new globalization.
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2019 marks the 70th anniversary of the founding of the People’s Republic of China. Based on China’s great accomplishments achieved over the seven decades and lessons drawn from its 40 years of reform and opening-up, Chinese President Xi Jinping reaffirmed China’s commitment to follow through with the reform and open its door wider. Currently, the Chinese government is focused on several tasks including supply-side structural reform, fighting three critical battles which are specifically preventing and resolving the major risks, conducting targeted poverty reduction, and controlling pollution, as well as cultivating scientific and technological innovation and digital economy. Hainan, where this Annual Conference is hosted, is right at the forefront of China’s new round of reform and opening-up. In 2018, the province was designated as China’s 12th pilot free trade zone, and it will be transformed, by stages, into a free port with Chinese characteristics. China will be happy to join hands with other countries and territories to promote regional integration and new globalization and push ahead with the Belt and Road initiative—as part of our joint effort to restore rule- based multilateral trade mechanisms. It is my hope that, through this year’s annual conference, leaders from national governments, international organizations, business circle and the academia, can have candid exchange of views, shedding light on key issues and topics concerning regional integration and new globalization and other issues of global importance. By seeking common ground and forging consensus, the conference can facilitate concerted action in common development. Wish the conference a great success!
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BFA as a Champion of Common Development
by Li Baodong, Secretary General, Boao Forum for Asia
The small coastal town of Boao in Hainan, China will again welcome thousands of participants from Asia and the rest of the world in this pleasant season of spring. Scheduled from March 26 to 29, the Boao Forum for Asian (BFA) Annual Conference 2019 (AC 2019) is a flagship event of the BFA as well as a great gathering of Asian and emerging economies. Over the years, the BFA, as an Asia-based platform with a global vision, is committed to strengthening economic exchanges and cooperation among Asian, emerging economies and countries from other continents, as well as promoting free trade and multilateralism. Every annual conference closely associates itself with the current state of the world and discusses issues of international interest. The world economy is showing a moderate growth, but with a slower momentum. Today’s world is also challenged by distinct divergences among major economies in growth and monetary policy, intensifying volatility in international flows of capital, financial and energy markets, the severely impacted multilateral trade mechanisms and pressing issues facing global structural reforms. Early this year, the World Bank and the IMF downgraded global economic growth forecasts for 2019 and 2020. At the same time, the world is also surrounded by many more unstable factors and uncertainties, such as heightened competition among big powers and intermittently deteriorating hot- button issues. When seeking views regarding the theme of AC 2019, we were generally under an impression that all stakeholders are concerned about uncertainties caused by unilateralism and protectionism to the world economy, holding their expectations in strengthening multilateralism and global governance. Where is the world economy heading? How should Asia and the rest of the world cope with these challenges for better development? These questions will be vigorously debated and answered at the closely watched AC 2019. It is our belief that globalization and free trade are inevitable trends of economic development; that multilateralism, dialogue and cooperation are the shared aspiration of most countries; and that openness and innovation are natural choices to sustain economic progress and globalization. Therefore, we have opted for “Shared Future, Concerted Action, Common Development” as the
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theme of AC 2019. Through the platform of the BFA, we strive to forge a broader consensus and catalyze more actions to promote common development in Asia and worldwide. Around this theme, AC 2019 will have more than 50 official sessions formatted under five modules, including the opening plenum, themed sessions, roundtables and dialogues. The “open world economy” module, which highlights the keyword of “open”, is designed to feel the pulse of the world economy and address challenges impeding globalization. The module covers topics such as global economic outlook, opening of the services sector, WTO reform, cross-border E-commerce, free trade zones and free ports. The “multilateralism, regional cooperation and global governance” module focuses on “multilateral cooperation” to explore challenges facing multilateralism and regional cooperation, while forging consensus on global governance. The module includes sessions such as global governance, emerging economies, the Belt and Road initiative, island economy, Asian regional organizations roundtable, ASEAN-China governors/mayors dialogue, CEO dialogues between China and the US, Japan, South Korea and Australia, as well as multinationals, cross-strait CEO and overseas Chinese CEO roundtables. The “innovation-driven development” module, which emphasizes “technology innovation”, explores the frontiers and trends of the new wave of technological and industrial revolutions to identify the best path for Asian and global economic growth. The module is composed of sessions such as 5G and the Internet of Things, “AI Plus”, big data, “Automobiles by the Year of 2050”, shared economy, blue economy as well as an IT leaders roundtable. The “high-quality development” module, which accentuates “quality growth”, explores major issues in various sectors of the economy to promote healthy and sustainable economic growth. The module includes sessions such as “A Sustainable Future for Rural Asia and Cities”, “The Real Estate Market: 30 Years of Ups & Downs”, “The Logic of Tax Cut”, cross-border investment, “The Financial Sector ‘Breaking Through’”, “Consumption: Upgrading or Downgrading”, “How Much Can We Borrow”, stock market, as well as a dialogue between SOEs and private companies, and “Energy & Resources Roundtable”. The “hot issues” module mainly discusses issues of common interest to the international community that are also closely related to economic growth, including politics, diplomacy, security, education, health and livelihood. The module includes sessions such as “South China Sea”, “A Conversation with University Presidents” and roundtables for young leaders, women leaders and media leaders.
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AC 2019 brings together more than 2,000 participants from 60 countries and territories, the majority of which is from the business community. They include chairmen and CEOs from nearly 100 Fortune 500 and leading companies. We believe that such a prominent gathering of political, business and academic leaders will surely make AC 2019 an inspiring and productive event. As a non-governmental, non-profit platform for high-level international dialogue, the BFA also exhibits the following three characteristics and strengths—First, it is cross-cultural. After nearly two decades of development, the BFA has become an important bridge for east-west dialogue. The BFA has its own views and pursuits, but we are committed to openness and inclusiveness, encouraging exchange of different views to reflect the cultural diversity of Asia and the world. Second, it is cross-disciplinary. The BFA maintains its traditional focus on economic, financial, trade and energy issues, while keeping abreast of the times by expanding its scope to cover all major issues in world development. Third, it is cross-sectoral. For discussion on whatever the topic, we can always pool the wisdom of elites from governments, businesses, think thanks, media organizations and other communities. More importantly, we can provide a platform for dialogue and cooperation between political and business leaders. To maximize our impact, the BFA has defined one theme with a focus on five strategic sectors. It will continue to sharpen its focus on economic issues, while expanding to cover five strategic priorities—technology innovation, health, education, culture and media. During AC 2019, the BFA will officially launch the Asian Media Cooperation Organization. As an exchange platform for media organizations from Asia and other continents, the organization will integrate media, government and corporate resources to expand the global impact of media companies. In June 2019, we will convene the first Global Health Forum in Qingdao, China, which is a global platform for high-level dialogue and cooperation in health. In terms of technology innovation, education, culture and other fields, we are also exploring cooperation opportunities with many business partners, which will be followed by some specific programs. Looking into the future, under the leadership and guidance of the Board of Directors and the Council of Advisors, and with the support and engagement of members and partners, the BFA will collaborate with all stakeholders in a concerted effort to transform the BFA into a continuous source of wisdom and vitality for the development of Asia and the world.
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Partner profile
Yousef Abdullah Al-Benyan
Vice Chairman and CEO, SABIC
1.What is your view on the current global economy and Asian economy? What is the impact on the development of SABIC? The current global economy reveals that the need for global interconnectivity is more pronounced than ever before. Globalization is the future, and for SABIC, this means leveraging the global aspects and universality of our operations. This allows us to forge even more mutually advantageous partnerships that will fuel global industry growth. For Asia, the economy should maintain a solid growth pace, driven by increasing market demands -- especially in China and the rest of Asia. Therefore, transformation to embrace the “new normal” and innovation towards the higher end of the value chain are the two key points for companies looking to stay competitive. As for SABIC, we have greatly benefitted from the phenomenal growth that has occurred in Asia and China over the past three decades, and are committed to remaining a growth partner. 2.How do you think Asia should achieve better-concerted action and common development? What role can SABIC play? China is playing a vital role in enabling cross-regional collaboration. This can be seen on a large scale through projects such as the Belt and Road Initiative, which enables prosperity throughout Asia and the rest of the world. But it is also happening on a smaller scale – last year’s inaugural CIIE held in Shanghai was a great representation of the government’s desire to further open up and create a more globalized community for trade. Venues such as Boao Forum for Asia are facilitating important conversations in these areas.
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This has been highly positive for SABIC, which fully supports a more globalized community. We are already playing our part, supporting vital initiatives such as Belt and Road and Saudi Vision 2030. We are using our sizable resources to enable these projects and promote further collaboration. 3.What are your expectations for the Boao Forum for Asia? The theme of this year’s conference is ”Shared Future, Concerted Action and Common Development,” and so naturally, we expect to see strides made in the discussion of moving towards a more globalized future. Asia, especially China, has been one of the world’s greatest economic success stories and conferences such as Boao Forum for Asia provide the perfect opportunity to highlight that success. Through this year’s we hope to continue making steps towards a more tightly-knit global community and breakthroughs in tackling the issues facing the world today.
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Andrew Forrest
Chairman, Fortescue Metals Group
1.What is your view on the current global economy and Asian economy? What is the impact on the development of FMG? FMG is now the fourth largest and lowest cost, global supplier of seaborne iron ore to China, and is proud of its contribution to China’s growth and development since its first shipment to China in 2008. As the global economy and globalisation face challenges, our cooperation and collaboration on major investments in areas like infrastructure, artificial intelligence and automation will help contribute to mutually supportive and strong growth. This will support the ongoing strength and long term fundamentals of not only the China market, but also related emerging economies, and will drive significant investment and growth across the region for decades to come. The Chinese steel industry continues to grow and we anticipate demand for iron ore to remain at its current level of over one billion tonnes per annum, while emerging sectors like electric vehicles, battery minerals and renewable energy will fuel growth across many resources and industries. FMG’s business is developing to meet these global needs, building on its capability, innovation and flexibility. 2.How do you think Asia should achieve better concerted action and common development? What role can Fortescue play? Mutual respect is the bedrock of our shared destiny and purpose in the region, as we work together to develop our nations’ and our region’s future. China and Australia have supported each other’s incredible growth and prosperity, and China now buys around 30% of Australia’s exports, representing a $30 billion trade surplus on our current account.
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Likewise, Australian entrepreneurialism in mining and agriculture, and our highly-skilled services in sectors like education and healthcare, continue to propel the development and rising standard of living of our neighbour China.There is much more growth to come. FMG is proud of its long standing relationships with China, with the success and longevity of our association built on four pillars of engagement – supply as well as procurement, two-way business investment and community participation. We are committed to the ongoing development of this shared future for our region, based on respect, understanding and mutual benefit. 3.What are your expectations for the Boao Forum for Asia? FMG is honoured to join the prestigious Boao Forum for Asia as a Diamond Partner, for our eleventh consecutive year. The theme for the Forum of ‘Shared Future, Concerted Action, Common Development’ will bring a real focus to how we work together to deliver benefits and a win-win result for us all. We look forward to contributing to the rich dialogue and opportunity to share ideas, perspectives and knowledge that will build on the sustained success of this important event.
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David Cruickshank
Global Chairman, Deloitte Touche Tohmatsu Limited
The risk of a synchronized global slowdown is rising. The US, the key engine of the global economy, has slipped into the late stages of its economic cycle. The UK is encountering prolonged uncertainty about the outcome of Brexit. Germany's lengthy economic expansion threatens to end as it feels the limits of its export-oriented growth model. However, China, despite challenges including trade tensions and its ongoing deleveraging campaign, will see GDP growth of about 6.2 percent due to resilient domestic consumption and measured fiscal stimulus. Asia is likely to remain economically resilient in 2019 with sufficient policy leeway to contain risks. Trade tensions should cause a slowdown for Asian economies given their dependence on trade. However, regional policymakers could seek to contain the damage through judicious use of fiscal easing measures in the short term and supply-side reforms in the longer term. Besides, Asian economies are enjoying a respite from falling crude oil prices and only a few domestic imbalances cannot be managed. This will give the region space to address deeper structural challenges. The Asia Pacific region has become the emerging leader of global economic growth, while the business of Deloitte Asia Pacific has also seen dynamic expansion in recent years. Although businesses face challenges due to modest risk of economic slowdown, there remain more development opportunities for them thanks to regional economic integration, new technologies and resilient consumption. Meanwhile, economies in the region are pursuing supply-side reform to create a more open and fair business environment for enterprises, which will further promote economic cooperation among these countries. Deloitte Asia Pacific will also help its clients identify business opportunities, manage risks and realize common development. Overall, it could not be a more apt time to hold the BFA Annual Conference 2019 in this economic climate. With "Shared Future, Concerted Action, Common Development" as its theme, this year's Annual Conference aims to explore challenges of common concern to Asia Pacific countries as well as the possibility of concerted action to foster common development. Against this backdrop, voices at this Annual Conference are set to have a substantial impact on the Asia Pacific region and even the world, marking another solid step in the evolution of BFA from a regional forum to a global platform for dialogue. As a world-leading professional services firm, Deloitte looks forward to fruitful results from BFA and this year's Annual Conference, which will connect more countries and regions for a future of common development.
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Li Baofang
Chairman, Kweichow Moutai Co., Ltd.
1.What do you think of the economic outlook of Asia and the world? What impact will it have on Kweichow Moutai Group (Moutai)? Globally, we have seen an economic slowdown as well as the rise of trade frictions and barriers. The world has not experienced such a widespread disturbance for a long time. Compared with the Great Depression that took place early in the last century, however, our technological progress and economic interdependence have reached an unprecedented level. From a corporate perspective, the world economy will still need to move towards mutual inclusion and opening after frictions and fluctuations. The increased likelihood to resolve trade disputes may reverse the downward trend of the world economy and thus lead to a rebound. Recently, the US and China have made substantial progress on trade negotiations, which is best evidenced by the heat in stock markets worldwide. As the most economically vibrant continent in the world, Asia enjoys strengths in fields ranging from markets to labor, capital, technology and management. For a long time to come, its growth momentum will remain strong and Asia will continue to be the most powerful engine of the global economy, which will boost the growth of regional markets, including China. As a company operating in the most dynamic, promising sector of the economy, which is also perfectively competitive, Moutai has grown into the most valuable liquor company over the past few years. In terms of sales, Moutai remains focused on China, but the international market has never been so important to us as it is now in terms of sales contribution. In the long run, accelerating our internationalization, particularly in culture and service, and winning global market recognition hold the key to expanding the breadth of Moutai’s development. When looking back at the history of Asia, particularly East Asian companies over the past half a century, Moutai is more optimistic about the future. The Belt and Road initiative is a great platform enabling quality Chinese products and brands to go global. It has also created new opportunities for Moutai’s global strategy. 2.In your opinion, how should Asian countries take concerted actions for common development? What role can Moutai play in this process? Asia, particularly East Asia, shares similar cultures and traditions, and is the biggest beneficiary from manufacturing shifts over the past five decades. Thanks to the development of its real economy, Asia has not only become a crucial link in global value chains, but more importantly, improved people’s lives. By moving up the value
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chain ladder, many Asian countries have been growing at a sustained fast pace, from the early Four Asian Tigers to later China, Vietnam and Malaysia. Today, Asian countries need to deepen cooperation and create growth opportunities for more countries and regions through sharing of strengths and division of labor. China, for example, has set a goal of achieving moderate prosperity in all respects by 2020, which will then create a larger, better consumer market, as well as a more dynamic labor market for Asia. This process calls for mutual interaction with and support from other Asian economies. In the post-World War II process of globalization, Asian companies have identified their own development path. They have not only made the world economy more open, but have also contributed governance models with Asian ancient cultural characteristics and the vitality of modern companies. It’s my belief that Asian companies will continue to play significant roles in future growth. Moutai will be happy to promote the coordinated development of leading companies and SMEs at a greater breadth and in various forms, so that brands, high- and low-end, and companies, large and small, can co-exist and compete for win-win outcomes. We have proposed to develop “Moutai as a culture” in the hope of bridging understanding gaps through culture. At the same time, based on changes on the demand side, we will optimize supply and improve product quality, consumer experience and branding in an innovative and comprehensive manner to adapt to changes that come with digitalization, globalization and diversification. This is part of our effort to provide some sharable business cases on “Made in Asia” in the context of consumption upgrading. 3.What are your expectations of the Boao Forum for Asia (BFA)? The BFA is one of the world’s most important platforms for exchange of views. Moutai’s cooperation with the BFA has generated a far-reaching impact on us, inspired our thinking and broadened our vision. Moutai always highly values its engagement with the BFA, which offers many valuable insights on global and domestic economic trends and policies that are very meaningful and instrumental, at the micro level, to business operations. This year’s BFA Annual Conference’s theme, which is “Shared Future, Concerted Action, Common Development”, has a strong resonance with a business concept championed by Moutai in recent years. We expect the BFA to share more perspectives and insights on the transition of traditional manufacturing in the context of globalization, thus informing and inspiring Asia-Pacific and other emerging economies. We also hope that the BFA will provide more dialogue channels for Asian brands to globalize their operations and offer intellectual support from conceptual, cultural and other perspectives to support companies’ innovation and transformation efforts—particularly when the world is experiencing such profound shifts in international trade. Moutai also wishes to see the BFA unleash the value and power of insights to provide companies with intellectual support in more fields as a think tank. In today’s complex and rapidly changing world economy, the BFA is expected to quickly pool the wisdom of top minds from around the world to better support and inspire companies—by helping them find directions and positions and formulate effective strategic plans. 17 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Economic Outlook in Asia Pacific
Although markets in Asia Pacific lost ground in recent months, they did so from a position of strength. Much the same could be said of the Asia Pacific economies. Having performed well through 2017 and 2018, they have only slowed a little of late, and they have the potential to remain resilient through 2019 as well.
The economies of Asia Pacific are enormously dependent on trade. The Sino- US trade negotiations are under progress, and the US President’s recently announced delay to the increase in tariffs is a good sign in this regard. If all goes well, a resolution of the trade conflict – even a temporary truce – could mitigate risks for the region's markets.
With global liquidity tightening, stocks and currencies across the region were sold off amid a proliferation of geopolitical concerns, worries about disruptions to supply chains and other risks that were almost impossible to quantify. If financial liquidity continues to tighten, the gap between still-decent economic growth and market performance may continue in the region in 2019.
If the recent easing in growth continues and trade tensions flare further, Asia Pacific policymakers may well have to resort to raising spending and/or cutting taxes. Regional trade integration is moving forward. ASEAN economies plus China, Japan, South Korea, Australia, New Zealand and India can facilitate a resolution to the Regional Comprehensive Economic Partnership (RCEP) agreement. Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) is being expanded given Thailand and South Korea have shown substantial interest in it.
In our view, the Asia Pacific region in 2019 is likely to remain economically resilient with sufficient policy leeway to contain the risks.
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Figure 1. 2019 real GDP growth forecast for some AP economies
As an co ntr es forecast of rea P ro t n
In a C na In ones a a a s a a an a a stan e A stra a orea n apore a apan r e ea an Arab a
or an I As an e e opment an
Table 1. 2019 real GDP growth forecast for some AP economies
World Bank IMF Asian Development Bank
India 7.5% 7.4% 7.6% China 6.2% 6.2% 6.3% Indonesia 5.2% 5.1% 5.2% Malaysia 4.7% 4.6% 4.7% Thailand 3.8% 3.9% 4.1% Kazakhstan 3.5% 3.1% 3.8% New Zealand - 3.0% - Australia - 2.8% - Korea - 2.6% 2.6% Singapore - 2.5% 2.9% Saudi Arabia 2.1% 2.4% - Japan 0.9% 0.9% 1.0% Turkey 1.6% 0.4% -
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Asia Pacific Investment Confidence Barometer
In January 2019, BFA Institute delegated Deloitte China, as Intellectual Supporting Partner of the forum, to conduct Asia Pacific Investment Confidence Barometer Survey. The survey is intended to get a better understanding of how the members of Boao Forum for Asia (BFA) think of the economic trends across globe and Asia, in particular how confident they are in investing in Asia Pacific. We are grateful for having more than half members of the forum (Figure 1-3) participate in the survey. According to the findings of the survey, despite uncertainties over the global economic outlook in 2019 casted by various ongoing issues, most businesses are still optimistic about future economic development and strongly confident in Asian countries, thereby showing great enthusiasm for investment.
Figure 1. Geographic distribution of the businesses surveyed
Geographic locations of the businesses surveyed
Businesses within the territory of China Businesses outside the territory of China
Source: Asia Pacific Investment Confidence Barometer Survey, BFA Institute, Deloitte Research
Figure 2. Industrial distribution of the Figure 3. Distribution of the businesses businesses surveyed surveyed by type Industries that businesses surveyed represent Types of the businesses surveyed
Technology and R&D Energy and industry Foreign invested Local Chinese businesses businesses Consumer industry Service industry
Source: Asia Pacific Investment Confidence Barometer Survey, Source: Asia Pacific Investment Confidence Barometer Survey, BFA Institute, Deloitte Research BFA Institute, Deloitte Research
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Figure 4. Businesses' expectation for global Figure 5. Businesses' expectation for global economy in 2019 economy in the next three years How do you think the global GDP of How do you expect the global economic 2019 will be different from that of 2018? trend in the next three years?
Optimistic Somewhat optimistic Down Up Relatively equal Neutral Somewhat pessimistic Pessimistic
Source: Asia Pacific Investment Confidence Barometer Survey, Source: Asia Pacific Investment Confidence Barometer Survey, BFA Institute, Deloitte Research BFA Institute, Deloitte Research
Global and Asia Pacific economy: worries countries will also explore their respective and hopes coexist potentials and enhance mutual cooperation to Asia Pacific businesses in the survey are worried maintain economic stability in the region. Thanks Geographic locations of the businesses surveyed about the global economic outlook in 2019, to the new growth drivers, Asia Pacific is able against the backdrop of rising anti-globalization to maintain stable growth while driving global sentiment triggered by China-US trade friction economy to achieve a turnaround in the future. Businesses within the territory of China Businesses outside the territory of China and Brexit. Nonetheless, they still have strong Technological innovation, further opening-up confidence in the world economy for the next two policies and changing consumption pattern to three years, seeing new growth drivers coming are ranked as the top three growth drivers for into play. economic development in Asia Pacific (Figure 6).
When asked about how the global GDP of 2019 Figure 6. Prediction about the economic will be different from that of 2018, up to 36.8% growth drivers in Asia Pacific of respondents expect a drop, which suggests a What do you think will drive the economic growth in Asia worry about global economic downturn in 2019. Pacific in the coming year? Yet almost half of the respondents are relatively 100% 85.5% optimistic about the global economic outlook in 80% the next three years (Figure 4-5). 65.2% 60.9% 60% 42.0% Asia Pacific will continue to embrace economic 40%
growth above global average, driven by the 20% 15.9% stable economic growth of China, India and 0% other large emerging economies. Asia Pacific Technological Further Changing More active More active innovation opening consumption multilateral multilateral -up polices pattern trade trade
Source: Asia Pacific Investment Confidence Barometer Survey, BFA Institute, Deloitte Research
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Technological innovation: driving a new The respondents also provide their views about wave of globalization the risks for Asia Pacific economy (Figure 7). It is a proven fact that technological advance Trade friction and protectionism are listed as the boosts global economic development. New most important risks threatening the economic technologies represented by big data, artificial development in the region. They believe that a intelligence (AI) and autonomous driving are rebalanced globalization system could largely changing the methods of production, trade and mitigate such risks. information flow all over the world, contributing to global prosperity. All major countries Changing consumption pattern: new are engaged in scientific and technological business opportunities competition, and have issued a series of policies Development of network technologies has to encourage technological development. Such changed the way of shopping. The global policies include America’s strategies to reinforce online retail sales in 2017 reached US$2.3 its advantages in relevant technological fields; trillion, accounting for 10%3 of the total retail the UK’s technological development planning sales. Global climate change makes people to support autonomous driving and Internet of more aware of their purchase behaviors, Vehicles; Japan’s Comprehensive Strategy on showing inclination to environment friendly and Science, Technology and Innovation; as well as sustainable consumption habits. In the meantime, the strategic planning of Germany, South Korea well-developed social networks provide more and Russia for the scientific and technological channels for feedbacks and communications, development in the next five to ten years. which enables consumers to connect with global buyers and have access to desirable Further opening-up policies: running against commodities. anti-globalization As global trade protectionism is on the rise since the financial crisis of 2008, many are worried about the dominant tendency of anti-globalization. In spite of the disruption to Figure 7. Views on the risks for economic multilateral free trade, an increasing number of growth in Asia Pacific regional free trade agreements and bilateral trade What do you think will be the major potential risks for agreements have been refined and established. Asia Pacific economic growth in the next year? Governments across the globe are still pursuing 100% free trade, against trade protectionism. 87.0% 80% 56.5% 1 60% Last year witnessed the replacement of NAFTA 47.8% 2 40% by USMCA among the US, Canada and Mexico; 31.9% 30.4% US-EU tariff negotiations; and the signing of EU- 20% Japan Economic Partnership Agreement. With 0% the development of new technologies and new Trade Further Aging Major Blockade on business models, the comparative advantages of friction and economic population economies technologies protectionism turmoil/ failing to each country are changing. And the expansion downturn promote of such regional and bilateral trade agreements, domestic reform following these countries’ identification and adjustment to their comparative advantages, Source: Asia Pacific Investment Confidence Barometer Survey, serves as the prelude to a new round of global BFA Institute, Deloitte Research trade liberalization.
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Influenced by the changing consumption pattern, attitude toward global economy, and continue businesses are constantly transforming their to show great enthusiasm for cross-border products and services. New consumption trends investment. Of all the businesses surveyed, over and hot spots keep emerging every few weeks. 60% have made cross-border investments in More environment-friendly, exquisite and healthy the past three years. Nearly three quarters of products are dominating manufacturers and the respondents have a plan to do so in the next market. year. While most of them believe the existing environment for cross-border investment Cross-border investment: enthusiasm remains the same as last year, 30% of continues to grow respondents predict a worsening investment Businesses maintain a cautious and optimistic environment (Figure 8-11).
Figure 8. Willingness for cross-border Figure 9. Assessment of environment for investment cross-border investment
Is your business planning to make How do you think of existing environment cross-border investment in the next year? for cross-border investment?
15%
27% 30%
73% 55%
Better Same as last year Yes No Worse
Source: Asia Pacific Investment Confidence Barometer Survey, Source: Asia Pacific Investment Confidence Barometer Survey, BFA Institute, Deloitte Research BFA Institute, Deloitte Research
Figure 10. Cross-border investment plan Figure 11. Plan for cross-border investment
Has your business made cross-border in China investment in the past three years? Will your business invest more in China in the next year?
9%
33%
67% 91%
Yes No Yes No Source: Asia Pacific Investment Confidence Barometer Survey, Source: Asia Pacific Investment Confidence Barometer Survey, BFA Institute, Deloitte Research BFA Institute, Deloitte Research
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When it comes to the preferred destination for Compared with other industries, manufacturing future cross-border investment, Asia Pacific transformation and upgrade have become a (79.7%), North America (44.9%) and Europe common focus of global major economies. Smart (43.5%) are top three based on geography, manufacturing and Industry 4.0, as new engine political security and economic status (Figure 12). of economic growth, also bring substantial Most businesses indicate they would increase opportunities for business investment. The impact investment in China in the next year, showing the of in-depth integration between manufacturing confidence of Asia Pacific businesses in China's and emerging technologies such as AI and IoT will economy. extend beyond the manufacturing industry to various aspects of economy. Investment opportunities: expanding both vertically and horizontally The Belt and Road Initiative (BRI) has encompassed Businesses are also asked about their views on nearly 70 countries in Asia and Central and opportunities and challenges of cross-border Eastern Europe, representing about 17% of global investment. They believe that opportunities economy, with great potential for investment. As in the next year would probably arise from countries along the BRI vary significantly in the industrial upgrade (69.6%), technological progress of industrialization, differences exist innovation (66.7%), and industrial cooperation in how investment will be accepted and utilized along the Belt and Road (55.1%), showing an by these countries. For those at the early stage expansion of cross-border investment both of industrialization, businesses may invest in vertically and horizontally (Figure 13). infrastructure. For those at the middle stage of industrialization, investment should be focused Industrial upgrade involves two aspects. The first on manufacturing. For those at the late stage of is industrial restructuring in the big economic industrialization, it is advisable to invest in service picture, becoming a key driving force of the sector, financial industry, as well as emerging rapid economic growth. The second aspect is industries. upgrading within each industry in terms of product, manufacturing technologies, industrial chain, etc. Huge opportunities may arise in both aspects for businesses to make cross-border investment.
Figure 12. Destinations for cross-border Figure 13. Opportunities of cross-border investment investment
Choose your preferred destination for What are the major opportunities of cross-border cross-border investment investment in the next year? 100% 100% 79.7% 80% 80% 69.6% 66.7% 55.1% 60% 60% 44.9% 43.5% 43.5% 40% 40% 20.3% 15.9% 15.9% 20% 20%
0% 0% Asia North Europe South Middle Africa Industrial Technological Industrial Further opening-up Pacific America America East upgrade innovation cooperation of consumption along B&R and service market
Source: Asia Pacific Investment Confidence Barometer Survey, Source: Asia Pacific Investment Confidence Barometer Survey, BFA Institute, Deloitte Research BFA Institute, Deloitte Research
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Further opening-up of consumption and service market Figure 14. Risks of cross-border investment Figure 15. Challenges of cross-border investment What are the major risks of cross-border investment in the next year? What are the major challenges of cross-border investment?
100% 87.0% 100% 76.8% 80% 80%
60% 60% 47.8% 47.8% 44.9% 33.3% 33.3% 40% 30.4% 27.5% 40% 30.4% 20% 20%
0% 0% Protectionist Rising Insufficient Insufficient Lack of Risks Insufficient Lack of Challenges Unclear policies labor cost protection of protection of required associated financing cross-border in supply strategic intellectual intellectual talents with overseas channels investment chain vision property rights property laws and /rising cost talents integration rights regulations
Source: Asia Pacific Investment Confidence Barometer Survey, Source: Asia Pacific Investment Confidence Barometer Survey, BFA Institute, Deloitte Research BFA Institute, Deloitte Research
Risks and challenges: cost and regulations rate, tax, and timeline, it is advisable to follow the are top priority latest policy updates of different central banks, Greater opportunities are always accompanied consult professional agencies and gain deeper by greater risks. When asked "what are the major understanding of foreign financing procedures. risks of cross-border investment in the next year", the respondents rank "protectionist policies" For many businesses engaged in cross-border (87%), "labor cost" (47.8%) and "insufficient financing, insufficient understanding of host protection of intellectual property rights" (33.3%) country's laws and regulations remains a as the top three risks. When asked about major perennial problem. As a result, many businesses challenges in cross-border investment, the have worked with professional advisory service respondents prioritize risks associated with providers to avoid risks. With technological overseas laws and regulations (76.8%), insufficient advancement and increasing intellectual property financing channels/rising cost (47.8%), lack of litigations in recent years, many businesses under cross-border investment talents (Figure 14-15). investigation show concerns for intellectual Based on the survey results, businesses are most property protection, which indicates an concerned with cost and regulations. increasing awareness for intellectual property rights. It is also necessary for businesses to apply The survey results show an increase in cost, for patent overseas in advance, reduce patent including both labor cost and financing cost. lawsuits, and improve negotiation capabilities The best way to deal with rising labor cost is to in patent war, while they invest in technological increase labor productivity. As financing cost in innovations. cross-border investment mainly involves factors such as currency conversion, lock in the exchange
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China's economy: a future with greater frictions between China and the US (Figure 17). openness Respondents believe technological innovations Respondents hold cautious optimism towards will drive continued growth of China's economy, China's economic outlook. Over 60% businesses expressing the hope that improvement in are optimistic about China's economy in the next business environment and consumption upgrade year (Figure 16) and more than half hold the will become the new engine (Figure 18). same attitude towards the development of trade
Figure 16. Views on China's economic outlook Figure 17. Views on China-US trade relationship What's your view on China's What's your view on the development economy in the next year? of China-US trade frictions?
Optimistic Somewhat optimistic Optimistic Somewhat optimistic
Neutral Somewhat pessimistic Neutral Somewhat pessimistic Pessimistic Pessimistic
Source: Asia Pacific Investment Confidence Barometer Survey, Source: Asia Pacific Investment Confidence Barometer Survey, BFA Institute, Deloitte Research BFA Institute, Deloitte Research
Figure 18. Perception on growth drivers for China's economy
Which areas will contribute the greatest driving force to China's economic growth for the next year? 100%
80% 69.6% 59.4% 55.1% 60% 36.2% 36.2% 40% 17.4% 14.5% 20%
0% Technological Improved Continued Further Substantial Efficient Deepened innovation business consumption opening-up of the progress of advancement of cooperation of environment upgrade service sector supply-side regional the BRI reform economic industries integration Source: Asia Pacific Investment Confidence Barometer Survey, Deloitte Research, BFA Institute
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Efficient advancement of regional economic integration Figure 19. Perception of risks in China's economy Where will the potential risks in China's economic growth most likely come from in the next year?
100%
80% 71% 58% 60% 47.8% 40.6% 39.1% 40% 20.3% 20%
0% Escalation of Debt risk Fluctuations in Real estate Aging population RMB exchange trade frictions the capital market restriction rate fluctuation market
Source: Asia Pacific Investment Confidence Barometer Survey, BFA Institute, Deloitte Research
Business environment: a more open market Consumption upgrade: China to be a major for fair competition importer Respondents highly appreciate the improvements In 2018, China's total consumption goods retail in China's business environment which, they revenue exceeded RMB38 trillion, with a 9% believe, will provide important guarantee year-over-year growth and the final consumption for China's economic growth. The Chinese expenditure to GDP growth reaching 76.2%4. government is offering greater convenience for The rising income of Chinese people is gradually businesses in multiple aspects including market releasing the potential of consumer market. Also access, tax and administrative fees. The 2018 changing are the spending models and shopping edition of "Negative List for Market Access" behaviors, as consumers demand products of published in December 2018 clarifies certain better quality, with storyline and significance. The rules and requirements, regulates and downsizes Internet conveniently brings goods from across restricted categories, reducing areas that are the world to the attention of Chinese consumers, either banned to non-state businesses or who expect an increasing supply of quality requiring government approval to 151, compared products from everywhere. with the previous 328 in the pilot program. The downsized list ensures a fair playground Risks: playing to win Which areas will contribute the greatest driving force to China's economic growth for the next year? for businesses of all ownership structures, Being relatively positive towards China's 100% giving them equal access and opportunity in economic forecast, the respondents nonetheless 80% 69.6% the market. In 2018, the Chinese government expressed concerns over some risk factors. 59.4% 55.1% 60% slashed RMB1.3 trillion of tax and administrative When asked "Where will the potential risks in 36.2% 36.2% 40% fees for businesses and individuals, and the China's economic growth most likely come from 17.4% 14.5% replacement of business tax with VAT, together in the next year?", businesses ranked escalation 20% with streamlined government services, will see of trade frictions (71%), debt risk (58%) and 0% further reductions and exemptions. fluctuations in the capital market (47.8%) at the Technological Improved Continued Further Substantial Efficient Deepened innovation business consumption opening-up of the progress of advancement of cooperation of top of the list (Figure 19). environment upgrade service sector supply-side regional the BRI reform economic industries integration
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With China-US trade negotiations signaling After the first quarter of 2018, China's debt positive developments, the concerns around leverage ratio has moderately increased. At the trade friction escalation are lessening. Central Economic Work Conference held at the Meanwhile, the Chinese government is end of 2018, China's top leadership pledged to promoting greater openness and launching implement a proactive fiscal policy and a steady supportive trade measures in line with it, monetary policy, raising debt risk concerns among especially in the service sector. The efforts will businesses. The country now has a government steadily increase the openness of sectors such debt equivalent to 37% of GDP, well under the 60% as finance, transportation, commerce, trade, target set by EU, which means the government debt logistics and professional services, defusing risks risk is manageable. The emphasis on deepening brought by the uncertainties of goods trade. supply-side structural reform and managing risks in the financial sector will remain unchanged, so will the deleveraging efforts.
Conclusion The survey reveals a cautious optimism towards the economic prospects of the world, Asia Pacific and China among the majority of the respondents. Refreshed globalization environment will encourage economies in Asia Pacific to cooperate in a more inclusive manner; technological evolution will generate growth momentum for the global economy; and consumption upgrade is set to bring more business opportunities for markets in Asia Pacific and the world. Given these trends, businesses' enthusiasm for cross-border investment is likely to hold for another one to three years, with a focus on industrial upgrading, technological innovation and cooperation opportunities in the industries covered by the BRI. As for the prospective risks of higher costs and legal or regulatory challenges that may emerge in the process of investment, we suggest businesses take precautionary measures and counter the risks upfront.
1. North American Free Trade Agreement
2. 2 United States-Mexico-Canada Agreement
3. Global E-commerce Report 2017, Institute of China International Electronic Commerce Center
4. Statistical Communiqué of the People's Republic of China on the 2018 National Economic and Social Development", National Bureau of Statistics of China
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Outlook of Belt and Road International Power Cooperation
NASA recently released a stunning image named The B&R Initiative proposes to improve Earth at Night, which shows a global view of the infrastructure construction and interconnectivity, East and West hemispheres on Earth at night and of which energy infrastructure construction, in also reminds us the extreme imbalance of global particular, is crucial for addressing the issue of power development – Europe, North America, power supply in underdeveloped areas. and East Asia are densely covered with bright lights, while Africa, Latin America, and South Asia only see few lights scattered around the area.
Source: NASA https://www.nasa.gov/topics/earth/earthday/gall_earth_night.html
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Coal power remains dominant with countries. In 2015, operating capacity of coal increased risks power in B&R countries reached 1,398 million As many B&R countries still suffer from power kWh, accounting for 73% of the total globally. It is shortage, addressing the issue of power supply predicted that by 2030, newly-installed capacity and accessibility becomes their top priority. of coal power in B&R countries will reach 696 Considering resource endowment, demand million kWh, and 900 million kWh by 2040. growth, and price factor, coal power will remain the dominant source of power supply in some International financial organizations are B&R countries for some time to come. But coal “conditionally” supportive to coal power project power projects are expected to face increased financing. For example, the Asian Infrastructure risks mainly for two reasons: Investment Bank (AIIB) expresses that it will • potential risk of coal power projects being put consider investments into power generation on-hold. projects that utilize coal in an efficient and environment-friendly manner, especially projects • local policy changes. that retire old equipment and in regions without other alternative energy resources2. Power demands in B&R countries are constantly growing at fast paces. Currently, the B&R China has been working closely with B&R Initiative has covered a population of 4.6 billion, countries in respect of coal power projects. As of with a power usage of 2,825 kWh per capita, the end of 2016, China had involved in the coal much lower than the international average of power projects of 25 of the 65 B&R countries, 3,295 kWh1 . In the future, power demands will with a total of 240 projects and total installed maintain rapid growth in B&R countries. Power capacity of 25.1 billion kWh. At present, there are generation capacity of B&R countries in 2016 52 projects pending for implementation (projects was about 5.189 trillion kWh, and is expected to under planning and signed-off), with 7.2 billion grow by 70% by 2020. kWh installed capacity in total, taking up 12.66% of the total coal power installed capacity pending Coal power will remain dominant in B&R for implementation globally; 54 projects are
Table1. Growth of power demands in B&R countries in 2016
GDP Power consumption Power consumption CAGR of power (USD1 trillion) (100 million kWh) per capita consumption (kWh/per capita) 2016-2020 B&R countries 22.6 51,890 2,825 14.5% China 11.2 59,198 3,938 5.9% Global 75.4 215,380 3,295 3.0%
Source: WIND, IEA, Deloitte Research
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under construction, with 4.8 billion kWh installed by 48%, and installed capacity of projects under capacity in total, occupying 17.59% of the total construction dropped by 19%, and the number of under construction globally. The scale of coal projects put off were 164% higher compared with power projects that involve Chinese enterprises that of the same period (Figure 1). As of July 2017, in B&R countries shows an upward trend in among all global 30 MW or above coal power general, but this momentum has slowed down projects, 600 million kWh of installed capacity slightly after the signing of the Paris Agreement was put on hold, representing 42% of all installed in 20163. capacity of coal power project under planning. In East Asia, as China and Japan tightened In the future, coal power projects will continue to restrictions on coal power plants, 420 million kWh provide most of the power for B&R countries, but of installed capacity were put on hold. In addition, they are expected to encounter higher risks. main destinations of coal power investments for Chinese enterprises, such as South Asia and Firstly, as many coal power projects are being Southeast Asia, also saw large number of projects put on hold, projects under planning that involve being put off (Figure 2). Reasons for that include Chinese enterprises may face greater risks. carbon constraints, financing gap, investment Compared with the same period of 2016, in environment, and water resource pressure. January 2017, installed capacity of coal power Currently, over 40% of coal power projects China projects pending for implementation decreased
Figure 1. Installed capacity of global coal power plants by stages (30MW & above coal-fired generator units, unit: MW）
MW
2,500 3% 2,000 - 48% 1,500 164% 1,000 - 19% 500
- Pre-construction Under construction On hold Operating As of January 2016 As of January 2017
Source: Boom and Bust 2017, Deloitte Research
31 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
involves in are in the stages of pre-construction Given that China’s international power (including projects under planning and signed- cooperation with B&R countries will remain to off) and construction. Considering the growing be dominated by coal power projects, Chinese opposition against coal power in the international enterprises must shape a comprehensive community and the reality of accelerated energy understanding of the above risks. In the future, structure transformation, these projects may face the focus of China’s thermal power exports greater risks. should shift to improving energy efficiency ratio and reducing pollutant emissions of coal power In addition to the risk of being put on hold, plants. Moreover, power enterprises also need to Chinese coal plant investments will also face risks pay close attention to changes in local industry, of local policy changes. Countries including India, investment, and taxation regulations. In case of Turkey, Indonesia, and Vietnam are adjusting or unexpected tax inspections, enterprises should reviewing their coal plant planning; Middle East promptly seek help from professional legal and countries, with economy impacted by falling oil tax consultants to avoid unnecessary tax losses. prices, and South Asia countries, due to political factors, are tightening tax inspections on Chinese coal power enterprises.
Figure 2. Coal power plant projects under construction and on hold by region (As of July 2017, 30MW & above coal-fired generator units, unit: MW)
423,899 East Asia 162,502
92,398 South Asia 48,643
36,517 Southeast Asia 26,977
20,369 Non-EU countries 2,640
11,840 Africa and Middle East 12,963
3,951 Latin America 2,175
2,666 Australia/New ealand
1,410 28 EU countries 6,885
USA/Canada 1,400
On hold Construction
Source: Boom and Bust 2017, Deloitte Research 32 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
“New reality” of renewable energy detailed assessments in local markets on new Renewable energy and the advance of energy or substitution demands for renewable energy, storage technology are rapidly reducing the costs the degree of financing difficulty, power sales of power generation using renewable energy agreements, and local political, economic, and and even enabling it to compete with traditional business environments. fossil energy. As the cost of renewable energy decreases, many countries are actively planning The B&R countries have huge potentials in for renewable energy projects while adjusting growth of power capacity of renewable energy. and reducing subsidies. In the future, the success As estimated from IEA data, new power capacity of renewable energy projects will depend more of renewable energy in B&R countries will reach on investors’ understanding of local markets, approximately 1.94 billion kW by 2030 and 2.6 rather than support of feed-in tariffs. Investors billion kW by 2040. Based on the target date will need to conduct more thorough and for carbon emission reduction goal set by the Paris Agreement, by 2030, new power capacity of renewable energy in B&R countries will
Table 2. Favorable renewable energy policies and adjustments in some countries
Country Feed-in tariff Competitive Tax Sales tax, Public policy bidding for credits for energy tax, investment, loan, renewable investment VAT and royalty, capital energy or other tax subsidy or other projects production reliefs privileges
Poland Y Y Y Y Czech R Y Y Germany R Y Y Y R UK R Y R France R Y Y Y R Indonesia R Y Y Y R Philippines R Y Y Y Y Vietnam Y Y Y Y Y India R Y Y Y Pakistan R Y Y Saudi Arabia Y UAE Y Y Y Egypt R Y Y Y US Y R Y R
Note: Y: related favorable policies in place, R: related favorable policies are adjusted
Source: REN21, Deloitte Research
33 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
generate up to 3.5 trillion kWh of electricity. In addition to rules for feed-in tariffs, many Of all the B&R countries, Europe, India, and countries have also adjusted financial and tax Africa have the greatest potential in renewable policies on renewable power generation projects power generation, which is in line with their and other supporting policies. Iran has required local resource endowments and development a 35% of localization rate for solar power and demands, followed by Southeast Asia, Japan, and wind power plants; Turkey has specified that wind the Middle East 4. power plants may have a 50% increase in price if all the wind power generators are produced Over the past year or two, policymakers have domestically, while the price of power generated been reducing feed-in tariffs and a growing by imported solar panels will be cut in half. number of European and Asian countries have replaced feed-in tariff with competitive bidding China is working increasingly closer with B&R for large power generation projects. In Europe, countries in renewable energy sector. In 2016, the European Commission has approved the China invested a total of USD7,655 million in changes to power price bidding by large projects power industry projects in B&R countries, more in several EU member countries. Countries than twice of that in 2015. Of which, hydropower including Germany, France, Czech, Slovenia, and clean energy investments accounted for Poland, UK, and Ukraine have also adjusted their 48%, thermal power 21%, power transmission policies regarding feed-in tariffs. In Asia, China and transformation 16%, mineral resources 9%, and Japan have reduced feed-in tariffs for solar and others about 6%5. power; Pakistan has lowered its on-grid solar power price by 36%; and the Philippines has also In addition to renewable energy greenfield proposed a third round reduction of feed-in tariff. projects, renewable energy has always been Only Indonesia goes the opposite way to increase an important target asset for overseas M&As its on-grid tariff by 70% for solar power and set by Chinese power enterprises. In 2017, 50% of a fixed on-grid price for geothermal energy. In overseas M&A transactions made by Chinese Africa, Kenya announces to change all feed-in power enterprises took renewable energy assets tariffs to competitive bidding; Egypt releases and enterprises as targets. new on-grid tariff policies, requiring that 30% of capital for solar power projects and 40% for B&R countries have great potentials for future wind power projects must be funded by domestic renewable energy development. parties.
34 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
A long way to go for grid interconnectivity covering Kazakhstan, Uzbekistan, Kyrgyzstan, Infrastructure interconnectivity is a priority and Tajikistan. In South Asia, there have been in the B&R construction, and power grid connected transmission lines between Nepal and interconnectivity is an important part of it. But it India and between Bhutan and India, through is undoubtedly an arduous task considering the which Nepal and Bhutan import some power sensitivity of power grids and the complexity of from India during dry seasons and export to India state grids in B&R countries. during wet seasons. In Southeast Asia, power grid interconnectivity has been built between most Given their backward power grid construction of the Greater Mekong sub-regions, including and high transmission loss rates, upgrading interconnections between Laos, Thailand power grid becomes an exceptionally urgent and Vietnam; Cambodia and Laos, Thailand, task for many Asian countries. For instance, in Vietnam; Malaysia and Thailand, Singapore; Pakistan, losses resulted from transmission and etc. In Middle East, with great support from the electric larceny account for nearly 25% of the Gulf Cooperation Council, countries including country's total power supply, and, during peak Saudi Arabia, Kuwait, Qatar, Bahrain, UAE and hours in summer, outage hours can last as long Oman have achieved interconnection of power as 12 hours in urban areas and 16 hours in rural grids. According to data from IEA, B&R countries areas6. transact about 130 billion kWh of electricity every year, approximately 3.1% of total consumption7. The construction of cross-border power grid interconnectivity of B&R countries has also International power cooperation can firstly focus been launched in many regions. In Central and on cross-border power grid connection and Eastern Europe, countries have built power transmission projects with neighboring countries grid interconnection within the region and with to realize cross-border power consumption and Russia as they are small in size and close to supply-demand balance on a small scale. each other with strong links in power grids. In Central Asia, a long-chain power grid structure from the north to the south mirroring the load centers has developed as a looped network
35 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Develop overall “going global” plans to explore a new path of “EPC + investment + Now power enterprises are not only interested operation + brand” packaged exporting, and, at in power infrastructure projects, but also attach the same time, keep a close eye on the latest greater importance on long-term development technology trends in developed countries to strategies in B&R markets and how to satisfy achieve fast expansion through M&As. demands of local stakeholders. To tap the potentials of B&R markets, power enterprises Standards are the technical language and need to develop overall plans and innovate new criterion for interconnectivity. In areas with patterns with focuses on packaged integration, immature or no power standards, Chinese localization and interconnectivity of standards. power enterprises may develop power standards together with the B&R countries concerned and “If you want to go fast, go alone; if you want to take the lead in the development of standards go far, go together.” In certain underdeveloped regarding their advantaged technologies; in regions, we have seen some successful areas with stringent standards, enterprises firstly cases of packaged business undertaking by need to master the established standards and groups of enterprises. In these cases, the then consider how to bridge advanced Chinese general contractor takes full account of the standards with existed overseas standards. overall infrastructure construction planning, Though standards, technologies, and services including electricity, roads, water utilities, are soft strengths, they are always much more building management, etc. and cooperates with important than hard strengths. experienced companies in different projects to build a mutually beneficial community of interests. Such comprehensive projects will bring much higher profits than single ones and greater benefits for local people. From the perspective of vertical integration, the power industry needs
36 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Innovative financing models helps raise funds without owner guarantee or As estimated by the Asian Development Bank in with limited guarantee through structured design, 2017, from 2016 to 2030, developing countries in which can effectively release owners' balance Asia would require investments of USD26 trillion sheet pressures, greatly enhance capital liquid- in total for infrastructure construction, of which, ity, and improve investment efficiency. Owners USD14.7 trillion (56%) are energy investment de- often tend to choose project financing as it has mands (Figure 3). Based on this estimation, Asian longer loan terms that could cover the whole countries would require an average investment construction period of power projects, lower of USD1.7 trillion for infrastructure construction financial requirements on the owner side, and each year, much higher than the current level of less pressures on re-financing. However, there near USD900 billion8. are several major challenges for project financing. First, as project financing has high requirements As overseas power projects require huge sum on the project's business contract and structure, of funds and has long payback cycles, overseas enterprises may miss the opportunity of project power project owners often consider equipment financing if they adopt the same "simple practic- quality, price, and the ability of contractor to es" on business arrangements of similar projects bring successful financing as well as the amount as in domestic market; second, as foreign banks, and costs of financing. Given a huge gap of funds international multilateral financial organizations supply and demand, financing is becoming a key or banks operating in project location are just factor to owners when making tendering and starting to provide project financing services, bidding decisions. Chinese enterprises need to take this opportunity and build up different capabilities (e.g. overseas As calculated based on Thomson Reuters’ global assets, business negotiation talents, communica- loans data, energy and power sector loans in tion skills with local governments, identification B&R countries totaled USD183.2 billion in 2017, of international law and local legal risks, market among which, 112 loans were project financing analysis and study of government planning, etc.); loans, with a total of USD54.7 billion, the top of third, as local project sponsors generally have all loan categories. Compared with enterprise relatively low credit ratings and are unable to guaranteed credit financing, trade financing, and provide satisfactory credit guarantee to banks, traditional corporate financing, project financing
Figure 3. Demands of investment in infrastructure construction in Asian developing countries from 2016 to 2030 (unit: USD1 trillion, %)
0.8(3%)
2.3(9%)
8.4(32%) Energy Transportation Network communications Water and environmental sanitation 14.7(56%)
Source: Asian Development Bank (“ADB”), Deloitte Research
37 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Chinese owners and the project itself may face brought by long construction cycles. For certain greater responsibilities and risks when collabo- projects that need to raise funds for acquisition rating with local partners. or start construction within a short period of time, enterprises may also adopt the method In addition to project financing, each party shall with bridge loan and project financing combined. actively explore innovative financing methods, such as project bonds, bonds+ consortium loans, Under the circumstance of fierce competition for equity investment financing and other combina- funds, capabilities of fast fundraising, low debt/ tions of multiple financing channels. asset ratio, and low-cost financing are crucial for shaping key competitiveness. As financing Project bonds provide institutional investors an for overseas power projects involves multiple opportunity to invest in infrastructure projects parties and complicated structures, engagement through tradable securities and offer risk-adjust- of financial consultants with suitable experience ed returns. There are two major challenges for in financing, industry and the target investment project bonds: first, bond issuers generally have country is often required to assist enterprises in low credit ratings or even have no credit ratings; respect of business architecture design, financial second, due to long construction cycles and low model development, financing plan design, finan- acceptance among investors, it is very difficult for cial model building, and financing negotiations till green field projects to adopt this method. Alter- the completion of project financing. natively, enterprises may consider the method of “corporate bonds (during construction) + project financing (after completion)” to reduce the risks
Table 3. Energy and power sector loans in B&R countries in 2017
Use of funds Loan amount Proportion No. of loan Proportion ($100 million) transactions Project financing 547 30% 112 39% General corporate 429 23% 36 13% purposes Capital expenditure 352 19% 69 24% Re-financing 339 18% 39 14% Working capital 62 3% 19 7% M&A financing 25 1% 4 1% Others 79 4% 8 3% Total 1,832 100% 287 100%
Source: Thomson Reuters, Deloitte Research
38 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
PPP project valuation As the number of projects under the B&R initiative increase, project structural design becomes more and more important. Some projects are directly funded by governments, some apply traditional credit guarantee and some adopt the trendy model of “EPC+F” (engineering design, procurement, construction plus financing). Apart from these models, public-private partnership (PPP) model is also gaining momentum.
Considering the reality of backward infrastructure construction in Africa and Southern Asia and the impact of low international oil price on the Middle East, many countries in these regions are seeking equity investments on condition of ownership or control rights over the infrastructure. As a result, PPP model becomes an option that ensures both infrastructure construction and ownership.
As the Chinese government promotes outward investments and encourages acquisition of equities in overseas projects and assets, more and more Chinese enterprises begin to engage in overseas infrastructure investments, seeking other roles apart from being contractors. Indeed, collaboration with countries who value China’s professional experiences may bring win-win results. However, as PPP projects require strong capabilities in controlling cash flows and risks, enterprises should conduct a thorough financial analysis before participating in PPP projects in order to avoid being stuck in reverse due to long investment cycles.
Financial models can be used to analyze project payback period, return of investment and cash flows, as well as enterprise sustainability in three aspects: first, assess whether the enterprise can sustain under cash flow pressures (including the stability and controllability of cash flows, and local tax policies etc.) through accurate analysis of cash flows of the future project; second, as enterprises often work with local governments on more than a single project, whether the current project can bring replenishment of subsequent projects and project clustering; and third, how such projects contribute to improvements in the industry chain and integrated operation of the enterprise.
1. “Power investments lead Chinese enterprises’ ‘going global’ under the B&R Initiative”, China Electric Power News, December 26, 2017 http://www.cnenergy.org/dl/201712/t20171226_449554.html
2. AIIB plans conditionally support coal power project, China dialog, March 2017, https://www.chinadialogue.net/article/show/ single/en/9648-AIIB-plans-to-conditionally-support-coal-power
3. “Overview of China’s participation in coal power projects under the B&R Initiative”, Global Environmental Institute, May 2017, http://www.geichina.org
4. “Cooperation potential and implementation path of B&R power cooperation”, Caixin.com, August 4, 2017 http://m.opinion. caixin.com/m/2017-08-04/101126236.html
5. “Broad prospect for the cooperation between power and high energy-consuming industries along B&R”, China Industry News, October 20, 2017 http://fec.mofcom.gov.cn/article/tjgjcnhz/xgzxhlj/201710/20171002657363.shtml shtml
6. “Overview of Infrastructure in Pakistan”, China International Contractors Association (CHINCA), April 22, 2016 http://obor. chinca.org/fxyj/55433.jhtml?country=499
7. “Cross-border power grid interconnectivity promotes B&R facilities connectivity”, Gao Guowei, China Electric Power News, June 13, 2017 https://feed.baidu.com/feed/data/wise/landingpage?s_type=news&dsp=wise&nid=3838166396441913914 &n_type=&p_from=4
8. “Asia Infrastructure Needs Exceed $1.7 Trillion Per Year, Double Previous Estimates”, AIIB, February 28, 2017 https://www. adb.org/news/asia-infrastructure-needs-exceed-17-trillion-year-double-previous-estimates
39 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Industry 4.0 Readiness Survey
Deloitte 2019 Industry 4.0 Readiness Survey (Where do APAC executives stand? Deloitte Global's second- annual Readiness study sought to assess business and government readiness for the Fourth Industrial Revolution, also known as Industry 4.0. This year's survey covers more than 2,000 C-suite executives across 19 countries, including 514 APAC respondents from China, India, Japan, and Australia. The survey aims to uncover how leaders are taking action to address this new, deeper level of knowledge, where they are making the most progress, and what sets the most effective leaders apart.
Industry 4.0 Readiness Figure 1. Which of the following are the most- The survey explores how executives are enabling important factors your organization uses to their organizations to succeed in the age of Industry measure success when evaluating its annual 4.0 in four areas: positively affecting society, shaping performance? (% Ranked first) business strategy, utilizing 4.0 technology, and managing talent and workforce needs. The survey Customer 25% results showed that over the past year, leaders are satisfaction 16% more knowledgeable about the effects Industry 4.0 is having on their businesses, their industries, and Employee the world around them. 20% satisfaction and retention 16% Social impact Global leaders are increasingly using societal impact
(eg. environment inequality, diversity) as their Societal impact 20% measure of success. Deloitte survey showed that 39% 39 percent of global executives ranked “societal impact” first, compared to 20 percent of APAC executives who said the same. Financial 18% performance 16% While less APAC leaders use societal impact as measure of success than executives in the rest of the world (RoW), more of them report having Regulatory 17% developed or changed products or services than adherence 13% their global counterparts. More than three-quarters of APAC executives say they have developed or APAC RoW changed a product to make a more positive impact on society (APAC 78 percent, RoW 72 percent). Asian Source: Deloitte 2019 Industry 4.0 Readiness Survey leaders indicate they are achieving greater results from these initiatives: 63 percent say they have Strategy generated new revenue streams from changing Global executives are struggling to develop products to be more socially conscious, compared effective strategies in today’s rapidly changing to 50 percent of their global counterparts, and 54 markets. Faced with an ever-increasing array percent say that social initiatives, more often than of new technologies, leaders said they feel not, contribute to their profitability, compared to 46 as though they have too many options from percent across the globe. which to choose and, in some cases, they lack 40 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Figure 2. More APAC executives having the strategic vision to help guide their efforts. developed or changed products or APAC executives are more likely to agree their services to make a positive impact on organization has clearly defined decision-making soicety (Percentage who agree with each processes, but are less likely to indicate they have statement) permission from their leadership to fail and learn in the context of innovation. 78% 72% Forty-five percent of APAC leaders completely 63% agree their organization has clearly defined 54% 50% 46% decision-making processes (compared to 23 percent of global leaders). APAC executives are also more likely to say their decisions are made after input from a diverse and inclusive set of stakeholders (APAC 28 percent, RoW 17 percent) and to be using data-driven insights to guide their decision making (APAC 26 percent, RoW 14 We have developed We have generated new Societal initiatives, or changed a revenue streams by more often than not, percent). product or service developing or changing contribute to our to make a more products or services to profitability positive impact on be more socially or As innovation is fundamental to decision-making society or the environmentally environment in the conscious in the age of Industry 4.0, it is wise for leaders past year to have permission to fail and learn from APAC RoW their mistakes in the context of innovation. 63 percent of APAC executives agree that they have Source: Deloitte 2019 Industry 4.0 Readiness Survey permission from their leadership to fail and learn in the context of innovation, compared to 71 percent of global leaders.
Figure 3. To what extent do you agree with the following statements regarding how Figure 4. Which statement best represents major strategic decisions related to Industry your personal views? 4.0 are made in your organization? (% Completely agree) 37% 29% 45%
28% APAC RoW 23% 26% 17% 14% 63% 71%
My organization has Decisions are made We have been a clearly defined after input from a utilizing data-driven In general, I believe I have permission from my leadership decision-making diverse and inclusive insights more in our process set of stakeholders decision making to fail and learn in the context of innovation I rarely believe I have permission from my leadership to fail APAC RoW even in the context of innovation
Source: Deloitte 2019 Industry 4.0 Readiness Survey Source: Deloitte 2019 Industry 4.0 Readiness Survey
41 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Figure 5. To what extent do you agree with the following statements with regard to the ethical use of technology? (% Completely agree)
46% 44% 47% 37% 29% 25% 26% 24% 15% 11%
My organization is Our leadership has Our leadership Our leadership is My organization is highly concerned with frequent discussions understands the concerned about exploring policies to ethically using about the ethical use potential ethical our organization put in place, or Industry 4.0 of Industry 4.0 ramifications of being harmed by already has policies in technologies technologies Industry 4.0 others' unethical place, related to the technologies use of Industry 4.0 ethical use of Industry technologies 4.0 technologies
APAC RoW
Source: Deloitte 2019 Industry 4.0 Readiness Survey
Technology Talent Overall, two-thirds of all surveyed executives Much attention has been paid to talent when it said their tech investments have met or comes to Industry 4.0. According to the survey, exceeded expectations. While not necessarily 52 percent of Asian leaders indicate they know disruptive, new technology is allowing them to which skillsets they will need in the future, which address problems that exist for large groups is less than the 66 percent of global executives of customers. APAC leaders are more likely to who say the same. But, Asian leaders are more say their organizations are investing in new confident in the ability of the current education technologies to disrupt the market, rather than system to prepare individuals for Industry 4.0 protecting it. Nearly half of APAC leaders say their (APAC 52 percent, RoW 40 percent), and are much organizations are investing in new technologies likelier to be taking a more proactive approach and to disrupt the market, compared to just 28 extensively training their current employees (APAC percent of all other executives. 62 percent, RoW 36 percent).
The ethical implications of new technologies As for preparing their workforce for Industry are serious. While leaders are beginning to 4.0, APAC executives are similar to their global acknowledge ethical concerns, few companies counterparts: they are most challenged by the are actively discussing the subject, let alone mismatch between current skillsets and those acting on it. Comparatively, APAC leaders are that will be needed in the future (APAC 57 percent, much more likely to say their organizations are RoW 55 percent); they also indicate concern with highly concerned with ethically using Industry retaining (APAC 46 percent, RoW 47 percent) and 4.0 technologies (APAC 46 percent, RoW 25 attracting talent with the necessary skills (APAC 44 percent). Asian leaders are also more likely to be percent, RoW 49 percent). discussing the ethical use of these technologies (APAC 37 percent, RoW 26 percent), but, like Faces of progress global executives, most have not yet taken action While organizations surveyed are in different and put policies in place around their use (APAC stages of navigating Industry 4.0, we found that 15 percent, RoW 11 percent). leaders making better progress share a number of characteristics. They strive to turn societal initiatives into profitable ventures, act decisively in
42 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
an increasingly complex environment, deploy new Figure 6. Which statement best represents technologies in a disruptive manner, and equip your personal views about your their workforces with the right skill sets to navigate organization's Industry 4.0 technology the Fourth Industrial Revolution. investments?
A commitment to doing good. All are highly attuned 28% 72% to using Industry 4.0 technologies in an ethical 52% manner. For many, this has resulted in societally driven products that have created new revenue APAC RoW streams.
48% Clearer vision of the path forward. They are purposeful and methodical in setting Industry 4.0 strategies. Their companies follow clearly defined We invest in new technologies to disrupt the market processes and use data to make decisions, more so than other companies. We invest in new technologies to protect our business from disruption
Longer-term lens on technology investments. In Source: Deloitte 2019 Industry 4.0 Readiness Survey addition to achieving incremental gains for short- term initiatives, these leaders are more likely than Figure 7. What are the top challenges in others to invest in Industry 4.0 technologies to preparing your workforce for Industry 4.0? disrupt their markets. (Select up to 3)
Taking the lead on workforce development. They Too great a mismatch between current skillsets and 57% embrace the opportunity to extensively train those that will be needed in 55% the future their existing employees. Further, they are more confident that their organizations already possess Difficult to retain talent with 46% the correct workforce composition for the future. the necessary skills 47%
Difficult to attract talent with 44% the necessary skills Figure 8. Industry 4.0 readiness in terms 49% of talent (Percentage who agree with each statement) Lack of knowledge of which 44% skills will be needed 46% 66% 62% Lack of technology fluency by 41% 52% 52% employees and leaders 45% 46% 48% 40% 36% Lack of effective 37% training programs 40%
APAC RoW
We know which My organization The current We will Source: Deloitte 2019 Industry 4.0 Readiness Survey skillsets our is doing education system extensively train workforce will everything we will sufficiently our current need in the can to create a prepare employees future workforce for individuals for Industry 4.0 Industry 4.0
APAC RoW
Source: Deloitte 2019 Industry 4.0 Readiness Survey
43 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Smart Manufacturing Priorities
As automation and intelligent technologies disrupt global manufacturing, China, as a manufacturing giant, is proactively seeking breakthroughs. The Chinese government has clearly identified smart manufacturing as a priority, but a full-scale implementation of smart manufacturing means more than reshaping the internal processes of factories. Rather, it involves reforming the ecosystem beyond the shop floor. Changes are inevitably happening, then how should Chinese industrial enterprises deploy smart manufacturing to embrace the new era?
Five priorities Digital factory According to Deloitte's survey on 150 industrial Smart manufacturing is centered on the enterprises, the five priorities for deploying smart application of intelligent technologies in manufacturing are: digital factory (63%), tapping manufacturing processes, therefore digital into equipment and user value (62%), industrial factory is identified as the top priority. Digital IoT (48%), rebuilding business model (36%) and AI factory builds on end-to-end data flow, which (21%) (Figure 1). relies on connection regarding three types of data: the production process data, product data and supply chain data.
Figure 1. Five priorities in smart manufacturing deployment
0% 10% 20% 30% 40% 50% 60% 70%
Digital factory 63%
Tapping into equipment and user value 62%
Industrial IoT 48%
Ecosystem and business model 36%
AI 21%
Source: Deloitte smart manufacturing survey 2018
44 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
• Production process data: this type of data Figure 2. Data connection status among comes from the process from production respondents planning to execution (e.g. ERP to MES), as well
as the connection between MES and monitoring 83% have connected the data from production & control equipment, connection between planning to execution on-site equipment and control equipment, and connection between MES and on-site 62% have connected the data equipment. throughout production planning, execution and on-site equipment • Product data: connection of product data 47% have connected is primarily reflected in digital integration product data and traceability throughout the lifecycle of a product. 44% have connected supply chain data • Supply chain data: connection of supply chain data can be reflected in optimized coordination between the upstream and Source: Deloitte smart manufacturing survey 2018 downstream sectors across the supply chain, helping to achieve dynamic analysis and flexible It is in the nature of manufacturers to dig deep configuration of manufacturing services and into the value of equipment. By incorporating resources. new technologies into the R&D for more intelligent and diversified products; providing Currently, enterprises focus on the connection equipment-related financial services in the sales of data from production to execution when phase; conducting real-time data collection and deploying digital factory, leaving great space to monitoring on products in the after-sales phase; improve product and supply chain data. Only analysing performances and making predictive 47% respondents have achieved connection of maintenance, manufacturers will be able to product data, while 44% have connected supply elevate the safety level and have access to more chain data (Figure 2). Given that the respondent service opportunities. businesses have strong capabilities and are above medium in size, the ratios are remarkably Though a latecomer, manufacturers are taking higher than the national average. steps to harness user value to a larger extent, notably through customer-to-manufactory Tapping into the value of equipment and (C2M) programs. C2M, featuring on-demand and users customized production, enables manufacturers Pressed by increasing market competition and to interact directly with the users to meet pricing transparency, manufacturers have no personalized requirements while reducing costs choice but to seek out new sources of value. and improving efficiency with less intermediate Our survey has found leveraging equipment processes. and user value to be the second top priority in smart manufacturing deployment, with 62% respondents proactively making deployments to tap deep into the value of equipment and users. Among them, 41% emphasize on the value of equipment, and 21% on the value of users.
45 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Industrial IoT oriented industrial big data analytics and decision Smart manufacturing requires systems with and service-oriented application platforms. The sensing, analyzing, decision-making and respondents have generally built up sensing execution capabilities, the core of which involve systems to collect dynamic data through sensors, IoT-related technologies such as those oriented but are lagging behind in terms of data analytics towards sensing (sensor, RFID, chip), analysis- and platform application (Figure 3).
Figure 3. IoT-related technologies adopted by respondents
Electrical and electronics 76% 33% 43%
Automotive and components 73% 20% 13%
Advanced equipment manufacturing 68% 32% 32%
Pharmaceuticals 67% 50% 33%
Aerospace and aviation 50% 25% 38%
New materials 31% 31% 31%
Sensor technologies Big data IoT platforms
Source: Deloitte smart manufacturing survey 2018
Building sensing capability is an initial step of that many enterprises have not clearly defined the adopting IoT. The essence of IoT is elevating commercial application of industrial cloud platform efficiency through data-driven actions and creating and lack capabilities in this regard has also resulted new value via integration with services. By providing in the reluctance to deploy industrial cloud. strong data transmission, storage and processing capabilities, cloud platforms help manufacturers Rebuilding business model collect and process massive volumes of data to Smart manufacturing not only helps manufacturers identify and build new business models. However, save costs and increase efficiency, but also brings Deloitte's survey shows that the manufacturers about opportunities to rethink value proposition are not keen to deploy cloud, with 53% having and rebuild business models. In the meantime, new yet to deploy industrial cloud, 47% undergoing entrants continue to challenge traditional market deployment, 27% adopting private cloud, 14% players, and the incoming technological companies choosing public cloud, and 6% implementing hybrid are pressing industrial enterprises to innovate their platforms (Figure 4). Cloud adoption dramatically business models. reduces unit storage and computing costs, and may even create new business models by Deloitte's survey reveals that enterprises define transcending industry barriers; but it also brings their future business model mainly in four ways: along complexities. Enterprises are concerned that 30% of respondents focus on platforms, 25% once data related to production processes and adopt scalable customization, 24% target transition asset performance management enter the cloud, towards solution providers by focusing on "product information security and intellectual property + service", and 12% emphasize on IPRS (Figure 5). rights (IPRS) issues will follow. In addition, the fact
46 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Figure 4. Industrial cloud deployment among respondents
6% 14%
53% 47%
27%
Not deployed Private cloud Public cloud Hybrid Source: Deloitte smart manufacturing survey 2018
Platform-based business model aims at providing Artificial intelligence software services and building ecosystems. AI influences manufacturing mainly in two Although the industry is unlikely to see the aspects: firstly, improving product quality rise-up of BAT-like giants, vertical industry and productivity of the manufacturing and leaders (enterprises or platforms) will abound. management processes; and secondly, radically Rather than being confined to clothing, scalable disrupting the existing products and services. customization such as C2M will be adopted in automotive and equipment manufacturing as With elevated automation level of China's well. The "product + service" focus, which means manufacturing, robotics are widely used in providing solutions around customer demands, manufacturing and management processes, has been widely embraced by enterprises. And and AI enhances the self-learning capabilities IPRS-centered enterprises tend to win market of robots. By incorporating data management, shares by establishing technical barriers through automation and interconnectivity, robotics can patent strategy. help precisely coordinate production lines and make more accurate prediction or detection Figure 5. Future business model of about emerging issues through machine learning. respondents AI's application in the products and services of manufacturing industry can be even more 9% disruptive. The product per se is a carrier of AI technologies, and the combination of hardware 12% 30% and software will generate sensing and judgment- making capabilities and enable interactions with the user and the environment. AI may even disrupt the existing ecosystem. The traditional 24% automotive industry, for instance, is pyramid structured - with OEMs at the summit dominating 30% suppliers of various levels. But in the era of smart vehicles, OEMs may find their position challenged by component manufacturers, Internet giants, Platform-based algorithm companies, chip manufacturers Scalable customization and sensor providers, who are stepping up "Product service"as focus IPRS as focus Others Source: Deloitte smart manufacturing survey 2018 47 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Table 1. Characteristics and challenges of different business models
Business model Characteristics and trends Challenges
Platform-based • Multiple software services + ecosystem • Industrial enterprises are better equipped to innovate physical products, • Competitiveness in the service not software services capabilities of software instead the platforwm itself • Software platforms need to support multiple types of service solutions, • Most enterprises prefer extension- including those yet to be developed ready public cloud platforms for infrastructure building • Data ownership • Leading enterprises or platforms of • May need to acquire software the vertical market rather than BAT-like companies giants will emerge • Platform-based model isn't built • Representatives: GE Predix, SANY overnight, the investment cycle duration Group, Rootcloud puts pressure on executives and shareholders • As platform-based businesses are disadvantaged in winning talents and financial resources against existing functions, enterprises may need to reorganize business unit P&L and adjust accounting practice
Scalable • Customer-facing, multi-dimensional • Investment on technologies for customization cross analytics, customer behavior customer interaction, data storage and knowledge and data modeling analytics will rise dramatically • Modular design is widely used • Supply chain also needs to go through digital transformation to support • Data chain runs through the user, customized manufacturing manufacturer and supplier • As production processes become more • Business process aligns with features complex, enterprises need to control of flexible configuration cost level and manage cost structure • Many industries (e.g. clothing, consumer electronics, automotive, equipment manufacturing) may head towards scalable customization • Representatives: Redcollar Group, Haier and Chang'an Automotive
"Product + • Provide integrated solutions • Transition from improving customer service" as focus comprising two major modules: experience around existing products product and service to providing solutions around customers' needs • Service is a major component and profit source of product strategy • Systemic integration capabilities need to be improved • Dual-track approach: service innovation and product innovation • Moderate benefits from dramatically increased innovation investment • Representatives: Rolls-Royce, XCMG • New revenue model
48 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Business model Characteristics and trends Challenges
IPRS as focus • Enterprises tend to win market • Immense technological R&D shares by establishing technical investment barriers through patent strategy • Uncertainties around commercial • Revenue streams: 1.patent licensing application of R&D outputs royalty; 2.combination of patent, • Uncertainties around revenue sources product and solution; 3.technology prior to patent licensing transfer • Massive amount of resources poured • Technical licensing is often in tandem into patent maintenance with standardization strategy • Representatives: Qualcomm, Huawei, Netac
Source: Deloitte's analysis
through R&D efforts and commercialization may provide excellent machine learning in autonomous driving, and aspiring to tip the resources for AI providers, thus giving practical balance of the ecosystem by gaining an upper solutions to the problems in manufacturing hand technologically1. processes. As Deloitte's survey shows, for the manufacturers that haven’t deployed AI, the Compared with financial services, retail, and challenges include a lack of business case for healthcare, the manufacturing industry has yet investing in AI, inadequate system capabilities to to tap into the full potential of AI. Vast amount of set up and support AI technologies, and gap in reliable, steady and constantly updated data from understanding of the prerequisites (Figure 6). production equipment that remain unexploited
Figure 6. Major causes of reluctance to deploy AI
0% 10% 20% 30% 40%
Lack of business case for AI invest- ment Inadequate capabilities to establish and support AI systems Gap in understanding of the prereq- uisites for building and scaling AI systems Need to invest in data management platform optimization No budget Absence of supporting process and supervision Unable to obtain data
Source: Deloitte smart manufacturing survey 2018
49 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Growing pains Remarkable rise in smart manufacturing's Rapid growth contribution to bottom line The growth of China's smart manufacturing During its national survey across 200 is shown in three aspects. Firstly, the manufacturers in 2013, Deloitte found infrastructure—the strengthening of digital Chinese players still in the early stage of smart capabilities of China's industrial enterprises lays manufacturing, and struggling with low margins. a solid foundation for the analysis, predictability After five years of fast growth, the profitability of and self-adaptation of manufacturing systems products and services has increased markedly. of the future. Secondly and in terms of financial Enterprises that rely on smart manufacturing benefits, smart manufacturing contributes a for over 50% of its profit have grown from noticeably growing share to profit. Thirdly and 14% in 2013 to 33% in 2017 (Figure 8). Smart from the perspective of typical applications, China manufacturing owes its growing contribution to has become the biggest market for industrial revenue to elevated production efficiency and robots, and the demand continues to grow. higher value of offerings.
Growing digital capabilities Market potential for application With the integration of industrialization and China has been the No.1 consumer of industrial informatization, "Made in China 2025" and robots for six years. According to International industrial IoT moving forward in tandem, Federation of Robotics (IFR), China's industrial manufacturers' digital capabilities have grown robot market is worth USD4.2 billion in 2017, remarkably, with most enterprises aiming at vertical accounting for 27% of the global total and set data integration. Deloitte's survey shows that 81% to grow to USD5.9billion in 2020. From 2018 to of respondents have computerized their operation, 2020, 160,000 units, 195,000 units and 238,000 among which 41% are in the connection stage, units are estimated to be sold yearly in China, 28% have achieved visibility, and 9% information with a CAGR of 22% (Figure 9). The automotive, transparency. Those in predictability and self- advanced equipment and electoral & electronics adaptation phases each accounts for 2% of the sectors remain as the predominant buyers. total respondents (Figure 7).
Figure 7. Respondents' Industry 4.0 progress (based on self-evaluation)
100% 2% 9% 2%
80% 28%
60%
40% 41%
20% 19% 0% Computerization Connection Visibility Transparency Predictability Self-adaptation
Source: Deloitte smart manufacturing survey 2018
50 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
What are China's advantages? First and to the country's large population and amount foremost, the data volume. Machine learning— of equipment. Secondly, the relatively newer the technological basis of AI, relies heavily on hardware and facilities, compared with those data. Large volumes of "training data sets" are in developed countries, mean that Chinese required for facial recognition, translation and manufacturers are better positioned to autonomous driving testing. Chinese enterprises interconnect the equipment and revamp their are bestowed with competitive edges thanks factories.
Figure 8. Smart manufacturing's increasing contribution to profit
art anufactur n contribution to profit
0% - 10% 55%
11% - 30% 41% 14%
31% - 50% 14% 9%
51% - 80% 19% 9%
81% - 100% 14% 5% 201 201 1
2017 2018
Source: Deloitte smart manufacturing survey 2018
Figure 9. Sales of industrial robots in major markets (by unit)
China North America Japan Germany
450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 - 2018 2019 2020 2021 2022 2023
Source: IFR, Deloitte Research
51 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Figure 10. Priorities in capability building (weighted grading according to self-assessment results, higher grading indicates greater weakness)
Business model optimization
Innovation management
Cloud deployment
User experience design
Digital technology structure
Data analytics
Defining vision and strategy
Equipment interconnectivity
Project management
900 950 1000 1050 1100 1150
Source: Deloitte smart manufacturing survey 2018
Capability gaps • Transformation and reorganization: optimize the China's smart manufacturing is indeed existing model through improvements across the developing at an admirable speed, but full- entire process from raw material procurement scale implementation is bound to change to sales, and identify opportunities for overall or the traditional business models. Rebuilding localized enhancement to support the new model. business model is no easy task. As shown in the • Reconfigure the IT system: enterprises need to respondents' self-evaluation of their capability explore, design and implement improvements in gaps against target business models, the three the infrastructures and IT systems. critical areas for capability building are: business model optimization, innovation management and • Reallocate workforce: one of key factors to cloud deployment. Deloitte suggests considering sustainable transformation is to harness the full the following points to close the gaps (Figure 10). potential of talents. This emphasizes on designing and implementing personnel allocation to Business model optimization support the new business model and smoothly Business model optimization might mean transition out of the legacy structure. Mapping changing or improving some of the factors in the out new KPI systems and report lines is also existing model, or involve a major transformation involved to enable the change. of the entire operating model. Over the past • Adjust legal, financial and tax structures: the 15 years, the speedy progress in technology, planning and implementation of business model communications, logistics and transportation optimization programs often involve complex has driven more enterprises to embrace overall reforms regarding the legal entity and legal transition. Manufacturers need to optimize the structure. The management teams need to business model by revamping every aspect of weigh the pros and cons of different methods the following processes through proven methods and consider issues such as how income tax and tools. and transfer pricing will evolve with the new model, and the implications of VAT and customs regulations. 52 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Innovation management Cloud deployment The objects of innovation management include The cloud migration of data and applications is optimizing innovative product management, far from enough. In most cases, cloud adoption capital efficiency and risk management. involves many functions and may impact the supplier, financial statement and client, requiring • Optimization of innovative product long-term planning and phased execution. management: establish a consistent product Enterprises also need to consider whether their management system (covering services and human resources and digital maturity align with physical products), optimize the process and the cloud initiative. elevate the efficiency of decision making. • Planning: examine the current business model • Life-cycle cost optimization: improve product and explore other practical possibilities, design investment and operation cost efficiency cloud deployment program accordingly, through optimized management throughout while defining business cases and evaluating the life-cycle of product. capabilities. • Capital efficiency optimization: improve product • Execution: execution can be accomplished management and elevate capital efficiency in four steps. The first is SaaS deployment through monitoring, evaluation and KPI that covers ERP, CRM, HR transformation and systems. other software; the second phase requires • Risk management optimization: effectively customized deployment that includes manage risks in various aspects such as application development, structure building market and data security during the innovation and platform deployment; the third is cloud process. migration, which may involve updating and fine- tuning the application software; and the fourth It is worth noting that by optimizing innovative stage involves introducing big data analytics product management alone, manufacturers platform. cannot remain competitive in the long run. Today, almost all categories of products are Today's market becomes increasingly diversified subject to fierce competition, which means any with ever-evolving consumer demands. unique advantage will quickly run out of steam. A Meanwhile, the digitalization and smart portfolio of various innovations can help obtain transformation of products, manufacturing better financial returns. Although not all gains processes and services have become a can be attributed to innovation, the enterprises' prevailing trend. Driven by this, manufacturers mechanism and shareholders' expectation can are accelerating intelligent deployment and be improved through it. rethinking business models to form effective strategies in order to create substantial value from operational and strategic dimensions.
1. Autonomous driving reshapes competition in the ecosystem, Deloitte, April 2018 https://www2.deloitte.com/content/dam/ Deloitte/cn/Documents/cip/deloitte-cn-cip-autonomous-driving-reshapes-competition-in-ecosystem-zh-180424.pdf
53 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Outlook for Digital Life Service Ecosystem
Digital life service has experienced rapid growth over the past decade, accelerating the digitalization course of the market. As the industry is embracing scalable and more mature models, large integrated life service platforms are established. Attracted by considerable and diverse market demand, many vertical service providers are taking specific demand as the breakthrough point to enter the market, enriching the service content and rapidly developing to be important pillars of the market. Multipolar competition will continue to be prevalent.
Under the influence of multiple factors such as consumer demand, capital, infrastructure and policies, life service market has experienced rapid growth and accelerating digitalization over the past decade. As the industry is embracing scalable and more mature models, omni-channel life service market is shifting from extensive growth to optimization and upgrading, driving the establishment of large integrated life service platforms. Meanwhile, attracted by considerable and diverse market demands, many vertical service providers are taking specific demand as the breakthrough point to enter the market, enriching the service content and rapidly developing to be important pillars of the market. Multipolar competition will continue to be prevalent.
Digital development of life service market As suggested by the data of iResearch, food Driven by multiple factors, omni-channel life service consumption through e-commerce platforms market continues to grow rapidly. The market reached RMB1.17 trillion in 2017, maintaining a size of life service e-commerce has increased to CAGR of 86.9% since 2013. It is expected that food RMB2.705 trillion in 2017 from RMB434 billion consumption through e-commerce platforms will in 2013, creating a CAGR of 58%. As predicted continue to grow at an average rate of 23.7% during by iResearch, the market size of life service 2017-2023, and is likely to increase to RMB4.18 e-commerce will increase to RMB8.011 trillion in trillion in 2023, when the estimated CAGR of food 2023, almost tripling that of 2017; the CAGR during delivery and online non-catering food retailing will 2017-2023 will stay at a high level of 19.8% (Figure be 31% and 22.1% respectively (Figure 2). It should 1). As for stores, the penetration rate of stores will be noted that with a driving of CAGR of 31%, food grow from 44.6% in 2017 to 80.6% in 2023, with delivery service is expected to generate significant store network covering most areas. value in 2023, five times of that in 2017, becoming the core driver of online food consumption growth. Competitive landscape of major market segments Meituan Dianping in-store dining business has Catering secured the first place for three consecutive As the starting point of life service e-commerce, years by market share in terms of deal value. Its catering, as well as traditional in-store dining and business model has expanded beyond vouchers its derivative food delivery, is now one of the most to cover comprehensive in-store services including important business components of the market. making reservation, lining up virtually and payment.
54 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Figure 1: Five priorities in smart manufacturing deployment
CAGR during CAGR during 2013-2017: 58.0% 2017-2023: 19.8%
8011 7207
6405
5550
4583 3633
2705
1876 1211 711 434
2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E
Market size of life service industry (RMB1 billion)
Source: iResearch Note: Services cover food delivery, in-store dining, food retailing, local transportation, flight booking, hotel booking, railway booking, travel service, beauty service, karaoke, wedding coordination, parenting service, laundry, housekeeping, auto after-sales service, home maintenance, movie ticket purchasing and other on-site entertainment services.
Figure 2. Market size of food consumption through e-commerce platforms of service industry in China
CAGR during CAGR during 2013-2017: 86.9% 2017-2023: 23.7%
4176
3748 3317
2832
2243
1694
1166 736 441 216 96
2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E
Market size of food delivery Market size of in-store dining Market size of non-catering (RMB1 billion) (RMB1 billion) food sales (RMB1 billion)
Source: iResearch
55 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Besides, Meituan Dianping also provides IT and such as Alibaba and Meituan Dianping joining the operation related services for merchants. With game, the market landscape is changing. Alibaba establishing Koubei in 2015 and Baidu launching Nuomi subsequently, super platforms are Online ride hailing still the major players competing for in-store dining. The number of monthly active users of independent apps indicates that the total Food delivery service platforms including Meituan, number of active users in online ride hailing Ele.me and Baidu Waimai account for over 98% market keeps growing. According to Trustdata, of the market share. Given Baidu Waimai was the active users of five independent Android- acquired by Ele.me in 2017, Meituan Waimai based online ride-hailing apps increased from and Ele.me are now the only two giant players in 39.28 million in April 2017 to 53 million in April the market. According to iResearch, in Q1 2018, 2018, up by 35% year-on-year. DiDi has distinct Meituan Waimai took 59.1% of the market share, advantages in market share over the other with the other two platforms accounting for 36% competitors. However, it is worth noting that Dida and 3.8% respectively. Considering food delivery Pinche saw an increase of monthly active users is a crucial part of growth in life service sector, the to 3 million in April 2018, almost tripling over two platforms will continue to invest and compete the same period of 2017. It suggests that other in this field. And the two-horse racing will last in the players also have the opportunity to grow under short run. the current market conditions.
Hotel Bike sharing The hotel market in China is highly fragmented. Bike sharing, which serves as an effective solution According to iResearch, the top five hotel chains to the last mile problem for commuters, has accounted for approximately 13.8% of the hotel been well received by users and become a hot market share in China and 26.5% in the US in target of investment since it was launched in 2017, in terms of hotel retail sales. The deal value 2015. Among various players setting foot in of hotel industry reached RMB576 billion in 2017, the bike-sharing market, Mobike and ofo have with the online penetration rate of 31.6%. This distinguished themselves as unicorns. Facing industry is expected to maintain a CAGR of 8.5% the fierce competition, many players fail to build during 2017-2023. The deal value of the industry competitive advantages to attract funding and is likely to reach RMB938 billion in 2023, with a therefore have to exit, which gradually cleans out penetration rate of 44.6%. the market landscape. According to Trustdata's statistics about the monthly active users of The domestic room nights statistics during 2015- Android-based independent apps, the two major 2017 show that the top three market shares players Mobike and ofo were almost equal by in online booking have changed from 40.1%, the number of monthly active users in Q1 2018; 19.6% and 24.5% to 33.7%, 31.3% and 17.2% Hello-Bike supported by Alibaba has seen rapid respectively, showing a trend of decentralization. growth of about 200% in the number of active Meituan Dianping, as a new entrant, made it to users within one year. Facingexplosive growth, the second place with rapid growth in its market the balance between cost and benefits is still an share, which was close to that of the first place. issue that needs to be considered by players in The market is undergoing new changes. the market.
Mobility To sum up, most market segments are becoming As an emerging life service segment based on increasingly concentrated, with continuous Internet and mobile terminals, mobility has elimination of inferior players through intense developed rapidly in recent years. Riding the competition. Meanwhile, the super platforms trend, emerging companies including DiDi, keep penetrating into different market segments, Mobike and ofo have grown to be unicorn giving rise to new competitions among Meituan companies. With traditional Internet companies Dianping, Tencent and Alibaba.
56 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Trends and opportunities in life service the super platforms are making efforts to market enhance the connection between demands and Factors influencing the development of life businesses, and to set foot in new sectors while service market building the consumer ecosystem. The rapid growth of life service market in recent years is closely related to the distinct industrial Rise of the new generation of consumers environment. Taking digital for example, the Millennials have emerged as an important ongoing digital development in China has made force in China's consumer market. The new a profound impact on the country's business generation of consumers prefer personalized models. Driven by technical advancement, more products or services and value better experience. technologies can be applied in digital business, Millennials are less materialistic, as evidenced enabling companies to better understand by the fact that more than half of young and serve consumers as well as to improve consumers prioritize experience over stuff, and operational and management efficiency. The rise new consumers are more inclined to accept of the new generation of consumers is another personalized and innovative experience. Under factor driving the development of the industry, the trend, new consumption concepts such as as the life styles based on Internet and mobile sharing economy and outbound travel become terminals are better received and supported increasingly popular (Figure 3). When choosing by these consumers who have higher incomes, commodities, new consumers assign more more varied demands and increasingly digital importance to usefulness, quality and personal life habits. As an important force of establishing preferences. They are not as enthusiastic about and integrating the current consumer ecosystem, luxuries as the last generation.
Figure 3. Major consumer demand
Technology-driven Health Event-driven Connectivity
Personalized Experience Convenient Sharing economy
Source: Deloitte's Future of Retail Series
57 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Application of digital technology is another Technological advancement feature of millennials. The year 2010 marks the Technological advancement is one of the core beginning of the era of individual consumers drivers for business reform, and the foundation in China, when digital technologies are more for digital transformation of consumer market. intensively applied by individual consumers The fast advancement of critical factors such than by businesses, and the gap is widened as computing capabilities, algorithms and by new technical applications such as mobile data over the years has driven the continuous devices, online social networking, e-commerce, evolvement and iteration of major technologies cloud computing and big data. To make up for including cloud computing, big data and the deficiency, businesses need to make better artificial intelligence. Under such background, use of digital tools to integrate and leverage many industries are able to integrate different resources and meet the demand of consumers technologies through innovation and reform more effectively and efficiently through designed for specific demand and application customized solutions. scenarios, leaving a more extensive and in-depth influence on the business community, thereby to redefine the future business models (Figure 4).
Figure 4. Major core technologies
Clou co put n tora e
The development of cloud-computing related technolo- gies has led to qualitative leap of companies in data storage, management and computing. Artificial intelligence o Business intelligence is The development of IoT has realized, with data improve- significantly improved the ment and the rapid evolvement ability of data collection and and application of algorithms. provided more human-ma- The transformation will also chine interaction approaches. expand to production, distribution, use and other fields. Core AR R tec nolo e
AR&VR technology has provided new options and possibilities for content presentation and user interaction. B ata Bloc c a n Under the new ecosystem, data become core resources. Through the decentralized system, business With the development of big community can optimize credit models, solve data technology, data can be business conflicts and improve operational well leveraged to improve efficiency. competitive advantages.
Source: Deloitte's report on Six Major Changes in Science and Technology Reshaping the Retail Industry
58 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Penetration of platforms use their products and services in 24 hours Super platforms, which are penetrating in life (Figure 5). Tencent's WeChat accounts for nearly service market during the process of building 30% of the time of mobile phone users in China. ecosystems, are also playing a vital role in market Alibaba is also trying to capture a bigger share development. Through resources integration in the time of consumers by keeping investing and business model innovation, super platforms in social media, culture and entertainment, etc. are driving the change of the whole consumer By taking a bigger proportion in consumers' market. Influenced by the change, players in time, super platforms can establish multi- the market will focus on the competition for dimensional connections with consumers and individual consumers and their time. One create consumer profiles based on data collected important criterion to evaluate different players to provide customized products and services, will be the percentage of time when consumers thereby to fully meet consumers' demand.
Figure 5. The current market: Consumers' 24 hours
• Female
• 35-years old
• Married with one son
• College education
• Works as a finance controller at a MNC in shanghai Activity Key: Industry connect point
11 A.M. 1 p.m. Bank services Browse insurance & Banking wealth mgmt. Products Insurance & asset mgmt. 9:30 p.m. Mobile time (chatting & browsing) 3 p.m. TMT Online shopping
E-commerce and traditional Retail 9 p.m. Shower time 3:30 p.m. Consumer products Afternoon tea/ snack Food & beverages
7 p.m. TV Time 6 p.m. Media Off work – drive home Auto
Source: Deloitte's Future of Retail Series
59 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Analysis of the trends and opportunities in determine their market position. Thus, how to major market segments improve the competitiveness of merchants on From the perspective of market development, the platform and provide tailored solutions for traditional sectors represented by in-store consumers becomes a key matter of concern for dining are going stable and mature after super platforms. For merchants on platforms, it years' development, with the shift of market is critical to make good use of the resources over development logic from horizontal expansion to the platform and focus on meeting consumers' vertical development and resources optimization. needs based on core competitiveness in Emerging businesses, such as food delivery and products and services, particularly in the current online ride hailing, have not fully developed yet, market environment. Digital transformation is and require further reform and expansion for the mainstream of the transformation trend in improvement. Therefore, fast evolvement is the the current business world. For merchants and mainstream of the development of emerging platforms, digital transformation mainly means businesses. digital interaction with consumers and digital operation. Integrated digital capabilities will help Intensive development of traditional sectors companies to establish consumer-centric and After long time of development, the landscape interlocking approaches to data integration, of traditional life service segments has been which enables transparent data flows and established, with super platforms taking traceable analysis. In this way, companies can dominant roles. For platforms, merchant better understand and meet consumers' needs performance and consumer satisfaction will and establish new operational models driven by data and analysis (Figure 6).
Figure 6. User data collection
User data collection
Collect user data in an all-round way through various smart terminals and mobile devices in the age of IoT
Front end Back end
Digital marketing Digital decision-making Digital supply chains
Attract and retain members Select locations, perform Leverage front-end data to quickly, and realize digital product/service research provide support for and customized marketing and development and make procurement, warehousing according to user business decisions with the and logistics, etc. at the preferences and consumer help of big data back end, improving the behaviors efficiency of supply chains
Source: Deloitte Research
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Fast evolvement of emerging sectors For instance, the fast-growing food delivery, Emerging business innovation is gettingmore which proves to be a new effective development prevalent in life service market over the recent path of catering business, has provided years, with shorter cycle from launching to rapid more consumption choices and accumulated expansion. Against intense competition and considerable transport resources. With market changing market landscape, practitioners in expansion, food delivery platforms are investing emerging sectors are committed to optimizing more resources and time in improving the overall their business models and operational operational capabilities, and exploring new management, while keeping on with the initiatives business models for higher resources utilization for expansion and higher penetration, in order to efficiency (Figure 7). improve their comprehensive competitiveness.
Figure 7. Three development directions of food delivery sector
pro e operat onal capa l t e Improve digital operation capabilities through more technical application Allocate transport resources reasonably to improve delivery efficiency Make full use of intelligent technologies to enable autonomous delivery
nno ate u ne o el Capture more consumption scenarios Fac l tate uppl - e Explore additional consumption refor time Optimize commodity categories Develop new business models Improve the digital capabilities (innovation of models such as of merchants factories-terminals-users model)
Source: Deloitte Research
Resources integration for value chain Integration of service resources. optimization In order to capture more consumption scenarios In order to capture more consumption scenarios and account for a bigger share in consumers' and enhance consumer stickiness, as well as time to establish more comprehensive to optimize value chain through resources consumption and service chains, super platforms coordination, super platforms are implementing keep performing consumer-centric integration of integration initiatives including the integration of service resources. service resources and technical resources.
61 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Integration of technical resources. Take Meituan as an example, the distribution Technical progress is the core factor driving of both service and technical resources has business development in the digital age. The enabled Meituan Dianping to establish relatively explosive growth of basic technologies has sound service and technical chains, which cover significantly facilitated technical application. Apart marketing, daily operation, supportive financial from the efforts in service integration, super service and system-related IT service (Figure platforms are also integrating technical resources 8). Such specific service-centric integration and technology suppliers to bring about more of upstream and downstream resources and systematic and consistent technical application. technologies is important for intensive business development and whole value chain optimization.
Figure 8. Services provided by Meituan Dianping
SaaS-based cashier system Meituan Dianping The fourth-generation smart cashier system connects restaurants with the platform, creating IT service Supply chain service Marketing service smart restaurants integrating online and offline Financial service Operational service Logistics service services. Open platform Tianzixing Meituan Dianping establishes seamless connection It is a smart supply chain solution providing big data- with catering service providers through APIs based applications to help merchants attract more integrating all catering business functions on the customers. platform, to improve merchants' experience. In-store dining Intelligent payment Shanghutong platform Intelligent acquiring is redefined in the new catering It is an essential decoration tool for online stores, which age, leading to higher acquiring efficiency and more provides plenty of marketing methods and information intelligent value-added services about nationwide stores. It helps to enhance brand Cloud-based store assistant recognition among consumers and influence their Ordering by QR code purchasing decisions to drive sales. Self-help ordering by customers helps merchants Tuiguangtong platform improve service efficiency and cut labor cost. With the smart advertising product, merchants can Lining up virtually enhance their exposure to the market and make use It helps to improve efficiency of lining up for dining of intelligent scenario recommendations to attract and reduce labor workload. Besides, merchants more customers. will have free access to online traffic on Meituan Reservation Dianping. Online reservation can improve user experience, Instant invoice issuance identify high quality customers and optimize front- Merchants will issue invoices immediately after end operation. customers scan the QR code. Packages and vouchers They can help merchants convert potential customers into paying customers and develop more marketing models. With packages and vouchers, it would be Meituan Xiaodai easier for new stores to attract more customers even Deeply engaged in big data application, Meituan beyond peak hours, increase orders and create hot provides precise support for more than 5 million cakes. small and micro businesses, which have difficulty Delivery in borrowing loans or have to afford high cost for Delivery service loans. As the biggest O2O delivery platform in China, Insurance Meituan provides consumers' needs-oriented, Taking merchants' benefits as the top priority, delivery service, covering various fields including Meituan provides customized insurance products catering, supermarket, fruit, flowers and cakes, and and efficient claim settlement services to mitigate drinks and desserts. merchants' potential risks. Daishu College The official training organization under Meituan Catering College Waimai provides an open platform where professional It is a training organization under Meituan, which training and communication are available for take-out serves as a platform for catering practitioners to catering practitioners in China. learn professional, systematic and practical catering Omni-channel membership business knowledge. It improves loyalty of customers across all channels.
Premium Delivery, Speedy Delivery and Paotui Meituan provides diverse services to meet merchant's needs and ensure quality user experience, based on the real-time and intelligent coordination system and the delivery model integrating three types of services.
Source: Meituan Dianping and Deloitte Research
62 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Industry ecosystem outlook platform economy facilitates mass collaboration With increasingly concentrated market and and inspires unprecedented economic vitality. integrated resources, major platforms have In addition to the value they directly create, established stable positions in the market. platforms can also stimulate the collaboration Meituan Dianping has expanded its business and economic growth of different upstream network to cover almost every aspect of life supply chains in raw materials, design, service. Alibaba is also investing in life service manufacturing and distribution. Connecting market through different approaches, based on consumers and merchants, life service platforms its ecosystem consisting of retail, entertainment, have established collective life service systems to financial service and technical service, etc. Life meet the demand of consumers, and provided service market in general, is dominated by super corresponding solutions for merchants to platforms, and such dominance will last into the improve their capabilities in IT, finance, logistics, future. marketing, operation and supply chains (Figure 9). With high deal volume (Over 5.8 billion deals Establishment of platform-economy model worth RMB357 billion in total were made through With the dominance of life service market by Meituan Dianping in 2017), platforms are creating super platforms, platform-economy model value for consumers and industry. Besides, has been established. Based on prosperous platforms are indispensable for governments business ecosystem, open infrastructure, digital due to their functions in facilitating economic production factors, and low-cost and high- development and collaborative governance. efficiency information matching mechanism,
Figure 9. Ecosystem of Meituan Dianping
B e car a rplane ullet tra n
IT Mobility
Delivery Finance Accommodation Travel
Information Information e tuan Consumers Merchants Capital anp n Capital
Food Shopping Marketing Supply chains
Entertainment Operation el er an
Source: Consolidated based on publicly available information
63 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Platform economy governance Factor 2: Roles In the age of information, platform economy Platform economy is a complex ecosystem creating multi-dimensional values through with various stakeholders including regulators, different roles, is gradually changing product or service providers, consumers, our production and life, and stimulating platforms and third-party organizations. The corresponding productivity and production governance structure of traditional economy relations innovation. In order to adapt to G-B-C is evolving to G-P-B-C of platform economy changes in the system of platform economy, with specific key features: 1. Platforms are actively new cognition and mechanism are needed. engaged in and facilitating the governance of Under such background, collaboration platform economy, playing a leading role in the among governments, platforms, companies maintenance of platform ecosystem by making and consumers is an important driver for platform rules; 2. consumers and third-party improvement. organizations engaged in rule-based governance and case judgement are directly driving the The newly emerging platform economy based prosperity of ecosystem to some extent; 3. on Internet is an open beneficial and inclusive governments, as the "night watchman" ensuring ecosystem. With the development of platform an inclusive and protective environment for newly economy, its governance is increasingly becoming emerging trends, should be adjusted to the new a matter of concern. Under the new governance situation, new thoughts, new methods and new structure, four factors should be considered. order of social governance in the age of Internet.
Factor 1: Principles Factor 3: Methods Three principles should be followed for the Collaborative governance is the basic approach governance of platform economy: 1. Encourage to effective platform economy governance. It innovation. Implement platform economy requires the establishment of a decentralized governance, while taking innovation as one mechanism with various stakeholders engaged of the priorities, with reasonable systems and in, to attract more participants, each of whom plans to avoid stifling innovation; 2. ensure performs its own functions. Such mechanism will fairness among different players. Create a drive the shift from being management-oriented desirable environment for entrepreneurship and to being governance or even collaborative innovation to ensure practically fair competition governance-oriented. among players online and offline, and different platforms; 3. maximize benefits for as many Factor 4: Tools entities as possible. Coordinate relations of Platform economy is an unprecedented and responsibilities, rights and interests among complex ecosystem in human history. Neither relevant entities, and facilitate reasonable benefit Internet companies nor governments have any distribution to build an inclusive system beneficial experience related to such new economic model. to as many entities as possible. In addition to systematic tools such as laws and regulations, and network rules, technical
64 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
tools such as big data, artificial intelligence and Potential industry reshaping trend block-chain should also be well leveraged to Digital age sees different development improve the efficiency and accuracy of platform characteristics from the industrial age. The economy governance through the establishment unique digital environment in China has brought of credit systems and code rules based on big about discontinuous and unpredictable industry data. Technical tools are essential for future changes, infinite subdivision of the market, governance of platform economy, which is quite and the possibility that each consumer group different from the governance of traditional can make a unique market segment. Industry economy. boundaries are fading away and players in the market are seeking cross-boundary collaboration to better meet consumers' needs. Therefore, the development logic is transforming from linear thinking to non-linear thinking (Figure 10).
Figure 10. Digital age VS industrial age
n u tr al a e tal a e
Rule of c an e Cont nuou cont nuou Percept on a out Pre cta le npre cta le t e en ron ent Pro uct alue n e c an e alue n u e
ar et a ar et n ual-centr c ar et
Cl ent n ual alue roup alue
Cro - oun ar n u tr Boun ar con tra nt colla orat on
Bu ne para n n o e near t n n on-l near t n n
Source: Chen Chunhua, Liao Jianwen: Build Cognitive Framework for Digital Strategy [J]. Harvard Business Review, 2018 (7).
65 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
The rapid development of technologies in recent ••New interactive methods. Technical years are accelerating industry changes in the development is likely to generate new digital age. According the Deloitte's research interactive media and channels. The shift from about the trend of technological development, PC to mobile devices and then to new media is over the past nine years, continuous iteration of bound to have disruptive impact on the market. technological application has left profound and ••New players. While the landscape of major diverse impact on the business community. To be market segments is going stable, significant specific, technological application is driving the life service needs are yet to be satisfied. The evolvement of digitalization, analytics, network, combination of technical advance and model IT business, cloud and core, as evidenced by innovation is expected to bring new players to the digital transformation of media, content the market. and social organizations, improvement of data and analytics capabilities, establishment of new ••New relationships between supply and networks (blockchain), explosive IT development demand. The relationships between merchants and new core reshaping, etc. We are likely to see and consumers are changing from being explosive development of multiple technologies merchants and products-centric to being around 2020, among which technologies related consumers-centric. With closer and more direct to large-scale machine learning, Internet of interaction between consumers and merchants, Intelligences, 5G and natural human-machine consumers will have increasing impact on the interaction are worth special attention for their supply chain. Besides, new media may also business impact. accelerate the new trend aforesaid.
••New digital capabilities. Driven by technological Technological development and application will development, digital capabilities of players be the core factors to drive the reshaping of including platforms and merchants in the future life service e-commerce market. market are improving. Though at a relatively Considering technological development direction early stage of development, the emerging and the development history of life service technologies, data and analytics capabilities market, four potential changes are likely to drive will further integrate in the future to generate the reshaping of the market. synergies and lead to repositioning of market players.
66 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Conclusion development characteristics. Continuous With continuous economic development, integration of resources and improvement of the service market will maintain its stable overall capabilities have enabled super platforms growth.Driven by more application of digital to establish dominate positons in the market. In technologies, online service will be increasingly the super platforms-led market, the established penetrating into the market, and the omni- platform-economy model has exerted an channel integration will continue to evolve. important influence on the industry and even Growing number of young consumers, the society. New interactive methods, new fast-developing technologies and platforms players, new relationships between supply and constantly engaged in resources integration are demand, and new digital capabilities brought by important factors influencing the market, where technological advance will be important factors different segments will demonstrate different reshaping the future life service market.
67 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
New Retail Reinvigorates China's Imports New technologies, new models and new channels
China's digital-driven new retail leads the rise since 2014, with the role of consumption in global consumer market driving growth becoming increasingly prominent China's influence continues to rise in the each year. global consumer market After decades of rapid development, China's The economic contribution and growth rates of economy is entering its 'new normal'. The China's FCE exceed the consumer goods markets economic growth model is changing, with in each of the US, Eurozone and Japan. Between consumption replacing investment as the core 2013 and 2016, the average annual contribution driver of growth. In the first half of 2018, the of China's FCE to global consumption growth contribution of final consumption expenditure was 23.4%, higher than that of the US (23%), (FCE) to gross domestic product (GDP) growth Eurozone (7.9%) and Japan (2.1%). Over the same reached 78.5%. This figure has continued to period, China's annual FCE growth rate of 7.5% was also higher than FCE growth in the US (2.2%), Eurozone (1%) and Japan (0.6%).
Figure 1. China's consumption growth leads the world
25.00% 23.40% 23% 20.00%
15.00%
10.00% 7.50% 7.90% 5.00% 2.20% 2.10% 1% 0.60% 0.00% China US Eurozne Japan
Average contribution of FCE to global consumption growth (2013-2016) Average annual growth rate of FCE (2013-2016)
Source: CCTV Business Channel, Deloitte Research
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Increasingly diversified sources of consumer relationships reflect this. In 2006, Japan, South goods imports to China Korea, Germany and the United States were the With improved spending power and sustained top four sources of China's consumer goods, progress in opening-up, China has been steadily but by 2016, the ranking had changed to the increasing its proportion of imported consumer United States, Germany, Japan and South Korea, goods in the global consumer goods import with the shares of these major trading partners market, and its influence on this market has changing considerably. In the meantime, in 2006, grown correspondingly. According to data from countries other than China's top 10 trading the World Integrated Trade Solution (WITS), partners accounted for only 24% of consumer China's consumer goods imports accounted for goods imports, but by 2016, the percentage had about 2% of the global total in 2006. By 2016, the risen to 36%, reflecting the trend of diversifying proportion reached 4.4%, and the absolute value trading relationships. A growing number of of China's consumer goods imports in USD had countries are participating in consumer goods reached 2.7 times that in 2006. trade with China. In a more open market and friendlier policy environment, more countries and From 2006 to 2016, the sources of China's regions will have access to the Chinese market consumer goods imports changed significantly. and become important contributors to China's Changes in the proportions of major trading consumer goods import market. partners and the diversification of trading
Figure 2. The proportion of China's imports of consumer goods in the global total continues to rise
6000 5.00%
5000 4.00%
4000 3.00% 3000 2.00% 2000
1.00% 1000
0 0.00% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
China's consumer goods imports Global consumer goods imports (USD1 billion) (USD1 billion) China's proportion of global consumer goods imports (%)
Source: WITS, Deloitte Research
69 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
China's new retail drives the global retail world 1.5-fold. In such a large, highly digitized transformation market driven by leading participants, China's In terms of total market size, the total value of retail landscape has entered a new phase of retail sales of consumer goods in China reached reform focused on consumer demand and driven RMB36.6 trillion in 2017 (USD5.43 trillion based by digitization. Overall efficiency is improving on an exchange rate of RMB6.75 per USD), a through Omni-channel integration and supply year-on-year increase of 10.2%. In terms of chain optimization. As reform and innovation digitization, China's online sales were 18.7 times deepen, new models, applications and products the international average, with mobile payment are continually being used in China, a trend with penetration 3.8 times the global average and far-reaching significance for development and mobile internet use outpacing the rest of the innovation in global retail.
Figure 3. Comparison of the sources of China's consumer goods imports
2006 2016
13% 19% 24%
12% 36%
2% 15% 3% 3% 12%
4%
6% 8% 3% 3% 7% 8% 8% 3% 4% 4% 4%
Japan Korea, Rep. Germany United States Germany Japan
United States Other Asia, nes Korea, Rep. United Kingdom Italy Singapore Malaysia Russian Federation France Other Asia, nes Australia
Hong Kong, China France Other countries Indonesia Other countries
Source: WITS, Deloitte Research
70 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Wealth accumulation, scientific and Jiangmen. The GBA, which spans 'one country, technological progress and regional two systems and three customs zones', has economic development spur market become the latest member of the world's 'Bay expansion and reform Area Economies', joining the Tokyo, New York and The accumulation of wealth is driving San Francisco bay areas. The GBA is a national- consumption upgrades level strategy for China to integrate regional Sustained economic development has expanded resources and expand its opening-up. It will bring China's mid-to-high-income population and numerous opportunities to enhance economic the accumulation of wealth, making the middle development and consumer market growth: class the main driver of the Chinese consumer • Closer regional synergy and resource market. Wealth accumulation over the past integration will promote industrial upgrading, decade has brought about substantial changes leading regional development into a new, 'three in consumption patterns: the proportion of daily wheel-driven' model that relies on research necessities has fallen and the variety of consumer and innovation, high-end manufacturing and spending is expanding in lockstep with income. modern service industries, as well as promoting At the same time, consumers are now satisfied regional economic development to release not just by quantity, but have also diversified consumption potential. their demands for quality, high-end, healthy and experiential products and services, driving the • The pooling and circulation of talent due to upgrade of consumption in the Chinese market. regional collaboration will increase the mid to high income population, which will then Innovation and technology are reshaping become the new driver of consumption growth, the entire retail value chain especially of high-end products and services. The innovation and popularization of retail • Improved infrastructure will create a connected technology based on a series of underlying population in a region where no city will be technologies including cloud computing, more than an hour's travel from another. the Internet of Things, big data and artificial Connections between the Chinese Mainland intelligence are driving the entire retail ecosystem and Hong Kong and Macao will make consumer to become more digitized, intelligent and and commodity flows more convenient, efficient. This gives retail market participants the bringing new development opportunities for opportunity to connect and interact seamlessly overseas brands. with consumers across multiple channels. It is also enabling market participants to optimize and Opening-up provides strong support to the integrate their supply chains with real-time, multi- import market dimensional data, improving their operational China has cut import tariffs on a variety of efficiency and customer service and making them consumer goods on five occasions from 2015 to more competitive in the process of reshaping the September 2018. Measures in July 2018 covered value chain. 1,449 items and cut their average tax rate from 15.7% to 6.9%, representing an average tax Regional development the new engine of cut of more than 50%. In November 2018, the China's economic growth Government introduced further tariff reductions To deepen its opening-up and connection with on certain commodities as well as measures to the global economy, China in 2017 proposed streamline customs clearance. Free-trade zones the 'Guangdong-Hong Kong-Macao Bay Area', or are also a key component of opening-up. China 'Greater Bay Area' (GBA), development strategy. has established 12 free-trade zones-Shanghai, This encompasses 11 cities-Hong Kong, Macau, Tianjin, Guangdong, Fujian, Zhejiang, Chongqing, Guangzhou, Shenzhen, Zhuhai, Dongguan, Sichuan, Hubei, Henan, Liaoning and Shaanxi- Huizhou, Zhaoqing, Foshan, Zhongshan and each of which plays a pivotal role in promoting trade in goods and imports.
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Figure 4. The GBA
1 Guangzhou-Shenzhen-Hong Kong high speed rail 2 Hong Kong-Zhuhai-Macao Bridge • It takes only 48 minutes to travel from • It takes 30 minutes to travel from Hong Kong Guangzhou to Hong Kong to Zhuhai • 16 mainland urban high-speed rail stations • Joint trial operation in Guangdong, Hong connect directly to Hong Kong West Kowloon Kong and Macao began in September 2018 Railway Station. For example, the travel time Zhaoqing Guangzhou 1 from Beijing to Shenzhen is nine hours 4 Huizhou • Officially launched in September 2018 Foshan Dongguan 3 Shenzhen Zhongshan Jiangmen 3 Shenzhen-Zhongshan Bridge-Tunnel 4 Pearl River Delta Intercity Railways Zhuhai 2 Hong Kong • It takes 30 minutes to travel from Shenzhen to Macau • 15 intercity railways will form a railway Zhongshan network including three circle routes and • Promotes coordinated development by eight north-south routes linking the west bank of the Pearl River and • Every major urban center in the area will be the Guangdong-Hong Kong-Macao Bay Area within one hour's travel by rail • Scheduled to launch in 2025 • Scheduled to launch in 2020
Source: Deloitte Research
High-quality, healthy, diverse – the new era tea and coffee in China reached USD15.7 billion, of import consumption up 11.72% from the previous year. In addition to Quality has become the main factor in healthy foods, the Ministry of Commerce report Chinese consumers' import purchases indicates that Chinese consumers would also As consumers have accumulated wealth and welcome a greater variety of available sports become conscious of quality, their attention to shoes, casual clothes, outdoor and fitness and purchases of high-quality goods have grown equipment and other sports and fitness related rapidly. High-quality imported food, cosmetics, products over the next six months. Rising mother and baby and healthcare products have demand for imported healthcare products is become popular in recent years. According to another reflection of the ongoing 'health kick' the Statistical Analysis Report on the Supply and among Chinese consumers. Based on data from Demand of Major Consumer Goods issued by the the Ministry of Commerce, healthcare products, Ministry of Commerce earlier this year, quality which already take up a large proportion of has become a key consideration in consumers' traditional imports, remain one of the categories purchases of imported products. More than 70% in which in which consumers hope to see more of consumers attach importance to the quality of imports. All of these indicators show China's cosmetics; 74% seek quality in imported sports 'health kick' has changed not only people's products such as outdoor and fitness equipment; lifestyles, but also their purchasing preferences. and 70.2% value quality in household goods. This attention to and pursuit of quality will benefit Chinese consumers prefer a diverse array of the long-term development of the best foreign commodities brands in China. On one hand, burgeoning middle-class consumers are increasingly demanding more Chinese consumers' renewed appetite for sophisticated, diversified products such as healthy products imported exotic foods, skincare and color From imported fresh fruits and vegetables to cosmetics for different purposes, and healthcare additive-free juices, increased health awareness products with specific functions. On the other has changed Chinese consumers' purchasing hand, the emerging main consumers of imported habits and preferences. In 2017, imports of plant goods, i.e. the generations born since the 1990s, products including fresh fruit and vegetables, are more willing to try out new imports and 'internet meme' products. They have promoted 72 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
the growth of a wide range of imports aimed Digital marketing provides new model for at meeting segmented, diversified demand, brand owners including new beauty products, new fashion Consumers' perception of and demand for goods brands and popular online food retail. is increasingly influenced by digital marketing. E-commerce websites, social media and multiple Digitization reshapes consumption patterns online services (information/entertainment/search) Amid unpreceded digitization, 'real life' has become have become important channels for influencing almost indistinguishable from 'digital life' as a and attracting consumers, and interactive content result of consumers dependence on their mobile has become an essential element of online devices. Numerous online channels have influenced marketing. All these changes give high-quality, consumers even before they start to develop diversified imported brands more opportunities personal preferences. As purchasing behavior to influence consumers directly. Support from deepens, the logic behind consumer purchases digital media is particularly important for brands becomes more diversified and more difficult to and categories that lack exposure in China. Digital predict. This means interaction and collaboration marketing has sparked explosive growth in China's between online and offline channels is becoming consumption of Greek body cleansing products, more important for retailers and brand owners. Chilean red wine, Spanish facial extracts, Hungarian As far as import consumption is concerned, chocolates and many other imported sub- cross-border e-commerce has grown explosively categories from niche countries. amid the influence of digitization and institutional innovation. Traditional patterns of consumption are Coordinated development of new and old changing beyond recognition, bringing forth new channels market entities, marketing methods and channels. The rise of cross-border e-commerce has provided new channel choices for the development of Post-90s generations becoming the main imported brands in China. Increasingly, imported drivers of import consumption growth brands have adopted cross-border e-commerce People born since the 1990s have a growing as a supplementary or even main channel for their presence in overall consumption and cross- import trade, forming an entirely new channel border e-commerce. Their involvement has been development model. In this new combined channel increasing rapidly each year, gradually approaching model, imported brands rely on the open, efficient the same level as consumers born since the 1980s. characteristics of cross-border e-commerce to As internet-era digital natives, post-90s consumers' introduce products rapidly and develop their habits are very different from previous generations. audiences, bringing successfully piloted products They are self-focused and desire quality, to the Chinese market on a large scale through experience, individuality and interaction, traits that registration and filing under normal trade are driving them to use more digital channels to requirements before expanding their market share obtain high-quality, personalized imported goods via mature, omni-channel models. These and other and services. channel model innovations improve options for the development of imports in China. Figure 5. Digitalization reshapes import consumption patterns New Channel New Market Entities New Marketing Methods Combinations
The post-90s generations Rise of cross-border Digital marketing provides new are now the main drivers of e-commerce creates growth opportunities for high- import consumption growth new channels for import quality, diverse imports consumption development Source: Deloitte Research 73 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Consumer demand still has growth potential sized home appliances. That said, declines in the Driven by consumption upgrades, Chinese import volume and growth of certain categories consumers are gradually diversifying and refining of goods does not necessarily mean consumers their purchasing preferences. In 2017, the no longer want these types of product. It can overall growth rate of China's imports reached also mean consumer demand is concentrated in 15.3%. According to official statistics from China categories that domestic products are unable to Customs, consumption of daily use chemicals, satisfy. According to the Ministry of Commerce, timepieces, clothes, household and food Chinese consumers still want to buy imported products grew rapidly as a proportion of China's smart hardware including water and air purifiers, import market in 2017, expanding by 38.1%, electric toothbrushes, robotic vacuum cleaners 20.5%, 17.8%, 15.8% and 14% respectively. and photographic equipment.
Within these broad categories, consumption of Substantial room for growth in healthcare cosmetics, milk powder, suitcases, healthcare products, elderly care supplies, home audio- products, aquatic products, household products visual products and walking aids and fruits and vegetables increased by 48.6%, Healthcare products have long made a 40.4%, 24%, 23.1%, 19.6%, 15.8% and 12.1% substantial contribution to imports into China, respectively, making them some of the most with the growth rate of imported healthcare popular imports in 2017. products reaching 23.1% in 2017 alone. Consumption upgrades and China's aging Healthy aquatic products, fruits and population are major factors behind this growth. vegetables still have growth potential Older consumers become interested in imported Traditional imported meat (-3.8%) imports are products as they upgrade their consumption being outpaced by the imports of healthier food preferences and young consumers are also including aquatic products (+19.6%) and fresh paying more attention to healthcare. There are and dried fruits and nuts (+12.1%). Consumer only about 2,000 healthcare products targeted at purchases of these items will continue to rise as elderly consumers in China, compared to more Chinese consumers' 'health kick' continues amid than 40,000 in Japan. There is still substantial consumption upgrades. room for foreign producers to meet Chinese consumers' demand for greater diversity in Consumer demand for intelligent electronic elderly healthcare products. Consumer demand and electrical products remains unmet for healthcare products with different functions, In 2017, the growth in imports of electronic and elderly rehabilitation supplies and audio-visual electrical product consumption declined (-23.4%), products that meet elderly lifestyle needs has yet mainly due to falling demand for large and mid- to be satisfied.
74 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Figure 6. Subcategory imports growth rates
USD 100 million
250 20.00% 17.09% 17.85% 17.52% 18.00% 200 16.00% 13.80% 14.00% 150 12.00% 10.00% 100 8.00% 6.00% 50 4.00% 2.00% 0 0.00% Food, beverages, Leather goods, Clothes Shoes, boots, and tobacco travel suitcases and leggings
2007 2017 CAGR
Source: China Customs, Deloitte Research
Conclusion China's economy will continue to grow; the Chinese consumer market has huge potential and its geographical horizons are expanding; and Chinese consumers have a strong appetite for high-quality, diversified imports. In these circumstances, brand owners with ambitions to enter the Chinese market should adopt a strategic approach. They should start with their own unique characteristics and brand development strategies, and use digital means to better understand and interact with consumers so as to determine optimal marketing methods and channel combinations. This will put them in a strong position to achieve sustained development with the support of China's mature, omni-channel resources and technology.
75 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
5G: Reshaping Industries
As the global telecommunications industry evolves from 4G to 5G technology, various new application scenarios and businesses will emerge, leveraging faster transmission, extremely low latency, lower power consumption and a massive amount of reliable connections. In the new era of Internet of Everything (IoE), businesses can generate tremendous economic value through digitalizing all aspects of people's lives. 5G will be adopted in autonomous driving, the Internet of Things (IoT), the Internet of Vehicles (IoV) and Industrial IoT (IIoT), giving rise to trillion-yuan market opportunities. It is predicted that 5G network will cover 40% of the world population by 2025, or 2.7 billion people, with China becoming the biggest marketplace.
Currently, 77 operators across 49 countries and regions are conducting 5G test, while Chinese operators are deploying the biggest 5G network in the world. The wide participation in 5G indicates that all operators are striving to take the lead - it is not only higher speed of internet access, but the key to a country's competitiveness in the age of intelligent technology. The countdown to commercial use of 5G has begun in the US, China, Japan and South Korea.
76 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Value creation IoT boosts the need for 5G network With the rapid development of mobile and information technologies, Internet application is evolving from customer level to industry level. Exponential growth of IoT terminals and the generation of massive data are imposing higher requirements on the mobile network infrastructure (Figure 1, Figure 2 and Figure 3). The emerging 5G technology, with higher transmission rate, greater mobility, lower latency and more terminal connections, will power the IoE.
Figure 1. Massive data from IoT facilities
HD monitoring Autonomous Flights Intelligent systems vehicles factories 10GB per day 4TB per day 40TB per day 1PB per day
Source: GSMA, Report on the Work of the Government, IDC, China Info100, McKinsey Global Institute, TalkingData, Deloitte Research
Figure 2. Exponential growth of connection terminals
2040F 100 000 ll on
1 000 t e
2030F 1 000 ll on
10 t e
2020F 00 ll on
t e 2016 100 ll on
Source: IDC, Deloitte Research
77 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Figure 3. Benefits of 5G technology
1980s 1 Basic voice communications Voice communications
1990s 2 Voice and text messaging Voice communications Text messaging communications communications
2000s Multimedia applications Music Pictures Videos
2010s
Mobile Internet applications Live video streaming Mobile shopping Mobile social network 2020s and beyond Internet of Everything (IoE) Internet of Vehicles (IoV) Drones Remote control
er u er of A r nterface Low High ter nal o l t ter nal ela Perfor a eloc t connect on e
0.05-0.1 Maximum speed 10-100 ms 10,000/sq.km Gbps of 350 km/h
m C u C 0.1-1 Minimum speed 10,000,000/s Gbps of 500km/h 1ms q.km
Source: Ericsson, 3GPP, Huawei, Deloitte Research
78 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
The economic benefits of 5G investment Global investment across 5G industry chain during 2020-2035 is set to reach around USD3.5 trillion, to which China may contribute 30%. Meanwhile, over USD12 trillion worth of sales will be generated by global industry applications driven by 5G technology (Figure 4).
Figure 4. 2020-2035 global investment across 5G industry chain
Global investment into 5G industrial chain during 2020-2035 and industry value driven by 5G applications
Unit: USD About SD trillion of global investment 1, of which 30% is from China
A out 12 tr ll on of lo al n u tr alue
Industry 5G-enabled outcome
Over 20 trillion Manufacturing Smart city Over 10 trillion Information and communications Wholesale, retail and entertainment Public services and utilities Over 5 trillion Construction Smart life Finance and insurance Logistics Agriculture Over 2 trillion Real estate Education Energy Below 2 trillion Health Smart Others production
Source: IHS, Deloitte Research
79 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
5G application scenarios Smart security 5G's applications in smart city and the value • Security inspection by drones: drones for Intelligent grid inspection upload data to the cloud constantly • Grid integration: large volumes of distributed to assist with investigation, and check for parameters on new energy power generation emergencies such as fires for timely warning. are transmitted to the key control station in a timely manner for integration with low latency Smart mobility using 5G technologies, in order to improve grid • Communications and entertainment on high- integration systems. speed rails: high-speed data transmission • Precise load control: precise control over enabled by 5G technology brings efficient different power demand is implemented for communications and entertainment on high- efficient and off-peak power consumption, speed rails that can reach a speed of 350km/h. through grid slicing according to real-time • Vehicle platooning: the first vehicle transmits feedback of power load information from end information to those following with low latency users. and high reliability, realizing multitasking at expressways, tunnels and ports, etc.
Figure 5. OEM business model
ner et c an connecte clou platfor
Car ale Car e cle l fec cle nfor at on an Autono ou ar n ana e ent enterta n ent r n platfor rental platfor
• Car rental/sharing • Services cover car purchase • Vehicles will • Human-vehicle (such as model selection gradually become interaction to • Autonomous and loan), using (such as mobile recreation improve driving driving expands precise navigation, traffic- terminals experience the coverage of condition-based route sharing economy • 4K/8K ultra HD • Vehicle platooning recommendation and live videos/videos dynamic vehicle condition • Autonomous driving on demand are monitoring) and maintenance available in cars (such as vehicle maintenance and repair, annual vehicle examination, handling of traffic violation and car insurance)
Source: open data, Deloitte Research 80 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
• Remote driving: images are sent back in 5G's applications in smart life and the value real time with low latency by HD cameras at Cultural and entertainment consumption roadways, to support the indoor remotely- • Immersive online games: a perception of being controlled driving, improving the flexibility of physically present in the non-physical online mobility. game world with lower latency, supported by 8K • Autonomous driving: the high reliability and low video transmission and AR/VR. latency of 5G can support all types of Vehicle to • Immersive education: remote interactive Everything (V2X), enabling autonomous driving. teaching and experiential education scenarios supported by 8K video transmission and AR/VR. For instance, 5G-based IoV and autonomous driving will drive the transformation of OEM • 360° live video streaming of games: 360° business model from selling cars to providing live video streaming of major sport and cultural mobility services such as car sharing/rental, events in ultra HD, supported by 8K video human-vehicle and vehicle-vehicle interaction transmission and AR/VR. solutions (Figure 5). The changes and value • Virtual shopping malls: remote shopping and brought by 5G will be in three areas. The first virtual fitting anytime and anywhere, supported is ecosystem. Under the new business model by 8K video transmission and AR/VR. of the future, dealers will gradually loose significance while telecom operators, providers Smart healthcare of AI solutions, IoT solutions and big data services Super ambulance: transmit ultra HD videos and ner et c an connecte will collaborate with OEMs in the research and • data through intelligent medical devices to the clou platfor development of autonomous driving. Secondly, hospital, helping doctors make diagnosis and the revenue model will be different. As sales predictions in advance. and after-sales services will be replaced by car sharing, the new revenue channels may • Tele-consultation: provide doctors with include vehicle lifecycle management (in form of more factual information about the patients' monthly or annual rental), in-car entertainment condition to offer advanced medical contents and data traffic, and autonomous consultation to patients, with the help of the driving service. The last area of change will be key transmission of HD videos and the integration competitive factors. The core value of increasingly of force sensing and feedback devices. standardized vehicles of the future will be more • Telesurgery: control robots from a distance about services, e.g. driving assistance, in-car Autono ou to perform telesurgery, with the support of Car ale Car e cle l fec cle nfor at on an entertainment and personalized software, while ar n ana e ent enterta n ent r n platfor real-time information transmission through 5G automobile companies will cooperate in the rental platfor network and the integration of VR and tactile development of vehicle network platforms for sensing systems. connectivity.
81 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
5G network allows for diagnostics and health • Personalized healthcare services such as care beyond geographic limitations, home-based regular home-based diagnosis and remote health management and preliminary diagnosis, medical consultation provided by global more efficient allocation and alignment of doctors experts. and patients, and the transformation of traditional • Medical resources sharing with less hospitals to health management centers. The geographical limitation and more changes and value brought by 5G will be reflected access to medical services: connection in the operation model of hospitals (Figure 6). among medical organizations driven by real-time telecommunication gives access • Extension of traditional disease diagnosis to expert medical services such as remote and treatment to health management. diagnostics/consultation, telesurgery/ Ultra-reliable and low latency 5G technology surgery assistance and postoperative can better support continuous monitoring and rehabilitation support. sensory processing devices and facilitate the • Improved emergency treatment: 5G continuous and robust operation of IoT medical technology, featuring high frequency devices in the background to collect patient data transmission, is likely to reach a rate of in a real-time manner. As data is increasingly milliseconds. Emergency communication becoming a new type of healthcare capital, systems and diagnostic imaging hospitals may transform to health management equipment under 5G network will ensure organizations providing remote services, such adequate preparation for immediate rescue as daily health monitoring that reduces medical when patients arrive at the hospital. spending through disease prevention, preliminary diagnosis that leads to less clinic consultations, • Higher surgery success rate and improved and home-based rehabilitation monitoring that physician-patient relationship enabled by saves medical resources. VR applications.
Figure 6. 5G-enabled smart healthcare
Higher efficiency Balanced resource Higher quality distribution
City 1 City 2 City 3
Data sharing Data sharing Hospital 1 Hospital 2 Hospital 3 Remote Remote collaboration collaboration
Uploading and processing of massive health data
Connected medical devices Wearable devices Mobile terminals
Health data
Patients and sub-health population
Source: open data, Deloitte Research 82 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
5G's applications in smart production and The role of telecom operators the value In the age of 5G, the role of telecom operators Smart agriculture will be extended. Beyond providing infrastructure and connection, operators will participate in • Intelligent planting: factors influencing the empowering the development of downstream growth of crops such as humidity and light application scenarios, and then drive 5G are constantly monitored through 5G-based investment as these applications mature, thereby sensors. The data are then uploaded to cloud building a closed business loop. These are the for real-time analysis, enabling automatic three roles of telecom operators in the 5G era: irrigation and fertilization by agricultural equipment under timely and precise control. • Build infrastructure: build infrastructure for the distribution of network facilities, from which • Smart animal farming: with the support of offerings such as network service and platform technologies including voice recognition, services are derived. image analysis and AI, 5G network enables the monitoring and analysis of livestock's health • Make profit from channel-based data: and safety based on data about the physical provide more efficient, convenient and faster condition and location of animals collected connection; offer custom network connection through sensors. for certain industries, in addition to efficient basic services. • Farming by drones: 5G-based agricultural plant protection drones are applied in seed sowing, • Stimulate market demand: join hands with pesticide spraying and other crop protection a third party to provide integrated service work covering large areas of land, and livestock solutions, or assist in offering services as an monitoring and searching. independent third party supporter.
Smart factories In the 4G era, some regions have insufficient demand and the lack business scenarios, the • Large-scale dispatching: 5G technology can be operators have yet to recoup the investments. applied in ports, mines and other large sites to Compared with that of a 4G base station, the support the intelligent dispatching of goods and deployment of a 5G base station costs roughly even transportation facilities over an expansive 1.5 times more. And full-coverage deployment area. of 5G will need 4 times the investment on 4G. • Connected factories: data connection across Therefore 5G investment has to be more precise, factories breaks down information silos, which means the investors need to evaluate allowing data to be shared among different the maturity of application, identify whether facilities and devices. well-defined use scenarios and business models • Teleoperation: industrial robots are controlled exist, and assess ROI. In short, the 5G era will from a distance to perform fault diagnosis, repair and operation with the support of VR and tactile sensors, reducing maintenance cost.
83 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
see the telecom operator changing from asset Applications drive deployment of 5G network and connection provider to active player in In terms of application scenario selection, 5G-empowered downstream application scenario small-scale 5G pilot deployment, with its special development, collaborating with third party advantages, will be implemented in scenarios that organizations (vertical market businesses) to provide augmented mobile broadband experience, provide integrated services and helping them such as people-centric 4K/8K videos and immersive deliver offerings for end users, thereby forming a entertainment consumption supported by AR beneficial closed business loop (Figure 7). and VR. With the increase of base stations and downstream application terminals, and more Technology integration fosters 5G stringent latency requirements of scenarios, ecosystem operators will be increasingly focusing on the The evolution or transformation of industry deployment of networks featuring low latency and applications and business models cannot be high reliability. The value of 5G will be fully exploited achieved via a single technology, but requires through the application of IIoT. the integration of 5G and other technologies. In addition to the support from 5G network As to selection of deployment areas, firstly, facilities, the evolution or transformation of implement small-scale deployment in highly industry applications also requires the integration populated areas and core application scenarios in of basic technologies such as AI, edge computing, major cities with large population and advanced visual technologies and sensor technologies, economy; then, expand the scenarios and areas and vertical industry solutions such as drones, of deployment in major cities, as well as important VR/AR and monitoring and control systems. 5G scenarios in other cities. assures the applications driven by various kinds of technologies could be effectively integrated Correspondingly, downstream application to function in a more complete and intelligent scenarios with great technology maturity and manner (Figure 8). economic value will be given priority in the implementation of 5G network. More technical barriers will be broken down over time, and economic value brought by 5G-based downstream applications will increasingly emerge in more scenarios (Figure 9).
Figure 7. The role of telecom operators
Pro e a et
o e o e
Pro e connect on er ce
Pro e er ce cooperat el or n epen entl
Source: NGMN, Deloitte Research 84 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Figure 8. The integration of 5G with technologies at various
Basic General Platform application Basic technologies General technologies/ Industry scenario modules solutions Flexibly allocate computing resources Cloud according to key demands with the Mobile intelligent Life and computing support of technologies such as monitoring entertainment virtualization Help to resolve complicated problems Connected Consumption AI based on neural network algorithm of drones and retailing deep learning
Improve device user experience with 5G Cloud-based Transportation AR/VR disruptive human-machine data AR/VR and mobility 5G interaction The fifth Industrial control, drone control and generation of Control Remote industrial Urban other technologies for precise control mobile + technology control management communications of objects through instruction Visual Collect, process, transmit and analyze Agricultural IoV technology HD videos production Sense environmental features such as Sensor light, electricity, temperature and Healthcare technology humidity, and collect relevant information with sensors Provide network, computing, storage Edge and other resources near the source computing of data
Source: Deloitte Research
Figure 9. Application implementation timeline
o Short-term Mid-term Long-term
2 Present-2022 2022-2026 2026-2030 Intelligent power ? Life scenarios distribution system Remote maintenance Smart traffic control system and inspection robots Agricultural drones Remote equipment ? Production operating system scenarios High-speed railway communications and entertainment AR/VR Commercial vehicle platooning immersive Sophisticated telesurgery Connected homeentertainment
L2 autonomous driving Outdoor Assisted telesurgery Logistics drones logistics robots ? Production scenarios Mobile HD monitoring L3 intelligent driving AR/VR-based situational L4 intelligent driving education and shopping L5 intelligent driving
cono c alue of appl cat on cenar o Mobile 4K/8K HD videos
a Technical difficulty of application scenarios1 Comment: marked positions indicateDifficult the time when pilot projects are art pro uct on art l fe art c t completed and extensive commercial application starts Note: 1. including the difficulty of applying 5G technologies and other necessary basic technologies 2. including the market size of scenarios and the payment capability of downstream clients
Source:Source: Deloitte Deloitte ResearchResearch 85 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Capital stimulates market vitality The positive influence of 5G and relevant 5G technology market has drawn wide attention technologies on downstream industries has from capital markets. Currently, the investment drawn wide attention from business and capital focuses on basic technologies, downstream markets. Investors are working together to applications, and small businesses. Based on establish vertical industry 5G ecosystem. Major incomplete data, from January 2017 to August participants in 5G industrial chain including 2018, over 200 investment deals were made telecom operators, IT solution providers and CT mainly for basic technologies such as AI, big solution providers actively invest in 5G ecosystem data and visual technology, and downstream to jointly explore and promote the industrial applications such as smart mobility and smart application of 5G (Figure 10). healthcare. Institutional investors remain as the most prominent participants. As the industry is Moreover, 5G industry also draws the attention still at an early stage of development, most of the of international private equity investment funds. investments are made by venture capital funds to Deloitte selects 10 venture capital investment the small and medium-sized start-ups. funds and 10 private equity investment funds from China and the US respectively to analyze their investment in 5G. Figure 10. Major 5G investors
olut on pro er
perator
ntell ent anufactur n art ecur t A
C olut on
pro er Control i data Culture an Re ote echnolo enterta n P teac n ent
ntelli ent Sen or ro ot technolo Financial investments art ntell ent o Drone ealt care Strategic investments r Guiding investments ... Down-stream applications C art ntell ent o l t o e n u tr alfun Basic technologies andgeneral technologies ... Driving effect
econ ar ar et
Source: Crunchbase, ITjuzi, Deloitte Research
86 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Chinese private equity investment funds healthcare are the most popular investment mainly target basic technologies followed by targets among downstream applications downstream applications, when investing in (Figure 11). The 20 active Chinese private equity 5G related industries. AI, big data and visual investment funds (including VCs and PEs) in 5G technology attract more investment than other industrial chain made about 200 investments basic technologies, and smart mobility and smart from January 2017 to August 20181.
Figure 11. Investment segments of private equity investment funds in 5G-related industries
Investment segments of 20 Chinese private equity investment funds in 5G industry since 2017 (based on incomplete statistics)
40 36 58% 31% Basic technologies 30 General technologies 21 20 11% Downstream applications 20 17 16 13 9 9 10 8 8 6 6 4 4 3 3 2 2 2 1 0 AI Smart mobility Big data Smart healthcare Intelligent robots Visual technology AR/VR Cloud computing IoV IoT manufacturing Intelligent technology Communications entertainment (AR/VR) Culture and Intelligent chips Drones Sensing technology Smart security Intelligent home Control technology Smart grid
Source: ITjuzi, Deloitte Research
87 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
5G to power mega sport events 5G-enabled technologies such as AR/VR, robots, Robot referees: the venues are equipped drones and facial recognition will help bring with intelligent referee robots. These remotely about an intelligent and digital mega sport controlled robots and AI technology facilitate event. Once deployed, the 5G network will dispute resolution, reducing biases and allow the audience to enter the stadium via misjudgments caused by human intervention. facial recognition, which can also ensure their safety. Besides, AR devices can provide better Switching between multiple games: viewers park tour experience and commentary for on- can wear VR devices to watch multiple matches site audiences. VR devices will enable off-site at the same time at the VR area. For example, audiences to watch the games as if they were at they can get updates about skating games while the site. Moreover, after the mega sport events, watching ski racing for more fun. the collection and analysis of big data will provide valuable reference for future sports events. 5G integrates with technologies including service robots and VR/AR to provide translation, 5G application in mega sport events navigating and customized tour guiding services 5G enables 360° live video streaming, immersive at venues, optimizing visitor experience. VR experience, robot referees and switching between matches through integration with AR/ Immersive VR experience: visitors can acquire VR technologies, providing a better watching extensive information about the venue and experience. the host city through VR glasses in advance. Organizers can input appropriate promotion 360° live video streaming of mega sport materials to elevate the profile of the host city. events: 360° panoramic cameras are mounted across the stadium to help capture every exciting AR-based translation and navigation at moment. The audience can enjoy the games as venues: AR glasses can provide navigation and if they were present at the venue with close-ups translation services in pre-set language, providing captured and transmitted through 8K HD videos. greater convenience for visitors from all over the world. Immersive VR experience: mini 8K HD cameras on the helmets of athletes can send data to Private robot guide: all venues are equipped devices in real time, providing viewers with a fully with connected robots to provide local language immersive experience of watching high-speed guiding and catering services anytime and winter sports. With high speed and low latency, anywhere. 5G can make the experience as real as "on the court".
88 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Ticket checking via face scanning: people Transportation at the venue: 5G network- upload their facial recognition information based real-time vehicle dispatching ensures a and other identity data to cloud databases via smooth and orderly flow of traffic in the venues Internet when purchasing tickets. 5G network- with different types of vehicles and people based facial information verification allows moving around; driverless buses send athletes, audience to enter venues via face scanning. coaches and audiences to venues.
5G will be widely used for enhanced security, Logistics and delivery: drone transit stations protection and intelligent control at and outside are deployed at and outside the venues, and the venues during mega sport events. drones can accurately deliver daily necessities for athletes in the living area. Anti-terrorism security and protection: drones for inspection and 8K cameras, remote 5G application in mega sport events and real-time monitoring at and outside the Continued use of the infrastructure after venue, and AI-supported facial recognition the 5G-basedmega sport events and the big can detect suspicious persons and abnormal data generated from the games will produce behaviors to prevent accidents. sustainable business value and drive the development of smart cities. Healthcare services at the venue: wireless medical equipment can offer first aid to Continued use of infrastructure: two athletes through 5G mobile network. Wearables scenarios of the continued use of the connected to 5G network monitor athletes’ infrastructure applied in mega sport events are physical condition in real time and transfer data applications at the venues (large cultural events to the hospitals nearby. Ambulances equipped in the future) and downstream applications in with 8K video communications and medical industries related to people's daily life. devices collect necessary data about the injured on the way, ensuring adequate preparation Value of big data: process and analyze specific of medical resources before the arrival of the data derived from information collected by patient. devices at the games, and send back information with the support of AI technologies to provide personalized services for industry users and improve the capabilities to offer daily life services to the general public.
89 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
The New Physics of Financial Services
Underpinnings These advances are rapidly changing what it takes What is artificial intelligence? to build a successful business in financial services. No one quite agrees. Every definition has its variation—slight and not-so-slight. To get an idea of how profound this change is, consider the old paths to industry dominance. Part of this has to do with the “AI effect,” which Large assets provided economies of scale. Physical seems to happen with every breakthrough in AI locations and standardized products drove technology. No matter the capability, someone cost-effective revenue growth. Direct access to finds a reason to conclude that the underlying markets and connections to investors discouraged programming isn’t real intelligence at all. And so competition. It was difficult to switch providers, the AI target moves again. so customers tended to stay. At the same time, process efficiency was a function of human labor But it’s difficult to have a productive discussion and know-how. without establishing some kind of common rhetorical ground. In that spirit—and without Eventually, AI will transform every one of these claiming anything other than a desire to reflect building blocks. Technology will make operations what experts appear to mean when they mention efficient enough that asset size, although still AI—we offer the following non-technical definition. important, will no longer be sufficient on its own to build a successful business. As a result, Artificial intelligence is a suite of technologies, competition to achieve scale of data flow-through enabled by adaptive predictive power and will be more important to sustain cost advantages. exhibiting some degree of autonomous learning, Meanwhile, revenue will come not from that dramatically advance our ability to: standardization but from the highly customized products and personalized interactions that AI ••Recognize patterns makes possible. Neither will exclusive relationships ••Anticipate future events be a differentiator; in a digitized world, providers ••Create good rules will be known for their ability to create well- matched connections. Customers will stay with ••Make good decisions an institution, not because it’s hard to walk away ••Communicate with other people but because their benefits are better there than anywhere else. Process efficiency will result from the interplay of human and artificial strengths.
90 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
From these new building blocks, an unfamiliar ••Upend competitive dynamics. Data sharing environment will appear, one that has been will become critical to competitive success. The reassembled to: advantage will go to first movers and large-scale players in an increasingly bifurcated market. ••Deliver new kinds of value. Product and service innovation will lead to greater financial ••Take public policy into uncharted territory. AI inclusion and a sleeker, more personalized will raise questions that challenge government customer experience. and society, prompting the need for a new set of norms to protect humans, regulate machines, ••Reshape operating models. Financial and remake the financial infrastructure. institutions will become leaner, highly networked, and more specialized. They’ll also The result? A great upheaval—of capabilities, become more dependent on the capabilities of resources, relationships, and potential. Old bonds large technology players. will break. New ones will form in unexpected ways. The center of gravity will shift, and where it comes to rest depends on the choices that stakeholders make today.
Figure 1. AI is reshaping the building blocks of success in financial services
Past Future
Scale of assets Scale of data
Mass production Tailored experiences
Exclusivity of relationships Optimization and matching
High switching costs High retention benefits
Dependence on human ingenuity Value of augmented performance
91 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Value creation ••Customization of offerings to customers’ AI is changing how financial institutions get specific financial needs and objectives and keep customers. Even as it commoditizes ••Engagement through ongoing and integrated traditional points of differentiation, AI offers the interactions beyond financial services (such as opportunity for significant market innovation. offering forecasting services to merchants or The one certainty is that firms must adapt their booking repairs for auto damage) products and services for the day when AI automates customers’ financial lives—or much ••Curated ecosystems based on data from of it, anyway—and improves their financial consumers, corporate clients, and third parties outcomes. These levers will provide stronger ways for A new proving ground for customer loyalty financial institutions to compete on value, retain Historically, financial institutions have relied customers, offer differentiated advice, and on price, speed, and access as ways to attract provide one-stop solutions. They’re becoming customers. But online platforms are making it possible because AI breaks the tradeoffs between easier for customers to compare prices. Emerging better service and cost. technologies are reducing instant product and service delivery to a basic expectation. And That said, some of this requires competing with thanks to digital distribution, there’s less need for existing offerings in different industries. And intermediaries in the course of doing business. firms may need to move forward before knowing what the natural equilibrium of price will be in a As the old levers become less effective, new ones platform economy—or the margins institutions are coming up in their place. They include: might expect to earn.
Examples
Integrated services RBC is piloting a forecasting tool for car dealers to predict demand for vehicle beyond financial purchases based on customer data. By offering this tool alongside their lending products solutions, RBC motivates auto dealers to offer RBC lending products more frequently.1, 2
Ecosystem curation Lloyds Banking Group committed US$4.1 billion a year in a digital strategy that positions the company to combine banking and insurance services and pursue new API-enabled propositions. The aim is to be an ecosystem provider and a “trusted guardian of data” in the age of many providers.3
Data and insight at Ping An’s suite of finance, medicine, cars, and housing apps has attracted over 880 scale million users, 70 million businesses, and 300 partners. The firm uses the data they generate to close service gaps and improve the overall quality of offerings.4
Foreshadowing in the Companies such as Google and Amazon are using their technological advantage tech industry and scale of data to satisfy customers’ increasing preference for engagement and relevant, valuable experiences.5
92 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Implications
Granular insight into customer behavior Product development and a willingness becomes critically important—inside and to experiment become critical skills for outside of financial services institutions
Institutions will need to be highly focused on To succeed, incumbents must harvest new delivering what customers actually want. This resources and ways of working, including means getting to know customers beyond technical AI skills, product development financial services and looking for opportunities to capabilities, and datasets. They’ll also improve their day-to-day lives. need to cultivate a bias for innovation and experimentation.
Large tech firms have distinct advantages in Margins are squeezed in institutions that attracting new customers fail to develop new differentiators
Tech companies ordinarily capture user Institutions that procrastinate in creating new attention—and data—through free products and ways to differentiate their products face an uphill services. The financial services these players offer battle at preserving margins, especially once end up benefiting from the existing service shelf. technology normalizes traditional metrics like price and speed.
Key questions to consider
••What are the most effective offerings companies can pursue?
••What does it take to be sustainably different?
••How can institutions go about implementing this change in mentality? What capabilities do they need to build or acquire?
Self-driving finance Enter self-driving finance. In this reimagined Financial advice, part of every product, is experience, consumers interact with an AI-based often generic and impersonal. It also tends agent for advice and product customization. The to be overly reliant on subjective advice from self-driving agent offers guidance on complex different customer service agents. The product decisions such as homebuying, retirement and customer information needed to improve planning, or corporate financing. At the same financial outcomes can be hard to pull together, time, it automates routine transactions such as both within and across institutions. bill payment and refinancing. Products come from financial institutions, as they do today with human agents.
93 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Figure 2. Self-driving finance could transform the delivery of financial advice
Con umer interact ith the a ent or roduct are provided product advice and to cu tomi e their product manufacturers (e.g., financial institutions)
Comple deci ion receive advice e ,
Home Retirement Corporate purchase planning financing Users Self- driving evel o perception Products agent outine deci ion are automated e
Treasury and Bill payment, Refinancing cash flow savings loans Data
AI enables self-driving finance in three key ways. In every scenario, it’s data—from customers, First, the technology can compare products and groups, third-party platforms, and financial providers to arrive at an optimal price and fit for institutions themselves—that sustains the agent the customer. It also can personalize both the and informs its decisions. advice and the products it offers to a degree that isn’t economical for human agents to do. Still unknown is who delivers the self-driving Finally, a self-driving agent can manage day-to- agent. Will it be incumbents, new entrants, or day finances entirely behind the scenes. It avoids large technology companies? Neither is it clear fees, monitors for better deals, and more on the how the interests of consumers will align with customer’s behalf, without the customer having those of product manufacturers and self-driving to intervene. agents. Put another way, the accountability framework for algorithm-driven decision-making has yet to be determined.
Examples
Next-gen personal Early personal financial management apps assessed the user’s financial situation financial management but offered no actionable insights or recommendations. Now, firms like Clarity Money and MoneyLion are using AI to offer personalized advice about refinancing, debt management, and more.
Consolidation of Citi’s mobile app provides customers with a 360-degree view of their financial lives financial lives across all banks and providers.6 Meanwhile, chat platforms like WeChat enable interoperability across different financial services verticals.
Automation of savings Apps like Acorns round up customer transactions and transfer the balance to and bill payment a savings account. On the payments side, startups like Tally aggregate all of a customer’s cards into one account and pay each bill through a single line of credit.
Customer-centric New, cloud-based infrastructure lets institutions treat an entire product portfolio banking infrastructure as a single balance sheet to enable dynamic customization and pricing. For example, Thought Machine’s core infrastructure treats products as smart contracts so banks can quickly customize and deploy them through a wizard or direct code.
Financial management Increasingly, multi-provider platforms are looking to fortify their offerings through via multi-provider personalized recommendations of products and features. One example: Credit platform Karma, which has found success as a lead generator for loans, aims to build financial advisor tools and extend their control of customer experiences.7
94 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Implications
Owners of customer experience earn the Customer interaction is much less frequent largest margins
Those who face customers will likely keep them As the customer experience becomes automated, because self-driving agents become more fewer interactions take place between provider accurate as they collect more data. This lets and customer. But the interaction points that customer experience owners exert market power do persist become increasingly important and and nab the lion’s share of profits. centered around advice.
Product manufacturers reshape Conduct risk is larger and rarer themselves around algorithms Tech companies ordinarily capture user As self-driving agents take over sales activities attention—and data—through free products and from sales staff, conduct risk significantly declines. services. The financial services these players offer But when misconduct does occur, it does so at a end up benefiting from the existing service shelf. much larger scale.
Key questions to consider
••How can companies stand out in a self-driving future?
••What “quick wins” can financial institutions achieve to delight customers?
••What does channel strategy look like with a self-driving channel in the mix?
Operating models From cost center to profit center AI isn’t just for the front of the house. It also AI may end up prompting firms to turn their holds out exciting changes for the back office, centers of excellence into services, while potentially improving it to the point where outsourcing most other back-office capabilities. institutions make parts of it available as a Why? Because it’s hard to excel at everything, and commercial service. But here, as elsewhere in the over time competitors are likely to replicate the organization, AI’s effect on talent can be a speed processes that are efficient but not best in class. bump. To preserve their competitive position, At the same time, the processes that do achieve firms will have to carefully manage the interplay of excellence under AI could improve so rapidly that talent and technology. it becomes impossible for others to catch up. At that point, the center of excellence becomes both a defensible advantage and a sustained revenue source for the institution.
95 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Figure 3. AI-enabled back-office functions will allow firms to turn their centers of excellence into services
ra t onal o el Back-office “as a service” model
n titution develop A driven center o n titution develop A driven center n titution n titution e cellence around certain proce e , Data and o e cellence around iven proce e , yet have other processes that lag proce in and offer that process “as a service” Activity 1 behind best-in-class capabilities External activity Fintech specialist These processes continuously learn 3rd party incumbent Activity 2 Achieving excellence across all External activity and improve using data from their Activity 3 processes is challenging Center o 3rd party incumbent collective u er , improvin at a rate e cellence faster than could be achieved by any Continuously peration In the long term, competitors will move improvin one in titution Data to replicate the efficient capabilities proce Data of a few institutions, limiting the This creates a defensible advantage defensibility of this advantage 3rd party incumbent in efficiency and a sustained revenue peration ource Lead capabilities Lagging capabilities Data Data
That’s not to say AI won’t affect other parts algorithms. It’s a lot more difficult to amass high of the back office. Intelligent technologies are volumes of quality data. coming along at a time when financial institutions are looking to modernize their operations, for Existing software-as-a-service offerings provide example by using cloud-based architecture. a blueprint for AI-based outsourced services. Moving to the cloud makes it easier to “plug and With that, incumbent institutions still must figure play” with third-party services. It also makes it out how to build centers of excellence that are easier to turn internal centers of excellence into attractive service offerings. Another quandary is commercial offerings. And if the commercial how to protect the value of proprietary data when offerings are enhanced with AI, they can bring in firms must share that data with competitors more data for the technology to learn from and in order to achieve minimum requirements continuously improve. of efficiency. The effect of data regulations on outsourced back-office processing might Early movers have the advantage in this impact the globalization of financial services. profit-center scenario. In the open-source Finally, concerns about data security and cloud AI environment, it’s not so difficult to mimic architecture have yet to be resolved.
Examples
Modular microservice IDC estimates that by 2021, 80 percent of application development will take place architecture on cloud platforms using microservices and cloud functions.8 On the back end, cloud infrastructure makes up one-third of all IT spending in financial services and is growing at over 20 percent CAGR as institutions push to migrate legacy technology onto modern platforms.9
Virtuous data cycles AI can help institutions continuously improve their services in what is sometimes called a virtuous data cycle.10 Google Translate, Spotify’s Discover Weekly, and Facebook’s timeline algorithm are examples of services built on AI that have been progressively improving over time as users interact with them. Those who start from scratch in trying to compete with these services face a steep uphill battle.
Externalization BlackRock and Ping An are two examples of incumbent financial institutions that of best-in-class developed respected internal services, then made them commercially available. processes BlackRock CEO Larry Fink has stated that he wants Aladdin to make up 30 percent of BlackRock’s revenues.11 Ping An’s OneConnect is its internal advanced technology infrastructure, covering everything from core banking technology to advanced AI capabilities. They have transformed this technology into a service offering used by nearly 500 banks across China.12
96 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Implications
Operational efficiency stops being a Market power favors service providers competitive differentiator
Back-office processes become increasingly As service offerings become increasingly efficient, uniform across financial services as most institutions that use those services face high institutions consume similar capabilities, forcing switching costs, allowing providers to charge high institutions to look for new differentiators. margins for them.
Redundancies decline while concentration Talent shifts from financial institutions to goes up service providers
As financial institutions rely on a diminishing Once institutions become mostly consumers number of critical systems, systemic risk rises as of capabilities, the balance of jobs shifts to flaws within those systems acquire an outsized service providers, making roles look considerably impact on financial services. different.
Key questions to consider
••What capabilities does it take to build an AI center of excellence?
••What process areas should institutions build out internally versus outsource?
••How will data regulations impact the globalization of financial services?
97 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Finding a balanced approach to talent ••A myopic focus on the near term. That is, In the context of AI, talent is a touchy subject. The eliminating redundancy does little to address a near-term focus for AI appears to be on doing the hierarchical, bureaucratic environment opposed same things better. This could lead the industry to new ways of working. to shed jobs faster than they create them. But ••Strategies that reward the status quo. letting this happen in the absence of a long-term Rewards, recognition, and retention work talent strategy could cause financial institutions against the ultimate vision for business growth. to stumble as they attempt some of AI’s bigger opportunities. In short, the industry confronts an historic under- investment in talent and technology. To head this It’s entirely possible that the business models and off, financial executives should weigh what to do competitive dynamics that AI generates will lead differently to manage their talent needs. What to net new opportunities for talent. And success kinds of talent do firms need for new business in these new business realities will be predicated models? How can humans keep pace with on distinctively different strategies around roles, technological transformation? Then there’s the culture, and rewards. Failure to adapt could result in: role of government during this period of change. ••Stalled capacity for innovation. Initial efforts More on that later. of experimentation remain siloed, with only small segments of talent being exposed to new opportunities.
Examples
AI in the back office The back office of a financial institution often has thousands of people processing customer requests or tackling reporting needs. For a European bank where 70 percent of applications were paper-based, digitization and automation enabled staff to spend 70 percent less time processing forms.13
AI in the front office JP Morgan’s asset management group is developing a software robot equipped with machine-learning capabilities to boost the efficiency and profitability of its trading desk.14 Another area of opportunity for financial institutions: contact centers, where services like Amazon Connect offer cloud-based, AI-driven solutions to replace the facility and staffing of these sizeable environments.15
Reskilling in an AI- Confronting a significant mismatch between the human knowledge and capabilities powered organization they need today and those they will need to remain competitive in coming years, incumbent institutions like Scotiabank, BNP Paribas, and BlackRock have begun prioritizing efforts to reskill their workforce.16, 17, 18
Cultural shifts in an AI- Beyond reskilling, financial institutions must reshape their organizational powered organization cultures to attract and retain sought-after skills and capabilities. This can include broadening roles, pushing decision-making authority to the individual contributor level, and building attractive environments that enable the adoption of AI.
98 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Implications
Institutions remain unsure of the skills they The value of talent requires new investment need
Efforts to reskill lack a clear view on the roles Too many firms see talent strategies as an and responsibilities that institutions and administrative hurdle versus a strategic enabler. individuals need. Without a longer-term vision and Institutions search for a new framework coordinated strategy, some institutions have a to understand how the success of other skills deficit and some individuals are out of work. investments depend on the evolution of their talent.
Resistance to change leads to a People management becomes a competitive number of false starts advantage
The most significant roadblock to change Financial institutions that create new talent comes from people, thanks to insufficient time, experiences via elevated and evolved policies, effort, and investment allocated at the onset of processes, and structures become leading transformations. executors of business transformations.
Key questions to consider
••What could financial executives do differently to manage talent transformation more effectively?
••What are the specific talent archetypes that financial services will need to evolve and perform within new business models?
••How can financial institutions accelerate transformations when training, learning, and adapting takes place at human speed?
99 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Competition as loans and insurance—will aggressively push As AI reduces search and comparison costs customers to switch to lower-cost providers. For for customers, financial services providers will customers with different needs, optimization find themselves at extreme ends of the market. algorithms will find the niche products that fit This will amplify returns for large-scale players them best. AI will also make it cheaper for firms to and create new opportunities for niche and create products in response to this demand. agile innovators. With every institution vying for diversity of data, more firms will join forces All this can make it tough for mid-sized firms with competitors and potential competitors—a to compete. They’ll struggle to make the strategy fraught with strategic and operational investment they need to stay in the game once risks. larger incumbents become AI service providers themselves. In this scenario, regulators will Bifurcation of market structure need to decide how to respond to the increased The economics of AI will push market structures consolidation of assets. They also may be pressed to extremes, giving the advantage to large-scale to reduce regulatory barriers to enable new players and agile innovators. If this happens, mid- entrants. An open question is to what extent sized firms can become a thing of the past. consolidation of scale players becomes a cross- border phenomenon, with international firms Why? For one thing, AI platforms—having noticed aggressively expanding in domestic markets. that price drives many financial products such
Figure 4. The economics of AI will push market structures to extremes
cale pla er Regional / mid-sized firms c e pla er
o a ar et tructure
Con olidation o cale pla er Di appearance o roli eration o niche into e er ut lar er entitie mid-sized firms and agile firms
Future ar et tructure
100 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Examples
Market extremes in In exchange-traded fund (ETF) markets, automated platforms such as robo- asset management advisors enhance the ability to seamlessly optimize investments and fees. At the other end of the spectrum, a new class of funds—led by innovators who use AI and quantitative investing to deliver differentiated return profiles—can scale rapidly without a substantial increase in their costs or staffing.
Investment gaps Firms with fewer assets trail larger investment firms in both AI and digital between large and transformation. A survey by DBR Research finds that 48 percent of banks with mid-tier firms more than US$50 billion in assets have deployed an AI solution, compared to 7 percent for banks with US$1 billion to US$10 billion in assets.19 One reason for this is that mid-tier firms have tighter investment budgets and greater reliance on technology vendors.
Implications
Scale players acquire focus and efficiency Mid-tier players consolidate
To retain the favor of recommendation As mid-sized financial institutions become less algorithms, scale players maximize their profitable, they become acquisition targets for economies of scale by focusing on key products scale players. and divesting from peripheral activities that may undermine price and performance.
Lower costs of entry enable a new Product shelves widen and diversify generation of product manufacturers
Innovative entrepreneurs form new firms and As more niche players enter the market and try scale them rapidly. These firms look radically to fill unique and underserved needs, consumers different from traditional financial institutions. gain products that are a better fit for their financial requirements.
Key questions to consider
••With the likelihood of increased consolidation in the industry, how will companies navigate greater cross-border activity to thrive or survive?
••As operational barriers to entry give way, how will institutions plan for regulatory changes aimed at maintaining a level playing field, enabling competition and consumer protection?
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Uneasy data alliances ecosystems. Winners gain excessive market Data partnerships will have winners and losers. power, enabling them to pit providers against Some firms will be pushed to the periphery. one other. But they also gain more exposure to Others will emerge as ecosystem hubs. security and privacy risks that could break apart their partnerships. They might also end up with Either way, the AI opportunities that institutions diminishing power of asset scale if the data gap hope to capture will likely be short-term ones. between large techs and incumbents continues to Partnerships may be a quick way to get the depth grow. And then there’s partnership lock-In. A too- and breadth of data firms need for more accurate great reliance on data flows from partnerships models and more complex use cases. Access to can perpetuate relationships that serve firms end users also raises the possibility of virtuous poorly in the end. data cycles. Of course, all these tensions are manageable. But the risks of partnerships will be long-term. Other firms have figured out how. Will financial The customer experience tends to be winner- institutions, especially in light of open banking? take-all, especially in platform and self- driving Time—as it generally does—will tell.
Examples
Growing alliances The employee health insurance alliance among JP Morgan Chase, Amazon, and Berkshire Hathaway hints at the power of collaboration.20 The alliance will use big data and technology to align incentives, improve customer engagement, and improve targeted programs for clinical and behavioral health. However, this has given rise to speculation that Amazon may eventually disrupt financial services.
Proliferating upstarts As the UK Open Banking Standard and PSD-2 take effect, a number of niche providers has emerged. Challenger banks such as N26, and third-party providers such as Squirrel and Klarna, are rapidly expanding across Europe. These players can extract from incumbent institutions the data they need to power their operations—without, in some cases, giving the incumbents reciprocal access.
Growing tensions with Technology companies—think Google Pay and Uber’s Credit Card—are building technology companies products to access and generate financial data. But these initiatives are misaligned to shifts in the industry: data is increasingly important to differentiation, while profits from transaction revenues are in decline. As a result, competitive tensions between technology companies and financial institutions are likely to grow.
Emerging ecosystems New financial services ecosystems are emerging in Asian countries. Some of them, in Asia like Taikang Life, are layering apps on top of existing tech platforms such as Wechat. Wechat connects customer data with financial institutions and financial institutions with one another. The platform becomes the critical provider, while the financial services provider is interchangeable based on customer preferences.
102 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Implications
Partnership development becomes a critical Large tech companies become critical competency sources of data and customer experience Developing the right data partnerships Due to their data advantage, large technology while mitigating potential tensions in those firms anchor the financial value proposition. relationships allows firms to sustainably develop Incumbents partner with these firms so they can unique and differentiated products, insights, and quickly access customers and data. experiences.
Emerging tensions threaten alliance Data sharing restrictions leave firms at a longevity disadvantage By positioning themselves as the critical link Firms that oppose data sharing struggle to across the ecosystem, firms can turn other form the data partnerships necessary to participants into commoditized service providers. develop AI capabilities, which risks leaving them Tensions arising from this may limit the longevity uncompetitive. of emerging alliances.
Key questions to consider
••What products and services will be most reliant on third-party data to be competitive?
••Who will retain control of the customer experience in partnerships between tech companies and financial services firms?
••How will smaller companies negotiate effectively with large tech companies, particularly if they already have major financial services partners?
103 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Public policy financial system safer and more reliable. A At the center of the AI story lies data. With solution becomes even more important given expansive amounts of data powering the virtuous that a problem with the process at one institution cycle of improvement, financial institutions may can have a ripple effect on other institutions find it practical to pool what they have so they across the ecosystem. can build common solutions for non-competitive functions. If that happens, firms could not only Since these processes are rarely strategic—and realize mutual efficiencies in operations—they often generic across product categories— could make the financial system safer as well. institutions might find it’s worth trading their proprietary approach for the flexibility and But there are regulatory issues to consider. Rules efficiency of a mutual one. AI can then recognize around data privacy and portability will affect patterns across the shared dataset and develop the relative ability of financial and non-financial insights on threats that cross institutional institutions to deploy AI. On top of this are AI’s boundaries. potential risks to societal and economic well- being. Addressing these issues will go a long way Besides leadership and investment, a collective toward encouraging institutions to adopt more solution requires some means to keep it aligned transformative AI capabilities. with the interests of its stakeholders. There also must be agreement on how utilities, collectives, Collective solutions for shared problems and individual institutions will share liability for AI-driven utilities offer a chance to address some errors and compliance failures. Then there’s the of the challenges of today’s financial system. They question of whether cross-border solutions are can do this by addressing data asymmetries that even possible given the diversity of financial and impede fraud prevention, anti-money laundering, data regulations. We’ll discuss some of those and other processes intended to make our challenges next.
Figure 5. Collaborative AI-driven tools built on shared datasets can unlock a safer, more efficient financial system
ra t onal o el Collect e olut on
ad actor Institution Institution Institution ad actor Institution Institution Institution
peration peration peration
Data Data Data Predictive AI model
a ed a ed a ed re pon e re pon e re pon e Collective data
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Examples
Strained budgets Cumulative financial penalties for noncompliance between 2009 and 2017 totaled US$345 billion globally,21 with 89 percent of industry executives expecting continued cost increases in global compliance from 2017 to 2019.22 Besides leverage and capital requirements, there is increased regulatory focus on collective issues such as financial crime, privacy, and data security.
Collective risks Many have speculated that real-time payments bring real-time fraud. The United Kingdom experienced a 132 percent increase in fraud the year after they implemented the Faster Payments Service.23 Thanks to automation, insurance fraud cases are expected to double.24 Experts have warned that the proliferation of AI technologies could enable new forms of cybercrime and other threats across different industries.
Improved transaction Companies like ComplyAdvantage and Shift Technology have shown significant monitoring benefits to using AI-based algorithms to monitor transactions. ComplyAdvantage claims to have achieved an 84 percent reduction in false positive alerts for anti- money laundering risk data, while Shift Technology is using AI to help insurers fight claims fraud.25
Emerging collective Collective institutions such as SWIFT and EarlyWarning have started developing utilities service offerings that apply AI and the collective power of data against some of the system’s biggest threats. SWIFT is launching a new, AI-equipped fraud control system. EarlyWarning is a fraud and risk management technology company started by a collective of the largest US banks.
Implications
The safety of the financial system is Efficient compliance becomes a commodity radically improved
Real-time scanning, using full-market data, As institutions share compliance services, dramatically increases institutions’ ability to head they participate on the same competitive off threats and nip malicious activities in the bud. plane—removing efficiency of compliance as a competitive differentiator.
Accountability and control become Leadership priorities shift toward increasingly unclear competitive imperatives As shared utilities take on certain processes, Institutions gain some latitude in their leadership institutions seek to offload accountability to agendas and investment dollars. As a result, them. Meanwhile, regulators push to hold they shift their focus from regulatory and system institutions themselves accountable, even for protection to their own strategic priorities. the processes that are collectivized.
105 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Key questions to consider
••What is the right ownership framework for collective utilities to ensure their interests are aligned with their stakeholders?
••How will utilities, collectives, and individual institutions share liability for errors and compliance failures?
••Is it possible to develop cross-border solutions given a growing divergence in financial and data regulations?
alongside a wealth of other personal data Regulatory and ethical dilemmas Global data regulations are undergoing a period to secure a head start in developing new AI of unprecedented change as governments move models. to adopt new rules to protect and empower citizens. These rules affect the development of AI Other risks of AI are beyond the scope of financial in a number of ways, including: regulators. They can affect such things as: •Financial safety. AI exposes the industry to ••Use of cloud-based services. Regulations • on cloud usage by financial institutions vary broader risks of contagion, as AI demands ever- globally, with stricter restrictions in Europe. In tighter connections across domestic and cross- regions with more relaxed rules, technology border systems. players have the advantage in developing new ••Global and regional economic growth. capabilities. AI could polarize global communities as competition around AI development becomes a ••Use of personal data. New privacy and data protections limit the collection, transmission, point of regional conflict. and storage of personal data. As a result, data ••Consumer protection and the public partnerships are becoming increasingly difficult interest. Despite its potential to democratize to manage. Meanwhile, consumers are gaining financial advice, AI could also perpetuate increasing control over how businesses use financial exclusion among segments of the their data. population.
••Access to financial data. Regulations in ••Employment and human capital. AI will Europe require incumbent institutions to share reduce the need for labor across routine tasks, customers’ financial data with third parties leaving some people out of work. (at the request of the customer). But the data ••Experience of other industries. AI is sharing is one-way: Third parties needn’t susceptible to creating excessive concentrations reciprocate by sharing their nonfinancial of market power and driving income inequality. data with financial institutions. This means large technology firms can use financial data Though AI can bring us various benefits, its potential risks must be strictly controlled.
106 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Examples
PSD-2 and GDPR The revised Payment Services Directive (PSD-2) of the European Union came into force in January 2018, with the aim of enabling more innovative payments across Europe. Together with the General Data Protection Regulation (GDPR), this requires institutions to carefully balance the need to share data with third parties against the risk of substantial penalties in cases where data is mishandled.26
Open banking The United Kingdom is one of the first jurisdictions to adopt Open Banking as a mandate across financial services. In 2016, the Competition and Markets Authority reported that “older, larger banks do not have to compete hard enough for customers’ business, and smaller and newer banks find it difficult to grow and access the market.”27
Emerging Chinese Although China lacks an open banking framework, the system has been very conducive ecosystems to fintechs and third-party providers. Application programming interfaces (APIs) between incumbent institutions and technology companies such as Wechat and Alipay have allowed these platforms to become interoperability layers to facilitate the flow of data across institutions.28
US-style laissez faire In the United States, data-sharing alliances are more ad-hoc rather than mandated, with individual banks building bilateral relationships with data aggregators. Regulators have not signaled their intention to implement similar frameworks to the United Kingdom and the European Union.29 But Congress has been listening to testimony from large tech companies such as Facebook, Google, and Twitter on the topic of privacy and data security, which could lead to the emergence of new rules.30
Other potential Governments around the world are considering radical changes to their data regulations openness regimes. Australia, Singapore, Canada, and Iran—among others—are actively considering some form of the open banking regulatory model.31, 32
Implications
Incumbents must help to shape data Existing/being-formulated data regulations regulation in order to remain competitive cast long shadows over financial markets
Wide-reaching, cross-sector data regulations In many jurisdictions, data regulations remain in affecting entire economies determine whether development. As these regulations solidify, they incumbents can get the external data they need affect financial markets for years to come. to continue owning the customer experience.
Fintechs thrive by using AI to develop unique Digital identity systems are critical to offerings and open banking to access data managing personal data flows
Heightened requirements for data portability As consumers gain control over how their data is erode incumbents’ advantage, allowing fintechs to used, they need an easy way to manage consent compete more effectively in the big-data realm. and authorization. The likely solution is a digital identity system.
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Key questions to consider
••What form will new open banking and data privacy rules take around the world, and how will it affect financial institutions?
••What norms will develop regarding international data flows? How will divergent rules affect cross-border data flows?
••What solution is there to address consumer concerns regarding improper data usage and data sharing?
Concluding thoughts ••Form strategic collaborations. Rely on Understanding and adapting to AI is a journey. It’s open forums to solve for issues collectively. a journey subject to the headwinds and tailwinds Meanwhile, take advantage of shared of economic, social, and political change. It’s also a capabilities to fulfill supervisory responsibilities. journey no firm should take on its own. ••Work with policymakers. Concentrate on the ways AI will change various segments across the The future of financial services lies in its ability to system as well as on new mitigations to explore. fully benefit from new technologies. AI is a new technology that will make front and back office We’ll leave you with this thought. AI in financial operations look radically different, create major services—for individual institutions, the economy, shifts in the structure and regulation of financial and society—is a long-haul flight. Getting it markets, and raise critical challenges for society done, and done well, will take extensive and to resolve. Nothing less than a collaborative effort unglamorous work. Will it add complexity? Yes. will triumph over these challenges and unlock AI’s Does it represent great progress? Also yes. benefits for the best interests of business and society. The Forum will continue to explore the effects of AI in financial services. If you’d like to discuss the Where to go from here? We suggest the ideas in this report—formally or informally—we’d following: like to hear from you. ••Continue with short-term value. However, don’t let short-term priorities distract from understanding the long-term implications of AI and making the appropriate investments to prepare for transformation.
108 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
AI: A glossary
Experts disagree on what AI is—or isn’t. And even a consensus on the technical attributes of AI wouldn’t necessarily help business leaders understand what the technology could do for their organizations.
But in the ongoing global conversation about AI, certain terms come up again and again. Here’s a selection of those terms, along with what they mean in the context of advanced computing technology.
Term Capability
Customization Generate rules from specific profiles and apply general data to optimize outcomes
Decision making Generate rules from general data and apply specific profiles against those rules
Foresight Determine the probability of future events
Interaction Communicate with humans through digital or analog mediums
Pattern detection Recognize regularities in data
109 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
1. “Big tech knows you better than your bank does, and that worries RBC’s CEO Dave McKay,” by Geoff Zochodne, Financial Post, 6 April 2018, http://business.financialpost.com/business/big-tech-knows-you-better-than-your-bank-does-and-that-worries-rbcs-ceo- dave-mckay.
2. “Royal Bank of Canada warns on Big Tech threat to banking,” by Gareth Jones, FinTech Collective, 13 June 2018, http://news.fintech.io/post/102exfi/royal-bank-of-canada-warns-on-big-tech-threat-to-banking.
3. “Strategic update,” Lloyds Banking Group, 21 February 2018, http://www.lloydsbankinggroup.com/globalassets/documents/investors/2018/2018_lbg_strategic_update_presentation.pdf.
4. “From peace to platform: Technology innovation wins the future,” by Chen Xinying, Ping An Group, 20 November 2017, http://www.pingan.com/app_upload/images/info/upload/5677f5d7-409a-41b6-a229-9e15eabec596.pdf.
5. “The Engagement Project: Connecting With Your Consumer in the Participation Age,” by Tara Walpert Levy, Think with Google, May 2013, https://www.thinkwithgoogle.com/consumer-insights/engagement-project-new-normal/.
6. “Citibank Announces National Digital Banking to Serve Clients Across the U.S.,” 26 March 2018, https://www.citigroup.com/citi/news/2018/180326b.htm.
7. “Silver Lake is buying a $500M stake in Credit Karma in a massive secondary round,” by Matthew Lynley, TechCrunch, 28 March 2018, https://techcrunch.com/2018/03/28/silver-lake-is-buying-a-500m-stake-in-credit-karma-in-a-massive-secondary-round/.
8. “IDC FutureScape: Worldwide Cloud 2018 Predictions,” by Eric Newmark et al., October 2017, https://www.idc.com/research/viewtoc.jsp?containerId=US42014717.
9. “Worldwide Public Cloud Services Spending Forecast to Reach $160 Billion This Year, According to IDC,” 18 January 2018, https://www.idc.com/getdoc.jsp?containerId=prUS43511618.
10. “Artificial Intelligence is the New Electricity,” by Andrew Ng, Stanford Graduate School of Business, 2 February 2017, https://www.youtube.com/watch?v=21EiKfQYZXc.
11. “BlackRock bets on Aladdin as genie of growth,” Financial Times, https://www.ft.com/content/eda44658-3592-11e7-99bd- 13beb0903fa3.
12. “Ping An eyes $2bn listing of OneConnect fintech unit,” Financial Times, https://www.ft.com/content/28f7fd06-332d-11e8- ac48-10c6fdc22f03.
13. “Automating the bank’s back office,” by Joao Dias et al., Mckinsey, July 2012, https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/automating-the-banks-back-office.
14. “JP Morgan Working on Artificial Intelligence Trading Bot,” by Shaun Williams, Wccftech, 12 April 2018, https://wccftech.com/jp-morgan-working-on-machine-learning-trading-bot/.
15. “AWS launches Amazon Connect, productizes Amazon’s in-house contact center software,” by Ingrid Lunden, TechCrunch, 28 March 2017, https://techcrunch.com/2017/03/28/aws-amazon-connect/.
16. “Scotiabank invests $250M to help re-skill employees for the digital economy,” BNN Bloomberg, 10 April 2018, https://www.bnnbloomberg.ca/scotiabank-invests-250m-to-help-re-skill-employees-for-the-digital-economy-1.1052470.
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17. “BNP Paribas to spend €3bn on digital transformation,” Financial Times, https://www.ft.com/content/c57ac5ca-ec9b-11e6- ba01-119a44939bb6.
18. “Work in Progress: How CEOs are Helping Close America’s Skills Gap,” Business Roundtable, April 2017, http://businessroundtable.org/sites/default/files/immigration_reports/BRT%20Work%20in%20Progress_0.pdf.
19. “Competitive Survival in Banking Hinges on Artificial Intelligence,” The Financial Brand 2 October 2017, https:// thefinancialbrand.com/67890/.
20. “Jamie Dimon Lays Out JPMorgan-Amazon-Berkshire Health Care Priorities,” by Bill Peters, 5 April 2018, Investors Business Daily, https://www.investors.com/news/jamie-dimon-jpmorgan-chase-amazon-berkshire-venture/.
21. “Global Banking Recovery Stalls, as Risk and Regulatory Costs Bite,” The Boston Consulting Group, 22 February 2018, https://www.bcg.com/d/press/22february2018-global-risk-future-proofing-bank-agenda-185132.
22. “Global Regulatory Outlook 2017,” Duff & Phelps, https://www.duffandphelps.com/-/media/assets/pdfs/publications/ compliance-and-regulatory-consulting/2017-global-regulatory-outlook-viewpoint.ashx.
23. “Risks in Faster Payments,” by Julius Weyman, Federal Reserve Bank of Atlanta, May 2016, https://www.frbatlanta.org/-/media/Documents/rprf/rprf_pubs/2016/risks-in-faster-payments.pdf.
24. “Insurance fraud cases expected to double with the rise of automation,” by Arnaud Grapinet, Medium, 15 January 2018, https://medium.com/@arnaud.grapinet/insurance-fraud-cases-expected-to-double-with-the-rise-of-automation- ce6e700ccc2a.
25. “AI-Driven Risk Data & Next-Generation Technology,” ComplyAdvantage, https://complyadvantage.com/wp-content/uploads/2017/12/20171211USComplyAdvantageOverivewBrochure-1.pdf.
26. “European Parliament adopts European Commission proposal to create safer and more innovative European payments,” European Commission press release, 8 October 2015, http://europa.eu/rapid/press-release_IP-15-5792_en.htm?locale=en.
27. “Background to Open Banking,” UK Open Banking Implementation Entity, https://www.openbanking.org.uk/about-us/.
28. “Open Banking Developments in Asia Pacific,” by Steven Rice et al., Herbert Smith Freehills, 6 February 2018, https://www.herbertsmithfreehills.com/latest-thinking/open-banking-developments-in-asia-pacific.
29. “Why do most U.S. banks shut the door on open banking?,” by Penny Crosman, American Banker, 20 December 2017, https://www.americanbanker.com/list/why-do-most-us-banks-shut-the-door-on-psd2-style-open-banking.
30. “Facebook, Twitter, and Google CEOs summoned for a hearing on data privacy by Congressional committee on 10 April,” Firstpost, 27 March 2018, https://www.firstpost.com/tech/world/facebook-twitter-and-google-ceos-summoned-for-a- hearing-on-data-privacy-by-congressional-committee-on-10-april-4407165.html.
31. “Australia to force ‘big four’ to open banking data by July 2019,” by Asha McLean, ZDNet, 10 May 2018, https://www.zdnet.com/article/australia-to-force-big-four-to-open-banking-data-by-july-2019/.
32. “Federal budget: Ottawa to study merits of ‘open banking,’ a catalyst for fintech,” by Barbara Shecter, Financial Post, 27 February 2018, http://business.financialpost.com/news/fp-street/ottawa-to-study-merits-of-open-banking-a-catalyst-for-fintech.
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Survey Finds Biopharma Companies Lag in Digital Transformation It is time for a sea change in strategy
The life sciences industry’s commitment to digital transformation is increasing, but few organizations are digitally maturing. Here’s how companies can take an enterprisewide approach to digital transformation.
Introduction As is true for most industries, digital transformation is no longer a buzzword, but a strategic imperative for life sciences companies. While first movers would likely gain a competitive advantage, all of today’s companies risk falling behind their competitors in delivering across all elements of the value chain if their strategies are limited to a few pilots and experiments. Life sciences companies have been fast followers in adopting new technologies, but waiting too long to commit could leave some companies with portions of their value chains disrupted in an ever more price-conscious segment.1
Although many life sciences companies have been exploring the opportunities that digital technologies can offer, ranging from engaging with consumers through apps to using artificial intelligence to help improve operations, a recent survey by Deloitte with MIT Sloan Management Review finds that only 20 percent of biopharma companies are digitally maturing. The survey also shows that across industries digitally maturing companies are building new business models by successfully scaling lessons learned from early experiments, changing at all levels of the organization, and enhancing external collaboration.2
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The biopharma industry’s commitment to digital transformation is increasing; companies are thinking about how to organize their digital activities, and some are hiring chief digital officers (CDOs), often with experience in other industries, to lead transformation efforts. That said, we anticipate that the transformation may pose some challenges to biopharma companies, especially in overcoming cultural barriers.
So where are biopharma companies today in The majority of companies that responded to the their digital journey? survey are either in early stages of the journey Deloitte and MIT Sloan Management Review’s (25 percent) or developing their capabilities (55 fourth annual study on digital maturity shows percent); only 20 percent report themselves that digitally maturing companies across to be maturing. These levels reflect how industries are changing their leadership and respondents grade their companies in response culture to adapt to and succeed in a rapidly to the prompt, “Imagine an ideal organization changing market.3 utilizing digital technologies and capabilities to improve processes, engage talent across the Biopharma ranks somewhere in the middle organization, and drive new value generating of industries in digital maturity and adoption business models.” The rankings were on a scale of flexible and adaptable leadership and of 1 to 10, and the three maturity groups were learning models, above manufacturing, financial early (1–3), developing (4–6), and maturing (7–10). insurance companies, and government, but Even though most biopharma companies are still behind IT, entertainment, and telecom. While developing their digital capabilities, 58 percent many biopharma companies are experimenting say that digital is a top management priority and with digital, most are yet to make consistent, 79 percent expect to realize the value of digital sustained, and bold moves to take advantage of initiatives within the next five years. the new capabilities.
SURVEY METHODOLOGY In the fall of 2017, MIT Sloan Management Review (MIT SMR) and Deloitte surveyed global executives, business leaders, and analysts across 28 industries and 123 countries to understand how digital is impacting organizational strategy, culture, leadership, and talent. This report analyzes data collected from 68 biopharma respondents from a distribution of companies of varying sizes (ranging from less than US$1 billion to more than US$20 billion). More than two-thirds of respondents were from outside the United States.
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What are digitally maturing companies digitally maturing biopharma companies report doing differently? scaling up successful initiatives to drive digital Digitally maturing companies differ from those transformation across the organization, this is in the earlier stages of digital maturity in the way true for only 38 percent of those in the early they apply digital, scale learnings, collaborate, stages. Digitally maturing companies also foster and facilitate change. a culture of adaptability and consider lessons from success and failure equally valuable. Digital technologies can make existing Furthermore, they are more likely to encourage competencies work more efficiently and allow feedback and share results from successful and companies to explore new ways of doing failed experiments in ways that facilitate learning business. Survey results show that among across the organization. biopharma companies, a greater percentage of digitally maturing companies are exploiting Digitally maturing biopharma companies also new ways of doing business, compared with recognize that driving change through leadership companies that are in the early phase of digital is not enough; instead, they encourage change maturity (Figure 1). at all levels of the organization. Moreover, individuals at all levels of digitally maturing Digitally maturing companies also implement companies are facilitating change more than digital initiatives in stages, establishing pilots and their counterparts at companies in early stages of taking a measured approach to scaling initiatives digital adoption (Figure 2). based on lessons learned. While 62 percent of
Figure 1. Digitally maturing biopharma companies are most likely to explore new ways of doing business (vs. those in the developing or early stages of digital adoption) Di ital o ective rea do n maturit aturin
Developin
arl
Exploring new ways of doing business Exploiting competencies and exploring new ways of doing business equally Exploiting existing organizational competencies N/A Source: Deloitte Center for Health Solutions analysis of MIT SMR and Deloitte’s 2018 Digital Business Global Executive Survey data.
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Collaboration is also a differentiator. Digitally This is especially important in biopharma, in maturing companies are increasing and which emerging data sources are likely to come encouraging collaboration internally, especially from external stakeholders including hospitals, across functions, more than early-stage physicians, health plans, and patients. companies. They are also more likely to collaborate externally (with business partners and customers) than companies in the early stages.
Figure 2. At digitally maturing companies, employees at all levels are more likely to facilitate change than to inhibit it Figures denote percentage of respondents that agree that: Differences between early stage and digitally maturing Biopharma average organizations
eader hip arl acilitate chan e aturin
ana er arl acilitate chan e aturin
mplo ee arl acilitate chan e aturin
Source: Deloitte Center for Health Solutions analysis of MIT SMR and Deloitte’s 2018 Digital Business Global Executive Survey data.
Figure 3. Top three traits biopharma employees are looking for from their leaders
1 nno at on 2 rect on ecut on
Creatin the condition rovidin vi ion and mpo erin people to or people to purpo e think differently e periment Source: Deloitte Center for Health Solutions analysis of MIT SMR and Deloitte’s 2018 Digital Business Global Executive Survey data. 423,899 East Asia 162,502 115 92,398 South Asia 48,643
36,517 Southeast Asia 26,977
20,369 Non-EU countries 2,640
11,840 Africa and Middle East 12,963
3,951 Latin America 2,175
2,666 Australia/New ealand
1,410 28 EU countries 6,885
USA/Canada 1,400
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What is holding the industry back from succeed in the digital age, and only 20 percent evolving digital capabilities? think their companies are effectively developing The survey sheds light on several factors that may the type of leaders who have the capabilities be holding biopharma companies back, including necessary to lead the organization in a digital lack of a clear vision and leadership and funding for environment (Figure 3). digital transformation. Interestingly, some digitally maturing biopharma Though over half of the companies say that digital companies have recruited chief digital officers investment is a priority for their leaders, they also (CDOs) externally, often from the retail and say they would like leaders to provide a clearer fashion industries, perhaps with the expectation vision and purpose for their organization’s digital that they will provide fresh perspectives to investments. Without this, companies may end up typically conservative and risk-averse companies. being distracted by the “shiny object” syndrome— One CDO in particular has leveraged his fashion shifting focus based on topics they hear about industry experience to change the approach to from media or competitors. Figure 3 shows more patient engagement. He structured his team like of the survey’s findings regarding what biopharma a magazine outlet, hiring editors, librarians, and employees want most from their leaders. copywriters to run a digital campaign.
On leadership, more than three-quarters of Funding is also an issue, according to the survey: biopharma respondents (78 percent) say their Fifty-four percent of respondents agree that organization needs to find new leaders to adequate funding is a major challenge for digital initiatives (Figure 4).
Figure 4. Biopharma requires new leaders and more funding to succeed in the digital age
ea er p Fun n
20 ore than three uarter Only one-fifth agree their More than half agree a ree that their or ani ation are adequate funding is a or ani ation re uire developin capa le ma or challen e ne leader to ucceed leader to help in the impactin di ital in the di ital a e di ital environment initiative
Source: Deloitte Center for Health Solutions analysis of MIT SMR and Deloitte’s 2018 Digital Business Global Executive Survey data.
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Where are the opportunities? requires the capabilities of a digitally maturing Opportunities for digital transformation are organization, including an overall strategy, available throughout life sciences organizations’ culture of collaboration and experimentation, business, from business operations such and supportive leadership. For instance, digital as production and enabling functions to consumer platforms (as described below) engagement with patients, physicians, health can leverage ecosystem relationships and systems, and payers to developing new products partnerships that have a much larger impact than and services. Realizing each opportunity a single organization (Figure 5).
Figure 5. Digital transformation offers biopharma companies opportunities to execute efficiently, engage effectively, and innovate new products and services
ecute Engage Innovate Efficiently Effectively New products & services
Di iti e and rationali e Drive a ne en a ement Catal e the proce e to drive model that create and development o efficiencies and cost deliver tar eted product , ervice , and avin , and develop a omni channel interaction ne u ine model to di ital culture that that addre cu tomer drive value or ena le ne a o need and o ter lo al cu tomer u in data thin in and capa ilitie relation hip and innovative plat orm
Source: Deloitte analysis.
Execute efficiently augmented reality can also capture video, Digital can help companies execute better by which helps eliminate manual recordkeeping improving performance and reducing costs and reconciliation. This may also enhance through collaboration, centralization of digital operational capacity as well as quality review technologies to streamline delivery, and and approval. enhanced capabilities across the organization or • Streamlining marketing efforts. Another division. biopharma company cut 20 percent of its marketing base costs by setting up a global Here are some examples: marketing system. This move followed an • Supply chain. A global biopharma company analysis of creative duplication, in which is experimenting with virtual reality in its the company found that up to 60 percent manufacturing operations. By creating of localized asset creation activities were virtual training programs that mimic aseptic duplicative. The centralized content production environments, managers can development hub it now has can provide cut training time in half and speed up the standardized marketing material in flexible path to proficiency. Smart glasses and formats to over 40 local markets.
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• Acquiring talent more efficiently. A health Patient Ecosystem helps biopharma companies care company used to check nurse applicant build partnerships with advocacy groups licenses twice during the interview process and providers to enhance the experience of to verify a candidate’s ability to practice patients with complex, chronic, and terminal in the assigned state. This involved going to diseases. It supports a next-generation digital a verification website, taking a snapshot of health care network focused on patient support the candidate’s license, and storing the and digital engagement. Patients who consent information in their applicant file. A human to sharing their data receive information and resources “bot” was able to automate 80 updates from the sponsoring organization percent of the process, resulting in 65 percent (typically biopharma companies and patient lower labor costs and reducing the risk of advocacy groups) to help navigate their disease. errors. It freed up one full-time equivalent ••Optimizing the content provided to health worth of work, allowing for staff to focus on care practitioners. A large global biopharma higher value activities. company has built a self-service portal for over 30,000 practitioners across Europe to Engage effectively access marketing and sales content across a Digital can help companies deliver a variety of media. The content shared with each differentiated, engaging, digitally enabled practitioner varies depending on previous impactful experience to key customers, the viewing habits, enabling customized targeting workforce, and ecosystem partners. Key elements and improving the effectiveness of the include using digital platforms to engage patients marketing approach. and other stakeholders remotely, leveraging social and other community networks, and Innovate products and services personalizing experiences with user data to Digital transformation offers opportunities to deliver greater value. Below are some examples: envision and deploy products and services with ••Creating a platform for customer experience. new or enhanced value. Opportunities also PatientConnect (Deloitte’s patient services and exist to improve the return on research and care management platform) delivers consistent, development by shortening drug discovery or high-touch patient experiences across channels otherwise lowering research costs.4 Below are and enables adherence to treatment and care some examples: coordination with each patient’s full network • Expediting recruitment and diversifying of care providers. Through connected apps participants. Using NORA, Science 37, a and devices, PatientConnect supports digital clinical research company, recruited patients therapy, helps improve patient outcomes, for a rare-disease, phase-3 trial at its meta- and helps health care providers coordinate to site approximately 20–30 times faster than manage patient care. The platform analyzes is possible through traditional recruitment internal and external data to gain insights into methods. Using the NORA technology platform patient treatment and interactions and can with a built-in e-consent module, the Science 37 integrate with ConvergeHealth’s Miner platform team gathered medical records and screened for analyzing real-world evidence. patients from seven states in the country and ••Connecting patients, biopharma, caregivers, covered a more diverse study population health care providers, and other stakeholders. (30–40 percent were from minority groups, ConvergeHealth by Deloitte’s Connected compared with the typical 2–10 percent).5
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• Using new data sources. Doc.ai, an artificial and roadmap should explain how initiatives intelligence company, has built a platform form platforms that create real value in the leveraging blockchain to develop insights based short-term and long-term. That goal requires on personal data that users are willing to seeing differently, thinking differently, and doing share. Doc.ai uses AI to process health records, differently. Many life sciences companies begin wearable device data, and/or social media this journey using one of three approaches: accounts and draw inferences. This could serve • Top down. Develop a corporate ambition and as a new platform to collect and derive insights vision, and then decide what needs to be done from patient-reported outcome data.6 to make that vision a reality.
Developing the digital strategy—Where to • Bottom up. Select use cases across domains begin? and use them as the foundation for the Developing and delivering a holistic digital overall digital strategy and roadmap. A use strategy is not an easy task. For some, the word case, for example, might include chatbots “digital” seems to have evolved to mean nothing that can interact with patients and provide and everything at the same time. And there is real-time support, or master data that is a tendency to manage digital initiatives in ways managed through distributed blockchain. Other that take the form of projects or are limited to examples could include cross-study clinical activities within a given division or function. Life data wrangling, automated adverse-event sciences companies that want to move away processing, and the ability to track equipment from that tendency need to develop a digital performance over time using sensor data and DNA by which a company’s digital activities, analytical models. people, culture, and structure are aligned with the organization’s broad ambition. The strategy
Figure 6. Digital transformation approach
ecute Engage Innovate Efficiently Effectively New products and services
Articulate the am ition r ani e, operate, and ehave in ne di ital a De i n the olution and data architecture
Techniques Deliver and cale the am ition
Source: Deloitte analysis.
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• Horizontally. Pick a key business problem Organize, operate, and behave (in new or process and use it to identify potential digital ways) transformation opportunities (e.g., a patient Digital DNA is a set of 23 traits—identified journey, a regulatory approval process). through research—that organizations can adopt to become more digitally mature (Figure 7). Life Regardless of the approach, if done correctly, sciences organizations can use Digital DNA to digital transformation can allow life sciences guide the tactical actions that are needed to organizations to more effectively use data for bring about transformation. making decisions on how to run the existing business and position the organization for the Design the solution and data architecture future. Understanding patients, customers, employees, and ecosystem partners can give life sciences A digital transformation approach companies insight into unmet needs, motivations, Life sciences organizations should start with concerns, and drivers. These insights—combined determining and articulating their ambition. with an understanding of data types and sources, Practically, this means prioritizing initiatives, technical capabilities, and business objectives— anchoring decisions, and focusing on the future. can help companies transform lofty ideas into These capabilities can improve the speed and well-balanced concepts that are ready to pilot, effectiveness in meeting objectives. After articulating scale, and launch. the enterprisewide ambition, leaders should adapt operating models and culture, implement Iterative testing of these ideas, paired with technology, and scale solutions ( Figure 6). rigorous proof of concepts, should minimize risk without curtailing innovation.
Figure 7. Digital DNA traits and organizational needs
Changing mix of traditional and Modulating risk Continuous nontraditional Intentionally and security ecosystem Synchronizing Iterative stakeholders collaborative boundaries disruption ways of working Changing nature Constantly Geography and types of Constant changing Morphing team agnostic work disruption decision criteria structures
Continuously Democratizing Dynamic skill Failing forward, Flattening Fluidity innovating information building learning faster and changing hierarchy Customer Managing Shifting Productive Real time and Nimbleness centricity multi-modal decision rights mobility on demand operations and power
Source: Deloitte analysis.
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In this highly iterative phase, conducting design- and-test sprints to gather feedback quickly from THE RISK OF DIGITAL users and other stakeholders helps refine the TRANSFORMATION Minimum Viable Offering (MVO). The MVO is the Even as life sciences companies develop, solution that has the fewest features needed implement, and refine their digital strategies, to satisfy partners. It also allows the use of concerns about risks are likely to arise. prototypes to test concept desirability, feasibility, Can digital systems work well enough to and viability, before outlining the MVO solution in ensure the safety of products, security of preparation for launch. consumers’ and company information, and compliance with regulatory requirements? These concerns can become a barrier to Deliver and scale the ambition change in some organizations or parts of Building, launching, and delivering on value the organization. However, organizations propositions is the final step before ideas can would do best to acknowledge that risk become reality. This step takes the MVO through is inherent in digital transformation and detail design and development, delivering take steps to address it rather than delay components of the concept, and determining the opportunities digital can bring. whether the business is ready to deliver it. This should include operational readiness assessments and a deployment strategy. Feedback from the market and users and adoption tactics monitoring will further inform how and when to release the MVO.
What does the future look like? Our analysis of industry trends and the cycles of technology adoption point to several new archetypes that could go well beyond today’s primary focus on products. Competencies for these new organizations could include:
• Aggregating and deriving insights from a vast array of shared data;
• Operating smart and connected devices and products that furnish automated and pervasive screening and testing; and
• Delivering just-in-time drugs and other personalized therapies.
Although life sciences companies today may already be doing some of this, the future will focus on these competencies to a much greater extent. Investment in digital technologies and the organizational transformation needed to realize their promise is critical for not only success but for survival.
1. Dawn Anderson, Jonathan Fox, and Natasha Elsner, Digital R&D: transforming the future of clinical development, Deloitte Insights, February 14, 2018.
2. Gerald C. Kane et al., Coming of age digitally: learning, leadership, and legacy, MIT Sloan Management Review and Deloitte Insights, June 5, 2018.
3. Ibid.
4. Anderson, Fox, and Elsner, Digital R&D.
5. Ibid.
6. Brett Davis, Jeff Morgan, and Sonal Shah, Mission critical: Biopharma companies are accelerating real-world evidence adoption, investment, and applications, Deloitte Insights, June 28, 2018.
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Ten Trends in AI's Commercial Application
Artificial Intelligence (AI) can improve labor China is making remarkably fast progress in productivity and bring revolutionary change to AI, boasting one of the biggest AI markets people's life by effectively reducing labor costs, in 2018. The major driving forces include optimizing products and services, and creating significant improvement of computing capability, new markets and job opportunities. Being aware multifaceted policy support, massive and of the economic and strategic importance of frequent investment, and users' demand for AI, global governments and organizations are smart living. increasingly involving AI in national strategies and business activities. Gartner predicts a global The AI development in China differs from other AI market size of over US$5 trillion by 2025. countries' with its extensive R&D and application of AI in various areas. Moreover, AI is expected After more than half century of uneven to change the traditional industry ecosystems as progress since its birth in early 1956, AI has it can be used as the underlying technology to experienced rapid development and a second optimize existing technologies to meet different explosive growth in the past five to ten years. users' needs for intelligent transformation. The growth of AI in the new age since 2015 has demonstrated different trends, as proved by its unprecedented application in business.
Figure 1. Global AI market size
US$ trillion
6 80% 70% 5.052 70% 5 4.725 62% 4.358 60% 3.923 4 3.346 50% 39% 3 40% 2.649
1.901 26% 30% 2
1.175 17% 20% 1 11% 0.692 8% 7% 10%
0 0% 2017 2018 2019 2020 2021 2022 2023 2024 2025
Source: Gartner, Deloitte Research 122 BFA Annual Conference 2019 Pre-Conference Report | Shared Future, Concerted Action, Common Development
Figure 2. AI-enabled solutions to industry pain points
Industry Pain points Selected AI-enabled solutions
Government • Heavy and complex workload for government due • Increase the adoption of self service, employing to increasing city population; technologies such as computer vision and machine learning; • Failure to predict crimes and terrorist attacks • Identify and arrest criminal suspects, using computer vision to analyze their living habits and places they might appear
Finance • Operational cost pressure for financial • Establish intelligent customer service system institutions; with technologies such as speech recognition and semantic understanding to solve • Inability of financial institutions to provide customers' business problems and reduce customized products and services for long tail customer service cost; customers; • Develop intelligent investment advisers, using • Lack of multi-dimensional approaches to credit big data and AI to provide personalized services management, causing financial risks such as bad to more customers; debts and transaction fraud • Establish intelligent risk control systems by integrating AI and big data to enable multi- dimensional data assessment and improve risk management and control capabilities
Healthcare • Failure to meet healthcare needs due to • Leverage intelligent video technology to inappropriate resource allocation caused by diagnose cancer and other related diseases unbalanced medical resources; quickly; • High healthcare cost and waiting too long for • Encourage health management to change diagnosis; people's health habit • Tense relationship between doctors and patients, and misdiagnosis; • Poor condition of basic medical and healthcare service
Transportation • Frequent traffic accidents; • Liberate people's hands, using autonomous driving through sensing and visual technologies; • Limited attention span of humans; and improve logistics efficiency through the use • High cost of freight transportation of shared services and electric vehicles
Retail • Difficult to reflect consumers' needs by using the • Make use of machine learning-enabled user traditional market research methods; profiles to align advertising activities with users' preferences; • Inadequate accuracy of advertising to target audiences and difficulty in measuring the exact • Capture customers' behaviors using machine effect; vision technology to analyze their real needs; • Higher requirements of consumers for in-store • Improve consumer experience, using computer experience, convenient payment and timely vision and speech recognition/semantic delivery understanding technologies
Manufacturing • Time consuming and costly product research and • Identify defective items efficiently and development; accurately using computer vision technology; • High defect rate and low traceability of manual • Use robots instead of humans to work under procedures; dangerous conditions • High cost of massively and quickly producing customized products by manual; • Shortage of low-cost workforce
Source: Deloitte Research
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Figure 3. Number of AI companies
450 395 400
350
300
250 210 200 165 150
100 66 42 50 20 17 17 16 15 12 10 5 5 3 3 3 0 Beijing Sichuan Tianjin Shanxi Fujian Hubei Anhui Henan Jiangxi ShanghaiGuangdong Zhejiang Jiangsu Shandong LiaoningChongqing Heilongjiang
Source: Tsinghua University, Deloitte Research
Deloitte has identified ten trends in AI's 2. Technology giants are engaged in commercial application in China, based on ecosystem competition, while startups intensive industry research and interviews are developing vertical industry solutions with representative companies: and exploring areas where the giants have 1. Chinese companies are less concerned not fully extracted the data value. Tech about the base layer, which requires giants, which are building ecosystems, have long-term investment, while focusing on obtained advantages in infrastructure and technologies and applications to enhance technologies. Inferior to giants in technological their technological competitiveness. AI outputs, startups are increasingly investing in industry chain consists of three layers: base layer sectors (finance, government affairs, healthcare, (chips and algorithm framework), technological transportation and manufacturing, etc.) with layer (computer vision, natural language potential data value that giant companies understanding, speech recognition and machine have not fully tapped and creating solutions learning) and application layer (vertical industry to industry pain points, seeking to establish and accurate scene). Chinese companies tend to appropriate business models. invest in areas featured with mature technologies and clear application scenarios, laying little emphasis on chips. Focusing on chips dedicated to AI may prove to be a new path for Chinese companies to stand out.
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Figure 4. Number of AI industrial parks in different provinces and cities in China
1 1 1
an n 2
2 2 2 2 2 2 an a 2 2 1
Source: Public data, Deloitte Research (according to incomplete statistics)
3. Policy and capital factors are driving 4. Local governments are leveraging AI regional competition in the development industry to accelerate the conversion of of AI industry, with Beijing, Shanghai and old growth drivers to new ones, through Shenzhen taking the lead. Top choices for AI the establishment of industrial parks. A companies to locate are Beijing-Tianjin-Hebei large number of AI industrial parks are springing Region, the Pearl River Delta, the Yangtze River up, mostly based on previous high-tech Delta and the Sichuan-Chongqing Region. Beijing, industrial parks and connecting with the existing Shanghai and Shenzhen secure the top level of companies in the parks. However, AI industrial AI strength. Guangzhou has small number of parks are emerging at a speed too fast to attract large companies and startups and Hangzhou sufficient AI companies and qualified talents. heavily relies on Alibaba, hence at the second level. Chongqing stays at the third level due to restrictions of technology and talent shortage.
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5. In terms of digital government, 7. It is imperative for healthcare industry governments are the main channels for the to establish a standardized mechanism application of AI in smart approaches to for AI products to enter the market government affairs management and public and enhance the building of healthcare security. Early entrants are building barriers, database, in spite of fast development of and data fragmentation is an issue that must AI application in the industry. AI will help be addressed for long-term development. Due healthcare industry to address various livelihood to differences in the governments' work scopes issues including medical resource shortage and and objectives, companies need to provide unbalanced allocation. As it concerns people's customized services instead of standardized life and health, healthcare is subject to stringent solutions, based on the actual needs. The regulation. Whether AI can be extensively applied governments' high requirements for partner in the industry as expected depends on the companies have reinforced the barriers to entry establishment of appropriate standards for and led to the distinct trend that the strong healthcare and data regulation during product performers are getting even stronger. commercialization.
6. AI is most intensively applied in financial 8. Mobility will see changes in the industry, where application scenarios autonomous driving-dominated auto are expanding from ensuring transaction industry chain. The production, channels and safety to transforming the whole process sales models of traditional auto companies will of financial operation. Traditional financial be replaced by new business models. Industry organizations and tech companies are working boundaries between emerging tech companies together to drive the application of AI in financial providing autonomous driving solutions and industry, resulting in changes in the rules of traditional auto companies will blur. With the rise financial services industry, higher business of car-sharing, autonomous driving-based shared efficiency of financial organizations, and mobility will replace traditional private car-based customized products for long tail customers with mobility. The establishment of industry rules and lower financial risks. standards will give rise to new industries such as unmanned freight and logistics with higher safety and speed.
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9. The application of AI in manufacturing AI to compete with tech giants in the application is underestimated, with quality data of big data and AI, which suggests increasing resources yet to be further employed. As a partnerships between retailers and startups. highly technical industry, manufacturing requires complex and customized solutions. Thus, AI is Despite China's global leadership in AI now mainly applied in product quality inspection development, we should be aware of the fact that and sorting, predictive maintenance and other China is still in the early stage of AI development. areas featured with easy expansion of technical Despite the competitiveness in specific applications. However, volumes of reliable, stable technologies and rapid application, China's AI and continuously updated data generated by development is still constrained by the weakness production equipment are not fully utilized, while in basic technologies and other challenges such these data can provide quality machine learning as difficulty in the implementation of standards, samples for AI companies to solve practical defects in laws and regulations and insufficient problems in manufacturing. talents.
10. AI application scenarios in retail industry are transforming from separate individuals to integrated systems. Traditional retailers and startups are joining hands to design application scenarios oriented to consumers, products, stores and supply chains. AI is widely applied in retail industry, which is experiencing application scenario fragmentation and large-scale experiments. Traditional retailers are investing in
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