Whitepaper on China Best Managed Companies

Contents Introduction 1

Winners of 2019 China Best Managed Companies 3

Part I China Best Managed Companies survey report 5 Key insights 6 The report 9 Part II BMC winners and best management practices 45 Pathway to excellence: Understanding the merits of Best Managed Companies to offer solutions for Chinese private companies 46 Case study: How should Chinese private companies achieve management excellence? 52 Part III Expert insights 71 Building management excellence frameworks for sustainable development of private companies 72 Blood is not always thicker than water: why families need governance 78 Transformation & succession: Experience of large family businesses in Chinese mainland 81 Strategy execution: incorporating mission, vision and strategy into execution 84 Technological innovation: Reconstructing traditional industries with faster, better and more cost efficient models 89 Sustainability:Balancing both enterprise and stakeholders for sustainable development 98 Organizational innovation:Practices of transformation into network organizations 102 Conclusion 106 Opinions 107

Editorial Board

Chief Editors Contributors William Chou Deloitte Private Leader We wish to thank the following review panelists and staff Xu Sitao Deloitte China Chief Economist for their insights and contributions to the report: Zhao Jian Deloitte China BMC Program Lead BMC program review panelists: Bank of Singapore Asia Partner Pacific Chief Executive Mr. Derrick Tan, Dean of HKUST Gui Yan Deloitte China BMC Program Director Business School Professor Tam Kar Yan, Harvard Business Lydia Chen Deloitte Research Director Review China General Manager Ms. Liu Xiao, Executive President of Federation of Shenzhen Commerce and Shenzhen General Chamber of Commerce Ms. Lin Hui, and Deloitte China Chairman Philip Tsai Harvard Business Review China: Cui Yi, Li Weiquan, Qi Jing Deloitte China: Allen Xie, Wang Yunjuan, Carol Zheng, Jolin Gu, Stacie Liu, Liu Keyu, Josie Zhou, Liu Zhuang, Cui Peng, Hu Yi Whitepaper on China Best Managed CWomhipteanpaiepse r| oWn innerChinsa oBfe 20st 19Ma nCahginaed BCeosmt pMananieasg e|d I ntrCoomdpuanctiiones

Introduction

China has made incredible advances in developing its economy over more than 40 years of reform and opening up, with total GDP having grown by 22,400 percent. Private companies in particular have contributed significantly to China's economic development. Without them, there could have been no "China miracle". Up to now, private companies have become an essential pillar of the Chinese economy, and a good number of big and strong private companies have emerged with management excellence.

As we observe, the development of Chinese private companies has the following four features:

First, rapid expansion in scale. Statistics show that the number of registered private companies in China exceeds 27 million. They have contributed more than 60 percent of GDP, and over 50 percent of state revenue. Of the listed companies, family enterprises account for more than 50 percent, and the minimum revenue of China's top 500 private companies has increased by 50 percent from five years earlier.

Second, entrepreneurship is a core driver for rapid growth. The first generation of entrepreneurs have had a subtle sense of policy changes, market trends and business opportunities, as well as strong endurance, resilience, and coordination skills, which are key to the rapid growth of private companies. Their individual judgments and styles have shaped the development and management models of the companies.

Third, Chinese private companies in general have focused more on business than on management. As we go beyond the leaders and look at the vast group of private companies, the lack of effective internal control and capability in addressing external risks due to extensive management under rapid business growth begins to show.

Lastly, apparent deficiencies in sustainability. When a company grows big enough, it should pay more attentions to "sustainable" profitability and growth. With focus on companies' long-term visions, sustainability offers a development model that helps build core capabilities of the company based on such vision.

No doubt that there have emerged a number of private companies with management excellence, who are led by brilliant entrepreneurs and centered on technologies, and have developed and iterated their management models with own characteristics. However, most private companies still need tos learn from advanced management practices to build up a strong structure and systematically enhance management capabilities. This, at present, is a prime concern for private companies in China.

We also notice that most awards and rankings for companies, such as top 500 and fortune rankings, are mainly based on their scales including revenue, asset value and market value. There is not a program to comprehensively measure and evaluate the management systems of private companies.

In view of such, Deloitte China, with Bank of Singapore, the Business School of Hong Kong University of Science and Technology (HKUST), Harvard Business Review China and the Federation of Shenzhen Commerce, launched the Best Managed Companies

Whitepaper on China Best Managed CWohmitpeanpaipees r| oWn iCnnerhinas oBfe 20st M19a nCahginaed BCeosmt pMananieasg e| dI ntrCoomdpuanctiiones

(BMC) program in August 2018. The program, established in Canada in 1993, has been introduced to many countries worldwide and is now the only global initiative to identify and recognize private companies in terms of their management. In 2018, building on Deloitte’s 25-year experience of running the BMC program in other countries, Deloitte China leveraged global resources to study the management styles of over one thousand companies across the globe, and boiled down to four cornerstones of management excellence and relevant criteria for private companies. The four cornerstones, i.e. strategy, capabilities, commitment and financial strength, are integral and interconnected to each other, and comprise the enterprise frameworks for management excellence.

By launching the first BMC program in China, Deloitte worked with partners in various sectors to review candidates' information, organize Best Managed CEO Lab on-site review and mentorship, arrange reviews by an Independent Review Committee, and selected a list of 23 companies that show management excellence across different sectors as the first 2019 Best Managed Companies winners.

Through the BMC program this year and beyond, we aim to identify and recognize China's private companies with advanced management ideas and excellent business performance, and help them develop into best managed companies with "industry leadership, global thinking, long-term strategy, innovative development and people- oriented" that are set to achieve solid long-term performance and robust growth.

The Whitepaper, which presents the results of the program, includes three parts: Part I contains Deloitte's analysis of the overall development of private companies in China and a sample questionnaire survey on their management; Part II focuses on case studies of the first BMC winners; and Part III shares insights and opinions of review panelists on the management of China's private companies.

Workers assembling a pump cementing truck at Yantai Jereh Petroleum Equipment & Technologies Co., Ltd. Photo/Visual China

Whitepaper on China Best Managed Companies | Winners of 2019 China Best Managed Companies

Winners of 2019 China Best Managed Companies

The program leverages a global framework of "Management Excellence Criteria" to evaluate private companies based on the four cornerstones of management excellence, i.e. strategy, capabilities, commitment and financial strength. The framework covers best practices in 20 segments of management. First is strategy, the soul of a company. There would be no management excellence without a clearly defined strategy, even if the company performs well. A good strategy would not only be recognized by the management, but also facilitate understanding of the company's mission, aspiration, strategies and the path towards it. At the same time, effective strategic management systems, including mechanisms for the implementation, evaluation and analysis of the strategy, are also important. The second is capabilities. With a clear strategy, companies need to establish a proper system with supporting execution capabilities, systematically enhancing competitiveness by improving their organization, processes, technologies and risk control, and via mergers and acquisitions, alliances, global expansion as well as innovation. Commitment comes as the third, as in addition to strategy and execution system, companies need their employees of all levels to have commitment and a sense of mission towards the company, including support of leadership, talent development, corporate culture, and family inheritance and succession plan, as well as corporate social responsibilities. Lastly, financial strength, which includes excellent financial performance, good corporate governance, standardized financial system and sound risk control.

Figure 1: Deloitte Management Excellence Criteria Global Framework

Strategy Capabilities Commitment Financial strength

· Clear & focused · Focus on enhancing · Continuous · Business performance strategic direction productivity investment in talent strength · Strong periodic · Strong capability in development · High asset efficiency strategic review resources · Individualized, · Effectively balanced process integration flexible and systemic corporate governance · Brief & concise · Strong commercial incentive policy system team viability of · Build a "as one" · Sound tax management communication and innovation and corporate culture strategic execution digitalization · Has plan for future · Top industry · Leading brand value leaders development ranking in specific · Strong capability in and succession segment global operation · Has sound CSR · Risk intelligence management system

Source: Deloitte Research

Whitepaper on China Best Managed Companies | Winners of 2019 China Best Managed Companies

Since launching the BMC program on 1 August 2018, Deloitte China and its partners have nominated nearly 90 companies for the program. During August to October, the review panel conducted a primary screening of the companies from perspectives of industry rankings, company scale/management level, financial strength, shareholders/executives, risks and compliance, etc., and issued registration forms to over 30 companies. After research, analysis and comparison based on the registration information submitted, the review panel organized Best Managed CEO Labs for a shortlist of more than 20 outstanding companies beginning from late October.

From perspectives of the 20 management areas linking to strategy, capabilities, commitment and financial strength, and with an on-site review team comprised of more than 30 experts from Deloitte and a dozen from Bank of Singapore, we have comprehensively held in-depth discussions with CEOs and executives of the companies through the Best Managed CEO Labs to understand their management, learn about best management practices and their own management features. The Labs have received high praise from the candidate private companies. Through more than five months of research, review and communication, we have selected the following 23 companies as the winners.

Figure 2: Winners of 2019 China Best Managed Companies

Company name Industry iKang Healthcare Group,Inc Life Science BETTER LIFE COMMERCIAL CHAIN SHARE CO.,LTD. Consumer Skyworth Group Co.,Ltd Manufacturing DAQO GROUP CO.,LTD. Manufacturing Tunghsu Group Co.,ltd Manufacturing Haidilao International Holding Ltd Consumer Kidswant Children Products Co.,Ltd Consumer Hengan International Group Co.,Ltd. Manufacturing Jack Sewing Machine Co.,Ltd Manufacturing 9F group Inc. IT K11 Concepts Limited Real Estate Longfor Group Holdings Limited Real Estate Shandong Weigao Group Medical Polymer Company Limited Life Science Shanying International Holding co.,Ltd Manufacturing Shenzhen Mindray Bio-Medical Electronics Co.,Ltd Life Science Shenzhen Absen Optoelectronic Co.,Ltd Manufacturing Shenzhen Inovance Technology Co.,Ltd. IT Tempus Global Business Service Group Holding Ltd. Consumer Topchoice medical investment CO.,Inc Life Science New Oriental Education & Technology Group Inc. Consumer Yantai Jereh Oilfield Services Group Co.,Ltd. Energy China Education Group Holdings Limited Consumer Sunpower Group Ltd. Manufacturing

Source: Deloitte Research

Whitepaper on China Best Managed Companies | Part I China Best Managed Companies survey report

Part I China Best Managed Companies survey report

This is an era of uncertainties and challenges. How can private companies achieve sustainable growth in the future?

Private companies should actively explore ways that align with the law of survival of private companies in times of economic transformation, and identify pain points and issues to enhance their own management practice from multiple aspects. This is also Deloitte China's initial intention to initiate this BMC project.

Shenyang New World Centre K11 Art Mall. Photo/Visual China

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Key insights

How can Chinese private companies realize sustainable growth amid uncertainties and challenges? In order to better understand and analyze the overall management status of private companies in China, Deloitte conducted a nationwide survey on private companies, in an effort to identify their pain points and solutions. Key findings include:

Shortfalls in execution of strategies: Private companies are good at making the big plan, including how to closely match product value with customer needs; while their major pain points include developing, executing, implementing and practicing management mechanisms as well as accessing resources.

Approaches to and bottlenecks in diversified development: In their search for a "second race track", the two approaches most adopted by companies surveyed are "business model innovation" and "digital & new technologies". How to choose the right "second race track" and how to conduct efficient cross-disciplinary integration are the main bottlenecks.

Slightly unbalanced innovation: Chinese private companies focus their innovation efforts on product improvement and new business forms, while investment in innovations that indirectly enhance competitiveness through talent management, services, sales channel, financing methods, and customer engagement remains inadequate, which is exactly where Chinese private companies lag behind the successful multinational companies.

International influence yet to be enhanced: For companies with experience in overseas M&A, the challenges are to identify and respond to risks before, during and after M&As as well as to establish mechanisms to achieve synergy between the parent company and overseas companies.

Talent development struggling to keep pace with business growth: Most private companies surveyed pursue leadership development with a focus on improving the mindset and vision of middle managers, hoping to help them take part in the development and execution of the overall strategy of the company, in an effort to address the gap between the workforce and business growth. A lack of competitive salaries remains the greatest pain point of private companies in recruiting and retaining high-end talents, while at the core of today's Chinese entrepreneurship lies persistent innovation, resilience and continuous learning.

Insufficient investment in risk management: Chinese private companies in general fail to connect risk management with business growth, and they need to establish a long- term and effective management system.

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A Better Life Mall in Nanchang, Jiangxi. Photo/Visual China

In a word, there remains a variety of challenges for Chinese private companies to enhance their management practices. A number of companies, however, have emerged under such circumstances. Therefore, we have aimed to recognize Chinese private companies with management excellence as Best Managed Companies in China, hoping to set examples for Chinese private companies as a whole to better explore development paths, enhance management practices and seize future opportunities. By analyzing the stories of the first BMC winners in China, Deloitte proposes the following solutions for Chinese private companies to achieve management excellence:

First, develop long-term strategic planning as early as possible, focusing on future perspectives. Enterprises should formulate complete and detailed annual strategic planning on paper, with clearly defined long-term vision, medium-term strategies and short-term plans.

Second, pursue targeted technology and model innovations, and do not innovate for innovation's sake. Build a clear innovation management and planning system, and allocate sufficient resources to support these targeted innovations, and purposefully bring in relevant talents. Keep up with the time with regard to the application of digital technologies.

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Moreover, think globally and enhance international influence by integrating into local communities and value systems allowing companies to grow into "global organizations", acquire talent and new ideas, and ultimately create high-quality products and services

In addition, adhere to people-oriented principles to continuously invest in talent development, sustain and develop corporate culture and entrepreneurship, and establish a sound social responsibility management system to inspire teams' commitment to shared vision.

Lastly, be proactive and prepare for changes. Be flexible and responsive in face of external changes, displaying not only an ability to survive and withstand risks, but also management excellence. Such risk management and response capabilities become even more important in the context of macro-economic downturns and intensifying de-globalization.

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The report

1. Overview of the development of private companies in China Private companies in China have undergone progressive development through four main stages. The first stage was from the launch of reform and opening up to early 1990s when private companies emerged in times of economic difficulty. From the 1990s, private companies entered the second stage of development. During that period, the market economy system was established which gave rise to a wave of official exodus, and the state-owned enterprise (SOE) reform kicked off which boosted the robust development of private companies. In the first decade of the 21st century, private companies entered the third stage of development. The policy environment was opened up significantly, allowing rapid growth in the size of private companies. Meanwhile, with China entering the World Trade Organization (WTO), private companies began to be part of the globalization process. From the second decade of the 21st century till now, private companies have been seeking changes in the new normal. Today, the private economy are now the new force of the economic growth in the Chinese market.

1.1 The scale of the Chinese private economy continues to grow rapidly According to the data of the National Bureau of Statistics of China, as from the 18th NCCPC convened in September 2012, the number of private companies and registered capital contributed 99 percent and 70 percent of the overall growth of companies respectively. They became the main driving force of economic development. As of the end of 2017, the number of private companies in China reached 27.26 million, and registered capital exceeded RMB165 trillion. (As of September 2017, the actual number of private companies was 26.07 million, and registered capital was 165 trillion, accounting for 90 percent and 60 percent of all companies respectively) (see Figure 1).

Figure 1: Percentage and growth rate of private companies

Up 10.8% 100%

80% Up 23.1%

60%

40%

20%

0% Percentage of private Percentage of companies registered capital

2012.9 2017.9

Source: State Administration for Industry and Commerce, Deloitte Research

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In addition, according to the data of China's Top 500 Private Enterprises listed by All- China Federation of Industry and Commerce (ACFIC), the number of Chinese private companies with revenues exceeding RMB100 billion increased year-on-year, reaching 42 in 2018, compared with 16 in 2014 (see Figure 2).

Figure 2: The number of private companies with revenue exceeding RMB100 billion (2014-2018) Unit: No. of companies CAGR27.29% 42

22 16 17

2014 2015 2016 2017 2018

Source: ACFIC, Deloitte Research

In terms of the percentage of private companies among China's Top 500 Enterprises, the number of private companies increased rapidly from 184 in 2011 to 226 in 2017. The total revenue of the 226 private companies on the list in 2017 reached RMB18 trillion, a year-on-year increase of 18 percent under the same measure, with a number of indexes substantially outperforming the average growth rate of the Top 500 Enterprises and SOEs. Among the Top 500 Enterprises in 2018, 237 were private companies. The gap in the number of companies entering the list further narrowed (see Figure 3).

Figure 3: Private companies accounted for nearly half of China's Top 500 Enterprises (2017-2018)

52.60% 45.20% Private companies SOEs and others 54.80% 47.40%

Note: The inner circle and outer circle represent 2017 and 2018 respectively Source: China Enterprise Confederation, Deloitte Research

In terms of distribution by sector, the sectors covered by private companies are increasingly diversified. The percentage of the traditional manufacturing sector continued to decline (see Figure 4).

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Figure 4: Sector distribution of private companies with revenue exceeding RMB100 billion (2014-2018) 100% Gas production and supply 90%

80% Commercial services 70% Conglomerates 60% Finance and insurance 50% 40% Internet 30% Real estates 20% Retail and wholesale 10% 0% Manufacturing 2014 2015 2016 2017 2018

Source: ACFIC, Deloitte Research

In terms of economic contribution, private companies have made significant contribution in driving the Chinese economic development. The percentage of GDP generated by the private economy rose to over 50 percent in 2015 from 1 percent during the initial stage of reform and opening up.

In terms of tax revenue, China's tax revenue totaled RMB15.6 trillion in 2017, of which RMB8 trillion, or 53 percent, were contributed by private companies, and RMB4 trillion, or 29 percent, were contributed by state-owned and state-holding enterprises (see Figure 5).

Figure 5: Percentage of contribution to tax revenue by major market entities in China in 2017

18.70%

Private companies

SOEs 52.70%

Others 28.60%

Source: State Taxation Administration, Deloitte Research

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In terms of the percentage of total investment, private investment had accounted for over 60 percent of the fixed asset investment of China for five consecutive years since 2012, peaking at 65 percent. In particular, in the manufacturing sector, more than 80 percent of investment were made by the private sector. Private investment has become the major force of investment.

In recent years, China rolled out a series of policies and measures such as "The 36 Articles on the Non-public Economy", "The 36 Articles on Private Investment", "The 39 Articles on Encouraging Social Investment", "The 10 Articles on Stimulating the Vitality of Effective Private Investment" and Opinions on Deepening the Reform of the Investment and Financing Systems with the aim of creating a fair market environment to stimulate vitality of private investment.

When comparing the investment by sector, sectors contributing a higher percentage of private investment included the manufacturing sector (87 percent), the farming, forestry, animal husbandry, and fishery sector (76 percent), the mining sector (54 percent), and the culture/sports and entertainment sector (52 percent) (see Figure 6).

Figure 6: Distribution of private companies by sector (2016-2017)

Manufacturing 87.20% 87.2% Farming, forestry, animal 74% husbandry, and fishery 76.0%

Mining 59.70% 53.6%

Culture and 51.80% entertainment 53.0%

Construction 42.90% 46.2% 2016 Hygiene and 38.10% 2017 social work 41.4%

Electric power, 36.80% heat power, etc. 38.2%

26.40% Education 24.9%

Water, environment 22.70% and public utility 22.6%

Transportation, warehousing 22.60% and postal services 20.3%

Public administration, 19.60% social security, etc. 16.5%

Source: National Bureau of Statistics, Deloitte Research

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According to the statistics of ACFIC, the private economy contributed more than 80 percent of urban employment and over 90 percent of new jobs.

In short, the significance of private companies to the Chinese economy today can be summarized using “56789”, as private companies contributed over 50 percent of the state’s fiscal revenue; over 60 percent of GDP, fixed asset investment and foreign direct investment; over 70 percent of technological innovation and new products of enterprises; over 80 percent of urban employment; and over 90 percent of new jobs (see Figure 7).

Figure 7: Contribution of the private economy to the Chinese economy

Over 50% of the state’s fiscal revenue

Over 60% of GDP, fixed asset investment and foreign direct investment

Over 70% of technological

innovation and new products of enterprises

Over 80% of urban employment

Over 90% of new companies and jobs

Source: Deloitte Research

The rapid growth of the private economy has been driven by a number of factors.

The first driving force is encouragement and system innovation in terms of policies. Since the private economy was officially recognized upon constitutional amendments in 2004, measures in respect of access to market, investment and financing, taxation, and land use have been constantly implemented, which continuously raised the status of the private economy. State-level system reform and innovation such as the SOE reform is an important factor for the rise of the private economy. In November 2018, Xi Jinping said in a key speech at a private company symposium, "the status and role of the non-public economy in the development of the Chinese economy and society have not changed; our policy of encouraging, supporting and guiding the development of the non-public economy has not changed; our policy of committing to creating a sound environment and offering more opportunities for the non-public economy has not changed". From a policy perspective, China's private economy will only get stronger and could not be weakened; it could not fade out and will only go out further in the playing field.

The next driving force is the improvement in the understanding of theories. Reform and opening up and the entering of the WTO have exposed the Chinese companies to many world-leading companies which brought to China more advanced management theories when they entered the Chinese market. By drawing on these leading concepts in

Whitepaper on China Best Managed Companies | Part I China Best Managed Companies survey report addition to experiencing and exploring by themselves, some private companies successfully started from scratch and grew in scale.

Furthermore, entrepreneurs and entrepreneurship have played an important role. The first-generation entrepreneurs after reform and opening up largely focused on the entity's economy. They were characterized by their courage to break new ground, their diligence, and their stronger emotional ties with the country (such as Ren Zhengfei, Liu Chuanzhi and Lu Guanqiu). The second generation was comprised of the entrepreneurs of the virtual economy from the mid-1990s to the start of the information age in China. They were characterized by high education level, high perspective, and openness to cooperation. The third-generation entrepreneurs today are in the post-internet age, an age of transformation when physical and virtual economies integrate. Their characteristics can be summarized by the substance of entrepreneurship of the new age as mentioned in the 19th NCCPC, which includes engaging in innovation and starting businesses, focusing on quality, and pursuing excellence. The three generations of entrepreneurs witnessed the rapid development of the Chinese private economy.

1.2 Gradual globalization of the Chinese private companies Private companies are gradually becoming China's foreign trading entities In 2009, China became the world's largest exporter, and remained the largest trader in goods for three consecutive years from 2013 to 2015, of which private companies were the largest exporters.

According to the data of the Ministry of Commerce in 2017, private companies accounted for 47 percent of the Chinese exporting companies, making them the largest exporting entities in China. Foreign companies and SOEs were second and third respectively, which accounted for 43 percent and 10 percent of the Chinese exporting companies respectively (see Figure 8).

Figure 8: Percentage of exports of private companies between 2013 and 2017

46.50% 47% 46.00% 46% 45.20% 45% 44% 43.10% 43% 42% 41.50% 41% 40% 39% 2013 2014 2015 2016 2017

Source: Ministry of Commerce, Deloitte Research

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Besides, as indicated in The Belt and Road Big Data Report of the State Information Center, private companies accounted for 42 percent of the top 50 enterprises with influence in the belt and road initiative. Specifically, private companies have exceptional impact on the investment in the ASEAN countries. In terms of foreign trade exporting entities in China, private companies accounted for 56 percent of exports to the Belt and Road countries in 2018, making them the most significant force of exports. In terms of exports by region, private companies contributed the largest volume of exports to different regions, of which the Central Asia was the highest in percentage, followed by Southeast Asia, Eastern Europe, and South Asia, where the percentages of exports by private companies all exceeded 50 percent.

Foreign investment and M&As by Chinese private companies grow in size rapidly In recent years, the growth of foreign investment by SOEs declined year-on-year, while the status of private companies and private capital became increasingly significant. According to The Chinese Private Enterprises Foreign Direct Investment Index Annual Report 2017, as of the end of 2016, non-SOEs accounted for 46 percent of the USD1.18 trillion of China's foreign non-financial direct investment. Private companies' foreign investment may account for about 40 percent.

Further, as technological level and operating capacity improved, cross-border M&As have gradually become the most important means of foreign investment for the Chinese private companies. Compared to other modes of investment, cross-border M&As do not require a long period of construction. Therefore, it has become the preferred approach of multinational companies that hope to accelerate the expansion of the market scale and enter the target market in a short time.

According to the data of the Ministry of Commerce, the volume of foreign M&As by Chinese companies grew at an average annual rate of 16 percent between 2013 and 2016. In 2017, the state strengthened scrutiny and control on capital outflows of foreign investment made by certain non-priority sectors. As a result, the volume of foreign M&As dropped by 55 percent compared to 2016. Despite a decline in size, the quality of M&A projects as well as their relevance to the state's strategy were both improving. In respect of parties to the M&As, private companies have been accounting for about 60 percent, being the major force of foreign M&As (see Figure 9).

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Figure 9: Percentage of investors by type and deal value of cross-border M&As of Chinese companies (Unit: USD1 billion)

100%

90% 80%

70%

60% 50%

40%

64.92% 66.31% 30% 58.60% 53.34% 54.19% 20%

10% 0% 2012 2013 2014 2015 2016 Private companies SOEs Financial investors

Source: Hurun Report, Deloitte Research

Meanwhile, emerging private internet enterprises represented by Baidu, Alibaba and Tencent are initiating a new wave of investment. This expands the investment landscape to Silicon Valley in the United States, facilitating companies to seek high-quality start-up projects, and leads the investment hotspot in the coming years. The strategic investment landscape is the key focus of these enterprises: Baidu has wholly acquired mobile security company Trust Go; Tencent has invested in flash sales website Fab; Alibaba has invested in app search engine Quixey, mobile chat and call app Tango, and smart remote app start-up Peel. The rapid development of private internet companies in China has boosted foreign M&As by Chinese companies as well as cross-border M&As of innovative products and businesses instead of traditional sectors.

Besides, Chinese companies' enthusiasm for foreign greenfield investments has held up in recent years. Major investment destinations range from the key regions along the Belt and Road to developed regions like Europe and North America. Greenfield investments directly promote the growth of production capacity, output and employment of the host country. A company's marketing network, market entry channels and brand loyalty are key factors determining whether greenfield investments are suitable for the company. The higher the volume of exports of the company, the greater the potential for it to make greenfield investments. The greenfield investments of Chinese private companies in Africa are mainly major projects. In Europe and America, such investments are mainly minor projects, but investment volume is the largest.

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Localization of overseas staff of Chinese private companies is yet to deepen As the pace of overseas trading and investment of Chinese private companies continue to accelerate, the number of overseas employees of these companies has increased year by year. The number and percentage of overseas employees indirectly reflect the level of localization of a company's overseas business. Overall, the level of localization of overseas employees of Chinese private companies is still lower compared to that of central enterprises and SOEs.

According to the data of the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), 85 percent of the staff of the overseas branches and subsidiaries of central enterprises were local employees, and some reached a localization rate of over 90 percent. The percentage of staff localization of CNPC's Indonesia operation and China Mobile's Pakistan operation achieved 99 percent. For private companies, the level of staff localization is relatively higher in Huawei. For example, in 2017, Huawei had more than 35,000 overseas employees. The percentages of staff localization of Huawei from 2015 to 2017 were 72 percent, 71 percent and 70 percent respectively.

Of China's Top 100 Multinational Companies and Multinational Index published by China Enterprise Confederation and China Enterprise Directors Association, 33 were private companies. The percentage of overseas employees of Chinese companies was just 9.76 percent, which was far lower than that of Fortune 500 companies as well as the percentages of overseas revenue and overseas assets of private companies (see Figure 10).

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Figure 10: Percentages of overseas staff of China’s Top 100 Multinational Companies and Fortune 500 Companies

58.65% Percentage of 9.76% overseas staff

Global 64.93% Percentage of China overseas revenue 20.86%

62.15% Percentage of 18.79% overseas assets

Source: ACIFIC, Fortune 500, Deloitte Research

1.3 Chinese private companies continue to expand their investment in R&D and innovation while development remains unbalanced During the four decades of reform and opening up, private companies have continuously grown in market shares, and are gradually taking the lead in technological innovation for the state. According to the data of the National Bureau of Statistics, the R&D spending of private companies above designated size reached RMB761.9 billion in 2016, accounting for 70 percent of the total R&D spending of enterprises above designated size. Compared to the data of 2012, the percentage had increased by 10 percentage points in five years, with CAGR achieving 15 percent.

In September 2018, the National Development and Reform Commission (NDRC) indicated that private companies have flexible and market-based mechanisms, and have devoted significant efforts and achieved sound outcome in optimizing industrial structure, promoting technological innovation and facilitating transformation and upgrade. According to the statistics of NDRC, private companies contributed 65 percent of patents, over 75 percent of technological innovation, and over 80 percent of new product development in China (see Figure 11).

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Figure 11: Percentage of R&D investment of Chinese private companies

RMB100 million 8000 72% 7000 70% 6000 69.60% 68% 66% 5000 67.20% 65.70% 64% 4000 64.10% 62% 3000 60% 2000 59.90% 58% 1000 56% 0 54% 2012 2013 2014 2015 2016

R&D spending of private companies Percentage above designated size Note: The data of private companies represents the R&D investment of "domestic enterprises above designated size", excluding the R&D investment of "SOEs, collective enterprises, joint-stock cooperative enterprises, state joint-ownership enterprises and wholly state-owned enterprises" from the National Bureau of Statistics. Source: National Bureau of Statistics, Deloitte Research

Meanwhile, investment in innovation by leading private companies in China is coming into the spotlight internationally. The Economics of Industrial Research and Innovation (IRI), a research institute under the European Commission, publishes the world's top 2500 R&D investors annually. The number of Chinese companies entered the list is on the rise steadily every year. In 2017, 376 companies from China made it to the list, surpassing Japan in terms of number of companies, and second only to the United States. 44 Chinese companies hit the top 500, of which 18 were private companies, representing nearly half of those Chinese companies, and grown by three in terms of number compared to last year. Besides, according to the data of IRI, the R&D investment of the Chinese companies on the list grew at a rate far above the average level across the world over the past decade. This indicates that leading private companies from different industries and sectors in China have already achieved a considerable level of competitiveness in R&D and innovation worldwide (see Figure 12).

Figure 12: R&D investment growth of Chinese companies among R&D Investment Top 2500 against the global total

40.0% 37.5%

30.4% 31.7%

30.0% 26.8%

20.8% 19.7% 18.8% 20.0% 15.7% 11.0% 7.7% 9.0% 10.0% 6.6% 7.1% 6.7% 6.5% 5.8% 4.4% 5.2% 3.9% -3.6% 0.0%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 -10.0% Chinese companies R&D investment growth Global R&D investment growth

Source: IRIEU, Deloitte Research

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In addition, leading Chinese private companies are accelerating their development in the innovative new industries. In the past few years, a substantially larger number of private companies have entered new fields such as the energy conservation and environmental protection industry, the new materials and new energy industry, the new-generation information technology industry, the high-end equipment manufacturing industry, the bio industry, and the new energy automotive industry. Private companies are gradually becoming the lead of national strategies such as "Made in China 2025" and "Industry 4.0". The Ministry of Science and Technology and the ACFIC have indicated the need to foster a number of innovative private companies with outstanding core technology capacity and strong integrated innovation capacity that can lead the industrial development with global competitiveness in different sectors. Following the 19th NCCPC, China has defined innovation and the promotion of conversion of technological advances as the priorities of the government, with the aim of accelerating transformation from "made in China" to "created in China". The core tasks include achieving innovation-driven industrial and commercial reforms and reshaping China into the "world innovation center" from the "world factory". Private companies will play a critical role in these tasks (see Figure 13).

Figure 13: China's industrial transformation pathway

I n

Phase 1: d

Product Sales and u R&D Procurement Manufacturing Marketing Services early to s Development delivery t

late '90s r y

Only small amount of isolated equipment and products s t r u

Phase 2: c Product Sales and t mid to R&D Procurement Manufacturing Marketing Services u Development delivery r

e late '90s

Started providing raw Started consolidating Started to have independent p g

material procurement product and brands for local market r a

equipment distribution d i n

Phase 3: g Product Sales and 2000- R&D Procurement Manufacturing Marketing Services Development delivery 2010 Consolidated into the global Consolidated into the global The best time to enter resources network manufacturing network the Chinese market

Phase 4: Product Sales and 2010- R&D Procurement Manufacturing Marketing Services Development delivery 2020

Started R&D and product development Consolidated into the global value chain

Phase 5: Product Sales and 2020- R&D Procurement Manufacturing Marketing Services Development delivery

Realize the innovation-driven Industry 4.0 Innovative business model industrial revolution From "The World's Factory" to "The World's Innovation Center" Source: Deloitte Consulting, Deloitte Research

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Over the four decades since China's reform and opening up, private companies have continuously grown in market shares, and are gradually taking the lead in technological innovation for the state.

However, private companies are still facing unbalanced development in technological innovation. Although a few domestic private companies and even those world- renowned private enterprises have already taken the lead in technological innovation, over 90 percent of micro, small and medium-sized enterprises still mainly engage in general competitive industries such as the low-end manufacturing sector and the service sector. Their technical threshold is lower and are positioned at the lower end of the industry chain. These companies largely live on low cost, low-level processing and emulation. The added values of their products are lower, lacking core competitiveness. Even among the companies on the Top 500 Private Enterprises ranking, more than half of which are still lower than 1 percent in terms of R&D intensity; and more than 85 percent of those companies are lower than 3 percent. Internationally, it is generally believed that only companies with R&D intensity of over 5 percent may compete in the market. That is to say the robust R&D investment of Chinese private companies was in fact driven by a few leading enterprises, while the overall level is yet to improve (see Figure 14).

Figure 14: R&D intensity distribution among 2018 Top 500 Private Companies

1.5% R&D intensity>10%

16.0% R&D intensity 3%-10%

27.4% R&D intensity 1%-3%

55.1% R&D intensity < 1%

Source: All-China Federation of Industry and Commerce, Deloitte Research

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1.4 Private companies are becoming more concentrated in certain geographies with entities in coastal areas gaining notable advantages Against the backdrop of reform and opening up, China is entering into the market economy, and its coastal areas, for their advantages in location, market environment and policy, have become the heartland for the development of private companies. The Yangtze River Delta, Pearl River Delta and the Bohai Rim have grown into the major areas where private enterprises concentrate. As indicated by the 2018 China Top 500 Private Enterprises report, nearly 40 percent of the Top 500 are based in the Yangtze River Delta, one quarter in the Bohai Economic Rim and 12 percent in the Pearl River Delta. These companies, along with those in the coastal province Fujian, contributed 422 companies, or 84 percent of the Top 500.

These geographies each have their own advantages in location, resources and entrepreneurial traditions. The east end of Yangtze River Delta connects the East China Sea and starts from the Yangtze River on its west, providing a trade hub for areas along the Yangtze River and ports. The areas along the Yangtze River abound in resources, and the population are well familiar with business traditions and knowledge. These provide a solid foundation for the development of private businesses along the Yangtze River Delta. Regional models such as "Southern Suzhou Model" and "Wenzhou Model" have formed. The Pearl River Delta is neighbor to Hong Kong and Macau, two SARs with well-established market economy mechanisms, and stands at the estuary of the Pearl River and the connection between China and Southeast Asia. It naturally pioneers China's reform and opening up. The establishment of Shenzhen Special Economic Zone has greatly promoted the growth and expansion of private enterprises in the Pearl River Delta. The Bohai Economic Rim, located in the Northeast Asia economic circle, connects with Japan and South Korea with its ports. Having within it China's political center and sound industrial base, the area has natural advantages, policy-wise, for the development of private companies (see Figure 15).

Figure15: Geographic distribution of Top 500 private companies

Beijing Bohai Rim

Yangtze River Delta

>60

20-30 Pearl River Delta 10-20 <10

Source: All-China Federation of Industry and Commerce, Deloitte Research

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Ranked based on revenue, the top five provinces are Jiangsu (86 companies, with total revenue of RMB4.4185 trillion), Guangdong (60 companies, total revenue RMB4.1883 trillion), Zhejiang Province (93 companies, total revenue RMB3.6473 trillion), Shandong Province (73 companies, total revenue RMB3.1767 trillion), and Beijing (15 companies, total revenue RMB1.6939 trillion). These five provinces contribute nearly 70 percent to the total revenue of the Top 500 (see Figure 16).

Figure 16: High revenue provinces and breakdown

1 2 44184.6669 Nearly 41882.6876 3 Beijing, 70% 36472.4727 4 7% 31767.0275 Shandong, 5 13% 16938.6984 Zhejiang, 15%

Jiangsu, 18% Guangdong, Jiangsu Guangdong Zhejiang Shandong Beijing 17% Yangtze River Delta Pearl River Delta Bohai Rim Source: All-China Federation, Deloitte Research

Industry structure constantly optimized with regional distribution becoming more diverse As the industry structure of private companies across regions getting optimized, Chinese private enterprises are more diversely distributed geographically. The three core economic regions have developed characteristic industry clusters based on their unique advantages and features.

The Pearl River Delta area, focused on light industry trade, is the country's biggest emerging manufacturing base with representative industries including manufacturing of furniture, home appliances, computers, telecommunications and other electronic information equipment. The home appliances and information products manufacturing in the area are leading China. In addition, construction, real estate and business services are also key industries of the region. Though massive and possessing distinctive characteristics, the industry clusters in the Pearl River Delta are generally "large in cluster, small in businesses", meaning the industries cover large areas but lack dominant companies. The region is also a leader in China's use of foreign capital, a key exporter and contributor of foreign currency and a typical outward-looking economy.

The Yangtze River Delta, with a strong economic foundation, has solid strength in manufacturing and contributes to over two thirds of China's capacity. The region currently has highly complementary industries: with Shanghai being the center for its capabilities in financial services and R&D; Jiangsu, Zhejiang and Anhui focused on biomedicine, automotive, advanced equipment manufacturing and electronic information. Apart from that, the region is notably commanding in industry innovation capabilities. Having attracted a large number of China's top universities, research institutions and multinational companies' R&D centers in China, the region is leading in talent and investment, which makes it an investment-driven economy. The region is

Whitepaper on China Best Managed Companies | Part I China Best Managed Companies survey report also transferring some industries to the Central and Western China to optimize is industry structure through the Yangtze River Economic Belt.

The Bohai Rim's development is centered on Beijing. The Capital has gathered emerging service industries including finance, insurance, the internet, technological services, cultural services and retail, and these industries are growing fast. Hebei, Eastern Liaoning Peninsula and Shandong Peninsula are focused on heavy industries, with pillars being energy, iron & steel, electronics, machinery, construction materials, chemical engineering and textile. Compared with the two delta areas, the Bohai Rim lags in interregional coordination and balanced development, but it is catching up rapidly, driven by strong regional demand.

Benefiting from industry transfer, Central and Western China is rising up Driven by a combination of factors including rising labor costs and the need for business expansion and growth, various types of private companies are transferring subordinate units to the Central and Western China which provides more efficient human resources and favorable policies. Notably, the enterprises based along the coastal areas in Eastern China are transferring towards the downstream reaches of Yangtze River, namely Wuhan, Sichuan and Chongqing through the Yangtze River Economic Belt, supplementing the industry distribution of private companies in Central and Western China.

Meanwhile, industries being transferred are no longer limited to the traditional middle and low-end manufacturing, but are expanding to high-tech areas including electronic information, equipment manufacturing and new energy, requiring the destination regions to think more rigorously about comprehensive manufacturing costs and supporting industries. In addition, some leading companies from the Central and Western China are moving their headquarters and R&D centers towards the coastal regions to tap into the talent and technical resources.

Therefore, China's industry cluster transfer generally has entered a full-on stage. The decisions around industry transfer and industry chain deployment are closely related to local policies. Deloitte's current research indicates that among all the local policies aiming at attracting branch establishments of private companies, tax incentive is most attractive one, followed by more effective measures to support the specific industry chain, increase industry concentration, or in other words, to help build sounder industry clusters (see Figure 17).

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Figure 17: Which local policies are most effective in attracting private companies to set up branch units?

Preferential tax policies 81.1% Enhancing support for industry chain to increase industry concentration 54.7%

Talent acquisition policies 39.6% Sounder supporting financial and information services industries 34.0%

Stronger interregional logistics and transport 22.6%

Government-led funds 17.0% More aggressive measures to attract business and investments from other regions/countries 3.8%

Source: Deloitte Research

1.5 Private companies are growing faster amid challenges Though private companies are enjoying positive development trends and policy environment, they need to properly address some difficulties and challenges if they are to grow rapidly in the long run. The difficulties and challenges lie mainly in:

Some industries have high barriers for entry: The Chinese government has launched official document stressing the importance of supporting and guiding non-public sector into all the industries permitted by the law and regulations, and granting equal treatments to non-public sectors and businesses with all other ownership structures in terms of investing, financing, taxation and trade. Private businesses nevertheless experience discriminative treatments in some areas, especially the market entry of high-tech industries such as telecommunications, infrastructure, military, aerospace and biomedicine. With the full-scale implementation of "Market-entry Negative List" from the end of 2018, China's National Development and Reform Commission (NDRC) reiterated that private companies shall not be impeded by unreasonable or discriminative conditions barring them from the areas not included in the list. If all levels of governments could adequately implement this policy, the market entry conditions will be further improved for private companies.

Inadequate IPR protection and management: China is lagging in IPR protection for core technologies of private companies. Private companies are not fully aware of the importance of IPR protection, and IPR management mechanism in China has yet to be improved with IPR infringement being a wide-spread phenomenon. These issues severely raise the risks in transforming and upgrading private companies. Meanwhile, China's IPR- related legal framework is unsound. In December 2018, the National Intellectual Property Administration (CNIPA) issued ten measures aiming at supporting the innovative development of private companies with IPR protection, hoping to leverage intellectual property rights to safeguard the innovative development of private companies.

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Difficulties and high costs for financing: As reported by Chinese Academy of Fiscal Sciences, private companies in China have to pay 1.5 percent higher interest rates on loans than those imposed on SOES. According to statistics from Wind, only 8.86 percent of China's credit bonds were issued by private companies from January to August 2018, significantly lower than the share of more than 10 percent from 2015 to 2017. In addition to its declining volume, interest costs of private companies for bond issuance in overall are much higher than that of SOEs. As shown by the statistics from Wind, from January to August 2018, the interest rates of AA, AA+ and AAA rated private bonds were higher than those of state-owned entities by 60 to 130 base points. Meanwhile, as credit rating rises, the cost gap between private and state-owned entities of the same level also widens (see Figure 18).

Figure 18: Bond interest difference between private and state-owned entities on the same level*

Base point 140 120 100 80 AA 60 AA+ 40 AAA 20 0 2015 2016 2017 2018年1-8月 *Interest rate difference is calculated as the average interest rate of private company bonds minus the average interest rate of SOE bonds, in 0.01%. Source: Wind, Deloitte Research

However, from the second half of 2018, multiple financial authorities including the People's Bank of China, Ministry of Finance, China's Banking Regulatory Commission, China's Insurance Regulatory Commission and China Securities Regulatory Commission launched a number of policies to improve the financing environment and liquidity of private companies, especially micro and small ones. Going forward, we expect the financing conditions to get more enabling for private companies.

Heavy burdens on private companies: According to the World Bank's 2018 business environment report Doing Business, Chinese companies' tax burden (the amount of tax paid/income) is 67 percent, ranking at 130 among 190 economies. The ratio is 44 percent in the US, 47 percent in Japan, 55 percent in India and around 34 percent averagely in both East Asia and the Pacific. Meanwhile, out of the total tax paid by Chinese companies, social security contributions account for 49 percent of their profits while the rate is some 10 percent in the US and 35 percent in the welfare state Sweden. China International Capital Corporation Limited (CICC)'s calculation indicates that after transferring the collection of social security contributions to tax authorities, if the base amount is fully standardized without lowering the social security rate, the total amount levied could be increased by around RMB700 billion. The results will pull down the profits of publicly traded companies by 3 percent, that of private companies by around 8 percent and small and medium startups by roughly 9 percent, dealing a heavy blow on private companies which have low gross margin. The 2018 Chinese Companies Social Security White Paper issued by 51shebao.com mentioned that only

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27 percent of Chinese companies pay social security based on the standard base amount, 16 percent companies pay according to fixed salary and 32 percent, mostly privately held, pay based on the lowest requirement.

Policies lack consistency, innovation and fault tolerance: Though some regions have put in place preferential policies to encourage innovation of private companies, but weak enforcement and complicated applications procedures have resulted in these companies not being benefited from these policies. Private companies, concerned about the frequent changes in policies, tend to hold back. Government policies lay excessive stress on hierarchical management and segmentation of functions, thus falling short of giving appropriate support for new business models (e.g. capacity sharing among manufacturers).

Rising pressures on environmental protection: From the latter half of 2017, China has been redoubling its efforts in environmental protection monitoring and inspection and putting higher environment requirements on production. Effective from January 2018, China rolled out its new Environment Protection Tax Law. The law follows the principle of "levying tax according to the amount of waste emission and exempting those who don't emit waste from paying tax", forcing private companies that let out large amount of pollutants to transform. Meanwhile, the Central Economic Work Conference emphasized on the importance of combatting pollution and named it one of China's "three tough battles".

Hard to recruit and retain talent: Due to nonstandard business procedures, uncertainties of development, and lack of resolve and confidence in transformation and upgrading, many private companies are unable or unwilling to increase investment on transformation and upgrading. This in turn makes it difficult for them to provide competitive salary and desirable career paths to attract or retain key talents.

The drawbacks of Chinese management style: Lastly, many private companies are not practicing the best management philosophies. For instance, they tend to view operation and management as separate sections, implementing unsystematic management that stresses certain aspects while compromising others; they also lag in the professionalism and specialization of management, lack the responsible professionalism and fail to observe their corporate values or rules.

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1.6 Private companies should grasp the opportunities brought by enabling policy directions and economic transformation Chinese private companies are seeing unprecedented support from the state government. The top leadership has reiterated the importance of private business on many occasions, promising unwavering support, guidance and protection for private companies and expressing the expectation for them to become the major force in national-level plans including "Made in China 2025" and the "Belt and Road" Initiative.

To counter the slowdown of macroeconomic growth and improve the business environment for private companies, the Chinese government has issued a number of official documents and policies to encourage the development of private companies and non-government investors in the latest two years. Our current research suggest that among the measures to help private companies overcome difficulties and generate substantive benefits, tax and fee reduction/exemption is the most effective policy as cited by 78 percent respondents. The second most voted-for policies are credit support and R&D incentive, both cited by nearly half of the respondents (see Figure 19).

Figure 19: Top five policies to help private companies' weather challenges

78.4

49.0 49.0

31.4 29.4

Greater credit Tax and fee R&D support reduction incentives Open market Talent access acquisition and development

Source: Deloitte Research

We can see from this result that for China's private companies, currently the most favorable policies aim at "reducing costs while broadening sources" as lowering operational and financing costs are the most direct ways to help private companies enhance their advantages over competitors. In addition, incentives for R&D needed in industry transformation and upgrading and policy support for talent development are also effective in helping private companies climb up the value chain.

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Apart from policy-wise opportunities, private companies should also grasp the opportunities brought by the era of new economy and digital economy. Since 2015, the country started promoting "wide participation in entrepreneurial activities and innovation" by reforming business policies and delegating government powers. These initiatives greatly boosted the enthusiasm of entrepreneurs, created a surging of private companies which injected new vitality into China's economy.

According to the New Economy Index (NEI) and Digital Economy Index (DEI) jointly launched by Caixin Insight, BBD and MasterCard, new economy investment accounts for 30 percent of total investment in economic activities. The indexes for digital economy maintain high speed of growth, mainly driven by artificial intelligence (AI) and big data industries. The change in these two indexes reflects the dynamism in the new economy and the digital economy compared with traditional industries, and constitute an important indicator of the transition from the traditional economy to the new economy (see Figure 20).

In addition, private companies should proactively explore the path of survival that suits themselves in the transition phase and elevate management practices and philosophies from various aspects. This is also the starting point of Deloitte China's BMC program. According to Deloitte China's observations, Chinese private companies can consider the 12 best practices listed below to grasp the dual opportunities generated by government policies and the economic transition (see Figure 21).

Figure 20: China's NEI and DEI trends

33 500 32 450 400 31 350 30 300 29 250 28 200 150 27 100 26 50 25 0

NEI (left axis) DEI (right axis)

NEI: new economy investment against total investment in the economy DEI: A sub-index based on the NEI methodology, comprising the indexes of three digital economy industries (AI, Big Data, the internet) Source: Caixin Insight, Deloitte Research

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Figure 21: Best management practice philosophies for China's private companies

Execute mission, vision and Reshape business model via Strategy strategy to create a strategic Technologies digitalization closed-loop management system

Set global management Globalization standards to become genuine Brand & Client experience and client MNCs market lifecycle management

Success comes not from M&A acquisition, but merger and Funds & Implement resources portfolio management for sustained consolidation Capital profitability and value growth

Build a balanced stakeholder Sustainability mechanism to do the right things Reverse the pyramid to let the for clients, collaborators and Leadership leadership support the staff communities

Not limited to product and technology, innovation can be approached from more aspects Talent Innovation Organizational reshaping, talent with more effective mechanisms attraction & strategy and incentive model (e.g. Deloitte's Ten Types of retention Innovation)

Systemically elevate Family office: effectively identify Productivity organizational and procedural Succession the future owner and manager efficiency

Source: Deloitte Research

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2. Overview of management and operation of Chinese private companies With support from HKUST Business School, Deloitte China conducted a nation-wide survey on the management and operation of private companies across different industries to better understand and analyze the overall management and operational status of private companies in China. The survey focused on questions about the strategy, capability and commitment of private companies, with an aim to obtain a deeper understanding of the development status of Chinese private companies (see Figure 22).

Figure 22: Industry distribution of private companies covered by Deloitte's survey on management

Others Energy & 15% Technology resources 2% 17% Telecom 4%

Real estate 4% Manufacturing 15%

Media 6%

Financial services Travel, hospitality & 13% services 6%

Life science & healthcare 7%

Retail, wholesale & distribution 11% Source: Deloitte Research

Below are the key findings of the survey:

2.1 Management strengths and pain points Firstly, private companies in China are well aware of their own management strengths and pain points. Results of the survey show that top three strengths of the companies surveyed in terms of management excellence are "strong ability to integrate value with a customer focus", "unique core values and strategic goals", and "organizational models that effectively support rapid business development and iteration", which mean that Chinese private companies are good at making big plan, including maintaining a close match of product value with customer needs, setting strategic goals, and iteration of organizational structure based on business changes. At the same time, as the company grows in scale, achieving efficiency of organizational structure, consistency of strategic goals and product strategies centered on customers would become even more difficult. This is why some companies cited "difficulty in selecting the right model for organizational transformation" as a top pain points (see Figure 23).

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Figure 23: Management strengths & pain points of Chinese private companies

Strengths Pain points

Strong ability to Lack of strategic execution integrate value with a 63.9% 56.9% and oversight capabilities customer focus

Unique core values Difficulty in attracting and 47.9% 56.9% and strategic goals retaining top talent to spur innovation Organizational models that Lack of innovation mechanisms effe ctively support rapid business 47.9% 45.1% (technology, management, development and iteration business model innovations) Poor execution of strategy due to Innovation in customer & marketing 34.6% 43.1% misjudgments of new businesses and management lack of effective analytics

Commitment of all to continuous Lack of strategies and innovation & learning; unique 31.9% 41.2% experience in international innovation mechanism operations and management

Mastering key technologies of IRP, 29.3% 29.4% Modern corporate governance investing in technologies & digital structure to be optimized transformation

Brand advantage 26.6% 21.6% Difficulty in selecting the right model for organizational transformation

Lean management & excellence Difficulty in aligning tones within management 24% 17.7% in operation and clarifying roles & responsibility to address major risks

Difficulty in formulating effective and Leadership excellence to drive positive 21.3% 15.7% change, distinct corporate culture agile decision making mechanism for new businesses

Difficulty in protecting brand value, preventing Outstanding ability to integrate resources 16% 15.7% reputation damage, and implementing digital reform

Source: Deloitte Research

As to pain points, "lack of strategic execution and oversight capabilities", "difficulty in attracting and retaining top talent to spur innovation", "lack of innovation mechanisms (technology, management, business model innovations)", "poor execution of strategy due to misjudgments of new businesses and a lack of effective analytics", and "lack of strategies and experience in international operations and management" are most cited by the companies surveyed. It appears that major pain points of Chinese private companies generally concentrate on the development, execution, implementation and practice of management and operational mechanisms as well as access to resources.

From these strengths and pain points, we can see that Chinese private companies are relatively clear about their big plans and goals, but weak in putting mechanisms and rules that define their paths and approaches in place to achieve these goals, i.e. they "have strategic plan but lack strategic management", and "are willing to innovate but lack mechanisms and resources required".

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2.2 Diversified development to open a second race track After a period of rapid development, many Chinese private companies find it increasingly difficult to achieve growth with single one business. To avoid a bottleneck of business growth, companies are pursuing diversified development as they grow in scale, in an effort to seek a second race track for growth.

The survey reveals that more than 70 percent of respondents choose to extend their innovation efforts on the basis of current business model to drive for diversified development. The most adopted approach to business model innovation is the enterprise model innovation that focuses on network cooperation, which is to establish external collaboration and partnership. It maximizes commercial value via positive interaction between the ecosystems with up- and down-stream of the supply chain.

Meanwhile, over 40 percent of respondents use new technologies like digitalization to open a second race track, which include two kinds of digital transformation. One is digitalization of commercial and production behaviors, adopting a shift from offline to online, platforms, smart manufacturing and other means to help upgrade and transform the business. The other is digitalization of the way of working, which utilizes digital tools to complete online organization, communication, collaboration and other tasks, connecting people and digits within the enterprise in an organic manner to enhance operational efficiency. Specifically, this includes continuous upgrade of traditional information systems such as OA, ERP and CRM, as well as expanding coverage of emerging management tools like Ding Talk and Enterprise WeChat.

In addition, over one in three respondents choose mergers and acquisitions (M&A) as well as internal project incubation that focus mainly on expanding industry chain or business scope on the basis of current industries. Acquiring readily available products or market channels via M&A has become one of the most efficient means for company expansion, while incubating startup projects internally would help retain top employees wanting to start their own businesses and unleash their potentials, and bring positive changes to relationships within the company to foster a sense of ownership among employees and improve profitability (see Figure 24).

Figure 24: Main approaches adopted by private companies in opening a second race

70.6% 45.1% 35.3% 33.3% 19.6%

Business model Digital & new Internal project M&A and IPO/privatization innovation technologies incubation restructuring Source: Deloitte Research

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Surely, companies would also face many challenges in the process of opening a second race track, the biggest of which is how to choose the right second race track. When deciding on the right segments for the development of a second race track, it would be most pivotal for Chinese private companies to choose the direction for diversified development based on own core competitive edges, and ensure synergies between new and existing businesses. Therefore, an increasing number of companies that have certain strengths within the industry are focusing on extending and integrating upstream and downstream industry chains, seeking to obtain oligopolistic advantages (see Figure 25).

Figure 25: Major challenges in opening a second race How sideline business could effectively create value for existing customers 14%

35% How to achieve efficient multi-disciplinary 18% integration How to make collective decisions with limited resources

33% How to accurately choose the right segment for a second race track

Source: Deloitte Research

To extend and integrate industry chains, companies are required to have greater capabilities in vertical and horizontal integration across industries, disciplines and geographies, which presents another major challenge for private companies to open a second race track. Chinese private companies will need to address the major issue of how to share resources, utilize complementary advantages and achieve alignment of value among different disciplines. The goal would be to reduce internal strife, streamline configuration, and enhance market competitiveness through synergy.

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2.3 Innovation inputs and overseas development Innovation inputs More than half of respondents cite research and development of core technologies as an area for innovation inputs, and nearly half choose product portfolio upgrade. It is thus clear that Chinese private companies still focus their innovation efforts on improving products, followed by business model innovation, which mainly include profit model innovation, operational management innovation, marketing innovation and external partnership innovation, each are cited by over one third respondents (see Figure 26).

Figure 26: Areas of innovation inputs by Chinese private companies

Core technology R&D 58.5%

Product portfolio upgrade 49.1%

Profit model innovation 45.3%

Operational management innovation 43.4%

Marketing innovation 39.6%

External cooperation innovation 35.9%

Talent management innovation 30.2%

Client engagement innovation 24.5%

Financing channel innovation 15.1%

Service innovation 15.1%

Channel innovation 11.3%

Source: Deloitte Research

However, innovation inputs by companies surveyed in other areas that indirectly enhance company's competitiveness, such as talent management, services, sales channel, financing mode and customer engagement, remain insufficient. These are precisely where Chinese private companies are left behind by world-class enterprises. In the future, Chinese private companies should continue their pursuit of diversified innovation. The "Ten Types of Innovation" proposed by Deloitte may be taken as guidance (see Figure 27).

Figure 27: Deloitte Ten Types of Innovation

Configuration Offering Experience

Product Profit model Network Service Channel performance

Product Customer Structure Process Brand system engagement

Ten Types of Innovation

Source: Deloitte Research

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Progress of going global Since China's entrance into WTO and the 16th CPC national congress, more and more private companies have been taking part in the advancement and competition of globalization. This survey on private companies reveals that the main methods adopted by Chinese private companies to go global remain at trade level, i.e. overseas sales of products and import & supply of raw materials. It reflects an issue regarding Chinese private companies in going global, which is that most companies remain at the stage of developing international operations, and a company with international operations does not necessarily constitute a "global company". A truly globalized multinational company must have a diversified strategy for global development, while at present most Chinese private companies are pursuing international development in a relatively simple pattern (see Figure 28).

Figure 28: Main methods adopted by Chinese private companies to go global

Overseas sales & distribution 58.5%

Integration of global supply chain 54.7%

Overseas M&A and joint venture 37.7%

Global talent flow 37.7%

Overseas R&D investment 20.8%

Overseas greenfield investment 11.3%

Source: Deloitte Research

Overseas M&A is becoming an effective means for companies in pursuing globalized development, but it also proves challenging in practice. The survey finds that the biggest pain point in global M&As as cited by respondents is to identify and address risks before, during and after merger/acquisition. In addition, there are also challenges in fostering synergy between the parent company and the overseas subsidiary within one to three years after merger/acquisition (see Figure 29).

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Figure 29: Pain points of overseas M&As by private companies

Identifying and addressing risks before, 62.8% during and after merger/acquisition

Fostering plan for synergy between the parent company and the overseas subsidiary 52.9% within 1-3 years

Defining parent company's control 41.2% organization and strategy over overseas company

Recruiting and developing sufficient 39.2% international talent

Determining future core management indicators 33.3% and approaches to overseas company

Ensuring smooth M&A transition 21.6%

Source: Deloitte Research

Ever since 2018, China have been seeing an increasing number of risk factors from the outside, including global trade disputes and rising regional protectionism, with de- globalization seemingly becoming an irreversible trend in the short term. These factors will impose profound impacts on the strategies of Chinese private companies in going global. In the survey, impacts of de-globalization on the respondents are relatively dispersed, as companies are affected in varying degrees due to varied strategies adopted in pursuing global development (see Figure 30).

Figure 30: Impact of de-globalization on private companies

Impact on export business 47.1%

Limits to overseas investment 41.2%

Limits to operation of overseas branches 29.4%

Impact on import of raw materials 29.4%

Limits to Sino-foreign joint 23.5% ventures/cooperation

Limits to technology transfer 17.7%

Limits introduction of overseas talent 15.7%

Source: Deloitte Research

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Specifically, the top two areas mostly impacted are export and overseas investment, which correspond with the main methods adopted by Chinese private companies in going global as mentioned above. Technology transfer talent recruitment is less impacted, showing relatively lower inputs in these areas by Chinese private companies.

Brand zone of Hengan Group at the International Baby-Kids-Maternity Industry Expo. Photo/Visual China

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2.4 Talent management and leadership building, entrepreneurship and succession Talent management and leadership building The basis for the talent strategy of a company is to establish sound mechanisms for talent recruitment, training, leadership building and incentives. At present, Chinese private companies are still struggling to attract and retain talent, especially in the competition for top talent. Results of the survey show that the biggest pain points of respondents in attracting and retaining top talent lies at uncompetitive salaries. Ineffective performance review system, lack of supportive corporate culture, and limited personal development path are also key challenges (see Figure 31).

Figure 31: Top challenges in attracting and retaining top talent

Lack of effective training system

7.8%

Uncompetitive salaries Limited career development 17.7% path for individual employees 35.3%

19.6%

19.6% Lack of strong corporate culture Ineffective performance review system

Source: Deloitte Research

Another focus of the talent strategy is to develop and foster leadership among employees in general. Enhancing leadership of staff at all levels via corresponding organizational structure and work flows would help companies improve operational efficiency and maintain a stable workforce. The survey reveals that efforts of future leadership building by respondents focus mainly on improving strategic mindsets and visions of middle management personnel to ensure employees are better integrated into the overall strategy of the company, addressing the gap between the workforce and the speed of enterprise development. Enhancement of change management capability comes next, which is also critical for private companies who are seeing rapid changes both internally and externally (see Figure 32).

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Figure 32: Focuses of leadership building by private companies

Enhancing strategic mindsets and visions 60.8%

Enhancing change management capability 49.0%

Strengthening collaboration and trust 41.2%

Cultivating leadership talent and succession 37.3%

Capturing insights on industry development trends 33.3%

Investing in talent development strategy 25.5%

Boosting morale of all employees 25.5%

Source: Deloitte Research

Entrepreneurship and succession Another key aspect of "Commitment" is entrepreneurship promotion and corporate succession. Entrepreneurs as a whole have play a vital role in advancing innovation for the entire society. Every country in the world would require iteration of enterprise innovation to move forward, and entrepreneurship is key to the process. The great success of private companies in China over its 40 years of reform and opening up depends much on entrepreneurship, which includes adventurousness, desire to explore, strategic acuity, ability to capture policy trends, understanding of Chinese local culture, strong execution as well as flexible coordination skills. There are the common traits of entrepreneurship in China, which, however, vary to a certain extent in different times. The survey finds that at present, the most important components of entrepreneurship of Chinese private companies include persistent innovation, resilience and continuous learning (see Figure 33).

Figure 33: Core components of entrepreneurship of today's private companies

Commitment to pursuing greater excellence

7.8%

Adventurousness 9.8%

39.2% Persistent innovation 19.6%

Continuous learning 23.5%

Resilience

Source: Deloitte Research

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In addition, succession is also an issue that Chinese private companies, especially those with a long history, need to address. With the first and second generations of entrepreneurs starting to retire, companies would need to pay more attention to establishing effective succession plans in order for their values, corporate cultures and competitiveness to pass on. Based on the results of the survey, the biggest challenge for Chinese private companies in terms of succession comes from the selection of successors, as well as the inheritance of their corporate philosophy and operating models. It is thus clear that how to ensure consistency of corporate strategy and efficiency of its implementation and execution becomes a top priority (see Figure 34).

Figure 34: Top challenges for private companies in terms of succession

Taboo in talking about succession due to cultural influence Proper handling of family property 2% 7.8%

35.2% 54.9% Selection of Inheritance of successors corporate philosophy and operating models A worker producing medical equipment at Weigao Group, Shandong Province. Photo/CNS Source: Deloitte Research

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2.5 Risk management and internal control Efficient risk management and internal control system that creates value can, to a certain extent, reflect a company's capability in financial management. The survey finds that pain points of respondents in risk management mainly include difficulty in effectively linking risk management to company's performance and business objectives, low degree of information-oriented management of risks, and lack of permanent compliance management mechanism (see Figure 35).

Figure 35: Challenges faced by private companies in enhancing risk management and internal control mechanisms

Linking risk management to company performance and business objectives 66.7%

Using information system to optimize coordination of risk identification, monitoring, 51% and response Ability to effective advance the development of permanent compliance management 49% mechanism

Effective identification of top 10 risks of the 45.1% company

Strengthening corporate financial risk prevention and control measures 45.1%

Establishing mechanism to identify and 41.2% address network and system risks

Internal control for new businesses 29.4%

Effective management of strategic and brand 23.5% risks to better respond to reputation incidents

Source: Deloitte Research

Specifically, internal control and risk management in most Chinese private companies is not effective linked to their strategic execution and performance. Companies with a good sense of risk management mainly use risk management and internal control to achieve compliance and optimize basic processes, while those with a poor sense could not manage to improve their governance structure and basic compliance, not to mention awareness and capabilities of risk management and internal control among all employees to support strategic execution and realize performance goals. Advanced companies abroad generally take a holistic approach to risk identification, assessment and response in terms of risks in strategy, finance, operation, compliance and network to achieve "smart risk management", while most Chinese private companies remain at the basic stage of preventing financial risks and improving internal control system.

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In general, though the management level of Chinese private companies has improved over the past decades, but there remain various pain points. Common issue include more focus on business than on management, lack of systemic reflections on management systems, and mechanisms to ensure implementation of management structure. Therefore, in Part II, we will elaborate on the unique features of excellence that allow BMC winners to stand out from the crowd, and share case studies of the winners to provide reference for Chinese private company

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Part II BMC winners and best management practices

The disruptive age calls for leaders. Some leading companies have overcome the bottleneck in terms of management philosophies and quality and are heading towards excellence. While expanding businesses, they are increasingly concerned about how to achieve “sustainable” growth and profits. This is worth learning.

A production line at Skyworth Group. Photo/Visual China

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Pathway to excellence: Understanding the merits of Best Managed Companies to offer solutions for Chinese private companies

Shortlisted candidates to the BMC program are leading companies in sectors including manufacturing, consuming, energy, technology, education, healthcare, real estate etc., from industry leaders to “hidden champions”. They have the most sophisticated management among Chinese private companies. They have long-term strategies, global thinking, innovation potential, and leading industry roles, adhere to people- oriented principle, and can rapidly respond to internal and external changes. This makes them different and explains why they can overcome management bottleneck and succeed in this changing world. Chinese private companies should learn from BMC winners, take actions, and prepare for the future (see Figure 1).

Figure 1: the path to excellence for BMC winners Source: Deloitte research

Innovation Global potential thinking

People- Industry oriented leadership principle

Long-term Complementary and indispensable Responses strategy

Best Managed Companies

Source: Deloitte research

1.1 Develop long-term strategies as early as possible Through this BMC program, we find that this year’s BMC winners all focus on future perspectives with clear business priorities, and are committed to promoting long-term social development. They formulate complete and detailed annual strategic planning on paper and have clearly defined long-term vision, medium-term strategies and short- term plans.

BMC winners develop long-term strategies mainly based on three approaches: First, long-term market research; second, continuous feedback from customers; and third, periodic internal executive consultation and discussion. In addition to the three approaches, strategic planning also replies on strategy decomposition (performance

Whitepaper on China Best Managed Companies | Part II BMC winners and best management practices and goal management), strategy review (strategy implementation assessment) and strategy publicity and implementation mechanism (understanding of strategic goals from top to down). All BMC winners this year have effectively implemented their strategic plans.

When developing strategic initiatives, what BMC winners care most are: First, accurate understanding of changes in the product demands of customers; second, talent acquisition and cultivation, and well as upgrading of core technologies; and third, digital transformation and reform, and iterative management of organizational structure and key operation indicators. They have invested large amount of resources in these aspects, and some of them have made annual action plans and appointed principals. Iterative management of strategies and organizational structure is an important measure for improving management excellence. Most BMC winners will adjust strategies based on customer and market insights and then flexibly change organizational structure at irregular intervals according to strategic demands.

1.2 Maintain long-term industry leadership As strong industry performers, this year’s BMC winners have competitive advantages in international or domestic market and have leading financial performance, some of them are even industry leaders. Meanwhile, BMC winners maintain leading industry positions with steady growth. For BMC winners, in the three years from 2014 to 2017, the average compound growth in revenue is 30 percent in and that in net earnings is 37 percent, both are much higher than the average level of A-share listed companies and China's top 500 private enterprises (see Figure 2).

Figure 2 ：Revenue and net earnings growth (2014-2017)

Compound revenue growth 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00%

Compound net earnings growth 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00% A-share listed companies Top 500 private enterprises BMC winners Source：Wind, ACFIC, Deloitte research

Moreover, BMC winners have won many awards in various fields home and abroad, reflecting their excellent brand building and management capabilities as well as leading brand values.

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1.3 Develop targeted innovation approaches BMC winners also have shown outstanding independent innovation capabilities. They have core products embedded with leading technologies and more than 500 patents on average including inventions, utility models and designs, with some of them holding over 2,000 patents. In addition to technology and product R&D innovation, BMC winners are also increasing investment in operation management innovation, marketing innovation, financing innovation, etc.

Innovation mechanisms of BMC winners have the following advantages: first, they all have clear innovation management systems, including periodic goals for product and service innovation, mechanisms for collecting innovation suggestions of employees; second, they are able to provide special capital and resource support on product or service development; third, they put in place targeted measures to introduce and attract talent for developing new products or services; fourth, they implement reward and incentive mechanisms for successful innovation projects; and finally, they actively collaborate with external resources to encourage innovation.

BMC winners also have advantages in digital innovation. They actively use digital technologies in business innovation of different levels. Artificial intelligence and big data are the most relevant digital technologies in business innovation, followed by process automation, cloud computing, social media and online marketing (see Figure 3).

Figure 3: Digital technology relevance distribution in BMC winners’ innovation

Cloud computing

Process automation

Applications in moile Others devices Artificial Social media and Information intelligence Big data analytics online marketing VR security Source: Deloitte research

1.4 Foster global development thinking Another feature of BMC winners is global thinking. They actively expand businesses, integrate supply chain and make investments, M&As, and cooperation on a global scale. Among BMC winners, over 90 percent of companies have conducted or is planning to conduct businesses in overseas markets, launch global procurement, or launch overseas R&D and technology cooperation, over 80 percent of companies have completed or planned to make overseas M&As. For overseas income of BMC winners, the highest proportion of overseas income has exceeded 60 percent and the average is higher than 20 percent.

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Exhibition area of Tunghsu Group at the International Photovoltaic Power Generation and Smart Energy Exhibition. Photo/Visual China

More importantly, BMC winners are actively establishing overseas branches and enhancing their independent operation capability through overseas talent exchanges and employee localization improvement. Some companies have established independent talent recruitment, incentive and management mechanisms for overseas operation. Meanwhile, to effectively coordinate global resource allocation, most BMC winners have established special teams to deal with international development issues, aiming to ensure strategy consistence and coordination across regions.

In the future, we believe that some BMC winners are likely to upgrade from “international business providers” to “global organizations” and become “multinational companies from China”.

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1.5 Adhere to people-oriented principle When maintaining business growth and development, BMC winners always make continuous talent investments based on people-oriented principle. Only companies with clear cultural characteristics can encourage teams to stay committed to their common vision.

BMC winners have systemic talent attraction and retention mechanisms. Except providing periodic performance assessment and training and establishing effective incentive mechanisms, what is more important is to give outstanding employees with continuous challenges and career development opportunities to improve talent diversification. BMC winners have four advantages in talent attraction and retention, i.e. platform scale, career development, compensation system and corporate culture. These advantages can help companies ensure the stability of human resources. Therefore, BMC winners can keep the average turnover rate at a lower level of 10 percent to 15 percent.

Meanwhile, BMC winners also focus on the balance between teamwork and personal achievement as well as organization leadership building. They can retain executives and cultivate reserved talents based on corporate value and long-term vision. They have established distinctive leadership development programs based on the principle of internal promotion, supplemented by external introduction. In their diversified executive teams, some executives grow from grass roots and some are excellent talents recruited from home and abroad.

In addition to talent development, most BMC winners have complete social responsibility management and disclosure systems, as well as management systems to protect the rights of shareholders, creditors, employees, suppliers, clients and consumers. Meanwhile, they also have made great achievements in environment protection, sustainable development, public relations and social public welfare undertakings.

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1.6 Be proactive and prepare for changes Finally, BMC winners are able to response to external environment changes with agility. Such resilience is a long-term viability, a risk resistance capability, and a strategic management ability, which is vital for companies in mature markets.

For major enterprise management risks such as strategic risk, financial risk, operational risk, compliance risk and network risk, BMC winners have developed complete measures to identify and cope with them. With these measures, they can conduct qualitative and quantitative analysis on risks, set threshold for risk identification, and hedge and control risks with complete internal control procedures and systems.

Some BMC winners have integrated risk management systems into information-based systems to build comprehensive data-driven risk management systems. They identify risk characteristics and trends with data models, quantify risk frequency and impact through data digging, and then develop dynamic risk identification and response strategies, this is the so called “intelligent risk management”. Now the application of intelligent risk management is still in the early stage, but we believe it will become an important risk management tool for BMC winners in the future.

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Case study: How should Chinese private companies achieve management excellence?

To help you better understand how Chinese private companies achieve management excellence, we summarize the experience of BMC winners as cases listed below. We hope Chinese companies can learn from their experience and be well-prepared to address future challenges.

healthcare within reach

Shenzhen Mindray Bio-Medical Electronics Co., Ltd. Specialized in medical device sector for 27 years, with unique global platform and research strengths as well global leading technology and digital operation capabilities; known as the “Junior Huawei” in healthcare industry

With the vision of “better healthcare for all” and the mission of “advance medical technologies to make healthcare more accessible”, Mindray has become one of China’s largest medical device producers after 27 years of development. Mindray was founded by Li Xiting, Xu Hang, Cheng Minghe in 1991 in Shekou, Shenzhen. As China’s first independent monitor equipment producer, it puts an end to the long-term monopoly of foreign brands in Chinese market and brings Chinese medical devices into overseas markets, with business operations covering over 190 countries and regions. About half of its revenues are generated from overseas businesses. Mindray aims to integrate R&D with production, constantly improve product quality, develop cost and efficiency advantages, and build a global operation platform through independent R&D, innovation and M&As, supplemented by advanced supply chain and intelligent manufacturing. It observes the principle of “self-disciplined investment”, focuses on customer demands, and allows R&D, production and marketing teams to be involved in developing core strategies. Meanwhile, it takes high-end medical technologies as the core competence and implements strategic reforms with agile organization and rapid response capability. With remarkable achievements in international expansion, it sells products to over 190 countries and regions, generates nearly half of revenues from overseas businesses. It establishes eight R&D and innovation centers to allocate resources globally and owns over 2,000 patents. With strong M&A and integration capability, Mindray has completed more than ten domestic and international M&As in recent years; besides, it also achieves considerable progress in making global operation, channel, R&D, and supply chain more intelligent. Mindray establishes a management school to enhance leadership development; exchanges and delivers corporate value and vision by making periodic visits home and abroad; and attracts,

Whitepaper on China Best Managed Companies | Part II BMC winners and best management practices encourages and retains excellent talents with broad platform and bright prospects. It maintains excellent financial performance, with sales and ROE growing year on year. In 2017, its revenues reached RMB11.2 billion, with 67 percent of gross margin, higher than the industry average. Mindray has a sound governance system and takes compliance as the prerequisite of growth.

New Oriental Education & Technology Group Inc. Leading comprehensive technology-driven education group, BRANDZ top 100 Most Valuable Chinese Brand 2018, and dream maker for tens of millions of students.

As the leader of Chinese education industry, New Oriental aims to be “an outstanding and respectable Chinese education institution with cultural value” and takes “helping students achieve all-round growth and becoming a comprehensive technology-driven education group” as its mission. With clear strategic orientation, it provides comprehensive full lifecycle education services for students to follow new technology developments and keep up with the times based on a three-year rolling budget system. It builds an integrated teaching operation and administration platform to analyze organizational process dynamically based on standardized, processed and systemic leadership team arrangements. It invests substantially in new technologies such as big data, AI and mobile device applications to promote innovation and achieves significant innovation achievements in product R&D and operation & management. With focus on leadership development, it has gradually built a three-tier reserved talents cultivation structure (high level, middle level and basic level) and developed complete succession mechanism. It actively collaborates with mainstream overseas study training organizations and develops different rewarding systems for employees of different functions to identify and nurture talents. The corporate culture of New Oriental is consist of unity and cooperation, equality and happiness, open communication, innovation, respect for talent and efficiency orientation. The Group has strong financial performance. In 2018, its revenues exceeded USD2.4 billion, with a compound growth rate of 32 percent and a gross margin of 58 percent.

Longfor Properties Co., Ltd. With 25 years of history, Longfor focuses on four main businesses, practices the business philosophy of “For You Forever”, and provides full lifecycle services for customers. Digital transformation, advanced platform-based management system and stable financial performance contribute to superior brand value of the company.

Longfor practices the philosophy of “For You Forever” and takes the mission of creating alive space, compelling services and sweet surprises. It adopts “platform + terminal” management model, uses digital technologies and management ideas, and constantly helps grass-root employees to improve efficiency, delivering superior brand value with the platform-based management system. After 25 years of endeavors, Longfor has become the industry leader and maintains a steady strategy management system based on unique vison and strategies as well as the self-developed “organization performance V model”. It is committed to realizing steady and sustainable development and has gained leading industry

Whitepaper on China Best Managed Companies | Part II BMC winners and best management practices position in financing capability, brand value, operation capability, resource integration and digital innovation. Refined management and excellent operation capability are the core competence of Longfor. With flexible and flat organizational structure, stringent and orderly processes, as well as rapidly changing and up-to-date systems, Longfor is able to adapt to new environment and achieve sustainable and steady growth. It is committed to providing employees with long-term career development opportunities and platforms. Based on the core values of “entrepreneurship, integrity, embracing changes and win-win”, it aims to gather and develop the most suitable talents, and effectively apply the most intelligent technologies and become a pioneer in the real estate industry. Longfor is the only one private real estate company rated as full investment-grade at domestic and international level. Robust and competitive financing and cash management capabilities have become important capital advantages. In 2018, Longfor's revenues is expected to reach RMB100 billion, with gross margin at nearly 30 percent. With continuous and steady profitability growth, Longfor will keep its industry competence for a long time to come.

Shandong Weigao Group Medical Polymer Company Limited With the widest product range in the world and robust financial strength, Weigao is China’s largest medical system solution provider in medical device and pharmaceutical industry. It is breaking through the barriers across product segments through overseas M&As.

Weigao aims to “help medical professionals to build a healthy future” and become “a world-class, respectable and innovative Chinese medical device and pharmaceutical company”. As China’s largest medical system solution provider, it has with the widest product range in the world and leading clinic nursing and orthopedics brands in China. Based on the value creation orientation, the Group constantly integrates “channel, product and supply chain value”, promotes steady and fast sales growth through channel innovation, product innovation, internationalization and M&As, and improves operation efficiency through product focus and supply chain integration. In terms of production, to reduce costs and improve efficiency, it establishes six operation sharing platforms and takes procurement platform as the value center. Innovation is Weigao’s another advantage, with product innovation increasing by over 50 percent every year. It has developed clear innovation mechanism and execution platform (Weigao Institute) and owns 680 patents (including 240 overseas patents). As for international expansion, the Group has successfully acquired and integrated Argon Medical Devices Holdings, Inc. In the coming three to five years, it will focus on building overseas development platforms to increase the proportion of overseas revenues to 20-25 percent. With the core value of “conscience, integrity and loyalty”, the Group has developed positive talent incentive and retention mechanism based on “family culture” and maintained low turnover rate. For talent development, it has both long-term development programs and short term selection plans. It also has completed social responsibility system, which can support the whole industry chain on sales and supply end. The Group maintains outstanding financial performance. From 2014 to 2018, it kept steady growth in revenues, net earnings and gross margin, all at a level higher than industry average. It has a steady financial team and has developed complete financial management systems for different businesses.

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Hengan International Group Co., Ltd. Hengan leads sanitary napkin, tissue paper & wet wipes and baby diapers segments in China. Since 2002, it has implemented three comprehensive management reforms to find new ways to improve efficiency and effectiveness.

Aiming to become the world’s top-tier supplier of daily products through ongoing innovations and provision of premium products and services, Hengan group adheres to the corporate spirit of “integrity, diligence, innovation and dedication” and the business philology of “growing with you for a better life”. After 34 years of development, Hengan Group has become the largest maternity and child products as well as tissue paper & wet wipes provider in China. Hengan focuses on innovation and has implemented three comprehensive management reforms to improve core competence. Hengan’s core strategy is building a highly effective and rapidly responsive system platform centered on customers based on customer demands. Hengan has become the most trustworthy company, by building equal and transparent operation mechanisms, integrating internal and external resources, and constantly providing products and services that customers need. In addition to organization innovation and comprehensive reforms, Hengan Group develops a platform-based small team operation model to delegate power and stimulate operation vitality based on big data operation platform. Supported by the Belt and Road Initiative, Hengan Group is accelerating the pace of going global. It acquires listed companies in Malaysia, establishes factories in Indonesia and Russia, and invests biopulping projects in Finland to further extend its industry chain and enter into overseas markets. Hengan establishes comprehensive talent introduction, cultivation and promotion mechanisms, designs scientific compensation system, and develops distinctive corporate culture to grow with employees while expanding businesses. It recognized RMB19.8 billion of sales revenue and RMB3.8 billion of earnings in 2017. Hengan Group engages domestic and foreign accounting firms to conduct rigid auditing to ensure the legitimacy and compliance of finance and operation.

Kidswant Children Products Co., Ltd. Kidswant provides distinctive one-stop shopping and value-added services. With data-driven and insight-based approaches, this innovative maternal and child family services provider based on user relationships helps realize visualization and rapid response of internal management and external client services with high level of digitalization.

With the mission of “creating happier childhood”, Kidswant aims to be “the preferred omni-channel service provider of Chinese families”. As a leading omni-channel maternal and child company, it provides distinctive one-stop shopping and value-added services. With data-driven and insight-based approaches, this innovative maternal and child family services provider based on user relationships helps realize visualization and rapid response of internal management and external client services with high level of digitalization. Kidswant applies a member-centric strategy and expands rapidly with clear orientation and timely updating, based on self-developed large store model, childcare consultation, “commodity + service + socializing” model and membership- based single consumer economy. It proposes the concepts of “digitalization, scenario, content and relationship”, integrates digital application with strategy decomposition, and provides real-time results of client demand analysis, supply chain management, 2B2C business result analysis and financial performance analysis. Kidswant takes the

Whitepaper on China Best Managed Companies | Part II BMC winners and best management practices lead to embrace community economy, embeds Internet characteristics into organizational structure, and promotes new businesses as projects. It stresses on customer centric philosophy, advocates de-centralization and encourages coordination across different functions. Kidswant always insists on international operation and local innovation and actively builds unique digital capability. It is good at making data-driven strategies and has developed a “human-customer integrated” system independently with digital tools. It has started developing an initial leadership succession plan and added the role of directors to facilitate the growth of middle level talents to executives, enabling supporting systems to be further improved. Meanwhile, Kidswant has built up a complete talent development system on childcare consultation to train shop assistants as childcare consultants. With reasonable talent structure and teamwork spirit, it will provide more opportunities for employees to work across boundaries. Kidswant adopts a corporate culture of “love children, friends and lives; justice, integrity and responsibility; respect others and be willing to communicate and share; keep learning, innovating and exploring; actively act, practice and gain the best results” it encourages team spirit and attaches equal importance to teamwork and personal achievements. In 2017, Kidswant recognized RMB5.7 billion of revenues and higher-than-average gross margin. It will use the advantages in financial and governance management to help build industry alliance with digital tools.

Skyworth Group Co., Ltd. Top 8 Chinese household appliance maker, TV, set top box (STB) and OLED TV markets leader, Skyworth aims to be a leading smart home appliance and IT company with global competence.

Skyworth Group aims to become a “leading smart home appliance and IT company with global competence” and takes “wholeheartedly creating a better life for mankind” as its mission. It sells TVs, digital STBs and other products in home and abroad and maintains leading market shares. For management, it takes overall strategy as the guideline and customer and market demands as the orientation. Skyworth keeps innovating group management mechanisms and building efficient organizational systems, and always insists on technology-based development and innovation–driven growth. To become a leading smart home appliance and IT company with global competence, it has developed four overall strategies: achieving RMB100-billion revenue; make intelligent, refined and international development; promoting the construction of Shenzhen headquarters, Pearl River Delta intelligent manufacturing base and Yangtze River Delta intelligent manufacturing base; and focusing on multi- media, intelligent electric appliance, intelligent system technologies and modern services. Over the past three decades, Skyworth has owned over 6,400 patents and participated in making several industrial standards such as four TV transmission standards. In term of international expansion, Skyworth has successfully made several overseas M&As and established branches, subsidiaries, and R&D and manufacturing centers in many countries in recent years. Moreover, it also has made rapid development in making global operation, channel, and R&D more intelligent. Skyworth integrates brand building with talent introduction and deepens school-enterprise cooperation. Meanwhile, it has professional enterprise university platform, robust training systems and complete talent development and rewarding mechanisms. As for culture building, Skyworth insists on six concepts: innovation, hardworking, excellence, performance, sharing and integrity, and has developed distinctive corporate culture

Whitepaper on China Best Managed Companies | Part II BMC winners and best management practices system. Skyworth has a good profitability with a revenue of over RMB40 billion, stable financial performance, and lower-than-average asset-liability ratio.

K11 The world’s first artistic shopping mall intrinsically blending art, people and nature, affiliated with New World China, K11 aims to build “a community to connect people alike” with international and sophisticated management.

As the world’s first artistic shopping mall intrinsically blending art, people and nature, K11 is committed to “building an original and personalized Chinese brand and developing cultural strength for modern China” with international and sophisticated management. K11 always keeps the original aspiration, satisfies customer demands with international service standards, and develops strategies through group discussions. From 2018 to 2019, the overall strategy is building K11 ecosystem, improving VOC mechanism and enhancing supply capability. K11 focuses on increasing market shares, enhancing productivity, improving risk and risk-warning system, making innovations and finding new income sources. The biggest feature of K11 is providing extraordinary experience for customers based on the integration of artistic shopping mall with art, people and nature. Meanwhile, K11 encourages innovation and creation, and focuses on improving retail management, CRM, unique retail model and business and 360 digital retail, to attract major consumption groups under the new consuming pattern. For social responsibility such as environment protection, K11 has been widely acknowledged by the public and the society for actively taking responsibilities. It helps employees to develop craftsmanship spirit and encourages them to design feasible innovation plans. It evaluates talents based on six indexes: strategy recognition capability, result orientation, capability of resolving complicated problems, attraction to excellent talents, self-emotion control, resilience, self- recognition and growth capability. K11 firmly believes “curiosity” is the soul of a company, so it encourages all employees to uphold the original aspiration and keep on innovating. It has maintained revenue growth (about 50 percent) and profit increase for three consecutive years. With complete corporate governance mechanism and rational work division by professional teams, K11 will make effective cooperation with partners.

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DAQO GROUP CO., LTD. As China’s top 100 machinery company, leading Chinese electrical enterprise and top performer of Chinese electrical industry for three consecutive years, DAQO attaches great importance to technologies, participates in making 35 national standards, and stresses cost control, efficiency and digital management.

DAQO takes building “an international company with a century of excellence” as its vision and takes becoming “China’s leading intelligent comprehensive electrical solution provider with international vision” as its mission. After 54 years of development, it has become one of China’s largest high-and-low voltage power supply and distribution equipment and electric power automation equipment manufacturers, participated in making 35 national standards and ranked top in Chinese electrical industry for three consecutive years. Under the guidance of the management system integrating industrialization and informatization, DAQO Group adopts a “flat and refined” management innovation model and realizes market-oriented internal management, process-based business development, refined accounting and digital assessment, by establishing standardized group operation systems and building new digital management platforms. It adopts the development strategy based on diversification, branding building and international expansion, takes electrical equipment, new energy equipment and transportation equipment as pillar industries, and insists on diversified operation. To be a world class innovative enterprise, it improves product quality, taps domestic market potential and expands international businesses. With “flat and refined” management model, DAQO gradually establishes a process-driven flexible management system, vigorously implements international expansion strategies, sets up joint ventures with foreign companies and establishes branches in many countries. Besides, with the complete three-tier scientific innovation system, DAQO develops core technologies independently, obtains several innovation patents, forms data-driven basic principles, innovates management models, and builds a new digital management platform. DAQO develops leadership model and talent reserve system based on: talent selection and allocation, talent cultivation and development, career channel design and succession plan. Moreover, DAQO takes integrity, dedication and innovation as core values and insists on business expansion based on independent innovation. In 2018, DAQO achieved a revenue of over RMB15 billion, with a YoY net earnings growth of 28 percent, and gross margin of 27 percent. It will build a win-win ecosystem with partners based on complete governance system.

Whitepaper on China Best Managed Companies | Part II BMC winners and best management practices

Haidilao International Holding Ltd. The largest Chinese restaurant chain operating 460 proprietary stores under the unique model of “aligned interests and disciplined management”. The company improves bargaining power with suppliers based on its core strength of motivating employees through corporate culture. As it expands global footprints and accelerates the use of smart applications, it is setting a benchmark of excellent dinning and service experiences.

Haidilao has become a world leading Chinese restaurant brand with the vision of “making more people enjoy themselves at tables to build a table culture for young people in the world to socialize” and the mission of “creating joyful hotpot time through selected products and innovative services to communicate a healthy hotpot culture with foodies around the world”. With a well-defined strategy and vision focused on main businesses in place, Haidilao sees business growth through strategic moves in tier 2 and tier 3 cities and global expansions. It builds core competitiveness of improving dining experience to increase the internal power for growth by strategically expanding its restaurant network and acquiring superior assets along with sustained investment in technologies. It enhances transparency through flattened management and ensures its strategic direction with controls over food safety and other risks while achieving the interests of employees highly aligned to the company and motivating them to propel its long-term growth. Haidilao also launches smart hotpot restaurants and cooperates with new tech companies like Panasonic, Aliyun and iFLYTEK to innovate kitchen fittings and mobile applications. Besides, it leverages innovative technologies to improve food safety and dining experience while optimizing restaurant administration costs. Adhering to the core values of “hands changing destiny”, Haidilao keeps educating store managers and successors for management team with mentorship at the core. The company builds a unique corporate culture centered on authorization in catering industry through compensation, sincerity, respect and commitment. It enjoys excellent financial performance with sustainable and stable operating revenues at CAGR of 36 percent.

Jack Sewing Machine Co., Ltd. China’s largest and the world’s second largest player in the segment of sewing machine; committed to smart manufacturing, with integrated overseas technologies and resources through three M&As; recently visited and recognized by Primer Li Keqiang as a “hidden champion”.

Under the vision of “building the best sewing equipment in the world” and the mission of “providing most competitive-priced sewing equipment and values for global clients, securing well-being for employees, creating markets for suppliers and generating returns for shareholder and benefits for society”, the company has ranked the first in the world for nine consecutive years in sewing machine sales, and is expected to see the highest worldwide sales in 2018. The company’s core management is centered on clients to improve products continuously. By applying digital business processes, the company has reduced costs with increased efficiency and generated brand value. It leverages its global operation platforms to expand its market share at home and abroad. Based on its

Whitepaper on China Best Managed Companies | Part II BMC winners and best management practices increasing market share of single machines (mainly including lockstitch, overlock and interlock machines), Jack Sewing Machine has been focusing on sewing equipment industry and accelerated the development of intelligent sewing businesses to transform itself into an intelligent packaged solution provider in sewing equipment and become the best brand in the global sewing equipment industry, leading China’s sewing equipment industry to grow from bigger to stronger. Jack Sewing Machine has comprehensively managed the industry chain, with its marketing network covering the world comprised of overseas dealers over 130 countries and regions, seeing its overseas revenues accounting for 56 percent. The company takes R&D as its core growth engine, with collaborative R&D teams comprised of 700 employees in nine regions across Italy, Germany and China, creating 980 effective patents (including 217 patents for invention, 584 patents for utility models and 179 design patents). By applying various software and hardware including intelligent production control center, intelligent finishing product line, intelligent production scheduling and intelligent production execution system, the company makes its business processes digital and visible to build digital product design and service process and production order and delivery process. Meanwhile, the company has a future leadership development and succession mechanism aligned with strategy design in place to build workforce across the sewing industrial chain integrated with all parts before, amidst and post the sewing. The company adheres to the compensation principle of “levels based on roles and compensations based on levels, with staff aligned with roles and dynamic changes to roles and compensations” and advocates a performance-driven compensation culture. It builds a culture development model of “culture to attract, educate and develop people” and a harmonious, reliable, altruistic and win-win family culture. Jack Sewing Machine has seen continuously rising financial results well above industry average, growing by over 50 percent to nearly RMB2.8 billion of operating revenues in 2017.

Better Life Commercial Chain Share Co., Ltd. A leading retailer in Southwest China, one of top 500 Chinese companies, ranking in top 10 FMCG chains. The company has a solid foundation protected by high barriers as an offline company focusing on a tight grip on supply chain, differentiated core labor-intensive teams and industrial transformation driven by internet technologies. It is accelerating the implementation of its digital strategy (about restructuring consumer-goods-store, reshaping value chain and integrating into new ecosystem).

Driven by the vision of “becoming a leading omni-channel retailer in Midwest China backed by customer and staff loyalty” and the mission of “working together to create a better life”, Better Life Group has developed for 24 years into a retailing leader in Southwest China and one of top 10 FMCG chains in China. The strategic objective of Better Life is to become “a company having industrial internet technologies with a solid foundation protected by high barriers”. It aims to build core competitiveness by a tight grip on supply chain, differentiated labor-intensive teams and leading technologies. The group focuses on five major initiatives including supply chain, Better Life cloud, digital membership, home business and partner through agile coupled organizational forms to implement strategies. The company’s core management is featured by “leading in multiple business formats”. It

Whitepaper on China Best Managed Companies | Part II BMC winners and best management practices leverages the strategy of “superior offerings for major cities and full ranges of offerings for small cities” to achieve rapid expansion. At the same time, the company integrates supermarkets, department stores/shopping centers, commercial complexes, e-commerce, home appliance, entertainment, catering and logistics to take an absolute leading position in targeted markets. The core capabilities of Better Life is well reflected by rapid expansion through M&As, innovation, integration and value chain reshaping through extensive cooperation and smart transformation through digital changes. The company has passed on its values and vision by focusing on talent development and innovating incentive and leadership culture. It retains outstanding talents by providing career development platforms and drives staff to move forward and work together with a corporate culture of “maintaining integrity, loving the company as one loves family and aspiring to be the best”. In the past three years, the company’s annual operating revenues have grown and maintained at higher levels above the industry average. Besides, with better operating cash flow than peers, the company has strong financial support for rapid expansion.

Shenzhen Inovance Technology Co., Ltd. A leading provider of automation products and customized solutions in China, a remarkable player in industry automation (ranking the second in inverter market share and the first in domestic product segment), robot (ranking the first in China’s SCARA market share), new energy vehicle (with the largest market share in bus) and rail transit.

Under the mission of “advancing the industry world with leading technologies” and the vision of “becoming one of the world’s top industrial automation product and solution providers”, Inovance has developed into a provider of comprehensive mechanical and electrical products and solutions from a single inverter provider after 15 years’ growth. The company designs a “double-king strategy”: being a king in intelligent manufacturing and a king in new energy vehicle. By focusing on the strategy of “a transmission shaft of high precision, efficiency and security control”, a proven multi-level network based on industrial bus and industrial internet, an industrial ecosystem where the industrial structure is optimized to implement intelligent manufacturing, robots are applied to gain returns for end users within two years, the company has built the core capability as a “strong platform for small business”. It has focused on R&D to develop industry leading technologies with R&D staff accounting for 26 percent and expense rate for R&D reaching 12 percent. The company has 229 patents for invention and 413 patents for utility models and also participates in developing standards for PLC and invertor industries. Inovance provides products to meet client needs better and expand the market by providing overall solutions and innovative market-oriented operations models and coordinating all functions to meet business needs through effective integration of HR BP, HRCOE and HR SSC. The company has built training mechanisms including Inovance College, Huangpu training courses and TMT, cooperated with Peking University and China Europe International Business School to prepare main forces for the company’s future. Inovance focuses also on social responsibility and was awarded as one of CCTV's

Whitepaper on China Best Managed Companies | Part II BMC winners and best management practices

2017 top 10 Chinese listed companies in social responsibility. The company performs well in financial results, with compound growth rate of its operating revenue reaching 30 percent and a YoY increase of 14 percent of the net margin attributed to the parent company. The company connects all business lines through budget management from strategic planning, budget quantification, differentiated process management and performance assessment.

Shenzhen Absen Optoelectronic Co., Ltd. A world leading LED display application and service provider, ranking the first in exporting LED displays in the industry for nine consecutive years. Driven by a core culture “centered on genuine products” that is recognized by clients, the company is transforming into an eco-chain platform service provider.

With the vision of “being a global leading brand in LED display as a provider of genuine LED display application and service” and the mission of “making the world shine more”, Absen has ranked the first in export sales of a single brand of display products for 10 consecutive years. The company has been focusing on LED display industry with the goal of becoming the first brand in the industry. It has identified profits from advance manufacturing businesses as the key to future growth and built a strong correlation between the goal and assets allocation. The company has strengthened internal management and coordinated efforts of the global operation platform to develop new teams, new capabilities, new opportunities and new businesses based on its core competitiveness of corporate culture. It has built a value triangle system and core values of “honesty, gratitude and responsibility”. Absen has achieved lower costs and higher efficiency in production, R&D and marketing and integrated the management of process and IT effectively. It has become more international by providing full ranges of services through overseas subsidiaries in nine countries. The company has also focused on innovation as its investment in R&D has been 3 percent above the industry average, achieving 88 patents and nine software copyrights. At the same time, Absen has been active in investment and M&A in stage performance and culture and creativity in recent years. The company has activated the whole organization through annual internal talent review. Regarding senior management, the company has applied a “two-leader mechanism” to six system leaders and they can replace each other for team management. Besides, the group provides regular internal trainings to communicate and pass on its values and vision. Externally, Absen’s core culture “centered on genuine products” is widely recognized by clients. In 2017, the company saw its gross margin reaching 36 percent, net margin reaching 7 percent and its debt asset ratio standing at about 40 percent.

Whitepaper on China Best Managed Companies | Part II BMC winners and best management practices

Top Choice Medical Investment Co., Inc. TC Medical rebuilds a simply structured headquarters through public hospital restructuring and internal marketization and sets up a unique TC Medical model combined with a service system with doctors as its core asset for profitable growth.

With the mission and vision of “building a leading medical platform in China and one of the world’s largest doctor group”, TC Medical enables its simply structured headquarters and internal market-oriented functions to constitute a service supporting platform for the company’s business development. Driven by the doctor group and market-oriented operations, the company has set up a medical service system that respects the nature of medicine centered on patents and considered doctors as the host of hospitals. The group applies its six-dimensional model including participation in restructuring and reform, coordinated development between headquarters and branches, integration of medicine, teaching and research, doctors’ shareholding, doctor team service and school training to build a comprehensive medical platform and a group of doctors and integrate medical resources from well-known universities and hospitals at home and abroad, making itself an example of private medical services. TC Medical achieves lower costs and higher efficiency by managing operating objectives, assets and R&D as well as regional and group marketing strategies. Its overseas businesses mainly cover overseas procurement, medical management experience learning and academic exchanges. The company focuses on innovation with 41 patents. It provides professional orthodontics services through AI and 3D printing and develops a medical plus internet model in vertical disease-specific areas. The company has achieved common management, shared interests and risks through an executive succession mechanism and a complete talent development and partnership mechanism. By cooperating with renowned universities and Top Choice School of Dentistry, the company has built a stable and scaled talent pool as its competitive edge. Moreover, TC Medical promotes the core values of simplicity, cooperation, platform and belief and adheres to the people-oriented management concept to live in the corporate culture. In 2017, the company saw its operating revenue up by 34 percent, net margin up by 59 percent, and the average returns on equity reaching 23 percent with a lower debt asset ratio. It has a stable and sustainable positive operating cash flow in a healthy financial status. Three independent directors among seven directors are all experts in finance and law. The company has a sound governance structure and financial management system.

Whitepaper on China Best Managed Companies | Part II BMC winners and best management practices

Tempus Global Business Service Group Holding Ltd. A leader in China’s tourism industry ranking top in brand value with its businesses covering tourism, internet and finance sectors.

Driven by its vision of “building a big tourism ecosystem to be the world’s largest tourism group” and the mission of “committing to business services to be a national high-quality service brand”, Tempus has become a leading comprehensive tourism group in China as Tempus Group Co., Ltd. ranks 48th among top 500 Chinese private companies. Tempus has an integrated management concept of Chinese and western ideas, i.e. the concept introducing western management mechanism and Amoeba operating model based on China’s unique corporate culture of being ambitious and aggressive. Under the combination principle of “resources plus channels and services” with strategic approaches, the company has vertically stepped into the tourism industry chain by covering resources, operations and channels to improve competitiveness and profitability and successfully strengthened its core competitiveness. Tempus has applied Amoeba operating model to enable each business unit to independently operate and implemented a finance and business integrated system. With a strong M&A integration capability, the company has set up several industrial M&A funds in recent years to facilitate its deployment and developed the functions of investment, financing, management and exit. Moreover, the company has actively developed international businesses as it cooperated with Bain Capital to acquire the world’s largest water aircraft company. Tempus builds a corporate university through partnership to set up a talent development system based on leadership, expertise and professionalism. It also integrates share incentive mechanism, partnership and performance incentive mechanism to retain and attract top talents. The company also builds a talent promotion and development mechanism through annual talent review and implements strategic decoding and collaboration through talent echelon development. In 2017, Tempus Global saw its overall performance growing rapidly at a YoY growth rate of 176 percent.

9F Group Inc. After 12 years’ growth, 9F Fintech Holdings Group has built five tech businesses with strengths in users, data, scenarios and AI as an AI-driven digital fintech platform, developing itself into the largest player in China’s internet finance industry. It has 690 million registered users with accumulated transactions amounting to nearly RMB300 billion.

Under the mission of “technology making finance simple”, 9F has focused on digital technology to drive the connection of users, scenarios and finance to provide intelligent and reliable inclusive finance services with the commitment to becoming a world’s leading digital fintech company. By taking advantage of opportunities from 1.0 mobile finance, 2.0 scenario finance, 3.0 digital finance and 4.0 intelligent finance, the group

Whitepaper on China Best Managed Companies | Part II BMC winners and best management practices has identified four production elements including user, scenario, data and AI algorithm to launch its strategy of 5.0 “T.E. technology empowerment” and convert its technological capabilities into products to empower banks, insurers and businesses home and abroad. The company has lowered costs and improved efficiency through investment in technologies and lean internal management to optimize resources allocation and become more international driven by AI technology. Regarding innovation, the company leverages data analytics, AI and cooperation with authorities to optimize processes and improve efficiency. The group has built an employer brand to attract talents and emphasized the communication of corporate culture and values, enhancing per capita efficiency in practice. The company applies several mechanisms of A and B positions for core management, rotating CEO, CEO of business units and political commissars to build the leadership of core employees by combining with a modular organizational management. The company has seen a robust financial performance thanks to its standard and transparent financial principles along with financial analysis for more effective strategic positioning, monitoring and corporate management. The group also has a sound governance mechanism in line with the core concept of “compliant and prudent operation” and the principle of win-win cooperation to empower the real economy.

iKang Healthcare Group, Inc. Leading China’s medical examination service industry by size as a leading service provider of private preventive healthcare services in China, seeing more opportunities in the high-end market. Focusing on “special staff responsible for medical examination”, the company has built 115 centers in 33 cities as of September 2018 based on a strong IT platform and customer service system. The company also leverages its own extensive medical resources with a focus on developing new additional consumption in 2C sector beyond 2B businesses.

In line with the vision of “striving to be a world-class health management organization” and the mission of “advancing preventive healthcare to improve quality of life and driving the transformation of healthcare systems with innovation and technologies”, iKang Group has devoted itself to healthcare services for 15 years. It has built a nationwide medical network in many ways including self-building, M&A and equity investment and provided one-stop health management and medical service platform for working staff and their families. Based on the values of “a resolute commitment to quality and patients”, iKang has committed to becoming an AI and big data-driven platform company to solve the scarcity of medical resources. Its core strategic planning team has also adjusted the company’s strategies based on changes to internal and external situations in time. Depending on its healthcare service centers, IT platforms and a strong customer service system, the company has offered various health management services for millions of customers every year. It has also offered international teleconsultation services in high-end medical examination segment. Besides, the company has launched digital products to leverage the strengths of partners and AI products to empower health check, post-check management and treatment so as to help users identify, diagnose and treat diseases earlier. The

Whitepaper on China Best Managed Companies | Part II BMC winners and best management practices company provides systematic professional trainings and promotion channels for employees based on iKang school and marketing school. iKang has well-defined plans for talent assessment and selection, systematic trainings and succession. Meanwhile, the company organizes activities for doctors and nurses every year to improve employees’ sense of identity and honor for iKang’s brand and values. iKang also has robust mechanisms for finance, internal control, fund management, budget analysis and financial accounting and sets up an internal auditing department to monitor on a regular and irregular basis.

Shanying International Holding Co., Ltd. Ranked No. 416 in Fortune China's top 500 enterprises with the third largest output of wrapping paper in China. The company has established an eco-friendly business model with leading value creation ability in the industry through continuous M&As, and is accelerating its digital transformation to achieve smart finance and operation.

Committed to the vision of establishing a world-leading eco-friendly business model with the best value creation ability and the mission to lead the construction of a collaborative, sharing and win-win industry environment, Shanying International was ranked among the top 10 papermaking companies in China's light industry with the third largest output of wrapping paper in China in 2018. Investing across the entire industry chain under the global vision, Shanying International has its advantages in cost efficiency. The company ensures high execution efficiency based on horizontal organizational structure, head office + business unit two-level management system, three-level review system and initial signature accountability. Its strategy of cooperation-driven value creation and sharing and competitive compensation system are helpful for attracting and retaining high-quality talent. Efforts in exploring the board management model and cross-culture collaborative management are driving the steady progress of going abroad. Guided by the 2020 "123 Strategic Goal", the group are taking initiatives to become a first-class digital and high- performing enterprise with over RMB2 billion net profit and more than RMB30 billion revenue by 2020. Related actions include highlighting core business strategies and making continuous optimization during strategy implementation. The company values eight factors for efficient production operation: performance reward, process, digitalization, IT, management and control, organization, talent and culture. It has realized lower cost and higher efficiency in self-power generation and the construction of industry 4.0 smart plants and obtained sufficient foreign waste quota. The company keeps optimizing processes and reinforcing initial signature accountability, two-level horizontal organizational structure and three-level review system to drive and align with rapid business growth. Apart from investing across the global industry chain and expanding its business across the global recycled fiber industry chain, Shanying International is driving the integration and synergy of domestic and international production bases and supply chains. The company implements the advanced industry + Internet management strategy to facilitate the continuous construction and optimization of global sharing centers and industry 4.0 smart

Whitepaper on China Best Managed Companies | Part II BMC winners and best management practices plants. As the company's talent training base, Shanying International College provides management trainee program, future leadership program and equity incentive program for middle management. The college develops talent through three sub-strategies, four themes and 10 initiatives. The company highlights accounting, tax, capital, performance management, sharing and financial strategies to achieve smart finance and operation. During the period from going public via restructuring in 2013 to FY2018, Shanying International has achieved improvement in revenue, profitability and cash flow creation, with a revenue CAGR of 134 percent and net profit CAGR of 195 percent.

Tunghsu Group Co., Ltd. Starting from high-end equipment manufacturing, Tunghsu Group Co., Ltd. has strived to replace imports and broken the international monopoly of TFT-LCD products with the largest market share in China after 21 years’ growth, ranking 188th among top 500 Chinese private companies. It is also making multi-industry coordinated efforts in intelligent manufacturing.

Driven by the vision of “building a world-class century-old Tunghsu” and the mission of “striving to revitalize China’s national industry”, with well-defined strategies in place, Tunghsu has started from high-end equipment manufacturing to replace imports and broken the international monopoly of TFT-LCD products with the largest market share in China after 21 years’ growth, ranking 188th among top 500 Chinese private companies. Based on the current situation, the group has focused on technological transformation and industrial upgrading led by innovation and industrial manufacturing, enabling itself to be China’s largest and the world’s fourth largest provider of high-end optoelectronic display materials. Looking at future, the group will actively engage in new material sector (e.g. graphene) mainly through M&As to build an industry closed loop. The company has seen lower costs and higher efficiency through organization, system and incentive. As it is going global in a stable manner, the group successfully issued offshore dollar debts. It has also completed transformation into sectors of graphene application, new energy vehicle and commercial robot through M&As. In 2012, Tunghsu University was established to build a five-level talent development system with a focus on culture communication, leadership development performance improvement. Being grateful to society and diligent in work is the essence of Tunghsu’s corporate culture while gratitude and dedication, loyalty and integrity, accountability and aspiration are the core values for Tunghsu talents. Elite culture is the foundation of Tunghsu’s personnel philosophy. In 2017, Tunghsu's consolidated operating revenues hit RMB38.4 billion, up by 82 percent on a year-on-year basis, with gross margin at 26 percent and net margin at 9 percent. It has a sound governance structure that is running in a standardized way. Besides, the company also has a complete financial management system and develops relevant systems for authorization, accounting and tax management to effectively prevent financial risks.

Whitepaper on China Best Managed Companies | Part II BMC winners and best management practices

Jereh Oilfield Services Group Co., Ltd. Jereh is a global group ranking No.1 among private oilfield service providers, specializing in oil & gas, power and environmental management with a unique vision—to be an enterprise respected by people all around the world. It is committed to exploring key technologies to drive industry development through continuous investment in innovation.

Under the vision to become an enterprise respected by people all around the world and the mission to focus on customers’ challenges, provide competitive solutions and create long-term value for customers, Jereh Group has developed as the No.1 oil & gas service provider in domestic private sector. As an integrated solutions provider, the group creates strategic synergy across multiple business segments, and improves its operational management capabilities worldwide through considerable M&As and equity participation. Considering the interconnection between oil & gas industry and macro economy, leaders of the company cooperate to develop forward-looking strategies, enabling highly-efficient process from strategy through budget and business report to review and execution. The group implements control-based operation in three major countries and increases investment in intelligent manufacturing, realizing cost cut and efficiency improvement during the organizational process. Increasing number of collaborative design centers overseas contributes to the stable growth of income from overseas market. With over 300 engineers, Jereh ensures continuous innovation based on research into critical equipment and technologies and innovation of over 100 products. The company obtains more resources through M&As and improves its digital capabilities based on CDS collaborative design platform. The future leadership development and succession mechanism supported by special training system and HKU leadership development program have enabled Jereh to develop executives through internal training. The company has established a talent recruitment and development system constituted by leadership development, professional development and new employee development segments in line with corporate strategy and business scenarios, and ensures transparency of the promotion system. With the integrity-based corporate culture, the group achieved a revenue increase of 12 percent year-on-year in 2017. Jereh has established a corporate governance system featured with counterbalance and maintained long-term and stable partnerships with banks, organizational investors and strategic sub-suppliers.

Whitepaper on China Best Managed Companies | Part II BMC winners and best management practices

Sunpower Group Co., Ltd Sunpower Group specializes in green investment and high-end environmental protection equipment manufacturing and service. With over 20 years' experience in efficient and environment-friendly pulverized coal combustion, ultra-low emissions and transmission through steam pipe network, the company is the "invisible champion" in the sector.

Under the vision to shape a green future and the mission to create harmonious relationship among all things, including technology-ecosystem and nature-culture harmony, Sunpower Group becomes the "invisible champion" in the sector after 20 years' development. To meet customers' demand and achieve the objective of higher productivity with less energy and benefit-oriented environmental protection, the company has been committed to environmental protection through technical approaches. With a long-term vision, Sunpower Group is engaged in multiple green investment projects, already completed or in progress, and planning for dozens of potential projects to support future development. The group has established a closed industry loop, by investing in three major industries: high-end equipment manufacturing, green investment equipment, and energy saving and environmental protection EPC service. After 20 years' development in high-end environmental protection equipment manufacturing and service, Sunpower Group has established a good reputation in domestic and international markets, with its leadership consolidated. It provides products and services for nearly 1,500 clients from over 30 countries across more than 15 industries, including BASF, BP, Shell, SABIC, DowDuPont, Sinopec, CNPC, CNOOC and other world-renowned brands. The group leverages its leading technologies in equipment manufacturing and service and high precision manufacturing as well as experience in professional project management in the investment and development of green investment projects, and has successfully invented thermal power upgrading technology. The people-oriented corporate culture enables the company and staff to develop together. Sunpower Group has been approved to establish cooperation centers which integrate production, education and scientific research, such as the postdoctoral research station of the Ministry of Human Resources and Social Security. The company is building its corporate culture featuring "higher productivity with less energy and benefit-oriented environmental protection, as well as a process from introduction to absorption and re-innovation". The group has achieved stable improvement in financial performance in recent years, and is reinforcing and improving its corporate governance mechanism based on the management and control of the audit department.

Whitepaper on China Best Managed Companies | Part II BMC winners and best management practices

China Education Group Holdings Limited The largest organization in China's private higher education industry, with over 20 years' experience in running private universities and colleges. It has been operating seven higher education institutions since its listing in 2017, with nearly 150,000 students. The group stands out for its unique theory of school management and has maintained steady growth. As the second generation of the founder, its CEO is committed to leading the group to higher achievements based on reasonable strategies and investment.

Guided by the vision to prepare students for success and the mission to be a pioneer of excellence and innovation in education, China Education Group provides talent resources that can meet the need of companies for knowledge and skills in emerging industries. With 30 years' experience in running schools, the group is operating the largest private university, private technician college and private secondary technical school in China. One of its universities has ranked No.1 among China's private universities for nine consecutive years, and was awarded the first prize of teaching achievements by the government. The group is expanding its school network to provide opportunities for more students to receive quality education. With the clear strategy to focus on private universities and colleges, China Education Group has successfully improved its scale, efficiency and reputation, through market integration and management optimization, including the establishment of a professional strategic investment team to support its integration initiatives in the industry and significant investment in digital technologies such as ERP + educational administration system, student support system and online learning system. In addition to optimizing employee training program of schools within its network, the group establishes the 839 University, an internal institution for employee training, and effectively implements financial, internal control and teaching management training plans to fully improve employees' teaching and administrative capabilities and support their career development. With strong sense of corporate social responsibility and strict and fair governance, the group is committed to providing high-quality and affordable education for students and contributing to social development. It takes the first place among the educational companies listed in Hong Kong with total assets of RMB6.67 billion.

Whitepaper on China Best Managed Companies | Part III Expert insights

Part III Expert insights

It is the best of times and the worst of times.

Deloitte and other four accrediting organizations share their insights on the general trend of the time as well as thoughts on transformation towards management excellence through this BMC program for private companies to consider against potential challenges in the future.

Citizens selecting goods at Tempus's cross-border shopping mall in Qianhai, Shenzhen. Photo/Xinhua

Whitepaper on China Best Managed Companies | Part III Expert insights

Building management excellence frameworks for sustainable development of private companies

By William Chou and Zhao Jian

As China is adapting to a new normal for economic growth, structural adjustment, innovation-driven and high-quality development are becoming key words of our time. Against the uncertain and unpredictable international competition landscape, China, as the world's second largest economy, has been playing an active role in driving economic globalization and taking international economic responsibilities. Private companies have once again become the focus of attention under the background of structural reform and transformation of Chinese economy. High attention from the government leaders and the introduction of new policies are providing new opportunities for the development of Chinese private companies.

1. Lessons and experiences of the past Fairness and system are frequently cited as obstacles blocking the way of Chinese private companies. It is consistent with the findings of Deloitte's surveys, which suggest that private companies are significantly limited by external environment. For example, private businesses are challenged by much barriers to enter high-tech industries including telecommunications, military, aerospace and biological medicine. Private companies usually cannot enjoy the preference of the government in supplier selection. Insufficient protection and management of intellectual property (IP) on the government level, defective laws and regulations in this area and deficiencies of businesses in IP management have led to extensive IP disputes. Private companies are also challenged by many difficulties and high cost in financing. Besides, they have to bear heavy tax burden.

Private companies will always be influenced by external challenges. Over the past 40 years, private sector has developed rapidly along with the economic growth in China. In addition to the willingness and courage of entrepreneurs to create and explore, other factors including incentive policies, innovative systems, demographic and market dividends, technological change and globalization have collectively generated a desirable environment for the development of private companies.

Firstly, after different stages at the policy level from strict control to deregulation and encouraging development, system innovation has led to a more market-oriented environment where companies can enjoy enormous demographic and market dividends. Meanwhile, as state-owned enterprises (SOEs) implement the strategy to invigorate large enterprises while relaxing control over small ones and ensure rational distribution of funds by increasing investment in some areas and pulling it out of others, it has expanded more opportunities for private companies to seek development

Whitepaper on China Best Managed Companies | Part III Expert insights in the market. SOEs and private companies should establish a complementary relationship with each other for integrative development rather than encroaching the living space of the other.

Moreover, China became a member of WTO in 2001, a milestone in its integration into economic globalization, providing more opportunities for Chinese private companies to grow through participating in international competition in the global market. Technological development has enabled private companies to move from low value- added business to high value-added business. During the period from 2012 to 2017, private companies are increasingly stepping into sectors including energy saving and environmental protection, new materials, new energy, new-generation information technology, high-end equipment manufacturing, biology and new energy vehicles. This period saw a substantial growth in the number of private companies.

Four waves of entrepreneurial surges in China give rise to a large number of industrious entrepreneurs with acute business sense. Being courageous with strategic vision with in-depth knowledge in policies and culture of the local market, they are able to operate their organizations in a highly flexible manner. Entrepreneurship has been and will still be critical for private companies to achieve success.

Nevertheless, private companies have to address the challenges from external environment no matter in the past or at present. Thus only companies with sufficient capabilities will be able to realize sustainable development against various challenges.

2. Management challenges for private companies There is no denying that the rapid economic growth and fast development of the private sector in China have been benefited from enormous demographic and market dividends over the past 40 years at the initial stage of China's economic development. Most fast-growing private companies place emphasis on business over management, without overall planning for management system. It is the result of management misconceptions of Chinese companies, who see management and business operation as two independent factors. Management is defined by Peter F. Drucker as the practice to achieve business missions. While missions derive from strong entrepreneurship, the accomplishment of missions relies on systematic management. Chinese private companies have to address 12 management defects (see Figure 1):

Whitepaper on China Best Managed Companies | Part III Expert insights

Figure 1: Management defects of Chinese private companies

Strategy: lack of Innovation: a long way to Funds and capital: how to 01 management over 05 go from product to 09 obtain sustainable existing strategies system and culture profitability and value growth?

Going global: having Productivity: much room Leadership: leadership international business remains for efficiency 10 bottleneck of individuals 02 does not equal a global 06 improvement limits the development of company the entire organization

M&A: significant gaps in Technology: to follow the Attracting and retaining integration capabilities trend or to transform talent: general lack of 03 07 technologies into 11 employee engagement sustainable business and loyalty model?

Sustainable development: Brand and market: Succession: defects in 04 deficiencies in 08 insufficient ability in 12 family succession and environment, social improving customer professional manager responsibility and experience and brand market corporate governance and value inadequate attention to

Source: Deloitte Research

First, many private companies lack management over existing strategies. Second, more and more companies are developing international businesses, but it doesn't mean they are global companies. Third, M&As, as integration after overseas M&As is what really matters, rather than the deal itself. Fourth, without a long-term vision, many companies focusing on business growth are not paying enough attention to issues related to environmental protection and social responsibilities. Fifth, entrepreneurship and innovation are frequently talked about by domestic entrepreneurs, but there's still a long way to go from product innovation to system and culture innovation. Sixth is efficiency, as they tend to excessively emphasize on size and speed, while ignoring the importance to improve system efficiency in relation to strategy, operation and production. Seventh, technology. The seemingly technology-driven business value increase in China is mostly benefited from demographic dividends rather than technology-driven business model. Eighth, brand and market, as most companies depend on products to build brand eminence and capture market, while subject to big gap with foreign competitors in customer experience. Ninth, funds and capital. Many companies don't know how to increase value through capital management and maintain sustainable cash flow growth via reasonable planning after achieving product or market position success. Tenth, leadership. The absence of a particular leader has fundamental influence on the company, and leadership bottleneck of individuals limits the development of the entire organization. Eleventh, attracting and retaining talent. Private companies often have difficulty in attracting and retaining talent, due to general lack of employee engagement and loyalty. Finally, family succession is also a big challenge for family enterprises.

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3. Improving management skills to break the bottleneck Fast growth is not the only driver for success. Companies of certain size should consider how to obtain sustainable profitability and growth. Through the BMC survey, Deloitte has identified some private companies with industry leadership, long-term strategy, global thinking, innovative development and people-oriented principle, which are set to achieve solid long-term performance and robust growth.

Take a Hong Kong-listed real estate company with 25 years of history as an example. Though not the fastest growing or largest player in the industry, it has been developing in a sustainable manner, based on long-term strategies, continuous organizational structure updating, emphasis on product quality and careful control over financing and development pace. Another example is a US-listed health management organization with 15 years of history. As an industry leader in China, it keeps focusing on the future development of the industry and pioneering in product innovation. It maintains its core competitiveness through significant investment in talent development, which stimulates employees' potential and ensures the creativity and loyalty of talent. It has a stable management team with senior executives serving the organization for over 10 years and a turnover rate of only 5 percent at the middle level and above. The other example involves a Shenzhen-based public company specializing in medical devices sector. It has maintained its gross margin above 50 percent and more than 50 percent of revenue from international business, mainly driven by technology innovation. It has kept stable growth through international M&As and in particular effective post-M&A integration. A retail company with less than 10 years of history has achieved CAGR of more than 50 percent, by adopting innovative and customer (member)-oriented business model in each market segment and establishing online digital system for the management of members, suppliers and employees based on continuous digital innovation and management tools.

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The booth of Inovance at an international robot exhibition. Photo/Visual China

Many private companies are adopting good management techniques, but not in a systematic manner. They still have to learn from world-class competitors in management techniques in some respects. Based on considerable consulting and research, Deloitte has identified four cornerstones of management excellence, i.e. strategy, capabilities, commitment and financial strength. The four cornerstones are integral and interconnected to each other, and comprise the enterprise frameworks for management excellence, covering best practices in 20 management segments.

Firstly, strategy is the soul of a company. Good business performance without a clear strategy is not equal to management excellence. A good corporate strategy should go beyond the management to employees at all levels, which means that everyone, from top to the bottom, would have a clear picture of the company's mission, vision, strategy and approaches. Effective strategy management system ranging from strategy implementation to assessment and review is also critical for the development of an organization. Second is capabilities. Organizations need the capabilities to implement the clear strategy. They should improve their competitive advantages systematically by optimizing the organizational structure, process, technologies and risk control and leveraging M&As, alliances, internationalization and innovation. Third is commitment. Apart from strategy and implementation system, employees' commitment and sense of mission are also important for companies, which requires companies to invest in leadership and talent development, corporate culture, family succession plan and social

Whitepaper on China Best Managed Companies | Part III Expert insights responsibilities. Lastly, financial strength, which covers financial performance, corporate governance, financial system and risk control.

How do best managed companies address the challenges for private companies? Deloitte's research identifies that, to address the 12 challenges they are facing, private companies may start from the following approaches of best practices to think about solutions:

a. Strategy: Integrate vision, mission and strategy into execution; b. Globalization: Build global management capabilities and systems to develop into a real global company; c. M&A: Focus on the critical step of post-M&A integration to achieve business success; d. Sustainable development: Establish a balanced stakeholder mechanism to create benefits for customers and the community; e. Innovation: Go beyond product and technology innovation to explore more effective innovation mechanisms from more perspectives, such as Deloitte's "Ten Types of Innovation"; f. Productivity: Think out of the box, strive for excellence and improve efficiency; g. Technology: Reshape the traditional industry and establish business models that are faster, better and more cost efficient; h. Brand and market: Make products as an experience, rather than goods; i. Funds and capital: Enhance portfolio resources management to achieve sustainable profitability and value growth; j. Leadership: Reverse the organizational pyramid to provide support for employees; k. Attracting and retaining talent: Build an interconnected talent network; l. Succession: Family office-identify potential business owners and managers of the future.

While applauding for the achievement of Chinese private companies over the past 40 years, we should also pay attention to problems in their internal management. Private companies actively involved in international competition should be aware of their gap with European and US leading players. For Chinese private companies, challenges from external environment may turn out to be opportunities in the longer term. Internal measures including systematic improvement of management skills and establishment of frameworks for management excellence are necessary for private companies to seize opportunities and realize sustainable development.

(William Chou is the leader of Deloitte Private and Zhao Jian is the lead partner of Deloitte China BMC Program)

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Blood is not always thicker than water: why families need governance

By Bank of Singapore

In the Ishikawa Prefecture of Japan, there is a small inn called the Hōshi Ryokan. It looks like any other inn in Japan, with simple furniture and a quaint tea room. But the basic architecture holds a deep history that has run for over a thousand years. Hōshi Ryokan is one of the oldest, possibly the oldest, family businesses in the world today. Set up in 718, the Hoshi family has been running the inn for more than 1,300 years. The current owner is the 46th generation in charge.

Many other family-run businesses have not been so durable. Research shows that seven in ten of family-owned businesses fail or are sold before the second generation gets a chance to take over. And just one in ten family businesses remain active for the third generation to lead. Hoshi Ryokan is probably the one in millions to have lasted so long.

There are many reasons for the failure of those family businesses. But they all have one common factor that is unique to family-run businesses: the family itself can be a potential source of tension, and the reason for failure.

1. Un-complicating the issue One thing for sure, there are many strengths inherent in a family-run business. Decisions can be quickly made, and family-run businesses tend to be more stable. However, family ties can also wreck the company, if they are not properly managed.

A big part of the issue is that while many family businesses may have strong corporate governance, the family that runs the business tends to be governed by informal structures. For the most part, if these informal structures result in a clear sense of direction, strong values and proper management, then there is no need for change. More often than not, however, these informal structures would break down, resulting in the loss of direction and clarity on the roles of family members in the business.

One specific example is the lack of succession planning. Over the past few decades, the strong growth in China has seen many family businesses thrive. As a result, many founders of the company may have taken for granted the harmony and stability of the business, and pay little attention to succession planning.

Part of the problem is related to culture, as in China discussions on death and mortality remain taboo subjects.

At the same time, the second and even third generation of the family may have very different ideas about the development of the business, as they have been brought up in a different environment. Many would have studied overseas from childhood, absorbing different influences and keen to bring new ideas to the table.

All of this comes to a head when the patriarch passes on. Without a proper succession plan in place, fighting within the family is likely to occur.

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And even if there is a smooth transition between the first and second generation of leaders, families grow over time and space. With more family members added, decision making becomes much more challenging.

This complexity is compounded by the fact that some family members may be pure shareholders, others are managers and some may be employees, and often there are family members who occupy all three roles, which makes the issue become more complicated.

In addition, the challenges continue to grow with rapid and deep shifts in the tax, legal and regulatory landscapes. How to properly manage family wealth is therefore a crucial issue.

2. Family governance: where to start Like corporate governance, family governance is based on a simple principle and idea, which is to clearly define the persons managing the company and their roles.

In this manner, good governance contributes three fundamental ingredients for family businesses to function well:

· Clarity on roles, rights, and responsibilities for all members; · Encouraging family members, employees, and owners to act responsibly; · Appropriately engaging family and owner inclusion in business discussions and decision making.

At its most basic, family governance helps to articulate the reasons and remind family members why they wish to stay together. Among other things, it is necessary to recognize that it is not always easy for families to remain bound; it requires a strong sense of commitment and duty to make it work.

At the very heart of the issue is to identify the family’s core values, its vision and its mission. For instance, a family that champions social causes will have very different priorities from one that supports entrepreneurship.

The second critical component of family governance is to establish proper forums for regular interaction and communication. These channels are crucial to ensure constant information flow between family members.

The third key element is to set out the rules of engagement and accountability. This sets the tone for how members should behave, and how conflicts are resolved.

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Many of these rules are enshrined in a family constitution, the key document that records the agreed rules and roles of the family members. Achieving this is difficult. They have to be driven consensus in the family, and agreed upon by all family members. It is not uncommon for the process to take years to achieve.

That is why it is important that the process starts early, before the family becomes too big and complex.

We have seen a much greater interest in setting up family governance structures among businesses in Asia today. Many are realizing and telling us that there is a need for proper management of both the family and its wealth. Not all family businesses can last more than a thousand years or even half a century，but with the right structures in place, we can at least ensure that families stick together and thrive through the generations.

New Oriental's high-end business English training. Photo/Visual China

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Transformation & succession: Experience of large family businesses in Chinese mainland

By Peng Qian

Since 1978 when the reform and opening-up policy was carried out, the Chinese mainland has witnessed rapid development in its private sector. As of the end of 2017, private economy has contributed over 50 percent of China's fiscal revenue, accounting for more than 60 percent of GDP, with family businesses as the key driver.

At the early stage, most family businesses in Chinese mainland focused on domestic market, or provided low-cost, low value-added services to famous brands in developed economies as OEMs. However, driven by technological revolution and globalization, the Millennium has witnessed the rapid rise of China's new middle class, who favored high price brand products and quality services. It is therefore imperative for enterprises in Chinese mainland to transform and upgrade. The author's recent research on 43 leading family businesses spanning various industries showed an average annual sales volume of more than RMB10 billion, and half of them have been taken over by the second generation. Due to limited space, this article mainly focuses on three major development strategies of these family businesses, which are closely related to succession planning.

1. Creating and acquiring a brand Based on our survey samples, most family businesses have enhanced their position in the value chain by creating a new brand or acquiring overseas famous brands. Establishing a new brand, as a natural growth strategy, may require the efforts of many generations to integrate the existing value positioning with a family's reputation, history and culture. However, overseas acquisition may give quick access to a brand, but attention should be paid to cultural conflicts that may arise in business integration.

Brand also plays a key part in the succession of a family business. In order for a family business to last, it is crucial to start early to develop next generation leadership and core technologies.

2. Diversification strategy At a certain scale, businesses may have to face various internal and external uncertainties, making it imperative for business owners to diversify their businesses to avoid the risk of putting all eggs in a basket. Our survey samples showed that most businesses are actively seeking for diversified development. At the same time, transgenerational entrepreneurship is beneficial for a family business to implement diversification strategy. Emerging new generations will always help a family explore new opportunities beyond traditional businesses. A key part for family businesses to thrive is to bring the potential of the next generation into full play.

However, the samples also showed that a few industry giants chose to focus on an individual business. Owners of these businesses considered that with limited energy and a stable external environment, it is better to stay focused on its advantages to

Whitepaper on China Best Managed Companies | Part III Expert insights build up core competence, which will help foster a new brand and ensure business sustainability. Unlike diversification, blind expansion without stable basis may give rise to significant potential risks, especially with the use of leverage.

A robot serving food attracts customer's attention at Haidilao's smart hotpot restaurant. Photo/Visual China

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3. Commitment to R&D and innovation A recent research showed that nearly 80 percent of family businesses regarded innovation as the biggest challenge for them to stay ahead, while quite a few family businesses in our study took the lead by actively investing in R&D and innovation to propel continuous upgrade.

Notably, our survey samples showed that the transformation and upgrade of a number of family businesses started from the first generation and obviously speeded up as the second generation participated in or took over the business. The innovation DNA within a family helps guarantee smooth business succession to a certain extent. If the second generation started to innovate without support or recognition from the first generation, business succession may not be an easy journey.

Compared with others, family businesses tend to be more forward-looking with greater willingness to invest in brand and R&D. Also, entrepreneurship that lasts for generations enables family business owners more likely to seize opportunities, and pursue diversified development and overseas M&A. Furthermore, family businesses are also flexible and innovative enough to respond quickly to disruptive technologies, and stay at the forefront of the new era. It is imperative to gain deeper insights into how family business leverage these strategies to thrive through the generations.

(Professor Peng Qian is the deputy director of Tanoto Center for Asian Family Business and Entrepreneurship Studies, Business School of Hong Kong University of Science and Technology)

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Strategy execution: incorporating mission, vision and strategy into execution

By Zhao Jian and Gui Yan

Though its long-term research on world-class companies with international competitiveness, Deloitte has identified and summarized the standards and key factors of their management excellence, and elaborated on how to benchmark with world-class companies, bringing cases of world-class companies and best managed practices to more and more private companies in China. As of today, there have been 115 Chinese enterprises included in 2017 Fortune Global 500 list, of which 24 are private companies. Some Chinese private enterprises has already taken the lead in global business trend, contributing to the improvement of human life.

1. What are the difficulties facing middle-sized private companies in strategy development and execution? A key characteristic of world-class companies is the capability to take the lead with strong core value and goals while being highly flexible and adaptive. These companies have established leadership in main business that may drive coordinated development of related businesses and facilitate structural optimization and adjustment. They also take a leading position in global industrial chain as the engine for industry development, while keep ahead of strategic emerging industries with a focus on sustainability.

Compared with their competitors, Deloitte clients that developed into industry leaders from middle-sized companies in a decade have focused more on the following:

1) Value creation with firm and forward-looking vision If a company regards profit and cash flow as the only and ultimate goal, it is doomed to be a mediocre company instead of a world-class one. A company need to have noble core value, which offers strong and long-lasting driving force for growth. It is just like a star in the sky, and you can always see it wherever you are. As early as the 1980s, Apple described computers as "bicycles for the mind". Over the years, Apple has been trying to empower people so that they will feel thrilled about everything they do.

Indeed, it is a long journey with no shortcuts. Some companies may be lost in making strategic choices and deviate from their original goals, failing to divest low-value business decisively in face of insufficient growth. Other companies, however, may overemphasize on original goals, resulting in a loss of market focus and customer base, as well as the ability to meet actual demand. It is the right choice to focus on original goals in the long run. However, if a middle-sized company pursues various segments, customer groups and propositions at the same time without a key focus at different stages, it would become difficult to begin with the end in mind and progress step by step with limited resources.

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2) Development of industrial portfolio strategy If a company's main business leads the way in a certain segment, it is advisable to develop its secondary and tertiary businesses to mobilize talents from different cultural background for maximized synergy of industrial portfolio. In this digital era, most traditional manufacturing companies, retailers and wholesale companies may face the same problems in developing a new business. Overemphasis on immediate changes in organizational structure when business strategy fails to drive new business growth is not recommended, as the teams responsible for new and previous businesses may not know what the value is and how to collaborate. Also, it may become difficult to find out proper incentives for different businesses to thrive while maximizing synergy under the overall strategy.

3) Full-year strategy execution and communication covering all employees For years, strategy development and selection has been a hot potato for companies. Therefore, many companies spend most of their time on strategy selection in their strategy review process, and ignore the closed loop of strategy execution, strategic task arrangement and supervision, internal communication and staff incentives. While strategy selection is of great importance to companies, overemphasis on corporate, operational and fully clarified product strategies will result in weak execution, empowerment, supervision, and collaborative planning. Strategy is in essence about maximizing the value of an organization. In this regard, if a strategy fails to motive employees within an organization to implement strategy execution plan, it is just an empty talk.

4) Scenario analysis, risk mitigation and dynamic choice in strategy review This is a major difference between Chinese and foreign companies, especially mid-sized companies. The biggest risk is unwilling to take risks. Chinese companies lead the way in taking risks, as they always vigorously pursue changes in the world's most active economy. However, only a few of them can clearly identify strategic, financial, operational, compliance and cyber risks, make strategic choices based on well-defined risks, returns and various risk owners, and effectively address internal and external risks at different stages. The above mentioned, as the focus of a certain stage, is actually part of strategy execution, empowerment and motivation.

2. How to incorporate mission, vision and strategy into execution in second startup to rebuild success with limited resources and talents? We no longer cite major successful private companies such as Huawei, Baidu, Alibaba and Tencent as examples since they outperform most middle-sized companies in resources and talents. Over the past decade, we have seen various companies developing from industry top 100 to top 10 and successfully expanded new businesses, while maintaining double-digit growth in both revenue and market value. Key factors for strategy development and execution, especially in today's digital world, include the following (see Figure 1):

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Figure 1: Key factors for strategy development and execution in a digital world

Group strategy analysis Group strategy selection Group strategy execution and promotion

Strategy Annual Aspiration & Internal Collabora execution Vision strategic mission review tion and task supervision 1 2 · Unique positioning with 3 forward-looking · Make breakthrough in perspectives strategy selection, focusing · Drive progress while on customer-centric value- · Simple and clear strategy balancing innovation driven services presentation · Empower synergy · Focus on the management · Inspire enthusiasm and of market value motivate all employees · Clarify synergy mechanism · Balance possibilities and to effectively support rapid risks to address internal business growth and external uncertainties as part of strategy execution

Source: Deloitte Research

1) Focus on corporate vision and core value Middle-sized private companies have already developed a characterized vision with outstanding core businesses alongside their business practices. The difficulty lies in collaborative empowerment of extended businesses and innovation of disruptive businesses. Collaboration in extended business is a major contributor to success, mainly focusing on practical matters regarding client selection and cooperation among front, middle and back-office functions. Short-term efforts on incentives of different functions with diverse cultural considerations will not lead to growth. Innovation of disruptive businesses is mainly about allocation of innovation activity. There is a golden ratio. According to the article "Managing Your Innovation Portfolio" published in Harvard Business Review (May 2012, by Bansi Nagji and Geoff Tuff of Monitor Deloitte), companies that allocated 70 percent of their innovation activities to their core business, 20 percent to adjacent initiatives, and 10 percent to transformational measures outperformed their peers, typically realizing a P/E premium of 10-20 percent. The optimal ratio may vary among different companies.

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A forward-looking company commits itself to its core values, and focuses on its perennial mission.

2) Focus on value creation for clients A more effective business portfolio strategy will drive greater value, mainly in terms of intrinsic value, market value and value for other stakeholders.

A more effective business portfolio may maximize intrinsic value, namely discounted cash flow (DCF). It is very challenging for a middle-sized company to constantly improve DCF of its business portfolio with higher return on invested capital (ROIC), new capital investment, or the release of unproductive capital. To maximize DCF, the first thing is examining the key drivers of intrinsic value, i.e. revenue growth and ROIC. This will help identify value created for core customers and assess existing performance of business portfolio, thereby finding initial solutions to some key issues such as whether to increase or reduce investment, and how's the business performance. The key is to focus on core customers and their needs. At this point of strategic choice, most companies may want to venture into as many markets and serve as many customers as possible, or subjectively guess what customers want instead of dynamically understanding and satisfying the their needs with proper guidance in advance. As a result, it becomes more difficult to realize intrinsic value.

The second step in maximizing intrinsic value is to develop new business portfolios. To begin with, it is necessary to design different business portfolios. Then, the company need to calculate and add up cash flow of various businesses. At the same time, efforts should be made to distinguish synergic and non-synergic effects inherent in various business portfolios. For example, how to get value from cross selling? How to create synergy through M&As? What's the tax implications of quitting a certain business? A more effective business portfolio will maximize the overall cash value in order to maximize shareholders' value. As mentioned before, intrinsic value (DCF) is a key measurement of the value of different business portfolios. However, market value cannot be ignored. Theoretically, market value (driven by market expectations) should be consistent with intrinsic value. But in practice, these two may conflict with each other, resulting in the change of business portfolios within a company.

While a more effective business portfolio is normally driven by intrinsic value creation, the management should not turn a blind eye on the threats and opportunities of the capital market.

3) Stay focused at different stages with flexibility A forward-looking company commits itself to core values, focusing on the perennial mission. The core values, deeply rooted in corporate strategy, leadership vision, and employees' mind, not only clearly define a company's commercial value, but also empower it to develop, grow and thrive. A company should embed its core values into individual and organization-wide strategy execution instead of merely articulating its aspirations. A clear and simple annual strategy review plan is particularly important for middle-sized companies given their limited resources and talents. Long-term strategy executive requires the development of new capabilities over the years.

It is necessary to consider the feasibility and risks when developing more effective business portfolios. While feasibility measures challenges in developing new business portfolios, risks mainly reflect uncertainties. A more effective business portfolio will

Whitepaper on China Best Managed Companies | Part III Expert insights fully consider corporate goals and risk appetite, to avoid under- or over-estimation of related risks. It is imperative for a company to take feasibility and risks into account from perspectives of both individual business and business portfolio. For example, companies may find it easy to execute individual businesses separately, but might struggle when managing them as a portfolio. In addition, risk of a business portfolio does not necessarily equal the aggregation of individual risks. For example, if profit curves of various business units are counter-cyclical or irrelevant, the risks of overall business portfolio would be lower than that of individual business unit, and the profitability of business portfolio will also become much more stabilized (see Figure 2).

Figure 2: Feasibility and risk measurement of business portfolios

Matrix Portfolio X Portfolio Y

Feasibility (pre stage)

Financing capability High Low

Target availability Middle Middle

Antitrust feasibility High Low

Executability High High

Risks (post stage)

Response of competitors Low Low

Technological risk Middle Middle

Compliance risk High High

Response of capital market Middle High

M&A Low Low

Macroeconomic risk Middle Low

Source: Deloitte Research

Finally, capabilities, commitment and other cornerstones pave the way for successful development and implementation of enterprise strategy. We will share best practices of middle-sized private companies across the world in subsequent articles.

(Zhao Jian is the lead partner of Deloitte China BMC Program, and Gui Yan is the managing director)

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Technological innovation: Reconstructing traditional industries with faster, better and more cost efficient models

By Deloitte China

The reconstruction of traditional industries is driven by two forces from both top down and bottom up in the macro environment.

The top-down force comes from the collision and conflicts caused by changes in relative advantages among "plates of economies", in which the most critical economic factor lies at the change of manufacturing competitive edges and the underlying causes. The bottom up force is mainly driven by the change of global population structure and the penetration of internet technologies in all industries. The trends that the aging population and millenniums (those born between 1985 and 2000) are becoming major owners of social wealth cannot be ignored. The internet, as a key driver for the last round of globalization, will further lead the economic transformation, industry upgrade and rapid iteration of business models driven by new technologies underpinned by internet in a new round of global change, becoming the most critical driver for bottom-up reconstruction.

In view of the challenges above, a spectrum of new technologies, represented by mobile internet technology, artificial intelligence (AI), robotics, cloud computing and big data, are impacting the ecosystem by transforming how all players participate to prepare for the challenges ahead. These new technologies are being commercialized and starting to impose impact on all players from traditional industries, initiating the transformation of the traditional ecosystem (see Figure 1).

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Figure 1: Intelligent robotics is forcing traditional industries to reconstruct ecosystem

· Conduct smart analysis of patient's conditions · Self-driving technology changes business models and propose treatment of traditional automotive OEMs, driving their shift · Improve medical devices and high-precision of focus from car selling to renting medical robotics to prepared for telemedicine · Build smart cities to improve traffic on roads

· Use facial recognition technology to monitor · Impact traditional educational philosophies, with public places in real time, changing the more focus on creative multi-disciplinary education security convention of post investigation · education tools, such as self-adaptive system that · Entrance control at companies/communities provides individualized learning to prevent entry of outsiders, changing the Transportatio door tag convention · Smart household system changes existing consumption mode for household products, with Education Healthcar vendors starting to offer individualized design of · Replace financial practitioners and use smart homes smart technologies to provide suggestions · Home service robots emerge, with various on asset management to clients, analyze vendors entering into this new area data such as user consumption and credit Security Household to make loan decisions

· AI helps realize accurately targeted advertising, · The emergence of finance robotics changing existing advertising mode implies that ruled based tasks will be Financial Media · Newsfeed products begin to push news based on replaced by robots Intelligent robotics is user behaviors · Use AI to dig into dark data and improve utilization of information forcing traditional · Offer human vs machine simulated online games in the gaming sector · Industrial robotics replace human labor Business Entertainme · Collect user's interests and hobbies to provide via rapid expansion, leading to changes recommendation in the social field in the structure of manufacturing workforce · Predict order volume in advance, optimize · Optimize manufacturing processes and Industry Logistics distribution routes and improve logistics efficiency make product quality more controllable Retail · Warehouse robots and distribution robots change traditional labor-intensive logistics system

· Predict order volume in advance, optimize distribution routes and improve logistics efficiency · Warehouse robots and distribution robots change traditional labor-intensive logistics system

Source: Deloitte Research

1. Penetration of industrial AI AI technologies that fall in cognitive stage mainly include natural language, machine vision and deep learning, which have been applied at varied degrees in the business sector, and asserted significant impacts on the development of China's manufacturing industry, forcing traditional industries to reconstruct their ecosystems. First, workforce structures are being transformed towards human-machine collaboration; second, relationships of upstream and downstream areas on the traditional manufacturing industry chain will be changing radically, especially during production and consumption of products, with the integration of technology suppliers and traditional service/product providers becoming one of the future trends for business development. In addition, as the philosophy of "data first" becomes increasingly accepted, profit models will also be changing. Manufacturing will no longer only produce products, but also satisfy individualized needs of consumers via products empowered by internet. Companies are no longer selling products, but a combination of products and services. These trends will differently affect each area of the manufacturing industry.

First is the change of user needs. Demands of users for individualized products and services are growing, which can be seen through the startups and e-commerce platforms that have emerged in China selling customized handmade products.

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Second is the change in the nature of the product. Products connected to the internet and sensors become "smarter", and the ways users evaluate a product are also changing. It will redefine the value of products, and what companies would be able to capture such value.

The change in ecosystem must also not be ignored. Business barriers in the past are now broken by the prevalence of computer technologies, while the rapid development and integration of new technologies such as internet and robotics brings more possibilities for products and their way of manufacturing. Such changes make the market increasingly fragmented to support the penetration of products into downstream industry chain, eventually connecting the end users. Large companies might turn to integrate various resources to build platforms.

Lastly, the circulating mode of commodities is also changing. In a world with free flow of information and shortened supply cycles, manufacturers are trying to build connections with the end users and engage with them in real time, and users also increasingly wish to connect with producers of the products they are using. With shortening distance between manufacturers and users, businesses that live off intermediate trading on the supply chain will be forced out. Manufacturers that are able to directly connect with users, shorten the time from prototype to production, or shift from Build-to-Stock to a Build-to-Order mode are set to succeed.

Deepening online and offline integration and continuous technological advancement is driving the reconstruction of the retail industry, and consumers become the core of the whole new industry ecosystem. Centered on consumers, connections among each link of the retail industry are growing more flattened and networked, enabling increasingly free flow and configuration of resources and data in the system. Resources on the industry chain will be deeply integrated by companies with strong advantages to shape an ecosystem that continuously satisfies consumer needs and enables robust growth (see Figure 2).

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Figure 2: Layout of the new retail ecosystem

Technologies become a core driver empowering the ecosystem and fueling its digital and smart Technologies become a core transformation. driver empowering the ecosystem and fueling its digital and smart Infrastructure underpins the operation transformation. of the ecosystem, and provides support for its upgrade.

Platform

Techn ology Infrast ruc ture A more open ecosystem will facilitate connections of finance with enterprises and consumers, spurring Brands are empowered in the consumption and providing Consumer ecosystem with more consumer support for enterprise touch points and higher development. management efficiency.

Finance Brand

The role of traditional retailers in the ecosystem will be weakened, and retailers may be integrated into a large Retailer Producer Producers are more closely ecosystem, or build small ecosystems connected with other players, and via diversified transformation and the traditional chain model is continuous innovation. expected to be disrupted.

Source: Deloitte Research

1) Emergence of new retails The rise and rapid expansion of internet has led to an internet-based revolution in China's retail market, and up to now the fast growing e-retail has become a vital part of the retail market. In view of such, Alibaba proposes for the first time to vigorously advance the integration of online and offline in the process of infrastructure construction, with a focus on consumer experience and new retail forms driven by data and technology. At the same time, with JD.com at the core, Jing Dong is also promoting synergetic development of O2O, logistics, finance and other businesses, and have struck strategic alliances with Yonghui via investment in the superstore and Walmart through acquisition of Yihaodian, continuously expanding its business landscape. Traditional retailers such as Gome are also unfolding supply chain capabilities (Gome Laigo), opening up aftersales resources (Gome Guanjia), opening up logistics capabilities (Anxun Logistics) and establishing alliances with different sectors (cross-industry integration) to build an inclusive and open super platform.

2) Digital transformation of brands to enhance industry efficiency Rapid changes in the retail market also provide drivers for brands to transform and upgrade. Brands need to understand more clearly consumers' needs, and take timely actions to address specific needs in a fast and accurate manner. Thus, many brands opt to promote a comprehensive digital transformation within the enterprise. They seek to establish more direct interactions with consumers through omni-channel building, addressing consumer needs in real time and ensuring proactivity, integrity and security of data via continuous data collection to guide marketing and production, and at the same time promote digitalization of internal processes and supply chain management to enhance operational efficiency and reduce operating cost.

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3) Mobile e-commerce decentralizes e-business The rapid development of mobile e-commerce brings more players as well as uncertainties to the online retail market, where a number of mobile vertical e-retailers have emerged with high-speed growth in recent years. Compared with large and comprehensive traditional e-retailers, mobile vertical e-retailers focus more on goods favored by customers and are well adapted to the individual needs of the next generation consumers as well as consumption patterns in the mobile internet age, with greater potentials for development in the future where demands become increasingly niche and individualized.

4) Traditional retailers aim to build diversified ecosystem Though at present e-commerce companies are leading and driving the transformation of retail industry in China, established traditional retailers also work to build multiple types of ecosystems underpinned by their solid base of offline resources. Traditional offline retailers have adopted different development strategies due to varied business forms, sizes, geographies and other factors. Large, comprehensive retailers (e.g. Suning, Gome) prefer to set up resources aggregation platforms based on omni- channels, aggregating industry chain resources to build an open and inclusive ecosystem, while small, robust businesses that specialize in niche segments and commodity services focus more on offline expansion, product innovation and enhancement, as well as improvement and upgrade of management systems for continuous development and growth.

5) New business forms emerge to address change of consumer demands Consumers are having new standards and requirements for products and services as consumption upgrades. They demand higher quality and value for money from products, and see services and contents as a key part of their consumption experience. Typical examples can be found in the field of fresh foods that are consumed frequently. Footprints in this field would help companies obtain frequent transaction data, and somewhat improve consumer stickiness. With no breakthroughs for the development of fresh food e-commerce in years, new retail businesses represented by Hema Fresh rapidly emerged in 2016 as powerful competitors with internet-based business concepts, online and offline omni-channel development, cross-disciplinary integration of retail and restaurant businesses, integration of supply chain, and strong resources support. They are also an important attempt of new retail models by super platforms.

2. Reconstruction of the traditional financial industry A spectrum of financial innovations driven by technological advancements are rapidly transforming each of the key areas in the financial industry. These innovations help make financial services industry more efficient, lower the cost, and thus greatly expand the breadth and depth of the financial industry as a whole. The future of financial industry is set to develop towards direct selling, mobile banking, mobile payment, distributed crowd funding platforms through capital aggregation, as well as applying Internet of Things, blockchain and other technologies to build interconnected insurance services, etc. (see Figure 3).

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Figure 3: Reconstruction of financial services industry driven by financial technologies

Non- A conventional payment solutions Dispersive K forces

Cash-free B Customized Simplified world products & infrastructure Connected services world D e p o s it & l n d i ng H Strategic

role of data Smarter & D faster Alternative machines lending C Change of I platforms customer preference Ma r k e t Related buyer and seller Reduced

i n f r a s t u c re F intermediate Autom ation of processes high value Customer activities Next-gen BPO empowerment E Alternative funding raising platforms G

Empowered investor

- Shared economy - Internet of - Internet loans - Internet of A - Autonomous B Things C - Alternative loan D Things vehicles - Sensors review - Sensors - Digital - Wearables - Wearables communication

- Virtual transactions - Advanced - Automated E F G & smart contracts algorithms investment advisor - Crowd funding - Cloud computing - Retail algorithmic - Alternative due - Capabilities sharing trading diligence

- Artificial - Market - Encrypted - Mobile payment H I J K intelligence information electronic - Simplified - Machine learning platform currency payment - Big data - Automated data - Mobile money - Facial recognition collection and Source: Deloitte Research

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3. Reconstruction of traditional education sector As economic globalization and modernization of higher education advances, technologies continue to penetrate into the contents and methods of education.

Innovation of traditional education via education technologies mainly include online education and STEAM education. In view of its momentum of continuous growth, many educational organizations are moving towards online education, which, compared with teaching models of traditional education, creates a new model that shares education resources on cloud platforms, lifting restrictions of space and time for education and allowing participants to choose courses on their own through e-learning. In addition to online teaching, it also utilizes relevant reading materials and course workshops to connect people with the same interests across the world. Online education is inextricably linked to offline education, with a variety of teaching modes including MOOC (Massive Open Online Course), Flipped Classroom, mobile teaching apps and education live-streaming growing more popular, and engagement of parents in teaching gradually increasing (see Figure 4).

Figure 4: Online education fueled by technological advancement

Use big data analytics to track users' consumption patterns and Big data learning preferences, recommend relevant courses to users, and improve learning efficiency via services including review of errors.

The integration of speech recognition with online education provides Speech new opportunities for online language education and improve efficiency recognition of online language learning.

The development of Live streaming technology helps create a Live classroom environment for online learning, and interactive live interaction streaming for education largely addresses concerns of consumers in selecting their courses.

Remote assessment issues certificates of qualification based on user's Remote learning, and also provides effective feedbacks to educational assessment organizations.

The application of smart wearables (e.g. smart glasses) extends and Wearables optimizes scenarios of learning for online education, enabling an enjoyable learning process.

Source: Deloitte Research

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STEAM education, which focus on knowledge applicable to real life and hands-on practice, also brings fresh blood for the development of education technologies. STEAM is an acronym that represents Science, Technology, Engineering, Arts, and Mathematics. Robotics, toys, Internet of Things, 3D printing and drones help make STEAM possible.

In overall, the integration of technology with education is an inevitable trend, and education in China is set to become smart, flattened (e.g. open courses, combination of live streaming and mobile platform apps), digitalized (replacement of existing learning tools, communication methods, etc. by electronic products) and stereoscopic (education technologies including VR, 3D and AR make flattened knowledge vivid, solid and sensible) in the future.

4. Reconstruction of the traditional entertainment sector Such rapid development and technological advancement will also reconstruct the traditional entertainment sector.

The development of network and mobile devices (especially smart phones) has speed up the flow of information, driving easier and faster spreading of entertainment contents, of which web-based contents account for a significant part. The emergence of live streaming and short videos brings a lot more of means and forms of interaction for the audience, and at the same time enables content creators to switch roles between producer and audience to develop more creative contents. 3D technology and devices help speed up the innovation and upgrade of cinemas. These developments have paved the way for the creation of an entertainment ecosystem, and, together with the integral and symbiotic entertainment system, is driving the development of the entertainment sector.

Five years earlier, TV and film businesses were the mainstream of the entertainment sector. Inconvenient payment methods and rampant piracy made it difficult for web- based contents to be profitable, with related digital contents only accounting for a small part of the total output. In just five years' time, with the emergence of a variety of mobile payment methods, the advent of a big IP era and rapid development of internet communications, digital contents have seen an explosion of growth with more and more consumers joining the paying group. These new signs raise up the enthusiasm and hopes of all consumers and companies for the reconstruction of entertainment sector driven by science and technologies.

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5. The start of digital economy era Reform of the economic landscape and application of new technologies will reshape all industries across the globe, and the world will usher into a digital economy era. Half of the economy and most of employment is expected to be running under the system of digital economy, in which data will be an essential production factor. Under such trends of the time, we will need to establish mechanisms and products for data sharing, improve the efficiency of data use, and accelerate the flow of data in order to build a better economy and living through data. In the future, "data volume" is expected to become a key indicator for digital economy, and data sharing would be the new normal.

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Sustainability:Balancing both enterprise and stakeholders for sustainable development

By Allan Xie, Jolin Gu

In the context of global economic integration, governments and the social community are increasingly concerned about issues including eco-environment, energy use, protection of employee's rights and benefits, product liability and community investment. With the penetration of corporate citizenship and sustainability, companies are focusing more on the expectations of broader stakeholders, including the environment, communities, employees, customers and consumers, governments and NGOs, while creating value for shareholders, working to achieve a harmony of economic, social and environmental values.

Private companies have been growing rapidly since China's reform and opening up, and constitute the backbone of economic development, playing a critical role in building a diverse market, promoting employment and creating tax revenue. However, they are also facing challenges in pursuing sustainable development. The sustainability of private companies, especially small and medium sized private companies, has become a key issue of concern.

1. Why sustainability is overlooked? At present, most Chinese private companies are small and medium in size. They are considered relatively poor performers in terms of sustainable development, and in recent years, most issues related to private companies that sparked major social and public criticisms also involved sustainability. Issues that are reported by the media and raise major concerns in society, such as food safety, ecological degradation and environmental pollution due to production by companies, employee's rights and benefits, occupational health, sustainable supply chain, and contribution to community, are all related to the development of private companies.

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Equipment of Shenzhen Mindray at China International Medical Equipment Fair. Photo/Visual China

In practice, sustainable development is often overlooked by private companies, resulting in various illegal and unethical actions that hamper their operation and development. Reasons for this include:

1) Restrictions of company size and stage of development Most private companies are small and medium in size. Some of them are still working hard to survive, focusing less on managing environmental and social risks. They would usually not issue sustainability report, and even violate the law from time to time for survival.

2) Weak sense of sustainability with focus on maximized profits The lack of visons for sustainable development and short-sighted actions have resulted in a weak sense of sustainability and social responsibility. Some private companies focus only on profits, and pursue internal benefits and economic value of business operation without addressing external benefits and social value. This includes lack of attention to their responsibilities in terms of work-related injury insurance, medical insurance, and labor insurance for employees, as well as taking advantage of policy and legislative gaps to minimize social spending, leading to serious accidents, environmental pollutions, etc. in business operation.

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3) Lack of evaluation of management's performance on environment and social efficiencies Indicators on environmental and social efficiencies are often not included in the key indicators in existing evaluation of management's performance, and there lacks internal impetus for the management to address environmental and social risks. Some companies might be aware of that environmental issues could affect their future economic viability, but as the protection and proper utilization of the environment involves all aspects of the company and requires significant investment of expertise, technologies and funds, which sometimes would not bring immediate, substantial or visible benefits for the company, management often acts with the company's economic efficiency as the fundamental basis guided by the orientation of their performance evaluation.

2. What it means to value sustainability Focusing on sustainability by private companies not only helps drive social advancement, but would also be beneficial to their own development. There has been a growing concern for the ability of private companies to achieve sustainable development in addition to their existing operation profitability. Non-financial management policies and performance would provide more thorough and extensive information for stakeholders to evaluate the company. For Chinese private companies at present, the focus on sustainability is of strategic significance because it can help:

1) Enhance risk management. Comprehensive risk management includes management and monitoring of risks related to environmental, social and governance matters of the company. Assessing environmental, social and governsance risks that may affect business allows companies to better prepare for and manage such risks, so as to achieve development goals in a more efficient manner.

2) Establish a new image to build reputation. By demonstrating how they manage environmental, social and governance risks and take actions to minimize negative impacts may help companies build a brand and image that undertakes responsibility and has potential for sustainable development, building a good reputation.

3) Retain and attract talent. Human resources are one of the most important assets of all companies. The image of employer is an important factor that drives employees to choose the company. Good performance and reporting in environment, society and governance would help attract and retain top talent, strengthen cohesiveness of employees, and enhance their loyalty.

4) Improve financing capability and reduce financing cost. Companies that value management of environmental, social and governance risks and reporting of related matters are considered to be more capable of identifying and managing risks. By demonstrating their soft power, companies would be able to gain recognition from shareholders and investors, enhance fund raising capability, and reduce funding cost.

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5) Reduce operating cost and improve business performance. One of the methods for companies to reduce operating cost and improve business performance is to open up sources of income and reduce expenditure. Through increased efficiency of energy use, reduced consumption of water resource, recycled use of wastes, companies may reduce their overall cost and spending, and thus improve business performance.

6) Uplift customer satisfaction. With growing social consciousness from consumers, the quality, safety, aftersales service, process of production and other elements of a product have become key considerations for purchase in addition to its price. The more companies value sustainability including product liabilities, the more their products and services would be welcomed by customers.

3. How to start implementing sustainability? It would not be difficult nowadays for private companies to recognize the importance of sustainability. Business owners should be more proactive to pursue sustainability with more efforts. They need to develop a strategy for sustainability, improve sustainability initiatives, and enhance sustainability capabilities as well as competitiveness.

1) Enhance consciousness of sustainability. New issues are driving entrepreneurs to reconsider their business management models. Companies should gradually shift their conceptions from maximizing business profits towards pursuing maximum value for stakeholders. They should look beyond immediate benefits when developing long-term development strategies, and consider from perspectives of society and stakeholders multiple aspects including development plan, management approaches and capability build-up while taking into account the harmony between environment and society.

2) Strengthen management of environmental and social risks and undertake more social responsibilities Given the current development of Chinese private companies, they should strengthen the management of environmental and social risks to enhance their capabilities in sustainability. To undertake more social responsibilities, including harmonious labor relations, private companies need to focus more on safety and occupational health issues, improve environmental quality to find harmony with nature, promote and maintain a green supply chain, value product liabilities and uphold ethics and integrity.

3) Establish a sound sustainability system Private companies should establish their own sustainability system, define work goals for sustainability, develop sustainability plans, and advocate, execute and continuously monitor sustainability management policies. Strengthen communication with stakeholders to understand their requests and industry specific demands, thereby to establish sustainability indicators system to measure, monitor management performance and keep correcting and improving.

(Allan Xie is the managing partner of Risk Advisory for Deloitte China Northern Region, and Jolin Gu is a partner of Deloitte China Sustainability Services)

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Organizational innovation:Practices of transformation into network organizations

By Wang Yunjuan, Carol Zheng

As external business environment experiences extensive, profound and rapid changes, how companies organize own resources, build core capabilities and respond to shifting challenges via flexible and agile organizational designs becomes the most important topic for business managers. Deloitte Global Human Capital Trend reports both in 2016 and 2017 explored "future organizational design" as a top trend, and researchers even were almost certain that "the organization of the future has arrived" in the 2017 report.

With numerous practices of organizational design in recent years, the author has helped companies of various types at different stages of development embark on the transformation road towards "the organization of the future ". Our research finds that the organization of the future needs to follow customer-oriented, agile, transparent and collaboration principles in order to fast adapt to unpredictable changes of the environment. On this basis, the organizations of the future are typically represented by their network organizational structure, which we may also refer to as "network organization".

At the same time, network organization would also help companies effectively respond to changing external environment via four features, i.e. "network effect", "fractal", "dual-channel communication" and "service interface" (see Figure 1).

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Figure 1: Four basic principles of the organization of the future

Four key features of network organizations

Customer- Agile Transparent Collaboration oriented

· Allocate internal and · Teams are formed on · Highly shared · Tone down job external resources a customer, product, information on responsibilities and and capabilities of the project, task and external environment KPI, encourage team company centered on issue basis, which can · Highly transparent collaboration customer experience be permanent or internal information, · Establish a "market to provide temporary depending resources, team mechanism" for differentiated and on specific tasks capabilities employee turnover, competitive services · Team members are · Highly recognized which allows for customers with not limited to internal common vision and employees to choose high authorization employees objectives among the their teams based on · Highly sensitive to teams own abilities and changes of external · Highly transparent interests, and teams environment performance to recruit members evaluation based on their objectives Source: Deloitte Research

Network effect: Network organization further enhances the customer-oriented principle, with each network node acting as perception neurons that perceive outside environment (including markets, technologies, competition, customer behaviors). The more the neurons and the more active they are, the greater their contribution to the value of the organization. Such value contribution would often increase exponentially as the number of the nodes grows. Palantir, one of the most promising companies specialized in unicorn data analytics in Silicon Valley, generates an annual revenue of up to USD250 million. However, there are no marketing or public relations departments, nor sales teams in the organizational structure of the company, with all of its employees being technical engineers. Proposition of the company is to "send real computer scientists onsite". Palantir would form its project teams based on client needs, in which Forward-deployed Engineers are first sent onsite to engage with clients to ensure its products satisfy their needs. As the project progresses, project team members would also engage directly with clients to solve problems onsite. This would not only improve work efficiency, but also help engineers identify new problems not known by clients. Engaging with clients also allows engineers to report product deficiencies to headquarter engineers and provide suggestions for improvement.

Fractal: Fractal means that network organizations may build smaller teams with similar forms through iteration and expansion of established organizational forms. The organizational structure is split into teams of different sizes at levels from clients, products, projects, tasks to issues, with similar forms at each of the levels. Self- similarity of the fractal structure refers to the basic rules of team organization, such as clearly defined customers (including internal customers), concrete team objectives, authorization to teams, collaboration procedures and tools, incentives system, etc. For example, Tencent has a typical fractal organizational structure with similar structures at each level from business groups, studios to project teams, centered on business objectives and based on standard rules for resources allocation, performance review and team composition to address business areas at various levels.

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Dual-channel communication: Network organizations value the exchange and sharing of information, and generally adopt a dual-channel communication mode of information flow and feedback flow (e.g. decision making) to speed up circulation of information and feedbacks and reduce attenuation of information transmission; at the same time motivate all staff to participate and continue making innovation achievements driven by the network effect. For example, via development of data access (including source code), Google supports fast and decentralized decision making mechanisms, which is key to Google's sustained innovation. Facebook's source code sharing policy allows employees to optimize its features based on user experience and add new properties and features in a fast and efficient manner.

Service interface: By replacing order/command interface with service interface, network organizations establish internal collaboration systems oriented towards team objectives based on customer experience, both internal and external. For example, the centers of excellence (CoE) for finance, human resources, data, technologies, etc. established by many large companies are typical forms of organization based on service interface. CoEs as platforms provide service interfaces for various business areas, and different business units can share their data and services on the platform. For example, Such CoE structure can be found in Amazon, where order information from customers are shared on CoE platforms and process teams including inventory, logistics, accounting can handle the order simultaneously. Progress of the order is updated in real time through team-side service interfaces to the CoE, significantly improving the efficiency of cross-functional collaboration.

The management structure of traditional organizations can be commonly rendered with frames and lines. However, the complexity and agility of network organizations as the organization of the future cannot be easily summed up via simple frames and lines (see Figure 2).

Figure 2: Characteristics of network organizations

Network organization

Source: Deloitte Research

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Based on Deloitte's Flexible Organization Design Methodology, evolution of traditional organizations towards network organizations can be generally divided into four steps:

· Protect the core and disrupt at the edge · Unleash the networked teams · Adopt a collaborative systems mindset · Create conditions for flexible design

Leveraging Deloitte's significant practices and experience in organizational design, the Practices of transformation into network organizations by traditional organizations series will introduce in details steps to management transformation, innovation of management mechanisms, as well as shift of mindsets, talent development and updates on incentive approaches.

(The author is a partner of Deloitte China Human Capital Advisory Services)

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Conclusion

To achieve new heights of development, now is the time to make bold decisions. Private companies are a significant force driving the development of the Chinese economy. As we have seen, Chinese companies are growing faster, bigger and better, but how do they transform from growing faster, bigger and better towards excellence? This is one of our focus topics. With joint efforts by Deloitte China and our partners, we aim to identify and recognize China's excellent private companies through the BMC program every year, and help them systematically improve and enhance management, transforming towards excellence. As China is set to create more miracles in the foreseeable future, we hope to see a number of private companies in China that excel in management with global competitiveness in the next 10-20 years.

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Opinions

New opportunities for Chinese private companies to go global?

Going global has become an essential strategic option for Chinese companies. We are seeing that the China's economy has been rapid growing over the 40 years of reform and opening up. Private companies, among others, have created numerous growth miracles from their birth, rise to going global. As they gradually develop as a major force in China's foreign trade industry, the scale of investment and M&As by Chinese private companies is also rapidly growing.

Compared with the vague impressions of "the world's factory" and "Made in China", Perceptions by consumers across the globe of Chinese companies are becoming specific with brands including Lenovo, Haier, Huawei, Geely, Tencent and Alibaba. Chinese companies are no longer manufacturers of cheap commodities, but are being recognized around the world with excellence in management practices and business value. Haier's practice rendanheyi, a mash-up of Chinese characters that connotes a tight coupling of the value created for customers with the value received by employees, made the front page of Harvard Business Review for December 2018, and Zhang Ruimin, Haier’s renegade CEO, has also been listed in the Thankers50 global ranking of management thinkers for several times.

However, are there companies in China that are truly globalized? This has long been a controversial topic.

In addition to these successfully cases, through this BMC program and survey jointly hosted and conducted with Deloitte China and other partners, we find that the main methods adopted by Chinese private companies to go global remain at trade level, i.e. overseas export of products and import and supply of raw materials. This means that most companies remain at the stage of developing international operations, and a company with international operations does not necessarily constitute a "global company". Chinese private companies need to further improve their international influence. For those have attempted overseas M&As, the focus should be how to identify and address risks before, during and after M&A, as well as how to establish effective collaboration mechanisms between the parent company and overseas subsidiaries.

Indeed, private companies with management excellence all have globalized mindsets and operations. Among the BMC winners this year, over 90 percent have already conducted overseas business, purchased products/services, or pursued R&D and technical cooperation overseas, or is planning to do so; more than 80 percent have completed or is planning M&A deals. Income from overseas by more 60 percent of the winners take up the biggest share in their total revenue, with the average share exceeds 20 percent. Operation footprints of leading companies in pharmaceutical and high-end LED manufacturing are relatively complete and

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More importantly, these companies are also actively establishing overseas affiliates and enhancing their capabilities to operate independently by exchanging with overseas talent, improving localization of employees and other means. They have also set up dedicated teams for international development in their organizational structure, aiming to achieve strategic alignment and collaboration of operations across regions.

Since 2018, China has been facing an increasing number of risks factors from outside, including global trade disputes and rising local protectionism, and "de-globalization" seems to become a growing trend in the short run. These will have profound impacts on the strategies of Chinese private companies in going global.

Are Chinese private companies really seeing new opportunities to go global? Think twice before answering the question. For private companies, it is too risky to take precipitate actions to go global. Is it necessary to go global? Why do we need to operate globally? What shall we do to prepare for globalization? What problems do we need to address? Private entrepreneurs have a clear understanding, planning, and specialized teams before taking actions.

Harvard Business Review China Editorial Board February 2019

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