KEY TAKE AWAYS FROM THE GREEN TECH TOUR 2024

Shanghai – Guangzhou – Shenzhen, April 2024

China’s economy in a new era

The world’s second-largest economy has entered a new era with much lower growth rates, and the property market collapse has a massive impact on consumer confidence. Indeed, 30 years of golden age is over, and both Chinese and foreign companies have woken up to a new normal with fierce competition and price wars in many industries.

The most important driver of new economic growth in China is now green manufacturing, and there is a real risk of new bubbles as overcapacity is already a problem in industries like batteries and solar panels.

The US Treasury secretary Janet Yellen just visited China and delivered a warning to her Chinese counterparts that Washington would not tolerate “supply shock” of artificially low-cost Chinese imports being dumped on its market. EU’s leaders are also increasingly worried about cheap Chinese goods flooding the market, and tariffs on Chinese electric cars (EVs) are likely to be imposed.

However, the Chinese premier Li Qiang claims that China’s oversupply “serves competition, as well as the survival of the fittest”. This is happening in the EV industry in China where the government discontinued the generous subsidies in 2022. Now the world’s largest EV market is a blood red ocean, and only the strongest companies will survive. A few years ago, there were more than 300 EV producers in China, which are expected to be reduced to around 30 companies.

Top-down innovation

China’s industrial model is very different from the systems in Europe and the US, and the top-down approach is the driving force behind much of the innovation happening in China today, and not least behind the structural shifts of the economy. Simply because of the access to cheap loans, free land and attractive tax breaks promoting development of certain technologies and industries.

The Made in China 2025-plan was launched in 2014, and outlines goals for “high quality development” and 10 strategic industries that China wants to lead in 2025, including electric cars, batteries, and solar panels, which has already been achieved.

China wants to lead the next industrial revolution and is poised to do so with huge investments in AI and automation. European companies, particularly in manufacturing will have a huge exposure, directly or indirectly.

It is increasingly difficult for both Chinese and foreign companies in China to operate outside strategic sectors promoted by the Chinese government, and the state generally plays a larger role than it did 5-10 years ago. This causes a lot of anxiety among private business owners, as it is getting more difficult to navigate and balance cooperation with the government, while at the same time trying to act as a private company in a global market.

“China’s green transition is a business case. It seems to me, that Chinese people and companies don’t focus much on global warming and sustainable living, but they are so focused on future business opportunities, and they might win the green tech-race.”
“It seems as if the climate change is and have been so present in China, that green solutions are being pushed forward out of need. China seems like the only country which can accelerate and scale these solutions fast enough to save all of us. I find it uplifting to witness this transition in full speed”.

Focus on self-reliance

The pandemic and the war in Ukraine caused several shocks in global supply chains and security is top of the agenda in boards and management teams around the world. The high dependency on Chinese suppliers has become a headache that is difficult to get rid of, although many companies are trying to diversify supply chains to Vietnam and India. The problem is many of the materials, components and machines still come from China, and some of the new factories in these countries are owned by Chinese companies. Experts estimate it will take 10-15 years to build new supply chains, in the meantime it’s had to take China out of the equation.

While the US and EU is trying to “derisk” from China, China is also trying to be less reliant on Europe and US in technology, investing billions in compu ter chip development.

Like other leaders around the world China’s Xi Jinping talks a lot about food and energy security, doubling down investments in science and technology.

However, Xi Jinping’s focus on self-reliance in technology is not new. As early as 2013 Xi Jinping said in a speech, according to South China Morning Post, that China had little choice but to pursue self-sufficiency in key technologies, and that country could rely on its socialist system to seek technological advantages. The speech was not published until 2023, but it makes perfect sense that the Chinese government launched the Made in China 2025 plan the year after.

Xi Jinping also said that China’s growth in the previous three decades was a result of importing and leveraging foreign and “second hand” technologies from the last industrial revolution, which would put China at a disadvantaged position.

“By sticking to the beaten path, China would not only suffer wider technology gaps, but also be trapped at the bottom of the global value chain of industrial production,” Xi said in the speech.

The US keeps imposing new trade restrictions and sanctions, which can harm Chinese companies. The latest one is the Bio secure Act, which among others, is targeting BGI, formerly knowns as Beijing Genomics Institute. BGI is the world’s largest sequencer of human DNA and operates in over 100 countries. The US lawmakers claim that Chinese biotech firms have stolen intellectual property and collaborated with the People’s Libera- tion Army and the Chinese government’s repression on Uyghurs. But according to The Economist the Bio secure Act is an overreaction, and oldfashioned protectionism at play because Chinese companies are getting more advanced.

According to The Economist, if the legislation passes, as seems likely, drug shortage and delayed clinical trials for medicine would probably follow. All the large Western pharma companies and many small ones would have to find new supply chains outside China.

Another consequence of trade wars and the current geopolitical situation is that large scale international scientific collaboration is getting harder to accomplish, even when it comes to health and climate change. The leaders from BGI are very concerned about this problem, as the company played a significant role in mapping the human genome more than 20 years ago. Next step would be mapping the genomes of all life on earth, and that again requires data from many countries, which seems unlikely to happen in the current cold war situation between China and the US.

Price

China previously manufactured solely inexpensive and basic goods. Presently, China generates a remarkable quantity of inexpensive, yet highly innovative products and techno- logies. It is a mistake to conclude that Chinese companies like BYD are capable only of producing low-cost items due to governmental subsidies and affordable labour within China. The primary factor behind this is a refined supply chain and a commitment to innovation.

BYD started as a battery producer and sits on the entire supply chain from lithium mines to batteries and car components and can produce up to 75 percent of certain car models by inhouse resources and supply chain.

Chinese companies often innovate to find ways to reduce the price of their products while at the same time adding new features. Quite the opposite approach from most European companies.

“Don’t believe in fat margin”, said Andy Xie, the independent economist. Instead, he, like many others in China, suggest focusing on massive scale and low margin. He expects that the world will be divided in two price structures in near future. Global north prices vs. global south prices (= China prices).

Rui Zang, founder of Zongmu and Cantron Robotics also stated that the price of his mobile EV charger will get lower as the company develops further. David Chang from Whale Dynamics said that his lidar system cost one-fifth of the US products on the market.

So, what is the right approach for European companies competing with Chinese companies, in China or in other markets? That is difficult to say, but if you don’t have a premium product, and your price is 30-40 percent higher than Chinese competitors, you have a problem.

It’s worth considering whether innovation could lead to lower cost and larger scale.

“Lower the prices, till you bleed. Let the competitors drown in your blood, until you win the entire market.
“Aim for the stars…”

Costumer centric approach

China is the largest and most advanced digital economy in the world with 1,2 billion internet users, and a hotbed of competition. Chinese consumers are probably the most courted in the whole world, and companies are forced to be very costumer centric. Therefore, companies must be creative and smart to catch the attention and deliver real value to win.

Gamification and entertainment features are widely used and an integrated part of e-commerce business, and many of the new features, like fundraising, in-app-shopping on Instagram and Facebook, are actually copies from Chinese social media platforms. Very often trends in China (live streaming on e-commerce, “pay with a smile”/face ID) appear at least 5 years before we see similar things on American platforms from Meta. Mark Zuckerberg, founder of Facebook, openly admitted that he thinks there is a lot to learn from We Chat in China. Elon Musk, founder of Tesla, also said that he hopes to transform X (Twitter) to a super app like We Chat and Alipay in China.

The digital ecosystem in China offers a lot of convenience for Chinese consumers. Ele.me can deliver meals, medicine, and grocery products within half an hour in large cities like Shanghai and Shenzhen. You can book a doctor on WeChat and pay with your palm instead of your face. You can collect green points when using Alipay, and when you have enough, you can plant a real tree, and check it via satellite images afterwards.

The Chinese market has become an “explorium” market for many world leading brands because of the intense competition and seamless integration of online and offline experiences. Starbucks is currently losing market share in China which is the largest coffee market in the world, and the new competitors are born digital and very cost-effective.

Luckin Coffee started out in 2017 offering delivery, which was not a part of Starbuck’s business model. But after realizing that this is what Chinese urban consumers require, Starbucks formed a cooperation with Alibaba’s delivery company and started offering the same service, so far only in China. But it’s very likely that the trends we see in China, will appear in other countries later. Today, Starbucks has around 7.000 stores in China, and Luckin has more than 16.000 smaller stores, mainly functioning as a pick up place, not so much as a café.

Ping An Group, the world’s largest insurance and banking group, offers a 360 degree costumer concept to make it easy for customers to buy and use their insurance and banking products. For examples 15 percent of car accident claims are handled purely by AI in less than 10 minutes. The costumer will make a short video of the damaged car, and the system will automatically handle the claim, and the money will be transferred immediately.

Ping An Health, a digital health platform, offers a human butler to accompany elder people to go to the hospital and find their way around + take notes from doctor’s appointment etc.

Chinese companies offer a vast variety of personalized content and products, even in education. Iflytek developed an AI teacher to assist human teachers in correcting papers and produce relevant tasks to improve the student capabilities in different subjects, based on data and performance.

AI deployment + regulation

China is probably two years behind the US in generative AI, but when it comes to the practical use, especially industrial use of AI, China is more advanced than any country in the world. China is still a manufacturing powerhouse and produces around 1/3 of all manufactured goods in the world, so there is a lot to gain from increased productivity. But the main driver of automation is demographic challenges caused by the one-child-policy which led to serious labour shortage in education, health care and industrial manufacturing.

Automation with robots and AI is happening in many industries, from ports to mines and factories. In short AI is taking over repetitive and dangerous jobs in China.

This is a paradox as youth unemployment in China is historically high (around 20 %), as the economy is growing at a slower pace. The main problem is that most young people don’t want to work in a port or in a factory but prefer to work in an office.

This is a global trend, even in emerging economies like Vietnam and India, and in some African countries. Therefore, factories in developing countries also deploy (cheap Chinese made) robots. This helps solve the issue of shortage of skilled workers. Sadly, the consequence could be that these countries can’t copy China’s model, where people came straight from the rice field into the factories. Instead, the automation drive could lead to even wider social inequalities in the future instead of lifting millions of poor people out of poverty.

Another reason for the widespread practical use of AI is that the attitude towards AI is much more positive among people in China, and in much of Asia, compared to the attitude in Europe. The majority of people in China see AI as a useful tool that can solve real problems in society and sometimes make their lives better or easier. Of course, there is also a lot of debate about deep fakes and other ethical issues around AI.

Ping An Group reduced the number of customer service staff by more than 90 percent over the past years while at the same time increasing costumer satisfactory. However, labour issues have become more sensitive in China, because of the slowdown of the economy and the high youth unemployment rate. Therefore, companies no longer brag about how they reduced the number of staff by using AI and auto- mation. Instead, they try and find other jobs for the people who got replaced by AI.

Rui Tang, founder, Zongmu/Cantron Robotics: “If AI replaces jobs, it creates a society problem. If AI replaces tasks, the society accepts it”

Digital humans or avatars are already employed as presenters in national TV stations and working as influencers on e-commerce platforms, and a funeral service in Shanghai offer to bring back dead family members by using deep fake technology. Whether this will happen in Europe in a few years is hard to predict, but as mentioned before China is often years ahead in terms of practical use of AI.

A few years ago, China was almost like a cowboy land for data collection, but now there are similar regulations like the European GDPR in place, and the tech companies are much more controlled than before. The Chinese government also issued guidelines for the use of generative AI, which effectively function like regulation because all companies are so afraid to cross the invisible line.

China is pioneering in AI regulation because the communist party likes control and sees chatbots as a potential threat. But also, because China’s leaders believe that AI should be regulated to protect people, especially children. There are already several regulations in place to protect minors from certain content on social media platforms and limitation on how long they can play video games.

There is a lot of discussion about copyright regarding artwork or content created by generative AI, but again China has a very different perspective than the US. A Chinese court in Beijing recently ruled that a man who created a piece of art by using generative AI owns the copyright. This underscores that in China AI is seen as a tool that can help people improve their work, just like photoshop or spelling control.

“Dr. Wanli Min got me thinking of how to get scale in application of AI. Not easy, but tremendous potential for doing good and for doing business.”
“The potential of AI is huge and already solves a lot of challenges/problems.”

Pioneering new industries + setting technical standards

As mentioned above Xi Jinping wants China to lead the next industrial revolution, and Chinese companies are working hard to show that they are not just followers. That’s why a wall of patents can be seen in the headquarters of some of China’s leading companies like BYD.

The presenter in BYD’s showroom proudly explained that BYD applies for 19 patents a day and the company is granted 15 patents a day and holds approximately 40.000 patents and employs 100.000 engineers.

That is one of the important reasons why the Chinese gov- ernment supported the NEV (New Energy Vehicle) sector massively over the past two decades. Chinese companies never really had a breakthrough in traditional combustion engine cars, so electrification offered a great opportunity for China, already sitting on much of the world’s battery manufacturing and controlling supply chains of critical minerals and car components as well.

The same goes for green mobility in general, especially autonomous driven cars, busses, and even flying cars. Ehang is working closely with the local government in Guangzhou, a city of 18 million people, in the pearl river delta in southern China to build an entire new industry and infrastructure. The Guangzhou government is planning to build 150 landing stations, and this is crucial to kickstart the new taxi service which will be like taking a flying Uber.

Ehang is the only vertical landing and take-off company that developed a drone without pilots, as they believe that the autonomous system will be much safer than humans pilots.

China will probably be the first major economy to launch autonomous transportation in scale as it is extremely important for China to be first, thus setting the technical standards and exporting Chinese solutions and products to other countries. It will likely happen in the air before on the ground, as autonomous drones fly around 1 km up in the air, much lower than airplanes and other traffic, which makes it easier to navigate. There are much more obstacles and dangers on the ground.

“It took BYD 13 years to go from 0 to 1 million EVs. It took them 3 months to go from 5 to 6 million EVs. The EV breakthrough is here.”

Twin transition

The Chinese government set up a dual carbon goal to peak carbon emission in 2025 (experts estimate it already happened) and become carbon neutral in 2060. It’s widely discussed whether the goal is ambitious enough, but the good news is that experts estimate that China could reach carbon neutrality in 2050. Compared to the situation in EU and in the US, China’s goals seem more realistic.

Western media often report about how many new coal powered plants China is building, but they fail to explain that the utilization rate is falling rapidly as China is building capacity in wind, solar and nuclear energy. In 2023 China installed more wind power and solar panels than the rest of the world combined.

Local government officials are now rewarded for their ability to decrease emissions like they used to be rewarded for creating GDP growth without caring about the environment and social consequences.

In China going green is a business case, and both companies and local governments eye opportunities to create new “green” jobs and more sustainable economic growth. There is a lot of competition between different provinces and cities in China, and the central government sometimes fail to coordinate the strong forces, resulting in overcapacity.

The green transition goes hand in hand with the digital transformation in China because it makes very good sense, both economically and in terms of sustainability.

European leaders talk a lot about “twin transition”, a term, made in the EU, but it’s very much being implemented in China.

We saw several examples of twin transition presented by one of China’s and the world’s leading AI experts Dr. Wanli Min. He demonstrated how traditional industries can take a quantum leap if they use data and AI.

For instance, if your factory or power plant equipment is 50 years old, you can make a deep dive into the 50 years of data and utilize it together with a few sensors and AI to better forecast and optimize energy consumption. You don’t need to invest in new hardware. There is a lot to gain by using data and AI. According to Dr. Wanli Min you can use data and AI in every aspect of your company or society where you seek to better balance supply and demand, basically everywhere where you have a flow of physical goods, energy, or services.

Dr. Wanli Min also foresees that AI will soon be able to create super staff who will do the hard and repetitive work, and you as a human only have to do the coaching. It’s very likely that one person + AI could create a company valued 1 billion USD in near future.

One of the reflections in the group was that while we discuss the legal framework and all the ethical dilemmas of AI, Chinese companies gain practical experience using these new technologies.

Quotes from participants:

“China seems to operate like a big corporation – China Inc.”
“Our children will ask us, how could you let this happen”.
“Think global – scale fast – lower prices – win the mass”
“It’s mind-blowing and a wake-up call”

Dr. Wanli Min’s advice on how to get started using AI:

Don’t make a 3-year plan, do a project in 3 weeks or 3 months.

People tend to be sceptical about AI or digital transformation, and therefore projects are often big and difficult. It is much better to make a small project where you can deliver superior results. This will give you a vote for trust. Use KPI and take advantage of industry experts with experience.