Consumer spending in China never fully recovered from the initial phase of the pandemic, and as COVID-19 drags into its third year, businesses are facing additional challenges. However, investment activity in the consumer sector has remained resilient, as China implements new strategies to capture the interest of foreign investors.
The Ukraine conflict, global inflation and supply chain disruptions have contributed additional challenges to the world’s leading economies. In China, retail sales plunged by 11.1% in April from a year ago, following a 3.3% increase during the first three months of the year.
Though many uncertainties still lay ahead, companies can focus on key trends and recent developments in the consumer sector to make more informed decisions.
The pandemic has significantly changed the behavior of consumers worldwide. Particularly in China, where several strict lockdowns forced millions of people to stay at home, food and beverages brands have used innovative ways to thrive in cities shut down by health authorities.
Several brands have created group buying deals, utilized private traffic to organize sales and employed other new ways of engagement with the consumers in restricted cities such as Shanghai. It will be interesting to see how these new channels will develop or whether they may sustain their operations and continue to thrive after the lockdown.
Customer loyalty will continue to be an important factor going forward. There are different ways to improve customer stickiness by engaging with them through the creation of various touchpoints and products and supporting their experiences by building a strong ecosystem.
This can be achieved through building alliances, entering joint ventures, creating partnerships, or buying out complementary assets with the goal of creating more loyalty and a greater share of customers’ wallets as well as to scale business.
Consumer sector companies are using more innovative deal structures to achieve their business goals, rather than traditional equity deals, such as collaboration, corporate venturing, and data sharing.
In China, investment activities in the consumer sector have remained stable despite challenges such as a slowing economy, supply chain disruption, factory closures, travel restrictions, and weak consumer demand. A few positive factors may still drive deals in the sector this year.
Valuations are now at a more reasonable level, therefore companies which had been struggling during the last few months because of COVID could be attractive targets if they have a good brand and economic fundamentals.
The Chinese government has moved forward with the opening of its markets to continue to attract foreign investment. One of the measures has included the shortening of the “negative” list for foreign investment, which eliminates certain restrictions and came into effect last January.
Several rules and policies have been issued since the new Foreign Investment Law took effect on January 1, 2020, to improve the protection of foreign investors’ intellectual property rights; to further open China’s capital market to foreign investors through the liberalization of the Qualified Foreign Institutional Investor (QFII) / RMB QFII regime; and the further streamlining of the approval and registration requirements for foreign investment in the country.
In the past few years, the Chinese authorities have tightened compliance rules, which has forced companies to prioritize and execute due diligence. This is especially important in M&A situations when the acquirer is looking to expand its capabilities by buying adjacent businesses. Buyers should be better informed about the new models of businesses and their respective risks.
The due diligence should focus on helping the acquirer to better understand the regulatory framework and compliance requirements of the target; and to analyze the internal risk mitigation and related policies to comply with issues such as big data and ESG.
It is crucial to evaluate how the target business copes with and adapts to the changes to maintain operational resilience.
Deal making will continue to be affected by the geopolitical situation. Business professionals will come to see this as the new normal and will develop skills and resilience to overcome obstacles. The Ukraine conflict will impact the trade of goods and supply chains around the world in the short and long-term.
When evaluating targets to acquire, it is important to consider the current regulatory settings and levels of compliance, as well as their approach in managing changes in the short, medium, and long term.
The latest changes in the consumer market have pushed China to issue a series of legal and regulatory measures to stabilize the many challenging issues brought about by new business models, technologies, and practices.
In addition, the amendments to the Anti-Monopoly Law (Amended AML) were approved and came into effect August 1, 2022. The amended AML brings significant changes to the current competition regime.
Among other things, the AML clarifies that antitrust regulation shall be carried out under the leadership of the Communist Party of China. This unprecedented level of focus on competition policy will directly affect the relationship between the state and the market, as well as the competitive landscape between businesses.
On a positive note, the resale price maintenance (RPM) is no longer illegal per se, as an “effect” test is explicitly introduced in relation to RPM. The introduction of the new test means that companies can implement RPM as long as it does not create an anti-competitive impact – the RPM is unlikely to be anti-competitive if the market shares in the relevant markets held by the distribution agreement parties, do not exceed the “safe harbor” threshold.
The exact threshold is still to be confirmed by the State Administration for Market Regulation.
According to the Draft Monopoly Agreement Provisions, the safe harbor market share threshold is 15% and the market shares of the distributors in the same market should be combined. If the supplier and distributors have shares above such threshold, the rule of reason still applies, but the burden of proof lies on the investigated company.
The new AML lays out the groundwork for the criminalization of monopolies in China. A company’s legal representative, the main person-in-charge, and any other responsible person of a business that has been involved in a vertical agreement will be subject to a fine of up to RMB 1 million.
Although the criminalization of these practices would require changes to the Criminal Law, the possibility of criminal liability for senior management and employees of the infringer under the AML will significantly increase.
The approval of the new AML was followed by an announcement for a consultation of amendments to six other competition regulations. Since Chinese authorities are paying more attention to the competition law, it is likely that enforcement activity will remain high in the future.
Since last year, the position of the Chinese competition authority has been promoted within the governmental hierarchy, while billions worth of fines have been imposed on the internet giants. The consumer sector is still one of the top ranked areas targeted by the antitrust agencies.
On a different front, to encourage innovation and attract famous brands, China has been devoting major efforts to high-quality economic development by improving Intellectual Property Rights (IPR) protection. Both the newly amended Patent Law and the Copyright Law, effective since 2021, have enhanced remedies to right holders, including increasing the statutory maximum amount of damages, establishing a punitive damages system, and clarifying the mechanism for transfer of burden of proof.
Finally, the prevalence of NFTs has become increasingly significant. Currently, there are no statutory definitions or specific laws on NFTs in China. As NFTs share some similarities with cryptocurrencies such as Bitcoin, there are doubts in the market as to whether NFTs would be considered and regulated as cryptocurrencies in China.
If so, this could heighten legal risks, as the usage and trading of cryptocurrencies is prohibited in the country. Currently, NFTs in China operate quite differently when compared to international markets. Therefore, companies interested in launching NFTs or related products should be aware of China-specific risks and restrictions.
Woodburn Accountants & Advisors is one of China’s most trusted business setup advisory firms.
Woodburn Accountants & Advisors is specialized in inbound investment to China and Hong Kong. We focus on eliminating the complexities of corporate services and compliance administration. We help clients with services ranging from trademark registration and company incorporation to the full outsourcing solution for accounting, tax, and human resource services. Our advisory services can be tailor-made based on the companies’ objectives, goals and needs which vary depending on the stage they are at on their journey.
Talk to an expert
Schedule a 30-mins complimentary, no-obligation call to see how Woodburn can help you. Book a call with our Head of Business Advisory - Kristina Koehler-Coluccia.
Topics we can advise on include:
Company Registration
Cloud Accounting & Financial Reporting
Cloud Payroll Services
Tax & Audit Services
Recruitment
Employer-of-Record
Visa Application
Trademark Registration
Switch to Woodburn
Partner with Woodburn (cross referral)
Our calls are automatically scheduled via Zoom - or via Teams, WeChat or WhatsApp upon direct request.
Our advisory calls are available from Monday-Friday from 8am to 5pm CEST and Wednesday until 9pm CEST.