China Company Transformation Indicator 2024

China Company Transformation Indicator 2024

China Company Transformation Indicator

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China Company Transformation Indicator

Contents

Preface

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What the China Company Transformation Indicator measures across companies

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Executive Summary

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Food and Beverage Sector

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New Energy Vehicle Sector

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New Materials Sector

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Methodology

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Preface

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China Company Transformation Indicator

In the dynamic and ever-evolving landscape of China’s economy, businesses are navigating through an era of transformation. As companies transition from the doubledigit growth since the 1990s to a focus on sustainability and innovation, the need for a comprehensive understanding of what it takes to thrive in this complex market has never been more critical.

The IMD China Initiative is proud to present the 2024 China Company Transformation Indicator (CCTI), a culmination of rigorous research and analysis aimed at shedding light on the transformative capabilities of leading companies across key sectors. Our research is driven by a robust intellectual foundation and extensive experience working with both multinational corporations and prominent Chinese companies.

This has enabled us to develop the China Company Transformation Indicator, a tool designed to measure the readiness and momentum of companies in adapting to China’s new economic realities. The CCTI evaluates companies on two main pillars: Core Resilience and New Growth Engines, covering a range of factors from financial robustness to innovation and environmental, social, and governance (ESG) practices.

We work to enhance understanding of China’s business environment and promote sustainable growth for companies operating there.

Sincerely, Mark Greeven IMD Professor of Innovation and Strategy IMD China | Chief Executive

The IMD China Initiative aims to equip businesses with knowledge and strategies for growth in China’s complex market. We offer insights and best practices to help companies seize opportunities and overcome challenges. Our practical approach, grounded in deep knowledge and experience of doing business in the country supports effective strategy implementation.

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What the China Company Transformation Indicator measures across companies

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China Company Transformation Indicator

The China Company Transformation Indicator (CCTI) consists of two pillars: Core Resilience and New Growth Engines. Under each pillar, there are several main factors which vary from sector to sector.

Business Success encapsulates the financial and operational prowess of a company and examines its ability to generate consistent and robust profits over time.

Core Resilience

Business Robustness evaluates a company’s financial resilience and stability.

Core Resilience refers to the fundamental strength and stability of an organization that enables it to endure and thrive amidst various challenges and disruptions – in short, its ability to perform today. This pillar encompasses multiple facets such as financial robustness, operational efficiency, and the ability to maintain consistent business performance. The emphasis is on ensuring that a company possesses the necessary attributes to withstand economic fluctuations, market volatility, and unforeseen crises, thereby securing its long-term viability.

New Growth Engines New Growth Engines refers to an organization’s capability to foster business transformation and expansion. It encompasses its current performance in creating value to fuel new business, its innovative vision for identifying and developing new avenues for growth, and its strategic investment in research and development (R&D). Additionally, New Growth Engines emphasize the importance of adhering to Environmental, Social, and Governance (ESG) principles and practices, ensuring that the company’s growth trajectory is both responsible and sustainable.

By focusing on these areas, a company can secure its ability to adapt and prosper in an evolving market landscape.

Business Diversity assesses a company’s ability to diversify its operations, investments, and market presence.

Customer Engagement evaluates a company’s effectiveness in building and maintaining strong relationships with its consumers.

China Policy Power measures a company’s influence and integration within the Chinese regulatory and governmental landscape.

Investment Capacity evaluates a company’s ability to fund and sustain long-term growth through strategic investments.

Investors’ Expectations of Future Growth assesses a company’s perceived potential for long-term expansion and profitability.

R&D Efforts evaluates a company’s commitment to innovation and technological advancement.

Early Innovation Results measures a company’s initial successes and impacts from its innovative activities.

ESG (Environmental, Social, and Governance) evaluates a company’s commitment to sustainable and ethical business practices.

A full description of each key factor is in the Methodology section at the end of this white paper.

Category

Key Factors

Core Resilience

Business Success Business Robustness Business Diversity Customer Engagement China Policy Power

New Growth Engines

Investment Capacity Investors' Expectations of Future Growth R&D Efforts Early Innovation Results ESG 7

Executive Summary

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China Company Transformation Indicator

The 2024 China Company Transformation Indicator (CCTI), developed by the IMD China Initiative, offers a comprehensive analysis of the transformative capabilities of leading companies across the key sectors – Food and Beverage, New Energy Vehicle (NEV) and New Materials – in China’s evolving economic landscape.

Cross-sector observations Across all three sectors, several common themes emerge.

Innovation and R&D consistently stand out as crucial drivers of current and future success, fueling competitiveness and market leadership across industries in the CCTI. This emphasis on innovation is closely tied to adaptability, with companies that swiftly respond to changing market conditions, consumer preferences, and technological advancements generally outperforming their peers.

It is obvious that Chinese companies and MNCs alike need to prioritize innovation to stay ahead of the game in the Chinese market.

To win in China companies, prioritize innovation. In terms of China Policy Power, understanding and aligning with government policies and initiatives has proven to be a significant advantage, particularly in sectors like NEV, where policy support in China plays a pivotal role. However, there is a downside to these government links; in Europe, for example, where a recently announced tariff on EVs from China may hinder their growth and development in the European market.

Finally, Customer Engagement emerges as a key factor, with companies that excel in understanding and meeting changing customer needs maintaining a competitive edge in rapidly evolving markets.

Furthermore, Customer Engagement emphasizes the company’s ability to leverage digital platforms to enhance its market presence and consumer interaction by creating multiple and multichannel touchpoints. Companies that excel in this domain utilize social media and e-commerce platforms effectively to engage with customers, promote their products, and gather valuable consumer insights.

The 2024 CCTI provides insights into the factors driving success in China’s dynamic business landscape. As companies navigate the transition from high growth to a lower growth environment, their focus on innovation, adaptability, and strategic alignment with both market trends and government policies will be crucial. The indicator serves as a tool for businesses to benchmark their performance and identify areas for improvement as they strive to thrive in China’s complex and evolving economic environment.

Companies demonstrating Business Diversity through varied product portfolios and market presence exhibit greater resilience and adaptability in the face of market fluctuations.

Companies are increasingly seeking their next growth curve in new markets. ESG focus is increasingly recognized as critical for long-term success and investor attractiveness and this is currently an area where foreign MNCs tend to outperform local companies. ESG concerns are now becoming part of the business vocabulary of leading companies in China.

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China Company Transformation Indicator

Food and Beverage sector

New Energy Vehicle (NEV) sector

Highlights

Highlights

The Chinese food and beverage market, one of the world’s largest and fastest-growing, is experiencing a shift in consumer behavior towards healthier options and innovative flavors. The CCTI reveals that top-performing companies in this sector excel in Early Innovation, allowing them to quickly adapt to changing consumer preferences for healthy options.

Coca-Cola has regained its top position in the 2024 ranking.

China’s NEV sector (defined herein as pure play NEV brands) has experienced rapid growth, driven by technological advancements, government support, and changing consumer preferences. The CCTI highlights the dominance of domestic brands like BYD and Geely, along with new players such as Xpeng, Li Auto, and NIO. Tesla remains the sole foreign brand in the top five.

Key findings from the F&B sector include: 1. Fierce competition among top companies, requiring continuous adaptation to a fickle post-COVID Chinese consumer.

2. Early Innovation as a critical factor for sustained success, as exemplified by Moutai, Wuliangye, Mengniu, and Yili.

3. The importance of Customer Engagement, illustrated by BYHEALTH’s jump from 19th to the top 10.

4. A focus on Business Diversity, contributing to Core Resilience, with Nestlé leading in this aspect.

5. ESG as an area for improvement for Chinese companies, with foreign MNCs generally outperforming local firms in this category.

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Notably, some German and Japanese brands are not included in this ranking study because their pureplay NEV presence is not strong or they do not have an exclusive brand dedicated to NEVs, only offering certain new energy models or series.

Key findings from the NEV sector include: 1. Innovation and R&D prominence, with Tesla and BYD leading in Early Innovation.

2. The significant role of China Policy Power, as demonstrated by BYD and Xpeng’s high rankings in this factor. This comes with a corresponding downside if foreign governments or institutions decide to impose tariffs on Chinese NEVs. 3. Differentiation strategies employed by new NEV manufacturers to compete in the market.

4. The rapidly increasing domestic market share of Chinese independent brands, reaching 56.1% in the first five months of 2024 from 41.2% in 2021.

China Company Transformation Indicator

New Materials sector Highlights The New Materials sector in China is crucial for many high-tech industries and is currently dominated by foreign multinational companies. - However, domestic companies like Beijing Easpring Material Technology, a leading supplier of lithium battery cathode materials, and Semcorp, specializing in the development and manufacture of advanced materials and the world’s largest producer of lithium-ion battery separator film by volume (both suppliers to LG Chem, CATL, and BYD), have made significant strides, breaking into the top 10 rankings.

This success reflects the ambitions of China’s “14th Five-Year Plan” which explicitly calls for the development and expansion of a New Materials industry, to ensure significant application demands and achieve a leading position in material development.

Key insights from the New Materials sector include: 1. Innovation is a critical success factor, with topranking companies excelling in R&D, Innovation, and Business Diversity.

2. The importance of a long-term, holistic approach to business operations, as demonstrated by Samsung, Honeywell, and Renesas.

3. ESG as an area for improvement for most local companies, while MNC competitors focus more on this area.

4. The significance of Business Diversity, where foreign MNCs generally outperform Chinese companies due to their global experience and resources.

5. The rise of domestic companies like Beijing Easpring and Semcorp, particularly in the Business Success factor.

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Food and Beverage Sector

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China Company Transformation Indicator

Overview in China Fueled by its vast population base, China’s food and beverage sector is one the largest and fastest growing in the world. A few years ago, the market was mainly driven by a growing middle class and rising disposable income, along with the trend of urbanization across China. However, these drivers have gradually shifted towards changing appetites and lifestyles, and growing concerns for healthy ingredients by young and middle-aged consumers.

As revealed in the 2024 IMD China Company Transformation Indicator, the top 10 ranking companies in the Food and Beverage sector generally outperform in Early Innovation. The explanation could be that companies who are quick to capture and respond to this change in consumer behavior can adjust their product pipeline to meet new demands and secure market share. Coca-Cola, ranked top in our 2024 CCTI, moving up a place from its 2023 CCTI position, has been successful in China by providing a variety of flavors to specifically cater to the Chinese palate.

The two dairy competitors, Mengniu Diary and Yili, are still resilient in securing their rankings, with Mengniu dropping by one spot. However, China Feihe, the famous national infant formula brand has disappeared from the top 10 to 12th position in the 2024 CCTI. This may reflect the plummeting birth rate in the past two years and presents an ongoing challenge if the trend continues. Based on the results, Feihe needs to cultivate business diversity and find its second growth curve to better prepare for future growth.

The Chinese food and beverage sector is characterized by fierce competition and changing tastes, which presents both opportunities for new joiners and risks for current winners. As revealed by our research, the best companies perform well across many different factors from R&D and innovation to China Policy Power and Customer Engagement. This means companies must have a deep understanding of local tastes, a strong commitment to quality, and continuous innovation to achieve long-term success.

Top 10 companies 1

Coca-Cola 可口可乐

2

Wuliangye Yibin 五粮液

3

Kweichow Moutai 贵州茅台

4

Nestlé 雀巢

5

PepsiCo 百事

6

China Mengniu Dairy 蒙牛乳业

7

Inner Mongolia Yili 伊利股份

8

Luzhou Laojiao 泸州老窖

9

Byhealth 汤臣倍健

10

Nongfu Spring 农夫山泉

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Initiative Transformation Indicator China Company

Top 10 companies

Core Resilience

Core Resilience vs New Growth Engines

Nestlé

Coca-Cola

China Mengniu Dairy Luzhou Laojiao Nongfu Spring

Wuliangye Yibin Kweichow Moutai

PepsiCo Byhealth

Inner Mongolia Yili

New Growth Engines

Food and Beverage sector Key factors A full description of each key factor is in the Methodology section of this white paper.

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Category

Key factors

Core Resilience

Business Success Business Robustness Business Diversity Customer Engagement China Policy Power

New Growth Engines

Investment Capacity Investors’ Expectations of Future Growth R&D Efforts Early Innovation Results ESG

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China Company Transformation Indicator

China Company Transformation Indicator 2024 Top 5 companies Food and Beverage Sector Key factors comparison Top Five Companies Coca-Cola Wuliangye Yibin Kweichow Moutai Nestlé PepsiCo

Business Success

Investment Capacity

Early Innovation Results

Customer Engagement

R&D Efforts

Business Diversity

New Growth Engines

Investors' Expectations of Future Growth

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43

Business Robustness

Core Resilience

China Policy Power

ESG 15

China Company Transformation Indicator

Coca-Cola

Kweichow Moutai

Coca-Cola Company has jumped to first place this year, surpassing Wuliangye and Kweichow Moutai.

This is not a coincidence as our study shows that Coca-Cola has performed better across six factors, ranging from China Policy Power and Early Innovative to Business Diversity and ESG commitment.

Kweichow Moutai has capitalized on its reputation as a premium baijiu brand, deeply rooted in Chinese culture and tradition. It is ranked third in our 2024 ranking study, reflecting high and balanced scores spanning Product Innovation and R&D investment to strong sales and Business Robustness.

Coca-Cola’s ability to adapt its products and marketing strategies to local tastes and preferences in China has been a key to its success. To take advantage of the joyous atmosphere surrounding, for instance, the Chinese New Year. Coca-Cola adopts a strategic approach that involves special edition packaging of zodiac and promotional campaigns.

This plan is put into action at the start of every year to coincide with the timing of the festivities.

For example, in early 2023 and 2024, Coca-Cola introduced packaging showcasing rabbit and dragon motifs, respectively. These intricate designs, paired with the brand’s signature vibrant red hue, create a celebratory look that appeals to customers. In September 2023, Coca-Cola’s global creative platform “Coca-Cola Creations” unveiled a new limited edition product – the first-ever AI-developed sugar-free Coca-Cola “Future 3000.” In partnership with the domestic smart technology brand Xiaodu, consumers can scan the QR code on the bottle or access the “Future Imagination Platform” and enjoy an AI-generated content (AIGC) experience. Such marketing campaigns, coupled with an extensive distribution network ensure a strong presence and easy accessibility of Coca-Cola products, which will support ambitions to boost sales.

Moutai ranks fourth in Business Success and second in Business Robustness, indicating strong financial performance and the ability to withstand market challenges effectively. Additionally, Moutai has embraced digital transformation, launching an online direct sales platform to reach a broader audience, while ensuring authenticity. Also worth mentioning is that Moutai introduced the “Xunfeng Digital World” in 2023, a platform powered by virtual reality that transports users into the real setting of the Moutai brewing environment. This interactive experience enables the discovery of Moutai’s extensive past, traditions, and expertise. Xunfeng also serves as a space for user-created content, empowering participants to establish virtual residences within the APP. Through the collection of brewing supplies and equipment, participants can take part in simulated brewing, reveling in the satisfaction of crafting drinks.

With the highest rank in China Policy Power, CocaCola must be wielding a level of influence over industry standards and policies, especially those touching on beverage production and packaging.

Most of these standards are about setting definitions, technical requirements, and specifications to ensure uniformity and quality in the sector. This is re-echoed in the company’s participation toward the development of 21 national standards of China, among which are “General standard for beverage” and “Beer, carbonated beverage cans filling production line – general technical specifications,” showcasing the company’s impact in the Chinese marketplace.

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On the other hand, Moutai is ranked lower for Customer Engagement, Business Diversity, and ESG factors, which appears to be a common characteristic for the Chinese liquor sector which recorded similar low rankings for other brands in our study.

Being the iconic Chinese liquor brand, with continuous innovation and increased commitment to social responsibility, Moutai is poised to maintain this leading position in a competitive market.

China Company Transformation Indicator

Nestlé Being a global leader in the food and beverage industry, Nestlé is ranked fourth, outperforming many local companies in the Chinese market. Nestlé’s success is a result of its persistent focus on R&D, effective Customer Engagement, and a strong ESG commitment.

Nestle’s leading position in Business Diversity, marked by its four corporate venture capital investment (CVC) agreements, five merger and acquisition (M&A) deals, and 2610 global media mentions linked to CVC and M&A operations, showcases its strategic approach to broadening its business range and extending its worldwide impact. This strong level of activity indicates Nestle’s dedication to discovering fresh markets, technologies, and collaborations, and of promoting innovation and expansion through intentional investments and takeovers. The widespread media exposure also emphasizes the importance of these actions, showcasing Nestle’s capacity to draw interest and shape the industry environment. Nestlé has made significant moves in the Chinese market by acquiring well-known local food brands such as Totole, Yinlu, and Hsu Fuji. In 2023, Nestlé Group CEO Mark Schneider reaffirmed the company’s dedication to investing in China and expressed support for strengthening the Chinacentric strategy through further acquisitions.

Nestlé’s impressive standing in Customer Engagement paints a picture of a company that truly understands its customers. It’s not just about making a sale but creating a community where loyalty is the golden ticket and it’s about being there for customers and making sure they feel valued and heard.

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China Company Transformation Indicator

Insights and takeaways from leading companies in the China Company Transformation Indicator

Fierce market competition among the best companies

Business Diversity contributes to Core Resilience

In an interesting shake-up in China’s 2024 Food and Beverage ranking, Coca-Cola is back on top, because of significantly better performance across various factors, particularly in China Policy Power, where it ranks first. This suggests effective improvement in their overall strategy and performance. However, the shifts in ranking among the top 10 companies highlight the dynamic nature of the market, where companies must continuously adapt to new trends to maintain their positions.

For two consecutive years, Nestlé has excelled in Business Diversity, significantly contributing to its Core Resilience. Nestlé’s extensive portfolio, ranging from infant formula and confectionery to coffee and bottled water, enables it to meet a wide array of consumer needs in China. This diversity is bolstered by strategic brand acquisitions, allowing Nestlé to continuously expand and enhance its product offerings, thus ensuring robust market presence and adaptability.

Early Innovation is key for sustained success

ESG can be an area of improvement for Chinese companies

The four popular brands, Moutai and Wuliangye, Mengniu, and Yili, are still standing strong in the top five and top 10. The results may reveal an important factor, Early Innovation is a key factor influencing sustained success. These four companies have occupied the top four positions in Early Innovation for two consecutive years, although the order has slightly varied. This could suggest that a strong commitment to innovation is crucial for sustained success and long-term growth.

The ranking also suggests that foreign MNCs in the Food and Beverage sector have generally outperformed local companies in ESG rankings, potentially due to a variety of factors including a global approach to ESG with high minimum standards across all their operations, regardless of location, investment in sustainability, corporate governance, social responsibility, and environmental initiatives.

The consumer is still king Surprisingly in the 2024 ranking, BYHEALTH jumped directly from 19th place to the top 10. This could largely be thanks to its top rank in Customer Engagement, indicating that effective consumer interaction and relationship-building could help the company to better understand, meet, and anticipate consumer needs, thus maintaining a competitive edge.

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However, it’s also important to consider the broader context and other performance factors that contribute to a company’s overall success.

Nevertheless, strong ESG practices can help build a sustainable and competitive business model that contributes to business success and long-term growth.

China Company Transformation Indicator

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New Energy Vehicle Sector

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China Company Transformation Indicator

Overview in China Over the past three years, China’s passenger car market has undergone significant structural changes.

After years of accumulating technological knowledge, policy promotion, and the rapid development of intelligent technology, the electric vehicle industry – characterized mainly by electrification, intelligence, and automation – has quickly risen to gradually replace the position of internal combustion engine (ICE) vehicles in China’s passenger car market.

Despite the Chinese government’s policy and ambitious targets for New Energy Vehicles (NEV), many traditional foreign automakers have been sluggish in making up their mind to adapt to the change. Notably, some German and Japanese brands are not included in this ranking study because their pure play NEV presence is not strong, or they do not have an exclusive brand dedicated to NEVs, only offering certain new energy models or series. Instead, we only see one foreign brand, Tesla, showing in the top five.

Domestic brands represented by BYD and Geely, along with the new forces in NEV manufacturing represented

by Xpeng, Li Auto, and NIO, have become the leaders in this sector, according to the study. Together, they have propelled the rapid rise of Chinese domestic brand automobiles, enabling China to achieve preeminence in the automotive field.

In 2020, the market share of Chinese domestic brands was only 35.8%, with the rest mainly occupied by German, Japanese, and American brands. By 2021 and 2023, the market share of Chinese independent brands reached 41.2% and 51.9% respectively. As of the first five months of 2024, this figure has risen to 56.1%.

These significant structural changes demonstrate China’s firm determination to address global environmental issues and achieve carbon neutrality and emission reduction targets in personal mobility.

We found from the study that top-ranking companies have all scored high in R&D, Technology Innovation, and Business Diversity.

Overall, the CCTI for NEVs shows these Chinese enterprises invest heavily in supply chain, manufacturing, and innovation capability in the field of NEVs. The result is likely to be a future characterized by breakthroughs in AI technology, bringing China’s NEVs closer to true intelligence and automation, thus strengthening the sector’s leadership position in the future global automotive field.

Top 10 companies 1

BYD 比亚迪

2

Xpeng 小鹏汽车

3

Tesla 特斯拉

4

Nio 蔚来

5

Aion 广汽埃安

6

Li Auto 理想

7

Zeekr 极氪

8

Hozon 哪吒汽车

9

Seres 赛力斯

10

JAC Yiwei 钇为汽车 21

China Company Transformation Indicator

Top 5 companies

Core Resilience

Core Resilience vs New Growth Engines

BYD

Xpeng

Aion

Nio

Tesla

New Growth Engines

New Energy Vehicle sector Key factors The selection of companies and factors in our analysis of the New Energy Vehicle (NEV) sector is meticulously designed to address the unique context of these entities. Many NEV companies operate as subsidiaries or extensions of larger parent organizations, leading to a consolidation of their financial outcomes within the broader results of their parent companies. This integration can obscure a clear understanding of the individual subsidiary’s performance and historical trajectory. Therefore, our approach emphasizes the selection of variables that

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are both highly relevant and obtainable, enabling us to construct a well-rounded and objective analysis, and leveraging the most critical and accessible data points to deliver a coherent and concise evaluation of each company’s position and future potential within the NEV sector.

A full description of each key factor is in the Methodology section of this white paper.

Category

Key factors

Core Resilience

Business Success Business Diversity China Policy Power

New Growth Engines

Early Innovation Results R&D Efforts

China Company Transformation Indicator 2024 Top 5 companies

China Company Transformation Indicator

New Energycomparison Vehicle Sector Key factors Top Five Companies BYD Xpeng Tesla Nio Aion

Core Resilience

New Growth Engines

Business Success

1 2 3 4

Early Innovation Results

5 6 7 8 9 10 11 12 13 14 15

Business Diversity

16 17 18

R&D Efforts

China Policy Power 23

China Company Transformation Indicator

BYD In the field of NEVs, BYD is the most comprehensive all-round player. BYD is strategically positioning itself through product development, cost control, technological innovation, and strategic partnerships.

This is consistent with our research findings, in which BYD, ranked number one in the overall ranking, scored high for all five factors.

as the recent tariffs in Europe and the US suggest. By leveraging continuous innovation in core technologies and targeted market strategies, BYD has gained a competitive advantage to enhance product quality and performance, contributing to the green-oriented transformation of the Chinese automobile industry.

Unlike during the era of ICE vehicles, BYD is no longer content with just offering models priced around 100,000 yuan. Now it provides the most diverse product range from economy models such as Ocean Series and Dynasty series to premium products such as Yangwang U8, as it works to gain market share across different tier cities. BYD’s market share in new energy vehicles expanded to 31.9% in 2023, marking a year-on-year increase of 4.8 percentage points.

This achievement marks the first time a Chinese automobile enterprise has ranked among the top 10 in global sales.

Tesla

BYD’s success also relies on its innovation in NEV technology and vertical supply chain management, which enables BYD to provide the best quality product at the most appealing price. In 2023, the Group introduced several innovative technologies, including the “e4 Platform” architecture, the “DiSus” intelligent body control system, the advanced intelligent driving assistance system known as “God’s Eye,” and the “DMO” super hybrid off-road platform. These advancements significantly enhanced the Group’s overall competitiveness and elevated its business development to new heights. BYD is the best example of implementing vertical business integration.

Unlike many competitors, BYD manufactures its own batteries and key components, ensuring cost and quality control as well as supply chain resilience. This advantage has been particularly crucial amidst global supply chain disruptions.

Lastly, BYD has built up strategic partnerships with Chinese local and foreign governments to increase its market presence and reputation, particularly as revealed by the China Policy Power factor. It has expanded to over 70 countries with exports growing production by 334.2% to 242,765 units in 2023. In Jul 2023, BYD and the Government of Bahia State in Brazil jointly announced that the two parties would set up a large-scale production base complex consisting of three factories in Camaçari. This move will further promote BYD’s globalization process. Nevertheless, it is not easy to gain the trust of foreign policymakers, 24

Ranked third overall, Tesla holds the top spot for early innovation. As a trailblazer in the field of EVs, Tesla’s initial advancements in technology, especially in autonomous driving capabilities, have firmly established its dominance in the EV industry. This spirit of innovation has resulted in a solid brand image and product recognition, with the Model Y becoming the world’s best-selling car in 2023 and making Tesla the sole and leading foreign electric vehicle brand in the Chinese market. The company’s ability to generate substantial revenue despite competitive pressures underscores its strong brand presence and consumer loyalty.

Tesla’s success is rooted in innovations in multiple dimensions, including a direct-sales model bypassing dealerships, the original one-piece casting techniques, and the convenience and cutting-edge technology experience provided by over-the-air (OTA) software updates. These innovations have enabled Tesla to achieve the highest profitability in the electric vehicle industry.

Tesla’s Shanghai Gigafactory played a crucial role in promoting its production capacity, contributing to its volume and revenue growth, as reflected by a high score in Business Success. In 2023, Tesla’s Shanghai Gigafactory achieved a cumulative delivery volume of 947,000 vehicles, accounting for more than half of its global production capacity. The Gigafactory can roll out a China-made Tesla vehicle in just over 30 seconds.

Relying on China’s well-established ecosystem for new energy vehicle components and high-quality standards, the localization rate of components for Tesla vehicles produced at the Shanghai Gigafactory has reached 95%. Tesla’s revenue from China accounted for nearly a quarter (22.5%) of its total revenue in 2023, reflecting the importance of the Chinese market to its overall business. However, as the spokesperson for technology, Tesla’s overly

China Company Transformation Indicator

minimalist interior design may not cater to the local market’s emphasis on interior and intelligent control systems. Also, with a lower ranking in China Policy Power, Tesla might need to up their game in aligning with local policies to further solidify their position in the Chinese market.

NIO In the intricate mosaic of rankings that span from Business Success to China Policy Power, NIO has managed to maintain a steady and uniform presence. The balanced approach can be seen as both a strength and a potential area for strategic development. On the one hand, it demonstrates the company’s ability to manage and perform competently in diverse areas. On the other hand, the lack of a clear lead suggests that there may be opportunities for NIO to differentiate itself by homing in on specific strengths or opportunities for innovation where it could establish a more pronounced competitive advantage.

NIO House and NIO Space, fostered a sense of community and brand loyalty among its customers, helping retain and build up its customer base. Being an innovative channel for engaging and serving users, NIO House and NIO Space facilitate direct interaction with customers to enhance user loyalty and retention.

By the end of 2023, NIO had established 145 NIO Centers worldwide.

In summary, NIO’s balanced rankings indicate a company that operates with a steady hand, ensuring broad competency but also presenting a landscape where targeted strategic focus could potentially lead to more significant achievements and industry leadership in selected areas.

NIO has achieved its success through differentiated positioning and an innovative battery service model.

NIO smartly chose the luxury car segment in the electric vehicle market, thus avoiding the least profitable mid- to low-end market and the most competitive mid- to high-end market. In 2023, NIO delivered 92,186 premium SUVs and 67,852 premium sedans, with a manufacturer’s suggested retail price (MSRP) ranging from 298,000 to 498,000 RMB, thus establishing its position as a leader in the premium EV segment.

NIO’s battery leasing and battery swap model lowers the upfront cost of purchasing an EV and alleviates consumers’ range anxiety, enhancing the consumer experience of electric vehicles. By the end of 2023, supported by over 1,600 patent technologies, all NIO vehicles were equipped for battery swapping.

With 2,350 battery swap stations worldwide, NIO has completed more than 35 million battery swaps cumulatively. NIO users can swap batteries in just a few minutes. In December 2023, NIO launched the Power Swap Station 4.0, which is compatible with battery swaps for multiple car brands, significantly enhancing efficiency and enabling up to 480 swaps per day.

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China Company Transformation Indicator

Insights and takeaways from leading NEV companies in the China Company Transformation Indicator Innovation and R&D prominence High-flyers in Innovation and R&D, like Tesla and BYD, are the trailblazers of the industry, really shaking things up. Tesla, taking the lead as the pacesetter in Early Innovation, is the one everyone’s looking at to see in what direction the future is headed. BYD is not far behind, snapping at Tesla’s heels with their own innovative spirit, showing they’re serious players in this race.

These companies are the heartbeat of the industry, pumping out new ideas and tech that keep everyone else on their toes. For them, investing in new technology isn’t just a nice-to-have; it’s the golden ticket to staying ahead of the curve and keeping their fans excited about what’s coming next.

This is a clear sign that when companies are willing to take the innovation ‘plunge’ and bet big on R&D, they can turn heads, make waves, and lead the pack in a dynamic market that’s hungry for the next consumer and automotive trends. It’s not just about making cars; it’s about making history with each new model that hits the road.

China Policy Power plays an important role Companies such as BYD, which occupies the premier position in China Policy Power, and Xpeng, holding a robust eighth place, wield considerable influence in shaping or adeptly aligning with the government’s strategic directives. This substantial policy sway indicates they have not only earned a seat at the table where policies are discussed but are actively participating in the conversation, which is a clear strategic benefit.

The alignment with government policies is particularly advantageous in a landscape like China’s, where the government’s backing can provide a significant boost to the NEV sector. This support often comes in the form of incentives, subsidies, and regulatory frameworks that favor companies operating in 26

the NEV space. BYD and XPeng’s high rankings in China Policy Power suggest they have managed to synchronize their business strategies with the government’s strategic vision on the development of NEVs, thereby positioning themselves to leverage these supportive policies to their utmost benefit.

This strategic alignment likely involves a deep understanding of the political and economic landscape, proactive engagement with policymakers, and a commitment to meet or exceed the standards and expectations of the government as a major influential stakeholder. As a result, these companies are better equipped to navigate the domestic regulatory environment, secure funding, and gain a competitive edge in a market that is heavily influenced by public policy.

In export markets, however, this government support has resulted in the imposition of tariffs on EVs by both the United States of America and the European Union, with the US imposing significant tariffs on electric vehicles imported from China, with some rates reaching up to 100%. While bilateral dialogues continue, significant breakthroughs in comprehensive trade agreements seem unlikely in the near term for either the EU or the US in their negotiations with China.

Differentiation is key For years, China’s mid- to high-end and luxury passenger car market has been dominated by German and Japanese brands. Chinese domestic brands mainly fight and survive in the mid-to-low-end market with prices under 200,000 yuan.

How can China’s new energy vehicle brands compete in a market with a solid share and fierce competition?

The answer is characterized by three new forces in NEV manufacturing and development: a strategy of differentiation.

Xpeng focuses on technology. It insists on fullstack in-house development in autonomous driving, establishing a leading position in autonomous driving technology.

China Company Transformation Indicator

Li Auto focuses on products, targets family users, and designs family cars that meet the needs of all family members. It successfully positions itself in the MPV sector pricing above 300,000 yuan through rangeextender technology.

NIO, on the other hand, emphasizes its luxury positioning, superior service, and innovative battery leasing services and battery swapping technology to win its own market share

However, it’s also important to consider the broader context and other performance factors that contribute to a company’s overall success.

Nevertheless, strong ESG practices can help build a sustainable and competitive business model that contributes to business success and long-term growth.

Business Diversity contributes to Core Resilience For two consecutive years, Nestlé has excelled in Business Diversity, significantly contributing to its Core Resilience. Nestlé’s extensive portfolio, ranging from infant formula and confectionery to coffee and bottled water, enables it to meet a wide array of consumer needs in China. This diversity is bolstered by strategic brand acquisitions, allowing Nestlé to continuously expand and enhance its product offerings, thus ensuring robust market presence and adaptability.

ESG can be an area of improvement for Chinese companies The ranking also suggests that foreign MNCs in the Food and Beverage sector have generally outperformed local companies in ESG rankings, potentially due to a variety of factors including a global approach to ESG with high minimum standards across all their operations, regardless of location, investment in sustainability, corporate governance, social responsibility, and environmental initiatives.

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New Materials Sector

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China Company Transformation Indicator

Overview in China New Materials covers a wide range of fields and generally refer to newly emerging materials with superior performance and special functions, or traditional materials with performance that is significantly improved after alteration. Positioned in the middle and upper reaches of the industry value chain, the sector is the foundation that provides technological solutions for many other important industries, such as semiconductors, aerospace, and medical devices.

China’s “14th Five-Year Plan” explicitly calls for the development and expansion of a New Materials industry, to ensure significant application demands and achieve a leading position in material development. Our results show that, to catch up with today’s top-performers, Chinese companies should emphasize R&D Investment, Business Diversity, and ESG.

During our research for the 2024 China Company Transformation Indicator, we investigated the leading new materials companies in China. It is no surprise to see the top 10 companies in China dominated by foreign multinational companies (MNCs), as China is a relative latecomer in this field, while foreign companies have a first-mover advantage.

However, two domestic companies, Beijing Easpring Material Technology Co., Ltd. and Semcorp, have broken into the top 10, ranking in the top three in terms of Business Success. Moreover, beyond the top 10, there are several other domestic Chinese challenger companies present in the CCTI.

Top 10 companies 1

Samsung Electronics 三星电子

2

Honeywell 霍尼韦尔

3

Renesas Electronics 瑞萨电子

4

BASF 巴斯夫

5

LG Chem LG 化学

6

Dow 陶氏

7

Easpring Material 当升科技

8

3M

9

DuPont 杜邦

10

Semcorp 恩捷股份 29

China Company Transformation Indicator

Top 10 companies

Core Resilience

Core Resilience vs New Growth Engines Samsung Electronics Honeywell DuPont

BYD 3M

Dow Semcorp

LG Chem

BASF

Easpring Material

New Growth Engines

New Materials sector Key factors A full description of each key factor is in the Methodology section of this white paper.

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Category

Key factors

Core Resilience

Business Success Business Robustness Business Diversity China Policy Power

New Growth Engines

Investment Capacity Investors’ Expectations of Future Growth R&D Efforts Early Innovation Results ESG

China Company Transformation Indicator

China Company Transformation Indicator 2024 Top 5 companies

New Materials Sector Key factors comparison Top Five Companies Samsung Electronics Honeywell Renesas Electronics BASF LG Chem

Core Resilience

Business Robustness

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

New Growth Engines Investors' Expectations of Future Growth

Business Success

Investment Capacity

Business Diversity

R&D Efforts Early Innovation Results

China Policy Power ESG

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China Company Transformation Indicator

Samsung Electronics

Honeywell

As the biggest MNC, South Korean Samsung Electronics has achieved significant success and established its leading position in the field of new materials and semiconductors. It was ranked number one across many factors from R&D and Early Innovation to China Policy Power and Business Diversity.

Honeywell ranked second with quite a balanced score for Core Resilience and New Growth Engines demonstrating a well-rounded strategy that balances innovation with operational excellence.

Samsung’s top ranking in R&D and Early Innovation – with the press count on semiconductors reaching a surprising 4,301 in the recent three years – indicates a strong commitment to pushing the boundaries of new material technology, likely driving its market leadership. On Memory Tech Day 2023, Jung-Bae Lee, President and Head of the Memory Business at Samsung Electronics addressed Samsung Electronics’ commitment to overcoming the challenges of the hyperscale era through innovations in transistor structures and materials. This includes developing new 3D structures for sub-10nm dynamic random access memory (DRAM) chips, enabling larger single-chip capacities exceeding 100Gb. Following the mass production of its 12nm-class DRAM in May 2023, Samsung is now focusing on its 11nm-class DRAM, aiming for the industry’s highest density. Also, Samsung is actively researching and developing “hafnia ferroelectrics,” a next-generation memory semiconductor material. This research aims to significantly increase the capacity of memory semiconductors by advancing 3D NAND flash memory technology from the current 200-300 layers to a remarkable 1,000 layers by 2030.

Samsung’s business diversity and strong resilience rankings reflect a broad and adaptable business approach that can withstand market fluctuations and capitalize on varied opportunities.

Samsung’s success in China also relies on its strategic partnerships with Chinese companies, including AAC Technologies providing precision acoustic components, BYD as a key supplier of batteries, and Chengdu Xuguang Technology supplying critical electronic components. These partnerships underscore Samsung’s commitment to leveraging advanced technology and high-quality products from leading Chinese suppliers to enhance its product offerings and brand power.

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Years of effort and transformation in establishing a comprehensive localized value chain in China have finally paid off. As it said, “Little by little, we had this Chineseness in our bones.” Honeywell’s business spans aerospace, and building technologies to performance materials & technologies, and safety & productivity solutions. It is well-positioned to develop new technologies in different areas and to weather market challenges effectively. Honeywell’s strategic investments in digital initiatives, including the Honeywell Forge Performance+ software and its pioneering eFining technology for sustainable aviation fuel production, have firmly established the company as a leader in the new materials sector.

It also leverages China’s supply chain advantage in local R&D and production activities. More than 20 years ago, Honeywell introduced the “East for East” strategy. Since then, Honeywell has continuously studied China’s national policies, including various programmatic documents and work reports. Based on the requirements of local customers, Honeywell provides end-to-end solutions that address specific industry challenges in China. Integrating local expertise with Honeywell’s global technological capabilities enables the company to quickly adapt to evolving market needs and regulatory requirements.

This has made them a preferred partner for many Chinese enterprises.

Honeywell’s commitment to sustainability and energy efficiency has also resonated well with Chinese market trends. For example, as China advances its “dual carbon” goals, energy conservation and emission reduction in the construction industry have become imperative. Honeywell has collaborated with various stakeholders to establish the Low Carbon Smart Building Research Institute, accelerating the adoption of technological innovations and mature solutions to support the industry’s digital transformation and sustainable development. In the first half of 2023, Honeywell also launched the Sustainable Development Digital Innovation Center, the UOP China Olefins Technology Support Center, and the Honeywell Cold Chain Research Institute in China. In addition, Honeywell has published several sustainability white papers to support China’s energy transition. For example, the industry white paper

China Company Transformation Indicator

“Fueling Sustainable Aviation” addresses current and future carbon reduction challenges in the aviation sector, promoting the accelerated adoption of sustainable aviation fuels and other mature solutions in China.

Renesas Electronics As a leading global provider of semiconductor solutions, Renesas stands out with high rankings in Business Robustness and Early Innovation, signaling a company that is agile and quick to adapt to market changes, while also investing in new technologies.

Renesas’ focus on sustainability and research and development further underscores its dedication to responsible development and supply chain management. This is completely consistent with the findings from IMD research. To support its strategy for sustainable technology, Renesas invested 220 billion yen in research and development in 2023, representing approximately 15% of its total sales.

The company plans to maintain this level of R&D investment in the future to enhance its existing business operations and advance its technological capabilities. Renesas also invested heavily in AIdriven R&D to accelerate the development of new materials.

Besides investment in organic growth, Renesas also expanded its Business Diversity and looked for strategic acquisitions. In June 2022, Renesas acquired Reality AI through an all-cash transaction.

Reality AI’s comprehensive embedded AI and TinyML solutions are tailored for advanced non-visual sensing applications across automotive, industrial, and consumer products, seamlessly integrating with Renesas’ embedded processing and IoT offerings.

Within just a year of this acquisition, Renesas has introduced a range of solutions leveraging Reality AI technology. These innovations enable customers to achieve faster, more accurate data processing and response while minimizing computational power and energy consumption. Its acquisition of Panthronics in 2023 will further expand its product portfolio and solidify its position in the New Materials sector.

Easpring Material Ranked seventh overall, China’s Beijing Easpring Material shows an overall superior performance with strengths in Business Success, Robustness, and Early Innovation.

The company navigated a dynamic and challenging landscape in 2023. Despite the strong demand for new energy vehicles, it faced multiple challenges including economic volatility, intense market competition, substantial fluctuations in raw material prices, significant overseas trade barriers, and structural overcapacity in the industry, necessitating strategic innovation and the application of effective management practices.

Easpring Material reported a revenue decrease of 29% in 2023 while its net profit margin improved to 12.7%, up from 10.6% in 2022. The higher profit margin amidst declining revenue showcases its financial resilience and capability to manage costs efficiently in a deteriorating and adverse market environment. By concentrating on key market trends and deepening its business strategy, Easpring Material managed to deliver solid financial performance.

The company adopts an innovative R&D model, relying on three major research institutes to continuously build an integrated innovation platform encompassing “basic research on lithium battery materials, product development, and process technology equipment research.” As a global leader in lithium battery cathode materials, it has earned numerous national and provincial honors and qualifications, such as “National Technology Innovation Demonstration Enterprise,” “National Intellectual Property Demonstration Enterprise,” and “China Light Industry High-Energy Lithium Battery Key Laboratory.” It is also the first in the industry to achieve the status of “National Certified Enterprise Technology Center.” Furthermore, Easpring Material is actively innovating its marketing strategies and promoting the development of the entire “materialsbattery-automobile” industry chain. Their market strategy emphasizes “expanding the Chinese market, strengthening the European market, and optimizing the American market,” consistently striving to attract and develop high-quality customers both domestically and internationally.

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China Company Transformation Indicator

Insights and takeaways from leading New Materials companies in the China Company Transformation Indicator Innovation is key The results of the CCTI in this sector show all the overall top five ranked companies are also ranked high in R&D, Innovation, and Business Diversity. It seems this strong focus is a common trait among top-ranking companies, underscoring the critical role that innovation plays in driving success in the New Materials sector.

Long-term holistic approach The top three performing companies – Samsung, Honeywell, and Renesas – have all excelled in both core resilience factors as well as factors related to new growth engines. Companies that excel in a balanced manner across multiple factors tend to have better overall rankings, indicating the benefits of a holistic approach with a long-term view of business operations. This might best summarize Renesas’s success in the market in China.

ESG cannot be neglected From our study, it is notable that most local companies have not scored well in terms of ESG. As ESG practices are increasingly important to investors, industrial customers, and consumers who prioritize sustainability and ethical business operations, companies with poor ESG practices may lose customer trust and loyalty, resulting in lower sales, market share, and stock valuations.

Business Diversity matters in the long run Besides ESG, inadequate Business Diversity is a common trait for most Chinese companies. Most foreign MNCs have been operating globally for decades and have extensive experience in diverse

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markets and greater resources to invest in R&D. This enables them to innovate and diversify their product lines, catering to a wider range of industries and applications. Chinese New Materials companies often have a more localized focus, with less international exposure. While Chinese companies are increasingly engaging in mergers and acquisitions, they may still be catching up in terms of strategic partnerships that can enhance their Business Diversity.

Two rising stars Two domestic companies, Beijing Easpring Material Technology and Semcorp, are present in the top 10 and are ranked third and first respectively for the Business Success factor. They also proved to be quite capable of making strong investment returns.

Easpring Materials has focused heavily on developing advanced lithium battery materials, which are critical for the electric vehicle (EV) market. Its leadership position in battery materials helped it form strategic partnerships with leading battery and automotive companies, such as CATL and BYD, catering to the growing demand from the NEV industry. Partnerships have also significantly boosted Easpring Materials’ market presence and credibility, helping them secure steady demand and facilitating technological advancements through collaborative R&D efforts.

In summary, their emphasis on innovation and quality has positioned both companies as leaders in their respective fields within the New Materials sector.

Their focus on high-demand products, strategic partnerships, and capacity expansion has resulted in strong financial performance, which translated into high returns on investment and positive future growth expectations, which are in turn attracting more investors.

China Company Transformation Indicator

Picture to come

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Methodology

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China Company Transformation Indicator

Description of CCTI key factors Category

Key factors

Core Resilience

Business Success Business Robustness Business Diversity Customer Engagement China Policy Power

New Growth Engines

Investment Capacity Investors’ Expectations of Future Growth R&D Efforts Early Innovation Results ESG

Business Success

Business Robustness

The Business Success factor encapsulates the financial and operational prowess of a company. It examines the firm’s ability to generate consistent and robust profits over time, reflecting its financial stability and efficiency. This involves evaluating the company’s performance in terms of profitability margins, revenue generation per employee, and the growth of earnings before interest, taxes, depreciation, and amortization (EBITDA). Companies that excel in this area demonstrate a solid foundation of financial health, ensuring they can weather economic fluctuations and sustain their growth trajectory.

The Business Robustness factor evaluates a company’s financial resilience and stability – crucial for navigating the complexities of the market. It focuses on the firm’s liquidity, debt management, and overall financial security. Assessing metrics such as the quick ratio, cash ratio, and interest coverage ratio determines the company’s ability to meet shortterm obligations and manage financial risks. A robust financial structure ensures a company can maintain operations and pursue strategic opportunities despite economic downturns.

Furthermore, Business Success underscores the strategic maneuvers a company employs to maintain and enhance its market position. This includes maintaining high net income margins while optimizing operational processes to enhance productivity.

Firms that succeed in this domain often leverage advanced technologies, such as AI-driven supply chain management, to streamline operations and reduce costs. This strategic focus on efficiency and profitability enables these companies to reinvest in innovation and expansion, thereby securing a competitive edge.

Business Robustness also encompasses the firm’s capability to generate and sustain free cash flow, which is vital for ongoing investment and growth.

Companies that perform well in this area exhibit a strong free cash flow relative to their operating revenue, indicating efficient cash management and operational efficiency. This financial health allows them to invest in innovation, expand their market presence, and enhance their competitive positioning.

By maintaining a solid foundation of financial security, these companies can better withstand market volatility and continue to thrive in the competitive landscape.

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China Company Transformation Indicator

Business Diversity The Business Diversity factor assesses a company’s ability to diversify its operations, investments, and market presence. It examines metrics such as the number of corporate venture capital investments, mergers and acquisitions (M&A), and the extent of international media exposure. Companies with a high level of business diversity engage in various strategic initiatives, spreading their risk across different ventures and markets. This approach allows them to tap into new revenue streams, mitigate market-specific risks, and enhance their overall resilience.

Additionally, Business Diversity encompasses the company’s adaptation to digital transformation and e-commerce trends, as indicated by the percentage of online sales. Firms that successfully diversify their business models to include robust online sales channels demonstrate their agility and responsiveness to changing consumer behaviors. This diversification is particularly significant in the Chinese market, where digital commerce is rapidly expanding. By maintaining a diverse portfolio of investments, partnerships, and market engagements, these companies can sustain growth, foster innovation, and remain competitive amid evolving industry trends and economic fluctuations in the sector.

Customer Engagement In the context of the Chinese market, the Customer Engagement factor evaluates a company’s effectiveness in building and maintaining strong relationships with its consumers. This indicator assesses metrics such as customer satisfaction ratings, follower counts on major Chinese social media platforms like WeChat, Douyin, and Taobao, and engagement rates on platforms like Weibo. High scores in these areas reflect a company’s ability to connect with its customers, understand their needs, and foster loyalty through active and responsive communication.

Furthermore, Customer Engagement emphasizes the company’s ability to leverage digital platforms to enhance its market presence and consumer interaction. Companies that excel in this domain utilize social media and e-commerce platforms effectively to engage with customers, promote their products, and gather valuable consumer insights. This digital engagement not only boosts brand visibility and consumer trust but also enables the company to quickly adapt to market trends and consumer 38

feedback. By prioritizing customer engagement, firms can build a loyal customer base, enhance their brand reputation, and drive sustained growth in these highly competitive Chinese industries.

China Policy Power In the context of the Chinese market, the China Policy Power factor measures a company’s influence and integration within the Chinese regulatory and governmental landscape. This indicator assesses the firm’s market share, the number of government procurement contracts, and its capacity to set industry standards. Companies with strong China Policy Power often have substantial market shares, reflecting their significant presence and competitive advantage in the industry. Additionally, securing numerous government contracts highlights their strategic alliances and compliance with regulatory requirements, which can provide a stable revenue stream and bolster their market position.

Moreover, China Policy Power emphasizes the company’s ability to navigate and influence the Chinese regulatory environment effectively. This involves not only adherence to existing regulations but also active participation in shaping emerging industry standards. Firms that excel in this domain often possess a strategic advantage, leveraging their policy influence to drive industry norms and practices.

Their robust tax contributions further indicate their alignment with national economic goals, reinforcing their legitimacy and operational stability in the market.

By cultivating strong China Policy Power, companies can enhance their competitive edge, mitigate regulatory risks, and capitalize on government support to drive growth and innovation in the sector.

China Company Transformation Indicator

Investment Capacity In the context of the Chinese market, the Investment Capacity factor evaluates a company’s ability to fund and sustain long-term growth through strategic investments. It examines key metrics such as reinvestment ratios, earnings retention rates, and return on invested capital, reflecting the firm’s capacity to generate and allocate financial resources effectively. Companies with high investment capacity demonstrate robust capital expenditures and a strong track record of reinvesting profits, enabling them to pursue innovation, expand their operations, and enhance their competitive edge.

Furthermore, Investment Capacity highlights the firm’s ability to build and manage investor confidence, which is often influenced by dividend yields and market capitalization growth rates. Companies that excel in this domain often exhibit a balanced approach to rewarding shareholders while retaining sufficient earnings to fuel future growth. This strategic financial management allows them to undertake significant investments in research and development, infrastructure, and market expansion.

By maintaining a strong investment capacity, these companies can adapt to market changes, leverage emerging opportunities, and ensure sustained growth and competitiveness.

Investors’ Expectations of Future Growth The factor for Investors’ Expectations of Future Growth assesses a company’s perceived potential for long-term expansion and profitability. It incorporates metrics such as the price-to-earnings ratio, enterprise value to EBITDA ratio, and market capitalization growth rate, which reflect investor sentiment and confidence in the company’s future performance.

High values in these metrics suggest that investors are optimistic about the firm’s growth prospects, anticipating strong earnings and significant market value appreciation. This optimism is crucial for attracting and retaining investment, which is vital for funding innovation and expansion.

returns are more likely to be perceived as stable and promising investments. This positive investor sentiment not only boosts the company’s stock performance but also enhances its ability to raise capital at favorable terms. By maintaining strong expectations of future growth, these firms can secure the financial resources necessary to innovate, scale operations, and capture new market opportunities, thereby sustaining their competitive advantage in the Chinese market.

R&D Efforts The R&D Efforts factor evaluates a company’s commitment to innovation and technological advancement. It examines metrics such as R&D intensity, R&D expenses, and the growth rate of these investments over recent years. Companies with high R&D intensity allocate a significant portion of their resources to research and development, reflecting their focus on innovation and long-term growth. This dedication to R&D is essential where continuous product improvement and adaptation to changing consumer preferences are crucial for maintaining competitive advantage.

Furthermore, the R&D efforts factor also considers the number and growth rate of patents filed in China, showcasing the company’s ability to generate and protect intellectual property (IP). A strong patent portfolio indicates a firm’s innovative capabilities and its potential to introduce groundbreaking products and processes. Companies that excel in this area often leverage advanced technologies and pioneering research to stay ahead of industry trends. By prioritizing R&D efforts, these firms not only enhance their product offerings and operational efficiencies but also position themselves as leaders in innovation, driving sustainable growth and market differentiation.

This factor also signals the firm’s financial health and stability through metrics like free cash flow yield and long-term beta, which measure risk-adjusted returns and volatility. Companies that demonstrate robust financial metrics with low volatility and high

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China Company Transformation Indicator

Early Innovation Results The Early Innovation Results factor measures a company’s initial successes and impacts from its innovative activities. It assesses metrics such as the number of media mentions related to customer engagement, digital advancements, innovation initiatives, and sustainability efforts over the past three years. High counts in these areas suggest that the company is gaining recognition for its innovative approaches and is effectively engaging with consumers and stakeholders through novel strategies and technologies. This early recognition is crucial where consumer trends and technological advancements can rapidly reshape market dynamics.

Moreover, the Early Innovation Results factor highlights the company’s ability to generate buzz and capture media attention, which can significantly influence brand perception and market positioning.

Companies that excel in this domain are often seen as industry pioneers, driving trends and setting new standards for product quality, customer experience, and sustainability. This early success in innovation not only boosts the company’s reputation but also builds momentum for further advancements and market penetration. By showcasing strong early innovation results, these firms demonstrate their capability to lead in a competitive landscape, attract investment, and foster long-term growth.

ESG The ESG (Environmental, Social, and Governance) factor evaluates a company’s commitment to sustainable and ethical business practices. This indicator examines metrics such as resource use, emissions, environmental innovation, workforce management, human rights, community involvement, product responsibility, corporate governance, shareholder relations, and overall CSR (Corporate Social Responsibility) strategy. Companies with strong ESG performance demonstrate their dedication to minimizing environmental impact, promoting social equity, and maintaining high standards of corporate governance. Robust ESG practices can significantly enhance a company’s reputation and market competitiveness.

Moreover, the ESG factor highlights the company’s proactive measures in addressing environmental and social challenges, such as reducing its carbon footprint, innovating eco-friendly products, ensuring

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fair labor practices, and contributing to community development. Companies that excel in this area not only comply with regulatory requirements but also go beyond them and set industry benchmarks for sustainability and ethics. This commitment to ESG principles can attract socially conscious investors, foster consumer trust, and build long-term resilience against regulatory and market changes. By integrating strong ESG practices, firms can ensure sustainable growth, mitigate risks, and reinforce their leadership.

Rule-based methodology We utilize and enhance the methodology developed

by Howard Yu at IMD’s Center for Future Readiness for their Future Readiness Indicator, but localize it to the country level (China) and customize it to different sectors. This includes careful consideration of data sources, verification and triangulation, variable selection, outlier management, and appropriate normalization to ensure the model’s strength and reliability. Additionally, we employ advanced data science tools such as text mining algorithms, factor analysis, and random forest to broaden our data sources and enhance the accuracy of our indicators.

Our China Company Transformation Indicator measures the transformative momentum of leading players by revenue and market capitalization in each industry. The Indicator amalgamates information and data including financial statement analysis, company strategy, innovation initiatives, market circumstances, supply chain links, government associations, media impact, customer relations, social responsibility, environmental protection, and more.

China Company Transformation Indicator

How we calculate the results Our data sources

Our statistical method

Our variables are based on hard data that is publicly available on company websites, announcements, annual reports, press releases, news stories, white papers, academic journal articles, and equity research reports.

Following the collection of company data, we perform pre-processing methods including identifying and removing errors and duplicates, filling in the blanks, and processing the outliers. Then we model the distribution of each variable based on their nature and characteristics and perform appropriate standardization.

We consult trustworthy databases like Refinitiv, Pitchbook, Factiva, and others, and utilize local data vendors like East Money Choice. Specifically, Refinitiv provides access to company financial data and economic indicators and news, analytics, and productivity tools. Pitchbook offers a detailed view of companies, investments, buy-side deals, investors, funds, financials, valuations, and more. Factiva is an archive of over 32,000 major global newspapers, newswires, industry publications, magazines, reports, and other sources.

The standardized data is passed to the indicator calculation operator. Equal weight is assigned to each factor and allocated evenly to inner variables. We compute the indicator based on the sum of weighted standardized data. The company’s overall ranking, together with factor-specific rankings is calculated.

Then we plug the results into algorithms designed to analyze their sensitivity, robustness, and validation.

These sources are also supplemented by information from public administrations including the National IP Administration and National Medical Products Administration. Data extracted from the above databases are cross-checked and calibrated with data from other sources, including Statista, Yahoo Finance, Wallmine, Stock.us, Google Finance, HKEXnews, and Wind.

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China Company Transformation Indicator

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China Company Transformation Indicator

Acknowledgements The research for the China Company Transformation Indicator (CCTI) was carried out by Wei Wei and Kunjian Li at IMD’s research hub in Shenzhen, China, under the supervision of research director Mark Greeven, Professor of Innovation and Strategy at IMD.

The IMD China Research Hub Team: • Mark Greeven • Wei Wei • Sophie Liu • Kunjian Li

For any enquiries into CCTI or IMD China, please contact Paul Hu at: paul.hu@imd.org

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China Company Transformation Indicator

Challenging what is and inspiring what could be, we develop leaders and organizations that contribute to a more prosperous, sustainable and inclusive world.

About the International Institute for Management Development (IMD) IMD has been a pioneering force in developing leaders and organizations that contribute to a more prosperous, sustainable, and inclusive world for more than 75 years. Led by an expert and diverse faculty, with campuses in Lausanne and Singapore as well as a Management Development Hub in Shenzhen, IMD strives to be the trusted learning partner of choice for ambitious individuals and organizations worldwide.

Our executive education and degree programs are consistently ranked among the world’s best. This consistency at the forefront of its industry is grounded in IMD’s unique approach to creating “Real Learning. Real Impact.” Through our awardwinning research, programs and advisory work, we enable business leaders to find new and better solutions, challenging what is and inspiring what could be.

To learn more, visit the IMD China Initiative website

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