(Yicai Global) April 11 -- China’s retail and auto sectors face challenges such as weak consumer confidence, a shift in the country’s role in global supply chains and high inflation, although some problems have been resolved since China relaxed Covid-19 controls, two experts from global consultancy firm AlixPartners told Yicai Global today. 

Cutting costs, diversifying supply, use of artificial intelligence and government support policies like tax reductions and subsidies are important ways to cope with these challenges, said Stephen Dyer, co-leader and head of the Asia automotive practice at AlixPartners China, and Kenny Yao, director of AlixPartners China, in an exclusive interview. 

Below are excerpts from the interview.

Yicai Global: How do you see the challenges facing some industries after China’s relaxation of Covid-19 controls? 

Steve Dyer: We’ve seen over the last year disruptions to the supply chain, a massive increase in raw material costs, geopolitical instability and a mismatch of supply and demand with semiconductor chips.

The raw material cost increase issue has been solved, but there still seem to be some issues with consumer confidence, uncertainty about what the global supply chain will look like, and inflation. Some key export markets as well as some companies are seeking secondary alternatives to China to mitigate the risks of supply chain disruptions. 

Kenny Yao: I can give some perspective on the retail area. Not all consumer goods behaved the same during the pandemic, as things like groceries and food were less affected. We have observed the trend for things to go online, and it is still progressing. 

Another thing is China’s position in the supply chain. International companies rely on China, but they also want to put some emphasis on supply chains outside China, not only because of cost, but also to avoid risks. This is something we have seen happening.

Besides, due to the economic slowdown and high interest rates, consumers try to spend less. The overall situation also impacts China’s exports. 

YG: How will companies cope with these challenges?

Yao: In the short term, what companies need to do is survive, which means they need to reduce costs to make sure they are financially healthy. Increasing sales is more difficult in an economic downturn, so costs are very important. 

What companies need to manage in the mid- to longer-term is structural change, and in the even longer term they also need to think about how they can build up their other advantages. 

YG: What about the auto industry? Do you think price cuts are necessary for companies to survive? 

Dyer: Cutting prices is more of an aggressive, proactive, competitive move to gain market share, as the auto industry is a very asset-intensive industry with high fixed costs that need to be covered by sales volume. However, cutting prices is not a sustainable business model.

We have seen some multinational companies begin to balance their supply chains through the concept of ‘China+1.’ Instead of focusing solely on China as the low-cost producer for some of the components that they need, they’ll add at least one other country or region to mitigate supply chain risks. To make up for the cost of diversifying supply chains, improving productivity, cost efficiency and automation and embracing digital technologies will also be important for reducing costs. 

Chinese carmakers are also increasing exports. They are producing products that are much better quality than in the past. They look good, have good styling, and tend to include a lot of extra technology features and also some advanced driver assist systems. 

YG: Who do you expect to survive in this new environment?

Dyer: I won't talk about specific carmakers, but it seems that there are advantages and disadvantages to being a privately owned company versus a state-owned company. The state-owned companies have a lot of resources. They benefited quite a bit from partnering with multinational automakers over the last two decades, and by having resources or government access that private car companies historically didn’t have.

But private companies have to fight on their own and figure out a way to succeed, and they’ve learned a lot of hard lessons, so I wouldn’t be surprised to see some of them becoming successful. I think it's only a matter of time before we see Chinese automakers becoming global brands. We're at the phase now where that seems to be accelerating.

YG: What do you think artificial intelligence will bring to the retail and auto sectors? 

Dyer: Companies offering tech like ChatGPT really are making breakthroughs, opening up a whole new world of possibilities that we haven’t considered before. Artificial intelligence tools will help customer engagement, providing a better experience in a cheaper way. 

Yao: I agree with Steve that it's more like a tool that can help to generate new business models or to make things in a more efficient way.

ChatGPT can help us because of AI’s capability to handle huge amounts of data to make something which was not feasible in the past. 

I also see that AI is built on data that humans already have, built on knowledge people already have, so it will not help in something that people don’t know. For example, it will not tell you how we get rid of Covid-19. 

YG: What do you think of the Chinese government’s policies to boost consumption? 

Dyer: Following the end of subsidies for new energy vehicles in December last year, we've seen a lot of local governments and provincial governments step up and offer subsidies to support their local players.

It's clear that subsidies have a positive impact on demand. And I think one of the main things that the Chinese government could do is to consider additional purchase tax rebates or additional subsidies for investment. In certain areas, these measures have historically had a positive impact on economic growth.

I guess anything that can improve consumer confidence is also good. Restoring travel, both out of China and into China, is an important next step to get the economy back and running.

Yao: From the government perspective, one key thing is for people to believe that our industry, our overall economy is still healthy. Although we are facing some challenges in the short term, in the long term, we can recover. Tax reductions, subsidies and inviting global leaders as we saw recently are all ways to build confidence for industry and consumers.

Editor: Tom Litting