Will China lead the twin transformation post-covid?

China

By Jacques Bughin and Sybille Berjoan

The Covid-19 pandemic has led many corporations to retrench in the short term—but the saying goes that no matter large are the turbulent times, companies must re-relaunch their going concern fast – and in particular, their innovation pipeline if they want to pre-empt long-term performance erosion.  

This narrative of « agile innovation » has proven right in previous crises such as the 2000 internet bubble or the 2008 financial crisis. It also holds at covid time, but with a twist: it has become second to the benefits of scaling a twin transformation of digitization and better sustainability practices.  

A fringe of resilient corporations is already operating at the frontier of this twin transformation and as a sign of the time, are more often witnessed among Chinese than European or US companies.

On top of health issues, the covid-19 pandemic has brought along lockdown measures that badly hit economic activity. No company or industry has remained unaffected. Some companies had the chance of good tailwinds– in healthcare or technology sectors, for instance-. Others were less fortunate, and faced major headwinds, – in sectors like consumer goods, or automotive.   

Faced with sudden crisis, corporations often pick a strategy, from exiting the market, retrenching from some activities, persevering through debt financing, or innovating. A set of factors guide companies’ choice. For example, SMB’s are notoriously financially fragile, with a few months of cash to finance their operations, limiting their choice of sticking to a persevering strategy for long. Companies built up on strong organizational agility are much quicker than others to pivot towards innovations.  

Covid-19 should not be an exception to this picture, as per our recent research. The dominant strategy when the Covid-19 pandemic first hit was about retrenching. A large portion of companies reduced their innovation spending, and R&D spent went down by about 10%.  Among the 45% of the best global firms (growing their profit at an annual rate above 5% during pre-Covid), 20% went to shrink and another 20% was able to maintain its revenue trajectory of pre-covid. This segment quickly re-accelerated spending on innovations by end of 2020, and now anticipates to expand trajectory higher than pre-covid, for this year.

But the Covid-19 has also brought its own peculiarities. In particular, Covid-19 has led to a twin transformation: on one hand, in line with the work by Perez that major economic crises often give birth to a major technology shift, it has led to acceleration of digital technology adoption. One obvious example is the diffusion of technologies to support work-from-home. On the other hand, corporations have been accelerating their ESG initiatives, with some clear success. Those actions follow the strategic priorities, set up by 40% of large corporations, of sustainable development and digital transformation acceleration to re-build competitive advantage. 

One critical element for this twin transformation to succeed is that companies can operate the twin transformation at the frontier. The frontier, in this case, is defined by the extent to which companies have adopted a wide scope of sustainability projects and digital technologies, and have scaled those twin initiatives, versus simply experimenting or piloting before scaling.  

Our research estimates that the average twin score remains low, at about 55%, highlighting that companies are only at the start of this type of transformation, — and also implying in passing that this low maturity may lead to the minimal business upside. 

Yet, we also find that a set of “pioneers” (roughly the top 20% of firms exhibiting the most mature sustainability and technology scores above 7,5/10) is showing a rather new story. 75% of them have already rebounded above and beyond their long-term profit trajectory of pre-covid time. This contrasts with the other companies, reaching resilience in only 25% of cases.   

Of notice, this delivery of twin transformation programs has been the primary cause of fast rebound for those pioneer corporations in all sectors of manufacturing and service industries altogether. This strategic focus has proven to more than double resilience than if companies would have followed only the traditional recipe of accelerating innovation.  

China has been getting out of the Covid-19 pandemic faster than elsewhere, for multiple reasons. One which has been overlooked is the leadership taken by Asian (and mostly Chinese) firms in engaging into this twin transformation. According to Arabesque S-Ray data, large Chinese firms have already a sustainability score in-between Europe and US, and are tapping already extensively in new digital technologies such as Artificial Intelligence, RPA and others. As Chinese firms are foreseeing large synergies between digitization and sustainability, the portion integrating both practices, happens to be larger in China than in Europe and US. Even better, the majority of large Chinese twin transformers firms ( 55% versus barely 1/3 only for US and European ones) is a pioneer, that is, exploits those new practices at scale

What can one thus conclude from this twin evolution? Business-wise, the future post-covid must include the twin transformation; geopolitically-wise, this future is getting shaped especially by China, and the rest of the world is taking notice. In our survey, a large part of European companies clearly saw how a crisis may change the world—while, at the start of the pandemic, only 12% thought Chinese firms will emerge more competitive after, than before, the covid-19, this belief is now shared by 4 times as many firms than one year ago. 

Be the new world start. With the hope that Europe takes notice and agile at scale actions on twin transformation.

 

About the Authors

Jacques Bughin

Jacques Bughin is Professor, Chaire Gillet of Management Practice, at the Solvay Business School, Free University of Brussels, and among others, a former Director of McKinsey and of the McKinsey Global Institute. 

Sybille Berjoan

Sybille Berjoan leads the Accenture Research European team and drives the European Thought Leadership agenda.

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