Business sentiment of Italian companies in China Post-Covid19

Asian Development Prospects and challenges under the Pandemic
Shanghai, Friday May 9th 2020
Article by Mattia Marino, CEO, Ambrosetti (Beijing) Consulting Ltd.


Business sentiment of Italian companies in China Post-Covid19

On May 9th 2020, I had the opportunity to speak at the “Asian Development Prospects and challenges under the Pandemic” webinar, in occasion of the launch of the Boao Forum for Asia 2020 Flagship Report at the presence of former PBOC Governor Zhou Xiaochuan and chaired by Secretary General Li Boaodong.

I was asked to share the outlook of the Italian investments in China under the pandemic and after it.

With the mandate to represent the largest part of the Italian business community operating in China, I decided to briefly interview in advance the members of the Ambrosetti Community | China Chapter. They represent a good sample of the largest and better-established Italian firms in the PRC, so I thought that their contributions would make my speech more significant for the audience.

With limitations to mobility in place, and a number of expatriates still stranded abroad (namely, outside Mainland China, from my point of view), the exercise had to go through a number of wechat and zoom calls, which I realized can be an excellent tools when you are communicating with fine minds with whom you have and established rapport of trust. I thank them for sharing their views with great sharpness and frankness.

Here is the summary of what turned out to be my speech to an audience of international economists; Asian ambassadors to China, Africa and Middle East; and Asian firm that are executive’s members of the Boao forum for Asia.

When the Covid-19 epidemic hit, Italy was coming out from 2019 already not in a great shape: a sluggish GDP grow of +0.3% (versus an average 1.3% of the Euro area), a 9.7% unemployment rate and an export growth of 2.3% vs 2018, that resulted in a loss on the whole world quota.

With this unimpressive pedigree, when the epidemic hit last February our country was weak and unprepared: way before the lockdown hit Italy in early March the mobile phones of Italian subsidiaries’ CEOs expatriated to China have started to ring in search of clues.

At that very moment (mid-end of February), the Chinese subsidiaries of the Italian firms (like those of other countries, of course) in were already back to work in the new post-Covid19 normal and had accumulated a new set of skills and expertise. They were remotely managing the state of health and safety of their employees had designed and fined tuned in different rounds the strict measures to allow workers into factories and employees to their desks, and most of them already screened suppliers and purchased masks and other safety gears to allow local plant to re-open.

What shall we do? How did you do?
These were the most common questions.

Next, they were invited to chair or guide their HQs management committees and help the parent to navigate through uncertainty. Then the pandemic exploded in Europe and Americas and it was clear that what initially seemed a “China problem” was becoming everyone’s.

Our internal think tank estimates year-end Italy’s GDP for 2020 is -8.5%, with about 17% of companies that will experience financial tensions of many ways, from cash flow shortages to bankruptcy. This of course will also mean, consequently, that a number of Italian companies that have invested in China will struggle financially and may need to withdraw or discontinue operations. Travelling is disrupted and Covid-19 has already changed the way businesses are run internationally: zoom calls have substituted face-to-face meetings and ad significant decrease in international business travels is here to remain also after the pandemic. The overall number of expatriates will decline but, as a result, the role of the expatriate will go back to its origins:

that of the market sherpa, the expert consulted across the organization when it’s the time to take decision for the market, the man trusted by the board.

Italian investments in China

From the voice of the local managers, the Covid-19 will express a level of adjustment towards Italian investments in China, which can be classified as follows:

  • Companies that sell in China the Italian lifestyle. These firms mostly produce in Italy and that will not change: they are luxury brands that made the Made in Italy their flag, Italian gourmet products, wines, jewelry, high-end cosmetics, and luxury sports cars. China was one of their key market before the Covid-19 and the epidemic will not change that. Possibly, for some, the next six months will see a sharp increase of mainland sales for the simple reasons that consumers do not travel and they will buy more
  • Companies that produce or assemble in China, with a technological core coming from the HQs (or from abroad, in general). These firms will need to readjust: the pandemic has clearly shown that the extensive search for the lowest possible production cost with a global supply chain is a risky proposition and does not allow the company to reposition in case of systemic Companies that are falling into this category can be divided in two:
    • Those who sell to final consumer or mostly to Chinese B2B, they shall likely consider having a production/assembly facility in each of the three main markets: Italy for Europe, China for Asia, and the USA for the Americas. With some level of flexibility to fine tune adjustments between
    • Those who are part of an integrated supply chain of multinational companies. These ones will necessarily need to follow their core clients and follow their – if any – relocation decision outside of China. Alternatively, more likely, expand their production where the American, Japanese or so will decide to expand
  • Companies operating in high tech areas. These firms, often state owned enterprises, will feel the political pressure from Italy strategic allies in particular in the areas of core technologies for the 5G, pharmaceutical and biotechnological research, and most of all industries linked to national security. These companies were already suffering a “certain degree of pressure” as the trade war between the USA and China escalated. The Covid- 19 led to  mutual  accusations  between  the new  cold war rivals, and this will accelerate and aggravate the tension.

Overall China, if it plays well its cards, will emerge from the Covid-19 pandemic economically stronger (as it controlled the virus first, and better) and geopolitically more assertive as it helped other countries both through the sanitary emergency to fight the virus providing guidance, as well as to counterbalance the economic slump by providing lines of financing.

Italian companies shall be wise enough not to be trapped into the intricacies of a geopolitical confrontation between the USA – that will continue no matter what president is elected in November 2020 – and China. Italy has everything to lose in taking any side. It shall instead maintain its wheel focused on business: market growth for the current (and likely the next) century is and will be mostly Asia, and Covid-19 has acted as a catalyzer in accelerating the uprising of Asia.

China from it side… shall only be wise enough to avoid faulty moves and lose a game that it has already won.

I believe it is time for its political leadership to be less secretive in the decision-making processes, thus providing more guidance and reassurance for companies that invested in the Country. In fact, in a moment when the control of risks has become the new imperative, visibility about the future changes to the investment environment will be required before investing more.

Article by Mattia Marino, CEO, Ambrosetti (Beijing) Consulting Ltd.

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