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ROTATING TO THE NEW

HOW CHINESE MANUFACTURERS CAN REIGNITE GROWTH THROUGH DIGITAL TRANSFORMATION

OVERVIEW

China’s manufacturing sector has been going through a challenging period. Traditional drivers of manufacturing demand – investmentled growth policies at home and exports abroad – have weakened. Across manufacturing sectors, revenue growth stalled and profits fell from 2010 to 2015 (with a slight recovery in 2016). Returns to shareholders also fell steadily.

Digital transformation can play an important role in helping Chinese manufacturers improve performance and restore growth. In this paper we share the results of our research on the impact of digital on the performance of Chinese manufacturers and describe how companies can embrace new digital capabilities to sharpen their competitive edge and seize new opportunities in the digital economy. This will require comprehensive, long-range strategies to embed digital processes across organizations, using data to understand customer needs, and building new organizational capabilities.


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KEY FINDINGS

To help companies gauge their current level of digital transformation, Accenture has created the Digital Performance Index (DPI). This index assesses the level of digital investment and progress across four business functions: planning, manufacturing, selling and management. These measurements show the extent to which a company plans and executes digital strategies, creates digital products and services, uses digital in marketing, sales and customer service, and builds digital culture and operations within the organization.

In China, Accenture has formed a consortium with two institutions – the National Research Center for Industry Information Security and the China Service Alliance for Integration of Informationization and Industrialization (CASIII) – to assess the digital performance of manufacturing companies in China. The consortium applied the DPI criteria to 170 publicly traded companies from six key manufacturing sectors and found that these companies have, a relatively low level of digital performance. Only four companies (or 2 percent of the sample) scored among the top 15% among their respective industry peers in all four areas.

TRANSLATING DIGITAL INVESTMENTS INTO BETTER FINANCIAL PERFORMANCE

The results of the DPI assessment point to the opportunity for Chinese manufacturing companies to improve both profitability and growth. We found that companies that scored highest on the DPI metrics, have also been top performers financially. To understand the interplay between digital and financial performance, we combined and compared the DPI results with Accenture’s High Performance Business (HPB) framework – our method of evaluating business performance against industry peers. The HPB framework uses 14 indicators of financial performance on dimensions such as revenue growth, profitability, and growth of total returns to shareholders. We found that once DPI scores exceed a certain threshold – about 2.9 on a scale of 1 to 4 – the average financial performance increases by 54 percent. Given the limited adoption of digital technologies in Chinese manufacturing companies, this indicates enormous potential for overall performance improvement in the industry.



A FEW “DIGITAL HIGH PERFORMERS” STAND OUT

Few Chinese manufacturers achieved highly differentiated performance. These companies are far along in implementing digital capabilities across their operations and are making the organizational changes needed to maximize the benefits of digital. Only 4% of companies in our sample fall into this category of “Digital High Performers” that score highly both in terms of Digital and Financial Performance. Another group of companies, which we call Digital Leaders, have made digital transformation a high priority, but have not yet seen the financial results. About 19% of companies fit into this category. Another 19% of the sample are Business Leaders – companies that score highly on HPB criteria, but are not yet Digital Leaders. The majority of manufacturers in the sample – 58% of companies – do not score highly on either digital or financial performance metrics.



ROTATE TO THE NEW: UNLEASH THE POWER OF DIGITAL

Our research shows that most companies are capable of using digital technologies to create business efficiencies, but few are currently using them to substantially improve their performance for the long run. This is what Digital High Performers do and this is a critical requirement for Chinese manufacturers that hope to find new sources of growth. To be more like Digital High Performers, manufacturers need to deliberately plan to change their organization perpetually by deploying digital technologies to achieve their business’s required rotation to the new. We identify four imperatives for rotating to the new:


  • Transform the Core – Use digital technology to automate and streamline processes, creating a lower cost structure that will generate the profits to fund further efficiency gains and growth.

  • Grow the Core. Use digital technology to drive topline growth in the core business. Digital marketing and analytics, for example, can generate new insights that can lead to incremental sales; well executed web/mobile experience can activate new demand and help manufacturers expand into new markets.

  • Scale the New. Identify and build up new – businesses beyond the core. Create an effective innovation architecture such as innovation hubs, labs and partnerships and make the investments to take new businesses from concept to large scale.

  • Make a wise pivot. Balance the size and timing of core and non-core investments to keep the core business healthy as new businesses takes shape.