2 JANUARY 2023

The Great China

Recovery of 2023

Is it time to start reinvesting in your

China opportunity?
SEARCHLIGHT MANAGEMENT CONSULTING

EARLY COVID DAYS – ECONOMIC IMPACT AND RECOVERY IN

2020-21

U
n"l early 2020, when the first news about COVID-19 (at that "me, loosely
termed “coronavirus” emerged, China was on a tremendous path to be a
dominant player in the world - shaping consumer trends, global opinion and
the power-structure of the 21st century.

Businesses have been upbeat about China from the late 1990s, oIen seJng up China
as a dis"nct business unit repor"ng directly into global management instead of going
through an “Asia” or “Interna"onal” management layer, inves"ng in China-specific
brands, China-based manufacturing, M&A specific to China and so forth.

The early days of COVID seemed to show a resilience in China that was reassuring to
global businesses. Ini"al management of the situa"on was effec"ve, by April 2020
China was back to normal, although with precau"ons in place and by Q3 2020 a
recovery was well under way. Travel, however, both domes"c and interna"onal, was
badly affected.

All this while, the rest of the world started a cycle of lockdowns and remote working
that con"nued for several months and China seemed like the one stable place in a
world ravaged by COVID.

2019 2020

Preference for local brands increased in 2020 v/s 2019

0.7

0.525

0.35

0.175

0
Local Foreign Unsure

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Chinese ci"zens expressed pride and confidence in their government and this
expressed itself in a stronger desire to stay in China, consume Chinese brands and
adopt a lifestyle that was dis"nct from the rest of the world. Over 2021, it was
star"ng to become apparent that foreign brands in China were in a much more
sensi"ve place than before, with several brands succumbing to backlash from
adver"sing or PR campaigns that appeared insensi"ve or disrespecWul of Chinese
people and their customs.

2022 – ZERO COVID, LOCKDOWNS AND A PERCEPTION OF

BEING BEHIND THE WORLD IMPACT CONFIDENCE
As the rest of the world came through the worst phases of mass-infec"ons and
deaths from COVID and started to recover, China con"nued with what had worked
before- restric"ons, tes"ng and quaran"ne.

Chinese consumers regained confidence in 2021, only to lose it in 2022

130

125

120
Index points (100 = neutral)

115

110

105

100

95

90

85
Jul '19
Nov' 17
Jan '18
Mar '18
May '18
Jul '18
Sep '18
Nov '18
Jan '19
Mar '19
May '19

Sep '19
Nov '19
Jan '20
Mar '20
May '20
Jul '20
Sep '20
Nov '20
Jan '21
Mar '21
May '21
Jul '21
Sep '21
Nov '21
Jan '22
Mar '22
May '22
Jul '22
Sep '22

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SEARCHLIGHT MANAGEMENT CONSULTING

In 2022, controls intensified into hard lockdowns affec"ng large propor"ons of the
popula"on The impact on the economy was very tangible and visible, with a very
large number of retail businesses shuJng down or scaling back.

Retail sales of consumer goods shows drop in first half 2022 v/s 2021
4

3.5

2.5
Trillion RMB

1.5

0.5

0
Aug Sep Oct Nov Dec Mar Apr May Jun Jul Aug
2020-21 Urban 2021-22 Urban 2021-21 Rural 2021-22 Rural

Monthly retail sales value of consumer goods in urban and rural China 2021-2022 in trillion RMB
(*no data for Jan-Feb 2022 so we skip that in the comparison)

THE END OF ZERO-COVID AND THE SUDDEN OPENING UP OF

CHINA
In December 2022, the government suddenly reversed all restric"ons, stopped all
monitoring of health codes, tes"ng and any manner of control on people’s
movements. In the absence of adequate prepara"on in terms of mRNA vaccines,
hospital capacity and basic flu medica"on, China is seeing a massive rise in COVID
cases with a corresponding fatality rate, especially amongst the elderly and those
with underlying condi"ons. However, this is expected to peak in mid-January and
then start going down, with all expecta"ons that by late February, China will have

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SEARCHLIGHT MANAGEMENT CONSULTING

built enough herd immunity that they can then con"nue to live with COVID as the
rest of the world is doing.

In the mean"me, restric"ons on travel have been liIed, inbound quaran"ne has been
abolished and an official announcement on the resump"on of issuing new passports
has been made. This ar"cle shows how within a half-hour of this announcement,
travel queries went up tenfold from a year ago.

WHAT IS LIKELY TO HAPPEN IN 2023 AND BEYOND?

We saw in 2020 that the Chinese economy rebounded from the disrup"on of the first
2 quarters very quickly. We believe that in 2023, the underlying recovery will be just
as swiI and by H2 2023, we will see key economic indicators at least on par with
2019, if not beler.

Rapid GDP growth in 2021 bodes well for post-COVID recovery in 2023
10%

8%
GDP year-on-year change

6%

4%

2%

0%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Gross domes"c product (GDP) growth rate in China 2011-2027

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SEARCHLIGHT MANAGEMENT CONSULTING

The government has recognized the need to bring back economic growth and has
issued a raI of policies to s"mulate growth. The document lis"ng this (in Chinese) is
here. A summary of the key points is below:

• Expansion of tax relief, VAT credit rebate policy

• Deferring social security payments and housing provident funds
• Deferring principal and interest repayments for MSMEs
• Boos"ng infrastructure spending
• Alrac"ng foreign investment
• Increased government purchasing and loan support for MSMEs
• Specific measures for automobile, avia"on and logis"cs industries
• Employment boos"ng measures (incen"ves to companies for recrui"ng fresh
graduates)
• Rural subsidy packages
• Increased coal quotas to ensure energy supply, promo"on of new energy projects

In addi"on to these central measures (announced mid-2022 and likely to be followed

by more as China opens up in 2023) various provincial and local governments
announced addi"onal policies and incen"ves of their own, notably Shanghai, which is
the commercial capital of China. Some recent outlines for ongoing policy ini"a"ves to
drive growth are listed here.

PRIVATE INVESTMENT CLIMATE

China has, for a long "me, been a hot market for VC and PE funds looking to find the
next unicorn to ride to the stock-market.

In recent years, government restric"ons on companies that are listed outside China,
the crackdown on tech and some of the de-lis"ngs from the NYSE have prompted
cau"on and pessimism. There has also been a percep"on that the ini"al crackdowns
on both Chinese firms listed overseas and some retalia"on towards US listed firms
aIer their regulatory moves against companies like GRINDR and Tiktok foretold a
more inward-looking tech environment.

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SEARCHLIGHT MANAGEMENT CONSULTING

As the market re-opens and the economy grows again, it is very likely that
investments will also come back, especially since a lot of funds are China specific and
do not have a remit to invest elsewhere. This ar"cle provides some background on
the atmosphere around mid-2022 and even at that "me, with no end to Zero-COVID
in sight, it was apparent that there was a lot of investment money in China chasing
very few opportuni"es. That will change from next year.

WHAT ARE SOME OF THE KEY INDUSTRIES TO KEEP AN EYE

ON?
Travel will rebound very quickly – before 2019 China was the source of the largest
component of outbound travel globally and this will very likely be the case once the
current wave of COVID infec"ons end, normal passport issuance resumes and other
countries drop any restric"ons on passengers arriving from China.

Tourism revenue drop in 2021, set to come back in 2023

7,000 6,630
5,970
6,000
5,400
5,000 4,690
Revenue in billion RMB

4,130
4,000 3,730

2,950 2,919
3,000
2,590
2,250 2,230
2,000

1,000

0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Revenue from tourism in China 2011-2021

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SEARCHLIGHT MANAGEMENT CONSULTING

Luxury and lifestyle brands will also see a rebound and in a reversal of sen"ment, we
an"cipate a great opportunity for interna"onal brands to regain the affec"on of
Chinese consumers.

With the eventual change in habit of wearing masks, cosme"cs will make a major
comeback, aIer three years of becoming a literally invisible category.

Healthcare is likely to see a major boost with consumers taking more proac"ve
interest in managing their health going forward, buying products and services
(including insurance) beyond what they get as part of their provident fund / social
security benefits.

Health expenditure 6.7% of GDP, likely to rise post COVID reopening

8,000

7,000
Health Expenditure in billion RMB

6,000

5,000

4,000

3,000

2,000

1,000

0
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021

Health expenditure in China 2001-2021

Confidence in the China real-estate market has been shaken by the news about
Evergrande. Addi"onally, the events of 2022 have created a large sec"on of middle-
class urban Chinese consumers who will be keen to look at opportuni"es outside
China, if not for themselves then for their children.

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SEARCHLIGHT MANAGEMENT CONSULTING

Interest in overseas educa"on and real estate will build. That increase in open-ness to
the rest of the world will also augur well for content and media brands as well as
brands that seek to represent a lifestyle and culture.

Fueled by over-leveraged developers, China real-estate heading for a

slowdown
11,000

10,000

9,000
Price in RMB per square meter

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0
1998
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Average real estate sale price in China 1998-2021

HOW CONSUMERS CHANGED OVER THE PANDEMIC

Some insights on topics that have become important over the course of 2022 and will
likely con"nue to have significant interest going forward comes from a study of the
social plaWorm Lille Red Book (⼩红书) which hosts long-form content on a wide
variety of topics where consumers seek informa"on and read about trending topics.

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SEARCHLIGHT MANAGEMENT CONSULTING

A study published by Lille Red Book and Ins"tute of Sociology, Chinese Academy of
Social Sciences establish that oIen, trends in social media and searches for content
are precursors of significant growth in the categories related to the topics of
heightened interest.

Studying some of the search and content trends on Lille Red Book over 2022 shows
us some ways in which consumers have changed over the last couple of years and
how that may affect their behaviour in the near future.

An increased focus on mental wellness

While, during the course of 2022, consumers had limited avenues for dealing with
stress and mental pressure, the end of restric"ons on movement and interna"onal
travel will likely see them dealing with stress in mul"ple ways. Ongoing, con"nuous
lifestyle efforts like yoga, medita"on and crea"ng a beler home environment will
remain, but will likely be supplemented with travel and other ac"vi"es and
experiences to create a sense of a break from rou"ne and everyday pressures.

That focus on mental wellness expresses itself in the next two trends – showing how
consumers want to be able to beler manage their mental health while at home, as
well as use real or virtual travel experiences to create opportuni"es for releasing their
stresses and taking a break from their everyday lives.

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SEARCHLIGHT MANAGEMENT CONSULTING

Home improvement and accessories to create a more complete sanctuary

Over 2022, par"cularly aIer the lockdowns, people are more aware of their homes
and how, in order to spend more "me there in comfort, homes need to start
suppor"ng different aspects of their lives beyond just being a place to return to from
the outside world. Workspaces, enhanced entertainment op"ons and a more
aesthe"cally pleasing environment are all part of this, as are kitchens as people may
con"nue to choose to do more home-cooking than pre-COVID, now that it’s become
a habit

Escaping city life – greater interest in the outdoors and nature

There is significantly increased interest around “escapes” of various forms – both real
escapes on trips far from home as well as some mini-escapes nearby and even virtual
escapes within the confines of home. This will also feed back into the travel boom but
with some specific characteris"cs around the kinds of travel people book, and will
create a market as well for the accessories, skills, tools and other paraphernalia that
surround such ac"vi"es.

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SEARCHLIGHT MANAGEMENT CONSULTING

WHAT WILL IT TAKE FOR BRANDS TO SUCCEED IN CHINA IN

2023 AND BEYOND?
There will be three key factors that determine a brand’s ability to develop rapidly in
the near future in China.

1. Ability to help Chinese consumers live the life they visualize and want for
themselves going forward
How this expresses itself will vary by product categories, par"cularly luxury,
fashion, cosme"cs, travel, educa"on and real-estate. Brands need to understand
and empower the aspira"ons of their core audience.

2. Availability and salience within China

This will require a thorough understanding of where Chinese consumers go for
brands and how to stand out in the rapidly evolving ecommerce, social media and
digital environment. One of the longer-las"ng changes from the 3 years of zero-
COVID and the last year of strict lockdowns is the ever-accelera"ng trend towards
online channels (both tradi"onal e-commerce and O2O channels) to buy products
– making these more important than ever for both physical availability and
salience. Apart from new, evolving channels, the ways in which brands use these
to communicate and sell has evolved – the evolu"on of “direct-broadcast” sales

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events by influencers or brand owners being a key new prac"ce of the last couple
of years.

3. Adaptability and sensi"vity to Chinese consumers, culture and recent history

While there will be increased openness to interna"onal brands, lifestyles and
concepts, brands need to con"nue to be sensi"ve to Chinese culture and
tradi"ons. Given some of the reac"ons to China’s opening up, Chinese consumers
will be looking to brands that help them find their place in a world that has
become somewhat forbidding and hos"le to them in the last few years.

THANK YOU FOR READING. HERE’S WHAT YOU CAN DO NEXT

Share: We hope you found this opinion-piece useful. If you did, please help us by
forwarding it to any of your professional connec"ons that you think may benefit from
it.

Reach out and talk to us: If you’d like to know more about how to build your business
in China over the coming months and years we’d be happy to have a call to
understand your ambi"ons and see if there are areas in which we can add value.
Please write to us at enquiries@searchlightchina.com

To see some of the clients whom we’ve helped and read their tes"monials visit
hlps://searchlightchina.com/tes"monials-2/

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SEARCHLIGHT MANAGEMENT CONSULTING

MORE ABOUT SEARCHLIGHT

Founded in 2020, in the early days of COVID, Searchlight is a bou"que management consul"ng firm focusing
on helping brands iden"fy the core business opportunity, the right business model and the brand
architecture and marke"ng strategy to deliver on them.

We are, by very conscious design, a bou"que consultancy where the founders want to be personally involved
in every client. We therefore limit ourselves to very few clients each year, ensuring that we always have the
"me to do jus"ce to each of the very interes"ng business problems we’re privileged to work on.

We work with our clients in a highly collabora"ve manner to co-create strategies that build on the
tremendous internal knowledge of each company and our unique perspec"ve as China specialists in fields as
varied as start-ups, ad-tech, hospitality, food services, FMCG and medical devices. We have varying technical
backgrounds covering business strategy, brand management, crea"ve and media strategy, data analysis,
CRM, e-commerce and sales management. We have experience in both B2B and B2C business models.

In our short history as a consultancy so far, we have had the pleasure of working with some very interes"ng
clients, some of whom were already well-known before we met them and some of whom are now on the
road to fame. Amongst these are mul"na"onal brands like J&J (Acuvue), Pandora and the global medical
device brand Hollister. We have partnered both established Chinese brands like Sunner (a listed company
whose core business is processed chicken) and up and coming brands like Flowerplus and UrCoffice.

We have some brief client quotes below. Detailed tes"monials as well as our blog posts and thoughts on
marke"ng and business in China are available at our website www.searchlightchina.com

“Global perspective with a local focus, great thinking with effective

execution set Searchlight apart from other consulting companies…”
- 李婧 Jing Li, General Manager J&J Vision Care China

“Working with Searchlight is like a shot of strong espresso; providing a

boost of clarity, energy and focus both for me and for our business…”
-⾼颖佳 Karen Gao, Founder and CEO Unibrown Coffee

“In this fast changing market Searchlight helps brands cut through
the fog and find their own path…”
-余敦 Simon Yu, Founder and CEO Little Ondine

“Searchlight helped to make China the first successful B2C market for
Hollister worldwide…”
-王兴梅 Daphne Wang, General Manager, China
Business Director, Asia Hollister Medical

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SEARCHLIGHT MANAGEMENT CONSULTING

Some of our key personnel and their background and experience are introduced
below:

Jacquelyn Wu: Founder and Managing Partner

Jacquelyn has 22 years of work experience at agencies and brands, with over
15 years of that experience in China. AIer working on key accounts like KFC,
McDonald’s, Dove, Kotex, SK-II at agencies like Ogilvy, DDB and Leo Burnel in
her agency career Jacquelyn has had several senior marke"ng leadership
roles: Global & China Brand Director at Lee Kum Kee; China Marke"ng Director
at Campbell’s Soup; Brand GM, at Octave, and Greater China Marke"ng
Director at JDE Coffee. Jacquelyn’s area of focus is brand management and e-commerce.

hlps://www.linkedin.com/in/jacquelynwu/

D.Sriram: Co-founder and Managing Partner

Sriram has over 30 years of experience in Asia and over 12 in China across
agencies, ad-tech and consul"ng. He has held posi"ons like the Asia CEO of
Starcom Mediavest Group, China COO of Aegis and China Chairman of global
marke"ng consul"ng firm Ebiquity. He has also had a 7 year career in ad-tech,
with the successful China launch and exit of eBUS as well as a s"nt as COO at
North Asia mobile and data startup Vpon.Sriram leads analy"cs and business
strategy and has also done execu"ve coaching for some of the CEOs of our client companies
hlps://www.linkedin.com/in/srirambiztransform/

Corin Somerville: Principal Consultant

With 20 years experience in China and roles leading planning and strategy
development at both crea"ve and media agencies, Corin brings a combina"on
of content and contact planning experience to create uniquely effec"ve
communica"ons and connec"ons plans. He specializes in developing
communica"on strategy – content and contact

hlps://www.linkedin.com/in/corinsomerville/

Joan Wu: Senior Consultant: Bryce Whitwam: Strategic

E-commerce strategy and
sales planning
Joan has over 25 years of
experience in sales
management and
ecommerce, having held
senior posi"ons like Na"onal
sales director of imported brands at Mondelez
China, Head of ecommerce at JDE coffee, GM at
Shanghai Baoli (Baozun) – managing a division
specifically for FMCG giant LIBY and GM of the
ecommerce division of LIBY Group
Advisor on CRM
Bryce has over 30 years of
experience in marke"ng
services, 19 of that in
China. He set up and built
Wunderman over a 11 year period, leaving as
their Greater China CEO to join MRM as CEO for
China for about 2 years. Bryce specializes in
retail, CRM and loyalty marke"ng.

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SEARCHLIGHT MANAGEMENT CONSULTING

If you’d like to get to know us beler, please do reach out at

enquiries@searchlightchina.com and we’d be happy to set up an introductory call.

Our best wishes to you and your business in 2023. We hope you will achieve your
ambi"ons and have a wonderful and prosperous new year.

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