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InterChina: Founded in 1994 © InterChina Confidential Exclusive China member of Strategy | Corporate Finance www. InterChinaConsulting.com www. InterChinaPartners.com China 2020 Time to Double Down

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Page 1: China 2020 Time to Double Down 2020-Executive... · 2019-11-26 · Estimated CAGR by Category (2017-2030E) Food Consumption CAGR by Category (2013-2018) Confidence Driver 1- Higher

InterChina: Founded in 1994 © InterChinaConfidential

Exclusive China member of

Strategy | Corporate Financewww.InterChinaConsulting.comwww.InterChinaPartners.com

China 2020Time to Double Down

Page 2: China 2020 Time to Double Down 2020-Executive... · 2019-11-26 · Estimated CAGR by Category (2017-2030E) Food Consumption CAGR by Category (2013-2018) Confidence Driver 1- Higher

© InterChinaConfidential

8 M&A deals to be closed in

2019.

27 Ongoing mandates in our execution pipeline

200Transactions we have closed

50 dedicated staff members, in

Shanghai, Beijing and London.

26 years of doing business in China.

Top 5independent advisory firm

in China.

30 strategy consulting

projects on top-line growth issues in 2019.

Information Sources of our annual Forecast Report Based on 100+ interviews with China-based senior executives conducted over past 2 months, together with our own project work …

“In 2019 we have conducted over 2,000

executive level interviews related to 35 M&A mandates and 30

strategy consulting projects”

2

Page 3: China 2020 Time to Double Down 2020-Executive... · 2019-11-26 · Estimated CAGR by Category (2017-2030E) Food Consumption CAGR by Category (2013-2018) Confidence Driver 1- Higher

© InterChinaConfidential 3

Big Picture for 2020

Page 4: China 2020 Time to Double Down 2020-Executive... · 2019-11-26 · Estimated CAGR by Category (2017-2030E) Food Consumption CAGR by Category (2013-2018) Confidence Driver 1- Higher

© InterChinaConfidential

01China: Headwinds vs Government Stimulus• Difficult balance: reform (deleveraging) vs stimulus. • Manufacturing: Realignment + consolidation • Consumption: single-digit growth with structural changes.• Services: Double digit and a key driver

02 US-China Trade War: • Manageable• Accelerate China’s self-reliance • Some relocation but not dramatic.

03 MNCs in China: Impacted, but not as much as market noises suggest• FDI with single digit growth, stable numbers.• … Suffering in areas where excess capacity and changes of consumption patterns• … But growing on others: China demand + quality upgrade + consolidation.

2019 Review: Hectic year, uneven performance and MNC forced to change business model.

4Source: InterChina Interviews & Analysis

Page 5: China 2020 Time to Double Down 2020-Executive... · 2019-11-26 · Estimated CAGR by Category (2017-2030E) Food Consumption CAGR by Category (2013-2018) Confidence Driver 1- Higher

© InterChinaConfidential

2020: Not a crisis, but a slowdown with experienced stakeholders (government, corporates etc.) with the will to overcome

5Source: InterChina Interviews & Analysis

Economic Downturn Cycle: Will belonger than 2008 with only <1 year

Investment Environment For MNC: Much more improved in China now

GDP Growth: No shocking “collapse” now

Policy: Careful policy fine-tuning now vs 4 Trillion of monetary flooding

…?

2008

2009

2019

2020

2007-2008 2018-2020

6.6%↓6%

14.2%↓9.7%

2008

RMB 4 Trillion

2020

Note: *World Bank Ranking Of “Ease Of Doing Business”

2008 2019

Rank31*

Rank83*

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© InterChinaConfidential

Conclusion- Continuation of positive trends. A more negative scenario is possible in the medium-term if reforms stall

Scenario Possible Outcomes

Reform & Economic Stimulus Progress

• Strong central power• Reform roll outs will continue, but remain

patchy.• Trial and error approach means that

uncertainties will continue. • SOE’s likely to remain untouchable

Economic Performance

Maintaining of Momentum• Limited stimulus (investment, liquidity, subsidies, PPP).• Increasing competitiveness.• Slow but steady financial reform.• Continued consolidation• Maintenance of consumer confidence. • Evolving consumption patterns.• Social reforms.

GDP Growth5.5-6%

Inflation2.5~4%

RMBDepreciation

5~9%

LaborCost

3~6%

Source: InterChina Interviews & Analysis 6

Page 7: China 2020 Time to Double Down 2020-Executive... · 2019-11-26 · Estimated CAGR by Category (2017-2030E) Food Consumption CAGR by Category (2013-2018) Confidence Driver 1- Higher

© InterChinaConfidential

Estimated CAGR by Category (2017-2030E)

Food Consumption CAGR by Category (2013-2018)

Confidence Driver 1- Higher Consumption higher + better quality... A shift to higher value goods and a broad range of services, with higher e-commerce penetration

Med

. & S

ervic

e

Clot

hing

7.2%

Alco

hol &

Tob

aco

Tran

s. &

Com

m.

5.1%

Recr

eatio

n &

Edu.

4.2%

7.6%9.2%

Source: DBS Bank, EIU, NBS, Kantar, InterChina Interviews & Analysis.

40%

20%

0

30%

10%

50%

70%

60%

2000

2024

F

2006

2004

1990

2028

F

1992

1994

1996

1998

2002

2008

2010

2012

2014

2016

2018

2020

F

2022

F

2026

F

2030

F

Personal Consumption % GDPUrbanization RateE-commerce share in FMCG retail value (%)

Eggs

Beef

Fres

h Fr

uits

Grai

n

Poul

try

-0.4%

Pork

Fres

h Ve

g.

Milk

& D

airy

5.7% 4.7%4.6% 3.3%

2.9%0.9%

-3.1%

7

China Personal Consumption % GDP vs. Urbanization Rate vs. e-commerce penetration (main charts)With Shift From Basic Consumption to Service/Alternative Goods Consumption (two mini charts)

Page 8: China 2020 Time to Double Down 2020-Executive... · 2019-11-26 · Estimated CAGR by Category (2017-2030E) Food Consumption CAGR by Category (2013-2018) Confidence Driver 1- Higher

© InterChinaConfidential

Market Forces• Higher Demand for Quality & Comprehensive Portfolio of products• Service driven approach is becoming relevant• Price Trend upwards: Excess capacity reduction

Government Reform Open Up• Lifting of JV restrictions (auto, finance,

railway, healthcare). • Compliance will be positive to MNC (ie.

Corporate Social Credit System)• IPR Protection is working better • Foreigners are accessing R&D Subsidies.

Still protectionism… more focused

• Key State Owned Segments (Energy, Infrastructures, Basic Financing, Education)

• China 2025 will continue in different shapes

• Cybersecurity and Data• Social Control

Confidence Driver 2- Levelling the playing field in most segments. Unprecedented restriction lifting + Compliance Reform (Anti Corruption, Green China, Security, Taxes.. Social Credit System) + Consumer Trade Up… all benefit MNC’s.

8Source: InterChina Interviews & Analysis

01Market

02Opening

03Protectionism

“70% of China is being further liberalized, while the remaining 30% will be more protected… in the long run China will further liberalize as it consolidates its role of a

global leader”

- APAC President, Chemical.

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© InterChinaConfidential 9

No Easy Access To FinanceA New Industrial Paradigm

Demand Trade-Up• Comprehensive product mix. • Quality & standards.• Higher technology.

R&D And Product

Trade-Up

Need To Build Real

Sales & Marketing

Way To Market Has Changed

Stricter Environmental Protection • CAPEX. • Increasing costs.

Capacity Decrease• Over-capacity situation is starting to bite• Mainly closures of POEs (not SOEs) and “idle”

capacity.• Price spikes, supply problems.

Tax & Compliance • VAT.• Social security.• Anti corruption

Financial Deleverage• Borrowing money is almost impossible

for many non listed companies. • Listed companies have already pledged

their shares at higher valuations.

Network Financing• Cost is +400-600 points higher on

average than normal financial.• Banks refuse non-related cross

collateral, and are revising existing structures.

Source: InterChina Interviews & Analysis

Risk Driver 1- Manufacturing Readjustment (“Industrial Bubble”). Continued pressure leaves manufacturing companies with stark choice: “The end of the traditional Chinese Entrepreneur?”

Page 10: China 2020 Time to Double Down 2020-Executive... · 2019-11-26 · Estimated CAGR by Category (2017-2030E) Food Consumption CAGR by Category (2013-2018) Confidence Driver 1- Higher

© InterChinaConfidentialSource: Morgan Stanley, InterChina Interviews & Analysis

Most industrial conglomerates move a small portion of business out of China

(Samsung Electronics only) “Closing last factory in China” (But Samsung announced to have 60mil mobiles via ODM from China late Oct.).

10

…with limited cases of significant action

“Move up to 30% of notebook production out of China”

“Move all production of US. bound refrigerators from China”

“Move some production to other countries”

“Moving Kindle e-reader and digital assistant Echo out of China”

“Expanding production elsewhere in Asia”

Many cases with partial operation out of China…

Most of ASEAN and Mexico don’t have faster FDI inflow yet after US-China trade-war

How much gross FDI inflows in2019/2Q have accelerated or slowed down before/after US-China Trade-war

(CAGR is based on 4Q trailing sum in USD bn)

*2019/1Q 4Q trailing sum only

8.22.5

-4.4

5.50.5

-1.1

-3.4

-2.3

-2.7

-4.2

6.63.3

-7.6

0.7

5.2

-3.8

-0.4-4.4

-4.9

-6.3

Taiwan

Thailand

-38.6

Vietam

India

Singapore*

Malaysia

Philippines

Indonesia

Hong Kong

Korea

Mexico

-31.4

vs 2Q18vs 4Q18 2Q19 4Q Trailing Sum

90.1

10.6

13.6

47.9

12.0

27.7

9.8

7.6

55.1

24.2

29.4

Risk Driver 2- New Global Order: “New Normal” Actual impact of the current Trade conflict seems limited… but could change as the underlying geo political conflict escalates.

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© InterChinaConfidential 11

Business & Corporate Strategies.

Double Down (The Search for Relevance)

….Or Restructure

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© InterChinaConfidential

Amcham Shanghai Survey: Which cities does your company plan on investing in or expanding to outside Shanghai?

Demand tops decision-making now,

Amcham Shanghai Survey: Top 3 factors that positively influence the

company’s investment and expansion outside Shanghai

2017 Survey

2019 Survey

Labor Cost Proximity To Target Markets

Proximity To Target Markets Labor Cost

Talent PoolLocal Gov. Access &

Support For MNC

1. Multi China Approach- Geographical PenetrationDiversified regions for expansion, Proximity to markets and ad hoc “County Level” strategies

Source: Amcham Shanghai, InterChina Interviews & Analysis

Harbin哈尔滨 1%

Changchun长春

1%Shenyang

沈阳2%

Dalian大连

2%Tianjin天津

6%Beijing北京

14%Zhengzhou

郑州2%

Xi’an西安

6%

Chengdu成都

13%

Chongqing重庆

7%

Changsha长沙

3%

Kunming昆明

2%

Yantai烟台

2%Qingdao青岛

3%Jinan济南

3%Nanjing南京

8%Wuxi无锡

6%Hefei合肥

3%Suzhou苏州

14%Hangzhou

杭州8%

Ningbo宁波

4%Wuhan武汉

8%Wenzhou

温州2%

Fuzhou福州3%

Xiamen厦门

4%

Shenzhen深圳12%

Dongguan东莞3%

Guangzhou广州9%

12

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© InterChinaConfidential

2. Portfolio Revamp & Diversification (“Reinventing Business Model”)China is amplifying this change, due to its Size, Speed, Technology and Competitive Landscape.

Source: InterChina Interviews & Analysis 13

X-axis: More distant away from Comfort Zone (existing products and markets), more new capabilities building are required via in-house and partnership

New Eco-system:

What to Reshape?

Same Step In Value Chain -

What to Revamp?

Movement AlongValue Chain –

What to Create?

Portfolio Expansion (e.g. ICENEV;

various white goods products)

Seek Hidden Customer Base (e.g.

CHN customers)

Backwards Integration (e.g.

raw chemicals material driven)

Tech Re-deployment (e.g. Polymer tech3D;

Filter techAir Cleaner)

Platform Model (e.g. auto aftermarket

model like Michelin and BCH; MRO)

Tech-driven Cross-sector

Diversification (e.g. AI car AD)

Profit-driven Service Biz (e.g. for industrial equipment, machineries, and B2C

like mobile)

Localized Offering For China

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© InterChinaConfidential 14

3. Traditional Industries into Digital/ E-Commerce/IoTIoT likely to reach 2% of GDP in the medium term, re-shaping many established sectors

Source: MIIT, InterChina Interviews & Analysis

A shift in ICxC R&D activity towards

disruptive technologies

Start Up Network and Integration Initiatives

China as global basis for new Customer

Engagement Models

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© InterChinaConfidential 15

4. Consolidation Times: A majority of companies interviewed have –aggressive- M&A plans for 2020. Scale, Local Technologies and Regional Expansion are top

Source: InterChina Survey of 100 China/APAC CEOs.

Need of Scale a New Growth Drivers• Size is a Key Success factor for profit Protection. • Search of Adjacent growth segments (double digit)

Chinese Client Base • From traditional client base to new high growth client segments• Chinese clients (medium sized, listed, SOE)

B-brand Buffers• Accesing the Medium Quality Segment (good enough, at lower

costs). • Preempt incumbent players to move up on the value chain.

Acquire Local Technologies• Products 100% adapted to Chinese standards. • Cost competitive processes that are difficult to replicate to MNC.

Consolidation & Expand Regional Coverage • Participate in Chinese consolidation process.• Complement Coastal Regions with Inland and West China

presence

Digitalization• Access to Indigious innovatation (ie. Electric car,

Connectivity, E- Commerce) • JVs between Online and Offline players.

Develop Local R&D Teams & Skills• Access to local talent, processes, subsidies. • Patents adapted to Chinese standards and needs.

Service/ After Sales Revenue Streams• Local licenses/practices and models that are very

difficult to replicate. • Acquire captured local client basis.

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© InterChinaConfidential 16

Transaction Prices are going down in traditional segments “Chinese Entrepreneur Crisis” and general gloomy mood

Note: Based on disclosed values; Exceptionally high multiples above 60x were excludedSource: Capital IQ

15.8x

21.1x

25.2x

29.5x32.1x

26.1x

12.5x10.4x

2012 2013 2014 2015 2016 2017 2018 2019

Median EV/EBITDA

Chinese Public Companies trading multiples – EV/EBITDA

Page 17: China 2020 Time to Double Down 2020-Executive... · 2019-11-26 · Estimated CAGR by Category (2017-2030E) Food Consumption CAGR by Category (2013-2018) Confidence Driver 1- Higher

© InterChinaConfidential

Website: www.raas-corp.comEstablished: 1988Headquarters: Shanghai, ChinaEmployees: ~3,000Listed: Shenzhen Stock ExchangeMarket Cap: USD ~5,298 million

Shanghai RAAS is engaged in the research, development, and manufacture of blood products and plasma-derived medical products. It also offers vaccines, diagnostic reagents, and testing equipment and services. It has become the largest blood products company in China and Asia

The company’s products, including human albumin, human immunoglobulin, coagulation factors and others, have been registered in ~20 countries. Currently, Shanghai RAAS is one of the very few domestic manufacturers that are able to export blood products. The company has 41 plasma collection stations in China with an annual production capacity of +900 tons

Website: www.grifols.comEstablished: 1940Headquarters: Barcelona, SpainEmployees: ~18,300Listed: Spanish Stock ExchangeMarket Cap: USD ~16,571 million

Grifols produces essential plasma-derived medicines for patients and provides hospitals and healthcare professionals with the tools, information and services they need to help them deliver expert medical care. The company is the world’s largest maker of immunoglobulin

The three main divisions – Bioscience, Diagnostic and Hospital – develop, produce and market innovative products and services that are available in more than 100 countries. The company has a network of 250 plasma donation centers (U.S. and Europe). Grifols Diagnostic Solutions advances patient care with diagnostic solutions to improve disease detection and management and simplify laboratory operations. As of Sep 30, 2018, GDS revenue was USD 570 million and EBITDA USD 270 million

Trend A - Playing the Stock MarketShanghai RAAS Blood Products to acquire Grifols Diagnostic Solutions through USD ~5 billion share swap

4,367 4,483 4,8782,567

1,295 1,260 1,477 744596 601 646 387

2015 2016 2017 2018 H1

Revenue EBITDA NI

319 348283

150150 183 13977111 138 96 55

2015 2016 2017 2018 H1

Revenue EBITDA NIUnit: USD mil Unit: USD mil

17

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© InterChinaConfidential

Founded in 1997, Faurecia has grown to become a major player in the globalautomotive industry. A leader in its three areas of business, the Group isbacked by a R&D and production network with sites in 35 countries. It is thepreferred partner of the world's largest automakers, which value itsoperational excellence and technological expertise.

Jiangxi Coagent Electronics is a private Chinese company specialized ininfotainment and interior electronic solutions, including the integration ofdigital displays and HMI technologies. The company employs 1,300 peopleincluding more than 300 engineers. Jiangxi Coagent Electronics is based inFoshan for its Research and Development activities and in Jiangxi Province forits industrial production. The company is a supplier to leading Chineseautomotive manufacturers and is seeing a strong growth in sales, whichreached 148 million euros in 2016 and will rise to 270 million euros by 2019.

In order to expand its product portfolio and accelerate its expansionin China, Faurecia embarked on an acquisition initiative. Throughacquisition of Coagent, Faurecia will be able to penetrate the ChineseOEM market

InterChina served as one of Faurecia’s financial advisor in this transaction. Our Role in this transaction was focused on identification of the target and negotiations.

Trend B - Acquire Local Technologies Faurecia acquires majority stake in Jiangxi Coagent Electronics

• Transaction: majority buyout• Deal Value: RMB 1.45 billion

Transaction

18

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© InterChinaConfidential

Trend C - Re-Emergence Of JVs: The new JV partner profile offers long-term synergies, and less of the traditional IP (“steal my business”) risk

19

The New JV Profile• Listed or to be listed. • SOE (and listed). • Cash rich. • Critical mass, national sales channels. • Localized products and brands. . • Still led by traditional leaders, but run

by a second tier of professionalized managers.

Source: InterChina Interviews & Analysis

Traditional JV Profile• Privately-owned.• Self-made first generation

entrepreneur.• Very early stage of company

development.• Nothing to lose, everything to

gain.

What synergies are new partners looking for?• Protect its stock price.• Quality technologies and product mix to increase sales channel value.• CAPEX/process to face growing China cost and green compliance. • Investment for growth needs.• Globalization.

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© InterChinaConfidential 20

Trend D - Divestments: The number of divestments by foreign companies in China definitely trend up in recent years

• 1,225 divestments from MNCs in China. i.e. ownership is a registered entity not in China

• The number of divestments has increased five-fold since start of 2000

2000

Source: Thomson Financial, InterChina Interviews & Analysis

2013 2015 2019

• Sellers = non China resident• Partial sale• Complete exit• Foreign PE exits• JV restructuring

> 3,0001,225

Management time

Lack of meaningful scale

Deteriorating financial performance

Requirements for continued funding

Relationship with partners (if it is a JV)

Lack of long term competitiveness

Scaling down on capacity

Page 21: China 2020 Time to Double Down 2020-Executive... · 2019-11-26 · Estimated CAGR by Category (2017-2030E) Food Consumption CAGR by Category (2013-2018) Confidence Driver 1- Higher

© InterChinaConfidential

Industrial/Auto

… Many international companies have opened up their China equity or spun off interests in China over recent years …

Consumer Healthcare, Chemicals, Tech

Source: InterChina Interviews & Analysis

PARTNER SHIFT THROUGH PARTIAL OR FULL DIVESTMENT

21

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© InterChinaConfidential 22

Business With China.

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© InterChinaConfidentialSource: Dealogic

Chinese Outbound Investment: Big Shift and Change of Approach. Less, but better quality. Divestments.

23

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© InterChinaConfidential

One Belt One Road. OBOR already takes 26% of China’s int’l trade, and China is looking to increase trade inflows to USD 2tr from the OBOR countries by 2020

24

China Trade with OBOR Countries(Total import and export value, USD bn)

50

100

150

200

13

14

15

16

17

20162012

15%

%USD bn

16%

2011

15%

16%

2013 2014

13%

2015

14%

Trade Value Share in Total

Eastern Europe

0

50

100

150

200

2

3

4

5

65%

3%

%

2012

USD bn

4%

2011

5%

2013

4%

2014

3%

2015 2016

Central Asia

10

20

30

40

50

0

20

40

2016

%USD bn

28%27%27%

2011 2012

25%

2013

28%

2014 2015

23%

Northwest Asia

0

50

100

150

200

0

10

20

2014

%USD bn

11%

20132011

10%

2012

9% 10%11%

2015

12%

2016

South Asia

456789

10

0.4

0.6

0.8

0.5%

%USD bn

0.7%

2011

0.7%

20142012

0.6%

2013

0.7%

2015

0.5%

2016

East Asia

0

100

200

300

400

500

40

42

44

46

48

2015

%48%USD bn

41%

2011 2013

42%

2012

43% 43%

2014

47%

2016

Southeast Asia

Source: China Customs, ADB, IMF, InterChina Interviews and Analysis

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© InterChinaConfidential 25

Conclusion

Slowdown with more experienced stakeholders (government, corporates) with the will to overcome it.

At a corporate level, uncertain times, 2020-2022 period will call for leadership and vision as difficult

choices will have to be made in China.

“I see a fundamental swift in all key dynamics-competitive landscape, consumption patterns, disruptive technologies-.. The China we know today will not be anything close to the one coming in 2025, and I am doing my best to transfer this reality to my HQ, so

we can be part of this process” (APAC President, EU Industrial Group)

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© InterChinaConfidential

www.interChinaconsulting.comwww.interchinapartners.com