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China’s Changing Investment Environment: 2010 and Beyond
U.S. Chinese Services GroupMay 7, 2010
Copyright © 2010 Deloitte Development LLC. All rights reserved. 1
• Navigating risk in a land of opportunity
• China’s 12th Five-Year Plan (FYP) and opportunities for engagement
• Q & A
Agenda
February 14, 2010 marks the start of the Chinese New Year of the Tiger
Copyright © 2010 Deloitte Development LLC. All rights reserved. 22
Navigating risk in a land of opportunity
Copyright © 2010 Deloitte Development LLC. All rights reserved. 3Sources: PRC National Bureau of Statistics, IMF, U.S. Bureau of Economic Analysis
$0
$1
$2
$3
$4
$5
US$
trill
ions
China’s Nominal GDP Growth(1978-2009)
1978 – “Reform and Opening Up” begins
1992 – Deng Xiaoping’s
“Southern Tour”
2001 – China’s WTO Accession
2009-2010 – Global downturn, stimulus
plan, recovery
30 Years of Chinese Economic DevelopmentFour Major Milestones
Given recent events, 2009-2010 will likely qualify as another turning point in Chinese economic development
Copyright © 2010 Deloitte Development LLC. All rights reserved. 4
China Today – Engine of Global RecoveryComparing China’s GDP Growth to Other Markets
China accounted for 50% of global economic growth last year
2008 Growth 2009 Growth 2010 IMF
Growth Forecast(Jan. 2010)
China 9.6 8.7 10.0
U.S. 0.4 -2.5 2.7
EU-27 1.0 -4.0 1.0
Japan -1.2 -5.3 1.7
Brazil 5.1 -0.4 4.7
Russia 5.6 -9.0 3.6
India 7.3 5.6 7.7
ASEAN 5* 4.7 1.3 4.7
Australia 2.4 0.7 2.0
World 3.0 -0.8 3.9
Source: IMF * Indonesia, Malaysia, Philippines, Thailand and Vietnam
Copyright © 2010 Deloitte Development LLC. All rights reserved. 5
FDI into China– Defying Expectations
Foreign Direct Investment into China(1983 – 2009)
Source: PRC Ministry of Commerce (MOFCOM)
Although FDI into China fell 2.6% during 2009, China still had its 2nd best-year at a time when global FDI flows fell 39%
0
20
40
60
80
100
120
US$ bln
China's non-financial sectors China's financial sector
* = 2009 FDI in China's financial sector not yet disclosed
?
Copyright © 2010 Deloitte Development LLC. All rights reserved. 6
U.S. FDI in China– Resilient Despite the Downturn
US$
bill
ion
Flow of U.S. FDI in China(2000-2009)
Source: PRC Ministry of Commerce
After investing approximately US$64 billion through 2008 – 7.5% of China’s cumulative total - U.S. investors continued to favor China in 2009 despite the global downturn
U.S. FDI into China during 2009 was US$3.6 billion – a 24% increase from 2008 despite the economic crisis
Copyright © 2010 Deloitte Development LLC. All rights reserved. 7
Achieving coverage and scale in ChinaThe key challenge for U.S. investors in the years ahead
Positioning your company to have the right coverage and scale commensurate with your stage of development in China is key to sustainable success.
Key outcomes
• Profitability
• Growth
• A matter of scaleHow to compete?
Key determinants
• A matter of coverageWhere to compete?
Main questions
?
Copyright © 2010 Deloitte Development LLC. All rights reserved. 8
< 8%8-9%
9-10%
10-11%> 11%
Source: PRC National Bureau of Statistics, Carrefour
Hainan
Heilongjiang
Jilin
Liaoning
Hebei
Beijing
Tianjin
Inner Mongolia
Shandong
Zhejiang
Fujian
Guangxi
HunanJiangxi
AnhuiHubei
Henan
Guizhou
Yunnan
Sichuan Chongqing
Gansu
Ningxia
Shaanxi
Shanxi
Qinghai
Xinjiang
Tibet
Jiangsu
Shanghai
Guangdong
Pursuing Coverage and ScaleWorld’s 2nd largest retailer
% growth in urban per capita disposable income
(2009 vs. 2008)
= Cities with 5 or more stores
= Cities with 1-4 stores
• As of Dec. ‘09,157 stores in 40+ cities since opening first in ‘95
• 22 stores added in ‘09 -22 in ‘08 and16 in ’07
• 16% annual revenue growth in China in ‘09 –bright spot globally but sufficient to keep pace with 17% growth in retail sales in China during ‘09 ?
• China’s largest foreign retailer, but ranked 6th
overall for 3 yrs. straight
19 stores in Shanghai - with 30 planned - but most recent openings in Changchun, Chengdu, Qingdao, Suzhou and Wuhan
Copyright © 2010 Deloitte Development LLC. All rights reserved. 9
Relative Market Opportunity New Investment
Company 2009 U.S. Sales
( Vehicles)
2009 vs. 2008 U.S.
sales growth (overall market growth)
2009 China Sales
(Vehicles)
2009 vs. 2008 China sales growth
(overall market growth)
Estimated cumulative
investment in China, as of
2008
New China Investment
(US$m)
Timeframe
“Big Three” automaker 1
2,070,000 -33%(-21%) 1,826,424 67%
(40%) 5,000 5,000 2008-2012
“Big Three” automaker 2
1,620,000 -15%(-21%) 440,619 44%
(40%) 1,000 490 2009-2012
Pursuing Coverage and ScaleU.S. automakers
Sources: Corporate websites, media, * Total investment based on publically-available information ** Confirmed US$5 billion investment plan through 2012 announced in December 2007
Is your company matching investments decisions to market opportunities?
Copyright © 2010 Deloitte Development LLC. All rights reserved. 10
But what about risk?
Risk Rater
U.S. China India Brazil Russia
Economist Intelligence Unit Country Risk Rating1
B C C C C
S&P Sovereign Rating2
(Local Currency)AAA A+ BBB+ BBB+ BBB
Transparency International Corruption Perceptions Index3
7.3 3.6 3.4 3.5 2.1
Key1. October 2009 - Rating scale from A (least risky) to E (most risky)2. October 2009 - Rating scale is divided into ten overlapping bands: AAA (least risky), AA, A, BBB, BB, B, CCC, CC, C, D (most risky); + and –
denote gradations within the bands3. 2008 Corruption Perceptions Index - Rating scale from 10 (least corrupt) to 1 (most corrupt)
Based on these risk ratings, it would appear that doing business in China is no riskier than doing business in other large emerging
markets – but considerably riskier than doing business in the U.S.
Copyright © 2010 Deloitte Development LLC. All rights reserved. 11
Managing risk in China Risks, as perceived by U.S. investors in China, change fast
Rank 2003 Member Survey
2005 Member Survey
2007 Member Survey
2009 MemberSurvey
1Trading Rights IPR Enforcement Human Resources Administrative &
Business Licensing
2Transparency Distribution Rights Administrative &
Business Licensing
Impact of Economic Downturn on China
Operations
3Distribution Rights Transparency IPR Enforcement Human Resources
4 Standards, Technical Regulations Human Resources Competition and
OvercapacityCompetition and
Overcapacity
5IPR Enforcement Market Access in
Services Transparency Market Access in Services
Results of the U.S.-China Business Council Annual Member Survey (2003-2009) – Top Business Issues in China
Effective risk management in China requires constant updating of priorities and not overly relying on past experience
IPR Enforcement/TransparencyTied at 8
Source: US-China Business Council
Copyright © 2010 Deloitte Development LLC. All rights reserved. 12
So Why is Risk Management in China So Difficult?Three reasons the “Learning Curve” often does not apply
As it is much harder to benefit from past experience in today’s China –developing the ability to “see around corners” becomes essential
• Speed of Change – The fast-evolving regulatory and competitive environment means that the nature of risk itself changes rapidly
• War for Talent – High turnover and talent shortages limit the ability to institutionalize learning
• Diversity of China’s Economy – Wide geographic, sectoral, and ownership structure differences mean that experience gained from one investment may not apply when making another
Copyright © 2010 Deloitte Development LLC. All rights reserved. 13
US$
mill
ion
Source: USCBC, Department of Commerce
Keeping Pace with ChinaThe challenge for Massachusetts exporters
Growth in Massachusetts’s Exports (2000-2009)To China: 173%
To rest of world: 11%
Massachusetts ranked 12th in terms of exports to China in 2009 – 2% of U.S. total - but it had the lowest 2000-2009 growth rate of any U.S. state in the top 15
Growth in U.S. Exports (2000-2009)To China: 330%
To rest of world: 29%
Copyright © 2010 Deloitte Development LLC. All rights reserved. 1414
12th FYP – Focus areas and opportunities for engagement
Copyright © 2010 Deloitte Development LLC. All rights reserved. 15
China’s 5-Year planning (FYP) cycle returns12th FYP (2011-2015)
Drafting
March 2011 Final approval at 4th
Plenary Session of 11th
NPC
2009 20112010
Research
October 2010 Review and approval of draft at 5th
Plenary Session of 17th the CCP Central Committee
Review & approvalImplementation
October 2008
2nd National Economic Census
launched
March 2010 Premier Wen
submits guidelines to 3rd Plenary Session of the 11th NPC for approval, allowing drafting to move to
next phase
November 2009 NDRC announces that drafting of the 12th FYP is under
way, drawing on input from across China
Early 2010 NDRC submits guidelines for State Council
approval
December 2010 Results of 2nd National
Economic Census to be released
November 2008 Planning division of NDRC
releases draft outline of 12th
FYP
Sources: State Council, NDRC, Chinese media, ACMR
Copyright © 2010 Deloitte Development LLC. All rights reserved. 16
11th FYP“Five Balances”
(五个统筹)12th FYP Policy Thrust 12th FYP Targets
Urban vs. rural development Accelerate urbanization Increase national urbanization rate from 47% to 50%
Harmonious development of man and nature
Create an energy-efficient, low-carbon society
Undefined interim goal to reduce carbon intensity by 40-45% from 2005 levels by 2020
Development between various regions
Reduce disparities through regional integration & specialization
Increase urbanization rate of Central China from 40% to 48%; reduce energy intensity by 25% from 2008 levels by 2015
Economic and social development
Extend social safety net Universal basic healthcare coverage by 2020
Internal development and opening up to the world
Lessen reliance on global markets for growth; achieve economic rebalancing
Increase domestic consumption to 50% of GDP from 36%
From 11th to 12th Five-Year Plans Continuity With 2-years left, China’s 4th Generation Leadership (Hu-Wen) is looking to consolidate its legacy - a “harmonious society” achieved through “scientific development”
Source: State Council, NDRC, Chinese media, ACMR
Copyright © 2010 Deloitte Development LLC. All rights reserved. 17
Setting the tone from the topFrom 4th generation to 5th generation leadership
“China will stick to the road of urbanization with Chinese characteristics, promote the coordinated development of medium and small cities and small towns…exert the radiation and driving effect of cities on rural communities and promote the benign interaction of urbanization and the construction of new rural communities."
Premier Wen Jiabao, government working report at the opening of 3rd
session of the 11th National People’s Congress, March 5, 2010
Chinese Premier Wen JiabaoSource: CCTV
“By tapping into new markets and expanding business, companies can absorb rural workforce substantially. This will help create conditions for deeper urbanization. Urbanization in return can boost consumption and drive up the economy.“
Vice Premier Li Keqiang, remarks during an inspection tour of Pearl River Delta cities, December 15, 2009
Chinese Vice Premier Li Keqiang
Source: china.gov.cn
Source: china.gov.cn, Chinese media, ACMR
Copyright © 2010 Deloitte Development LLC. All rights reserved. 18
* 1978 = 100
1978 – A difference of RMB 209
2009 – A difference of RMB 12,022
• In 2009, urban Chinese earned 3.3 times as much as rural Chinese compared to 2.6 times in 1978, one of the largest income gaps in the world
• Urbanization is a key strategy for closing that gap, offering expanded employment opportunities to new arrivals and a source of remittances for those remaining behind
Source: National Bureau of Statistics, Ministry of Agriculture
Rising urban-rural income disparityA leading obstacle to the harmonious society
Year
Annu
al p
er c
apita
net
Inco
me
(RM
B)*
Copyright © 2010 Deloitte Development LLC. All rights reserved. 19
Meeting the challenge of green urbanization
• Accounting for just 3% of global surface area and 50% of the world’s population, cities consume 75% of the world’s energy and emit 80% of greenhouse gases
• 622m urban residents in China today – 2X entire U.S. population - but still just 47% urban; plans to urbanize an additional 325m Chinese by 2030 will strain sustainability
Sources: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: The 2009 Revision and World Urbanization Prospects: The 2009 Revision, Chinese Academy of Social Sciences, China Daily
47%
51%
82%
Urbanization Rates (1975-2030)
Copyright © 2010 Deloitte Development LLC. All rights reserved. 20
Sources: Zhejiang Development and Reform Commission, Hangzhou Municipal Development and Reform Commission,
Zhejiang Province – Sample Objectives Hangzhou Municipality – Sample Objectives
National goals, provincial focus, local projects
• Develop high tech industry• Transform the southern tier of the Yangtze
River Delta into a modern service center• Design layout of modern logistics• Establish secure system of affordable
housing• Develop low carbon economy; build a low
carbon city• Coordinate urban and rural development
(i.e. coordinated development of 5-county region around Fuyang and Lin’an cities)
• Enhance Zhejiang’s role in the regional integration of the Yangtze River Delta
• Reengineer Zhejiang’s core competitiveness
• Accelerate the development of modern services
• Reform the social security system• Promote new cities• Invest in major infrastructure
network projects
Copyright © 2010 Deloitte Development LLC. All rights reserved. 21
Urban Rail Transit Projects
= Under construction in 2010
▲
Hangzhou
Beijing
Tianjin
Shanghai
Chongqing
▲▲
▲
▲
▲Changchun
Guangzhou
▲▲
▲ Shenzhen
▲Wuhan
▲Nanjing
▲ Dalian
▲ Dongguan
▲Xi‘an
▲Changsha
▲Foshan
▲Ningbo
▲
▲
WuxiSuzhou
▲Fuzhou
▲ Shenyang
▲Zhengzhou
▲ Harbin
▲ Qingdao
▲ Chengdu
▲Kunming
▲Nanchang
Of China’s 655 cities, 26 will have urban rail systems under construction in 2010Identifying emerging urban growth centers
China intends to invest roughly US$130 billion to triple the total length of urban rail
to 3,000 km by the end of the 12th FYP
Sources: PRC State Council and Ministry of Transportation, Chinese media
Copyright © 2010 Deloitte Development LLC. All rights reserved. 22
20 are also located on high-speed rail routes under construction in 2010Identifying emerging urban growth centers
Sources: PRC State Council and Ministry of Railways, Chinese media
China will invest US$300 billion during the 12th FYP to extend high-speed rail routes
Copyright © 2010 Deloitte Development LLC. All rights reserved. 23
High-growth power centers= Estimated > 6%
annual increase in power demand between 2010 and 2020
▲
7 are also cities where demand for power is expected to surge between 2010–2020Identifying emerging urban growth centers
Chongqing
Gansu
Xinjiang
▲
▲Wuhan
▲Xi‘an
▲Changsha
▲Fuzhou
▲Chengdu
▲ Nanchang
= China’s first 3 inland nuclear plants (under construction)
Sources: State Grid
China is weighing plans to invest nearly US$600 billion to meet rising urban power
demand through 2020
Copyright © 2010 Deloitte Development LLC. All rights reserved. 24
0.0%
4.0%
8.0%
12.0%
16.0%
8.7%
A closer look*Our seven emerging urban growth centers
0.0%5.0%
10.0%15.0%20.0%25.0%30.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Per-capita urban disposable income growth (2009 vs. 2008)•All 7 are provincial capitals
•All 7 have populations of at least 3 million, placing all among the top five in the U.S.
•Six of the 7 are located in the interior
Sources: PRC National Bureau of Statistics* 2009 data for Nanchang not available
GDP growth(2009 vs. 2008)
Retail sales growth(2009 vs. 2008)
= national average growth rate (2009 vs. 2008)
8.8%
15.5%
Copyright © 2010 Deloitte Development LLC. All rights reserved. 25
Creating sustainable China value in 2010Key take-aways
√ China is too large and complex to tackle as a whole
√ Study the central government's development goals as a road map for identifying emerging investment opportunities
√ Narrow your investment focus to a few promising geographic locations
√ Understand the many roles of sub-national officials – investor, manager, regulator and potential spoiler
√ Think beyond traditional means of investment (M&A and greenfield)
√ Articulate your value proposition and team accordingly
Copyright © 2010 Deloitte Development LLC. All rights reserved. 26
Deloitte’s Chinese Services GroupYour Connection to China
Contact Information:Kris Knutsen
Senior [email protected]
M&A in China – Deal breakers and pricing challenges
Staying one step ahead – Hot topics on investing in China
China Mergers & Acquisitions Playbook
Thank You
M&A in China – Structuring and Compliance Considerations
Copyright © 2010 Deloitte Development LLC. All rights reserved. 27
Q&A