China’s Competitive Threat A Sector Perspective Presented by Mark Killion, CFA Managing Director Global Insight’s World Industry Services

Copyright 2002 Global Insight, Inc.

China’s Competitive ThreatA Sector Perspective

Presented by

Mark Killion, CFAManaging Director

Global Insight’s World Industry Services

2Copyright 2004 Global Insight, Inc.

Agenda

1) China’s Market Size and Growth Patterns

2) China’s Manufacturing Sector, Role in World Markets

3) China’s Trading Patterns, Sector Winners & Losers


Manufacturing Sector is Leading Overall Growth(% Growth in Inflation Adjusted Chinese Sector Sales – Includes Domestic Sales + Exports)

0

2

4

6

8

10

12

14

16

18

20

1999 2000 2001 2002 2003 2004 2005 2006-2010

GDP (All Sectors)Manufacturing SectorServices SectorsConstruction Sector

What is the Outlook for Growth in China?

Source: World Industry ServiceSource: World Industry Service


0

5

10

15

20

25

30

35

40

45

50

1999 2000 2001 2002 2003 2004 2005 2006-2010

Small Household Appliances

Computers & Commun. Electronics

Autos & Parts

What is the Outlook for Manufacturing Sectors?

Growth Rates of Chinese Electronics & Autos (% Growth in Inflation Adjusted Sector Sales – Includes Domestic Sales + Exports)



Growth Rates of Key Chinese Manufacturing Sectors(% Growth in Inflation Adjusted Sector Sales – Includes Domestic Sales + Exports)

0

5

10

15

20

25

1999 2000 2001 2002 2003 2004 2005 2006-2010

Textiles & Apparel

Rubber & Plastics

NonMetal Minerals

Chemicals & Products




Growth Rates of Key Chinese Manufacturing Sectors(% Growth in Inflation Adjusted Sector Sales – Includes Domestic Sales + Exports)

0

2

4

6

8

10

12

14

16

18

1999 2000 2001 2002 2003 2004 2005 2006-2010

Paper & Paper Products

Drugs & Medicines

Food Products




Chinese Manufacturing Has Lagged in Employment

Share of Manufacturing Employment in Total Employment

-15

-10

-5

0

5

10

15

20

25

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

Growth Rate of Manufacturing EmploymentGrowth Rate of Gross Output of Manufacturing ISIC 3

Growth Rate of China Manufacturing Output Versus Growth Rate of

Manufacturing Employment

0

5

10

15

20

25

30

35

19

75

19

80

19

85

19

90

19

95

19

99

20

02

China JapanSouth Korea USTaiwan

Source: National Statistics Agencies of Above Source: National Statistics Agencies of Above CountriesCountries


0

5

10

15

20

25

1980 1985 1990 1995 2000 2005

Share of Total US Imports from China in US Consumption

Share of Total US Imports(exc. China) in US Consumption

Share of U.S. Consumption of Manufactured Goods Supplied by

Imports from China and Others

Share of US Imports from Regions, Manufacturing

How Important is Chinese Manufacturing to U.S. Markets?

0

5

10

15

20

25

30

35

1980 1985 1990 1995 2000 2005

US Imports Share from NAFTA US Imports Share from West Europe

US Imports Share from Japan US Imports Share from China



China Manufacturing Sales

($1.9 Trillion, 2002)

Minerals5%

Basic Metals

10%

Machinery &

Equipment37%

Food & Tobacco

11% Textiles12%

Wood1%

Paper and Printing

3%Chemicals20%

Others1%

What is the Size of Chinese Manufacturing Sectors?


0

5

10

15

20

25

30

35

40

45

China Europe Japan Taiwan UnitedStates

India

Manufacturing Sector Share of Total GDP, 2002


What is the Size of Chinese Manufacturing Sectors?

Sales of Machinery & Equipment($410 Billion, 2002)

Fabricated Metal10%

Transportation Equip.

22%

Electrical & Electronics

46%

Industrial Machinery

21%


Sales of Electrical & Electronics(including Computers)

($242 Billion, 2002)

Others14%Appliances

12%

Communication Equip.

10%

Industrial Elect.40%

Computers, Offi ce

Equipment24%


Regional Share of Total World Manufacturing Sales

($18.4 Trillion, 2003)

Western Europe

30%Other

Emerging Asia7%

China12%

Japan13%

United States

24%

Other16%

What is the Size of Chinese Manufacturing in the World Economy?

0

5

10

15

20

25

30

35

40

45

Share of World Manufacturing Sales

Share of Total Increase in World Manufacturing Sales Over Last 5 Years(Total Inflation Adjusted, Increase Over 1999-2003 was $2 Trillion)

Share of World Sales and Share of Sales Growth – Manufacturing Sector



What is Role of Chinese Exports in World Trade?

Greater China Manufacturing Exports Percent Share of Total World Manufacturing Exports

0

2

4

6

8

10

12

14

1980 1990 1995 2000 2005

China* Hong Kong* Taiwan* Intra-Regional

* Export totals from China, Hong Kong and Taiwan exclude trade with each other. These are included in Intra-Regional.



-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

Ch

an

ge

in S

ha

re

Taiwan South Korea China

1980-1989 1990-1999 2000-2009

Change in World Manufacturing Export Shares (Delta on the Shares: Share at End of Period less Share at Start of Period)

What is the Chinese Competitive Threat?

2004--2009: +1.7%

2000--2003: +2.5%



Manufacturing Exportsas % of World Manufacturing Exports, 2003

0

10

20

30

40

50%

Greater China(13%)

Western Europe(41%)

NAFTA (19%)

Exports w/n Region (Intra-Regional)Exports to Rest of World

Note: Greater China includes China, Hong Kong & Taiwan

0

10

20

30

40

50 %

Greater China(30%)

Western Europe(41%)

NAFTA (23%)

Exports w/n Region (Intra-Regional)Exports to Rest of World

Manufacturing Exports as % of Total Domestic Economy Sales, 2003

What is Role of Chinese Exports in the Economy?



-40

-20

0

20

40

W1 W2 W3 W4 L1 L2 L3 L4

China Trade Balance as a Percent of Total Chinese Sales – 2003Selected Industrial Sectors

Sectors with Trade SurplusW1: Textiles, Apparel, Wood & Paper (Rising)W2: Rubber Products & Plastics (Rising)W3: Office & Computing Machinery (Rising)W4: Small Household Appliances (Rising)

Sectors with Trade DeficitL1: Primary Metals & Non-Metals (Deteriorating)L2: Chemicals (Steady)L3: Communication Equipment (Deteriorating)L4: Motor Vehicles (Steady)

%

In Which Sectors Are Imports Outpacing Exports?



0

10

20

30

40

50

60

70

80

90

100

China

Taiwan

S. Korea

Brazil

S. Africa

Export Share of Production Import Share of Consumption

Trade Shares for Textiles, Apparel & Leather

(Percent, 2003)

Trade Shares for Wood & Wood Products

(Percent, 2003)

0

10

20

30

40

50

60

70

80

90

100

China

Taiwan

S. Korea

Brazil

S. Africa



How Does China’s Trade Compare to Other Countries?


0

5

10

15

20

25

30

China

Taiwan

S. Korea

Brazil

S. Africa


Trade Shares for Paper, Paper Products & Printing

(Percent, 2003)

Trade Shares for Primary Metals & Non-Metals (e.g. Glass & Cement)

(Percent, 2003)

0

10

20

30

40

50

60

China

Taiwan

S. Korea

Brazil

S. Africa





0

5

10

15

20

25

China

Taiwan

S. Korea

Brazil

S. Africa


Trade Shares for Rubber Products & Plastics

(Percent, 2003)

Trade Shares for Chemicals(Percent, 2003)

0

5

10

15

20

25

30

35

40

45

50

China

Taiwan

S. Korea

Brazil

S. Africa





0

20

40

60

80

100

120

China

Taiwan

S. Korea

Brazil

India


Trade Shares for Office & Computing Machinery

(Percent, 2003)

Trade Shares for Small Household Appliances(Percent, 2003)

0

10

20

30

40

50

60

70

80

China

Taiwan

South Africa

Brazil

India





0

10

20

30

40

50

60

70

80

90

China

Taiwan

S. Korea

Brazil

S. Africa


Trade Shares for Communication Equipment

(Percent, 2003)

Trade Shares for Motor Vehicles(Percent, 2003)

0

5

10

15

20

25

30

35

40

45

50

China

Taiwan

S. Korea

Brazil

S. Africa





Chinese Competitive Threat: Summary

• Competitive manufacturing threat from China is real• Degree of threat varies quite a bit among sectors• US and Europe do also benefit from lower consumer prices, and by pulling China

into their supply chain• China’s competitive threat felt more strongly in other developing countries

• Sizable increase in world manufacturing market share still to come• Driven by FDI, MNCs, fast growth differential with rest of world• Sovereign influence on commerce still pervasive, But Will it Slow Growth?

• Brutal competition, low domestic price gains• Domestic pricing conditions exported to rest of world

• Fast growth and development requires a lot of imports• Domestic demand pulls in commodities and technology• Production requirements supporting commodity input prices

• Low Chinese export prices, along with fast Chinese growth supporting higher commodity input prices, will continue to pinch the profits of many western producers and emerging economy competitors


Thank you!

Mark Killion, CFAManaging Director

World Industry Services

Phone: 610-490-2547

Email: [email protected]

Documents

China’s Competitive Threat A Sector Perspective Presented by Mark Killion, CFA Managing Director Global Insight’s World Industry Services