July 2010

APCO Brief:China Goes West

Introduction to China’s Western Region

China’s ‘Go West’ Policy

Opportunities for Foreign Business

Introduction to China’s Western Provinces

80% of China’s water resources

70% of natural gas reserves 69% of overall land area 60% of coal reserves 27% of population 19% of GDP 17% of consumer spending 14% of FDI 10% of applied patents 6% of registered foreign

enterprises 4% of exports

Source: China’s National Bureau of Statistics 2009, 2011

China’s 12 Western Provinces account for:

3

West More Reliant on Raw Materials

Source: China Statistical Handbook 2011 4

Greater China

Eastern Provinces

Western Provinces

0%10%20%30%40%50%60%70%80%90%

100%

Primary SectorSecondary SectorTertiary Sector

Composition on China’s Economy

47

43

10 6

49

45

13

51

36

Urban Household Income is dramatically less in the western provinces

Source: China’s National Bureau of Statistics 2011

Xinjiang

Beijing

Tianjin

Shanghai

Chongqing

Guangdong

Fujian

Tibet

QinghaiGansu

Inner Mongolia

Heilongjiang

Sichuan

Yunnan

Guizhou

Guangxi

Ningxia

Shaanxi

ShanxiHebei

Liaoning

Jilin

Shandong

HenanAnhui

Jiangsu

ZhejiangJiangxiHunan

Hubei

Hainan

< RMB 20k

RMB 20k-25k

RMB 25k-30k

> RMB 30k

5

Western Consumerism Lags Behind the East

Source: National Bureau of Statistics 2011

Per Capita Annual Living Expenditure

6

TotalConsumpti

on

Food Education and Recreation

Household Items

RM

B

02000400060008000

100001200014000160001800020000

Eastern ProvincesWestern Provinces

Economic Overview Regional Policies for Investment

黑龙江吉林辽

宁河北山东

福建

江西

安徽湖

北湖南

广东

广西

河南

山西

内蒙古陕西

宁夏

甘肃

青海

四川贵州云

南

西藏

新疆

浙江

北京

重庆

• 12 provinces• 27% of total

population• 71% of total land

area• Leverage

infrastructure investment to drive economic development

• Attract foreign investment

• China’s rust belt• 3 provinces and 5

cities of Inner Mongolia

• 8% of total population• 11% of total land area• Revitalize old

industrial base

• 10 provinces and cities• 60% of total GDP • 38% of total population• 7% of total land area• Leverage SEIs and R&D

investment to lead innovative & sustainable development

• Link of East Coast and Western China • 6 provinces • 27% of total population, 30% of total rural

population• 10% of total land area, 23.8% of total

cultivated area• Promote industrialization, urbanization,

and modernization of agriculture

“Go West” (1997)

“Rise of Central China” (2006)

“Northeast Revitalization”

(2003)

Developed East Coast

Western Provinces face numerous challenges

Source: Social and Economic Atlas of Western Provinces, China Business Handbook 2009

Geography- Extended distances between economic

centers- Low population density- Some extreme altitudes- Water shortages, particularly in the

north- Inhospitable conditions in some areas

and relatively little arable land

Nature & Climate- Extreme temperatures, particularly in

the north- Threat of natural disasters (e.g.

earthquake in Sichuan)- Degradation of the environment

(particularly deforestation, desertification)

Ethnic Situation- Ethnically diverse regions- Persistent conflicts among ethnic groups

(e.g. Tibetans, Uyghurs)

Politics- Western provinces were politically

neglected for a long time, only regaining serious political focus for the last 10 years

- Political problems are hinder economic progress (e.g. Tibet, Xinjiang)

Specific Challenges in Western

China

8

Introduction to China’s Western Provinces

China’s ‘Go West’ Policy

Opportunities for Foreign Business

China has been implementing the “Go West” policy for more than a decade

The Chinese government under Premier Zhu Rongji first clarified the guidelines of its “Go West” policy in 1999; after which developments have steadily followed…

“Western Development” plan begins2000

Construction of the “West-East Gas Pipeline” initiated2002

Policy of “Returning Grazing Land to Grassland” takes effect

2003

Law on Promoting Western Development is listed on the legislative plan of the 10th National People’s Congress

2004

Compulsory education tuition and fees exempted in Western areas

2005

Qinghai-Tibet Railway begins operation2006

The Ministry of Finance invests RMB 280 billion in the west to support key projects

2007

NDRC announced US$100 billion in 23 new infrastructure projects including airports, roads, railways, coal mines, and nuclear power stations

2010

10

Go West Policy has several key priorities

• Construction of railway lines, highways, airport expansion projects, and gas pipelines, hydropower plants, telecommunications, etc.

• By 2009, China had invested more than US$322 billion

• This month, the NDRC announced US$100 billion in 23 new infrastructure projects including airports, roads, railways, coal mines, and nuclear power stations

Infrastructure

• Preferential tax rates and flexible policies• Chongqing Liangjiang New Area

Foreign Investment

• Converting farmland to grassland and forest areasEcological Protection

• Compulsory educationEducation & Retention of Educated Workforce

11

Go West Policy’s Focus Regions & Industries

Energy Chemicals Mineral mining and

processing Agricultural goods

processing Engineered products High-tech sectors Tourism

Several focus industries:

Three focus regions:

Chongqing-Chengdu

Guangxi “North Bay”

Guanzhong-Tianshui

12

The Go West policy has yielded impressive results…

Source: China Statistical Yearbook, Yearbook of China Transportation and Communications

32.5118

2000 2008

Flight Passengers (m)

350016500

25320

2000 2008 2011

Freeway s (km)

76 233 299

2000 2008 2011

Power Generation Capacity (GW)

22000 29500 36307

2000 2008 2011

Rail Tracks (km)

CAGR: 18% CAGR: 21%

CAGR: 4%CAGR: 15%

13

…However, it has insufficiently closed the development gap

73.30%60.87%

79%

1990 2000 2011

West’s Relative Level of GDP per Capita

20.88%17.13% 19%

1990 2000 2011

West’s Contribution to GDP

14

Introduction to China’s Western Provinces

China’s ‘Go West’ Policy

Opportunities for Foreign Business

Corporations have prioritized several key locations for potential investment

LOW HIGH

HIGH

Corporate Perspective

Analy

tica

l Pe

rspect

ive Ningxia

Qinghai

Tibet

Guizhou

Xinjiang

Gansu

Yunnan

Inner Mongolia

Guangxi

Shaanxi

Chongqing

Sichuan

Source: Roland Berger,

16

Chengdu:City Overview

Most prosperous and populous city in western China, with 2009 GDP of RMB 450 billion (USD 66.17 billion), representing 14.7% growth year on year;

Economic hub in Western China for electronics and IT manufacturing.

Transp

ort

ati

on China’s sixth largest aviation

hub centered around Shuangliu International Airport;Competing with Chongqing to build largest transportation hub in Western China;Investment RMB 20-50 billion (USD 3-7.3 billion) per year to build 5,400 km of new railways to 2020.

Develo

pm

ent

Zon

es Two national level

development zones:• Chengdu High-tech

Development Zone – electronics and IT

• Chengdu Economic and Technological Development Zone – auto manufacturing

.

Chengdu: Industries and Policies

Pillar industries: electronics & IT, telecom and auto manufacturing • Sales revenue of electronics and IT industry in 2009 reached RMB 143.3 billion (USD 21.07 billion), making up 31% of total GDP;

• Major consumer electronics and IT companies in Chengdu include Nokia, Siemens, Samsung, Sony, Cisco Systems, Intel, HP and Foxconn;

• Chengdu has a complete auto manufacturing supply chain with 8 major manufacturers including FAW-Volkswagen and over 150 auto components suppliers.

• Chengdu also announced plans to build electric vehicle charging facilities by 2012 and manufacture 910,000 electric vehicles by 2017, planning to generate RMB 193 billion (USD 28.38 billion) in sales revenue.

• Chengdu municipal government had decided to invest RMB 50 billion (USD 7.35 billion) to build a national-level telecom hub in 2008. By 2011, Chengdu will become, after Beijing, Shanghai and Guangzhou, the fourth information broadcasting base in China.

Sustainability: Chengdu-Chongqing Economic Zone and Tianfu New Area

• Chengdu’s Tianfu New Area is slated to become a major industrial and economic center in Western China enjoying similar preferential policies as Pudong New Area;

• The State Council approved Chengdu-Chongqing Economic Zone to be a new twin-city Special Economic Zone (SEZ), one of China’s three western economic zones created to spur regional growth.

Chengdu:Economic Indicators

GDP rose 14.7% yoy to RMB 450 billion (USD 66.17 billion), boosted by infrastructure spending on post-quake reconstruction. Compared to its hi-tech rivals in Western China, Chengdu’s GDP growth was lower than Chongqing but faster than Xi’an.

GDP per capita reached RMB 35,215 (USD 5,178) in 2009 (14% growth yoy);

Annual disposable income was RMB 18,659 (RMB 2,773) in 2009 (10.1% growth yoy);

Chengdu’s CPI fell 3.8% in 2009; Exports and imports in 2009 was USD 1.05 billion and USD

7.36 billion, respectively. Total exports ranked no. 1 in western China;

Electronics and IT industry contributed to a third of Chengdu’s total GDP in 2009, supported primarily by growth of the software and IT outsourcing market segments.

Chengdu expects to achieve GDP target of RMB 700 billion (USD 109.2 billion) by 2017.

2007 2008 2009 2010 (E)

2012 (E)

2017 (E)

050

100150200250300350400450500

0%

10%

20%

30%

40%

50%

60%

70%Electronics and IT Industry Market

Size

Electronics manufacturing

Software and IT service

Grow rate of electronics manufacturing sector

Growth rate of software and IT service sector

RM

B

20002001200220032004200520062007200820090

500010000150002000025000300003500040000

94

96

98

100

102

104

106

Economic Indicators

GDP per capita Annual disposable incomeCPI

RM

B

2000 2001 2002 2003 2004 2005 2006 2007 2008 20090

2000

4000

6000

8000

10000

12000

Import and Export

Import (USD million) Export (USD million)

Chengdu:Tax Incentives

Corporate Income Tax

(CIT)

• Encouraged sector firms: 15%

• Non-encouraged sector firms: 25%

• Refund Rate: 100% refund of local portion (40%) of CIT for 3 years and 50% for the following 5 years

• NPV=19%

Value Added Tax (VAT)

• Standard Rate: 17%

• Refund Rate: 100% refund of local portion of VAT (16%) for 2 years, and 50% refund for the following 3 years.

• NPV=8.41%

• Free duty and VAT for imported equipment: eligible equipment

Others Based On TE Project Description:R&D subsidies: negotiable based on R&D investment capital and product;

Employee training subsidies: Company is grant subsidy RMB 200 per employee for signing contract with local resident for a minimum of one year;

Individual income tax merits for high-level management: 100% refund of local portion (26%) of individual income tax;

Business tax: 100% refund of local portion (65%) of business tax for 2 years; 50% refund rate for the following 3 years.

Significant incentives provided by central and local governments

Corporate income tax reductions Personal income tax rebates Rental discounts Subsidies for employee training Subsidies for employee relocation Financing support R&D funding support Subsidy for standards certification Tax exemptions for equipment importation

23

Advantages and challenges for foreign business

ADVANTAGES Market access: Western provinces provide access to quickly-growing local and regional markets

CHALLENGES

Lower wages: Western regions wages are significantly below those in China’s east

Government support: Wide-spread support for foreign investment can be found at both the national and local level

Level of familiarity: Local authorities are less experienced in working with foreigner and foreign companies

Personal relationships: “Guanxi” more important in Western regions which requires time and patience to develop

Quality of Staff: Staff qualification level comparatively lower than found in China’s eastern region

24

Success in the West depends on your preparation and execution

In order for a company to take advantage of the opportunities in China’s west and the ‘Go West’ policy it needs to be prepared and committed…

Conduct thorough market analysis

Perform solid technical and location due diligence

Thoroughly vet partner and key customers

Build solid government relationships

Develop a dedicated and motivated team of managers and workersBe flexible to the changing environment

Monitor and track new opportunities and evolving government priorities

25