china’s changing investment environment: 2010 …results of the u.s.-china business council annual...

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


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


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


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

?


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


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

?


< 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


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?


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.


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


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


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%


12th FYP – Focus areas and opportunities for engagement


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


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


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


* 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)*


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)


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


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


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


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


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%


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


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

mailto:[email protected]


Q&A

china’s changing investment environment: 2010 …results of the u.s.-china business council annual...

Documents