The Chinese economic recession and its

future global impact.

Chris Goode

Chief Business Development Officer of the Propulsys group

responsible for:

Development of the business to give long term sustainability

Diversification into new growth industries & new opportunities

President of White (China) Drive Products Co. Ltd.

General Manager of Peerless Manufacturing Zhenjiang Co. Ltd.

General Manager K Products (Zhenjiang) Co. Ltd.

Today, I am going to share with you the real life changes

that are occurring in China; not as reported or unreported

for that matter, in the western media, but nevertheless

changes of significance that will impact every business in

the world and every citizen in the world!

But, first let me give you a quick overview of who we are

and what we do in China.

Propulsys Group World Headquarters, Hopkinsville,

Kentucky, USA

Propulsys - A family-owned group of companies

White (China) Drive Products

Co. Ltd Zhenjiang, Jiangsu, China

Manufacturer of Commodity Products

&

Global Engineering Center

White (China) Drive Products

Asian Distribution Center Shanghai, China

K Products Zhenjiang Co. Ltd Zhenjiang, Jiangsu, China

A Trading Company

Peerless Manufacturing

(Zhenjiang) Co. Ltd Zhenjiang, Jiangsu, China.

Energy related products manufacturer

Tenacis Inc. Hopkinsville, Kentucky, USA

Real estate

WH Manufacturing Inc. Hopkinsville, Kentucky USA

Manufacturer of engineered

products

White Drive Products Inc. Hopkinsville, Kentucky USA

Global Sales & Marketing,

Global Application Engineering

White Drive Products

GmbH Opfenbach, Germany

European Sales &

Distribution Center

Expand Product offering

Diversification New Markets

Growth

White Staffing Management,

LLC. Hopkinsville, Kentucky, USA

Temporary & Permanent Staffing

Agency

White Drive Products – Core Products

Hydraulic Motors & Brakes

White (China) Drive Products Co. Ltd.

Business License issued April 28, 2005

Location of White (China) Drive Products Co. Ltd.

Zhenjiang, Jiangsu

Home to 2.89million people.

The 78th largest city in China.

White (China) Drive Products Co. Ltd.

From nothing to a

profitable wholly-

owned foreign

investment

enterprise in

RunZhou District

of Zhenjiang City,

250 days.

“Ground Zero”

May 31, 2005

In production

November 2005

White (China) Drive Products Production Facilities

Heat Treatment Typical CNC Cell

Final assembly & test Wash, Paint & Dry

Peerless Manufacturing (Zhenjiang) Co., Ltd.

Operational July 8, 2009,

PMZ’s mission is to make energy safe,

efficient and clean

PMZ serves China & Asian Markets

PMZ is versatile and meets Chinese and

American standards

PMZ world class quality products using

advanced technologies.

Peerless Manufacturing (Zhenjiang) Co., Ltd. Products manufactured:

Primary Products:

Nuclear Power Station Equipment

Steam Dryers

Separation Vessels used in LNG

supply lines

Horizontal separation vessels

Vertical separation vessels - dry

scrubber cyclone bundles, swirl

tube bundles

Pressure Vessels, including

Pulsation Dampeners

CHINA

A land of constant changes

A land driven by its cultural destiny

A land of people driven by historical events

A land of capitalism in a communistic society

A land where the values of people are different to ours

A land where the mood of its people has shifted significantly

A land that will become the center of the world again

The Times They Are A Changin’

Come writers and critics

Who prophesize with your pen

And keep your eyes wide

The chance won't come again

And don't speak too soon

For the wheel's still in spin

And there's no tellin' who

That it's namin'

CHINA

1990 ~ 2008 the economic growth was driven by:

Exports

Foreign Investments

Economy absorbed 400 million people who migrated from rural

areas

Broad based improvement of living standards

CHINA

Global Recession of 2008/2009

China began to integrate into the world economy

Provided direct support through funding of USA and EU debt

Very successfully Implemented their own stimulus package

Provincial and local government debt exploded

Exports continued their shift to finished products

Entrepreneurs started to realize the importance of branding and the associated implications

Dramatic improvement in living standards in the urban areas

Migration from the rural areas continues as planned

The “destiny” of China moved from a belief to a reality

The expectations of the people of China changed

Things they are a changin’

The Times They Are A Changin’

The expectations of the Chinese people

The cultural revolution is just an history lesson for the current

generation

Chinese communism has been good to its people

Life is good and should continue to get better

Life is not all about work

Life is about enjoyment and harmony at work and at home

Cradle to grave dependency is evaporating

Freedom to do what I want

To travel wherever I want

“I am Chinese”

Times They Are A Changin’ The results of expectation change on Chinese worker:

Owning my own home

Owning a car

Owning an investment property………

Giving my child a good education – good university education

Travelling overseas

Looking after mom & dad

Eating meat every day

Going out restaurants – often

Getting a less arduous job

Being a manager

Earning more money

Buying more

Living the American Dream Living the Chinese Dream

The Times They Are A Changin’ China is in a recession its growth rate in 2011 fell into single digits!

The forecasted future growth rate is:

• Next few years 8%

• Average over the next 20 years 6%

• As 2030 approaches 5%

Why the change?

End of stimulus implementation

Global economic impact

The Chinese government has been shifting gears big time.

Meeting the needs of the current and upcoming generations

Focusing on consumer driven growth

Creating wealth that will fuel consumer spending

Less emphasis of foreign investment

Less emphasis on exports

YES DRIVEN BY THE POWER OF THE PEOPLE

USA, Russia, Japan, Mexico, Germany, Turkey, France, UK, Italy, Ukraine, Spain, Poland, Canada, Romania, Netherlands, Greece, Portugal, Belgium, Czech Rep. Hungary, Belarus, Sweden, Austria, Serbia, Bulgaria, Switzerland, Denmark, Slovakia, Finland, Norway, Croatia, Georgia, Ireland, Bosnia & Herzegovina, Lithuania, Albania, Latvia, Kosovo, Macedonia, Slovenia, Guernsey, Greenland, Lichtenstein, Monaco, Gibraltar, Iceland, Jersey, Andorra, Isle of Man, Estonia, Luxembourg

1,376,484,604

52 Countries

1,323,044,000

POPULATION OF PRC CONSUMER SPENDING WILL INCREASE FROM 37% of GDP

to 50% over the NEXT 5 YEARS

Does “living the Chinese dream” mean the end of

cheap labor? You decide:

Data below based on increased salaries effective April 1, 2012 and ¥6.25 to US$1

4 Highly competent CNC operator and programmer $3.05 per hour

3 Competent CNC operator $2.55 per hour

Accountant with Bachelors degree + 5 years experience $ 592 per month

Quality Eng.- Bachelors degree +5 years experience $ 864 per month

Mechanical Eng.- Bachelors degree +5 years experience $ 960 per month

Design Engineers Masters degree + 5 years experience $1,280 per month

Competent department manager $1,600 per month

Fringe Costs 34% of negotiated level

Housing fund 10% 0f salary capped at $128 employer contribution

Annual Bonus Maximum 3 month salary, minimum 1 months salary

What about enjoyment of life and living in harmony?

Participate with Communist Labor Union in your company! Negotiate and work with the officials of the Labor Bureau to establish:

Principal of operation in your company:

No employees “contribution” to the CCP

Annual Wage & Salary Review – Target acceptance CCP planned increase

Safety & Security of the workers

Education & training programs

Employee activities

Agree annual participation cost

Target 2% of annual salary cost paid monthly

100% use of contribution in the company, no contribution to the CCP

Give the employees the opportunity to create enjoyment and

harmony.

Living the Chinese Dream- What is the impact on business?

Ability to borrow working capital to support fast growth 80% of ALL bank loans are to provincial & local government ($1.7T)

Bank debt ratio’s controlled by the central bank and ever changing to control growth versus inflation

Pool of funds available for business working capital is constantly changing

Increasing direct labor costs Productivity gains still to be made

Declining pool of labor

Highly skilled operators expect to move out of direct labor into supervision

Increasingly available low cost robotics

A significant opportunity to introduce lean concepts

Increasing indirect labor costs Very significant opportunity to increase productivity in this area

Innovation & Product Development Chinese engineers are highly innovative when encouraged and allowed to “fly”

Product development cycles are shorten due to availability of well qualified engineers

The cost for innovation & development will remain low in the long term

Managing in civility and harmony Energy and time consuming

The real risks to: The Times They Are A Changin’

Population growth Single child policy in the urban areas

As incomes increase and family debt decreases

Increasingly couples are paying the penalties and having more than one child.

The lack of skilled worker Declining vocational college attendance – parents pushing higher education

Unskilled migrating labor needs training

Robotics are already being increasingly used

Local government debt Total provincial and local government debt ¥10.7T (US$1.7T)

Majority of the debt is through direct ownership of construction companies and

development projects

17 local governments were authorized to issue bonds in 2011 Very popular with investors – Shanghai bond issue was over subscribed 300%

Over time the liquidation of housing inventory is inevitable with the continued

migration of rural workers to the urban centers (300~400 million more people)

The real risks to: The Times They Are A Changin’(continued)

Infra-Structure Spending Not to be repeated

Funding of Provincial and Local Government Current source of funds, the income from “sale” of land, cannot be sustained

A new fiscal/taxation system will need to be introduced This will not be popular with property owners – now the people

Funding of Government Departments Nearly all government departments are expected to be self funding and

“profitable” on their own transaction fees

Lack of transaction fees in 2011 & 2012 led to little used tax regulations being

implemented…..subject to negotiations

This will continue to be an issue

The lack of continuing movement to a social “democracy” This movement has continued now for more than a decade

It will continue under the influence of Premier Wen Jaobao in his retirement. This was made very clear in his recent address to the National Congress.

The recent World Bank recommended actions

required to sustain the Chinese Economy

Rein in state owned companies

Reform banking

Fiscal system overhaul

Build world class universities

Greater emphasis on innovation

Land reform

Reform the social safety net

Integrate China into the world economy

China, consumer driven & “Living The Chinese

Dream” will impact the developed economies:

Consumer Products Currently imported Chinese goods will cost more

This will be CPI Inflationary

Capital Equipment & Durable Goods Currently unknown quality Chinese equipment will be purchased

Current and or local manufacturers will not be able to cost effectively compete unless they are Chinese.

Less and less manufacturing in the developed countries

More and more service industries jobs

Raw Material resources. China has been quietly executing longer contracts and arrangements to secure long term availability of raw materials

Energy resources & costs China is investing heavily in their 2020 Energy Independence program

China’s long term energy costs will be lower than the rest of the world

Propulsys remains firmly committed to expansion of its investment in China and in particularly to RunZhou, Zhenjiang.

We see and understand the tremendous gr0WTH opportunity in China

We see and participate in the global business shift that is occurring We know and experience the attitude change of the people of China We understand guanxi and the importance of relationships

We live the changes

Propulsys believes that for the foreseeable future China will offer the best opportunity for above average returns on investment The Chinese lack of an external debt burden and the consumer driven

growth will: Create significant tax advantages compared to USA and Europe Longer term inflationary impact in China will be less than in USA and Europe

Propulsys’ strategies for future investment

Propulsys’ strategies for future investment

Based on its knowledge, experience and capabilities in China Propulsys will:

Continue its own investment and expansion in China Work with Chinese companies to establish new highly profitable

growth ventures

Offer to western third party companies: J/V opportunities that will establish new wholly owned WOFIE’s in China Strategic Partnership Relationships to design, develop and manufacture:

Finished Products Metric designs Chinese materials and components

Conduct domestic Chinese Market analysis/study to identify and quantify the sales and manufacturing opportunity

Strategies for future foreign investors

Recognize the economy of China – the fastest growing

consumer driven market in the world.

Respect and participate in the Chinese culture

Change your attitude!

China is not going to change…..you need to change!

Thank you for your time.

Q&A