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Boosting Domestic Consumption GDP Growth Rate Adjustment 1 2 Industry Upgrade and Innovation 3
12-5 Strategic Plan 6 Internationalization 5 Regional Coordinated Development 4 Energy Saving and Environmental Protection
The 12-5 plan emphasizes development rather than growth of the economy, indicating a growing focus on sustainability
Comparison of Economic Growth Target
11-5 plan vs. 12-5 plan Enhancing quality of Development
China has enjoyed stunning economic growth based on low-value added and low-cost production, which will not be able to sustain its economic development China needs to enhance the quality of its development by cultivating high value-added industries and eliminating the outdated capacity China has a large amount of national income, yet its household consumption remains largely weak To achieve its goal by 2020 of being a relatively affluent nation, China needs to boost its household consumption in domestic market Chinas past growth comes at the expense of its deteriorating environment China needs to adjust its development model to make its economic growth more sustainable
11-5 Plan
China has to maintain stable and moderately fast economic development
12-5 Plan
China will maintain stable economic development
Guiding Principle
7.5%*
7.0%
Led by the shifting focus of the government from the pursuit of speed of economic growth to its quality and sustainability
Note*: The average annual growth of GDP during 11-5 period was 11.2% Source: China 12th 5-year Plan; China 11th 5-year plan; Literature research; Booz & Company analysis
Booz & Company 20110331 201104_The 12th 5-year plan.ppt
Import exceeded export in Feb. 2011 indicates a probable crossover in the economy
Value of China Exports and Imports
Oct 2010-Feb 2011; Billion US$ Billion US$ 160 140 120 100 80 60 40 20 0 Oct, 2010 In Feb 2011, China witnessed more imports than exports for the first time in the past six years Imports Exports
Nov, 2010
Dec, 2010
Jan, 2011
Feb, 2011
In the 12-5 plan, the Chinese Government has put boosting domestic consumption as the top agenda
Emphasis on Domestic Consumption in 12-5
11-5 Plan China needs to adjust its economic development structure 12-5 Plan China needs to expand its domestic demand, making it a strategic focal point, in order to achieve the balance among investment, net export and consumption in economic growth This will be achieved through increasing household disposable income
c egi trat S
For China, its domestic consumption contributes much less to GDP compared with the EU and the U.S.
Breakdown of GDP
2009;China vs. EU. vs. U.S.
100%
37%
58%
66%
45%
Government Expenditure Private Consumption
19% 6% China
Source: Global Insight data; Booz & Company analysis
Booz & Company 20110331 201104_The 12th 5-year plan.ppt
1% Europe
China household consumption has been decreasing against GDP over the last decade
Share of China Household Consumption in GDP
2000-2010; %
70
World Average: 61.5%
Comment
Chinas household income grew much slower in the past 5 years Household disposable income* grew at CAGR of 6~8% SOE revenue grew at CAGR of ~20% National fiscal revenue grew at CAGR of ~22% GDP per capita grew at a faster rate of 17% compared to household disposable income growth in the past 5 years, indicating a widening gap between national income and residential income, and threatening social stability
60 50
-30%
40 30 20 10 0 2000
US$
6,000 4,000
+17%
946 1,726
4,383
2002
2004
2006
2008
2010
2,000 0
2000
Note*: Source: Household disposable income includes income from both urban and rural residents here China's National Bureau of Statistics; China info bank statistics; Booz & Company analysis
201104_The 12th 5-year plan.ppt
2005
2010
Policies
Summary
Large SOEs were required to contribute more of their after-tax profit with the government Starting from 2011, more SOEs will be asked to share their profits Also, the amount of profit to be shared has been adjusted to a higher level The taxable* income base is expected to adjust from 2000 RMB per month to 3000 RMB per month
Implication
The profit contributed by SOEs will be used to provide public service
The Chinese government is also making efforts to enhance the social welfare and security system
This will help residents live in a better-off and safer society, with basic needs covered by the government This will encourage residents to purchase foreign goods in domestic market other than in overseas markets
The Chinese government is trying to bridge the price gap of luxury goods bought abroad and home
Note*: Here taxable salary base refers to the salary base subject to income taxes Source: China 12-5 plan; Literature research; Booz & Company analysis
Booz & Company 20110331 201104_The 12th 5-year plan.ppt
Implications Consumption in China is expected to grow at a faster rate from 2009 onwards, indicating Chinas promising future in becoming a large consumer market Investors need to change their perception on China as a mere manufacturing base; instead, they should treat it more as a growing consumer market Investors need to learn the specific needs of Chinese consumers, and design tailoredmade products and services accordingly
15.9
Note: The 2020 consumption in China is estimated by UBS Source: National Bureau of Statistics of China; Booz & Company analysis
Booz & Company 20110331 201104_The 12th 5-year plan.ppt
In 12-5 period, China will devote to developing seven emerging industries as well as the culture industry
12-5 Plan Strategy Highlight
Continue to increase value added Eliminate outdate capacity Develop advanced equipment manufacturing industry
Leading Industries
Energy Consumption
Increase government support to develop the 7 emerging industries* of strategic significance GDP contribution of the 7 industries should increase to 8% by 2015 from the current 2% Cultivate the culture industry to be a leading industry Implication: the share of value added of GDP by the culture industry needs to double from the current 2.5% to 5%
With Chinas labor cost rising, Chinese industries have been losing edge in international competition It is necessary for China to transform its industry structure to make it more technology and innovation-driven
Note: 7 strategic emerging industries include energy efficiency & environmental protection, new generation information technology, bio-technology, high-end equipment manufacturing, alternative energy, new materials, electric vehicle Source: China 12-5 plan; Literature research; Booz & Company analysis
Booz & Company 20110331 201104_The 12th 5-year plan.ppt
India
China
Vietnam
China
Russia
India
China is losing its cost advantage to Vietnam as its labor cost continues to increase and widens the gap
Source: HIS Global data; Literature research; Booz & Company analysis
Booz & Company 20110331 201104_The 12th 5-year plan.ppt
10
China is aiming to move up the value chain: from made in China to created in China (1/2)
Progress of Chinas Industry Development
Stage 1 Circa early to mid 1990s
R&D Product Development Sourcing Manufacturing Marketing Sales & Distribution Service
R&D
Sourcing
Manufacturing
Marketing
Service
Began to have brand for the local market and local sales & distribution Sales & Distribution
R&D
Product Development
Sourcing
Manufacturing
Marketing
Service
R&D
Product Development
Sourcing
Manufacturing
Marketing
Service
11
China is aiming to move up the value chain: from made in China to created in China (2/2)
Number of Patents
2006-2009 (Historical); 2010 (Estimate)
55,000 51,280 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 16,736 17,821 18,855 16,797 17,171 12,337 27,025 27,743 28,760 29,802 32,156 54,043 51,637 45,618 44,855
60 50 40 30 20 10 0 -10 -20
China
3,942
5,455
6,120
7,900
2006
2007
2008
2010 (E)
06-07
07-08
08-09
09-10
China has witnessed stunning growth in the number of patents in recent years, demonstrating its growing competency in innovation
12
Toyota Technical
Equity: Invest: 100% TMC $ 8.7 mil
Center1)
GM PATAC 2) (1997)
Partner: Invest: Staff: Nanjing Shanghai 50% SAIC $ 300mil 1,700
Toyota Shanghai
Equity: Invest: 100% TMCI $ 11Mil
Ford (2006)
Fuzhou
Toyota Guangzhou
Equity: 100% TMCI Guangzhou
Partner: 100% Ford Invest: 2.2B ($27.5M) Scope: Vehicle, engine, parts design & engineering
Nissan R&D
Partner: 50% Dongfeng Foundation: 2005
SAIC-VW (1999)
Partner: Invest: Staff:
low Supplier availability Separated entity high part of JV
1) 2)
Toyota Motor Technical Center China in Tianjin Pan Asia Technical Automotive Center
201104_The 12th 5-year plan.ppt
13
MNCs from various industries have shifted their R&D centers to China
Pharmaceutical Industry Consumer Goods Industry
5th
The 18nd R&D center worldwide Mainly focus on the China and Asia market
The 4th R&D center worldwide Mainly focus on the China and Asia market
IT Industry
Energy Industry
The 1st R&D center in Asia, part of Intels global R&D network
14
The 12-5 plan sets more constraints on energy consumption and emissions, and will enhance enforcement
Summary
Notion
China proposes a new notion of combat global climate change Decrease CO2 emissions per unit of GDP by 17% by 2015
Targets
New targets to control energy consumption and emissions Increase the proportion of non-fossil energy consumption over that of primary energy by 3.1% to 11.4% by 2015 Add two more emissions indicators, NHx and NOx, whose emissions have to decease by 10% by 2015 Emissions control targets will be further allocated to enterprises Outdated production capacity will be further eliminated Local governments need to come up with a list of enterprises whose production capacity will be eliminated and timeline Administrative For regions that fail to meet the targets, their applications for government-sponsored projects or request for land use will not be reviewed For enterprises that fail to meet the targets, their manufacturing licenses will be revoked Financial Banks will refuse to offer loans to regions or enterprises that fail to meet the targets
469
Measures
U.S.
China
India
Enforcement
China is consuming much more energy compared to other economies (except for the U.S.), as its has a higher proportion of energy-consuming and polluting industries such as steel in its industry structure There is huge potential for China to reduce its energy consumption
Source: China 12-5 plan; BP report; Literature research; Booz & Company analysis
Booz & Company 20110331 201104_The 12th 5-year plan.ppt
15
Heavily energy-consuming industries will be the prioritized targets of Chinas national energy saving plan
Energy Consumption by Industry
2007;%
Characteristics of energy consumption in China Industrials consume over 70% of energy Within the industrials sector, consumption of nine major industries accounts for ~80% These nine industries are the prioritized targets of the energy saving plan as they consume collectively over 50% of energy in China
21%
8% 25% Smelting and Pressing of Non-Ferrous Metal Raw Chemical Material and Chemical Products 2% 3% Non-metal Mineral Products Electric Power, Thermal Power Production and Supply Petroleum Processing and Coking 14%
7% 10% 11%
Industrials
4%
71%
6%
Smelting and Pressing of Ferrous Metal Coal Mining Textile Oil and Gas Extraction Others
16
Comments Petroleum and petrochemical sector is one of the prioritized industries in national energy saving plan, initiatives including: Accelerating the promotion of energy reduction technologies
Pilot energy saving projects with a focus on recycle, use of alternative energy, and system optimization
17
The barriers in reducing energy consumption in these industries suggest potential investment opportunities
Examples of Technical Difficulties in Energy Saving and Emissions Reduction
Motor System Energy Saving Project
Power Electronic Device except for SCR, China is not capable of producing modern power electronic devices such as IGBT/IGCT Frequency Control Products with high efficiency and large power are dominated by foreign competitors; domestic products can hardly compete against foreign products in terms of the reliability of FOC and TDC Compact Fluorescent Lamp (also known as a Energy Saving Light) a large proportion of domestic products suffer from poor lumen maintenance rate (<80%) and short lifecycle (< 6,000 hours) LED Lamp key technologies of Ultra Bright LED are yet to be developed; technological breakthroughs in packaging and application are not fulfilled
Technical Difficulties
Natural Gas Vehicle (NGV) the first generation technology is applied to most of existing domestic modified cars, emissions targets of which are lower than their foreign counterparts with electric fuel pumps Hybrid Power Vehicle the efficiency of domestic batteries and motors are 30% lower compared with world leading standard, failing to save energy
18
Economic development varies across regions in China, with Western China lagging behind
GDP per capita
2009; RMB
Heilongjiang Jilin Xinjiang Beijing Liaoning Gansu Inner Mongolia Tianjin Hebei Ningxia Shanxi Shandong Qinghai Shaanxi Henan Jiangsu Hubei Anhui Sichuan Shanghai Chongqing Zhejiang GuizhouHunanJiangxi Yunnan Guangxi I <20,000 RMB p.a. II 20,000-30,000 RMB p.a. III 30,000-40,000 RMB p.a. IV >40,000 RMB p.a. Hainan Fujian Guangdong I <15,000 RMB p.a. II 15,000-20,000 RMB p.a. III 20,000-24,000 RMB p.a. IV >24,000 RMB p.a. Xinjiang
Heilongjiang Jilin Beijing Liaoning Gansu Inner Mongolia Tianjin Hebei Ningxia Shanxi Shandong Qinghai Henan Jiangsu Shaanxi Hubei Anhui Sichuan Shanghai Chongqing Zhejiang GuizhouHunanJiangxi Yunnan Guangxi Hainan Fujian Guangdong
Tibet
Tibet
19
69% of China's overall area 28% of population 19% of China's GDP 17% of consumer spending 14% of foreign direct investments 10% of applied patents 6% of registered foreign enterprises 4% of exports
western provinces
20
% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0 Western China 35% Central China 40% Eastern China 60%
2005
2006
2007
2008
2009
China is gradually urbanized The 12-5 plan aims to increase Chinas urbanization by 4% by 2015
East China has been highly urbanized with ~60% of its population living in cities, rendering it hard to continue to urbanize at a high rate Central China and West China currently are at a relatively low level of urbanization, and will be key drivers for China to reach its goal by 2015 21
Western development is made a key national strategy in the 12-5 plan, with focus on three specific geographical areas
Three key regions for development
Xinjiang
Inner Mongolia Gansu Ningxia Shaanxi Sichuan Chongqing Guizhou Yunnan Guangxi
Chengdu-Chongqing:
(cities:chengdu,chongqing,etc)
Qinghai Tibet
Western provinces
22
6 Internationalization
Internationalization becomes hot, foreign companies have to think how to partner with local players to exploit global opportunities
Foreign Investment in China
2004-2009; Billion US$ Billion US$ 100 90 80 70 60 50 40 30 20 10 0 2004 2005 2006 2007 2008 2009 61 60 63 75 92 95 Billion US$ 60 55 50 45 40 35 30 25 20 15 10 5 0 18 12 6 56 57
27
2004
2005
2006
2007
2008
2009
23
6 Internationalization
The 12-5 plan also encourages foreign investors to participate in China market competition in various ways
Summary Foreign investors are encouraged by the Chinese government to invest Industries: In high-tech industries, alternative energy, and modern service industry, etc Regions: More in Central and Western China Channels: Via M&A, buying stakes in domestic enterprises, expanding their value chain such as R&D in China, etc The Chinese government is devoted to making its policies more favorable to foreign investments Enforcement of laws will be strengthened to protect investors legal rights in China
China market will be more open, safe and favorable to foreign investors
24
Implication
Not manufacturing base for exports but a huge potential consumption market Develop products for China: from MADE IN CHINA TO MADE FOR CHINA Focusing on strategic emerging industries, NEV is key Taking care of creativity industry opportunity Expand value chain to upstream to increase competitive advantages A sizable demand market Good opportunities for equipment manufacturing industry More opportunities in emerging service models, such as energy management contract (EMC) Go West!!! Focus on resources and energy consumption intensive industries Fast urbanization and related investment opportunities, eg, retail, infrastructure, real estate Teaming up with Chinese partners
GDP Growth 4 Energy Saving and Environmental Protection Rate Adjustment 5 Regional Coordinated Development
6 Internationalization
25