China 2020: What Will China Look Like in the Future?

Preface: What Does China Look Like from Space? At Night?
Why?
Source: NASA (United States – National Aeronautics and Space Administration)

Table of Contents – Corporate Series (Part 1 of 6)
Introduction – What China Will Look Like in the Future
STRUCTURAL FRAMEWORK: Determinants of China’s Economic Geography
The PAST: China’s Economic Growth
- WEALTH: Forward Trend in Middle Class Growth
- URBANIZATION: Forward Trend in Mass Migration / Urbanization
- The FUTURE: China’s Future Country-Sized Mega-Clusters
Next Generation Structural/Functional Strategies
TODAY’S BURNING PLATFORM: Structural Optimization (Cost / Revenues)
1. Cost Reduction / Resources: Opportunity Envelopes for Emerging Structural Cost Optimization
2. Revenue Growth / Markets: Pareto-Optimal Cost-Revenue Platform Solutions
FUTURE BURNING PLATFORMS: Next Generation Optimization Opportunities
3. Innovation Enhancement / Talent: Innovation-Seeking Investment Trend
4. Shared Service Centers: SSC and BPO Trends, Strategic Opportunities
5. Virtually Integrated Operating Models: Migration to Virtually Integrated Operating Models
China’s Economic Health and Opportunities for Investors
- China Investor Confidence: China Ranks #1 as Most Attractive Investment Destination of Future
- Financial & Economic Health: China Balance Sheets - Banks, Enterprises, Households
- Stimulus Plan: Composition and US Comparison
- Investment Opportunities: What are Investment Opportunities? For which Sectors?

INTRODUCTION: What China Will Look Like in the Future …

Structural Determinants of China’s Economic Geography …
67% Mountains, Deserts, Steppe … 90% of 1.3 billion Population in EAST
Deserts
Heilongjiang
Steppe
Jilin
Liaoning
Xinjiang
Inner Mongolia
Beijing
Gansu
Tianjin
Hebei
Mountains
Shanxi
Ningxia
Shandong
Qinghai
Henan
Jiangsu
Shaanxi
People
Tibet
Anhui
Shanghai
Hubei
Sichuan
Zhejiang
Chongqing
Jiangxi
Hunan
Fujian
Guizhou
Yunnan
Guangdong
Guangxi

The PAST: Fastest Growing Large Economy in World
China’s Economy: Doubles every 7 Years … Tripled most Recently
China GDP (USD trillion)
Hosts OLYMPIC games
3x
Accepted full convertibility for current account transaction
Admitted to WTO
USD (Real Market Rates)
Eliminated its dual exchange rate
China
Opens to the World
Applied to join GATT
2x
2x
Source: IMF

900
800
99
700
90
600
500
53
170
355
400
461
525
239
300
255
200
157
106
100
73
35
0
2005
2010F
2015F
2020F
2025F
WEALTH: Forward Trend in Exploding Middle Class
China’s Middle Class: 400 million (2010) … 500 million (2015)
Middle Class Income Bands for Urban Population
Urban Household Income (US$ – PPP-Adjusted)
822
822
756
756
Global > US$107,800
684
684
Affluent US$3,800 - 107,800
607
607
531
531
Urban Population (millions)
Upper Middle US$21,501 – 53,900
Lower Middle US$13,500 – 21,500
Poor < US$13,500
Upper Middle Class
Lower Middle Class
Sources: Urbanization Rates, Population based on UN, World Urbanization Prospects 2007; MGI Consumer Demand 2008

URBANIZATION: Forward Trend in Mass Migration into Cities
China’s Urban Population: 600 million (2010) … 700 million (2015)
China’s Urban Population versus Rural Population
1,600
1.45 billion
1.4 billion
1,400
1.3 billion
1.2 billion
624
1,200
Rural Population (million)
1 billion
705
1,000
782
800
833
822
822
Urban Population (million)
600
684
400
531
381
200
245
Urbanization
57%
23%
49%
40%
31%
0
1985
1995
2005
2015
2025
Source: World Urbanization Prospects 2007

The FUTURE (2020): Emergence of 10+ Mega-Clusters Size of Countries
Mega-Cluster Profile: 60 Million Population + World-Class Infrastructure
Mega-Clusters
China’s Emerging MEGA-CLUSTERS
Mega-Corridors
Deserts
Heilongjiang
Steppe
Jilin
Liaoning
Xinjiang
Inner Mongolia
Beijing
Gansu
Tianjin
Hebei
Mountains
Shanxi
Ningxia
Shandong
Qinghai
Jiangsu
Shaanxi
Henan
Tibet
Anhui
Shanghai
Hubei
Sichuan
Zhejiang
Chongqing
Jiangxi
Hunan
Fujian
Guizhou
Yunnan
Guangdong
Guangxi

TODAY’S BURNING PLATFORM: Structural Optimization (Cost / Revenues)

TODAY’S BURNING PLATFORM: Structural Cost Reduction, Revenue Growth
Global Structural’ Cost Reduction … Revenue Growth
3) INNOVATION
Revenue Growth
KNOWLEDGE
Sales
Engineering
MARKETS
CONTRACTS, PARTNERSHIPS
Marketing
IT HR
R&D
Shared Services
SHARED SERVICE CENTERS
F&A Procure
Distribution
Sourcing
RESEARCH & DEVELOPMENT
Production
SALES & MARKETING
RESOURCES
PRODUCTION / SOURCING
Cost Reduction
DRIVING Shareholder Value

1. COSTS: Does First-World Infrastructure with Third-World Wages Exist?
Asia Labor Costs: 10 – 20 Times Cheaper than in West
Labor Costs (USD per month)
Utility Costs
Note: Units for Electricity $/kWh; Water in USD/m3; Waste Water in USD/m3
Source: Wage Data from the International Labor Organization; Utilities Rates from Public Utilities (non-negotiated rates)

1. COSTS: China Yields Major Cost Savings through Production & Sourcing
Is it POSSIBLE for a Company’s Economy … to Surpass that of Countries?
7th Place
10th Place

1. COSTS: Significant Stratification Trend for Wage Bands
Labor Costs: Western China @ 65% of Costs compared to EAST
Low Cost Labor
(Bands Normalized to Highest Wages for Operators)
Wage Bands
Deserts
Heilongjiang
Steppe
Jilin
Liaoning
Xinjiang
1
Inner Mongolia
Beijing
Gansu
Tianjin
Hebei
Mountains
Shanxi
Ningxia
Shandong
Qinghai
0.65 - 0.75
Henan
Jiangsu
Shaanxi
1
Tibet
Anhui
Shanghai
Hubei
0.8 - 0.9
Sichuan
0.7 - 0.8
Zhejiang
Chongqing
Jiangxi
Hunan
Fujian
Guizhou
Yunnan
1
Guangdong
Guangxi
Source: Exolus Research

1. COSTS: Where are Emerging Structural Cost Reduction Opportunities?
Intersection: Low Cost Bands + Emerging Mega-Clusters
Wage Bands / Mega-Cluster Overlay
(Normalized to Highest Wages)
Wage Bands
Mega-Cluster
Mega-Corridors
Deserts
Heilongjiang
Steppe
Jilin
Liaoning
Xinjiang
1
Inner Mongolia
Beijing
Gansu
Tianjin
Hebei
Mountains
Shanxi
Ningxia
Shandong
Qinghai
0.65 - 0.75
Henan
Jiangsu
Shaanxi
1
Tibet
Anhui
Shanghai
Hubei
0.8 - 0.9
Sichuan
0.7 - 0.8
Zhejiang
Chongqing
Jiangxi
Hunan
Fujian
Guizhou
Yunnan
1
Guangdong
Guangxi

Germany (5)
France (6)
China (2)
EU-27
UK (7)
Germany (3)
EU-27
France (6)
UK (4)
2. REVENUES: China Already World’s 2nd Largest Economy (PPP)
GDP PPP (2008)
11,8 trillions de $
6,4 trillionsde $
US (1)
3,6 trillionsde $
3 trillionsde $
India (3)
Japan (4)
$7.8 tr
$4.4 tr
$3.3 tr
$14.9 tr
$14.3 tr
GDP Nominal (2008)
US (1)
$5.1 tr
Japan (2)
China (5)
IND(9)
$14.3 tr
$4.2 tr
$4.9 tr
$1.2 tr
$17.1 tr
Source: EIU; IMF; CIA World Factbook

2. REVENUES: Significant Income Stratification Trends across China
Coastal Wealth Spreading Across the Country
China Per Capita Annual Income
(USD, PPP-Adjusted)
Per Capita Annual Income
(USD, PPP-Adjusted)
Heilongjiang
Jilin
Xinjiang
Liaoning
Inner Mongolia
Beijing
Gansu
Hebei
Tianjin
Shanxi
Ningxia
Shandong
Qinghai
Henan
Jiangsu
Shaanxi
Tibet
Anhui
Shanghai
Hubei
Sichuan
Zhejiang
Chongqing
Jiangxi
Hunan
Fujian
Guizhou
Yunnan
Guangdong
Guangxi

2. REVENUES: Car Sales/Production Proxy for Directional Market Sizing?
China Cars: World’s #1 Consumer … World’s #1 Producer
China Automotive Production
VW: Audi, Jetta, Bora, Golf
Mazda: M6
Toyota: Land Cruiser
BMW: 3 Series and 5 Series
GM: GL8
GM:Chevrolet (Epica, Sail, Aveo, Lova)
GM: Wuling
Hyundai: Sonata, Elantra
Daimler-Chrysler: Mercedes-Benz, Cherokee, Jeep
Mitsubishi: Pajero, Outlander
Changchun
Kia: Pride, Accent, Optima
Shenyang
Fiat: Iveco
Ford
Beijing
Tianjin
Yantai
Qingdao
Toyota: Vios, Corolla, Crown
Daihatsu: Charade
VW: Santana, Passat, Polo, Gol, Touran
GM: Buick Regal, Royaum,Lacrosse,
Excelle, Cadillac
Zhengzhou
Yancheng
Nanjing
Wuhu
Wuhan
Shanghai
Chengdu
Nissan: Paladin, pickup
Nanchang
Chery: Fulwin,Cowin,Easter,QQ,A5,V5
Taizhou
Chongqing
Changsha
Toyota: Terios, Prado
Fuzhou
Geely: Haoqing, Meirie, Uliou, Maple
Suzuki: Alto, Swift, Gazelle
Isuzu: F-Series, N-Series
Ford: Fiesta, Mondeo
Guangzhou
Liuzhou
Nissan: Teana
Peugeot-Citroen: Fukang, Elysee, Xsara, Peugeot, Picasso
Honda: CR-V
Hainan
Mitsubishi: Pajero
Soueast: Lioncel, Delica, Freeca, Soveran
Daimler Chrysler: Spinter Vito/Viano
GM: Spark, Wuling
Honda: Accord, Fit, Odyssey
Nissan: Bluebird, Sunny
Toyota: Camry
Mazda: Premacy, Familia
Ford: Transit
Sources: Company Websites, Publically Available Information

1
100%
2
4
16
90
11
80
9
9
5
70
7
15
60
12
6
50
11
40
9
30
54
20
29
10
0
1990
2010f
2. REVENUES: High Spending Growth Sustained Through Global Crisis
Sustained Retail Sales Growth … Huge Shift in Discretionary Spend
Retail Sales Growth
Personal Expenditure
1.8
15.5% Growth (2009)
Transport & Communications
USD Trillions
Health Care
Consumer Goods
Education
Home Appliances
0.7
Housing
Clothing
0.4
Food
Source: China National Bureau of Statistics

2. REVENUES: Immense, Rapidly Growing Markets across Verticals
Exploding Middle Class+ High Speed Urbanization = Explosive Growth in Consumption
Source: China National Bureau of Statistics, EIU 2008, Various

COSTS/REVENUES: Where are Pareto Optimal Envelopes?
Low Cost Bands + Emerging Mega-Clusters + High-Income Geographies
Per Capita Income / Wage Band Overlay
Per Capita Annual Income
(USD, PPP-Adjusted)
Heilongjiang
Jilin
Xinjiang
Liaoning
Inner Mongolia
1
1
Beijing
Gansu
Wage Bands
Hebei
Tianjin
Mega-Cluster
Shanxi
Ningxia
Mega-Corridors
Shandong
Qinghai
0.65 - 0.75
Henan
Jiangsu
Shaanxi
1
1
Tibet
Anhui
Shanghai
Hubei
0.8 - 0.9
Sichuan
0.7 - 0.8
Zhejiang
Chongqing
Jiangxi
Hunan
Fujian
Guizhou
Yunnan
1
1
Guangdong
Guangxi

FUTURE BURNING PLATFORMS:Next Generation Strategic Optimization

The FUTURE: Third, Fourth & Fifth Generation Global Strategies
INNOVATION
REVENUES
KNOWLEDGE
MARKETS
Sales
Engineering
Marketing
R&D
IT HR
SSC
CONTRACTS, PARTNERSHIPS
F&A Pro’c
SHARED SERVICE CENTERS (SSC)
Distribution
Sourcing
RESEARCH & DEVELOPMENT
Production
SALES & MARKETING
PRODUCTION / SOURCING
RESOURCES
DRIVING Shareholder Value
COSTS

3. INNOVATION: China Mobilizes all Resources to Develop Talent
China Science and Engineering: 1.6 Million Graduates per Year
University Natural Sciences Degrees(1985 – 2005)
USA
China
Thousands
Sources: National Science Board, Science & Engineering Indicators 2008

3. INNOVATION: Where are Key Nodes for Structuring R&D Platforms?
“R” of R&D Seeks Universities … “D” Seeks Markets & Production
R&D Centers
(# Operations)
Research & Development Centers
(Number of Operations in Select Cities)
> 10
> 50
Deserts
Heilongjiang
Steppe
> 150
Jilin
Wage Bands
Mega-Cluster
Liaoning
Xinjiang
Mega-Corridors
1
Inner Mongolia
Beijing
Gansu
Tianjin
Hebei
Mountains
Shanxi
Ningxia
Shandong
Qinghai
0.65 - 0.75
Henan
Jiangsu
Shaanxi
1
Tibet
Anhui
Shanghai
Hubei
0.8 - 0.9
Sichuan
0.7 - 0.8
Zhejiang
Chongqing
Jiangxi
Hunan
Fujian
Guizhou
Yunnan
1
Guangdong
Guangxi
Source: UNCTAD, WIR

3. INNOVATION: Even Big Pharma Migrating R&D Functions to China
Costs Disease Diversity R&D Clinical Trials
R&D Centers
(# Operations)
Research & Development Centers
(Number of Operations in Select Cities)
> 10
> 50
Heilongjiang
> 150
Jilin
Wage Bands
Mega-Cluster
Liaoning
Xinjiang
Mega-Corridors
Inner Mongolia
Beijing
Gansu
Tianjin
Hebei
Shanxi
Ningxia
Shandong
Qinghai
Henan
Jiangsu
Shaanxi
Tibet
Anhui
Shanghai
Hubei
Sichuan
Zhejiang
Chongqing
Jiangxi
Hunan
Fujian
Guizhou
Yunnan
Guangdong
Guangxi
Source: UNCTAD, WIR

4. SHARED SERVICE CENTERS (SSC): Strategic Solution Envelopes
Efficiencies … Economies of Scale … Knowledge Sharing … Standardization
Strategic Sourcing / Mega-Cluster Overlay
Shared Services
Wage Bands
Deserts
Mega-Clusters
Heilongjiang
Steppe
Mega-Corridors
Jilin
Liaoning
Xinjiang
1
Inner Mongolia
Beijing
Gansu
Tianjin
Hebei
Mountains
Shanxi
Ningxia
Shandong
Qinghai
0.65 - 0.75
Henan
Jiangsu
Shaanxi
1
Tibet
Anhui
Shanghai
Hubei
0.8 - 0.9
Sichuan
0.7 - 0.8
Zhejiang
Chongqing
Jiangxi
Hunan
Fujian
Guizhou
Yunnan
1
Guangdong
Guangxi
Source: KPMG “A new Dawn: China’s Emerging Role in Global Outsourcing”, 2009

5. Global Virtual Integration Models: Extension of Core Functions
Global Virtual Integration Models … Even Big-Pharma LEAP-FROGGING Generations
Boehringer Ingelheim
First Big Pharma to have entrusted a sole distributor for all of its products in China: Sinopharm.
Sinopharm is China’s largest pharmaceutical distributor by sales and the only China distributor to cover the entire PRC.
Boehringer Ingelheim’s sales spiked upward by 45% from 2006 to 2007; Sinopharm saw an annual growth rate of 32%.
Pfizer
Outsources to Wuxi PharmaTech: synthetic chemistry, parallel medicinal chemistry, and bio-analytical services. It also has a 3-year CRO contract with Wuxi PharmaTech to provide services in the areas of: in-vitro Absorption, Distribution, Metabolism and Excretion (ADME) services.
GSK
Outsources to Shanghai Institute of Materia Medica (SIMM) chemistry requirements.
AstraZeneca
Invested USD14 million in Wuxi Pharma Tech for the synthesis of 150,000 compounds.
China’s CRO Market
CSO Extended Cases
CRO Extended Cases
Sources: Goldman Sachs: Healthcare Services: CROs, December 2007; Exolus Research

China’s Economic Health … Opportunities for Investors

Senior Executives Select China as Most Attractive in World
Investor Confidence in China #1 in World
Top 14 Most Attractive Destinations for Future Investment (2009 – 2011)
%
Percent of Responses
Source: World Investment Prospects 2009 - 2011

Healthy Balance Sheets – Banks, Enterprises, Households
Insulation of Financial System … USD 2.4 trillion in Foreign Reserves … Low Inflation
China’s Financial System Healthy, Benefits from Insulation, Abundant Liquidity
China banks cleaned up in 1990s: Non-performing loans in 1997 averaged 40 – 50%; only 6% in 2007.
Financial institutions extended approximately USD1.4 tr in new loans in 2009; almost double that of 2008
Forex Reserves Achieve Record High in 2009: USD 2.4 trillion
The Central Bank has accumulated over USD 2.4 trillion in foreign reserves.
The accumulation of large external surpluses means financial system enjoys abundant liquidity.
Clean Balance Sheets for Enterprises and Households
State Owned Enterprise net profits as share of GDP has grown from (-1%) in 1997 to (+4.3%) in 2007.
Record corporate profit growth over past 5 years (industrial profits rose 38 ppa); liability ratios declined.
Urban incomes have nearly doubled in past 10 years.
CPI Inflation, Expected Modest Rise in 2010
January 2010 CPI at 1.5%, while preliminary forecasts predict inflation to reach 3% during 2010.
Source: Deutsche Bank; Standard Chartered; UBS; IMF; Other

Stimulus Plan Well Structured, Strong Ability to Implement
Large Stimulus Package … Authorities able to Deploy Quickly … China Early Recovery
China Stimulus Distribution
Economic Stimulus - Comparative
Source: China’s Stimulus vs. America’s Bailout, Housel 2008 ; National Development and Reform Commission March 2009

Stimulus Plan will be of Direct Benefit to Range of Investors
Source: MOFCOM; NAROS; Various :

Business Consulting
For Full Report and More Information Please Contact Us:
URL: www.exolus.com
Email: info@exolus.com
www.exolus.com

Disclaimer
In writing we benefit from standing on the shoulders of others and, in the process, we strive to make our own contributions to the market of ideas. As well, we are always tremendously grateful for the many, often selfless, contributions that are availed in the process.
The opinions represented herein were prepared for information purposes only, at the time of publication.The information represented herein is believed to be reliable, at the time of publication, and was obtained by various public sources also believed to be reliable. The opinions were considered to be accurate at the point of creation, and further, any views, forecasts, or estimates contained herein may be subject to change at anytime without notice. The opinions expressed or implied herein may not be the opinions of the author, also Exolus, or any associated affiliates.
This report and the information contained herein collectively, is not offered as, and should not be regarded as, used or relied upon as advice on any matter. It shall not constitute or be construed as a recommendation or solicitation on behalf of the author, and no legal commitment or obligation shall arise by reason of this document. Thus, the reader shall make an independent assessment of opinion’s stated herein that shall not be considered a substitute for obtaining advise from the readers’ advisors.
The author shall not accept responsibility, express or implied, with regards to the accuracy and completeness of the information herein, and the author shall not be liable whatsoever and howsoever arising in connection to this publication. The author shall not accept, and hereby disclaim, all responsibility and liability to all persons, entities, or organizations for all consequences arising out of any use or reliance on the whole or any part of this publication.
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China 2020: What Will China Look Like in the Future?

by France Houdard on Nov 04, 2010

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