The China Analyst - April 2012
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  • 1. April 2012 І www.thebeijingaxis.com/tca The China Analyst 中国分析家 A knowledge tool by The Beijing Axis for executives with a China agendaFeaturesState of Change: Assessing China’s CompetitivenessHow to Engage: The Rise of New Chinese ManufacturersChinese OFDI: Bolder, Wiser and More Strategic
  • 2. Chinese companies in the Fortune 500 juxtaposedwith the development of Beijing’s subway systemThis infographic illustrates the progression of Chinese companies in the Fortune 500 from 1994 (when the first Chinese companyjoined the list) with a visual reference to the expansion of the Beijing subway system from 1971. All but two of Beijing’s current15 lines were opened in the last decade; in the same period, 47 of the current total of 58 mainland Chinese companies joined theFortune 500.The circles around each company visually portrays the expansion in revenue of the companies at time of joining the Fortune 500 vs.2010. Note the subway map is not exhaustive of Beijing’s current subway system of 15 lines. Line 5 Opened in 2007 Bank of Communications Line 13 Opened in 2002 China Ocean China National China Shipping Offshore Oil Minmetals Lenovo Group China National Building China Railway Line 4 Materials Group Engineering Zhejiang Materials Jiangsu Opened Industry Group Shagang in 2009 Group China Metallurgical Group China China South Railway Industries Construction Group Chemchina Peoples  Aluminum China Datang  Huawei  Ping An  Insurance Co. of  Corp. of China China  Wuhan Iron &  Technologies Insurance China Shenhua Group Guodian Group Steel Line 10 Opened in 2008 China State Aviation Industry Construction Corp. of China China China Pacific China National Comunications Insurance Group Petroleum Corp. Construction China Mobile China Mobile Communications Communications Jizhong Energy Group Henan Coal Shanghai China Automotive China North  Shipbuilding & Chemical Industries Group Industry Shanghai State Power Baosteel Group (company reorganised Line 1 Line 2Opened Opened China and reformed) Huanengin 1981 in 1981 Sinomach Group Cofco Group China Construction Agricultrual China Bank Bank of China Telecommunications State Power Sinochem Bank of China Industrial & Sinopec Group Commercial Bank of China China National China China First State Grid Dongfeng Motor Aviation Fuel Southern Automotive Group Power Grid Works China Railway Materials China United Commercoal Telecommunications  Citic GroupLegend China Electronics Companies that joined the Fortune 500 before 2000 (Line 1) Companies that joined the Fortune 500 in 2000-04 (Line 2) Companies that joined the Fortune 500 in 2005-07 (Line 13) Hebei Iron & Steel Group China Post Companies that joined the Fortune 500 in 2008 (Line 5) Group Companies that joined the Fortune 500 in 2009 (Line 10) Companies that joined the Fortune 500 in 2010 (Line 4) Sinosteel Inside circle: Company revenue in year of joining Fortune Shougang Group 500 Outside circle: Company revenue in 2010
  • 3. The China AnalystAt the Highest Level The ChinaThe China of 2012 is a China that is priming itself for a new era. Change anddevelopment have been ubiquitous in China for over three decades now— Analystduring all this time China has been changing itself and the world in many April 2012ways. But what is about to happen is a Chinese evolution on a different level.It is imperative for every company in the world to change their perception of Published byChina. The Beijing Axis 3806 Central Plaza 18 Harbour Road Wanchai Hong Kong, PRC China is changing. Chinese companies, involving years of imitation, Tel: +86 (0)10 6440 2106 While this simple alteration, adaptation, and innovation. Yet it is Fax: +86 (0)10 6440 2672 statement could have a process that is very much underway in China, www.thebeijingaxis.com been uttered at any progressively impacting various markets around time in the last three the world. Executive Editor decades, in 2012, it is beginning to take Thus, it is essential not to underestimate the Kobus van der Wath kobus@thebeijingaxis.com on a new meaning. change that China is still capable of. Hence, Although China has in this edition of The China Analyst, we have become the second- undertaken the task of assessing China’s current Editor largest economy in level of competitiveness and to consider the Barry van Wyk barryvanwyk@thebeijingaxis.com the world, it has now future implications of a more competitive China. reached the point We have highlighted China’s leading companies Assistant Editor where its ambitions are that are approaching the ‘technological frontier’no longer satisfied with being second-best, with in their respective industries, and have assessed Daniel Galvez danielgalvez@thebeijingaxis.combeing merely an imitator, a follower, and a user of the options that are available to foreign firms inforeign technology. It is now aiming to be a leader the face of a more competitive China. Design Specialistin its own right, an industrial giant renowned notonly for its scale but also for its pioneering spirit. Hattie Peng What is required is for foreign companies and hattiepeng@thebeijingaxis.com observers to start changing their perspectivesTo some companies around the world this may on China. A more competitive China will bringsound odd. Many would still not mention ‘China’ new challenges as well as new opportunities. It is To view the contents of previousand ‘innovation’ in the same sentence. There are editions of The China Analyst, see imperative that companies be informed, the first Previous Editions on page 39. Toindeed various reasons why the type of innovation steps towards being able to act preemptively. subscribe free of charge to The Chinathat has taken root in China in the last few Analyst, please visit www.thebeijingaxis.decades has in large part relied on imitation and I trust our readers will enjoy this edition of The com or www.thebeijingaxis.com/tca.reproduction. But to maintain this impression of China Analyst, and as always we welcome your For advertising opportunities, pleaseChina would be a costly error of judgement. feedback. contact Barbie Co at barbieco@ thebeijingaxis.com.Today, the best way to look at China is to use alittle imagination, to project current trends into Kobus van der Waththe future and to imagine what such a world Founder & Group Managing Directormight be like. Farsighted individuals will do this The Beijing Axisnow, not in two, five or ten years down the road. kobus@thebeijingaxis.comThose who delay this assessment indefinitely willat some point in the future find, to their dismay,that Chinese competitors have approached ahigher level of competitiveness.In 2012, as China transitions to new political DISCLAIMER This document is issued by The Beijing Axis Ltd. While all reasonable care has been taken in preparing this document, no re-leadership, this process is starting to go into a sponsibility or liability is accepted for errors or omissions of fact or for any opinions expressed herein. Opinions, projections andhigher gear. The main battleground for market estimates are subject to change without notice. This document is for information purposes only, and solely for private circula-share in value-added industries is currently tion. The information presented here has been compiled from sources believed to be reliable. While every effort has been made ensure that the information is correct and that the views are accurate, The Beijing Axis cannot be held responsible for any loss,ongoing in developing markets. In countries irrespective of how it may arise. In addition, this document does not constitute any offer, recommendation or solicitation to anylike Brazil, South Africa and India, Chinese heavy person to enter into any transaction or to adopt any investment strategy, nor does it constitute any prediction of likely future movements or events in any form. Some investments discussed here may not be suitable for all investors. Past performance isand construction machinery manufacturers have not necessarily indicative of future performance; the value, price or income from investments may fall as well as rise. The Beijingmade substantial gains in recent years. While Axis, and/or a connected company may have a position in any of the investments mentioned in this document. All readers are advised to make their own independent judgement with respect to any matter contained in this document.competitively-priced product offerings havelong been a core element of China’s competitive Copyright notice: Copyright of all materials, text, articles and information contained herein resides in and may only be repro-advantage, Chinese manufacturers are now duced with permission of an authorised signatory of The Beijing Axis. Copyright in materials created by third parties and the rights under copyright of such parties is hereby acknowledged. Copyright in all other materials not belonging to third partiesprogressively fabricating products that compete and copyright in these materials as a compilation vests in and shall remain copyright of The Beijing Axis and should not benot only on price but also on quality and after reproduced or used except for business purposes on behalf of The Beijing Axis or save with the express prior written consent of an authorised signatory of The Beijing Axis. All rights reserved. © The Beijing Axis 2012.sales services. It is an extended process for4 І The Beijing Axis
  • 4. Table of Contents April 2012 6 FEATURES State of Change: Assessing China’s Competitiveness 22 STRATEGY Mapping China in the Global Debt LandscapeForeign companies are facing the prospect of a competitive In this edition we illustrate China in the global debt outlook.landscape significantly altered by emerging Chinese competi- 24tors. STRATEGY China in Europe: Cash, Debt and M&As 9 FEATURES How to Engage: The Rise of New Chi- Is Europe’s crisis becoming China’s opportunity? nese ManufacturersChinese machinery suppliers are producing increasingly sophis-ticated goods, but are still struggling to increase their efficiency 27 REGIONS Regional Overview: BRIICS A macro overview of the leading developing economies: Brazil,and adequacy of internal support processes. Russia, India, Indonesia, China and South Africa.11 FEATURES Chinese OFDI: Bolder, Wiser and More 28 REGIONS Regional Focus: CHINA-AFRICA China-Africa trade and investment analysis, and a focus on Strategic China’s relations with the East African community. 30The current Chinese OFDI wave is emerging as a key enabler ofconsolidation, growth, market positioning and the acquisition REGIONSof strategic assets and expertise for Chinese companies. Regional Focus: CHINA-AUSTRALIA China-Australia trade and investment analysis, and the series Australia State Watch, featuring Tasmania.14 MACROECONOMY China in 2012 - Soft Landing? 32 REGIONS Regional Focus: CHINA-LATIN AMERICA China-Latin America trade and investment analysis, and a spe-This year marks the beginning of a trying period for China’s cial focus on China’s relations with Ecuador.economy. As it aims for a soft landing, it will find itself in themidst of a fundamental transition, and the economic indicatorshave already begun to reflect these new trends. 34 REGIONS Regional Focus: CHINA-RUSSIA16 China-Russia trade and investment analysis, including the series PROCUREMENT China-Russia Resources Watch. China Sourcing Strategy: The Purchase 36 Positioning Matrix The Beijing Axis News - September 2011–Understanding the Purchase Positioning Matrix can help companies March 2012determine the most suitable procurement structure to set up in China. The latest The Beijing Axis Group news.19 INVESTMENT China Capital: Inbound/Outbound FDI & Financial Markets 40 About The Beijing Axis Company profile and contact information.Analysis on the latest on FDI in China and OFDI by Chinesefirms.
  • 5. The China Analyst State of Change: Assessing China’s Competitiveness China has become very competitive in a relatively short space of time, and now it is aiming to transition to the next development stage, namely innovation-driven competitiveness. China’s general trajectory in this regard is clear, and foreign companies are facing the prospect of a competitive landscape significantly altered by emerging Chinese competitors. By Barry van Wyk C hina in 2012 is on the verge of transitioning to a third The Global Competitiveness Report (GCR), an annual generation of national leadership that is seeking publication by the World Economic Forum, is the most to make China’s economy more competitive in the comprehensive assessment of national competitiveness. It global economy. After three decades of sustained economic defines competitiveness as the set of institutions, policies, and growth, China has ambitions not only of being competitive, factors that determine the level of productivity of a country, but of being a leader in innovation and industry. To reach where productivity leads to economic growth and prosperity. these objectives, China’s leadership is considering initiatives The report measures a wide range of factors grouped into and reforms for making China a more developed, more 12 pillars1, and it evaluates the importance of these pillars to prosperous and more creative country. China’s economy and individual countries by dividing the latter into three stages of its competitive standing in the world is in a state of change, development: and in various industries, this is presenting different types of • Factor-driven, for countries still competing based on opportunities and challenges for foreign companies. factor endowments such as unskilled labour and natural resources; Measuring China’s success • Efficiency-driven, for countries developing more efficient production processes and increasing product Companies and countries are inevitably drawn into greater quality to account for rising wages; competition over finite markets. To gain a greater share of those markets, a company must provide products that are • Innovation-driven, for countries where wages have in some way superior to those of its competitors, so it can risen so much that businesses can only compete by ultimately increase profit. For a country, the ultimate objective producing new and unique products of gaining greater share of global markets is to increase the standards of living of its citizens. In the latest edition of the report (2011-12), China, which has improved its ranking each year since 2005 and is now ranked China’s rising competitiveness after 1978 was the result of a 26th overall2, is categorised in the Efficiency-driven stage. The mobilisation of the factor endowments that the country had report notes that China has improved its performance in most in abundance, especially cheap, unskilled labour. Opening of the pillars, yet notable ones where its standing is much parts of the economy to foreign investors drew in technology lower than its overall position are Institutions (due mostly to and allowed China to integrate itself into occurrences of corruption), Financial market development global value chains. China systematically and Technological readiness. became a supplier of labour-intensiveOver the period products and components, combining To benchmark national industrial performance for evaluating inward FDI with a policy to develop the competitiveness of companies, the United Nations2001-08, China’s competitive local companies. The rise in Industrial Development Organisation (UNIDO) developedmanufacturing China’s competitiveness was conditioned the Competitive Industrial Performance (CIP) index, whichexports grew by a by the concurrence of several factors: a measures an economy’s competitiveness for producing andstaggering 27.9% favourable exchange rate, low wages and exporting manufactured goods. Measuring a set of eight large labour supplies, the inflow of FDI, the key indicators using manufacturing value add (MVA) datay-o-y. huge potential of the Chinese domestic as well as population and trade data from 2005 and 2009 for market, and the opening of world markets 118 economies, the 2011 CIP index ranked China in 5th place to Chinese manufacturers. overall, rising from 6th in 2005, and trailing only Singapore (1st overall), the US, Japan and Germany. In analysing the China has come to occupy a unique position in studies of data used for the CIP index, the UNIDO report found that competitiveness. Its rapid growth in the last three decades has seen Chinese exports gaining global market share in an 1 The 12 pillars are Institutions, Infrastructure, Macroeconomic expanding range of industries along with China’s progression environment, Health and primary education, Higher education and up the value chain. The living standards of Chinese nationals training, Goods market efficiency, Labour market efficiency, Financial have also clearly improved, so that China’s competitiveness market development, Technological readiness, Market size, Business has increased at both the national and company levels. sophistication, and Innovation. 2 China leads the BRICS in the rankings; South Africa is next in line in 50th place. 6 І The Beijing Axis
  • 6. Features Features 专题 The China AnalystLeading Producers in the Five Fastest Growing Industry both in the national as well as company spheres. Yet whileSectors (%, 2000 and 2009) China’s exports have indeed expanded enormously after its Average World Five Leading Economies accession to the World Trade Organisation (WTO) in 2001, Annual (Share in World MVA) the processing trade accounts for around half of its exports. Growth According to a WTO trade policy review on China published in Rate Economy 2000 Economy 2009 2010, foreign-invested enterprises (FIEs) accounted for 84.1% US 53 US 53 of China’s total processed exports in 2009. As export dataOffice, Japan 15 China 11 reflect the gross value of products leaving a country’s ports,accounting UK 6 Japan 9 the very high share of imported inputs in Chinese exports& computing 9.8machinery China 4 Germany 7 means that export data do not adequately measure the value(ISIC 30) Korea actually produced in China. The competitiveness of Chinese Germany 4 6 exports is thus in large part fuelled by foreign multinational Rep. US 61 US 62 plants in China’s coastal regions, and not necessarily by world-Radio, Japan 15 China 12 class Chinese companies.television and China 5 Japan 10communication 9.4 Taiwan, Korea Furthermore, since 1996, foreign firmsequipment 3 5 have accounted for around 85% of China Rep.(ISIC 32) Korea Taiwan, China’s high-technology exports. 4 Since 1996, foreign 3 4 Rep. China The technological spillovers that firms have accounted Japan 23 China 33 were expected to accrue from the for around 85%Electrical US 21 Japan 20 FIEs and many MNCs operating inmachinery and 7.9 Germany 13 Germany 10 China, moreover, have largely failed of China’s high-apparatus(ISIC 31) China 8 US 10 to materialise. For all its export growth technology exports. Italy 4 India 5 and the increasing competitiveness of US 31 US 22 its industry, and despite the fact that Japan 9 China 15 58 mainland Chinese companies wereOther transportequipment 7.3 UK 8 Brazil 14 included in the Fortune 500 in 2011 (the third-most after the(ISIC 35) Brazil 6 Japan 7 US and Japan), China has not as yet been able to produce a Korea France 5 6 truly global brand:5 the latest edition of Interbrand’s 100 Best Rep. Global Brands in 2011 is still missing the first Chinese entry. In Japan 23 China 48 terms of the living standards of Chinese people, the ultimate US 14 Japan 14 objective of national competitiveness, China is still far inBasic Metals China 12 US 5 5.7 arrears. With a GDP per capita of USD 4,382 in 2010, the figure(ISIC 27) Germany 6 Germany 4 for China is not yet half that of Brazil or Russia’s, countries that Korea 4 India 3 rank below China in comparisons of national and industrial Rep.Source: Industrial Development Report 2011, UNIDO competitiveness.China had increased its share in overall global MVA from 6.7% Transitionsin 2000 to 15.4% in 2010, when global MVA amounted toUSD 7.39 billion. Reflecting the shifting landscape of global China can theoretically only reach the innovation-drivenmanufacturing towards Asia, in 2010, developing economies threshold by raising the skills of its workers and upgrading itsaccounted for 35.6% of global MVA (up from 20.7% in 1990), domestic technology and institutions to be able to produceand China accounted for almost 75% of the latter total. innovative products and pioneering technology. The drive for increasing China’s competitiveness is currently envelopedGlobal manufactured exports are dominated by medium- and in a broad transition of China’s economy seeking to develophigh-technology products, which have never dropped below better paid, more skillful and more competitive workers and60% of world manufactured exports since 1992. The UNIDO industries. In 2012, this is occurring on the backdrop of areport found that the five fastest-growing sectors globally national leadership transition.over 2005-093 were all (except for Basic Metals) in medium-and high-technology manufacturing. In all of these sectors, A vision for a competitive and innovative China was presentedin fact in 21 out of the total 22 industrial sectors, China has in February 2012 in a voluminous study jointly developedbecome the first or second leading manufacturer in the world by the World Bank, the Chinese Ministry of Finance and the(see table above). In this process, over the period 2001-08, Development Research Centre of China’s State Council. TheChina’s total manufacturing exports grew by a staggering resultant China in 20306 document outlined six key strategic27.9% annually. Developed countries still account for around aspects for China to consider in order to become a high-60% of global medium- and high-technology exports, yet here income country by 2030. These focus in part on rethinkingalso China has made inroads, with the share of medium- and the role of the state and the private sector in China’s economyhigh-technology products of its total exports increasing from to encourage increased competition, innovation, and China’s45.5% in 2000 to almost 60% in 2009. continued integration with global markets.Caveats 4 ‘Foreign’ here refers to foreign firms and joint ventures. In 2009, for example, the share of foreign firms in this case was 83.2%. See http://China has clearly dynamically improved its competitiveness, www.sts.org.cn/sjkl/gjscy/data2010/2010-2.htm for more details. 5 Although Lenovo and Huawei have been suggested as possible3 Office, accounting and computing machinery; Radio, television candidates.and communication equipment; Electrical machinery and apparatus; 6 With the subtitle Building a Modern, Harmonious, andOther transport equipment; and Basic metals. Creative High-Income Society. 7 І The Beijing Axis
  • 7. The China Analyst As the Global Competitiveness Report outlined, rising wages State of change: The implications of a more have been instrumental in inducing companies to innovate competitive China to remain competitive. Wages in China have been rising rapidly since the mid-2000s. All urban wage growth has The current transitions in China’s economy and society have been high, yet that of low-skilled workers has been highest broad implications for the new type of competition as well among all wage earners, more or less doubling in real terms opportunity that a more competitive China can hold. Foreign from 2001 to 2010. China’s labour force is expected to peak companies in various industries are increasingly presented at around 1 billion workers in 2015, and China may already with a competitive landscape significantly altered by these have passed or is about to pass the Lewisian turning point.7 transitions in China. Rising wages in urban areas in China are also regarded as an important means for decreasing the urban-rural income gap For lower value-added products in industries where China has and increasing urbanisation in China, thereby stimulating the long been dominant as a Low Cost Country (LCC) producer, services industry. China is still to a large extent an attractive option. Yet whereas procurement managers could previously focus their attention China’s competitiveness will decline, solely on China, they are now increasingly considering China however, if rising wages occur without as only one of a few options. Foreign companies sourcingA small number of concomitant increases in labour productivity textiles and clothes from China, for example, will now findChinese companies and innovation. With this in mind, China’s it attractive to source only some products from China, as ithave reached or government has identified improving the still holds comparative advantage in areas such as industrial quality of China’s human capital as a key variety and infrastructure, while increasingly sourcing selectedare approaching objective. The core policy framework to items from other Asian countries like India and Sri Lanka.the technological this end is the 12th Five-Year Plan (FYP) forfrontier. 2011-15, which aims to engineer competitive One industry that can serve as an illustration of China’s advantages for China based on science, increasing competitiveness is heavy industry. In this industry, technology and innovation and to make China has over the last few years begun to provide new options China an industrial leader in certain strategic for buyers of construction and mining machinery, challenging industries. During the previous FYP of 2007-11, China’s the established industry leaders. In the period 2000-10, China’s expenditure on R&D increased by 22% annually, and in 2011, exports of heavy machinery grew by a CAGR of around 30%. R&D spending is estimated to reach 1.85% of GDP.8 Chinese companies have been most successful in this regard in developing markets, and have gained a small degree of China’s output in academic publications has soared in the market share in countries like Brazil and South Africa, as our last decade, reaching 112,000 in 2008 (8.5% of the global next article How to Engage outlines. output), and Chinese research publications have become leaders in the fields of materials science, physics, chemistry This process is still at an early stage, and while China’s and mathematics. Chinese patent applications to the World construction equipment manufacturers, for example, are Intellectual Property Office (WIPO) increased from 23,000 in now able to manufacture a bulldozer or a motor grader by 1996 to 290,000 in 2008. Yet in terms of academic papers, industry standards and make gains in market share on price, Chinese contributions are reportedly still lacking so-called these machines do not yet compete with the leading brands in high-impact articles, and the quality of its patents have not the market. Yet Chinese companies are making investments in been matched by its quantity as incentives for filing patent these countries and are systematically upgrading the quality applications have produced a large number of minor design of their machines as well as their parts and after sales services and utility patents. to become more competitive, following the example of the likes of South Korea. The logical conclusion of this process A small but growing number of Chinese companies have will be a Chinese bulldozer that is cheaper and basically just actually reached or are approaching the ‘technological as good as a Caterpillar bulldozer, providing an attractive frontier’ in their respective industries. These include ZTE alternative for mining and construction companies. This and Huawei in the ICT industry, Suntech Power in the solar gound-breaking development may still be a few years away, industry and Dalian Machine Tool Group in engineering. yet it is inevitable.10 Huawei, for example, has developed the world’s first ‘100G’ technology capable of delivering large amounts of data The globally competitive and pioneering Chinese company wirelessly over long distances. Chinese companies – both and brand are still under development, but the outlines have state-owned and private – are excelling in areas such as PVCs, started to take shape. biopharmaceuticals, nanotechnology, stem cell therapeutics, high density power batteries, supercomputers, and shipping Barry van Wyk, Senior Consultant containers. Chinese companies have also achieved results with barryvanwyk@thebeijingaxis.com other forms of innovation, for example developing creative business models to suit existing products.9 7 As China in 2030 points out, “Although the precise timing remains disputed, most researchers accept that China is at or nearing the Lewis turning point of exhaustion of the rural labour surplus, and the remaining rural working age population may be too old, sick, or disinclined due to family obligations to migrate to urban areas.” 8 The 12th FYP aims to raise expenditure on R&D to 2.2% of GDP by 2015. Some countries have achieved a science & technology ‘takeoff ’ when this percentage approached 2%. 9 Broad Air Conditioning, for example, has developed a way to 10 In South Africa, the Chinese company Shantui recently opened a commercialise gas-powered air conditioning systems for large large new facility and has launched an advertising campaign as ‘the buildings. world’s leading maker of bulldozers’. 8 І The Beijing Axis
  • 8. Features Features 专题 The China AnalystHow to Engage: The Rise of NewChinese ManufacturersSqueezed from different angles by the strengthening of the renminbi, rising costs for labour andraw materials, more stringent environmental regulations, push towards industry consolidation,and slack capacity in developed countries, Chinese machinery suppliers have no choice butto move up the value chain. They are producing increasingly sophisticated goods, but are stillstruggling to increase their efficiency and adequacy of internal support processes. Buyers mustbe patient and invest more time in building relationships with suppliers to ensure that they cancapture the benefits of China procurement while reducing its risks. By Lilian LucaG one are the days when the West had the luxury of worrying about low-end textiles and shoe exports from China. The future of exports from China will be led by equipmentmanufacturers, and although they may not yet be penetratingWestern markets, competition in third markets is intensifying.(EIU, 2011, ‘Heavy Duty: China’s next wave of exports’)While China has steadily grown its manufacturing and exportbase over the past 20 years to become the world’s largestexporter, a status that has now become firmly entrenchedin the minds of procurement managers worldwide, a fewworrisome trends emerged last year that depict alterationsto the old China sourcing equation. Labour and raw materialscosts in China have seen a steady increase to a point wheremany commodity-type goods such as textiles, toys andsimple carbon steel products can no longer be competitively XEMC’s 220t haul truck. (Source: XEMC)sourced from China, with China losing market share toother Low-Cost Country (LCC) producers. Moreover, as we by reduced export rebates affecting the export pricenoted in the September 2011 issue of The China Analyst, competitiveness, more stringent energy and pollutionthe competitiveness of simple, labour- or raw-material- regulations leading to increasing costs, rising labour andintensive goods made in China has been further eroded by a raw materials costs, and currency appreciation. For a fewstrengthening Chinese currency, government-imposed export years, Chinese manufacturers in these sectors were able toduties and quotas, the closure of old, polluting facilities, and maintain profit margins by investing in new, more efficienta reduction in subsidies which provide access to cheap land manufacturing processes, but this game isand electricity. becoming increasingly difficult to play due to rising costs of building new capacity inSo, since China is becoming more expensive, all one can do is China, including the rising cost of capital, Facing increasedprepare for a lengthy trip to discover new suppliers in exotic land and environmental compliance. Thus, competition,Asian locations, right? Wrong. The big picture tells a different facing increased competition at home from Chinesestory altogether. both existing producers with outdated capacity and nimbler, more innovative manufacturers areThe global, long term trend at work here is of course China’s startups, Chinese manufacturers are turning to producttransformation into a middle-income country, one that is turning to product innovation and exports innovation andindustrialised, modern and aspires to become a leading as avenues for growth.producer of high value-added manufactured goods. The exports as avenuesgovernment has been promoting this for years, with every five An article by the Economist Intelligence for growth.year plan shifting resources to support knowledge-intensive Unit 1 cites the evidence of Westernindustries, encouraging investment in science and technology manufacturers losing market share in keyeducation, and discouraging the exports of low-value added, industries where they still dominate globalresource- or labour-intensive goods via various policies. As exports as evidence that Chinese producers are climbingan example of such policies, the 12th Five-Year Plan’s list of up the value chain. In centrifuges and filtering/purifyingpriority industries includes high-end machinery, energy machinery, for example, a USD 45 billion global exportsconservation and clean technology (included among the market, China doubled its market share from 3.5% to 7.1%seven ‘Strategic Emerging Industries’). from 2007 to 2010, while OECD countries lost market shareOn the other hand, ’discouraged’ industries get penalised 1 See quotation and reference at the beginning of this article. 9 І The Beijing Axis
  • 9. The China Analyst Increase in China’s Market Share of Select Product Categories (%, 2007-10) 18 Cruise ships, cargo ships, barges Bubble size: 2010 Global Transmission shafts/cranks, gears 16 export value (USD bn) 14 124 Air, vacuum pumps; hoods incorp a fan Heating/cooling equip for plant/lab use Market Share Increase 12 Centrifuges, filtering/purifying machinery Chemicals in 15 Taps, cocks, valves for pipes 10 wafer form Lifting/handling/loading machinery Motorcycles, Electrical switching apparatus 8 17 side-cars Derricks, cranes Bearings Harvesting/threshing machinery 6 12 19 Refrigerators, freezers 31 4 Tube or pipe fittings, of iron or steel Fork-lift trucks, trucks with 76 45 43 15 36 handling equip Aluminium bars, rods and profiles 15 29 60 15 10 14 26 60 2 65 36 51 Pumps for liquids; liquid elevators Optical fibre, cables Self-propelled bulldozers, excavators 0 55 60 65 80 Electrical ignition/starting equip 95 Construction/mining machinery parts Moving/grading/boring machinery for earth OECD Countries Global Market Share (2010) Source: Economist Intelligence Unit; The Beijing Axis Analysis in the same period, from 82.7% to 80.9%. The same trend is from OECD countries, quality variability, lack of service and visible in transmissions, gears, bearings, handling machinery limited spare parts supply networks, and lack of flexibility in and other sectors (see chart above). commercial terms remain the biggest challenges when dealing with Chinese manufacturers. As the sophistication of buyers in Most of these exports from China are, however, not going to emerging markets gradually increases, so will their demands OECD markets, but rather to non-OECD countries, an example on Chinese products: availability of customised designs and of the so-called South-South trade relationship. Brazil, Russia, features, higher specifications and tolerances, availability of and India are the major importers of machinery from China. credit terms and financing options, transparent tendering Incidentally, with growth stagnating in the developed world processes and pricing, and improvements in customer service in the aftermath of the global financial are some of the features they will demand in the coming years. crisis, China’s exports are going to markets that are currently driving world economic Chinese manufacturers will thus have to upgrade not onlyWith growth growth. They successfully compete in these their manufacturing capacities and product design andstagnating in the markets against established Western brands, R&D capabilities, but also their supply chain systems (ability offering more affordable products with to monitor inputs for quality and timeliness), the interfacedeveloped world, simpler features and specification sets while between their engineering departments and manufacturingChina’s exports are more sophisticated, feature-laden Western workshops, capabilities in the tendering departmentsgoing to markets gear gradually lose their appeal to budget- (sophisticated English-language commercial and legal support,that are currently conscious emerging market buyers. In these fast design change implementation and cost modeling), and markets, where secure sources of capital of course will have to put more solid internal quality assurancedriving world remain scarce and costly, upfront cost processes in place which should become the norm rather thaneconomic growth. considerations often trump lifetime costs the exception. of ownership at which OECD machinery exports perform better. In the meantime, global procurement managers can already actively investigate and engage with Chinese suppliers Chinese producers utilise a number of different ways to offering more sophisticated machinery, high-tech spares climb the technology ladder. Many have successfully reverse- and consumables. This entails investing upfront time on engineered (and often improved upon) Western designs; researching and traveling to production facilities, establishing others are beginning to see the fruits of massive R&D good working relations to open ongoing dialogues over spending; and still others are trying their hand at acquiring features and pricing, discussing service support options, and new technologies through M&A as evidenced by the shopping working with suppliers to ensure a rock-solid quality control spree being undertaken at the moment by Chinese firms in process. In these unchartered territories, local support in Europe’s mid-size industrial sector. The heavy equipment the form of procurement service providers experienced in industry has some shining examples of leading Chinese commercial and technical China procurement issues is often innovators moving up the value chain and making inroads indispensible and the key to achieving LCC procurement into the export markets: XEMC is introducing increasingly targets within a manageable time frame. sophisticated haul trucks (see picture on previous page), Taiyuan Heavy (TZ) is becoming a world leader in open-pit Lilian Luca, MD: Beijing Axis Procurement mine excavators, while ZPMC is the world’s top container luca@thebeijingaxis.com crane and gantry crane producer. As machinery exports from China penetrate more markets, the reality is that many Chinese suppliers are still unprepared to adequately service foreign sales. Even though their machinery is often simpler to maintain and less complex than that 10 І The Beijing Axis
  • 10. Features Features 专题 The China AnalystChinese OFDI:Bolder, Wiser and More StrategicUnlike the initial wave of overseas investment led by China’s dominant state sector in theirpurchases of mining and energy companies in resource-rich regions, the current M&A activityis emerging as a key enabler of consolidation, growth, market positioning and the acquisitionof strategic assets and expertise for Chinese companies. Forward-looking Chinese companiesnow consider overseas investment as a viable approach towards moving up the value chain bygaining access to foreign brands and technology. By Daniel GalvezW ith China’s rapid economic ascent and subsequent attention being placed on advanced manufacturing, transformation into a market-based economy, technology and science-based industries. Unlike the initial Chinese companies are now expanding abroad and wave of overseas investment led by China’s dominate stategoing global not only per the government’s mandate, but sector in their purchases of mining and energy companiesalso to reduce their reliance on China’s economic growth by in resource-rich regions, current M&A activity is emerging asexpanding into new markets. At the same time, market forces a key enabler of consolidation, growth, market positioningare inducing them to acquire or gain access to sophisticated and the acquisition of strategic assets and expertise.technologies through strategic mergers and acquisitions Forward-looking Chinese companies now consider overseas(M&A), at increasingly favourable prices, to raise their level investment as a viable approach towardsof competitiveness. China’s overseas acquisitions in the moving up the value chain by gainingnon-financial sector, which reached a record USD 60.1 billion access to foreign brands and technology.in 2011, will continue as increasingly sophisticated Chinese Likewise, while global leaders in the heavy The mostbuyers seek bargains amid the downturn among developed machinery sectors have a significant competitive Chineseeconomies, especially in Europe (see chart below). presence all around the world, they mostly firms realise size come from developed countries. However,Over the short term, the ongoing euro zone debt crisis will leading Chinese construction equipment alone will notcreate multiple opportunities for active Chinese investors, makers such as Sany Heavy Industry are guarantee long-giving them easier access to technologies they have long quickly catching up, displacing previous term success in thecoveted in the European and other developed markets. Our industry leaders from the top 10 in termsarticle in this issue, China in Europe: Cash, Debt and M&As, domestic market. of sales through both organic growth anddives further into this trend. But what are the new driving strategic acquisitions (on next page).forces behind the current wave of Chinese OFDI? And whatare the strategies being employed by Chinese companies to Chinese companies have also shown a bigger appetitesuccessfully close deals in the natural resources and industrial for relatively riskier assets compared to their peers fromsectors, which continue to comprise the bulk of Chinese OFDI developed countries. In other words, Chinese companiesdeals? (see chart below) are beginning to realise the intangible benefits from making purchases overseas. But why exactly are Chinese becomingShifting focus bolder, looking for acquisitions outside their own borders? It is becoming increasingly well-known that Chinese companiesAs China’s economy moves into a new phase, the focus of are not only concerned about becoming bigger and increasingChinese investment abroad is also shifting, with greater their market share in the short term, Chinese companies areChina’s Outbound M&A by Region (USD bn, 2010-11) China’s Outbound M&A by Sector (%, 2010-11) 2010 2011 1% Automotive 15% 12% Europe Industry 7% 14% Asia 14% Services Chemicals 3% 22% North AmericaAustralia & New Zealand Resources 61% South America 51% Africa 0 3 6 9 12 15 2010 2011Source: A Capital; The Beijing Axis Analysis Source: A Capital; The Beijing Axis Analysis 11 І The Beijing Axis
  • 11. The China Analyst Ten Leading Global Construction Equipment Makers China National Offshore Oil Corporation (CNOOC), China’s (Annual Sales USD mn, 2007 vs. 2011) largest offshore oil and gas producer, has shown a particular 30 2007 2011 interest in Chesapeake Energy’s assets, investing USD 3.43 billion since October 2011 in two separate deals. In these Market Share by Country (2011) 25 deals, Chesapeake (the second-largest US natural gas supplier Others and most active American natural gas driller) gets a cash boost 12.0% 20 Germany US to help pay back its USD 10.3 billion debt load and remains the 7.5% 28.3% operator of these projects, lessening the likelihood the deals Sweden 15 11.4% will face regulatory opposition. In exchange, CNOOC gains China Japan exposure to the complicated shale gas extraction technology it 24.9% 10 16.0% lacks. In other words, China is forgoing ‘big splash’ investments and opting for smaller, more strategic assets under the radar. 5 So what’s driving this quest for shale gas technology? Chinese 0 energy companies are racing to meet China’s aggressive Caterpillar Komatsu Hitachi Volvo Liebherr Sandvik XCMG Zoomlion Sany Terex production growth forecasts to power the country’s fast- growing economy. In fact, Beijing recently announced it *Note: XCMG, Zoomlion and Sany were not ranked among the top 10 in 2007 would invest USD 13 billion to switch the city’s coal-fired Source: China Construction Manufacturing Online; The Beijing Axis Analysis power plants and heating facilities to natural gas in a move aimed at addressing public concern over the city’s poor air quality, with other cities sure to follow. Likewise, according to seeking to invest in assets abroad that will better position the Energy Information Administration (EIA), China is believed them at home, relative to their domestic rivals, as well gain to have vast reserves (36 trillion cubic metres) of natural gas a foothold in new markets over the long term. The most trapped in shale rocks, a quantity roughly 12 times the size competitive firms realise size alone will not guarantee long- of China’s conventional natural gas deposits. In June 2011, term global success; technological know-how enhances long- China National Petroleum Corp (CNPC), the country’s largest term competitiveness, and puts them in a better position to energy producer and PetroChina’s parent, formed a joint compete against western rivals in their own home markets. venture with Shell to improve its own shale-gas well drilling For example, aforementioned Sany recently opened a USD 60 efficiency. Subsequently, in March 2012, the firms announced million office and assembly plant in the south-eastern US in their partnership had reached new heights with the signing 2011, its largest such facility outside China, to help realise it’s of a production sharing contract to develop a shale gas long term goal of eventually manufacturing excavators in the block in China, the first such deal in the country. Increased US to directly compete against industry-leading Caterpillar domestic demand along with untapped shale gas reserves is on its home turf. So while industry consolidation is still being strengthening the competitive rivalry among China’s energy encouraged to facilitate the development of China’s own giants, forcing them to buy strategic assets overseas from ‘global champions’, China’s fast-rising global competitors are their existing partners in order to become more competitive now letting their global ambitions drive their strategies rather in China. than relying on government policy alone. China’s construction equipment manufacturers have also New trends shown a keen interest in acquiring new technologies through foreign acquisitions (see chart below). At the beginning of It’s widely known that China’s energy policy has increased 2012, Sany announced that it would acquire Putzmeister, a its focus on commercial ties with countries rich in natural German Mittelstand company and also the world’s largest resources and related technologies, and more specifically manufacturer of high-tech concrete pumps. Together with those that can help China unlock its huge Citic PE Advisors, a Chinese private equity company, Sany reserves of unconventional (shale) natural will acquire all of Putzmeister for USD 473 million, with Citic gas. Of the roughly USD 18 billion that retaining a minority shareholding. This follows Zoomlion’sChina is forgoing Chinese state-owned enterprises spent‘big splash’ buying oil and gas companies in 2011,investments and nearly one-third (USD 5 billion) was invested China’s Construction Machinery Industry Outbound M&A in Canada’s resource sector. In October (2005-12*)opting for smaller, 2011, Sinopec acquired the Canadian firm 350 3.5more strategic Daylight Energy Ltd. for USD 2.2 billion in 300 % of China Overall Outbound M&A (%) (rhs) 3.0assets under the order to gain access to Canadian shale-gas Value of Deals (USD mn) (lhs)radar. reserves which marked Sinopec’s largest 250 2.5 foreign acquisition of the year. In 2012, PetroChina completed its acquisition of a 200 2.0 minority (20%) stake in a Royal Dutch Shell shale-gas project in Canada, which will allow the company to 150 1.5 use any advanced technology to which it gains access to for 100 1.0 its own exploration and development purposes back in China. Major Chinese energy firms have also shown a strong interest 50 0.5 in the US, whose firms, along with those in Canada, lie at the forefront of shale gas technology and are gradually warming 0 0.0 2005 2006 2007 2008 2009 2010 2011 2012 to Chinese investment partly because of cash shortages and the potential for future exploration opportunities in China. *Note: As of 6 March 2012 Source: Thomson Reuters; The Beijing Axis Analysis 12 І The Beijing Axis
  • 12. Features Features 专题 The China Analyst(Sany’s domestic rival) purchase of Italian concrete pumps showed an unwillingness to transfer technologies or brandsmaker CIFA back in 2008. Following Sany’s announcement, to Chinese companies, in a futile attempt to retain long-speculation has grown that XCMG is preparing to bid for full term competitiveness. For example, the planned purchasecontrol of Germany’s Schwing GmbH, the world’s second- of Swedish car maker Saab by China’s Pangda Automobilelargest concrete machinery manufacturer while Guangxi Trade Co. Ltd. was aborted after General Motors Co blockedLiugong Machinery Co. recently unveiled plans to acquire the deal. Likewise, historically, the engineering expertisethe engineering machinery unit of a Polish company, Huta and strong brands of German Mittelstand companies areStalowa Wola SA, for USD 62 million. However, simply stating highly attractive to potential foreign buyers but tight familyChinese construction equipment manufacturers are solely control has been a barrier to widespread Chinese takeovers inafter technologies would be inconclusive. Germany. Nonetheless, in addition to Sany’s recent purchase, other German Mittelstand companies now in Chinese handsChina’s increasingly globally competitive construction include Waldrich Coburg (Beijing No. 1), a maker of millinggear makers are not only buying production capacities machines, and Dürrkopp Adler (Shang-Gong Group), a makerand technology, they are also after brand recognition and of industrial sewing machines, which suggests the notion thatestablished distribution networks, which will China realise once reluctant overseas investors are warming up to Chineseits three-year goal of becoming the world’s top exporter in investors. In addition to shifting perceptions and attitudes,the USD 150 billion global market for equipment such as Chinese companies are beginning to circumnavigate thesebulldozers, excavators and forklifts. Their post-acquisition prejudices by buying the foreign assets of other companies,strategies are also changing. Zoomlion became the first a trend which can clearly be seen in recent Chinese dealsmajor Chinese construction gear maker to retain a foreign throughout Latin America.management and production team when it bought CIFA, amove that extended its presence to more than 70 countries. A sign of things to comeSimilarly, when announcing the Putzmeister deal in January,Sany stated that Germany would become its new headquarters Relative to the size of its economy, China’s overseas investmentsfor concrete machinery outside China. The country’s largest remain quite modest. The total stock of investment abroadbulldozer-maker, Shandong Heavy Industry Group, also said rose to 5.3% of China’s GDP in 2011, up from just 2.6% inthis year it would keep the management and production 2001, but it remains well below the average of 27.7% forbase of its latest acquisition Ferretti in Italy, to build up its OECD countries. Moving forward, Chinese enterprises will nottechnological know-how. Globally ambitious Chinese firms only have the money, but also the motive and opportunity toare realising that the value of acquired assets lies not only spend an additional USD 560 billion on overseas investmentsin patented technologies, but also in the intrinsic value a in the next five years. Chinese companies are taking advantagecompany possesses in its management and employees. of the crisis, acquiring strategic assets overseas whichLikewise, with employment sagging in Europe, Chinese moves will empower them to move toward the frontier of globalto retain jobs are welcomed and will likely make regulatory competition. Additionally, the People’s Bank of China recentlyapproval easier. released the most detailed public proposal yet for loosening the government’s strict capital controls, a move which willPolitical and corporate hurdles only spur Chinese companies to buy up far more American and European assets, which have become more affordable byChinese companies have their own unique hurdles when the global financial crisis.attempting to make acquisitions abroad, often dealing withunfavourable political environments which adds another However, doing deals with China is complex and can poseobstacle for Chinese companies to win bids, even if cash is not special integration challenges for both sides due to cultural,an issue. In one of the most cited cases of strong government business and political differences. For Chinese companiesopposition to potential Chinese takeover, in 2005, CNOOC and their new partners, the key lies in maximising synergieswithdrew its USD 18.5 billion bid for Unocal due to strong once the above obstacles are overcome. Looking ahead,opposition from US government regulators and politicians. Chinese companies will have more tools, more experiencedLooking back, among other factors, the failure of the case could and seasoned M&A professionals and a greater overallbe attributed to a relative lack of diplomacy and common understanding of the complexity of cross-border M&Aunderstanding between the two countries at that time, which processes, a good recipe for success in future Sino-foreignmade it nearly impossible for the Chinese government and M&A deals.companies to drum up reputable counter arguments to stemopposition and address concerns. Nowadays, it can be argued Daniel Galvez, Consultantthat China’s central government and its leading figures are danielgalvez@thebeijingaxis.commore versed in the ‘art of diplomacy,’ which often spills overinto the business arena. Nowadays, state visits by China’sleaders are accompanied by high-profile trade and investmentdeals. It can be argued that environmental changes are alsomaking it easier for Chinese companies to seal attempteddeals overseas. For example, CNOOC’s recent investmentsare now aligned with global efforts to curb greenhouse gasemissions and also reiterate the U.S.-China Shale Gas ResourceInitiative announced in 2009, a policy which simply did notexist four years prior.At the corporate level, the major hurdle for potential Chineseinvestors is that some foreign companies have blatantly 13 І The Beijing Axis
  • 13. The China Analyst Macroeconomic Monitor: China in 2012 - Soft Landing? This year marks the beginning of a trying period for China’s economy. As it aims for a soft land- ing, it will find itself in the midst of a fundamental transition, and the economic indicators have already begun to reflect these new trends. By Kirill Riabtsev I n Q4 2011, China reported GDP growth of 8.3%, down from China’s Quarterly GDP Growth (%, 2007-11) 9% in Q3 and 9.6% in Q4 2010, achieving an average rate 16 of 8.9% for the whole year (see chart to the right). Leaving 14 2011 full year aside any long term trend benchmarking, this growth is still growth rate: 9.2% impressive. However, even though moderation was expected 12 and even welcomed, some observers have raised concerns 10 about the large drop between Q3 and Q4, compared to the 4-year average, rates observed in the previous three quarters. Sceptics were 8 2007-11: 10.6% quick to discern the beginning of China’s economic collapse, Government 6 stimulus package while the devotees of China’s growth miracle argued for the Impact of global (USD 586 bn) positive effects of the cooling economy, which should result in 4 financial crisis Policy easing for moderation of inflation and reduction in overinvestment, thus 2 growth curtailing any further bubble trends. But what about China moderation itself? 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 07 08 09 10 11 Changing weather conditions Source: CNBS; The Beijing Axis Analysis Premier Wen Jiabao stated that slowing growth, combined with persistent price inflation, adds new challenges to the observed against the backdrop of a moderate decline in fixed management of the second-largest economy in the world. asset investment (-0.4% in 2011), stable average month-on- However, the disinflationary process appears to have already month growth (2.3%) in property sales (compared to 14.1% kicked in during Q4 of 2011. In December, China’s CPI in 2010) and a 5.2% growth rate (2011) in new passenger moderated to a 15-month low of 4.1% car sales, forecasted by the China Association of Automobile y-o-y, while PPI experienced a sharp Manufacturers to grow between 5% and 8% in 2012. decline due to significant decreasesThe figures closing 2011 in both the international prices of Although it is still early days, these observations reflectsuggest that the shift raw materials and domestic demand potentially new long-term trends. As China can no longer relytowards greater reliance (see chart below). China’s official PMI on exports of manufactured goods to the rest of the world for recovered in December 2011 as new sustaining its own economy, increased domestic consumptionon internal demand orders edged up, capacity utilisation must gradually become the main engine of the economy.away from exports has added 9.3 points, hiring stepped up and Enormous production capacity was createdalready started. credit conditions jumped 15.9 points, but an overall stable downward trend China’s Inflation Rate (%, 2008-Feb 2012) persisted through the year. On the other 10 20 hand, retail sales kept firm, increasing in 2011 by 17.1% y-o-y, supported by further growth in wages CPI (lhs) PPI (rhs) and incomes per capita, while export growth continued a 8 Tightening of monetary policy to avoid hard landing steady decline with December 2011 showing the slowest 10 6 Effect of stimulus export growth since February 2011 (see chart on next page, plan left). 4 0 Focusing more closely on exports, one can see that trade with the Eurozone, Japan and the United States have continued 2 a stable decline in 2011 (down by another 2.3% from 2010), -10 while intraregional trade with ASEAN economies grew 0 further, adding another 4.2% to the total (see chart on next page, top right). At the same time 29.3% of total government -2 -20 expenditure in 2011 went towards further strengthening Jan Jul Jan Jul Jan Jul Jan Jul Jan 08 09 10 11 12 consumption via increased education and better social safety nets such as healthcare insurance. Finally, these trends are Source: CNBS; The Beijing Axis Analysis 14 І The Beijing Axis
  • 14. Features Features 专题 The China Analystthrough large fixed asset investments over the past decade China’s Export Destinations (2001-Nov 2011)to cater for export-led growth in manufacturing. The 12th 100%Five Year plan, however, rolled out at the beginning of 2011, Otherwas underpinned by the need to transform China’s economic 80%growth mode away from investment and exports and more ASEANtowards consumption. The figures closing 2011 suggest that 60% H. Kongthe shift towards greater reliance on internal demand away -11.9%from exports has already started (slowly, but that would be 40% Japanexpected). US 20%This shows how quickly China can begin reorganising and EUremodelling its economy with top-down coordination 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011and quick reactions from all key sectors of the economy. (Nov.)Increasing social spending, stabilising (not radically falling Source: Morgan Stanley; The Beijing Axis Analysisor persistently rising) trends in the housing market and fixedasset investments, as well as emerging disinflationary trends 2010). Beyond 2012, we see GDP growth of 7.5-8.5% over theagainst the backdrop of moderately growing real per capita period 2013-2015. But this period will present the biggestincomes, and a robust outlook on key consumer goods (e.g. policy challenges to Beijing in 30 years, and it will be necessarypassenger car sales), indicate that the wheels have started to to carefully gauge the relevant risks. Given the overheatingturn in the right direction and China is beginning to shift away pressures during much of the period from 2002 to 2011, morefrom an outward-focused towards an inward-driven economy. moderate growth is desirable and indeed more sustainable – provided that China grows at around 7.0-7.5% or more – whichYet key challenges remain. Managing aggregate demand will still allow Beijing to deal with its social and developmentis arguably a much more tricky process than managing agenda. Even with moderation in GDP growth, the investmentaggregate supply, as the economies of the West have sector will remain an important driver. Infrastructurerecently demonstrated. A massive monetary injection into development and social housing will be athe system does not always serve as an automatic stabiliser focus as private sector real estate growthof falling consumption, if underlying perceptions of the is curtailed. Increasingly, consumptionconsumers are negative. In China, the desired rate of growth will complement investment as a driver While in the longerin consumption on the back of policy stimulus may be while China’s broad-based transformation run greater relianceconstrained by the traditionally high propensity to save. In continues. Both underpin ongoing on the domesticlight of that, Beijing must find the balance between curbing commodity demand, providing ainflation and preventing a hard landing. A monetary stance generally sound backdrop for resource consumer is the waythat is too tight will combat inflation but undermine growth forward, over the shortin the short term, possibly to the point of a hard landing; producers such as Australia, Africa andeasing too quickly will mean that inflation will recur which Latin America. and medium termwill undermine growth and structural integrity in the longer such change must beterm. In finding the balance, Beijing must interpret complex The above represents a base-line view. However, uncertainty continues to linger supported by significantdomestic and international developments. A weak globalbackdrop in developed countries, especially in Europe, adds in Europe. There is a possibility of a reorganisation of trade.considerably to the risks in balancing policy. marked further deterioration in the fiscal landscape, and even a break-up of theSoft landing, but bumpy approach Euro. A severe deterioration would have a negative global impact and not less so for China. The relevanceOur view is that China’s growth will soften further in the first of the Eurozone crisis for China has been demonstrated byhalf of 2012, but the slowdown will not be severe. Hence, we recurring discussions between Chinese and European leadersdo not see a hard landing. We expect China’s GDP growth to on the possibilities of China providing funds to the troubledease to around 8.5% in 2012 (from 9.2% in 2011 and 10.4% in economies of the EU. At the same time, in the last week of December 2011, China began discussing currency pairing arrangements with Japan and announced currency swapsChina’s Imports and Exports (USD bn, 2010-Feb 2012) with some of its Southeast Asian trade partners. Exports (lhs) Imports Y-o-Y Growth (rhs) These moves indicate that while China recognizes that, in the200 Imports (lhs) Exports Y-o-Y Growth (rhs) 100 longer run, greater reliance on the domestic consumer is the way forward, over the short and medium term, such change 80160 must be supported by significant reorganisation of trade flows, and further shifts away from troubled developed markets and 60 increasingly more towards emerging economies. In the short120 run, net exports will remain the backbone of China’s growth, 40 Feb. 2011: Negative and given global weakness in developed markets, substantial 80 trade balance uncertainty about their performance persists. A positive effect 20 of this, however, is that such uncertainty will further shift the 40 economy towards domestic demand and may significantly Mar. 2010: Negative 0 trade balance speed up this positive transition, which, according to the 2011 figures at least, has already started. 0 -20 Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan 10 11 Kirill Riabtsev, Senior Project ConsultantSource: CNBS; The Beijing Axis Analysis kirill@thebeijingaxis.com 15 І The Beijing Axis
  • 15. The China Analyst China Sourcing Strategy: The Purchase Positioning Matrix Global purchasing managers sourcing from China face a myriad of options on setting up their Chinese procurement operations. Whether it be a direct structure such as a rep office, offshore structure, joint-venture, and WOFE; or to completely outsource operations to a trading company or third-party service providers, each option has its own pros and cons. Understanding the Purchase Positioning Matrix can help companies determine the most suitable procurement structure to set up in China. By Li-Chia Ou The Purchase Positioning Matrix: A Tale of Two complexity and value: Bottleneck (high, low); Routine (low, low); Axes Leverage (low, high); and Strategic (high, high). Based on ‘The Portfolio Instrument’ developed by The Bottleneck Position: Stuck in No Man’s Land Dirk-Jan F. Kamann (which is itself based on Kraljic’s 1983 purchasing model), the Purchase Positioning Matrix is a (Lower right quadrant – Low value, high complexity) framework for buyers to develop their supplier relations strategy by examining their sourcing needs in terms of Procurement in this quadrant tends to focus on specialised products sourcing value and sourcing complexity. The Matrix can from unique suppliers that are not very expensive. Typically, OEM be represented by the following illustration: products belong to this quadrant. Avoid this position if possible. The best strategy is to look for standard substitutes that are widely available. International buyers in the Bottleneck position, High however, do not have readily available and economically sensible options available to them in selecting a procurement structure in Leverage Strategic (Low, High) (High, High) China. The complex procurement requires a more formal business structure in order to establish partnerships with suppliers. This Value makes establishing a rep office or outsourcing not the most suitable options, yet the low procurement values also do not justify the expense of a JV or WOFE structure. Routine Bottleneck (Low, Low) (High, Low) To make matters worse, the supplier has all the power in this position as their product is of high complexity or rare, while the buyer cannot effectively leverage economies of scale. The lack of appealing Low Complexity High options in establishing a procurement structure, combined with low buyer power means that buyers should avoid being placed in this position as much as possible and try to seek out substitute The matrix has two axes, an x-axis that measures the products. If, however, foreigner buyers find themselves unable to complexity of the procurement needs (low complexity extract themselves from this position, perhaps the best way is to would be sourcing simple commodities such as pumps; adopt a fly-in fly-out approach until they find a substitute product. high either complexity would be missile systems), and a y-axis China example: China’s rare earth metals industryThe Purchase that measures the procurement Currently China has a near monopoly on the rare metals industry,Positioning Matrix is a value (which can be high because supplying around 95% of global exports. However, due to the the purchase item is expensive, industry’s damaging impact on the environment, the Chineseframework for buyers to e.g. an aircraft, or because the government is consolidating the industry. A single government-develop their supplier purchase volume is large, e.g. USD controlled monopoly, Bao Gang Rare Earth, has been created torelations strategy 100 million’s worth of pumps). A mine and process ore in northern China, the region that accountsby examining their procurement need is considered for two-thirds of China’s output, while production from southern complex if there are no more than China will be consolidated into three companies in the near future.sourcing needs in terms four suppliers that can meet the The government has already ordered 31 mostly private rare earthof sourcing value and manufacturing requirements, processing companies to shut down and is forcing four others tocomplexity. otherwise it is regarded as merge with Bao Gang. Along with industry consolidation, China is simple. A procurement need also tightening export quotas, which has sent the price of rare earth is considered high value if the metals soaring, impacting a long list of industries. For example, procurement value for a product the average price for fluorescent bulbs (using the rare element group or from a country is more than 3% of the total europium oxide), rose by 37% in 2011. procurement value. The Routine Position: Lather, Rinse and Repeat Based on these two axes, the matrix can be divided into four quadrants with corresponding values of sourcing (Lower left quadrant – Low value, low complexity) 16 І The Beijing Axis
  • 16. The China AnalystProcurement in this quadrant usually focuses on more routine The Strategic Position: Towards a Win-Win Rela-products which are easily available and cheap. Here, organisational tionshipcosts can be more important than the invoiced costs. Suppliersshould be selected on their ability and willingness to reduce the (Upper right quadrant – High value, high complexity)costs of logistics. Procurement needs in this quadrant are characterisedInternational buyers in the Routine position have the most options by high costs and unique suppliers. Here, co-operationwhen choosing a procurement structure in China. If the procurement and long-term relations that gradually grow deeper arevalues are very low (less than 1% of the total input value) and typical features. Relations rather than contracts are anthe complexity is simple, it makes more economic sense to just issue; usually, in regards to contracts, they last five yearsoutsource the entire procurement operation to a qualified service or the total production life cycle of a particular product.provider, such as a PSP or trading company. If the procurementvalue is closer to the 3% threshold, establishing a rep office (whether International buyers in the Strategic position havefrom headquarters or offshore) should be considered, since with complex procurement needs and high procurementhigher procurement values, more extensive use of service providers values, which makes it worthwhile to set up a morewill be needed. Thus, it makes sense to establish a permanent office formal business structure, such as a WOFE, in order toto ensure the quality of service providers. WOFE or JV structures are form strategic relationships with the limited number ofnot economically justifiable. suppliers. A company may even consider partnering with an existing supplier in China by forming a joint venture inChina example: AlibabaAs the ‘factory of the world’, its no surprise that China is home to order to obtain exclusive distribution rights or to be ablethe world’s largest online business-to-business trading platform for to better manage the design/production process for thesmall businesses, Alibaba. Claiming to have more than 65 million products produced by that supplier. Due to the highlyregistered users, Alibaba is a transaction-based wholesale platform strategic and sensitive nature of the buyer-supplierthat brings together importers and exporters from more than 240 relationship in the Strategic position, relying on agentscountries and regions. For buyers with limited procurement needs and trading houses for procurement needs is no longerin China, Alibaba provides another channel for them to source small suitable.quantities of goods at wholesale prices from China. China example: Commercial Aircraft Corporation of ChinaThe Leverage Position: Maximising Economies of Scale (COMAC) COMAC, a Chinese state-owned(Upper left quadrant – High value, low complexity) corporation, is a new entrant in the larger passenger aircraft industry Buyers should striveProcurement needs in this quadrant are characterised by high and has the potential to break the to move in a clockwisevolumes in monetary terms and the availability of ample suppliers Boeing/Airbus duopoly. COMAC direction with the goalfor the same product. Because of the volume, various discounts has already signed an agreement with Irish airline Ryanair, Europe’s of ultimately endingbecome available. This further reduces other organisational costs,such as ease of ordering, lead-time, flexibility, and payment terms, largest discount airline, to up in the ‘Strategic’among others. In this position, buyers have substantial power over cooperate in the development of quadrant.suppliers. China’s large passenger aircraft, the C919. According to the deal,A rep office structure, whether from headquarters or offshore, is the the two companies will workmost suitable one for international buyers in China in the Leverage together in research and development, airworthinessposition. The high value of procurement from China makes it and customer services on the C919 project. The C919’seconomically worthwhile for the company to set up a rep office in first test flight is planned for 2014.China. The key to making this work is the frequent use of serviceproviders. Although branch offices cannot directly import/export, Putting the pieces togetherit can chose from plenty of service providers in China that canprovide this function. From a savings-to-cost ratio, this makes the With an understanding of the Purchase Positioningbranch office highly scalable since it is much easier to use or not use Matrix, global procurement mangers can now identifyservice providers than to hire or fire direct employees. Furthermore, where they belong on the matrix and hopefully avoidsince the purchase complexity is low, companies can comfortably some costly mistakes, such as setting up a WOFEoutsource procurement operations in China without having to send structure or expensive JV when they are in the Bottlenecktheir own personnel, leaving the branch office to take care of routine or Routine position. As a general rule, starting from thesupervision duties. ‘Bottleneck’ position, buyers should strive to move in a clockwise direction with the goal of ultimately ending upChina example: Walmart in the ‘Strategic’ quadrant. This will be a natural transitionWalmart is the world’s largest retailer and grocery chain by sales. for international buyers in China to move towardsIn 2011, Walmart reported USD 422 billion’s worth of revenue, anyway, especially as China moves further up the value-which is more than its five closest competitors combined, including chain, away from labour-intensive, low value addedTarget and Tesco. Because of its mammoth size and buying power, manufacturing into high-tech, R&D-intensive industriesWalmart can leverage economies of scale to pressure suppliers to currently largely dominated by developed countries.accept lower margins in exchange for high purchase volumes. Manysuppliers give in to Walmart’s pressure because they depend on the Li-Chia Ou, Senior Consultantdiscount retailer for a majority of their sales. To keep its prices even lichia@thebeijingaxis.comlower, Walmart sources extensively from China, and has establishedits Global Merchandising Centre in Shenzhen. Walmart’s purchasevolumes from China are so substantial that if Walmart were acountry it would be China’s sixth largest export country. 17 І The Beijing Axis
  • 17. The China AnalystHow to Procure from China #9 - Transaction MonitoringThe Beijing Axis Procurement Process Flow encapsulates the full extent of project engagement, fromthe point of first enquiry to the range of services in the solution process and benefits provided for thecustomer. In this edition we focus more closely on step 9 of the Beijing Axis Procurement Process Flow:Transaction Monitoring.The Process Flow and Service Delivery Platform of Beijing Axis Procurement • Overall Project Management • Holistic Risk Management • Strategic Relationship Management Strategic Sourcing Analysis Procurement 1 2 3 4 Initial Scoping, Supplier Supplier Needs Analysis & Systematic Industry Supplier Evaluation, Pre-Qualification, Evaluation, Due Diligence China Procurement Search & Supplier Application of high- Due Diligence & Competitive Identification level filters & Final Selection Analysis Final Selection Engagement Commercial 8 7 6 5 Supplier Engagement, Process, Site Inspection, Supplier Site Inspections, Sample Contracting Tender Evaluation Sample Testing and Engagement, RFQ & and Contract Standards Tendering (SOI, RFP) Testing, Contracting Management Supply Chain Process 9 Quality 10 11 Coordination & 12 Mgmt & Transaction Monitoring, Management (QA/ Assistance On Site Transaction Logistics Support QA, Expediting, Third- Monitoring QC), Expediting Management (Material Mgmt, and Third-Party Commissioning, Party Mgmt & Logistics Management etc.)Beijing Axis Procurement Guidelines for Transaction Such potential costs include costs for hiring inspectors, flightsMonitoring and accommodation for sourcing and technical teams, cost for amendment of the contract based on the revision of technicalBeijing Axis Procurement monitors the transaction execution by requirements, etc. Beijing Axis Procurement helps clients to manageeither assisting the client or by acting on their behalf. Potential risks these costs at the beginning of the transaction, by for example:during the transaction will be an incomplete understanding of the • Carefully analysing costs when the contract is signed;technical aspects of the contract, as well as the schedules, quality, • Managing the costs:potential cost increases and crises which might occur at any time. • Negotiating whenever necessary with suppliers andUnderstanding technical contract: The fact that a Chinese supplier third parties;has signed the technical contract does not mean that they fully • Planning trips in an economic and efficient way;understand it and will comply with it. This could be caused by many • Operating locally in China or even in suppliers’ workshopreasons, such as a language barrier for the technical terms, different on behalf of clientsindustry conventions (the default in the client’s country might not • Recording and regularly reporting on costs to clientsbe the same as in China), poor internal coordination in the supplier’sorganisation, etc. Beijing Axis Procurement provides assistance withtechnical clarification and with coordinating the supplier’s various Crises: Due to many uncontrollable elements, there will always bedepartments to ensure full comprehension. Whenever necessary, sudden crises in any transaction. Beijing Axis Procurement will assistBeijing Axis Procurement will summarise all the potentially risky clients to decide whether the transaction should proceed. If the crisistechnical issues and discuss these with suppliers. With proper is not serious enough to break the deal, Beijing Axis Procurement willoutsourced technical support for some large projects, Beijing Axis produce solutions to enable the two sides to reach an agreementProcurement can provide technical solutions to bridge the client’s and maintain the relationship, which sometimes is more importantrequirements and suppliers’ capabilities in a more economic and than dealing with the crisis itself. If the crisis is serious and the risk ispractical way so that the transaction can proceed. too high, Beijing Axis Procurement will help clients to negotiate with suppliers to minimise the loss and find alternative solutions for clientsPotential cost increases: Even though low product costs appear to maintain supply.to promise large savings when the contract is first signed, globalprocurement managers often find that the contract execution cost By Beijing Axis Procurementfor purchasing from China can severely complicate the transaction.18 І The Beijing Axis
  • 18. The China Analyst Monthly Inbound FDI in China and y-o-y Growth RateChina Capital: (USD bn, Jan 2011-Jan 2012) 14 0.35 0.30Inbound/Outbound 12 10 0.25 0.20 0.15FDI & Financial 8 0.10 0.05 0.00Markets 6 4 -0.05 -0.10 -0.15 -0.20In 2011, FDI into China amounted to USD 116 bn, 2 -0.25up by 9.72% y-o-y. However, FDI decreased y-o-y -0.30 0 -0.35for four consecutive months from November 2011 Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec Jan Febto February 2012. China’s outbound investment Source: MOFCOM; The Beijing Axis Analysis 11 12in 2011 reached USD 60.1 bn, registering a slightgrowth of 1.8% y-o-y. Significant investments Notable FDI Deals in China in 2011occurred both in the resources and non-resources • In February, Softbank Corp., a Tokyo-based company engaged in telecommunications and e-commerce, acquired a 35%sectors. By Beijing Axis Capital stake in China’s SynaCast Corporation, a Shanghai-based online media company, for USD 244 mn • In March, Rhodia SA, a French specialty chemical manufacturer, completed its acquisition of a chemical facility owned byForeign Direct Investment into China Suzhou HiPro Polymers Company for USD 489 mn • In August, Japanese trading house Itochu Corp. agreed to buy aSummary 30% stake in Chinese textile and apparel maker Shandong Ruyi • In 2011, foreign direct investment (FDI) into China amounted Science and Technology Group in a deal worth USD 200 mn to USD 116 bn, up by 9.72% y-o-y. Yet FDI into China fell for four • In October, Scotiabank, Canada’s third-largest bank and the one consecutive months from November 2011 to February 2012 with with the biggest overseas presence acquired a 20% stake in concerns that the Chinese economy is set for slower growth in 2012 China’s state-owned Bank of Guangzhou for about USD 735 mn • In 2011, wholly foreign-owned enterprises were the major • In November, Pearson agreed to buy China’s Global Education vehicles of investment in China, accounting for around 78% and Technology Group for USD 294 mn of total actually utilised capital • In November, French chemical maker Arkema agreed to • In 2011, 87% of FDI in China originated from other Asian acquire two chemical firms in China for a total of USD 365 mn countries/regions. Hong Kong, as the main bridge for inbound • In December, US-based IT company Expedia concluded its investment into mainland China, is still the largest source of acquisition of Renren’s stake in online travel provider eLong capital, contributing USD 77 bn or 66.4% of total FDI for USD 72.4 mnAnnual Inbound FDI in China (USD bn, 2005-2011) FDI into China by Source Country/Region (USD bn, 2011) 120 Netherlands (0.78) France (0.8) 100 Germany (1.14) Others UK (1.61) (9.71) South Korea (2.55) 80 US (3) Singapore (6.33) 60 Japan (6.35) 40 Hong Kong Taiwan (77) (6.73) 20 0 2005 2006 2007 2008 2009 2010 2011Source: MOFCOM; The Beijing Axis Analysis Source: MOFCOM; The Beijing Axis Analysis 19 І The Beijing Axis
  • 19. The China AnalystChinese Outbound Foreign Direct Investment China Financial MarketsSummary China’s Stock Markets in 2011-Q1 2012 • In 2011, China’s OFDI amounted to USD 60.1 bn, an increase • In 2011, China experienced a bearish market and there was a of 1.8% y-o-y general downward trend in all of China’s three major indexes • In 2011, Beijing Axis Capital followed 122 overseas investment • Starting at 2,852.6, the Shanghai Stock Exchange Index activities by Chinese companies (including ongoing finished at 2,199.4, down by approximately 23%, yet it still transactions and concluded deals of previously announced outperformed the Shenzhen Stock Exchange Index transactions), among which 44 are resource-related investments and 78 are non-resources investments Shanghai Stock Exchange Index (Jan 2011-Mar 2012) • In terms of resources deals, Australia became the most 3200 attractive region for Chinese investors with 14 deals followed by North America and Africa, with 10 and 8 deals, respectively. In terms of non-resources deals, Europe was favoured the most by Chinese investors with 25 deals, followed by Asia 2800 and North America, with 20 and 16 deals, respectively. Africa was the least favoured with only two non-resources deals by Chinese investors • In terms of deal size, oil & gas deals conducted by China’s 2400 three energy giants, CNPC, Sinopec, and CNOOC, are notable. Two of the most recent big deals occurred in North and South America, with both exceeding USD 2 bn in deal size (see Galp Energia and OPTI Canada deals below) 2000Notable Chinese OFDI Deals in 2011 • In April, XCMC China, a wind energy company, acquired the Argentinian company Reta Region Wind Power for USD 200 mn 1600 Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar • In May, China National Chemical Corporation (CNCC) concluded 11 12 Source: Shanghai Stock Exchange an agreement with MA Industries, an Israeli farm chemicals company, to buy a 60% interest in MA for USD 1.44 bn • In May, Fosun International, a leading private company in • The Shenzhen Stock Exchange Index slumped by China, acquired 9.5% of the Greece luxury jewellery maker approximately 30% over the year from 12,714 to 8,919. The Folli Follie for USD 123 mn market lost its momentum from the beginning of H2, while it • In July, China’s largest agricultural group COFCO announced its was relatively stable during the first half of 2011 acquisition of Tully Sugar, an Australian company, for USD 149 mn • Like the other two indexes, the Growth Enterprise Market • In November, Sinopec bought a 30% stake in the Brazilian unit declined from 1,155 to 729.5 at the end of the year, registering of Portuguese oil company Galp Energia for USD 3.54 million a 37% plunge, despite a recovery period in Q3 after it fell to • In December, China Guangdong Nuclear Power Group around 790 at the end of H1 announced the acquisition of Australia-based Kalahari • Despite the stock market indexes plunging significantly in Minerals for USD 990 mn 2011, the beginning of 2012 saw a recovery. The Shanghai • In December, CNOOC completed the acquisition of the Index and Shenzhen Index have climbed by around 9.5% and Canadian energy company OPTI Canada for USD 2.1 bn with 16%, respectively, as of mid-March, while the Growth Market the objective of securing oil resources in North America Index has also risen since the end of JanuaryChina’s Annual Outbound Non-financial FDI and y-o-y Growth Shenzhen Stock Exchange Index (Jan 2011-Mar 2012)Rate (USD bn, 2005-11) 14000 70 150% 60 120% 12000 50 90% 40 10000 30 60% 20 8000 30% 10 6000 0 0 Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar 2005 2006 2007 2008 2009 2010 2011 11 12Source: MOFCOM; The Beijing Axis Analysis Source: Shenzhen Stock Exchange20 І The Beijing Axis
  • 20. The China AnalystSource: Various media; Company reports; The Beijing Axis Analysis 21 І The Beijing Axis
  • 21. The China Analyst The China AnalystMapping China in the Global Debt LandscapeThe Eurozone debt crisis was one the leading events in the global economy in 2011. The map below illustrates the global debt outlook not only in Europe, where the situation is clearly severe, but also in other regions. It isnotable how little debt can be attributed to the BRICS countries, including China, and how large the debt exposure is in developed countries, notably the US and Japan. The red and yellow bars indicate the growth that indebtednations will be able to muster in 2011 and 2015. By Beijing Axis Strategy Japanese public Negative debt in 2011: USD growth in 10, 917.5 bn 2011 Germany Sweden Iceland Canada Finland Russia Ireland Norway United Kingdom Netherlands Denmark Switzerland Japan Poland Negative Austria growth in Kazakhstan France 2011 Hungary H Belgium United States Italy Turkey US public debt Spain Uzbekistan Azerbaijan in 2011: USD 10, 458.9 bn Negative Tunisia Greece China Cyprus Lebanon growth in Israel Kuwait Iran Pakistan South Korea 2011 Portugal Morocco Algeria Libya Bahrain Qatar Egypt Saudi Arabia Taiwan Cuba Dominican United Arab Bangladesh Emirates Hong Kong SAR Republic Mali Oman India Mexico Honduras Jamaica Barbados Senegal Guatemala Nicaragua Sudan Yemen Vietnam Trinidad and Nigeria Thailand Costa Rica Panama Tobago Côte Ghana Ethiopia Philippines Venezuela d’Ivoire Malaysia Cameroon Sri Lanka Uganda Equatorial Kenya Singapore Ecuador Colombia Guinea Gabon Seychelles Indonesia Papua New Guinea Peru Brazil Angola Malawi Zambia Public Debt 2011 (USD bn) GDP Growth (IMF % Estimate) Bolivia Mozambique Namibia Mauritius 0 2015 Botswana 11 1 Paraguay 750 Chile 10 2 Argentina Australia 500 2011 South Africa Uruguay 50 9 3 8 4 New Zealand 7 5 6 Public Debt as a Share of GDP (%) 1-19 20-39 40-59 60-79 80-99 100+Source: The Economist; IMF22 І The Beijing Axis 23 І The Beijing Axis
  • 22. The China Analyst likely to fall even further. Despite China’s efforts to transition China in Europe: to a consumption-driven economy, its economy is still largely export-driven and Europe remains China’s second-largest trading partner. Hence China would like to see a strong euro Cash, Debt and to preserve its exports to the region. On the bright side, while the sovereign debt crisis has triggered a plunge in the value of the euro, Chinese companies with an overseas investment agenda are in a strong position to take advantage of this trend. M&As Over the medium to long term, China aims to build competi- tive advantagew based on science, technology, and innova- tion, which is precisely what Europe has to offer. In the last ten years, we have seen Chinese manufacturers progressively move up the value chain, from producing low value-added Europe is looking to China as an alternative goods with low margins to more sophisticated products with source of finance and growth. China, the higher margins and from OEM to branded goods. Far from the low price and low quality perceptions often associated world’s fifth-largest investor in 2010, invested with Chinese companies, they are aggressively challenging USD 4.61 bn (non-financial) in Europe last international competition by penetrating strategic segments. year, a 57.3% year-on-year increase. This wave Very often this has been achieved through licensing and technology transfer agreements with European manufac- of Chinese investment comes at a time when turers that boast advanced and patented technologies, and European companies are thirsty for cash. Is who were attracted by the favorable investment environment of the Chinese low cost production base. In many instances, Europe’s crisis becoming China’s opportunity? and as Chinese manufacturers grew in scale, capabilities and By Javier Cuñat export revenue, foreign companies end up selling their main patents to their Chinese counterparts. Strategic alliances and M&As, as part of Chinese companies’ business expansion W hile sovereign debt has risen substantially in only a models, are now set to take off in Europe. few eurozone countries, it is threatening to envelop otherwise healthy economies throughout the region. Despite this context, and taking into account the size of the As austerity measures are being enacted throughout Europe two economic blocks and the scale of their bilateral trade, as a response, company profits are declining or are showing Chinese investments into Europe are still rather low. The weak growth prospects. Credible sources of finance are state ownership of Chinese investors, lack of experience in shrinking. Within this context, FDI is becoming more impor- international deal making and a protective attitude among tant as a facilitator of economic growth in Europe. On the host countries are some of the reasons behind this current other side of the globe, Asia is gradually playing a more promi- status. Yet this is a dynamic and changing process. Chinese nent role as a source of global OFDI, with Asian OFDI growing investors have learned their lessons, and a protective attitude at a CAGR of 8% in the last two decades, a figure substantially in Europe is rapidly becoming outdated. Before the crisis, higher than other regions. China is taking the lead in this. It China had made only modest investments in the region while became the world’s fifth-largest investor in 2010, ahead of all today Chinese investments are not only welcomed, but are other Asian countries. also strongly desired among struggling but still competitive European companies. In 2006, China invested USD 1.44 bn in the European Union (EU), only 0.25% The players of total OFDI received in the EU in thatChina aims to build year. According to China’s Ministry of Most Chinese investments in Europe to date came from large Commerce (MOFCOM), China’s non- state owned enterprises (SOEs). These large conglomeratescompetitive financial investment in the EU reached (117 in total) report to SASAC (State-owned Assets Supervisionadvantage based on USD 4.3 billion in 2011, more than and Administration Commission of the State Council). SASACscience, technology, double the 2006 figure, accounting will appoint their top executives and approve their overseas for 1.4% of total OFDI in the region. transactions. They hold leading positions in their respectiveand innovation, which This figure also represented a 94.1% industries in China, are financially supported and have specificis precisely what Europe increase over 2010. While China has mandates from the central government. In some cases, deals made it clear that buying government are negotiated and agreed between high-level governmenthas to offer. bonds of deficit-ridden European officials, and executed by these SOEs. While they may have countries is not currently a priority, experience in emerging markets, they are currently operating the ongoing crisis inevitably presents in the relatively unfamiliar territory of Europe. Yet their execu- some great buying opportunities for tives are ambitious, logical and highly practical, and these cash-rich Chinese firms. Europe has plenty to offer as China companies are able to adapt fast and learn quickly. seeks to expand into new markets, acquire new brands and upgrade its high-tech sector. Chinese capital will bring Recent examples of transactions undertaken in Europe employment, tax revenue and reciprocal market access. by these types of companies include China Three Gorges Corporation (CTGPC), which bought a 21% stake in Energias The context de Portugal for USD 3.51 billion, and State Grid Corporation of China (SGCC), the largest electric power transmission and Over the short term, a potential recession in the eurozone is distribution company in China, which recently agreed to pay not in China’s best interest. Given that China’s currency is still USD 508 million for a 25% stake in the national electricity grid largely fixed to the US dollar, the euro’s progressive deprecia- of debt-stricken Portugal. tion against the dollar is making Chinese exports to Europe more expensive. In addition, as European demand shrinks due Medium-sized state owned enterprises are also venturing into to government austerity measures, imports from China are Europe. There are thousands of these companies operating at 24 І The Beijing Axis
  • 23. The China AnalystChina M&A in Europe Since January 2011 > USD 1 billionYear Investor USD mn Partner Sector LocationMar-12 Value Partners Ltd. 6.4 KBC Asset Management N.V. Financial BelgiumFeb-12 Guangxi Liugong Machinery Co., Ltd. 62 Huta Stalowa Wola Machinery PolandFeb-12 Sany Heavy Industry 426 Putzmeister Holding GmbH Manufacturing GermanyFeb-12 CITIC PE Advisors (Hong Kong) Ltd. 47 Putzmeister Holding GmbH Manufacturing GermanyFeb-12 State Grid Corporation of China 508 Redes Energéticas Nacionais (REN) Power PortugalJan-12 China Investment Corporation ~1,000 Thames Water Infrastructure UKDec-11 China Three Gorges Group 3,510 Energias de Portugal (EDP) Power PortugalJan-12 LDK Solar Co. Ltd. 31 Sunways AG Power GermanyJan-12 Shandong Heavy Industry Group 478 Ferretti Group Manufacturing ItalyDec-11 Sinochem 279 DSM Anti-infective business Pharmaceutical NetherlandsNov-11 China Investment Corporation 3,200 GDF Suez SA Oil & Gas FranceNov-11 Ningbo Huaxiang Electronics 37 Sellner Group Manufacturing GermanyNov-11 Xinjinang GoldWind Science & Technology 24 GreWin Projektgessellschaft Ploen 1 GmbH Power PolandOct-11 Chengdu Geeya Technology Co. 35 Harward International Plc Electronic Products UKSep-11 China National BlueStar (Group) Co. Ltd. n/a France Innovia Agriculture, Chemicals, Cosmetics FranceJul-11 Lenovo China 906 Medion AG Electronic Product GermanyJul-11 Petro China 1,015 INEOS Group Holding plc Oil & Gas UK Rohde & Schwarz Professional Mobile RadioJun-11 Hytera Communications Co., Ltd. 3 Technology Germany GmbHJun-11 Qinhuangdao Tianye Tolian Heavy Industry 6 Eden Technology SRL Equipment ItalyJun-11 Ausnutria Dairy 15 Hyproca Dairy Agricultural NetherlandsJun-11 Beijing Hainachuan Automotive Parts Co., Ltd. 2,480 Inalfa Roof Systems Group Automobile NetherlandsMay-11 Guoco Group n/a The Rank Group Plc Gaming UKMay-11 Fosun 123.2 Folli Follie Jewelry Retail GreeceMar-11 Hainan Airlines n/a BAA Airline UKFeb-11 Beijing Automotive Industry Holding Group 45 WEIGL Automobile SwedenJan-11 CATIC Beijing 60 KHD Humboldt Wedag International AG Machinery GermanyJan-11 SmartHeat Inc. n/a Güstrower Wärmepumpen GmbH Machinery GermanyJan-11 Wanhua Industrial Group 1,690 BorsodChem Zrt. Chemical HungaryJan-11 China National Blue Star (Group) Co. Ltd. 1,950 Elkem AS Metals and Materials NorwaySource: Various media; Company reports; The Beijing Axis Analysisthe central, provincial or city level and which are more focused Examples include Fosun, a Shanghai-based diversified privateon one specific or niche sector. Generally speaking, one can holding group, which grew from a USD 8,000 start-up to a USDcluster them as either ‘slow’ or ‘fast-growing’. The ‘slow-growing’ 20 billion asset enterprise. Fosun acquired a minority stakesub tier of companies is composed of those companies which in France’s Club Med, as well as Greece’s Folli Follie. Anotherhave encountered difficulties growing in a highly fragmented Example is Huawei, which first launched its Western Europeanand cut-throat Chinese market over the last two decades. They enterprise division in 2010, and has since built up a workforceusually operate in non-strategic sectors (e.g. textiles), have of around 400 employees in Europe.smaller international ambitions and are often consolidated intobigger firms as part of an ongoing process in China. Going forwardThe ‘fast-growing’ sub-tier of companies is composed of We are leaving behind a stage in the relationship characterisedmedium-sized export-oriented enterprises that have success- by booming bilateral trade, few investments and imbalances,fully consolidated market share at home. Their motivation to and entering a new stage characterised by increasing collab-go global is often a matter of ‘survival’ as the Chinese domestic oration. Challenges are twofold. From one side, Europeanmarket becomes increasingly saturated. While they receive companies will have to understand the complexities of dealingless overall support from the central government, they are with Chinese investors, and learn how tocommonly provided with financing by Chinese domestic adapt to them. Even though China hasbanks and are able to move faster than the larger firms. cash to invest, successful deal making is usually the result of understanding the Chinese privateExamples include Shandong Heavy Industry, a heavy equip- Chinese business culture, identifying multinationalment maker, which agreed to pay USD 478 million for a 75% stakeholders with the right strategic fitstake in Ferretti Group, an Italian luxury yacht maker with and developing customised modes of companies are probablydebt problems, effectively enabling it to acquire overseas engagement. From the Chinese side, some of the mosttechnology, know-how as well as an international brand probably the main challenge over thename at a discount. Another example is Sany Heavy Industry, long run will be to become a respected attractive investors fora construction equipment manufacturer, which more recently international investor in Europe. Europe.agreed to acquire the German family-owned engineering firm Chinese companies are usually knownPutzmeister for USD 426 million. for their strong balance sheets, govern- ment ownership structures and interna-Chinese private multinational companies are probably some tional ambitions but are still far from being considered ideal;of the most attractive investors for Europe. They are usually hence they need to empower their executives to becomeyoung companies, from ten to twenty years old, which have well respected investors who comply with international bestbeen able to grow extremely fast during the 1990s and 2000s practices. While this is not always true, a change in perceptionbased on both domestic and international demand. They will be key if China aims to establish a long term footprint inare usually managed by either practical self-made Chinese Europe.entrepreneurs with little business education, or Chinesereturnees educated overseas with a well-grounded interna- Understanding both sides of the equation and adapting totional mind-set and management skills. They are often rooted the new realities of the relationship will enable companies toin Hong Kong, Shandong or Shanghai, locations which first successfully navigate the current environment, and to developbenefited from China’s economic reform and where one can and build upon existing competitive advantages.expect them to be listed. They do not benefit from systematicgovernment support to ‘go global’, yet they often partner with Javier Cuñat, General Manager: Beijing Axis StrategyChinese SOEs for specific projects and transactions. javiercunat@thebeijingaxis.com 25 І The Beijing Axis
  • 24. The China Analyst a slowdown in the mining, agriculture and manufacturingRegional Overview: • sectors, India’s economic growth is forecast to dip below 7% in 2012 In Indonesia, GDP grew at a rapid 6.5% in 2011, the highestBRIICS rate of growth in over a decade. This was as a result of a large emerging middle class that is benefiting from new economic policies as well as a more stable government. Also contributing to the growth was a sustained increase in foreign direct investment in IndonesiaBrazil, India, Indonesia and China going strong; Russia and • Economic growth in China slowed in 2011 to 9.2% from 10.3% in 2010. This was largely attributed to a moderationSouth Africa still lagging behind of export demand as well as stricter government policies • Brazil experienced 2.7% GDP growth during 2011, significantly aimed at reining in consumer and property prices. China aims below expectations. The laggard growth was a result of high to further reduce its GDP growth to 7.5% in 2012 partly as a interest rates, an appreciation of the real versus the dollar, reflection of low export demand from debt-stricken Europe which hurt exports manufacturers, as well as the effects of the and a frail US economy ongoing Euro debt crisis • South Africa is estimated to have grown 3.1% in 2011, up • Russia’s economy grew by 4.3% in 2011, a small increment from 2.9% in 2010. The main drivers for growth included above the 4% economists were expecting. The growth was finance, real estate and business services, which collectively mainly ascribed to an increase in agricultural output coupled contributed 0.7%. In 2012, lower demand from European with strong consumer spending as well as record low inflation countries will negatively affect South Africa’s economy as • India’s economy is estimated to have grown at 7.6% in exports and production in the mining, manufacturing and 2011. Due to interest rate increases to curb inflation as well agricultural sectors will be contained Russia 143 mn Legend USD 1,543 bn Population, 2011 USD 10,790 China GDP, 2011 1,348 mn GDP per capita, 2011E India* USD 6,419 bn 1,210 mn USD 4,762 USD 1,843 bn USD 1,527 Indonesia Brazil South Africa* 240 mn 193 mn 50 mn USD 834 bn USD 2,517 bn USD 422 bn USD 3,469 USD 12,917 USD 8,342Source: IMF; Trading Economics. * Projected GDPBRIICS Real GDP Growth (%, 2011, Q1-12F) BRIICS Inflation and Unemployment (%, Feb 2012)10 Inflation Unemployment Rate* 25 2011 Q1-12F 8 23.90% 20 6 15 4 10 8.80% 6.56% 5.85% 6.60% 2 5 4.10% 6.60% 6.10% 5.70% 3.20% 3.56% 3.70% 0 China India Indonesia Brazil South Africa Russia 0Source: Trading Economics; Russian Federal State Statistics; Statistics Indonesia; China Source: Trading Economics; Various; The Beijing Axis Analysis. *Unemployment: ChinaNBS; IMF; BBVA. Note: 2011 growth rates for India and South Africa are estimates. (4Q-11), Indonesia (Aug 11), South Africa (4Q-11), Russia (Jan 12) 27 І The Beijing Axis
  • 25. The China Analyst China-Africa TradeRegional Focus: Total Trade • In 2011, China-Africa trade reached USD 166 billion, andCHINA-AFRICA new record high and increase of 31% y-o-y. South Africa and Angola remained China’s largest trading partners (see chart below: Ten Largest Partners). China’s imports from Africa grew at much faster pace than its exports, widening its trade deficit with the continentIn 2011, China-Africa trade reached USD 166 billion, China-Africa Annual Trade (USD bn, 2001-11)once again reiterating the ever-strengthening trade 100 2011 total trade: Chinese Imports from Africa USD 166.2 bnrelations between the two regions. In this edition,we report the latest China-Africa trade data, review 80 Chinese Exports to Africamajor China-Africa trade and investment deals of2011 and early 2012, and also spotlight China’s 60investment relationship with the East African .4% 31Community (EAC). GR 40 CA 2001 total trade: USD 10.8 bn 20China-Africa Briefing: Increasing Chinese cooperationwith regional African bodies; Kidnapping of Chinese 0workers; New AU headquarters 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 • In late 2011, The EAC and China signed a Framework Source: CEIC; The Beijing Axis Analysis Agreement on economy, trade, investment and technical cooperation. For China, this is the first such working mechanism with a regional bloc and the first of its kind in China Imports from Africa sub-Saharan Africa. The Agreement will attempt to further • China’s imports from Africa in 2011 totalled USD 93.1 bn, up open up Sino-EAC investment and trade opportunities. 40% y-o-y The Agreement will focus on the promotion of commodity • Trade data for 2011 reveal that the five-biggest African trade, exchange of visits by businesspeople from both sides, exporters to China (South Africa, Angola, Sudan, DR Congo co-operation on investment, infrastructure development and and Congo-Brazzaville) accounted for nearly 80% of China’s human resource development and training imports from the continent during this period (see chart • 2012 opened on a sour note for China-Africa relations with below: Ten Largest Partners) several high-profile kidnapping of Chinese workers on the continent. In January, 34 Chinese workers were kidnapped China Exports to Africa in Sudan and although most were released, several were • China’s exports to Africa in 2011 totalled USD 73.1 bn, up 20% killed during the raid. In February, 25 workers from a Chinese y-o-y cement factory in Egypt’s Sinai region were kidnapped by • Trade data for 2011 reveal that the leading five export Bedouin tribesmen but were later released. The kidnapping destinations for Chinese goods in Africa were South Africa, re-focused global attention on China’s investments in what Nigeria, Egypt, Liberia and Algeria. These five countries are traditionally high-risk areas, while also raising awareness accounted for 54% of the continent’s total imports from China of how China should ensure the safety of its citizens working in 2011 overseas • In January, China continued to increase its soft-power in the China-Africa Trade, Ten Largest Partners (USD bn, 2010 vs. 2011) continent by officially launching China Central Television South (CCTV) Africa in Nairobi, Kenya. The channel will cover the 50 Africa political, economic, social and cultural aspects of the entire African region 40 Others 2010 2011 • The biggest Sino-Africa event of 2012 thus far is undoubtedly the opening of the new 52,000 square meter African Union (AU) headquarters in Addis Ababa, Ethiopia. The USD 124 30 Angola mn centre – entirely funded by China – was opened by Jia Qinglin, the chairman of the National Committee of the Chinese People’s Political Consultative Conference and 20 Sudan Nigeria Jean Ping, the current AU chairman. Moreover, in a sign of Egypt continuing co-operation with the AU, China also agreed to Algeria 10 Congo Mor- provide USD 95 million in aid to the AU over the next three Congo Liberia (DRC) occo years for additional projects to be agreed upon by the two sides at a later stage 0 Source: CEIC; The Beijing Axis Analysis28 І The Beijing Axis
  • 26. The China AnalystChina-Africa Investment Africa Regional Focus: China and the East-AfricanTrends Community (EAC) • Based on the major China-Africa investment activities in late Brief Regional Profile 2011 and 2012, China’s investment appetite in Africa remained • The EAC is composed of five countries: Kenya, Uganda, strong in three sectors: oil & gas, mining, and infrastructure Tanzania, Rwanda and Burundi who have a combined GDP of around USD 80 bn. The average GDP growth rate betweenMajor Recent Deals and Developments the five countries was over 5% in 2011 • In October 2011, an official from the state-owned China • As East Africa’s integration advances with the launching of a Development Bank announced that it would provide a USD 1 Common Market Protocol in 2010 and greater political and bn special purpose loan to support small and medium-sized currency integration planned in the coming five years, China’s enterprises in Ethiopia, Egypt and other African countries investments into the region have also been increasing • In October 2011, Australia-listed Sundance Resources • Chinese OFDI stock into the region has increased over the announced that it would be acquired by China’s Sichuan past decade from a lowly USD 38 mn in 2003 to around USD Hanlong Group for USD 1.65 bn. The deal would give Hanlong 691 mn in 2010, representing a CAGR of 52% over eight access to the USD 4.7 mn Mbalam iron mine, located in the years. Chinese investment into the region is more diverse Republic of Congo and Cameroon than in other regions on the continent partly due to region’s comparatively lower natural resource endowments • In November 2011, China signed a series of agreements with Tanzania during the 4th meeting of the China-Tanzania Joint Allocation of China’s FDI Stock in E. Africa (USD mn, 2003-10) Economic and Trade Commission. The agreements guarantee 800 loans of about USD 95 mn to the African country, which will Burundi Uganda be earmarked towards improving the nations’ public telecom 700 networking as well as its transportation system Rwanda Kenya Tanzania • In November 2011, state-owned China Petrochemical Corp 600 (Sinopec Group) said that it had completed its acquisition of an 80% stake in Pecten Cameroon Co. in Cameroon, from 500 Royal Dutch Shell, gaining its first oil production assets in the African country 400 % 5 2.2 • In November 2011, China Nonferrous Metal Mining (Group) GR Co Ltd, one of China’s largest state-owned enterprises 300 CA announced plans to invest around USD 2 bn in Zambia from 200 2011 to 2015, to expand operations and begin construction of infrastructure facilities, adding that it had already injected 100 nearly USD 2 bn into the African country • In December 2011, a subsidiary of Shanghai Construction 0 2003 2004 2005 2006 2007 2008 2009 2010 Group Co. Ltd. announced it would acquire 60% of Eritrea- Source: Chinese Statistical Bulletin of OFDI; Various; The Beijing Axis Analysis based Zara Mining Share Co. for USD 80 mn, and retain the option of further acquiring unconfirmed mines at a price of no more than USD 20 mn • In November 2011, China signed a Framework Agreement with the EAC on economy, trade, investment and technical • In December 2011, Ethiopia and China signed two co-operation in order to boost Sino-EAC trade, which in 2010 agreements, with China agreeing to provide about USD 400 stood at nearly USD 4 bn, a 39% y-o-y increase mn in loans to support the country’s water projects and its Growth and Transformation Plan • In February 2012, China National Material Group Corporation Select Chinese Investments in Eastern Africa (USD mn, 2009-11) Ltd. (Sinoma) officially completed construction of a USD 1 bn Year Major Investment by Country Sector Value Chinese Firm cement plant in Nigeria, empowering the country with new cement export capabilities 2009-11 Nairobi-Thika Highway Kenya Infrastructure 320 mn • In February 2012, China Railway Construction Corp. 2009 Kigali Urban Roads Rwanda Infrastructure 31 mn announced that it had won several railway construction Entebbe’s International 2010 Uganda Infrastructure 350 mn contracts in Africa. The contracts, worth a total of USD 1.2 bn, Airport include projects in Nigeria, Djibouti and Ethiopia Upgrade Nyakahita- 2010 Uganda Infrastructure 128 mn Kamwenge Road Project • In February 2012, the China Minmetals Corporation announced that it had already obtained more than 90% of CNOOC-Lake Albert basin 2011 Uganda Energy 1,450 mn oil project Anvil Mining Limited, an Africa-based mining company with several metal ore mines in the DRC Mchuchuma Coal Project; 2011 Tanzania Mining 3 bn Liganga Iron Project • In February 2012, China’s state-owned CNOOC announced National Backbone Industry/ that along with Anglo-Irish Tullow Oil and France’s Total, it 2011 Burundi n/a Network Telecom would invest in a USD 1.5 billion refinery in the Lake Albert 2011 Mui Basin Kenya Mining 1,000 mn rift basin in western Uganda 2011 Chery Automobile Co Ltd Kenya Industry 50 mn • In February 2012, a Chinese firm, Good Time Steel Zambia Chunlun Tea Group Limited, announced it would invest more than USD 26 million 2011 Tanzania Industry n/a Company in its expansion programme to produce angle iron bars in Rehabilitation of  Northern 2012 Kenya Infrastructure 37 mn Zambia Corridor Highway  Source: Chinese Statistical Bulletin of OFDI; Various; The Beijing Axis Analysis 29 І The Beijing Axis
  • 27. The China Analyst China-Australia Annual and Monthly Trade (USD bn, 2001-11)Regional Focus: Chinese Exports to Australia Chinese Imports from AustraliaCHINA-AUSTRALIA Annual/monthly Trade Balance (rhs) 100 0 8 -2 7 80 -10 6 -3 60 -20 5 4 -4 40 -30 3Sino-Australian trade and investment activities 2 -5remained robust in 2011 and early 2012. Bilateral 20 -40 1trade set a new record with total trade reaching 0 -50 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec -6 01 02 03 04 05 06 07 08 09 10 11USD 116.41 bn, an increase of 32.95% from 2010. Source: China Customs; The Beijing Axis AnalysisLikewise, a flood of investment transactions in theenergy and resources sectors transpired late in2011. • China’s trade deficit with Australia peaked in September 2011 at USD 5.22 bn when China exported USD 3.13 bn’s worth of goods to Australia while importing a record total of USD 8.36 bn • According to ABS, China’s trade deficit with Australia alsoChina-Australia Briefing: Chinese currency settlement peaked in September 2011, when Australia imported USDscheme expands to Australia; China seeks to capitalise on 3.92 bn worth of goods from China and exported USD 7.25weak coal prices bn, resulting in a negative balance of USD 3.33 bn for the • As a part of China’s plan to free up its currency, the Hong Kong month Monetary authority authorised 15 banks to provide trade settlement accounts in the Chinese currency in the second China Imports from Australia half of 2011. As a result, Australia and New Zealand Banking • Australia continued to be a net supplier of commodities to Group Limited (ANZ) and HSBC Australia have been encour- China in 2011, with ores, slag and ash maintaining their posi- aging their customers that are doing business in China to tion as China’s leading imports from Australia at 59% or USD take advantage of this platform to settle transactions directly 23.17 bn of the total USD 39.44 bn. Mineral fuels, oils, distil- using the Chinese currency instead of going through the lation products, etc. came in second at 16% or USD 6.43 bn, normal route of using the US dollar while copper and articles thereof came in third at 4% or USD • Australia’s thermal coal price benchmark continues to remain 1.69 bn weak as buyers stay away and sellers face an oversaturated market. Chinese utilities are enquiring for coal deliveries for China Exports to Australia April and May, hoping to book supply while prices remain • Electrical and electronic equipment remained China’s leading weak. However, the annual term negotiations between exports to Australia in 2011 at 19% or USD 3.93 bn of the Australian producers and Japanese utilities are helping to total USD 20.65 bn. Nuclear reactors, boilers, machinery, etc. keep a hold on prices came in second place at 19% or USD 3.90 bn, while articles • In more coal-related news, in early March Australia cleared of apparel and accessories came in third place at 11% or USD the way for China’s Yancoal to take over miner Gloucester Coal 2.17 bn in a multi-billion dollar deal that gives Beijing a greater foot- hold in the resource-rich country. Australian Treasurer Wayne Swan stated that Australia’s foreign investments watchdog had given its approval for the deal under strict conditions that Australia-China Annual and Monthly Trade (USD bn, 2001-11) the new company should remain headquartered in Australia Australian exports to China and list on the stock exchange before the end of 2012 Australian imports from China Monthly trade balance (rhs)China-Australia Trade 80 70 8 8Total Trade 70 60 7 7 • Sino-Australian trade increased by 33% from USD 87.56 bn in 60 50 6 6 2010 to USD 116.41 bn in 2011, according to China Customs 50 40 5 5 (CC), whereas the Australian Bureau of Statistics (ABS) puts 40 30 4 4 the increase at 30.82% from USD 90.15 bn in 2010 to USD 117.93 bn in 2011 30 20 3 3 • China and Australia experienced their largest ever trade gap 20 10 2 2 in 2011 with CC pegging China’s deficit at USD 48.59 bn, a 10 0 1 1 46.8% increase from 2010’s USD 33.10 bn deficit; ABS puts 0 -10 0 0 China’s deficit at USD 31.01 bn, up 75.11% from 2010’s USD 01 02 03 04 05 06 07 08 09 10 11 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 17.71 bn Source: Australian Bureau of Statistics; The Beijing Axis Analysis30 І The Beijing Axis
  • 28. The China AnalystAustralia State Watch: Tasmania Approved Investment Proposals in Australia by Country (2009- • With a real gross state product (GSP) of USD 23.48 bn in 2010- 10, USD mn) 11, Tasmania is Australia’s seventh-largest economy No. of approvals • It is a net exporter with exports amounting to USD 3,270.81 142 US mn and imports amounting to USD 942.03 mn 410 UK • Main exports in 2010-2011 were zinc (16.62%), followed by 1,766 China aluminium (12.83%), wood chips (7.39%), copper ores and concentrates (6.99%), and iron ore and concentrates (6.19%) 72 Japan 37 Switzerland • Key industries in terms of contribution to state GSP are manu- facturing (9.4%), health care and social assistance (8.2%), 24 New Zealand financial and insurance services (7.2%) ownership of dwell- 52 Canada ings (7.1%) and agriculture, forestry and fishing (7.1%) 37 Netherlands • In 2010-11, China was Tasmania’s largest trading partner, with 74 Germany a total trade volume of USD 643.90 mn, followed by Japan 320 Singapore (USD 424.32 mn) and the United States (USD 325.41 mn) 0 5000 10000 15000 20000 25000 30000 35000 Source: FIRB; The Beijing Axis AnalysisTasmania Trade with China (USD mn, 2010-11) Exports to China will have a 14.8% stake in the merged group. In a separate transaction, Yanzhou signed agreements to fully acquire Imports from China Wesfarmers Premier Coal and Wesfarmers Char for USD 296 Monthly trade balance (rhs) mn in September 2011 90 -10 • In December 2011, China Petrochemical Corp (Sinopec) agreed to raise its equity stake in the Australia Pacific LNG 80 -20 project to 25% from the original 15%. This reduces the owner- 70 ship of ConocoPhillips and Origin Energy to 37.5% each. -30 Sinopec also agreed to purchase an additional 3.3 mn tons of 60 LNG annually to 2035, boosting the previously agreed 4.3 mn -40 tons annually to 7.6 mn tons per year 50 • In December 2011, China’s Guohua Energy Investment agreed 40 -50 to buy a 75% stake in Australian government-owned Hydro Tasmania’s wind farms in northwest Tasmania. A subsidiary 30 -60 of Chinese coal producer Shenhua Group, Guohua will pay 20 USD 89.4 mn for the 65MW Bluff Point and 75MW Studland -70 Bay wind farms 10 • In December 2011, Chinese engineering development group 0 -80 DADI completed a USD 24 mn investment in MetroCoal, an J F MAM J J A S O N D J F MAM J J A S O N D emerging energy company in Australia. The HK-listed DADI 2010 2011Source: Australian Bureau of Statistics; The Beijing Axis Analysis has been involved in many significant coal projects, specifi- cally focusing on open cut and underground coal mine design, processing plant design, coal processing research andChina-Australia Investment development and engineering, procurement and construc- tion projects. Further developments in January 2012 sawMajor Recent Deals DADI boosting its ownership in MetroCoal to 19.6% via an off-market transaction with Metallica Minerals Limited • In October 2011, China’s Hanlong Mining raised its offer price for Australia’s Sundance Resource Limited to roughly • In December 2011, Rio Tinto accepted a USD 996 mn offer USD 1.7 bn, from its original offer of around USD 1.5 bn. The from China Guangdong Nuclear Power Corp (CGNPC) and deal is proceeding despite an insider-trading probe involving the China-Africa Development Fund (CAD Fund) for an several Hanlong executives 11.1% stake in London-listed Kalahari Minerals PLC. This boosted its existing 30.8% stake in Kalahari to roughly 42%. • In November 2011, Shanghai Sky Chem Industrial Co Ltd. initi- After winning control of Kalahari, CGNPC has set its sight on ated the acquisition of a 51% stake in ASX-listed Eagle Nickel Extract Resources (42.7 owned by Kalahari), recently making a through a share placement agreement. One of China’s largest takeover offer of USD 2.38 in February 2012. The move brings importers and distributors of chemicals, the privately-owned CGNPC a step closer towards winning control of the Namibian Shanghai Sky plans to build a leading ASX-listed resource Husab uranium project, one of the largest uranium mines in enterprise the world. Rio Tinto, which owns a 14 percent stake in Extract, • In December 2011, Yanzhou Coal Mining Co. initiated a bid has yet to decide whether it will accept CGNPC’s offer to merge its Australian unit, Yancoal Australia Ltd., with • China National Petroleum Corp (CNPC) is currently in talks Sydney-based Gloucester Coal Ltd. Should the USD 2.1 bn with Woodside Petroleum Ltd with respect to its Browse merger push through, the merged group will become one liquefied natural gas (LNG) project in Western Australia. CNPC, of Australia’s largest listed coal companies, as well as almost the country’s largest energy producer, is said to be bidding for doubling Yanzhou’s coal mines in Australia and expanding its as much as 15% of the venture. The stake is estimated to cost access to ports. This transaction will leave Yanzhou with a 77% around USD 1.5 bn stake in the new company, while Noble-backed Gloucester 31 І The Beijing Axis
  • 29. The China Analyst Chinese counterpart Yang Jiechi and China’s Vice PrimeRegional Focus: Minister Li Keqiang in an effort to elevate their relationship to the ‘strategic partner’ level. Holguin is also seeking to level out the trade balance between the two countries and promoteCHINA-LATIN AMERICA Chinese investment in Colombia, especially in the energy and infrastructure sectors China-LatAm Trade Total Trade • In 2011, China’s total bilateral trade with LatAm reached aIn 2011, China-Latin America trade relations reached new high of USD 213 bn, an increase of 16 % y-o-y (see chartnew heights, yet as Chinese goods flood Latin below, left)American markets, new forms of protectionism are • Brazil, Mexico and Chile were China’s largest trading partners in LatAm, accounting for 40%, 16% and 15%, respectively,becoming more prominent, most notably in Brazil’s of China’s total trade with the region during 2011 (see chartautomobile sector. In this edition, we review these below, right)evolving issues and highlight Ecuador’s budding • China’s trade deficit with the region widened slightly to USD 14.8 bn in 2011, up from USD 14.1 bn in 2010trade relationship with China. China Imports from LatAm • In 2011, China’s total imports from LatAm amounted to USDChina-LatAm Briefing: State visits strengthening bilateral 113.9 bn, an increase of 31% y-o-ytrade; Brazil’s resistance to Chinese imports • Approximately 74% of LatAm’s exports to China in 2011 • In September 2011, Guido Mantega, Brazil’s finance minister, originated from just three countries, namely Brazil (46%), announced a 30-point increase in the country’s industrial- Chile (18%) and Venezuela (10%) product tax on cars, mainly to stem the increasing flow of Chinese automobiles in the local market China Exports to LatAm • In January 2012, representatives from Chile’s House of • During 2011, China’s total exports to LatAm in 2011 reached Representatives, including Speaker of the House Patricio USD 99.1 bn, an increase of 36 % y-o-y Melero, visited China to meet with the National People’s Congress Standing Committee Chairman Wu Bangguo, as • In 2011, approximately 67% of China’s exports to the region well as Chinese Vice President Xi Jinping. Melero indicated were concentrated in Brazil (32%), Mexico (24%) and Chile that Chile must focus on Asian markets to offset waning (11%) demand from the US and Europe and welcomed Chinese investment in energy infrastructure projects China-LatAm Investment • In February 2012, Chinese Vice Premier Wang Qishan met with Brazilian President Dilma Rousseff in Brasilia to discuss their Trends differences in the ballooning multi-billion-dollar trade ties. • Since 2005, China has lent more than USD 75 bn to LatAm, Brazil urged China to open its doors to Brazilian manufactured including USD 13 bn in 2011 alone. In 2010, it lent more than goods and limit its massive exports of shoes, textiles and other the World Bank, Inter-American Development Bank and the products that have recently been flooding Brazil’s market US Ex-Im Bank combined • Also in February, Colombia´s Foreign Minister Maria Angela • According to figures released at the 5th China – LatAm Holguin made an official visit to China, meeting with her Business Summit, by the end of 2011, China’s total investmentChina-LatAm* Annual Trade (USD bn, 2003-11) China-LatAm Trade* by Country (USD bn, 2010 vs. 2011)120 Chinese Imports Chinese Imports Chinese Exports Chinese Exports 2010 2011 2010 2011 Chinese Exports to LatAm100 Paraguay Chinese Imports from LatAm Bolivia Ecuador 80 Cuba Uruguay 60 Colombia Argentina 40 Peru Mexico 20 Venezuela Chile Brazil 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 60 50 40 30 20 10 0 5 10 15 20 25 30 35Source: CEIC; UN Comtrade Source: CEIC; The Beijing Axis Analysis* Note: Latin America here refers to the Latin American Integration Association (LAIA). LAIA’s members are Argentina, Bolivia, Brazil, Chile, Colombia, Cuba,Ecuador, Mexico, Paraguay, Peru, Uruguay and Venezuela.32 І The Beijing Axis
  • 30. The China Analyst in the region was expected to reach USD 23 bn. The majority China-LatAm Country Watch: Ecuador of investments are concentrated in the energy, mining, automotive, financial, and chemical sectors Brief Country Profile• Chinese investments in LatAm continue to accelerate, with the • Ecuador is the eight-largest economy in LatAm, with an main objective of securing mineral resources, which account expected nominal GDP of USD 65.3 bn (2011) and a GDP for roughly 50% of China’s total FDI in the region. China also per capita of USD 4,352. Ecuador’s total population in 2011 aimed to tap into the region’s growing potential as a market was about 14 million, and like many other LatAm countries, for its products. However, a more recent development is a its economy is mainly driven by exports of agricultural and new focus on the agricultural sector in a drive to secure mineral commodities additional food sources for China’s population of 1.3 bn • Ecuador’s economy has been experiencing robust growth since the financial crisis. In 2011, GDP is expected to grow at 8.5%Major Recent Deals and Developments • Ecuador’s top three sources of imports are the United• In October 2011, SHC, the company that imports JAC States, Colombia and China and its main imports include automobiles into Brazil, said it would invest 80% of the USD commodities, fuels, machinery, equipment, vehicles and 509 mn needed to build a factory, with JAC providing the rest electronic equipment. Its top three export destinations are the of the required investment US, Panama and Peru, and its main exports include minerals, fruits, fish, and trees• In November 2011, Sinopec invested USD 5.2 bn to acquire 30% of Galp Energia, a Portuguese oil and natural gas integrated operator. Under the terms of the deal, state-owned China-Ecuador Annual Trade (USD mn, 2001-11) Sinopec will subscribe USD 4.8 bn for a 30% stake in Petrogal 2500 Brasil, a subsidiary of Galp Energia, the company will make an additional loan to Petrogal Brasil for USD 390 mn Chinese Exports to Ecuador• In November 2011, home appliance giant Midea Holding Co. 2000 Chinese Imports from Ecuador purchased a 51% stake in Carrier Corp.’s air-conditioner assets in LatAm as it looks to accelerate its global expansion plan 1500• In December 2011, China Development Bank and Peru BBVA Bank signed a USD 50 mn loan agreement that will be used for electrical infrastructure projects in Peru, and which also forms part of a broader memorandum of understanding between 1000 China and Peru for substantive bilateral cooperation• In January 2012, Chinese group Lifan Industry set up 500 partnership with Grupo Effa, an Uruguayan manufacturer of Chinese cars, to sell into the Brazilian and other South American markets 0• In early January, Alliance One Brasil Exportadora de Tabacos 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (AOB) and China Tobaco Internacional do Brasil (CTIB) signed Source: CEIC; The Beijing Axis Analysis an agreement to set up a partnership in Brazil. The new company, which will be majority owned by CTIB (51%) plans on having an initial processing capacity of 25,000 tons China-Ecuador Bilateral Ties• Also in January, Sinochem, the Chinese state-owned • Bilateral relations between Ecuador and the People’s petrochemical group, agreed to buy 10% stakes in five Republic of China, which celebrated its 30th anniversary in offshore oil blocks in Brazil’s Espirito Santo basin from 2010, strengthened further in 2011, with both sides seeking London-based Perenco, expanding Chinese penetration in mutual understanding in political, economic, trade, social, Brazil’s fast-growing offshore oil frontier academic and cultural affairs. Some of the main benefits of this• In February 2012, CITIC group purchased a 10% stake in relationship thus far have been increased Chinese investments Venezuela’s state-owned company PDVSA’s Petropiar’s in the form of loans through the China Development Bank, heavy oil upgrading project. The value of the purchase was which are mostly aimed at infrastructure development projects as well as large investments by Chinese companies in Ecuador’s not disclosed, however this deal comes after Venezuela mineral and agricultural sectors signed a USD 10 bn financing agreement with the Chinese government to support oil projects • Ecuador’s default in 2008-09 induced it to develop deep financial ties with China. In 2011, China’s loans to Ecuador• In March 2012, Ecuacorriente, a Chinese-owned mining exceeded USD 8 bn, equivalent to about 12% of its GDP company, signed a contract to invest USD 1.4 bn over a five year period to extract copper from the Mirador deposit • In June 2011, Ecuador signed a USD 2 bn loan agreement with China Development Bank. In exchange, Ecuador will supply located in Ecuador’s Zamoira Chinchipe province. The deposit China with 72,000 barrels of crude oil per day for two years has an estimated life span of 25 years and reserves of 2.1 mn tons. Ecuador is to receive USD 4.5 bn over the period of • Ecuador’s total trade with China reached USD 2.8 bn in 2011, the agreement, in which the company is expected to start an increase of 40% y-o-y. Bilateral trade between the two production in late 2014 countries has been increasing at a CAGR of 33% since 2001• Also in March, China and the Inter-American Development • China’s total imports from Ecuador increased by 14% y-o-y to approximately USD 580 mn in 2011. Oil (70%), fish flour (8%), Bank (IDB) announced the establishment of a USD 1 bn Latin and virola sawn wood (3%) made up the bulk of China’s imports American fund, to make investments in infrastructure as well as equity investments in natural resource related mid-cap • China’s total exports to Ecuador in 2011 reached USD 2.25 bn, companies. The fund, which should start operations this year, an increase of 49% y-o-y. In 2010, Chinese exports to Ecuador is a partnership between China’s Export-Import Bank and the were mainly comprised of electrical machinery and equipment (17%), nuclear reactors, boilers, machinery and mechanical IDB, with each side initially injecting USD 150 mn equipment (15%) and vehicles (10%) 33 І The Beijing Axis
  • 31. The China Analyst of oil via the East Siberia-Pacific Ocean (ESPO) pipeline, inRegional Focus: 2011, oil supply via ESPO was flowing in accordance with the contract terms. The ‘ever-pending’ gas deal, however, which involves supplying natural gas to China via the ‘Altai’ pipelineCHINA-RUSSIA from Western Siberia, remains a thorny issue China-Russia Trade Total Trade2011 was a year of flourishing trade relations • Bilateral trade between China and Russia maintained abetween Russia and China, with trade flows confident trajectory in 2011, reaching USD 79.25 bn, an increase of 43% y-o-y (see chart below)reaching a new record of nearly USD 80 billion.The 2009-18 Cooperation Programme also gained China Imports from Russiatraction in 2011, with 27 joint investment projects • China’s imports from Russia in December 2011 amounted toput into operation. The only major sticking point is USD 3.65 bn, up 47.7% y-o-ythe lack of agreement on natural gas prices. • China’s imports from Russia in 2011 amounted to USD 40.34 bn, a staggering increase of 56.15% y-o-y China Exports to RussiaChina-Russia Briefing: Trade highs; Joint investment • China’s exports to Russia in December 2011 amounted to USDprojects; Oil and gas deals 3.53 bn, up 19.1% y-o-y • China’s exports to Russia in 2011 amounted to USD 38.9 bn, • Bilateral trade between China and Russia set a new record in 2011, reaching USD 80 bn. At the current pace, bilateral trade an increase of 31.37% y-o-y will exceed outgoing Russian President Dmitry Medvedev’s prediction in June 2011 that this figure would reach USD 100 China-Russia Monthly Trade (USD bn, 2010-11) bn by 2015. Near-border territories play a special role, with 8 China becoming a major trade partner for the Russian Far East 2010 2011 in the last decade. However, resources still dominate Russian 7 exports to China while finished goods’ share in China’s total exports to Russia exceed 75% 6 • On 31 January 2012, the Chamber of Commerce and Industry of the Russian Federation (RF CCI) held a session of the 5 Russian-Chinese Business Council (RCBC) to announce the 4 2011 outcomes of the 2009-18 Cooperation Programme. Overall, 27 major joint projects worth a total of USD 10 bn were 3 implemented in the 19 federal regions of Russia. The original framework between the Russian Far East, Eastern Siberia 2 and Northeast China called for the establishment of 200 projects throughout the three regions. The commencement 1 of this framework has seen increased participation by Chinese companies in Russia in 2010 (see chart below) 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec • Despite certain price disputes between the China National Source: China National Bureau of Statistics Petroleum Corporation (CNPC) and Russia’s Rosneft and Transneft during the autumn of 2011 regarding the transport China-Russia Trade Nexus: HeilongjiangForeign-invested Enterprises in Russia, Top Five Countries (No. of • Heilongjiang province in Northeast China plays a crucial roleCompanies, 2001-10) in China-Russia trade relations, with trade volume totalling Germany China US USD 18.99 bn in 2011 or 23.96% of the total trade volume 1800 UK Turkey between the two countries • Among Heilongjiang’s exports to Russia, the highest growth 1600 rates can be seen in machinery and electronic appliances (38.2%) and hi-tech products (10.3%). However, exports are 1400 still dominated by clothing, footwear and textiles, which collectively account for a share of around 50% 1200 • Heilongjiang’s major imports from Russia include crude oil, 1000 iron ore, timber and wood pulp. From January to November 2011, growth rates for iron ore, timber and wood pulp were 800 84.75%, 52.7% and 32.3%, respectively. However, with the official launch of ESPO on January 1, 2011, provincial trade 600 relations with Russia are now dominated by crude oil, a pattern which will likely last for years to come. Heilongjiang’s 400 oil imports stood at 15.01 mn tons in 2011, accounting for 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 around 60% of China’s total oil imports from Russia in 2011Note: British Virgin Islands and Cyprus are not included here as off-shore investmentdestinations. Source: Federal State Statistics Service of the Russian Federation34 І The Beijing Axis
  • 32. The China AnalystChina-Russia Investment China Annual OFDI Flow to Russia (USD mn, 2004-10) 600Major Recent Deals Historical high • At the end of September 2011, Omsk Manufacturing Association and China’s ZTE signed a cooperation agreement 500 to collaborate in the production and deployment of complex solutions on the basis of GoTa technology (Global open 400 Trunking architecture). The firms agreed to implement joint projects to develop new techniques and technologies, in % 3 7.5 addition to conducting joint R&D and marketing research 300 GR • Also in September, Sakhcement-Longxing, a China-Russia CA joint venture, commissioned a cement plant in Sakhalin, an 200 island on the east coast of Russia. The costs of construction- installation works and equipment totalled USD 2.74 mn, with the Chinese party assuming USD 1.4 mn of these costs. During 100 its first three months of operation, the plant produced 7,000 tons and expects to reach an annual capacity of 150,000 tons 0 • In February 2012, another China-Russia joint venture, New 2004 2005 2006 2007 2008 2009 2010 Century, announced that it would complete the construction Source: 2010 Statistical Bulletin of China’s OFDI; The Beijing Axis Analysis of a brick factory in Sakhalin in Q2 2012. The project is expected to help meet Sakhalin’s strong need for high-quality Russia. As many Russian experts believe, Gazprom will never construction materials. With approximately USD 10 mn in agree on supplying natural gas on China’s current terms. If investment from strategic Chinese investors, annual plant the parties eventually reach an agreement, it would involve a capacity is expected to reach 20 mn bricks significant decrease in the supply volume • Also in February, Rosvertol, the attack and transport helicopter • In January this year, System Operator of the United Power arm of the state-owned Russian Helicopters holding System (SO-UPS), the sole provider of operational dispatch company, announced an agreement with Xi’Ao Aeroplane management for the Russian power grid, and the Northeast Manufacturing, one of China’s leading aircraft manufacturers, China Centre for Dispatching and Communication successfully to construct a production base in China’s Hebei province for completed testing of direct current links at the new 500 kW the Mi-2M and Mi-2A multi-purpose helicopters. Construction ‘Amurskaya-Heihe’ transnational overhead transmission line, is expected to be completed by July 2012, and the required which was built to increase electricity exports from Russia to investment is expected to reach USD 224 mn. Production China. The ‘Amurskaya-Heihe’ transmission line was jointly capacity will be 100 helicopters per year. When operational, constructed by the Russian Federal Grid Company of Unified this base will also become the only overhaul centre for Energy System, Inter RAO UES, and China’s State Grid in 2011. Mi-type helicopters in Asia This new line will significantly increase Russia’s power supply capacity to China by 750 MW without the need to synchroniseChina-Russia Resources Watch the two countries’ systems • In February, following a successful testing of the ‘Amurskaya-Electricity exports from Russia to China; Deadlock on Heihe’ line, Inter RAO signed a deal with China’s State Grid onnatural gas pipeline project; New national oil and gas field power supply for a period of 25 years. Supplies are expected toservice company commence in March 2012. According to Inter RAO estimates, • In 2011, oil supply through the ESPO pipeline from Russia 2012 will see a doubling of Russian electricity exports to to China’s Heilongjiang province was carried out in full China, amounting to 2.6 bn kilowatt-hours. These exports will accordance with the contract terms. As mentioned in previous increase in subsequent years to eventually amount to around editions, according to the 2009 agreement between Russia’s 100 bn kilowatt-hours over the 25 years Rosneft and Transneft and China’s CNPC, Russia will supply • In February, Igor Sechin, the vice-premier of Russia, assigned 15 mn tons of crude oil to China annually over a period of the Ministry of Energy and three leading state-owned energy 20 years. In 2011, the first successful year of the project, companies (Rosneft, Gazprom and Zarubezhneft) the task of the amount supplied reached 15.01 mn tons. According to preparing the necessary documentation to realise the idea of China, the transported oil meets the specified standards, with creating a national oil/gas field service company, most reliable pipeline operations and no breakdowns probably on the basis of Rosneft. The idea was also presented • As for natural gas, China’s CNPC and Russia’s Gazprom have not to Russian President Elect Vladimir Putin. With this initiative, yet been able to reach an agreement. The export agreement Igor Sechin effectively supports the plan initially offered by has been under discussion since 2006, yet for the past five Natalia Komarova, governor of the Khanty–Mansi Autonomous years the parties have not been able to agree on a price. Various Region (which accounts for over 50% of Russia’s crude oil Russian experts seriously doubt that the parties will be able production). Various experts in Russia are already discussing to come to any agreement on pricing in 2012, or even over the potential participation of leading Chinese companies the long term. Chances of a successful contract with mutually (namely CNPC and Sinopec) in this project, including the acceptable terms between Gazprom and CNPC became even establishment of a joint venture. Experts emphasise the fact smaller after the announcement of a new deal between China that both Chinese companies have solid experience in and Turkmenistan. During the summer of 2011, Gazprom working with Rosneft. In 2005, Rosneft and Sinopec even offered Beijing a discounted gas price, on the condition established a geological exploration joint venture (part of the that CNPC will give Gazprom an advance payment of USD Sakhalin-3 project), and in 2006 Sinopec bought a 49% stake 40 bn, despite the fact that the offered discount would not in Udmurtneft, a subsidiary of Rosneft, to jointly produce oil guarantee 12-15% profit margins, a precondition for Gazprom in the Udmurt Republic (Urals region). In 2010, Rosneft and in its previous investment projects in China. Nevertheless, in CNPC created the largest ever China-Russia joint venture (USD September, China officially declined to sponsor the deal with 5 bn) for the construction of an oil refinery in Tianjin 35 І The Beijing Axis
  • 33. The China AnalystThe Beijing Axis News:September 2011–March 2012 Africa 4th South Africa Ferroalloys Conference - Johannesburg, South Africa On 15-16 September 2011, the 4th South Africa Ferroalloys Conference was held at Hilton Sandton, Johannesburg. Kobus van der Wath, Founder and Group Managing Di- rector, delivered a presentation entitled The Global Context: How will China/Asia affect demand and will investment in South Africa continue? on September 15. China Africa Business Forum – Johannes- burg, South Africa On 20 October 2011, the Beijing Axis co-or- ganised this one-day business forum where Kobus van der Wath delivered a presenta- tion entitled BRICS: The Africa and China Per- spective, while Dirk Kotze, Director and GM: Africa, talked about India & China in Africa: Adversaries or Allies? The Beijing Axis Procurement Roundta- ble – Johannesburg, South Africa On 4 November 2011, The Beijing Axis or-Greater China and Asia dustry (DTI) and the Ministry of Commerce ganised this roundtable breakfast at Radis- of the People’s Republic of China (MOF- son Blu Hotel Sandton in Johannesburg.Platts Asian Steel Forum – Beijing, COM). The Beijing Axis was invited by the Kobus van der Wath delivered a presenta-China South African Embassy in Beijing to attend tion entitled Integrating China in CapitalOn 22 September 2011, the Platts Asian and exhibit at the event. Project Planning and the Supply Chains ofSteel Forum was held at Crowne Plaza Ho- Global Mining, Infrastructure and Industrialtel, Beijing. Haiwei Huang, General Man- Other events recently attended by The Bei- Sectors.ager: Strategic Projects & Relationships, jing Axis in Greater China and Asia include:delivered a presentation entitled The long Mining Business and Investment (MBI)term outlook for China’s chrome demand McCloskey China Coal East Africa 2011 – Nairobi, Kenyaand outbound investment. 6-7 September 2011; Beijing, China On 17-18 November 2011, the MBI 2011 Procurement Leaders Forum East Africa was held at the Crowne Plaza,ICDA Chrome Ore Forum – Beijing, China Nairobi. Walter Ruigu, Manager: Eastern Af-On 10-11 October 2011, the ICDA Chrome 14-15 September 2011; Singapore rica Desk, delivered a presentation entitledOre Forum was held at Grand Mercure Chinese Investment in Metals and Minerals in SA Trade and Investment ForumXidan, Beijing. Haiwei Huang attended. Eastern Africa. 29-30 September 2011; Beijing, ChinaCHaINA 2011 – Shanghai, China Investing in African Mining Indaba 2012 China: Prepare for OpportunityOn 2-3 November 2011, CHaINA 2011 was – Cape Town, South Africa 19 October 2011; Beijing, Chinaheld at Intercontinental Shanghai Puxi, On 6-9 February 2012, the Investing in Af-Shanghai. Lilian Luca, Managing Direc- China Mining 2011 rican Mining Indaba 2012 was held at thetor: Beijing Axis Procurement, delivered a 6-8 November 2011; Tianjin, China Cape Town International Convention Cen-presentation entitled Challenges and Op- tre in South Africa. Kobus van der Wathportunities for Procuring Capital Goods in China Overseas Investment Fair 2011 was a keynote speaker, and delivered aChina for Global Mining and Infrastructure 8-9 November 2011; Beijing, China presentation entitled Asia’s Importance forProjects. African and Global Mining on 6 February. GMAC ANZ Lunch Briefing During the event, Kobus was interviewedSA Expo – Beijing, China 9 January 2012; Beijing, China by CNN as well as South Africa’s Money-On 24-26 November 2011, the SA Expo web.com, and Dirk Kotze was interviewed2011 was held at the Beijing Exhibition by CNN as well as the Chinese nationalCentre. The event was co-organised by the network CCTV.South African Department of Trade and In-36 І The Beijing Axis
  • 34. The China AnalystAfrican Mining in the Year of the Drag- Australiaon – Cape Town, South Africa INVESTING INOn 8 February 2012, the Beijing Axis co- CIPSA Sundowner – Perth, Australiaorganised this networking cocktail with On 21 February 2012, The Beijing Axisjoint venture partner, Cadiz Corporate So- sponsored the first local event of Thelutions, during the Mining Indaba week at Chartered Institute of Purchasing & Sup-Brundyn + Gonsalves art gallery in Cape ply Australasia (Western Australia) at UWATown. Club in Perth. I N DA B AThe Beijing Axis Procurement Roundta- Other events recently attended by The 29-31 OCT, 2O12ble – Johannesburg, South AfricaOn 16 February 2012, The Beijing Axis Beijing Axis in Australia include: SINGAPOREorganised the second installment of the Africa Downunder Conferenceroundtable breakfast where Kobus van 31 August – 2 September 2011; Perth,der Wath, Founder and Group Managing GET A AustraliaDirector, delivered a presentation entitled FOOTHOLDAssessing China as a Supply Chain Partnerfor the African Mining, Industrial and Retail Latin AmericaSectors. The event was held at RadissonBlu Hotel Sandton, Johannesburg. IN THE 2nd Coaltrans Colombia - Bogota, Co- lombia ACCELERATINGAfrica Forecasting Workshop – Johan-nesburg, South Africa On 20-21 September 2011, the 2nd ASIAN MININGOn 29 February–1 March 2012, the Africa Coaltrans Colombia was held at AR Hotel Salitre, Bogota. Javier Cuñat, General Man- MARKETForecasting Workshop was held at HiltonHotel Sandton, Johannesburg. Dirk Kotze ager: Beijing Axis Strategy, delivered adelivered a presentation entitled Assess- presentation entitled The Role and Impor- CHANNELING FOREIGNing China as a Supply Chain Partner for the tance of Asia for Latin-American Coal – with INVESTMENT specific reference to Colombia.African Mining, Industrial and Retail Sec- FUELING ASIANtors. RESOURCE SUPPLY Events recently attended by The BeijingUCT GSB Distinguished Speakers Pro- Axis in Latin America include: Investing in Asian Mininggramme – Cape Town, South Africa Indaba is the newestOn 7 March 2012, the University of Cape Perumin addition to the globalTown (UCT) Graduate School of Business 12-15 September 2011; Lima, Peru Mining Indaba brand(GSB) Distinguished Speakers Programme and is presented by thewas held at the UCT Graduate School of Exposibram organisers of the world’sBusiness Breakwater Campus, Cape Town. 26-29 September 2011; Belo Horizonte, largest African miningKobus van der Wath delivered a presenta- Brazil investment event –tion entitled China and Asia in 2012 - Stra- Investing in African Miningtegic Imperatives for South African Busi- Indaba. For full details, visitnesses in the Year of the Dragon. Europe and Americas AsianMiningIndaba.comOther events recently attended by The 31st Coaltrans World Coal Conference –Beijing Axis in Africa include: Madrid, Spain On 16-18 October 2011, the 31st CoaltransSAPICS Breakfast Presentation World Coal Conference was held at Palacio15 September 2011; Johannesburg, South de Congresos, Madrid. Javier Cuñat partic- SAVE US$100Africa ipated in a panel discussion on Maximis- ing Shareholder Value in the Coal Industry. WHEN YOU BOOKSmart Procurement World 2011 BY 20 JULY 201211-12 October 2011; Johannesburg, Mines and Money London 2011 – Lon- Mention Code TBA100South Africa don, UK Mention code “TBA100” when you register On 6-7 December 2011, Mines and Money for the Investing in Asian Mining IndabaChina Day in South Africa Conference London 2011 was held at the Business and you will save US$100 on the standard3 February 2012; Cape Town, South Africa rate. See AsianMiningIndaba.com for Design Centre, London, UK. Matt Pieterse, registration details. Managing Director: Beijing Axis Capital, participated in a panel discussion entitled China and the other BRICS nations lead the WWW.ASIANMININGINDABA.COM way for growth, but what damage is being INFO@MININGINDABA.COM caused by the US decline? @AsianIndaba #AsianMiningIndaba 37 І The Beijing Axis
  • 35. 12th INTERNATIONAL CONGRESS INTERNATIONAL CONFERENCE A STRATEGIC LOOK AT CHINAS DEVELOPMENT. TUESDAY, APRIL 10th SANTIAGO - CHILE The event is aimed at professionals who wish to obtain an updated vision of the PRC and the PRC and www.expomin.cl executives interested in developing business relations with the Asian giant. This will be done through three first level presentations: Prospects. SPEAKERS CONFIRMED: SPEAKERS CONFIRMED: CONTACTS: CONTACTS: mvasquez@expomin.cl mvasquez@expomin.cl congreso@expomin.cl congreso@expomin.clORGANIZED BY In the framework of: www.fisa.cl 9 - 13 APRIL SANTIAGO - CHILE @expomin2012 ESPACIO RIESCOSUPPORTED BY: f www.expomin.cl expomin2012
  • 36. The China AnalystPrevious Editions of The China Analyst September 2011 March 2011 Regulars Regulars • Macroeconomic Monitor • Macroeconomic Monitor • China Facts & Figures • China Facts & Figures • China Trade Roundup • China Trade Roundup • China Sourcing Strategy • China Sourcing Strategy • China Capital • China Capital • Mapping China • Mapping China • Regional Focus: China-Africa, • Regional Focus: China-Africa, China-Australia, China-Latin America and China-Australia, China-Latin America and China-Russia China-Russia Features Features Resources for Infrastructure: China’s Role in Africa’s New Business Landscape China in 2030: Outlines of a Chinese Future Chinese companies active in Africa are reshaping the continent’s business land- China appears to have an awe-inspiring future ahead of it, and its economy scape, yet at its core the relationship rests on one simple although vital exchange. its set to attain unparalleled dimensions, if the future turns out like we ex- pect. China and Latin America: Untapped Sources of Added Value Trade and investment between China and Latin America have increased Chinas Construction Industry: Strategic Options for Foreign Players ten-fold in the last decade, yet the two regions are now set to enter a new Entering the Chinese construction industry is a challenging prospect for for- higher value added stage of their relationship. eign firms, yet opportunities still exist. August 2010 May 2010 Regulars Regulars • Macroeconomic Monitor • Macroeconomic Monitor • China Facts & Figures • China Facts & Figures • China Trade Roundup • China Trade Roundup • China Sourcing Strategy • China Sourcing Strategy • China Capital • China Capital • Mapping China • Mapping China • Regional Focus: China-Africa, • Regional Focus: China-Africa, China-Australia, China-Latin America and China-Australia, China-Latin America and China-Russia China-Russia Features Features The China Factor: Supplying China’s Phenomenal Demand for Resources Upstart: China’s Emergence in Science and Technology How did the China Factor become a singular driving force of global demand After coming of age in China’s domestic markets, Chinese are now replicat- for natural resources in the 2000s? ing their domestic success in global markets. Road to 2020: Nuclear’s Rising Contribution to China’s Energy Needs Building by Design: How China Develops the Developing World Nuclear power has entered a new era in China as China targets 2020 for radi- Chinese contractors and design firms have gone international and are cally ramping up nuclear production. shaping landscapes where its needed most: the developing world.Other Recent Publications by The Beijing Axis Asia’s Importance Assessing China as a Challenges and for African and Supply Chain Partner Opportunities for Global Mining for the African Min- Procuring Capital Investing in ing, Industrial and Goods in China African Mining Retail Sectors for Global Mining Indaba TBA Procure- and Infrastructure ment Roundtable Projects February 2012 Breakfast February 2012 CHaINA 2012 November 2011 The long term The Role and Im- The Global Context: outlook for China’s portance of Asia for How will China/ chrome demand and Latin-American Coal Asia affect demand outbound investment – with specific refer- and will investment ICDA Chrome Ore ence to Colombia in South Africa Coaltrans Colombia continue? South African Ferro- October 2011 September 2011 alloys Conference 2011 September 2011To view or download current or previous editions of The China Analyst or other The Beijing Axis publications, visit our website at www.thebeijingaxis.com. 39 І The Beijing Axis
  • 37. The Beijing Axis is a China-focused international advisory firm operating in four principal areas: Commodities, Capital, Procurement andStrategy. We provide international clients with integrated and China-specific advisory services that draw upon the company’s deep Chinaknowledge. We also act as advisor to our Chinese clients in their international growth strategies. Our services cover various sectors andindustries, yet our core focus is on the mining and resources, industrial and engineering sectors. The Beijing Axis was established in 2002,and has offices in Beijing, Johannesburg, London, Perth and Singapore.The Group is organised along four synergistic business units:Beijing Axis CommoditiesBeijing Axis Commodities supports commodity producers with their international marketing efforts and the structuring of off-takeagreements, and assists commodity consumers with their procurement efforts in securing supply.Beijing Axis CapitalBeijing Axis Capital provides independent corporate finance advisory and transaction origination services. We have a specialist China-specific approach with extensive international and Africa-specific knowledge and experience.Beijing Axis ProcurementBeijing Axis Procurement is a China-focused global procurement house and provides a comprehensive range of services across the supplychain.Beijing Axis StrategyBeijing Axis Strategy provides management consulting services to CEOs and senior executives in the areas of strategy formulation andstrategy implementation.Contact InformationBeijing, China +86 10 6440 2106, +86 10 6440 2672 (fax)Beijing Axis Commodities Beijing Axis Capital Beijing Axis Procurement Beijing Axis StrategyCheryl Tang Matt Pieterse Lilian Luca Javier CuñatMD, Beijing Axis Commodities MD, Beijing Axis Capital MD, Beijing Axis Procurement GM, Beijing Axis Strategycheryl@thebeijingaxis.com matt@thebeijingaxis.com luca@thebeijingaxis.com javiercunat@thebeijingaxis.comJohannesburg, South Africa Moscow, Russia Perth, Australia & Singapore Latin America DeskDirk Kotze Lilian Luca Kobus van der Wath Javier Cuñat (in Beijing)Director & GM: Africa MD, Beijing Axis Procurement Founder & Group GM GM, Beijing Axis Strategydirk@thebeijingaxis.com luca@thebeijingaxis.com kobus@thebeijingaxis.com javiercunat@thebeijingaxis.com+27 (0)11 201 2453+27 (0)11 201 2508 (fax) www.thebeijingaxis.com