• Share
  • Email
  • Embed
  • Like
  • Save
  • Private Content
Created in China
 

Created in China

on

  • 1,691 views

As China continues to upgrade its economy and add value-added services, it will transition from ‘Made in China’ to ‘Created in China’. ...

As China continues to upgrade its economy and add value-added services, it will transition from ‘Made in China’ to ‘Created in China’.

This presentation was created by China-based consultancy SmithStreetSolutions,

Statistics

Views

Total Views
1,691
Views on SlideShare
1,691
Embed Views
0

Actions

Likes
0
Downloads
49
Comments
0

0 Embeds 0

No embeds

Accessibility

Upload Details

Uploaded via as Adobe PDF

Usage Rights

CC Attribution-NonCommercial LicenseCC Attribution-NonCommercial License

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

    Created in China Created in China Presentation Transcript

    • Upgrading the Chinese Economy The Historic Transition from “Made in China” to ”Created in China” June 23, 2010 Copyright 2010 SmithStreetSolutions. All rights reserved. 0
    • Table of Contents 1. What “Created in China” Means 2. Why China Must Create 3. Enablers of Chinese Creation 4. Challenges to Chinese Creation 5. Implications of “Created in China” 1
    • Quotes from Beijing’s 2005 China Economic Summit I think now it’s time for Chinese companies to build their own brands. I think now it’s time for Chinese companies to build their own brands. The Chinese government should push healthy developments of the The Chinese government should push healthy developments of the economy. economy. Robert A. Mundell, winner of the 1999 Noble Prize in Economics Robert A. Mundell, winner of the 1999 Noble Prize in Economics Unique and creative designs will give China’s manufacturing a major Unique and creative designs will give China’s manufacturing a major boost and higher technological maturity will make Chinese products boost and higher technological maturity will make Chinese products more competitive. more competitive. Sir James Alexander Mirrlees, winner of the 1996 Noble Prize in Economics Sir James Alexander Mirrlees, winner of the 1996 Noble Prize in Economics Japanese products completed the transition from manufacturing to Japanese products completed the transition from manufacturing to creation in over 10 years, setting a good example for Chinese companies. creation in over 10 years, setting a good example for Chinese companies. This transition is necessary for the development of China’s This transition is necessary for the development of China’s manufacturing. manufacturing. John Forbes Nash, winner of the 1994 Noble Prize in Economics John Forbes Nash, winner of the 1994 Noble Prize in Economics 2
    • What Makes Creation Four basic elements are necessary for “creation” in the industrial sense to happen. The difference between Manufacturing an iPod and Creating an iPod I. Sound Market Strategy II. Smart Product Design III. Successful Technology IV. Shrewd Branding Source: SmithStreet Analysis 3
    • Moving up the Value Chain As a country’s economy transitions from basic manufacturing to innovation and creation, it will see its industries moving up the value chain. Case Study: The Rise of “Made in Japan” In the 1970s, the image of Japanese brands in the international market was defined by cheap price and low cost To move up the value chain, the Japanese government did two things: – The government stepped in to increase corporate identity awareness among large Japanese companies, and helped them establish their Corporate Identity Strategies – The government spent many resources to promote demand for good design among consumers Now Tokyo is one of the world’s leading innovation capitals and “Made in Japan” is linked to high quality and superior design Source: SmithStreet Analysis 4
    • An Increasingly Important Service Sector As an economy becomes more and more innovation- and creation-oriented, its service industry becomes increasingly important. Service Sector as a Percentage of Service Sector as a Percentage of China’s GDP over Time GDP across Countries, 2007 100% 100% 90% 90% 80% 80% 70% 70% 68.9%, OECD Average 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 1982 1987 1992 1997 2002 2007 China Korea Germany Japan UK US Source: National Bureau of Statistics of China; OECD 5
    • Table of Contents 1. What “Created in China” Means 2. Why China Must Create 3. Enablers of Chinese Creation 4. Challenges to Chinese Creation 5. Implications of “Created in China” 6
    • The Maturing Chinese Manufacturing Industry Since China’s opening-up, its manufacturing industry has made great achievements and is now at the point to usher in a new era of innovation. For the past 30 years, the CAGR of China’s trade volume was higher than the CAGR of Player in Global China’s GDP (17.4% vs. 15.6%). Now, China is the third largest trading nation and the Trade world’s second largest exporter. The World’s China has become an indispensable part of the international division of labor, with manufactured goods making up 94.6% of China's total exports in 2008 compared with Manufacturing the 1980’s 49.7%. China is a major global supplier of manufactured goods, and is no Base longer a pure exporter of resources and primary products. Strong Domestic China’s has a huge domestic market, superior infrastructure, and the world’s largest Resource Base talent pool to match its titanic manufacturing capability. Source: National Bureau of Statistics of China; Ministry of Commerce of China; WTO 7
    • The Currency Factor With the trade surplus China has accumulated, the Renminbi is bound to appreciate, which in turn creates an environment allowing China to upgrade its manufacturing sector. “The China Price“ in USD Technology Price in RMB Source: SmithStreet Analysis 8
    • Trading Prices Down The global financial crisis drives down the price of undifferentiated goods and erodes the margins of low-end producers. Source: SmithStreet Analysis 9
    • Rising Labor Costs The new labor law introduced in China last year enhances rights for Chinese workers and requires higher product prices to cover the raised production costs. Source: Ministry of Labor and Social Security of China 10
    • Environmental Concerns China’s traditional low-end manufacturing has been developed at the cost of the deterioration of the environment, and is unsustainable given the sheer size of the country’s capacity. Source: SmithStreet Analysis 11
    • Table of Contents 1. What “Created in China” Means 2. Why China Must Create 3. Enablers of Chinese Creation 4. Challenges to Chinese Creation 5. Implications of “Created in China” 12
    • Government Support The Chinese government has taken the upgrading of the country’s industries seriously and industrial technological advancement has been a repeated focus of recent government guidelines. “Optimizing and upgrading industrial structure” is one of the major goals in China’s Five-Year Plan for the 2006 – 2010 period, ratified by National People’s Congress in 2006 The Guideline for the National Medium- and Long-Term Science and Technology Development Plan (2006-2020) issued later by the State Council echoes the principles of the Five-Year Plan Source: Gov.cn 13
    • China Is Building its Financial Infrastructure China is steadily building up the soundness of its financial system, against the background of an upgrading manufacturing sector. In December of 2008, the China Banking Regulatory Commission (CBRC) issued a guideline allowing Chinese Encouraging Yuan- banks to grant loans to Dominated Funds enterprises, not excluding foreign holding companies or Private Equity, to acquire the The Red Chip Model used to equity and assets of a target provide an exit strategy for firm dollar dominated funds’ Pushing Away Dollar- China investments Denominated Funds Primarily triggered by this new guideline, we have seen a The Chinese government’s recent hustle of foreign PE 2006 M&A regulations firms trying to set up Yuan- effectively froze approvals denominated funds in China for overseas listings and hampered the exit of foreign venture investors Source: Ministry of Commerce of China; China Banking Regulatory Commission 14
    • Relatively Cheaper US Assets US assets are relatively cheaper due to falling US equity and the rising value of the RMB. Falling US Equity Appreciating RMB RMB/USD Exchange Rate 0.150 0.145 0.140 0.135 0.130 0.125 0.120 7/1/2005 10/1/2005 1/1/2006 4/1/2006 7/1/2006 10/1/2006 1/1/2007 4/1/2007 7/1/2007 10/1/2007 1/1/2008 4/1/2008 7/1/2008 10/1/2008 The Chinese Yuan has appreciated The Chinese Yuan has appreciated Both the S&P500 and Dow Jones have Both the S&P500 and Dow Jones have 20.9% since the RMB was unpegged 20.9% since the RMB was unpegged fallen over 25% in the past year. fallen over 25% in the past year. from the USD in July of 2005.* from the USD in July of 2005.* *Note: Calculated based on the change from the original pegged price of 0.121 RMB/USD to 0.1463 RMB/USD on 12/17/09. Source: Bloomberg; Oanda.com 15
    • China’s Cash Holdings China’s foreign exchange reserve has been growing rapidly in recent years. China’s Foreign Exchange Reserves USD Bn 2,000 1,800 1,600 % 1,400 = 29.7 C AGR 1,200 1,000 800 600 400 200 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: State Administration of Foreign Exchange 16
    • Inbound M&A Moving Toward Value-added Industries Foreign investments in higher value-added industries are growing faster than investments in traditional enterprises. China Inbound M&A 2004 China Inbound M&A 2007 Social Services, 3% Real Estate, 5% Social Services, 12% Real Estate, Finance & Finance & 14% Insurance, Insurance, 28% 1% Manufacturing, 50% Manufacturing, 64% IT, 11% IT, 0% Retail, 2% Transport & Retail, 0% Logistics, 10% Transport & Logistics, 0% Total = RMB 4.67 billion Total = RMB 10.47 billion Source: China Mergers & Acquisitions Yearbook 2005, 2008 17
    • Table of Contents 1. What “Created in China” Means 2. Why China Must Create 3. Enablers of Chinese Creation 4. Challenges to Chinese Creation 5. Implications of “Created in China” 18
    • Intellectual Property Protection To boost innovation, China has to enhance its anonymous intellectual property protection. Source: SmithStreet Analysis 19
    • Education System China’s education system focuses more on memorization than on innovation , which can be a drawback in creating an innovative environment. Source: SmithStreet Analysis 20
    • Distorted Financing Channels In spite of the high amount of bad assets in China’s banking system, Small- and Medium-sized Enterprises (SMEs), the major driver of innovation and creation in China, find it very difficult to get loans from banks. Source: SmithStreet Analysis 21
    • Quality Control China’s reputation for poor quality products and the compete-on-price mindset of Chinese manufacturers could stand in the way of China’s moving up towards creation and innovation. Recent product and food safety Recent product and food safety scandals have only worsened scandals have only worsened China’s reputation for poor China’s reputation for poor quality goods quality goods Source: SmithStreet Analysis; Amazon.com 22
    • Branding Chinese companies traditionally focus on increasing sales and market share, and have been reluctant to make long-term investments in intangible areas such as brand building. While the value of luxury brands is well understood, the While the value of luxury brands is well understood, the mentality that a brand is only a ‘name-on-a-box’ is still mentality that a brand is only a ‘name-on-a-box’ is still common among manufacturers common among manufacturers Source: SmithStreet Analysis and Primary Research 23
    • Table of Contents 1. What “Created in China” Means 2. Why China Must Create 3. Enablers of Chinese Creation 4. Challenges to Chinese Creation 5. Implications of “Created in China” 24
    • Increased Outbound M&A In 2008, China’s overseas investment doubled to $52.2 billion, a figure that has already been surpassed this year due in large part to surging outbound M&A. Outbound M&A Deal Value USD Bn 60 50 % = 97.3 40 CAGR 30 20 10 0 2003 2004 2005 2006 2007 2008 Outbound M&A will increase as Chinese manufacturing continues to move Outbound M&A will increase as Chinese manufacturing continues to move up the value chain and weans itself from price-based competition. up the value chain and weans itself from price-based competition. Source: China Ministry of Commerce; Thomson Reuters 25
    • An Emerging Group of Chinese Brands With Chinese manufacturers’ awareness of branding aroused and more attention being paid to product design and innovation, we expect a group of Chinese brands to achieve global recognition in the next 10 years. More Chinese brands, other The rise of Japanese than Lenovo and Haier, will brands started in enter global customers’ the 1970s. horizons in the years to come. 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 A group of Korean brands began to take off in the late 1990s. Leading Chinese Brands Source: SmithStreet Analysis 26
    • The Renminbi as a Global Reserve Currency As China’s manufacturing moves up the value chain and Chinese producers are no longer competing on a cost basis, the Renminbi’s lack of free convertibility, a major impediment to becoming a global reserve currency, will gradually disappear. Source: SmithStreet Analysis 27
    • Innovation in the Last 150 Years 28
    • What Will a Chinese Future Look Like? 29
    • Contact Information Franklin Yao Shanghai Office Franklin Yao Chief Executive Officer 20 Jinchuang Road, 10th Floor Chief Executive Officer Yangpu, Shanghai 200433 US Mobile: +1 (917) 775 2611 +86 (21) 6565 6533 US Mobile: +1 (917) 775 2611 China Mobile: +86 134 8266 7778 China Mobile: +86 134 8266 7778 Email: franklin.yao@smithstreetsolutions.com Email: franklin.yao@smithstreetsolutions.com Cynthia Zhang Cynthia Zhang Marketing Manager Marketing Manager New York Office 521 Fifth Avenue, 17th Floor China Mobile: +86 137 7424 8340 China Mobile: +86 137 7424 8340 New York, NY 10175 Email: cynthia.zhang@smithstreetsolutions.com Email: cynthia.zhang@smithstreetsolutions.com +1 (212) 292 4420 www.smithstreetsolutions.com www.smithstreetsolutions.com 30