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Enrique	  Ibáñez	                                                                     	             	            	        ...
Enrique	  Ibáñez	                                                                                                         ...
Enrique	  Ibáñez	                                                                       	              	             	    ...
Enrique	  Ibáñez	                                                                                 	           	           ...
Enrique	  Ibáñez	                                                                    	           	           	            ...
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How China is becoming the center of the world


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Overview to understand the growing importance of China. A wake up call to Western countries

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How China is becoming the center of the world

  1. 1. Enrique  Ibáñez               December  2010                                      Version  6  Conclusions  from  a  one-­month  trip  to  China           How  CHINA  is  becoming  the  CENTER  of  the  WORLD   5  views  in  5  pages       Illustration  by  Harry  Camp,  The  Economist       “The  economic  future  of  the  world  for  the  next  20  to  50  years  is  going  to  be  dominated  by  China”    Guy  Hands,  chairman  of  Terra  Firma     “China  is  clearly  going  to  be  the  no.1  economic  power  and  it  is  already  full  of  potential”     Bernard  Arnault,  chairman  of  LVMH     “’We  are  the  masters  now’,  that  was  certainly  the  refrain  that  I  kept  hearing  in  my  head  when  I  was  in  China”     Niall  Ferguson,  journalist  The  Economist       1.  A  huge  country-­size  with  an  increasing  global  impact   “China  invested  $78bn  in  the  2010  Shanghai  World  Expo,  5x  the  budget  for  the  2012  London  Olympic  Games”     Illustrative  highlights   Map  of  Chinese  main  cities       • Population:   <1.4bn   people,   c.20%   of   world     population.   Divided   in   34   province-­‐level     administrative   units   -­‐   with   c.50m   people   on   average     -­‐  and  100  cities  >  1m  habitants     • GDP:  $6.5tr.,  9%  of  world  economy,  although  <5%   5-­‐yrs.   ago.   Just   behind   US   ($15tr.),   but   it   has   been   growing  close  to  +10%  p.a.  for  the  last  20-­‐yrs.   -­‐ By   2030,   China   is   expected   to   be   the   largest   world   economy   with   a   24%   share   -­   according   to   Standard  Chartered   -­‐ By   2050,   China   is   expected   to   be   over   10x   larger  than  it  was  in  2009  and  4x  the  size  of  the   2009  US  economy  -­‐  according  to  Goldman  Sachs     • Commodities:  China  accounts  for  broadly  >30%  of   worldwide   demand.   In   fact,   China:   (a)   increases   yearly   its   electricity   consumption   by   the   size   of   U.K.   and   (b)   is   setting   up   30m   car   production   capacity  per  annum  vs.  18m  at  the  peak  in  US     Source:  The  China  Strategy,  Edward  Tse         1  
  2. 2. Enrique  Ibáñez               December  2010                                      Version  6  Conclusions  from  a  one-­month  trip  to  China           2.  Two  radical  population  segments   “When  I  saw  an  old  tricycle  at  the  base  of  the  modern  Shanghai  World  Financial  Center  skyscraper,   I  realized  the  huge  differences  that  the  fast-­growth  was  generating”         CURRENT:  Urban-­affluent  consumers   FUTURE:  emerging  middle-­class  in  rural  /  smaller  cities       • The   inflated   asset  price  in  property  and  stock   • Chinese   private   consumption   is   still   in   its   markets   has   created   tremendous   wealth   effect,   infancy   levels:   $1tr   (<20%   of   GDP)   vs.   $9.5tr   as  well  as,  the  fast-­growing  middle-­class,  which   in  US  (>70%  of  GDP)  in  2007   it   is   another   strong   growth   driver.   At   the   same     time,  huge  revenues  disparities  are  arising   • However,   “Chinas   urban   population   will     expand   from   572m   in   2005   to   926m   in   2025   • The   Chinese   luxury   goods   market   represents     and  hit  the  1  billion  mark  by  2030”  McKinsey   >€20bn   in   2010,   accounting   for   32%   of   the     global  share  and  it  grew  at  +23%  (09-­‐10).  Thus,   • “80%  of  middle-­class  consumption  is  in  340   massively  benefiting  Western  luxury  brands   cities.  In  2020,  it  will  be  in  550”  BCG       • Example  -­‐  Montblanc  has  95  stores  in  China  (vs.   • Rural   population   still   has   very   low   34   in   US)   and   expects   130   by   2015.   Note   that   a   consumption.   E.g.,   penetration   rates   in   home   Montblanc  watch  costs  between  $5-­‐15k   appliances:   10%   air   condition,   30%   fridges,     50%  washing  machine  vs.  100%  in  urban  areas   • There   are   already   almost   1m   people   with   more     than  >$150k  financial  assets.  However,  GDP  per   • According   to   BCG,   during   the   next   decades   head   is   <$4.800   vs.   $48.010   in   US,   and   it   was   households   with   income   >$9.000   will   just  $1.700  five  years  ago   increase  from  150m  to  400m  and  2/3  of  them   will  resided  in  small  cities     “When  you  go  to  Shanghai,  you  visit  The  Bund  and  typically  take  a  picture  of  the  skyscrapers  of  Pudong.  Actually,   I  also  took  a  picture  of  all  the  Chinese  that  were  just  walking  on  The  Bund.  Imagine  when  they  will  start  consuming”        CHART:  Astonish  forecasted  growth  of  the  Asia-­Pacific  middle-­class     Global  middle  class  in  2009  and  prediction  for  2030                                        Source:    Standard  Chartered,  OCDE     2  
  3. 3. Enrique  Ibáñez               December  2010                                      Version  6  Conclusions  from  a  one-­month  trip  to  China           3.  Two  phases  in  the  international  expansion   “After  attending  a  couple  of  trade  fairs,  you  quickly  discover  that  the  Chinese  started  producing  cheap,     then  cheap  and  high  quality,  and  now,  they  are  directly  buying  Western  brands  and  distribution  networks”     Illustration  by  Bill  Butcher,  The  Economist     PAST:  exports  that  generated  an  enormous  trade  surplus   FUTURE:  acquisition  of  all-­types  of  foreign  assets       • An   extraordinarily   high   savings   rate   -­‐   due   to   the   • Foreign   reserves:   foreign   investment   +   trade   lack  of  the  social  safety  net  -­‐  and  an  undervalued   surplus  =  >$1.3tr.    Largest  in  the  world  and   exchange   rates   have   fuelled   a   rapid   export-­led   more  than  60%  of  them  invested  in  US$  assets   growth,  and  hence,  the  world’s  biggest  current-­   account  surplus • China   is   progressively   increasing   its   power   on     supranational   institutions.   Moreover,   • Exports   represent   >40%   of   GDP,   a   significant   Chinese   companies   are   focusing   on   their   increase  from  the  just  20%  ten  years  ago   internationalization   and   they   are   becoming   -­‐ In   2009,   China   over   passed   Germany   as   very   active   in   overseas   auctions,   investing   in   largest  world  exporter   companies,  financial  assets  and  real  estate   -­‐ Moreover  -­‐  as  a  matter  of  reference  -­‐  just  the     Shenzhen   area   exports   as   much   as   India:   • Moreover,   China   is   heavily   investing   in   raw   $162bn   materials   in   Latam/Africa   and   narrowing     links   with   other   emerging   countries   in   a   • As   a   consequence,   China:   (a)   has   become   the   deliberate   hedging   strategy   to   reduce   largest   world   exporter   with   >30%   global   share   economic  dependence  on  the  West   (e.g.   China   exports   $15bn   to   Spain   and   only     imports   $2bn)   and   (b)   has   dominant   world   • At   the   same   time,   China   still   needs:   much   production   shares   on   products   such   as:   cameras   more   brands,   larger   distribution   networks   50%,  tv  35%,  air  conditioners  34%,  apparel  32%   and   more   investment   on   research   and     product  development   • However,   the   current   world   economy   situation   has   generated   a   significant   production   overcapacity,  and  therefore,  price  pressure     “At  the  end  of  the  meeting  with  one  of  the  largest  Chinese  private  equity  funds,  the  managing  partner  told  me:   ‘I  would  love  to  buy  a  flat  in  Barcelona’  …  ‘but  if  it  is  12-­hour  flight  away!’  I  though”   Chinese  people  love  the  style  of  Western  well-­known  cities     Table:  Significant  increase  of  Chinese  buyers  of  luxury  homes  in  Western  cites     Source:  “China  towns”,  Financial  Times  Nov.  12th  2010,  Knight  Frank       3  
  4. 4. Enrique  Ibáñez               December  2010                                      Version  6  Conclusions  from  a  one-­month  trip  to  China           4.  A  major  State  power     “When  I  booked  my  trip  to  the  Great  Wall,  the  travel  agency  was  State-­owned,  same  as  the  coach  company,  the     restaurant  where  we  ate,  the  silk  company  we  visited  and  the  companies  managing  the  Ming  tombs  and  Great  Wall”     One  thing  =  Party  +  Government  +  large  companies   Regional/local  governments  cannot  be  undervalued     “Fast  economic  growth,  but  slow  political  change”   “The  mountains  are  high  and  the  Emperor  is  far  away”       -­‐ Government   has   2   key   objectives:   GDP   growth   • China   is   not   a   singular   market,   but   a   >8%  (“baoba”)  and  social  stability  (“baowen”)   regional   one.   Therefore,   the   importance   of     regional  and  local  governments  is  significant   -­‐ High   State   control:   c.30%   of   the   economy      e.g.,     ownership  of  the  150  largest  companies:   • Moreover,   the   vast   majority   of   Chinese   -­‐ Great   to   implement   quick   measures   and   companies   still   only   have   regional   shift  the  direction  of  the  economy   coverage.   Hence,   a   significant   amount   of   -­‐ Positive   long-­term   view.     Govnt.   objectives   domestic   industry   expansion,   and   based  on  a  5-­‐year  plan,  with  high  pressure  to   consolidation,   will   necessary   occur   over   the   reach  the  goals.    Note  elections  are  restricted   coming  years   to  top  members  of  the  Party       • Note   that   strategic   sectors   are   still   -­‐ Widespread  corruption  as  well  as  fraud  and  not   restricted   to   foreign   investment,   such   as:   much  developed  business  ethics     telecom,  media,  transport,  energy     5.  Doing  business  in  China   “We  knew  what  we  ate,  not  what  we  paid”   a  restaurant  bill  illustrates  the  huge  communication  barriers.   Chinese  food  is  rich  and  diverse,  however  it  is  so  different  that  I  really  enjoyed  when  I  was  sharing  the  table  with  a  local     High  cultural  barriers  –  China  is  not  Westernising   • Strong  importance  of  personal  relationships  -­  “guanxi”:  concept  of  personal  relationships  and  reciprocal   favours  that  underpin  all  deals    “first  friends,  then  businesses”  a  Chinese  proverb     • High  importance  of  social  reputation,  image  and  status  -­‐  “mianzi”:  concept  to  express  the  extremely     high  importance  that  the  Chinese  gives  to  something  that  it  is  much  more  than  just  the  person’s  brand   “They  always  wanted  to  meet  me  at  the  Mandarin  Oriental,  the  first  upscale  hotel  in  Hong-­Kong”   that’s  when  I  understood  the  importance  of  “mianzi”   • Patience  and  perseverance  is  a  need  -­‐  it  always  takes  more  time  than  expected.  E.g.:  Alsa,  a  Spanish  coach   company,  spent  3  years  negotiating  with  the  Chinese  partner  and  another  2  to  get  all  permits     • Flexibility   is   a   must,   such   as   accepting   new   proposals,   suggestions   from   the   local   partner   or   public   bodies.   However  -­‐  at  the  same  time  -­‐  it  has  to  be  clear  which  are  the  unchangeable  parts  for  a  foreign  player       • Overall,   I   saw   the   Chinese   work   hard   (easily   >60   hours/week),   have   a   strong   desire   to   learn   and   to   cope   with   change   and   are   highly   entrepreneur   and   competitive.   E.g.,   China   has   85m   private   companies   vs.   25m  in  US  and  c.1.5m  in  Spain       “I  was  really  surprised  in  Beijing  when  this  old  man  took  out  from  his  bag  a  book  about:  how  to  learn  English”     I  wish  we  would  see  more  examples  like  this  in  US  and  Europe         4  
  5. 5. Enrique  Ibáñez               December  2010                                      Version  6  Conclusions  from  a  one-­month  trip  to  China       the  way,  they  love  you  tell  them  how  much  you  admire  their  long  and  rich  history!  It  goes  back  5000  years    6.  Conclusion  -­‐  my  personal  view   • Despite  the  potential  instabilities  in  the  way  through   -­‐  such  as  the  property,  equity,  commodities  bubbles  –   long  term  I  am  quite  confident  on  China  and  agree  this  is  just  the  beginning  of  the  so-­‐called  Asia  century     • How  much  time  it  will  take  to  become  the  world  most  important  and  largest  country?  It  will  pretty  much   depend  on  how  successful  they  are  in  developing  their  middle-­class.  This  is  a  necessary  step  to  push  their   internal  private  consumption,  and  hence,  shift  away  from  an  export-­‐led  growth  model     • In  order  to  achieve  it,  I  believe  their  individuals  have  an  admirable  attitude  and  their  political  system   the  strength  to  set  up  and  quickly  execute  challenging  objectives      7.  Appendix:  10  books  on  China     1. Mr.  China,  Tim  Clissold:  raising,  investing,  managing  …and  losing  a  $400m  private  equity  fund  in  China   2. Managing  the  Dragon,  Jack  Perkowski:  how  to  build  a  one  billion  company  in  China   3. The  next  Asia,  Stephen  Roach:  a  macroeconomic  view  of  Asia  by  the  chairman  of  Morgan  Stanley  Asia   4. Think  like  Chinese,  Zhang  Haiuhua  and  Geoff  Baker:  understanding  how  to  do  business  in  China   5. Chinamerica,  Handel  Jones:  a  description  of  the  relationships  between  USA  and  China   6. A  bull  in  China,  Jim  Rogers:  analysis  from  an  investment  perspective  of  different  sectors  in  China   7. El  siglo  de  China,  Ramón  Tamames:  revision  histórica  y  económica  desde  Mao  a  la  primera  potencial  mundial     8. The  China  Strategy,  Edward  Tse:  a  senior  partner  from  Booz&Co  describes  how  to  enter  the  Chinese  mkt.   9. China  Inc.,  Ted  Fishman:  an  American  view  of  the  Chinese  rising  power   10. To  Live!,  Yu  Hua:  an  epic  and  heartbreaking  journey  spanning  four  decades  of  recent  Chinese  history     5