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

The document discusses the strategic importance of China as a key player in global economic growth, particularly highlighting opportunities in sectors such as automotive, pharmaceuticals, and e-commerce by 2020. It emphasizes the role of mega-cities and urbanization in shaping future market dynamics, along with the challenges faced by companies in navigating China's complex investment landscape. Additionally, it outlines the migration of research and development functions from multinational corporations to China, driven by an increasingly educated workforce.

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Global Strategy Global Challenges Executable Solutions France Houdard Managing Director france.houdard@exolus.com November 2010 Copyright © 2010 Exolus. All rights reserved. China 2020: How to Structure Companies around Mega-Cities Your Corporate Platform – Globally Competitive or Obsolete for Tomorrow’s World? France Houdard Managing Partner Phone US: 1 (917) 285.6528 Phone China: (00 86) 135.8591.0838 france.houdard@exolus.com September 2014 -- UPDATED --
1 Copyright © 2014 Exolus. All rights reserved.. If so … How? Preface: Can this Picture from Space help us Structure Business Platforms? Source: NASA (United States – National Aeronautics and Space Administration)
2 Copyright © 2014 Exolus. All rights reserved.. China Market 2020
3 Copyright © 2014 Exolus. All rights reserved.. This Section is about Opportunities and Challenges around … Revenues … Costs … Efficiency 2. Supply Chain COSTS Sales Engineering R&D Sourcing Production Distribution Marketing Shared Services IT HR F&A Procure 1. Market 3. Innovation DRIVING Shareholder Value Research & Development Shared Service Centers Virtually Integrated Models Production / Sourcing Sales / Marketing
4 Copyright © 2014 Exolus. All rights reserved.. Source: World Bank GDP* 2013 6,4 trillions de $ 3,6 trillions de $ $6.8 tr $4.2 tr $16.2 tr $17.3 tr US China India $16.8 tr India Japan GDP* 2020 $30.0 tr $13.4 tr $28.8 tr $6.8 tr $29.6 tr US India China Japan EU-27 France UK Germany GDP* PPP-adjusted GDP* PPP-adjusted EU-27 France UK Germany 1. Future China: Projected to be #1 Largest Economy in World by 2020
5 Copyright © 2014 Exolus. All rights reserved.. 29% 10% 5% 4% 6% 46% Future GDP Growth by Geography (2007 – 2025) Greater China United States & Canada Latin America Western Europe Asia Rest of The world Source: 2012 Annual Chinese Consumer Report by McKinsey & Company China a MUST for Future Competitiveness 1. Future China: Accounts for 29% of Future Global Economic Growth
6 Copyright © 2014 Exolus. All rights reserved.. 1. Future Market (Auto): China Growth Explosive … US Flat Saturation China Market 2x Larger than US Market by 2020 Source: National Bureau of Statistics of China, IHS 0 5 10 15 20 25 30 35 Million Car Sales Volume – China & US (2000 – 2020f) China US China Car Sales 10 MM (2008) 20 MM (2013) 30 MM (2017)
7 Copyright © 2014 Exolus. All rights reserved.. Already World’s Largest Auto Market 26% 21% 21% 32% China North America Europe Other 34% 14% 10% 42% China North America Europe Other Source: China Association of Automobile Manufacturers Global Car Sales by Geography 2013 2020 1. Future Market (Auto): China Tracking to 35% of Global Sales by 2020
8 Copyright © 2014 Exolus. All rights reserved.. Already World’s 2nd Largest Pharma Market Pharmaceutical Market Size Country Ranking (USD billion) Sources: IMS Health Market Prognosis, 2013; Exolus 1. Future Market (Pharma): Tracking to US$245 bn Market by 2015 2000 Top 7 USA 150 Japan 58 Germany 17 France 17 UK 11 Italy 11 China 6.8 Brazil 6.7 Canada 6.3 Spain 6.2 2005 Top 7 USA 262 Japan 65 Germany 24 France 21 UK 16 Italy 15 China 13 Brazil 10 Canada 10 Spain 9.8 2010 Top 5 USA 441 Japan 75 Germany 48 France 39 China 34 UK 32 Italy 28 Brazil 24 Canada 22 Spain 21 2015f Top 2 USA 506 China 245 Japan 130 Germany 82 Brazil 64 France 49 UK 38 Russia 35 India 33 Italy 32
9 Copyright © 2014 Exolus. All rights reserved.. 15% 39% 24% 32% 10% 2011 China North America Europe Japan& South Korea Others 25% 33% 19% 13% 10% 2015 China North America Europe Japan& South Korea Others Source: SFDA (State Food and Drug Administration of China) China a MUST for Future Competitiveness 1. Future Market (Pharma): Tracking to 25% of Global Sales by 2015 Pharmaceutical Sales by Geography
10 Copyright © 2014 Exolus. All rights reserved.. 0 100 200 300 400 500 600 700 800 900 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014f 2015f 2016f 2017f Number of Users Sales US Already World’s Largest Internet Population and Still Growing Source: CNNIC; iResearch Internet Users – China & US (2005 – 2017f) 1. Future Market (Ecommerce): Internet Users Soon 3x Size US Population China
11 Copyright © 2014 Exolus. All rights reserved.. 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 0.0 0.5 1.0 1.5 2.0 2.5 2009 2010 2011 2012 2013 2014f US$ trillion Sales Growth Ecommerce Volume has Quadrupled in past 5 Years Source: Ministry of Commerce, China Ecommerce Trade (2009 – 2014f) 1. Future Market (Ecommerce): Explosive Growth in China Ecommerce Volume Growth
12 Copyright © 2014 Exolus. All rights reserved.. 1. Market Drivers: Explosive Growth in Middle Class China’s Middle Class: 400 million (2010) … 756 million (2020) Middle Class Income Bands (Measured against Urban Population) Urban Population (millions) Urban Household Income (US$ – PPP-Adjusted) Global > US$107,800 Affluent US$3,800 - 107,800 Upper Middle US$21,501 – 53,900 Lower Middle US$13,500 – 21,500 Poor < US$13,500 607 684 822 239 255 157 106 73 53 170 355 461 525 90 99 0 100 200 300 400 500 600 700 800 900 2005 2010 2015F 2020F 2025F 531 756 Upper Middle Class Lower Middle Class Sources: Urbanization Rates, Population based on UN, World Urbanization Prospects 2007; MGI Consumer Demand 2008
13 Copyright © 2014 Exolus. All rights reserved.. 1. Market Drivers: Driven by an Explosion in Urbanization China’s Urban Population: 600 million (2010) … 822 million (2025) China’s Urban Population (Measured against Total Population) 1.4 billion 1.3 billion 1.2 billion 1 billion 245 381 531 684 822 822 833 782 705 624 0 200 400 600 800 1,000 1,200 1,400 1,600 1985 1995 2005 2015 2025 1.45 billion Urban Population (million) Rural Population (million) Source: World Urbanization Prospects 2007 Urban Population (millions)
14 Copyright © 2014 Exolus. All rights reserved.. Mega-City Profile: 60 Million Population + World-Class Infrastructure 1. Future China: Driving Emergence of Mega-Cities and Mega-Corridors Source: NASA (United States – National Aeronautics and Space Administration)
15 Copyright © 2014 Exolus. All rights reserved.. 1. Future China: A Fundamental Change in Economic-Geography Framework for Investment Decisions around Structuring Corporate Platforms Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Mountains China’s Emerging MEGA-CITIES Mega-Cities Mega-Corridors
16 Copyright © 2014 Exolus. All rights reserved.. Production / Supply Chain: Opportunities and Challenges
17 Copyright © 2014 Exolus. All rights reserved.. 2. Supply Chain: World’s Major OEM’s Aggressively Expanding in China Investment Decisions made with China JV Partners China Automotive Production Sources: Company Websites, Publically Available Information
18 Copyright © 2014 Exolus. All rights reserved.. 2. Supply Chain: Big Pharma Aggressively Expanding in China Investment focused in Yangtze River Delta, Bohai Rim, Pearl River Delta Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Pharma Manufacturing Operations Mountains Mega-Cities Mega-Corridors Sources: Company Websites, Publically Available Information
19 Copyright © 2014 Exolus. All rights reserved.. 2. Supply Chain: World’s Major MNC’s Aggressively Expanding in China Production Largely in Eastern Part of China Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Mountains Mega-Cities Mega-Corridors Production Operations in China
20 Copyright © 2014 Exolus. All rights reserved.. 2. Supply Chain: China Still Provides Major Labor Arbitrage Opportunity Major Labor Cost Differential Manufacturing Labor Costs (2003 - 2012) Source: National Bureau of Statistic of China; U.S. Bureau of Labor Statistics, International Labor Comparisons, August 2013 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 China United States Singapore Brazil Philippines China USA US$ per month
21 Copyright © 2014 Exolus. All rights reserved.. 2. Supply Chain: Labor Costs Significantly Lower in West (35%) Intersection: Low Cost Bands + Emerging Mega-Cities Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Mountains Wage Bands / Mega-City Overlay (Normalized to Highest Wages) Wage Bands Mega-Cities Mega-Corridors 1.0 1.0 1.0
22 Copyright © 2014 Exolus. All rights reserved.. 2. Supply Chain: Where are Pareto Optimal Deployment Envelopes? Low Cost Bands + Emerging Mega-Cities + High-Income Geographies Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Per Capita Income / Wage Band Overlay 1 1 1 Mountains Per Capita Annual Income (USD, PPP-Adjusted) > 40,000 30,000 - 40,000 25,000 - 30,000 20,000 -25,000 17,500 - 20,000 0 - 17,500 Wage Bands Mega-City Mega-Corridors
23 Copyright © 2014 Exolus. All rights reserved.. 2. Supply Chain: Major Opportunities, but Significant Risks China Investment Process – Key Challenges Strategy Transaction Execution Investment Strategy Development Zone Screening High Level Due Diligence Zone & Site Evaluation & Ranking Negotiate Investment Agreement Detailed Due Diligence Business Registration Land Auction/ Construction Contracts Zone Screening Challenges: Given that China has 8,000 zones, the process of filtering through to a suitable zone and site represents significant complexity, time commitment and high risks rooted in: wide-ranging and ambiguous regulations, hidden land quotas, unclear ownership/ zoning, investment hurdles, utility infrastructure, tax regimes, etc. Due Diligence: Most information presented during DD unreliable as representations tend to be made by (promotion) officials pushing to hit their quotas, rather than by the broad array of officials with actual authority and responsibility for all aspects of planning, land ownership, utility availability/extensions/upgrades, geotech and so forth. Negotiations: Negotiations involve significant counterparty risk, as representations tend to be made by those without actual authority to implement agreements. Further, there is a tendency for legal advisors to lack engineering expertise; agreements thus often lack relevant contractual terms – exposing projects to significant potential costs, delays and even failure.
24 Copyright © 2014 Exolus. All rights reserved.. R&D / Innovation: Opportunities and Challenges
25 Copyright © 2014 Exolus. All rights reserved.. 3. Innovation: Where are Auto OEMs Migrating R&D Functions in China? “R” of R&D Seeks Universities … “D” Seeks Markets & Production Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Source: Company Websites; Exolus Research 1 1 1 Mountains Wage Bands Mega-Cities Mega-Corridors > 800 > 1,500 > 2,000 R&D Centers (# Operations) Auto R&D Operations
26 Copyright © 2014 Exolus. All rights reserved.. 3. Innovation: Where is Big Pharma Migrating R&D Functions in China? “R” of R&D Seeks Universities … “D” Seeks Markets & Production Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin 1 1 1 Mountains Wage Bands Mega-Cities Mega-Corridors > 800 > 1,500 > 2,000 R&D Centers (# Operations) Pharma R&D Operations Source: Company Websites; Exolus Research
27 Copyright © 2014 Exolus. All rights reserved.. 3. Innovation: MNC’s Migrating R&D Functions to China “R” of R&D Seeks Universities … “D” Seeks Markets & Production Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Mountains Wage Bands Mega-Cities Mega-Corridors > 800 > 1,500 > 2,000 R&D Centers (# Operations) Source: National Bureau of Statistics, 2nd R&D Census, 2009 1 1 1 c Consumer Business R&D Operations
28 Copyright © 2014 Exolus. All rights reserved.. 3. Innovation: Driven by Rapid Increase in Educated Workforce China Science and Engineering: 1.2 Million Graduates per Year Thousands University Natural Sciences & Engineering Degrees (1985 – 2010) Sources: National Science Board, Science & Engineering Indicators 2014 0 200 400 600 800 1,000 1,200 1,400 U.S. China UK Japan South Korea Germany China USA
29 Copyright © 2014 Exolus. All rights reserved.. 3. Innovation: Organization Models for Foreign R&D in China Satellite Laboratories (Bottom-up Approach to R&D) Mostly “adaptive” – adapting existing products to better fit local market conditions Usually do not work on “innovation” as part of global teams That is, they act more as listening posts for parent company/ business unit -- helping detect new ideas and product innovations based on the unique characteristics of the local market Vulnerable to budget cuts Contract R&D (Top-Down Approach to R&D) More focused on “innovative” research Usually support global team in carrying out specific module as part of global research project -- closely interacts with R&D teams at headquarters & other affiliates Used to exploit lower cost engineers, capabilities and infrastructure Has dense information flows, but unequal knowledge exchange -- Requires tight mechanisms to control IPR leakage Integrated Global Partnerships (Balanced/Integrated Approach to R&D) The China R&D Center has regional and/or global product innovation mandate Equal participant in all corporate decisions, R&D work, & other global corporate activities No barriers to full-fledged knowledge exchange between China R&D center and the company‟s headquarters and the company‟s other global R&D centers Models Vary Considerably in China Sources: National Science Board, Science & Engineering Indicators 2014
30 Copyright © 2014 Exolus. All rights reserved.. 3. Innovation: Migrating Upstream to Innovative and Global Models China-Adaptive Focus  Global-Innovative Focus Sources: National Science Board, Science & Engineering Indicators 2014 R&D centers designed to support production and adapt technologies; be near customers; cooperate with local partners; access markets; improve the local “image” of a company; launch a product simultaneously; facilitate rapid scale-up in manufacturing; and overcome protectionist barriers against imports. As national markets become regionally more integrated, some countries may become the preferred base for adaptation, not only for the local market but for the region as a whole. Adaptive R&D has evolved into more advanced forms of innovation, with the local market serving as a test-bed for new products for regional or even global markets. Facilities able to do both R&D with output aimed at global exploitation by parent company. May evolve out of locally integrated laboratories & retain tight links with production in host economy, or Set up independently of local production to tap local innovation clusters and skills CHINA FOCUS ADAPTIVE REGIONAL / GLOBAL FOCUS INNOVATIVE
31 Copyright © 2014 Exolus. All rights reserved.. 3. Innovation: Footprint Drivers Vary for Innovative and Adaptive R&D Functional Objectives Drive Platform Decisions for R&D Sources: National Science Board, Science & Engineering Indicators 2014 Adaptive R&D Center Primary Drivers Customer Locations & Business Opportunities Proximity to Inter-Company Production Operations Skills Availability Fresh graduates and mid-level engineers Experienced management (secondary) Local Government Support Local Resources at Universities Secondary Drivers Living Environment Facilities Utilities Transportation Incentives Innovative R&D Center Primary Drivers Skills Availability (experienced engineers) Local Resources at Universities Low Labor Costs Secondary Drivers Living Environment Facilities Utilities Transportation Incentives
32 Copyright © 2014 Exolus. All rights reserved.. 3. Innovation: Where are Key Nodes for Structuring R&D Platforms? “R” of R&D Seeks Universities … “D” Seeks Markets & Production Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Mountains Wage Bands Mega-Cities Mega-Corridors > 800 > 1,500 > 2,000 R&D Centers (# Operations) Research & Development Centers (Number of Operations in Select Cities) Source: National Bureau of Statistics, 2nd R&D Census, 2009 1 1 1
33 Copyright © 2014 Exolus. All rights reserved.. Platform Structuring: Where are Pareto Optimal Deployment Envelopes? Spatial Framework for Platform Optimization Decisions Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Spatial Framework for Platform Optimization Decisions 1 1 1 Mountains Per Capita Annual Income (USD, PPP-Adjusted) > 40,000 30,000 - 40,000 25,000 - 30,000 20,000 -25,000 17,500 - 20,000 0 - 17,500 Wage Bands Mega-Cities Mega-Corridors > 800 > 1,500 > 2,000 R&D Centers (# Operations)
34 Copyright © 2014 Exolus. All rights reserved.. Contract Outsourcing Models & Shared Service Centers
35 Copyright © 2014 Exolus. All rights reserved.. This Section is about Next Generation Operating Models … Virtually Integrated Models + Shared Service Centers (SSC) Supply Chain Sales Engineering R&D Sourcing Production Distribution Marketing Market Innovation Sales / Marketing DRIVING Shareholder Value Production / Sourcing Research & Development Shared Service Centers (SSC) Virtual Integration SSC IT HR F&A Pro’c
36 Copyright © 2014 Exolus. All rights reserved.. FIPCO MODEL  VIPCO MODEL (CSO, CMO, CRO, PC-CRO, INSTITUTIONS) 4. Virtual Integration Models: Outsourcing Core Functions FIPCO (Fully Integrated Pharma Co.) Research Technology Manufacturing Clinical & Regulatory Sales & Distribution CSOs CMOs CROs Partnerships Academia, Scientific, Institutions R&D Preclinical Support Clinical Development Manufacturing Sales & Distribution Preclinical CROs VIPCO (Virtually Integrated Pharma Co.) Source: G. S. Burrill, „Biotech 2008: A 20/20 Vision to 2020‟, The Burrill Indiana Life Sciences Meeting, October 2008.
37 Copyright © 2014 Exolus. All rights reserved.. MIGRATION to ADVANCED OPERATING MODELS in CHINA: CSO, CMO, CRO 4. Virtual Integration Models: Big Pharma Adoption in China Sources: Goldman Sachs: Healthcare Services: CROs, December 2007; Exolus Research Boehringer Ingelheim (CSO) First Big Pharma to have entrusted a sole distributor for all of its products in China: Sinopharm. Sinopharm is China‟s largest pharmaceutical distributor by sales and the only China distributor to cover the entire PRC. Boehringer Ingelheim‟s sales spiked upward by 45% from 2006 to 2007; Sinopharm saw an annual growth rate of 32%. AstraZeneca (CSO) In a recent move, AZ licensed Cubicin, an antibiotic for skin infections, for development and commercialization on the Chinese market. Pfizer (CRO) Outsources to Wuxi PharmaTech: synthetic chemistry, parallel medicinal chemistry, and bio-analytical services. It also has a 3-year CRO contract with Wuxi PharmaTech to provide services in the areas of: in-vitro Absorption, Distribution, Metabolism and Excretion (ADME) services. GSK (CRO) Outsources to Shanghai Institute of Materia Medica (SIMM) chemistry requirements. AstraZeneca (CRO) Invested USD14 million in Wuxi Pharma Tech for the synthesis of 150,000 compounds. AZ has contracted WuXi Pharmatech, a Chinese CRO, for the synthesis of collections of drug candidates, and signed an agreement with Shanghai‟s Jiao Tong University for research on the genetics of schizophrenia. CSO/CRO Extended Cases China’s CRO Market 0 2 4 6 8 10 12 14 16 18 Clinical Development Preclinical Development US$ billion
38 Copyright © 2014 Exolus. All rights reserved.. 4. Shared Service Centers: Opportunity Map for China Efficiencies … Economies of Scale … Knowledge Sharing … Standardization Source: KPMG “A new Dawn: China‟s Emerging Role in Global Outsourcing”, 2009 Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Mountains 1 1 1 Shared Service Center Hubs Wage Bands Mega-City Mega-Corridors Shared Services
39 Copyright © 2014 Exolus. All rights reserved.. Platform Structuring: Where are Pareto Optimal Deployment Envelopes? Spatial Framework for the Range of Platform Optimization Decisions Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Spatial Framework for Platform Optimization Decisions 1 1 1 Mountains Per Capita Annual Income (USD, PPP-Adjusted) > 40,000 30,000 - 40,000 25,000 - 30,000 20,000 -25,000 17,500 - 20,000 0 - 17,500 Wage Bands Mega-Cities Mega-Corridors > 800 > 1,500 > 2,000 R&D Centers (# Operations) Shared Services
40 Copyright © 2014 Exolus. All rights reserved.. Spatial Framework for the Range of Platform Optimization Decisions Platform Structuring: Where are Pareto Optimal Deployment Envelopes? Source: NASA (United States – National Aeronautics and Space Administration)
41 Copyright © 2014 Exolus. All rights reserved.. China Economic Health Report
42 Copyright © 2014 Exolus. All rights reserved.. 5. Health: Senior Executives Select China as Most Attractive in World Investor Confidence in China #1 in World Source: World Investment Prospects Survey 2013 - 2015 Top 14 Most Attractive Destinations for Future Investment (2013 – 2015) Percent of Responses % 0 10 20 30 40 50 60 70
43 Copyright © 2014 Exolus. All rights reserved.. Source: China Statistical Yearbook Record FDI of USD118 billion in 2013 0 20 40 60 80 100 120 140 USD billion Foreign Direct Investment Inflows (1990 – 2013) 5. Health: Foreign Direct Investment Continues to Soar in China
44 Copyright © 2014 Exolus. All rights reserved.. Source: World Investment Report 2014 by UNCTAD China Ranks #2 for Inbound FDI … or #1 when HK Included USD billion Foreign Direct Investment Inflows (2013) 0 20 40 60 80 100 120 140 160 180 200 220 Hong Kong Portion of FDI 5. Health: China and US Top Global Destinations for FDI
45 Copyright © 2014 Exolus. All rights reserved.. 5. Health: Balance Sheets – Banks, Enterprises, Households USD4 trillion in Foreign Reserves … Insulation of Financial System … Clean Balance Sheets China’s Financial System Healthy, Benefits from Insulation, Abundant Liquidity China banks cleaned up in 1990s: Non-performing loans in 1997 averaged 40 – 50%; only 1% in 2014. Financial institutions extended approximately USD1.44 tr in new loans in 2013; and USD1.32 tr in 2012, USD 1.21 tr in 2011. Forex Reserves Achieve Record High in 2013 The Central Bank has accumulated over USD 4 trillion in foreign reserves. The accumulation of large external surpluses means financial system enjoys abundant liquidity. Clean Balance Sheets for Enterprises and Households State Owned Enterprise net profits as share of GDP has grown from (-1%) in 1997 to (+3.34%) in 2013. Record corporate profit growth over past 5 years (industrial profits rose 100%); liability ratios declined. Urban incomes have quadrupled in past 10 years. Source: Deutsche Bank; Standard Chartered; UBS; IMF; Other
Exolus Group Overview
47 Copyright © 2014 Exolus. All rights reserved.. About Us: Leading Investment Advisory Firm Global Scale: Established in 1931 • 3,000 Employees • 250 Offices Worldwide Leading Expertise: Acquisitions • Dispositions • RE Funds • Agency • Structuring Real Estate Advisory: Industrial, Office, Residential, Retail Business Advisory: Strategy, Targeting, Due Diligence, Structuring, Negotiations Investment Formats: Greenfield, JV's, Acquisitions, Dispositions, Outsourcing Multi-Disciplinary Expertise: Legal-Tax, Supply Chain, Engineering, HR, Real Estate Investment Advisory: Financial Advisory, Capital Raising, Fund Structuring Investment Sectors: Automotive, Life Sciences, Manufacturing, Technology, Real Estate Geographic Focus: Greater China and US Leading Global Investment Advisory Firm
48 Copyright © 2014 Exolus. All rights reserved.. Services: Align Directly with China (M&A) Investment Process Strategy Client Approval LOI Term Sheet Purchase Agreement Ownership Transfer Transaction Execution Acquisition Strategy Development Target Screening High Level Due Diligence Evaluation & Ranking Negotiate LOI Detailed Due Diligence Structure & Negotiate Transaction Transaction Closing Exolus Group China Expertise Cross-Industry Expertise Facility & Engineering Expertise Structuring & Negotiating Expertise Due Diligence Expertise Client Involvement Targets & Counterparties Mergers & Acquisitions M&A and JV’s
49 Copyright © 2014 Exolus. All rights reserved.. Exolus Group China Expertise Cross-Industry Expertise Facility & Engineering Expertise Structuring & Negotiating Expertise Due Diligence Expertise Services: Align Directly with China (Greenfield) Investment Process Strategy Client Approval Investment Agreement DD Findings Legal Entity Land/Facility Ownership Transaction Execution Investment Strategy Development Zone Screening High Level Due Diligence Zone & Site Evaluation & Ranking Negotiate Investment Agreement Detailed Due Diligence Business Registration Land Auction/ Construction Contracts Client Involvement Targets & Counterparties Direct Investment Greenfield Investment
50 Copyright © 2014 Exolus. All rights reserved.. New Entity Philosophy: Provide Holistic Solutions that Benefit Entire Organization Establish Manufacturing Operations Research & Development (R&D) - Marketing, Sales & Distribution Sales & Marketing Shared Services Solutions Rooted in Multi-Disciplinary Expertise:  Real Estate, Facilities, Engineering -Facilities, construction, geotechnical, environmental, utilities, critical paths, permitting  Supply Chain, Sourcing, Distribution, Transportation - Logistics, distribution, taxes, modes, physical transportation, rates, providers  Labor-Force Dynamics - Structure, laws, trends, skills, costs, quality, scalability, sustainability  Financial Analysis & Structuring (Tax, Legal) -Legal structures, tax structures, financial analysis, feasibility, business case, incentives Corporate Stakeholders Corporate Real Estate, Engineering, Manufacturing Supply Chain, Logistics Human Resources Finance, Tax, Legal Exolus Client China Solutions Require a Multi-Disciplinary Approach
51 Copyright © 2014 Exolus. All rights reserved.. Exceeding our Clients’ Expectations Representative Clients: Serving World’s Leading Companies
2014 52 Copyright © 2011 Exolus. All rights reserved.. For a Comparative Perspective with the other BRIC Countries Please Refer to the Following Research Reports Found on Slideshare @ http://www.slideshare.net/Exolus/india-2020-what-india-will-look-like-in-the-future http://www.slideshare.net/Exolus/brazil-2020-what-will-brazil-look-like-in-the-future http://www.slideshare.net/Exolus/russia-2020-what-will-russia-look-like-in-the-future http://www.slideshare.net/Exolus/bric-2020-what-will-the-brics-look-like-in-the-future Download Reports @ www.exolus.com/en/knowledge/research.html Brazil 2020 Russia 2020 India 2020 BRIC 2020
China 2020: What Will China Look Like in the Future?

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

  • 1.
    Global Strategy GlobalChallenges Executable Solutions France Houdard Managing Director france.houdard@exolus.com November 2010 Copyright © 2010 Exolus. All rights reserved. China 2020: How to Structure Companies around Mega-Cities Your Corporate Platform – Globally Competitive or Obsolete for Tomorrow’s World? France Houdard Managing Partner Phone US: 1 (917) 285.6528 Phone China: (00 86) 135.8591.0838 france.houdard@exolus.com September 2014 -- UPDATED --
  • 2.
    1 Copyright ©2014 Exolus. All rights reserved.. If so … How? Preface: Can this Picture from Space help us Structure Business Platforms? Source: NASA (United States – National Aeronautics and Space Administration)
  • 3.
    2 Copyright ©2014 Exolus. All rights reserved.. China Market 2020
  • 4.
    3 Copyright ©2014 Exolus. All rights reserved.. This Section is about Opportunities and Challenges around … Revenues … Costs … Efficiency 2. Supply Chain COSTS Sales Engineering R&D Sourcing Production Distribution Marketing Shared Services IT HR F&A Procure 1. Market 3. Innovation DRIVING Shareholder Value Research & Development Shared Service Centers Virtually Integrated Models Production / Sourcing Sales / Marketing
  • 5.
    4 Copyright ©2014 Exolus. All rights reserved.. Source: World Bank GDP* 2013 6,4 trillions de $ 3,6 trillions de $ $6.8 tr $4.2 tr $16.2 tr $17.3 tr US China India $16.8 tr India Japan GDP* 2020 $30.0 tr $13.4 tr $28.8 tr $6.8 tr $29.6 tr US India China Japan EU-27 France UK Germany GDP* PPP-adjusted GDP* PPP-adjusted EU-27 France UK Germany 1. Future China: Projected to be #1 Largest Economy in World by 2020
  • 6.
    5 Copyright ©2014 Exolus. All rights reserved.. 29% 10% 5% 4% 6% 46% Future GDP Growth by Geography (2007 – 2025) Greater China United States & Canada Latin America Western Europe Asia Rest of The world Source: 2012 Annual Chinese Consumer Report by McKinsey & Company China a MUST for Future Competitiveness 1. Future China: Accounts for 29% of Future Global Economic Growth
  • 7.
    6 Copyright ©2014 Exolus. All rights reserved.. 1. Future Market (Auto): China Growth Explosive … US Flat Saturation China Market 2x Larger than US Market by 2020 Source: National Bureau of Statistics of China, IHS 0 5 10 15 20 25 30 35 Million Car Sales Volume – China & US (2000 – 2020f) China US China Car Sales 10 MM (2008) 20 MM (2013) 30 MM (2017)
  • 8.
    7 Copyright ©2014 Exolus. All rights reserved.. Already World’s Largest Auto Market 26% 21% 21% 32% China North America Europe Other 34% 14% 10% 42% China North America Europe Other Source: China Association of Automobile Manufacturers Global Car Sales by Geography 2013 2020 1. Future Market (Auto): China Tracking to 35% of Global Sales by 2020
  • 9.
    8 Copyright ©2014 Exolus. All rights reserved.. Already World’s 2nd Largest Pharma Market Pharmaceutical Market Size Country Ranking (USD billion) Sources: IMS Health Market Prognosis, 2013; Exolus 1. Future Market (Pharma): Tracking to US$245 bn Market by 2015 2000 Top 7 USA 150 Japan 58 Germany 17 France 17 UK 11 Italy 11 China 6.8 Brazil 6.7 Canada 6.3 Spain 6.2 2005 Top 7 USA 262 Japan 65 Germany 24 France 21 UK 16 Italy 15 China 13 Brazil 10 Canada 10 Spain 9.8 2010 Top 5 USA 441 Japan 75 Germany 48 France 39 China 34 UK 32 Italy 28 Brazil 24 Canada 22 Spain 21 2015f Top 2 USA 506 China 245 Japan 130 Germany 82 Brazil 64 France 49 UK 38 Russia 35 India 33 Italy 32
  • 10.
    9 Copyright ©2014 Exolus. All rights reserved.. 15% 39% 24% 32% 10% 2011 China North America Europe Japan& South Korea Others 25% 33% 19% 13% 10% 2015 China North America Europe Japan& South Korea Others Source: SFDA (State Food and Drug Administration of China) China a MUST for Future Competitiveness 1. Future Market (Pharma): Tracking to 25% of Global Sales by 2015 Pharmaceutical Sales by Geography
  • 11.
    10 Copyright ©2014 Exolus. All rights reserved.. 0 100 200 300 400 500 600 700 800 900 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014f 2015f 2016f 2017f Number of Users Sales US Already World’s Largest Internet Population and Still Growing Source: CNNIC; iResearch Internet Users – China & US (2005 – 2017f) 1. Future Market (Ecommerce): Internet Users Soon 3x Size US Population China
  • 12.
    11 Copyright ©2014 Exolus. All rights reserved.. 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 0.0 0.5 1.0 1.5 2.0 2.5 2009 2010 2011 2012 2013 2014f US$ trillion Sales Growth Ecommerce Volume has Quadrupled in past 5 Years Source: Ministry of Commerce, China Ecommerce Trade (2009 – 2014f) 1. Future Market (Ecommerce): Explosive Growth in China Ecommerce Volume Growth
  • 13.
    12 Copyright ©2014 Exolus. All rights reserved.. 1. Market Drivers: Explosive Growth in Middle Class China’s Middle Class: 400 million (2010) … 756 million (2020) Middle Class Income Bands (Measured against Urban Population) Urban Population (millions) Urban Household Income (US$ – PPP-Adjusted) Global > US$107,800 Affluent US$3,800 - 107,800 Upper Middle US$21,501 – 53,900 Lower Middle US$13,500 – 21,500 Poor < US$13,500 607 684 822 239 255 157 106 73 53 170 355 461 525 90 99 0 100 200 300 400 500 600 700 800 900 2005 2010 2015F 2020F 2025F 531 756 Upper Middle Class Lower Middle Class Sources: Urbanization Rates, Population based on UN, World Urbanization Prospects 2007; MGI Consumer Demand 2008
  • 14.
    13 Copyright ©2014 Exolus. All rights reserved.. 1. Market Drivers: Driven by an Explosion in Urbanization China’s Urban Population: 600 million (2010) … 822 million (2025) China’s Urban Population (Measured against Total Population) 1.4 billion 1.3 billion 1.2 billion 1 billion 245 381 531 684 822 822 833 782 705 624 0 200 400 600 800 1,000 1,200 1,400 1,600 1985 1995 2005 2015 2025 1.45 billion Urban Population (million) Rural Population (million) Source: World Urbanization Prospects 2007 Urban Population (millions)
  • 15.
    14 Copyright ©2014 Exolus. All rights reserved.. Mega-City Profile: 60 Million Population + World-Class Infrastructure 1. Future China: Driving Emergence of Mega-Cities and Mega-Corridors Source: NASA (United States – National Aeronautics and Space Administration)
  • 16.
    15 Copyright ©2014 Exolus. All rights reserved.. 1. Future China: A Fundamental Change in Economic-Geography Framework for Investment Decisions around Structuring Corporate Platforms Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Mountains China’s Emerging MEGA-CITIES Mega-Cities Mega-Corridors
  • 17.
    16 Copyright ©2014 Exolus. All rights reserved.. Production / Supply Chain: Opportunities and Challenges
  • 18.
    17 Copyright ©2014 Exolus. All rights reserved.. 2. Supply Chain: World’s Major OEM’s Aggressively Expanding in China Investment Decisions made with China JV Partners China Automotive Production Sources: Company Websites, Publically Available Information
  • 19.
    18 Copyright ©2014 Exolus. All rights reserved.. 2. Supply Chain: Big Pharma Aggressively Expanding in China Investment focused in Yangtze River Delta, Bohai Rim, Pearl River Delta Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Pharma Manufacturing Operations Mountains Mega-Cities Mega-Corridors Sources: Company Websites, Publically Available Information
  • 20.
    19 Copyright ©2014 Exolus. All rights reserved.. 2. Supply Chain: World’s Major MNC’s Aggressively Expanding in China Production Largely in Eastern Part of China Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Mountains Mega-Cities Mega-Corridors Production Operations in China
  • 21.
    20 Copyright ©2014 Exolus. All rights reserved.. 2. Supply Chain: China Still Provides Major Labor Arbitrage Opportunity Major Labor Cost Differential Manufacturing Labor Costs (2003 - 2012) Source: National Bureau of Statistic of China; U.S. Bureau of Labor Statistics, International Labor Comparisons, August 2013 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 China United States Singapore Brazil Philippines China USA US$ per month
  • 22.
    21 Copyright ©2014 Exolus. All rights reserved.. 2. Supply Chain: Labor Costs Significantly Lower in West (35%) Intersection: Low Cost Bands + Emerging Mega-Cities Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Mountains Wage Bands / Mega-City Overlay (Normalized to Highest Wages) Wage Bands Mega-Cities Mega-Corridors 1.0 1.0 1.0
  • 23.
    22 Copyright ©2014 Exolus. All rights reserved.. 2. Supply Chain: Where are Pareto Optimal Deployment Envelopes? Low Cost Bands + Emerging Mega-Cities + High-Income Geographies Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Per Capita Income / Wage Band Overlay 1 1 1 Mountains Per Capita Annual Income (USD, PPP-Adjusted) > 40,000 30,000 - 40,000 25,000 - 30,000 20,000 -25,000 17,500 - 20,000 0 - 17,500 Wage Bands Mega-City Mega-Corridors
  • 24.
    23 Copyright ©2014 Exolus. All rights reserved.. 2. Supply Chain: Major Opportunities, but Significant Risks China Investment Process – Key Challenges Strategy Transaction Execution Investment Strategy Development Zone Screening High Level Due Diligence Zone & Site Evaluation & Ranking Negotiate Investment Agreement Detailed Due Diligence Business Registration Land Auction/ Construction Contracts Zone Screening Challenges: Given that China has 8,000 zones, the process of filtering through to a suitable zone and site represents significant complexity, time commitment and high risks rooted in: wide-ranging and ambiguous regulations, hidden land quotas, unclear ownership/ zoning, investment hurdles, utility infrastructure, tax regimes, etc. Due Diligence: Most information presented during DD unreliable as representations tend to be made by (promotion) officials pushing to hit their quotas, rather than by the broad array of officials with actual authority and responsibility for all aspects of planning, land ownership, utility availability/extensions/upgrades, geotech and so forth. Negotiations: Negotiations involve significant counterparty risk, as representations tend to be made by those without actual authority to implement agreements. Further, there is a tendency for legal advisors to lack engineering expertise; agreements thus often lack relevant contractual terms – exposing projects to significant potential costs, delays and even failure.
  • 25.
    24 Copyright ©2014 Exolus. All rights reserved.. R&D / Innovation: Opportunities and Challenges
  • 26.
    25 Copyright ©2014 Exolus. All rights reserved.. 3. Innovation: Where are Auto OEMs Migrating R&D Functions in China? “R” of R&D Seeks Universities … “D” Seeks Markets & Production Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Source: Company Websites; Exolus Research 1 1 1 Mountains Wage Bands Mega-Cities Mega-Corridors > 800 > 1,500 > 2,000 R&D Centers (# Operations) Auto R&D Operations
  • 27.
    26 Copyright ©2014 Exolus. All rights reserved.. 3. Innovation: Where is Big Pharma Migrating R&D Functions in China? “R” of R&D Seeks Universities … “D” Seeks Markets & Production Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin 1 1 1 Mountains Wage Bands Mega-Cities Mega-Corridors > 800 > 1,500 > 2,000 R&D Centers (# Operations) Pharma R&D Operations Source: Company Websites; Exolus Research
  • 28.
    27 Copyright ©2014 Exolus. All rights reserved.. 3. Innovation: MNC’s Migrating R&D Functions to China “R” of R&D Seeks Universities … “D” Seeks Markets & Production Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Mountains Wage Bands Mega-Cities Mega-Corridors > 800 > 1,500 > 2,000 R&D Centers (# Operations) Source: National Bureau of Statistics, 2nd R&D Census, 2009 1 1 1 c Consumer Business R&D Operations
  • 29.
    28 Copyright ©2014 Exolus. All rights reserved.. 3. Innovation: Driven by Rapid Increase in Educated Workforce China Science and Engineering: 1.2 Million Graduates per Year Thousands University Natural Sciences & Engineering Degrees (1985 – 2010) Sources: National Science Board, Science & Engineering Indicators 2014 0 200 400 600 800 1,000 1,200 1,400 U.S. China UK Japan South Korea Germany China USA
  • 30.
    29 Copyright ©2014 Exolus. All rights reserved.. 3. Innovation: Organization Models for Foreign R&D in China Satellite Laboratories (Bottom-up Approach to R&D) Mostly “adaptive” – adapting existing products to better fit local market conditions Usually do not work on “innovation” as part of global teams That is, they act more as listening posts for parent company/ business unit -- helping detect new ideas and product innovations based on the unique characteristics of the local market Vulnerable to budget cuts Contract R&D (Top-Down Approach to R&D) More focused on “innovative” research Usually support global team in carrying out specific module as part of global research project -- closely interacts with R&D teams at headquarters & other affiliates Used to exploit lower cost engineers, capabilities and infrastructure Has dense information flows, but unequal knowledge exchange -- Requires tight mechanisms to control IPR leakage Integrated Global Partnerships (Balanced/Integrated Approach to R&D) The China R&D Center has regional and/or global product innovation mandate Equal participant in all corporate decisions, R&D work, & other global corporate activities No barriers to full-fledged knowledge exchange between China R&D center and the company‟s headquarters and the company‟s other global R&D centers Models Vary Considerably in China Sources: National Science Board, Science & Engineering Indicators 2014
  • 31.
    30 Copyright ©2014 Exolus. All rights reserved.. 3. Innovation: Migrating Upstream to Innovative and Global Models China-Adaptive Focus  Global-Innovative Focus Sources: National Science Board, Science & Engineering Indicators 2014 R&D centers designed to support production and adapt technologies; be near customers; cooperate with local partners; access markets; improve the local “image” of a company; launch a product simultaneously; facilitate rapid scale-up in manufacturing; and overcome protectionist barriers against imports. As national markets become regionally more integrated, some countries may become the preferred base for adaptation, not only for the local market but for the region as a whole. Adaptive R&D has evolved into more advanced forms of innovation, with the local market serving as a test-bed for new products for regional or even global markets. Facilities able to do both R&D with output aimed at global exploitation by parent company. May evolve out of locally integrated laboratories & retain tight links with production in host economy, or Set up independently of local production to tap local innovation clusters and skills CHINA FOCUS ADAPTIVE REGIONAL / GLOBAL FOCUS INNOVATIVE
  • 32.
    31 Copyright ©2014 Exolus. All rights reserved.. 3. Innovation: Footprint Drivers Vary for Innovative and Adaptive R&D Functional Objectives Drive Platform Decisions for R&D Sources: National Science Board, Science & Engineering Indicators 2014 Adaptive R&D Center Primary Drivers Customer Locations & Business Opportunities Proximity to Inter-Company Production Operations Skills Availability Fresh graduates and mid-level engineers Experienced management (secondary) Local Government Support Local Resources at Universities Secondary Drivers Living Environment Facilities Utilities Transportation Incentives Innovative R&D Center Primary Drivers Skills Availability (experienced engineers) Local Resources at Universities Low Labor Costs Secondary Drivers Living Environment Facilities Utilities Transportation Incentives
  • 33.
    32 Copyright ©2014 Exolus. All rights reserved.. 3. Innovation: Where are Key Nodes for Structuring R&D Platforms? “R” of R&D Seeks Universities … “D” Seeks Markets & Production Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Mountains Wage Bands Mega-Cities Mega-Corridors > 800 > 1,500 > 2,000 R&D Centers (# Operations) Research & Development Centers (Number of Operations in Select Cities) Source: National Bureau of Statistics, 2nd R&D Census, 2009 1 1 1
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    33 Copyright ©2014 Exolus. All rights reserved.. Platform Structuring: Where are Pareto Optimal Deployment Envelopes? Spatial Framework for Platform Optimization Decisions Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Spatial Framework for Platform Optimization Decisions 1 1 1 Mountains Per Capita Annual Income (USD, PPP-Adjusted) > 40,000 30,000 - 40,000 25,000 - 30,000 20,000 -25,000 17,500 - 20,000 0 - 17,500 Wage Bands Mega-Cities Mega-Corridors > 800 > 1,500 > 2,000 R&D Centers (# Operations)
  • 35.
    34 Copyright ©2014 Exolus. All rights reserved.. Contract Outsourcing Models & Shared Service Centers
  • 36.
    35 Copyright ©2014 Exolus. All rights reserved.. This Section is about Next Generation Operating Models … Virtually Integrated Models + Shared Service Centers (SSC) Supply Chain Sales Engineering R&D Sourcing Production Distribution Marketing Market Innovation Sales / Marketing DRIVING Shareholder Value Production / Sourcing Research & Development Shared Service Centers (SSC) Virtual Integration SSC IT HR F&A Pro’c
  • 37.
    36 Copyright ©2014 Exolus. All rights reserved.. FIPCO MODEL  VIPCO MODEL (CSO, CMO, CRO, PC-CRO, INSTITUTIONS) 4. Virtual Integration Models: Outsourcing Core Functions FIPCO (Fully Integrated Pharma Co.) Research Technology Manufacturing Clinical & Regulatory Sales & Distribution CSOs CMOs CROs Partnerships Academia, Scientific, Institutions R&D Preclinical Support Clinical Development Manufacturing Sales & Distribution Preclinical CROs VIPCO (Virtually Integrated Pharma Co.) Source: G. S. Burrill, „Biotech 2008: A 20/20 Vision to 2020‟, The Burrill Indiana Life Sciences Meeting, October 2008.
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    37 Copyright ©2014 Exolus. All rights reserved.. MIGRATION to ADVANCED OPERATING MODELS in CHINA: CSO, CMO, CRO 4. Virtual Integration Models: Big Pharma Adoption in China Sources: Goldman Sachs: Healthcare Services: CROs, December 2007; Exolus Research Boehringer Ingelheim (CSO) First Big Pharma to have entrusted a sole distributor for all of its products in China: Sinopharm. Sinopharm is China‟s largest pharmaceutical distributor by sales and the only China distributor to cover the entire PRC. Boehringer Ingelheim‟s sales spiked upward by 45% from 2006 to 2007; Sinopharm saw an annual growth rate of 32%. AstraZeneca (CSO) In a recent move, AZ licensed Cubicin, an antibiotic for skin infections, for development and commercialization on the Chinese market. Pfizer (CRO) Outsources to Wuxi PharmaTech: synthetic chemistry, parallel medicinal chemistry, and bio-analytical services. It also has a 3-year CRO contract with Wuxi PharmaTech to provide services in the areas of: in-vitro Absorption, Distribution, Metabolism and Excretion (ADME) services. GSK (CRO) Outsources to Shanghai Institute of Materia Medica (SIMM) chemistry requirements. AstraZeneca (CRO) Invested USD14 million in Wuxi Pharma Tech for the synthesis of 150,000 compounds. AZ has contracted WuXi Pharmatech, a Chinese CRO, for the synthesis of collections of drug candidates, and signed an agreement with Shanghai‟s Jiao Tong University for research on the genetics of schizophrenia. CSO/CRO Extended Cases China’s CRO Market 0 2 4 6 8 10 12 14 16 18 Clinical Development Preclinical Development US$ billion
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    38 Copyright ©2014 Exolus. All rights reserved.. 4. Shared Service Centers: Opportunity Map for China Efficiencies … Economies of Scale … Knowledge Sharing … Standardization Source: KPMG “A new Dawn: China‟s Emerging Role in Global Outsourcing”, 2009 Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Mountains 1 1 1 Shared Service Center Hubs Wage Bands Mega-City Mega-Corridors Shared Services
  • 40.
    39 Copyright ©2014 Exolus. All rights reserved.. Platform Structuring: Where are Pareto Optimal Deployment Envelopes? Spatial Framework for the Range of Platform Optimization Decisions Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Spatial Framework for Platform Optimization Decisions 1 1 1 Mountains Per Capita Annual Income (USD, PPP-Adjusted) > 40,000 30,000 - 40,000 25,000 - 30,000 20,000 -25,000 17,500 - 20,000 0 - 17,500 Wage Bands Mega-Cities Mega-Corridors > 800 > 1,500 > 2,000 R&D Centers (# Operations) Shared Services
  • 41.
    40 Copyright ©2014 Exolus. All rights reserved.. Spatial Framework for the Range of Platform Optimization Decisions Platform Structuring: Where are Pareto Optimal Deployment Envelopes? Source: NASA (United States – National Aeronautics and Space Administration)
  • 42.
    41 Copyright ©2014 Exolus. All rights reserved.. China Economic Health Report
  • 43.
    42 Copyright ©2014 Exolus. All rights reserved.. 5. Health: Senior Executives Select China as Most Attractive in World Investor Confidence in China #1 in World Source: World Investment Prospects Survey 2013 - 2015 Top 14 Most Attractive Destinations for Future Investment (2013 – 2015) Percent of Responses % 0 10 20 30 40 50 60 70
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    43 Copyright ©2014 Exolus. All rights reserved.. Source: China Statistical Yearbook Record FDI of USD118 billion in 2013 0 20 40 60 80 100 120 140 USD billion Foreign Direct Investment Inflows (1990 – 2013) 5. Health: Foreign Direct Investment Continues to Soar in China
  • 45.
    44 Copyright ©2014 Exolus. All rights reserved.. Source: World Investment Report 2014 by UNCTAD China Ranks #2 for Inbound FDI … or #1 when HK Included USD billion Foreign Direct Investment Inflows (2013) 0 20 40 60 80 100 120 140 160 180 200 220 Hong Kong Portion of FDI 5. Health: China and US Top Global Destinations for FDI
  • 46.
    45 Copyright ©2014 Exolus. All rights reserved.. 5. Health: Balance Sheets – Banks, Enterprises, Households USD4 trillion in Foreign Reserves … Insulation of Financial System … Clean Balance Sheets China’s Financial System Healthy, Benefits from Insulation, Abundant Liquidity China banks cleaned up in 1990s: Non-performing loans in 1997 averaged 40 – 50%; only 1% in 2014. Financial institutions extended approximately USD1.44 tr in new loans in 2013; and USD1.32 tr in 2012, USD 1.21 tr in 2011. Forex Reserves Achieve Record High in 2013 The Central Bank has accumulated over USD 4 trillion in foreign reserves. The accumulation of large external surpluses means financial system enjoys abundant liquidity. Clean Balance Sheets for Enterprises and Households State Owned Enterprise net profits as share of GDP has grown from (-1%) in 1997 to (+3.34%) in 2013. Record corporate profit growth over past 5 years (industrial profits rose 100%); liability ratios declined. Urban incomes have quadrupled in past 10 years. Source: Deutsche Bank; Standard Chartered; UBS; IMF; Other
  • 47.
  • 48.
    47 Copyright ©2014 Exolus. All rights reserved.. About Us: Leading Investment Advisory Firm Global Scale: Established in 1931 • 3,000 Employees • 250 Offices Worldwide Leading Expertise: Acquisitions • Dispositions • RE Funds • Agency • Structuring Real Estate Advisory: Industrial, Office, Residential, Retail Business Advisory: Strategy, Targeting, Due Diligence, Structuring, Negotiations Investment Formats: Greenfield, JV's, Acquisitions, Dispositions, Outsourcing Multi-Disciplinary Expertise: Legal-Tax, Supply Chain, Engineering, HR, Real Estate Investment Advisory: Financial Advisory, Capital Raising, Fund Structuring Investment Sectors: Automotive, Life Sciences, Manufacturing, Technology, Real Estate Geographic Focus: Greater China and US Leading Global Investment Advisory Firm
  • 49.
    48 Copyright ©2014 Exolus. All rights reserved.. Services: Align Directly with China (M&A) Investment Process Strategy Client Approval LOI Term Sheet Purchase Agreement Ownership Transfer Transaction Execution Acquisition Strategy Development Target Screening High Level Due Diligence Evaluation & Ranking Negotiate LOI Detailed Due Diligence Structure & Negotiate Transaction Transaction Closing Exolus Group China Expertise Cross-Industry Expertise Facility & Engineering Expertise Structuring & Negotiating Expertise Due Diligence Expertise Client Involvement Targets & Counterparties Mergers & Acquisitions M&A and JV’s
  • 50.
    49 Copyright ©2014 Exolus. All rights reserved.. Exolus Group China Expertise Cross-Industry Expertise Facility & Engineering Expertise Structuring & Negotiating Expertise Due Diligence Expertise Services: Align Directly with China (Greenfield) Investment Process Strategy Client Approval Investment Agreement DD Findings Legal Entity Land/Facility Ownership Transaction Execution Investment Strategy Development Zone Screening High Level Due Diligence Zone & Site Evaluation & Ranking Negotiate Investment Agreement Detailed Due Diligence Business Registration Land Auction/ Construction Contracts Client Involvement Targets & Counterparties Direct Investment Greenfield Investment
  • 51.
    50 Copyright ©2014 Exolus. All rights reserved.. New Entity Philosophy: Provide Holistic Solutions that Benefit Entire Organization Establish Manufacturing Operations Research & Development (R&D) - Marketing, Sales & Distribution Sales & Marketing Shared Services Solutions Rooted in Multi-Disciplinary Expertise:  Real Estate, Facilities, Engineering -Facilities, construction, geotechnical, environmental, utilities, critical paths, permitting  Supply Chain, Sourcing, Distribution, Transportation - Logistics, distribution, taxes, modes, physical transportation, rates, providers  Labor-Force Dynamics - Structure, laws, trends, skills, costs, quality, scalability, sustainability  Financial Analysis & Structuring (Tax, Legal) -Legal structures, tax structures, financial analysis, feasibility, business case, incentives Corporate Stakeholders Corporate Real Estate, Engineering, Manufacturing Supply Chain, Logistics Human Resources Finance, Tax, Legal Exolus Client China Solutions Require a Multi-Disciplinary Approach
  • 52.
    51 Copyright ©2014 Exolus. All rights reserved.. Exceeding our Clients’ Expectations Representative Clients: Serving World’s Leading Companies
  • 53.
    2014 52 Copyright© 2011 Exolus. All rights reserved.. For a Comparative Perspective with the other BRIC Countries Please Refer to the Following Research Reports Found on Slideshare @ http://www.slideshare.net/Exolus/india-2020-what-india-will-look-like-in-the-future http://www.slideshare.net/Exolus/brazil-2020-what-will-brazil-look-like-in-the-future http://www.slideshare.net/Exolus/russia-2020-what-will-russia-look-like-in-the-future http://www.slideshare.net/Exolus/bric-2020-what-will-the-brics-look-like-in-the-future Download Reports @ www.exolus.com/en/knowledge/research.html Brazil 2020 Russia 2020 India 2020 BRIC 2020