China 2014: In Transition & In Transformation 50+ YEARS OF EXPERIENCE & KNOWHOW IN CHINA BUSINESS Juha Moilanen, Chinaworks Finland For the Chamber of Commerce, Tampere 14 Feb.2014 @ Technopolis Yliopistonrinne
Jan 27, 2015
China 2014:In Transition &
In Transformation
50+ YEARS OF EXPERIENCE & KNOWHOW IN CHINA BUSINESS
Juha Moilanen, Chinaworks FinlandFor the Chamber of Commerce, Tampere14 Feb.2014 @ Technopolis Yliopistonrinne
Juha Moilanen 2014
CHINA 2013 IN NUMBERS
3RD PLENUM OUTCOMES
DEMOGRAPHIC & ECONOMIC OUTLOOK
YEAR OF THE HORSE: INDUSTRIES IN FOCUS
BOOMING E-COMMERCE
THE END OF THE HEYDAY FOR LUXURY BRANDS?
CONTENT
Juha Moilanen 2014
CHINA 2013 IN NUMBERS
Juha Moilanen 2014
China 2013 In Numbers
GDP +7.7% Forecast for 2014: +7.5%
Electricity Consumption 5320 TWh, 3940 kWh/capita, (+7.5% year-on-year), at price 0.36-0.64 CNY/kWh
Finland: 15740 kWh/capita
CPI +2.6% (Government target: below 3.5%)
Trade Balance: +260 bn USD, +12.6% y-o-y
Forex Reserves 31 Dec.: 3820 bn USD, +17.0% y-o-y
Retails sales based on receipts (fāpiào): 3840 bn USDUrban consumption 86.4% of this, 3318 bn USD (+12.9% y-o-y)
Rural consumption 502 bn USD (+14.6% y-o-y)
Juha Moilanen 2014
China 2013 In Numbers
Unemployment
Government counts only a subset of those unemployed in cities and no one at all outside them
Urban: officially 4.1%, excludes private enterprises and migrant workers (same as 2012)
Total Urban Unemployment: 6.1% (CIA estimate)
A total of 13.1 million new jobs were created in urban areas
Foreign estimates put the overall unemployment incl. rural areas somewhere in the range of 15-20% (see e.g. http://thediplomat.com/2014/01/chinas-gdp-growth-says-little)
Potentially the biggest threat for social stability and cause for unrest
Juha Moilanen 2014
OUTCOMES OF THE 3RD PLENUM
Juha Moilanen 2014
The 3RD Plenum
The 3rd Plenum of the 18th Central Committee of China's Communist Party.
Held 9-12 Nov. 2013 behind closed doors
Third Plenums are seen as very important becausethe First Plenum introduces each new leadership
the Second Plenum tends to be personnel- and Party construction-focused
the Third one is usually seen as the first plenary session at which the new leadership has basically consolidated power and can introduce a broader economic and political blueprint
High expectations as the new leadership, President Xi Jinping and Premier Li Keqiang had ahead of the meeting repeatedly stated that the Third Plenum will introduce comprehensive and unprecedented economic and social reforms.
Juha Moilanen 2014
The 3RD Plenum
Key economic outcomes:
Markets are allowed to play a “decisive” role in the economy: the list of factor prices to be liberalized is specified and extended to include transportation and telecommunication, besides water, oil, natural gas and electricity.
SOE Reform: e.g. state-owned enterprises will pay 30% of their dividend to the Social Security Fund by 2020, up from 10-20% at the moment.
All investors will be allowed to enter any industry other than those on the “negative list”, which is the new mechanism being tested in the Shanghai free trade zone and will lead the path of China's service sector eventual liberalization. More SEZs to come?
Private investors can set up banks.
Common consensus on the main disappointment: No commitment to a more concrete timetable.
Juha Moilanen 2014
The 3RD Plenum
Key social outcomes:
One child policy further loosened: two child policy?
Hukou system will be further relaxed
Appraisal of local governments' performance will focus more on aspects other than GDP, such as pollution, excess capacity and debt.
Rural land for non-agriculture uses that is collectively owned by farmers will be allowed to enter the land market at same prices and with same rights as state-owned land. This revolutionary change would undermine local governments' monopoly over land markets and boost farmers' income, thus providing them with the start-up capital to settle in cities.
The labor camp system will formally be abolished.
Vertical integration of the judiciary system.
Juha Moilanen 2014
DEMOGRAPHIC & ECONOMIC OUTLOOK
Juha Moilanen 2014
Demographic Outlook
Juha Moilanen 2014
China’s Senility Bubble !
Juha Moilanen 2014
Breathtaking Pace of Urbanization
Shanghai alone encompasses about 11 million migrant workers, 9 million of them long-term, in addition to its population of 13 million. Over 50% of the workforce is migrant.
According to McKinsey & Company, the urban population will grow to 850 million (from the current 730 million) by 2020 with 20% of that population comprising of 1st generation migrant workers from rural areas.
Juha Moilanen 2014
Demographic Outlook
Juha Moilanen 2014
Economic Outlook
The 12th five-year-plan adopted by China’s parliament in March 2011 spells out 10 major challenges for the country
1. Resource constraints: energy and raw materials.
2. Mismatch in investment and imbalance in consumption.
3. Income disparity.
4. Weakness in capacity for domestic innovation.
5. Production structure is not rational: too much heavy industry, not enough service.
6. Agriculture foundation is thin and weak.
7. Urban/rural development is not coordinated.
8. Employment system is imbalanced.
9. Social contradictions are progressively more apparent.
10. Obstacles to scientific development continue to exist and are difficult to remove.
Juha Moilanen 2014
Economic Outlook
Before discussing the concrete outline of the plan, the National People’s Congress sets out a theoretical approach for guidance:
The Main Line: “China must rapidly engage in a complete transformation of its form of economic development.”
The idea is not to refine the current system, but to completely transform the current system in the brief period of five years. This is a bold goal.
The focus of transformation: From excessive reliance on exports to balance between export, import and domestic consumption.
From reliance on foreign technology to reliance on domestic innovation.
From reliance on “old” energy and materials and industries to creation of a low-carbon / new-materials based economy.
Juha Moilanen 2014
Economic Outlook
Proposed solutions to recognized problems:
1. Emphasis on R&D and utilization of alternative, renewable energy sources.
2. Encourage domestic consumption, stricter requirements for FIEs.
3. Strengthen the development of minimum wages, establish a comprehensive public social welfare system incl. unemployment and pension benefits & government funded basic medical coverage for all.
4. Improve IPR enforcement and implementation of legislation in line with WTO engagements.
5. Shift from low value-adding industries into high-tech and services, create an innovation driven society by encouraging education and training of the workforce.
6. Improve the welfare of the rural population while building urban infrastructure, encourage stable urbanization by eliminating distinction.
7. Continue with liberalization and “opening-up” to the outside, but on a new track, actively participate in international economic governance.
Juha Moilanen 2014
Economic Outlook
Key targets in practice for 2011-2015
Economic:
GDP to grow by 7% annually on average
Urban registered unemployment to be kept at less than 5%
Increased domestic consumption
Breakthrough in emerging strategic industries*
Service sector value-added output to account for 47% of GDP, up 4% points
Expenditures on R&D to account for 2.2% of GDP
3.3 patents per 10,000 people => implications on IPR legislation
Juha Moilanen 2014
Economic Outlook
Key targets in practice for 2011-2015
Social & Environmental:
Population be no larger than 1.39 billion
Urbanization rate to reach 51.5%, up 4% points
Life span per person to increase by one year
Pension schemes to cover all rural residents and 357 million urban residents
Minimum wage standard to increase by no less than 13% on average each year
Improved democracy and legal system
Improved government efficiency and credibility
Non-fossil fuel to account for 11.4% of primary energy consumption
Forest coverage rate to rise to 21.66% and forest stock to increase by 600 million m3
Juha Moilanen 2014
YEAR OF THE HORSE: INDUSTRIES IN FOCUS
Juha Moilanen 2014
REGULATORY FRAMEWORK FOR FDIs
The government is encouraging foreign business participation in Strategic Emerging Industries development, but to what extent is a key question given China’s indigenous innovation drive. Those seven key SEIs in focus are:
1. New & Alternative Fuels for the Automotive Industry
2. Information Technology
3. Biotechnology
4. High-End Manufacturing
5. New Materials
6. New Energy
7. Environmental Protection
Juha Moilanen 2014
REGULATORY FRAMEWORK FOR FDIs
In terms of incentives, the newly (06/2011) released draft revisions of the Catalogue for Guidance of Foreign Investment (http://english.mofcom.gov.cn/article/policyrelease/aaa/201203/20120308027837.shtml) greatly expanded the list of encouraged industries
Foreign investment is encouraged in e.g. following business areas:
Energy and resource saving
Environmental protection
Hi-tech manufacturing
Transportation infrastructure development
Logistics
Business outsourcing
Improvements in agricultural technology.
The revised tax code allows tax incentives to encourage such investments.
Juha Moilanen 2014
REGULATORY FRAMEWORK FOR FDIs
Industry in Focus: Opportunities for Finnish Clean-Tech companies
State Council released a national plan in September 2011 that calls for a 15-25 % reduction in particulate matter by 2017 in the three key manufacturing regions around Beijing, Shanghai and Guangzhou
Investment in the improvement of the air quality alone will exceed 200 bn € during 2012-2017.
By 2020, China targets having 5 million e-cars on her streets
Starting 01/2014, 179 cities in China are releasing real-time information on their air quality. API avg. for Jan 2014 (PM2.5 = 2.5 µm (µg/m3)):
Beijing 153
Shanghai 140
Guangzhou 161
Chengdu 224
For comparison: Finland: 5-10, Helsinki 2011:20 (= WHO limit)
Beautiful Beijing(www.finpro.fi/markkinamahdollisuus/beautiful-beijing)
Juha Moilanen 2014
REGULATORY FRAMEWORK FOR FDIs
Added to the list of encouraged industries:
Vocational training, provision of consulting or intellectual property services and establishment of VC enterprises and R&D centers;
Environmental pollution treatment & monitoring technology, high-tech green battery; construction and operation of renewable water plants;
Unconventional natural gases exploration and development (encouraged only through joint-ventures);
Key new energy cars’ parts and components: foreign ownership in such investment shall be limited to 50%;
Production of natural food additives and ingredients
Juha Moilanen 2014
REGULATORY FRAMEWORK FOR FDIs
Prohibitions
No projects that rely on cheap Chinese raw materials or energy
No projects that waste energy or raw materials, are excessively polluting or that rely on outdated technology
No projects that center on low technology, low investment, low value added and high employment: toys, apparel, furniture, house wares, shoes…
No support for such projects in the form of VAT or other tax benefits
No projects that are oriented solely towards export
New FDI in real estate prohibited, with remaining foreign investment in real estate strongly discouraged
FDI through M&A strongly discouraged
Juha Moilanen 2014
REGULATORY FRAMEWORK FOR FDIs
Tax neutral FDI policy since 2008
Under the old policy, foreign investors were taxed at a lower rate than domestic investors. Investors in numerous specific development zones and industrial parks were provided with various tax exemptions.
All this was eliminated in the new income tax code, which mandates a neutral FDI investment framework: no incentives based on nationality. Incentives are instead provided for specific encouraged business activities.
Regional investment still encouraged in the Central and Western regions. Regional tax breaks are permitted in this region as an exception for the general prohibition on regional tax incentives (see: The catalogue of Priority Industries for Foreign Investment in China's Central and Western Regions”, revised in 2013).
Juha Moilanen 2014
REGULATORY FRAMEWORK FOR FDIs
Rising costs: Foreign businesses can expect a changed cost structure during the 12th FYP period (2011-15).
Increased costs result from:
VAT hikes
Minimum wage development
Raw material resource price reforms
Tightened legislation
Environment-related taxes
Appreciation of the RMB yuan
Juha Moilanen 2014
RISING COSTS
Reuters has reported that Taiwan’s Foxconn Technology Group, the major supplier of Apple’s iPhones and iPads, is set to relocate their high-end manufacturing to the United States and low-end manufacturing to Indonesia. As manufacturing prices in China rises, and labor unrest increases, Foxconn looks to diversify its supply chain.
“Foxconn has no choice but to do it, China is no longer a manufacturing or sourcing hub for global MNCs, especially in the IT sector. This trend will continue and affects other industries such as textiles and light manufacturing. We’ve already seen this in Vietnam and it is now spreading to other ASEAN nations. Indonesia is attractive for Foxconn due to its large labor market.”
“If companies are able to bring production levels up to 70 % of what can be achieved in China, lower wages in India & ASEAN dictate that it makes better economic and financial sense to relocate. This is exactly what Foxconn are doing.”
www.reuters.com/article/2014/01/27/us-foxconn-taiwan-idUSBREA0Q01F20140127
Juha Moilanen 2014
VAT
During 2012-13, the Chinese Government was embarking upon one of the most ambitious tax reform programs in the recent history.
The grand plan is to replace Business Tax with VAT across the whole services sector in mainland China (financial and real estate sectors by 2015).
Impacts also in how VAT can be reclaimed upon exports, and at what level
Producers of value-added goods receive higher VAT rebates which encourages exports, whereas producers of basic materials get lower VAT rebates, thus discouraging exports.
For “deemed self-manufactured products”, the VAT refund rate will be the VAT levying rate (normally 17%), unless otherwise provided by the State Administration of Taxation.
Separate treatment for trading companies.
Juha Moilanen 2014
MINIMUM WAGE INFLATION
2010 2011 2012 2012 2013 20140
200
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600
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1000
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Shenzhen, RMB/month
Chart from Dezan Shira
Juha Moilanen 2014
MINIMUM WAGE INFLATION
Why is China Expensive?
China’s youth labour supply has started to decline
China’s wages are rising
China’s currency is appreciating rapidly
China’s land and other production costs are rising rapidly
China’s SMEs find it difficult to obtain capital
Source: Silk Road Associates: The End of Made-in-China?
Juha Moilanen 2014
Dezan Shira: “Based on the review of minimum labor costs, determined by the legal minimum amount stipulated in 15 different countries, and added together with the pertinent mandatory welfare payments due, it is apparent that since the introduction of the revised labor law in 2008, China’s workers are now amongst some of the best paid in Asia.”
MINIMUM WAGE INFLATION
Juha Moilanen 2014
TYPICAL OFFICE SALARIES, 2011
1€ = 8.2 RMB1 RMB = 0.122 €The table shows typical median cash salaries paid in 2011
by job category for local staff in offices in Guangzhou, Shanghai and Beijing. Salaries are based on a 13-month per year payment. Source: J.M. Gemini, Guide to China Market Salaries, Fourth Quarter 2011.
Title Experience Qualifications Monthly salary range (RMB)
VP, HR 15 years+ in mgmt Master’s degree 70000 – 90000
Director, HR 10 years+ in mgmt University graduate 60000 – 80000+
Manager, HR 5 years in mgmt University graduate 20000 – 35000+
Office manager 3+ years University graduate 17000 - 27000
Business manager 5+ years University graduate 19000 - 32000
Training manager 5+ years University graduate 17000 - 26000
Senior secretary 5 – 8 years College and above 10000 - 14500
Secretary 3 – 5 years College and above 6500 - 9500
Senior receptionist 2 – 4 years College 3000 - 5500
Juha Moilanen 2014
CNY – EUR CONVERSION RATE
Data from xe.com
Juha Moilanen 2014
CNY – USD CONVERSION RATE
Data from xe.com
Juha Moilanen 2014
McKinsey: Vehicle production is projected to soar in China and South Asia by 2020, reflecting a broader trend where more than two-thirds of global manufacturing activity takes place in industries that locate close to demand.
IN SPITE OF RISING WAGES…
Juha Moilanen 2014
BOOMING E-COMMERCE
Juha Moilanen 2014
“"I can not separate myself from Taobao now. It is becoming a lifestyle, or it is life itself”.
-Mei Xiao, a civil servant from Wuhan. May, 2013-
As the country's largest online shopping platform, Taobao (a C-2-C portal similar to eBay) alone features nearly one billion products and has nearly 500 million registered users. It sells 48,000 products each minute and its maximum daily turnover reached 4.38 billion yuan (US$713 million). Taobao delivers 20 million parcels every day, accounting for 70% of the country's total.
According to statistics from the Ministry of Commerce, it is estimated that China's online commerce industry raked in more than 1.1 trillion yuan (US$175 billion) in revenue in 2012.
Per capita consumption in online shopping estimated to reach 10’000 yuan (1’220 €) in 2013, according to Alipay.
BOOMING E-COMMERCE
Juha Moilanen 2014
Taobao, a member of Alibaba Group, overtook Amazon as the world’s biggest online retailer by sales volume, netting > 1000 billion RMB = 120 bn. € in 2012.
Taobao is basically a platform for > million small B-2-C and C-2-C shops: like eBay without the auction aspect
T-Mall is focusing in large-size and luxury brand manufacturers
BOOMING E-COMMERCE
Juha Moilanen 2014
BOOMING E-COMMERCE
Distribution network is functioning surprisingly well, with door-2-door-deliveries within a couple of days in most cities
Juha Moilanen 2014
BOOMING E-COMMERCE
Alipay payment method enables easy and safe online payments. The consumers transfer funds from their private bank account to their Alipay account, thus not having to disclose their credit card details on the internet.
Juha Moilanen 2014
BOOMING E-COMMERCEChinese customers expect to be able to contact the retailer directly when online. For this purpose, Alibaba has created a Aliwangwang chat-feature. This is especially important for retailers to win the shoppers’ trust, since defected products are rampant in the China market. At the same time, the shoppers are able to haggle the prices.
Juha Moilanen 2014
BOOMING E-COMMERCE
And of course, these features need to be available for mobile shoppers, too!
Juha Moilanen 2014
BOOMING E-COMMERCE
WeChat (WeiXin): A mobile apps with 300 mn users in China + 100 mn worldwide
1. Online storefront with minimial fee for opening public account
2. Deeply customazible to meet everyone’s needs
3. Includes a mobile wallet – in-app payment function
4. Can buy anything from movie tickets or taxi rides to online investment funds
5. ”Virtual HongBao” account
Juha Moilanen 2014
BOOMING E-COMMERCE
www.GoGlobe.comData from 2013.
Juha Moilanen 2014
E-commerce becomes M-commerce. Jack Ma (Alibaba’s founder): “The mission of Alibaba’s mobile department is to eliminate Taobao – by replacing it with Taobao mobile”. Now all Chinese e-commerce firms realize that it’s time to move the business to mobile devices, before rival companies get the chance to steal a lead.
On November 11, China’s largest online shopping festival – the equivalent of Cyber Monday in the US – took place. On the two Alibaba-owned stores T-mall and Taobao, Chinese consumers spent $5.7 billion in a single day, setting a new record for global e-commerce. 25 % of all purchases were made using mobile devices.
Research from Observer Solutions reveals that China’s retail m-commerce sales reached RMB 43.3 billion ($7.1 bn) – in Q3/2013, +141.9% y-o-y.
Growing off a relatively small base, m-commerce is expected to explode in 2014 given the rapid increase in mobile internet users, increased internet accessibility through mobile devices, and constantly improving mobile payment solutions in China.
460 million mobile web users, 242 million online shoppers (CINIC)
CHINA’S E-COMMERCE GOES MOBILE IN 2014
Juha Moilanen 2014
THE END OF THE HEYDAY FOR LUXURY
BRANDS?
Juha Moilanen 2014
THE END OF HEYDAY FOR LUXURY BRANDS?
Juha Moilanen 2014
Chinese President Xi Jinping has ordered an end to lavish spending by officials on everything from luxury hotels to lavish funerals. He has even gone so far as to ban luxury advertising in state media.
Rolex and Zegna no longer appear on government officials after China’s new railway minister Sheng Guangzu, “Mr. Watch” was arrested, having appeared in photos wearing watches whose combined value is more than double his annual salary. Also vice-minister of health and vice-principal of State Administration Academy are being investigated for alleged corruption.
According to state media, more than 37,000 government officials have been placed under investigation. The anti-corruption campaign has ensnared also executives working for foreign and Chinese companies, and employees at companies like GlaxoSmithKline, Danone and state-backed oil company PetroChina have all been implicated.
THE END OF HEYDAY FOR LUXURY BRANDS?
Juha Moilanen 2014
Bain & Co.Luxury goods sales:• 2012: +7%• 2013: +2%
THE END OF HEYDAY FOR LUXURY BRANDS?
Juha Moilanen 2014
“Restrained bling-bling” an emerging trend for officialsSwiss watch manufacturers exports to greater China dropped 8.5 % in the first 11 months of 2013 as the country cracked down on the use of luxury goods as bribes and illegitimate gifts.
Rémy Cointreau, maker of $3,000-a-bottle Louis XIII cognac, warned investors that operating profits would fall at least 20 % in 2013 y-o-y as a result of what it described as “a sharp slowdown in China”.
Premium liquor sales has flopped. Shuijingfang, one of China’s most exclusive brands of the spirit baijiu, the Communist party’s favourite tipple, now sells half its product range at Rmb 500 a bottle or less – a price point at which the company previously sold nothing.
China's catering sector grew at its slowest pace in more than two decades in 2013 as diners avoided splashing out in luxury restaurants during an anti-corruption campaign targeting official excess. Catering in China grew 9 % last year, the weakest growth in 21 years, Xinhua news agency reported
Sales of Chinese specialty dishes has plummeted by as much as 70%, and exotic Chinese dishes like shark fin have been banned from official functions.
THE END OF HEYDAY FOR LUXURY BRANDS?
Juha Moilanen 2014
谢谢THANK YOU !
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