Booz & Company This document is confidential and is intended solely for the use and information of the client to whom it is addressed. Shanghai, April, 2011 China’s 12 th 5-Year Plan Implications For Foreign Investors
Booz & Company
This document is confidential and is intended solely for the use and information of the client to whom it is addressed.
Shanghai, April, 2011
China’s 12th 5-Year PlanImplications For Foreign Investors
201103311201104_The 12th 5-year plan.pptBooz & Company
“12-5” Strategic Plan
Boosting Domestic Consumption
Industry Upgrade and Innovation
Energy Saving and Environmental
Protection
GDP Growth Rate Adjustment
Internationalization
Regional Coordinated Development
Six Major Themes of “12-5” Strategic Plan
Six major themes marked China‘s “12-5” strategic plan
1
2
3
4
5
6
201103312201104_The 12th 5-year plan.pptBooz & Company
The 12-5 plan emphasizes “development” rather than “growth” of the economy, indicating a growing focus on sustainability
1 GDP Growth Rate Adjustment
11-5 Plan 12-5 Plan
Guiding Principle
GDP Growth Target
� “China has to maintain stable and moderately fast economic development”
� “China will maintain stableeconomic development”
� 7.5%* � 7.0%
Note*: The average annual growth of GDP during 11-5 period was 11.2%Source: China 12th 5-year Plan; China 11th 5-year plan; Literature research; Booz & Company analysis
Comparison of Economic Growth Target 11-5 plan vs. 12-5 plan
Led by the shifting focus of the government from the pursuit of speed of economic growth to its quality and sustainability
Drivers for the Trend
Enhancing quality of Development
Increasing affordability of Chinese
Changing model of Development
� China has enjoyed stunning economic growth based on low-value added and low-cost production, which will not be able to sustain its economic development
� China needs to enhance the quality of its development by cultivating high value-added industries and eliminating the outdated capacity
� China has a large amount of national income, yet its household consumption remains largely weak
� To achieve its goal by 2020 of being a relatively affluent nation, China needs to boost its household consumption in domestic market
� China’s past growth comes at the expense of its deteriorating environment
� China needs to adjust its development model to make its economic growth more sustainable
201103313201104_The 12th 5-year plan.pptBooz & Company
Oct, 2010 Nov, 2010 Dec, 2010 Jan, 2011 Feb, 2011
80
100
160
120
Imports
Exports
140
20
40
Billion US$
60
0
Value of China Exports and ImportsOct 2010-Feb 2011; Billion US$
Import exceeded export in Feb. 2011 indicates a probable cross-over in the economy
In Feb 2011, China witnessed more imports than exports for the first time in the past six years
Source: China customs website; Booz & Company analysis
201103314201104_The 12th 5-year plan.pptBooz & Company
Strategic Significance
In the 12-5 plan, the Chinese Government has put boosting domestic consumption as the top agenda
2 Boosting Domestic Consumption
“11-5” Plan “12-5” Plan
Emphasis on Domestic Consumption in “12-5”
� “China needs to expand its domestic demand, making it a strategic focal point, in order to achieve the balance among investment, net export and consumption in economic growth”
� This will be achieved through increasing household disposable income
� “China needs to adjust its economic development structure”
Domestic Demand is elevated to be the focal
point of China’s economic growth
201103315201104_The 12th 5-year plan.pptBooz & Company
Breakdown of GDP2009;China vs. EU. vs. U.S.
12%16%22%
100%
U.S.
-3%
15%
66%
Europe
1%
19%
58%
China
6%
45%
37%
For China, its domestic consumption contributes much less to GDPcompared with the EU and the U.S.
2
Government Expenditure
Net Exports
Fixed Investment
Private Consumption
Source: Global Insight data; Booz & Company analysis
Boosting Domestic Consumption
201103316201104_The 12th 5-year plan.pptBooz & Company
China household consumption has been decreasing against GDP over the last decade
Comment
� China’s household income grew much slower in the past 5 years
– Household disposable income* grew at CAGR of 6~8%
– SOE revenue grew at CAGR of ~20%
– National fiscal revenue grew at CAGR of ~22%
� GDP per capita grew at a faster rate of 17% compared to household disposable income growth in the past 5 years, indicating a widening gap between national income and residential income, and threatening social stability
2
Share of China Household Consumption in GDP2000-2010; %
0
10
20
30
40
50
60
70
2000 2002 2004 2006 2008 2010
-30%
Note*: Household disposable income includes income from both urban and rural residents hereSource: China's National Bureau of Statistics; China info bank statistics; Booz & Company analysis
4,383
1,726946
0
2,000
4,000
6,000
2010
US$
20052000
GDP per Capita of China2000-2010; US$
China household consumption keeps
dropping against GDP
+17%
World Average: 61.5%
Boosting Domestic Consumption
201103317201104_The 12th 5-year plan.pptBooz & Company
China has instituted specific policies to boost consumption…
2
� Large SOEs were required to contribute more of their after-tax profit with the government
– Starting from 2011, more SOEs will be asked to share their profits
– Also, the amount of profit to be shared has been adjusted to a higher level
� The taxable* income base is expected to adjust from 2000 RMB per month to 3000 RMB per month
Policies Summary
� The Chinese government is also making efforts to enhance the social welfare and security system
Implication
� The profit contributed by SOEs will be used to provide public service
� This will enable residents to have a higher level of disposable income
� This will help residents live in a better-off and safer society, with basic needs covered by the government
Sharing SOEs’Profit
Adjusting Taxable Salary Base
Enhancing Social Security System
Note*: Here taxable salary base refers to the salary base subject to income taxesSource: China 12-5 plan; Literature research; Booz & Company analysis
Reducing Price Imparity
� The Chinese government is trying to bridge the price gap of luxury goods bought abroad and home
� This will encourage residents to purchase foreign goods in domestic market other than in overseas markets
Boosting Domestic Consumption
201103318201104_The 12th 5-year plan.pptBooz & Company
Consumption in China is expected to boom with government policy support
1.81.6
1.21.00.9
0.70.6
2004
2.0
1.5
15.9
2009
Trillion US$
15.0
2020
0.5
2.5
2003 2005
1.0
+20%
15.5
16.0
2006
0.0
20082007
Consumption in China2003-2009 (Historical); 2020(Estimate); Trillion US$
Note: The 2020 consumption in China is estimated by UBSSource: National Bureau of Statistics of China; Booz & Company analysis
Implications
� Consumption in China is expected to grow at a faster rate from 2009 onwards, indicating China’s promising future in becoming a large consumer market
� Investors need to change their perception on China as a mere manufacturing base; instead, they should treat it more as a growing consumer market
� Investors need to learn the specific needs of Chinese consumers, and design tailored-made products and services accordingly
+22%
2 Boosting Domestic Consumption
201103319201104_The 12th 5-year plan.pptBooz & Company
In “12-5” period, China will devote to developing seven emerging industries as well as the culture industry
3 Industry Upgrade and Innovation
Leading Industries
Seven Emerging Industries
Producer Services Industry
Note: 7 strategic emerging industries include energy efficiency & environmental protection, new generation information technology, bio-technology, high-end equipment manufacturing, alternative energy, new materials, electric vehicle
Source: China 12-5 plan; Literature research; Booz & Company analysis
12-5 Plan Strategy Highlight
� Continue to increase value added� Eliminate outdate capacity� Develop advanced equipment
manufacturing industry
� Increase government support to develop the 7 emerging industries* of strategic significance
� GDP contribution of the 7 industries should increase to 8% by 2015 from the current 2%
� Cultivate the culture industry to be a leading industry
� Implication: the share of value added of GDP by the culture industry needs to double from the current 2.5% to 5%
Drivers for the Trend
� China’s leading industries, such as steel industry and petrochemical industry, consume a larger amount of energy per unit of GDP, whose growth will not be sustainable with the limited reserve of energy
Energy Consumption
Increasing Labor Cost
� With China’s labor cost rising, Chinese industries have been losing edge in international competition
� It is necessary for China to transform its industry structure to make it more technology and innovation-driven
Lack of Natural Resources
� China has very limited reserve of natural resources such as ore, oil, etc, which motivates the Chinese government to cultivate industries that are less natural resource consuming
2011033110201104_The 12th 5-year plan.pptBooz & Company
As China is losing its cost advantage…
0.5
2.52.7
0.0
0.5
1.0
1.5
2.0
2.5
3.0
China
US$/hour
VietnamIndia
Manufacturing Labor Cost2010; US$/hour
60119
676
0
100
200
300
400
500
600
700
Billion US$
Russia IndiaChina
Electric, Gas and Steam Utilities Sales2010; Billion US$
Source: HIS Global data; Literature research; Booz & Company analysis
3 Industry Upgrade and Innovation
� China is losing its cost advantage to Vietnam as its labor cost continues to increase and widens the gap
� China’s utility consumption is also much higher than neighboring countries
2011033111201104_The 12th 5-year plan.pptBooz & Company
Service Sales &
Distribution Marketing Manufacturing Sourcing
Product Development
R&D
Service Sales &
Distribution Marketing Manufacturing Sourcing
Product Development
R&D
Stage 1Circa earlyto mid 1990s
Stage 2Circa mid to late 90s
� Started with a few, isolated production facilities
� Began to integrate production facilities
� Began to serve as a procurement source
� Began to have brand for the local market and local sales & distribution
Service Sales &
Distribution Marketing Manufacturing Sourcing
Product Development
R&D
Service Sales &
Distribution Marketing Manufacturing Sourcing
Product Development
R&D
Stage 3Early 2000s
Stage 4Present to 5-10 years
� Start to perform R&D and PD role
� Integrated into globalmanufacturing network
� Integrated into global sourcing network
� Best practice transferred to China
� Integrated into global value chain
China is aiming to move up the value chain: from “made in China”to “created in China” (1/2)
Industry Upgrade and Innovation
Industry S
tructu
re U
pgra
de
Industry S
tructu
re U
pgra
de
Source: Booz & Company analysis
Progress of China’s Industry Development
3
2011033112201104_The 12th 5-year plan.pptBooz & Company
China is aiming to move up the value chain: from “made in China”to “created in China” (2/2)
Industry Upgrade and Innovation
Source: World Intellectual Property Organization; Booz & Company analysis
3
44,85545,618
51,63754,043
51,280
32,15629,80228,76027,74327,025
17,17116,79718,85517,82116,736
12,337
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
55,000
2010 (E)2009
7,900
2008
6,120
2007
5,455
2006
3,942
Number of Patents2006-2009 (Historical); 2010 (Estimate)
-20
-10
0
10
20
30
40
50
60China
Germany
Japan
U.S.
09-1008-0907-0806-07
Comparison of Patent Growth 2006-2009 (Historical); 2010 (Estimate)
� China owns a small number of patents compared to other large economies
� China has witnessed stunning growth in the number of patents in recent years, demonstrating its growing competency in innovation
China
Germany
Japan
United States of America
2011033113201104_The 12th 5-year plan.pptBooz & Company
Many foreign OEMs have established local R&D capabilities in China
13
GM PATAC 2) (1997)Partner: 50% SAIC Invest: $ 300milStaff: 1,700
Toyota ShanghaiEquity: 100% TMCIInvest: $ 11Mil
SAIC-VW (1999)Partner: 50% SAICInvest: € 400 mil Staff: 1,200
Supplier availabilitylow high
Shanghai
Guangzhou
Fuzhou
Separated entity
part of JVAnnounced new
operations
Hyundai (2008)Partner: 50% BAIC
Scope: vehicle/part adaptations
Toyota GuangzhouEquity: 100% TMCI
Tianjin
Beijing
VW China Test CenterPartner: SINOPECInvest: n.a. Staff: n.a.
Ford (2006) Partner: 100% FordInvest: 2.2B ($27.5M)Scope: Vehicle, engine,parts design & engineering
Nanjing
Nissan R&DPartner: 50% Dongfeng
Foundation: 2005
Toyota Technical Center1)
Equity: 100% TMCInvest: $ 8.7 mil
Industry Upgrade and Innovation3
1) Toyota Motor Technical Center China in Tianjin2) Pan Asia Technical Automotive Center
2011033114201104_The 12th 5-year plan.pptBooz & Company 14
MNCs from various industries have shifted their R&D centers to China
Pharmaceutical Industry
IT Industry
Consumer Goods Industry
Energy Industry
Source: Literature research
� R&D center for the Asia-Pacific region
� 2nd R&D center in Asia
� The 18nd R&D center worldwide
� Mainly focus on the China and Asia market
� The 4th R&D center worldwide
� Mainly focus on the China and Asia market
� R&D center for Asia
� R&D center for China � Multi R&D centers, serving China and Asia
� Global R&D center on diabetes
� R&D center for China and Asia
� The 5th R&D center worldwide
� The 1st R&D center in Asia, part of Intel’s global R&D network
� The 2nd R&D center world wide, serving Asia
2011033115201104_The 12th 5-year plan.pptBooz & Company
The 12-5 plan sets more constraints on energy consumption and emissions, and will enhance enforcement
4
Source: China 12-5 plan; BP report; Literature research; Booz & Company analysis
Notion
Targets
� China proposes a new notion of “combat global climate change”
Summary
� Decrease CO2 emissions per unit of GDP by 17% by 2015
� New targets to control energy consumption and emissions– Increase the proportion of non-fossil energy
consumption over that of primary energy by 3.1% to 11.4% by 2015
– Add two more emissions indicators, NHx and NOx, whose emissions have to decease by 10% by 2015
Primary Energy Consumption2009; Million Tons of Oil Equivalent
� China is consuming much more energy compared to other economies (except for the U.S.), as its has a higher proportion of energy-consuming and polluting industries such as steel in its industry structure
� There is huge potential for China to reduce its energy consumption
Measures
� Emissions control targets will be further allocated to enterprises
� Outdated production capacity will be further eliminated – Local governments need to come up with a list of
enterprises whose production capacity will be eliminated and timeline
Enforcement
� Administrative– For regions that fail to meet the targets, their
applications for government-sponsored projects or request for land use will not be reviewed
– For enterprises that fail to meet the targets, their manufacturing licenses will be revoked
� Financial– Banks will refuse to offer loans to regions or enterprises
that fail to meet the targets
226290464469
2,1772,182
Germany BrazilU.S. China India Japan
Energy Saving and Environmental Protection
2011033116201104_The 12th 5-year plan.pptBooz & Company
Heavily energy-consuming industries will be the prioritized targets of China’s national energy saving plan
Energy Consumption by Industry 2007;%
Source: National Bureau of Statistics of China; Booz & Company analysis
11%
9%
100%
8%Transportation
Household consumption
Others
Industrials
21%
6%
7%
10% 11%
3%
14%
4%
25%
2%
� Characteristics of energy consumption in China– Industrials consume over 70% of energy– Within the industrials sector, consumption of nine
major industries accounts for ~80%� These nine industries are the prioritized targets of the
energy saving plan as they consume collectively over 50% of energy in China
4 Energy Saving and Environmental Protection
71%
Others
Oil and Gas Extraction
Coal Mining
Raw Chemical Material and Chemical Products
Electric Power, Thermal Power Production and Supply
Textile
Smelting and Pressing of Non-Ferrous Metal
Smelting and Pressing of Ferrous Metal
Petroleum Processing and Coking
Non-metal Mineral Products
2011033117201104_The 12th 5-year plan.pptBooz & Company
…with petroleum and petrochemical industry being one of them
Oil and Petrochemical Sector in the National Energy Saving Plan
Food processing
Textile
Raw Chemical Material and Chemical Products
Non-ferrous metal Mining
1.0
0.3
0.2
0.2
Electric Power, Thermal Power Production and Supply
Non-metal Mineral Products
Smelting and Pressing of Ferrous Metal
Smelting and Pressing of Non-Ferrous Metal 0.7
1.6
1.7
10.6
Petroleum Processing and Coking 0.6
Paper-making and Paper Products 0.5
Top 10 Industries by Energy Consumption(2007; In Million Tons of Coal Equivalence)
Top 10 Industries by Emissions of SO2(2008; In Million Tons)
Source: National Bureau of Statistics of China; Booz & Company analysis
Comments
� Petroleum and petrochemical sector is one of the prioritized industries in national energy saving plan, initiatives including:
– Accelerating the promotion of energy reduction technologies
– Pilot energy saving projects with a focus on recycle, use of alternative energy, and system optimization
4 Energy Saving and Environmental Protection
478
Non-metal Mineral Products
Raw Chemical Material and Chemical Products
Petroleum Processing and Coking
Electric Power, Thermal Power Production and Supply
132
72
62
37
33
272
204
107Smelting and Pressing of Ferrous Metal
185
Textile
Coal Mining
Paper-making and Paper Products
Oil and Gas Extraction
Smelting and Pressing of Non-Ferrous Metal
2011033118201104_The 12th 5-year plan.pptBooz & Company
Examples of Technical Difficulties in Energy Saving and Emissions Reduction
18
The barriers in reducing energy consumption in these industries suggest potential investment opportunities
� Power Electronic Device – except for SCR, China is not capable of producing modern power electronic devices such as IGBT/IGCT
� Frequency Control – Products with high efficiency and large power are dominated by foreign competitors; domestic products can hardly compete against foreign products in terms of the reliability of FOC and TDC
Motor System Energy Saving Project
� Fuel Washing and Screening: domestically produced coals tend to lower boiler efficiency and cause environmtnal pollution due to their poor purity, quality and screening technologies
� Energy Saving Technologies for Boilers: ultra-supercritical units have been introduced, but advanced technologies are still needed
Low-Efficiency Coal Boiler Transformation Project
Green Lights Project Oil Saving and Substitution Project
� Compact Fluorescent Lamp (also known as a Energy Saving Light) – a large proportion of domestic products suffer from poor lumen maintenance rate (<80%) and short lifecycle (< 6,000 hours)
• LED Lamp – key technologies of Ultra Bright LED are yet to be developed; technological breakthroughs in packaging and application are not fulfilled
� Natural Gas Vehicle (NGV) – the first generation technology is applied to most of existing domestic modified cars, emissions targets of which are lower than their foreign counterparts with electric fuel pumps
� Hybrid Power Vehicle – the efficiency of domestic batteries and motors are 30% lower compared with world leading standard, failing to save energy
Source: NDRC, Booz & Company analysis
Technical Difficulties
4 Energy Saving and Environmental Protection
2011033119201104_The 12th 5-year plan.pptBooz & Company
Economic development varies across regions in China, with Western China lagging behind
5 Regional Coordinated Development
Source: National Bureau of Statistics of China; Booz & Company analysis
Urban Household Disposable Income per Capita2009; RMB
GDP per capita 2009; RMB
Tibet
Gansu
Qinghai
XinjiangBeijing
TianjinHebeiShanxi
Inner Mongolia Liaoning
Jilin
Heilongjiang
Shanghai
Jiangsu
Zhejiang
Anhui
Fujian
Jiangxi
Shandong
Henan
Hubei
Hunan
GuangdongGuangxi
Hainan
Sichuan
Guizhou
Yunnan
Shaanxi
Ningxia
Chongqing
Beijing
TianjinHebeiShanxi
Inner Mongolia Liaoning
Jilin
Heilongjiang
Shanghai
Jiangsu
Zhejiang
Anhui
Fujian
Jiangxi
Shandong
Henan
Hubei
Hunan
GuangdongGuangxi
Hainan
Sichuan
Guizhou
Yunnan
Tibet
Shaanxi
Gansu
Qinghai
Ningxia
Xinjiang
Chongqing
IV >24,000 RMB p.a.
III 20,000-24,000 RMB p.a.
I <15,000 RMB p.a.
II 15,000-20,000 RMB p.a.
IV >40,000 RMB p.a.
III 30,000-40,000 RMB p.a.
I <20,000 RMB p.a.
II 20,000-30,000 RMB p.a.
2011033120201104_The 12th 5-year plan.pptBooz & Company
Brief introduction of Western China
5 Regional Coordinated Development
western provinces
… 69% of China's overall area
… 28% of population
… 19% of China's GDP
… 17% of consumer spending
… 14% of foreign direct investments
… 10% of applied patents
… 6% of registered foreign enterprises
… 4% of exports
2011033121201104_The 12th 5-year plan.pptBooz & Company
Urbanization will create significant opportunity in western China
Urbanization across Regions
Eastern China 60%
35%
Central China 40%
Western China
5 Regional Coordinated Development
Source: Literature research; Booz & Company analysis
� East China has been highly urbanized with ~60% of its population living in cities, rendering it hard to continue to urbanize at a high rate
� Central China and West China currently are at a relatively low level of urbanization, and will be key drivers for China to reach its goal by 2015
622607594577562
4746454443
0
100
200
300
400
500
600
700
40%
30%
20%
10%
2005 2007 2008 2009
0
%
2006
Million
50%
60%
70%
80%
90%
100%
Urban Population and Urbanization Rate2005-2009; Million
� China is gradually urbanized
� The 12-5 plan aims to increase China’s urbanization by 4% by 2015
2011033122201104_The 12th 5-year plan.pptBooz & Company
Western development is made a key national strategy in the 12-5 plan, with focus on three specific geographical areas
5 Regional Coordinated Development
Three key regions for development
Western provinces
Guanzhong-Tianshui (cities: Xi'an, Xianyang, Baoji, Tianshui)
Inner MongoliaXinjiang
Ningxia
Gansu
Yunnan
Guizhou
Tibet
Qinghai Shaanxi
Sichuan
Guangxi
Chongqing
Chengdu-Chongqing:(cities:chengdu,chongqing,etc)
"North Bay" (Cities: Nanning, Beihai, Qinzhou, connection to Guangdong, Hainan)
2011033123201104_The 12th 5-year plan.pptBooz & Company
Internationalization becomes hot, foreign companies have to think how to partner with local players to exploit global opportunities
6 Internationalization
Billion US$
0
10
20
30
40
50
60
70
80
90
100
75
2007
92
2008
95
20092006
63
2005
60
2004
61
Foreign Investment in China2004-2009; Billion US$
Billion US$
0
5
10
15
20
25
30
35
40
45
50
55
60
27
2007
56
2008 2009
57
2006
18
2005
12
2004
6
Overseas Investment by Domestic Players2004-2009; Billion US$
Source: China Statistics Yearbook
2011033124201104_The 12th 5-year plan.pptBooz & Company
The 12-5 plan also encourages foreign investors to participate in China market competition in various ways
6 Internationalization
� Foreign investors are encouraged by the Chinese government to invest
– Industries: In high-tech industries, alternative energy, and modern service industry, etc
– Regions: More in Central and Western China
– Channels: Via M&A, buying stakes in domestic enterprises, expanding their value chain such as R&D in China, etc
Source: China 12-5 plan
Diversify Investment Channels
Enhance Policy and Law Enforcement
Summary
� The Chinese government is devoted to making its policies more favorable to foreign investments
� Enforcement of laws will be strengthened to protect investors’ legal rights in China
China market will be more open, safe and favorable to foreign investors
2011033125201104_The 12th 5-year plan.pptBooz & Company
GDP Growth
Rate Adjustment
12th-5 Year Plan: 10 Implications For Foreign Investors
25
“12-5” Theme Implication
� Boosting Domestic Consumption
� Not manufacturing base for exports but a huge potential consumption market� Develop products for China: from MADE IN CHINA TO MADE FOR CHINA
� Industry Upgrade and Innovation
� Focusing on strategic emerging industries, NEV is key � Taking care of creativity industry opportunity � Expand value chain to upstream to increase competitive advantages
� Energy Saving and Environmental Protection
� A sizable demand market� Good opportunities for equipment manufacturing industry� More opportunities in emerging service models, such as energy management contract (EMC)
� Regional Coordinated Development
� Go West!!!� Focus on resources and energy consumption intensive industries� Fast urbanization and related investment opportunities, eg, retail, infrastructure, real estate
� Internationalization � Teaming up with Chinese partners
“12-5” Implication to Investors
2
3
4
5
6
1