The ChinaAnalyst中国分析家A knowledge tool by The Beijing Axis for executives with a China agenda
Features
State of Change: Assessing China’s Competitiveness
How to Engage: The Rise of New Chinese Manufacturers
Chinese OFDI: Bolder, Wiser and More Strategic
April 2012 І www.thebeijingaxis.com/tca
Line 1
Opened in 1981
Bank of Communications
Jiangsu Shagang Group
China Minmetals
China National Offshore Oil
China Ocean Shipping
China Railway Engineering
China Railway Construction
China State Construction
China Mobile Communications
SinopecIndustrial & Commercial Bank of China
Bank of ChinaSinochem Group
Cofco Group
Lenovo Group
China Metallurgical Group
Aluminum Corp. of China
China Comunications Construction
Shanghai Automotive
Shanghai Baosteel Group
Agricultrual Bank of China
State GridChina First Automotive Works
China Southern Power Grid
China National Aviation Fuel Group
Sinomach
Henan Coal & Chemical
Jizhong Energy Group
China Shipbuilding Industry
China Pacific Insurance Group
China Guodian
Wuhan Iron & Steel
China Datang Group
Huawei Technologies
Ping An Insurance
People's Insurance Co. of China Shenhua Group
China North Industries Group
China Telecommunications State Power
Dongfeng Motor
Chemchina
Zhejiang Materials Industry Group
China National Building Materials Group
China Railway Materials Commercoal
China Electronics
China Post Group
Shougang Group
China South Industries Group
Aviation Industry Corp. of China
China National Petroleum Corp.
China Mobile Communications
China Huaneng Group
China Construction Bank
China United Telecommunications
Citic Group
Hebei Iron & Steel Group
Sinosteel
Line 5
Opened
in 2007
Line 13
Opened
in 2002
Line 4
Opened
in 2009
Line 10
Opened
in 2008
Line 2
Opened in 1981
Legend
Companies that joined the Fortune 500 before 2000 (Line 1)
Companies that joined the Fortune 500 in 2000-04 (Line 2)
Companies that joined the Fortune 500 in 2005-07 (Line 13)
Companies that joined the Fortune 500 in 2008 (Line 5)
Companies that joined the Fortune 500 in 2009 (Line 10)
Companies that joined the Fortune 500 in 2010 (Line 4)
Inside circle: Company revenue in year of joining Fortune 500
Outside circle: Company revenue in 2010
State Power
(company reorganised
and reformed)
Chinese companies in the Fortune 500
juxtaposed
with the development of Beijing’s subway system
This infographic illustrates the progression of Chinese companies in the Fortune 500 from 1994 (when the fi rst Chinese company
joined the list) with a visual reference to the expansion of the Beijing subway system from 1971. All but two of Beijing’s current
15 lines were opened in the last decade; in the same period, 47 of the current total of 58 mainland Chinese companies joined the
Fortune 500.
The circles around each company visually portrays the expansion in revenue of the companies at time of joining the Fortune 500 vs.
2010. Note the subway map is not exhaustive of Beijing’s current subway system of 15 lines.
The China Analyst
4 І The Beijing Axis
At the Highest LevelThe China of 2012 is a China that is priming itself for a new era. Change and
development have been ubiquitous in China for over three decades now—
during all this time China has been changing itself and the world in many
ways. But what is about to happen is a Chinese evolution on a diff erent level.
It is imperative for every company in the world to change their perception of
China.
The China Analyst
April 2012
Published by
The Beijing Axis
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Executive Editor
Kobus van der Wath
Editor
Barry van [email protected]
Assistant Editor
Daniel [email protected]
Design Specialist
Hattie [email protected]
To view the contents of previous editions of The China Analyst, see Previous Editions on page 39. To subscribe free of charge to The China Analyst, please visit www.thebeijingaxis.com or www.thebeijingaxis.com/tca.
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DISCLAIMERThis document is issued by The Beijing Axis Ltd. While all reasonable care has been taken in preparing this document, no re-
sponsibility or liability is accepted for errors or omissions of fact or for any opinions expressed herein. Opinions, projections and estimates are subject to change without notice. This document is for information purposes only, and solely for private circula-
tion. The information presented here has been compiled from sources believed to be reliable. While every eff ort has been made
ensure that the information is correct and that the views are accurate, The Beijing Axis cannot be held responsible for any loss, irrespective of how it may arise. In addition, this document does not constitute any off er, recommendation or solicitation to any
person to enter into any transaction or to adopt any investment strategy, nor does it constitute any prediction of likely future
movements or events in any form. Some investments discussed here may not be suitable for all investors. Past performance is
not necessarily indicative of future performance; the value, price or income from investments may fall as well as rise. The Beijing
Axis, and/or a connected company may have a position in any of the investments mentioned in this document. All readers are advised to make their own independent judgement with respect to any matter contained in this document.
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reproduced or used except for business purposes on behalf of The Beijing Axis or save with the express prior written consent of an authorised signatory of The Beijing Axis. All rights reserved. © The Beijing Axis 2012.
China is changing. While this simple statement could have been uttered at any time in the last three decades, in 2012, it is beginning to take on a new meaning. Although China has become the second-largest economy in the world, it has now reached the point where its ambitions are
no longer satisfi ed with being second-best, with being merely an imitator, a follower, and a user of foreign technology. It is now aiming to be a leader in its own right, an industrial giant renowned not only for its scale but also for its pioneering spirit.
To some companies around the world this may sound odd. Many would still not mention ‘China’ and ‘innovation’ in the same sentence. There are indeed various reasons why the type of innovation that has taken root in China in the last few decades has in large part relied on imitation and reproduction. But to maintain this impression of China would be a costly error of judgement.
Today, the best way to look at China is to use a little imagination, to project current trends into the future and to imagine what such a world might be like. Farsighted individuals will do this now, not in two, fi ve or ten years down the road. Those who delay this assessment indefi nitely will at some point in the future fi nd, to their dismay, that Chinese competitors have approached a higher level of competitiveness.
In 2012, as China transitions to new political leadership, this process is starting to go into a higher gear. The main battleground for market share in value-added industries is currently ongoing in developing markets. In countries like Brazil, South Africa and India, Chinese heavy and construction machinery manufacturers have made substantial gains in recent years. While competitively-priced product offerings have long been a core element of China’s competitive advantage, Chinese manufacturers are now progressively fabricating products that compete not only on price but also on quality and after sales services. It is an extended process for
Chinese companies, involving years of imitation, alteration, adaptation, and innovation. Yet it is a process that is very much underway in China, progressively impacting various markets around the world.
Thus, it is essential not to underestimate the change that China is still capable of. Hence, in this edition of The China Analyst, we have undertaken the task of assessing China’s current level of competitiveness and to consider the future implications of a more competitive China. We have highlighted China’s leading companies that are approaching the ‘technological frontier’ in their respective industries, and have assessed the options that are available to foreign fi rms in the face of a more competitive China.
What is required is for foreign companies and observers to start changing their perspectives on China. A more competitive China will bring new challenges as well as new opportunities. It is imperative that companies be informed, the fi rst steps towards being able to act preemptively.
I trust our readers will enjoy this edition of The China Analyst, and as always we welcome your feedback.
Kobus van der WathFounder & Group Managing DirectorThe Beijing [email protected]
Table of Contents April 2012
MACROECONOMYChina in 2012 - Soft Landing?
This year marks the beginning of a trying period for China’s economy. As it aims for a soft landing, it will fi nd itself in the midst of a fundamental transition, and the economic indicators have already begun to refl ect these new trends.
PROCUREMENTChina Sourcing Strategy: The Purchase Positioning Matrix
Understanding the Purchase Positioning Matrix can help companies determine the most suitable procurement structure to set up in China.
INVESTMENTChina Capital: Inbound/Outbound
FDI & Financial MarketsAnalysis on the latest on FDI in China and OFDI by Chinese fi rms.
FEATURESState of Change: Assessing China’s
Competitiveness
Foreign companies are facing the prospect of a competitive landscape signifi cantly altered by emerging Chinese competi-tors.
FEATURESHow to Engage: The Rise of New Chi-nese Manufacturers
Chinese machinery suppliers are producing increasingly sophis-ticated goods, but are still struggling to increase their effi ciency and adequacy of internal support processes.
FEATURESChinese OFDI: Bolder, Wiser and More Strategic
The current Chinese OFDI wave is emerging as a key enabler of consolidation, growth, market positioning and the acquisition of strategic assets and expertise for Chinese companies.
STRATEGYMapping China in the Global Debt
LandscapeIn this edition we illustrate China in the global debt outlook.
STRATEGYChina in Europe: Cash, Debt and
M&As
Is Europe’s crisis becoming China’s opportunity?
REGIONSRegional Overview: BRIICS
A macro overview of the leading developing economies: Brazil, Russia, India, Indonesia, China and South Africa.
REGIONSRegional Focus: CHINA-AFRICA
China-Africa trade and investment analysis, and a focus on China’s relations with the East African community.
REGIONSRegional Focus: CHINA-AUSTRALIA
China-Australia trade and investment analysis, and the series 'Australia State Watch', featuring Tasmania.
REGIONSRegional Focus: CHINA-LATIN AMERICA
China-Latin America trade and investment analysis, and a spe-cial focus on China’s relations with Ecuador.
REGIONSRegional Focus: CHINA-RUSSIA
China-Russia trade and investment analysis, including the series 'China-Russia Resources Watch'.
The Beijing Axis News - September 2011–
March 2012The latest The Beijing Axis Group news.
About The Beijing AxisCompany profi le and contact information.
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6 І The Beijing Axis
The China Analyst
State of Change: Assessing China’s CompetitivenessChina has become very competitive in a relatively short space of time, and now it is aiming to
transition to the next development stage, namely innovation-driven competitiveness. China’s
general trajectory in this regard is clear, and foreign companies are facing the prospect of a
competitive landscape signifi cantly altered by emerging Chinese competitors. By Barry van Wyk
Over the period
2001-08, China’s
manufacturing
exports grew by a
staggering 27.9%
y-o-y.
China in 2012 is on the verge of transitioning to a third
generation of national leadership that is seeking
to make China’s economy more competitive in the
global economy. After three decades of sustained economic
growth, China has ambitions not only of being competitive,
but of being a leader in innovation and industry. To reach
these objectives, China’s leadership is considering initiatives
and reforms for making China a more developed, more
prosperous and more creative country. China’s economy and
its competitive standing in the world is in a state of change,
and in various industries, this is presenting diff erent types of
opportunities and challenges for foreign companies.
Measuring China’s success
Companies and countries are inevitably drawn into greater
competition over fi nite markets. To gain a greater share of
those markets, a company must provide products that are
in some way superior to those of its competitors, so it can
ultimately increase profi t. For a country, the ultimate objective
of gaining greater share of global markets is to increase the
standards of living of its citizens.
China’s rising competitiveness after 1978 was the result of a
mobilisation of the factor endowments that the country had
in abundance, especially cheap, unskilled labour. Opening
parts of the economy to foreign investors drew in technology
and allowed China to integrate itself into
global value chains. China systematically
became a supplier of labour-intensive
products and components, combining
inward FDI with a policy to develop
competitive local companies. The rise in
China’s competitiveness was conditioned
by the concurrence of several factors: a
favourable exchange rate, low wages and
large labour supplies, the infl ow of FDI, the
huge potential of the Chinese domestic
market, and the opening of world markets
to Chinese manufacturers.
China has come to occupy a unique position in studies of
competitiveness. Its rapid growth in the last three decades
has seen Chinese exports gaining global market share in an
expanding range of industries along with China’s progression
up the value chain. The living standards of Chinese nationals
have also clearly improved, so that China’s competitiveness
has increased at both the national and company levels.
The Global Competitiveness Report (GCR), an annual
publication by the World Economic Forum, is the most
comprehensive assessment of national competitiveness. It defi nes competitiveness as the set of institutions, policies, and
factors that determine the level of productivity of a country,
where productivity leads to economic growth and prosperity.
The report measures a wide range of factors grouped into
12 pillars1, and it evaluates the importance of these pillars to
individual countries by dividing the latter into three stages of
development:
• Factor-driven, for countries still competing based on
factor endowments such as unskilled labour and natural
resources;
• Efficiency-driven, for countries developing more
effi cient production processes and increasing product
quality to account for rising wages;
• Innovation-driven, for countries where wages have
risen so much that businesses can only compete by
producing new and unique products
In the latest edition of the report (2011-12), China, which has
improved its ranking each year since 2005 and is now ranked
26th overall2, is categorised in the Effi ciency-driven stage. The
report notes that China has improved its performance in most
of the pillars, yet notable ones where its standing is much
lower than its overall position are Institutions (due mostly to
occurrences of corruption), Financial market development
and Technological readiness.
To benchmark national industrial performance for evaluating
the competitiveness of companies, the United Nations
Industrial Development Organisation (UNIDO) developed
the Competitive Industrial Performance (CIP) index, which
measures an economy’s competitiveness for producing and
exporting manufactured goods. Measuring a set of eight
key indicators using manufacturing value add (MVA) data
as well as population and trade data from 2005 and 2009 for
118 economies, the 2011 CIP index ranked China in 5th place
overall, rising from 6th in 2005, and trailing only Singapore
(1st overall), the US, Japan and Germany. In analysing the
data used for the CIP index, the UNIDO report found that
1 The 12 pillars are Institutions, Infrastructure, Macroeconomic
environment, Health and primary education, Higher education and
training, Goods market effi ciency, Labour market effi ciency, Financial market development, Technological readiness, Market size, Business sophistication, and Innovation. 2 China leads the BRICS in the rankings; South Africa is next in line in
50th place.
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7 І The Beijing Axis
Since 1996, foreign
fi rms have accounted
for around 85%
of China’s high-
technology exports.
China had increased its share in overall global MVA from 6.7%
in 2000 to 15.4% in 2010, when global MVA amounted to
USD 7.39 billion. Refl ecting the shifting landscape of global
manufacturing towards Asia, in 2010, developing economies
accounted for 35.6% of global MVA (up from 20.7% in 1990),
and China accounted for almost 75% of the latter total.
Global manufactured exports are dominated by medium- and
high-technology products, which have never dropped below
60% of world manufactured exports since 1992. The UNIDO
report found that the fi ve fastest-growing sectors globally
over 2005-093 were all (except for Basic Metals) in medium-
and high-technology manufacturing. In all of these sectors,
in fact in 21 out of the total 22 industrial sectors, China has
become the fi rst or second leading manufacturer in the world
(see table above). In this process, over the period 2001-08,
China’s total manufacturing exports grew by a staggering
27.9% annually. Developed countries still account for around
60% of global medium- and high-technology exports, yet here
also China has made inroads, with the share of medium- and
high-technology products of its total exports increasing from
45.5% in 2000 to almost 60% in 2009.
Caveats
China has clearly dynamically improved its competitiveness,
3 Offi ce, accounting and computing machinery; Radio, television and communication equipment; Electrical machinery and apparatus; Other transport equipment; and Basic metals.
both in the national as well as company spheres. Yet while
China’s exports have indeed expanded enormously after its
accession to the World Trade Organisation (WTO) in 2001,
the processing trade accounts for around half of its exports.
According to a WTO trade policy review on China published in
2010, foreign-invested enterprises (FIEs) accounted for 84.1%
of China’s total processed exports in 2009. As export data
refl ect the gross value of products leaving a country’s ports,
the very high share of imported inputs in Chinese exports
means that export data do not adequately measure the value
actually produced in China. The competitiveness of Chinese
exports is thus in large part fuelled by foreign multinational
plants in China’s coastal regions, and not necessarily by world-
class Chinese companies.
Furthermore, since 1996, foreign fi rms
have accounted for around 85% of
China’s high-technology exports.4
The technological spillovers that
were expected to accrue from the
FIEs and many MNCs operating in
China, moreover, have largely failed
to materialise. For all its export growth
and the increasing competitiveness of
its industry, and despite the fact that
58 mainland Chinese companies were
included in the Fortune 500 in 2011 (the third-most after the
US and Japan), China has not as yet been able to produce a
truly global brand:5 the latest edition of Interbrand’s 100 Best
Global Brands in 2011 is still missing the fi rst Chinese entry. In
terms of the living standards of Chinese people, the ultimate
objective of national competitiveness, China is still far in
arrears. With a GDP per capita of USD 4,382 in 2010, the fi gure
for China is not yet half that of Brazil or Russia’s, countries that
rank below China in comparisons of national and industrial
competitiveness.
Transitions
China can theoretically only reach the innovation-driven
threshold by raising the skills of its workers and upgrading its
domestic technology and institutions to be able to produce
innovative products and pioneering technology. The drive
for increasing China’s competitiveness is currently enveloped
in a broad transition of China’s economy seeking to develop
better paid, more skillful and more competitive workers and
industries. In 2012, this is occurring on the backdrop of a
national leadership transition.
A vision for a competitive and innovative China was presented
in February 2012 in a voluminous study jointly developed
by the World Bank, the Chinese Ministry of Finance and the
Development Research Centre of China’s State Council. The
resultant China in 20306 document outlined six key strategic
aspects for China to consider in order to become a high-
income country by 2030. These focus in part on rethinking
the role of the state and the private sector in China’s economy
to encourage increased competition, innovation, and China’s
continued integration with global markets.
4 ‘Foreign’ here refers to foreign fi rms and joint ventures. In 2009, for example, the share of foreign fi rms in this case was 83.2%. See http://www.sts.org.cn/sjkl/gjscy/data2010/2010-2.htm for more details. 5 Although Lenovo and Huawei have been suggested as possible candidates. 6 With the subtitle Building a Modern, Harmonious, andCreative High-Income Society.
Source: Industrial Development Report 2011, UNIDO
Leading Producers in the Five Fastest Growing Industry
Sectors (%, 2000 and 2009)
Average Annual Growth Rate
World Five Leading Economies (Share in World MVA)
Economy 2000 Economy 2009
Offi ce, accounting& computing machinery(ISIC 30)
9.8
US 53 US 53
Japan 15 China 11
UK 6 Japan 9
China 4 Germany 7
Germany 4Korea Rep.
6
Radio, television and communication equipment(ISIC 32)
9.4
US 61 US 62
Japan 15 China 12
China 5 Japan 10
Taiwan, China
3Korea Rep.
5
Korea Rep.
3Taiwan, China
4
Electrical machinery and apparatus(ISIC 31)
7.9
Japan 23 China 33
US 21 Japan 20
Germany 13 Germany 10
China 8 US 10
Italy 4 India 5
Other transport equipment (ISIC 35)
7.3
US 31 US 22
Japan 9 China 15
UK 8 Brazil 14
Brazil 6 Japan 7
France 5Korea Rep.
6
Basic Metals (ISIC 27)
5.7
Japan 23 China 48
US 14 Japan 14
China 12 US 5
Germany 6 Germany 4
Korea Rep.
4 India 3
8 І The Beijing Axis
The China Analyst
As the Global Competitiveness Report outlined, rising wages
have been instrumental in inducing companies to innovate
to remain competitive. Wages in China have been rising
rapidly since the mid-2000s. All urban wage growth has
been high, yet that of low-skilled workers has been highest
among all wage earners, more or less doubling in real terms
from 2001 to 2010. China’s labour force is expected to peak
at around 1 billion workers in 2015, and China may already
have passed or is about to pass the Lewisian turning point.7
Rising wages in urban areas in China are also regarded as an
important means for decreasing the urban-rural income gap
and increasing urbanisation in China, thereby stimulating the
services industry.
China’s competitiveness will decline,
however, if rising wages occur without concomitant increases in labour productivity
and innovation. With this in mind, China’s
government has identifi ed improving the
quality of China’s human capital as a key
objective. The core policy framework to
this end is the 12th Five-Year Plan (FYP) for
2011-15, which aims to engineer competitive
advantages for China based on science,
technology and innovation and to make
China an industrial leader in certain strategic
industries. During the previous FYP of 2007-11, China’s
expenditure on R&D increased by 22% annually, and in 2011,
R&D spending is estimated to reach 1.85% of GDP.8
China’s output in academic publications has soared in the
last decade, reaching 112,000 in 2008 (8.5% of the global
output), and Chinese research publications have become
leaders in the fi elds of materials science, physics, chemistry
and mathematics. Chinese patent applications to the World
Intellectual Property Offi ce (WIPO) increased from 23,000 in
1996 to 290,000 in 2008. Yet in terms of academic papers,
Chinese contributions are reportedly still lacking so-called
high-impact articles, and the quality of its patents have not
been matched by its quantity as incentives for fi ling patent
applications have produced a large number of minor design
and utility patents.
A small but growing number of Chinese companies have
actually reached or are approaching the ‘technological
frontier’ in their respective industries. These include ZTE
and Huawei in the ICT industry, Suntech Power in the solar
industry and Dalian Machine Tool Group in engineering.
Huawei, for example, has developed the world’s fi rst ‘100G’
technology capable of delivering large amounts of data
wirelessly over long distances. Chinese companies – both
state-owned and private – are excelling in areas such as PVCs,
biopharmaceuticals, nanotechnology, stem cell therapeutics,
high density power batteries, supercomputers, and shipping
containers. Chinese companies have also achieved results with
other forms of innovation, for example developing creative
business models to suit existing products.9
7 As China in 2030 points out, “Although the precise timing remains disputed, most researchers accept that China is at or nearing the Lewis turning point of exhaustion of the rural labour surplus, and the remaining rural working age population may be too old, sick, or disinclined due to family obligations to migrate to urban areas.”8 The 12th FYP aims to raise expenditure on R&D to 2.2% of GDP by 2015. Some countries have achieved a science & technology ‘takeoff ’ when this percentage approached 2%. 9 Broad Air Conditioning, for example, has developed a way to commercialise gas-powered air conditioning systems for large buildings.
State of change: The implications of a more competitive China
The current transitions in China’s economy and society have
broad implications for the new type of competition as well
opportunity that a more competitive China can hold. Foreign
companies in various industries are increasingly presented
with a competitive landscape signifi cantly altered by these
transitions in China.
For lower value-added products in industries where China has
long been dominant as a Low Cost Country (LCC) producer,
China is still to a large extent an attractive option. Yet whereas
procurement managers could previously focus their attention
solely on China, they are now increasingly considering China
as only one of a few options. Foreign companies sourcing
textiles and clothes from China, for example, will now fi nd
it attractive to source only some products from China, as it
still holds comparative advantage in areas such as industrial
variety and infrastructure, while increasingly sourcing selected
items from other Asian countries like India and Sri Lanka.
One industry that can serve as an illustration of China’s
increasing competitiveness is heavy industry. In this industry,
China has over the last few years begun to provide new options
for buyers of construction and mining machinery, challenging
the established industry leaders. In the period 2000-10, China’s
exports of heavy machinery grew by a CAGR of around 30%.
Chinese companies have been most successful in this regard
in developing markets, and have gained a small degree of
market share in countries like Brazil and South Africa, as our
next article How to Engage outlines.
This process is still at an early stage, and while China’s
construction equipment manufacturers, for example, are
now able to manufacture a bulldozer or a motor grader by
industry standards and make gains in market share on price,
these machines do not yet compete with the leading brands in
the market. Yet Chinese companies are making investments in
these countries and are systematically upgrading the quality
of their machines as well as their parts and after sales services
to become more competitive, following the example of the
likes of South Korea. The logical conclusion of this process
will be a Chinese bulldozer that is cheaper and basically just
as good as a Caterpillar bulldozer, providing an attractive
alternative for mining and construction companies. This
gound-breaking development may still be a few years away,
yet it is inevitable.10
The globally competitive and pioneering Chinese company
and brand are still under development, but the outlines have
started to take shape.
Barry van Wyk, Senior Consultant
10 In South Africa, the Chinese company Shantui recently opened a
large new facility and has launched an advertising campaign as ‘the
world’s leading maker of bulldozers’.
A small number of
Chinese companies
have reached or
are approaching
the technological
frontier.
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9 І The Beijing Axis
by reduced export rebates affecting the export price
competitiveness, more stringent energy and pollution
regulations leading to increasing costs, rising labour and
raw materials costs, and currency appreciation. For a few
years, Chinese manufacturers in these sectors were able to
maintain profi t margins by investing in new, more effi cient
manufacturing processes, but this game is
becoming increasingly diffi cult to play due
to rising costs of building new capacity in
China, including the rising cost of capital,
land and environmental compliance. Thus,
facing increased competition at home from
both existing producers with outdated
capacity and nimbler, more innovative
startups, Chinese manufacturers are
turning to product innovation and exports
as avenues for growth.
An article by the Economist Intelligence
Unit1 cites the evidence of Western
manufacturers losing market share in key
industries where they still dominate global
exports as evidence that Chinese producers are climbing
up the value chain. In centrifuges and filtering/purifying
machinery, for example, a USD 45 billion global exports
market, China doubled its market share from 3.5% to 7.1%
from 2007 to 2010, while OECD countries lost market share
1 See quotation and reference at the beginning of this article.
Gone are the days when the West had the luxury of worrying
about low-end textiles and shoe exports from China. The
future of exports from China will be led by equipment
manufacturers, and although they may not yet be penetrating
Western markets, competition in third markets is intensifying.
(EIU, 2011, ‘Heavy Duty: China’s next wave of exports’)
While China has steadily grown its manufacturing and export
base over the past 20 years to become the world’s largest
exporter, a status that has now become fi rmly entrenched
in the minds of procurement managers worldwide, a few
worrisome trends emerged last year that depict alterations
to the old China sourcing equation. Labour and raw materials
costs in China have seen a steady increase to a point where
many commodity-type goods such as textiles, toys and
simple carbon steel products can no longer be competitively
sourced from China, with China losing market share to
other Low-Cost Country (LCC) producers. Moreover, as we
noted in the September 2011 issue of The China Analyst,
the competitiveness of simple, labour- or raw-material-
intensive goods made in China has been further eroded by a
strengthening Chinese currency, government-imposed export
duties and quotas, the closure of old, polluting facilities, and
a reduction in subsidies which provide access to cheap land
and electricity.
So, since China is becoming more expensive, all one can do is
prepare for a lengthy trip to discover new suppliers in exotic
Asian locations, right? Wrong. The big picture tells a diff erent
story altogether.
The global, long term trend at work here is of course China’s
transformation into a middle-income country, one that is
industrialised, modern and aspires to become a leading
producer of high value-added manufactured goods. The
government has been promoting this for years, with every fi ve
year plan shifting resources to support knowledge-intensive
industries, encouraging investment in science and technology
education, and discouraging the exports of low-value added,
resource- or labour-intensive goods via various policies. As
an example of such policies, the 12th Five-Year Plan’s list of
priority industries includes high-end machinery, energy
conservation and clean technology (included among the
seven ‘Strategic Emerging Industries’).
On the other hand, ’discouraged’ industries get penalised
How to Engage: The Rise of New Chinese ManufacturersSqueezed from diff erent angles by the strengthening of the renminbi, rising costs for labour and raw materials, more stringent environmental regulations, push towards industry consolidation, and slack capacity in developed countries, Chinese machinery suppliers have no choice but to move up the value chain. They are producing increasingly sophisticated goods, but are still struggling to increase their effi ciency and adequacy of internal support processes. Buyers must be patient and invest more time in building relationships with suppliers to ensure that they can capture the benefi ts of China procurement while reducing its risks. By Lilian Luca
Facing increased
competition,
Chinese
manufacturers are
turning to product
innovation and
exports as avenues
for growth.
XEMC’s 220t haul truck. (Source: XEMC)
10 І The Beijing Axis
The China Analyst
in the same period, from 82.7% to 80.9%. The same trend is
visible in transmissions, gears, bearings, handling machinery
and other sectors (see chart above).
Most of these exports from China are, however, not going to
OECD markets, but rather to non-OECD countries, an example
of the so-called South-South trade relationship. Brazil, Russia,
and India are the major importers of machinery from China.
Incidentally, with growth stagnating in the developed world
in the aftermath of the global financial
crisis, China’s exports are going to markets
that are currently driving world economic
growth. They successfully compete in these
markets against established Western brands,
offering more affordable products with
simpler features and specifi cation sets while
more sophisticated, feature-laden Western
gear gradually lose their appeal to budget-
conscious emerging market buyers. In these
markets, where secure sources of capital
remain scarce and costly, upfront cost
considerations often trump lifetime costs
of ownership at which OECD machinery
exports perform better.
Chinese producers utilise a number of different ways to
climb the technology ladder. Many have successfully reverse-
engineered (and often improved upon) Western designs;
others are beginning to see the fruits of massive R&D
spending; and still others are trying their hand at acquiring
new technologies through M&A as evidenced by the shopping
spree being undertaken at the moment by Chinese fi rms in
Europe’s mid-size industrial sector. The heavy equipment
industry has some shining examples of leading Chinese
innovators moving up the value chain and making inroads
into the export markets: XEMC is introducing increasingly
sophisticated haul trucks (see picture on previous page),
Taiyuan Heavy (TZ) is becoming a world leader in open-pit
mine excavators, while ZPMC is the world’s top container
crane and gantry crane producer.
As machinery exports from China penetrate more markets, the
reality is that many Chinese suppliers are still unprepared to
adequately service foreign sales. Even though their machinery
is often simpler to maintain and less complex than that
from OECD countries, quality variability, lack of service and
limited spare parts supply networks, and lack of fl exibility in
commercial terms remain the biggest challenges when dealing
with Chinese manufacturers. As the sophistication of buyers in
emerging markets gradually increases, so will their demands
on Chinese products: availability of customised designs and
features, higher specifi cations and tolerances, availability of
credit terms and fi nancing options, transparent tendering
processes and pricing, and improvements in customer service
are some of the features they will demand in the coming years.
Chinese manufacturers will thus have to upgrade not only
their manufacturing capacities and product design and
R&D capabilities, but also their supply chain systems (ability
to monitor inputs for quality and timeliness), the interface
between their engineering departments and manufacturing
workshops, capabilities in the tendering departments
(sophisticated English-language commercial and legal support,
fast design change implementation and cost modeling), and
of course will have to put more solid internal quality assurance
processes in place which should become the norm rather than
the exception.
In the meantime, global procurement managers can already
actively investigate and engage with Chinese suppliers
offering more sophisticated machinery, high-tech spares
and consumables. This entails investing upfront time on
researching and traveling to production facilities, establishing
good working relations to open ongoing dialogues over
features and pricing, discussing service support options, and
working with suppliers to ensure a rock-solid quality control
process. In these unchartered territories, local support in
the form of procurement service providers experienced in
commercial and technical China procurement issues is often
indispensible and the key to achieving LCC procurement
targets within a manageable time frame.
Lilian Luca, MD: Beijing Axis Procurement
Bubble size: 2010 Global
export value (USD bn)
OECD Countries Global Market Share (2010)
With growth
stagnating in the
developed world,
China’s exports are
going to markets
that are currently
driving world
economic growth.
76
65 606051
45 43
36
36
31
2926
19
17
15
15
15
1514
12
10
0
2
4
6
8
10
12
14
16
18
55 60 65 80 95
Cruise ships, cargo ships, barges
Motorcycles,
side-cars
Chemicals in wafer form
Aluminium bars, rods and profiles
Tube or pipe fittings, of iron or steel
Refrigerators, freezers
Derricks, cranes
Electrical switching apparatus
Optical fibre, cables
Bearings
Air, vacuum pumps; hoods incorp a fan
Moving/grading/boring machinery for earth
Taps, cocks, valves for pipes
Construction/mining machinery parts
Centrifuges, filtering/purifying machinery
Lifting/handling/loading machinery
Transmission shafts/cranks, gears
Electrical ignition/starting equip
Heating/cooling equip for plant/lab use
Fork-lift trucks, trucks with
handling equip
Self-propelled bulldozers, excavators
Pumps for liquids; liquid elevators
Harvesting/threshing machinery
124
Increase in China’s Market Share of Select Product Categories (%, 2007-10)
Source: Economist Intelligence Unit; The Beijing Axis Analysis
Ma
rke
t S
ha
re In
cre
ase
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11 І The Beijing Axis
Chinese OFDI: Bolder, Wiser and More Strategic Unlike the initial wave of overseas investment led by China’s dominant state sector in their
purchases of mining and energy companies in resource-rich regions, the current M&A activity
is emerging as a key enabler of consolidation, growth, market positioning and the acquisition
of strategic assets and expertise for Chinese companies. Forward-looking Chinese companies
now consider overseas investment as a viable approach towards moving up the value chain by
gaining access to foreign brands and technology. By Daniel Galvez
The most
competitive Chinese
fi rms realise size
alone will not
guarantee long-
term success in the
domestic market.
With China’s rapid economic ascent and subsequent
transformation into a market-based economy,
Chinese companies are now expanding abroad and
going global not only per the government’s mandate, but
also to reduce their reliance on China’s economic growth by
expanding into new markets. At the same time, market forces
are inducing them to acquire or gain access to sophisticated
technologies through strategic mergers and acquisitions
(M&A), at increasingly favourable prices, to raise their level
of competitiveness. China’s overseas acquisitions in the
non-fi nancial sector, which reached a record USD 60.1 billion
in 2011, will continue as increasingly sophisticated Chinese
buyers seek bargains amid the downturn among developed
economies, especially in Europe (see chart below).
Over the short term, the ongoing euro zone debt crisis will create multiple opportunities for active Chinese investors, giving them easier access to technologies they have long coveted in the European and other developed markets. Our article in this issue, China in Europe: Cash, Debt and M&As, dives further into this trend. But what are the new driving forces behind the current wave of Chinese OFDI? And what are the strategies being employed by Chinese companies to successfully close deals in the natural resources and industrial sectors, which continue to comprise the bulk of Chinese OFDI
deals? (see chart below)
Shifting focus
As China’s economy moves into a new phase, the focus of
Chinese investment abroad is also shifting, with greater
attention being placed on advanced manufacturing,
technology and science-based industries. Unlike the initial
wave of overseas investment led by China’s dominate state
sector in their purchases of mining and energy companies
in resource-rich regions, current M&A activity is emerging as
a key enabler of consolidation, growth, market positioning
and the acquisition of strategic assets and expertise.
Forward-looking Chinese companies now consider overseas
investment as a viable approach towards
moving up the value chain by gaining
access to foreign brands and technology.
Likewise, while global leaders in the heavy
machinery sectors have a significant
presence all around the world, they mostly
come from developed countries. However,
leading Chinese construction equipment
makers such as Sany Heavy Industry are
quickly catching up, displacing previous
industry leaders from the top 10 in terms
of sales through both organic growth and
strategic acquisitions (on next page).
Chinese companies have also shown a bigger appetite
for relatively riskier assets compared to their peers from
developed countries. In other words, Chinese companies
are beginning to realise the intangible benefi ts from making
purchases overseas. But why exactly are Chinese becoming
bolder, looking for acquisitions outside their own borders? It
is becoming increasingly well-known that Chinese companies
are not only concerned about becoming bigger and increasing
their market share in the short term, Chinese companies are
China’s Outbound M&A by Region (USD bn, 2010-11)
0 3 6 9 12 15
20112010
Africa
South America
Australia & New Zealand
North America
Asia
Europe
Source: A Capital; The Beijing Axis Analysis
China’s Outbound M&A by Sector (%, 2010-11)
Automotive
Industry
Services
Chemicals
Resources
20112010
15%
7%
14%
3%
61%
1%
12%
14%
22%
51%
Source: A Capital; The Beijing Axis Analysis
12 І The Beijing Axis
The China Analyst
seeking to invest in assets abroad that will better position
them at home, relative to their domestic rivals, as well gain
a foothold in new markets over the long term. The most
competitive fi rms realise size alone will not guarantee long-
term global success; technological know-how enhances long-
term competitiveness, and puts them in a better position to
compete against western rivals in their own home markets.
For example, aforementioned Sany recently opened a USD 60
million offi ce and assembly plant in the south-eastern US in
2011, its largest such facility outside China, to help realise it’s
long term goal of eventually manufacturing excavators in the
US to directly compete against industry-leading Caterpillar
on its home turf. So while industry consolidation is still being
encouraged to facilitate the development of China’s own
‘global champions’, China’s fast-rising global competitors are
now letting their global ambitions drive their strategies rather
than relying on government policy alone.
New trends
It’s widely known that China’s energy policy has increased
its focus on commercial ties with countries rich in natural
resources and related technologies, and more specifically
those that can help China unlock its huge
reserves of unconventional (shale) natural
gas. Of the roughly USD 18 billion that
Chinese state-owned enterprises spent
buying oil and gas companies in 2011,
nearly one-third (USD 5 billion) was invested
in Canada’s resource sector. In October
2011, Sinopec acquired the Canadian fi rm
Daylight Energy Ltd. for USD 2.2 billion in
order to gain access to Canadian shale-gas
reserves which marked Sinopec’s largest
foreign acquisition of the year. In 2012,
PetroChina completed its acquisition of a
minority (20%) stake in a Royal Dutch Shell
shale-gas project in Canada, which will allow the company to
use any advanced technology to which it gains access to for
its own exploration and development purposes back in China.
Major Chinese energy fi rms have also shown a strong interest
in the US, whose fi rms, along with those in Canada, lie at the
forefront of shale gas technology and are gradually warming
to Chinese investment partly because of cash shortages and
the potential for future exploration opportunities in China.
China National Off shore Oil Corporation (CNOOC), China’s
largest off shore oil and gas producer, has shown a particular
interest in Chesapeake Energy’s assets, investing USD 3.43
billion since October 2011 in two separate deals. In these
deals, Chesapeake (the second-largest US natural gas supplier
and most active American natural gas driller) gets a cash boost
to help pay back its USD 10.3 billion debt load and remains the
operator of these projects, lessening the likelihood the deals
will face regulatory opposition. In exchange, CNOOC gains
exposure to the complicated shale gas extraction technology it
lacks. In other words, China is forgoing ‘big splash’ investments
and opting for smaller, more strategic assets under the radar.
So what’s driving this quest for shale gas technology? Chinese
energy companies are racing to meet China’s aggressive
production growth forecasts to power the country’s fast-
growing economy. In fact, Beijing recently announced it
would invest USD 13 billion to switch the city’s coal-fi red
power plants and heating facilities to natural gas in a move
aimed at addressing public concern over the city’s poor air
quality, with other cities sure to follow. Likewise, according to
the Energy Information Administration (EIA), China is believed
to have vast reserves (36 trillion cubic metres) of natural gas
trapped in shale rocks, a quantity roughly 12 times the size
of China’s conventional natural gas deposits. In June 2011,
China National Petroleum Corp (CNPC), the country’s largest
energy producer and PetroChina’s parent, formed a joint
venture with Shell to improve its own shale-gas well drilling
effi ciency. Subsequently, in March 2012, the fi rms announced
their partnership had reached new heights with the signing
of a production sharing contract to develop a shale gas
block in China, the fi rst such deal in the country. Increased
domestic demand along with untapped shale gas reserves is
strengthening the competitive rivalry among China’s energy
giants, forcing them to buy strategic assets overseas from
their existing partners in order to become more competitive
in China.
China’s construction equipment manufacturers have also
shown a keen interest in acquiring new technologies through
foreign acquisitions (see chart below). At the beginning of
2012, Sany announced that it would acquire Putzmeister, a
German Mittelstand company and also the world’s largest
manufacturer of high-tech concrete pumps. Together with
Citic PE Advisors, a Chinese private equity company, Sany
will acquire all of Putzmeister for USD 473 million, with Citic
retaining a minority shareholding. This follows Zoomlion’s China is forgoing
‘big splash’
investments and
opting for smaller,
more strategic
assets under the
radar.
Ten Leading Global Construction Equipment Makers
(Annual Sales USD mn, 2007 vs. 2011)
0
5
10
15
20
25
30
20112007
TerexSanyZoomlionXCMGSandvikLiebherrVolvoHitachiKomatsuCaterpillar
*Note: XCMG, Zoomlion and Sany were not ranked among the top 10 in 2007
Source: China Construction Manufacturing Online; The Beijing Axis Analysis
Others12.0%
Germany7.5%
Sweden11.4%
China16.0%
Japan24.9%
US28.3%
Market Share by Country (2011)
China’s Construction Machinery Industry Outbound M&A
(2005-12*)
0
50
100
150
200
250
300
350
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
% of China Overall Outbound M&A (%) (rhs)
Value of Deals (USD mn) (lhs)
20122011201020092008200720062005
*Note: As of 6 March 2012
Source: Thomson Reuters; The Beijing Axis Analysis
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13 І The Beijing Axis
(Sany’s domestic rival) purchase of Italian concrete pumps
maker CIFA back in 2008. Following Sany’s announcement,
speculation has grown that XCMG is preparing to bid for full
control of Germany’s Schwing GmbH, the world’s second-
largest concrete machinery manufacturer while Guangxi
Liugong Machinery Co. recently unveiled plans to acquire
the engineering machinery unit of a Polish company, Huta
Stalowa Wola SA, for USD 62 million. However, simply stating
Chinese construction equipment manufacturers are solely
after technologies would be inconclusive.
China’s increasingly globally competitive construction
gear makers are not only buying production capacities
and technology, they are also after brand recognition and
established distribution networks, which will China realise
its three-year goal of becoming the world’s top exporter in
the USD 150 billion global market for equipment such as
bulldozers, excavators and forklifts. Their post-acquisition
strategies are also changing. Zoomlion became the first
major Chinese construction gear maker to retain a foreign
management and production team when it bought CIFA, a
move that extended its presence to more than 70 countries.
Similarly, when announcing the Putzmeister deal in January,
Sany stated that Germany would become its new headquarters
for concrete machinery outside China. The country’s largest
bulldozer-maker, Shandong Heavy Industry Group, also said
this year it would keep the management and production
base of its latest acquisition Ferretti in Italy, to build up its
technological know-how. Globally ambitious Chinese fi rms
are realising that the value of acquired assets lies not only
in patented technologies, but also in the intrinsic value a
company possesses in its management and employees.
Likewise, with employment sagging in Europe, Chinese moves
to retain jobs are welcomed and will likely make regulatory
approval easier.
Political and corporate hurdles
Chinese companies have their own unique hurdles when
attempting to make acquisitions abroad, often dealing with
unfavourable political environments which adds another
obstacle for Chinese companies to win bids, even if cash is not
an issue. In one of the most cited cases of strong government
opposition to potential Chinese takeover, in 2005, CNOOC
withdrew its USD 18.5 billion bid for Unocal due to strong
opposition from US government regulators and politicians.
Looking back, among other factors, the failure of the case could
be attributed to a relative lack of diplomacy and common
understanding between the two countries at that time, which
made it nearly impossible for the Chinese government and
companies to drum up reputable counter arguments to stem
opposition and address concerns. Nowadays, it can be argued
that China’s central government and its leading fi gures are
more versed in the ‘art of diplomacy,’ which often spills over
into the business arena. Nowadays, state visits by China’s
leaders are accompanied by high-profi le trade and investment
deals. It can be argued that environmental changes are also
making it easier for Chinese companies to seal attempted
deals overseas. For example, CNOOC’s recent investments
are now aligned with global eff orts to curb greenhouse gas
emissions and also reiterate the U.S.-China Shale Gas Resource
Initiative announced in 2009, a policy which simply did not
exist four years prior.
At the corporate level, the major hurdle for potential Chinese
investors is that some foreign companies have blatantly
showed an unwillingness to transfer technologies or brands
to Chinese companies, in a futile attempt to retain long-
term competitiveness. For example, the planned purchase
of Swedish car maker Saab by China’s Pangda Automobile
Trade Co. Ltd. was aborted after General Motors Co blocked
the deal. Likewise, historically, the engineering expertise
and strong brands of German Mittelstand companies are
highly attractive to potential foreign buyers but tight family
control has been a barrier to widespread Chinese takeovers in
Germany. Nonetheless, in addition to Sany’s recent purchase,
other German Mittelstand companies now in Chinese hands
include Waldrich Coburg (Beijing No. 1), a maker of milling
machines, and Dürrkopp Adler (Shang-Gong Group), a maker
of industrial sewing machines, which suggests the notion that
once reluctant overseas investors are warming up to Chinese
investors. In addition to shifting perceptions and attitudes,
Chinese companies are beginning to circumnavigate these
prejudices by buying the foreign assets of other companies,
a trend which can clearly be seen in recent Chinese deals
throughout Latin America.
A sign of things to come
Relative to the size of its economy, China’s overseas investments
remain quite modest. The total stock of investment abroad
rose to 5.3% of China’s GDP in 2011, up from just 2.6% in
2001, but it remains well below the average of 27.7% for
OECD countries. Moving forward, Chinese enterprises will not
only have the money, but also the motive and opportunity to
spend an additional USD 560 billion on overseas investments
in the next fi ve years. Chinese companies are taking advantage
of the crisis, acquiring strategic assets overseas which
will empower them to move toward the frontier of global
competition. Additionally, the People’s Bank of China recently
released the most detailed public proposal yet for loosening
the government’s strict capital controls, a move which will
only spur Chinese companies to buy up far more American
and European assets, which have become more aff ordable by
the global fi nancial crisis.
However, doing deals with China is complex and can pose
special integration challenges for both sides due to cultural,
business and political diff erences. For Chinese companies
and their new partners, the key lies in maximising synergies
once the above obstacles are overcome. Looking ahead,
Chinese companies will have more tools, more experienced
and seasoned M&A professionals and a greater overall
understanding of the complexity of cross-border M&A
processes, a good recipe for success in future Sino-foreign
M&A deals.
Daniel Galvez, Consultant
14 І The Beijing Axis
The China Analyst
In Q4 2011, China reported GDP growth of 8.3%, down from
9% in Q3 and 9.6% in Q4 2010, achieving an average rate
of 8.9% for the whole year (see chart to the right). Leaving
aside any long term trend benchmarking, this growth is still
impressive. However, even though moderation was expected
and even welcomed, some observers have raised concerns
about the large drop between Q3 and Q4, compared to the
rates observed in the previous three quarters. Sceptics were
quick to discern the beginning of China’s economic collapse,
while the devotees of China’s growth miracle argued for the
positive eff ects of the cooling economy, which should result in
moderation of infl ation and reduction in overinvestment, thus
curtailing any further bubble trends. But what about China
itself?
Changing weather conditions
Premier Wen Jiabao stated that slowing growth, combined
with persistent price infl ation, adds new challenges to the
management of the second-largest economy in the world.
However, the disinfl ationary process appears to have already
kicked in during Q4 of 2011. In December, China’s CPI
moderated to a 15-month low of 4.1%
y-o-y, while PPI experienced a sharp
decline due to significant decreases
in both the international prices of
raw materials and domestic demand
(see chart below). China’s official PMI
recovered in December 2011 as new
orders edged up, capacity utilisation
added 9.3 points, hiring stepped up and
credit conditions jumped 15.9 points, but an overall stable downward trend
persisted through the year. On the other
hand, retail sales kept fi rm, increasing in
2011 by 17.1% y-o-y, supported by further growth in wages
and incomes per capita, while export growth continued a
steady decline with December 2011 showing the slowest
export growth since February 2011 (see chart on next page,
left).
Focusing more closely on exports, one can see that trade with
the Eurozone, Japan and the United States have continued
a stable decline in 2011 (down by another 2.3% from 2010),
while intraregional trade with ASEAN economies grew
further, adding another 4.2% to the total (see chart on next
page, top right). At the same time 29.3% of total government expenditure in 2011 went towards further strengthening
consumption via increased education and better social safety
nets such as healthcare insurance. Finally, these trends are
observed against the backdrop of a moderate decline in fi xed
asset investment (-0.4% in 2011), stable average month-on-
month growth (2.3%) in property sales (compared to 14.1%
in 2010) and a 5.2% growth rate (2011) in new passenger
car sales, forecasted by the China Association of Automobile
Manufacturers to grow between 5% and 8% in 2012.
Although it is still early days, these observations reflect
potentially new long-term trends. As China can no longer rely
on exports of manufactured goods to the rest of the world for
sustaining its own economy, increased domestic consumption
must gradually become the main engine of the economy.
Enormous production capacity was created
Macroeconomic Monitor:China in 2012 - Soft Landing?This year marks the beginning of a trying period for China’s economy. As it aims for a soft land-ing, it will fi nd itself in the midst of a fundamental transition, and the economic indicators have already begun to refl ect these new trends. By Kirill Riabtsev
The fi gures closing 2011
suggest that the shift
towards greater reliance
on internal demand
away from exports has
already started.
Source: CNBS; The Beijing Axis Analysis
China’s Quarterly GDP Growth (%, 2007-11)
0
2
4
6
8
10
12
14
16
Q4Q3Q2Q1 11
Q4Q3Q2Q1 10
Q4Q3Q2Q1 09
Q4Q3Q2Q1 08
Q4Q3Q2 Q1 07
4-year average, 2007-11: 10.6%
Impact of global financial crisis
Government
stimulus package
(USD 586 bn)
Policy easing for growth moderation
2011 full year growth rate: 9.2%
Source: CNBS; The Beijing Axis Analysis
China’s Infl ation Rate (%, 2008-Feb 2012)
-2
0
2
4
6
8
10
-20
-10
0
10
20
CPI (lhs) PPI (rhs)
Jan 12
JulJan 11
JulJan 10
JulJan 09
JulJan 08
Effect of stimulus plan
Tightening of monetary policy to avoid hard landing
15 І The Beijing Axis
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through large fi xed asset investments over the past decade to cater for export-led growth in manufacturing. The 12th Five Year plan, however, rolled out at the beginning of 2011, was underpinned by the need to transform China’s economic growth mode away from investment and exports and more towards consumption. The fi gures closing 2011 suggest that the shift towards greater reliance on internal demand away from exports has already started (slowly, but that would be expected).
This shows how quickly China can begin reorganising and remodelling its economy with top-down coordination and quick reactions from all key sectors of the economy. Increasing social spending, stabilising (not radically falling or persistently rising) trends in the housing market and fi xed asset investments, as well as emerging disinfl ationary trends against the backdrop of moderately growing real per capita incomes, and a robust outlook on key consumer goods (e.g. passenger car sales), indicate that the wheels have started to turn in the right direction and China is beginning to shift away from an outward-focused towards an inward-driven economy.
Yet key challenges remain. Managing aggregate demand is arguably a much more tricky process than managing aggregate supply, as the economies of the West have recently demonstrated. A massive monetary injection into the system does not always serve as an automatic stabiliser of falling consumption, if underlying perceptions of the consumers are negative. In China, the desired rate of growth in consumption on the back of policy stimulus may be constrained by the traditionally high propensity to save. In light of that, Beijing must fi nd the balance between curbing infl ation and preventing a hard landing. A monetary stance that is too tight will combat infl ation but undermine growth in the short term, possibly to the point of a hard landing; easing too quickly will mean that infl ation will recur which will undermine growth and structural integrity in the longer term. In fi nding the balance, Beijing must interpret complex domestic and international developments. A weak global backdrop in developed countries, especially in Europe, adds
considerably to the risks in balancing policy.
Soft landing, but bumpy approach
Our view is that China’s growth will soften further in the fi rst
half of 2012, but the slowdown will not be severe. Hence, we
do not see a hard landing. We expect China’s GDP growth to
ease to around 8.5% in 2012 (from 9.2% in 2011 and 10.4% in
2010). Beyond 2012, we see GDP growth of 7.5-8.5% over the
period 2013-2015. But this period will present the biggest
policy challenges to Beijing in 30 years, and it will be necessary
to carefully gauge the relevant risks. Given the overheating
pressures during much of the period from 2002 to 2011, more
moderate growth is desirable and indeed more sustainable –
provided that China grows at around 7.0-7.5% or more – which
will still allow Beijing to deal with its social and development
agenda. Even with moderation in GDP growth, the investment
sector will remain an important driver. Infrastructure
development and social housing will be a
focus as private sector real estate growth
is curtailed. Increasingly, consumption
will complement investment as a driver
while China’s broad-based transformation
continues. Both underpin ongoing
commodity demand, providing a
generally sound backdrop for resource
producers such as Australia, Africa and
Latin America.
The above represents a base-line view.
However, uncertainty continues to linger
in Europe. There is a possibility of a
marked further deterioration in the fi scal
landscape, and even a break-up of the
Euro. A severe deterioration would have a
negative global impact and not less so for China. The relevance
of the Eurozone crisis for China has been demonstrated by
recurring discussions between Chinese and European leaders
on the possibilities of China providing funds to the troubled
economies of the EU. At the same time, in the last week of
December 2011, China began discussing currency pairing
arrangements with Japan and announced currency swaps
with some of its Southeast Asian trade partners.
These moves indicate that while China recognizes that, in the
longer run, greater reliance on the domestic consumer is the
way forward, over the short and medium term, such change
must be supported by signifi cant reorganisation of trade fl ows,
and further shifts away from troubled developed markets and
increasingly more towards emerging economies. In the short
run, net exports will remain the backbone of China’s growth,
and given global weakness in developed markets, substantial
uncertainty about their performance persists. A positive eff ect
of this, however, is that such uncertainty will further shift the
economy towards domestic demand and may signifi cantly
speed up this positive transition, which, according to the 2011
fi gures at least, has already started.
Kirill Riabtsev, Senior Project [email protected]
While in the longer
run greater reliance
on the domestic
consumer is the way
forward, over the short
and medium term
such change must be
supported by signifi cant
reorganisation of trade.
Source: Morgan Stanley; The Beijing Axis Analysis
China’s Export Destinations (2001-Nov 2011)
0
20%
40%
60%
80%
100%
Other
ASEAN
H. Kong
Japan
US
EU
2011(Nov.)
2010200920082007200620052004200320022001
-11.9%
China’s Imports and Exports (USD bn, 2010-Feb 2012)
0
40
80
120
160
200
-20
0
20
40
60
80
100
Imports Y-o-Y Growth (rhs)
Exports Y-o-Y Growth (rhs)Imports (lhs)
Exports (lhs)
JanNovSepJulMayMarJan11
NovSepJulMayMarJan10
Mar. 2010: Negative
trade balance
Feb. 2011: Negative
trade balance
Source: CNBS; The Beijing Axis Analysis
The China Analyst
16 І The Beijing Axis
China Sourcing Strategy: The Purchase Positioning MatrixGlobal purchasing managers sourcing from China face a myriad of options on setting up their Chinese procurement operations. Whether it be a direct structure such as a rep offi ce, off shore structure, joint-venture, and WOFE; or to completely outsource operations to a trading company or third-party service providers, each option has its own pros and cons. Understanding the Purchase Positioning Matrix can help companies determine the most suitable procurement structure to set up in China. By Li-Chia Ou
The Purchase Positioning Matrix: A Tale of Two Axes
Based on ‘The Portfolio Instrument’ developed by Dirk-Jan F. Kamann (which is itself based on Kraljic’s 1983 purchasing model), the Purchase Positioning Matrix is a
framework for buyers to develop their supplier relations
strategy by examining their sourcing needs in terms of
sourcing value and sourcing complexity. The Matrix can
be represented by the following illustration:
The matrix has two axes, an x-axis that measures the
complexity of the procurement needs (low complexity
would be sourcing simple commodities such as pumps;
high either complexity would
be missile systems), and a y-axis
that measures the procurement
value (which can be high because
the purchase item is expensive,
e.g. an aircraft, or because the
purchase volume is large, e.g. USD
100 million’s worth of pumps). A
procurement need is considered
complex if there are no more than
four suppliers that can meet the
manufacturing requirements,
otherwise it is regarded as
simple. A procurement need
is considered high value if the
procurement value for a product
group or from a country is more than 3% of the total
procurement value.
Based on these two axes, the matrix can be divided into
four quadrants with corresponding values of sourcing
complexity and value: Bottleneck (high, low); Routine (low, low);
Leverage (low, high); and Strategic (high, high).
The Bottleneck Position: Stuck in No Man’s Land
(Lower right quadrant – Low value, high complexity)
Procurement in this quadrant tends to focus on specialised products from unique suppliers that are not very expensive. Typically, OEM products belong to this quadrant. Avoid this position if possible. The best strategy is to look for standard substitutes that are widely available. International buyers in the Bottleneck position, however, do not have readily available and economically sensible options available to them in selecting a procurement structure in China. The complex procurement requires a more formal business structure in order to establish partnerships with suppliers. This makes establishing a rep offi ce or outsourcing not the most suitable options, yet the low procurement values also do not justify the expense of a JV or WOFE structure.
To make matters worse, the supplier has all the power in this position as their product is of high complexity or rare, while the buyer cannot effectively leverage economies of scale. The lack of appealing options in establishing a procurement structure, combined with low buyer power means that buyers should avoid being placed in this position as much as possible and try to seek out substitute products. If, however, foreigner buyers fi nd themselves unable to extract themselves from this position, perhaps the best way is to adopt a fl y-in fl y-out approach until they fi nd a substitute product.
China example: China’s rare earth metals industryCurrently China has a near monopoly on the rare metals industry, supplying around 95% of global exports. However, due to the industry’s damaging impact on the environment, the Chinese government is consolidating the industry. A single government-controlled monopoly, Bao Gang Rare Earth, has been created to mine and process ore in northern China, the region that accounts for two-thirds of China’s output, while production from southern China will be consolidated into three companies in the near future. The government has already ordered 31 mostly private rare earth processing companies to shut down and is forcing four others to merge with Bao Gang. Along with industry consolidation, China is also tightening export quotas, which has sent the price of rare earth metals soaring, impacting a long list of industries. For example, the average price for fl uorescent bulbs (using the rare element
europium oxide), rose by 37% in 2011.
The Routine Position: Lather, Rinse and Repeat
(Lower left quadrant – Low value, low complexity)
The Purchase
Positioning Matrix is a
framework for buyers to
develop their supplier
relations strategy
by examining their
sourcing needs in terms
of sourcing value and
complexity.
Routine
(Low, Low)
Bottleneck
(High, Low)
Strategic
(High, High)
Leverage
(Low, High)
Complexity
Val
ue
Low High
High
The China Analyst
17 І The Beijing Axis
The Strategic Position: Towards a Win-Win Rela-tionship
(Upper right quadrant – High value, high complexity)
Procurement needs in this quadrant are characterised by high costs and unique suppliers. Here, co-operation and long-term relations that gradually grow deeper are typical features. Relations rather than contracts are an issue; usually, in regards to contracts, they last fi ve years or the total production life cycle of a particular product.
International buyers in the Strategic position have complex procurement needs and high procurement values, which makes it worthwhile to set up a more formal business structure, such as a WOFE, in order to form strategic relationships with the limited number of suppliers. A company may even consider partnering with an existing supplier in China by forming a joint venture in order to obtain exclusive distribution rights or to be able to better manage the design/production process for the products produced by that supplier. Due to the highly strategic and sensitive nature of the buyer-supplier relationship in the Strategic position, relying on agents and trading houses for procurement needs is no longer suitable.
China example: Commercial Aircraft Corporation of China (COMAC)COMAC, a Chinese state-owned corporation, is a new entrant in the larger passenger aircraft industry and has the potential to break the Boeing/Airbus duopoly. COMAC has already signed an agreement with Irish airline Ryanair, Europe’s largest discount airline, to cooperate in the development of China’s large passenger aircraft, the C919. According to the deal, the two companies will work together in research and development, airworthiness and customer services on the C919 project. The C919’s
fi rst test fl ight is planned for 2014.
Putting the pieces together
With an understanding of the Purchase Positioning Matrix, global procurement mangers can now identify where they belong on the matrix and hopefully avoid some costly mistakes, such as setting up a WOFE structure or expensive JV when they are in the Bottleneck or Routine position. As a general rule, starting from the ‘Bottleneck’ position, buyers should strive to move in a clockwise direction with the goal of ultimately ending up in the ‘Strategic’ quadrant. This will be a natural transition for international buyers in China to move towards anyway, especially as China moves further up the value-chain, away from labour-intensive, low value added manufacturing into high-tech, R&D-intensive industries
currently largely dominated by developed countries.
Li-Chia Ou, Senior Consultant
Procurement in this quadrant usually focuses on more routine products which are easily available and cheap. Here, organisational costs can be more important than the invoiced costs. Suppliers should be selected on their ability and willingness to reduce the costs of logistics.
International buyers in the Routine position have the most options when choosing a procurement structure in China. If the procurement values are very low (less than 1% of the total input value) and the complexity is simple, it makes more economic sense to just outsource the entire procurement operation to a qualifi ed service provider, such as a PSP or trading company. If the procurement value is closer to the 3% threshold, establishing a rep offi ce (whether from headquarters or off shore) should be considered, since with higher procurement values, more extensive use of service providers will be needed. Thus, it makes sense to establish a permanent offi ce to ensure the quality of service providers. WOFE or JV structures are not economically justifi able.
China example: AlibabaAs the ‘factory of the world’, its no surprise that China is home to the world’s largest online business-to-business trading platform for small businesses, Alibaba. Claiming to have more than 65 million registered users, Alibaba is a transaction-based wholesale platform that brings together importers and exporters from more than 240 countries and regions. For buyers with limited procurement needs in China, Alibaba provides another channel for them to source small quantities of goods at wholesale prices from China.
The Leverage Position: Maximising Economies of Scale
(Upper left quadrant – High value, low complexity)
Procurement needs in this quadrant are characterised by high volumes in monetary terms and the availability of ample suppliers for the same product. Because of the volume, various discounts become available. This further reduces other organisational costs, such as ease of ordering, lead-time, fl exibility, and payment terms, among others. In this position, buyers have substantial power over suppliers.
A rep offi ce structure, whether from headquarters or off shore, is the most suitable one for international buyers in China in the Leverage position. The high value of procurement from China makes it economically worthwhile for the company to set up a rep offi ce in China. The key to making this work is the frequent use of service providers. Although branch offi ces cannot directly import/export, it can chose from plenty of service providers in China that can provide this function. From a savings-to-cost ratio, this makes the branch offi ce highly scalable since it is much easier to use or not use service providers than to hire or fi re direct employees. Furthermore, since the purchase complexity is low, companies can comfortably outsource procurement operations in China without having to send their own personnel, leaving the branch offi ce to take care of routine supervision duties.
China example: WalmartWalmart is the world’s largest retailer and grocery chain by sales. In 2011, Walmart reported USD 422 billion’s worth of revenue, which is more than its fi ve closest competitors combined, including Target and Tesco. Because of its mammoth size and buying power, Walmart can leverage economies of scale to pressure suppliers to accept lower margins in exchange for high purchase volumes. Many suppliers give in to Walmart’s pressure because they depend on the discount retailer for a majority of their sales. To keep its prices even lower, Walmart sources extensively from China, and has established its Global Merchandising Centre in Shenzhen. Walmart’s purchase volumes from China are so substantial that if Walmart were a country it would be China’s sixth largest export country.
Buyers should strive
to move in a clockwise
direction with the goal
of ultimately ending
up in the ‘Strategic’
quadrant.
The China Analyst
18 І The Beijing Axis
How to Procure from China #9 - Transaction MonitoringThe Beijing Axis Procurement Process Flow encapsulates the full extent of project engagement, from
the point of fi rst enquiry to the range of services in the solution process and benefi ts provided for the
customer. In this edition we focus more closely on step 9 of the Beijing Axis Procurement Process Flow:
Transaction Monitoring.
Beijing Axis Procurement Guidelines for Transaction Monitoring
Beijing Axis Procurement monitors the transaction execution by
either assisting the client or by acting on their behalf. Potential risks
during the transaction will be an incomplete understanding of the
technical aspects of the contract, as well as the schedules, quality,
potential cost increases and crises which might occur at any time.
Understanding technical contract: The fact that a Chinese supplier
has signed the technical contract does not mean that they fully
understand it and will comply with it. This could be caused by many
reasons, such as a language barrier for the technical terms, diff erent
industry conventions (the default in the client’s country might not
be the same as in China), poor internal coordination in the supplier’s
organisation, etc. Beijing Axis Procurement provides assistance with
technical clarifi cation and with coordinating the supplier’s various
departments to ensure full comprehension. Whenever necessary,
Beijing Axis Procurement will summarise all the potentially risky
technical issues and discuss these with suppliers. With proper
outsourced technical support for some large projects, Beijing Axis
Procurement can provide technical solutions to bridge the client’s
requirements and suppliers’ capabilities in a more economic and
practical way so that the transaction can proceed.
Potential cost increases: Even though low product costs appear
to promise large savings when the contract is fi rst signed, global
procurement managers often fi nd that the contract execution cost
for purchasing from China can severely complicate the transaction.
Such potential costs include costs for hiring inspectors, flights
and accommodation for sourcing and technical teams, cost for
amendment of the contract based on the revision of technical
requirements, etc. Beijing Axis Procurement helps clients to manage
these costs at the beginning of the transaction, by for example:
• Carefully analysing costs when the contract is signed;
• Managing the costs:
• Negotiating whenever necessary with suppliers and
third parties;
• Planning trips in an economic and effi cient way;
• Operating locally in China or even in suppliers’ workshop
on behalf of clients
• Recording and regularly reporting on costs to clients
Crises: Due to many uncontrollable elements, there will always be
sudden crises in any transaction. Beijing Axis Procurement will assist
clients to decide whether the transaction should proceed. If the crisis
is not serious enough to break the deal, Beijing Axis Procurement will
produce solutions to enable the two sides to reach an agreement
and maintain the relationship, which sometimes is more important
than dealing with the crisis itself. If the crisis is serious and the risk is
too high, Beijing Axis Procurement will help clients to negotiate with
suppliers to minimise the loss and fi nd alternative solutions for clients
to maintain supply.
By Beijing Axis Procurement
The Process Flow and Service Delivery Platform of Beijing Axis Procurement
Procurement
Needs Analysis &
China Procurement
Competitive
Analysis
Commercial
Process,
Contracting
and Contract
Management
Transaction
Monitoring
Systematic Industry
Search & Supplier
Identifi cation
Tender Evaluation
Quality
Management (QA/
QC), Expediting
and Third-Party
Management
Supplier Evaluation,
Application of high-
level fi lters
Site Inspection,
Sample Testing and
Standards
Logistics
Management
Supplier
Engagement, RFQ &
Tendering (SOI, RFP)
Coordination &
Assistance On Site
(Material Mgmt,
Commissioning,
etc.)
1
8
9
2
7
10 11 12
3
6
4
5
StrategicSourcing Analysis
Initial Scoping, Supplier
Evaluation, Due Diligence
& Final Selection
Engagement
Supplier Engagement,
Site Inspections, Sample
Testing, Contracting
Process
Transaction Monitoring,
QA, Expediting, Third-
Party Mgmt & Logistics
Supply Chain Mgmt & Support
• Overall Project Management
• Holistic Risk Management
• Strategic Relationship Management
Supplier
Pre-Qualifi cation,
Due Diligence &
Final Selection
The China Analyst
19 І The Beijing Axis
China Capital: Inbound/Outbound FDI & Financial Markets
In 2011, FDI into China amounted to USD 116 bn,
up by 9.72% y-o-y. However, FDI decreased y-o-y
for four consecutive months from November 2011
to February 2012. China’s outbound investment
in 2011 reached USD 60.1 bn, registering a slight
growth of 1.8% y-o-y. Significant investments
occurred both in the resources and non-resources
sectors. By Beijing Axis Capital
Foreign Direct Investment into China
Summary
• In 2011, foreign direct investment (FDI) into China amounted
to USD 116 bn, up by 9.72% y-o-y. Yet FDI into China fell for four
consecutive months from November 2011 to February 2012 with
concerns that the Chinese economy is set for slower growth in 2012
• In 2011, wholly foreign-owned enterprises were the major
vehicles of investment in China, accounting for around 78%
of total actually utilised capital
• In 2011, 87% of FDI in China originated from other Asian
countries/regions. Hong Kong, as the main bridge for inbound
investment into mainland China, is still the largest source of
capital, contributing USD 77 bn or 66.4% of total FDI
Notable FDI Deals in China in 2011
• In February, Softbank Corp., a Tokyo-based company engaged
in telecommunications and e-commerce, acquired a 35%
stake in China’s SynaCast Corporation, a Shanghai-based
online media company, for USD 244 mn
• In March, Rhodia SA, a French specialty chemical manufacturer,
completed its acquisition of a chemical facility owned by
Suzhou HiPro Polymers Company for USD 489 mn
• In August, Japanese trading house Itochu Corp. agreed to buy a
30% stake in Chinese textile and apparel maker Shandong Ruyi
Science and Technology Group in a deal worth USD 200 mn
• In October, Scotiabank, Canada’s third-largest bank and the one
with the biggest overseas presence acquired a 20% stake in
China’s state-owned Bank of Guangzhou for about USD 735 mn
• In November, Pearson agreed to buy China’s Global Education
and Technology Group for USD 294 mn
• In November, French chemical maker Arkema agreed to
acquire two chemical fi rms in China for a total of USD 365 mn
• In December, US-based IT company Expedia concluded its
acquisition of Renren’s stake in online travel provider eLong
for USD 72.4 mn
Source: MOFCOM; The Beijing Axis Analysis
0
2
4
6
8
10
12
14
-0.35
-0.30
-0.25
-0.20
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
FebJan
12
DecNovOctSepAugJulyJuneMayAprMarFebJan
11
Monthly Inbound FDI in China and y-o-y Growth Rate
(USD bn, Jan 2011-Jan 2012)
FDI into China by Source Country/Region (USD bn, 2011)
Source: MOFCOM; The Beijing Axis Analysis
Others
(9.71)
Netherlands (0.78)
France (0.8)
Germany (1.14)UK (1.61)
South Korea (2.55)
US (3)
Singapore (6.33)
Japan (6.35)
Taiwan (6.73)
Hong Kong(77)
Source: MOFCOM; The Beijing Axis Analysis
0
20
40
60
80
100
120
2011201020092008200720062005
Annual Inbound FDI in China (USD bn, 2005-2011)
The China Analyst
20 І The Beijing Axis
Chinese Outbound Foreign Direct Investment
Summary
• In 2011, China’s OFDI amounted to USD 60.1 bn, an increase of 1.8% y-o-y
• In 2011, Beijing Axis Capital followed 122 overseas investment activities by Chinese companies (including ongoing transactions and concluded deals of previously announced transactions), among which 44 are resource-related investments and 78 are non-resources investments
• In terms of resources deals, Australia became the most attractive region for Chinese investors with 14 deals followed by North America and Africa, with 10 and 8 deals, respectively. In terms of non-resources deals, Europe was favoured the most by Chinese investors with 25 deals, followed by Asia and North America, with 20 and 16 deals, respectively. Africa was the least favoured with only two non-resources deals by Chinese investors
• In terms of deal size, oil & gas deals conducted by China’s three energy giants, CNPC, Sinopec, and CNOOC, are notable. Two of the most recent big deals occurred in North and South America, with both exceeding USD 2 bn in deal size (see Galp
Energia and OPTI Canada deals below)
Notable Chinese OFDI Deals in 2011
• In April, XCMC China, a wind energy company, acquired the Argentinian company Reta Region Wind Power for USD 200 mn
• In May, China National Chemical Corporation (CNCC) concluded an agreement with MA Industries, an Israeli farm chemicals company, to buy a 60% interest in MA for USD 1.44 bn
• In May, Fosun International, a leading private company in China, acquired 9.5% of the Greece luxury jewellery maker Folli Follie for USD 123 mn
• In July, China’s largest agricultural group COFCO announced its acquisition of Tully Sugar, an Australian company, for USD 149 mn
• In November, Sinopec bought a 30% stake in the Brazilian unit of Portuguese oil company Galp Energia for USD 3.54 million
• In December, China Guangdong Nuclear Power Group announced the acquisition of Australia-based Kalahari Minerals for USD 990 mn
• In December, CNOOC completed the acquisition of the Canadian energy company OPTI Canada for USD 2.1 bn with
the objective of securing oil resources in North America
China Financial Markets
China’s Stock Markets in 2011-Q1 2012
• In 2011, China experienced a bearish market and there was a
general downward trend in all of China’s three major indexes
• Starting at 2,852.6, the Shanghai Stock Exchange Index
fi nished at 2,199.4, down by approximately 23%, yet it still
outperformed the Shenzhen Stock Exchange Index
• The Shenzhen Stock Exchange Index slumped by
approximately 30% over the year from 12,714 to 8,919. The
market lost its momentum from the beginning of H2, while it
was relatively stable during the fi rst half of 2011
• Like the other two indexes, the Growth Enterprise Market
declined from 1,155 to 729.5 at the end of the year, registering
a 37% plunge, despite a recovery period in Q3 after it fell to
around 790 at the end of H1
• Despite the stock market indexes plunging signifi cantly in
2011, the beginning of 2012 saw a recovery. The Shanghai
Index and Shenzhen Index have climbed by around 9.5% and
16%, respectively, as of mid-March, while the Growth Market
Index has also risen since the end of January
0
10
20
30
40
50
60
70
0
30%
60%
90%
120%
150%
2011201020092008200720062005
China’s Annual Outbound Non-fi nancial FDI and y-o-y Growth
Rate (USD bn, 2005-11)
Source: MOFCOM; The Beijing Axis Analysis
Shenzhen Stock Exchange Index (Jan 2011-Mar 2012)
Source: Shenzhen Stock Exchange
6000
8000
10000
12000
14000
MarFebJan12
DecNovOctSepAugJulJunMayAprMar11
Shanghai Stock Exchange Index (Jan 2011-Mar 2012)
Source: Shanghai Stock Exchange
1600
2000
2400
2800
3200
MarFebJan12
DecNovOctSepAugJulJunMayAprMar11
The China Analyst
21 І The Beijing Axis
Source: Various media; Company reports; The Beijing Axis Analysis
The China Analyst The China Analyst
22 І The Beijing Axis 23 І The Beijing Axis
Mapping China in the Global Debt LandscapeThe Eurozone debt crisis was one the leading events in the global economy in 2011. The map below illustrates the global debt outlook not only in Europe, where the situation is clearly severe, but also in other regions. It is notable how little debt can be attributed to the BRICS countries, including China, and how large the debt exposure is in developed countries, notably the US and Japan. The red and yellow bars indicate the growth that indebted nations will be able to muster in 2011 and 2015. By Beijing Axis Strategy
Source: The Economist; IMF
1-19
2015
50
500
750
2011
Public Debt 2011 (USD bn)
Public Debt as a Share of GDP (%)
20-39 40-59 60-79 80-99 100+
01
2
3
4
56
7
8
9
10
11
GDP Growth (IMF % Estimate)
Belgium
AlgeriaMorocco
NigeriaCôte
d’Ivoire
Ghana
MaliSenegal
Iceland
Equatorial Guinea
Barbados
Dominican Republic
Cuba
Jamaica
Costa Rica
Guatemala
Honduras
Nicaragua
PanamaVenezuela
Ecuador
Trinidad and Tobago
Bolivia
Peru
Paraguay
Uruguay
Chile
United KingdomNetherlands
France
Spain
Portugal
Ireland
United States
Mexico
Colombia
Argentina
Brazil
CanadaRussia
China
Thailand
MalaysiaPhilippines
Indonesia
Australia
Taiwan
South Korea
Japan
Singapore
Iran
Bahrain
Saudi ArabiaQatar
Oman
Yemen
Kuwait
Bangladesh Hong Kong SAR
Vietnam
New Zealand
Papua New Guinea
United ArabEmirates
Egypt
Libya
Tunisia
Sudan
Ethiopia
KenyaUganda
South Africa
BotswanaNamibia
Mozambique
MalawiZambia
Angola
Cameroon
Gabon
Israel
Turkey
Azerbaijan
Cyprus LebanonPakistan
PolandAustria
Kazakhstan
Uzbekistan
Germany
SwitzerlandDenmark
Norway
Sweden
Finland
Italy
Greece
Hungary
India
Mauritius
Seychelles
Sri Lanka
Japanese public
debt in 2011: USD 10, 917.5 bn
US public debt
in 2011: USD 10, 458.9 bn
H
Negative growth in 2011
Negative
growth in 2011
Negative
growth in 2011
The China Analyst
24 І The Beijing Axis
China in Europe: Cash, Debt and M&As Europe is looking to China as an alternative source of finance and growth. China, the world’s fi fth-largest investor in 2010, invested USD 4.61 bn (non-financial) in Europe last year, a 57.3% year-on-year increase. This wave of Chinese investment comes at a time when European companies are thirsty for cash. Is Europe’s crisis becoming China’s opportunity? By Javier Cuñat
While sovereign debt has risen substantially in only a few eurozone countries, it is threatening to envelop otherwise healthy economies throughout the region.
As austerity measures are being enacted throughout Europe as a response, company profi ts are declining or are showing weak growth prospects. Credible sources of finance are shrinking. Within this context, FDI is becoming more impor-tant as a facilitator of economic growth in Europe. On the other side of the globe, Asia is gradually playing a more promi-nent role as a source of global OFDI, with Asian OFDI growing at a CAGR of 8% in the last two decades, a fi gure substantially higher than other regions. China is taking the lead in this. It became the world’s fi fth-largest investor in 2010, ahead of all other Asian countries.
In 2006, China invested USD 1.44 bn in the European Union (EU), only 0.25% of total OFDI received in the EU in that year. According to China’s Ministry of Commerce (MOFCOM), China’s non-fi nancial investment in the EU reached USD 4.3 billion in 2011, more than double the 2006 figure, accounting for 1.4% of total OFDI in the region. This fi gure also represented a 94.1% increase over 2010. While China has made it clear that buying government bonds of deficit-ridden European countries is not currently a priority, the ongoing crisis inevitably presents some great buying opportunities for
cash-rich Chinese fi rms. Europe has plenty to off er as China seeks to expand into new markets, acquire new brands and upgrade its high-tech sector. Chinese capital will bring employment, tax revenue and reciprocal market access.
The context
Over the short term, a potential recession in the eurozone is not in China’s best interest. Given that China’s currency is still largely fi xed to the US dollar, the euro’s progressive deprecia-tion against the dollar is making Chinese exports to Europe more expensive. In addition, as European demand shrinks due to government austerity measures, imports from China are
likely to fall even further. Despite China’s eff orts to transition to a consumption-driven economy, its economy is still largely export-driven and Europe remains China’s second-largest trading partner. Hence China would like to see a strong euro to preserve its exports to the region. On the bright side, while the sovereign debt crisis has triggered a plunge in the value of the euro, Chinese companies with an overseas investment agenda are in a strong position to take advantage of this trend.
Over the medium to long term, China aims to build competi-tive advantagew based on science, technology, and innova-tion, which is precisely what Europe has to off er. In the last ten years, we have seen Chinese manufacturers progressively move up the value chain, from producing low value-added goods with low margins to more sophisticated products with higher margins and from OEM to branded goods. Far from the low price and low quality perceptions often associated with Chinese companies, they are aggressively challenging international competition by penetrating strategic segments. Very often this has been achieved through licensing and technology transfer agreements with European manufac-turers that boast advanced and patented technologies, and who were attracted by the favorable investment environment of the Chinese low cost production base. In many instances, and as Chinese manufacturers grew in scale, capabilities and export revenue, foreign companies end up selling their main patents to their Chinese counterparts. Strategic alliances and M&As, as part of Chinese companies’ business expansion models, are now set to take off in Europe.
Despite this context, and taking into account the size of the two economic blocks and the scale of their bilateral trade, Chinese investments into Europe are still rather low. The state ownership of Chinese investors, lack of experience in international deal making and a protective attitude among host countries are some of the reasons behind this current status. Yet this is a dynamic and changing process. Chinese investors have learned their lessons, and a protective attitude in Europe is rapidly becoming outdated. Before the crisis, China had made only modest investments in the region while today Chinese investments are not only welcomed, but are also strongly desired among struggling but still competitive European companies.
The players
Most Chinese investments in Europe to date came from large state owned enterprises (SOEs). These large conglomerates (117 in total) report to SASAC (State-owned Assets Supervision and Administration Commission of the State Council). SASAC will appoint their top executives and approve their overseas transactions. They hold leading positions in their respective industries in China, are fi nancially supported and have specifi c mandates from the central government. In some cases, deals are negotiated and agreed between high-level government offi cials, and executed by these SOEs. While they may have experience in emerging markets, they are currently operating in the relatively unfamiliar territory of Europe. Yet their execu-tives are ambitious, logical and highly practical, and these companies are able to adapt fast and learn quickly.
Recent examples of transactions undertaken in Europe by these types of companies include China Three Gorges Corporation (CTGPC), which bought a 21% stake in Energias de Portugal for USD 3.51 billion, and State Grid Corporation of China (SGCC), the largest electric power transmission and distribution company in China, which recently agreed to pay USD 508 million for a 25% stake in the national electricity grid of debt-stricken Portugal.
Medium-sized state owned enterprises are also venturing into Europe. There are thousands of these companies operating at
China aims to build
competitive
advantage based on
science, technology,
and innovation, which
is precisely what Europe
has to off er.
The China Analyst
25 І The Beijing Axis
the central, provincial or city level and which are more focused on one specifi c or niche sector. Generally speaking, one can cluster them as either ‘slow’ or ‘fast-growing’. The ‘slow-growing’ sub tier of companies is composed of those companies which have encountered diffi culties growing in a highly fragmented and cut-throat Chinese market over the last two decades. They usually operate in non-strategic sectors (e.g. textiles), have smaller international ambitions and are often consolidated into bigger fi rms as part of an ongoing process in China.
The ‘fast-growing’ sub-tier of companies is composed of medium-sized export-oriented enterprises that have success-fully consolidated market share at home. Their motivation to go global is often a matter of ‘survival’ as the Chinese domestic market becomes increasingly saturated. While they receive less overall support from the central government, they are commonly provided with financing by Chinese domestic banks and are able to move faster than the larger fi rms.
Examples include Shandong Heavy Industry, a heavy equip-ment maker, which agreed to pay USD 478 million for a 75% stake in Ferretti Group, an Italian luxury yacht maker with debt problems, eff ectively enabling it to acquire overseas technology, know-how as well as an international brand name at a discount. Another example is Sany Heavy Industry, a construction equipment manufacturer, which more recently agreed to acquire the German family-owned engineering fi rm Putzmeister for USD 426 million.
Chinese private multinational companies are probably some of the most attractive investors for Europe. They are usually young companies, from ten to twenty years old, which have been able to grow extremely fast during the 1990s and 2000s based on both domestic and international demand. They are usually managed by either practical self-made Chinese entrepreneurs with little business education, or Chinese returnees educated overseas with a well-grounded interna-tional mind-set and management skills. They are often rooted in Hong Kong, Shandong or Shanghai, locations which fi rst benefi ted from China’s economic reform and where one can expect them to be listed. They do not benefi t from systematic government support to ‘go global’, yet they often partner with Chinese SOEs for specifi c projects and transactions.
Examples include Fosun, a Shanghai-based diversifi ed private holding group, which grew from a USD 8,000 start-up to a USD 20 billion asset enterprise. Fosun acquired a minority stake in France’s Club Med, as well as Greece’s Folli Follie. Another Example is Huawei, which fi rst launched its Western European enterprise division in 2010, and has since built up a workforce of around 400 employees in Europe.
Going forward
We are leaving behind a stage in the relationship characterised by booming bilateral trade, few investments and imbalances, and entering a new stage characterised by increasing collab-oration. Challenges are twofold. From one side, European companies will have to understand the complexities of dealing with Chinese investors, and learn how to adapt to them. Even though China has cash to invest, successful deal making is usually the result of understanding the Chinese business culture, identifying stakeholders with the right strategic fi t and developing customised modes of engagement. From the Chinese side, probably the main challenge over the long run will be to become a respected international investor in Europe. Chinese companies are usually known for their strong balance sheets, govern-ment ownership structures and interna-tional ambitions but are still far from being considered ideal; hence they need to empower their executives to become well respected investors who comply with international best practices. While this is not always true, a change in perception will be key if China aims to establish a long term footprint in Europe.
Understanding both sides of the equation and adapting to the new realities of the relationship will enable companies to successfully navigate the current environment, and to develop and build upon existing competitive advantages.
Javier Cuñat, General Manager: Beijing Axis Strategy
Chinese private
multinational
companies are probably
some of the most
attractive investors for
Europe.
Year Investor USD mn Partner Sector Location
Mar-12 Value Partners Ltd. 6.4 KBC Asset Management N.V. Financial BelgiumFeb-12 Guangxi Liugong Machinery Co., Ltd. 62 Huta Stalowa Wola Machinery PolandFeb-12 Sany Heavy Industry 426 Putzmeister Holding GmbH Manufacturing GermanyFeb-12 CITIC PE Advisors (Hong Kong) Ltd. 47 Putzmeister Holding GmbH Manufacturing Germany
Feb-12 State Grid Corporation of China 508 Redes Energéticas Nacionais (REN) Power Portugal
Jan-12 China Investment Corporation ~1,000 Thames Water Infrastructure UKDec-11 China Three Gorges Group 3,510 Energias de Portugal (EDP) Power PortugalJan-12 LDK Solar Co. Ltd. 31 Sunways AG Power GermanyJan-12 Shandong Heavy Industry Group 478 Ferretti Group Manufacturing ItalyDec-11 Sinochem 279 DSM Anti-infective business Pharmaceutical NetherlandsNov-11 China Investment Corporation 3,200 GDF Suez SA Oil & Gas FranceNov-11 Ningbo Huaxiang Electronics 37 Sellner Group Manufacturing GermanyNov-11 Xinjinang GoldWind Science & Technology 24 GreWin Projektgessellschaft Ploen 1 GmbH Power PolandOct-11 Chengdu Geeya Technology Co. 35 Harward International Plc Electronic Products UK
Sep-11 China National BlueStar (Group) Co. Ltd. n/a France Innovia Agriculture, Chemicals, Cosmetics France
Jul-11 Lenovo China 906 Medion AG Electronic Product GermanyJul-11 Petro China 1,015 INEOS Group Holding plc Oil & Gas UK
Jun-11 Hytera Communications Co., Ltd. 3Rohde & Schwarz Professional Mobile Radio
GmbHTechnology Germany
Jun-11 Qinhuangdao Tianye Tolian Heavy Industry 6 Eden Technology SRL Equipment ItalyJun-11 Ausnutria Dairy 15 Hyproca Dairy Agricultural NetherlandsJun-11 Beijing Hainachuan Automotive Parts Co., Ltd. 2,480 Inalfa Roof Systems Group Automobile NetherlandsMay-11 Guoco Group n/a The Rank Group Plc Gaming UK
May-11 Fosun 123.2 Folli Follie Jewelry Retail Greece
Mar-11 Hainan Airlines n/a BAA Airline UKFeb-11 Beijing Automotive Industry Holding Group 45 WEIGL Automobile SwedenJan-11 CATIC Beijing 60 KHD Humboldt Wedag International AG Machinery GermanyJan-11 SmartHeat Inc. n/a Güstrower Wärmepumpen GmbH Machinery GermanyJan-11 Wanhua Industrial Group 1,690 BorsodChem Zrt. Chemical HungaryJan-11 China National Blue Star (Group) Co. Ltd. 1,950 Elkem AS Metals and Materials Norway
China M&A in Europe Since January 2011
Source: Various media; Company reports; The Beijing Axis Analysis
> USD 1 billion
The China Analyst
27 І The Beijing Axis
Brazil, India, Indonesia and China going strong; Russia and South Africa still lagging behind
• Brazil experienced 2.7% GDP growth during 2011, signifi cantly
below expectations. The laggard growth was a result of high
interest rates, an appreciation of the real versus the dollar,
which hurt exports manufacturers, as well as the eff ects of the
ongoing Euro debt crisis
• Russia’s economy grew by 4.3% in 2011, a small increment
above the 4% economists were expecting. The growth was
mainly ascribed to an increase in agricultural output coupled
with strong consumer spending as well as record low infl ation
• India’s economy is estimated to have grown at 7.6% in
2011. Due to interest rate increases to curb infl ation as well
Regional Overview: BRIICS
a slowdown in the mining, agriculture and manufacturing
sectors, India’s economic growth is forecast to dip below 7%
in 2012
• In Indonesia, GDP grew at a rapid 6.5% in 2011, the highest
rate of growth in over a decade. This was as a result of a
large emerging middle class that is benefiting from new
economic policies as well as a more stable government. Also
contributing to the growth was a sustained increase in foreign
direct investment in Indonesia
• Economic growth in China slowed in 2011 to 9.2% from
10.3% in 2010. This was largely attributed to a moderation
of export demand as well as stricter government policies
aimed at reining in consumer and property prices. China aims
to further reduce its GDP growth to 7.5% in 2012 partly as a
refl ection of low export demand from debt-stricken Europe
and a frail US economy
• South Africa is estimated to have grown 3.1% in 2011, up
from 2.9% in 2010. The main drivers for growth included
fi nance, real estate and business services, which collectively
contributed 0.7%. In 2012, lower demand from European
countries will negatively aff ect South Africa’s economy as
exports and production in the mining, manufacturing and
agricultural sectors will be contained
Source: Trading Economics; Russian Federal State Statistics; Statistics Indonesia; China NBS; IMF; BBVA. Note: 2011 growth rates for India and South Africa are estimates.
Source: Trading Economics; Various; The Beijing Axis Analysis. *Unemployment: China (4Q-11), Indonesia (Aug 11), South Africa (4Q-11), Russia (Jan 12)
Source: IMF; Trading Economics. * Projected GDP
Legend
Population, 2011
GDP, 2011
GDP per capita, 2011E
Brazil
193 mn
USD 2,517 bn
USD 12,917
South Africa*
50 mn
USD 422 bn
USD 8,342
Russia
143 mn
USD 1,543 bn
USD 10,790
India*
1,210 mn
USD 1,843 bn
USD 1,527
China
1,348 mn
USD 6,419 bn
USD 4,762
Indonesia
240 mn
USD 834 bn
USD 3,469
BRIICS Real GDP Growth (%, 2011, Q1-12F)
0
2
4
6
8
10
Q1-12F2011
RussiaSouth AfricaBrazilIndonesiaIndiaChina
BRIICS Infl ation and Unemployment (%, Feb 2012)
0
5
10
15
20
25
Infl ation Unemployment Rate*
3.20%
8.80%
3.56% 3.70%
5.70%
23.90%
4.10% 6.60%
6.56% 6.60%
6.10%
5.85%
The China Analyst
28 І The Beijing Axis
China-Africa Briefi ng: Increasing Chinese cooperation with regional African bodies; Kidnapping of Chinese workers; New AU headquarters
• In late 2011, The EAC and China signed a Framework
Agreement on economy, trade, investment and technical
cooperation. For China, this is the first such working
mechanism with a regional bloc and the fi rst of its kind in
sub-Saharan Africa. The Agreement will attempt to further
open up Sino-EAC investment and trade opportunities.
The Agreement will focus on the promotion of commodity
trade, exchange of visits by businesspeople from both sides,
co-operation on investment, infrastructure development and
human resource development and training
• 2012 opened on a sour note for China-Africa relations with
several high-profi le kidnapping of Chinese workers on the
continent. In January, 34 Chinese workers were kidnapped
in Sudan and although most were released, several were
killed during the raid. In February, 25 workers from a Chinese
cement factory in Egypt’s Sinai region were kidnapped by
Bedouin tribesmen but were later released. The kidnapping re-focused global attention on China’s investments in what
are traditionally high-risk areas, while also raising awareness
of how China should ensure the safety of its citizens working
overseas
• In January, China continued to increase its soft-power in the
continent by offi cially launching China Central Television
(CCTV) Africa in Nairobi, Kenya. The channel will cover the
political, economic, social and cultural aspects of the entire
African region
• The biggest Sino-Africa event of 2012 thus far is undoubtedly
the opening of the new 52,000 square meter African Union
(AU) headquarters in Addis Ababa, Ethiopia. The USD 124
mn centre – entirely funded by China – was opened by Jia
Qinglin, the chairman of the National Committee of the
Chinese People’s Political Consultative Conference and
Jean Ping, the current AU chairman. Moreover, in a sign of
continuing co-operation with the AU, China also agreed to
provide USD 95 million in aid to the AU over the next three
years for additional projects to be agreed upon by the two
sides at a later stage
Regional Focus: CHINA-AFRICA
In 2011, China-Africa trade reached USD 166 billion, once again reiterating the ever-strengthening trade relations between the two regions. In this edition, we report the latest China-Africa trade data, review major China-Africa trade and investment deals of 2011 and early 2012, and also spotlight China’s investment relationship with the East African Community (EAC).
China-Africa Trade
Total Trade
• In 2011, China-Africa trade reached USD 166 billion, and
new record high and increase of 31% y-o-y. South Africa and
Angola remained China’s largest trading partners (see chart
below: Ten Largest Partners). China’s imports from Africa grew
at much faster pace than its exports, widening its trade defi cit
with the continent
China Imports from Africa
• China’s imports from Africa in 2011 totalled USD 93.1 bn, up
40% y-o-y
• Trade data for 2011 reveal that the five-biggest African
exporters to China (South Africa, Angola, Sudan, DR Congo
and Congo-Brazzaville) accounted for nearly 80% of China’s
imports from the continent during this period (see chart
below: Ten Largest Partners)
China Exports to Africa
• China’s exports to Africa in 2011 totalled USD 73.1 bn, up 20% y-o-y
• Trade data for 2011 reveal that the leading five export destinations for Chinese goods in Africa were South Africa, Nigeria, Egypt, Liberia and Algeria. These five countries accounted for 54% of the continent’s total imports from China in 2011
China-Africa Annual Trade (USD bn, 2001-11)
Source: CEIC; The Beijing Axis Analysis
0
20
40
60
80
100Chinese Imports from Africa
Chinese Exports to Africa
20112010200920082007200620052004200320022001
2011 total trade: USD 166.2 bn
2001 total trade: USD 10.8 bn
CAGR 31.4%
China-Africa Trade, Ten Largest Partners (USD bn, 2010 vs. 2011)
Source: CEIC; The Beijing Axis Analysis
0
10
20
30
40
50 South
Africa
Angola
Nigeria
Algeria
LiberiaMor-
occo
Egypt
Others
CongoCongo
(DRC)
Sudan
2010 2011
The China Analyst
29 І The Beijing Axis
China-Africa Investment
Trends
• Based on the major China-Africa investment activities in late
2011 and 2012, China’s investment appetite in Africa remained
strong in three sectors: oil & gas, mining, and infrastructure
Major Recent Deals and Developments
• In October 2011, an official from the state-owned China
Development Bank announced that it would provide a USD 1
bn special purpose loan to support small and medium-sized
enterprises in Ethiopia, Egypt and other African countries
• In October 2011, Australia-listed Sundance Resources
announced that it would be acquired by China’s Sichuan
Hanlong Group for USD 1.65 bn. The deal would give Hanlong
access to the USD 4.7 mn Mbalam iron mine, located in the
Republic of Congo and Cameroon
• In November 2011, China signed a series of agreements with
Tanzania during the 4th meeting of the China-Tanzania Joint
Economic and Trade Commission. The agreements guarantee
loans of about USD 95 mn to the African country, which will
be earmarked towards improving the nations’ public telecom
networking as well as its transportation system
• In November 2011, state-owned China Petrochemical Corp
(Sinopec Group) said that it had completed its acquisition
of an 80% stake in Pecten Cameroon Co. in Cameroon, from
Royal Dutch Shell, gaining its fi rst oil production assets in the
African country
• In November 2011, China Nonferrous Metal Mining (Group)
Co Ltd, one of China’s largest state-owned enterprises
announced plans to invest around USD 2 bn in Zambia from
2011 to 2015, to expand operations and begin construction
of infrastructure facilities, adding that it had already injected
nearly USD 2 bn into the African country
• In December 2011, a subsidiary of Shanghai Construction
Group Co. Ltd. announced it would acquire 60% of Eritrea-
based Zara Mining Share Co. for USD 80 mn, and retain the
option of further acquiring unconfi rmed mines at a price of
no more than USD 20 mn
• In December 2011, Ethiopia and China signed two
agreements, with China agreeing to provide about USD 400
mn in loans to support the country’s water projects and its
Growth and Transformation Plan
• In February 2012, China National Material Group Corporation
Ltd. (Sinoma) offi cially completed construction of a USD 1 bn
cement plant in Nigeria, empowering the country with new
cement export capabilities
• In February 2012, China Railway Construction Corp.
announced that it had won several railway construction
contracts in Africa. The contracts, worth a total of USD 1.2 bn,
include projects in Nigeria, Djibouti and Ethiopia
• In February 2012, the China Minmetals Corporation
announced that it had already obtained more than 90% of
Anvil Mining Limited, an Africa-based mining company with
several metal ore mines in the DRC
• In February 2012, China’s state-owned CNOOC announced
that along with Anglo-Irish Tullow Oil and France’s Total, it
would invest in a USD 1.5 billion refi nery in the Lake Albert
rift basin in western Uganda
• In February 2012, a Chinese fi rm, Good Time Steel Zambia
Limited, announced it would invest more than USD 26 million
in its expansion programme to produce angle iron bars in
Zambia
Africa Regional Focus: China and the East-African Community (EAC)
Brief Regional Profi le
• The EAC is composed of five countries: Kenya, Uganda, Tanzania, Rwanda and Burundi who have a combined GDP of around USD 80 bn. The average GDP growth rate between the fi ve countries was over 5% in 2011
• As East Africa’s integration advances with the launching of a Common Market Protocol in 2010 and greater political and currency integration planned in the coming fi ve years, China’s investments into the region have also been increasing
• Chinese OFDI stock into the region has increased over the past decade from a lowly USD 38 mn in 2003 to around USD 691 mn in 2010, representing a CAGR of 52% over eight years. Chinese investment into the region is more diverse than in other regions on the continent partly due to region’s comparatively lower natural resource endowments
• In November 2011, China signed a Framework Agreement with the EAC on economy, trade, investment and technical co-operation in order to boost Sino-EAC trade, which in 2010
stood at nearly USD 4 bn, a 39% y-o-y increase
Select Chinese Investments in Eastern Africa (USD mn, 2009-11)
YearMajor Investment by Chinese Firm
Country Sector Value
2009-11 Nairobi-Thika Highway Kenya Infrastructure 320 mn
2009 Kigali Urban Roads Rwanda Infrastructure 31 mn
2010Entebbe’s International Airport
Uganda Infrastructure 350 mn
2010Upgrade Nyakahita-Kamwenge Road Project
Uganda Infrastructure 128 mn
2011CNOOC-Lake Albert basin oil project
Uganda Energy 1,450 mn
2011Mchuchuma Coal Project; Liganga Iron Project
Tanzania Mining 3 bn
2011National Backbone Network
BurundiIndustry/Telecom
n/a
2011 Mui Basin Kenya Mining 1,000 mn
2011 Chery Automobile Co Ltd Kenya Industry 50 mn
2011Chunlun Tea Group Company
Tanzania Industry n/a
2012Rehabilitation of Northern Corridor Highway
Kenya Infrastructure 37 mn
Source: Chinese Statistical Bulletin of OFDI; Various; The Beijing Axis Analysis
Allocation of China’s FDI Stock in E. Africa (USD mn, 2003-10)
Source: Chinese Statistical Bulletin of OFDI; Various; The Beijing Axis Analysis
0
100
200
300
400
500
600
700
800Burundi
Rwanda
Uganda
Kenya Tanzania
20102009200820072006200520042003
CAGR 52.2%
The China Analyst
30 І The Beijing Axis
China-Australia Briefing: Chinese currency settlement scheme expands to Australia; China seeks to capitalise on weak coal prices
• As a part of China’s plan to free up its currency, the Hong Kong Monetary authority authorised 15 banks to provide trade
settlement accounts in the Chinese currency in the second
half of 2011. As a result, Australia and New Zealand Banking
Group Limited (ANZ) and HSBC Australia have been encour-
aging their customers that are doing business in China to take advantage of this platform to settle transactions directly
using the Chinese currency instead of going through the
normal route of using the US dollar
• Australia’s thermal coal price benchmark continues to remain
weak as buyers stay away and sellers face an oversaturated
market. Chinese utilities are enquiring for coal deliveries for
April and May, hoping to book supply while prices remain
weak. However, the annual term negotiations between
Australian producers and Japanese utilities are helping to
keep a hold on prices
• In more coal-related news, in early March Australia cleared
the way for China’s Yancoal to take over miner Gloucester Coal
in a multi-billion dollar deal that gives Beijing a greater foot-
hold in the resource-rich country. Australian Treasurer Wayne
Swan stated that Australia’s foreign investments watchdog
had given its approval for the deal under strict conditions that
the new company should remain headquartered in Australia
and list on the stock exchange before the end of 2012
China-Australia Trade
Total Trade
• Sino-Australian trade increased by 33% from USD 87.56 bn in
2010 to USD 116.41 bn in 2011, according to China Customs
(CC), whereas the Australian Bureau of Statistics (ABS) puts
the increase at 30.82% from USD 90.15 bn in 2010 to USD
117.93 bn in 2011
• China and Australia experienced their largest ever trade gap
in 2011 with CC pegging China’s defi cit at USD 48.59 bn, a
46.8% increase from 2010’s USD 33.10 bn defi cit; ABS puts
China’s defi cit at USD 31.01 bn, up 75.11% from 2010’s USD
17.71 bn
Regional Focus:
CHINA-AUSTRALIA
Sino-Australian trade and investment activities remained robust in 2011 and early 2012. Bilateral trade set a new record with total trade reaching USD 116.41 bn, an increase of 32.95% from 2010. Likewise, a fl ood of investment transactions in the energy and resources sectors transpired late in 2011. • China’s trade defi cit with Australia peaked in September 2011
at USD 5.22 bn when China exported USD 3.13 bn’s worth
of goods to Australia while importing a record total of USD
8.36 bn
• According to ABS, China’s trade defi cit with Australia also
peaked in September 2011, when Australia imported USD
3.92 bn worth of goods from China and exported USD 7.25
bn, resulting in a negative balance of USD 3.33 bn for the
month
China Imports from Australia
• Australia continued to be a net supplier of commodities to
China in 2011, with ores, slag and ash maintaining their posi-
tion as China’s leading imports from Australia at 59% or USD
23.17 bn of the total USD 39.44 bn. Mineral fuels, oils, distil-
lation products, etc. came in second at 16% or USD 6.43 bn,
while copper and articles thereof came in third at 4% or USD
1.69 bn
China Exports to Australia
• Electrical and electronic equipment remained China’s leading
exports to Australia in 2011 at 19% or USD 3.93 bn of the
total USD 20.65 bn. Nuclear reactors, boilers, machinery, etc.
came in second place at 19% or USD 3.90 bn, while articles
of apparel and accessories came in third place at 11% or USD
2.17 bn
Australian exports to China
Australian imports from China
Monthly trade balance (rhs)
0
10
20
30
40
50
60
70
80
-10
0
10
20
30
40
50
60
70
11100908070605040302010
1
2
3
4
5
6
7
8
0
1
2
3
4
5
6
7
8
DecNovOctSepAugJulJunMayAprMarFebJan
Source: Australian Bureau of Statistics; The Beijing Axis Analysis
Australia-China Annual and Monthly Trade (USD bn, 2001-11)
Chinese Imports from Australia
Chinese Exports to Australia
Annual/monthly Trade Balance (rhs)
0
20
40
60
80
100
-50
-40
-30
-20
-10
0
11100908070605040302010
1
2
3
4
5
6
7
8
-6
-5
-4
-3
-2
DecNovOctSepAugJulJunMayAprMarFebJan
China-Australia Annual and Monthly Trade (USD bn, 2001-11)
Source: China Customs; The Beijing Axis Analysis
The China Analyst
31 І The Beijing Axis
Australia State Watch: Tasmania
• With a real gross state product (GSP) of USD 23.48 bn in 2010-
11, Tasmania is Australia’s seventh-largest economy
• It is a net exporter with exports amounting to USD 3,270.81
mn and imports amounting to USD 942.03 mn
• Main exports in 2010-2011 were zinc (16.62%), followed by
aluminium (12.83%), wood chips (7.39%), copper ores and
concentrates (6.99%), and iron ore and concentrates (6.19%)
• Key industries in terms of contribution to state GSP are manu-
facturing (9.4%), health care and social assistance (8.2%),
fi nancial and insurance services (7.2%) ownership of dwell-
ings (7.1%) and agriculture, forestry and fi shing (7.1%)
• In 2010-11, China was Tasmania’s largest trading partner, with
a total trade volume of USD 643.90 mn, followed by Japan
(USD 424.32 mn) and the United States (USD 325.41 mn)
China-Australia Investment
Major Recent Deals
• In October 2011, China’s Hanlong Mining raised its offer
price for Australia’s Sundance Resource Limited to roughly
USD 1.7 bn, from its original off er of around USD 1.5 bn. The
deal is proceeding despite an insider-trading probe involving
several Hanlong executives
• In November 2011, Shanghai Sky Chem Industrial Co Ltd. initi-
ated the acquisition of a 51% stake in ASX-listed Eagle Nickel
through a share placement agreement. One of China’s largest
importers and distributors of chemicals, the privately-owned
Shanghai Sky plans to build a leading ASX-listed resource
enterprise
• In December 2011, Yanzhou Coal Mining Co. initiated a bid
to merge its Australian unit, Yancoal Australia Ltd., with
Sydney-based Gloucester Coal Ltd. Should the USD 2.1 bn
merger push through, the merged group will become one
of Australia’s largest listed coal companies, as well as almost
doubling Yanzhou’s coal mines in Australia and expanding its
access to ports. This transaction will leave Yanzhou with a 77%
stake in the new company, while Noble-backed Gloucester
will have a 14.8% stake in the merged group. In a separate
transaction, Yanzhou signed agreements to fully acquire
Wesfarmers Premier Coal and Wesfarmers Char for USD 296
mn in September 2011
• In December 2011, China Petrochemical Corp (Sinopec)
agreed to raise its equity stake in the Australia Pacifi c LNG
project to 25% from the original 15%. This reduces the owner-
ship of ConocoPhillips and Origin Energy to 37.5% each.
Sinopec also agreed to purchase an additional 3.3 mn tons of
LNG annually to 2035, boosting the previously agreed 4.3 mn
tons annually to 7.6 mn tons per year
• In December 2011, China’s Guohua Energy Investment agreed
to buy a 75% stake in Australian government-owned Hydro
Tasmania’s wind farms in northwest Tasmania. A subsidiary
of Chinese coal producer Shenhua Group, Guohua will pay
USD 89.4 mn for the 65MW Bluff Point and 75MW Studland
Bay wind farms
• In December 2011, Chinese engineering development group
DADI completed a USD 24 mn investment in MetroCoal, an
emerging energy company in Australia. The HK-listed DADI
has been involved in many signifi cant coal projects, specifi -
cally focusing on open cut and underground coal mine
design, processing plant design, coal processing research and
development and engineering, procurement and construc-
tion projects. Further developments in January 2012 saw
DADI boosting its ownership in MetroCoal to 19.6% via an
off -market transaction with Metallica Minerals Limited
• In December 2011, Rio Tinto accepted a USD 996 mn off er
from China Guangdong Nuclear Power Corp (CGNPC) and
the China-Africa Development Fund (CAD Fund) for an
11.1% stake in London-listed Kalahari Minerals PLC. This
boosted its existing 30.8% stake in Kalahari to roughly 42%.
After winning control of Kalahari, CGNPC has set its sight on
Extract Resources (42.7 owned by Kalahari), recently making a
takeover off er of USD 2.38 in February 2012. The move brings
CGNPC a step closer towards winning control of the Namibian
Husab uranium project, one of the largest uranium mines in
the world. Rio Tinto, which owns a 14 percent stake in Extract,
has yet to decide whether it will accept CGNPC’s off er
• China National Petroleum Corp (CNPC) is currently in talks
with Woodside Petroleum Ltd with respect to its Browse
liquefi ed natural gas (LNG) project in Western Australia. CNPC,
the country’s largest energy producer, is said to be bidding for
as much as 15% of the venture. The stake is estimated to cost
around USD 1.5 bn
0 5000 10000 15000 20000 25000 30000 35000
US
UK
China
Japan
Switzerland
New Zealand
Canada
Netherlands
Germany
Singapore
No. of approvals
142
410
1,766
72
37
24
52
37
74
320
Approved Investment Proposals in Australia by Country (2009-
10, USD mn)
Source: FIRB; The Beijing Axis Analysis
Tasmania Trade with China (USD mn, 2010-11)
Source: Australian Bureau of Statistics; The Beijing Axis Analysis
0
10
20
30
40
50
60
70
80
90
-80
-70
-60
-50
-40
-30
-20
-10
DNOSAJJMAMFJ 2011
DNOSAJJMAMFJ 2010
Exports to China
Imports from China
Monthly trade balance (rhs)
The China Analyst
32 І The Beijing Axis
Regional Focus:
CHINA-LATIN AMERICA
In 2011, China-Latin America trade relations reached new heights, yet as Chinese goods flood Latin American markets, new forms of protectionism are becoming more prominent, most notably in Brazil’s automobile sector. In this edition, we review these evolving issues and highlight Ecuador’s budding trade relationship with China.
China-LatAm Briefi ng: State visits strengthening bilateral trade; Brazil’s resistance to Chinese imports
• In September 2011, Guido Mantega, Brazil’s fi nance minister, announced a 30-point increase in the country’s industrial-product tax on cars, mainly to stem the increasing fl ow of Chinese automobiles in the local market
• In January 2012, representatives from Chile’s House of Representatives, including Speaker of the House Patricio Melero, visited China to meet with the National People’s Congress Standing Committee Chairman Wu Bangguo, as well as Chinese Vice President Xi Jinping. Melero indicated that Chile must focus on Asian markets to offset waning demand from the US and Europe and welcomed Chinese investment in energy infrastructure projects
• In February 2012, Chinese Vice Premier Wang Qishan met with Brazilian President Dilma Rousseff in Brasilia to discuss their diff erences in the ballooning multi-billion-dollar trade ties. Brazil urged China to open its doors to Brazilian manufactured goods and limit its massive exports of shoes, textiles and other products that have recently been fl ooding Brazil’s market
• Also in February, Colombia´s Foreign Minister Maria Angela Holguin made an offi cial visit to China, meeting with her
Chinese counterpart Yang Jiechi and China’s Vice Prime Minister Li Keqiang in an eff ort to elevate their relationship to the ‘strategic partner’ level. Holguin is also seeking to level out the trade balance between the two countries and promote Chinese investment in Colombia, especially in the energy and infrastructure sectors
China-LatAm Trade
Total Trade
• In 2011, China’s total bilateral trade with LatAm reached a new high of USD 213 bn, an increase of 16 % y-o-y (see chart below, left)
• Brazil, Mexico and Chile were China’s largest trading partners in LatAm, accounting for 40%, 16% and 15%, respectively, of China’s total trade with the region during 2011 (see chart below, right)
• China’s trade defi cit with the region widened slightly to USD 14.8 bn in 2011, up from USD 14.1 bn in 2010
China Imports from LatAm
• In 2011, China’s total imports from LatAm amounted to USD 113.9 bn, an increase of 31% y-o-y
• Approximately 74% of LatAm’s exports to China in 2011 originated from just three countries, namely Brazil (46%), Chile (18%) and Venezuela (10%)
China Exports to LatAm
• During 2011, China’s total exports to LatAm in 2011 reached USD 99.1 bn, an increase of 36 % y-o-y
• In 2011, approximately 67% of China’s exports to the region were concentrated in Brazil (32%), Mexico (24%) and Chile (11%)
China-LatAm Investment
Trends
• Since 2005, China has lent more than USD 75 bn to LatAm, including USD 13 bn in 2011 alone. In 2010, it lent more than the World Bank, Inter-American Development Bank and the US Ex-Im Bank combined
• According to figures released at the 5th China – LatAm Business Summit, by the end of 2011, China’s total investment
* Note: Latin America here refers to the Latin American Integration Association (LAIA). LAIA’s members are Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, Ecuador, Mexico, Paraguay, Peru, Uruguay and Venezuela.
China-LatAm* Annual Trade (USD bn, 2003-11)
Source: CEIC; UN Comtrade
0
20
40
60
80
100
120
Chinese Imports from LatAm
Chinese Exports to LatAm
201120102009200820072006200520042003 Source: CEIC; The Beijing Axis Analysis
60 50 40 30 20 10 0
Chinese Imports
2011Chinese Imports
2010
Brazil
Chile
Venezuela
Mexico
Peru
Argentina
Colombia
Uruguay
Cuba
Ecuador
Bolivia
Paraguay
5 10 15 20 25 30 35
Chinese Exports
2011
Chinese Exports
2010
China-LatAm Trade* by Country (USD bn, 2010 vs. 2011)
The China Analyst
33 І The Beijing Axis
in the region was expected to reach USD 23 bn. The majority of investments are concentrated in the energy, mining, automotive, fi nancial, and chemical sectors
• Chinese investments in LatAm continue to accelerate, with the main objective of securing mineral resources, which account for roughly 50% of China’s total FDI in the region. China also aimed to tap into the region’s growing potential as a market for its products. However, a more recent development is a new focus on the agricultural sector in a drive to secure additional food sources for China’s population of 1.3 bn
Major Recent Deals and Developments
• In October 2011, SHC, the company that imports JAC automobiles into Brazil, said it would invest 80% of the USD 509 mn needed to build a factory, with JAC providing the rest of the required investment
• In November 2011, Sinopec invested USD 5.2 bn to acquire 30% of Galp Energia, a Portuguese oil and natural gas integrated operator. Under the terms of the deal, state-owned Sinopec will subscribe USD 4.8 bn for a 30% stake in Petrogal Brasil, a subsidiary of Galp Energia, the company will make an additional loan to Petrogal Brasil for USD 390 mn
• In November 2011, home appliance giant Midea Holding Co. purchased a 51% stake in Carrier Corp.’s air-conditioner assets in LatAm as it looks to accelerate its global expansion plan
• In December 2011, China Development Bank and Peru BBVA Bank signed a USD 50 mn loan agreement that will be used for electrical infrastructure projects in Peru, and which also forms part of a broader memorandum of understanding between China and Peru for substantive bilateral cooperation
• In January 2012, Chinese group Lifan Industry set up partnership with Grupo Eff a, an Uruguayan manufacturer of Chinese cars, to sell into the Brazilian and other South American markets
• In early January, Alliance One Brasil Exportadora de Tabacos (AOB) and China Tobaco Internacional do Brasil (CTIB) signed an agreement to set up a partnership in Brazil. The new company, which will be majority owned by CTIB (51%) plans on having an initial processing capacity of 25,000 tons
• Also in January, Sinochem, the Chinese state-owned petrochemical group, agreed to buy 10% stakes in five offshore oil blocks in Brazil’s Espirito Santo basin from London-based Perenco, expanding Chinese penetration in Brazil’s fast-growing off shore oil frontier
• In February 2012, CITIC group purchased a 10% stake in Venezuela’s state-owned company PDVSA’s Petropiar’s heavy oil upgrading project. The value of the purchase was not disclosed, however this deal comes after Venezuela signed a USD 10 bn fi nancing agreement with the Chinese government to support oil projects
• In March 2012, Ecuacorriente, a Chinese-owned mining company, signed a contract to invest USD 1.4 bn over a fi ve year period to extract copper from the Mirador deposit located in Ecuador’s Zamoira Chinchipe province. The deposit has an estimated life span of 25 years and reserves of 2.1 mn tons. Ecuador is to receive USD 4.5 bn over the period of the agreement, in which the company is expected to start production in late 2014
• Also in March, China and the Inter-American Development Bank (IDB) announced the establishment of a USD 1 bn Latin American fund, to make investments in infrastructure as well as equity investments in natural resource related mid-cap companies. The fund, which should start operations this year, is a partnership between China’s Export-Import Bank and the IDB, with each side initially injecting USD 150 mn
China-LatAm Country Watch: Ecuador
Brief Country Profi le
• Ecuador is the eight-largest economy in LatAm, with an expected nominal GDP of USD 65.3 bn (2011) and a GDP per capita of USD 4,352. Ecuador’s total population in 2011 was about 14 million, and like many other LatAm countries, its economy is mainly driven by exports of agricultural and mineral commodities
• Ecuador’s economy has been experiencing robust growth since the fi nancial crisis. In 2011, GDP is expected to grow at 8.5%
• Ecuador’s top three sources of imports are the United States, Colombia and China and its main imports include commodities, fuels, machinery, equipment, vehicles and electronic equipment. Its top three export destinations are the US, Panama and Peru, and its main exports include minerals, fruits, fi sh, and trees
China-Ecuador Bilateral Ties
• Bilateral relations between Ecuador and the People’s Republic of China, which celebrated its 30th anniversary in 2010, strengthened further in 2011, with both sides seeking mutual understanding in political, economic, trade, social, academic and cultural aff airs. Some of the main benefi ts of this relationship thus far have been increased Chinese investments in the form of loans through the China Development Bank, which are mostly aimed at infrastructure development projects as well as large investments by Chinese companies in Ecuador’s mineral and agricultural sectors
• Ecuador’s default in 2008-09 induced it to develop deep fi nancial ties with China. In 2011, China’s loans to Ecuador exceeded USD 8 bn, equivalent to about 12% of its GDP
• In June 2011, Ecuador signed a USD 2 bn loan agreement with China Development Bank. In exchange, Ecuador will supply China with 72,000 barrels of crude oil per day for two years
• Ecuador’s total trade with China reached USD 2.8 bn in 2011, an increase of 40% y-o-y. Bilateral trade between the two countries has been increasing at a CAGR of 33% since 2001
• China’s total imports from Ecuador increased by 14% y-o-y to approximately USD 580 mn in 2011. Oil (70%), fi sh fl our (8%), and virola sawn wood (3%) made up the bulk of China’s imports
• China’s total exports to Ecuador in 2011 reached USD 2.25 bn, an increase of 49% y-o-y. In 2010, Chinese exports to Ecuador were mainly comprised of electrical machinery and equipment (17%), nuclear reactors, boilers, machinery and mechanical equipment (15%) and vehicles (10%)
Source: CEIC; The Beijing Axis Analysis
China-Ecuador Annual Trade (USD mn, 2001-11)
0
500
1000
1500
2000
2500
Chinese Imports from Ecuador
Chinese Exports to Ecuador
20112010200920082007200620052004200320022001
The China Analyst
34 І The Beijing Axis
Regional Focus:
CHINA-RUSSIA2011 was a year of flourishing trade relations between Russia and China, with trade flows reaching a new record of nearly USD 80 billion. The 2009-18 Cooperation Programme also gained traction in 2011, with 27 joint investment projects put into operation. The only major sticking point is the lack of agreement on natural gas prices.
China-Russia Briefi ng: Trade highs; Joint investment projects; Oil and gas deals
• Bilateral trade between China and Russia set a new record in 2011, reaching USD 80 bn. At the current pace, bilateral trade will exceed outgoing Russian President Dmitry Medvedev’s prediction in June 2011 that this fi gure would reach USD 100 bn by 2015. Near-border territories play a special role, with China becoming a major trade partner for the Russian Far East in the last decade. However, resources still dominate Russian exports to China while fi nished goods’ share in China’s total exports to Russia exceed 75%
• On 31 January 2012, the Chamber of Commerce and Industry of the Russian Federation (RF CCI) held a session of the Russian-Chinese Business Council (RCBC) to announce the 2011 outcomes of the 2009-18 Cooperation Programme. Overall, 27 major joint projects worth a total of USD 10 bn were implemented in the 19 federal regions of Russia. The original framework between the Russian Far East, Eastern Siberia and Northeast China called for the establishment of 200 projects throughout the three regions. The commencement of this framework has seen increased participation by Chinese companies in Russia in 2010 (see chart below)
• Despite certain price disputes between the China National Petroleum Corporation (CNPC) and Russia’s Rosneft and Transneft during the autumn of 2011 regarding the transport
of oil via the East Siberia-Pacifi c Ocean (ESPO) pipeline, in 2011, oil supply via ESPO was fl owing in accordance with the contract terms. The ‘ever-pending’ gas deal, however, which involves supplying natural gas to China via the ‘Altai’ pipeline from Western Siberia, remains a thorny issue
China-Russia Trade
Total Trade
• Bilateral trade between China and Russia maintained a
confident trajectory in 2011, reaching USD 79.25 bn, an
increase of 43% y-o-y (see chart below)
China Imports from Russia
• China’s imports from Russia in December 2011 amounted to
USD 3.65 bn, up 47.7% y-o-y
• China’s imports from Russia in 2011 amounted to USD 40.34
bn, a staggering increase of 56.15% y-o-y
China Exports to Russia
• China’s exports to Russia in December 2011 amounted to USD
3.53 bn, up 19.1% y-o-y
• China’s exports to Russia in 2011 amounted to USD 38.9 bn,
an increase of 31.37% y-o-y
China-Russia Trade Nexus: Heilongjiang
• Heilongjiang province in Northeast China plays a crucial role
in China-Russia trade relations, with trade volume totalling
USD 18.99 bn in 2011 or 23.96% of the total trade volume
between the two countries
• Among Heilongjiang’s exports to Russia, the highest growth
rates can be seen in machinery and electronic appliances
(38.2%) and hi-tech products (10.3%). However, exports are
still dominated by clothing, footwear and textiles, which
collectively account for a share of around 50%
• Heilongjiang’s major imports from Russia include crude oil,
iron ore, timber and wood pulp. From January to November
2011, growth rates for iron ore, timber and wood pulp were
84.75%, 52.7% and 32.3%, respectively. However, with the
offi cial launch of ESPO on January 1, 2011, provincial trade
relations with Russia are now dominated by crude oil, a
pattern which will likely last for years to come. Heilongjiang’s
oil imports stood at 15.01 mn tons in 2011, accounting for
around 60% of China’s total oil imports from Russia in 2011
China-Russia Monthly Trade (USD bn, 2010-11)
Source: China National Bureau of Statistics
0
1
2
3
4
5
6
7
8 20112010
DecNovOctSepAugJulJunMayAprMarFebJan
Note: British Virgin Islands and Cyprus are not included here as off -shore investment destinations. Source: Federal State Statistics Service of the Russian Federation
Foreign-invested Enterprises in Russia, Top Five Countries (No. of Companies, 2001-10)
400
600
800
1000
1200
1400
1600
1800 Turkey
Germany
UK
USChina
2010200920082007200620052004200320022001
The China Analyst
35 І The Beijing Axis
China-Russia Investment
Major Recent Deals
• At the end of September 2011, Omsk Manufacturing Association and China’s ZTE signed a cooperation agreement to collaborate in the production and deployment of complex solutions on the basis of GoTa technology (Global open Trunking architecture). The fi rms agreed to implement joint projects to develop new techniques and technologies, in addition to conducting joint R&D and marketing research
• Also in September, Sakhcement-Longxing, a China-Russia joint venture, commissioned a cement plant in Sakhalin, an island on the east coast of Russia. The costs of construction-installation works and equipment totalled USD 2.74 mn, with the Chinese party assuming USD 1.4 mn of these costs. During its fi rst three months of operation, the plant produced 7,000 tons and expects to reach an annual capacity of 150,000 tons
• In February 2012, another China-Russia joint venture, New Century, announced that it would complete the construction of a brick factory in Sakhalin in Q2 2012. The project is expected to help meet Sakhalin’s strong need for high-quality construction materials. With approximately USD 10 mn in investment from strategic Chinese investors, annual plant capacity is expected to reach 20 mn bricks
• Also in February, Rosvertol, the attack and transport helicopter arm of the state-owned Russian Helicopters holding company, announced an agreement with Xi’Ao Aeroplane Manufacturing, one of China’s leading aircraft manufacturers, to construct a production base in China’s Hebei province for the Mi-2M and Mi-2A multi-purpose helicopters. Construction is expected to be completed by July 2012, and the required investment is expected to reach USD 224 mn. Production capacity will be 100 helicopters per year. When operational, this base will also become the only overhaul centre for
Mi-type helicopters in Asia
China-Russia Resources Watch
Electricity exports from Russia to China; Deadlock on natural gas pipeline project; New national oil and gas fi eld service company
• In 2011, oil supply through the ESPO pipeline from Russia to China’s Heilongjiang province was carried out in full accordance with the contract terms. As mentioned in previous editions, according to the 2009 agreement between Russia’s Rosneft and Transneft and China’s CNPC, Russia will supply 15 mn tons of crude oil to China annually over a period of 20 years. In 2011, the first successful year of the project, the amount supplied reached 15.01 mn tons. According to China, the transported oil meets the specifi ed standards, with reliable pipeline operations and no breakdowns
• As for natural gas, China’s CNPC and Russia’s Gazprom have not yet been able to reach an agreement. The export agreement has been under discussion since 2006, yet for the past fi ve years the parties have not been able to agree on a price. Various Russian experts seriously doubt that the parties will be able to come to any agreement on pricing in 2012, or even over the long term. Chances of a successful contract with mutually acceptable terms between Gazprom and CNPC became even smaller after the announcement of a new deal between China and Turkmenistan. During the summer of 2011, Gazprom even off ered Beijing a discounted gas price, on the condition that CNPC will give Gazprom an advance payment of USD 40 bn, despite the fact that the off ered discount would not guarantee 12-15% profi t margins, a precondition for Gazprom in its previous investment projects in China. Nevertheless, in September, China offi cially declined to sponsor the deal with
Russia. As many Russian experts believe, Gazprom will never agree on supplying natural gas on China’s current terms. If the parties eventually reach an agreement, it would involve a signifi cant decrease in the supply volume
• In January this year, System Operator of the United Power System (SO-UPS), the sole provider of operational dispatch management for the Russian power grid, and the Northeast China Centre for Dispatching and Communication successfully completed testing of direct current links at the new 500 kW ‘Amurskaya-Heihe’ transnational overhead transmission line, which was built to increase electricity exports from Russia to China. The ‘Amurskaya-Heihe’ transmission line was jointly constructed by the Russian Federal Grid Company of Unifi ed Energy System, Inter RAO UES, and China’s State Grid in 2011. This new line will signifi cantly increase Russia’s power supply capacity to China by 750 MW without the need to synchronise the two countries’ systems
• In February, following a successful testing of the ‘Amurskaya-Heihe’ line, Inter RAO signed a deal with China’s State Grid on power supply for a period of 25 years. Supplies are expected to commence in March 2012. According to Inter RAO estimates, 2012 will see a doubling of Russian electricity exports to China, amounting to 2.6 bn kilowatt-hours. These exports will increase in subsequent years to eventually amount to around 100 bn kilowatt-hours over the 25 years
• In February, Igor Sechin, the vice-premier of Russia, assigned the Ministry of Energy and three leading state-owned energy companies (Rosneft, Gazprom and Zarubezhneft) the task of preparing the necessary documentation to realise the idea of creating a national oil/gas field service company, most probably on the basis of Rosneft. The idea was also presented to Russian President Elect Vladimir Putin. With this initiative, Igor Sechin eff ectively supports the plan initially off ered by Natalia Komarova, governor of the Khanty–Mansi Autonomous Region (which accounts for over 50% of Russia’s crude oil production). Various experts in Russia are already discussing the potential participation of leading Chinese companies (namely CNPC and Sinopec) in this project, including the establishment of a joint venture. Experts emphasise the fact that both Chinese companies have solid experience in working with Rosneft. In 2005, Rosneft and Sinopec established a geological exploration joint venture (part of the Sakhalin-3 project), and in 2006 Sinopec bought a 49% stake in Udmurtneft, a subsidiary of Rosneft, to jointly produce oil in the Udmurt Republic (Urals region). In 2010, Rosneft and CNPC created the largest ever China-Russia joint venture (USD 5 bn) for the construction of an oil refi nery in Tianjin
Source: 2010 Statistical Bulletin of China’s OFDI; The Beijing Axis Analysis
China Annual OFDI Flow to Russia (USD mn, 2004-10)
0
100
200
300
400
500
600
2010200920082007200620052004
CAGR 37.5%
Historical high
The China Analyst
36 І The Beijing Axis
The Beijing Axis News: September 2011–March 2012
Greater China and Asia
Platts Asian Steel Forum – Beijing,
China
On 22 September 2011, the Platts Asian
Steel Forum was held at Crowne Plaza Ho-
tel, Beijing. Haiwei Huang, General Man-
ager: Strategic Projects & Relationships,
delivered a presentation entitled The long
term outlook for China’s chrome demand
and outbound investment.
ICDA Chrome Ore Forum – Beijing, China
On 10-11 October 2011, the ICDA Chrome
Ore Forum was held at Grand Mercure
Xidan, Beijing. Haiwei Huang attended.
CHaINA 2011 – Shanghai, China
On 2-3 November 2011, CHaINA 2011 was
held at Intercontinental Shanghai Puxi,
Shanghai. Lilian Luca, Managing Direc-
tor: Beijing Axis Procurement, delivered a
presentation entitled Challenges and Op-
portunities for Procuring Capital Goods in
China for Global Mining and Infrastructure
Projects.
SA Expo – Beijing, China
On 24-26 November 2011, the SA Expo
2011 was held at the Beijing Exhibition
Centre. The event was co-organised by the
South African Department of Trade and In-
dustry (DTI) and the Ministry of Commerce
of the People’s Republic of China (MOF-
COM). The Beijing Axis was invited by the
South African Embassy in Beijing to attend
and exhibit at the event.
Other events recently attended by The Bei-
jing Axis in Greater China and Asia include:
McCloskey China Coal6-7 September 2011; Beijing, China
Procurement Leaders Forum14-15 September 2011; Singapore
SA Trade and Investment Forum29-30 September 2011; Beijing, China
China: Prepare for Opportunity19 October 2011; Beijing, China
China Mining 20116-8 November 2011; Tianjin, China
China Overseas Investment Fair 20118-9 November 2011; Beijing, China
GMAC ANZ Lunch Briefi ng9 January 2012; Beijing, China
Africa
4th South Africa Ferroalloys Conference -
Johannesburg, South Africa
On 15-16 September 2011, the 4th South
Africa Ferroalloys Conference was held at
Hilton Sandton, Johannesburg. Kobus van
der Wath, Founder and Group Managing Di-
rector, delivered a presentation entitled The
Global Context: How will China/Asia aff ect
demand and will investment in South Africa
continue? on September 15.
China Africa Business Forum – Johannes-
burg, South Africa
On 20 October 2011, the Beijing Axis co-or-
ganised this one-day business forum where
Kobus van der Wath delivered a presenta-
tion entitled BRICS: The Africa and China Per-
spective, while Dirk Kotze, Director and GM:
Africa, talked about India & China in Africa:
Adversaries or Allies?
The Beijing Axis Procurement Roundta-
ble – Johannesburg, South AfricaOn 4 November 2011, The Beijing Axis or-
ganised this roundtable breakfast at Radis-
son Blu Hotel Sandton in Johannesburg.
Kobus van der Wath delivered a presenta-
tion entitled Integrating China in Capital
Project Planning and the Supply Chains of
Global Mining, Infrastructure and Industrial
Sectors.
Mining Business and Investment (MBI)
East Africa 2011 – Nairobi, Kenya
On 17-18 November 2011, the MBI 2011
East Africa was held at the Crowne Plaza,
Nairobi. Walter Ruigu, Manager: Eastern Af-
rica Desk, delivered a presentation entitled
Chinese Investment in Metals and Minerals in
Eastern Africa.
Investing in African Mining Indaba 2012
– Cape Town, South AfricaOn 6-9 February 2012, the Investing in Af-
rican Mining Indaba 2012 was held at the
Cape Town International Convention Cen-
tre in South Africa. Kobus van der Wath
was a keynote speaker, and delivered a
presentation entitled Asia’s Importance for
African and Global Mining on 6 February.
During the event, Kobus was interviewed
by CNN as well as South Africa’s Money-
web.com, and Dirk Kotze was interviewed
by CNN as well as the Chinese national
network CCTV.
The China Analyst
37 І The Beijing Axis
African Mining in the Year of the Drag-
on – Cape Town, South Africa
On 8 February 2012, the Beijing Axis co-
organised this networking cocktail with
joint venture partner, Cadiz Corporate So-
lutions, during the Mining Indaba week at
Brundyn + Gonsalves art gallery in Cape
Town.
The Beijing Axis Procurement Roundta-
ble – Johannesburg, South Africa
On 16 February 2012, The Beijing Axis
organised the second installment of the
roundtable breakfast where Kobus van
der Wath, Founder and Group Managing
Director, delivered a presentation entitled
Assessing China as a Supply Chain Partner
for the African Mining, Industrial and Retail
Sectors. The event was held at Radisson
Blu Hotel Sandton, Johannesburg.
Africa Forecasting Workshop – Johan-
nesburg, South Africa
On 29 February–1 March 2012, the Africa
Forecasting Workshop was held at Hilton
Hotel Sandton, Johannesburg. Dirk Kotze
delivered a presentation entitled Assess-
ing China as a Supply Chain Partner for the
African Mining, Industrial and Retail Sec-
tors.
UCT GSB Distinguished Speakers Pro-
gramme – Cape Town, South Africa
On 7 March 2012, the University of Cape
Town (UCT) Graduate School of Business
(GSB) Distinguished Speakers Programme
was held at the UCT Graduate School of
Business Breakwater Campus, Cape Town.
Kobus van der Wath delivered a presenta-
tion entitled China and Asia in 2012 - Stra-
tegic Imperatives for South African Busi-
nesses in the Year of the Dragon.
Other events recently attended by The
Beijing Axis in Africa include:
SAPICS Breakfast Presentation15 September 2011; Johannesburg, South Africa
Smart Procurement World 201111-12 October 2011; Johannesburg, South Africa
China Day in South Africa Conference3 February 2012; Cape Town, South Africa
Australia
CIPSA Sundowner – Perth, Australia
On 21 February 2012, The Beijing Axis
sponsored the fi rst local event of The
Chartered Institute of Purchasing & Sup-
ply Australasia (Western Australia) at UWA
Club in Perth.
Other events recently attended by The
Beijing Axis in Australia include:
Africa Downunder Conference31 August – 2 September 2011; Perth, Australia
Latin America
2nd Coaltrans Colombia - Bogota, Co-
lombia
On 20-21 September 2011, the 2nd
Coaltrans Colombia was held at AR Hotel
Salitre, Bogota. Javier Cuñat, General Man-
ager: Beijing Axis Strategy, delivered a
presentation entitled The Role and Impor-
tance of Asia for Latin-American Coal – with
specifi c reference to Colombia.
Events recently attended by The Beijing
Axis in Latin America include:
Perumin12-15 September 2011; Lima, Peru
Exposibram26-29 September 2011; Belo Horizonte, Brazil
Europe and Americas
31st Coaltrans World Coal Conference –
Madrid, Spain
On 16-18 October 2011, the 31st Coaltrans
World Coal Conference was held at Palacio
de Congresos, Madrid. Javier Cuñat partic-
ipated in a panel discussion on Maximis-
ing Shareholder Value in the Coal Industry.
Mines and Money London 2011 – Lon-
don, UK
On 6-7 December 2011, Mines and Money
London 2011 was held at the Business
Design Centre, London, UK. Matt Pieterse,
Managing Director: Beijing Axis Capital,
participated in a panel discussion entitled
China and the other BRICS nations lead the
way for growth, but what damage is being
caused by the US decline?
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The event is aimed at professionals who wish to
obtain an updated vision of the PRC and
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The China Analyst
39 І The Beijing Axis
Previous Editions of The China Analyst
Other Recent Publications by The Beijing Axis
To view or download current or previous editions of The China Analyst or other The Beijing Axis publications, visit our website at www.thebeijingaxis.com.
Challenges and
Opportunities for
Procuring Capital
Goods in China
for Global Mining
and Infrastructure
Projects
CHaINA 2012
The long term
outlook for China’s
chrome demand and
outbound investment
ICDA Chrome Ore
The Role and Im-
portance of Asia for
Latin-American Coal
– with specifi c refer-
ence to Colombia
Coaltrans Colombia
The Global Context:
How will China/
Asia aff ect demand
and will investment
in South Africa
continue?
South African Ferro-
alloys Conference 2011
Assessing China as a
Supply Chain Partner
for the African Min-
ing, Industrial and
Retail Sectors
TBA Procure-
ment Roundtable
Breakfast
Asia’s Importance
for African and
Global Mining
Investing in
African Mining
Indaba
February 2012
September 2011
February 2012
September 2011
November 2011
October 2011
Regulars
• Macroeconomic Monitor
• China Facts & Figures
• China Trade Roundup
• China Sourcing Strategy
• China Capital
• Mapping China
• Regional Focus: China-Africa,
China-Australia, China-Latin America and
China-Russia
Features
The China Factor: Supplying China’s Phenomenal Demand for Resources
How did the China Factor become a singular driving force of global demand
for natural resources in the 2000s?
Road to 2020: Nuclear’s Rising Contribution to China’s Energy Needs
Nuclear power has entered a new era in China as China targets 2020 for radi-
cally ramping up nuclear production.
August 2010
Regulars
• Macroeconomic Monitor
• China Facts & Figures
• China Trade Roundup
• China Sourcing Strategy
• China Capital
• Mapping China
• Regional Focus: China-Africa,
China-Australia, China-Latin America and
China-Russia
Features
China in 2030: Outlines of a Chinese Future
China appears to have an awe-inspiring future ahead of it, and its economy
its set to attain unparalleled dimensions, if the future turns out like we ex-
pect.
China's Construction Industry: Strategic Options for Foreign Players
Entering the Chinese construction industry is a challenging prospect for for-
eign fi rms, yet opportunities still exist.
March 2011
Regulars
• Macroeconomic Monitor
• China Facts & Figures
• China Trade Roundup
• China Sourcing Strategy
• China Capital
• Mapping China
• Regional Focus: China-Africa,
China-Australia, China-Latin America and
China-Russia
Features
Upstart: China’s Emergence in Science and Technology
After coming of age in China’s domestic markets, Chinese are now replicat-
ing their domestic success in global markets.
Building by Design: How China Develops the Developing World
Chinese contractors and design fi rms have gone international and are
shaping landscapes where its needed most: the developing world.
May 2010
Regulars
• Macroeconomic Monitor
• China Facts & Figures
• China Trade Roundup
• China Sourcing Strategy
• China Capital
• Mapping China
• Regional Focus: China-Africa,
China-Australia, China-Latin America and
China-Russia
Features
Resources for Infrastructure: China’s Role in Africa’s New Business Landscape
Chinese companies active in Africa are reshaping the continent’s business land-
scape, yet at its core the relationship rests on one simple although vital exchange.
China and Latin America: Untapped Sources of Added Value
Trade and investment between China and Latin America have increased
ten-fold in the last decade, yet the two regions are now set to enter a new
higher value added stage of their relationship.
September 2011
Johannesburg, South AfricaDirk Kotze
Director & GM: Africa
+27 (0)11 201 2453
+27 (0)11 201 2508 (fax)
Moscow, Russia Lilian Luca
MD, Beijing Axis Procurement
Perth, Australia & SingaporeKobus van der Wath
Founder & Group GM
Latin America Desk
Javier Cuñat (in Beijing)
GM, Beijing Axis Strategy
The Beijing Axis is a China-focused international advisory fi rm operating in four principal areas: Commodities, Capital, Procurement and
Strategy. We provide international clients with integrated and China-specifi c advisory services that draw upon the company’s deep China
knowledge. We also act as advisor to our Chinese clients in their international growth strategies. Our services cover various sectors and
industries, yet our core focus is on the mining and resources, industrial and engineering sectors. The Beijing Axis was established in 2002,
and has offi ces in Beijing, Johannesburg, London, Perth and Singapore.
The Group is organised along four synergistic business units:
Beijing Axis Commodities
Beijing Axis Commodities supports commodity producers with their international marketing eff orts and the structuring of off -take
agreements, and assists commodity consumers with their procurement eff orts in securing supply.
Beijing Axis Capital
Beijing Axis Capital provides independent corporate fi nance advisory and transaction origination services. We have a specialist China-
specifi c approach with extensive international and Africa-specifi c knowledge and experience.
Beijing Axis Procurement
Beijing Axis Procurement is a China-focused global procurement house and provides a comprehensive range of services across the supply
chain.
Beijing Axis Strategy
Beijing Axis Strategy provides management consulting services to CEOs and senior executives in the areas of strategy formulation and
strategy implementation.
Beijing, China +86 10 6440 2106, +86 10 6440 2672 (fax)
Beijing Axis CommoditiesCheryl Tang
MD, Beijing Axis Commodities
Beijing Axis Capital Matt Pieterse
MD, Beijing Axis Capital
Beijing Axis ProcurementLilian Luca
MD, Beijing Axis Procurement
Beijing Axis Strategy Javier Cuñat
GM, Beijing Axis Strategy
Contact Information
www.thebeijingaxis.com