The China Analyst - April 2012

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)



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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18 Harbour Road

Wanchai

Hong Kong, PRC

Tel: +86 (0)10 6440 2106

Fax: +86 (0)10 6440 2672

www.thebeijingaxis.com

Executive Editor

Kobus van der Wath

[email protected]

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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contact Barbie Co at barbieco@

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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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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.

Features 专题FFFFFeeeaaatttttuuurrreeesss 专题专题专题专题专题专题 The China Analyst


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


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

[email protected]

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.



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)


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

[email protected]

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



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


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



(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

[email protected]


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%


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


Features 专题FFeeaattuurreess 专题专题专题专题 The China Analyst

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


The China Analyst


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


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

[email protected]

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


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


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)


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)


0

20

40

60

80

100

120

2011201020092008200720062005

Annual Inbound FDI in China (USD bn, 2005-2011)

The China Analyst


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)


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


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


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


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

[email protected]

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


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


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)


0

10

20

30

40

50 South

Africa

Angola

Nigeria

Algeria

LiberiaMor-

occo

Egypt

Others

CongoCongo

(DRC)

Sudan

2010 2011

The China Analyst


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


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


China-Australia Annual and Monthly Trade (USD bn, 2001-11)

Source: China Customs; The Beijing Axis Analysis

The China Analyst


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


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


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%)


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


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


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


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


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.


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


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.


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?

[email protected]

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A STRATEGIC LOOK AT CHINA'S DEVELOPMENT.

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SUPPORTED BY:

The event is aimed at professionals who wish to

obtain an updated vision of the PRC and

executives interested in developing business

relations with the Asian giant. This will be done

through three first level presentations:

Prospects.

SPEAKERS CONFIRMED:

CONTACTS: [email protected]

[email protected]

The event is aimed at professionals who wish to

obtain an updated vision of the PRC and

executives interested in developing business

relations with the Asian giant. This will be done

through three first level presentations:

Prospects.

SPEAKERS CONFIRMED:

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The China Analyst


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





• China Capital

• Mapping China



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





• China Capital

• Mapping China



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





• China Capital

• Mapping China



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

[email protected]

+27 (0)11 201 2453

+27 (0)11 201 2508 (fax)

Moscow, Russia Lilian Luca

MD, Beijing Axis Procurement

[email protected]

Perth, Australia & SingaporeKobus van der Wath

Founder & Group GM

[email protected]

Latin America Desk

Javier Cuñat (in Beijing)

GM, Beijing Axis Strategy

[email protected]

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

[email protected]

Beijing Axis Capital Matt Pieterse

MD, Beijing Axis Capital

[email protected]

Beijing Axis ProcurementLilian Luca

MD, Beijing Axis Procurement

[email protected]

Beijing Axis Strategy Javier Cuñat

GM, Beijing Axis Strategy

[email protected]

Contact Information

www.thebeijingaxis.com