Global Global

Strategy Challenges

Executable
Solutions

China (2010 – 2020): What China Will Look Like in the Future
Today’s Corporate Platforms: Competitive or Obsolete for Tomorrow’s World?

France Houdard
Managing Director
February 2010

Copyright © 2010 Exolus. All rights reserved.

Preface: What Does China Look Like from Space? At Night?
Why?

Copyright © 2010 Exolus. All rights reserved.. Source: NASA (United States – National Aeronautics and Space Administration) 2
 Table of Contents – Corporate Series (Part 1 of 6)
♦ Introduction – What China Will Look Like in the Future
- STRUCTURAL FRAMEWORK: Determinants of China’s Economic Geography
- The PAST: China’s Economic Growth
- WEALTH: Forward Trend in Middle Class Growth
- URBANIZATION: Forward Trend in Mass Migration / Urbanization
- The FUTURE: China’s Future Country-Sized Mega-Clusters

♦ Next Generation Structural/Functional Strategies

TODAY’S BURNING PLATFORM: Structural Optimization (Cost / Revenues)
1. Cost Reduction / Resources: Opportunity Envelopes for Emerging Structural Cost Optimization
2. Revenue Growth / Markets: Pareto-Optimal Cost-Revenue Platform Solutions

FUTURE BURNING PLATFORMS: Next Generation Optimization Opportunities

3. Innovation Enhancement / Talent: Innovation-Seeking Investment Trend
4. Shared Service Centers: SSC and BPO Trends, Strategic Opportunities
5. Virtually Integrated Operating Models: Migration to Virtually Integrated Operating Models

♦ China’s Economic Health and Opportunities for Investors

- China Investor Confidence: China Ranks #1 as Most Attractive Investment Destination of Future
- Financial & Economic Health: China Balance Sheets - Banks, Enterprises, Households
- Stimulus Plan: Composition and US Comparison
- Investment Opportunities: What are Investment Opportunities? For which Sectors?

Copyright © 2010 Exolus. All rights reserved.. 3

 INTRODUCTION: What China Will Look like in the Future …

Copyright © 2010 Exolus. All rights reserved.. 4

Structural Determinants of China’s Economic Geography …
67% Mountains, Deserts, Steppe … 90% of 1.3 billion Population in EAST

Heilongjiang

Des e
erts
Jilin

pp
e
St
Xinjiang Liaoning
Inner Mongolia Beijing
Gans
u Hebei Tianjin

Shanxi
Ningxia Shandong
Qinghai

Henan
Shaanx Jiangsu
Mountains i

People
Tibet Anhui Shanghai
Hubei
Sichuan
Chongqing Zhejiang

Hunan Jiangxi
Guizhou Fujian

Yunnan
Guangxi Guangdong

Copyright © 2010 Exolus. All rights reserved.. 5

The PAST: Fastest Growing Large Economy in World
China’s Economy: Doubles every 7 Years … Tripled most Recently

China GDP (USD trillion)

Hosts
OLYMPIC
games

3x
USD (Real Market Rates)

Accepted full
convertibility for
current account Admitted to
transaction WTO

Eliminated its
dual exchange
China rate
Opens to Applied to join
the World GATT 2x

2x

Copyright © 2010 Exolus. All rights reserved.. Source: IMF 6

WEALTH: Forward Trend in Exploding Middle Class
China’s Middle Class: 400 million (2010) … 500 million (2015)

Middle Class Income Bands for Urban Population

Urban Household Income
900 (US$ – PPP-Adjusted)
822
800 756 Global > US$107,800
99
684
700 Affluent US$3,800 - 107,800
90
607
600
Urban Population (millions)

531
500
53 170
400 355 461 525 Upper Middle US$21,501 – 53,900

300 239
255
200
157
100 106
73 Lower Middle US$13,500 – 21,500
0 35 Poor < US$13,500

2005 2010F 2015F 2020F 2025F

Upper Middle Class

Lower Middle Class

Copyright © 2010 Exolus. All rights reserved.. Sources: Urbanization Rates, Population based on UN, World Urbanization Prospects 2007; MGI Consumer Demand 2008 7
URBANIZATION: Forward Trend in Mass Migration into Cities
China’s Urban Population: 600 million (2010) … 700 million (2015)

China’s Urban Population versus Rural Population

1,600
1.45 billion
1.4 billion
1,400
1.3 billion
1.2 billion
1,200 624 Rural Population
1 billion (million)
705
1,000
782
800
833
822 822 Urban Population
600
(million)
684
400 531
381
200 245
23% 31% 40% 49% 57% Urbanization
0
1985 1995 2005 2015 2025

Copyright © 2010 Exolus. All rights reserved.. Source: World Urbanization Prospects 2007 8
The FUTURE (2020): Emergence of 10+ Mega-Clusters Size of Countries
Mega-Cluster Profile: 60 Million Population + World-Class Infrastructure

Mega-Clusters
China’s Emerging MEGA-CLUSTERS
Mega-Corridors

Heilongjiang

Des e
erts
Jilin

pp
e
St
Xinjiang Liaoning
Inner Mongolia Beijing
Gans
u Hebei Tianjin

Shanxi
Ningxia Shandong
Qinghai

Shaanx Henan Jiangsu

Mountains Tibet
i
Hubei
Anhui Shanghai
Sichuan
Chongqing Zhejiang

Hunan Jiangxi
Guizhou Fujian

Yunnan
Guangxi Guangdong

Copyright © 2010 Exolus. All rights reserved.. 9

 TODAY’S BURNING PLATFORM: Structural Optimization (Cost / Revenues)

Copyright © 2010 Exolus. All rights reserved.. 10

TODAY’S BURNING PLATFORM: Structural Cost Reduction, Revenue Growth
Global Structural’ Cost Reduction … Revenue Growth

Revenue Growth 3) INNOVATION

KN
TS

O
KE

W
Sales Engineering

LE
AR

DG
M

E
Marketing IT HR R&D CONTRACTS,
PARTNERSHIPS
Shared
Services
SHARED
F&A Procure SERVICE
CENTERS
Distribution Sourcing
RESEARCH &
Production
DEVELOPMENT

SALES &
MARKETING
RESOURCES
PRODUCTION /
SOURCING

Cost Reduction DRIVING

Shareholder Value

Copyright © 2010 Exolus. All rights reserved.. 11

1. COSTS: Does First-World Infrastructure with Third-World Wages Exist?
Asia Labor Costs: 10 – 20 Times Cheaper than in West

Labor Costs Utility Costs

(USD per month)

Note: Units for Electricity $/kWh; Water in USD/m3; Waste Water in USD/m3

Copyright © 2010 Exolus. All rights reserved.. Source: Wage Data from the International Labor Organization; Utilities Rates from Public Utilities (non-negotiated rates) 12
1. COSTS: China Yields Major Cost Savings through Production & Sourcing
Is it POSSIBLE for a Company’s Economy … to Surpass that of Countries?

Company China
Sourcing
$27 billion

$18 billion

$10 billion

$8.5 billion

$5.5 billion

7th Place
$2.6 billion

$2.5 billion

10th Place
$2.2 billion

$1.8 billion

Copyright © 2010 Exolus. All rights reserved.. 13

1. COSTS: Significant Stratification Trend for Wage Bands
Labor Costs: Western China @ 65% of Costs compared to EAST

Low Cost Labor

Wage Bands
(Bands Normalized to Highest Wages for Operators)

Heilongjiang

Des e
erts
Jilin

pp
e
St
Xinjiang Liaoning
Inner Mongolia Beijing
Gans 1
u Hebei Tianjin

Shanxi
Ningxia Shandong
Qinghai

5
.7
Henan
Shaanx Jiangsu
Mountains

-0
i

0.8
Tibet
0.Anhui 1 Shanghai
65
Hubei
8
0.
Sichuan
- 0 Zhejiang

-
Chongqing

0.7
Jiangxi
.9
Hunan
Guizhou Fujian

Yunnan
Guangdong
Guangxi
1

Copyright © 2010 Exolus. All rights reserved.. Source: Exolus Research 14

1. COSTS: Where are Emerging Structural Cost Reduction Opportunities?
Intersection: Low Cost Bands + Emerging Mega-Clusters

Wage Bands
Wage Bands / Mega-Cluster Overlay
(Normalized to Highest Wages)
Mega-Cluster
Mega-Corridors
Heilongjiang

Des e
erts
Jilin

pp
e
St
Xinjiang Liaoning
Inner Mongolia Beijing
Gans 1
u Hebei Tianjin

Shanxi
Ningxia Shandong
Qinghai

5
.7
Henan
Shaanx Jiangsu
Mountains

-0
i

0.8
Tibet
0.Anhui 1 Shanghai
65
Hubei
8
0.
Sichuan
- 0 Zhejiang

-
Chongqing

0.7
Jiangxi
.9
Hunan
Guizhou Fujian

Yunnan
Guangdong
Guangxi
1

Copyright © 2010 Exolus. All rights reserved.. 15

2. REVENUES: China Already World’s 2nd Largest Economy (PPP)

GDP PPP (2008)

Germany (5)

11,8 trillions de $ France (6)

EU-27
US (1) 6,4 trillions
de $ 3,6 trillions 3 trillions
UK (7)
de $ de $
India (3) Japan (4)

$14.3 tr $7.8 tr $3.3 tr $4.4 tr $14.9 tr

GDP Nominal (2008)

EU-27 Germany (3)

US (1)
$5.1 tr
France (6) UK (4)
Japan (2) China (5)
IND(9)

$14.3 tr $4.9 tr $17.1 tr $4.2 tr $1.2 tr

Copyright © 2010 Exolus. All rights reserved.. Source: EIU; IMF; CIA World Factbook 16
2. REVENUES: Significant Income Stratification Trends across China
Coastal Wealth Spreading Across the Country

Per Capita Annual Income

(USD, PPP-Adjusted)
China Per Capita Annual Income
(USD, PPP-Adjusted)
> 40,000
30,000 - 40,000 Heilongjiang
25,000 - 30,000
20,000 -25,000
Jilin
17,500 - 20,000
0 - 17,500 Xinjiang Liaoning
Inner Mongolia
Gans Beijing
u Hebei Tianjin
Shanxi
Ningxia Shandong
Qinghai

Henan
Shaanx Jiangsu
i
Tibet Anhui Shanghai
Hubei
Sichuan
Chongqing Zhejiang

Hunan Jiangxi
Guizhou Fujian

Yunnan
Guangxi Guangdong

Copyright © 2010 Exolus. All rights reserved.. 17

2. REVENUES: Car Sales/Production Proxy for Directional Market Sizing?
China Cars: World’s #1 Consumer … World’s #1 Producer

China Automotive Production

VW: Audi, Jetta, Bora, Golf BMW: 3 Series and 5 Series

Mazda: M6 GM: GL8

Toyota: Land Cruiser GM:Chevrolet (Epica, Sail, Aveo, Lova)

GM: Wuling
Hyundai: Sonata, Elantra
Changchun
Kia: Pride, Accent, Optima
Daimler-Chrysler: Mercedes- Shenyang
Benz, Cherokee, Jeep Beijing Fiat: Iveco
Tianjin
Mitsubishi: Pajero, Outlander Ford
Yantai
Qingdao
Toyota: Vios, Corolla, Crown Zhengzhou VW: Santana, Passat, Polo, Gol, Touran
Yancheng
Daihatsu: Charade Wuhu Nanjing GM: Buick Regal, Royaum,Lacrosse,
Wuhan Shanghai Excelle, Cadillac
Chengdu
Nissan: Paladin, pickup
Nanchang Taizhou Chery: Fulwin,Cowin,Easter,QQ,A5,V5
Chongqing
Changsha
Toyota: Terios, Prado Fuzhou
Geely: Haoqing, Meirie, Uliou, Maple
Suzuki: Alto, Swift, Gazelle Liuzhou Guangzhou

Isuzu: F-Series, N-Series Nissan: Teana

Ford: Fiesta, Mondeo Peugeot-Citroen: Fukang, Elysee,
Hainan
Xsara, Peugeot, Picasso
Mitsubishi: Pajero
Honda: CR-V

Soueast: Lioncel, Delica, Freeca, Soveran

GM: Spark, Wuling
Honda: Accord, Fit, Odyssey
Daimler Chrysler: Spinter Vito/Viano
Mazda: Premacy, Familia Nissan: Bluebird, Sunny

Toyota: Camry Ford: Transit

Copyright © 2010 Exolus. All rights reserved.. Sources: Company Websites, Publically Available Information 18
2. REVENUES: High Spending Growth Sustained Through Global Crisis
Sustained Retail Sales Growth … Huge Shift in Discretionary Spend

Retail Sales Growth Personal Expenditure

1.8
1
100%
15.5% Growth (2009) 2  Transport &
4
90 16 Communications
11
80 9  Health
Care
9
5  Consumer Goods
USD Trillions

70 7
60 12 15  Education

50 6  Home Appliances
0.7
11  Housing
40
9  Clothing
0.4 30
54
20
29  Food
10

0
1990 2010f

Copyright © 2010 Exolus. All rights reserved.. Source: China National Bureau of Statistics 19
2. REVENUES: Immense, Rapidly Growing Markets across Verticals
Exploding Middle Class+ High Speed Urbanization = Explosive Growth in Consumption

Technology Sector

2005 2006 2007 2008 2009F CAGR (2005-

2008)

Internet Users (million) 111 137 155 180 208 17.5%

Telephone Main Lines (million) 350 368 365 339 N/A -1.1%
Mobile Subscribers (million) 393 461 547 649 N/A 18.2%

Consumer Business Sector

2005 2006 2007 2008 2009F CAGR (2005-

2008)
Consumer Expenditure on Food (USD billion) 301 348 406 494 522 18%
Soft Drinks (USD billion) 23.5 25.8 27.9 30.1 31.6 8.60%
Cosmetics and Toiletries (USD billion) 11.1 12.1 13.3 14.3 15.5 8.8%
Tobacco (USD billion) 73.8 78.7 84.7 90.4 94.4 7.0%

Copyright © 2010 Exolus. All rights reserved.. Source: China National Bureau of Statistics, EIU 2008, Various 20
COSTS/REVENUES: Where are Pareto Optimal Envelopes?
Low Cost Bands + Emerging Mega-Clusters + High-Income Geographies

Per Capita Annual Income

(USD, PPP-Adjusted)
Per Capita Income / Wage Band Overlay
> 40,000
30,000 - 40,000 Heilongjiang
25,000 - 30,000
20,000 -25,000
Jilin
17,500 - 20,000
0 - 17,500 Xinjiang Liaoning
Inner Mongolia

Wage Bands
Gans 1Beijing
u Hebei Tianjin
Mega-Cluster
Shanxi
Ningxia Shandong
Mega-Corridors
Qinghai

5
.7
Henan
Shaanx Jiangsu

-0
i

0.8
Tibet
0.Anhui 1 Shanghai
65
Hubei
8
0.
Sichuan
- 0 Zhejiang

-
Chongqing

0.7
Jiangxi
.9
Hunan
Guizhou Fujian

Yunnan
Guangdong
Guangxi
1

Copyright © 2010 Exolus. All rights reserved.. 21

 FUTURE BURNING PLATFORMS: Next Generation Strategic Optimization

Copyright © 2010 Exolus. All rights reserved.. 22

The FUTURE: Third, Fourth & Fifth Generation Global Strategies

REVENUES INNOVATION

KN
TS

OW
KE

LE
AR

DG
Sales Engineering

E
Marketing IT HR R&D

SSC CONTRACTS,
F&A Pro’c
PARTNERSHIPS

SHARED
Distribution Sourcing
SERVICE
CENTERS (SSC)
Production RESEARCH &
DEVELOPMENT

SALES &
MARKETING

PRODUCTION /
RESOURCES SOURCING

DRIVING
COSTS Shareholder Value

Copyright © 2010 Exolus. All rights reserved.. 23

3. INNOVATION: China Mobilizes all Resources to Develop Talent
China Science and Engineering: 1.6 Million Graduates per Year

University Natural Sciences Degrees

(1985 – 2005)
200 United States
China
180 United Kingdom
USA
Japan
160 China
South Korea
Germany
140
Thousands

120

100

80

60

40

20

Copyright © 2010 Exolus. All rights reserved.. Sources: National Science Board, Science & Engineering Indicators 2008 24
3. INNOVATION: Where are Key Nodes for Structuring R&D Platforms?
“R” of R&D Seeks Universities … “D” Seeks Markets & Production

R&D Centers Research & Development Centers

(# Operations)
(Number of Operations in Select Cities)
> 10

> 50 Heilongjiang

> 150

Des e
erts
Jilin
Wage Bands
pp
e
St
Mega-Cluster Xinjiang Liaoning
Mega-Corridors Inner Mongolia Beijing
Gans 1
u Hebei Tianjin

Shanxi
Ningxia Shandong
Qinghai

5
.7
Henan
Shaanx Jiangsu
Mountains

-0
i

0.8
Tibet
0.Anhui 1 Shanghai
65
Hubei
8
0.
Sichuan
- 0 Zhejiang

-
Chongqing

0.7
Jiangxi
.9
Hunan
Guizhou Fujian

Yunnan
Guangdong
Guangxi
1

Copyright © 2010 Exolus. All rights reserved.. Source: UNCTAD, WIR 25

3. INNOVATION: Even Big Pharma Migrating R&D Functions to China
Costs Disease Diversity R&D Clinical Trials

R&D Centers Research & Development Centers

(# Operations)
(Number of Operations in Select Cities)
> 10

> 50 Heilongjiang

> 150

Jilin
Wage Bands
Mega-Cluster Xinjiang Liaoning
Mega-Corridors Inner Mongolia Beijing
Gans
u Hebei Tianjin

Shanxi
Ningxia Shandong
Qinghai

Henan
Shaanx Jiangsu
i
Tibet Anhui Shanghai
Hubei
Sichuan
Chongqing Zhejiang

Hunan Jiangxi
Guizhou Fujian

Yunnan
Guangxi Guangdong

Copyright © 2010 Exolus. All rights reserved.. Source: UNCTAD, WIR 26

4. SHARED SERVICE CENTERS (SSC): Strategic Solution Envelopes
Efficiencies … Economies of Scale … Knowledge Sharing … Standardization

Strategic Sourcing / Mega-Cluster Overlay

Shared Services

Wage Bands
Mega-Clusters Heilongjiang

Mega-Corridors
Des e
erts
Jilin

pp
e
St
Xinjiang Liaoning
Inner Mongolia Beijing
Gans 1
u Hebei Tianjin

Shanxi
Ningxia Shandong
Qinghai

5
.7
Henan
Shaanx Jiangsu
Mountains

-0
i

0.8
Tibet
0.Anhui 1 Shanghai
65
Hubei
8
0.
Sichuan
- 0 Zhejiang

-
Chongqing

0.7
Jiangxi
.9
Hunan
Guizhou Fujian

Yunnan
Guangdong
Guangxi
1

Copyright © 2010 Exolus. All rights reserved.. Source: KPMG “A new Dawn: China’s Emerging Role in Global Outsourcing”, 2009 27
5. Global Virtual Integration Models: Extension of Core Functions
Global Virtual Integration Models … Even Big-Pharma LEAP-FROGGING Generations

CSO Extended Cases China’s CRO Market

 Boehringer Ingelheim
 First Big Pharma to have entrusted a sole distributor for all of its 14
products in China: Sinopharm.
 Sinopharm is China’s largest pharmaceutical distributor by sales
and the only China distributor to cover the entire PRC.
12
 Boehringer Ingelheim’s sales spiked upward by 45% from 2006
to 2007; Sinopharm saw an annual growth rate of 32%.

10

CRO Extended Cases

 Pfizer 8
 Outsources to Wuxi PharmaTech: synthetic chemistry, parallel
medicinal chemistry, and bio-analytical services. It also has a 3-
year CRO contract with Wuxi PharmaTech to provide services in 6
the areas of: in-vitro Absorption, Distribution, Metabolism and
Excretion (ADME) services.
 GSK
4
 Outsources to Shanghai Institute of Materia Medica (SIMM)
chemistry requirements.
 AstraZeneca 2
 Invested USD14 million in Wuxi Pharma Tech for the synthesis
of 150,000 compounds.
0
2006 2007 2008 2009e 2010e 2011e
Copyright © 2010 Exolus. All rights reserved.. Sources: Goldman Sachs: Healthcare Services: CROs, December 2007; Exolus Research 28
 China’s Economic Health … Opportunities for Investors

Copyright © 2010 Exolus. All rights reserved.. 29

Senior Executives Select China as Most Attractive in World
Investor Confidence in China #1 in World

Top 14 Most Attractive Destinations for Future Investment

(2009 – 2011)
%
s es nops e Rf ot necr e P

Copyright © 2010 Exolus. All rights reserved.. Source: World Investment Prospects 2009 - 2011 30
Healthy Balance Sheets – Banks, Enterprises, Households
Insulation of Financial System … USD 2.4 trillion in Foreign Reserves … Low Inflation

 China’s Financial System Healthy, Benefits from Insulation, Abundant Liquidity

 China banks cleaned up in 1990s: Non-performing loans in 1997 averaged 40 – 50%; only 6% in 2007.
 Financial institutions extended approximately USD1.4 tr in new loans in 2009; almost double that of 2008

 Forex Reserves Achieve Record High in 2009: USD 2.4 trillion

 The Central Bank has accumulated over USD 2.4 trillion in foreign reserves.
 The accumulation of large external surpluses means financial system enjoys abundant liquidity.

 Clean Balance Sheets for Enterprises and Households

 State Owned Enterprise net profits as share of GDP has grown from (-1%) in 1997 to (+4.3%) in 2007.
 Record corporate profit growth over past 5 years (industrial profits rose 38 ppa); liability ratios declined.
 Urban incomes have nearly doubled in past 10 years.

 CPI Inflation, Expected Modest Rise in 2010

 January 2010 CPI at 1.5%, while preliminary forecasts predict inflation to reach 3% during 2010.

Copyright © 2010 Exolus. All rights reserved.. Source: Deutsche Bank; Standard Chartered; UBS; IMF; Other 31
Stimulus Plan Well Structured, Strong Ability to Implement
Large Stimulus Package … Authorities able to Deploy Quickly … China Early Recovery

Economic Stimulus - Comparative China Stimulus Distribution

Monetary Stimulus $586 billion $700 billion

GDP (PPP) $7.8 trillion $14.3 trillion
GDP $4.2 trillion $14.3 trillion
Stimulus/GDP 14% 5.10%
National Debt/GDP 20% 76%
Trade Surplus (Deficit)/GDP 10% -4%
Past Stimulus/GDP 47% (‘90’s) 3% (’81-’91)

Copyright © 2010 Exolus. All rights reserved.. Source: China’s Stimulus vs. America’s Bailout, Housel 2008 ; National Development and Reform Commission March 2009 32
Stimulus Plan will be of Direct Benefit to Range of Investors

Stimulus Spending Development Items Industry Opportunity

Housing Building affordable and rural housing Building Materials, Logistics, Utility, EPCM

Rural Infrastructure Modernizing roads, power grids, diversion of Building Materials, Logistics, Engineering
drinking water, and gas treatment Equipment, EPCM
Transportation Airports, roads, highway, ports, railway Vehicle & Aviation, Building/Construction Materials,
Rail Industry, Telecom, Power Transmission &
Distribution, Engineering Equipment, EPCM

Health Hospital construction, restructuring Pharmaceuticals, Healthcare, Medical Devices

healthcare system, and health insurance
expansion in rural areas

Education Developing cultural centers, rural school Building/Construction Materials, Education

construction in Western and Central areas
Disaster Rebuilding Earthquake rebuilding Infrastructure, Healthcare, Energy, Telecom,
Construction Materials
Environmental Waste mgmt, renewable energy, technology Energy, Waste Water Treatment, Thin Film PV,
upgrades in coal burning Wind, Energy, Bio-energy, EPCM
Innovation Value-added industry development New Materials, Bio-tech, Parma, Medical Device,
BPO, Aerospace, Thin Film PV, IT, Telecomm

Copyright © 2010 Exolus. All rights reserved.. Source: MOFCOM; NAROS; Various : 33
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Copyright © 2010 Exolus. All rights reserved.. 34
Disclaimer
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Copyright © 2010 Exolus. All rights reserved.. 35

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