Overview to understand the growing importance of China. A wake up call to Western countries

1. Enrique
Ibáñez
December
2010
http://exprimiendonaranjaschinas.blogspot.com
Version
6
Conclusions
from
a
one-­month
trip
to
China
How
CHINA
is
becoming
the
CENTER
of
the
WORLD
5
views
in
5
pages
Illustration
by
Harry
Camp,
The
Economist
“The
economic
future
of
the
world
for
the
next
20
to
50
years
is
going
to
be
dominated
by
China”
Guy
Hands,
chairman
of
Terra
Firma
“China
is
clearly
going
to
be
the
no.1
economic
power
and
it
is
already
full
of
potential”
Bernard
Arnault,
chairman
of
LVMH
“’We
are
the
masters
now’,
that
was
certainly
the
refrain
that
I
kept
hearing
in
my
head
when
I
was
in
China”
Niall
Ferguson,
journalist
The
Economist
1.
A
huge
country-­size
with
an
increasing
global
impact
“China
invested
$78bn
in
the
2010
Shanghai
World
Expo,
5x
the
budget
for
the
2012
London
Olympic
Games”
Illustrative
highlights
Map
of
Chinese
main
cities
• Population:
<1.4bn
people,
c.20%
of
world
population.
Divided
in
32
provinces
plus
the
autonomous
zones
-­‐
with
c.50m
people
on
average
-­‐
and
100
cities
with
more
than
>
1m
habitants
• GDP:
$6.5tr.,
9%
of
world
economy,
although
<5%
5-­‐yrs.
ago.
Just
behind
US
($15tr.),
but
it
has
been
growing
close
to
+10%
p.a.
for
the
last
20-­‐yrs.
-­‐ By
2030,
China
is
expected
to
be
the
largest
world
economy
with
a
24%
share
-­
according
to
Standard
Chartered
-­‐ By
2050,
China
is
expected
to
be
over
10x
larger
than
it
was
in
2009
and
4x
the
size
of
the
2009
US
economy
-­‐
according
to
Goldman
Sachs
• Commodities:
China
accounts
for
broadly
>30%
of
worldwide
demand.
In
fact,
China:
(a)
increases
yearly
its
electricity
consumption
by
the
size
of
U.K.
and
(b)
is
setting
up
30m
car
production
capacity
per
annum
vs.
18m
at
the
peak
in
US
Source:
The
China
Strategy,
Edward
Tse
1

2. Enrique
Ibáñez
December
2010
http://exprimiendonaranjaschinas.blogspot.com
Version
6
Conclusions
from
a
one-­month
trip
to
China
2.
Two
radical
population
segments
“When
I
saw
an
old
tricycle
at
the
base
of
the
modern
Shanghai
World
Financial
Center
skyscraper,
I
realized
the
huge
differences
that
the
fast-­growth
was
generating”
CURRENT:
Urban-­affluent
consumers
FUTURE:
emerging
middle-­class
in
rural
/
smaller
cities
• The
inflated
asset
price
in
property
and
stock
• Chinese
private
consumption
is
still
in
its
markets
has
created
tremendous
wealth
effect,
infancy
levels:
$1tr
(<20%
of
GDP)
vs.
$9.5tr
as
well
as,
the
fast-­growing
middle-­class,
which
in
US
(>70%
of
GDP)
in
2007
it
is
another
strong
growth
driver.
At
the
same
time,
huge
revenues
disparities
are
arising
• However,
“China's
urban
population
will
expand
from
572m
in
2005
to
926m
in
2025
• The
Chinese
luxury
goods
market
represents
and
hit
the
1
billion
mark
by
2030”
McKinsey
>€20bn
in
2010,
accounting
for
32%
of
the
global
share
and
it
grew
at
+23%
(09-­‐10).
Thus,
• “80%
of
middle-­class
consumption
is
in
340
massively
benefiting
Western
luxury
brands
cities.
In
2020,
it
will
be
in
550”
BCG
• Example
-­‐
Montblanc
has
95
stores
in
China
(vs.
• Rural
population
still
has
very
low
34
in
US)
and
expects
130
by
2015.
Note
that
a
consumption.
E.g.,
penetration
rates
in
home
Montblanc
watch
costs
between
$5-­‐15k
appliances:
10%
air
condition,
30%
fridges,
50%
washing
machine
vs.
100%
in
urban
areas
• There
are
already
almost
1m
people
with
more
than
>$150k
financial
assets.
However,
GDP
per
• According
to
BCG,
during
the
next
decades
head
is
<$4.800
vs.
$48.010
in
US,
and
it
was
households
with
income
>$9.000
will
just
$1.700
five
years
ago
increase
from
150m
to
400m
and
2/3
of
them
will
resided
in
small
cities
“When
you
go
to
Shanghai,
you
visit
The
Bund
and
typically
take
a
picture
of
the
skyscrapers
of
Pudong.
Actually,
I
also
took
a
picture
of
all
the
Chinese
that
were
just
walking
on
The
Bund.
Imagine
when
they
will
start
consuming”
CHART:
Astonish
forecasted
growth
of
the
Asia-­Pacific
middle-­class
Global
middle
class
in
2009
and
prediction
for
2030
Source:
Standard
Chartered,
OCDE
2

3. Enrique
Ibáñez
December
2010
http://exprimiendonaranjaschinas.blogspot.com
Version
6
Conclusions
from
a
one-­month
trip
to
China
3.
Two
phases
in
the
international
expansion
“After
attending
a
couple
of
trade
fairs,
you
quickly
discover
that
the
Chinese
started
producing
cheap,
then
cheap
and
high
quality,
and
now,
they
are
directly
buying
Western
brands
and
distribution
networks”
Illustration
by
Bill
Butcher,
The
Economist
PAST:
exports
that
generated
an
enormous
trade
surplus
FUTURE:
acquisition
of
all-­types
of
foreign
assets
• An
extraordinarily
high
savings
rate
-­‐
due
to
the
• Foreign
reserves:
foreign
investment
+
trade
lack
of
the
social
safety
net
-­‐
and
an
undervalued
surplus
=
>$1.3tr.

Largest
in
the
world
and
exchange
rates
have
fuelled
a
rapid
export-­led
more
than
60%
of
them
invested
in
US$
assets
growth,
and
hence,
the
world’s
biggest
current-­
account
surplus • China
is
progressively
increasing
its
power
on
supranational
institutions.
Moreover,
• Exports
represent
>40%
of
GDP,
a
significant
Chinese
companies
are
focusing
on
their
increase
from
the
just
20%
ten
years
ago
internationalization
and
they
are
becoming
-­‐ In
2009,
China
over
passed
Germany
as
very
active
in
overseas
auctions,
investing
in
largest
world
exporter
companies,
financial
assets
and
real
estate
-­‐ Moreover
-­‐
as
a
matter
of
reference
-­‐
just
Shenzhen
exports
as
much
as
India:
$162bn
• Moreover,
China
is
heavily
investing
in
raw
materials
in
Latam/Africa
and
narrowing
• As
a
consequence,
China:
(a)
has
become
the
links
with
other
emerging
countries
in
a
largest
world
exporter
with
>30%
global
share
deliberate
hedging
strategy
to
reduce
(e.g.
China
exports
$15bn
to
Spain
and
only
economic
dependence
on
the
West
imports
$2bn)
and
(b)
has
dominant
world
production
shares
on
products
such
as:
cameras
• At
the
same
time,
China
still
needs:
much
50%,
tv
35%,
air
conditioners
34%,
apparel
32%
more
brands,
larger
distribution
networks
and
more
investment
on
research
and
• However,
the
current
world
economy
situation
product
development
has
generated
a
significant
production
overcapacity,
and
therefore,
price
pressure
“At
the
end
of
the
meeting
with
one
of
the
largest
Chinese
private
equity
funds,
the
managing
partner
told
me:
‘I
would
love
to
buy
a
flat
in
Barcelona’
…
‘but
if
it
is
12-­hour
flight
away!’
I
though”
Chinese
people
love
the
style
of
Western
well-­known
cities
Table:
Significant
increase
of
Chinese
buyers
of
luxury
homes
in
Western
cites
Source:
“China
towns”,
Financial
Times
Nov.
12th
2010,
Knight
Frank
3

4. Enrique
Ibáñez
December
2010
http://exprimiendonaranjaschinas.blogspot.com
Version
6
Conclusions
from
a
one-­month
trip
to
China
4.
A
major
State
power
“When
I
booked
my
trip
to
the
Great
Wall,
the
travel
agency
was
State-­owned,
same
as
the
coach
company,
the
restaurant
where
we
ate,
the
silk
company
we
visited
and
the
companies
managing
the
Ming
tombs
and
Great
Wall”
One
thing
=
Party
+
Government
+
large
companies
Regional/local
governments
cannot
be
undervalued
“Fast
economic
growth,
but
slow
political
change”
“The
mountains
are
high
and
the
Emperor
is
far
away”
-­‐ Government
has
2
key
objectives:
GDP
growth
• China
is
not
a
singular
market,
but
a
>8%
(“baoba”)
and
social
stability
(“baowen”)
regional
one.
Therefore,
the
importance
of
regional
and
local
governments
is
significant
-­‐ High
State
control:
c.30%
of
the
economy

e.g.,
ownership
of
the
150
largest
companies:
• Moreover,
the
vast
majority
of
Chinese
-­‐ Great
to
implement
quick
measures
and
companies
still
only
have
regional
shift
the
direction
of
the
economy
coverage.
Hence,
a
significant
amount
of
-­‐ Positive
long-­term
view.
Govnt.
objectives
domestic
industry
expansion,
and
based
on
a
5-­‐year
plan,
with
high
pressure
to
consolidation,
will
necessary
occur
over
the
reach
the
goals.
Note
elections
are
restricted
coming
years
to
top
members
of
the
Party
• Note
that
strategic
sectors
are
still
-­‐ Widespread
corruption
as
well
as
fraud
and
not
restricted
to
foreign
investment,
such
as:
much
developed
business
ethics
communications,
transport,
energy,
oil,
steel
5.
Doing
business
in
China
“We
knew
what
we
ate,
not
what
we
paid”
a
restaurant
bill
illustrates
the
huge
communication
barriers.
Chinese
food
is
rich
and
diverse,
however
it
is
so
different
that
I
really
enjoyed
when
I
was
sharing
the
table
with
a
local
High
cultural
barriers
–
China
is
not
Westernising
• Strong
importance
of
personal
relationships
-­
“guanxi”:
concept
of
personal
relationships
and
reciprocal
favours
that
underpin
all
deals

“first
friends,
then
businesses”
a
Chinese
proverb
• High
importance
of
social
reputation,
image
and
status
-­‐
“mianzi”:
concept
to
express
the
extremely
high
importance
that
the
Chinese
gives
to
something
that
it
is
much
more
than
just
the
person’s
brand
“They
always
wanted
to
meet
me
at
the
Mandarin
Oriental,
the
first
upscale
hotel
in
Hong-­Kong”
that’s
when
I
understood
the
importance
of
“mianzi”
• Patience
and
perseverance
is
a
need
-­‐
it
always
takes
more
time
than
expected.
E.g.:
Alsa,
a
Spanish
coach
company,
spent
3
years
negotiating
with
the
Chinese
partner
and
another
2
to
get
all
permits
• Flexibility
is
a
must,
such
as
accepting
new
proposals,
suggestions
from
the
local
partner
or
public
bodies.
However
-­‐
at
the
same
time
-­‐
it
has
to
be
clear
which
are
the
unchangeable
parts
for
a
foreign
player
• Overall,
I
saw
that
the
Chinese
work
hard
(easily
>60
hours/week),
have
a
strong
desire
to
learn,
to
cope
with
change
and
are
highly
entrepreneur/competitive.
(e.g.,
China
has
85m
private
companies
vs.
25m
in
US
and
c.1.5m
in
Spain).
However,
they
are
also
quite
individualistic
and
fully
driven
to
succeed
“I
was
really
surprised
in
Beijing
when
this
old
man
took
out
from
his
bag
a
book
about:
how
to
learn
English”
I
wish
we
would
see
more
examples
like
this
in
US
and
Europe
4

5. Enrique
Ibáñez
December
2010
http://exprimiendonaranjaschinas.blogspot.com
Version
6
Conclusions
from
a
one-­month
trip
to
China
...by
the
way,
they
love
you
tell
them
how
much
you
admire
their
long
and
rich
history!
It
goes
back
5000
years
6.
Conclusion
-­‐
my
personal
view
• Despite
the
potential
instabilities
in
the
way
through
-­‐
such
as
the
property,
equity,
commodities
bubbles
–
long
term
I
am
quite
confident
on
China
and
agree
this
is
just
the
beginning
of
the
so-­‐called
Asia
century
• How
much
time
it
will
take
to
become
the
world
most
important
country?
It
will
pretty
much
depend
on
how
successful
they
are
in
developing
their
middle-­class.
This
is
a
necessary
step
to
push
their
internal
private
consumption,
and
hence,
shift
away
from
an
export-­‐led
growth
model.
Equally
important
would
be
the
Government
ability
to
handle
a
potential
social
unrest,
if
GDP
slows
and
unemployment
rises
• In
order
to
achieve
it,
I
believe
their
individuals
have
an
admirable
attitude
and
their
political
system
the
strength
to
set
up
and
quickly
execute
challenging
objectives
7.
Appendix:
10
books
on
China
(ranked
by
preference)
1. Mr.
China,
Tim
Clissold:
raising,
investing,
managing
…and
losing
a
$400m
private
equity
fund
in
China
2. Managing
the
Dragon,
Jack
Perkowski:
an
how
to
build
a
one
billion
company
in
China
3. The
next
Asia,
Stephen
Roach:
a
macroeconomic
view
of
Asia
by
the
chairman
of
Morgan
Stanley
Asia
4. Think
like
Chinese,
Zhang
Haiuhua
and
Geoff
Baker:
understanding
how
to
do
business
in
China
5. A
bull
in
China,
Jim
Rogers:
analysis
from
an
investment
perspective
of
different
sectors
in
China
6. The
China
Strategy,
Edward
Tse:
a
senior
partner
from
Booz&Co
describes
how
to
enter
the
Chinese
mkt.
7. China
Inc.,
Ted
Fishman:
an
American
view
of
the
Chinese
rising
power
8. Chinamerica,
Handel
Jones:
an
overview
of
the
US
and
Chinese
industrial
evolutions
and
their
relationships
9. El
siglo
de
China,
Ramón
Tamames:
revision
histórica
y
económica
desde
Mao
a
la
primera
potencial
mundial
10. To
Live!,
Yu
Hua:
an
epic
and
heartbreaking
journey
spanning
four
decades
of
recent
Chinese
history
5