Presentation by Guy Dru Druy, CBI China chief representative on the opportunities for UK companies to provide goods and services to consumers in China.

1. CBI China Briefing
Consumer goods and services in China
5 May, 2009
Guy Dru Drury
Chief Representative
CBI, China

2. Overview of presentation
I. CBI Beijing office – an introduction
II. Chinese economy – an overview
III. Consumer goods and services in China – potential and case studies
IV. Q&A

3. CBI China: an overview
• We have been on the ground for over 3 years.
•We have more than 350 members that operate in over 25 regions across the country.
•In China we represent more than half of FTSE 100 CBI member companies.
•Our China membership is split 60% UK and 40% international companies.
•We have almost 1/3 of members in services and banking/finance.
•CBI China membership is funded by CBI subscription in the UK - members in Europe, USA, China &
India automatically covered.
Beijing over 100 members
Cities to watch:
Shanghai over 100 members
Dalian: (20 members) outsourcing, services,
consumer goods
Qingdao: (24 members) services, consumer goods,
Guangzhou logistics, manufacturing
over 40 members
Wuhan: (27 members) outsourcing, manufacturing,
services
Chongqing: (21 members) ITC, services, manufacturing
Chengdu: (34 members) services, finance,
manufacturing, consumer goods

4. CBI China: the offering
•Regular economic, business & political analysis of key issues facing companies in China.
•A channel for lobbying and raising profile.
•Access to Ministerial visits and events in China.
•Links and access to CBI’s national membership – currently active in 25 provinces.
•Invitations to CBI and UK/International business events, including annual UK-China
bilaterals, private members dinners, breakfasts.
•A monthly Business Voice magazine – overview of CBI’s UK and international activities.
•A bilingual website (www.cbichina.org.cn) providing information, sectoral briefings.
•A Beijing-based office providing on the ground knowledge and independent analysis.

5. Business in China: focal issues
•Economic crisis (business environment in China and government response)
•New legislation (anti-monopoly, labour law, health care reform)
•Intellectual property (food and beverage, pharmaceuticals, media and sports)
•Market access (medical devices and services sector)
•Regulatory issues (banking/insurance, food and beverages, and manufacturing)
•Protectionism (seven protected industries: defence, energy, oil, telecoms, mineral
resources, civil aviation, and shipping)
•Climate change (sharing best practice and raising awareness)

6. The economy in China: a quick overview
• 3Q 2008: 9% growth, for the first time in five years China experienced single digit growth.
• October 2008: CBI survey found members cautiously optimistic about investment in
China, varied depending on sector (export vs. domestic market).
• November 2008: Chinese government RMB4 trillion (US$586 billion) 2-year fiscal
package. By 2Q, the government has cashed in RMB230 billion (US$33.8 billion).
- 3Q will see a third injection of as of yet unannounced sum into projects in health and
education sectors, big infrastructure projects, and housing for low-income earners.
• 1Q 2009: 6.1% growth, slowest in 20 years.
Definite slowdown
however, there are signs of recovery:
• Mid-April: Data released indicates domestic demand recovering, 1Q 2009 the bottom.
Data by RBS, CLSA

7. Industrial output
• Stimulus package has
invigorated domestic demand
•1Q industrial output rose
5.1% year on year to RMB
2.81 trillion (US$411.4 billion)
• Up 8.3% in March
• Rising from 3.8% in Jan/Feb

8. Fixed asset investment
• FAI continues strong
•1Q FAI rose 28.8% year on
year to RMB 2.81 trillion
(US$411.4 billion)
• Up 30.3% in March
• Rising from 27% in Jan/Feb

9. • Sales picking up again
Retail sales
•1Q retail sales rose by 15.9%
in real terms, 15% nominal, to
RMB2.94 trillion (US$430.4
billion)
• March nominal retail sales
rose 14.7%, down from 15.2%
in Jan/Feb
•Urban retail sales up by
14.1%; rural retail sales up by
17%
• Reflecting strong home
sales, 1Q furniture sales were
up 24%, construction and
decoration materials
20%, and vehicles 11%

10. BUT
• Recovery remains overly reliant on public-sector demand.
• Government needs to stimulate private consumption and correct export growth and
FDI inflow.

11. Potential for foreign companies in China
• Population
– 1.3 billion people = one-fifth of the world's population.
• Migration
– In 1950, the urban population represented less than 13% of the total – in 2008
approximately 40% and is expected to reach 60% by 2030.
Migration to urban areas (%)
100
80 60
60 40
40 Urban population
20 13 Rural population
0
1950 2008 2030

12. • Consumers
- Crucial in transforming China from a manufacturing to a service-based economy.
- Improved standards of living, higher disposable income and more exposure to a
wider range of international tastes.
• Rising wealth
– World Bank states that the number of rural poor surviving on less than 1.25
US$/day was lowered from 60.2% to 15.9% between 1990-2005
– April 2009 McKinsey report on Chinese affluent population (excess of RMB250,000
annual income):
• 1.6 million affluent consumers, a figure growing 16% annually
• 80% under 45, compared with 30% in the US and 19% in Japan
• Keen on buying foreign brands, hi-tech gadgets & paying for quality products

13. BUT
– Private consumption is still small part of economic demand.
– The economic boom has led to a widening wealth gap, most acute between
coastal and interior regions.
– The richest 10%‘s share of consumption is 33%; the poorest 10% 1.8%; the rest
65%.
Proportion of total consumption according to wealth
33
Richest 10%
Poorest 10%
65 Rest
1.8

14. Potential continued
• Aspirational goods
– Foreign brands aspirational, especially in big cities.
– Numerous food scandals have helped importers by reinforcing perceptions of their
superior standards.
- Tainted milk scandal killed at least six infants and sickened nearly 300,000 others.
• Trends
The European Chamber of Commerce in China on the food and beverages industry in
China:
– Emerging luxury markets
– New products gaining a foothold in the market
– A new focus on health and convenience
• Government
– The 11th Five-Year Plan calls for structural transformation and growth of the service
sector.
– Scope for international companies to introduce their business methodologies into the
Chinese market.
– China seeks innovation and processes that will enhance its ‘harmonious’ development.

15. Barriers to entry
• Trade policy issues
- Product labelling, sanitary (hygiene) certificates, food safety
- Lack of level playing field, regulation and bureaucracy, particularly Chinese standards
• Economic issues
-Price-led competition, economic downturn
-Almost all supermarkets and hypermarkets in China are competing on price and by
constant sales.
-A recent poll by Zenith showed that 78% of Chinese consumers are feeling the pinch.
Of those, an approximate 50% said they would cut down eating at Western fast food
restaurants due to its relatively high price.
• Market issues
- Lack of product awareness, need to show commitment to the market
- Product differentiation/finding a niche:
-Chinese grocery chains which only stock imported goods catering for expats and
rich locals.
-Wal-Mart and Carrefour stock local goods due to price factor.
-High quality goods versus generic local copies. (Quality vs. price)
Sources: Zenith International, China Cuisine Association), Xinhua , Datamonitor

16. Examples of CBI consumer goods and services in China

17. • In China for over 80 years.
• Introduced over 20 brands to Chinese consumers, covering home and personal
care, food and beverages and ice cream.
• Have invested over US$1 billion and hired more than 5,000 employees.
• Further remarks
– Localisation: 90% managers are recruited and trained locally.
– CSR: ‘Unilever Hope Star’ project helped pay for university tuition for 200
poor students.
– Problems: Counterfeit goods with potential health hazards.
Source: Unilever China

18. • In China since 1988.
• Introduced over 20 brands to Chinese consumers, covering home and personal care,
and food.
• Have invested over US$ 1 billion and hired over 6,300 staff.
• Further remarks
– Location: Guangzhou (South China), proximity to Hong Kong, one of the first
development zones.
– Rural consumers: April 07 signed agreement to help improve outlets, build new
ones, and train locals in some 10,000 villages in retailing.
– Problems: Counterfeit products containing illegal additives.
Source: P&G China

19. • In China since 2004.
• Started by founding a 50:50 partnership with a local partner, in 2006 increased
share to 90:10. In 2008, rebranded to Tesco Legou.
• 65 outlets in 22 Chinese cities and over 21,000 staff and serving over 3 million
customers every week.
• Further remarks
– Localisation: Over 99% of Tesco China staff are local.
– Problems: Highly diversified market
Regional differences
Logistics
Source: Tesco China

20. • In China since 1999.
• 63 B&Q stores in 26 cities around China and employ over 10,000 staff.
• Further remarks
– Localisation: Out of 10,000 staff, only 6 expats
– Problems: Rapid expansion/regulation to reign in emerging housing bubble.
Will close 22 stores and downsize further 17.
– Long-term commitment:
Trying to achieve a turnaround to generate more value to
shareholders.
Do not expect profits until 2011.
Source: Kingfisher

21. • Google China was founded in 2005.
• Launched Google.cn, Chinese-language search service, in January 2006.
• Has 27.8% of the market in China.
• Launched music search service in April 2009.
• Further remarks
– Regulation: Self-imposed Internet censorship.
– New business model: Free music downloads online.
Revenue from advertising.

22. Conclusions
• China market offers vast potential for foreign consumer goods and services
companies.
• To be successful requires a number of steps:
– Conduct in-depth consumer research and really get to know the
market
– Build up a network of contacts
– Show long-term commitment, and
– React swiftly to changing consumer characteristics and emerging
trends
• CBI’s Beijing office can help members via a suite of networking, representation,
lobbying and business intelligence services.

23. THANK YOU
CBI Beijing: 1006B, China Life Tower, 16 Chaoyangmenwai Ave, Beijing 100020
Tel (GMT + 8 hrs): (0086) 010 8525 3100 Fax: 010 8525 3116
Guy Dru Drury: (0086) 139 1103 7537
Email: guydd@cbi.org.uk
www.cbichina.org.cn