Department of Commerce 2nd Tiered Cities

www.export.govwww.export.gov 1-800-USA-TRADE1-800-USA-TRADE

China’s 2China’s 2ndnd-Tier Cities:-Tier Cities:The Next Frontier for US CompaniesThe Next Frontier for US CompaniesChina’s 2China’s 2ndnd-Tier Cities:-Tier Cities:The Next Frontier for US CompaniesThe Next Frontier for US Companies

2008 CONFERENCE ON BUSINESS STRATEGIES AND TRADE WITH

CHINAMonterey, Ca.

March 21, 2008

2008 CONFERENCE ON BUSINESS STRATEGIES AND TRADE WITH

CHINAMonterey, Ca.

March 21, 2008


U.S. Commercial Service

U.S. Commercial Service

Our mission:

• To promote the export of goods & services from the United States, particularly by small- and medium-sized businesses

• To represent U.S. business interests internationally

• To help U.S. businesses find qualified international partners

Our mission:

• To promote the export of goods & services from the United States, particularly by small- and medium-sized businesses

• To represent U.S. business interests internationally

• To help U.S. businesses find qualified international partners

The U.S. Commercial Service is the trade promotion unit of the International Trade Administration, with trade specialists in 107 U.S. cities and in more than 80 countries.


You’ll find Commercial Service officers and trade specialist living and working in: You’ll find Commercial Service officers and trade specialist living and working in:

157 trade experts on the ground in China to help157 trade experts on the ground in China to help

Beijing Shanghai Guangzhou Shenyang Chengdu Hong Kong


What are 2nd-Tier Cities? What are 2nd-Tier Cities?


“The 2nd-Tiers”“The 2nd-Tiers”

• Aside from the three megacities – (Beijing, Shanghai, and Guangzhou)…they are:

– Tianjin -Ningbo -Chongqing– Dalian -Xiamen -Kunming– Harbin -Qingdao -Xi’an– Nanjing -Wuhan -Shenzhen– Hangzhou -Shenyang -Zhuhai– Chengdu

• Aside from the three megacities – (Beijing, Shanghai, and Guangzhou)…they are:

– Tianjin -Ningbo -Chongqing– Dalian -Xiamen -Kunming– Harbin -Qingdao -Xi’an– Nanjing -Wuhan -Shenzhen– Hangzhou -Shenyang -Zhuhai– Chengdu


8, 19, and 548, 19, and 54

By the numbers with

China’s 2nd-tier sixteen. They account for…

By the numbers with

China’s 2nd-tier sixteen. They account for…


8% of China’s Population8% of China’s Population


19% of China’s GDP19% of China’s GDP


54% of China’s Imports54% of China’s Imports


2nd-Tier Growth2nd-Tier Growth

0%2%4%6%8%

10%12%14%16%18%20%

Nominal GDP Growth in Second-Tier Cities (2006)


2nd-Tier Growth -- Compared2nd-Tier Growth -- Compared


2nd-Tiers: Dominating China’s Demand for US & Foreign Goods

2nd-Tiers: Dominating China’s Demand for US & Foreign Goods

• 8% total population,

• 54% of China’s imports from the world

• (and 49 % from the US’)

• 8% total population,

• 54% of China’s imports from the world

• (and 49 % from the US’)

Beijing9%

Shanghai28%

Guangzhou4%

Top 15 2nd-Tier City

Importers54%

Other5%

Destination of Global Exports to China (2007)


There’s More than the Numbers…There’s the Trends

There’s More than the Numbers…There’s the Trends

• Not just Beijing, Shanghai, & Guangzhou

• The “spillover”effect

• Not just Beijing, Shanghai, & Guangzhou

• The “spillover”effect

13.989.27

-3.65

29.3333.09

44.67

-505

1015202530354045

U.S. Export Growth by 1st and 2nd Tier Cities Percent change between first 3 quarters of 2006-2007


US Export MarketsTaking Off…

US Export MarketsTaking Off…

Chongqing - Vehicles 178%

Xi’an - Machinery 114% Tianjin - Vehicles 92%

Nanjing Medical Instruments 70% Machinery

143%

Qingdao - Electrical machinery 78%

Dalian - Electrical machinery 120%

% = ’05-’06 increase of U.S. exports

Kunming – Semiconductor manufacturing equip 233.7%

Hangzhou – Electronic Components 229%


Understanding the “New” Chinese Marketplace

Understanding the “New” Chinese Marketplace

• Grandpa’s China; Beijing, Shanghai, Guangzhou…and the countryside

• The Olympic China; Industrial clusters by geography, new megalopolises, and a resilient middle class

• Grandpa’s China; Beijing, Shanghai, Guangzhou…and the countryside

• The Olympic China; Industrial clusters by geography, new megalopolises, and a resilient middle class


Cluster #1: The Yangtze River Delta Cluster #1: The Yangtze River Delta

• Deng Xiaoping’s T-Shaped Strategy

• 21% of China’s GDP

• China’s Commercial Backbone

• Being compared to the US’ Eastern Corridor

• Deng Xiaoping’s T-Shaped Strategy


• China’s Commercial Backbone

• Being compared to the US’ Eastern Corridor


Cluster #2: The Pearl River DeltaCluster #2: The Pearl River Delta

• Shifting from China’s manufacturing capital to its services one


• Saturation is pushing business outward from HK and Guangzhou

• Shifting from China’s manufacturing capital to its services one


• Saturation is pushing business outward from HK and Guangzhou


Clusters 3&4: Bohai River Delta and Central China

Clusters 3&4: Bohai River Delta and Central China

• Bohai: Beijing, Tianjin, Dalian…up to Harbin

• Central: Their “Rust Belt”…Chongqing, Chengdu, Xi’an, Kunming

• Bohai: Beijing, Tianjin, Dalian…up to Harbin

• Central: Their “Rust Belt”…Chongqing, Chengdu, Xi’an, Kunming


What Drives 2nd-Tier Cities?:Consumption

What Drives 2nd-Tier Cities?:Consumption

Consumption growth outpaced investment growth in China for the first time in seven years (2006):

•Consumer spending: 4.4% •Investment: 4.3%


Keeping up with the ChensKeeping up with the Chens

20-30 year olds have known nothing but upward mobility

Luxury goods hot – from caviar to wine to Louis Vuitton

Western brands sell

‘Hypermarkets’ and retail chains booming along with new construction

Studies show most consumers planning big ticket item purchases in next 12 months

20-30 year olds have known nothing but upward mobility

Luxury goods hot – from caviar to wine to Louis Vuitton

Western brands sell

‘Hypermarkets’ and retail chains booming along with new construction

Studies show most consumers planning big ticket item purchases in next 12 months


2nd-Tier Cities are the Heart of China’s Middle Class

2nd-Tier Cities are the Heart of China’s Middle Class

Yangzhou’s per capita income doubled from 400rmb to 800rmb from 2003 to 2005

Merrill Lynch estimates that 5% of the Chinese are currently in the middle-class…will be 40% by 2020

And ironically…the study also shows 86% of Chinese “think” they are in the middle-class

Yangzhou’s per capita income doubled from 400rmb to 800rmb from 2003 to 2005

Merrill Lynch estimates that 5% of the Chinese are currently in the middle-class…will be 40% by 2020

And ironically…the study also shows 86% of Chinese “think” they are in the middle-class


Three Reasons to Target Emerging Markets


• Lower costs on land, labor and energy

• Second-tier cities enjoy a higher average growth rate—2% faster than the national average

• 7% GDP growth over the next 20 years

• Rising income & moderate savings rates will lead to a strong spending surge amongst the rapidly expanding middle class

• Lower costs on land, labor and energy

• Second-tier cities enjoy a higher average growth rate—2% faster than the national average

• 7% GDP growth over the next 20 years

• Rising income & moderate savings rates will lead to a strong spending surge amongst the rapidly expanding middle class

Reason 1: Surging demand




Reason 2: Greater Opportunity• Less-saturated markets

• Less competition

– Opportunity to establish early presence and brand-loyalty

• Less-saturated markets

• Less competition

– Opportunity to establish early presence and brand-loyalty




• In the last 5 years, the Chinese government has invested $123 billion USD in China’s national expressway system

• Strong central government commitment to improving local infrastructure and developing public projects

• Streamlined bureaucracy, incentives, more level playing field

• In the last 5 years, the Chinese government has invested $123 billion USD in China’s national expressway system

• Strong central government commitment to improving local infrastructure and developing public projects

• Streamlined bureaucracy, incentives, more level playing field

Reason 3: Policy Momentum


Case Study Medical Devices & Equipment

Case Study Medical Devices & Equipment

China: World’s 3rd largest MD market (13b)

• 10-15% growth rates until 2010

• Large aging pop - 198 m > 65 by 2025

U.S. in China MD market

• Largest market share (31%)

• US products adv. Tech & affordability

China: World’s 3rd largest MD market (13b)

• 10-15% growth rates until 2010

• Large aging pop - 198 m > 65 by 2025

U.S. in China MD market

• Largest market share (31%)

• US products adv. Tech & affordability


Medical Devices in 2nd-Tiers:

Medical Devices in 2nd-Tiers:

• Increasing affluence= Surging Demand

• Low market penetration= SME Opportunity

• Strong Government Support

• WTO accession: Only 4-6% tariff rate

• Local Distribution= Control and “Guanxi”

• Highly precious products – they only want the best, and these come from the US

• Increasing affluence= Surging Demand

• Low market penetration= SME Opportunity

• Strong Government Support

• WTO accession: Only 4-6% tariff rate

• Local Distribution= Control and “Guanxi”

• Highly precious products – they only want the best, and these come from the US


MEDICAL DEVICES: Target Emerging Markets

MEDICAL DEVICES: Target Emerging Markets

Medical Devices Imports (Emerging Cities)

$0

$20

$40

$60

$80

$100

$120

$140

2000 2002 2004 2005 2006

Mill

ion

s

Year

Imp

orts

(U

SD

)

Shenzhen Tianjin Dalian Nanjing Hangzhou Qingdao Chongqing

Xian Xiamen Ningbo Wuhan Harbin Zhuhai Kunming


Sectors to Watch: The US’ Traditional Leaders Sectors to Watch: The US’ Traditional Leaders

Integrated Circuits

Machinery

Heavy Machinery

Construction/Farm Equipment

Electrical Power Generation

Electronic Components

• Packaging Materials

• Paper & Forest Products

• Machine Tools

Integrated Circuits

Machinery

Heavy Machinery

Construction/Farm Equipment

Electrical Power Generation

Electronic Components

• Packaging Materials

• Paper & Forest Products

• Machine Tools


Sectors to Watch: The Up-and-Comers: Lifestyle

Sectors to Watch: The Up-and-Comers: Lifestyle

Wine!

Health and beauty

Telecom/ICT

Travel & Tourism up 25%

Medical Devices

Home furnishings, fixtures and appliances

• What’s important: education, health care, retirement

• Entertainment

Wine!

Health and beauty

Telecom/ICT

Travel & Tourism up 25%

Medical Devices

Home furnishings, fixtures and appliances

• What’s important: education, health care, retirement

• Entertainment


A Snapshot from One “Cluster”:Hot Industries in Central/SW China

(Sichuan + Chongqing)

A Snapshot from One “Cluster”:Hot Industries in Central/SW China

(Sichuan + Chongqing)

• MNCs already active in the region: Intel at Chengdu, 575 million USD investment, Ford at Chongqing (a joint venture with Chang’an Group), total of 600 million investment, half by Ford), other include Corning, Motorola, Microsoft, Agilent, Commins.

• ICT(IC, Software, Digital media): Chengdu is now one of the 5 ITO centers in the country (SAP, Symantec) , government encourage call centers (tax + policy support).

• Biotech/pharmaceutical: more locally – oriented, one of the pillar industries supported by local government

• Retail & Franchise: popular brands are coming one by one, like Levi’s, Gap, Estee Lauder, SK-II, DQ, Starbucks, Coffee Beanery, Hagendaz. 4 stores by Walmart, Best Buy, introduction of mall concept in commercial real estate.

• Other sectors of interest: energy (natural gas), clean technologies (energy-efficient technologies), tourism.

• MNCs already active in the region: Intel at Chengdu, 575 million USD investment, Ford at Chongqing (a joint venture with Chang’an Group), total of 600 million investment, half by Ford), other include Corning, Motorola, Microsoft, Agilent, Commins.

• ICT(IC, Software, Digital media): Chengdu is now one of the 5 ITO centers in the country (SAP, Symantec) , government encourage call centers (tax + policy support).

• Biotech/pharmaceutical: more locally – oriented, one of the pillar industries supported by local government

• Retail & Franchise: popular brands are coming one by one, like Levi’s, Gap, Estee Lauder, SK-II, DQ, Starbucks, Coffee Beanery, Hagendaz. 4 stores by Walmart, Best Buy, introduction of mall concept in commercial real estate.

• Other sectors of interest: energy (natural gas), clean technologies (energy-efficient technologies), tourism.


CS China: • 19 Cities

– 5 Commercial Service Offices

– 14 Secondary markets

• 157 Commercial Service officers & Trade Specialists

CS China: • 19 Cities

– 5 Commercial Service Offices

– 14 Secondary markets

• 157 Commercial Service officers & Trade Specialists

It’s not Whether you need to be there, it’s Where, and How

It’s not Whether you need to be there, it’s Where, and How


14 Secondary Cities with American Trading Centers14 Secondary Cities with American Trading Centers

More Market Access. Same Quality Service.

Dalian

Chongqing

Hangzhou

Harbin

Kunming

Nanjing

Ningbo

Nanjing

Qingdao

Shenzhen

Tianjin

Wuhan

Xi’an

Zhuhai


What can we do for you?What can we do for you?

• Find & qualify business partners• Shipping/logistics difficulties• Tariff/tax/duty information• Export compliance/licensing• Referrals to in-country legal services• Advocacy support for tenders• Non-payment problems• Marking, packaging, labeling, and product testing standards• Market research• Set up government appointments• Product promotion• Facilitate with Ex-Im Bank, TDA, and Development Banks


www.export.gov/china

www.export.gov/china


FYI:Some IPR ResourcesFYI:Some IPR Resources

The US Embassy IPR Toolkit

http://beijing.usembassy-china.org.cn/ipr.html

China IPR Advisory Program -

one hour free IPR consultation with legal expert

http://www.abanet.org/intlaw/china_program2.html

US Patent & Trademark Office: free China conferences

http://www.stopfakes.gov/events/china_webinar_series.asp

IP webinar series (www.stopfakes.gov)

The US Embassy IPR Toolkit

http://beijing.usembassy-china.org.cn/ipr.html

China IPR Advisory Program -

one hour free IPR consultation with legal expert

http://www.abanet.org/intlaw/china_program2.html

US Patent & Trademark Office: free China conferences

http://www.stopfakes.gov/events/china_webinar_series.asp

IP webinar series (www.stopfakes.gov)


China Webinar Series

Past Webinars – Download at http://www.stopfakes.gov/events/china_webinar_series.asp

• Latest Trends in Brand Protection Strategies in China • Hiring an Investigative Firm in China • How to Get Executive Support for Your IPR Program• Analyzing Value of IP Assets and Conducting Audits of your IP Agreements• IP Strategies for Negotiating Licensing Agreements and the Realities of Enforcing the Terms of Agreements - spotlight on China• Civil IP Litigation in China• The Latest on Trademark Protection in China• Stopping Fakes at China’s Trade Fairs• Patent Protection in China• The Battle at the Border - China’s Fake Products in the US


U.S. Commercial Service“Core Services”

U.S. Commercial Service“Core Services”

Business Facilitation• Gold Key Matchmaking• International Partner Search• International Company Profile• Single Company Promotion

Business Facilitation• Gold Key Matchmaking• International Partner Search• International Company Profile• Single Company Promotion

Trade Promotion

• International Buyer Programs

• Trade Missions/US Pavilions

• FUSE

• Commercial News USA

Trade Promotion

• International Buyer Programs

• Trade Missions/US Pavilions

• FUSE

• Commercial News USA

Customized Programs

• Platinum Key Service

• Advocacy

• Business Consulting

Market Research

• Market Research Library

• Customized Market Research


Contact UsContact Us

U.S.

Karl Kailing, US Commercial Service, Silicon Valley

[email protected]

408-535-2743

Kully Nelson, US Commercial Service San Francisco

[email protected]

Matthew Quigley, China Business Information Center

[email protected]

Jeff Hamilton, Asia-Pacific Team Leader

[email protected]

CHINA:

Jennifer Lee, US Embassy Beijing

[email protected]

U.S.

Karl Kailing, US Commercial Service, Silicon Valley

[email protected]

408-535-2743

Kully Nelson, US Commercial Service San Francisco

[email protected]

Matthew Quigley, China Business Information Center

[email protected]

Jeff Hamilton, Asia-Pacific Team Leader

[email protected]

CHINA:

Jennifer Lee, US Embassy Beijing

[email protected]