China's 12th 5-Year Plan (Booz & Company)

Booz & Company

This document is confidential and is intended solely for the use and information of the client to whom it is addressed.

Shanghai, April, 2011

China’s 12th 5-Year PlanImplications For Foreign Investors

201103311201104_The 12th 5-year plan.pptBooz & Company

“12-5” Strategic Plan

Boosting Domestic Consumption

Industry Upgrade and Innovation

Energy Saving and Environmental

Protection

GDP Growth Rate Adjustment

Internationalization

Regional Coordinated Development

Six Major Themes of “12-5” Strategic Plan

Six major themes marked China‘s “12-5” strategic plan

1

2

3

4

5

6


The 12-5 plan emphasizes “development” rather than “growth” of the economy, indicating a growing focus on sustainability

1 GDP Growth Rate Adjustment

11-5 Plan 12-5 Plan

Guiding Principle

GDP Growth Target

� “China has to maintain stable and moderately fast economic development”

� “China will maintain stableeconomic development”

� 7.5%* � 7.0%

Note*: The average annual growth of GDP during 11-5 period was 11.2%Source: China 12th 5-year Plan; China 11th 5-year plan; Literature research; Booz & Company analysis

Comparison of Economic Growth Target 11-5 plan vs. 12-5 plan

Led by the shifting focus of the government from the pursuit of speed of economic growth to its quality and sustainability

Drivers for the Trend

Enhancing quality of Development

Increasing affordability of Chinese

Changing model of Development

� China has enjoyed stunning economic growth based on low-value added and low-cost production, which will not be able to sustain its economic development

� China needs to enhance the quality of its development by cultivating high value-added industries and eliminating the outdated capacity

� China has a large amount of national income, yet its household consumption remains largely weak

� To achieve its goal by 2020 of being a relatively affluent nation, China needs to boost its household consumption in domestic market

� China’s past growth comes at the expense of its deteriorating environment

� China needs to adjust its development model to make its economic growth more sustainable


Oct, 2010 Nov, 2010 Dec, 2010 Jan, 2011 Feb, 2011

80

100

160

120

Imports

Exports

140

20

40

Billion US$

60

0

Value of China Exports and ImportsOct 2010-Feb 2011; Billion US$

Import exceeded export in Feb. 2011 indicates a probable cross-over in the economy

In Feb 2011, China witnessed more imports than exports for the first time in the past six years

Source: China customs website; Booz & Company analysis


Strategic Significance

In the 12-5 plan, the Chinese Government has put boosting domestic consumption as the top agenda

2 Boosting Domestic Consumption

“11-5” Plan “12-5” Plan

Emphasis on Domestic Consumption in “12-5”

� “China needs to expand its domestic demand, making it a strategic focal point, in order to achieve the balance among investment, net export and consumption in economic growth”

� This will be achieved through increasing household disposable income

� “China needs to adjust its economic development structure”

Domestic Demand is elevated to be the focal

point of China’s economic growth


Breakdown of GDP2009;China vs. EU. vs. U.S.

12%16%22%

100%

U.S.

-3%

15%

66%

Europe

1%

19%

58%

China

6%

45%

37%

For China, its domestic consumption contributes much less to GDPcompared with the EU and the U.S.

2

Government Expenditure

Net Exports

Fixed Investment

Private Consumption

Source: Global Insight data; Booz & Company analysis



China household consumption has been decreasing against GDP over the last decade

Comment

� China’s household income grew much slower in the past 5 years

– Household disposable income* grew at CAGR of 6~8%

– SOE revenue grew at CAGR of ~20%

– National fiscal revenue grew at CAGR of ~22%

� GDP per capita grew at a faster rate of 17% compared to household disposable income growth in the past 5 years, indicating a widening gap between national income and residential income, and threatening social stability

2

Share of China Household Consumption in GDP2000-2010; %

0

10

20

30

40

50

60

70

2000 2002 2004 2006 2008 2010

-30%

Note*: Household disposable income includes income from both urban and rural residents hereSource: China's National Bureau of Statistics; China info bank statistics; Booz & Company analysis

4,383

1,726946

0

2,000

4,000

6,000

2010

US$

20052000

GDP per Capita of China2000-2010; US$

China household consumption keeps

dropping against GDP

+17%

World Average: 61.5%



China has instituted specific policies to boost consumption…

2

� Large SOEs were required to contribute more of their after-tax profit with the government

– Starting from 2011, more SOEs will be asked to share their profits

– Also, the amount of profit to be shared has been adjusted to a higher level

� The taxable* income base is expected to adjust from 2000 RMB per month to 3000 RMB per month

Policies Summary

� The Chinese government is also making efforts to enhance the social welfare and security system

Implication

� The profit contributed by SOEs will be used to provide public service

� This will enable residents to have a higher level of disposable income

� This will help residents live in a better-off and safer society, with basic needs covered by the government

Sharing SOEs’Profit

Adjusting Taxable Salary Base

Enhancing Social Security System

Note*: Here taxable salary base refers to the salary base subject to income taxesSource: China 12-5 plan; Literature research; Booz & Company analysis

Reducing Price Imparity

� The Chinese government is trying to bridge the price gap of luxury goods bought abroad and home

� This will encourage residents to purchase foreign goods in domestic market other than in overseas markets



Consumption in China is expected to boom with government policy support

1.81.6

1.21.00.9

0.70.6

2004

2.0

1.5

15.9

2009

Trillion US$

15.0

2020

0.5

2.5

2003 2005

1.0

+20%

15.5

16.0

2006

0.0

20082007

Consumption in China2003-2009 (Historical); 2020(Estimate); Trillion US$

Note: The 2020 consumption in China is estimated by UBSSource: National Bureau of Statistics of China; Booz & Company analysis

Implications

� Consumption in China is expected to grow at a faster rate from 2009 onwards, indicating China’s promising future in becoming a large consumer market

� Investors need to change their perception on China as a mere manufacturing base; instead, they should treat it more as a growing consumer market

� Investors need to learn the specific needs of Chinese consumers, and design tailored-made products and services accordingly

+22%

2 Boosting Domestic Consumption


In “12-5” period, China will devote to developing seven emerging industries as well as the culture industry

3 Industry Upgrade and Innovation

Leading Industries

Seven Emerging Industries

Producer Services Industry

Note: 7 strategic emerging industries include energy efficiency & environmental protection, new generation information technology, bio-technology, high-end equipment manufacturing, alternative energy, new materials, electric vehicle

Source: China 12-5 plan; Literature research; Booz & Company analysis

12-5 Plan Strategy Highlight

� Continue to increase value added� Eliminate outdate capacity� Develop advanced equipment

manufacturing industry

� Increase government support to develop the 7 emerging industries* of strategic significance

� GDP contribution of the 7 industries should increase to 8% by 2015 from the current 2%

� Cultivate the culture industry to be a leading industry

� Implication: the share of value added of GDP by the culture industry needs to double from the current 2.5% to 5%

Drivers for the Trend

� China’s leading industries, such as steel industry and petrochemical industry, consume a larger amount of energy per unit of GDP, whose growth will not be sustainable with the limited reserve of energy

Energy Consumption

Increasing Labor Cost

� With China’s labor cost rising, Chinese industries have been losing edge in international competition

� It is necessary for China to transform its industry structure to make it more technology and innovation-driven

Lack of Natural Resources

� China has very limited reserve of natural resources such as ore, oil, etc, which motivates the Chinese government to cultivate industries that are less natural resource consuming


As China is losing its cost advantage…

0.5

2.52.7

0.0

0.5

1.0

1.5

2.0

2.5

3.0

China

US$/hour

VietnamIndia

Manufacturing Labor Cost2010; US$/hour

60119

676

0

100

200

300

400

500

600

700

Billion US$

Russia IndiaChina

Electric, Gas and Steam Utilities Sales2010; Billion US$

Source: HIS Global data; Literature research; Booz & Company analysis

3 Industry Upgrade and Innovation

� China is losing its cost advantage to Vietnam as its labor cost continues to increase and widens the gap

� China’s utility consumption is also much higher than neighboring countries


Service Sales &

Distribution Marketing Manufacturing Sourcing

Product Development

R&D

Service Sales &


Product Development

R&D

Stage 1Circa earlyto mid 1990s

Stage 2Circa mid to late 90s

� Started with a few, isolated production facilities

� Began to integrate production facilities

� Began to serve as a procurement source

� Began to have brand for the local market and local sales & distribution

Service Sales &


Product Development

R&D

Service Sales &


Product Development

R&D

Stage 3Early 2000s

Stage 4Present to 5-10 years

� Start to perform R&D and PD role

� Integrated into globalmanufacturing network

� Integrated into global sourcing network

� Best practice transferred to China

� Integrated into global value chain

China is aiming to move up the value chain: from “made in China”to “created in China” (1/2)


Industry S

tructu

re U

pgra

de

Industry S

tructu

re U

pgra

de

Source: Booz & Company analysis

Progress of China’s Industry Development

3


China is aiming to move up the value chain: from “made in China”to “created in China” (2/2)


Source: World Intellectual Property Organization; Booz & Company analysis

3

44,85545,618

51,63754,043

51,280

32,15629,80228,76027,74327,025

17,17116,79718,85517,82116,736

12,337

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

2010 (E)2009

7,900

2008

6,120

2007

5,455

2006

3,942

Number of Patents2006-2009 (Historical); 2010 (Estimate)

-20

-10

0

10

20

30

40

50

60China

Germany

Japan

U.S.

09-1008-0907-0806-07

Comparison of Patent Growth 2006-2009 (Historical); 2010 (Estimate)

� China owns a small number of patents compared to other large economies

� China has witnessed stunning growth in the number of patents in recent years, demonstrating its growing competency in innovation

China

Germany

Japan

United States of America


Many foreign OEMs have established local R&D capabilities in China

13

GM PATAC 2) (1997)Partner: 50% SAIC Invest: $ 300milStaff: 1,700

Toyota ShanghaiEquity: 100% TMCIInvest: $ 11Mil

SAIC-VW (1999)Partner: 50% SAICInvest: € 400 mil Staff: 1,200

Supplier availabilitylow high

Shanghai

Guangzhou

Fuzhou

Separated entity

part of JVAnnounced new

operations

Hyundai (2008)Partner: 50% BAIC

Scope: vehicle/part adaptations

Toyota GuangzhouEquity: 100% TMCI

Tianjin

Beijing

VW China Test CenterPartner: SINOPECInvest: n.a. Staff: n.a.

Ford (2006) Partner: 100% FordInvest: 2.2B ($27.5M)Scope: Vehicle, engine,parts design & engineering

Nanjing

Nissan R&DPartner: 50% Dongfeng

Foundation: 2005

Toyota Technical Center1)

Equity: 100% TMCInvest: $ 8.7 mil

Industry Upgrade and Innovation3

1) Toyota Motor Technical Center China in Tianjin2) Pan Asia Technical Automotive Center

2011033114201104_The 12th 5-year plan.pptBooz & Company 14

MNCs from various industries have shifted their R&D centers to China

Pharmaceutical Industry

IT Industry

Consumer Goods Industry

Energy Industry

Source: Literature research

� R&D center for the Asia-Pacific region

� 2nd R&D center in Asia

� The 18nd R&D center worldwide

� Mainly focus on the China and Asia market

� The 4th R&D center worldwide

� Mainly focus on the China and Asia market

� R&D center for Asia

� R&D center for China � Multi R&D centers, serving China and Asia

� Global R&D center on diabetes

� R&D center for China and Asia

� The 5th R&D center worldwide

� The 1st R&D center in Asia, part of Intel’s global R&D network

� The 2nd R&D center world wide, serving Asia


The 12-5 plan sets more constraints on energy consumption and emissions, and will enhance enforcement

4

Source: China 12-5 plan; BP report; Literature research; Booz & Company analysis

Notion

Targets

� China proposes a new notion of “combat global climate change”

Summary

� Decrease CO2 emissions per unit of GDP by 17% by 2015

� New targets to control energy consumption and emissions– Increase the proportion of non-fossil energy

consumption over that of primary energy by 3.1% to 11.4% by 2015

– Add two more emissions indicators, NHx and NOx, whose emissions have to decease by 10% by 2015

Primary Energy Consumption2009; Million Tons of Oil Equivalent

� China is consuming much more energy compared to other economies (except for the U.S.), as its has a higher proportion of energy-consuming and polluting industries such as steel in its industry structure

� There is huge potential for China to reduce its energy consumption

Measures

� Emissions control targets will be further allocated to enterprises

� Outdated production capacity will be further eliminated – Local governments need to come up with a list of

enterprises whose production capacity will be eliminated and timeline

Enforcement

� Administrative– For regions that fail to meet the targets, their

applications for government-sponsored projects or request for land use will not be reviewed

– For enterprises that fail to meet the targets, their manufacturing licenses will be revoked

� Financial– Banks will refuse to offer loans to regions or enterprises

that fail to meet the targets

226290464469

2,1772,182

Germany BrazilU.S. China India Japan

Energy Saving and Environmental Protection


Heavily energy-consuming industries will be the prioritized targets of China’s national energy saving plan

Energy Consumption by Industry 2007;%

Source: National Bureau of Statistics of China; Booz & Company analysis

11%

9%

100%

8%Transportation

Household consumption

Others

Industrials

21%

6%

7%

10% 11%

3%

14%

4%

25%

2%

� Characteristics of energy consumption in China– Industrials consume over 70% of energy– Within the industrials sector, consumption of nine

major industries accounts for ~80%� These nine industries are the prioritized targets of the

energy saving plan as they consume collectively over 50% of energy in China

4 Energy Saving and Environmental Protection

71%

Others

Oil and Gas Extraction

Coal Mining

Raw Chemical Material and Chemical Products

Electric Power, Thermal Power Production and Supply

Textile

Smelting and Pressing of Non-Ferrous Metal

Smelting and Pressing of Ferrous Metal

Petroleum Processing and Coking

Non-metal Mineral Products


…with petroleum and petrochemical industry being one of them

Oil and Petrochemical Sector in the National Energy Saving Plan

Food processing

Textile


Non-ferrous metal Mining

1.0

0.3

0.2

0.2



Smelting and Pressing of Ferrous Metal

Smelting and Pressing of Non-Ferrous Metal 0.7

1.6

1.7

10.6

Petroleum Processing and Coking 0.6

Paper-making and Paper Products 0.5

Top 10 Industries by Energy Consumption(2007; In Million Tons of Coal Equivalence)

Top 10 Industries by Emissions of SO2(2008; In Million Tons)


Comments

� Petroleum and petrochemical sector is one of the prioritized industries in national energy saving plan, initiatives including:

– Accelerating the promotion of energy reduction technologies

– Pilot energy saving projects with a focus on recycle, use of alternative energy, and system optimization


478



Petroleum Processing and Coking


132

72

62

37

33

272

204

107Smelting and Pressing of Ferrous Metal

185

Textile

Coal Mining

Paper-making and Paper Products

Oil and Gas Extraction

Smelting and Pressing of Non-Ferrous Metal


Examples of Technical Difficulties in Energy Saving and Emissions Reduction

18

The barriers in reducing energy consumption in these industries suggest potential investment opportunities

� Power Electronic Device – except for SCR, China is not capable of producing modern power electronic devices such as IGBT/IGCT

� Frequency Control – Products with high efficiency and large power are dominated by foreign competitors; domestic products can hardly compete against foreign products in terms of the reliability of FOC and TDC

Motor System Energy Saving Project

� Fuel Washing and Screening: domestically produced coals tend to lower boiler efficiency and cause environmtnal pollution due to their poor purity, quality and screening technologies

� Energy Saving Technologies for Boilers: ultra-supercritical units have been introduced, but advanced technologies are still needed

Low-Efficiency Coal Boiler Transformation Project

Green Lights Project Oil Saving and Substitution Project

� Compact Fluorescent Lamp (also known as a Energy Saving Light) – a large proportion of domestic products suffer from poor lumen maintenance rate (<80%) and short lifecycle (< 6,000 hours)

• LED Lamp – key technologies of Ultra Bright LED are yet to be developed; technological breakthroughs in packaging and application are not fulfilled

� Natural Gas Vehicle (NGV) – the first generation technology is applied to most of existing domestic modified cars, emissions targets of which are lower than their foreign counterparts with electric fuel pumps

� Hybrid Power Vehicle – the efficiency of domestic batteries and motors are 30% lower compared with world leading standard, failing to save energy

Source: NDRC, Booz & Company analysis

Technical Difficulties



Economic development varies across regions in China, with Western China lagging behind

5 Regional Coordinated Development


Urban Household Disposable Income per Capita2009; RMB

GDP per capita 2009; RMB

Tibet

Gansu

Qinghai

XinjiangBeijing

TianjinHebeiShanxi

Inner Mongolia Liaoning

Jilin

Heilongjiang

Shanghai

Jiangsu

Zhejiang

Anhui

Fujian

Jiangxi

Shandong

Henan

Hubei

Hunan

GuangdongGuangxi

Hainan

Sichuan

Guizhou

Yunnan

Shaanxi

Ningxia

Chongqing

Beijing

TianjinHebeiShanxi

Inner Mongolia Liaoning

Jilin

Heilongjiang

Shanghai

Jiangsu

Zhejiang

Anhui

Fujian

Jiangxi

Shandong

Henan

Hubei

Hunan

GuangdongGuangxi

Hainan

Sichuan

Guizhou

Yunnan

Tibet

Shaanxi

Gansu

Qinghai

Ningxia

Xinjiang

Chongqing

IV >24,000 RMB p.a.

III 20,000-24,000 RMB p.a.

I <15,000 RMB p.a.

II 15,000-20,000 RMB p.a.

IV >40,000 RMB p.a.

III 30,000-40,000 RMB p.a.

I <20,000 RMB p.a.

II 20,000-30,000 RMB p.a.


Brief introduction of Western China


western provinces

… 69% of China's overall area

… 28% of population

… 19% of China's GDP

… 17% of consumer spending

… 14% of foreign direct investments

… 10% of applied patents

… 6% of registered foreign enterprises

… 4% of exports


Urbanization will create significant opportunity in western China

Urbanization across Regions

Eastern China 60%

35%

Central China 40%

Western China


Source: Literature research; Booz & Company analysis

� East China has been highly urbanized with ~60% of its population living in cities, rendering it hard to continue to urbanize at a high rate

� Central China and West China currently are at a relatively low level of urbanization, and will be key drivers for China to reach its goal by 2015

622607594577562

4746454443

0

100

200

300

400

500

600

700

40%

30%

20%

10%

2005 2007 2008 2009

0

%

2006

Million

50%

60%

70%

80%

90%

100%

Urban Population and Urbanization Rate2005-2009; Million

� China is gradually urbanized

� The 12-5 plan aims to increase China’s urbanization by 4% by 2015


Western development is made a key national strategy in the 12-5 plan, with focus on three specific geographical areas


Three key regions for development

Western provinces

Guanzhong-Tianshui (cities: Xi'an, Xianyang, Baoji, Tianshui)

Inner MongoliaXinjiang

Ningxia

Gansu

Yunnan

Guizhou

Tibet

Qinghai Shaanxi

Sichuan

Guangxi

Chongqing

Chengdu-Chongqing:(cities:chengdu,chongqing,etc)

"North Bay" (Cities: Nanning, Beihai, Qinzhou, connection to Guangdong, Hainan)


Internationalization becomes hot, foreign companies have to think how to partner with local players to exploit global opportunities

6 Internationalization

Billion US$

0

10

20

30

40

50

60

70

80

90

100

75

2007

92

2008

95

20092006

63

2005

60

2004

61

Foreign Investment in China2004-2009; Billion US$

Billion US$

0

5

10

15

20

25

30

35

40

45

50

55

60

27

2007

56

2008 2009

57

2006

18

2005

12

2004

6

Overseas Investment by Domestic Players2004-2009; Billion US$

Source: China Statistics Yearbook


The 12-5 plan also encourages foreign investors to participate in China market competition in various ways

6 Internationalization

� Foreign investors are encouraged by the Chinese government to invest

– Industries: In high-tech industries, alternative energy, and modern service industry, etc

– Regions: More in Central and Western China

– Channels: Via M&A, buying stakes in domestic enterprises, expanding their value chain such as R&D in China, etc

Source: China 12-5 plan

Diversify Investment Channels

Enhance Policy and Law Enforcement

Summary

� The Chinese government is devoted to making its policies more favorable to foreign investments

� Enforcement of laws will be strengthened to protect investors’ legal rights in China

China market will be more open, safe and favorable to foreign investors


GDP Growth

Rate Adjustment

12th-5 Year Plan: 10 Implications For Foreign Investors

25

“12-5” Theme Implication

� Boosting Domestic Consumption

� Not manufacturing base for exports but a huge potential consumption market� Develop products for China: from MADE IN CHINA TO MADE FOR CHINA

� Industry Upgrade and Innovation

� Focusing on strategic emerging industries, NEV is key � Taking care of creativity industry opportunity � Expand value chain to upstream to increase competitive advantages

� Energy Saving and Environmental Protection

� A sizable demand market� Good opportunities for equipment manufacturing industry� More opportunities in emerging service models, such as energy management contract (EMC)

� Regional Coordinated Development

� Go West!!!� Focus on resources and energy consumption intensive industries� Fast urbanization and related investment opportunities, eg, retail, infrastructure, real estate

� Internationalization � Teaming up with Chinese partners

“12-5” Implication to Investors

2

3

4

5

6

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Documents

China's 12th 5-Year Plan (Booz & Company)