The China Analyst - July 2008

THE THE CHINA CHINA ANALYST ANALYST 2008 JulyJuly 2008

A knowledge tool by THE BEIJING AXIS for executives with a China agenda

Getting a grip on high-value sourcing from China p.10

Features The Scramble for Australia Sourcing High-Value Capital Products from China

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Regulars China Sourcing Strategy

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China Facts, Figures & Forecasts

18

China Business News Highlights

28

China’s International Relations

31

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Earthquake details... Wenchuan County, Sichuan 12 May 2008 14:28:42

“Nothing and no one can destroy the Chinese people. They are relentless survivors. They are the oldest civilised people on earth. Their civilisation passes through phases but its basic characteristics remain the same. They yield, they bend to the wind, but they never break.”

Pearl S. Buck (1892 - 1973)

4 At the Highest Level China gets Bronze as it overtakes Germany to become the word’s third largest economy; but despite a testing first half of 2008, it is going for Gold.

areas of the country; while the second quarter was marred by the devastating Wenchuan earthquake in Sichuan, and events in its tragic aftermath.

China’s Olympian economy managed to overtake Germany in the past half-year to become the world’s third largest economy. Remember, this comes after China had sat at number seven until December 2005 when it overtook Italy, the UK and France to be number four by the end of January 2006. At the highest level, China’s economic growth, development and social stability remains the utmost priority for Beijing—and the nation remains on the right general trajectory. The main political priority over the short term is staging a successful Beijing Olympics. Having traveled around Beijing during the past months (calling on senior Olympics administrators; visiting the village; using the airport, underground system, buses and taxis; and talking to the people around me), I have found that the stage is set for a fantastic event. Beijing awaits you— and while there are sure to be minor glitches, the event is on the whole likely to add positively to China’s global profile and status. It will also bolster pride and national unity. But the Olympics is approaching as we look back on a half-year that has been one of China’s most testing periods in recent history. The first quarter was dominated by cold weather and disruptive snow storms that severely affected vast

On the economic front, China also had its problems. Inflation edged higher to long term record levels on the back of food and energy price increases. The central bank’s resolve was tested and strained by a significant wave of speculative hot money inflows while supply bottlenecks became more evident in areas such as coal distribution to some power generators, food production and other basic material supplies. Meanwhile, some statistics and anecdotal evidence pointed towards foreign (and local) firms losing their cost competitiveness, the inability of some businesses to stay in export markets and increases in firm closures in some regions and/or sectors. For example, the media picked up on the many small local (or HK invested) firms in Guangdong that closed down due to rising costs while other reports highlighted that many South Korean firms in Shandong packed up for lower cost countries such as Vietnam. All this in a 6-month period that saw China’s stock market down around 50% year-to-date as global markets took a beating. This decline left China as the world’s worst performing stock market in US dollar terms after having been the number one performer in both 2006 and 2007 with triple digit growth in the index. We also heard complaints that corruption remains a real issue, and the environmental challenge presents Beijing with a dilemma. To add to the strained atmosphere, China faced an international and public

relations challenge that frustrated the Olympic torch relay due to opposing views on Tibet. So, no doubt, it has been a tough time. However, everything considered and despite the fact that these difficulties are by no means insignificant, China is not going to be derailed from its development track. In fact, dealing with challenges, internal and external shocks and having to adjust policies in turbulent times are natural elements of long term development. Hoping for a smooth and risk-free ride is unrealistic. Rather, Beijing has demonstrated its ability to deal with problems as they arise: SARS in 2003, flooding in 2005, this year’s snow storms and of course the May earthquake. As we enter the second half of 2008, Beijing wants to leave all these negative shadows behind, host a phenomenal event in August, and continue urgent ‘work-inprogress’ to accelerate China’s development. In our view, that is exactly what will happen. As such, looking into the middle distance, we think China remains on track for the Silver; and longer term China is going for Gold. I trust that our readers will enjoy this edition of THE CHINA ANALYST—and we welcome all feedback. Finally, we wish China, all visitors and of course all athletes a successful 2008 Beijing Olympics!

Kobus van der Wath Group Managing Director THE BEIJING AXIS China Business Solutions [email protected]

5 Table of Contents July 2008

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The Scramble for Australia Australia is playing a crucial role in China’s raw materials supply pipeline. Similarly, China is underpinning Australian economic activity. We take a closer look as China’s Australian mining interest moves from trade to investment.

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Sourcing High-Value Industrial Products from China

14

China Sourcing Strategy

16

China Sourcing Blog Highlights

17

Macroeconomic Monitor

18

China Facts, Figures & Forecasts

20

China Trade Roundup

The era of Chinese high-value industrial exports is approaching, and the winners will be the foreign firms that successfully navigate the pitfalls and peculiarities. Looking at the WHY, WHAT and HOW of sourcing in China, we put forward a simplified high-level framework for thinking about China sourcing. Highlights from pages of The China Sourcing Blog, THE BEIJING AXIS online information portal and discussion forum on issues relevant to sourcing from China. Is China’s Olympian economy slowing down at last? Although the growth rate has softened, further policy action may be needed. Yet a slowing world economy has given Chinese authorities much more to think about in their balancing act. A selection of data illustrating growth, transformations and trends in Chinese commerce and industry, focusing on trade and foreign investment. To illustrate the overall picture, breakdown and key trends in China’s trade map, the Roundup summarizes the latest China trade statistics.

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Financial Markets

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FDI & OFDI

24

The C in BRICS

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China Business News Highlights

31

China’s International and Cross-Straits Relations

34

Upcoming Events

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Careers at THE BEIJING AXIS

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THE BEIJING AXIS News

Tracking the dynamics of China’s Shanghai and Shenzhen Composite Indexes, benchmark interest rates and the CNY exchange rate regime. With FDI and OFDI increasing both in and from China, FDI & OFDI illustrates sources of FDI into China and unpacks Chinese outbound investments, as well as mergers & acquisitions involving Chinese firms locally and abroad. With recent economic statistics from Brazil, Russia, India, China and South Africa, The C in BRICS is a comparative segment that contrasts China with the other leading developing economies. A roundup of the main business stories coming out of China during the second quarter, including the iron ore benchmark settlement and developments on Coal-to-Liquid cooperation with South Africa. A summary of the main stories related to China’s rising stature in international affairs, including direct flights to Taiwan and the first Japanese naval visit to China since World War Two. News and schedules of upcoming fairs, exhibitions and seminars in China, with a focus on resources and industrial sourcing. THE BEIJING AXIS is looking for dynamic, creative, performance-driven individuals to assist us in meeting our present and future business challenges. Company news for the second quarter, including attendance of the National Mining Congress in Perth and donations to the Red Cross’ Sichuan earthquake relief fund.

THE CHINA ANALYST is published and distributed by THE BEIJING AXIS Ltd. For more information on services, please see page 39.

6 The Scramble for Australia Just as Australian resources supported Japan’s rise in the 1960s and ‘70s, Australia is again playing a crucial role alongside China’s impressive economic growth. We take a closer look at China’s Australian mining interests as they move from trade to investment.

“Back in the 1420s, the expeditionary fleets of China's Ming Dynasty reached Australian shores,” stated President Hu Jintao in his opening remarks to Australia’s Federal Parliament in 2003. President Hu’s remarks echo the enormous transformation that Australia is undergoing from a Eurocentric country to one where an Asian worldview and a China agenda are pivotal. It is a rapidly growing relationship, one that Australia has certainly benefited from in recent years. This is a case of history repeating itself: Japan’s industrialisation in the 1960s and 1970s was driven on the back of Australian resources and it was during this period that Japan emerged onto the global scene, hosting the Olympic Games in Tokyo in 1964 and World Expo in Osaka in 1970. Fast forward four decades and China is in an almost identical situation, with Australia the key resource partner in China’s impressive industrialisation. Given Australia’s geographic proximity to China and its ‘resource export basket’, it is little surprise that China is now Australia’s largest trading partner, having recently displaced Japan from that position after 36 years. During April 2008, Australia recorded a trade surplus for the first time in 6 years largely on the back of higher iron ore export values. Moreover, Chinese investment in Australia’s mining sector has been growing rapidly. This has now brought Australia’s China stance to the fore, and the debate on whether China should be allowed to buy into the sector occupies minds in Canberra as well as those

of journalists and commentators, researchers, and miners in Western Australia and the rest of the vast resource rich country. Importantly, however, the phenomenon of Chinese engagement in Australian resources has clearly attracted attention in Tokyo, New Delhi, Moscow and elsewhere. In some ways, the China-Australia story is now being seen in the context of China’s engagement with Africa and other resource-rich countries and regions. While some see Western Australia’s recent boom as China-inspired, others point out the dangers of allowing China into a sector if it does not serve the national interest. This debate is sure to intensify as China’s outward FDI and M&A continues to hit Australian shores. Killing Two Birds with One Stone A 2005 report by the Minerals Council of Australia highlighted that 52% of Chinese global outward FDI was destined for minerals and energy ventures. While Australia-China trade has been dominated by raw material exports, until recently FDI in this area has been a negligible part

of the equation. Since 2005, however, China’s global outgoing FDI has seen a considerable spike and this has had a direct bearing on Australia’s resource sector. (See the FDI & OFDI section on page 23 of this report.) As it is a particularly strategic investment destination, Australia’s raw material smorgasbord gives China the opportunity to kill the proverbial two birds with one stone. Not only does it offer a diversification of China’s ballooning foreign exchange reserves (around USD1.8 trillion), but mining investment is also a commodity price hedge against rapidly rising prices. Says Andy Caruso, Managing Director of Australasian Resources: “To me it is an obvious strategic link up - we’ve got the resources and they have the capital.” This translates into sharp Chinese investment inflows into the Australian economy. According to Australian Treasurer Wayne Swan, while China only accounted for 0.2% of Australian foreign investment - with a total amount invested of AUD3.4

China and Australia’s Complementary Mining Economies Resource Iron Ore Coal Alumina Zinc Lead Gold Nickel Copper

Australia (position as a global producer)* 2 4 1 2 2 2 3 4

China (position as a global consumer)** 1 1 2 1 2 4 3 1

*Minerals Council of Australia (2006-07) ** Minerals Council of Australia (2004)

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billion by the end of 2006 - Chinese investment could reach as much as AUD30 billion by the end of fiscal 2008. This clearly reflects the current environment and shows where big-ticket deals are being put together. Perfect Suitors? Australia is the world’s leading producer of bauxite and alumina, ilmenite, rutile and zircon, synthetic rutile and tantalum. In addition, Australia ranks second in gold, iron ore, lead, uranium, diamonds (by weight) and zinc; third in silver and nickel; fourth in copper, black coal and manganese; and is the fifth largest producer of aluminium, copper and lignite. But while China accounts for roughly 7% of global GDP, it consumes over 16% of the world’s metals. It is the largest consumer of copper, tin, zinc, steel, iron ore and coal; second largest consumer of aluminium, petroleum and lead; third largest consumer of nickel and the fourth largest user of gold.

Mining Operational

Ready to dig deep: Australia’s iron ore mining sector is of great interest to Chinese investors, supporting its status as the largest steel producing nation.

Given this China-Australia demandand-supply-map, it is not surprising that mineral exports account for about 60% of Australia’s total exports to China, while minerals and energy exports represent 7 of Australia’s top 10 merchandise export items to China.

Major Chinese Mining Investments in Australia by level of completion: May 2008

Under Construction Feasibility Study Announcement / MOU Processing Operational

Notable Chinese Mining Investments The bilateral engagement between Australia and China is viewed in a very strategic light in Beijing and is already mid-process. China Inc. has invested in more Australian projects and at greater volume over a longer time period than in any other country. This extensive cooperation has given a greater sense of depth to mining relations between the two countries, but the extent to which this has created a stable and mutually beneficial relationship remains a matter for debate. In order to explore this question further, we here briefly examine three noteworthy Chinese miners that offer a unique glimpse into the nature and challenges surrounding Chinese investments in Australia.

Under Construction Feasibility Study Announcement / MOU (For more detailed information on these projects, please contact THE BEIJING AXIS Beijing office)

CITIC Resources CITIC Resources was China’s first mover in Australia’s mining sector. Its defining Australian mining investment was made over two dec-

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Summary of Chinese investments in Australia's mining sector (Reuters 29 May 2008) Chinese Investor Shenhua Group, CIC Yanzhou Coal Guangdong Yudean Group CITIC Resources Shougang Group Shougang Group Angang Baotou Iron and Steel CITIC Pacific MCC Group Haoning Group Western Mining Co Hugo Natural Enterprises Sinosteel Corp Chinalco and Alcoa Inc Zhongjin Lingnan Nonfemet

Australian Company FMG/Harbinger Southland mine (Austar) Narrabri Coal project Macarthur Coal Mount Gibson Australasian Resources Gindalbie Metals Centrex Metals Sino Iron project Cape Lambert Iron Ore Brockman Resources FerrAus Apollo Minerals Midwest Corp Rio Tinto Herald Resources

ades ago via a 22.5% interest in Victoria’s Portland Aluminium Smelter. This is recognized as being the first major overseas investment undertaken by a Chinese company. CITIC Resources has subsequently deepened its exposure to Australia’s mining sector by taking numerous equity stakes. These include a 7% interest in the Coppabella and Moorvale coal mines, a 19.9% interest in Macarthur Coal, a 5% interest in minerals exploration company Aztec Resources and a 7.5% interest in a small uranium exploration company. Another noteworthy aspect of CITIC’s involvement in Australia was the formation of the Australian Stock Exchange-listed CITIC Australia that handles CITIC’s raw material exports from Australia and creates greater vertical integration of CITIC’s operations. CITIC Resources showed that Chinese firms have the ability to enter, grow and build scale, integrate and become players that can attain diversified local critical mass over time.

Resource Iron Coal Coal Coal Iron Iron Iron Iron Iron Iron Iron Iron Iron Iron Diversified Zinc

Stake USD2 bn 7.5% (AUD67.5 mn) 19.9% 3.6% 8.4% 12.8% 10.3% 100% AUD400 mn 10% (AUD15.5) Increase to 19.9% USD1.3 bn USD14.4 bn

Rio Tinto Chinalco’s highly publicized coinvestment of USD14 billion with Alcoa in Rio Tinto was a direct affront to BHP Billiton’s takeover plans and showed a new level of Chinese investor savvy—and boldness. The threat of BHP acquiring Rio Tinto and tying up over 40% of the world’s iron ore supply was perceived as a direct challenge to China’s bargaining power around one of its key strategic resources and provided it with a strong investment catalyst. BHP Billiton had already demonstrated its strong position by lumping the Chinese Iron and Steel Association with a 71.5% year-on-year price increase in 2004. In addition, they also demanded what was seen in Beijing as an unprecedented surcharge of up to USD10 per ton of iron ore, reasoning that importing from Australian mines would save on transport costs compared to Brazilian iron ore imports.

Details Media Reports Purchased Purchased Purchased Purchased Purchased Purchased Purchased Purchased Under discussion Under discussion Purchased Under discussion Under discussion Purchased Under discussion

act to protect what it saw as its strategic mineral interests, but it could also muster up large amounts of capital to do so. Above all, the Rio Tinto deal showed us that Chinese firms can do complex and sensitive deals and that the world’s third biggest economy, having overtaken Germany in the past two quarters, is punching at a new weight. Indeed, the stealth, speed and finesse of the deal herald a new era in global M&A. Looking back at the Noranda and Unocal debacles, it is clear that some lessons have been learned in Beijing. The question remains whether national governments, regulators and boardrooms in the rest of the world have adapted their worldview to incorporate a balanced perspective on China’s true potential as a big player over the short term. Midwest

The Rio Tinto investment was China’s largest single overseas investment to date and also its first in a major mining company. The deal showed that not only would China

At the centre of the current debate is the unfolding Sinosteel-MidwestMurchison case experience. Sinosteel increased its stake in the Perth-

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based Midwest iron ore mining company to 28.37% and then to 43.6% in June and eventually over 50% in July as part of a takeover bid and is now closing in. If Sinosteel succeeds in its bid, it would be the largest metals acquisition by a Chinese mining company thus far. It would also be the first successful hostile engagement. The timing of this share purchase followed closely on the heels of Chinalco’s investment in Rio Tinto and met with many reports that the Australian Government was reassessing high level Chinese investments in its mining industry. While this was quickly denied, Sinosteel’s bid highlighted a growing sentiment voiced by a senator of Australia’s National Party that if an Australian company tried to become involved in a key aspect of the Chinese economy, the Chinese would block it. This reflects a divide in views on the most appropriate policy. Unsurprisingly, this divide is also evident in the split views between large and small mining companies: large players are generally resistant to an open door for Chinese investment, while smaller firms see China’s capital as attractive. Ultimately, Canberra has to balance an array of complex and sometimes conflicting interests. These include Australia’s wider international relations objectives and diplomacy; its relations with China as it becomes a force in the world economy; its ties with other Asian partners (i.e. Japan and India); the scope of overall export potential to China (and the risk of a protectionist backlash); Australian national and regional politics; and the international competition to attract Chinese investment. Not easy.

very tangible benefits, but unlike the more hands-off raw material trading relationship that characterized the pre-2006 era, FDI brings with it greater complexity and political baggage, especially as China’s mining sector still remains largely off-limits for Australian companies seeking reciprocal opportunities. In addition, most high profile Chinese mining investors are still backed by strong government ownership or support. This will maintain the topic of China’s investment in Australia as a contentious and controversial one. However, as long as the commodity boom continues, Australia has much to gain from a sound bilateral engagement. Any slowdown in the bonanza will change the outcome as shrinking margins bring ownership issues and other challenges to the fore. But for now, bulk cargo carriers following the routes of Ming Dynasty Admiral Zheng He’s armada are writing a new chapter that is not expected to end anytime soon. Now is the time to shape a long term relationship with China that maximizes the current investment and trade opportunity but that also serves the long term national interest. So, as long as Australian resources continue to underpin Asian industrialisation, the integration with Chinese mining companies continues to have scope for a win-win situation. With a Mandarin speaking Prime Minister; the ongoing FTA negotiations; a fresh new trade surplus; and lively debate, the stage is set for Australia to fare (at worst) still far better than many other countries seem to be doing in their China engagement. At best, China could fully and truly become a new strategic partner, investor and market.

Looking into the Future The emergence of China’s new thirst for investment offers Australia

Kobus van der Wath Group Managing Director [email protected]

Key China questions for Australian mining boardrooms: Local landscape What is Japan’s view of China’s expansion in African and Australian resources? What is the view from other large emerging markets like India and Russia? Will they increase their Australian interest on the back of Chinese firms’ expansion activities? Will the Australian government end up encouraging such diversification of investment sources? Is there an opportunity here? International growth What is the scope for Australian mining companies to cooperate with Chinese players in 3rd countries. i.e. in PNG, Laos, Africa, etc? China entry Would reciprocal co-investment in Australia and China create the groundwork for a successful China entry strategy over the medium term? Supply Is there an opportunity to reduce capital cost of new projects or operating costs via effective China procurement? How to implement an effective China supply chain? Partnering For how long will the top Chinese firms remain unmarried? (For example, Chinese banks have been forging international strategic and financial partnerships, making it hard for foreign newcomers to find top-end banking partners.) Is time now also running out for miners to forge meaningful partnerships? Does that spell the need to act fast?

10 Sourcing High-Value Capital Products from China The era of Chinese high-value industrial exports is approaching, but the world is weary of diving in too soon. Yet the real winners will be the foreign firms that successfully navigate the pitfalls and peculiarities, thereby developing experience and realizing cost advantage before it becomes the norm.

Conventional wisdom once held that East Asian economies fly in formation: As Japan outgrew a certain industry, it was passed on to the Tiger economies of Hong Kong, Taiwan, Singapore and Korea. Once these economies went upmarket, lower-end industries were then passed on to the likes of Indonesia, Malaysia and Thailand. China’s ‘Great Leap’ of the last three decades has, however, shown such thinking to be too conventional and without much wisdom. Centrally directed economic development has seen China leapfrog its Asian neighbours to play in such industries as semiconductors and large passenger planes. And although Chinese high-tech ability is still subsidised by foreign technology transfers (passenger planes) and government backing (Lenovo, Huawei), a competitive edge has developed in several areas of high-value industrial and equipment manufacturing. One of the most interesting such areas is that of high-value capital goods (HVCG). Manufacturers of everything from machine tools to telecommunications equipment have moved onto the global A-list, and in the case of Huawei, a telecommunications equipment maker based in Shenzhen, its equipment and service were considered good enough to beat Siemens in a German tender. Zhenhua Port Machinery had a full two thirds of global port crane orders in 2006, dominating in an area once belonging to the likes of Liebherr and Samsung. Tian Di Science and Technology is the national leader in the design and manufacturing of coal mining equip-

ment, while Hudong Heavy Machinery is the biggest supplier of diesel engines and related parts to the rapidly growing Chinese shipbuilding industry. Certainly, many of these companies have found greatness on the coat tails of local economic growth, and a considerable amount of institutional support. It is true that Chinese state enterprises are at times prodded to use local suppliers who may produce to an inferior quality, but this is only one part of the story. Through exposure to world class projects, Chinese manufacturers have negotiated a very steep learning curve, a phenomenon that was no doubt assisted by foreign companies who were willing, thanks to the sheer size of the Chinese opportunity, to partner with local firms and sometimes forego intellectual property. But Chinese suppliers have now become globally competitive in regard to quality, without having to fully sacrifice the cost advantage that they have always had. Yet there still lies a long way ahead. Foreign customers will naturally want to engage Chinese HVCG manufacturers in products with a higher value, complexity and risk. But the Made in China reputation is still employed as a scare tactic by European suppliers that charge anything up to 100% higher for equipment that Chinese manufacturers can make without a flaw. And as concerns about equipment quality have been giving way, concerns about service quality, especially with regards to after sales service, will surface. This is an area that cannot be perfected by R&D and govern-

ment relationships, but only through experience or by implementing foreign practices in organisations that are often change-resistant. It is exactly in this area that competitive advantage will be gained by foreign companies sourcing capital goods from China. Companies that have sourced from China usually find that it is not an easy, smooth ride. Negotiations are long and unpredictable; user manuals have to be translated from Chinese; training may only be supplied through a poor translator; or email etiquette may be interpreted in an entirely different way than usual. Nevertheless, when the machine arrives, it works perfectly well. This ‘soft skills’ deficit of Chinese manufacturers will be eliminated over time, but the real winners over the next several years will be foreign companies that can ‘beat the curve’ by filling the deficit themselves, without expecting the service delivered by traditional First World suppliers. This will be difficult, since it may require an adjustment of old habits and assumptions which will be as challenging to foreign companies as to Chinese ones. Still, through the use of (reasonably priced) intermediate service providers or the proactive communication of service requirements, significant progress can be made in ‘pulling’ Chinese suppliers into a more professional pattern of behaviour, instead of waiting for them to learn it themselves. At the same time, learning to live with some of the service aspects peculiar to Chinese suppliers would also go a long way in gaining competitive advantage. This whole

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process is obviously fraught with difficulties: the process of changing aspects of two very dissimilar corporate cultures contains risk and ought to be approached with sensitivity. Yet it is in the conquering of these kinds of difficulties that the competitive advantage lies. But doesn’t this apply to all levels of sourcing from China? The sourcing of high value capital goods from China is different from the sourcing of lower value goods in primarily five areas . 1. Firstly, the sheer scale makes the potential rewards huge, but so too the risks. In sourcing HVCG, careers are often made or ended, and indeed the growth prospects of companies can be influenced. This makes it a highstakes effort where success is either 100% or zero.

2. Secondly, the value and immediacy of HVCG purchases eliminates the possibility of ‘testing the water’. In some exceptional cases, a company can be engaged through buying gradually more valuable machinery, but this is rare. Thus, instead of only evaluating a company’s product, an assessment of the company itself may be necessary to determine whether it can complete a product that takes two years to manufacture. 3. This immediacy then leads to another major difference, in that it reduces or eliminates the option of minimising risk through diversification. 4. All this happens against the background of greater complexity, requiring the parties not only to do things right, but to also do more things right, the success of

which are interrelated. 5. A final difference is the need to manage change. When ordering a machine that is to be built and delivered over a period of two years, changes in the two companies need to be managed, a process that is complicated by cultural differences, high staff turnover (in China) and expansion pressures on the Chinese company. In the schematic below, the phases of building sourcing capabilities in China are illustrated. From initial sampling, one would move on to the purchasing of components or low value products, and then gradually move on to the third phase, that of developing a comprehensive China sourcing solution. When sourcing HVCG, however, the luxury of the first two stages do not exist. The successful sourcing of HVCG auto-

Capturing Value From Strategic Sourcing Early stage

• Recognize China’s potential

• May source some products on a trial basis

• Have no formal China initiatives

Purchasing components or complete products

Developing comprehensive sourcing

• Focus on reducing

• Sourcing plan

purchasing costs

• Obtain valuable understanding of the supply base

• But gain little defensible advantage

• Not yet organized for sourcing in China

Source: Adapted from the Boston Consulting Group

includes - Parts

- Products - Talent / R&D • Advantage gained from

- Supplier relationships - Product development - Proprietary tools and processes - Market intelligence

Adopting integrated China strategy

• View China as both a market and a sourcing location

• Leverage synergies between export sourcing and domestic production - Integrated capacity planning - Flexible production

Capturing global advantage

• Exploit global synergies in

- Cost structure - Manufacturing strategy

- Supply chain • Leverage best -

global capabilities Deploy high-cost assets

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matically requires a comprehensive sourcing solution at the outset, and for this reason the lessons normally learnt in the first two stages need to be directly applied in the third stage. In short, sourcing HVCG from China presents more risk than sourcing HVCG from First World suppliers. But contrary to popular belief, the risk and difficulties reside not in product quality, but rather in abstract processes such as relation-

ship management, the ability to influence, communication, protocol and expectations. Indeed, many Chinese companies manufacture HVCG on a contract basis for foreign companies, but are unable to gain access to the enduser interface due to limitations in these service-related fields. While Chinese industry has leapfrogged the flying formation of the Tiger economies, it has done so mainly in

terms of technology, not service delivery. That will take another few years, and until that day arrives, real competitive advantage lies in bridging this gap from the other side.

Dirk Kotze China General Manager [email protected]

Selected Chinese Machinery and Equipment Manufacturers Name

Activities and background

Near-term world class export & service readiness

ZTE Corp

Telecommunications equipment maker with extensive business in developing markets. Top two in China.

Huawei

Telecommunications equipment maker with extensive business in developing markets. Top two in China.

Shanghai Electric

Four main business segments: power equipment (one of big three in China), electromechanical equipment, transportation equipment, environmental systems. Largest listed machinery enterprise in China.

Suntech Power

Solar energy company that designs, develops, manufactures and markets a variety of photovoltaic (PV) cells and modules. Largest in China.

CIMC

Principally engaged in the manufacture and sale of containers, road transport vehicles and airport bridges. Global leader.

Zhenhua Port Machinery

Manufacturer of container cranes and large steel structures. Major products include quayside container cranes, rubber-tired and rail-mounted gantry cranes. Global leader.

SANY Heavy Industry

Largest producer of concrete pumps in China and top five globally. Expanding into a wide range of construction machinery.

Weichai Power

Largest heavy-duty diesel engine manufacturer in China, supplying mainly to domestic truck and construction machinery manufacturers.

CIMH

One of top three wheel loader makers in China and looking to expand into excavators.

Hudong Heavy Machinery

Largest producer of diesel engines and diesel engine parts for the shipbuilding industry in China; produces low and medium-speed diesel engines.

Anhui Heli

Largest producer of forklifts in China, including engine-powered forklift trucks and battery-powered forklift trucks, as well as related parts and components.

Tebian Electric Apparatus

Principally engaged in the manufacture and sale of transformers, cables and wires for power transmission; also produces high-voltage electronic aluminium foil and assembles key control components for solar energy equipment.

Tian Di Science & Technology

Principally engaged in the design, production and sale of coal preparation equipment and mining equipment, the construction of underground engineering projects, as well as the design and construction of mines and mine production systems.

Shenyang Machine Tool

One of top two machine tool makers in China. The company offers its products under five categories, including computer numeric control (CNC) machines, conventional machines, special machines, set products and other products, such as function parts and CNC systems. Aggressively buying businesses overseas.

Fujian Longxi Bearing

Largest producer of special bearings in the world, including spherical plain bearings, tapered roller bearings, argentum (AG) bearings, deep groove ball bearings. Also produces auto parts such as automotive steering systems, shock absorbers and mufflers.

Source: THE BEIJING AXIS case experience and analysis

2005 2008

2010

14 China Sourcing Strategy China Sourcing: WHY? WHAT and HOW? - Towards a Basic Framework of Analysis. In this edition we put forward a simplified framework for approaching China sourcing. We briefly elaborate the Why? and What? Then we ponder the How?

China’s status as the leading global sourcing hub is now undisputed. Yet, many firms still find it difficult to extract enough value from their China sourcing ventures. Below we briefly highlight key issues that impact the question ‘WHY source from China?’ as well as the question of ‘WHAT to source from China?’

The WHY is impacted in mainly four areas: China advantage; international forces, industry changes and trends; and factors internal to the firm. A good amount of emphasis should be placed on the WHY and WHAT. Desk research, consultants and good logic can often sufficiently address these two questions.

The HOW question remains the most problematic. Even after 10 years of China being a major sourcing hub, firms with significant experience still find it difficult to get this right. On the next page we highlight the typical causes of the HOWrelated problems; and a high-level framework for thinking about HOW.

Why Source from China? China International industry and trends Firm level

Growth

International r elation s

Key

Socio-political environment

Sound macro econom y

Political stab ilit y

Size Stabilit y

Cost pressur es

Capital expenditure & tooling

Competitors are doing it I alr ead y sour ce internationall y

Internal to m y firm

Low setup co sts

Incentives Amortised co st in full-cost pri ce

Can I identif y the W HAT? Can I identif y the HOW ?

RMB exchange rate Export incentives i. e. subsidies

Traditional supplier countries rendered un competitive My tr aditional supplier went to China

New competitive tr ends

Reduced co st of borro wing

WHY Source from China?

Supportive policy environment

Active export promotion Gener al r egulations i.e. cu stoms

China’s domestic p layer s have reach ed the bar in m y products

Broader industri al b ase Anti-dumping restri ctions r emoved Better diversified econom y

Scale and scop e Scope in technolog y produ cts

Tie up top Chinese suppliers before they partner with comp etition

Serviced i.e. engin eer ing & IT Competitive Strateg y Abundant labour

Provide a Chinese alternative to cl ients before Chinese ent er m y mar ket dir ectl y

Low l abour co sts

Better infrastructure i.e. r ail, ports, etc Many service providers

Improved logistics

Many engineers and scientists Toy scare not representative

Ongoing qualit y improvem ents

More world class supplier s

What to Source from China? Does China h ave an advantage for m e? Ask the right questions China’s tradition al exports Emerging exports Labour intensive goods

Most likely cluster s

Some r aw m ateri als / intermediat e goods

W ill I manufacture in Chin a or wor k with existing Chinese supplier s

Rapid upward move in technolog y absorption / diffusion Many new Chin ese suppliers leapfrog incumbents with better technolog y Key Developm ents

Many Chinese can no w m anufacture what only leading MNCs used to be able to do OEM suppliers d evelop their o wn brand Stricter qualit y standard s and b etter enforcement Trade tensions in certain products i.e. textil es Anti-dumping status Regulator y ch anges

Does China h ave the qual it y? What about the logistics impli cations?

WHAT to Source from China?

Export subsid ies/reb ates Export taxes Support or resistance Environmental issues

How complex is m y product? Is it a commodit y or stand ardised item(s)? Are design and engin eer ing involved? Can I force m y suppliers to move to China?

15

calate as the relationship gets older; 2) IP transgressions by suppliers or other firms; 3) lengthening lead times; 4) troublesome logistics (i.e. customs and shipping arrangements); and 5) contract renegotiation etc.

Typical China Sourcing Problems From experience we have identified many HOW problems in China sourcing. We highlight key ones: ●

●

●

●

Internal buy-in from various divisions to join the centralised China procurement effort. This causes fragmented attempts, slows organisational learning and reduces synergies. Strong top management support and good Global CSM organization is crucial; Internal users of products often prefer developed country (i.e. German) quality, and equate Chinese products with inferior quality. Internal education and reeducation is needed; Project management during design/engineering and fabrication. Languages, practices and different priorities can cause havoc. In China sourcing the emphasis of Project Management needs to fall on Relationship Management; Some common other problems that are often sited are the following: 1) quality declines or prices es-

Constructing a Framework The key is to approach the HOW firstly from a strategic angle and then to move to an implementation model that comprehensively and systematically addresses all the relevant problem areas. We argue that a thorough understanding of China, goals/objectives, global industry dynamics and the firm itself are necessary to help drive decision-making about the approach to China sourcing that will be followed. Not everyone needs to become a ‘Sinofile’, but it is necessary to understand China’s cultural nuances, practices and economic landscape. That itself implies advantage and can greatly enhance the probability

of negating the problems mentioned above and formulating a winning strategy. Concepts such as ‘true supply chain cost’ and ‘total cost of ownership’ remain illusive in the absence of a sourcing strategy that can be fully implemented. Implementation requires a good grip on SCM organizational design; people, skills and teams; methodologies, processes and insource/outsource decisions; and working with service providers. It also requires solid holistic managerial skills in the areas of project, risk and relationships. The conceptual map below highlights these interdependencies. In the next edition we will look at Organization. We explore the optimal structure for multinational SCM / Procurement / Sourcing teams that are active in China. Kobus van der Wath Group Managing Director [email protected]

How to Source from China? Views of contracts Culture in business Risk m anagem ent b y relationship

Impact of langu age Concept of time

Sourcing

Histor y Culture

Politics & po wer

Ordering, liai son Commercial & contr acts

China SCM Organization

Understanding China

Technical/ engineering support QA, Expediting

Economic tr ansformation

Logistics

Cost (TCO) Deliver y cycles

Obj ectives

Many suppli ers or a f ew Does the product travel well?

Languages skill s

Implementation

Production/selling in Chin a Low volume h igh value vs high volume lo w value

People Context of my industr y

Cultural astuteness International p erspective Benchmar king processes against best practi ce Risk m anagem ent philosoph y

HOW to Source from China? Methodology

China read iness HQ & top managem ent support

Processes in-house vs outsourced processes Consultants

Strateg y Managing service providers

Agents/Tr ade

QA specialists Logistics Finance/b anks

Fl y-in-fly-out WFOE/FICE JV, etc.

Project manag ement Relationships man agem ent

Firm factors

Global SCM organ isation Increm ental entr y vs Gr eat L eap into China

Rep. Office

Anal ysis Supplier id , filtering, selection Negotiation

Contract/lawyer s, et c.

Channel to source— own sourcing office?

Failure

Approach Results

Finished products vs components Capital goods vs operating expenditures only Value to be placed at ri sk

Success

Learning Improvements Pull out? Accelerate and scale Add complex produ cts Revisit ‘approach’ - potential ly ti er up

16 China Sourcing Blog Highlights Change is in the air with China sourcing, and CSB has been tracking the ominous transportation and ‘hidden’ costs that have been inflating risk, making this time a critical inflection point in the history of China sourcing. Yet ultimately, risk is the only thing that cannot be outsourced.

Sponsored by THE BEIJING AXIS, the China Sourcing Blog takes on a multi-faceted, dynamic subject, and carefully scans everything from the mainstream financial media to the more distant corners of the Internet to get to the bottom of all the best bits and pieces on China sourcing. The following are some of the most popular postings over the last three months: Posted: 1 July 2008 Costs and risk in global supply chains are currently higher and more complicated than ever, yet under current indications of rising energy and transportation costs, analysts project a fundamental reorientation of supply chain and sourcing strategies. Fast, cheap and often out of control, complex supply chains have induced riskmitigating fever as manufacturers devise more aggressive strategies to boost sales and cut costs. Posted: 19 June 2008 Could China’s three decade-long growth miracle finally be reaching a climax? As slower economic growth in 2008 could be the first indication of an economic slowdown, the implications for sourcing are bound to be significant as China slowly prices itself out of low-cost country sourcing. At the same time, however, 635 million Chinese people have been lifted out of poverty since 1978. Posted: 11 June 2008 An independent report by the EU identified small players, among both Chinese manufacturers and European importers, as the weak links in the global supply chain, and be-

Stacked slightly lower at Shenzhen: Energy costs have hit shipping lines hard.

cause of these weak links outsourcing has been moving to the top of the globalization agenda. Yet despite the elaborate nature of today’s supply chains, the fact remains that businesses retain ultimate responsibility for the safety and reliability of their products: risk remains the only thing that can never be outsourced. Posted: 30 May 2008 The rapidly rising cost of oil and transportation is fast becoming the biggest obstacle for China sourcing, and may in fact be reversing long-standing trends of globalization. As importers begin to feel the pinch, Chinese exports have shown signs of receding as shipping lines adapt by raising shipping costs and renegotiating contracts. For many analysts these are ominous signs of troubled times ahead…

Posted: 27 May 2008 With time to reflect on the wave of China product recalls of 2007, the strategic impact of the quality concerns seems have been more stringent quality control measures that were applied to Chinese suppliers. Yet these are still no guarantee for success in China; the best action to ensure a successful sourcing program is still to visit the Chinese factory - multiple times. And finally… The China sourcing debate is never complete without considering China’s struggle with intellectual property, and in a posting on 18 May, CSB outlined China’s latest concrete steps in an uphill struggle against counterfeiters as IP protection gradually gains momentum. [email protected] www.chinasourcingblog.org

17 Macroeconomic Monitor Is China’s Olympian economy slowing down at last? Although the growth rate has softened, further policy action may be needed. Yet a slowing world economy has given Chinese authorities much more to think about in their balancing act.

Overview

Consumer Price Index (% change y-o-y , 2005-May 2008)

10 8 6 4 2 0

China's buoyant economy grew at 11.6 percent in the first quarter of 2008, surging ahead despite Beijing’s efforts at restraint. The 11.6 percent was, however, down from Q1-07 growth of 11.7 percent and full year 2007 growth of 11.9 percent. This slight slowdown is likely to continue in Q2-08 and is a welcome pullback below 11 percent.

7.1% increase, biggest y-o-y since 1996

2005

2006

2007

Jan-08 Feb-08 Mar-08 Apr-08 May-08

Source: National Bureau of Statistics

A key factor for Beijing is the sharp increase of CPI over the past 12 months. Higher food prices and energy costs have pushed the CPI over 8 percent for the first 4 months of 2008. It fell back to 7.7 percent in May, but rising prices for oil and for industrial input materials will keep pressure on prices, even as the effect of higher food prices starts to fall out of index calculations. Further oil price increases (oil from USD100145pb and copper spiking to USD8,000/t again) will certainly add upward pressure, and thus the Chinese government’s monetary policy agenda will be dominated by inflation for the foreseeable future.

China's economic growth continues to be driven by strong export growth (albeit that y-o-y growth is down to 12 percent in Jan-May 2008 from last year's y-o-y growth of 18 percent for the full year); soaring investment in factories and other fixed assets despite repeated increases in interest rates this year; and moderate broad-based private consumption growth. Beijing wants to maintain rapid growth to ease poverty and maintain stability, yet is concerned that runaway expansion and overspending on real estate and other assets could cause structural problems.

Salient trends & points ●

●

Beijing has to curb growth, but does not want to do so just as the world economy slows down sharply—this has clear implications: Beijing will want to maintain its gradualist approach to curbing credit/liquidity and it will guard against a too rapid RMB appreciation. Although the Sichuan earthquake at first appeared devastating, the severely affected zone is limited, and situated far from China’s main economic centres. As such, the effect on GDP will be marginal.

China GDP Growth (% change y-o-y, 1978-2010F) Latest overheating concerns

16 14

Past periods of overheating

7-10% GDP growth ‘band’

12

8% GDP growth ‘floor’

10 8 6 4 2 0 78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

Source: World Bank, China Statistical Abstract 2006, OECD Report, TBA Analysis

94

95

96

97

98

99

00

01

02

03

04

05

06

0 7 0 8 F 0 9 F 10 F

18 China Facts, Figures & Forecasts The following is a selection of recently released data and forecasts that illustrate the main trends in the growth and transformation of Chinese commerce and industry, with an emphasis on trade and foreign investment.

China — Selected Economic Indicators

General statistics Population (mn) Nominal GDP ($bn) GDP per capita ($) Real GDP growth (%) Growth in real retail sales (%) Growth in real fixed asset investment (%) Fixed investment (% of GDP) Prices, interest rates and exchange rates CPI inflation (%, December over December) CPI inflation (% change in average index for the year) Exchange rate (RMB per USD, end-year) Exchange rate (RMB per USD, average) Nominal wage growth (% year-on-year change, average) 3-month interbank rate (%, end-year) Fiscal data General government fiscal balance (% of GDP) General government primary fiscal balance (% of GDP) General government expenditure (% of GDP) Gross general government debt (% of GDP, end-year) Money supply and credit Broad money supply (M2,% of GDP) Broad money supply (M2,% year-on-year change) Domestic credit (% of GDP) Domestic credit (% year-on-year change) Balance of payments Exports (goods and non-factor services, % of GDP) Imports (goods and non-factor services, % of GDP) Exports (goods and non-factor services, % increase in $value) Imports (goods and non-factor services, % increase in $value) Current account balance ($bn) Current account (% of GDP) Net FDI ($bn) Scheduled external debt amortization ($bn) Foreign debt and reserves Foreign debt ($bn, year end) Public ($bn) Private ($bn) Foreign debt (% of GDP, end-year) Foreign debt (% of exports of goods and services) Central bank gross FX reserves ($bn) Central bank gross non-gold FX reserves ($bn) Source: Credit Suisse, Capital Goods Research Analysis, April 2008

2005 1,308 2,244 1,716 10.4 12.1 25.7 42 2005 1.6 1.8 8.07 8.19 14.6 3.6 2005 -1.2 -0.3 18.5 23 2005 160.7 17.6 105.9 9.3 2005 37.3 31.7 27.6 17.4 160.8 7.2 67.8 18.1 2005 281 98.7 182.4 12.5 33.6 819 815

2006 1,314 2,645 2,012 11.1 12.7 24 42.8 2006 2.8 1.5 7.8 7.97 14.4 2.8 2006 -0.8 0.1 19.2 20.9 2006 163.9 16.9 106.9 15.7 2006 40.1 32.2 26.9 19.8 249.9 9.4 60.3 20.9 2006 323 108.2 214.8 12.2 30.4 1,066 1,062

2007 1,321 3,242 2,454 11.9 13 24.8 44.1 2007 6.5 4.8 7.09 7.61 16.5 4.4 2007 -0.5 0.3 19.9 18.3 2007 163.6 16.7 106.1 16.1 2007 41 32.2 25.2 22.2 333.7 10.3 67.7 24.1 2007 373 118.7 254.2 11.5 28.1 1,528 1,524

2008E 1,329 4,214 3,171 10.5 13.6 20.2 43.2 2008E 7.5 7 6.6 6.95 20.3 5.2 2008E -0.6 0.1 20.4 15.9 2008E 161.9 17.5 104.1 16.5 2008E 34.3 31.8 8.9 28.5 150 3.6 32 27.3 2008E 423 130.3 292.7 10 29.2 1,773 1,768

2009E 1,336 5,592 4,186 9.8 13.7 19 41.8 2009E 6.2 7.2 5.9 6.25 25 5.8 2009E -0.6 0.1 21 13.8 2009E 156 15 99.4 14 2009E 28.6 28 10.7 16.9 73.1 1.3 25 30.5 2009E 473 142.9 330.1 8.5 29.5 1,918 1,914

19

Statistics by Province

Provinces in red make up half of China’s total GDP Heilongjiang

Jilin

Beijing

Xinjiang

Liaoning

Inner Mongolia

Gansu

Ningxia Tianjin

Hebei Qinghai

Shandong

Shanxi Shaanxi

Tibet

Henan

Jiangsu

Sichuan Hubei

Chongqing

Guizhou

Wenchuan County, Sichuan, epicentre of May 12 earthquake

Zhejiang

Jiangxi

Hunan

Shanghai

Anhui

Fujian

Yunnan Taiwan

Guangxi

Guangdong

Hainan

Pop. in mn

Pop. % GRP* in % of Comparable of Total USD bn GDP Size Economy

Anhui Beijing Chongqing Fujian Gansu Guangdong Guangxi

61 16 28 36 26 93 47

4.7 1.2 2.2 2.8 2 7.2 3.6

77 101 45 98 29 336 62

2.6 3.3 1.5 3.3 1 11.3 2.1

Morocco Peru Croatia Peru Sri Lanka Austria Vietnam

Guizhou Hainan Hebei Heilongjiang Henan Hubei Hunan

38 8 69 38 94 57 63

3 0.6 5.3 2.9 7.3 4.4 4.9

29 13 149 79 160 97 97

1 0.5 5 2.7 5.4 3.3 3.3

Sri Lanka Ethiopia Chile Morocco Colombia Peru New Zealand

Inner Mongolia

24

1.9

61

2.1

Vietnam

Jiangsu Jiangxi Jilin Liaoning Ningxia Qinghai Shaanxi Shandong Shanghai Shanxi Sichuan Tianjin Tibet Xinjiang Yunnan Zhejiang

Source: TBA Analysis, Various 2006; *GRP: Gross Regional Product

Pop. in mn

Pop. % of Total

GRP* in USD bn

% of GDP

Comparable Size Economy

76 43 27 43 6 5 37 93 18 34 82 11 3 21 45 50

5.9 3.3 2.1 3.3 0.5 0.4 2.9 7.2 1.4 2.6 6.3 0.9 0.2 1.6 3.5 3.9

278 60 55 119 9 8 58 283 133 61 111 56 4 39 51 202

9.4 2 1.9 4 0.3 0.3 2 9.6 4.5 2.1 3.7 1.9 0.1 1.3 1.7 6.8

Denmark Slovakia Slovakia Philippines Nepal Afghanistan Slovakia South Africa Singapore Vietnam Egypt Slovakia Niger Sudan Libya Portugal

20 China Trade Roundup To illustrate the main trends in the growth and transformation of Chinese commerce and industry with an emphasis on trade and foreign investment, the China Trade Roundup summarizes the latest available China trade statistics.

China Total Trade by Main Commodities (2006, USD bn)

China Total Trade (May 07-Apr 08, USD bn)

Imports

1000

Exports

120

Fuel & Mining

800

Agriculture

100

600

80 60

400

40

200

20

Manufacturing

0

0 M

J

J

A

S

O

N

D

J

F

M

Imports

Exports

A

Source: PRC Ministry of Commerce

Source: China National Bureau of Statistics

China 10 Largest Trade Surpluses (May 07-Apr 08, USD bn)

Total Trade (Imports & Exports) with Major Partners 2007

Hong Kong United States Netherlands UK UAE Spain Singapore Italy Vietnam Turkey

USD 159 bn USD 148 bn

0

50

Source: PRC Ministry of Commerce

100

150

200

United Japan Hong Korea S. Taiwan Germany Russia Malaysia Holland Australia

0

50

100 150 200 250

300 350

Source: PRC Ministry of Commerce

China’s Importance to the World: Trade with China as a Percentage of Country or Territory GDP (2007) Key*: 30% China

15%

0% No Data Available Source: TBA Analysis *For reasons of presentation the colour scheme used on this map only varies between 0 and 30%, with all countries representing percentages larger than 30% shown in black. These countries are: Benin (32%), Equatorial Guinea (30%), Liberia (84%), Mongolia (59%), Rep. of Congo (41%), Singapore (31%) and Togo (33%).

21

Total China Imports (CIF) & Exports (FOB) 2000-2007

China’s Share of World Exports (2006)

35%

12,500 Imports

Exports

10,000

Clothing

30%

Textiles Office/Telecom Machinery/Transport

25%

7,500

20%

5,000

15%

2,500

10%

Iron and Steel Food Chemicals Fuel / Mining Automotive Products

5%

0 2000 2001 2002 2003 2004 2005 2006 2007 Source: China Statistical Yearbook 2007

0% Source: WTO Database

Total Value of Exports to China of Top 10 Exporters 2000 (USD133bn)

2007 (USD410bn) Hong Kong 7%

Thailand 3% Australia 4%

Hong Kong 3%

Thailand 5% Australia 5% Russia 4% Singapore 4%

Russia 4% Singapore 4% Malaysia 4%

Japan 31%

Japan 28%

Malaysia 6%

Germany 8% USA 17%

S. Korea 17%

Germany 9% S. Korea 22%

USA 14%

Source: Asian Development Bank: Key Indicators 2007

Total Value of Top 10 Exporters from China 2007 (USD774bn)

2000 (USD184bn)

Hong Kong 24% Italy 2% UK 3% Russia 1% Singapore 4% Netherlands 4%

Japan 23% S. Korea 6% USA Germany 5% 28%

Source: Asian Development Bank: Key Indicators 2007

Hong Kong 24%

Japan 13% S. Korea 7%

Italy 3% UK 4% Russia 4%

USA 30%

Singapore Netherlands 5%

Germany 6%

22 Financial Markets Tracking the dynamics of China’s Shanghai and Shenzhen Composite Index Indicators and Benchmark Interest Rates, Financial Markets also illustrates recent trends and transformations in China’s exchange rate regime.

Shanghai Shenzhen (3(Jan-Dec month) 07) Share of & BRI(C)S TotalComposite Trade withIndex China Index: 1 March 2008 = 100%

RMB Exchange Rates (12 month trailing, Indexed) RMB/Foreign Currency

115 110 105 100 95 90 85 80 75 70

120 Shanghai

Shenzhen

100 80 60 40 20 0 March

April

USD

RUB

ZAR

1 July 2007

May

AUD

3 July 2008

Source: Shanghai Stock Exchange, Shenzhen Stock Exchange

Source: Oanda Corporation

Benchmark Interest Rates (as of 20 June 2008)

USD/RMB Exchange Rate (since peg loosened in 2005)

15%

12%

12%

4 19 July 2005: RMB ‘unpegged’ from US Dollar

5

10%

7%

6

5%

4%

5%

8%

7%

2%

7

1%

Brazil

South Africa

India

China

Australia

UK

EU

US

0% Japan

14% appreciation up to 2 July 2008

.5% CAGR 4

8 9 2005

2005

2007

2008

Source: PRC Ministry of Commerce

Source: China State Administration of Foreign Exchange

10 Largest Chinese Listed Firms (USD bn) P e t ro C hina

530

Indus t ria l a nd C o m m e rc ia l B a nk o f C hina

206

S ino pe c

139 130

B a nk o f C hina C hina S he nhua E ne rgy C o m pa ny

119

C hina Lif e

97 51

C hina M e rc ha nt B a nk P ing A n Ins ura nc e

Petrochemicals Financial Utilities Insurance Financial

B a nk o f C o m m unic a t io ns

40 39

Insurance Financial

C hina P a c if ic Ins ura nc e

39

Insurance

0 Source: Shanghai Stock Exchange

Petrochemicals Financial

100

200

300

400

500

600

23 FDI and OFDI With FDI and OFDI increasing both in and from China, FDI & OFDI illustrates sources of FDI into China and unpack Chinese outbound investments, as well as mergers & acquisitions involving Chinese firms locally and abroad.

China remains an attractive destination for FDI

China’s Foreign Direct Investment reached USD42.78 billion from January to May this year. This latest figure shows that China remains a favoured destination for investment from overseas, especially among big multinational corporations, which see the market potential as an important priority and recognize various opportunities for FDI in multiple sectors in China, including services. FDI has, however, also contributed to China's excess liquidity and massive build-up in foreign exchange reserves, which, by the end of May, were the largest in the world (USD1.75 trillion)

2007 Top 10 Sources of FDI (USD bn)

Hong Kong Br Virgin Islands South Korea Japan Singapore United States Cayman Island Western Samoa Taiwan Mauritius 0

5

10

15

20

25

30

Source: Ministry of Commerce

China outbound investments are soaring

China's outbound Foreign Direct Investment received a great deal of attention in 2007 because of the creation of the PRC's sovereign wealth fund, the China Investment Corp. (CIC), and several other high-profile investments and acquisitions. In May 2007, CIC announced the purchase of a USD3 billion stake in Blackstone, and in December purchased a 9.9 percent stake of Morgan Stanley, worth USD5 billion. China's outbound investment totaled about USD30 billion in 2007, a figure that is still less than half of the investment that flowed into China in the same period.

China Outbound FDI (USD bn)

50 45 40 35 30 25 20 15 10 5 0

32 USD bn Jan-May 2008

GR CA

2003

2004

% 106

2005

2006

2007

Jan-May 5/2008 2008

Source: Ministry of Commerce

China M&A becoming a force

Mergers and acquisitions in China reached USD43.1 billion in the first quarter of 2008. Cross-border M&A reached USD28.5 billion, four times the year-earlier value. The manufacturing sector had USD21.8 billion in M&A transactions, about half of the total, followed by the financial and energy industries with USD7.2 billion and USD6 billion, respectively. In February the Aluminum Corporation of China and US aluminum producer Alcoa bought a 12 percent stake in the British-listed company of iron ore giant Rio Tinto for USD14.05 billion, the largest overseas investment ever by a Chinese enterprise.

China Outbound M&A (USD bn)

30 25 20

GR CA

15

80

%

10 5 0 2003

2004

Source: Ministry of Commerce

2005

2006

2007

24 The C in BRICS With recent economic statistics from Brazil, Russia, India, China and South Africa, The C in BRICS is a comparative segment that ‘compares and contrasts’ China with the other leading developing economies.

Imports of Goods and Services (% of GDP)

Exports of Goods and Services (% of GDP)

South Africa

South Africa

Russia

Russia

Brazil

Brazil

India

India

2006 2005 2000

China

0

10

20

30

40

50

2006 2005 2000

China

60

0

10

20

30

Source: World Bank

Source: World Bank

Market Capitalization of Listed Companies (% of GDP)

GDP (Current USD in Billions)

40

50

60

3,000

South Africa

China

2,500

Russia

2,000 Brazil

1,500

India

Brazil Russia India

1,000 2006 2005 2000

China

500

South Africa

0 0

50

100

150

200

250

300

2000

2005

Source: World Bank

Source: World Bank

Fixed Line and Mobile Subscribers (per 100 people)

Internet Users (per 100 people)

South Africa*

South Africa *

2006

Russia

Russia*

Brazil

Brazil

India *

India

2006 2005 2000

China

0

10

*Year 2006 data not available Source: World Bank

20

30

40

50

60

2006 2005 2000

China

0 *Year 2006 data not available Source: World Bank

5

10

15

20

25

28 China Business News Highlights Second quarter Chinese business developments were underlined by rising resource costs. Iron ore prices escalated by up to 97% as demand from China grew. Sinosteel took matters into its own hands by attempting China’s largest global mining sector takeover.

Natural Resources China’s largest steel maker, Baosteel, and Australian mining company Rio Tinto have negotiated an iron ore price increase of up to 97% - the highest price increase in over a decade and nearly double that of 2007. The state-owned steel group has since 2007 been the global steel industry’s primary negotiator with the world’s three largest producers of iron ore. Chinese steel makers have accepted price rises for six consecutive years, driven up by huge increases in demand. The increase is also likely to destabilise BHP Billiton’s efforts at taking over Rio Tinto. On 20 June retail prices for oil and gasoline rose for the first time since November 2007. Gasoline went up by 16 percent, while diesel rose by 18 percent, and electricity tariffs rose by just less than 5 percent. This was in response to steadily rising crude oil prices - up by 45 percent from November last year. The increase was made to ensure stable supplies in the country, as many local refineries had cut back production to avoid making losses. A Sasol official stated on June 13 that the South African petrochemical giant and China's leading coal producer, Shenhua Group, will jointly produce fuel from coal in China starting from around 2016. Joint feasibility studies for two coalto-liquid projects showed smooth progress and are expected to be completed by the end of 2009. The two projects, one in Shaanxi Province and the other in Ningxia Province, will each be able to produce

around 80,000 barrels per day of fuel, amounting to 3.4 million tons annually of diesel, naphtha, liquefied petroleum gas and jet fuel. The Australian Securities and Investments Commission (ASIC) and the China Banking Regulatory Commission have formalised an agreement that will see Australia become an approved investment destination under the Chinese Qualified Domestic Institutional Investor (QDII) scheme. This essentially means that approved Chinese securities institutions may, on behalf of their clients, invest in Australian-listed stocks and management investment schemes registered by ASIC. ASIC Chairman Tony D’Aloisio believes the agreement is evidence that Australia’s capital markets are seen as highly favourable by China. Other countries already recognised under the QDII scheme are Hong Kong, United States, United Kingdom, Singapore and Japan.

Aluminium Corporation of China Ltd (Chinalco) - China’s top aluminium producer - will team up with Malaysia's MMC and Saudi Arabia's Binladin for a joint aluminium project in Saudi Arabia. The project, estimated to carry a USD4.5 billion price tag, includes an aluminium smelter plant and an equipped power plant to be located in Jazan Economic City in Saudi Arabia. The three sides also signed an agreement that increases support levels with the Saudi Arabia General Investment Authority. The smelter will have an annual production capacity of 1 million tons. Chinalco will take a 40 percent stake in the plant as the largest shareholder, and will also provide the technology and alumina. The Chinese government is expected to withhold pricing intervention in terms of domestic steel prices. The net increase in price, that factors in shipment and energy charges, is expected to rise up to CNY1,000 per tonne. President Hu

Sasol Global Fischer-Tropsch Activities

29

Jintao did however say he is considering raising steel export taxes in order to ensure sufficient domestic supply. China’s Zhenhua Port Machinery (ZPMC) has won orders worth USD2.03 billion in the first half of the year, up 32% from a year earlier. ZPMC is the world’s largest maker of port cranes and related systems, with a market share of more than two thirds of the global market. China's Sinosteel remains opposed to the proposed merger between Australian iron ore groups Midwest Corp - of which Sinosteel is the major stakeholder - and Murchison Metals Ltd. Sinosteel has built up a 43.6 percent stake in Midwest Corp after the surprising acceptance of its below market price offer by Malaysian shareholders. This is part of Sinosteel’s own AUD1.36 billion (USD1.3 billion) takeover bid. Sinosteel has appealed to Australia's Takeovers Panel in an attempt to legally prevent Murchison from carrying out a reverse takeover. This is on the grounds that Murchison and its main shareholder, Harbinger Capital, were acting as associates in that Harbinger's acquisition of Midwest shares breached the Foreign Acquisitions and Takeovers Act (FATA). Speculation that Sinosteel may have conceded to a merger at recent meetings in Beijing has been refuted. The takeover saga is expected to be put to a shareholder vote soon. The China National Machinery and Export Corporation (CMEC) announced in early July that it had reached agreement on the mineral rights of the Belinga iron ore deposit with the Gabonese government. A joint venture company will run the Belinga Mine and its sup-

Happy Together: China Netcom and China Unicom joined hands in Hong Kong, hoping to present a challenge to China Mobile’s hegemony.

porting infrastructure for 25 years, and is expected to yield some 30 million tons annually. The exploration and construction costs will be more than USD790 million, including the construction of 500km of railways, dams and a deep water port. This will be China’s largest single resource investment in Africa to date. The Belinga deposit is the world’s largest undeveloped iron ore resource. The Exim Bank of China will finance the project.

Industry China’s producer price index (PPI) increased 8.2 percent yearon-year in May - the fastest growth in almost four years. The PPI measures price changes at the so called ‘factory-gate’ and is one of the best indicators of future consumer price inflation (CPI) movements due to be passed on by producers. The increasing PPI num-

bers could signal further rising CPI figures for China in the months ahead. China’s CPI was up 8.5 percent in April, following an 8.3 percent rise in March and an 8.7 percent increase in February. On the back of strong demand for passenger cars, China’s domestic automobile sales are expected to rise by 15 percent this year. 4.3 million cars have already been sold in the first five months of this year, a 17 percent increase over the same period last year. However, while automotive sales decreased by 13 percent month-on-month in May, the total number still represents an increase of over 20 percent from the same date in May 2007. Despite the slowing growth in business vehicle sales, demand for passenger cars has remained robust. The newly released Fortune 500

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list included 35 Chinese companies, the most ever. The highest ranking of these was oil giant Sinopec, who joined 18 other state-owned firms on the list, mostly energy, financial and telecommunications companies. 26 companies hail from the mainland, three from Hong Kong and the remaining six from Taiwan.

Retail Chinese retail sales of consumer goods increased 22 percent in a year-on-year comparison in April. Total retail sales for the first quarter were CNY3.3697 trillion. Real growth in April (excluding the effects of inflation) was only one percentage point - signalling greater price stability.

ICT Telecommunications giants China Unicom and China Netcom have announced a merger valued at CNY439.17 billion. The Hong Kong-listed companies have reached a share swap agreement whereby each Netcom share will be exchanged for 1.508 Unicom shares. Furthermore, China Telecom has agreed to buy the CDMA (code division multiple access) services of China Unicom for CNY100 billion (USD14.49 billion). The merger is a sign of the growing trend of unions in China between fixed-line and mobile networks. The overriding aim is to restructure and increase competition in the China telecommunications industry, breaking China Mobile’s de facto monopoly. All deals should be completed by October this year. As soon as restructuring is complete, the government has announced plans to issue three 3G licenses, enabling access to a range of additional mobile services and applications. Internet has surpassed print me-

dia to become the second most popular information channel for the Chinese audience following the Olympic Games. A survey covering China’s 10 largest cities found that 30 percent of respondents plan to use the Internet to follow events, while around 90 percent will watch the games on television. According to a recent BCG report, China’s more than 210 million Internet users spent an average of 570 million hours online per day in 2007.

Finance Chinese urban property prices rose just over 10 percent year-onyear in April – up from only 7.6 percent in the previous year. In Beijing, prices are up 16.1 percent from last year. While the rise is considered stable, there is an unwillingness to buy property prior to the Olympic Games in the expectation that prices will moderate afterwards. The World Bank has increased its China’s 2008 inflation rate forecast from 4.6 percent to 7 percent. Projected GDP growth has been raised from 9.6 percent to 9.8 percent. Despite a slowdown in growth in line with the global economic slowdown, real growth has remained robust. Although inflation is expected to drop by next year, its rapid rise continues to be a challenge and the World Bank has recommended that China maintain its tight monetary policy stance in response. Banking sector shares dropped on the Shanghai Stock Exchange, reaching an 11 month low in mid June. This follows the fifth increase in the reserve ratio requirement this year, resulting in a continuing reduction in banking funds available for loans. The Industrial and Commercial Bank of China Ltd (ICBC) - the nation's largest bank and the world's biggest by market value - dropped

8.4 percent, while China Construction Bank Ltd fell 7.8 percent and Bank of China Ltd by 7.9 percent. The Industrial and Commercial Bank of China (ICBC) said firstquarter profits rose by 77 percent, due mostly to increased company borrowing and income from wealth management fees. Despite the Chinese government’s attempt to slow credit growth, ICBC has increased corporate loans and services to China's growing ranks of wealthy citizens. ICBC has also made acquisitions in Indonesia, Macao and South Africa in the past year in a move to triple the share of profit stemming from overseas investments. May 2008 saw the highest number of mergers and acquisitions for a month in China’s history. Despite the total number of deals being unknown, it has been revealed that of the 33 mergers that involved capital, a total of USD5.56 billion was invested. Nearly 53 percent of this took place in the manufacturing, energy and mining sectors, with these areas having experienced M&A growth rates in excess of 60 percent for 3 consecutive months. The newly established Chinese sovereign wealth fund, the China Investment Corporation (CIC), has joined other similar funds in coming to a general agreement on voluntary guidelines for greater transparency and better governance standards. The so-called ‘Generally Accepted Principles and Practices’ was reached under an IMFsponsored umbrella referred to as the ‘Working Group of Sovereign Wealth Funds’. Sovereign wealth funds broke onto the news front in 2007 when China announced it would establish such a fund as part of an effort to better apply its massive foreign exchange reserves.

31 China’s International and Cross-Straits Relations More favourable political weather has seen China’s relationships with its Asian neighbors show marked improvement in recent times. Soft power and pragmatism are replacing some of the hardline rhetoric that has often dominated regional headlines in recent years.

Following the Kuomintang’s (KMT) resounding win in Taiwan’s March elections, there has been a resumption of cross-straits talks between Taiwan and mainland China for the first time in almost ten years. The chairman of Mainland China’s Association for Relations Across the Taiwan Straits, Chen Yunlin, and the Taiwan-based Straits Exchange Foundation chairman Chiang Pin-kun, met during June to discuss economic, social and cultural issues on the basis of the ‘1992 Consensus’. Agreements have included recent settlements allowing mainland tourists to visit Taiwan. As part of this resolution, regular flights will be allowed between Beijing and Taiwan’s two largest cities, Taipei and Kaohsiung, starting from 4 July. These will be the first scheduled flights between the two sides since 1949. China and Vietnam will complete erecting markers along their common land border by the end of the year, a visiting Vietnamese leader said on May 30. This deadline, set in 1999, was reaffirmed in a meeting between China’s President Hu Jintao and Vietnam’s Communist Party Secretary General Nong Duc Manh. According to a statement released after the talks between Hu and Manh, China and Vietnam will work towards signing new border regulation agreements. China will work with South Africa to enhance exchanges and cooperation to push forward the bilateral strategic partnership, said President Hu Jintao after a meeting with the leader of the African National Congress, Jacob Zuma, on June 12.

Reaching across the Straits: President Hu Jintao met with Chiang Pin-kun, chairman of Taiwan’s Straits Exchange Foundation, the island’s official body dealing with cross-straits issues.

June 18 saw newly installed Chinese officials introduced to the US congress. The meeting followed two days of high-level Strategic Economic Dialogue (SED) talks between a number of Bush administration Cabinet officials and their Chinese counterparts at the US Naval Academy in Annapolis, Maryland. The Chinese delegation was led by Wang Qishan, recently installed as China's Vice Premier. The SED agreements signed at the talks included an energy deal and a bilateral investment treaty. He Guoqiang, a prominent Chinese Communist Party member, made an official visit to Cuba at the invi-

tation of the Cuban Communist Party. Although touted as a regular visit to an old ideological ally, the visit was widely regarded as a high-level endorsement of the new leader of the Cuban Communist Party, Raul Castro. The foreign ministers of China, Russia, India and Brazil (BRIC) met in Russia in May for the first time outside the format of other international organizations. Agreeing to further deepen future cooperation, the countries discussed and agreed on issues including food security, international law, challenges to global security and world economic issues, as well as

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stances on anti-terrorism, disarmament and UN reform. UN Security Council members Russia and China emerged at the meeting as strong proponents of a multipolar order in international politics, balancing US hegemony by attaching more importance to international organizations. A Japanese navy ship, the Sazanami, called at the Zhanjiang military port in Guangdong Province on June 24 for a five-day visit - the first such port call by a Japanese navy vessel to China since World War Two. China staged an unusu-

ally large welcoming ceremony for the destroyer, which in a similarly remarkable gesture delivered emergency supplies for victims of the Sichuan earthquake. The visit was widely seen as a significant step forward in the generally frosty relations between the two Asian giants. In 2005 Beijing, Shanghai and other major Chinese cities experienced violent anti-Japan protests after the then Japanese Prime Minister, Junichiro Koizumi, visited the controversial Yasukuni shrine in Tokyo where several war criminals are interred. The succession of Koizumi by

Shinzo Abe in 2007 seemed to herald the start of better relations, but the fact that Abe’s grandfather served as the Japanese governor of occupied Manchuria (Northeast China) in World War Two placed symbolic strain on the relationship. A 4-year dispute over the East China Sea Chunxiao gas field was settled when China and Japan agreed to cooperate in the exploration and development of the field. This move holds much potential for progress on some of the numerous maritime territorial disputes that

A Brief History of Cross-Strait Relations 1949

The Chinese civil war ends with the defeated Kuomintang (KMT) holed up on Taiwan, and the Communists controlling the mainland

1958

Mainland forces shell the Taiwan-held island of Jinmen, bringing the US to the brink of war with China

1960

President Dwight Eisenhower visits Taiwan as a show of support

1972

President Nixon visits China, laying the foundations for switching recognition to the People’s Republic of China

1972

The Republic of China (Taiwan) is expelled from the UN and replaced by the communist People’s Republic of China

1979

The US officially switches recognition from the Republic of China to the People’s Republic of China

1979

The daily firing of shells between mainland China and Taiwan-held Jinmen island stops after 21 years

1987

Martial law is repealed in Taiwan, allowing Taiwanese residents to reunite with family members on the mainland for the first time since 1949

1991

Taiwan holds its first democratic election, boosting its international standing

1992

The first semi-official talks between government bodies take place

1996

China tries to influence the 1996 Taiwan election by conducting missile exercises in the Taiwan Straits and dropping bombs 25km from Taiwan’s biggest harbour

2000

The pro-independence DPP comes to power in Taiwan, leading to an 8 year hiatus in meaningful contact between the two sides

2005

Opposition KMT leader Lien Chan visits China and formally makes peace with the Communist Party

2008

The KMT regains power in Taiwan in March, promising increased exchanges with China, including the first scheduled direct flights between the mainland and Taiwan since 1949

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China has with other countries in the region. The most contentious of these are still the Spratly Islands, a collection of barren islets and reefs lying in the South China Sea, equidistant from Vietnam, Malaysia and the Philippines. The area, claimed by five countries, is thought to possibly contain significant deposits of oil. Despite global condemnation of the situation in Zimbabwe, China reaffirmed its policy of non-interference in the domestic affairs of other countries. Foreign minister Yang Jiechi confirmed that Beijing will oppose UN sanctions against Harare, amidst efforts by US Secretary of State Condoleezza Rice to convince China otherwise. China’s steadfast refusal to take sides in the domestic squabbles of other countries has earned it extensive criticism, especially with regards to conflicts such as Darfur. Nevertheless, China considers this policy to be a cornerstone of its successful engagement of the third world in general, and resource-rich regimes in particular. New visa regulations implemented with an eye on security around the Olympic Games have stirred controversy amongst China’s foreign business community, as well as amongst potential visitors to the Games. Hotel occupancy rates in Beijing have plummeted significantly to levels not seen since the SARS crisis in 2003, while established companies have experienced difficulties in arranging new visas for skilled foreign workers. Chinese foreign ministry officials, however, have claimed that the tightened visa regime is in line with international practice. New Zealand and China signed a Free Trade Agreement in April, the first such agreement between China

New gunship diplomacy: Japanese naval personnel salute the crew of the Japanese Navy’s ‘Sazanami’ destroyer as they embark for the Guangdong port of Zhanjiang in the first such peacetime naval voyage to China.

and a First World country. China is New Zealand’s fourth largest trading partner, and demand in China is expected to grow for New Zealand’s agricultural and manufactured products and services, particularly in areas where China is already New Zealand’s largest international customer such as milk powder and wool. China’s central role on the East Asian diplomatic landscape was affirmed in late June when North Korea demolished a cooling tower at its Yongbyon nuclear facility north of the capital Pyongyang. The move coincided with North Korea’s handing over of information to China on all operations at the plant dating back to 1986. Although talks were conducted within the framework of the long-running six-party talks, China was undoubtedly the central player in convincing North Korea to give up its nuclear program. China has been North Ko-

rea’s most important ally and trading partner, yet since Pyongyang tested a nuclear weapon in October 2006, China’s relationship with North Korea is said to have been reassessed to include both pressure and incentives. China’s support for North Korea ensures a friendly nation on its Northeastern border, thereby serving as a land buffer between Chinese territory and 30,000 US soldiers based in South Korea. In early July French President Nicolas Sarkozy joined US counterpart George W. Bush in announcing that he would attend the opening ceremony of the Beijing Olympic Games. This followed some doubt earlier in the year when, after riots in Tibet, Sarkozy left open the question of whether he would attend the event. This leaves German chancellor Angela Merkel as the highest profile nonattendee.

34 Upcoming Events THE BEIJING AXIS can assist delegates who wish to attend fairs, exhibitions and conferences in China. Services include research, interpretation, negotiation and travel logistics. For more information: [email protected], or contact one of our offices.

Date

Event

Location

2 - 5 July 08

The Sixteenth Shanghai International Printing, Packaging, Paper Industry Exhibition

Shanghai

3 - 5 July 08

CIW 2nd China International Water Exhibition

Beijing

9 - 11 July 08

The 2008 China Shanghai Electric Industry Fair

Shanghai

9 - 12 July 08

Eastpo Shanghai - International Machine Tool Fair

Shanghai

22 - 24 July 08

Xinjiang International Coal, Minerals & Exploration technology & equipment expo

Xinjiang

23 - 25 July 08

China International Logistics Fair 2008

Shanghai

28 - 31 July 08

China Industrial Equipment Fair

Qingdao

28 - 31 July 08

China Machine Tools & Moulds Expo

Qingdao

28 - 31 July 08

China Industrial Automation & Instruments Expo

Qingdao

28 - 31 July 08

China Power Transmission & Control Technology Exhibition

Qingdao

28 - 31 July 08

China Plastics & Rubber Industry Exhibition

Qingdao

The 3rd Asia Outdoor Trade Fair

Nanjing

14 - 16 Aug 08

2008 China International Special Purpose Vehicle Exhibition

Shanghai

19 - 22 Aug 08

19th China International Construction Material and Indoor Decoration Exhibition

Shanghai

20 - 22 Aug 08

6th China International Auto Supplies Sourcing Fair

Shanghai

21 - 23 Aug 08

The China (Shanghai) International Steel Trading Exhibition

Shanghai

28 - 31 Aug 08

The 2nd International Gifts and House Wares Trade Fair

Shanghai

8 - 11 Sept 08

CIFIC 2008

Xiamen

17 - 19 Sept 08

16th China International Paper and Pulp Industry Exhibition

Shanghai

19 - 21 Sept 08

5th China International Finance Forum

Shanghai

22 - 25 Sept 08

2008 International Sourcing Fair

Shanghai

23 - 25 Sept 08

2008 China International Special Steel Industry Exhibition

Shanghai

26 - 28 Sept 08

5th China International Steel Pipe Industry Expo

Beijing

10 - 12 Oct 08

International Automobile manufacture, maintenance and equipment testing expo

Shanghai

12 - 14 Oct 08

2008 China International Door Industry Expo

Shanghai

14 - 20 Oct 08

2008 Guangzhou International Auto Parts Expo

Guangzhou

15 - 17 Oct 08

China International Copper Industry Exhibition

Shanghai

16 - 18 Oct 08

2008 China International Aluminium Industry Exhibition

Qingdao

16 - 18 Oct 08

2008 China (Qingdao) International Copper Industry Exhibition

Qingdao

30 Jul - 2 Aug 08

35 Alert: Mining Delegation to China (9-15 November 2008) THE BEIJING AXIS will facilitate a high-impact mining sector fact-finding and business development delegation to China during November 2008. Places are limited and senior executives from mining and related companies must let us have their expressions of interest as soon as possible. Raise your China Mining Knowledge and Profile

Select from 3 Focused SubStreams

China Mining Sector Unpacked

1. China Domestic Mining Environment (Intelligence & Networks)

Global Implications of China’s Rise China Mining Procurement Targeted 1-on-1 Meetings

2. China Goes Global (Intelligence, Partnering & Networks)

Attend China Mining 2008 (11-13 Nov)

3. China Procurement (Intelligence, Supplier search, Supplier visits, Direct engagement, Reference sites)

The Concept

Programme Elements

Senior Level Engagement

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A China trip that is sector-specific with focused sub-streams to allow a deep-dive and assure relevance

Programme is currently under construction; preliminary items include: ●

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A well organized itinerary to optimise use of time: structured elements (the whole group); targeted breakouts (for individual firms to maintain relevance); and free time (own appointments, and/or leisure) Timing coincides with China Mining 2008 Conference & Exhibition in Beijing (11-13 Nov 08) —Asia’s most prominent Mining event Programme designed to fit around the proceedings of China Mining and will allow delegates to add days (before and/or after the event) for side-trips to relevant areas for meetings & site visits Carefully targeted pre-arranged meetings will be tailored to the specific and focused needs of each individual firm/delegate based on research and screening

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We target those executives with a serious China agenda that want to extract more than the usual value from an expensive, time-consuming trip to China. We aim for specific business objectives to be achieved as opposed to having just a general China exposure. We will work closely with individual delegates in the lead-up to November to ensure high-impact interactions. We target mining companies but selected service providers and the investment community would also benefit:

Orientation in Johannesburg in October (Individual firm)

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Workshop/Roundtables in Beijing on arrival in China (All/Substreams)

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Opportunity to attend China Mining 2008 (All) One-on-one meetings with appropriate targeted firms. [The Beijing Axis will scope individual needs, do research and engage appropriate targets.] (Individual firm)

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Supplier/site visits (Individual firm)

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Mine site visit (optional), etc.

CHINA MINING 2008 Conference & Exhibition Overview

China Mining is Asia’s premier mining and exhibition event, hosted by China’s Ministry of Land and Resources. It will be held in Beijing from Experienced multi-lingual business 11-13 November 2008. consultants will accompany and The event is well attended by insiders support each delegate throughout and worthwhile to put on the calendar. Flexible travel arrangements (make your own or let us assist)

Who would find the trip valuable?

For more information please visit: www.china-mining.com

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Executives from mining companies that are selling into China Executives from investing or fundraising mining companies Executives from service companies that are looking at entering China or sourcing from China Mining and engineering sector procurement managers Sector analysts, strategists and fund managers

Please note that the aim is to keep all interactions at a senior level. Contact in Beijing Dirk Kotze—Tel: +86 10 6440 2347 [email protected] Contact in Johannesburg Jackie Li—Tel: +27 11 201 2318 [email protected] Programme to be finalised in July/August—expect more info on www.thebeijingaxis.com. Note: The trip has an Africa-China focus but delegates from other regions are welcome to contact us.

36 Careers at THE BEIJING AXIS THE BEIJING AXIS is looking for dynamic, creative, performance-driven individuals to assist us in meeting our present and future business challenges. If you can make a contribution to THE BEIJING AXIS, even if you specialize in a field not listed below, please send your CV with a letter of motivation and references to our Group Managing Director: [email protected].

LEAD CONSULTANT Beijing; 1 position ●

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To lead consulting assignments in the Strategy Division of THE BEIJING AXIS; To be a thought leader—and manage a team of consultants as they perform research/analytics and create top-level strategic intelligence; MBA preferred with more than 8 years experience in consulting and management; Strong focus preferred in the mining industry, with experience in any of the BRICS markets a significant advantage; Native English written and verbal communication skills essential; Mandarin language an advantage

Let your career take off: THE BEIJING AXIS is in an entrepreneurial firm and welcomes applications from persons with a well grounded knowledge of their professional fields in a China context.

SOURCING ENGINEER

CONSULTANT

ANALYST

Beijing; 1 position

Beijing and JHB; 2 positions

Beijing and JHB; 2 positions

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Employed in the China Sourcing Unit of THE BEIJING AXIS; Strong sourcing (or manufacturing) project management skills Focus: Project manage sourcing schedules (i.e. ensure that specialised capital equipment is manufactured to required standards and delivered on time); technical QA/QC knowledge; expediting experience and strong supplier management skills A degree in engineering, preferably mechanical/mining-related with a minimum of 10 years work experience in appropriate field; Excellent English and Mandarin written and spoken ability

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Employed in the Strategy Division of THE BEIJING AXIS; Analytical and problem solving skills; A degree in a business or technical discipline with a postgraduate qualification; Minimum of 3 years work experience in an appropriate or related field; Strong experience in the formulating and execution of research methodologies and analysis is preferred; Excellent written and verbal communication skills; Mandarin not essential, but regarded as an advantage

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Employed in the Strategy Division of THE BEIJING AXIS; To assist in research and distilling information and data into first level analysis; A degree in a business or technical discipline, with a minimum of two years work experience in a similar field; Strong working knowledge of the MS Office Suite and project management software tools. Analytical and problem solving skills and an attention to detail are essential; Excellent written and verbal communication skills Mandarin not essential

38 THE BEIJING AXIS News Community Following the tragic earthquake in China’s Sichuan province on 12 May, THE BEIJING AXIS and its staff made a modest donation to the Chinese Red Cross to assist with relief efforts. THE BEIJING AXIS made a sponsorship contribution to the South African Olympic kayaking team. The canoe and kayaking events will be held at the new Shunyi Olympic Rowing-Canoeing Park.

Learning & Getting Around Kobus van der Wath, Group MD, was invited to Chair the Asia Nonferrous Metals Development Dialogue in Beijing on 17 to 19 April. He also delivered a presentation on the enablers of and constraints on Chinese mining investments abroad. Kobus van der Wath and Corporate Office Manager Mitch Cosani travelled to Perth and Sydney in May. Further to attending a number of seminars and conferences, Kobus was a panellist at the Association of Mining and Exploration Companies’ (AMEC) National Mining Congress in Perth on 22-23 May. Kobus van der Wath was invited to speak at the South African Institute of Electrical Engineers (SAIEE) President’s Invitation Lecture in Johannesburg on 29 May. Kobus also delivered a presentation on Chinese mining investments in Africa at the Africa Mining Congress 2008 held in Johannesburg from 9 to 11 June. Kobus van der Wath was asked to present at the Africa M&A 2008 Conference in Johannesburg on 12 June. The presentation was entitled

‘China’s Global M&A Drive - A view from Beijing.’

Team Developments at THE BEIJING AXIS

Edward Wang, Executive Director, published an article in the China International Business Daily on 13 June entitled ‘Chinese mining companies - paying attention to soft skills when investing overseas’.

Kevin Zhou, previously GM of a Beijing-based trading company, joined the Sourcing Division in July. Kevin will graduate in 2009 with an MSc in Finance from Beijing Normal University.

On 14 July, Kobus van der Wath will attend an event sponsored by the South Africa-Singapore Business Association, titled: ‘Asia’s Future: The Impact of China, India and the Middle East’.

In July three consultants joined the Beijing office’s Strategy division: Jim Hu graduated with an MBA from Dongbei University of Finance and Economics in 2005. Barry van Wyk holds an MSc from the London School of Economics, graduating in 2005. Javier Cunat obtained BA degrees in Administration & Business Management and in Economics from the University of Valencia in Spain in 2005.

In July, Kobus van der Wath will travel to Australia for various engagements. On 15-16 July, he will present to the Aust-Asia Mining Conference in Brisbane after which he will chair the IQPC Mining Supply & Procurement Conference in Perth on 22 and 23 July. On 28 July he will deliver a guest lecture to the MBA and EMBA class of the Australian Graduate School of Management in Sydney, discussing the strategic implications of China’s rise for Australian firms. On 29 July he will speak at a one-day China conference on ‘Managing the Risks of Manufacturing in China’ in Sydney. THE BEIJING AXIS will be further represented at events in Australia in August and September: ●

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Diggers & Dealers in Kalgoorlie (4-6 August), the Perth Mining Exhibition & Conference (12-14 August), the Chartered Institute of Purchasing Supply (CIPS) event in Perth (21 August), the Africa Downunder Conference in Perth (4-5 September); and The Mining & Exploration Investment Conference in Sydney (14-16 September).

Mandy Zang joined the Beijing office as an Analyst in April. She recently graduated with a BA in Economic Sciences from the Changchun University of Technology. Prima Han joined the Beijing office as an Analyst in June. She studied Management Information Systems and graduated this year from Renmin Uni. in Beijing. In June the Beijing office hosted two South African interns. Tobie Taljaard and Brigid Kell, currently students at the University of Cape Town, made a significant contribution during their stay. In July the Beijing office is hosting an American intern, Tiger Miller, who is currently a student at UCLA. Given his background in web design, he is leading an initiative to create a Spanish version of THE BEIJING AXIS company website.

39 About THE BEIJING AXIS THE BEIJING AXIS is a cross-border business bridge to/from China in three principal areas: Strategy (Formulation & Implementation); Sourcing (China Sourcing Unit & Supply Chain Management and Support); and Investment (Corporate Finance Origination & Financial Advisory). Since our establishment in 2002, we have successfully worked with many large MNC and Chinese blue chip clients across many sectors and industries — but we also support many international and Chinese SMEs. We have successfully delivered projects across several sectors but our core focus is on the Chinese mining and resources sector; and China’s burgeoning industrial and engineering industries. Our solutions are always cross-border — supporting international firms in their efforts as they act in unfamiliar territory in China; and/or supporting Chinese firms as they venture out and go global. Our solutions go beyond market research and we emphasize 'actions and transactions'. Below more detail on our activity sphere.

Strategy

Sourcing

Investment

THE BEIJING AXIS Strategy Division provides professional business solutions, focused on strategy formulation and implementation:

THE BEIJING AXIS China Sourcing Unit (CSU) supports sourcing and procurement initiatives to/from China based on a systematic and analytical approach:

THE BEIJING AXIS Investment Advisory Team provides advisory services to firms that are undertaking investments in China, as well as Chinese firms investing abroad. The focus falls on origination activities:

Strategy Formulation ● Market intelligence ● Market & industry research ● Market entry strategy ● Partnering strategy ● Business planning Strategy Implementation ● Market entry assistance ● Business development ● Operational support ● Negotiation ● Agency and representation services ● Relationship management ● Business delegations

Strategic Sourcing Unit (CSU) ● Supply needs analysis ● Supplier identification, filtering, due diligence & selection ● Negotiation ● Commercial & contracts Supply Chain Management & Support ● Project management and transaction monitoring ● Managing 3rd parties ● QA/QC, expediting ● Logistics support ● Risk management

Corporate Finance Origination ● Origination activities for Chinese capital seeking crossborder assets, equity, projects ● Origination activities for Foreign capital seeking Chinese assets, equity and projects Financial Advisory ● Acquisition target identification, selection & due diligence ● Fundraising ● Valuations ● Opinions

Contact Information For more information, visit our English, Chinese, Russian or Spanish websites at www.thebeijingaxis.com. Beijing Dirk Kotze Tel: +86 10 6440 2347 [email protected]

Johannesburg Jackie Li Tel: +27 11 201 2318 [email protected]

Russia and Eastern Europe Lilian Luca Tel: +86 10 6440 2106 [email protected]