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International Consultants LtdInternational Consultants LtdAndrew LeunAndrew Leungg

China’s MegaTrendsand

Implications for Entrepreneurship in the 21st Century

Andrew K P Leung, SBS, FRSA

A presentation at the

Imperial College Business School, London

Thursday, 13 August, 2009

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Stage is set in 21Stage is set in 21stst CenturyCentury• The World is Flat, Thomas Friedman, 2005 – Walmart Just-In-Time;UPS 2% world GDP across the globe; internet sans frontiers (Facebook,Twitter,LinkedIn etc)

• Global value chain migration (Rolls Royce 60% research and 70%components); creative destruction and world competition (‘Bear outsideyour tent’)

• Communist Manifesto, Karl Marx,‘expanding markets …over the entiresurface of the globe ,,,,, new wants …products of distant lands andclimes …universal interdependence of nations’

• Power shifts into individuals - ‘Cosmocrats’ – A Future Perfect – TheChallenge and Hidden Opportunities of Globalization, John Micklethwait& Adrian Woodridge, 2000

• Three Billion New Capitalists, Clyde Prestowitz, 2005

• Future profits lie in scale, knowledge, creativity, technology and brands- $1 profit DVD player; 1.65% value of iPod, Google becoming world’smost profitable

• China launched ‘Going Global’ strategy 2001

• Globalization and Its Discontents, 2002 + Making Globalization Work,2006, Joseph Stiglitz; The Theory of Moral Sentiments, Adam Smith

• Global Financial and Economic Crisis and Rising Protectionism

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The swing of the global pendulumThe swing of the global pendulum

• National Intelligence Council Report Project2025:

– US leadership capacity weakening (EUfractious) v rise of BRIC + ME

– New developing countries alliances e.g.ASEAN + 3, SCO – pose challenge to old-styled UN, IMF, WB

– Global industrialization - geopolitics andgeo-economics of energy, food, water andclimate security

– Struggle for development in failing states =Arc of Instability

– China’s dramatic growth – BeijingConsensus – set to play a key role in newworld order

• Emerging Markets lead contributers to worldgrowth – China 27% v US 21% to growth: DCs15% v US/EU@23% world GDP)

Emerging Markets lead contributers toworld growth – China 27% v US 21%: DCs15%v US/EU@23% world GDP)

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Some New Power BrokersSome New Power Brokers

Foreign assets ($T) MGI, July 2009

2007 2008 2013(est)Pension Funds 30.4 25Mutual Funds 26.2 18.8Insurance assets 18.9 16.2Oil Producers 5.1 *5 8.9 – 13.2Asian SWFs 4.35 *4.76 (!) 7.5 – 8.5Hedge Funds 1.9 1.4 1.5 – 2.4Private Equity 0.906 0.938 1 – 1.2

(!) Increase virtually all due to China* Total $4.5b @day

Net capital outflow from surpluscountries ($b, 2006) (Mckinsey & Co)

1995 2006

Oil producers 35 484East Asia 133 446West Europe 110 308Rest of World 4 81

____ ___282 319

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East Asia dynamics reEast Asia dynamics re--defineddefined(When China Rules the World, Martin Jacques, 2009)• Complex supply chain centred on China

• ASEAN + 3; ACFTA (largest FTA with 2b people); 2003 Treaty of Amity& Cooperation; Chiang Mai Initiative (currency swaps);‘East Asia FTA’ +‘Asian Monetary Fund’; ASEAN + 6 ; Process-oriented Constructivism(Socialization of Power – Influence without Authority) Qin Yaqing + WeiLing, in China’s Ascent, Cornell University Press, 2008)

• China now South Korea’s largest trading partner + Singapore + Philippines+ Thailand all closer to China (all formal US allies)

• Intra-NE Asia trade (China, Japan, Taiwan + 2 Koreas) 52% total 5,ASEAN imports + 30-40% p.a.

• 4 x US aid to Philippines; 2 x Indonesia; far > US to Laos, Cambodia,Myanmar (Chinese navy access to Indian Ocean)

• Increasing Mandarin learning + Chinese tourists

• Australia double benefit – rising resource export and cheap imports

• Taiwan more accommodating

• Japan - Manufacturing; trade > US, influence < Japanese nationalism

• US influence declining except for naval power

• East Asia Economic Union? Asian Dollar? RMB regional currency? Afuture Asian Commonweath?

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Africa becoming more ChinaAfrica becoming more China--centriccentric(When China Rules the World, Martin Jacques, 2009)

• FOCAC 2006 Beijing (48 countries; 2007-9 Action Plan: $5bDevelopment Fund, $5b preferential loans + credits: schools, hospitals,professional training etc )

• China’s % share of Africa’s export of selected commoditiesCrude Oil Metals Wood Cotton

Angola 100Sudan 98.8Nigeria 88.9Congo 85.9Gabon 54.8 42.3DRC 99.6Ghanna 59.8SA 46.5Cameroon 39.7Tanzania 24.3 53.8

• Africa’s 3rd trading partner (US, France) > UK; soon 1st

• Africa > 30% of China’s total oil imports• Angola > Saudi Arabia as China’s largest oil supplier (15%)• More direct flights Africa/China > few Africa/US• Chinese Diaspora = 500,000 growing• Future 100m tourists (Abah Ofon, The New Sinosphere, 2006)• > IMF/WB – undermining v pathway to development• Beijing Consensus > Washington Consensus• Overarching e.g. Zimbabwe (railways, power supply, Air Zimbabwe,

ZBC); Zambia (‘a district’– Opposition candidate)• More Winner > Losers v narrow economic development• 2007 PEW Global Attitudes 10 Africa countries – China> US

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Threshold ofThreshold of China’sChina’s RRenaissanceenaissance(When China Rules the World, Martin Jacques, 2009)Ranking of economies (Goldman Sachs, 2007)

2025 2050

1. US (~$20T) China* (~$70T)2. China (~$18T)) US (~$38T)3. Japan (~$5T) India (~$38T)4. India Brazil5. Germany Mexico6. Russia Russia7. UK Indonesia8. France Japan9. Brazil UK10. Italy Germany11. Mexico Nigeria12. Korea France13. Canada Korea14. Indonesia Turkey15. Turkey Vietnam16. Iran Canada17. Vietnam Philippines18. Nigeria Italy19. Philippines Iran20. Pakistan Egypt21. Egypt Pakistan22. Bangladesh Bangladesh

• Already EU’s and Japan’s largest trading partner;leading in SE Asia and Africa; Latin America’s 2ndlargest trading partner by 2010• People’s satisfaction - China 72%, UK 44%, US39%, France 28%, Germany 25% etc• > 40 m Chinese Disapora•‘All roads lead to China ?’ - Pax Sinica?

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Grand Design v DengGrand Design v Deng’’s cautions caution• Grand Design nationalism, (Unhappy China) 2009

• Global Realities, Risks and Constraints –

Internal –• Inequalities, 5 Imbalances, Corruption, Rule of (> by) Law,

Governance, Checks and Balance, Environment, EthnicHarmony, Aging (4-2-1)

• Population Burden – now @ GDP < 100 countries, 2025/50@ GDP => Turkey; 2050 5.4% (86.4m) of projected 1.6 bpopulation still in farming

External –• Global military reach, energy and resources, technological

gap, creativity and innovation, financial expertise, ideas andvalues, global institutions, conflict with Western norms

• Dangers and Opportunities of Power Transition:Institutionalized International Order > Security Dilemma -China’s Ascent – Power, Security, and the future ofInternational Politics, Robert S. Ross & Zhu Feng (Editors,Cornell University Press, 2008); China’s Rise – Challengesand Opportunities, Bergsten, Freeman, Lardy, and Mitchell,Petersen Institute and CSIS, Washington DC, 2008

• Deng’s 28-word caution :, (in line with conclusions of Study

Project + ‘Neoliberal Defensive Realism’, Tang Shiping, in China’sAscent, Cornell University Press, 2008)

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MegaTrendMegaTrend 11 –– Massive UrbanizationMassive Urbanization

McKinsey Global Institute (Preparing for China’sUrban Billion, March 2008) :

• 1 b urbanites by 2025, + 350 m in 221 citieseach > 1 m population (EU=35)

• 15 super-cities each > 25 m population• 11 hub-and-spoke conurbations each > 60 m

population• Westward Ho! Most new urbanization to

spawn in currently-less-developed central,north-east and western provinces

• Concentrated mode of urbanization projectedto save 35% of carbon footprint and 2.5%GDP in government expenditure

• A YouTube snapshothttp://www.youtube.com/watch?v=cBqsSrPhyz4

• Global implications: resources, businessopportunities, experimentation, civil society

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MegaTrendMegaTrend 22 –– Rapid MobilityRapid Mobility

• Extensive inter-provincial highwaynetwork 2nd only to US Interstate in 17years

• Railway (6% of world’ total length, 25%total traffic) to increase from 78,000 km to100,000 km by 2020 (world’s largestrailway expansion since 19th century)

• More city conurbations to be linked byintegrated transport infrastructure e.g.$ 1.64b sea-spanning bridge overHangzhou Bay linking Shanghai toNingbo and other cities in the Provinces ofZhejiang and Jiangsu with a combinedpopulation of 72.4 million

• Global implications: rapidly developingChinese middle-class, changing lifestyles,vast supply chains

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MegaTrendMegaTrend 33 –– Rise of the middleRise of the middle--classclass• Combined urban disposable income of @annual

household income > RMB 100,001 to 200,000 to growfrom 0.1% of total 2005 to 36.4% by 2025 (Serving theNew Chinese Consumer, The McKinsey Quarterly, 2006Special Edition).

• Largely come from 100 m ‘single-child’ generation, incpost-80s, post-90s, and 21st century new-comers

• Luxury goods sales already 12% by value of world’stotal, to grow to 33% by 2015

• Car ownership to expand from 11/1,000 towards worldaverage 120/1,000 (<US 500/1,000) 500 m cars by 2050(Goldman Sachs)

• Young entrepreneurs to jump from current 300,000

• Average 50,000 USD millionaires to be added annually

• A more consumer-oriented economy emerging incoming decades

• Global implications: reducing over-reliance on exports,mitigating economic imbalance with the US.

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MegaTrendMegaTrend 44 –– Largest moderateLargest moderate--income economyincome economy• China > US by 2027/28 and > by 75% by 2050

(when India = US) (Goldman Sachs, TheEconomist, 30.6.2007)

• China’s @GDP ranks < 100 in the world =some poorest countries in Africa. By 2050,@GDP = middle-income nation in Asia orEastern Europe

• Aging population profile ( > 30% to be aged 60or over by 2050) Subsidized voluntary basicpension plan for rural population to grow from60% in 2010 to 80% by 2015

• Legacy of One-Child Policy, 4-2-1 phenomenon,relaxed if both parents single children, likely tobe relaxed further

• Still > 100 m with < $1 a day v 800 m such in1978. Poverty to shrink significantly in comingdecades

• Global implications: China will get old beforegetting rich. Needs a benign internal and externalenvironment to consolidate an economicfoundation to face social and financial burden ofa looming aged profile

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MegaTrendMegaTrend 55 –– Quiet Green RevolutionQuiet Green Revolution• Green Great Wall 4,480 km forestation absorbing 8% or

500m tons emissions p.a.- 20% or 1 b tons absorption by 2010.• Small coal-power plants of < 10m kW capacity closed by

2007. Most of < 50m kW likely to be cleared or expandedwithin a decade.

• To invest $2.3 trillion in energy development 2001-30, inc$200b to increase renewable energies from 8.3% to 10% ofprimary energy by 2010 and 15% by 2020, + 7% to 10% p.a.by 2010 and 20% p.a. by 2020, inc hydro-electric, nuclear,coal-seam gas, biomass, wind, solar, terrestrial heat and waveenergies (IEA)

• Hydro-electric power world’s first in installed capacity 145m kW and 482.9 billion kWh power generation

• Total of 110 million square meters of solar panels by far theworld’s largest

• Wind power has increased 7 x to > 6 m kW, 5th largest• 2 nuclear power stations p.a. for the next 15 years.• BYD, (Shenzhen) introduced 15.12.2008 world’s first mass-

produced plug-in hybrid electric vehicle @US$22,000,range 100 km on electric engine. Miles XS500, range 120miles at 80 mph, to launch in Tianjin in 2009 (Iain Carson andVijay V Vaitheeswaran, Zoom: The Global Race to Fuel theCar of the Future, Hachette Book Group, 2007)

• Dongtan eco-city concept of sustainable housing and urbandesign on the cards for new cities, towns and villages. Eco-friendly lifestyle catching on with rising middle-class.Methane gas from human and animal waste in villages

• Law on the Circular Economy effective 1.1.2009 mandatingenergy, water, and material recycling, conservation andemission reduction supported by tax breaks and fines.

• Global implications: an ecologically-conscious society with1/5 mankind; world’s car industries to be revolutionized

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MegaTrendMegaTrend 66 –– Science, Technology and InnovationScience, Technology and Innovation• Chang’e-1 Moon Probe (2007), Shenzhou-7 Space Walk (2008).

Planned Tiantong-1 small space station in 2010 -11 + docking withShenzhou 8, 9, & 10; Lunar Rover on moon surface 2013-17; LunarRover exploration and return 2017-20; planned satellite Yinghuo-1(+ Russian Phobos-Grunt) to fly towards Mars 2009; possibleparticipation in European Space Agency’s Aurora manned Marsexploration program 2030

• 5m university graduates p.a. mainly engineers and technologists,top in nos.scientific papers. Vast majority no productive research.Still no home-grown Nobel Prize laureates. Committeerepresentation, let alone chairmanship, extremely low in world-classscientific organizations

• But fast developing technologies in energy and water resources,environmental conservation, proprietary technologies, life sciences,aeronautics, and ocean sciences

• Various silicon valleys, leading science parks e, g. Beijing’sZhongguancun and high-tech cities like Hefei, Anhui. 40% ofoverseas post-doctoral students in US are from China. Growingnumbers of scientific returnees to seek greener pastures

• International corporate R& D centres 750 (100 in India), 35% vUK 47% and US 59%

• Shenyang Aircraft Corporation joint ventures in assembly andfuselage manufacture with Boeing, Airbus and Bombardier. May2008, Commercial Aircraft Corporation of China formed withcapitalization of $2.7 billion to compete with Boeing and Airbus.China’s home-made regional jet ARJ21 maiden flight on28.11.2008 with an order book > 100 aircraft

• Global implications: China’s aerospace industry, includingcommercial satellites, is set to grow by leaps and bounds.International space program cooperation. Growing competition inworld’s aircraft industries. Advances in life and environmentalsciences and commercialization

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MegaTrend 7 – A even more global China• 3 Chinese corporations world’s top 5 by market capitalization

- PetroChina ($1trillion, 2 x ExxonMobile), ICBC (world’slargest bank), and ChinaMobile

• Chinese corporations + SWFs taking equity in financial andenergy companies: ICBC 20% in Standard Bank, Africa’slargest bank; CHINALCO (Aluminum Corp of China) planned30% stake in bauxite mine of Rio Tinto

• Foreign currency reserve + $1.7 billion a day needs outlets >US Treasuries e.g. much needed natural resources,technologies and international business expertise.

• 4 of Big Five state-controlled banks have embraced foreignequity: HSBC 19.9% of BoCom; BoA 10% of CCB; GoldmanSachs 10% of ICBC; RBS’s (recently divested) 10% of BoC

• RMB as storage of value and stable means of exchange.RMB-denominated transactions and financial products togain even greater acceptance amongst China-related businesses.Eventual full convertibility but still distant until morecomfortable with speculative two-way capital flows

• Fuller global integration of Chinese skills and people. Vastdeveloping internal market multiplies global supply chains;Top Tourism Destination before 2020

• Global implications: Full integration of China into globalcommunity, future Asia Dollar?, more diversified central bankreserves, linked stock exchanges, IPOs across continents,Chinese M & As, cross-cultural management

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MegaTrend 8 - Defense

• Historical trauma with continental-sized borders andcoastline anxious to protect territorial integrity(including Taiwan) + choke-points of life-bloodenergy supply

• Total defense expenditure (2/3 for personnel,training and maintenance) < UK, Japan, France, andGermany v US expenditure > rest of world combined.As % GDP, much < UK, Russia and France v US(China’s 2006 National Defense White Paper)

• In light of US repeatedly rejection of call from 160countries, China included, to de-militarize space,China showed capability of killing moving satellite asspace defense deterrence

• Already a nuclear power, only major country withouta single aircraft carrier, doubt about cost- benefit ofblue-water navy + regional diplomatic interestsgiving way to clear signal (Defense Minster, 20.3.09)

• Likely to to keep up with modern military technologyfor more cost-effective credible deterrence,including submarines and asymmetric warfare

• Global implications: need for more transparency toease ungrounded fears (China needs benignenvironment to continue survival); scope for moreinternational cooperation for peace-keeping and fightagainst piracy

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MegaTrend 9 – Building a Harmonious World• Best defense is having no enemies – Confucian Harmony Also joining no

blocs.

• Simply cannot afford to be aggressive. Need for benign environment tobuild solid foundation - numerous challenges and contradictions + loomingaging population profile

• US - Leadership accepted except where national interests undermined, butdifferences on China’s internal issues and international approach to conflictresolution remain

• EU- main trading partner and plenty of scope for economic, trade, investment,technological, and scientific cooperation, but differences on China’s internalissues remain, less so v US

• Russia – Energy partner and balance against uni-polarity

• ME – Main oil supply source – eager to see more stability (geopolitics) butunlikely to intervene in ME politics

• ASEAN and the Asia community growing importance in global supplychain + geopolitical advantages in the Asia-Pacific

• Central Asia - Shanghai Cooperation Organization – harmony in neighboringregion and alternative energy supply route – national security

• Africa for 3rd world cooperation and trade/investment in resources

• Latin America – also 3rd world support + Venezuela (energy + support in USbackyard); Brazil (soybeans and resources)

• Global implications: Waning dominance + economic symbiosis, US needsChina as much as China needs US (Global Trends 2025 – A TransformedWorld, National Intelligence Council, Washington D.C., November, 2008).China growing global influence likely more active in UN, World Bank andthe IMF, dynamics for a more harmonious world best suited to China’snational interests.

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MegaTrend 10 – Civil Society• Vibrant civil society rapidly developing, e.g. spontaneous response to Sichuan earthquake

• Quarter of a million local NGOs campaign for consumer rights + environment + the under-privileged

• 80 to 100 million practising Christians (Jesus in Beijing, David Aikman, 2003)

• Vibrant 36 million blogs.

• More public hearings for major polices, often mandated by law

• Local elections held for all village and county chiefs and urban neighborhood committees

• More party secretaries and senior officials monitor public feedback through the internet

• CPC ‘government for the people’, law-based governance, official accountability, public transparency, publicconsultation, fight against corruption, more freedom of expression as instruments for legitimacy. Direct entry togovernment through public examinations. Competitive progression to high office. Confucian ideal of Mandate ofHeaven ‘shi ren xinzhe, shi tianxia’ (He who loses the hearts and minds of the people, loses the world).

• CPC think-tank on reform of political system post-17th Party Congress – NPC and CPPCC, centralizing power toappoint judges in the provinces (Storming the Citadel, Professor Zhou Tianyong et al, November 2007).

• Global network of Confucius Institutes, ultra-modern CCTV English channels, ancient culture and architecture,UNESCO-designated world heritage sites, colorful arts and customs all attracting an ever-mounting number offoreign tourists + trade, business, professional, academic, and educational visitors from all corners of world

• Renaissance China defined by 21st C interpretation of the Confucian Golden Mean, calibrated balance betweenopposites, + prudent harmony between contradictions

• Global failure of market fundamentalism + looming ecological collapse - a blindness to excess and a disregardfor prudence. A renaissance China stands a good chance of restoring a measure of global balance and harmony.

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Lessons from Financial and Ecological CollapseLessons from Financial and Ecological Collapse• Survival, Adaptation, and Transformation• Global Financial and Economic Crisis

– Overleveraging ($1.4 quadrillion debt, some stillunderneath the carpet)

– Excessive fundamentalism– Adam Smith’s missing Visible Hand– Global economic imbalance– Who Moved My Cheese? Spencer Johnson, 1999– GM, Chrysler, IBM, GE, R J Reynolds, BYD,

Suntech, Alibaba

• Collapse, How Societies Choose to Fail or Succeed,Jared Diamond, Penguin Books, 2009

– Easter Island – Splendid isolation, 1400 m fromnearest habitable island; first settled 900 A.D,original pristine paradise, Giant Palm (80 ft tall,6 ft diameter); statue (moai) production peaked1200-1500, @up to 65 ft tall 270 tons;accumulative deforestation; collapse of foodchain; by 1700 population crashing + wars, allstatues toppled by 1884, today only 2 small treesand 2 small shrubs left

– Greenland Inuit v Norse – Adapted sewn-skinkayak + harpoons with bladder floats as efficienthunting machines for resource-rich whales;Norse tied to European origin: church, walrustusks for income (wiped out by new supply ofivory from new colonial era)

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Andrew LeunAndrew Leungg International Consultants LtdInternational Consultants Ltd

Thank you

Andrew K P Leung, SBS, FRSA

www.andrewleunginternationalconsultants.com