China goes West
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Transcript of China goes West
July 2010
APCO Brief:China Goes West
Introduction to China’s Western Region
China’s ‘Go West’ Policy
Opportunities for Foreign Business
Introduction to China’s Western Provinces
80% of China’s water resources
70% of natural gas reserves 69% of overall land area 60% of coal reserves 27% of population 19% of GDP 17% of consumer spending 14% of FDI 10% of applied patents 6% of registered foreign
enterprises 4% of exports
Source: China’s National Bureau of Statistics 2009, 2011
China’s 12 Western Provinces account for:
3
West More Reliant on Raw Materials
Source: China Statistical Handbook 2011 4
Greater China
Eastern Provinces
Western Provinces
0%10%20%30%40%50%60%70%80%90%
100%
Primary SectorSecondary SectorTertiary Sector
Composition on China’s Economy
47
43
10 6
49
45
13
51
36
Urban Household Income is dramatically less in the western provinces
Source: China’s National Bureau of Statistics 2011
Xinjiang
Beijing
Tianjin
Shanghai
Chongqing
Guangdong
Fujian
Tibet
QinghaiGansu
Inner Mongolia
Heilongjiang
Sichuan
Yunnan
Guizhou
Guangxi
Ningxia
Shaanxi
ShanxiHebei
Liaoning
Jilin
Shandong
HenanAnhui
Jiangsu
ZhejiangJiangxiHunan
Hubei
Hainan
< RMB 20k
RMB 20k-25k
RMB 25k-30k
> RMB 30k
5
Western Consumerism Lags Behind the East
Source: National Bureau of Statistics 2011
Per Capita Annual Living Expenditure
6
TotalConsumpti
on
Food Education and Recreation
Household Items
RM
B
02000400060008000
100001200014000160001800020000
Eastern ProvincesWestern Provinces
Economic Overview Regional Policies for Investment
黑龙江吉林辽
宁河北山东
福建
江西
安徽湖
北湖南
广东
广西
河南
山西
内蒙古陕西
宁夏
甘肃
青海
四川贵州云
南
西藏
新疆
浙江
北京
重庆
• 12 provinces• 27% of total
population• 71% of total land
area• Leverage
infrastructure investment to drive economic development
• Attract foreign investment
• China’s rust belt• 3 provinces and 5
cities of Inner Mongolia
• 8% of total population• 11% of total land area• Revitalize old
industrial base
• 10 provinces and cities• 60% of total GDP • 38% of total population• 7% of total land area• Leverage SEIs and R&D
investment to lead innovative & sustainable development
• Link of East Coast and Western China • 6 provinces • 27% of total population, 30% of total rural
population• 10% of total land area, 23.8% of total
cultivated area• Promote industrialization, urbanization,
and modernization of agriculture
“Go West” (1997)
“Rise of Central China” (2006)
“Northeast Revitalization”
(2003)
Developed East Coast
Western Provinces face numerous challenges
Source: Social and Economic Atlas of Western Provinces, China Business Handbook 2009
Geography- Extended distances between economic
centers- Low population density- Some extreme altitudes- Water shortages, particularly in the
north- Inhospitable conditions in some areas
and relatively little arable land
Nature & Climate- Extreme temperatures, particularly in
the north- Threat of natural disasters (e.g.
earthquake in Sichuan)- Degradation of the environment
(particularly deforestation, desertification)
Ethnic Situation- Ethnically diverse regions- Persistent conflicts among ethnic groups
(e.g. Tibetans, Uyghurs)
Politics- Western provinces were politically
neglected for a long time, only regaining serious political focus for the last 10 years
- Political problems are hinder economic progress (e.g. Tibet, Xinjiang)
Specific Challenges in Western
China
8
Introduction to China’s Western Provinces
China’s ‘Go West’ Policy
Opportunities for Foreign Business
China has been implementing the “Go West” policy for more than a decade
The Chinese government under Premier Zhu Rongji first clarified the guidelines of its “Go West” policy in 1999; after which developments have steadily followed…
“Western Development” plan begins2000
Construction of the “West-East Gas Pipeline” initiated2002
Policy of “Returning Grazing Land to Grassland” takes effect
2003
Law on Promoting Western Development is listed on the legislative plan of the 10th National People’s Congress
2004
Compulsory education tuition and fees exempted in Western areas
2005
Qinghai-Tibet Railway begins operation2006
The Ministry of Finance invests RMB 280 billion in the west to support key projects
2007
NDRC announced US$100 billion in 23 new infrastructure projects including airports, roads, railways, coal mines, and nuclear power stations
2010
10
Go West Policy has several key priorities
• Construction of railway lines, highways, airport expansion projects, and gas pipelines, hydropower plants, telecommunications, etc.
• By 2009, China had invested more than US$322 billion
• This month, the NDRC announced US$100 billion in 23 new infrastructure projects including airports, roads, railways, coal mines, and nuclear power stations
Infrastructure
• Preferential tax rates and flexible policies• Chongqing Liangjiang New Area
Foreign Investment
• Converting farmland to grassland and forest areasEcological Protection
• Compulsory educationEducation & Retention of Educated Workforce
11
Go West Policy’s Focus Regions & Industries
Energy Chemicals Mineral mining and
processing Agricultural goods
processing Engineered products High-tech sectors Tourism
Several focus industries:
Three focus regions:
Chongqing-Chengdu
Guangxi “North Bay”
Guanzhong-Tianshui
12
The Go West policy has yielded impressive results…
Source: China Statistical Yearbook, Yearbook of China Transportation and Communications
32.5118
2000 2008
Flight Passengers (m)
350016500
25320
2000 2008 2011
Freeway s (km)
76 233 299
2000 2008 2011
Power Generation Capacity (GW)
22000 29500 36307
2000 2008 2011
Rail Tracks (km)
CAGR: 18% CAGR: 21%
CAGR: 4%CAGR: 15%
13
…However, it has insufficiently closed the development gap
73.30%60.87%
79%
1990 2000 2011
West’s Relative Level of GDP per Capita
20.88%17.13% 19%
1990 2000 2011
West’s Contribution to GDP
14
Introduction to China’s Western Provinces
China’s ‘Go West’ Policy
Opportunities for Foreign Business
Corporations have prioritized several key locations for potential investment
LOW HIGH
HIGH
Corporate Perspective
Analy
tica
l Pe
rspect
ive Ningxia
Qinghai
Tibet
Guizhou
Xinjiang
Gansu
Yunnan
Inner Mongolia
Guangxi
Shaanxi
Chongqing
Sichuan
Source: Roland Berger,
16
Chengdu:City Overview
Most prosperous and populous city in western China, with 2009 GDP of RMB 450 billion (USD 66.17 billion), representing 14.7% growth year on year;
Economic hub in Western China for electronics and IT manufacturing.
Transp
ort
ati
on China’s sixth largest aviation
hub centered around Shuangliu International Airport;Competing with Chongqing to build largest transportation hub in Western China;Investment RMB 20-50 billion (USD 3-7.3 billion) per year to build 5,400 km of new railways to 2020.
Develo
pm
ent
Zon
es Two national level
development zones:• Chengdu High-tech
Development Zone – electronics and IT
• Chengdu Economic and Technological Development Zone – auto manufacturing
.
Chengdu: Industries and Policies
Pillar industries: electronics & IT, telecom and auto manufacturing • Sales revenue of electronics and IT industry in 2009 reached RMB 143.3 billion (USD 21.07 billion), making up 31% of total GDP;
• Major consumer electronics and IT companies in Chengdu include Nokia, Siemens, Samsung, Sony, Cisco Systems, Intel, HP and Foxconn;
• Chengdu has a complete auto manufacturing supply chain with 8 major manufacturers including FAW-Volkswagen and over 150 auto components suppliers.
• Chengdu also announced plans to build electric vehicle charging facilities by 2012 and manufacture 910,000 electric vehicles by 2017, planning to generate RMB 193 billion (USD 28.38 billion) in sales revenue.
• Chengdu municipal government had decided to invest RMB 50 billion (USD 7.35 billion) to build a national-level telecom hub in 2008. By 2011, Chengdu will become, after Beijing, Shanghai and Guangzhou, the fourth information broadcasting base in China.
Sustainability: Chengdu-Chongqing Economic Zone and Tianfu New Area
• Chengdu’s Tianfu New Area is slated to become a major industrial and economic center in Western China enjoying similar preferential policies as Pudong New Area;
• The State Council approved Chengdu-Chongqing Economic Zone to be a new twin-city Special Economic Zone (SEZ), one of China’s three western economic zones created to spur regional growth.
Chengdu:Economic Indicators
GDP rose 14.7% yoy to RMB 450 billion (USD 66.17 billion), boosted by infrastructure spending on post-quake reconstruction. Compared to its hi-tech rivals in Western China, Chengdu’s GDP growth was lower than Chongqing but faster than Xi’an.
GDP per capita reached RMB 35,215 (USD 5,178) in 2009 (14% growth yoy);
Annual disposable income was RMB 18,659 (RMB 2,773) in 2009 (10.1% growth yoy);
Chengdu’s CPI fell 3.8% in 2009; Exports and imports in 2009 was USD 1.05 billion and USD
7.36 billion, respectively. Total exports ranked no. 1 in western China;
Electronics and IT industry contributed to a third of Chengdu’s total GDP in 2009, supported primarily by growth of the software and IT outsourcing market segments.
Chengdu expects to achieve GDP target of RMB 700 billion (USD 109.2 billion) by 2017.
2007 2008 2009 2010 (E)
2012 (E)
2017 (E)
050
100150200250300350400450500
0%
10%
20%
30%
40%
50%
60%
70%Electronics and IT Industry Market
Size
Electronics manufacturing
Software and IT service
Grow rate of electronics manufacturing sector
Growth rate of software and IT service sector
RM
B
20002001200220032004200520062007200820090
500010000150002000025000300003500040000
94
96
98
100
102
104
106
Economic Indicators
GDP per capita Annual disposable incomeCPI
RM
B
2000 2001 2002 2003 2004 2005 2006 2007 2008 20090
2000
4000
6000
8000
10000
12000
Import and Export
Import (USD million) Export (USD million)
Chengdu:Tax Incentives
Corporate Income Tax
(CIT)
• Encouraged sector firms: 15%
• Non-encouraged sector firms: 25%
• Refund Rate: 100% refund of local portion (40%) of CIT for 3 years and 50% for the following 5 years
• NPV=19%
Value Added Tax (VAT)
• Standard Rate: 17%
• Refund Rate: 100% refund of local portion of VAT (16%) for 2 years, and 50% refund for the following 3 years.
• NPV=8.41%
• Free duty and VAT for imported equipment: eligible equipment
Others Based On TE Project Description:R&D subsidies: negotiable based on R&D investment capital and product;
Employee training subsidies: Company is grant subsidy RMB 200 per employee for signing contract with local resident for a minimum of one year;
Individual income tax merits for high-level management: 100% refund of local portion (26%) of individual income tax;
Business tax: 100% refund of local portion (65%) of business tax for 2 years; 50% refund rate for the following 3 years.
Significant incentives provided by central and local governments
Corporate income tax reductions Personal income tax rebates Rental discounts Subsidies for employee training Subsidies for employee relocation Financing support R&D funding support Subsidy for standards certification Tax exemptions for equipment importation
23
Advantages and challenges for foreign business
ADVANTAGES Market access: Western provinces provide access to quickly-growing local and regional markets
CHALLENGES
Lower wages: Western regions wages are significantly below those in China’s east
Government support: Wide-spread support for foreign investment can be found at both the national and local level
Level of familiarity: Local authorities are less experienced in working with foreigner and foreign companies
Personal relationships: “Guanxi” more important in Western regions which requires time and patience to develop
Quality of Staff: Staff qualification level comparatively lower than found in China’s eastern region
24
Success in the West depends on your preparation and execution
In order for a company to take advantage of the opportunities in China’s west and the ‘Go West’ policy it needs to be prepared and committed…
Conduct thorough market analysis
Perform solid technical and location due diligence
Thoroughly vet partner and key customers
Build solid government relationships
Develop a dedicated and motivated team of managers and workersBe flexible to the changing environment
Monitor and track new opportunities and evolving government priorities
25