What s Next for China An Insider Perspective George Goldman Vice President & Managing Director, APL Hong Kong & South China.

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1 What s Next for China An Insider Perspective George Goldman Vice President & Managing Director, APL Hong Kong & South China November 16, 2010

2 Agenda China The Big Picture Big to Great Who Moved China s Cheese? Journey to the West The Missing Link 143

3 China The Big Picture 144

4 China s GDP Growth 9.1% EIU: 10.2% 145 Source: National Bureau of Statistics of China

5 China Re-tooling, Re-balancing The 30-year old model of China s economic miracle is undergoing fundamental changes Reduce reliance on fixed asset investments (FAI) and exports Move up manufacturing value chain towards less resource-intensive, less polluting industries Drive growth for high value activities and service industries Increase domestic consumption through enhanced social benefits, better credit access, urbanization and higher wages Reduce income disparity between coastal and interior, urban and rural 146

6 Macro Trends Changing demographics Rising labor costs Rising imports fueled by growing domestic demand Y RMB appreciation Manufacturing/ sourcing migration Rising influence of Chinese enterprises 147

7 Changing Demographics Workforce to shrink after 2015 Changing attitude and work expectations of post-1980 generation Working population: years old 2015 Non-working Population Working Population 148 Source: National Bureau of Statistics; Wall Street Journal

8 Rising Labor Costs 1998 & 2008 Average Annual Manufacturing Wages (RMB) 2010 Garment Production Labor Cost: $2.99/hr +17% YoY $1.84/hr +14% YoY $0.49/hr +2% YoY 149 Source: EIU

9 Rising Imports While China continues to dominate the world s exports, imports are rising at a faster rate 150 Source: China Customs

10 Manufacturing Migration Existing production hotspots lie mainly in coastal areas but new ones are emerging in Bohai Rim and Central China Growth Top 50% Bottom 50% Share Growth Matrix Bottom 50% Top 50% Top 33% Share New hotspots Existing hotspots Bohai Rim Share (05-08): 27% CAGR (05-08): 26% Current hotspots: 10 New hotspots: 10 YRD Western China Share (05-08): 8% CAGR (05-08): 29% Current hotspots: 1 New hotspots: 1 Central China Share (05-08): 20% CAGR (05-08): 32% Current hotspots: 1 New hotspots: 8 Share (05-08): 28% CAGR (05-08): 22% Current hotspots: 11 New hotspots: 6 PRD & Fujian Share (05-08): 17% CAGR (05-08): 23% Current hotspots: 6 New hotspots: Source: CEIC data, APL Analyses

11 RMB Appreciation The Chinese Yuan is expected to fall by 11% between 2010 and 2014 Y Appreciation / Depreciation (versus USD) CNY 7.4% INR -11.7% VND -20.9% October 152 Source: EIU forecast

12 Rising Influence of Chinese Enterprises 153 Source: FORTUNE Magazine Source: Fortune Magazine

13 Big to Great 154

14 Chinese mega ports Biggest and most productive China accounts for six of the world s top 10 container ports today, with Shanghai taking over the top spot; Chinese ports productivity are among the world s highest NY/NJ 155 Source: Alphaliner

15 This year, Chinese ports have grown at 21% so far but are expected to end slightly lower on strong 2009 Q4 base Mainland Chinese ports in global top 10 Emerging ports in YRD and Bohai Rim River ports growing at roughly the same speed 156 Source: Alphaliner

16 Capacity and throughput growth outlook remains strong but declining utilization expected for some ports Total Capacity ('000 TEU) Throughput Growth Utilization Rate E CAGR E E Tianjin Dalian Qingdao 6,780 11, % 18.0% 10.0% 91.0% 81.0% 14,890 19, % 20.0% 12.0% 77.0% 75.0% 10,770 27, % 9.0% 10.0% 93.0% 97.0% Shanghai Ningbo Xiamen 27,510 39, % 7.0% 8.0% 128.0% 115.0% 11,860 16, % 19.0% 8.0% 110.0% 80.0% Guangzhou 9,090 22, % 9.0% 12.0% 83.0% 68.0% Shenzhen 8,520 14, % 19.0% 12.0% 105.0% 108.0% 29,000 54, % 1.0% 8.0% 86.0% 75.0% 157 Source: GHK, CEIC Data

17 More infrastructure upgrading in the mid term Harbin Yangtze River Expressway hub by 2015 Container rail hub under construction Container rail hub completed Logistics circles Urumqi Lanzhou Beijing Tianjin Zhengzhou Shenyang Dalian Qingdao Xi an Hefei Shanghai Chengdu Wuhan Ningbo Chongqing Nanchang Changsha Guangzhou Kunming Shenzhen 158 Source: China Ministry of Transportation

18 Who Moved China s Cheese? 159

19 160 NOBODY!

20 Manufacturers are hesitant to move out of China Manufacturers responses to increasing business costs in China No. of respondents (Base: 202 companies) 161 Source: China Manufacturing Competitiveness Report 2009/2010

21 China remains compelling as an LCC option with six key sources of competitive advantages 162 Source : McKinsey & Company

22 In fact, China is growing NOT losing exporters share for textiles and apparel imports into the US Share of US textiles and apparel imports (Volume in M 2 equivalent units) CAGR (2005 Sep 2010) -9.0% 7.3% -4.3% 5.1% 22.1% -9.2% 5.6% 4.0% 163 Source: Office of Textiles and Apparel, International Trade Administration, US

23 Journey to the West 164

24 A Tale of Two China s China s coast and its interior have vastly different profiles and characteristics Scale Infrastructure Value Chain Maturity Ease of Business weak Capacity China Coastal China Inland Productivity strong Labor Costs 165 Source: McKinsey & Company, APL Analyses

25 Coastal provinces account for 91% of China s exports in 2009 i.e. only 9% are from the interior XX% XX% % of China s 2009 Exports % of China s 2009 Imports Greater Bohai Bay 16% 24% Yangtze River Delta 41% 36% Fujian Coastal Region Pearl River Delta 30% 3% 4% 27% 166 Source: China Customs, McKinsey & Company

26 Interior sourcing migration by Textiles and Apparel to the YRD is more apparent Share of the Interior Share of Bohai Rim Share 8.3% 8.7% 7.4% 8.6% +0.3% share Share 15.2 % 15.4 % 14.9 % 13.9 % -1.3% share Share of YRD Share of PRD & Fujian Share 28.9 % 24.4 % 26.6 % 27.2 % -1.7% share Share 47.6 % 51.5 % 51.1 % 50.3 % % share Source: EIU

27 The Missing Link 168

28 Cost savings from moving further inland can be marginalized by inefficient connectivity with coastal ports, particularly for the processing trade Inward movement of materials Dalian Xingang Qingdao Lianyungang Outward movement of finished goods Shanghai Ningbo Potential incremental logistics costs: - Inland transportation - Increased transit time - Added supply chain complexity Fuzhou Xiamen Guangzhou Shenzhen Hong Kong 169 Source: APL analyses

29 China s transportation network remains inefficient Though gradually improving, transportation in China is still far less efficient than the US and other industrialized economies. Poor interior and long-distance transportation services account for a large part of this gap. Transportation Costs as a Percentage of GDP% 170 Source: CFLP, US Department of Transportation,

30 Intermodal transportation modes compared Average cost per FEU per km (RMB): Barge Rail Truck * Average Haul: 252 km Average Haul: 757 km Average Haul: 69 km PROS: Cheapest mode High departure frequency Competitive / many providers CONS: Affected by weather / tide Moves restricted to waterways Unreliable PROS: Fairly cheap Transit certainty Accepts over-weight cargo Potentially reliable CONS: Monopoly operations Lack of capacity Lack of frequency / services Low priority for freight Moves restricted to tracks PROS: Departure flexibility Door-to-door Routing flexibility (diversion) Many service providers CONS: Highest cost mode Not suited for large volumes Affected by road / weather conditions Not environmentally friendly * This is the lowest cost estimate (sell-rate) and applicable only for long-haul trucking. Short haul (intra-city) trucking can cost >RMB20 per km 171 Source: APL internal estimates

31 Barging at Yangtze: Issues around Timeliness, Reliability and Congestion Average Haul: 378km Chengdu 5 tiered water-locks ~ 350km Transit times vary widely, depending on water levels affected by season, tide, currents and river dams 67% TEU share Up-stream (2,479 km to Shanghai) Draft: 2-6m Barge < 250 TEU Mid-stream (1,225 km to Shanghai) Draft: 5-9m Barge < 300 TEU Downstream (392 km to Shanghai) Draft: 12-17m Chongqing-Shanghai Transit Days Warm Season Winter 5-7 days 8-10 days 7-10-days days 172Source: China Ministry of Transportation

32 Rail can be better leveraged for speedy, efficient and reliable intermodal connectivity Room for Improvement: Capacity shortage, low track density Intermodal freight: bottom priority Low containerization (2.2%) Limited double-stack trains* No on-dock rail* Ocean and rail schedules not synchronized* Low service frequency and quality State-owned monopoly *APL is a pioneer in double-stack trains, on-dock rail and expedited sea-rail services in the US 173 Source: China Ministry of Rail, China Federation of Logistics and Purchasing Annual Report, US Department of Transportation, APL analyses

33 Summary China will remain a major supplier to US textiles and apparel importers in the near future Coastal China will continue to play a dominant role in exports and processing trade Sourcing activities in PRD has and will continue to move gradually to YRD, and to a slower extent to Central and West China Lack of intermodal rail connectivity limits interior sourcing 174

34 Thank You! 175