the china analyst september 2011 final

The China Analyst

A knowledge tool by The Beijing Axis for executives with a China agenda September 2011

Now online at www.thebeijingaxis.com/tca

Features

Resources for Infrastructure: China's Role in Africa's New Business Landscape

China and Latin America: Untapped Sources of Added Value

Rising Stars: China’s Emerging Construction Machinery Manufacturers

The New Scramble for Africa: Emerging Powers on the Emerging Continent

Regulars

China Sourcing Strategy: A New Approach to Procurement

China Capital: Inbound/Outbound FDI & Financial Markets

Strategy: Mapping China in the Global Contracting Industry/CCC

Regional Focus: China-Africa

Regional Focus: China-Australia

Regional Focus: China-Latin America

Regional Focus: China-Russia

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Building a new era

China's business in the developing world

Tanzania National Stadium

Dar es Salaam, TanzaniaCapacity: 60,000 people Completed in 2007

Sheraton Hotel & Towers

Oran, AlgeriaThe fi rst Sheraton hotel in AlgeriaCompleted in 2002

Lom Pangar Hydropower Project

CameroonIncludes 30-megawatt power stationConstruction to commence soon

Modern Sports Stadium

Ndola, Zambia Capacity: 40,000 peopleConstruction to commence in 2011

African Union Conference Centre

Addis Ababa, EthiopiaCovers a fl oor area of 51,887 square metresUnder construction

Dakar Grand Theatre

Dakar, Senegal Covers two hectares; capacity of 1,800 peopleCompleted in 2011

EMBLEMS OF A NEW ERA

Notable Chinese Construction Projects in Africa

The China Analyst The Beijing Axis 中外商桥

4 The Beijing Axis

At the Highest Level

Refl ecting on the momentous events happening in the world right now and in the last few turbulent years, it is clear that the world is changing signifi cantly. China is a big part of this change; in fact, its emer-gence has become instrumental to a new era that is aff ecting every region of the world, yet none more so than the developing world. China is bringing unprecedented change to Latin America and Africa, and a changing business landscape brings new opportunities.

In the last edition of The China Analyst, we looked at the changing business landscape within China, focusing on certain key industries and outlining the opportunities that can still be found for foreign companies. In this edition, we shift our focus to China's impact on the wider world, and especially on the regions where China's pres-ence and influence have been strongest, namely the developing world.

Africa and Latin America have experienced the most signifi -cant impact of China's newfound engagement with the developing world, an impact which the cover of this maga-zine has boldly dubbed 'a new era'. China's expanding reach is having a profound impact on Africa. Here, China's brand of state-led capitalism is serving to breach a heritage of risk aversion by foreign investors, and in doing so, contribute to economic growth in many parts of the continent. As our fi rst lead feature illustrates, by means of an essential exchange of resources for infrastructure, China is playing a crucial role in a new construction boom on the continent.

With a rapidly growing trade and investment relationship in recent years, China's business with Latin America has to a large extent been characterised by an exchange of resources for manufactured goods. Yet as our second lead feature envi-sions, the relationship is now set to enter a new phase of higher value added investment and trade, with wide impli-cations for Latin America.

China is not the only new player in these developing regions, however. In our fourth lead feature we outline the trade and investment activities in Africa of the other BRICS nations, revealing how the likes of India and Brazil are in their own ways contributing to the shaping of Africa's new business landscape.

With the business that these emerging nations, and espe-cially China, are doing in the developing world, the landscape in regions such as Africa and Latin America is changing, and opportunities for businesses are doing likewise. This edition of The China Analyst is also about these changes and oppor-tunities, and about how China's business in the developing world is indeed building a new era.

Of course this edition also features all the usual sections on China's trade and investment, procurement, and regional busi-ness. And I am also pleased to announce the launching of a new website dedicated to The China Analyst, at www.thebeijin-gaxis.com/tca, where the contents of this and previous editions can be found in an interactive online format.

I trust our readers will enjoy this edition of The China Analyst, and as always we welcome your feedback.

Kobus van der Wath

Founder & Group Managing Director, The Beijing Axis

[email protected]

The China Analyst - September 2011

Published by The Beijing Axis

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Wanchai

Hong Kong, PRC

Tel: +86 (0)10 6440 2106

Fax: +86 (0)10 6440 2672

www.thebeijingaxis.com

Executive Editor Kobus van der [email protected]

Editor Barry van [email protected]

Editorial Board Lilian [email protected]

Cheryl [email protected]

Javier Cuñ[email protected]

Dirk [email protected]

To view the contents of previous editions of The China Analyst, see Previ-ous Editions on page 55. To subscribe free of charge to The China Analyst, please visit www.thebeijingaxis.com or www.thebeijingaxis.com/tca.

For advertising opportunities, please contact Haiwei Huang at [email protected].

Table of Contents September 2011

FEATURES Resources for Infrastructure: China's Role in Africa's New Business LandscapeChinese companies active in Africa are reshaping the continent’s business landscape, yet at its core the rela-tionship rests on one simple although vital exchange.

FEATURES China and Latin America: Untapped Sources of Added ValueTrade and investment between China and Latin America have increased ten-fold in the last decade, yet the two regions are now set to enter a new higher value added stage of their relationship.

FEATURES Rising Stars: China’s Emerging Construction Machinery ManufacturersChina's three largest construction machinery manufacturers, XCMG, Sany and Zoomlion, have been success-ful in emerging markets and are aiming to catch up with global leaders in the industry. How did they do it?

FEATURES The New Scramble for Africa: Emerging Powers on the Emerging ContinentLed by China, the BRICS nations are at the forefront of a new scramble for projects and deals in Africa. Yet apart from China, how are the other four BRICS doing in this new scramble on the continent?

MACROECONOMY Macroeconomic Monitor: Chinese Infl ation - One of the Biggest Fears of 2011 With infl ation having reached 6.5% in July 2011, this edition looks at the Chinese government’s monetary and fi scal policy options to fi ght a scourge for which China's central planners have a legendary fear.

NEWS China Business News HighlightsRecent headline business stories in China, leading with the business deals following foreign trips by China’s leaders, China's power shortage in H1 2011, and China's latest construction marvels.

TRADE China Trade RoundupA review of China’s trade performance in Jan-Aug 2011, and an overview of China's trade in services.

PROCUREMENT China Sourcing Strategy: A New Approach to ProcurementChina procurement is changing, and procurement managers need to adapt to a new opportunity landscape.

INVESTMENT China Capital: Inbound/Outbound FDI & Financial MarketsAnalysis on the latest on FDI in China and OFDI by Chinese fi rms, and a review of China's OFDI approval processes.

STRATEGY Mapping China in the Global Contracting IndustryIn this edition we illustrate the presence of China's contractors in diff erent markets of the world.

STRATEGY CCC: China Inc.'s Leading EPC Contractor A closer look at the corporate strategy of arguably China's most internationalised contractor.

REGIONS Regional Overview: BRIICSA macro overview of the leading developing economies: Brazil, Russia, India, Indonesia, China and South Africa.

REGIONS Regional Focus CHINA-AFRICAChina-Africa trade and investment analysis, and the series 'Chinese Contractors in Africa', featuring CCECC.

REGIONS Regional Focus CHINA-AUSTRALIAChina-Australia trade and investment analysis, and the series 'Australia State Watch', featuring Victoria.

REGIONS Regional Focus CHINA-LATIN AMERICAChina-Latin America trade and investment analysis, and an interview with the Mexican Ambassador to China, Jorge Guajardo.

REGIONS Regional Focus CHINA-RUSSIAChina-Russia trade and investment analysis, including the series 'China-Russia Resources Watch'.

The Beijing Axis News - March-September 2011The latest The Beijing Axis Group news.

EVENTS Upcoming EventsA selection of upcoming China and global events focusing on the mining and engineering sectors.

About The Beijing AxisCompany profi le and contact information.

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Features 专题 The China Analyst

6 The Beijing Axis

Resources for Infrastructure: China's Role in Africa’s New Business Landscape

Chinese companies active in Africa are reshaping the continent’s business landscape as part of a complex partnership that has reignited and vastly expanded ties from a previous era. China’s ways of doing busi-ness in Africa today is diff erent from all those of yesteryear, yet the broad engagement can be under-stood through the prism of one vital exchange: Resources for infrastructure. By Barry van Wyk

In the 1970s, China’s fi nancing and construction of a 1,870 km-long railway giving landlocked Zambia access to the Tanzanian port of Dar es Salaam was a monument to

Chinese engagement and solidarity with Africa in a previous era. In a fl ush of post-colonial exuberance, Africa was under-going a construction boom. Drawing on colonial-era plans, various schools, hospitals and roads were being built in Ghana, for example, and in the Democratic Republic of Congo (then Zaire), the Inga hydroelectric project was completed in 1977 at a cost of USD 260 million, while a 1,100 mile power line to Katanga also saw the light of day.

Yet when the Katanga line was eventually completed in 1982 at a cost of USD 1 billion, it was four times over the original budget. Only 18% of Inga’s hydroelectric capacity and 20% of the capacity of the new power lines were ever used, and the sharp fall in the price of cocoa in 1961 put paid to Kwame Nkrumah’s construction projects in Ghana. Designed to carry fi ve million metric tonnes of cargo annually, with a lack of new investment, mounting debt, poor management and mainte-nance, moreover, Zambia’s new railway never carried more than 300,000. From being a symbol of a new era of Africa’s development, this railway – badly managed and insuffi ciently maintained – became emblematic of Africa’s lost construc-tion boom turned to protracted bust.

Instead of a boom of new steel and concrete, Africa expe-rienced decades of lost growth. In 2008, the World Bank1 estimted that access to the most basic services in Africa increased only modestly between the early 1990s and the early 2000s, and only slightly in the last decade. Electricity, for example, is still available to little more than 20% of Africa’s total population, and piped water to just 12%.

Compounding the problem was the fact that Africa was largely left to its own devices in terms of infrastructure in the 1990s when both African and donor investment in infrastruc-ture was scaled back relative to other priorities such as child immunisation and education, partly due to the mistaken belief that private investors would step up to fi ll the infra-structure fi nancing gap. As a result, while Africa’s construc-tion sector deteriorated, poor road, rail and harbour infra-structure added 30-40% to the costs of goods traded among African countries, and the costs of moving foreign imports to

1 See ‘Access, Aff ordability and Alternatives: Modern Infrastructure Services in Africa', Africa Infrastructure Country Diagnostic. The International Bank for Reconstruction and Development, World Bank, Feb. 2008

customers inland are on average 50% higher than the costs of shipping costs in other low-income developing regions.

Yet now a new China with vastly diff erent priorities and stra-tegic outlook is back in Africa, where it is instrumental in Africa’s new construction boom that is reshaping the busi-ness landscape on the continent. In contrast to its piecemeal interaction with African countries in previous decades, China is now comprehensively engaged with almost all of Africa’s 54 countries – lending money, providing aid, trading, investing, and more than all else: building infrastructure and extracting resources. This over-simplifi ed description of China’s business in Africa goes to the heart of how Africa’s business landscape is changing under the infl uence of a new superpower hungry for natural resources and well-suited to provide Africa with something it is sorely in need of: infrastructure.

Levels of engagement: Trade and investment

The China that built the railway in Africa in the 1970s is a distant shadow of the China of today that routinely builds railways, roads, ports and other infrastructure in various parts of the world. In the 2000s, as the size of China’s economy in quick succession surpassed that of Italy, France, the UK, and Germany, China’s energy consumption expanded four times faster than expected to 16% of global demand in 2006. While China’s GDP expanded at an annual rate of 10% over 2000-2008, its annual demand for industrial raw materials such as steel (16%), aluminium (20%), copper (13%) and nickel (23%) all grew even faster. In the ten years preceding 2008, China’s consumption of crude oil nearly doubled, and during the same period its consumption of copper and iron ore tripled while that of aluminium quadrupled. Between 2000 and 2008, China accounted for two-thirds of the world’s entire growth in demand for steel and aluminium and virtually all growth in global demand for copper and nickel.

This rapid growth in China’s natural resource use contrib-uted to a windfall in trade between China and Africa, a major supplier of raw materials. Bilateral trade stood at just over USD 10 billion in 2000, yet in 2010 it breached USD 125 billion, exceeding Africa’s trade with any other partner, the closest ones being the US with around USD 115 billion, France with around USD 66 billion, and the UK with around USD 31 billion (see chart on next page). This China-Africa trade pattern basi-cally encompasses an exchange of a diverse range of Chinese manufactured goods for African raw materials.

Features 专题FFFFFFeeeeaaaatttttuuuurrrreeeessss 专题专题专题专题专题专题专题专题Features 专题 The China Analyst

Along with the US and emerging economies such as Brazil and India, China’s imports from Africa are as expected char-acterised by a disproportionate share of oil and minerals. China’s trade with Africa has as a result been very lucra-tive for resource-rich African countries, and these African commodity suppliers have become crucial suppliers for China. South Africa is China’s only African trade partner from which it imports substantial amounts of products that are not resources, while China’s leading suppliers of oil (Angola), Manganese (South Africa), chromium (South Africa), cobalt (the DRC), and platinum (South Africa) are all African.

China's annual fl ow of Outbound Foreign Direct Investment (OFDI) to Africa in recent years is still far in arrears of the US, France and the UK (see chart above, right). In 2009, China’s OFDI stock in Africa reached USD 9.3 billion, still marginally behind that of Switzerland, the Netherlands and far behind the US, France and the UK (which has the most invested stock in Africa, namely USD 61.4 billion). Chinese investment in Africa refl ects a similar predilection for resource-rich coun-tries as is the case with trade, and in 2009 a full 76% of Chinese FDI in Africa was concentrated in resource-rich countries. In 2009, the main sectors for Chinese OFDI stock in Africa were mining (30%), manufacturing (22%), and construction (16%).

Yet while Chinese levels of OFDI in Africa still lag far behind those of Western countries, China and other emerging part-ners are following new paths of investing in Africa. Europe and North America have typically relied on FDI and Offi cial Development Assistance (ODA) in Africa, but emerging powers such as China are adopting a more holistic approach to broaden their economic relationship with Africa that combines trade and investment with development coop-eration. Thus while developing partners such as China, India, South Korea and Brazil are not only engaging with African countries that Western countries have avoided in the past, they are also increasingly using alternative fi nancing methods. China in particular uses the following fi nancing methods in Africa2:2 For more detail see ‘African Economic Outlook 2011’, ADB, OECD, UNDP, UNECA, 2011, p. 112.

• Export credits to support national exporters. In 2009, China disbursed USD 29.6 billion in export credit globally

• Natural resources-backed lines of credit, or the ‘Angola Mode’, where China’s Exim Bank uses natural resource exports or preferential access to them as collateral for infrastructure projects and as a means to repay loans

• Mixed credits, where financing packages combine concessional and market rate loans, such as a mixture of FDI and export credit3

Laying down a methodology: The Angola Mode

As China’s engagement with Africa has deepened during the last decade, its deals on the continent came to broadly fi t a mould. As a country that recently emerged from civil war yet that is rich in natural resources and sorely in need of infra-structural renewal, Angola has become one of the biggest recipients of Chinese fi nancing for infrastructure projects in Africa, one of China’s largest trading partners on the conti-nent, and a major source of its oil. In 2004 Angola signed a deal with China that would become emblematic of China’s ‘infrastructure for resources’ relationship with Africa.

Angola received a USD 2 billion loan from a Chinese policy bank, China EximBank, for the development of infrastructure, including electricity generation, telecom expansion, railway rehabilitation and water. As part of the repayment terms for the loan, Angola agreed to supply China with 10,000 barrels of oil per day. In a pattern that would be repeated frequently afterwards, a Chinese construction/engineering company was awarded contracts for the infrastructure projects, while rights for extracting natural resources was afforded to a Chinese oil company.

3 Deborah Brautigam, author of ‘The Dragon’s Gift,’ has put China’s total purely concessional loans, zero-interest loans and grant commitments to Africa at USD 2.1 billion in 2009, while she estimated China’s preferential export credit commitments to Africa for 2007-09 at around USD 2 billion and non-concessional fi nance at around USD 5 billion annually. In sum, all China’s alternative fi nancial fl ows to Africa reached an annual average com-mitment of USD 7.1 billion over 2007-09.

Source: OECD Statistical Database; China National Bureau of Stistics; The Beijing Axis Analysis

Major Investors in Africa OFDI Flow (USD bn, 2003-09)

The Beijing Axis 7

Source: UN Comtrade; The Beijing Axis Analysis

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Africa's Major Trade Partners (USD bn, 2000-10)

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8 The Beijing Axis

Repaying loans for infrastructure development with natural resources is not a new concept. The fi rst reported example of such a deal involving China in Africa was actually not 2004 in Angola, but 2001 in the DRC when China provided USD 280 million for dam construction and received loan payments in oil. After 2004, however, such deals became more widely used by China in Africa, and also expanded to other resources such as bauxite, chromium, and iron ore. It should be noted, however, that the Angola mode is not the only mode of engagement for Chinese companies in Africa, yet they are common in countries such as Angola, the DRC and Sudan who have only recently emerged from confl ict and instability.

The process of concluding Angola Mode deals is typically borne out of intergovernmental agreements that deter-mine the purpose, amount, maturity and interest rate of the loan, followed by the signing of a loan agreement – often concessional in nature – between China Exim Bank and the borrower. The capital is then disbursed in tranches in terms of project completion, and paid directly to Chinese contrac-tors in China, which are selected by Exim Bank and China’s Ministry of Commerce and sanctioned by the benefi ciary government. With such a methodology in place, the main Chinese actors in Africa are

• Lending agencies: China’s policy banks, China Exim Bank and China Development Bank through the China-Africa Development (CAD) Fund

• Extractors and builders: Large state-owned enter-prises and some private ones operating in the extrac-tive and construction/engineering industries

• Other business people: Small to medium-sized Chinese businesses and individual entrepreneurs that may appear subsequently

Getting their hands dirty: Chinese contractors in Africa

Collectively, these actors are re-shaping Africa’s business landscape, yet none are doing so more obviously than China’s construction and engineering contractors. Having originally relied solely on Chinese government-financed projects,

Chinese contractors have become highly competitive bidders for publicly tendered infrastructure projects. A 2007 survey of 35 Chinese construction companies active in Africa found that around 50% of Chinese projects in Africa were actually won via an international bidding process. The extent of Chinese contractors success in Africa is illustrated in the fact that in 2001 China’s share of contract revenue in Africa was a mere 7.4%, yet by 2009 this had climbed to 36.6% (see chart to the left), making it the dominant player, far ahead of Italy with 15% in second place and France with 10% in third.

Africa is now China’s largest market in terms of contract revenue with 41.1%, even more than Asia with 36%. Similar to Chinese trade and investment in Africa, the revenue of Chinese contractors is highly concentrated in a few resource-rich countries. In 2009, the leading six countries (Algeria, Angola, Sudan, Nigeria, Libya and Ethiopia), mostly oil and gas-related economies, accounted for USD 18.1 billion or 71% of China’s total revenue (see chart opposite page).

Chinese contractors in Africa have been most successful in civil infrastructure projects such as transport and construc-tion. As stated above, around 50% of Chinese contractors in Africa seem to prefer international bids, yet around 40% were accounted for by grants, concessional loan projects and other mechanisms in which the Chinese government play a strong role. The case of Angola, where Chinese commercial, investment and contracting activity has been vigorous for almost a decade now, can be held up as an example of the progression of Chinese contracting over time. The establish-ment of Angola’s fi rst loan agreement with China Exim Bank in March 2004 facilitated the entry of China’s large SOEs into Angola, and in the time since dozens of Chinese contractors have established operations there.4

Although Chinese contractors typically still focus more on the lower value added part of the construction value chain, their ability to undertake construction projects at cheaper prices have made them very competitive and, in the case of Angola, have broken the monopoly of Portuguese and Brazilian contractors. Due to the volume of their needs and the lack of quality products available for sourcing locally, Chinese contractors bring most of their workers and mate-rials from China (although in Angola some Chinese compa-nies have in the last few years begun to set up local factories to produce some industrial inputs). After a few years, mostly private Chinese companies also began entering Angola, largely to subcontract from the larger companies and to set up a procurement chain for providing equipment and mate-rials from China.

Windows of opportunity: Africa’s new business landscape

China is engaging with Africa like no other country has ever done before, and in the fundamental exchange of Africa’s resources for Chinese-built infrastructure, China is making

4 For an assessment of the various estimates provided for the number of Chinese state-owned and private companies in Angola, see L Corkin, ‘Chinese Construction Companies in Angola: A Local Linkages Perspective,’ p. 17.

Source: ENR; The Beijing Axis Analysis

International Contract Revenue in Africa, China's and Rest of World's Share (USD mn, 2001-09)

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Source: China Statistical Yearbook 2010; The Beijing Axis Analysis

Leading Countries for Chinese Contractor Revenue in Africa and Number of Chinese Contractors in Country (USD mn, 2009)

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a significant contribution to addressing a lasting struc-tural bottleneck in Africa. The ‘infrastructure for resources’ deals it concludes in Africa are unique in the way they lock African countries into using their resources for infrastruc-ture – revenue never actually comes in, obviating the need for taxation. China is transcending conventional patterns of engagement of straightforward FDI and ODI, and has instead fashioned an elaborate system where a strong government role and alternative fi nancing methods can overcome risk, and the leveraging of China’s own booming construction industry can see Chinese contractors building much-needed civil infrastructure as well as value-adding processing indus-tries such as refineries and petro-chemical complexes in Africa.

China is a strong player in Africa both in upstream activi-ties such as exploration and extraction, as well as in down-stream activities such as processing. China's demand for oil and minerals has created a new level of competition for Africa’s resources, and has contributed to higher prices, to the benefi t of Africa. In countries such as the DRC and Angola where previous failed construction booms have formed part of protracted instability, China has undertaken projects where many other investors have regarded the risk as being too high. The sustainability and fl exibility of China’s contem-porary engagement in Africa, moreover, should contribute signifi cantly to Africa’s current construction boom not being as forlorn as the previous one, and that would make it a true new era for Africa.

This is not to say that the impact of China in Africa is fl awless, yet this should not be the expectation for something that is not an exercise in altruism. Chinese projects in Africa are in essence turnkey projects, in theory fulfi lled by contractors who then sign off on the engagement, and hence the extent of the true lasting value add on the ground in Africa is some-times brought into question by some observers, especially since China exports a signifi cant share of its labour to Africa. Yet this could be changing, as we have seen, as Chinese companies seek to establish local manufacturing capabilities on the continent, in addition to establishing several special economic zones and other forms of skills transfer.

The strong role played by government-to-government inter-action in Chinese deals in Africa has in practice often meant that many of Africa’s mineral rights are sold in closed deals and not in public auctions. Yet the increasing number of Chinese extractive companies and construction/engineering contractors in Africa has opened up a vast new opportunity landscape for foreign companies on the continent, both in terms of potential partnership and new clientele. Thus in areas where Chinese companies are still comparatively less adept, such as consulting and industrial design, many opportunities for partnerships are now open to foreign fi rms. Chinese fi rms in Africa still lack a deep understanding of local business as well as cultural and regulatory issues, and here again foreign companies with experience in Africa can profi t.

Foreign companies could also explore joint bids with Chinese companies for construction projects. As Chinese fi rms spend

more time in Africa they will become more aware of their own shortcomings and more receptive to the value off ered by foreign companies with the right knowledge and experi-ence. For such foreign companies, the challenge will be to utilise these opportunities in the right industries, at the right time. China’s increased business in Africa has also created demand for services essential to doing in business in Africa, providing new opportunities for banks, law fi rms, and various other service providers.

These are but a few examples of how China’s ‘infrastructure for resources’ engagement is creating new business opportu-nities for foreign fi rms in Africa. Yet perhaps the best oppor-tunity of all is the fact that Africa itself is changing. As China’s activities in Africa increases, Africa is gradually transforming itself from a perennial backwater to a new source of growth with diversifying economies, expanding consumer markets, and working infrastructure – making Africa open for business like never before.

Barry van Wyk, Senior Consultant

[email protected]


10 The Beijing Axis

China and Latin America: Untapped Sources of Added Value

Bilateral trade between China and Latin America has increased ten-fold in the last decade, preparing the way for a massive wave of Chinese investment in the region in 2010. While both bilateral trade and investment are expected to increase further in the coming years, questions remain on how balanced and sustainable the relationship will be. This article argues that both regions are set to enter a new stage of their relationship that will be characterised by increasing Chinese investments in more value added industries and eventually higher value added exports from Latin America. By Javier Cuñat

Only ten years ago, upon China’s entry into the World Trade Organisation (WTO), China was the world’s seventh-largest economy, growing at 7.3% y-o-y and

accounting for just over a tenth of global economic growth. In 2010, with a global fi nancial crisis still persistent in the United States (US) and Europe, China became the world’s second-largest economy, growing at 9.6% (H1 2011) and contrib-uting one-third to total world GDP growth. The emergence of China as a global economic power has greatly benefi ted the global economy. In China’s phenomenal rise, one thing is clear: as China grows, other countries benefi t. As China’s exported-oriented economy keeps churning out increasingly higher value added goods, other countries can now purchase previously unattainable products at competitive prices.

Yet this trend has also to varying degrees presented the regions and countries within China’s trade, investment and geopolitical radar with a number of challenges. Antidumping and protectionist measures in the US and Europe, labour and community issues in Africa, and territorial disputes in Asia are just some examples. Latin America (LatAm), with its own particularities, is no exception.

The relationship

When China entered the WTO, annual trade between China and LatAm amounted to USD 14.4 billion, with LatAm accounting for 2.7% of China’s total imports and 2.9% of its total exports; and China accounting for 2.3 % of LatAm’s total

imports and 2% of its total exports (see charts below). Ten years later, trade between China and LatAm amounted to USD 179.3 billion, a tenfold increase, with LatAm accounting for 6.5% of China’s total imports and 5.6% of its total exports; and China accounting for 12.3% of LatAm’s total imports and 12.9% of LatAm’s total exports.

Overall, China is not only more important to LatAm today than ten years ago and vice versa, but the two regions are progres-sively becoming more dependent on each other as important sources of growth compared to other regions, exemplifi ed by the free trade agreements China has signed in recent years with Chile, Peru and Costa Rica. This trend became more evident during the most recent fi nancial crisis, during which China’s stimulus package and unrelenting demand for commodities helped LatAm’s exports to China counterbalance a decrease in demand from the US and Europe. For its part China found the perfect partner to serve its own demand, diversifying its sources of fuel and metals needed to power and build its economy during the fi nancial crisis and into the future.

According to the Economic Commission for LatAm and the Caribbean (ECLAC), China today ranks among LatAm’s top trading partners, particularly in countries such as Brazil, Chile, Peru and Argentina, where China accounts for 15%, 24%, 16% and 9%, respectively, of each country’s total exports. What's more, China is now the largest importer of goods and services from Brazil and Chile, and the second-largest from Peru, Argentina and Cuba. However, these exports remain

China's Trade with LatAm and the Caribbean (USD bn,

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China's Trade with LatAm and the Caribbean (%, 2001-10)

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The Beijing Axis 11

concentrated in raw materials such as copper, iron ore, and

soybeans, which account for nearly 60% of total exports.

Similarly, China’s exports to LatAm are mainly electronic

items, autoparts, equipment and machinery, and textiles.

Indeed, the trade relationship between China and LatAm

is essentially built on the exchange of natural resources for

manufactured goods or low value for high value added prod-

ucts. While this makes a lot of sense from the countries' factor

endowment and comparative advantage point of view, it also

presents great challenges for LatAm manufacturers who have

seen Chinese exports progressively replace their market shares

at home, in other LatAm markets, and especially in the US.

Regarding investment, China's FDI stock in LatAm breached

USD 41 billion at the end of 2009, accounting for up to 18%

of total Chinese FDI stock in the world. LatAm's investment

stock in China, on the other hand, dwarfs that number, hitting

USD 112.6 billion in 2008, or roughly 14% of the total foreign

capital absorbed by China. A closer look into the GDP fi gures

for both regions illustrates that current levels of Chinese FDI

in LatAm and the Caribbean are comparatively low. In addi-

tion, they are mostly concentrated in tax havens such as the

Cayman Islands and British Virgin Islands, which accounted

for 96.7% of all Chinese FDI into LatAm between 2003 and

2009. Excluding the two tax havens, LatAm only received

about USD 126 million in Chinese FDI, or less than 1% of the

annual total. Overall, there is Chinese under-investment in all

sectors but especially in higher value added industries.

2010 - Breakthrough

In 2010, with an estimated investment of USD 15.25 billion,

China's investment in LatAm was more than twice the amount

it invested in the region in the period 2006–09, namely USD

7 billion. China's 9% share of FDI in the region now makes

it the third-largest foreign investor in LatAm, trailing only

the US and the Netherlands, which accounted for 17% and

13%, respectively (see chart below). By country, the main

destinations for Chinese FDI were Brazil, Argentina and Peru,

all of which have established strong trade links with China.

Brazil, China’s BRICS counterpart in the region, was by far the

biggest benefactor of this investment wave, with USD 9.6

billion in Chinese FDI in 2010.

A survey by the China-Brazil Business Council (CBBC) revealed

that 93% of Chinese investments in Brazil in 2010 were under-

taken by state-owned companies, while 6% were undertaken

by companies belonging to provinces, and 1% by private

companies. The survey also found that Chinese investments

in 2010 totalled USD 12.6 billion (slightly higher than ECLAC’s

fi gures), 82% of which involved mergers and acquisitions.

Sinopec made the largest investment when it acquired a 40%

stake in the Brazilian operations of Repsol-YPF for USD 7.1

billion (see table on next page). Of China's total investment

commitments in 2010, 95% were concentrated in the areas

of oil and gas, agribusiness, mining, and ironworks. However,

this trend appears to shifting in 2011, with announced Chinese

investments in LatAm and the Caribbean thus far amounting

to USD 7.13 billion (see chart below), with a stronger focus on

higher value added industries.

If the fi gures from 2010 and the announced fi gures of H1

2011 are any indication, they show that China is becoming

increasingly entrenched throughout the region, possibly

marking the start of a new phase of economic relations

between China and LatAm which features stronger trade

links that are accompanied by growing investment in not

only natural resources, but also manufacturing, infrastruc-

ture and services. As examples, Huawei, ZTE and Lenovo are

becoming prominent investors in the telecommunications

and electronics sectors, and BYD, Chery and Geely are leading

the charge in the auto industry.

The fundamental challenges facing the China-LatAm relation-

ship are two-fold. Firstly, how to increase and diversify Chinese

FDI in the region beyond raw materials to more value added

industries; and secondly how to improve trade by means of

exporting more value added LatAm goods. Both challenges, as

they unfold, will present substantial opportunities for both sides.

Forever imbalanced? Unlikely

Over the long term, the greatest opportunity but also chal-

lenge facing Chinese companies in LatAm is successful inte-

gration with the host economies. The model it is presently

utilising in a number of countries, characterised by the acqui-

sition of natural resource assets, the extraction and low value

added exports ‘back to China’, and under-developed commu-

nity relations, has both a limited political and business shelf

Origin of FDI in LatAm and the Caribbean* (%, 2006-10) China's LatAm FDI Destinations by Country* (%, 2010-Q3 2011)

0%

20%

40%

60%

80%

100%Latin America

Others

Caribbean

Financial

Centres

Netherlands

China

UK

Japan

Spain

Canada

US20102006-2009

USD 864.17 bn

8%

30%

10%

5%4%2%10%

5%

25%

10%

28%

7%

13%

9%4%3%4%

17%

USD 112.63 bn

Colombia

Costa Rica

Mexico

Ecuador

Peru

Argentina

Brazil

0

20

40

60

80

100

Q1-Q3 20112010

USD 15.25 bn USD 7.13 bn

Source: ECLAC; The Beijing Axis Analysis*Note: Data for 2010 is confi rmed investments; data for 2011 is announced investments. Source: ECLAC; The Beijing Axis Analysis


12 The Beijing Axis

life. While benefi ts of both existing and proposed Chinese

investments are real, trade tensions from the LatAm side are

emerging and creating contradictions for both parties. We

saw a good example of this at the beginning of 2011, when

the Brazilian Finance Minister called for a revaluation of the

renminbi following a massive USD 15 billion fl ow of Chinese

investments into Brazil during 2010.

More importantly, LatAm now more than ever represents an

opportunity for Chinese manufacturers to enlarge their global

footprints and market shares, especially in markets where

their international competitors have a signifi cant presence.

Aware of China’s price advantages, constantly improving

technology standards and overall positive macroeconomic

outlook for the LatAm region (recently revised by the World

Bank to 4.6% growth for 2010), Chinese manufacturing

companies are realising that an export-oriented develop-

ment strategy towards LatAm without a footprint is a dead-

end game. Various factors, i.e. consolidated market shares at

home, the need to better understand their customers in the

region, and strong balance sheets built on export revenue

with low production costs, have laid the foundation for

capital investments to grow and deepen in the years to come.

In February 2010, Sany Heavy Industry, one of China’s largest

construction equipment manufacturers, decided to put down

roots in the region by investing USD 200 million in a manu-

facturing plant in the Brazilian state of Sao Paulo. One year

later, XCMG, its closest Chinese competitor, followed in its

footsteps. We have seen similar examples in the automobile

industry in Mexico, where Chinese automakers Zhongxing,

Geely and Changan, through a partnership with Mexico’s

Autopark, have all announced plans to establish auto-making

facilities. China’s ZTE has started manufacturing smartphones

in Argentina together with local white goods manufacturer

BGH and has also announced it will start producing tablet

computers in Brazil. The list goes on in a number of high-

value-added industries (see table above). Leading Chinese

companies are looking at a number of LatAm countries as

key launchpads from which to market their products not only

in other LatAm markets but also in North American markets.

According to ECLAC, 90% of China's confi rmed investment

in LatAm has targeted the extraction of natural resources.

Looking into China’s upgraded endowment factors over

the years, the scale, nature and international ambitions of

its domestic champions together with recent Chinese OFDI

fi gures in the region, one can expect an increasing number

of Chinese manufacturing companies to invest in high value

added industries in the region. While investments in oil,

Major Announced Chinese Foreign Direct Investments in LatAm (2010-11)

Source: China Global Investment Tracker, Heritage Foundation, Carta da China No 56 June 2010, China-Brazil Business Council; Observatario Iberoamericano de Asia - Pacifi co and press releases. Note highlighted deals denote those in non-resources sectors.

highlighted deals denote those in non-resources sectors

Year Month Investor Status USD mn Partner/target Sector Subsector Country

2010 Jan Honbridge Holdings Concluded 400 Sul-Americana de Metals Metals Iron ore Brazil

2010 Feb Sany Heavy Industry Ongoing 200 Build a manufacturing plant Manufacturing Heavy machinery Brazil

2010 Mar East China Mineral

Expl. & Develop.

Concluded 1,200 Itaminas Metals Iron ore Brazil

2010 Mar CNOOC Concluded 3,100 Bridas Energy Oil Argentina

2010 Mar State Grid Ongoing 1,050 Quadra Mining Metals Copper Chile

2010 Apr WISCO Concluded 4,700 A JV steel mill Metals Steel Brazil

2010 May State Grid Concluded 1,720 Cobra, Elecnor and Isolux Power Power grid Brazil

2010 May Sinochem Concluded 3,070 Peregrino Field Energy Oil Brazil

2010 Aug Tongling Nonferrous &

China Railway Construction

Planning 3,000 A copper mine Metals Copper Ecuador

2010 Sep Chery Ongoing 400 n/a Transport Auto Brazil

2010 Oct Sinopec Ongoing 7,190 Repsol/YPF Energy Oil Brazil

2011 Jan CR Zongshen Concluded 80 Kasinski Transport Motorcycle Brazil

2011 Mar Chongqing Grain Group Concluded 2,400 n/a Agriculture Soybeans Brazil

2011 Apr Lenovo Ongoing 900 Positivo Electronics PC Brazil

2011 Apr Huawei Ongoing 363 Build a plant Telecom Mobile phone, tablet PC Brazil

2011 Apr ZTE Concluded 200 Build a plant Telecom Tablet PC Brazil

2011 May Chongqing Polycomp

International Corp.

Concluded 60 Owens Corning Plant Material Fiber glass Brazil

2011 May XCMG Concluded 200 n/a Manufacturing Heavy machinery Brazil

2011 May Geely Concluded 10 Nordex Transport Auto Uruguay

2011 Jun China CNR Corp Ongoing 127 T’Trans Transport Train Brazil

2011 Jun Qingshan Mining Ongoing 3 JDC Mining Co Metals Gold, silver & copper Mexico

2011 Jun TCL Ongoing 21 Radio Victoria Fueguina Telecom Mobile Argentina

2011 Jul BOMCO Concluded n/a BRCP, Asperbras Energy Petroleum equipment Brazil

2011 Aug ICBC Ongoing 600 Standard Bank Argentina Finance Banking Argentina

2011 Aug Midea Group Ongoing 223 Carrier Corporation

of UTC Group

Manufacturing Home appliances Argentina,

Brazil, Chile

2011 Sep Taiyuan Steel, CITIC

Group and Baosteel

Ongoing 1,950 CBMM Metals Niobium Brazil

Total for Q1-Q3 2011 7,137


The Beijing Axis 13

gas and mineral resources will remain at the top of Beijing’s

agenda, less value added Chinese investments in LatAm

going forward would not make much sense from a global

supply chain point of view. If trade relations continue to

unfold as they have in the last decade, Chinese manufacturers

and infrastructure developers will need to integrate LatAm

in their supply chains in the long run as much as LatAm is

willing to. So expect this trend to intensify.

Over the long term, the greatest opportunity but also chal-

lenge facing LatAm companies seeking to compete in China

is to diversify their exports towards more value added prod-

ucts. While a signifi cant number of LatAm’s manufactured

exports compete with products China itself produces, one

should not forget that China is the world’s second-largest

importer of manufactured goods. So from a sectoral and

product perspective, the challenge is not that there is no

market for LatAm's manufactured goods in China, but rather

identifying what the specific products with the greatest

potential are and how to market them eff ectively.

The Chinese market is more complex than any other market

of comparable size, and therefore requires an on-the-ground,

customised and dedicated strategic approach. Even though

China is a large market for a number of products, entering the

Chinese market is not an easy task and profi ts are usually the

result of a long-term investment in understanding the Chinese

culture, the specifi cs of your market and network building.

Just as one cannot ignore that the emergence of Chinese

manufacturing companies is disrupting domestic competition

in a number of industries in LatAm, and increasingly in more

capital and technological-intensive products, one cannot

ignore that the Chinese marketplace represents a tremendous

opportunity for international companies. China ranks among

the world's largest consumers and importers of power gener-

ating equipment, aircraft and parts, computers and industrial

machinery, agricultural products, consumer and luxury goods

among a large spectrum of sectors and products.

Brazilian aircraft company Embraer, along with Mexican

bread maker Bimbo, are just two examples of successful

LatAm ventures in the Chinese market. Embraer, which

opened its fi rst offi ce in Beijing in 2000, continued with the

construction of a spare parts distribution centre at Beijing

International Airport, and the signing of a joint venture with

Aviation Industry Corporation of China in 2003. Embraer

has delivered more than 70 aircraft in China and has already

achieved a 52% share of China’s market for aircraft with up

to 120 seats in 2009. With two plants in China, Bimbo is a

pioneer in marketing packaged baked goods in China, espe-

cially in Beijing and Tianjin, and is expanding to other cities.

Despite such precedents, LatAm’s business presence in China

is still mainly dominated by the so-called multilatinas, with a

strong component coming from the natural resources sector,

while LatAm's small and medium-sized enterprises lag behind

their counterparts in terms of presence and market penetra-

tion. As LatAm becomes increasingly integrated with China,

bringing the region’s small and medium-sized enterprises to

the Chinese market not only represents a major competitive

challenge but probably one of the best opportunities for the

region’s export diversifi cation ambitions.

Cross-border opportunities for LatAm's exporters do not

only exist in the natural resources side of Chinese demand

but also in food, beverages, agribusiness, leather and fabrics,

plastics, chemicals, pharmaceuticals, machinery and elec-

tronics, among other sectors. While market entry strategies

may vary greatly - from organic to inorganic growth, from

JV partnerships to wholly foreign owned enterprises, from

export development to assembling and/or manufacturing,

from partnering with a local distributor(s) to developing

one's own distribution channels – one thing is clear: ignoring

the Chinese consumption market is neither possible nor wise

if one aims to remain competitive over the long term.

Final word

If 2010 meant anything for China-LatAm trade and invest-

ment relationship, it was change. We are leaving behind a

stage in the relationship characterised by booming bilateral

trade, few investments and strong unbalances, and entering

a new stage characterised by the utilisation of new sources

of added value. This stage will not only be characterised by

trade but also by increasing Chinese investments in more

value added industries and eventually higher value added

exports from LatAm. If this happens, and we think it will, the

exchange of natural resources for manufactured goods will

prove to be not the trend itself but the catalyst and continu-

ation of a bigger trend. Both regions are set to take steps

towards a more balanced, sustainable, value added and

mutually benefi cial relationship. While Chinese OFDI fi gures

for 2010 and H1 2011 provide some hints, it is still uncertain

which countries, sectors and companies will be the protago-

nists in the coming decade.

How do LatAm companies look at China and how do Chinese

companies look at LatAm? While the challenges involved in

business transactions are complex, a change in perception

will be key as old perceptions have on many occasions been

as unbalanced as the trade and investment relationship.

China should not be perceived as a neo-colonial power as

much as LatAm is no one’s backyard. The fi rst, and most prob-

ably the biggest, barriers that LatAm companies face when

engaging with China are not that diff erent than what the

Chinese face when engaging with LatAm. These are culture,

language, protocol, and lack of information, and they impact

how we understand the opportunities and challenges.

Working out the information defi cits and bringing the market

realities to the corporate landscape in China and LatAm will

further assist and facilitate mutually benefi cial and more

value added trade and investment. Government bodies,

industry associations, chambers of commerce, corporate

players and service providers must work in that direction.

The rules are changing but the game is just beginning.

Javier Cuñat, General Manager: Beijing Axis Strategy

[email protected]

.

Source: CCMA; Off -Highway Research

Global Market Share of Construction Machinery Industry in

Terms of Sales Volume (2002 vs. 2009)

Rising Stars: China’s Emerging Construction Machinery Manufacturers

Buoyed by increasing demand, especially in emerging markets, China's construction machinery players have been actively enhancing their international reach and catching up with their foreign counterparts. China’s three leading companies in this sector are XCMG, Sany, and Zoomlion, and this article outlines the diff erent strategies adopted by these rising stars and their global expansion plans. By Ankit Khaitan

Starting from a mere USD 1 billion worth of sales in 1999, China’s construction machinery industry saw a decade of high growth with sales reaching USD 60 billion in

2010. This phenomenal growth in demand was fuelled by rapid growth in both the developed coastal areas of China and more recently, inland areas. In developed areas, the genesis of growth was local governments’ expansion of small cities, while in inland China it was a growing market for infra-structure and housing. Currently, for every 1% increase in the urbanisation rate, 13 million people move from rural areas to cities, but this number still lags far behind that of developed countries and the global average. The Chinese government has set a clear target of achieving an urbanisation rate of 60% by 2020, indicating that China still has a long way to go in this regard.

Another key demand driver for construction machinery is the strong growth in fi xed asset investments spurred mostly by downstream segments, including infrastructure and property investments. For instance, social housing, though comparatively smaller investments, is signifi cant in construc-tion project volume and substantially increases the need for equipment. Additionally, demand from foreign markets has also grown, allowing China’s construction machinery exports to experience rapid growth in recent years. Together, these factors have bolstered the development of the construction machinery industry in China, making it the world’s fastest-growing and third-largest market and catapulting the three largest players onto the world stage.

Beginnings

According to a report by Off -Highway Research (a consul-tancy specialising in the research and analysis of interna-tional construction), China’s share of the global construc-tion machinery market jumped from 18% in 2002 to 32% in 2009 in terms of sales volume (see chart above, right). China’s three leading pioneers in this regard are Sany Heavy Industry, Zoomlion and XCMG, which have emerged as the three dominant manufacturers that together account for about 30% of the market in China, larger than the top three foreign companies active in China (see chart on next page). Indeed, these three are now ranked in the top ten in terms of sales revenue globally.

Out of these, Sany and XCMG only started operating in the early 1990s but quickly transformed themselves from being single product machinery companies to ones that boast

comprehensive production lines. In contrast, Zoomlion is China’s second-largest, and the world’s tenth-largest, construction machinery manufacturer. It emerged out of Changsha Construction Machinery Research Institute, a leading state-owned research institution focusing on construction machinery, effectively affording it a strong competitive advantage.

Consolidation and government support

Though the industry in China is highly fragmented with over 900 companies vying for market share, a majority of them only manufacture components or engage in sub-assembly due to the hefty upfront financial investments that are required. In addition, intense competition between both domestic and foreign participants as well as rising demand for improved and advanced technology have forced small operators to either be acquired by more established players or simply exit the game.

In fact, the large in-house companies have supplemented organic growth and scaled up rapidly through consolida-tion. In the past decade, Sany has acquired assets from its parent company to expand its capabilities while Zoomlion


14 The Beijing Axis

0

20

40

60

80

100

OthersJapanEuropeNorth America

18%

28%

28%

10%

16%

32%

22%

13%

4%

29%

China

20092002

has targeted third parties to scale up its product off erings. For example, Zoomlion acquired Hunan Puyuan Construction Machinery's truck crane business and Zhongbiao’s environ-mental and sanitation machinery business in 2003.

This consolidation is being further encouraged by the government, who is actively promoting consolidation in the industry to avoid disorderly competition among local manufacturers. Furthermore, equipment manufacturing is one of the seven strategic emerging industries identifi ed in the 12th Five Year Plan that the government will focus on so as to foster the development of a sound market environment; hence consolidation will be an ongoing trend in the industry going forward. Chinese construction machinery manufac-turers are also aff orded tax breaks and other incentives from local Chinese governments, enabling them to take a long term view of the market rather than just focusing on short term profi ts.

It is worth noting that foreign enterprises have had little opportunity to compete against local competitors in this consolidation drive due to regulatory restrictions, and have been unable to acquire majority stakes in joint ventures with domestic fi rms. This has allowed local rivals to gather market share from foreign companies and at the same time narrow the capability and quality gap by integrating independent enterprises’ abilities via strategic acquisitions. Moreover, foreign enterprises have simply not been able to increase production fast enough to meet rising demand, diluting their market shares.

Diff erent specialisations

The product portfolios of China’s three largest industry players mostly overlap, yet there is diversity in their product off erings and this unique characteristic defi nes some of the dynamics in the industry. Zoomlion has the world's most diverse range of products including concrete machinery, tower cranes, road and earthmoving machinery, environmental sanitation machinery, and bulk material transportation equipment. Despite such a diversified portfolio, revenue sources are

balanced between its two largest segments, concrete and crane machinery, contributing 43% and 34% to total revenue, respectively, in 2010 (see chart on next page).

Sany leads the local market for truck mounted concrete pumps and full hydraulic rollers; its production of pump trucks is one of the best in the world. Compared to Zoomlion, it is less diverse and its most important segment, concrete, alone contributes more than 60% of its total sales revenue. Nonetheless, after Sany acquired the excavator and truck crane businesses from its parent, its level of business diver-sification started closing in on Zoomlion’s, with product categories expanding to include concrete machinery, road construction machinery, excavator, pile driving machinery, hoisting machinery and port machinery.

XCMG is the world’s largest manufacturer of truck cranes, which account for most of its total revenue. The comprehen-sive line of products it off ers includes construction mobile cranes, crawler cranes, wheel loaders, concrete boom pumps, piling rigs, aerial fi re trucks, asphalt pavers and cold milling machines.

Over the years, Chinese companies in various industries have successfully moved up the value chain by off ering a wide range of products and the construction machinery industry is no diff erent. Foreign companies have historically served the Chinese excavator market by leveraging their strong expertise and precision quality. Yet according to CCMA data, Chinese companies now control one-third of the global exca-vator market, up from 22% in 2006. Such strategic moves have undeniably boosted their overall competitiveness and allowed them to capture market share from their foreign competitors in China and in other emerging markets.

Going global – M&A and partnership

The global presence of US-based Caterpillar and Japan's Komatsu has been strong for decades as they began expanding abroad early on when growth in their domestic markets slowed with urbanisation reaching a saturation point. Following a similar strategy, Zoomlion, Sany and XCMG have been encouraged to expand into foreign markets because of their solid positions in the Chinese market, world-class products, sustainable low cost advantage and China’s expansive infrastructure projects. Sany in particular has led domestic equipment manufacturers in overseas expansion.

However, the three diff er in their overseas expansion strat-egies. Zoomlion focuses on a direct M&A route to expand, integrating its costs and scaling its position in China while leveraging its target’s distribution network and technical capacities. CIFA, a global manufacturer based in Italy, was a very strategic acquisition for Zoomlion that strengthened the latter's R&D capabilities and helped increase its global market share. In contrast, Sany has preferred to expand by building its own plants in foreign countries. For instance, Sany recently built research and development centres in Brazil (2010) and Germany (2009) as part of an ambitious international expan-sion plan. Also, it is the fi rst Chinese construction machinery

Source: CCMA

Approximate Market Share of China's Construction

Machinery Industry (2010)


The Beijing Axis 15

Other Foreign

Other Chinese XGMA

Zoomlion XCMG

Sany HeavyKobelco

Hitachi Komatsu

Volvo Caterpillar

10%

32%

3%11%

8%

11%

1%4%

5%7%

9%

player to set up factories in India and the US, where it recently opened a USD 60 million assembly plant which in August 2011 started assembling trucks mounted with concrete-pumping equipment. XCMG, China's largest construction machinery maker, has opted to cooperate with foreign capital and foster close partnerships with overseas dealers. The group has already established close cooperation with nearly 100 dealers who help sell its products all over the world, but most notably in emerging markets such as Indonesia, Brazil and Russia.

Among these key differences, there is one commonality that exists in the internationalisation strategy of all three of China’s major machinery manufacturers - they have been aggressively marketing their product overseas though new distributing channels with a core focus on emerging markets, namely Brazil, Russia, India and Africa. Emerging markets are sweet spots for these companies because it is diffi cult to access developed US and European markets where dominant and established players, such as Caterpillar, emphasise their value-added after sales services. Emerging markets, on the other hand, are more price sensitive, and prices of machinery equipment from Chinese manufactures are typically 15-20% below foreign competitors, providing buyers in emerging markets with a considerable overall cost saving. Another important reason is that, like China, these countries are experiencing a similar urbanisation process and are conse-quently investing a lot towards infrastructure improvement, providing Chinese enterprises a potential market to tap into.

Reaching higher: The years ahead

XCMG, Zoomlion and Sany have revealed their sales targets for the 12th Five Year Plan period (2011-15). XCMG and Zoomlion aim to achieve USD 20 billion each in sales by 2015

and enter the top fi ve global construction machinery compa-nies. For its part, Sany plans to scale up rapidly to achieve these numbers as soon as 2012. To accomplish this, Sany is building plants in overseas markets with great potential such as Indonesia, North African countries and South Africa, a stra-tegic step that will open new channels to market its prod-ucts. Zoomlion is following similar tactics and expanding quickly to acquire brands, technology and distribution channels, with a keen focus on emerging markets. Similarly, XCMG recently announced the acquisition of two European suppliers, marking its fi rst international acquisitions aimed at boosting its value chain and extending its technological capabilities in key component production.

China’s three leading construction machinery manufacturers seem well placed to achieve these goals, yet each of them still have much potential to improve their technology. To be sure, to enhance their competitive position, Chinese machinery manufacturers are constantly upgrading their technological capabilities and focusing on technical innovation, but they still have some ground to cover before they start taking on the world leaders. That said, these fi rms have demonstrated a remarkable ability to incorporate technology and quickly adapt. As a case in point, Sany invented the fi rst 66-metre truck-mounted concrete pump in the world.

Chinese construction machinery manufacturers are set to become some of the largest benefi ciaries of the infrastruc-ture boom in emerging markets where competitive prices are key, and with improving technology and evolving interna-tional expansion plans, the likes of XCMG, Sany and Zoomlion are gearing up for bigger challenges.

Ankit Khaitan, Consultant

[email protected]


16 The Beijing Axis

Source: CCMA; Bloomberg

XCMG, Sany, Zoomlion Revenue Mix Comparison (%, H1

2010)

0

20

40

60

80

100

Compaction

Mechanical Scrapers

Others

Environmental Machinery

Excavators

Road and Piling Machinery

Crane Machinery

Concrete Machinery

37%

44%

3%3%4%9%

12%

52%

10%

20%

6%

69%

12%

12%

7%

ZoomlionSanyXCMG

8.00 am - 7.00 pm

Thursday, 20 October 2011

Gallagher Estate, South Africa

This one day Business Forum will bring together key business

leaders, industry specialists, project managers and others to

explore the exciting current dynamic of the China - Africa rela-

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The New Scramble For Africa: Emerging Powers on the Emerging Continent

The BRICS of China, India, Brazil, Russia and South Africa – and China in particular – are at the forefront of a new scramble for projects and deals in Africa. Each one brings to the continent its own distinct busi-ness nous, yet collectively the BRICS are instrumental in transforming Africa’s business fortunes. Leaving aside China’s dominant position in Africa, this article focuses on the activities of the other BRICS nations on the continent. By guest contributor Charlie Pistorius

The global balance of power is shifting into the hands of the rapidly industrialising emerging growth giants, especially the BRICS block of economies: Brazil, Russia,

India, China and South Africa. The BRICs (excluding South Africa as the smallest strategic member) are today fuelling the global recovery with their huge demand requirements, high growth multiples and vast deployment of capital. Explosive population growth and rapid urbanisation in these economies have engendered a vital demand for food and energy security, and an urgent need for capital stock build-up, in particular transport, power, communication and housing infrastructure. In Africa the emerging BRICS have latched onto China’s coattails in seeking commercial favour and opportunity, although each with their own individual modus operandi and business methodology. Yet they all have the same purpose, namely to secure a foothold in Africa’s vast and rich resource off erings. But the story is not merely one described by an exchange of outgoing raw materials in return for inbound capital, tools and cheap fi nal products. As the fl oodgates for broader and more ingrained partnerships are opening, so too will Africa’s story change in its balance of trade and investment.

The BRICS 'Way'

The large BRICS economies (as well as other emerging players such as South Korea and Turkey), all have the same compara-tive advantage in their outward engagement: they are able to access large pools of fi nance and cash reserves (mostly through state incentives and subsidised support), and they also uphold a version of the Developmental State Model that encourages a statist approach to business - explicit in the case of China - that enables private enterprise and mercan-tile commerce, rather than perpetuating poor management approaches which translates into an unproductive utilisation of strategic assets.

As a bloc, the BRICS' global outward FDI stock build-up increased substantially from USD 134 billion in 2000 to over USD 1,085 billion in 2010 – only a small smattering of this was, however, destined for Africa (roughly 2.7%). Developed economies still provide the largest vested interest of capital stock in Africa – roughly 40% originates from the European economies. Since 2000, the majority of BRICS outward invest-ments in Africa has been in cross-border M&A. Considered purely by this measure, the number of BRICS engagements

is impressive. Between 2000 to year-end 2009, India origi-nated the majority of deals, 812 in all; China managed 450; Russian fi rms undertook 436 deals; South Africa at least 237; and Brazil 190. For the year 2010 up to the end of May 2011, China led the way by undertaking 195 new deals, followed by India with 183, Russia 102, Brazil 51, and South Africa 40, according to UNCTAD’s World Investment Report (2011).

The trade relationship between the emerging economies and Africa is, however, the one that best defi nes the scale of their overall commitment and interest on the continent. Collective bilateral trade between the BRICS and Africa for instance ballooned from a mere USD 24.3 billion in 2000 to USD 193.4 billion in 2010 - though China's share of USD 123.3 billion alone makes up 64% of the total. Of Africa’s total trade volume with the world, the BRICS collectively account for an impressive 22%, which hardly measured 10% in 2000. Shockingly however, South Africa’s intra-Africa trade only measured 2.3% of Africa’s global total in 2009, dropping to 1.5% in 2010 (see chart on next page).

Brazil: Not only Lusophone specialists

To date Brazil’s multinational fi rms have mostly been involved in Africa’s construction and upstream exploration and energy production. The likes of Petrobras, which is one of the global oil and gas leaders with 2009 revenues of over USD 118 billion, has staked increasing claims in Africa, espe-cially in Nigeria, Senegal and Angola, while also maintaining exploration activity in Mozambique and Tanzania. Brazilian

Source: UNCTAD Statistical Yearbook 2010

BRICS Trade Profi le (As a % of Country Total, 2009)


18 The Beijing Axis

0

10

20

30

40

50

60

Latin America

South, East & Southeast Asia

Emerging Economies

Developed Economies

Africa

BRICSSARussiaBrazilIndiaChina

companies hold a comparative advantage in Lusophone countries Angola and Mozambique. Mining giant Vale, the world’s second-largest diversifi ed mining company, has an over USD 150 billion market capitalisation and wide foot-print in Africa – extracting coal and iron ore while exploring untapped copper, nickel, platinum and diamond deposits in the frontier economies of Mozambique, Angola, Guinea, Liberia and Zambia.

Brazil’s African focus has shifted in line with other emerging giants, though it still trails far behind China. In the seven years to 2009, Brazil invested in 25 Greenfi eld projects. Vale, for instance, is planning to invest USD 15-20 billion in Africa over the next fi ve years , and is leading the way forward for Brazilian interests in Africa. Petrobras has already deployed USD 2 billion into Africa, also putting aside a further USD 3 billion for deepwater exploration off Nigeria and Angola. Brazil’s own Odebrecht Mining Services is its preferred contractor for operations in Africa – which in 2009 accounted for over USD 2.4 billion in revenues, or 10% of its total earn-ings. Brazil currently only sports a low level of bilateral trade, hovering close to the USD 20 billion mark in 2010. It is widely estimated that Brazil’s trade will be hiked up by more than 100% by 2015, reaching USD 45 billion. Its investment stock in Africa will also be upped from between USD 8-12 billion in 2010 (only an approximate 7% of its total global stock), rising gradually to USD 15 billion by 2015.

Russia: Energy giant

Russian fi rms with the largest foothold in Africa have been focused on energy and mineral resource acquisitions. Growing global energy concerns and profit-seeking motives have fueled Russia’s geo-strategic positioning in resources. Russia has leveraged its Cold War relations with Africa and pursued proactive government incentives to urge its champion

state-aligned enterprises to acquire resource assets. As a country it consumed eff ectively the same barrels per day of oil as all of Africa did in 2009, just edging out Brazil. Russian fi rms retain a skilled advantage in the extractive industries, and it is therefore expected that their recalibrated African focus will be grounded in fi xed investments and M&A activity, rather than trade. Invested stock in Africa will very likely more than triple from current levels – roughly USD 5 billion. The enterprises that have shown most interest in Africa’s mineral resource sector to date has been the likes of Norilsk Nickel (the world’s largest nickel and palladium producer, as well as one of the largest in platinum and copper); Alrosa, which has diamond interests in Angola (where it is building a hydroelectric dam backed by a concession to explore for off shore oil and gas), Namibia (where it too is building an electric plant) and the DRC; UC RusAl (the world's largest aluminium producer) has revenue capacity in Angola, Guinea, Nigeria, South Africa and Botswana; and Severstal, which is preying heavily on West African gold deposits, already under-took a USD 2.5 billion iron ore mining project in Liberia.

In the energy sector, Russia’s state-owned oil and gas major Gazprom (with 2009 revenues over USD 141 billion) and Lukoil (with revenues exceeding USD 86 billion), have both sought interests in Namibia’s gas fi elds, Tanzania’s off shore blocks, and West African deep-water exploration and midstream activity (Gazprom for instance invested in a production-sharing agreement with Nigerian State Oil Company worth USD 2.5 billion). Renaissance Capital, a leading Russian investment and equity fi rm, entered Sub-Saharan Africa in 2006, and has since organised a number of Africa’s largest IPOs and owns 25% of Nigeria's Ecobank, with branches in 11 African countries. Renaissance also established a USD 1 billion pure Africa Fund and deployed USD 500 million into Africa thus far. To date it has offi ces in South Africa, Nigeria, Kenya, Zimbabwe, Zambia and Ghana, and now also off ers their gambit of sophisticated fi nancial services in Rwanda. India: Versatile player

India is a vital partner in Africa, and shares close cultural links, especially in the eastern part of the continent. India’s trade basket with Africa is broad and rising rapidly. From close to USD 40 billion in 2010, bilateral trade in 2011 is expected to exceed the USD 50 billion mark and more than double by 2015. Duty free trade deals have been signed with 34 of Africa’s least developed countries. Liberalisation of India’s foreign exchange market has opened up the fl oodgates for direct investments abroad, deploying most of its capital into developed (rather than emerging) markets. Cumulatively, India’s invested stock in Africa is currently estimated to be over USD 15 billion, more than China’s. Multinational compa-nies such as the diversifi ed industrial giant Tata, a leading player in the steel and automotive sector (among many), have made substantial acquisitions globally and in Africa. The end-destinations in Africa that takes the bulk of India’s interest are mostly in the COMESA1 block, as well as in Nigeria.

1 The Common Market for Eastern and Southern Africa, with 20 members on the continent.

Relative Share of Country/Bloc’s Bilateral Trade with Africa

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2000 (Total: USD 246.4 billion)

Source: Africa Economic Outlook 2011


The Beijing Axis 19

India in Africa is characterised by a diverse engagement, unlike Russia and Brazil, and perhaps even more than China. Indian interests in Africa have created a particular niche in telecoms, pharmaceuticals, hospitality, automotive and the banking sector. Unlike the other BRICS, and in stark contrast to China’s engagement model, the Indian multinational enterprises that are most active in Africa are private sector ones, with the Indian government off ering strategic support, yet not driving the engagement. In mining and energy, as well as the aforementioned sectors, Indian fi rms have signed large deals in more than 30 African countries – from infra-structure and pharmaceutical projects in Senegal, to power, fi nance and automotive projects in Ghana, and automotive, energy and power infrastructure in Sudan, to the full spec-trum of sectoral engagement in Kenya, South Africa, Nigeria, Zambia, Uganda, Tanzania, and in North Africa.

India’s mineral companies have been proactive in Africa. Vendanta has signed multibillion dollar deals to invest in Liberia’s iron ore, also directing over USD 1 billion into Zambia’s Copperbelt, and hence retains a leading position in Africa’s zinc and cobalt production. Tata too has spent billions in Cote d’Ivoire, Guinea and Liberia acquiring iron ore, and in Angola it has explored diamond deposits. Other Indian enter-prises are acquiring uranium from Namibia, while invest-ments in Mozambique encompass coal, copper and iron ore. State-owned National Mineral Development Corp. (NMDC) has a market capitalisation of over USD 40 billion, and is eager to make inroads across Africa’s commodity sector.

In the oil and gas space, India’s ONGC Videsh Ltd. has made a mark in Sudan where it opened the Khartoum-Port Sudan petroleum pipeline back in 2005; while another major, the Indian Oil Corp. (with nearly USD 63 billion in 2009 revenue), and Reliance Industry at half the size, has pegged the African market as an untapped frontier for exploration. In the power sector, National Thermal Power Corp. (NTPC), India’s largest power company, has secured over 3 million tonnes per annum of liquefi ed natural gas (LNG) in Nigeria in exchange for building power plants. In the telecoms space, a record-breaking USD 10.7 billion acquisition was made by India’s Bharti Airtel (India’s largest domestic telecoms fi rm) of Kuwaiti Zain Africa telecommunications operations, thereby becoming the world’s seventh-largest telecoms company, and giving it a wide pan-African footprint. Subsequent to the deal, Bharti said it would invest an additional USD 1 billion to expand its African operations in 2011.

The objectives of India in Africa are, however, similar to China’s: being highly diversified across all sectors of the African economy, and with a very long investment time-frame. Both countries are similarly seeking to secure energy resources and land for agribusiness and food production, and for India, Sub-Saharan Africa is seen as a new frontier market for its skilled workers, especially in the service sectors where India Inc. holds a global comparative advantage.

South Africa: Gateway to the continent

South Africa has a relative advantage in SSA in sharing a

complimentary economic structure and geographic prox-imity which allows it to tap in to the multilateral trade agreements such as the Southern African Development Community (SADEC) or the Common Market for Eastern and Southern Africa (COMESA), while also playing an active role in the continent’s politics by retaining a major voting share in the African Development Bank, while in its capacity as African Union stalwart, it pushes initiatives such as the New Partnership for African Development (NEPAD).

South Africa’s intra-Africa trade has fluctuated between USD 14 and 15 billion over the past few years, accounting for roughly 13% of its total trade with the continent in 2009, up from a 10% share in 2005 when its intra-African trade with Africa was USD 9.7 billion. Yet this number was down signifi cantly to a decade low in 2010, to only 8.7% of South Africa’s global total - which is striking if one considers South Africa’s total trade grew 41% y-o-y in 2010 to reach new highs, though its intra-Africa share has dwindled. To put this in context, the other BRICS’ trade profi le with Africa is led by India with 6.7% of its global bilateral trade in Africa, Brazil with 6.1%, China’s 4.1% and Russia’s small 1.8%. South Africa’s total bilateral trade contributes roughly 40% of its entire GDP, far more than Brazil’s comparative 14%, Russia’s 30%, and India’s 27%, but still less than China’s 50%.

Roughly one-fi fth of Africa’s active FDI stock sits in South Africa, and nearly 90% of all African portfolio flows go through the Johannesburg Stock Exchange – making South Africa a hugely important fi nancial intermediary and conduit, with the role of deepening growth in Africa’s equity capital and investment. South Africa is also the largest emerging market investor of FDI in Africa, accounting for roughly 17% of Africa’s internal investment stock, and over 70% of intra-Africa fl ows, with USD 2.6 billion per year (which is nearly double China’s offi cial FDI fl ows to Africa). The share of stock by South African enterprises has increased from a mere 5% of Africa’s total to about 22% currently.

While SSA’s total bilateral trade with China is four times the size of South Africa’s share, the latter’s relationship is deemed


Africa's Trade Coupling with BRICS (As % of Country’s

Global Total, 1995 vs. 2005 vs. 2009)


20 The Beijing Axis

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more complimentary in nature, with technologically-intensive products and managerial know-how its greatest exports into the continent. Yet South Africa’s import basket is no diff erent than any other actor. It is dominated by mineral resources and energy-related products, mostly oil (76% of total imports).

A number of SA Inc. players have been able to profi t and establish a solid footprint in Africa. Local telecommunica-tions leader MTN has arguably been one of the only compa-nies from South Africa to break into the diffi cult Francophile African marketplace. In all, MTN has been able to tap into the continent’s half a billion-plus mobile subscriber base, aiding its USD 11 billion 2010 revenues with operations throughout 13 non-domestic African countries.

Financial services group Standard Bank is the continent’s largest banking group by assets, with 2010 revenues of USD 16.6 billion via 17 African markets outside South Africa. Their non-domestic African exposure grew to almost 10% of its portfolio given the stronger growth potential compared to its own saturated home market. Multinational brewer SAB Miller has a strong presence in more than 10 African countries’ beer and beverage industries. Logistics major Imperial Holdings is facilitating capital deployment in huge projects in central, east and southern Africa and amassed nearly USD 6.8 billion of revenues in 2010. Leading South African construction and engineering company Aveng recorded almost USD 4.4 billion in revenues in 2010 with operations in over 15 African countries. On the mining front, South African majors Anglo American, AngloGold Ashanti and De Beers collectively oper-ated mines in 11 African countries, while mid-cap companies such as African Rainbow Minerals (with a vastly diversifi ed resource portfolio, mainly in South Africa) and copper and cobalt miner Metorex (recently acquired by Chinese miner Jinchuan for USD 1.32 billion) are both hungry to expand into Africa, and are already owners of lucrative assets in Namibia, Zambia and the DRC.

Conclusion

Africa’s new coupling with China and the emerging BRICS economies is the driving force of growth on the continent, and those African economies that align with the development of the emerging markets is set to meet great success. Africa itself is increasingly looking to adopt the Developmental State as a growth model, taking from each of the BRICS a tenet that suits their own needs. Yet notably this economic development model is not aligned to a Western mode of free-market capitalism, instead one with both statist and socialist developmental pillars. It is perfectly evident that China and the rest of the BRICS are in Africa to stay, their vested time horizon is seriously long-term, in excess of a hundred years, their ability to stomach risky environments and projects has unleashed dormant or fl ailing assets, opening up new markets and opportunities. Their method of development assistance has circumvented the previous resource curse fears and shown African stakeholders the impact of (espe-cially) Chinese capital and means - building essential infra-structure to become the continent’s most enabling actor of its socioeconomic development.

The BRICS countries, however, still lack a coherent engage-ment strategy in Africa, without which there is great risk in crowding out local investment and sector competition and exacerbating the resource curse that has plagued the conti-nent for so long. The commodity super cycle and changing fortunes of the developing world means a greater depend-ence on food and resource security from Africa. The absence of a specifi c BRICS Way leaves bilateral self-interest of the respective parties in a far greater seat of power, and hence will not translate into clear win-win outcomes for Africans. Unless a synchronised BRICS Way is sought, Africa will again face a ‘race to the bottom’ with inequitable distribution of wealth and opportunities.

The BRICS’ stepped up involvement in Africa has, however, unleashed African competitiveness in the global commerce space, brought to the fore new models for Africa’s continued development, opened up the taps to source fi nancing for projects, and has hence brought an invaluable pool of tech-nical expertise and know-how with it. Practical cooperation with the BRICS partners is bound to address the fragmented lack of regional integration, and given the commodity price booms, a reciprocal spillover eff ect is set to off er Africans a new lease on life.

China's engagement strategy in Africa has paradoxically ramped up interest from other emerging players, and tradi-tional partners alike. Not faltering in the midst of the global fi nancial crisis, Chinese capital and physical eff orts in Africa is constantly being stepped. Whether others are threatened by China gaining increasing market share and favour in Africa, or merely waking up to Africa’s growing status as a resource and consumer destination.... the simple fact is that it is Africa’s time, and more competition and enabling commercial part-nerships will leave Africans with greater hope, economic means of production, and a tangible grasp on prosperity.

Charlie Pistorius, Emerging and Frontier Market Analyst

Charlie Pistorius is a research analyst with Frontier Advisory (Pty) Ltd.


Africa's Trade Coupling with BRICS (Bilateral, USD bn)


The Beijing Axis 21

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Macroeconomy 宏观经济 The China Analyst

22 The Beijing Axis

Macroeconomic Monitor: Chinese Infl ation - One of the Biggest Fears of 2011

Infl ation in China reached a peak of 6.5% in July, before dipping slightly to 6.2% in August - possibly heralding a receding of high infl ation. Yet high infl ation remains a key theme in 2011, and this edition looks at the Chinese government’s monetary and fi scal policy options for fi ghting a scourge for which China's central planners have a legendary fear. By Dirk Kotze

With around six months to go before the official appointment of China’s next generation of leaders, stubbornly high infl ation is high on the national

agenda in 2011. Infl ation has a somewhat mystifi ed and over-blown role in the Chinese body politic. It is an article of faith among many China watchers that infl ation has, throughout Chinese history, been the cause of many a revolution or dynastic change, and that this is what causes the Communist Party’s diligent attention to the issue. It is true that infl a-tion is generally a scourge without which any government can do, but by the history of social upheavals around the world, China’s current infl ation is tame by comparison. More concerning is that, in a world of macroeconomic instability and uncertainty, the persistence of infl ation ties the govern-ment’s hands in employing other policy tools at a time when the latter are sorely needed.

Problematic pork prices

In July, China’s Consumer Price Index (CPI, the main infl ation indicator), reached a high of 6.5% compared to the same time last year (see chart to the right), with the main culprit being rising food prices. Foodstuff s comprise around 30% of China’s National Bureau of Statistics’ (NBS) CPI calcula-tion (see chart on the following page), and the 14.8% rise in the selected basket of food items in July was of particular concern for Chinese policy makers. Firstly, food is a basic staple for survival, so whereas the poor can opt out of buying expensive movie tickets, they cannot opt out of buying food – there is no escape from this type of infl ation. Secondly, as the poor typically buy food with small mark-ups, infl ation is passed on to the poorer consumer, while those retailers selling to the rich can generally absorb infl ation. Food infl a-tion thus amounts to a regressive tax on the entire popula-tion, a development that is all the more concerning in the context of widening income disparities.

As with the infl ationary spike that occurred in China in 2007, the biggest culprit in July’s CPI fi gures was again the price of pork, China’s staple meat. According to the NBS, the July price was 56.7% higher than a year before, contributing by most estimates some 2 to 3 percentage points to CPI. Vegetable prices also saw a spike over the last year, but these were more seasonal, as summer floods severely hampered harvests across southern and eastern China. China also suff ers from structural infl ationary pressures, such as shrinking excess capacity, rising wages brought about by the emergence of the Lewisian Turning Point (the point at which excess cheap

labour from the countryside runs out) and rising electricity prices.

Consumers rarely see inflation in terms of averages, but rather in a biased way through exorbitant and very visible increases in the prices of certain items. As such, consumers of pork (i.e. almost all Chinese people) may feel that the pork price represents all price rises, while the temporary spike in vegetable prices may be seen as everlasting, not only during fl oods. This is the source of widespread scepticism of the offi -cial infl ation fi gures, and the problem of perception is the most serious political fallout of infl ation.

Taking recourse to interest rates

For China's central planners, infl ation presents a similarly restricting ‘no way out’ scenario. China's policy makers had it good for a long time, able to tweak and cajole an obedient economy. In the tumult of the post-2008 world, however, there is considerably less certainty, and even less predict-ability. As a tool for stimulating the economy, the lowering of interest rates must for the time being be put on the back-burner, a reality that dawns at a very inauspicious time, given the expiry of QE2 in the US, the drift in the Euro sovereign debt crisis, and not to mention the ending of China’s own post-crisis stimulus eff orts. Furthermore, the People's Bank of China has not only been restrained from lowering interest rates, but has actually raised them three times already in 2011, and could possibly raise them again before the end

Source: National Bureau of Statistics of China. Note: Previous year = 100.

China Consumer Price Index (Jan 2008–Aug 2011)

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AJJMAMFJ 11

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Features 专题FFFeeeaaatttuuurrreeesss 专题专题专题Macroeconomy 宏观经济 The China Analyst

of the year. Reserve requirement ratios (RRR) have also been

increased nine times since October 2010, without any eff ect

in stalling rising CPI.

Raising the reserve ratio for banks causes the latter to restrict

lending by eff ectively shrinking their loanable funds. This

restricts liquidity in the economy, but one of the major causes

of infl ation in China is the negative real interest rates that

have existed since February 2010. It makes more sense to

invest spare cash than to let it languish in low interest bank

accounts, while persistently rising infl ation increases negative

real interest rates. This in turn causes more liquidity to enter

the economy, thereby raising infl ation and so completing a

vicious circle. This problem can only be addressed by raising

deposit rates through raising interest rates.

Room to maneuvre

The obvious question is how the Chinese government can

maintain robust and stable economic growth with so little

room to manoeuvre on monetary policy. Yet the situation is

not so bleak after all, given that Beijing actually does have

suffi cient fl exibility on fi scal policy. A good example of this

is the building of 10 million subsidised housing units before

the end of the year. Part of the planned building of 36 million

units included in the 12th Five Year Plan (2011-2015), the USD

111 billion budgeted for these fi rst 10 million units is certain

to serve as a major guarantor of economic growth in Q3 2011

and beyond. A tax cut for middle-income earners, eff ective 1

September, is also likely to have a positive eff ect on domestic

consumption. Existing rules on compulsory deposits for resi-

dential purchases (30% deposit for fi rst home, 40% deposit

for second and further homes) could be relaxed, given that

the property bubble is showing signs of defl ating. The value

of homes sold in July was RMB 348.7 billion (USD 65.9 billion),

compared with RMB 499.2 billion in June, a drop of 30%

month-on-month.

In fact, several other macroeconomic realities are also playing

out in favour of China's policy makers. A recent drop in

commodity prices will reduce imported infl ation, while the

ongoing appreciation of the renminbi will reduce infl ationary

pressure from the trade surplus. Nevertheless, adjustments of

controlled prices are usually slow in China, and the National

Development and Reform Commission (NDRC) recently

scoff ed at suggestions that it should lower fuel prices after

a slump in oil prices. The suggested hike in interest rates to

dampen infl ation may also come rather late, as utterances

by offi cials have hinted that the Chinese government aims

to wait out the current unstable global macroeconomic

situation.

Worst threats without, not within

At this point, the gravest threats to China’s internal macro-

economic stability are external. The adoption of a fl awed

‘deal’ by US lawmakers to raise the debt ceiling in exchange

for cuts in expenditure has made a third round of quantitative

easing inevitable. The S&P credit downgrade that followed

the deal will see global markets more reticent to invest in

US debt, leaving the US Treasury no choice but to stimulate

growth by buying its own bonds. This will, as in the case of

QE1 and QE2, cause a rise in commodity prices, a surge of

speculative capital infl ow into China and increased infl a-

tionary pressure. At the same time, if a serious slowdown in

the rest of the world should occur, the Chinese government

now has signifi cantly less leeway to stimulate itself out of a

slump.

Ironically, as the rest of the world looks toward China as a

source of economic stability, the Chinese economy is argu-

ably more vulnerable to the vagaries of economic policy-

making in Europe and the US. In China, infl ation and the

reduced effi cacy of interest rates and other monetary tools

may be a source of frustration to policy makers, but their

hands are by no means tied behind their backs. Yet a collapse

in economic confi dence in developed economies may cause

the Chinese government to have to roll up its sleeves higher,

and that is when Chinese infl ation will become everyone‘s

problem.

Luckily for China, the problem may be receding, as illustrated

by the drop in infl ation in August. The eff orts of the govern-

ment to slow the economy will likely see restrained growth in

prices for the rest of 2011. Yet infl ation has been a recurring

problem over the last few decades in China, and the dip in

August may yet be more of a temporary respite.

Dirk Kotze, Director & General Manager: [email protected]

China CPI Weighting (%, Q1 2011)

The Beijing Axis 23

Source: Nomura; The Beijing Axis Analysis

Tobacco & Liquor3.4%

Fruit & Vegetables

4.7%Household

5.6%

Meat & Poultry7.0%

Clothing8.6%

Healthcare9.6%

Transport & Communication

10.4%

Leisure14.0%

Other Food16.0%

Residence17.4%

News 新闻

24 The Beijing Axis

The China Analyst

Headlines

Business and diplomacy

In April, Spanish Prime Minister Jose Luis Rodriguez Zapatero visited China and announced that Spanish and Chinese enterprises had signed eight deals worth USD 1.44 billion. Agreements mainly cover the fi nance, wind energy, helicopter and valve manufacturing industries, with China also expressing it would continue to buy Spain’s government debt.

On 28 June, trade deals worth USD 4.3 billion, including a USD 2.46 billion agreement on building a clean coal plant between China Energy Conservation and Environmental Protection Group and British Seamwell International Ltd, were signed by Premier Wen Jiaobao and British Prime Minister David Cameron. The two leaders signed 12 agreements in total and expressed their desire to double bilateral trade to USD 100 billion by 2015.

Wen Jiaobao then went on to Germany, where he and German Chancellor Angela Markel signed deals worth more than USD 15 billion, with plans to double bilateral trade to USD 284 billion.

President Hu Jintao had earlier paid a visit to Ukraine in which he and Ukrainian President Viktor Yanukovich signed USD 3.5 billion worth of deals covering the industrial, energy, infrastructure and agricultural sectors.

Creeping infl ation

The most important indicator in China’s economy remains the Consumer Price Index (CPI), which in July reached 6.5%, its highest rate in over three years. In July, China experienced its biggest monthly trade surplus since January 2009, fuelled by record exports of USD 175.1 billion.

Given the large trade surplus China registered in July, China's currency, the renminbi, had continued to scale new highs against the US dollar, moving past 6.4 to the dollar in August for the first time in 17 years. China's currency will likely continue its appreciation into the second half of 2011. The Chinese currency has risen 6.8% against the US dollar since June 2010, when China ended the renminbi's de-facto peg to the dollar.

Large-scale power shortages

China has thus far managed to avoid a severe power crisis, as local governments have been proactive in passing restric-tions to reduce strain on power grid systems due to a steep rise in power demand during the peak summer season, with China thus far witnessing an increase of 12-14% y-o-y. Earlier in the year, offi cials had stated that China was on the verge of its worst electricity shortages in years, a capacity gap of around 30-40 gigawatts, due to soaring coal prices and severe droughts which had signifi cantly reduced China's hydropower capabilities, straining the country’s power grids.

Power shortage fears and related power restrictions are some of the factors which have kept China’s offi cial Purchasing Manager’s Index (PMI) hovering around the 50 mark or on the verge of contraction. In July, the fi gure was 50.7.

China's nouveau riche

In the beginning of June, it was reported that China now boasts more than one million millionaires, moving China into third place among countries worldwide with the most millionaire households, trailing only Japan and the US.

It was also reported in June that China is considering reducing import tariff s on luxury goods, which would further boost consumption among this fast growing segment. China’s middle class ranks also continue to swell with China Mobile, the world's largest mobile carrier, reporting in April that its customer base had exceeded 600 million.

In August, China also became the world’s largest PC market, surpassing the US, with 18.5 million units sold in China in Q2 2011, compared with 17.8 million units sold in the US, further signalling Chinese consumers’ relentless appetite for electronic products.

New construction marvels

In June, Beijing published a timetable for the construction of a new airport, with the inaugural fl ight expected to take off in October 2017. In July, China also opened the Jiaozhou Bay Bridge, the world's longest cross-sea bridge at 42 km, which links China's eastern port city of Qingdao to Huangdao island.

China Business News Highlights

Infl ation has remained a thorny issue in China, even amid intense monetary tightening measures. An uncertain global economic outlook due to the ongoing debt crisis in the Euro zone and the recent down-grade of the US debt rating, along with a large scale power crisis during the busy summer season are threatening to slow China's growth in the second half of 2011. However, looking to diversify its export destinations and build upon its status as the world’s second-largest economy, China has continued to increase its footprint around the world, with Premier Wen Jiabao signing USD 15 billion worth of deals in Germany in June along with an additional USD 4.3 billion worth in the UK.

News 新闻 The China Analyst

Sector News

Energy

In April, a Chinese offi cial acknowledged that China is on the verge of overtaking the US to become the world's biggest consumer of energy. To keep up with demand, China's natural gas imports more than doubled to 6.3 billion cubic meters in Q1 2011 from a year earlier. China also plans to invest RMB 400 billion (USD 62.54 billion) in the construction of four hydroelectric dams to boost the share of non-fossil fuels in national energy consumption. Wind power is also a part of this strategy as China will boost its off shore wind power installed capacity to fi ve gigawatts to form a complete technological and industrial chain.

Chinese companies going global

In April, Australian renewable energy company CBD Energy Ltd announced it had fi nalised a joint venture with China Datang Renewable Power Co., China's second-largest wind-power producer by capacity, and solar equipment maker Baodin Tianwei Baobian Electric Co., to develop approxi-mately USD 6.34 billion worth of wind and solar energy projects in Australia. The new entity, called AusChina Energy Group, seeks to take advantage of equipment and funding from the Chinese enterprises to lower overall project costs, which will enable their wind energy assets to reach grid price parity with coal-fi red power within three years.

In April, Shanghai Electric Group Co. announced it had won a USD 1.1 billion contract to expand a natural gas-fi red power plant currently under construction in Zubaidiyeh, south-east of Baghdad. The company also announced in April that they had signed an agreement with KSK Energy of India to export 125 units of 2 MW wind turbines to India, which marks Shanghai Electric’s fi rst major international wind turbine sale. The company expects India to become its largest export market, absorbing half its exports including wind turbines and thermal power units.

In July, China National Off shore Oil Corp. (CNOOC) agreed to acquire Opti Canada Inc. for USD 2.1 billion in cash and debt, which is expected to strengthen CNOOC's Canadian presence in the oil sands business and increase their reserves.

In July, the Mongolian government announced it had awarded Shenhua Group Corp Ltd, China’s largest mining company measured by output, with a 40% share in devel-oping Mongolia’s Tavan Tolgoi coalfi eld, the world’s largest untapped source of coal. The open-pit mine will help China further diversify its energy resources and meet its growing demand for coking coal.

It was reported in August that China's state-owned Bright Food Group agreed to buy a 75% stake in Australian branded food business Manassen Foods, giving it an enterprise value of USD 516 million. The deal marks Bright Food’s largest over-seas acquisition, as it looks to expand its dairy, sugar, wine, food industry and agriculture businesses overseas.

The Beijing Axis 25

Higher still: The Consumer Price Index reached 6.5% in China in July 2011, the highest rate in over three years (Reuters)

The Industrial & Commercial Bank of China announced in August that it was buying an 80% stake in South Africa's Standard Bank Ltd.’s Argentine unit.

Also in August, Heilongjiang Beidahuang Nongken Group Co., China’s biggest agricultural company, announced its plans to invest USD 1.5 billion to develop farms and expand a port in Argentina’s southern region to help ensure food supplies for 20 years.

FDI in China

In August, Coca-Cola announced plans to invest an additional USD 4 billion in China over the next three years starting from 2012. The additional investment will be used to expand the company's product lines, infrastructure and distribution systems as well as invest in cold drinks equipment.

In July, Nestle, the world’s largest food company, off ered to buy 60% of Chinese candy and pastries group Hsu Fu Chi International for about USD 1.7 billion, a move aimed at helping it achieve its target of 45% of sales coming from emerging markets within 10 years.

Retail

Bailian Group, China's largest retailer, aims to expand its e-commerce platform and open more than 800 outlets across China over the next fi ve years as it seeks to become a Fortune 500 company. Bailian expects to achieve annual revenue of RMB 180 billion (USD 28.14 billion) by 2015.

It was reported in August that Apple is currently in talks with China Mobile, the world’s largest carrier by subscribers, to offi cially introduce the iPhone on the carrier’s home-grown TDSCDMA network. A mutually benefi cial deal would help Apple meet upwardly mobile Chinese consumers’ growing demands for its products, while helping China Mobile attract more 3G subscribers. Although it seems unlikely that Apple will meet its target of opening 25 stores in the mainland by 2012, its four existing stores are the most heavily traffi cked Apple stores in the world.

Trade 贸易

26 The Beijing Axis

The China Analyst

China Trade Roundup: China's Trade in Services

In this edition of China Trade Roundup we review the major trends of China’s trade performance in the fi rst eight months of 2011, and we also take a closer look at the major trends in China's trade in services.

Signs of a Gradual Receding of China's Export Advantage

According to China's General Administration of Customs (GAC), in the fi rst eight months of 2011, China’s total foreign trade in terms of value topped USD 2.35 trillion, which was 25.4% higher year-on-year. Exports were up by 23.6% to USD 1,222.63 billion, while imports increased by 27.5% to USD 1,129.90 billion. China's trade surplus in the fi rst eight months of 2011 decreased 10.8% y-o-y to USD 92.73 billion.

In August, exports and imports collectively reached USD 328.87 billion, up 27.1% year-on-year. Imports were up by 30.2% year-on-year and hit a record monthly high of USD 155.56 billion in the same month, while exports reached USD 173.32 billion, up 24.5%.

In August, China recorded a trade surplus of USD 17.75 billion, down from the USD 31.48 billion posted in July, illustrating that China is seeking more balanced trade.

In the first eight months of 2011, China's ordinary trade reached USD 1,242.69 billion, up 32.1% y-o-y (see chart below). Exports reached USD 592.61 billion, up 30.5% year-on-year, higher than the 23.6% growth rate of total exports, while imports reached USD 650.02 billion, up 33.7% year-on-year, higher than the 27.5% growth rate of total imports.

The trade deficit of ordinary trade reached USD 57.35 billion, up 81.3%. The second-largest segment involved the processing and assembling of imported materials, which totally reached USD 710.84 billion, up 15.8%.

China's Trade by Type (USD bn, Jan-Aug 2011)

China's Total Monthly Imports/Exports (USD bn, 2009-Aug 2011)

China's Monthly Trade y-o-y Growth Rates (%, 2009-Aug 2011)

Source: China Customs; The Beijing Axis Analysis



China's Trade Profi le in Jan-Aug 2011

0

20

40

60

80

100

120

140

160

180

Imports

Exports

AJJMAMFJ 11

DNOSAJJMAMFJ 10

DNOSAJJMAMFJ 09

-50-40-30-20-10

0102030405060708090

Imports

Exports

AJJMAMFJ11

DNOSAJJMAMFJ10

DNOSAJJMAMFJ09

0 200 400 600

Imports

OthersEquipment imported for export processing zonesGoods on lease Contracting projects Equipment or materials invested by foreign-invested enterprisesBorder trade Customs warehousing trade Entrepot trade by bonded area Processing & assembling with materials provided abroadProcessing with imported materials

Ordinary trade

800 600 400 200 0

Exports

0.66%0.03%0.16%0.40%0.51%0.89%3.41%5.14%5.75%

30.22%

52.82%

15.640.673.839.50

11.9420.9780.23

121.01135.23710.84

1,242.69As % of TotalTotal Trade

Trade 贸易 The China Analyst

Rapid Growth, Great Potential

China's services trade has experienced rapid growth since the early 1990s, increasing from just under USD 10 billion in 1990 to USD 286.7 billion in 2009 (see chart below, left). In 2009, China's services trade was the fourth-largest in the world, behind the US (USD 801 billion), Germany (USD 470 billion), and the UK (USD 400 billion). China's services trade grew almost uninterruptedly up to 2009, yet in this year the global fi nancial crisis contributed to a y-o-y decline of 5.8%, the fi rst y-o-y decline since 1998. In 2008, China had experi-enced y-o-y growth of 21.4% in its services trade.

Despite growing rapidly for close to three decades, China's services trade in 2009 still constituted only 11.5% of China's total trade, the lowest of all the major economies and substantially below the world average of 20.4%. In contrast to the manufacturing sector, the service sector is character-ised by high added value, a smaller environmental impact and a higher potential for job creation. Hence the 12th Five Year Plan of 2011-2015 placed direct emphasis on increasing the proportion of the services trade in China's total trade, with a projection for China's services trade to reach USD 600 billion in 2015.

Trends

The chart below illustrates that China has consistently been a net importer of services. A large proportion of China's service imports has been devoted to the transportation industry. In 2009, China had a negative trade balance of USD -29.51 billion for transportation services, followed by USD -10.64 billion for royalties & license fees services, USD -9.71 billion for insurance services, and USD -4.03 billion for travel (see chart below, right). The only industries in which China was a net exporter in 2009 were other business services (USD 5.92 billion), consulting (USD 5.21 billion), construc-tion services (USD 3.60 billion), computer and information services (USD 3.28 billion), and advertising & media (USD 0.36 billion).

While China has consistently had a negative trade balance for transportation services, 2009 was an anomaly for travel services as China had maintained a positive trade balance before 2009. Interestingly, China had a negative trade balance for construction services until 2001, after which China's exports increased substantially to eventually reach USD 5.97 billion in 2008 before receding again to USD 3.60 billion in 2009.

Destinations of Chinese Services and Overseas Employment

As the map above illustrates, four of the fi ve leading coun-tries for Chinese employment outside the mainland are other Asian countries and regions, namely Japan, Singapore, Macao and South Korea. Such employment includes workers seconded for contracted projects or for labour service. Three African countries that are also strong trade and investment partners of China also feature on the list, namely Algeria, Libya and Angola. In the Middle East, Saudi Arabia and the United Arab Emirates also feature in the top ten.

China's Imports and Exports of Services (USD bn, 1999-2009) China's Services Trade by Sector (USD bn, 2009)

Source: MOFCOM; The Beijing Axis Analysis

Source: MOFCOM; The Beijing Axis Analysis. Note: Countries in North, Central and South America do not feature in the top ten.


The Beijing Axis 27

China's Trade in Services

Total Chinese Labourers Employed Outside of Mainland

China, Top Ten Countries/Regions at End-2009

0

20

40

60

80

100

120

140

160

180

Imports

Exports

20092008200720062005200420032002200120001999-20

-10

0

10

20

30

40

Imports y-o-y growth rate, % (rhs)

Exports y-o-y growth rate, % (rhs)

0

10

20

30

40

50

Exports

Imports

Oth

er b

usin

ess

serv

ices

Film

, au

diov

isual

Adve

rtisin

g,

med

ia

Cons

ultin

g

Roya

lties

&Li

cens

e fe

es

Com

pute

r &

Info

rmat

ion

Serv

ices

Finan

cial

Insu

ranc

e

Cons

truct

ion

Com

mun

icatio

n

Trav

el

Tran

spor

tatio

n

-80

-65

-50

-35

-20

-5

10

25

40Exports y-o-y growth rate, % (rhs)

Imports y-o-y growth rate, % (rhs)

Total Chinese labourers employed overseas, end-2009:777,619 (Top ten countries above account for 66.2%)

1

2

35

9

4

7

8 10

Angola31,072

Russia21,457

Japan162,556S.Korea

37,220

Macao49,999

Singapore83,769

Saudi Arabia20,944

Algeria49,631

6

Libya24,155

UAE34,067

The China Analyst Procurement 采购

28 The Beijing Axis

China Sourcing Strategy: A New Approach to Procurement

China's procurement environment is changing under the weight of both old and new trends, and procurement managers worldwide must adapt to a new opportunity landscape. A diff erent approach is now required that takes advantage of China's more sophisticated manufacturing base. By Lilian Luca

For the past 10-15 years, China has been the undisputed darling of purchasing managers worldwide. The goods Chinese suppliers export to the EU and US range from

apparel and electronics to heavy machinery, all of which have grown steadily in the past decades to place China in the number one spot for overall exports volume. Exports of machinery and equipment to developed countries have particularly enjoyed rapid growth over the past ten years (see chart to the right). But since 2006-07, new issues such as an appreciating currency and increasing labour costs have started to impact both the real and perceived competitive-ness of China as a source of manufactured goods. How should a procurement manager re-assess China in the light of these and other changes? How can they assure that competitive advantage is gained by investing in a China sourcing opera-tion? How to benefi t from the long-term trends and evolving landscape of China’s manufacturing base?

Old news: Labour and currency issues

Labour cost increases and rapid rises in input prices, mostly for commodities and energy, were a signifi cant problem for the Chinese manufacturing industry in the years preceding the global fi nancial crisis. The crisis provided a brief respite, with declining exports and capacity utilisation releasing upward pressures on prices and wages. But since early 2010, the trend has resumed, with labour costs increasing by 14.3% in real terms in 2010, and PPI infl ation reaching 5.5%. Not only is labour becoming more expensive, but there is also a shortage of experienced white collar workers, engineers and managers which are increasingly in high demand.

In addition, the Chinese government is allowing the gradual appreciation of the renminbi, with has risen by 21% against the US dollar over the past fi ve years. With pressure from the US and other developed countries for China to further appreciate its currency, this trend is likely to continue for the foreseeable future. Other trends that are not new but continue to plague the Chinese manufacturing base are intellectual property protection; weakly defi ned and poorly implemented quality management processes; governance issues in supplier selection and management; and incon-sistent product quality.

New trends

There are also more recent discernable trends which are negatively aff ecting the pricing and availability of Chinese exports. The government is increasingly implementing trade

restrictions such as export bans or export quotas, and also reducing VAT export rebates and in some cases placing export duties on certain commodity-type products, espe-cially energy-intensive goods or low-value-added processed raw materials.

On the other hand, newly emerging or existing sources of manufactured goods, such as Vietnam, Thailand, Malaysia, Indonesia, and the Philippines, have started to look compara-tively better from a labour cost perspective. Governments across the region have started implementing some of the policies that brought success to China’s leading export manu-facturing industries, and are offering increasingly attrac-tive investment incentives to manufacturers. Procurement managers across the globe are under pressure to evaluate these up and coming low-cost countries, and determine the best approach for avoiding increasing costs in China and taking advantage of these opportunities.

Estimating the extent of change

From our experience in China and our understanding of China’s manufacturing strengths and weaknesses, none of the trends described above are surprising. They all fi t into the mould of the long term income rise of China’s popula-tion, as well as government policy goals of increasing the value added of local manufacturing, reducing the country’s energy and raw materials dependency, and shifting the growth engine of the economy away from export-oriented manufacturing towards a more balanced portfolio of invest-ments, including boosting local consumption and the service

Source: UN Comtrade; The Beijing Axis Analysis

China's Machinery and Equipment Exports, Share in

Developed Countries (USD bn, 2000, 2005, 2010)

0

25

50

75

100

125

150

2000 2005 2010

AustraliaGermany JapanUS

In 2000, machinery and equipment imports from China only accounted for 4% of the US’ total machinery and equipment imports, while in 2010, this figure increased to 26%


exports are forecasted by MEPS to fall by 37% this year, while seamless tube exports will only see a modest 8% growth.

To better understand how to take advantage of this shifting China procurement equation, we need to re-assess the key elements of China’s traditional manufacturing competitive-ness. What began 30 years ago as a cheap labour outsourcing base for unsophisticated goods has changed dramatically to become a continent-scale country of widely varying costs, standards, capabilities and business environments.

In terms of labour costs, cost to company per employee is increasing across China due to uneven supply, high demand, inflationary pressure, organised labour demands, and growing social spending requirements. But Western China still off ers large pockets of very reasonable wages for skilled and semi-skilled labour, and foreign and local manufacturers in China are increasingly taking advantage of this. While it is true that wages are rising quickly in coastal regions, labour productivity gains due to investment and technical upgrades, especially in the machinery industry, have kept pace with the rise in labour costs (see chart to the right).

Chinese exporters of manufactured goods are also taking advantage of the massive local market. The demand for new plants, equipment, infrastructure – often one third to half of world demand – has created signifi cant economies of scale and of scope for most of China's manufacturing sub-indus-tries. The competitiveness and innovation in the construc-tion machinery sector, for example, have primarily been driven by the country’s infrastructure build-up over the past 15-20 years. The same eff ect has benefi ted the producers of steel commodities and structural steel, construction mate-rials, trucks, barges, electrical equipment, power generation equipment, etc. The infrastructure build-up and procurement demand, initially fuelled by foreign-invested companies and with some assistance from government procurement poli-cies, government-approved projects, and the availability and low cost of land and capital, have generated a highly competitive and increasingly sophisticated plethora of local producers that are now dominating the Chinese market and aiming for global expansion.

The size and growth of China’s manufactured goods market is in eff ect supporting a self-sustaining cycle of cut-throat competition that features innovation, capacity expansion and upgrading, and ‘learning by doing’. Suppliers and clusters of suppliers compete with each other but an engineering talent pool and the related innovation usually travels freely and contributes to China’s overall manufacturing competitive-ness. They take advantage of the more than 600,000 students who graduate with engineering degrees every year, excellent transport infrastructure, especially in coastal regions, and generally supportive government policies favouring Chinese high value added manufacturing. As industries across China consolidate and manufacturers grow and become more assertive in their quest for value-added production and profi tability at home and abroad, fi rms sourcing from China must address the following question: How can we protect and consolidate our savings in sourcing capital goods from

China through the establishment of a China procurement operation? At the same time, how can we move to the next level and take full advantage of an increasingly sophisticated manufacturing base?

A new approach: Drawing in the supplier and sourcing

goods of increasing complexity

The structural changes in China’s competitiveness across the sourcing spectrum will require procurement managers to shift some of their commodity spending from China to other LCCs, while increasing their orders of machinery, complex parts and high-value added consumables in China. In our view, the key to taking full advantage of a broader spectrum of cost and feature innovation present in the Chinese market is to move from a customer-supplier model of price-based sourcing with strictly dictated specifi cations and standards to a partnership-based approach where the supplier takes an active part in the overall project and in specifi cations design. This would entail a structured and patient exchange of ideas, a deeper understanding of Chinese manufacturing practices and standards, and above all, an open mind from both the customer and the supplier.

Commercial practices would also require modifications. Contract management with Chinese suppliers generally relies less on contract enforcement and more on relationship management, so many of the standard contractual clauses traditionally used by international procurement teams are either not applicable or not enforceable in China, and thus create unnecessary burdens on suppliers and ultimately increase the total costs of the contract.

Ultimately, a sophisticated foreign buyer of Chinese capital equipment will probably need to adopt a number of Chinese standards, practices and approaches – all without compro-mising quality, environmental and labour protection stand-ards, or good governance.

Source: China National Bureau of Statistics. * Note: Labour productivity=GDP/No. of employees.

Annual Average Wages and Labour Productivity* in China

(USD, 2000-10)

The Beijing Axis 29

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Labour Productivity

Average Wages

20102009200820072006200520042003200220012000

USD 5,823CAGR 16.24%

USD 4,270CAGR 16.95%

30 The Beijing Axis

Beijing Axis Procurement Guidelines for Commercial

Process, Contracting and Contract Management

With the tendering process closed and the winning supplier

identifi ed, the process moves to the next step of negoti-

ating and signing the supply agreement, and onwards to the

contract management stage.

Commercial process: Ideally, the supplier has received a draft

of the commercial terms and conditions as part of the RFP and

has either agreed or qualifi ed most of the clauses in the tender

documents. However, many Chinese suppliers will not have

read the commercial terms carefully until they are awarded.

At this stage Beijing Axis Procurement will not only assist

the buyer in negotiating specifi c clauses that were unclear

or not in agreement, but also read out the commercial terms

with the suppliers to avoid misunderstanding. Examples can

include:

• Finalising scope of supply including outsourced parts

• Supplier responsibilities regarding delivery point and

performance undertakings of goods

• Insurance

• Penalties

• Payment terms

• Bank guarantees

• Warranty

• Additional services during the commissioning stage

Contracting: At this stage Beijing Axis Procurement will assist

the buyer and the supplier with drafting and modifying the

English or bilingual contract. It is important to note that

lengthy, wordy contracts will unnecessarily delay the signing

process while adding little in terms of protecting the buyer, so

we generally advise buyers on removing from standard terms

and conditions items that are less relevant or not enforceable

in a Chinese business context. For some large Chinese manu-

facturers, design and manufacturing departments might only

follow what has been agreed in the contract instead of what

has been said before the signing due to gaps in companies’

internal coordination. To avoid this risk, suffi cient technical

requirements should be included in the contract.

Contract management: After the contract is signed, Beijing Axis

Procurement will put in place a project management team

assisted by required processes and an IT platform to monitor

the manufacturing schedule and inspection and testing

plan, coordinate and communicate with all involved parties,

communicate and register all modifi cations to the contract,

and notify the parties about any delays or non-conformances.

Beijing Axis Procurement will also visit the suppliers regularly

and submit progress reports frequently to the buyer.

By Beijing Axis Procurement

How to Procure from China #8 - Commercial Process, Contracting and Contract Management

The Beijing Axis Procurement Process Flow encapsulates the full extent of project engagement, from

the point of fi rst enquiry to the range of services in the solution process and benefi ts provided for the

customer. In this edition we focus more closely on step 8 of the Beijing Axis Procurement Process Flow:

Commercial Process, Contracting and Contract Management.


The Process Flow and Service Delivery Platform of Beijing Axis Procurement

Procurement

Needs Analysis &

China Procurement

Competitive

Analysis

Commercial

Process,

Contracting

and Contract

Management

Transaction

Monitoring

Systematic Industry

Search & Supplier

Identifi cation

Tender Evaluation

Quality

Management (QA/

QC), Expediting

and Third-Party

Management

Supplier Evaluation,

Application of

high-level fi lters

Site Inspection,

Sample Testing

and Standards

Logistics

Management

Supplier

Pre-Qualifi cation,

Due Diligence &

Final Selection

Supplier

Engagement, RFQ &

Tendering (SOI, RFP)

Coordination &

Assistance On Site

(Material Mgmt,

Commissioning,

etc.)

1

8

9

2

7

10 11 12

3

6

4

5

StrategicSourcing Analysis

Initial Scoping, Supplier

Evaluation, Due Diligence

& Final Selection

Engagement

Supplier Engagement,

Site Inspections, Sample

Testing, Contracting

Process

Transaction Monitoring,

QA, Expediting, Third-

Party Mgmt & Logistics

Supply Chain Mgmt & Support

• Overall Project Management

• Holistic Risk Management

• Strategic Relationship Management

The China Analyst Investment 投资

32 The Beijing Axis

China Capital: Inbound/Outbound FDI & Financial Markets

In H1 2011, FDI to China amounted to USD 60.9 bn, up by 18.4% year-on-year. This increase was mainly driven by investment from other Asian countries, which was up by 23.9%, while investment from the United States was down by 22.3%. China’s outbound investment in this period reached USD 23.9 bn, registering 34% growth year-on-year. Signifi cant investments occurred both in the Resources and Non-resources sectors. By Beijing Axis Capital

Foreign Direct Investment in China

Summary

• In H1 2011, Foreign Direct Investment (FDI) in China amounted to USD 60.9 bn, up by 18.4% y-o-y

• In this period, wholly foreign-owned enterprises were the major vehicles of investment in China, accounting for around 80% both of the approved FDI cases and the total actually utilised capital

• In H1 2011, FDI in China primarily originated from other Asian countries/regions, accounting for more than 85% of the total investment. Hong Kong, as the main bridge for inbound investment to mainland China, is still the largest source of capital, contributing USD 40 bn or 65.7% of total FDI

• Besides Hong Kong, Taiwan continues to be a notable source of FDI to mainland China, contributing USD 3.79 bn. Other top investors to China in this period included Japan (USD 3.51 bn), Singapore (USD 3.20 bn), and the US (USD 1.68 bn)

Notable FDI Deals in China in H1 2011

• In January, China Timber Resources Group Ltd., a Hong Kong-based timber company, reportedly agreed to acquire a 66% stake in Zhunxing Heavy Haul Expressway Co. Ltd., a toll expressway operator based in Inner Mongolia Autonomous Region, for USD 455 mn

• In February, Softbank Corp., a Tokyo-based company engaged in telecommunications and e-commerce, acquired a 35% stake in China’s SynaCast Corporation, or PPLive, a Shanghai-based online video media company

and the operator of a leading online TV service (PPTV), for USD 244 mn

• In February, Lyon-based SEB Group, the world’s largest manufacturer of countertop kitchen appliances, report-edly agreed to raise its stake in Zhejiang Supor Co., a Hangzhou-based manufacturer of cookware and small electric housewares, from 51.31% to 71.31%, for USD 526 mn

• In March, Rhodia SA, the French specialty chemical manufacturer, completed its acquisition of a chemical facility owned by Jiangsu province-based Suzhou HiPro Polymers Company for USD 489 mn


Monthly Inbound FDI in China and y-o-y Growth Rate (rhs) (USD bn, Jul 2010-Jun 2011)

Annual Inbound FDI in China (USD bn, 2003-H1 2011) FDI in China by Source Country/Region (H1 2011)

Source: MOFCOM; The Beijing Axis Analysis Source: MOFCOM; The Beijing Axis Analysis

0

3

6

9

12

15

0

5

10

15

20

25

30

35

40

JunMayAprMarFebJan DecNovOctSepAugJul

OthersUSD 5.08 bn

Nertherlands USD 0.35 bnFrance USD 0.42 bn

Germany USD 0.68 bnUK USD 0.92 bn

S. Korea USD 1.27 bnUS USD 1.68 bn

Singarpore USD 3.2 bn

Japan USD USD 3.51 bn

Taiwan, PRCUSD 3.97 bn

Hong KongUSD 40 bn

0

10

20

30

40

50

60

70

80

90

100

110

120

H1 2011

20102009200820072006200520042003


• Novartis AG, the Swiss healthcare giant, announced its acquisition of an 85% stake in privately-held Zhejiang Tianyuan Bio-Pharmaceutical Co. Ltd., a Zhejiang prov-ince-based vaccines company. Although fi nal fi nancial details were not disclosed, it was valued at more than USD 100 mn

• In April, Win Hanverky sold its major assets to Nike Inc.'s wholly-owned subsidiaries, Nike Global Services Pte. Limited and Umbro International Limited, for USD 214.5 mn

• In June, the Dutch electronics giant Royal Philips Electronics Inc. was reportedly in advanced talks with Shanghai POVOS Enterprise Co. Ltd. for acquiring the latter for USD 386 mn

Chinese Outbound Foreign Direct Investment

Summary

• In H1 2011, China’s OFDI amounted to USD 23.9 bn, which was 34% higher y-o-y

• In H1 2011, Beijing Axis Capital followed 75 overseas investment activities by Chinese companies (including ongoing transactions and concluded deals of previously announced transactions)

• In terms of numbers of deals, Europe rose to become the most attractive region for Chinese investors with 24 deals. North America slipped to second place with 17 deals while it ranked first in H2 2010. China had 14 investments in other Asian countries, while the commonly perceived Chinese OFDI destinations, Africa and Australia, accounted for a much smaller portion with 5 and 9 investments, respectively

• In terms of deal size, Australia and Europe saw the two largest deals in both the Energy & Resources sector and Non-resources sector, excluding fi nancial non-disclosed deals. There were also mega deals (more than USD 1 billion in terms of deal value) in Asia, Africa, and Latin America

• Non-resources deals accounted for nearly 61% in terms of the number of deals. Manufacturing, Agriculture, Technology were among the most important sectors

Notable Chinese OFDI Deals in H1 2011

• In January, China National Bluestar Group signed an agreement with Norway-based energy company Elkem AS to acquire Elkem’s silicon operation for USD 2 bn

• In February, China National Off shore Oil Corporation (CNOOC) agreed to buy 33.3% of an oil and gas project owned by US-based Chesapeake Energy Corporation for USD 570 mn

• In March, Bright Food, China’s largest food company, made an off er of USD 2.3 bn to purchase 50% of Yoplait, a French food company

• In April, the Shanghai based Shanghai Pengxin Group Ltd. agreed to pay USD 158 mn to buy 16 dairy and dry stock farms in New Zealand’s North Island

• In May, Baiyin Non-ferrous Group, a mining subsidiary of China’s CITIC Group, together with the China-Africa Development Fund (CADFund), agreed to acquire a 60% to 75% interest of Australia-based Company Gold One

International for USD 651 mn • In May, China National Chemical Corporation (CNCC)

concluded an agreement with MA Industries, an Israeli farm chemical company, to buy a 60% interest in MA for USD 1.44 bn

• In June, v Securities, China’s biggest stockbroker and one of its leading investment banks, agreed to pay USD 374 mn to acquire a 19.9% stake in CLSA, a Hong Kong-based brokerage and investment group, and its European counterpart, Credit Agricole Cheuvreux

China Financial Markets

China’s Stock Markets in H1 2011

• Despite an initial drop at the beginning of the year, China’s stock markets surged in Q1 2011. However, they have slumped signifi cantly from mid-April to mid-September, although there was a short period of recovery from mid-June to mid-July

• The Growth Enterprise Market declined to its lowest point ever, around 790, by the end of H1 2011, yet it recovered


Source: Shanghai Stock Exchange

China's Annual Outbound FDI and y-o-y Growth Rate (rhs)

(USD bn, 2004-H1 2011)

Shanghai Stock Exchange Index (Jan-Sep 2011)

The Beijing Axis 33

0

10

20

30

40

50

60

0

30

60

90

120

150

H1 20112010200920082007200620052004

2,000

2,250

2,500

2,750

3,000

131Sep

151Aug

151Jul

151 Jun

163 May'

151 Apr

151 Mar

151 Feb

144 Jan


34 The Beijing Axis

and fl uctuated around 900 from July to mid-September • China’s main exchange, the Shanghai Stock Exchange,

declined from 2,852 to 2,677 in January, followed by a 14% rise to 3,057 in the middle of April. However, since then, it has dropped to 2,491 as of mid-September, repre-senting an 18.5% decline

• The Shenzhen Stock Exchange Index decreased from 12,714 at the beginning of the year to 11,466 by the end of January, a near 10% decline. It then climbed to 13,158 in March and stayed relatively fl at until the middle of April, followed by a near 18% decrease to 10,775 by late June. July saw a rise to a high of 12,438 on the 11th, but by mid-September the Index had declined to 10,775

• The Growth Enterprise Market Index decreased from 1,155 to 978 at the end of January and recovered to 1,117 in February. However, since then, it declined to 792 by late June, the lowest point since its launching in Shenzhen, representing a 31% slump. It then recovered to about 900 since July and has fl uctuated around that level till mid-September 2011

• Under the current market circumstances, there are few sectors outperforming the market. The Coal & Oil, Non-ferrous, and Ferrous sectors complied with the general market, surging in Q1 yet slumping since then

• Despite the generally bearish market this year, until mid-September 2011, the Food & Beverage and End Fund sectors have experienced a steady period without strong fl uctuations

China OFDI Approval Processes and the Emer-

gence of Private Chinese Investors

In order to continue to raise its standing on the global stage in terms of economic development, the Chinese govern-ment has been encouraging domestic enterprises to expand overseas, especially in the sectors of Energy, Resources, Manufacturing, and High Technology. A visible current trend in China is for national authorities responsible for

the approval of outbound investment to pass down more approval authority to local governments in order to better facilitate the approval process for overseas investments. Yet despite the relaxation of the approval authority, Chinese companies still need to go through the following procedures before implementing their outbound investments:

China OFDI Approval Processes

• Approval of the State-Owned Assets Supervision and Administration Commission (SASAC): State-owned enter-prises require approval from SASAC, while local SOEs require approval from provincial or municipal SASAC. Private companies are not subject to approval from SASAC

• Submission of a report to the State Administration of Foreign Exchange (SAFE) or its subsidiaries: Chinese companies need to report and explain the source of investment capital to SAFE for further approval

• Approval of National Development and Reform Commission (NDRC): Resources-related investment above USD 300 mn, or Non-resources related investment above USD 100 mn needs to be approved by the NDRC. Investments under the above mentioned values are to be approved by local governments

• Approval of Ministry of Commerce: Chinese companies are required to fi le their application to MOFCOM if the investment is valued above USD 100 mn or the invest-ment fl ows to countries that have not established diplo-matic relations with China

• Other institutes, including the Ministry of Industry and Information Technology, the Banking Regulatory Commission, the Insurance Regulatory Commission, and the Securities Regulatory Commission might also partici-pate in the approval process. For example, the Securities Regulatory Commission monitors the corporate restruc-turing and new placement of listed companies

SOEs vs. Private Investors

• It is notable that SOEs and private investors in China have diff erent strategic considerations for overseas invest-ments. Although SOEs continue to dominate outward investment by volume, private investors have emerged to take a notable share in terms of the large investments

• SOEs focus more on scale and long-term strategic consid-erations, and as a result they emphasise the overall eval-uation of overseas investment opportunities

• However, recently the Chinese government has strength-ened the risk-control of SOEs due to increasing cases of fi nancial losses incurred in China’s overseas investments

• On the other hand, due to more restricted access to fi nancing, private investors regard short to medium term profi t potential and cash fl ow as more important. In addi-tion, private companies are always seen to cooperate with SOEs, which in the resources sector means off -take and further development of the asset

• While SOEs were the only vehicle of large-scale outbound investments in 2005, private investors have emerged to take a share in large-scale investments since then. In H1 2011, large-scale investments conducted by private investors accounted for 11% of the total large-scale investment volume

Source: Shenzhen Stock Exchange

Shenzhen Stock Exchange Index (Jan-Sep 2011)

8,000

9,000

10,000

11,000

12,000

13,000

14,000

131Sep

151Aug

151Jul

151 Jun

163 May

151 Apr

151 Mar

151 Feb

144 Jan


Source: Various media; Company reports; The Beijing Axis Analysis

The Beijing Axis 35

Major Chinese Outbound Investment Activity, January-August 2011

# Date Target / New Company Target

Country

Acquirer / Investor

(English Name)

Acquirer / Investor

(Chinese Name)

Industry Value Stake Status

1 Aug-11 Carrier Corporation of UTC Group Brazil, Argentina, Chile

Midea Group Manufacturing USD 223.3 mn 51.00% Ongoing

2 Aug-11 Standard Bank's Argentina operations Argentina ICBC Financial USD 600 mn n/a Ongoing

3 Aug-11 GE SeaCo. America Hainan Airlines Leasing USD 1 bn n/a Ongoing

4 Aug-11 Syntech Resources Pty & Syntech Holdings II Pty

Australia Yanzhou Coal Mining Co Resources: Coal USD 203 mn n/a Ongoing

5 Jul-11 OPTI Canada Canada CNOOC Resources: Oil & Gas USD 2.1 bn n/a Ongoing

6 Jul-11 Sundance Resources Australia Hanlong Group Resources: Iron Ore USD 1.3 bn 81.4% (already held 18.6%)

Ongoing

7 Jul-11 Panasonic Corp Japan Haier Group Manufacturing USD 128.3 mn 100.00% Ongoing

8 Jul-11 Tully Sugar Australia COFCO Food USD 147 mn 99.00% Concluded

9 Jul-11 Bannerman Resources Australia Hanlong Group Resources: Uranium USD 155 mn 100.00% Ongoing

10 Jul-11 Metorex South Africa Jinchuan Resources: Copper USD 1.32 bn 100.00% Ongoing

11 Jul-11 INEOS Refi nery I Ltd. & INEOS Refi nery II Ltd.

UK PetroChina Resources: Oil & Gas USD 1.015 50.1% and 49.9%

Concluded

12 Jun-11 Malaysian Lion Group's Amsteel Mills Malaysia Baosteel Manufacturing USD 1 bn n/a Ongoing

13 Jun-11 Sberbank Russia China Investment Corp. Financial USD 200 bn 5.00% Ongoing

14 Jun-11 CLSA Hong Kong CITIC Securities Financial USD 374 mn 19.90% Ongoing

15 Jun-11 Hyproca Dairy Netherlands Ausnutria Dairy Agricultural n/a 51.00% Ongoing

16 Jun-11 Aurora Holdings Limited South Africa Two mining companies Resources: Gold USD 100 mn 65.00% Ongoing

17 May-11 CP Vietnam Livestock Corporation Vietnam CP Pokphand Agricultural n/a 70.82% Ongoing

18 May-11 Folli Follie Greece Fosun Jewelry retail USD 123.2 mn 9.50% Ongoing

19 May-11 All Wealthy Capital Ltd British Virgin Islands

Nanjing Steel Resources: Iron ore USD 50 mn 10.00% Concluded

20 May-11 Gold One International Australia Baiyin Non-Ferrous & CADFund

Resources: Gold & uranium

USD 651 mn 60-75% Ongoing

21 May-11 Spyker Netherlands Pangda Automobile Trade Automobile USD 92 mn 24.00% Ongoing

22 May-11 NH Hotel Spain Hainan Airlines Hotel USD 617 mn 20.00% Ongoing

23 May-11 Whitehaven Coal Australia Yanzhou Coal Mining Resources: Coal USD 3.7 bn n/a Ongoing

24 May-11 The Rank Group Plc Europe Guoco Group IT USD 110 mn 40.84% Ongoing

25 May-11 Divalane Russia Yonghui Group Resources: Coal USD 90 mn 60.00% Ongoing

26 May-11 Huta Stalowa Wola Poland Guangxi Liugong Machinery Machinery USD 94 mn n/a Ongoing

27 May-11 MA Industries Israel CNCC Farm Chemicals USD 1.43 bn 60.00% Ongoing

28 May-11 Tonkolili Iron Ore Project Sierra Leone Shandong Iron & Steel Resources: Iron ore USD 1.5 bn 25.00% Ongoing

29 May-11 Noront Resources Ltd. Canada Baosteel Resources: Chrome & nickle

USD 30.7 mn 9.90% Ongoing

30 Apr-11 Chad International Airport Chad China CAMC Engineering Construction USD 1 bn n/a Ongoing

31 Apr-11 Origin ConocoPhilips LNG Projects Australia Sinopec Resources: Oil & gas n/a 15.00% Ongoing

32 Apr-11 Trenaco SA Switzerland Siberian Mining Resources: Coal USD 15 mn 70.00% Ongoing

33 Apr-11 MagIndustries Canada Evergreen Industries Group Chemical USD 120.3 mn n/a Ongoing

34 Apr-11 An Industry Park of Agriculture Brazil Red Dragon Company Agriculture USD 200 mn n/a Ongoing

35 Apr-11 Patuca River Hydroelectric Power Plant Honduras China’s Sinohydro Energy USD 50.5 mn n/a Ongoing

36 Apr-11 Reta Region Wind Power Argentina XCMC China Energy USD 200 mn n/a Concluded37 Apr-11 Bank of East Asia's U.S. Unit US ICBC Financial USD 140 mn 80.00% Ongoing

38 Apr-11 16 dairy and dry stock farms New Zealand Shanghai Pengxin Group Agriculture USD 158 mn 100.00% Ongoing

39 Mar-11 AES-VCM Mong Duong Power Co. Ltd Vietnam CIC Power n/a 19.00% Concluded

40 Mar-11 Jinduicheng Xise Co. Ltd Canada Fosun Resources: Zinc & nickel

USD 45 mn 12.00% Ongoing

41 Mar-11 Yoplait France Bright Food Food USD 2.3 bn 50.00% Ongoing

42 Feb-11 WEIGL Sweden Beijing Automotive Industry Automobile USD 45 mn 100.00% Concluded

43 Feb-11 USS Maching Center UK Ansteel and Stemcor Steel n/a 66.66% Ongoing

44 Feb-11 Century Iron Mines Corp Canada Wuhan Steel Resources: Iron ore USD 58 mn 25.00% Ongoing

45 Feb-11 Emir Oil LLC Kazakhstan MIE Holdings Resources: Oil & gas USD 170 mn 100.00% Ongoing

46 Feb-11 Riot Games US Tencent Technology IT USD 400 mn n/a Concluded

47 Jan-11 Chesapeake Energy Corporation US CNOOC Resources: Oil & gas USD 570 mn 33.30% Ongoing

48 Jan-11 Liquefi ed Natural Gas Ltd. Australia CHCEC Construction n/a 19.90% Ongoing

49 Jan-11 KHD Humboldt Wedag International AG Germany CATIC Beijing Machinery USD 60 mn 20.00% Ongoing

50 Jan-11 BorsodChem Zrt. Hungary Wanhua Industrial Group Chemical USD 1.69 bn 58.00% Concluded

51 Jan-11 Adriana Resources's Lac Otelnuk Project Canada WISCO Resources: Iron ore USD 120.7 mn 60.00% Ongoing

52 Jan-11 Aurobindo (Datong) Bio Pharma India CNPG Medical n/a 80.50% Concluded

53 Jan-11 Elkem AS Norway China National BlueStar Energy USD 2 bn 100.00% Ongoing

54 Jan-11 Easy Time Trading (Ratio Knitting) Hong Kong China Post E-commerce Textile USD 55 mn 100.00% Concluded

55 Jan-11 Sheraton Universal Hotel US Shenzhen New World Real estate USD 90 mn 100.00% Concluded

The China Analyst Strategy 战略 The China Analyst Strategy 战略

36 The Beijing Axis The Beijing Axis 37

Mapping China in the Global Contracting Industry

A map of the global contracting industry illustrates the rapid pace of growth of construction activity on the African continent, the region where the contracting industry had the highest CAGR between 2004 and 2009 (32%). Yet Africa's growth is closely followed by the Middle East (25%) and Latin America (24%). In these developing regions of the world, the largest revenues are being earned by Chinese contractors. Thus in the fastest-growing regions, Chinese contractors are eff ectively leveraging their low cost advantage to capture market share. In the developed regions of Canada, the US and Europe, however, the Chinese presence has grown only marginally. By The Beijing Axis KM & Research Unit

Source: ENR. Notes: *Compound Annual Growth Rate. †Refers to the Top 225 Global Contractors as identifi ed annually by Engineering News-Record.

2004 2009

4.1%

2004 2009

10.8%

16.8%

24.9%

2004 2009

14.7%

36.6%

2004 2009

1.6%

5%

2004 2009

0%0.4%

2004 2009

25 77

66101

11%

25%

30

73

19%

14

57

32%

19

27

24%

23

34

9%

513

22%

Total four Chinese companies

in 2009

Total 20 Chinese companies

in 2009


in 2009

0.8% 0.5%2004 2009

Total four Chinese companies

in 2009


in 2009

Total Revenue CAGR*, 2004 to 2009

Total Revenue of ENR 225†, USD bn Chinese Companies’ Share of Total Revenue in Region

20092004

LEGENDTotal Revenue 2004

Total Revenue 2009

Canada

US

Latin America

Africa

Middle East

Asia

Europe

1.6%0.4%

2004 2009Total 35 Chinese companies

in 2009

Total 46

Chinese companies in 2009

Fasted growing markets with with fastest growing Chinese presence

Strategy 战略SSSSSttttrraatttteeggyy 战略战略战略战略战略Strategy 战略 The China Analyst

38 The Beijing Axis

CCC: China Inc.'s Leading EPC Contractor

Now boasting one-sixth of global construction industry market share, Chinese contractors and design fi rms have become infl uential players and often the benchmark in the international construction market, whether in terms of quality, price or effi ciency. CCC, arguably the most internationalised of the Chinese contractors, is probably China's most internationalised contactor. Here we take a closer look at CCC’s competitive advantages and growth strategy. By Javier Cuñat

A total of 50 Chinese international contractors made it into the 2011 edition of ENR’s (Engineering News Record) ‘Top 225 International Contractors’ list. In other

words, roughly one out of every fi ve of the most globally competitive contractors hails from mainland China. Despite the global fi nancial crisis, Chinese contractors are progres-sively increasing their global market share, especially in the emerging markets of Asia and Africa. The global fi nancial crisis, in fact, gave Chinese contractors an opportunity to enhance their international profi les by leveraging their ready access to project fi nancing.

Communications Construction Co Ltd. (CCC), incorporated in 2006, is the fourth-largest contractor in China in terms of revenue, and is principally engaged in the construction of transportation infrastructure and port machinery manu-facturing. It is the country's largest port construction and design entity, as well as the top dredging company. It is also a leading manager of road and bridge projects in China and a global champion in crane manufacturing through its two subsidiaries, SPMP, and A-share-listed ZPMC. As the most internationalised of Chinese international contractors, CCC is not only a well-recognised brand in China but also over-seas, where it has executed projects of increasing scale and complexity.

How has CCC achieved this scale and capabilities in such a short period of time? What have been their competitive advantages and their growth strategy? What does it mean for international contractors facing increased competition from China at home and in other markets?

Borne of reform

The establishment of CCC was a milestone in China’s reform of its state owned enterprises (SOEs) and the result of SASAC's (the State-owned Assets Supervision and Administration Commission of the State Council) strategic planning. After China’s accession to the WTO in 2001, international contrac-tors started taking a more active interest in China’s fast growing economy as a target market. This presented substan-tial challenges to Chinese contractors, as China suff ered from a highly fragmented industry landscape; competition was already fi erce at home and relied on less-advanced technolo-gies. In order to improve industry effi ciency and productivity, SASAC urged a number of strategic mergers and acquisitions with the goal of establishing some 30-50 large SOEs capable of competing against their international peers. This marked the beginning of CCC.

China Communications Construction Group (CCCG), the parent company of CCC, was established in late 2005 with the merger of CHEC (China Harbour Engineering Company) and CRBC (China Road and Bridge Corporation). The two companies, previously owned by SASAC, were at one point the leading transportation-related infrastructure design and construction groups in China, each with more than 50 years of operating history. CHEC was then one of China’s leading SOEs focused on dredging, design and construction of ports and port machinery manufacturing, while CRBC was a leading SOE involved in the design and construction of roads and bridges. Further restructuring took place in 2006 when CCC was established as a joint-stock company. As a result, CCCG became the immediate parent of CCC and all core busi-ness units were transferred to CCC. This was a very strategic move as it allowed CCC to raise funds for future international expansion.

Since both CHEC and CRBC belonged to the Ministry of Communications and their business and management styles were similar, their merger was successful. This enabled them to develop a certain synergy with the consolidated entity dramatically increasing its competitiveness in bidding for larger and more complex projects. This in turn improved the overall operating effi ciency and profi tability of the company.

After restructuring, SASAC achieved its main objective: the establishment of a full-service, vertically-integrated trans-portation infrastructure construction group capable of fulfi lling monopolistic positions in some sectors domesti-cally. The combined strength of both companies signalled a breakthrough in China’s drive to create competitive ‘global champions’. Before the merger, CHEC and CRBC were ranked 31st and 48th, respectively, among the world’s largest global contractors, while after the merger, CCCG catapulted to 20th overall. CCC is now China’s largest international contractor, with over USD 7 billion in international revenue.

A vertically integrated business model

A vertically integrated business model is CCC's core competi-tive advantage. Today, CCC is active in infrastructure construc-tion, infrastructure design, dredging and port machinery manufacturing, and relies on its in-house capabilities to execute EPC projects, with very little sub-contracting. This approach has enabled CCC to allocate resources more effi -ciently, reduce costs over time, achieve economies of scale and most importantly, increase its competitive profi le and market share in the domestic and foreign markets.

Strategy 战略SSSSSttttrraatttteeggyy 战略战略战略战略战略Strategy 战略 The China Analyst

As China's largest port constructor, CCC enjoys synergistic benefi ts though its dredging operations, which are usually complementary services to port construction projects. In addition, as one of the China’s leading road and bridge construction entities, CCC is able to build roads and bridges that connect port areas with inland cities and provinces. Similarly, as China’s industry leader for port, road and bridge design, CCC’s infrastructure design capabilities are comple-mented by its construction business, enabling the company to construct high-end projects of increasing scale and complexity. Because of its superior operating scale, CCC has more pricing fl exibility, increasing its average profi t margins.

Through its two port machinery manufacturing subsidiaries, moreover, CCC can also undertake all the procurement for a project, which provides a very unique competitive and price advantage over its competitors. Shanghai Zhenhua Port Machinery Co. Ltd (ZPMC) and Shanghai Port Machinery Plant Co. Ltd (SPMP), both owned by CCC, have transformed the group into a world leader in its areas of business. Individually, Shanghai-listed ZPMC is the world's largest container crane manufacturer with a global market share of about 76% in terms of units ordered, according to 2010 fi gures.

In recent years CCC has seen further integration across its value chain, mainly through inorganic growth, and is moving into new business areas and accessing new complemen-tary markets. CCC is now also engaged in road and bridge construction machinery manufacturing, logistics services and trading of construction-related materials and equip-ment, among other areas. The company’s investment busi-ness is gradually becoming a new source of growth.

Finally, the most signifi cant factor in CCC’s overall competi-tiveness is the use of China’s state-backed banking institu-tions, the so-called ‘EPC+F’ business model. CCC has direct access to some of China’s fi nancial institutions, such as Exim Bank or Sinosure, that provide discounted loans and sources of fi nance for CCC’s overseas projects. In fact, this is one of the main challenges that international contractors face when bidding for international projects.

Examples of large and complex projects that CCC is currently conducting overseas include the Island and Tunnel of the Hong Kong-Zhuhai-Macau Bridge, Phase II of Sri Lanka Hambantota Port, Cameroon Kribi Deepwater Port, and Serbia Belgrade Zemun-Borca Bridge. In 2010, new contracts or overseas infra-structure projects accounted for about 19% of CCC's total value of new infrastructure construction contracts.

Signifi cance for international contractors

So what are the strategies that foreign companies can formu-late and implement in order to counter such core competitive advantages? The case of CCC has illustrated the following:

• Competing against Chinese international contrac-tors in bidding for international projects may work in the short term in more developed markets but the long term view is uncertain. Although they often lack specifi c local knowledge and face local protectionism hurdles, they are quickly catching up with interna-tional best practices, regularly hiring local experts to overcome these challenges

• Engaging with China is becoming a matter of survival. The trend of competitive Chinese enterprises expanding into emerging markets guarantees this

• It is vital to understand the past, present and future of China’s contractors. Core advantages and practices will determine the success of foreign players in global construction markets in the long run. They must adapt to China, as China has already adapted to them

• Corporate partnership is key, but meaningless without risk mitigation, fl exibility and a proper China strategy

In short, international contractors must develop creative China-engagement strategies to adapt to a shifting competi-tive landscape. What added value can international contrac-tors off er over their Chinese counterparts and how can these be sustained in the long run? International contractors must answer such critical questions today so that they can remain competitive tomorrow.

Javier Cuñat, General Manager: Beijing Axis Strategy

[email protected]

The Beijing Axis 39

CCC Revenue by Region (USD bn, 2006 vs. 2010) CCC Revenue by Business Unit (%, 2006 vs. 2010)

Source: CCC Annual Reports; The Beijing Axis Analysis. Note: China does not include Hong Kong and Macao.

Source: CCC Annual Reports; The Beijing Axis Analysis

0

10

20

30

40

50Overseas China

20102006

CAGR = 29.3%

USD 14.4 bn

USD 40.3 bn

CCC relied on China’s infrastructure boom to weather the global financial crisis

USD 14.4 bn USD 40.3 bn

0

20%

40%

60%

80%

100%

Other

Port Machinery Manufacturing

Dredging

Infrastructure Design

Infrastructure Construction

20102006

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The Beijing Axis 41

Regional Overview: BRIICS

Brazil, India, Indonesia and China going strong; Russia and South Africa still lagging behind

• With the economy of Brazil showing signs of slowing after expanding in 2010 at its fastest pace in 24 years, President Dilma Rousseff must manage expectations in the years ahead as Brazil tries to break through bottlenecks and upgrade its infrastructure ahead of the 2014 World Cup and 2016 Olympic Games

• The economy of Russia grew less than expected in H1 2011 (even amid high oil prices) due to the eff ects of more than USD 30 bn in capital fl ight, largely attributed to uncertainties surrounding the upcoming 2012 presidential elections

• Exports from India have been steadily growing and are on course to reach the government’s target of USD 300 bn for the current fi scal year, driven by increased government support to exporters to tap into new markets in Latin America and Africa. However, local reforms aimed at empowering Indian industries to become more competitive over the long term along with monetary tightening measures are threatening to slow growth moving forward

• The GDP of Indonesia is projected to grow nearly 7% in 2011, driven by soaring domestic consumption, global demand for Indonesian coal, tin, copper, and palm oil, increased FDI and a sound macroeconomic policy. Yet gold-driven infl ation is starting to spread through the economy

• In China, the economy grew by 9.6% y-o-y during H1 2011 as China seeks to become less reliant on the economies of the US and Europe and diversify its export markets. Consumer infl ation, especially for food, remains the most pressing concern, and policymakers are increasingly willing to use the renminbi’s continued appreciation against the US dollar as an infl ation fi ghting tool, a move which also pushes Chinese manufacturers to move up the value chain and encour-ages domestic consumption

• Economic growth in South Africa slowed sharply in Q2 2011 to 1.3% from 4.5% in Q1, which can be largely attributed to the ongoing sovereign debt crisis in Europe and an overall weakened global economic outlook. With an unemployment rate hovering above 25% of the labour force, South Africa might lower interest rates to regain recovery momentum, fuel investment and increase exports from its contracting manufacturing sector

Source: Trading Economics; China NBS; IMF. Source: Trading Economics. * Note Unemployment: China (Mar), India (Mar), Indonesia (Feb)

Source: IMF

Legend

Population, 2011E

GDP, 2011E

GDP per capita, 2011E

Brazil

195 mn

USD 2,421 bn

USD 12,423

South Africa

50 mn

USD 383 bn

USD 7,585

Russia

140 mn

USD 1,895 bn

USD 13,543

India

1,233 mn

USD 1,704 bn

USD 1,382

China

1,348 mn

USD 6,516 bn

USD 4,833

Indonesia

238 mn

USD 823 bn

USD 3,465

BRIICS Real GDP Growth (%, 2010-H1 2011)

0

2

4

6

8

10

12

BRIICS Infl ation and Unemployment (%, June 2011)

-25

-20

-15

-10

-5

0

5

102010 H1 2011

China India Indonesia Brazil South Africa Russia

Infl ation Unemployment rate*

Inve

rted

sca

le

6.50%

8.62%

4.61%6.00% 6.50%

25.70%

4.10%

9.40%

6.80% 6.87%9.00%

5.30%

Regional Focus: Africa

In 2010, China-Africa trade surpassed the USD 100 billion mark for the fi rst time, and despite the political turmoil in North Africa, trade in H1 2011 is around 30% higher y-o-y. We also review the major China-Africa deals in H1 2011, and profi le China Civil Engineering Construction Corporation, one of China's leading EPC contractors in Africa.

China-Africa Briefi ng: China Eyeing Unrest in North Africa; Building Relations with the Sudans; First China-Africa NGO forum

• China is paying close attention to the political situation in North Africa and the potential impact on China’s resource security in the region. Libya in particular is one of China's leading suppliers of crude oil in Africa; in 2010 Libya exported roughly USD 4.5 billion worth of oil to China. Over the years, China has invested billions of dollars in infrastructure projects in Libya, which China is urging the emerging post-Gaddafi government to protect during the transition period

• During a meeting in late June, President Hu Jintao and his Sudanese counterpart Umar al-Bashir signed agreements on infrastructure and equipment loans and for economic and technological cooperation. On 9 July, China also welcomed the independence of South Sudan, which holds three-fourths of old unifi ed Sudan’s oil reserves. President Hu also pledged to develop China’s mutually benefi cial relationship with the continent’s newest country

• In late August, around 200 representatives from 20 Chinese and 100 African non-governmental organisations gathered in Nairobi, Kenya for the fi rst China-Africa NGO forum. The two-day forum, with the theme 'Enhance partnership and promote friendship between China and Africa', featured discussions on climate change and food security, NGOs' cred-ibility and transparency, and the relationship between governments, NGOs, businesses and communities

China-Africa Trade

Total Trade

• In H1 2011, China’s total trade with Africa reached USD 78.96 bn, up 29% y-o-y. South Africa and Angola were China’s largest trading partners (see chart below to the right). China's imports from Africa experienced rapid y-o-y growth in H1 2011, yet China's exports to Africa decreased slightly

China Imports from Africa

• Chinese imports from Africa in H1 2011 totalled USD 46.34 bn, up 65.3% y-o-y

• China Customs data for Q1 2011 showed that the fi ve

biggest African exporters to China (South Africa, Angola, Sudan, Libya and Congo) accounted for just over 80% of Chinese imports from the continent during this period

China Exports to Africa

• Chinese exports to Africa in H1 2011 totalled USD 32.60 bn, down 1.65% y-o-y

• China Customs data for Q1 2011 showed that the fi ve most popular export destinations for Chinese goods in Africa were South Africa, Nigeria, Egypt, Liberia and Algeria. These fi ve countries accounted for 54% of the total

China-Africa Trade (USD bn, 2001-H1 2011) China's Africa Trade by Country (USD bn, Q1 2010 vs. Q2 2011)

Source: China National Bureau of Statistics; CEIC; The Beijing Axis Analysis Source: CEIC; The Beijing Axis Analysis


42 The Beijing Axis 42 The Beijing Axis

0

10

20

30

40

50

60

70

80

China Exports to Africa

China Imports from Africa

H1 2011

20102009200820072006200520042003200220018 7 6 5 4 3 2 1 0

Imports Q1 2011 Imports Q1 2010 Exports Q1 2011 Exports Q1 2010

South Africa

Angola

Sudan

Nigeria

Libya

Egypt

Congo Brazzaville

Algeria

Liberia

DRC

Others

1 2 3 4 5 6


The Beijing Axis 43

China-Africa Investment

Trends

• Based on the major China-Africa investment activities in H1 2011, China's investment appetite in Africa remained strongest in three sectors namely Oil & Gas, Mining, and Infrastructure (see our China OFDI dealsheet in the China Capital Section for details on specifi c deals)

Major Recent Deals and Developments

• In May, the government of Chad and Chinese engi-neering fi rm CAMC signed a USD 1 bn agreement for the construction of a new international airport north of the capital N’Djamena. The new airport will have an ultra modern terminal, and the project also includes the construction of a 40 km motorway between the airport and the capital

• In May, China’s Export-Import (Exim) Bank granted Cameroon a loan of USD 542 mn for the construction of the 210 MW Memve’ele hydropower dam on the Ntem River. The Memve’ele dam is expected to be completed within fi ve years

• In June, Kenya signed a concessional loan agreement worth around USD 110 mn with China. The loan will be used to build the third referral hospital at Kenyatta University in the capital city of Nairobi

• In June, Chinese bank ICBC granted a USD 285 mn loan to Zambia for the development of a new electricity trans-mission line. The new line will connect Zambia’s power grids with those in Tanzania and Kenya

• In July, Canadian rare earths miner Great Western

Minerals announced that it had signed an agreement with Ganzhou Qiandong Rare Earth Group (GQD) to build a rare earths separation plant in South Africa, to be followed later by the building of a mine

• A consortium of Chinese investors is currently bidding for Gold One International Ltd., estimated to be the lowest cost gold producer in South Africa, for about USD 642 mn. In early August, Gold One obtained approval from SA’s competition authorities for the buyout

• In August, Chinese steel producer Shandong Steel Corporation completed the acquisition of a 25% stake in the Sierra Leone-based Tonkolili iron ore project for USD 1.5 bn, which is owned by London-listed Africa-focused mining giant African Minerals Ltd

• In August, a contract of USD 526 million was signed between the China Water and Electric Company (CWE) and the Guinean government for the construction of a dam in the country's capital Conakry. The construction of the dam is expected to take 24 months

• In August, China Development Bank agreed to lend Ghana – Africa’s newest oil producer – USD 800 million to build natural gas infrastructure

• On a state visit to China in August, Mozambican President Armando Guebuza signed ten cooperation agreements with Chinese President Hu Jintao. Included among these was an agreement for Chinese fi rm China Kingho to fi nance the construction of a new railway line linking the town of Maotize in western Mozambique to the port of Beira

Chinese Contractors in Africa: China Civil Engineering Construction Corporation

Brief Country Profi le

• Established in 1979, China Civil Engineering Construction Corporation (CCECC) is one of China’s leading contractors for international projects, with over 80% of its revenues coming from overseas projects. CCECC is active in 40 countries and regions and has established more than 20 offi ces overseas

• CCECC was transformed into a state-owned enterprise for project contracting out of the earlier Foreign Aid Department of the Ministry of Railways (which participated in China’s then largest foreign-aid project in Africa, the TAZARA railway)

• Its range of services include international contracting for railway construction, civil engineering design & consultancy, real estate development, trading, industrial investment and hotel management

CCECC Selected Major Projects in Africa

Nigeria • Abuja-Kaduna Railway Project (USD

874 mn; 2011-14) • Construction/Rehabilitation of Nigerian

railway System (USD 528 mn; 1995-2000)

Botswana • Rehabilitation of Botswana Railway

(USD 40.56 mn; 1996-99)

Uganda • Rehabilitation of Nakivubo Drainage

Channel (USD 14.55 mn; 2000-03)

Djibouti • Djibouti Industrial and Commercial

School (USD 10 mn; 1991-93)

Rwanda • Stadium of Rwanda (USD 21 mn;

1984-88)

Tanzania • Kahama and Shinyanga Water Supply

Project Contract no. 4 (USD 47 mn; 2005-06)

• 140km track renewal on central line (USD 6.25 mn; 2005-06)


44 The Beijing Axis

Regional Focus: Australia

Australia continues to ride the resource boom, posting a GDP growth rate of 2.3% in 2009-10. Bilateral trade with largest trade partner China increased by more than 45% from 2009 to 2010, reaching USD 88.1 bn. Investment activities remain robust with sustained interest in mining and increasing interest in agro-processing, renewable energy and other sectors. However, concerns loom over a fl uctuating Australian economy, over-reliance on China and skill shortages.

China-Australia Briefi ng: New carbon pricing scheme in Australia; Active cross-border investment climate

• Australia has fi nally established a carbon pricing scheme that will be applied to all energy use except private cars and some other categories of transport. The AUD 23 (USD 25, EUR 17) per tonne carbon dioxide government-determined price (expected to rise to AUD 25.4 in 2014-15) is currently higher than the European emissions trading price and will aff ect 500 companies that are considered the biggest polluters in Australia. China declared its own plan of imple-menting an emissions trading scheme by 2015, setting a target of cutting its energy intensity by 16% and reducing its carbon intensity by 17% from 2011 to 2015

• The recently released Foreign Investment Review Board (FIRB) Annual Report for 2009-10 established that the board approved 4,401 proposals during the year, a drop of 18% from the 5,352 approvals in 2008-09. China had the most approvals with 1,766, followed by Malaysia with 524 and the UK with 410. However, in terms of value, the US was the largest foreign investor in Australia with USD 34.50 bn, followed by the UK with USD 25.29 bn and China with USD 14.38 bn. China’s total investment approval value decreased by 27.51% from USD 19.83 bn in 2008-2009; however, China’s interest in the mineral exploration and development sector remained robust at USD 10.76 bn or 74.84% of the total

China-Australia Trade

Total Trade

• Sino-Australian total trade increased by almost 47% from USD 60.1 bn in 2009 to USD 88.1 bn in 2010, according to China Customs (CC); whereas the Australian Bureau of Statistics (ABS) puts the increase at 45% from USD 62.1 bn in 2009 to USD 90.2 bn in 2010

• Trade fi gures for 2011 seem poised to break the 2010 record as H1 2011 trade of USD 51.75 has surpassed 2010’s halfway mark of USD 37.72 bn

• In monthly terms, CC put China’s highest trade defi cit with Australia yet in January 2011 at USD 4.45 bn. Said month saw China exporting USD 2.79 bn worth of goods to Australia while importing USD 7.24 bn worth of goods. According to ABS, China’s highest trade deficit with Australia occurred in March 2011 when China exported USD 2.91 bn to Australia while importing USD 5.86 bn, resulting in a trade defi cit of USD 2.96 bn

China Imports from Australia

• In Jan–May 2011, China’s imports from Australia totalled USD 29.93 bn according to CC (USD 26.38 bn based on ABS), with a high of USD 7.24 bn in January 2011

• A USD 94 bn supply deal has been signed between China Petroleum & Chemical Corporation (Sinopec) and Australia Pacific LNG, a joint venture between ConocoPhillips and Origin Energy, to supply China with a further 4.3 million tonnes of LNG annually for 20 years. Sinopec will pay USD 1.66 bn for a 15% stake in the said joint venture

China Exports to Australia

• In Jan–May 2011, China’s exports to Australia totalled USD 12.53 bn according to CC (USD 16.11 bn based on ABS), with a high of USD 2.79 bn in January 2011

China Annual and Monthly Trade with Australia (USD bn)

Source: China Customs; The Beijing Axis Analysis. Note: Balance = Chinese exports to Australia - Chinese imports from Australia, hence negative scale.

Australia Annual and Monthly Trade with China (USD bn)

China exports to Australia (lhs)

China imports from Australia (lhs)

Annual/monthly trade balance (rhs)

0

10

20

30

40

50

60

70

80

-35

-30

-25

-20

-15

-10

-5

0

2011.05

2010200920082007200620052004200320022001 0

1

2

3

4

5

6

7

8

-5

-4

-3

-2

-1

0

MayAprMarFebJan 2011

DecNovOctSepAugJulJun 2010

Australian exports to China (lhs)

Australian imports from China (lhs)

Monthly trade balance (rhs)

0

10

20

30

40

50

60

-5

0

5

10

15

20

2011.5

2010200920082007200620052004200320022001 0

1

2

3

4

5

6

0

1

2

3

MayAprMarFebJan DecNovOctSepAugJulJun

Source: Australian Bureau of Statistics; The Beijing Axis Analysis


China-Australia Investment


• In June, it was reported that Australian coking coal producer Caledon Resources had agreed to be bought by Guangdong Rising Assets Management for USD 507 mn. Caledon Resources has two coal mines in Queensland

• In July, ASE-listed MetroCoal announced that China Coal Import & Export Company (CCIEC) had received approval from the Chinese government to form a USD 33 mn joint venture with MetroCoal in which CCIEC will acquire a 51% stake in MetroCoal's Columboola mining area in Queensland

• In July, Zijin Mining Group confi rmed that it will invest an additional USD 30 mn in Australian miner and explorer Norton Gold Fields Limited. The Chinese gold miner currently holds 16.98% of Norton's total equity

• In July, Northwest Nonferrous International Investment acquired a controlling stake of 48.7% in Synergy Metals, an ASE-listed company engaging in mineral prospecting for USD 13.8 mn

• In August, Yanzhou Coal completed its USD 222.3 mn acquisition of Syntech Resources. The Australian coal miner owns Carnaby Downs mine – a 700 million metric ton thermal coal project in Queensland’s Surat Basin. China’s third-largest coal producer is also reportedly in the running for Whitehaven Coal, one of Australia’s largest remaining independent miners, along with India’s Aditya Birla Group and Peabody Energy of the US

• In August, China Nonferrous Metal Industry Foreign Engineering and Construction Co. stated that it would increase its stake in Terramin Australia Ltd, a base metal production company with an operating mine in South Australia and other advanced projects in Australia, from 14.38% to 19.86%. Terramin made it clear that it will use the USD 5 mn sale proceeds to develop two zinc and lead mining projects

• China Datang Corporation Renewable Power Co Ltd has fi nalised a JV with Australian company CBD Energy Limited and Hebei-based Baoding Tianwei Baobian Electric Co Ltd. Under the agreement, Datang will hold a stake of 63.75% in the JV, called AusChina Energy Group, while CBD Energy will hold 23.75% and Baoding Tianwei will hold the remaining 12.50%. With an investment of USD 3.19 bn, the JV is expected to establish wind farm and solar power plants in three years, with the goal of becoming a major player in the renewable energy market in Australia

• Shanghai’s Bright Food Group has agreed to buy a 75% stake in Champ Private Equity’s Manassen Foods Australia Pty Ltd. The famed 'White Rabbit' candy owner is eager to increase its overseas sales and footprint and has been looking at various acquisition targets for the past few months

• In August, Insurance Australia Group agreed to pay USD 103.3 mn for a 20% strategic stake in Chinese general insurer Bohai Property Insurance Pty Ltd.

Australia State Watch: Victoria

State Trade Profi le; Trade with China

• With a real gross state product (GSP) of USD 211.59 bn in 2008-09, Victoria is Australia’s second-largest state economy

• It is a net importer with exports of USD 17.55 bn and imports of USD 51.37 bn in 2009-10

• Main exports in 2009-10 were food and live animals (28.5%), followed by machinery and transport equip-ment (19.6%)

• Main mineral commodities produced are brown coal, petroleum and gas

• Key industries as shares of GSP are fi nancial and insur-ance services (12.5%), manufacturing (10.5%) and ownership of dwellings (7.7%)

• In 2009-10, China was Victoria's largest trading partner, with total trade amounting USD 11.35 bn, followed by the United States with USD 6.66 bn and Japan with USD 5.89 bn

Victoria Trade with China (USD bn, Jan 2010-May 2011

Source: Australian Bureau of Statistics; The Beijing Axis Analysis

The Beijing Axis 45

Approved Chinese Investments in Australia by Sector

(USD, 2009-10)

Source: FIRB; The Beijing Axis Analysis

0

200

400

600

800

1,000

1,200

-1,000

-800

-600

-400

MAMFJ 2011

DNOSAJJMAMFJ 2010

Exports to China (lhs)

Imports from China (lhs)

Monthly trade balance (rhs)

ManufacturingUSD 174.83 mnServices

USD 633.11 mn

Resource processingUSD 671.08 mn

Real estateUSD 2.13 bn

Mineral exploration & developmentUSD 10.76 bn

Total: USD 14.37 bn


46 The Beijing Axis

Regional Focus: Latin America

China has continued to strengthen its political and economic ties with Latin America in 2011. An offi cial visit to the region by one of China’s leading political fi gures, along with continued trade and investment growth are indicative of strengthening strategic ties between China and Latin America. In this edition, we revisit China’s relationship with Mexico, including an interview with the Ambassador of Mexico to China, Jorge Guajardo.

China-LatAm Briefi ng: High Level State Visits Solidifying Political and Economic Ties

• In June, Chinese Vice President Xi Jinping travelled to Uruguay, Cuba and Chile on offi cial visits. In Chile, Xi delivered a speech at the United Nations Economic Commission for Latin America and the Caribbean (UNECLAC), where he stated that countries in the Latin American and Caribbean regions have become more dynamic in their diplomatic activities and have emerged as a new force in global governance

• In Uruguay, Chinese Vice President Xi Jinping signed 17 accords with Uruguay in the fi elds of economy, trade, investment, culture, social welfare, industry and tourism. China is now Uruguay’s second-largest trade partner in the region, behind Brazil

• In Cuba, Havana and Beijing are currently implementing important cooperation projects in the fi elds of tourism, tele-communications, transportation, biotechnology and energy. China is also Cuba’s second-largest trade partner behind Venezuela, with China's main exports to Cuba largely revolving around infrastructure-related industries

• In April, Brazil’s new President Dilma Rousseff , along with her counterpart Hu Jintao, pledged to further develop the two countries’ strategic relationship during the former’s state visit to Beijing. The meeting resulted in the signing of approximately 20 trade agreements worth a total of USD 1 bn, as well as a number of large-scale investment proposals. China became Brazil’s largest investor as well as the second-largest importer of Brazilian goods in 2011

China-LatAm Trade

Total Trade

• In H1 2011, China’s total bilateral trade with LatAm reached USD 93.1 bn, an increase of 35% y-o-y

• Brazil, Mexico and Chile were China’s largest trading part-ners in LatAm, accounting for 33%, 16% and 16%, respec-tively, of China’s total trade with the region during H1 2011

• China’s trade defi cit with the region fell to USD 5.5 bn in H1 2011, a decrease of 20% y-o-y

China Imports from LatAm

• China's total imports from Latin America during H1 2011

amounted to USD 49.3 bn, an increase of 30% y-o-y • Approximately 86% of LatAm’s exports to China in H1

2011 originated from just three countries: Brazil (45%), Chile (19%) and Venezuela (12%)

China Exports to LatAm

• China’s total exports to LatAm in H1 2011 reached USD 43.8 bn, an increase of 41% y-o-y

• In H1 2011, nearly 70% of China’s exports to the region were concentrated in Brazil (33%), Mexico (24%) and Chile (11%)

China-LatAm* Trade (USD bn, 2003-H1 2011) China's LatAm* Trade by Country (USD bn, H1 '10 vs. H1 '11)

Source: China National Bureau of Statistics; CEIC; The Beijing Axis Analysis Source: CEIC; The Beijing Axis Analysis

* Note: LatAm here refers to the Latin American Integration Association (LAIA). LAIA’s members are Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, Ecuador, Mexico, Paraguay, Peru, Uruguay and Venezuela.

0

20

40

60

80

100

China imports from LatAm

China exports to LatAm

H1 201120102009200820072006200520042003 15 12 9 6 3 0

Imports H1 2011Imports H1 2010

Brazil

Mexico

Chile

Argentina

Colombia

Venezuela

Peru

Ecuador

Uruguay

Paraguay

Cuba

Bolivia

5 10 15 20 25

Exports H1 2010 Exports H1 2011


China-LatAm Investment

Trends

• While foreign investment in Latin America grew by 40% in 2010 to USD 113 bn, 2011 has seen further growth, driven by the offi cial visit from China’s Vice-President Xi Jinping earlier in the year which resulted in millions of dollars worth of trade and investment deals in the region

• Current developments in the global economy, particu-larly in the fi nancial markets, will also prompt Chinese enterprises to take better advantage of relatively bargain prices and acquire companies and assets abroad to satisfy China's demand for resources as well as gain access to new markets abroad. Latin America is expected to be one of the regions that will benefi t the most from this trend


• In April 2011, the Export-Import Bank of China (China Exim Bank), announced that it will formally launch a yuan-denominated sovereign fund targeting Latin America before the end of 2011. The USD 1 bn fund will mainly focus on infrastructure construction in collabora-tion with the Inter-American Development Bank

• In May 2011, Chery Automobile Co. announced that it will break new ground in Latin America with its USD 200 mn factory in Venezuela, which is expected to start producing vehicles for the regional market later this year. Chery had previously signed a cooperative agree-ment with China Development Bank and the Venezuelan government to set up the new factory, which will be Chery’s second-largest in Latin America, following its

auto manufacturing facility in Brazil • In June 2011 it was announced that China’s ZTE was

going to start producing its own Android-based tablets in Brazil. ZTE plans to invest a total of USD 250 mn in its operations in Brazil and expects to employ some 2,500 people in the country by 2014

• Ecuador announced in June that its loans from China will reach at least USD 3 bn in 2011 and the government’s oil revenue forecast will exceed the fi scal budget by some USD 60 mn, reassuring investors that South America’s seventh-biggest economy will be able to keep servicing its debt

• In August 2011, Chinese home appliances and elec-tronics manufacturer Midea announced plans to invest USD 223.3 mn to acquire a 51% stake in the Latin American air-conditioning business of Carrier, a US home appliances provider

• In August 2011, the Industrial and Commercial Bank of China Ltd., China’s largest commercial bank, stated that it would buy an 80% stake in Standard Bank Argentina SA for USD 600 mn

• In August 2011, Argentina’s Mining Secretary announced that the government is in discussion with Chinese inves-tors over the building of a USD 750 mn copper refi nery. The proposed project would process copper concen-trates into 210,000 tons of cathode copper and 700,000 tons of sulphuric acid per year. The names of the poten-tial Chinese investors have yet to be disclosed

China-LatAm Country Watch: Mexico

Brief Country Profi le

• Mexico is one of the largest and most developed coun-tries in Latin America, boasting a GDP of USD 1.4 tn (2010) and a GDP per capita of USD 9,580

• Mexico's economy rebounded strongly from the eff ects of the global fi nancial crisis, when its economy contracted by 6.1% (2009). In 2010, Mexico’s economy grew by 5.5%

China-Mexico Bilateral Ties

• China and Mexico are potential competitors competing in the US and Latin American markets, yet over the past decade their relationship has become more strategic as they are important sources of growth for one another

• China has expressed interest in intensifying its invest-ment in Mexico in the fi elds of agriculture, mining, and manufacturing among other sectors. Chinese manufac-turers can especially save on logistics costs by setting up operations in Mexico

• China’s total trade with Mexico reached USD 24.7 bn in 2010, an increase of 30% y-o-y; bilateral trade between the two countries has been growing at a compound annual growth rate of 30% since 2000

• China’s total exports to Mexico in 2010 reached USD 17.8 bn, an increase of 45% y-o-y. Electronic components

(29%), machinery (22%) and optical, photo and technical equipment (11%) made up the bulk of China’s exports

• China’s total imports from Mexico increased by 77% y-o-y to approximately USD 6.9 bn in 2010. Electronic equipment (28%), mineral ores (20%) and motor vehicles (11%) were the main exports to China

The Beijing Axis 47

Source: UN Comtrade; CEIC; The Beijing Axis Analysis

China Trade with Mexico (USD bn, 2000-H1 2011)

0

5

10

15

20

Chinese imports from Mexico

Chinese exports to Mexico

H12011

20102009200820072006200520042003200220012000


48 The Beijing Axis

Seizing Every Opportunity: Ambassador of Mexico to China, Jorge Guajardo,

on Mexico's Thriving Business Relationship with China

Ambassador Jorge Guajardo is seeing the best ever economic relations between Mexico and China, but he sees much more potential for the future. Bilateral trade has increased substantially, and Mexican companies such as Grupo Bimbo and Softtek have found success in China. Yet Mexico, he believes, is now more ready than ever to be one of China's main partners in the region.

Please provide an overview of the China-Mexico trade

and investment relationship.

Economic relations between Mexico and China are at their best level in history, but there is still huge potential to develop them further over the short, medium and long term. Last year, trade between the two countries amounted to almost USD 50 billion; Mexican exports to China reached USD 4.2 billion while imports reached USD 45.7 billion, leaving Mexico with a big defi cit. However, many Chinese products imported by Mexico consist of components and parts of other products that are assembled in Mexico and then exported to third countries, mainly the US.

China is Mexico’s second-largest trading partner. It is Mexico’s second-largest source of imports behind the US, and the third-largest destination of Mexican exports behind the US and Canada. In 2010, total trade grew 43.4% and Chinese imports from Mexico expanded by a full 90%. In the fi rst fi ve months of 2011, exports have grown almost a further 50%.

Investment is still modest. Offi cial fi gures indicate that Chinese investment in Mexico is around USD 130 million, but if we consider investments made by Chinese companies through subsidiaries based in third countries, the total investment is

around USD 400 million. Something similar occurs with Mexican investment in China. The offi cial fi gure is over USD 100 million, but actual investment is around USD 400 million. However, these investments have been made by well-known companies such as Grupo Bimbo and GRUMA from Mexico and Lenovo and Huawei from China, so we are confi dent that investment will grow rapidly in the coming years.

Can you cite some case studies of Mexican businesses in

China? Which Mexican companies have been successful in

China?

I will give you a few examples. Grupo Bimbo is the largest producer of bread in the world, with a history that goes back to 1945 in Mexico City. Bimbo bought a small Spanish bread company in Beijing in 2006. It has since tripled the size of its busi-ness, bought new brands and expanded to half a dozen cities, including Shanghai.

Softtek is an IT company based in Monterrey, Mexico. It arrived in Beijing in 2007 and has been working with high level clients from China and other countries since then. Just to mention two examples of this, they provided IT support for the Australian delegation during the Beijing Olympics and the US Pavilion at the Shanghai 2010 World Expo.

Nemak is one of the world’s leading manufacturers of aluminium components for automobile motors, with state-of-the-art tech-nology. They have a plant in Nanjing and supply the leading car manufacturers in China, both local and international. I am sure that in the near term, both the number and the success of Mexican companies investing in China will increase.

What are Mexico’s main competitive advantages as an

investment destination in Latin America?

Mexico has unique advantages. It has the largest Spanish speaking market in the world, with a population of 112 million, almost equal to that of Argentina, Colombia and Venezuela combined. It has one of the highest standards of living in the region, and its GDP per capita is around 40% higher than Brazil’s. The economic future of the country is promising. For instance, according to a Goldman Sachs forecast, Mexico will be the fi fth-largest economy in the world in 2050, behind only China, the US, India and Brazil.

Mexico has a wide net of free trade agreements, covering 44 countries, including the US, Canada, the European Union and Japan, collectively covering two-thirds of the world’s GDP and over a billion people. It has a unique geographic position, with a 3,300km-long border with the US, and long coastlines along the

The Ambassador of Mexico to China, Jorge Guajardo


two largest oceans in the world, the Atlantic and Pacifi c.The Mexican economy is not only big, but also sophisticated, and its open to foreign trade and investment. Mexico has signed Agreements to Promote and Protect Foreign Investment with 25 countries, and Treaties to Avoid Double Taxation with 36 econo-mies, including China in both cases.

What are the opportunities for Chinese companies in

Mexico? And the challenges?

We have identifi ed several sectors with opportunities for Chinese investment in Mexico. The most promising are automotive, new and renewable energy, mining, infrastructure construction and electric & electronic products. Let me elaborate on three sectors: automotive, infrastructure construction and mining.

Mexico is the fi fth-largest exporter of automobiles in the world and ranks among the ten leading manufacturers. Eight of the ten leading original equipment manufacturers in the world have assembly plants in Mexico. Through its free trade agreements network, exporters of cars and auto parts established in Mexico have access to the main markets in the Americas, Europe and Japan.

The administration of President Felipe Calderón has invested heavily in infrastructure construction to upgrade the commu-nication, transportation and logistics capabilities of Mexico. Investment in infrastructure has increased from 3% to 5% of GDP and the projects are open to international companies.

Mexico is the largest producer of silver in the world and is ranked among the leading 12 countries for production of eighteen types of minerals. A Behre Dolbear report published in 2010 placed Mexico as the world’s fourth-best investment destination for mining in a 25-country list and in fi rst place for fi scal regime.

When it comes to global manufacturing, as a low cost

sourcing country itself, is Mexico a competitor to China in

Latin America? Or is it a case of complementarity?

Mexico views itself not as low cost sourcing country but as a strategic platform for international companies from around the world. It is true that due to the gap between the average income of workers in Mexico and the US, historically Mexico has been a low cost manufacturing base, but now the situation has changed dramatically. With the improvement in global logistics, communications and information technologies, a country like China can directly compete with Mexico despite it being on the opposite shore of the Pacifi c Rim.

International companies will be greatly impressed by the oppor-tunities that Mexico offers. Its workforce is young and well educated and trained. There is a strong supply of managers and engineers with good command of English and knowledge of US and European cultures. We are in the same time zone as the US and the main cities in North America are within a six-hour fl ight-time radius.

The international division of work is a reality and Mexico off ers a distinctive platform because of its geographic location, human resources quality, solid economic and logistics foundations and a sound legal and administrative framework friendly to foreign trade and investment.

How do you see China - Latin American relations going

forward and how will Mexico play a role in China’s growing

interest in the region?

Relations between Latin America and China are at their best level in history. I think the links between the region and China will increase and diversify in the future, benefi ting both sides in terms of trade, investment and tourism, but also in the realms of culture, science and technology cooperation, among others.

Mexico is one of the largest economies in Latin America; it enjoys the most strategic geographical position and is the most globalised country in the region. The bilateral relationship with China was upgraded to the Strategic Partnership level in 2003 and Mexico will continue to be one of the main regional partners for China due to its intrinsic weight in terms of economy, culture and politics and as a bridge to other geostrategic regions: North, Central and South America, and the Caribbean.

d h l

Success Stories of

Chinese Investment in Mexico

In the last ten years, several Chinese companies have made successful investments in Mexico, paving the way for more companies to explore the opportunities that lay ahead in the second-largest economy in Latin America.

Among the top Chinese investors in Mexico is Huawei. The world's leading producer of telecommunications equipment has been in Mexico since 2001, where it has established its regional headquarters for Latin America. Huawei sells its products to the major telecommunica-tion carriers in Mexico and in 2009 arranged for USD 1.2 billion in credit from the China Development Bank to increase its supply to Telcel and Telmex, large telecom-munications fi rms in Mexico.

Lenovo landed in Mexico in 2007 with an investment of USD 20 million to establish a PC factory in Monterrey. The factory has a production capacity of 5 million units a year that are sold in the local market, but are also exported to the US and Latin America.

Golden Dragon Copper Tube is the leading manufac-turer of precision copper pipes in the world. It estab-lished a factory in the state of Coahuila in 2007, investing around 100 USD million and creating hundreds of jobs.

Chinese companies have also established operations in the mining and consumer products industries. In 2008, Jinchuan Group Ltd. acquired the Canadian company Tyler Resources Inc. for 214 million Canadian dollars, including the rights to exploit the Bauerachi copper and molybdenum project in Chihuahua, around 130 km from the Pacifi c coast of Mexico in Sinaloa State.

Hubei Tobacco established a joint venture with a local partner in Quintana Roo state in 2008 to manufacture cigarettes using Mexican tobacco leaves under Chinese brands, both for the local market and to export to Central

America.

The Beijing Axis 49


50 The Beijing Axis

Regional Focus: Russia

While bilateral trade between China and Russia maintained steady growth in the fi rst quarter of 2011, the two countries are still locked in long-running negotiations on gas prices and oil supplies. With the highly anticipated natural gas 'super deal' put on hold, the major event of the year in the China-Russia space could be in the banking sector where China Investment Corporation is set to participate in the SPO of Russia’s largest bank.

China-Russia Briefi ng: Hu Jintao state visit to Russia; Direct currency trading; Open door for invest-

ment from Hong Kong in Eastern Siberia

• On 15-18 June, Chinese President Hu Jintao undertook a state visit to Russia. Included in a package of other political and economic deals signed during the visit was a power generation deal and an investment cooperation deal between China Eximbank and Russia’s En+ Group. A main topic for discussion during the state visit was the terms of pending natural gas supplies from Russia to China, although agreement has still not been reached due to diff ering price expec-tations on the two sides

• In June, the central Bank of Russia and the People’s Bank of China signed an agreement on foreign trade payments using their national currencies. In accordance with this agreement, Russian and Chinese companies will be able to settle accounts using both freely convertible and national currencies. Trade partners will have the right to choose the currency independently, by mutual consent

• On 17 April, Russian President Medvedev paid his fi rst visit to Hong Kong and met with Donald Tsang, Chief Executive and President of the Executive Council of the Government of Hong Kong. The main topic of the meeting was to high-light opportunities for investment from Hong Kong in Eastern Siberia and Russia's Far East, following the cross-border cooperation programme for these regions and China’s North-East, which was announced two years ago

China-Russia Trade

Total Trade

• Bilateral trade between China and Russia increased substantially in H1 2011, reaching USD 35.8 bn, an increase of 40% y-o-y (see chart to the right)

China Imports from Russia

• China’s imports from Russia in June 2011 amounted to USD 3.17 bn, up 39.6% y-o-y

• China’s imports from Russia for H1 2011 amounted to USD 18.6 bn, an increase of 33.7% y-o-y

China Exports to Russia

• China's exports to Russia in June 2011 amounted to USD 3.54 bn, an increase of 42.7% y-o-y

• China's exports to Russia for H1 2011 amounted to USD 17.2 bn, an increase of 45.7% y-o-y

China-Russia Investment

Major Recent Deals

• In March, DST Global, a Russian investment group focusing on internet projects, joined a group of investors (including US retailer Walmart) putting ‘hundreds of millions’ of US dollars into China’s internet retailer 360buy.com. The exact amount of the investment was not disclosed

• In May, Israeli businessman Lev Levaev sold 18% of the Russian-Angolan mining company Katoka to China Sonangol, a joint venture between China International Fund (CIF) and Sonangol, an Angolan oil and gas para-statal. As a result, control of one of Africa’s largest diamond fi elds was transferred to a China-Angolan alliance. Lev

Levaev had bought Katoka’s stock of shares from ALROSA, Russia's largest diamond producer, for USD 20 mn in the late 1990s, when ALROSA was suff ering fi nancially due to the absence of export quotas

• In June, Chinese car glass producer Fuyao Glass signed an agreement with the local government of the Kaluga region in Russia to build a plant with capacity to manufac-ture three million car glass sets annually. According to the agreement, Fuyao Glass will invest USD 200 million in the project, and the region will provide utility networks and other infrastructure. The launch of the fi rst phase of the

China-Russia Monthly Trade (USD bn, Jan 2010-Jun 2011)

Source: China National Bureau of Statistics

0

1

2

3

4

5

6

7

20112010

DecNovOctSepAugJulJunMayAprMarFebJan


plant is scheduled for 1 December 2012, and the plant is expected to reach full capacity in February 2013

• In June, during the St. Petersburg International Economic Forum, Russia’s largest private power generation company, Eurosibenergo, and China’s largest public hydropower corporation, China Yangtze Power, signed an agreement for the construction of three power stations in Eastern Siberia. These stations include Lenskaya a thermal power plant in the Irkutsk region (capacity of 1200 MW), Nizhne-Angarskaya hydro power plant in the Krasnoyarsk region (capacity of 600-1200 MW) and the Transsiberian hydro power plant in the Zabaikalsk region (capacity of 400-900 MW). A joint venture, YES Energo, will be set up to imple-ment these projects

• In June, China Investment Corporation (CIC) received an off er to participate in the second public off ering (SPO) of Russia’s largest bank, Sberbank. The off er came from one of the investments banks that will organise Sberbank’s SPO, planned for the autumn of 2011. The Russian government plans to sell 7.6% of Sberbank’s shares, and CIC may purchase 5%. Considering the market capitalisa-tion of Sberbank, 5% may amount to about USD 3.5 bn, which will automatically make this deal the largest ever Chinese investment in the Russian fi nance sector. CIC’s strong interest in Sberbank follows CIC’s participation in February’s SPO of Russia’s second-largest bank, VTB, when it purchased 1% of VTB’s shares for USD 100 mn

China-Russia Resources Watch

More Russian iron ore exports to China; Protracted gas price negotiations; CNPC’s debt repayments; Biogas construction

joint venture in Russia

• 2011 saw a sharp y-o-y increase in Russia’s iron ore supplies to China through one of the main routes, the railway crossing point Zabaikalsk-Manzhouli. During the fi rst six months of 2011, China imported 8,789 wagons of iron ore (with total weight exceeding 500,000 tons). For the same period last year, China’s imports through this route totalled only 4,497 wagons (with a total weight of 200,000)

• In April, Russia's Biogas EnergoStroy and China National Bioenergy Company (the largest bioenergy enterprise in China, affiliated with State Grid) signed a memo-randum of understanding (MOU) on the establishment of a network of biogas facilities in Russia based on waste products of the local crop, livestock and utility sectors. Russian and Chinese collaborative technologies will be used for complex processing of raw materials. A joint venture (JV) will be set up to handle the construction of these facilities in diff erent regions of Russia by the autumn of 2011. The facilities will produce heat, elec-tricity and biogas. At some point in the future these companies plan to build Russia's fi rst large biotech plant producing wood fuel pellets from the waste of wood harvesting and wood processing in the Samara region in the southeastern part of European Russia

• By the end of May, China's oil giant China National Petroleum Corporation (CNPC) paid debts to the Russian companies Transneft and Rosneft for oil supplies. CNPC transferred USD 78 million to Transneft and USD 118 million to Rosneft. According to Transneft representative Igor Demin, taking into account the amount received from China, CNPC’s debt to Transneft declined to about USD 20 million. The amount of outstanding CNPC debt to Rosneft has not been disclosed. Disputes between the companies arose from the fact that the parties could not agree on the tariff for pumping oil through Russia via the Eastern Siberia-Pacifi c Ocean (ESPO) pipeline. According to a contract signed between the parties in February 2009, the pumping tariff covered the whole length of the ESPO. However, the Chinese side concluded that the tariff for pumping to Skovorodino in the Amur region (the starting point of the branch to China) would be 7% less. From the beginning of 2011, CNPC had unilaterally

commenced with payment reductions • The price of natural gas supplies from Russia to China

was the main topic of discussion between President Hu Jintao and his Russian counterpart Dmitry Medvedev during the St. Petersburg International Economic Forum (SPIEF) on 16 June. Gas will be supplied via the Altai pipe-line from Western Siberia through the western section of the Russian-Chinese border. It is planned that gas deliv-eries of about 30 billion cubic metres a year will begin in 2015. However, China and Russia have yet to reach agreement on pricing, and there was little progress at the SPIEF on this issue. The Chinese side wants to pay USD 235 per 1,000 cubic meters, although the average forecast for export prices of Gazprom to Europe in 2011 is USD 352 per 1,000 cubic meters. As for Russia’s initial plans to export 38 billion cubic meters of gas to China along the eastern route (driving gas supplies to 68 billion cubic metres a year and making China the largest importer of Russian gas by far), negotiations for this route are currently inactive. According to Gazprom’s CEO, Alexey Miller, Russia’s gas monopoly currently only pursues the western route project

Source: UN Comtrade

Russian Iron Ore Exports to China (Mn tons, 2004-10)

The Beijing Axis 51

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2010200920082007200620052004

The Beijing Axis News: March–September 2011

Greater China and Asia12th Asian Ferro-alloys Conference - Hong Kong, ChinaOn 28-30 March 2011, the 12th Asian Ferro-alloys Confer-ence was held at Kowloon Shangri-La, Hong Kong. Matt Pi-eterse attended the event and delivered a presentation en-titled The move westward and elsewhere for Asian M&A on 30 March.

7th Annual Asia Mining Congress 2011 - SingaporeOn 4-8 April 2011, The 7th Annual Asia Mining Congress 2011 was held at Marina Bay Sands, Singapore. Kobus van der Wath (Founder and Group Managing Director) attended the event and chaired the Africa Mining Investment Forum on 4 April.

AFBG on Africa: Penetrating the South African Market - SingaporeOn 6 April 2011, AFBG on Africa: Penetrating the South Af-rican Market, a dialogue session by the Singapore Business Federation’s Africa Business Group (AFBG), was held at Kep-pel Towers in Singapore. Kobus van der Wath was a panelist of the session entitled Perspectives from a Southern African company/businessmen.

Brazil-China Seminar Attended by Brazilian President

Dilma Rousseff - Beijing, ChinaOn 12 April 2011, Javier Cuñat (General Manager, Beijing Axis Strategy) and Barry van Wyk (Senior Consultant) attended a bilateral trade and investment seminar at the China World Trade Centre in Beijing. The event was attended by the Presi-dent of Brazil, Dilma Rousseff , as well as Chinese Vice Premier Wang Qishan.

5th CCPIT Chinese Enterprises Outbound Investment

Conference - Beijing, ChinaOn 28 April 2011, the China Council for the Promotion of International Trade (CCPIT) hosted the fi fth installment of its annual conference on Chinese outbound investment. Dirk Kotze (General Manager: Strategic Projects) and Haiwei Huang attended the seminar. Dirk was also invited to deliver a presentation at the event on the major trends and dynam-ics of China’s drive to invest abroad, particularly focusing on implications from a Chinese perspective.

Investment in Energy and Natural Resources – Current

Themes and Issues - Beijing, ChinaOn 24 May 2011, Javier Cuñat attended and delivered a presentation entitled An Examination of China’s Strategy for Outbound Investment in Mining and Infrastructure Sectors in Africa.

International Chromium Development Association

Members Meeting 2011 - Hong Kong, ChinaOn 1-3 June 2011, the International Chromium Develop-ment Association (ICDA) Members Meeting 2011 was held in Hong Kong. Matt Pieterse attended the meeting and deliv-

ered a presentation entitled The Infl uence of Asia on the World Economy.

FutureChina Global Forum - SingaporeOn 11-12 July 2011, the FutureChina Global Forum 2011 was held at the Ritz-Carlton in Singapore. Kobus was invited as the panelist of a session entitled Chinese Outbound M&As: From steady growth to a tidal wave?

Annual Precious Metals Meeting - Guiyang, ChinaOn 26-27 July 2011, the Annual Precious Metals Meeting was held in Guiyang, China. Haiwei Huang attended the event and delivered a presentation entitled The Development and impact of Chinese Mining Investment in Africa.

3rd Mining Investment Summit 2011 - SingaporeOn 27-28 July 2011, the 3rd Mining Investment Summit 2011 was held in Singapore. Kobus van der Wath delivered a pres-entation entitled The outlook for the Asian and global com-modities market.

Other events recently attended by The Beijing Axis in

Greater China and Asia:

13-14 April BRICS Business Forum Sanya, China25-29 April ACBC Trade and Investment

Delegation to BeijingBeijing, China

27 April South Africa Freedom Day Celebration

Beijing, China

29 May - 1 June 17th Coaltrans Asia Bali, Indonesia

2-3 June 5th Annual Asia Mining Partnering Forum

Beijing, China

14-16 June Mines and Money Beijing 2011 Beijing, China25-26 June Investment Policies and Foreign

Economic Market Opportunities and Risks in Asia, Africa, Latin America

Beijing, China

AfricaAfrica Project Access Business Briefi ng - Johannesburg, South AfricaOn 18 May 2011, the Africa Project Access Business Briefi ng was held at Werksmans Attorneys in Johannesburg, South Africa. Nitesh Dullabh of the South African offi ce attended and delivered a presentation entitled Strategic Market Entry by Chinese Companies in Africa.

Zambian Mining and Energy Conference - Lusaka, ZambiaOn 15-17 June 2011, the 1st Zambian International Min-ing and Energy Conference (ZIMEC) was held in Lusaka, Zambia. Nitesh Dullabh attended the event and delivered a presentation entitled China’s Importance to the African Re-sources Sector on June 15.

10th Coaltrans South Africa - Johannesburg, South AfricaOn 21-22 June 2011, Coaltrans South Africa was held at the Hilton Hotel Sandton in Johannesburg, South Africa. Kobus van der Wath attended the event and delivered a presen-


52 The Beijing Axis

tation entitled The Role and Importance of Asia for African Coal.

Africa Mining Congress 2011 - Johannesburg, South AfricaOn 19-22 July 2011, the Africa Mining Congress 2011 was held at the Sandton Convention Centre in Johannesburg, South Africa. Kobus van der Wath attended the event and delivered a presentation entitled China as a Driver of the Afri-can Resources Sector on 20 July.


Africa:

1-3 March Energy Indaba 2011 Johannesburg, South Africa

25 March CIPS Gauteng Regional Conference

Johannesburg, South Africa

18-20 May IMEXPO SADC China Trade Fair & Investment Forum


7-8 June Africa Iron Ore Cape Town, South Africa

26-28 June 33rd Annual SAPICS Confer-ence & Exhibition for Supply Chain, Logistics and Opera-tions Management Profes-sionals


28 June Impala Platinum Holdings Limited CEO - David Brown (GIBS Forum)


5-6 July Mozambique Coal Maputo, Mozambique

18 July The India Africa Business Network Launch


1 August American Chamber of Commerce Breakfast


22 August SA-Angola: Trade and Invest-ment Forum


AustraliaSA Boardroom Lunch - PerthOn 27 May 2011, Kobus van der Wath attended the event and delivered a presentation entitled China and its role in the Australian Mining industry.

Financial Review Mining Investment Conference 2011 - SydneyOn 23-24 June 2011, this conference was held at the Amora Hotel Jamison in Sydney, Australia. Javier Cuñat attended the event and delivered a presentation entitled China’s Ris-ing Outward Investment and How the West Can Benefi t.

AMEC (Association of Mining and Exploration Compa-

nies) Convention 2011 - PerthOn 28-30 June 2011, the AMEC Convention 2011 was held at Burswood Convention Centre in Perth, Australia. Kobus van der Wath delivered a presentation entitled China and its Role in the Australian Mining Industry on June 28.

Global Mining Investors ‘n' Explorers Show - SydneyOn 4-6 July 2011, the Global Mining Investment ‘n’ Explor-ers Show was held at the Hilton Hotel in Sydney, Australia. Kobus van der Wath delivered a presentation entitled China Outbound Investment Strategy on 5 July.

Xstract Lunch Time Technical Series - BrisbaneOn 16 August 2011, Xstract held one of its Lunch Time Tech-nical Seminars in Brisbane, Australia. Kobus van der Wath de-livered a presentation entitled The Why, What & How of China Procurement.


Australia:

5 July Australia China Business Council Sydney

1-3 August Diggers & Dealers Kalgoorlie

16 August CIPSA Strategic Procurement Forum Perth

22 August 7th Annual Coaltrans Australia Brisbane

31 August - 2 September

Africa Down Under Conference Perth

22-23 August

Coaltrans Australia Brisbane

30 August China Procurement Roundtable (Organised by The Beijing Axis)

Perth

Europe and AmericasStructured Commodity Finance Conference 2011 - Lon-don, UKOn 13-14 April 2011, the Structured Commodity Finance Conference 2011 was held at the Crowne Plaza Hotel in London, UK. Matt Pieterse attended the event and deliv-ered a presentation entitled China’s Impact on Global Com-modity Markets and Increasing International Investment on April 13.

Texel Breakfast Briefi ng - London, UKOn 16 May 2011, Matt Pieterse attended and delivered a pres-entation entitled China Moving Westwards and How Europe Stands to Benefi t.

World Mining Investment Congress - London, UKOn 17-19 May 2011, the World Mining Investment Congress was held at the Royal Garden Hotel in London, UK. Matt Pi-eterse attended the event and delivered a presentation on 18 May.

HARBOR Annual Aluminium Outlook Conference - Chi-cago, USOn 20-22 June 2011, the HARBOR Aluminium Conference was held at the Swissotel in Chicago, US. Lilian Luca deliv-ered a presentation at the event entitled China’s Economic Growth and its Expected Effects on Aluminium Supply and Demand on June 21, and another presentation entitled CHINA SOURCING: Perspectives on Why, What and How on June 22.


The Beijing Axis 53

54 The Beijing Axis

The China Analyst Events 会议展览

Upcoming Events

The Beijing Axis can assist delegates who wish to attend events in China as well as globally. The Beijing Axis’ service set includes research, interpretation, negotiation and travel logistics. For more information, please send an email to [email protected], or for contact details see The Beijing Axis corporate profi le on the back page.

Date Event Location

15-16 September 2011 4th South African Ferro-alloys Conference Johannesburg

Local and international delegates will be in attendance at this important industry forum for a country which is vital to the ferro-alloys market. Understand how your demand can be met and build lasting relationships with these key sup-pliers.

10-12 October 2011 Mines and Money Australia 2011 Sydney

Mines and Money Australia 2011 Conference and Exhibition will draw on the global investor database of its sister shows to match Australian mines with both domestic and international capital.

12-13 October 2011 The 7th CIPSA Annual Conference Melbourne

With 10 plenary sessions, 25 seminars and 6 pre-conference half-day workshops, the CIPSA Annual Conference is the leading procurement event in the region.

20 October 2011 CHINAAFRICA Business Forum 2011 Johannesburg

This one day forum will bring together key business leaders, industry specialists, project managers and others to explore the current dynamic of the China-Africa relationship

25-28 October 2011 2011 China Investment Summit London

This is the only conference of its kind bringing together European and institutional investors, sovereign wealth funds, banks, fund managers, regulators and all key stakeholders to access China’s investment opportunities..

6-8 November 2011 13th Annual CHINA MINING Congress & Expo Tianjin

The theme of this year’s Congress & Expo is 'The World and China in Mining Consolidation: Co-operation, Responsibility and Development.' Over the years CHINA MINING has evolved into one of the most infl uential mineral exploration/ex-traction trade events in the world, and has come to play a critical role in bringing together top policy makers and leading industry fi gures.

8-9 November 2011 3rd China Overseas Investment Fair Beijing

This fair is the fi rst authoritative and professional exhibition on China's overseas investment.

22-23 November 2011 Coaltrans Mozambique Mozambique

Coaltrans Mozambique provides a forum to discuss key developments and opportunities in both Mozambique and Southern Africa as a whole.

6-7 December 2011 Mines and Money London London

Mines and Money provides a channel for the global mining industry to cultivate long term partnerships with London’s mining stakeholders and investors, and brings together some of the most infl uential decision makers within mining com-panies, the investment community, governments and professional services.


DISCLAIMERThis document is issued by The Beijing Axis Ltd. While all reasonable care has been taken in preparing this document, no responsibility or liability is accepted for errors or omissions of fact or for any opinions

expressed herein. Opinions, projections and estimates are subject to change without notice. This document is for information purposes only, and solely for private circulation. The information presented here

has been compiled from sources believed to be reliable. While every eff ort has been made ensure that the information is correct and that the views are accurate, The Beijing Axis cannot be held responsible

for any loss, irrespective of how it may arise. In addition, this document does not constitute any off er, recommendation or solicitation to any person to enter into any transaction or to adopt any investment strategy, nor does it constitute any prediction of likely future movements or events in any form. Some investments discussed here may not be suitable for all investors. Past performance is not necessarily

indicative of future performance; the value, price or income from investments may fall as well as rise. The Beijing Axis, and/or a connected company may have a position in any of the investments mentioned

in this document. All readers are advised to make their own independent judgement with respect to any matter contained in this document.

Copyright notice: Copyright of all materials, text, articles and information contained herein resides in and may only be reproduced with permission of an authorised signatory of The Beijing Axis. Copyright

in materials created by third parties and the rights under copyright of such parties is hereby acknowledged. Copyright in all other materials not belonging to third parties and copyright in these materials as

a compilation vests in and shall remain copyright of The Beijing Axis and should not be reproduced or used except for business purposes on behalf of The Beijing Axis or save with the express prior written

consent of an authorised signatory of The Beijing Axis. All rights reserved. © The Beijing Axis 2011.

Previous Editions of The China Analyst

Other Recent Publications by The Beijing Axis

To view or download current or previous editions of The China Analyst or other The Beijing Axis publications, visit our website at www.thebeijingaxis.com.

January 2010

Regulars

Macroeconomic Monitor

China Facts & Figures

China Sourcing Strategy

China Sourcing Blog Highlights

China Trade Roundup

China Capital

Regional Focus: China-Africa, China-Australia,

China-Latin America and China-Russia

FeaturesFighting for Trade: China and the Threat of ProtectionismChina’s leaders are worried about protectionism, yet what is the real extent of the threat to China?

Rare Earths: China’s Contribution to Modern TechnologyA closer look at the history of the rare earths industry in China, the controversies surrounding it, and some upcoming trends to watch.

May 2010

Regulars



China Trade Roundup


China Capital

Mapping China



FeaturesUpstart: China’s Emergence in Science and TechnologyAfter coming of age in China’s domestic markets, Chinese are now replicating their domestic success in global markets.

Building by Design: How China Develops the Developing WorldChinese contractors and design fi rms have gone international and are shaping landscapes where its needed most: the developing world.

August 2010

Regulars



China Trade Roundup


China Capital

Mapping China



Features

The China Factor: Supplying China’s Phenomenal Demand for ResourcesHow did the China Factor become a singular driving force of global demand for natural resources in the 2000s?

Road to 2020: Nuclear’s Rising Contribution to China’s Energy NeedsNuclear power has entered a new era in China as China targets 2020 for radically ramping up nuclear production.

March 2011

Regulars



China Trade Roundup


China Capital

Mapping China



Features

China in 2030: Outlines of a Chinese FutureChina appears to have an awe-inspiring future ahead of it, and its economy its set to attain unparalleled dimensions, if the future turns out like we expect.

China's Construction Industry: Strategic Options for Foreign PlayersEntering the Chinese construction industry is a challenging prospect for foreign fi rms, yet opportunities still exist.

An Examination of China’s Strategy for Outbound Investment in Mining and Infrastructure Sectors in Africa

Investment in Energy and

Natural ResourcesMay 2011

The Role and Importance of Asia for African Coal

10th Coaltrans South AfricaJune 2011

China and its Role in the Australian Mining Industry

Association of Mining and

Exploration Companies Convention

June 2011

The outlook for the Asian and global commodities market

3rd Mining Investment

Summit 2011July 2011

China as a Driver of the African Resources Sector

Africa Mining Congress July 2011

China Sourcing: Perspec-tives on Why, What and How

HARBOR Annual Alumini-

um Outlook Conference June 2011

The Beijing Axis 55

a

ry

Johannesburg, South AfricaDirk KotzeDirector; GM, [email protected]+27 (0)11 201 2453+27 (0)11 201 2508 (fax)

Moscow, Russia Lilian Luca MD, Beijing Axis Procurement [email protected]

Perth, AustraliaDoug HorakBusiness Development Manager

[email protected]

Latin America Desk

Javier Cuñat (in Beijing) GM, Beijing Axis Strategy

[email protected]

The Beijing Axis Group is a cross-border business bridge to/from China in four principal areas: Commodities, Capital, Procurement and Strategy. We work across various industries, but our core focus is on the mining, resources, industrial and engineering sectors. With offi ces in Beijing, Singapore, Perth, Moscow, Johannesburg and London, we support international fi rms as they act in unfamiliar territory in China and Chinese fi rms as they venture out and ‘go global’. We are committed to safety and sustainability, and emphasise ‘actions and transactions’.

The Group is organised along four synergistic cross-border business units:

Beijing Axis Commodities Beijing Axis Commodities supports commodity producers with their international marketing eff orts and the structuring of off -take agreements, and assists commodity consumers with their procurement eff orts in securing supply.

Beijing Axis Capital Beijing Axis Capital provides independent corporate fi nance advisory and transaction origination services. We have a specialist China-specifi c approach with extensive international and Africa-specifi c knowledge and experience.

Beijing Axis Procurement Beijing Axis Procurement is a China-focused global procurement house and provides a comprehensive range of services across the supply chain.

Beijing Axis Strategy Beijing Axis Strategy provides management consulting services to CEOs and senior executives in the areas of strategy formulation and strategy implementation.

Beijing, China +86 10 6440 2106, +86 10 6440 2672 (fax)

Beijing Axis CommoditiesCheryl Tang

MD, Beijing Axis Commodities

[email protected]

Beijing Axis Capital Matt Pieterse

MD, Beijing Axis Capital

[email protected]

Beijing Axis ProcurementLilian Luca

MD, Beijing Axis Procurement

[email protected]

Beijing Axis Strategy Javier Cuñat

GM, Beijing Axis Strategy

[email protected]

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