C. Morel

1
25 Years and 11 Companies later ...
C. Morel Honorary Citizen Shanghai
1978 - 1983 The objective 1983 - 2001 The
reality 2002 - The new approach 1983 -
2003 Conclusions
2
25 Years and 11 Companies later ...
C. Morel Honorary Citizen Shanghai
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25 Years and 11 Companies later ...
1978 - 1983 The objective
FIGURES - Set up of joint venture company
1983-1998 - Chinese majority - 300 KL/Y final
capacity - 22 MUSD shareholder capital -
progressive vertical local integration up to
90 - cumulative Antwerp export 380 MUSD (direct
infeed) - SBell expected to be a 50 MUSD
company (yearly sales) STRUCTURE - SBell covers
the only final product (engineering production
installation) - SBell creates one 100 daughter
company for the component production
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25 Years and 11 Companies later ...
1983 - 2001 The reality
FIGURES - extension contract up to 2013
(renegotiated in 1992) 15 years - 15.000 KL/Y
output capacity mobile PABX transmission x
50 - 120 MUSD shareholder capital (via retained
earnings) x 6 - distributed local integration
up to 95 (spread over 10 companies) 5 -
cumulative Antwerp export 2.7 billion USD x
7 SBell proper sales figure 1.4 billion USD
(2003) x 28 SBell consolidated sales figure
2.1 billion USD (2003) x 42 SHANGHAI BELL
Pioneer License 6 out of 524.800 F.I.E.
(July 05)
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25 Years and 11 Companies later ...
1983 - 2001 The reality
STRUCTURE - SBell produces several (6) final
products of the telecom-network subcontracts
installation and commissioning per regio per
product (own other companies) subcontracts
high-volume items to low cost Chinese entities -
SBell creates 9 daughter companies with the final
customers as minority shareholder delocalisati
on partnering - SBell joins Alcatel in 4
specific product oriented joint
ventures focus on market segment
technology lean mean
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C. Morel Honorary Citizen Shanghai
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Content

• Some Figures
• WTO
• Structures, Methods and Explanations
• Problems and Opportunities
• New Government Policy
• Conclusions

8
Some Figures (1/8)

• Population
• 1,3 billion inhabitants, growing yearly with 5,5
  million persons till 2020
• The working population will reach 840 million in
  2020, another 150 million farmers will leave
  their farms, 200 cities will have more than 3
  million inhabitants
• 30 million people are still below the poverty
  line (was 490 in 1976)
• Retired people will grow from 7 to 12 in 2020

9
Some Figures (2/8)

• Labour market structure
• Today 33 work in the tertiary sector, 23 in
  the industry and 44 in the agricultural sector
• 42 million people work in the private sector
  (35) and 68 million in SOE (-34)
• The rural enterprises (35 GNP) absorbed 135
  million farmers
• The cities created 100 million jobs for rural
  immigrants

10
Some Figures (3/8)

• Social Structure
• New retirement system (8 8 ) introduced
  in1997, today 223 million workers registered
• Introduction of unemployment system (1 2 )
  in 1999, today 173 million registered, maximum 2
  years compensation
• Free medical service stopped in 1996, government
  pays only 10 of hospital budget, balance to be
  recovered on drugs
• Foreign investments in private hospitals allowed
  since 2004
• Health insurance introduced in 1998 (2 6 ),
  today 189 million registered

11
Some Figures (4/8)

• Foreign Direct Investments
• Totaling 1,096 trillion USD since 1982 (508.941
  FI enterprises)
• 90 à 100 billion USD per year is the forecast as
  from 2004
• 153,5 B USD (43.664 cies) in 2004
• (57 increase over 2003)
• Telecommunication
• 300 million mobile subscribers (1 million new per
  week) (500 million is objective for 2007)
• 250 million fixed network subscribers (25 million
  new per year)
• 60 of local production capacity of fixed lines
  (50 million) and mobile sets (180 million)
  exported

12
Some Figures (5/8)

• Auto market and production
• Market grew with 25 in period 1995-2002, with
  60 in 2003-2004 due to revised government
  policy on credit, growth of 10 à 15 forecasted
  for the period 2005-2020
• 5,2 million cars produced in 2004, capacity build
  up to 10 million by 2010 growing over-capacity
  results in price battles and export (VW Honda
  to Australia, Mercedes to USA, to Europe)
• Deal by Cherry Automobile to export 250.000 cars
  per year to USA as from 2007 (importer is US
  Visionary Vehicle Cy) (9.600 cars exported first
  semester 2005)

13
Some Figures (6/8)

• Gross Domestic Product
• 1,45 trillion USD in 2004 (9 above 2003)
• 4,00 trillion USD is the objective for 2020 (7,4
  cumulative growth)
• Import Export Balance
• 1,29 trillion USD in 2004 (51 more than 2003)
  (57 by FIE)
• 2 trillion USD was the objective for 2020 (will
  be reached in 2007 at present growth) (now
  slowdown to reach it only in 2010)
• Slowdown seems to fail 766 billion USD in
  Jan.-July 2005 ( 22 )
• Foreign Exchange Reserves
• 510 billion USD on Dec. 31, 2004 (25 more than
  Dec. 2003)
• 700 billion USD end of July 2005 (37 more than
  Dec. 2004)
• Procurement of companies i.s.o. USA government
  bonds

14
Some Figures (7/8)

• Small Medium Enterprises
• Estimated at 39 million of which 10 million
  officially registered
• They realise 80 of the total sales of textile,
  food, plastics,
• Diaspora
• 55 million Chinese live abroad
• Now they start to return (especially from USA)
  with capital, but basically with know-how and a
  network (Deng Xiaoping issue of 1990)
• Taiwan in PRC
• 72.000 JVC operational (320.000 Taiwanese in
  Shanghai)
• 136 billion USD FDI signed of which 84 Billion
  USD already invested

15
Some Figures (8/8)

• Education
• In 2003, universities had 12 million students,
  the high schools 19 million, 72 million persons
  followed vocational training and 78 million were
  in adult courses
• There are 70.000 private schools with 14 million
  students
• Forbes list of USD-billionaires
• 3 Chinese joined in 2004(Larry Ying of CITIC
  with 1,5 B USD)

16
WTO

• Perfect leverage (excuse) for the Central
  Government to act
• Drastic headcount reduction
• Import duty reduction
• Closing of un-economic companies
• Objective is to go faster than agreed in December
  2001
• Be better prepared to surprise foreigners when
  they arrive
• Extra pressure on local companies (to clean up
  faster)
• Quick reduction of import duties
• Real challenge restructuring of the Banks

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Methods, Structures and Explanations (1/3)

• Focussed site approach (SEZ, SIP, STC, )
• Later-on multiplied in different locations
• Focussed product approach
• Forex generation first textile, today
  electronics machinery(195 B USD 45 growth
  over 2003)
• Infrastructure related telecom, energy
• Attractive and efficient investment environment
• One step approach

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Methods, Structures and Explanations (2/3)

• Consistent longterm policies
• Results of career planning administration
  vice full minister level state council
• No real election pressure
• Use the export revenues to boost the import
  technologies, skills
• 45 of total export comes from J.V.C.
  W.F.O.E.
• Use the import needs to make friends worldwide
  (435 billion USD in 2003) through dedicated
  purchasing delegations
• 4 Q 03 USA 6,3 billion USD airplanes
  electromechanical
• Jan. 04 USA 2 billion USD telecom

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Methods, Structures and Explanations (3/3)

• Go Abroad policy (April 2003)
• Investing abroad 37 B USD by end 2004 (7.720
  companies)
• Make friends (job creation)
• Obtain technology skill (special attention for
  management)
• Direct import into China share dividends of
  exporters
• E.g. Galileo
• 236 M USD contribution (January 2004)

20
Problems and Opportunities (1/3)

• Ongoing GDP-growth of minimum 7 is necessary to
  create sufficient jobs, to avoid additional
  social tensions present key problem is to
  realise slow-down
• 30 million jobs lost in SOE
• 135 million peasants left the agriculture, 150
  million in the future
• Development gap between rich provinces and inland
• Opportunity for delocalisation (SBell since 1992)
• Necessity for infrastructural educational
  investments
• Natural resources are inland

21
Problems and Opportunities (2/3)

• Restructuring of banking world
• Estimated at 400 billion USD bad debts
• Still too much loans to SOE, hurts the private
  industry
• Seems now to start effectively(Dec. 03 45
  billion USD injection)(Dec. 04 15 billion USD
  injection and 85 billion USD asset liquidation)
• Investments abroad to saveguard raw material
  supply (oil fields in Sudan and Venezuela,
  steelworks in Brasil, ) and to create commercial
  networks (Lenovo IBM / USA)

22
Problems and Opportunities (3/3)

• Drastic and fast reduction of import duties
  accelerates breakdown of SOE and stimulates
  private industry
• (SOE 671 billion USD sales and 58 billion USD
  profit in 2004 which is an improvement of 50
  and 27 versus 2003)
• WTO implementation results in growing Foreign
  Direct Investments
• Big, big figures
• Latest technologies
• Most modern industrial service tools
• Upcoming spare capacity in many sectors (telecom,
  auto, steel,)
• Result drastic price reductions and export
  drive
• Support by Central Government machinery
  (political and financial)

23
New Government Policy (Hu Jintao Wen Jiabao)
(1/5)

• Keep silent no big declarations but faster
  action
• People first and a government for the people
• More harmony in the society East must help West
  Cities must help Rural Industry must help
  Agriculture
• Extra support for private enterprises today
  743.000 companies with 25 million workers
• Less administration and transfer out of
  government what is not kernel business
• New policy of industrialisation via technological
  innovation (environment, recycling, energy
  saving, )
• Reduction of Central Government Structures, will
  be followed by rationalisation of city / village
  management
• Reduce investments in assets financing and
  credits should go to service sector and
  consumption

24
New Government Policy (Hu Jintao Wen Jiabao)
(2/5)

• Go Abroad and Become Global
• TCL Thomson TV, Schneider electronics Alcatel
  Mobile
• Lenovo IBM PC
• PLA Dornier Airplane
• Huawei Netherlands
• Yearly investment of 10 à 15 B USD abroad (versus
  90 à 120 B USD inflow)(Now take advantage of
  weak economy in Europe, USA, Japan)
• To make friends
• To import from own companies
• To integrate in global trade and create global
  brands
• To accelerate the improvement in management

25
New Government Policy (Hu Jintao Wen Jiabao)
(3/5)

• Local market
• China remains the key-market of this world,
  extremely competitive and more and more open
• Middle-class with purchasing power increasing
  with 50 million persons per year (13 of today
  300 million luxury buyers in 2010)
• Technology center
• Building-up of RD considering cost aspect,
  available skills, quick innovation acceptance and
  standard definition-influence
• Export
• Government insist to slow down OEM, to increase
  own brands to keep profit in Chinese
  company-books
• The combination of Chinese price levels and
  government support combined with the MNC-existing
  customer networks will impact the global
  competitive arena

26
New Government Policy (Hu Jintao Wen Jiabao)
(4/5)

• The 2005-message of Prime Minister Wen
• SOE must be more internationally competitive
  (own brands, better result evaluation, less
  social duties, )
• Further liberalisation in the sectors of energy,
  telecom, aviation, railways, benefits the
  customer
• More control on the companies regarding safety,
  environment, employee rights,
• Government banks will be transformed into
  shareholding companies
• Extra money for education, technological and
  scientific development
• Taxes on agriculture will be reduced and
  distribution system has to be drastically
  improved

27
New Government Policy (Hu Jintao Wen Jiabao)
(5/5)

• Objective 1 it is an instruction
• 50 Chinese companies in Fortune Top 500 by 2015
  (8 first entered in 2004)
• 5.500 Chinese SME at the top by 2015
• Objective 2 set up of Chinese MS channels
  final goal
• Production is nice, but the real profit is in the
  distribution channels
• Objective 3 Mofcom instruction of January 17,
  2005 the SME have to improve
• By accelerating the technological innovations
• By building global sales networks
• By promoting own brands
• Mofcom sets up a regulator to evaluate the
  global
• competitiveness

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Conclusions (1/4)

• A yearly 500 à 999 billion USD import-country is
  a blessing for the exporting world economy
• A yearly 7 à 8 growing market of 1.3 billion
  potential customers provides business
  opportunities
• 100 million Chinese outbound visitors / year
  expected as from 2010 (20 million in 2003)
• 40 million visitors to China in 2003, growing to
  140 million in 2010
• Delocalisation closer to the final customer,
  closer to the low cost production site seems
  logical (174 MNC of Fortune-top invested in
  Shanghai)

29
Conclusions (2/4)

• The CPC Politburo Standing Committee
• All 9 members are engineers by training (for the
  first time zero career ideologists or soldiers)
• Reflected in the new government policies
• Project to move 400 million people from rural to
  urban area will result in fantastic opportunities
  and price effects
• Cooperation is the formula
• Complementarity (in business chain)
• Bothway (know-how, money, markets, products)
• Permanent evolution (production, RD, MS, )

30
Conclusions (3/4)

• The funny or cynical part of the story
• The Chinese take care of an improving business
  environment growing local purchasing power
• The foreigners provide capital, technology,
  management now the global markets
• You cannot stop the eager-beavers (5 65
  million guys) the shareholders (more return)
  the final customers (lower prices)

31
Conclusions (4/4)

• Chinese friends do not understand our surprise
• until the 15th century, China was a
  technological leader with the highest income per
  capita, in the period 1818-1830 China represented
  30 of the Global GDP, so we go back
  there(today they are at 7 )
• CHINESE PROVERB
• What you can not avoid,welcome