China Factors A guide for investing in China Global Chinese Services Group October 2018 Contents
Preface 1 China: A resilient and more open economy 3 China made a profound impression on the FG500 list 8 China pledges to improve the investment environment 10 Industry overview 13 Industry segmentation 22 Industry contacts 51 Implications for setting up business in China 53 Regional snapshots 62 Office contacts 79 Introduction to Global Chinese Services Group 80 Global Chinese Services Group Core Team 84
China Factors - A guide for investing in China | Preface
Preface
Being the second-largest economy in the Innovation and industrial upgrading have The 2018 China inbound investment world, China’s economy has been transforming become the new growth engines for the brochure delves deeper into the local market from high-speed to high-quality growth. The Chinese economy. The government has landscape, analyzing key proponents and consumption-driven economy features its made abiding commitment to fostering an industries that offer lucrative opportunities immense market with robust demand. As innovative environment that is conducive to for foreign investment. With more than China is celebrating the 40th anniversary of the development of technologies a priorities 13,000 people in 22 offices across mainland economic reforms, China’s opening-up has so that manufacturers can move up the China, Hong Kong, Macau, and Mongolia, entered a new era with a master plan for the value chain. With the major themes of future and serving more than 800 multinational economy to transform into a top innovative development focusing on innovation, opening- companies and their affiliated companies in nation and a moderately prosperous society up, people’s livelihood, and environmental mainland China, Deloitte is uniquely qualified while mitigating rising global protectionism. friendliness, China has pledged to open the to support your investment decisions with a doors wider by largely lowering the entry full range of audit and assurance, consulting, China’s economy has been resilient. In 2017, barrier to foster a world-class business financial advisory, risk management, and the economy grew by 6.9% – for the first environment. For example, the market access tax services. We work closely within Greater time in seven years, the pace of growth has to general manufacturing, financial services, China, across Asia-Pacific, and around the picked up. According to the National Bureau telecommunications, medical services, auto, world to provide clients of every size with local of Statistics (NBS), GDP growth in the first and new energy vehicles will be expanded. experience and international expertise. We quarter of 2018 was 6.8%, and IMF has Overseas investors will be granted tax deferral hope this piece of thoughtware serves as a estimated a 6.5% growth rate for China’s for the reinvestment of profits made in China. useful guide to make your next bold move economy in 2018. China’s consumption Procedures for setting up foreign-invested in China. upgrading, as well as improved labor force enterprises will be simplified. quality, will continue to draw an increasing amount of foreign investment.
1 China Factors-A guide for investing in China | Preface
2 China Factors - A guide for investing in China | China: A resilient and more open economy
China: A resilient and more open economy
China makes strides in economic Fixed asset investment, historically a key year. Indeed, Chinese retail sales have grown transformation driver of China’s growth, grew by 7.2 percent at double-digit rates in previous years. The China’s economy grew by 6.9% in 2017. For in 2017, 0.9 percentage points slower than resilience of the Chinese economy stems the first time in seven years, the pace of a year earlier (prior to 2016, fixed asset from the unfulfilled demand of confident growth has picked up (figure 1). Thanks to a investment grew at a much more rapid pace), consumers (exactly as President Xi has alluded stronger US economy and synchronized global making it a less important driver due to in his address at the 19th Party Congress). recovery, the outstanding exports grew at 7.9 to structural adjustments. More importantly, China’s consumption percent, ending the continuous drop of the upgrade story, a secular trend, is unlikely previous two years and helping to make 2017 China’s retail sales of consumer goods grew to be derailed by higher interest rates. better than expected. 10.2 percent year-over-year in 2017, 0.2 Consumption boom is trickling down to third percentage points slower than the previous and even fourth tier cities. China’s growing consumption, as well as improved labor force Figure 1. A consumption-driven economy quality, has drawn increasing amounts of China’s new normal – foreign investment. Interpretations from “the authoritative person” (%) 100 80 10.6 9.7 60 9.4 9.5 7.9 40 7.8 7.3 6.9 6.7 6.9 20 6.5 0 -20 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E -40 Est. by IMF -60 Contribution to GDP growth: consumption Contribution to GDP growth: investment Contribution to GDP growth: net exports GDP growth
Source: National Bureau of Statistics, Deloitte Research.
3 China Factors - A guide for investing in China | China – A resilient and more open economy
Innovation and industrial upgrading as To deemphasize the growth target new engines For the current 2018 scenario, however, Innovation and industrial upgrading have the economy is likely to slow down for the become the new growth engines for the following reasons. First, the excellent economic Chinese economy. With the world’s largest performance in 2017 (growth of 6.9%) set Internet user base, China’s new wave of a high base, making it difficult to repeat technological innovation featuring artificial that stellar performance. Second, having intelligence and “Internet Plus” lent impetus prioritized financial risk prevention in 2017, the to emerging sectors such as industrial government is likely to restrain credit growth, automation-notably robotics, whose sales which could dampen growth in the short have been growing at 20% on average for the term. In addition, the Trump administration’s past five years. pressure on China with regard to bilateral trade deficit reductions will not go away, which President Xi’s speeches at the 19th Party could pose challenges to Chinese exporters. Congress and Two Sessions underscored the government’s abiding commitment to The GDP growth target has been fostering an innovative environment that is deemphasized in the 19th Party Congress in conducive to the development of technologies 2017, which was a favorable measure given so that manufacturers can move up the that deleverage and state-owned enterprise value chain. Such policy directives, along (SOE) reforms could proceed more easily with China’s strength in IoT and AI, will not against a backdrop of slower growth. As only create more business opportunities for China’s GDP growth held steady at 6.8% in Q1 leading multinational corporations (MNCs), 2018, economic growth was well on track to but also enable those which could stay reach the government’s goal of “around 6.5%”. competitive in the Chinese market to The bottom line is that China still has ample become global leaders. policy leeway thanks to its domestic demand and global cyclical upswings.
4 China Factors - A guide for investing in China | China – A resilient and more open economy
US-China trade frictions—a new normal level, market access and reciprocity have which covered commercial banks, brokerage Global rising protectionism is another key become buzzwords in the United States and, firms, VCs, PEs, insurance companies, and factor that cannot be dismissed when it to a certain extent, in several developed rating agencies. In President Xi’s speech, the comes to analyzing economic trends in China. countries when it comes to trade relations insurance sector was particularly highlighted, We have long held the view that the adverse with China in recent years. Countries like and more importantly, implementation of such effects on the Chinese economy, because it is Germany have also made demands for liberalization measures within a timetable was so heavily export-dependent and entrenched improved market access on grounds of emphasized (figure 2). President Xi pointed out in global supply chains, lie mainly in three reciprocity rather than filing a claim for trade that China’s manufacturing sector is already areas: 1) inflation, 2) investor sentiment, and imbalance (Germany’s trade surplus with quite open, and suggested that the auto 3) disruption of supply chains. The inflationary China in Q1 2018 stood at USD 7.77 billion). sector is strong enough for further opening- impact of tariffs is already visible in China, Therefore, the best policy response would up. Specifically, tariffs on imported vehicles will as 2018 has seen significant increases in not be tit-for-tat tariffs but rather concrete come down and restrictions on joint ventures rents and furnishings, prices at restaurants, steps in opening up domestic markets (service will be eased. These actions could ease trade and manual labor in major cities. A further sectors in particular) within a clearly defined tensions for now, but all eyes will be on policy escalation of trade tensions between China timetable. At the same time, improved market implementation in the near future. We hope and the United State is bound to create fresh access will also defuse trade tensions between concrete steps will be taken to improve the inflationary pressure on China. This will, in China and other countries. business environment. turn, hurt investor sentiment, already shaky amid economic deceleration and regulatory Further opening-up of the economy tightening. With regards to the impact on Some ground has already been covered in supply chains, major decisions on the strategic the opening-up. In 2018, as the country is investment of enterprises have to be made celebrating the 40th anniversary of economic with a time horizon of at least 10 years. reforms, President Xi has pledged an Therefore, the lack of a clearly foreseeable end “unprecedented opening-up” at the Boao to the US-China trade war is deterring private Forum. Specifically, market access mainly investment and making investors risk-averse. concerns the manufacturing and services sectors, especially the financial sector. It is true that President Trump is preoccupied Last November, the Chinese government by bilateral trade imbalances, but on a deeper announced a slew of liberalization policies,
5 China Factors - A guide for investing in China | China: A resilient and more open economy
Figure 2. Roadmap of China’s opening on foreign ownership limit
Since August 2018 3 years later
Banks/AM 20% on a single-entity basis None companies 25% on an aggregate basis Securities/ fund/futures 49% companies 51% None Personal insurance 50%
Source: Public information, Deloitte Research.
Besides deepening its roots, opening-up the world for nearly five years, will become transforming into a consumption-driven has extended its breadth, forged ahead increasingly important. As directed by the economy, whose resilience stems from from eastern coastal areas to the hinterland, 19 th Party Congress, the BRI not only facilitates residents’ unfulfilled demand. Moreover, China from pilot cities to metropolitan areas. As Chinese outbound investment but serves as is pursuing development with its doors wide China enters a new phase of coordinated a new platform for international cooperation open and will accelerate financial liberalization regional development, there are increasing and gives equal emphasis to “bringing in” and improve market access in the long term. opportunities in areas such as the and “going global” with regard to capital. It should be noted that foreign capital can Guangdong-Hong Kong-Macao Greater Bay Foreign enterprises could also leverage the also reap the fruits by aligning well with these Area, as a junction for China to further open advantages of the BRI to expand business in megatrends, most importantly, the structural up to the global economy. key development districts of China. upgrading of China’s development model and its long-standing commitment to further Last but not least, the Belt and Road Initiative In conclusion, shifting away from a growth opening-up. (BRI), which has been a large part of the model regardless of resources and investment landscape across a swath of environmental constraints, China has been
6 China Factors-A guide for investing in China | China – A Resilient and More Open Economy
7 China Factors - A guide for investing in China | China made a profound impression on the FG500 List
China made a profound impression on the FG500 list
In 2018, 112 Chinese companies* made the Bolder reform and opening-up is going The evolving policy and market landscape Fortune Global 500 (FG500) list. It was the to take place in China. China will further boasts opportunities and challenges in China fifteenth straight year that Chinese companies expand the scope and raise the quality for both Chinese companies and foreign MNCs. had increased their presence on the list. The of its opening-up; China will also advance And we forecast that Chinese companies rise of Chinese companies was spectacular international cooperation under the Belt will continue their outbound investment given that there were fewer than 10 companies and Road Initiative. momentum, especially in markets along the Belt on the list in 2000. The United States led the and Road Initiative. 2018 FG500 list with 126 companies.
Most Chinese FG500 companies are in the Rank Countries 2014 2015 2016 2017 2018 sectors of energy, finance, retail, Internet, 1 United States 128 128 134 132 126 and property. More than 80 percent of these 112 companies are state-owned. Ten 2 China* 95 99 103 109 112 Chinese companies joined the list for the first time, including China Merchants Group and 3 Japan 57 54 52 51 52 Shougang Group. 4 Germany 28 29 28 29 32
Compared to its global peers, China FG500 5 France 31 31 29 29 28 companies are at the early stage of their 6 United Kingdom 27 28 26 24 21 globalization journey, but the pace to expand overseas markets is picking up. Deloitte’s 7 Korea 17 17 15 15 16 analysis finds that China FG500 companies accounted for 56% of capital invested overseas 8 Netherlands 12 12 12 15 15 from 2013 through 2017. 9 Switzerland 13 13 15 14 14 10 Canada 10 11 11 11 12
Source: Fortune Global 500. *Including companies headquartered in mainland China and Hong Kong only.
8 China Factors-A guide for investing in China | China Made a Profound Impression on the FG500 List
9 China Factors - A guide for investing in China | China pledges to improve the investment environment
China pledges to improve the investment environment
The Chinese government has been constantly by the State will be changed from the working on improving the investment examination and approval system to a filing environment for foreign investors. The system. Standing Committee of the National People’s Congress made a decision on the amendment In 2017, the State Council issued two of four laws, including the Law of the People’s important documents relating to the Republic of China on Wholly Foreign-Owned utilization of foreign investment, which are Enterprises, the Law of the People’s Republic the Notice of the State Council on Several of China on Sino-Foreign Equity Joint Ventures, Measures for Expansion of China’s Opening the Law of the People’s Republic of China up to the Outside World and Active Use of on Sino-Foreign Cooperative Enterprises, Foreign Capital and the Notice of the State and the Law of the People’s Republic of Council on Several Measures for Promoting China on the Protection of Investment by Foreign Investment Growth. More than 40 Taiwanese Compatriots on September 3, 2016. specific policies and measures have been The Ministry of Commerce published the formulated to promote the open and fair Provisional Measures on Filing Administration competition environment and to enhance for the Establishment and Change of Foreign the attraction of foreign investments. Investment Enterprises on October 8, 2016, Furthermore, the Catalogue of Industries for and made further revision on July 30, 2017. Guiding Foreign Investment was revised for Under these laws and regulations, it has been the seventh time in 2017. In the 2017 version, explicitly stipulated that the administration the restricted items on foreign investment of establishment and change of foreign were reduced to 63, from the earlier 93 items investment enterprises which are not subject in the 2015 version. to special administrative measures stipulated
10 China Factors - A guide for investing in China | China pledges to improve the investment environment
Recently, in the press conference of the first Except for the above-mentioned session of the 13th National People’s Congress improvements in foreign investment policies, held on March 6, 2018, Ning Jizhe, the deputy the government is also working on the director of the National Development and simplification of the formalities of foreign- Reform Commission (NDRC), announced that invested enterprise establishment. On the Chinese government will further improve February 28, 2018, the Ministry of Commerce the policy of attracting foreign investment and and the State Administration for Industry improve the foreign investment environment and Commerce jointly issued the Notice of by substantially loosening the market access, General Office of the Ministry of Commerce vigorously promoting the convenience of and General Office of the State Administration investment and so forth. The NDRC will work for Industry and Commerce on Matters together with other relevant departments Concerning the Acceptance of Applications of the State Council to further revise and for Commercial Record-filing and Business gradually extend the negative list of foreign Registration of Foreign-invested Enterprises at investment, which has been put into trial a Single Window with a Single Form pursuant use in the free trade zone to the whole to which applications for commercial record- country. The openness of the service industry filing and for business registration of foreign- will be largely enhanced and the general invested enterprises should be accepted at a manufacturing industry will be fully liberalized. single window with a single form as of June 30, The restriction on the foreign shareholding 2018, to optimize the procedures for foreign- ratio in certain industries and the restrictions invested enterprises to apply for enterprise on the business scopes of foreign investment establishment, shorten the processing period, will be loosened or even abolished. The and reduce enterprise cost. government will also make efforts to create a more fair competition environment for both domestic and foreign enterprises.
11 China Factors-A guide for investing in China | China Made a Profound Impression on the FG500 List
12 China Factors - A guide for investing in China | Industry overview
According to the report, the United States In addition, the report also pointed out that Industry overview topped the list of the top 10 host economies for after three consecutive years of growth, global FDI flows with inflows of USD 311 billion, followed cross-border M&As fell sharply in 2017. In fact, by China (the third largest FDI recipient in 2016) the growth of global cross-border M&As had Overview with USD 144 billion and Hong Kong with USD already slowed in 2016. In 2017, cross-border According to the Global Foreign Direct 85 billion. Other countries on the list include the M&A value went on to contract by 23%, Investment Review and Outlook 2017–2018 Netherlands, Ireland, Australia, Brazil, Singapore, reaching an estimated USD 666 billion, but still released by the United Nations Conference France, and India (in descending order). represented the third-highest level since 2007. on Trade and Development, global foreign direct investment (FDI) fell by 16% in 2017, to an estimated USD 1.52 trillion, from USD 1.81 Figure 3. FDI trends in China (USD billion) trillion in 2016. China, with recorded inflows of 150 40,000 USD 144 billion (USD 131 billion according to 30,000 the Ministry of Commerce), is now the second- 100 largest recipient in the world. 20,000 50 10,000 A slump in FDI flows to developed countries 0 0 (-27% in Europe and -33% in North America) was 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 the principal factor behind the global decline. Capital investment Number of projects (R) FDI inflows in the United States and the United Kingdom have returned to prior levels in 2017 Source: Ministry of Commerce, Wind. after spikes in the previous two years. Industry breakdown In 2017, by sector, there were 579 newly Against the backdrop of a decline in According to the 24-group industry classification established foreign-invested enterprises in worldwide FDI, the share of developing Asia sorted by the National Bureau of Statistics agriculture, forestry, animal husbandry and in global inflows rose from 25% in 2016 to of China, manufacturing, real estate, leasing fishery–up 29 percent from 2016 while the 30%. Estimated FDI flows to developing Asia and business services, wholesale and retail, actual use of foreign investment contracted amounted to USD 459 billion in 2017, up 2% information transmission, computer services by 52.1%, reaching USD 790 million. In the from 2016, regaining its position as the largest and software, and finance were most favored manufacturing sector, 4,986 foreign-invested FDI recipient region in the world, followed by the by foreign investors, attracting nearly 80% of the enterprises were newly established, a year- European Union and North America. total FDI flows in the past three years. over-year growth of 24.3%, while the actual
13 China Factors - A guide for investing in China | Industry overview
use of foreign investment fell 5.6% from 2016, to USD 33.51 billion. In the service sector, 30,061 new foreign-invested enterprises were established, up 28.4 percent from 2016 while the actual use of foreign investment was USD 95.44 billion, representing a year-over-year increase of 7.5%.
Figure 4. 2015–2017 FDI breakdown by industries (USD billion)
120
100 80 60 40 20 0 Manufacturing Real estate Leasing and business services Wholesale and retail trades and software Information transmission, computer services Finance computers and other electronic equipment Manufacture of communication equipment, geologic perambulation Scientific research, technical services and Transport, storage and post Manufacture of general purpose machinery gas and water Production and supply of electricity, Manufacture of special purpose machinery chemical products Manufacture of raw chemical materials and Construction Manufacture of medicines and fishery Agriculture, forestry, animal husbandry Residential services and other Manufacture of textile Culture, sports and entertainment Mining environment and public utilities Management of water conservancy, Hotels and catering services Sanitation, social security and welfare Education
Source: National Bureau of Statistics of China, Wind.
14 China Factors - A guide for investing in China | Industry overview
A further observation on the FDI investment during the three years (for detailed CAGR of services; and scientific research, technical data from 2015 to 2017 is shown in Figure 5: each industry, see table 1); and the bubble size services, and geological exploration achieved the below the horizontal axis shows the number represents the total investment amount over the best overall performance. The CAGR data from of foreign direct investment projects in each three years. Three sectors in the first quadrants, 2015 to 2017 shows that sectors with positive sector; the vertical axis indicates the compound including information transmission, computer and negative FDI growth can be split into equal annual growth rate of foreign direct investment services and software; leasing and business halves, with the real estate and financial sectors suffering the worst slump. Figure 5. Volume vs. value vs. CAGR of sector FDI (2015–2017)
Info. transmission, computer services software
Scientific research, technical services and geologic perambulation
Leasing and business services
Wholesale and retail Manufacturing trades Finance Note: IMF estimates Source: National Bureau of Statistics of China, Wind. 15 China Factors - A guide for investing in China | Industry overview
Table 1. Sector rank by CAGR (2015–2017)
Sectors CAGR (%) Sectors CAGR (%)
Information transmission, computer services 1.34 Hotels and catering Services -0.02 and software Wholesale and retail trades -0.02 Mining 1.32 Manufacture of raw chemical materials -0.05 Education 0.64 and chemical products Sanitation, social security and social welfare 0.46 Culture, sports and entertainment -0.06
Construction 0.30 Manufacture of communication equipment, -0.07 computers and other electronic equipment Leasing and business services 0.29 Manufacturing -0.08 Production and supply of electricity, gas and water 0.25 Residential services and other services -0.11 Manufacture of medicines 0.24 Agriculture, forestry, animal husbandry and fishery -0.16 Scientific research, technical services and 0.23 geologic perambulation Manufacture of textile -0.21 Transport, storage and post 0.16 Real estate -0.24
Management of water conservancy, environment 0.15 Finance -0.27 and public utilities Manufacture of general purpose machinery 0.01 Source: National Bureau of Statistics of China, Wind.
Manufacture of special purpose machinery -0.01
16 China Factors - A guide for investing in China | Industry overview
Table 2. Top 10 M&A deals by value (2015–2017)
Announced Target company Target dominant Bidder company Deal value date sector (USD billion) 09/26/2016 Yum China Holdings, Inc. (95% stake) Leisure Yum! Brands, Inc. (shareholders) 10.91
04/28/2017 Didi Chuxing Technology Co., Ltd. Internet/e-commerce SoftBank Group Corp.; Silver Lake 5.50 Partners; Bank of Communications Co., Ltd.; China Merchants Bank Co., Ltd. 11/27/2015 China TieTong Telecommunications Telecommunications: China Mobile Limited 5.36 Corporation (fixed line telecom and Carriers broadband business) 03/14/2016 CITIC Real Estate Group Co., Ltd.; CITIC Real Estate China Overseas Land and Investment 5.25 Pacific Limited Limited 03/02/2017 JD Finance (68.6% stake) Financial Services Undisclosed bidder 4.98
12/21/2017 Didi Chuxing Technology Co., Ltd. Internet/e-commerce SoftBank Group Corp. 4.58
05/12/2016 Didi Chuxing Technology Co., Ltd. Internet/e-commerce Apple Inc.; China Life Insurance Co., 4.50 Ltd.; China Merchants Bank Co., Ltd.; Alibaba Group Holding Ltd; … 10/19/2017 China Internet Plus Holding Ltd. Internet/e-commerce An investor group led by Tencent 4.00 Holdings Ltd 01/19/2016 China Internet Plus Holding Ltd. Internet/e-commerce An investor group led by Tencent 3.50 Holdings Ltd 10/26/2015 Qunar Cayman Islands Limited (45% stake) Internet/e-commerce Ctrip.com International, Ltd. 3.42
Source: Mergermarket.com
17 China Factors - A guide for investing in China | Industry overview
Table 3. Top 10 greenfield FDIs by value (2015–2017)
Project Investing company Parent company Source Industry sector Capital date country investment (USD billion) 12/2016 Foxconn Hon Hai Precision Industry Taiwan Electronic components 8.80
08/2017 Samsung Semiconductor Samsung South Korea Semiconductors 7.00
05/2015 Hongkong Land China Holdings Jardine Matheson Holdings Hong Kong Real estate 3.04
12/2015 Taiwan Semiconductor Taiwan Semiconductor Taiwan Semiconductors 3.00 Manufacturing (TSMC) Manufacturing (TSMC) 04/2015 Powerchip Technology Powerchip Technology (Powerchip Taiwan Semiconductors 2.18 (Powerchip Semiconductor) Semiconductor) 12/2017 Sateri International Royal Golden Eagle (RGE Group) Singapore Textiles 1.82
07/2017 LG Display LG South Korea Electronic components 1.60
05/2016 Pacific Oil & Gas Royal Golden Eagle (RGE Group) Singapore Coal, oil and natural gas 1.52
05/2016 Pacific Aerospace Resources & ARC Aerospace Industries United States Aerospace 1.50 Technologies 07/2016 Tishman Speyer Properties Tishman Speyer Properties United States Real estate 1.34
Source: fdimarkets.com
18 China Factors - A guide for investing in China | Industry overview
Source countries accounting for 95.1% of the total amount of In 2017, ASEAN invested in or established 1,287 According to official data from the National the actual use of foreign investment in the enterprises in China, a year-over-year increase Bureau of Statistics, 35,652 new foreign- country, up 5.2 percent from the previous of 11%, while the actual foreign investment invested companies were established in 2017, year. The top 10 source countries and regions reached USD 5.21 billion, a year-over-year a year-over-year increase of 27.8%, while the for investment into China were: Hong Kong decrease of 22.6%; the 28 EU member countries actual use of foreign investment rose to RMB (USD 98.92 billion), Singapore (USD 4.83 invested in or established 1,873 enterprises in 877.56 billion, a year-over-year increase of billion), Taiwan Province (USD 4.73 billion), China, a year-over-year increase of 7.6%, while 7.9% (or USD 131.04 billion, a year-over-year South Korea (USD 3.69 billion), Japan (USD 3.27 the actual foreign investment reached USD increase of 4%). billion), the United States (USD 3.13 billion), the 8.79 billion, a year-over-year decrease of 9.1%. Netherlands (USD 2.17 billion), Germany (USD Countries along the Belt and Road invested in The total actual foreign investment by the top 1.54 billion), the United Kingdom (USD 1.5 and established 3,857 enterprises in China, 10 FDI source countries was USD 12.46 billion, billion), and Denmark (USD 1.2 billion). a year-over-year increase of 32.8%, while the actual foreign investment amounted to USD Figure 5. FDI breakdown by major source countries 5.56 billion, a year-on-year decrease of 20.4%; 11,984 new foreign-invested enterprises were established in the Yangtze River Economic Belt, a year-over-year increase of 2.6%, while the 2017 actual use of foreign investment reached USD 57.42 billion, a year-over-year decrease of 6%.
2016 USD billion
2015
0 20 40 60 80 100 120 140
Hong Kong Singapore Taiwan Korea Japan USA Others
Source: Ministry of Commerce, Wind.
19 China Factors - A guide for investing in China | Industry overview
Destination regions When it comes to the distribution of foreign investment destinations, according to data from the National Bureau of Statistics, the top 10 regions for actual use of FDI in 2016 were Jiangsu, Guangdong, Shanghai, Zhejiang, Henan, Shandong, Anhui, Beijing, Hunan, and Chongqing, and the foreign capital inflows of each province exceeded USD 10 billion, with a total foreign investment inflow of USD 169.82 billion.
Figure 6. 2016 destination ranking in FDI
25 24.54 23.35
18.51 20 17.60 16.99 16.83 14.77 15 13.03 12.86 11.34
USD billion 10
5
0
Source: National Bureau of Statistics of China, Wind.
20 China Factors-A guide for investing in China | Industry Overview
21 China Factors - A guide for investing in China | Industry segmentation
Industry segmentation
Snapshot of China’s TMT industry—full Technology continue in 2018. The “Made in China 2025” steam ahead The technology sector is expected to sustain initiative aimed at boosting development in We live in a time of relentless change yet high growth, particularly in emerging verticals. high-tech will further push the robotics market stubborn continuity. The technology, media, growth for the long haul. and telecom sectors remain as active as ever. Robotics on high path: The Chinese robotics Progress will be exponential in some fields, market is set to expand rapidly. China is the while in other areas the way in which we live largest robotics market in the world. This and work may shift imperceptibly. was the case in 2016 and 2017, and is likely to
Figure 7. China’s robotics market (2017–2021E)
USD billion
600
R 27.9% 33.8% 500 CAG 32.1% 400 27.2%
300 18.9% 18.0% 200
100
0
Source: Robot-china 22 China Factors - A guide for investing in China | Industry segmentation
AI relentlessly marches forward: China’s artificial intelligence industry recently received a huge boost of validation from the government, which announced its plans to create a USD 150 billion artificial intelligence market by 2030, surpassing the US market.
Figure 8. China’s AI market (2015–2018E)
1% CAGR 2 25.0% USD billion 21.8% 40 16.3% 36.1 16.0% 28.88 30 23.71 20.39 20
10
0 2015 2016
Source: Robot-china
RPA to transform business dramatically: Robot-led automation has the potential to transform today’s workplace as dramatically as the machines of the Industrial Revolution changed the factory floor. Both robotic process automation (RPA) and Intelligent automation (IA) have the ability to make business processes smarter and more efficient, though in very different ways. RPA tools are best suited for processes with repeatable, predictable interactions with IT applications. These processes typically lack the scale or value to warrant automation via IT transformation. RPA tools can improve the efficiency of these processes and the effectiveness of services without fundamental process redesign.
23 China Factors - A guide for investing in China | Industry segmentation
Intelligent automation: Intelligent Machine learning (ML) will take baby automation has great potential to automate steps to mature: A core element of artificial nonroutine tasks involving intuition, intelligence will progress at a phenomenal judgment, creativity, persuasion, or problem pace. But this will be from a low base. As solving. The decreasing costs of data impressive as it is today, in 50 years’ time storage and processing power are driving the ML abilities of 2018 will be considered rapid developments in the field of artificial baby steps in the history of this technology. intelligence, creating a new breed of cognitive Over the coming year, ML will become more technologies with human-like capabilities such commonly deployed in enterprises, but will as recognizing handwriting, identifying images, remain far from ubiquitous. Almost every and natural language processing. When high-end smartphone will have a machine combined with robotic process automation learning chip, but those chips will not yet be and powerful analytics, these cognitive fully utilized. Nearly a million ML chips will be technologies can form intelligent automation installed in data centers, but this quantity will solutions that either directly assist people seem small within a decade. in the performance of nonroutine tasks or automate those tasks entirely.
24 China Factors - A guide for investing in China | Industry segmentation
Media capital flow, and supply-side development, treatment as domestic films. Further, tech The media sector is flourishing, particularly in the industry continues to grow. Revenue giants like Baidu, Alibaba, and Tencent, as film and live broadcasting. generated by China’s film industry is expected game-changers, utilize their ability to draw on to surpass that of North America, making big data to drive decision optimization and Film market bulldozing its way: After it the largest film market in the world. profit growth. The effect of these innovations a hiccup in 2016, the Chinese film market Coproductions will increase, albeit slowly, has already transformed the Chinese film rebounded quickly in 2017 and overtook and can achieve “win-win” outcomes for industry chain, from intellectual property North America in the first quarter of 2018. both parties, because they are considered to production, marketing and promotion, With sustained support from positive policies, to be “made in China” and enjoy the same distribution, ticket sales, and cinema screenings. Figure 9: Major global box office country comparison (USD billion, 2017) Vibrant live broadcast: The live broadcast 16 market will remain vibrant despite consumers’ 14.5 ever-improving capability to consume content 14 on demand or, in the case of live events, to 12 11.5 attend remotely. Even in an age in which the mantra for media is often “what you want, 10 when you want it, where you want it,” the way we want to consume is often “now” because 8 of the thrill and convenience of live delivery. 6 And in many regards, digital technology has actually made live content more productive 4 2.8 2.4 and profitable. China is likely to remain the 2.3 1.8 2 1.5 1.2 1.1 largest market for live streaming in 2018, with forecasted revenue of USD 4.4 billion. 0 Viewers are likely to reach 456 million. Live broadcast appears to be still alive in the digital era. Live content will thrive in a digital world–it is as relevant as ever for enterprises US & Canada and consumers.
25 China Factors - A guide for investing in China | Industry segmentation
Telecommunications the communications industry. By 2023, 5G boom, and the increase of e-business activities. Mobile and 5G will usher in a new era for the networks should have launched in most And the pace and reach of those networks is telecom sector. developed markets, offering much greater likely to increase. The majority of voice calls capacity and connectivity speeds. Over a billion have already moved to mobile networks. Now 5G moving ahead: The Chinese State 5G users are forecasted for China alone by it is the home broadband’s turn thanks to the Council will accelerate the development of 2023. The mobile Internet market will further ever-falling cost per gigabyte of data. The scale 5G industry, hoping to start 5G business in grow in the future, due to the steady growth of fixed assets investment in China’s telecom 2020 and enhance the competitiveness of of the mobile shopping and mobile gaming industry has been increasing in recent years, China’s manufacturing industry by upgrading markets, the forcasted mobile advertising and the growth rate of investment will continue in the next few years, under the impetus of Figure 10. China’s 5G base station investment 5G construction.
RMB billion 10 million Smartphone capability expands: Explicitly, the smartphone is unlikely to change markedly. 160 120 But implicitly, it is likely going to continue to 140 undergo a massive sequence of upgrades that 100 will steadily widen the device’s capability for 120 years to come. Companies that understand 80 100 best how to harness these invisible innovations are likely to profit most from forthcoming 80 60 innovations, for example, via evermore compelling augmented reality on smartphones. 60 40 The smartphone is likely to be used by more 40 people, with increasing frequency, and for a 20 wider scope of activities spanning the practical, 20 informative, and entertaining. This trend may well raise the question of whether smartphone 0 0 usage is excessive: the reality is that, like any technology, it is a tool whose appropriate usage Investment of 5G base stations Quantity of 5G base stations will be determined by society and individuals.
Source: CINIC
26 China Factors - A guide for investing in China | Industry segmentation
Snapshot of China’s retail industry— data systems have become the cornerstone of From the perspective of the categories of embracing future retail these changes. goods, the growth rates of most goods have Consumption has become the main driving risen from 2016, among which consumption force behind China’s economic growth, and Industry landscape upgrading goods has increased significantly. the retail sector, as an important component According to data from the National Bureau The sales of household appliances and of consumption, is undergoing a series of of Statistics, the total retail sales of consumer cosmetics products above the designated transformations and innovations to better goods reached 36,626 billion yuan in 2017, standard increased by 9.3% and 13.5% meet consumer demands while maintaining representing a year-over-year increase of respectively over the previous year; up 0.6 steady growth. Market participants have made 10.2% yet a 0.2 percentage point drop in its percent and 5.2 percent, respectively. The numerous attempts in channel integration, growth rate from 2016, and driven by steady communication equipment category still service model innovation, and traditional value growth in population and resident income, maintained 11.7% growth despite the high chain optimization. The rapid progress of retail total retail sales of consumer goods remained growth rate in the previous year. technology and the gradual improvement of stable. The trend of growth thus continued.
Figure 11. Total retail sales of consumer goods maintained steady growth
50,000 13.1% 12.0% 40,000 10.7% 10.4% 10.2% 10.1% 30,000
20,000
10,000
0 2013 2014 2015 2016 2017 2018F
Total retail sales (billion yuan) YoY growth (%)
Source: Wind, Iresearch.
27 China Factors - A guide for investing in China | Industry segmentation
In terms of retail channels, online retail sales growth, the penetration rate of online retail maintained rapid growth. According to data in overall retail sales has exceeded 15%, and from the National Bureau of Statistics, online the overall impact on the retail industry has retail sales of physical products nationwide become increasingly significant. The trend of in 2017 reached 5,480.6 billion yuan, an rapid growth and increasing penetration is increase of 28.0%, and the growth rate was expected to continue for years to come, and 17.8% higher than the total retail sales of the penetration rate is expected to exceed consumer goods. At a sustained high rate of 20% by 2020.
Figure 12. Increasing online retail penetration (RMB billion)
12,000 40% 10,000 30% 8,000 6,000 21.9% 20% 18.5% 20.3% 16.4% 4,000 14.2% 12.6% 10% 2,000 0 0% 2015 2016 2017 2018F 2019F 2020F
Online retail sales YoY growth (%) Percentage of total retail sales
Source: Wind, Iresearch.
28 China Factors - A guide for investing in China | Industry segmentation
Key drivers Economic development and continuous income growth have substantially boosted China’s consumer market, and the digital transformation driven by technology and data and industrial integration and innovation facilitate structural improvement in the retail sector. Taking both quality and quantity into account, there are currently three key drivers in China’s retail market: consumption upgrade, technology empowerment, and integration and innovation.
The continuous expansion of the consumer market is closely related to the growth of the overall economy and consumer income. With the continuous economic growth, the Consumption middle- and high-income population have upgrade expanded steadily and have gradually become the core force affecting the consumer market. According to the forecast of The Economist, the middle class in China accounted for only 8% of the total population in 2010, but by 2020, this proportion is expected to reach Integration 58.6%, and the number of poor and extremely Technology and Innovation poor people will decrease drastically. empowerment The rapid expansion of the middle- and high-income population is driving China’s consumption upgrade. Consumer demands for higher quality, better experience, and more customization are bringing new opportunities to the market, and in the meantime, stimulating market participants to optimize and enhance their products and services to better understand and meet consumer demands.
29 China Factors - A guide for investing in China | Industry segmentation
Figure 13. Growing middle class
2020E 23.8% 58.6%
2010 62.4% 8.0%
0% 20% 40% 60% 80% 100% 120%
Very poor Poor Middle class Very rich Extremely rich
Source: The Economist.
Figure 14. Technology and analysis become core driving force behind future retail transformation
60%
50%
40%
30%
20%
10%
0% Cloud Sensor & Inventory & Robotics & Wearable & Predictive 3D printing Driverless Internet of computing & automatic network automation mobile analytics vehicles & Things storage optimization technology drones
Adoption rate (in use today) 5-year compound annual growth rate
Source: Deloitte & MHI.
30 China Factors - A guide for investing in China | Industry segmentation
To better respond to ever-changing consumer drawing a more comprehensive and accurate important driving force behind enterprise demands in the unique digital environment in consumer portrait. Current major innovation optimization and innovation. Emerging China, market participants are using data and paths share the same basis in technology technologies such as wearable and mobile technology as a basis for transformation and and analytics capabilities. According to technology, predictive analytics, 3D printing, using consumer demands as a guide to set up a global corporate survey conducted by Internet of Things, and driverless vehicles will an innovative customer-oriented penetration Deloitte and MHI, some technologies such also see rapid growth and wider application strategy, trying to identify and meet consumer as cloud computing and storage, sensors in the next five years. Advances in science demands quickly and comprehensively. and automatic identification, inventory and technology and analytical capabilities Through the customer-oriented penetration and network optimization, and robotics are giving businesses and consumers more strategy, companies occupy consumers’ lives and automation have been recognized and opportunities and means of interaction and even more, developing consumer loyalty and adopted worldwide and have become an allowing companies more options in reshaping their value chain. Figure 15. M&As in the retail sector (USD million) The retail sector has been in a consolidation 150 50,000 period since 2013. We can learn from the M&A data that M&A activity has remained at 40,000 a high level: The M&A transaction volume has 100 30,000 remained stable though the transaction value has declined slightly since 2015, when both 20,000 50 reached a peak. 10,000
0 0 2013 2014 2015 2016 2017
Value of M&A deals (RHS) Number of M&A deals (LHS)
Source: Mergermarket.
31 China Factors - A guide for investing in China | Industry segmentation
Key trends to watch Industrial integration is going deeper When trying to build a consumer-oriented ecosystem, leading Internet companies have continued to penetrate the offline market. Thanks to these companies, the deepening of industrial integration will continue in 2018, while the traditional retail enterprises will also take a more active and open attitude toward participating in the integration, with a focus on resources and channels.
Figure 16. Deepening industrial integration
Tencent and JD Alibaba
Yonghui Sun Art Walmart Intime Carrefour Consumer Suning Better Life Bailian Five Star Newhuadu
Source: Deloitte Research.
Capital boosts industry innovation In 2017, private equity funds and venture capital rushed in to the retail sector, and more than half of these investments were concentrated in Series A companies. Investment in startups not only drove innovation in the industry but also promoted the application of technology in the retail sector.
32 China Factors - A guide for investing in China | Industry segmentation
Return of physical retail Figure 17. Private equity and venture capital investments Traditional retail companies began to (USD billion) transform after the industrial downturn 8,000 and achieved recovery and growth in 2017. 600 They rely on the development of science and technology to vigorously push ahead 6,000 digitization, using new technologies such as 400 4,000 cloud computing, Internet of Things, artificial 200 intelligence, and mobile Internet, as well as 2,000 continuously improving logistics distribution systems to optimize and innovate businesses. 0 0 Meanwhile, the deepening integration of 2015 2016 2017 retail enterprises and Internet companies has made the flow and allocation of resources Investment amounts (RHS) Deals (LHS) more efficient and has boosted traditional Source: PEdata. retail sales.
Figure 18. Physical retail sales rebound
10
5
0 1 9 7 5 3 1 1 9 7 5 3 1 1 9 7 5 3 1 1 9 7 5 3 -1 -0 -0 -0 -0 -0 -1 -0 -0 -0 -0 -0 -1 -0 -0 -0 -0 -0 -1 -0 -0 -0 -0 17 17 17 17
-5 17 17 16 16 16 16 16 16 15 15 15 15 15 15 14 14 14 14 14 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20
-10 Monthly sales growth of top 100 retail enterprises (%)
Source: Wind.
33 China Factors - A guide for investing in China | Industry segmentation
Figure 19. China smart manufacturing industry output (RMB trillion) Snapshot of China’s smart manufacturing industry—unfolding the tangible benefits 6 Chinese smart manufacturing on fast 5 track 5 CAGR: 11% China’s smart manufacturing sector will see 4 a compound growth rate of 16 percent in the 3 2015–2020 period, with the annual output of 3 CAGR: 16% the sector exceeding RMB 3 trillion by 2020 2 1.4 (about USD 473 billion) and RMB 5 trillion by 1 2025 (about USD 796 billion).
0 In 2018, China is deploying an additional 100 2015 2020 2025 smart manufacturing pilot demonstration projects, according to the Ministry of Industry Source: Qianzhan Industry Institute, Deloitte Research. and Information Technology. The project includes both traditional industries and emerging sectors, such as nonferrous metals, textiles, household appliance, 5G, Internet of Things, and connected vehicles.
34 China Factors - A guide for investing in China | Industry segmentation
Figure 20. Industrial robots sold by region CAGR 500,000 China 21%
400,000 North America 21%
300,000 Japan 14% Units 200,000 Germany 16% 100,000 - 2018 2019 2020E 2021E 2022E 2023E
Source: IFR, Deloitte Research.
Understanding the policy context government has intensified its subsidies The Internet Plus strategy aims at traditional “Made in China 2025” is China’s master plan to and funding mechanisms. It is also targeting industry transformation and innovation to establish its smart manufacturing ecosystem the creation of a number of manufacturing fully capitalize on a new set of technologies. and realize the industry transformation. It and innovation centers and national-level With the penetration of digitalization featured emphasizes 10 industries as particularly demonstration areas. by AI, big data, and cloud computing, China’s important priorities. These sectors include manufacturing companies can grow to be robotics, aerospace, new energy systems, Made in China 2025 is a high-level strategy; global champions. electric vehicles, and medical products. therefore, we need to see it in the context of The Chinese government perceives these other Chinese initiatives (e.g., Internet Plus “The Belt and Road Initiative” represents industries as the perfect opportunity to and BRI, which are running in tandem to push a chance to export China’s technological leapfrog technologically and boost global change forward). and engineering standards. Chinese policy competitiveness. To realize the targets, the makers see it as crucial to upgrade the country’s industry.
35 China Factors - A guide for investing in China | Industry segmentation
Key trends to watch Figure 21. Smart manufacturing deployment brings significant profit improvement Tangible benefits start to unfold in scale Profit % of Both 2013 and 2014 were educational years contribution surveyed enterprises for smart manufacturing, when Chinese enterprises learned what the technology could offer to their organizations and gained 51–80% 19% 9% a sense of the tangible benefits of deploying smart manufacturing. In 2015, China launched the pilot project program, and manufacturing 31–50% 14% 9% enterprises started to connect devices to improve production efficiency. From 2016– 2017, as the scales of smart manufacturing 11–30% 41% 14% projects and industry cooperation evolved, the benefits of digitization began to unfold. Deloitte’s survey results show that smart 0–10% 11% 55% manufacturing deployment has brought a remarkable increase in profit levels in 2017 compared to 2013 (figure 21). 2017Y 2013Y Source: Deloitte China smart manufacturing survey, 2017. Considering China’s population and the For the coming years, we expect that the scale of its manufacturing industry, Chinese number of connected devices, as well as Volume of data is a distinct advantage enterprises have natural advantages in smart manufacturing projects, will continue but also a challenge obtaining data compared to their European to expand with increased impact on revenue, From high levels of state backing to the and American peers. profits, and business models. Such increase scale of industry cooperation and a dynamic mainly comes from two sources: the technology sector, China has many distinct However, capitalizing on the data is another improvement of production efficiency and the advantages in place to promote long-term matter. Most enterprises collect vast troves increase in the value of products and services. growth of smart manufacturing. Of all the of process data but typically use them only drivers, scale of data is China’s most distinct for tracking purposes, not as a basis for advantage given the key role that data improving operations. Industrial software, play in smart manufacturing. For example, IoT, and data analytics vendors will need to the advancement of machine learning work closely with their clients to figure out heavily relies on the volume of data. customized solutions.
36 China Factors - A guide for investing in China | Industry segmentation
Sectors progress at different paces Nowadays, Chinese enterprises quickly gain technology know-how through two channels: foreign investors and overseas acquisition, whose appetites, however, vary across different sectors. Looking at China’s cross-border M&A data, it is clear that auto and chemical industries are still the hot spots. Electronics production and manufacturing will likely continue to be commoditized. Industrial automation, including robotics, sensing equipment, machine vision systems, process control equipments and so on, is the only sector increasing in outbound deal activities even at the backdrop of tighter scrutiny for overseas investment.
Figure 22. China’s cross-border M&A targeting manufacturing sectors
Outbound M&A targeting industrial Inbound M&A targeting industrial sectors sectors (number of deals) (number of deals) 35 25 30 20 25 20 15 15 10 10 5 5 0 0 ) s s s n n s r) s d d s ge er rt rt ct io io ct ic ic he an s ra an th s at at pa pa du du es s on ot es s on (o ( ve o o ri al al tr ri al al ro ro tr om om g g beverage ut ic ut rvic te be ic rvic p te p ec in in ut ut ec a a d El se se El a a ur ur em nd ma em ri al ri al ma nd d nd d al an ct ct a st st Ch ri al ri Ch a a d fa fa an an od st st du du to to nu nu In In Fo Foo du du Au Au In In Ma Ma 2015 2016 2017 2015 2016 2017
Source: Mergermarket, Deloitte analysis.
37 China Factors - A guide for investing in China | Industry segmentation
Snapshot of China’s LSHC industry— rapidly in the past few years with a growth In the near future, the focus of China’s innovation drives growth rate of more than 40 percent. The number of life sciences and health sector will remain Industry landscape IPO companies in the health care industry in on innovations in medical reform, drug According to estimates and forecasts, the 2017 also nearly doubled compared to 2016. development, and digital medical technology, life sciences and health care (LSHC) sector In addition, factors such as the continuous which are important engines for the sector to in China maintained double-digit growth in acceleration of urbanization and the growth maintain a stable and effective growth. 2017. Sales of pharmaceuticals and medical of residential income are also attracting devices increased by more than 11%, and attention to the health care industry. are expected to maintain a an average of 10 percent growth in the coming years. The Figure 23. Sales and growth of pharmaceutical industry in China proportion of total health expenditure to GDP also exceeded 6% and maintained a growth Billion RMB rate of about 9%. It is estimated that by 2020, 1,400 the proportion of total health expenditure to 1262.1 1156.1 1,200 13.1% GDP will reach 6.5 percent to 7 percent. 1052.9 946.4 1,000 There are multiple engines behind such a 784.7 849.0 11.3% long period of middle- and high-speed growth 800 11.5% for China’s life sciences and health care 9.8% 600 sector. First, the most important engine is the 9.2% change in the demographic structure. The 400 8.2% continuous growth of the aging population and the declining labor force will accelerate 200 the rise of medical demand. In addition, a 0 series of top-level designs and plans from the government, including the “Healthy China 2030” plan, show that the life sciences Sales Growth rate and health sector will play an increasingly important role in China’s economy. At the Source: BMI, Deloitte Research. same time, the involvement of social capital in the health care industry is also deepening. The scale of VC/PE investment has grown
38 China Factors - A guide for investing in China | Industry segmentation
Payment reform and medical R&D investment in new biological drug In addition, China Food and Drug Administration partnerships Amid the trend of “asset-light” pharmaceutical (CFDA) formally joined the International Council The rapid growth in medical costs in China R&D, medical giants and investment on Harmonisation of Technical Requirements was caused by the expanding bubble of drug institutions in the pharmaceutical sector for Pharmaceuticals for Human Use (ICH) in pricing and excessive medical treatments. have acquired R&D pipelines for new 2017, indicating that China is trying to make its Optimizing payment is an effective method drugs, especially bio-based drugs, through pharmaceutical R&D and registration better to control the unreasonable growth of investment and M&As. For some time in aligned with international standards. At the medical costs. In the second half of 2017, the future, the new drug R&D investment same time, CFDA has also issued measures to the General Office of the State Council will focus on small- and medium-sized encourage innovation in the pharmaceutical issued a document stating that it was biotechnology companies in four major areas. field, including the trial implementation of the necessary to speed up medical insurance The first is the field of cellular immunotherapy Marketing Authorization Holder (MAH) system, payment reform, whose target is to ensure that began to attract wide attention in 2017, and the simplification of the marketing authorization single-disease payouts covering at least 100 the second is biosimilars, which were expected process for high-quality new drugs, and diseases, and to carry out the diagnosis- to enter the Chinese market in 2018. In addition, the development of early-stage clinical trial related groups (DRG) pilot reform. traditional macromolecular monoclonal capabilities. China is striving to assert itself as a antibodies and small molecule targeting drugs hub of R&D innovation. Furthermore, the establishment of medical will still be hot spots for investment due to huge partnerships is another important task market demands. for medical reform in 2018. As of the end of October 2017, all 3A public hospitals Figure 24. Four major R&D investment areas for new drugs had started the establishment of medical partnerships. In 2018, the task was focused on the top-down supporting efforts and cooperation led by 3A hospitals. In addition, Cell immunotherapy Biosimilar in 2018, more and more private medical institutions were expected to join medical partnerships, in line with the national principle of encouraging privately operated medical institutions. Monoclonal antibody therapy Targeted drug
Source: Deloitte Research.
39 China Factors - A guide for investing in China | Industry segmentation
Digital transformation Snapshot of China’s automotive Survival from the policy shift Despite the close attention paid in 2016, industry—hitting a tipping point Underpinned by strong policy push and hefty investment and financing in related fields such Gearing up for revolutions financial subsidies, China has overtaken the as digital medicine and medical informatization After almost 10 years of exponential growth, United States to become the largest electric cooled down to some extent in 2017. The China’s auto market has entered a mature vehicle market since 2016. In 2017, the country underlying reason was that existing market phase where car sales will keep a steady but unveiled a dual-credit scheme that aimed at participants have not effectively converted slightly lower growth rate. With respect to gradually phasing out fuel-powered vehicles. digital technologies into clinical values. The new energy vehicles (NEV), China continued to Under the new rule, automakers must obtain collection of data and technologies did not enhance its leading position with annual sales NEV score of at least 10% in 2019 and 12% produce enough changes in the treatment rising by more than 50 percent in 2017. in 2020. Those who fail to meet the target process or in its outcome. Therefore, to drive will have to either purchase credit from the industry to enter a profit-making phase, China’s auto industry has entered an competitors or face fines. China’s NEV push market participants and investors should focus unprecedented era where technology has resulted in a new wave of joint ventures on the transformation of digital technology from breakthroughs, emerging mobility patterns, by which foreign auto makers who produce a “technology-focused” to “value-focused” in the and stringent fuel emission standards will large amount of gasoline vehicles can offset future. Key questions to answer include how to reshape the landscape of the industry. We their negative credits. use medical technology in the future (e.g., how expect 2018 to be a year in which all players to link data to clinical decisions). up and down the value chain will have to summon all their resources and carefully weigh the stakes of every strategy.
40 China Factors - A guide for investing in China | Industry segmentation
Figure 25. NEV sales forecast (2013–2020)
in,000
2,000 1,884 1,800 1,600 1,400 89% 1,200 1,004 1,000 777 800 507 85% 600 84% 400 40% 81% 17% 60% 200 83% 75% 25% 19% 16% 15% 11% 0 2013 2014 2015 2016 2017 2018E 2020E
BEV PHEV NEV penetration
Source: CAAM, Deloitte Research.
China’s top policy planners have turned their legislation toward the driverless era. A draft strategy issued in earlier January 2018 by the National Development and Reform Commission (NDRC) has helped lay out the policy and legal ground for autonomous driving. The document came only one month after Beijing had lifted the ban on the testing of self-driving cars. In March, Shanghai’s government passed a rule on self-driving car road testing, and became the second city to removed regulatory obstacles to autonomous driving. We expect that a dozen more cities will follow suit in late 2018.
41 China Factors - A guide for investing in China | Industry segmentation
Figure 26. Roadmap for China’s intelligent vehicle industry
A potential roadmap toward autonomous driving el ev l y m no to Au
Target: Target: Target:
• 50% of new cars (~15 • 100% of new cars • China strives to become million) will be intelligent will feature intelligent global powerhouse vehicles by 2020. functions by 2025. for intelligent vehicles • Achieve the • Achieve the scale-up and lead international commercialization of of high-level intelligent standards on key middle to high-level vehicles (L4 and above). technologies. intelligent vehicles (L3 and above).
42 China Factors - A guide for investing in China | Industry segmentation
Key trends to watch The future competition lies in strategic Chinese automakers’ growing appetite More opening-up for foreign automakers alliance for key technologies overseas In remarks during the 2018 Boao Forum, After five years of expansion, new mobility Geely’s 9.7% stake in Daimler marked the most President Xi announced that China was on service providers have developed into audacious deal for Chinese carmakers by far. track to reduce the tariff on imported vehicles formidable forces and are likely to become China is no stranger in the global M&A market. from the current 25% and a new taxation the largest procurers of new vehicles in the The intensifying competition in the domestic scheme would be rolled out later this year. near future. Chinese original equipment market and the fast changes in technologies, In addition, President Xi declared that China manufacturers (OEMs) have been rushing consumers, and legislation landscapes have would steer the auto industry toward more to seal strategic partnerships with mobility prompted automakers to grab cutting-edge openness by lifting the foreign ownership cap platforms such as ride-hailing giant Didi. technologies and premium assets overseas. on joint venture—a long-lasting policy that Further down the road, carmakers will sell Meanwhile, China’s push on connected was deemed an implicit guarantee to protect most of their shared and driverless vehicles vehicles also requires automakers to make domestic carmakers. The 50/50 ownership to ride-sharing and ride-hailing companies, sure they are prepared for the next industry cap has arguably enabled local carmakers which is seen as the easiest way to capitalize revolution and to invest heavily in leading to gain key technologies and expertise by on the technologies. technologies in electric vehicles, intelligent teaming up with foreign counterparts, and its cars, and autonomous driving. removal will help foreign automakers operate While in the race to self-driving, forming an more independently from their local partners alliance has even become a prerequisite. and grab a larger slice of the market share in OEMs are more eager than ever to team the long run. up with tier-one suppliers as well as tech companies in the hope of sharing investment burdens and risks of market uncertainty. We believe that the future lies in making strategic alliances that will enable companies to decide upon the best technology roadmap as well as the most fruitful path toward commercialization. However, given the many variables, OEMs should weigh their stakes carefully before jumping aboard.
43 China Factors - A guide for investing in China | Industry segmentation
Snapshot of China’s financial services 245.8 trillion (figure 27), holding 80.2% of total July 2017 for foreign insurance. industry—embracing the opening-up financial assets. During the past three years, strong financial Industry landscape regulation and deleveraging have been The Chinese financial services industry is In the three major areas within the financial continuing to slow down the growth of characterized by a significant concentration sector–banking, securities, and insurance– Chinese bank assets or even reduced their with banks’ total assets amounting for over foreign entities are currently dwarfed by assets. Profitability, however, has improved 80% amongst the total financial sectors their domestic Chinese counterparts. Data (figure 28). Furthermore, asset growth including banks, insurers, securities, assets disclosed recently by regulators revealed that of foreign banks has been continuing to under management (AuM) of trusts and the total asset ratio iranges from 1.7 percent increase rapidly, showing growth momentum public funds. By Q4 2017, the total assets of by Q3 2017 for foreign banks, to 4.5 percent by (figure 29). banking institutions in China reached RMB March 2017 for JV securities, to 6.1 percent by
Figure 27. Q4 2017 China’s financial sector Figure 28. Bank earnings continue to Figure 29. Higher growth of foreign banks total assets (RMB trillion) improve (RMB trillion)
11.6 26.3 2.00 20.0% 50% 6.1 1.50 15.0% 40% 16.8 1.00 10.0% 30% 0.50 5.0% 20% 10% 0.00 0.0% 2013 2014 2015 2016 2017 0% 9 6 3 2 9 6 3 2 9 6 3 -0 -0 -0 -1 -0 -0 -0 -1 -0 -0 -10% -0 Growth (YoY) 17 17 17 16 16 16 16 15 15 15 15 20 20 20 20 20 20 20 20 20 20 245.8 20 Large Chinese banks
Banks Insurers Medium-sized Chinese banks Securities Trusts (AUM) Small Chinese banks Public funds (AUM) Foreign banks in China
Source: CBRC, CIRC, Wind, Deloitte Research.
44 China Factors - A guide for investing in China | Industry segmentation
Foreign investors have not operated well Currently foreign investors participate in the Chinese market mainly as financial investors due to the government’s ownership restrictions. In fact, most foreign investors have not yet reached the ownership ceiling.
Table 4. The low ownership of foreign shareholders in China in 2017
Sectors Foreign shareholders The highest foreign ownership Banking Of A share-listed banks, 8 out of 25 have An investment made by Singapore’s OCBC in Ningbo foreign institutional shareholders and 5 are Bank is 20%. HSBC holds 18.7% shares in Bank city commercial banks. of Communications. Securities UBS is working to raise its ownership holding from Only Morgan Stanley’s ownership of its JV has reached its current 25%. the ceiling of 49%. Insurance Most foreign ownership levels stand at between Only AIA has a wholly-owned subsidiary, thanks in large 25% and 50%. part to historical reasons.
Source: Wind, CBRC, Deloitte Research.
45 China Factors - A guide for investing in China | Industry segmentation
Tight regulation leads to deleveraging has already exceeded RMB 102 trillion in China After a sustained period of growth, 2017 has in 2017. seen a continuing ramp-up in the process of deleveraging—largely aimed at supporting Policies stimulate strategic investment the official policies to address concerns of In April 2018, the Chinese government the risk positioning of the financial sectors, announced that it would ease restrictions such as the curbed growth of banks’ wealth on foreign ownership in the financial sector management products (WMPs), which are (banks, securities and fund, and insurance). partly responsible for the ballooning of The first batch of opening up policies landed in shadow banking. The supervision has been the first half of 2018. The newly revised further tightened in 2018 with stricter controls policy will stimulate foreign financial over financial deleveraging and regulation of institutions’ enthusiasm to invest in the conduit business (across institutions) in the Chinese financial sector. asset management (AM) sector whose AUM
Figure 30. China will eliminate all foreign ownership limits after 3 years
Since August 2018 3 years later
Banks/AM 20% on a single-entity basis None companies 25% on an aggregate basis Securities/ fund/futures 49% 51% None companies Personal insurance 50% 51% None
Source: Public information in April 2018, Deloitte Research.
46 China Factors - A guide for investing in China | Industry segmentation
Smaller financial institutions will be the fund industries. China’s insurance premium loans by continuing to reduce credit cost main investees income in 2017 increased 18.2% on a year- through debt-to-equity swaps and asset Foreign participation will increase the pace of over-year basis to reach RMB 3.66 trillion, securitization. Third, on the demand side, liberalization at the national level and further making it second largest in the world in 2017. macroeconomic stabilization and credit the internationalization of the RMB. At the Given the size of the Chinese population, demand in various sectors continue. industry level this will encourage foreign there is great potential for development investors to deepen their long-term value for foreign players in the life, health, and •• Practical rules of financial opening-up investment in the financial sectors. Looking pension insurance market in China. are expected ahead, foreign institutions will likely break The new round of financial opening-up through the 50 percent ceiling to become •• Banks’ profitability will continue policy is expected to attract foreign controlling shareholders of many small- and to increase investors to hold stakes in domestic small- medium-sized Chinese financial companies for The net profit of banks is expected to and medium-sized institutions, which the following reasons. continue to improve in 2018 for three should provide a positive influence over reasons. First, the enhanced regulation shareholders and corporate governance •• Insurance could be the most promising will speed up financial deleveraging to behavior and expectations. Nevertheless, industry lead the tight liquidity; therefore, market the actual opening-up process is Thanks to the relatively lower barrier of interest rates will potentially rise, leading expected to be slow, gradual, and entry, insurance could become the most to wider interest rate spreads, which will in methodical in nature. We should expect promising industry for foreign investors turn increase profitability. Second, banks further guidelines with practical rules as compared with banking, securities, and will likely deal with their nonperforming coming from the Chinese Government in the coming years.
Capital requirement The amount of investment required in smaller companies is less than what is needed for large institutions. Smaller companies operate in a much more flexible manner, and they are always in urgent need of capital.
Advanced technology and Foreign strategic investors are well positioned to help enhance capital adequacy levels, drive financial management skills innovation (fintech applications), and improve risk management.
47 China Factors - A guide for investing in China | Industry segmentation
Snapshot of China’s logistics industry— prominent position. Logistics has become one a more efficient prospect of the indispensable infrastructures in the Logistics rose to national infrastructure digital economy era. In 2017, China’s 19th Party Congress proposed to strengthen the construction The rapid growth of the e-commerce market of infrastructure networks such as water has improved the logistics service capacity. In conservation, railways, highways, water 2017, the volume of express delivery parcels transport and aviation, pipelines, and logistics. reached 40.06 billion pieces, a year-over-year This was the first time that logistics had been increase of 28%. The distribution of domestic mentioned as a part of the infrastructure of express parcels exceeded 100 million pieces the nation’s transportation network, elevating per day on average. the logistics industry to a new and far more
Figure 31. The volume of Chinese express parcels (billion)
60 70% 49.0 50 60% 40.1 50% 40 31.3 40% 30 20.7 30% 20 14.0 9.2 20% 5.7 10 3.7 10% 0 0%
The volume of Chinese express parcels Growth rate
Source: SPB, Deloitte Research.
48 China Factors - A guide for investing in China | Industry segmentation
The next five years will be crucial Key trends to watch Artificial intelligence Many express delivery companies have Looking ahead, we think the new trends in the New logistics technologies that use artificial increased scientific research investment logistics industry are as follows: intelligence have been continuously emerging, in smart unmanned warehouses, green driving the application of intelligent techniques logistics, unmanned aerial vehicles, and Globalization such as automatic sorting, electronic waybill, other technologies. They hope to transform Economic globalization and the rapid and so on. Artificial intelligence is penetrating the express delivery industry through development of multinational corporations, each and every aspect of the realm of logistics, big data and transform themselves into coupled with the constant innovation of especially last-mile delivery. In 2018, the technology companies. Internet technologies, have prompted logistics overall procurement and utilization of “smart enterprises to work together on a global equipment” in the logistics industry will Alibaba Group announced in September 2017 scale. The global retail industry drives the continue to rise. that it planned to increase its stake in Cainiao consolidation of the logistics enterprises to (a well-known logistics company that also is an form a global logistics network. In 2018, we Better environmental protection Alibaba subsidiary company) and to continue expect that logistics enterprises will ride on The sharing economy, as a new economic to invest RMB 100 billion in the next five years, the coattails of the Belt and Road Initiative to form, emphasizes the efficient utilization of on the heels of tens of billions of yuan already aggressively seize new overseas markets. idle resources, and its own development invested to accelerate the construction provides ideas for green logistics. Shared of a logistics network. The investment will A new ecology of logistics courier boxes, biodegradable green bags, be mainly used for the construction of key In 2016, Jack Ma (founder and executive and non-plastic boxes have all promoted the technologies such as big data technology, chairman of Alibaba Group) put forth the realization of the vision of green logistics. intelligent warehouses, intelligent distribution, concept of new retail and new logistics. The In 2018, more green measures will be and a global hub of super logistics. Meanwhile, new logistics mode shares information among introduced, such as green packaging materials JD Logistics (another noted logistics company, upstream and downstream enterprises across and new energy vehicles. which is owned by JD Group) also planned the entire industry chain. It is an important to build up its “Asia No.1” (JD’s national bridge linking consumers and manufacturers. logistics center) in more than 30 core cities In 2018, all sectors of the logistics industry will over the next five years so that its intelligent cooperate with one another to reconfigure warehousing would impact seven major their own social resources to jointly expand regions of the country. business operations and improve operational efficiency so as to maximize the benefits of joint distribution.
49 China Factors-A guide for investing in China | Industry Segmentation
50 China Factors - A guide for investing in China | Industry contacts
Industry contacts
National Industry Consumer Consumer Program Automotive Consumer Products Partner Partner Retail, Wholesale & Distribution John Hung Marco Hecker Partner +86 21 6141 1828 +852 2852 6588 Tian Bing Zhang [email protected] [email protected] +86 21 6141 2230 [email protected]
Energy, Resources & Energy, Resources & Energy, Resources & Industrials Industrials Industrials Industry Products & Construction Partner Oil, Gas & Chemicals Partner Kevin Guo Partner Ricky Tung +86 10 8520 7379 Christopher Roberge +86 10 8520 7130 [email protected] +852 2852 5627 [email protected] [email protected]
Financial Services Government & Public Life Sciences & Health Care Partner Services Life Sciences Tim Pagett Partner Partner +852 2238 7819 Clare Ma Yvonne Wu [email protected] +86 21 2312 7461 +86 21 6141 1570 [email protected] [email protected]
Real Estate Technology, Media & Technology, Media & Partner Telecommunications Telecommunications Richard Ho Technology Telecom, Media & +852 2852 1071 Partner Entertainment [email protected] William Chou Partner +86 10 8520 7102 Taylor Lam [email protected] +86 10 8520 7126 [email protected]
51 China Factors-A guide for investing in China | Industry Segmentation
52 China Factors - A guide for investing in China | Implications for setting up business in China
Implications for setting up business in China
What are the main concerns from a tax perspective when dealing with cross-border transactions ?
Since 2013, China Foreign investors Foreign investors Currently China’s VAT reform has participated in need to pay must qualify for a large payment remains underway. the OECD’s base attention to beneficial owner overseas is a Foreign investors erosion and profit general anti- criterion in order to focus of Chinese should closely shifting (BEPS) avoidance rules apply certain treaty tax authorities. watch the latest framework. Foreign when making benefits. Companies may not development of the investors should any commercial receive deductions VAT reform. keep an eye on the arrangement. if overseas development of the A tax-driven payments are not BEPS framework arrangement justified. and China’s should be response to it. avoided.
53 China Factors - A guide for investing in China | Implications for setting up business in China
Preferential tax treatments under the Enterprise Income Tax Law (EITL)
Before the unification of the EITL applicable to foreign and domestic enterprises, China offered Shift from granting incentives only in an array of tax incentives special regions to the entire country. to encourage investors to invest and do business in China.
Shift from a regional development orientation to an industry orientation.
With the issuance of Enterprise Income Tax Law Implementing Rules (EITLIR) on December 6, 2007, and a Shift from an export-oriented economy series of relevant circulars, to a domestically driven economy. the following new trends in the tax preferential treatments are clearer.
54 China Factors - A guide for investing in China | Implications for setting up business in China
Under the EITL, preferential tax treatments are offered to the following encouraged activities and industries:
Infrastructure developments High and new technology enterprises
Software and integrated circuit industries
Environmental protection, Agriculture, forestry, animal water or energy saving projects husbandry, and fishery
Infrastructure developments
Technology, innovation, and improvements Small-scale enterprises
55 China Factors - A guide for investing in China | Implications for setting up business in China
From a tax perspective, the new incentive that has attracted the broadest attention is a 15 percent tax rate that applies to an enterprise that qualifies as a high and new technology enterprise.
Certain major infrastructure, Qualified R&D environmental, and agricultural expenses (150% super deduction) projects
Encouraged industries In addition to the in certain autonomous Encouraged industries 15% tax rate, other regions incentives also apply.
Certain venture Certain labor and capital enterprises welfare services
56 China Factors - A guide for investing in China | Implications for setting up business in China
Specific areas with preferential tax treatments
1 Minority autonomous areas
2 Five special economic zones plus Shanghai Pudong New Area
3 Western region
4 Hengqin New Area, Pingtan Comprehensive Experimental Area
5 Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone
57 China Factors - A guide for investing in China | Implications for setting up business in China
Hengqin New Area of Guangdong Pingtan Comprehensive Qianhai Shenzhen-Hong Kong Province Experimental Area of Fujian Modern Service Industry Province Cooperation Zone of Shenzhen City
The enterprises are entitled to a preferential EIT rate of 15% from January 1, 2014, through December 31, 2020.
The aforementioned encouraged For the enterprise with branch offices enterprises refer to the enterprises located outside the special areas, mainly engaged in the industrial only income sourced from the special projects specified in the local areas is entitled to the preferential preferential EIT catalogue, and tax rate. the revenue derived therefrom contributes 70 percent or more of the total revenue for such enterprises.
58 China Factors - A guide for investing in China | Implications for setting up business in China
While considering the Other special zones, such location to set up your as the free trade zones, business, the various emerged over the years special zones within as new attractive areas China may be a wise for foreign investments choice as such zones due to the special customs typically offer additional treatments and other incentives and benefits. related incentives available to investors.
The first group of special The fast-growing economic zones in China economy and the need were introduced in the to further open up call 1980s, which provided for a more investor- foreign investors with friendly market special preferential environment. Innovative treatments, especially special zones were tax incentives. Special recently created, among economic zones which Shanghai Pilot Free gradually fade out Trade Zone (SPFTZ) and as they offer fewer Qianhai Shenzhen-Hong benefits. Kong Modern Service Industry Cooperation Zone (Qianhai) stand front and center.
59 China Factors - A guide for investing in China | Implications for setting up business in China
As the two different zones are with crossed but not overlapping development goals, the incentive policies in both the SPFTZ and Qianhai are closely related to and derived from the demand of investors both domestic and abroad.
• Free convertibility of RMB capital account • Liberalization of interest rates in the financial market • RMB cross-border use • Further opening up of financial services industry to qualified private capital and foreign • financial institutions • Reform in foreign exchange administration system
• Issuance of RMB-denominated bonds in Hong Kong within the approved quota • Establishment of Qianhai Equity Investment Mother Fund • Pilot of more innovative financial institutions (such as Tthe Tencent-backed Shenzhen Qianhai Weizhong Bank) • Hong Kong-based financial institutions and other overseas financial institutions to set up • international or national management headquarters and business operation headquarters • Experimentation in the expansion of offshore RMB fund flow-back channels • Development of Hong Kong as an offshore RMB settlement center and establishment of a cross-border RMB innovation zone
60 China Factors-A guide for investing in China | Implications for Setting Up Business in China
61 China Factors - A guide for investing in China | Regional snapshots
Regional snapshots
Beijing
Tianjin For those who are searching for appropriate locations to invest in or expand current Shandong business scope, we selected several provinces and municipalities, presented as regional Jiangsu snapshots, with regional GDP on a yearly Henan basis and several indicators in the foreign Shanghai investment field, as well as leading industries Anhui Sichuan Hubei segmentation. Zhejiang Chongqing Jiangxi Hunan Fujian
Guangdong
62 China Factors - A guide for investing in China | Regional snapshots
Top industries by 2016 industrial value-added
42% Financial intermediation 17% 58% Beijing Industry 16%
Wholesale and retail trades 9%
Real estate 7%
Transport, storage and post 4%
Construction 4%
Hotels and catering services 2%
Regional GDP Agriculture, forestry, animal husbandry, 1% and fishery industries RMB billion % of value-added by industry
3000 Indicator 2016 2015 2014 2013 2012 2566.9 2500 2301.5 # of foreign funded 30,401 29,396 28,041 27,061 26,535 2000 2133.1 1787.9 1980.1 enterprises (unit) 1500 Total investment of foreign funded 427,371 380,963 201,027 177,105 149,355 1000 enterprises (USD million)
500 Registered capital of foreign funded 275,522 245,658 119,161 105,851 90,704 enterprises (USD million) 0 2012 2013 2014 2015 2016
63 China Factors - A guide for investing in China | Regional snapshots
Top industries by 2016 industrial value-added
23%
Industry 38%
Wholesale and retail trades 13% Tianjin 77% Financial intermediation 10%
Real estate 5%
Construction 4%
Transport, storage and post 4%
Hotels and catering services 2%
Regional GDP Agriculture, forestry, animal husbandry, 1% and fishery industries RMB billion % of value-added by industry
2000 Indicator 2016 2015 2014 2013 2012 1788.5 # of foreign funded 13,339 12,278 11,507 11,413 11,491 1000 1653.8 1444.2 1572.7 enterprises (unit) 1289.4 1000 Total investment of foreign funded 222,594 181,328 144,146 127,423 118,913 enterprises (USD million) 500 Registered capital of foreign funded 148,473 112,018 82,486 72,074 64,949 enterprises (USD million) 0 2012 2013 2014 2015 2016
64 China Factors - A guide for investing in China | Regional snapshots
Top industries by 2016 industrial value-added
25% Industry 27%
Financial intermediation 17% 75% Shanghai Wholesale and retail trades 15% Real estate 8%
Transport, storage and post 4%
Construction 3%
Hotels and catering services 1% Regional GDP Agriculture, forestry, animal husbandry, and fishery industries 0% RMB billion % of value-added by industry
3000 2817.9 Indicator 2016 2015 2014 2013 2012 2512.3 2500 2356.8 2018.2 2181.8 # of foreign funded 79,410 74,885 68,952 64,412 61,461 2000 enterprises (unit) 1500 Total investment of foreign funded 734,246 661,273 530,467 457,933 413,768 1000 enterprises (USD million)
500 Registered capital of foreign funded 508,728 449,733 335,956 282,305 251,092 enterprises (USD million) 0 2012 2013 2014 2015 2016
65 China Factors - A guide for investing in China | Regional snapshots
Top industries by 2016 industrial value-added
18%
Industry 35%
Construction 10% 82% Chongqing Financial intermediation 9%
Wholesale and retail trades 8%
Agriculture, forestry, animal husbandry, 7% and fishery industries Real estate 5%
Transport, storage and post 5%
Regional GDP Hotels and catering services 2% RMB billion % of value-added by industry
2000 1774.1 Indicator 2016 2015 2014 2013 2012 1571.7 # of foreign funded 5,555 5,009 5,147 5,397 4,461 1000 1426.3 1278.3 enterprises (unit) 1141.0 1000 Total investment of foreign funded 88,065 78,845 67,517 58,841 53,694 enterprises (USD million) 500 Registered capital of foreign funded 54,901 49,360 42,543 36,900 31,155 enterprises (USD million) 0 2012 2013 2014 2015 2016
66 China Factors - A guide for investing in China | Regional snapshots
Top industries by 2016 industrial value-added
20%
Industry 40%
Wholesale and retail trades 10% 80% Real estate 8% Guangdong Financial intermediation 8% Agriculture, forestry, animal husbandry, 5% and fishery industries Transport, storage and post 4%
Construction 3%
Regional GDP Hotels and catering services 2% RMB billion % of value-added by industry
9000 8085.5 Indicator 2016 2015 2014 2013 2012 8000 7281.3 7000 6781.0 # of foreign funded 119,688 111,169 104,555 100,639 98,564 6247.5 6000 5706.8 enterprises (unit) 5000 4000 Total investment of foreign funded 781,571 644,310 562,063 512,640 478,645 3000 enterprises (USD million) 2000 Registered capital of foreign funded 508,588 390,614 337,737 303,715 283,269 1000 enterprises (USD million) 0 2012 2013 2014 2015 2016
67 China Factors - A guide for investing in China | Regional snapshots
Top industries by 2016 industrial value-added
21%
Industry 39%
Wholesale and retail trades 10% 79% Jiangsu Financial intermediation 8%
Agriculture, forestry, animal husbandry, 6% and fishery industries
Real Estate 6%
Construction 5%
Transport, storage and post 4% Regional GDP Hotels and catering services 2% RMB billion % of value-added by industry
9000 7738.8 Indicator 2016 2015 2014 2013 2012 8000 7011.6 7000 6508.8 # of foreign funded 55,938 53,551 51,634 50,514 50,461 5975.3 6000 5405.8 enterprises (unit) 5000 4000 Total investment of foreign funded 879,868 782,154 718,131 666,376 625,000 3000 enterprises (USD million) 2000 Registered capital of foreign funded 471,823 422,901 383,934 354,282 330,138 1000 enterprises (USD million) 0 2012 2013 2014 2015 2016
68 China Factors - A guide for investing in China | Regional snapshots
Top industries by 2016 industrial value-added
20%
Industry 39%
Wholesale and retail trades 12% 80% 6% Zhejiang Financial intermediation Construction 6%
Real estate 6% Agriculture, forestry, animal husbandry, 4% and fishery industries Transport, storage and post 4%
Regional GDP Hotels and catering services 2% RMB billion % of value-added by industry
5000 4725.1 Indicator 2016 2015 2014 2013 2012 4288.6 4000 3775.7 4017.3 # of foreign funded 34,442 32,778 31,005 30,674 29,595 3466.5 enterprises (unit) 3000 Total investment of foreign funded 319,870 291,813 262,881 240,408 217,810 2000 enterprises (USD million) 1000 Registered capital of foreign funded 192,140 171,399 152,681 140,665 127,466 enterprises (USD million) 0 2012 2013 2014 2015 2016
69 China Factors - A guide for investing in China | Regional snapshots
Top industries by 2016 industrial value-added
Industry 41%
Wholesale and retail trades 13% Shandong Agriculture, forestry, animal husbandry, 8% and fishery industries Construction 6% 18% Financial intermediation 5%
Real estate 4%
82% Transport, storage and post 4%
Regional GDP Hotels and catering services 2% RMB billion % of value-added by industry
7000 6802.4 Indicator 2016 2015 2014 2013 2012 6300.2 5942.7 6000 5523.0 # of foreign funded 28,527 27,240 26,023 25,755 25,885 5001.3 5000 enterprises (unit) 4000 Total investment of foreign funded 251,874 219,334 199,227 176,491 158,114 3000 enterprises (USD million) 2000 Registered capital of foreign funded 147,620 127,246 113,131 99,456 89,679 1000 enterprises (USD million) 0 2012 2013 2014 2015 2016
70 China Factors - A guide for investing in China | Regional snapshots
Top industries by 2016 industrial value-added
Industry 42% Agriculture, forestry, animal husbandry, 11% Henan and fishery industries Wholesale and retail trades 7%
Construction 6% 16% Financial intermediation 6%
Transport, storage and post 5%
Real estate 5% 84% Regional GDP Hotels and catering services 3% RMB billion % of value-added by industry
5000 4047.2 Indicator 2016 2015 2014 2013 2012 4000 3700.2 3493.8 # of foreign funded 8,058 8,316 10,056 9,934 10,168 2959.9 3219.1 3000 enterprises (unit)
2000 Total investment of foreign funded 82,249 68,710 58,878 47,787 46,341 enterprises (USD million) 1000 Registered capital of foreign funded 44,900 34,816 29,692 24,479 23,697 enterprises (USD million) 0 2012 2013 2014 2015 2016
71 China Factors - A guide for investing in China | Regional snapshots
Top industries by 2016 industrial value-added
Industry 41%
Agriculture, forestry, animal husbandry, 11% and fishery industries Anhui Wholesale and retail trades 7% Construction 7% 17% Financial intermediation 6%
Real estate 5%
83% Transport, storage and post 3% Regional GDP RMB billion Hotels and catering services 2% % of value-added by industry
3000 2440.8 2500 Indicator 2016 2015 2014 2013 2012 2200.6 2084.9 2000 1922.9 # of foreign funded 5,549 5,063 4,721 4,466 4,466 1721.2 enterprises (unit) 1500 Total investment of foreign funded 67,256 106,486 48,026 41,612 39,962 1000 enterprises (USD million) 500 Registered capital of foreign funded 34,577 30,916 26,075 22,660 20,706 enterprises (USD million) 0 2012 2013 2014 2015 2016
72 China Factors - A guide for investing in China | Regional snapshots
Top industries by 2016 industrial value-added
Industry 36% Agriculture, forestry, animal husbandry, and fishery industries 12%
Wholesale and retail trades 8% Hunan Construction 6% 25% Transport, storage and post 4%
Financial intermediation 4%
75% Real estate 3%
Regional GDP Hotels and catering services 2% RMB billion % of value-added by industry
3500 3155.1 Indicator 2016 2015 2014 2013 2012 3000 2890.2 2703.7 # of foreign funded 6,677 5,865 5,353 5,020 4,882 2500 2462.2 2215.4 enterprises (unit) 2000 1500 Total investment of foreign funded 58,000 52,147 46,307 40,486 38,381 enterprises (USD million) 1000 500 Registered capital of foreign funded 30,888 28,105 24,190 20,872 19,647 enterprises (USD million) 0 2012 2013 2014 2015 2016
73 China Factors - A guide for investing in China | Regional snapshots
Top industries by 2016 industrial value-added
Industry 34%
Agriculture, forestry, animal husbandry, 12% and fishery industries
Sichuan Financial intermediation 8%
Construction 8% 20%
Wholesale and retail trades 6%
Real estate 5% 80% Transport, storage and post 4% Regional GDP RMB billion Hotels and catering services 3% % of value-added by industry
3500 3293.5 Indicator 2016 2015 2014 2013 2012 3005.3 3000 2853.7 2639.2 # of foreign funded 10,370 10,594 10,253 9,147 9,107 2500 2387.3 enterprises (unit) 2000 Total investment of foreign funded 94,193 88,409 82,752 72,490 64,045 1500 enterprises (USD million) 1000 Registered capital of foreign funded 55,282 50,966 46,716 41,338 37,445 500 enterprises (USD million) 0 2012 2013 2014 2015 2016
74 China Factors - A guide for investing in China | Regional snapshots
Top industries by 2016 industrial value-added
Industry 39% Agriculture, forestry, animal husbandry, and fishery industries 11%
Construction 9% Jiangxi Wholesale and retail trades 7% 18% Financial intermediation 6%
Transport, storage and post 4%
82% Real estate 4% Regional GDP Hotels and catering services RMB billion 2% % of value-added by industry
2000 1849.9 Indicator 2016 2015 2014 2013 2012 1672.4 1571.5 # of foreign funded 6,918 7,094 7,020 6,667 7,334 1500 1441.0 1294.9 enterprises (unit)
1000 Total investment of foreign funded 77,738 72,578 67,025 58,770 53,857 enterprises (USD million) 500 Registered capital of foreign funded 55,060 48,095 43,769 38,436 34,904 enterprises (USD million) 0 2012 2013 2014 2015 2016
75 China Factors - A guide for investing in China | Regional snapshots
Top industries by 2016 industrial value-added
Industry 38% Agriculture, forestry, animal husbandry, and fishery industries 12%
Wholesale and retail trades 8% Hubei Financial intermediation 7%
Construction 7% 18% Transport, storage and post 4%
Real estate 4%
82% 2% Hotels and catering services % of value-added by industry Regional GDP RMB billion
Indicator 2016 2015 2014 2013 2012 3500 3266.5 2955.0 3000 2737.9 # of foreign funded 8,976 8,646 8,160 7,693 8,023 2500 2225.0 2479.2 enterprises (unit) 2000 Total investment of foreign funded 99,316 89,231 77,671 65,357 58,274 1500 enterprises (USD million) 1000 Registered capital of foreign funded 54,407 48,166 41,016 34,923 32,150 500 enterprises (USD million) 0 2012 2013 2014 2015 2016
76 China Factors - A guide for investing in China | Regional snapshots
Top industries by 2016 industrial value-added
Industry 41%
Agriculture, forestry, animal husbandry, 8% and fishery industries Construction 8%
Fujian Wholesale and retail trades 8% 17% Financial intermediation 6%
Transport, storage and post 6%
83% Real estate 4%
Regional GDP Hotels and catering services 1% % of value-added by industry RMB billion
Indicator 2016 2015 2014 2013 2012 3500 2881.1 3000 # of foreign funded 28,351 25,895 24,322 23,546 23,381 2598.0 2500 2405.6 enterprises (unit) 1970.2 2186.8 2000 Total investment of foreign funded 226,315 196,713 173,245 156,516 145,744 1500 enterprises (USD million) 1000 500 Registered capital of foreign funded 132,127 110,901 94,485 85,375 80,443 enterprises (USD million) 0 2012 2013 2014 2015 2016
77 China Factors-A guide for investing in China | Regional Snapshots
78 China Factors - A guide for investing in China | Office contacts
Office contacts
Northern Region Northern Region Managing Partner Deputy Managing Partner Norman Sze Andrew Zhu +86 10 8512 5888 +86 10 8520 7508 [email protected] [email protected]
Eastern Region Eastern Region Managing Partner Deputy Managing Partner Dora Liu Frank Xu +86 21 6141 1848 +86 21 6141 1031 [email protected] [email protected]
Southern Region Southern Region Managing Partner Deputy Managing Partner Dennis Chow Allen Lau +852 2852 1901 +86 20 2831 1011 [email protected] [email protected]
Western Region Western Region Managing Partner Deputy Managing Partner Terence Cheung Steven Cheung +86 23 8823 1199 +86 23 8823 1188 [email protected] [email protected]
79 China Factors - A guide for investing in China | Introduction to Global Chinese Services Group
Introduction to Global Chinese Services Group
Going Global with Deloitte It is our goal to help our clients expand their Over the past decade, the “Going Global” global footprint. In the past five years, one- strategy has been pivotal in propelling third of outbound deals on which we have the economic transformation of China. It advised were valued at more than USD 10 is also driving the overseas expansion of billion each. Further, we have participated in many Chinese companies, which are able to the largest overseas M&A transactions, as well tap the international markets and acquire as offered one-stop outbound investment new technologies and best practices. services to more than half of the Fortune Opportunities always come along with pitfalls, Global 500® Chinese companies. and it is our mission to provide guidance to Chinese companies through what can To stay ahead of the curve in putting the be something of a minefield during their needs of clients as our priority, the GCSG globalization journey. continues its efforts in evolving and adapting to the changing dynamics of the marketplaces, Established in 2003, Deloitte’s Global Chinese and provides advice and solutions to clients to Services Group (GCSG) aims to advise Chinese address their complex business challenges. companies expanding global presence, and multinational companies operating in China. We have professionals who speak Chinese and/or understand Chinese business culture in 90 countries and regions. This dedicated network is committed to providing professional advice and comprehensive solutions to Chinese companies’ globalization.
80 China Factors - A guide for investing in China | Introduction to Global Chinese Services Group
Global coverage Covering 90+ countries and regions
Iceland
Norway
Finland Sweden Belgium Russia
UK Denmark
Ireland Poland
Netherlands Germany Canada Luxembourg Czech Korea Hungary Caribbean & France Bermuda US Cluster Turkey Japan Portugal Albania Cyprus Spain Montenegro Serbia Mexico Venezuela Switzerland Israel Vietnam Myanmar Malta India Philippines Italy Thailand Greece Colombia UAE Cambodia Austria
Ecuador Malaysia Franco Kenya Africa Guam Peru West Africa Tanzania Singapore CSG presence Angola Indonesia Chile New Zealand CSG coverage Mauritius Brazil Mozambique Argentina South Africa Australia
81 China Factors - A guide for investing in China | Introduction to Global Chinese Services Group
CSG’s value to clients A globally integrated platform aiming to deliver the best client experiences
Breadth Client experience
Covering 90+ countries Availability of Chinese-speaking and regions and culturally proficient professionals enables good client experiences
Depth
Integrated cross-border and cross-functional expertise in providing a suite of China outbound services
VALUE TO CLIENTS
82 China Factors - A guide for investing in China | Introduction to Global Chinese Services Group
CSG mission
Operating as a platform to leverage expertise in the Chinese market and bridge the cultural gap, we are devoted to providing our clients with multi-member firm, multi-industry, multi-functional, and multi-disciplinary services. CONNECT Client focus ed Ex pert s on China
Cu stomized solut ions
No c ultu ra l barr ier
No t im e zone lim itat ion
83 China Factors - A guide for investing in China | Global Chinese Services Group Core Team
Global Chinese Services Group Core Team
Rosa Yang Johnny Zhang Chairperson Partner Shanghai, China Beijing, China Tel: +86 21 6141 1578 Tel: +86 10 8520 7061 Email: [email protected] Email: [email protected]
Khalid Bai Chenney Chen Core Team Member Core Team Member Shanghai, China Shanghai, China Tel: +86 21 6141 8888 Tel: +86 21 2316 6116 Email: [email protected] Email: [email protected]
Molly Yang Rachel Song Joe Zhou Core Team Member Core Team Member Core Team Member Beijing, China Beijing, China Beijing, China Tel: +86 10 8520 7286 Tel: +86 10 8520 7057 Tel: +86 10 8512 4874 Email: [email protected] Email: [email protected] Email: [email protected]
Acknowledgments The following teams are recognized for their strong contributions to this publication including Deloitte China Research, Deloitte China Tax, Deloitte China Legal, Deloitte China CEO Office, Deloitte China National Industry Program, Deloitte Global Creative Services, and Deloitte Global Chinese Services Group.
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