Disclaimer

This document is issued by The Beijing Axis. While all reasonable care has been taken in the preparation of this The Global Context: How will Asia affect document, no responsibility or liability is accepted for errors or omissions of fact or for any opinions expressed herein. Opinions, projections and estimates are subject to change without notice. This document is for demand and will investment in Latin information purposes only, and solely for private circulation. The information contained here has been compiled America continue? from sources believed to be reliable. While every effort has been made to ensure that the information is correct and that the views are accurate, The Beijing Axis cannot be held responsible for any loss, irrespective of how it may arise. In addition, this document does not constitute any offer, recommendation or solicitation to any person to enter into any transaction or to adopt any investment strategy, nor does it constitute any prediction of likely future movements or events in any form. Some investments discussed here may not be suitable for all investors. Past performance is not necessarily indicative of future performance; the value, price or income from www.thebeijingaxis.com investments may fall as well as rise. The Beijing Axis, and/or a connected company may have a position in any of the investments mentioned in this document. All concerned are advised to form their own independent judgement with respect to any matter contained in this document.

CHINA, A STRATEGIC LOOK AT ITS Javier Cuñat DEVELOPMENT – EXPOMIN 2012 General Manager, Beijing Axis Strategy Santiago, Chile, 10 April 2012 The Beijing Axis

The Beijing Axis 1

A number of megatrends are reshaping the global landscape

2 Beijing Axis Beijing Axis Beijing Axis Beijing Axis 1 Commodities Capital Procurement Strategy Emerging Market Rising Global • Commodity Marketing • Transaction Origination • Comprehensive • Strategy Formulation GDP Growth Integration 3 • Commodity Procurement • Corporate Finance Procurement Solutions • Strategy Implementation Advisory 9 Rising Risks The Beijing Axis’ Knowledge & Network Synergies Industrialisation and Urbanisation  Founded in 2002; has successfully worked with many international and Chinese MNCs Stronger Emerging Megatrends Market Companies 4  Operates in four synergistic cross-border China businesses Rising Emerging Market Consumption  Provides services across various sectors, with a core focus on the MINING, RESOURCES, INDUSTRIAL ENGINEERING and 8 OTHER SERVICES sectors Aging of the Global Rising Population (DM  Provides solutions to international firms as they act in unfamiliar territory in China/Asia Energy and and EM) New Commodity Global  Provides solutions to Chinese/Asian firms as they venture out and ‘go global’ Consumption 5 Technologies 7 in EM

6 The Beijing Axis 2 Source: Deutsche Bank; The Beijing Axis Analysis The Beijing Axis 3

Key global factors Agenda

The backdrop 1. A Closer Look at China/Asia Resource Consumption  China’s rise … labour market and supply shock as a producer … engine as a consumer … investor

 New competitive lines and forces, winners/losers – the rise of Asia, BRICS, etc. 2. China’s Outbound Investment – with specific reference to Latin America

 A two-speed global economy over the medium and long term 3. Implications and Future Trends  A lasting GDP trajectory in Asia, Africa and Latin America – governance, growth, stability, infrastructure, confidence, etc.

The issues now 4. Final Word

 Europe broken … fragile developed markets – and knock-on effects?

 China’s landing – soft or hard? Implications for growth and resource demand?

 Tapping into the China story vs. over-reliance on China and need to diversify economic ties

 Strategic intelligence – to make decisions in boardrooms around the world in order to reposition

Source: The Beijing Axis Analysis The Beijing Axis 4 TheThe Beijing Beijing Axis Axis 5 There is an on-going debate regarding China’s slowing growth – mainly China’s economy is heading for a soft landing – more moderate and more fuelled by the knock-on effect of the ongoing European debt crisis as well sustainable growth as the potential property bubble burst

Representative quotes China’s Quarterly Y-o-Y GDP Growth Rate (2009- Contribution of Components to China’s GDP (%, 2012F) 1998-2012F) “China is in a hard landing. Car sales are “China’s economy is headed for a ‘hard down, cement production is down, steel 15% 140 landing’ this year as weaker demand production is down, construction stocks are Net Exports of Goods and Services Gross Capital Formation overseas chokes off exports.” - Gary down. It’s not a debate anymore, it’s a fact” - 120 Policy easing to Final Consumption Expenditure (Household + Government) Shilling, Financial Analyst and commentator Adrian Mowat, JPMorgan Chase & Co.’s chief 3-year (2009-2011) provide room for 100 for WSJ, Forbes, and The New York Times Asian and emerging-market strategist. average: 9.4% growth moderation 10% 80 Effect from stimulus 60 package

40 Government stimulus 2012F y-o-y GDP: 5% 8.0% “If China doesn’t change course, and in a big way, package (USD 586 bn) 20 “Now the bubble is visibly bursting. How much the country will experience an economic crisis…. damage will it do to the Chinese economy — and 0 China is running out of time to fix the problems of its 2011 y-o-y GDP: the world?” – Paul Krugman, American Economist, economy” – Michael Schuman, Asia business 9.2% -20 Falling net exports op-ed columnist for The New York Times. contribution correspondent for TIME Magazine 0% Q1 Q1 Q1 Q1F -40 98 99 00 01 02 03 04 05 06 07 08 09 10 11F 12F 2009 2010 2011 2012F

Source: Various; The Beijing Axis Analysis The Beijing Axis 6 Source: CNBS; Deutsche Bank; Morgan Stanley; The Beijing Axis Analysis The Beijing Axis 7

Emerging economies are outperforming the developed world in terms of China is the largest emerging economy in the region. Other emerging economic growth. Asia is leading this transformation in the global balance markets including India and Indonesia among others, have also grown rapidly

Regional GDP Comparison (USD bn, 2015F)* Asia-Pacific Countries GDP Comparison (USD bn, 2010)

Size of the bubble: Nominal GDP (USD bn, 2010)* Asia-Pacific is expected to Bubble Size: Nominal GDP (USD GDP Average Growth Rate (%, 2011E-2015F) GDP Growth Rate (%, 2010) account for the largest share of bn, 2015F) Regional 2010 GDP CAGR 10 world GDP (34%) by 2015F Breakdown (USD bn) (2000-2010) Asia-Pacific 15 China is the largest Singapore Singapore grew 223 Eastern Asia 6,443.9 12.4% economy in the Southern Asia 1,968.4 11.9% the fastest in 2010 region South-Eastern Asia 1,473.1 9.4% Shaded bubbles represent China 2011E figures Western Asia 1,685.4 9.4% Rising real incomes and 25,807 India Taiwan Other Asia Developed Asia 5,263.1 1.2% high commodity prices 431 Oceania 1,158.7 8.4% 1,643 5,878 will drive growth 4,486 Forecast world 10 Developed economies are average GDP 2011E to 2015F 2,259 expected to continue to lose growth until Thailand Though large, Japan is Africa Philippines World average 5 4,280 South America share in world GDP in the 319 Malaysia Hong Kong a slow growing 2015F: 3.95% 189 238 Korea GDP growth for coming years 104 225 economy 104 2010: 5% 707 208 1,007 2015F GDP 2011* Growth Rate 2010 GDP Per Other Asian BRICS 5 Vietnam (USD bn) (%) Capita (USD) North America Indonesia Countries 1,480 5,459 Australia China 10,903.6 9.2% 4,382.1 19,634 India 2,359.2 7.4% 1,370.8 Russia SE economies together New Zealand 1,236 Russia 1,926.1 4.1% 10,355.7 Japan Brazil 2,546.7 2.9% 10,816.5 20,337 are the third- largest in the 140 Europe South Africa 425.6 3.1% 7,274.4 2011E to 2015F % of World GDP (2015F) region GDP Per Capita (2010) 0 0 0% 5% 10% 15% 20% 25% 30% 35% 40% 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 *Note: Data based on IMF World Economic Outlook *Note: Other Asia includes Bangladesh, Sri Lanka, Nepal, Pakistan, Bhutan, Burma, North Korea, Kazakhstan, Tajikistan, Turkmenistan and Uzbekistan. *Note: The regional breakdown accords to UNCTAD. Regional Breakdown numbers will not add to the total due to overlap Source: IMF 2012; The Beijing Axis Analysis The Beijing Axis 8 Source: IMF; The Beijing Axis Analysis The Beijing Axis 9

Asia has become a fundamentally important engine of capital, trade and China and India are regaining their position – overall emerging economies commodity consumption worldwide are set to progress

Asia-Pacific as % of World Total (%, 1990, 2000, 2010) Historical Share of Global GDP (1-2050E) Advanced vs Emerging Economies GDP (USD bn) 60,000 Advanced Economies 100% 100% Emerging Economies 50,000 Advanced Economies % World GDP (rhs) GDP FDI Inflows FDI Outflows GDI % of GDP By 2050, China and 90% 80% Rest of GDP India will together 40,000 ROW APAC ROW* APAC* ROW APAC Gross Domestic Investment account for 44% of Emerging economies 80% 30,000 60% 100% 100% 100% 100% global GDP catching up with Rest of the world advanced economies 70% 20,000 Narrowing gap 40% 10,000 50% 50% 50% 50% 60% 0 20% 50% North America, Europe, Japan 28% 31% 30% 27% 28% 27% 29% 26% 12% 13% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 7% 10% 2012E 0% 0% 0% 0% 40% 1990 2000 2010 1990 2000 2010 1990 2000 2010 1990 2000 2010 30% China and India GDP of Key Selected Economies (USD bn) India Exports as % of GDP Imports as % of GDPCopper Consumption Steel Consumption accounted for around 20% 20,000 United States Russia Japan Rest of GDP Exports Rest of GDP Imports ROW APAC ROW APAC 50% of world GDP in 100% 100% 100% 100% 10% 1800 15,000 Germany Brazil China India 0 China 10,000

50% 50% 50% 50% 5,000 57% 65% 65% 40% 37% 44% 0 14% 21% 24% 13% 19% 25% 0% 0% 0% 0% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2000 1990 2000 2010 1990 2000 2010 1990 2000 2010 1990 2000 2010 2012E *Note: ROW stands for Rest of World and APAC stands for Asia-Pacific Source: CEIC; CRU; UN; World Steel Association; The Beijing Axis Analysis The Beijing Axis 10 Source: PWC; Deutsche Bank; The Beijing Axis Analysis The Beijing Axis 11 China has dramatically increased its share of world consumption of key metals China’s steel consumption is poised for more moderate but sustained and minerals over the past two decades. The drivers of this trend remain intact growth and the base effect matters

China’s Share of Global GDP and Consumption of Selected Commodities (% 1990, 2000, 2010) Steel Intensity Comparison of Top 30 Economies(1) and Other Selected Asian Economies (2010)

Steel Consumption Per Capita Bubble Size: GDP CAGR (USD, 2010) 1,200 (2000-2010) GDP Primary Aluminium Steel Coal S. Korea ROW China ROW China ROW China ROW China Developed Economies 100% 100% 100% Developing economies 100% 1,000 Steel consumption declines Emerging Economies except China consume less steel per after GDP per capita capita, but their relatively reaches USD 25,000 Mainland China large populations ensure 50% 50% 50% 50% China in 2000 800 years of steady demand With less infrastructure 47% growth construction, developed 10% 41% 45% 7% 2% 4% 4% 17% 18% 22% economies have lower demand 0% 0% 0% 14% 0% 600 Spain for finished steel 1990 2000 2010 1990 2000 2010 1990 2000 2010 1990 2000 2010 Japan Malaysia Germany Austria Turkey Italy Canada China Saudi Arabia Refined Nickel Chrome Ore Refined Copper Refined Zinc 400 Russia Australia ROW* China ROW China ROW China ROW China Iran Belgium US 100% 100% 100% 100% Poland France Netherlands China(2) Sweden 200 UK India Mexico Thailand Brazil 50% 50% 50% 50% Vietnam Argentina Venezuela Philippines0 South Africa Indonesia 33% 38% 41% 0 10,000 20,000 30,000 40,000 50,000 60,000 32% 4% 20% 4% 13% 13% 17% 12% 8% GDP Per Capita (USD, 2010) 0% 0% 0% 0% The trend line is indicative of the general pattern in steel consumption at different stages of industrialisation 1990 2000 2010 1990 2000 2010 1990 2000 2010 1990 2000 2010 *Note: (1)Switzerland, Norway and Sweden are not included for comparison purposes *Note: ROW stands for Rest of World (2) China in the year 2000 Source: World Bank; CNBS; CEIC; The Beijing Axis Analysis The Beijing Axis 12 Source: IMF; World Steel Association; The Beijing Axis Analysis The Beijing Axis 13

China is still in its early stages of commodity intensity – mainly in steel, iron China features in most commodity trade routes. The rise of Asia/China is ore, copper, etc. fundamentally changing the landscape of commodity trading and flows

Commodity Intensity by Cycle (2011) 2010 World’s Top 20 Mineral Trade Flows

Consumption Routes having China as a Intensity trading partner

100% 2010 Mineral Imports & Exports of Selected Asian Countries Country Imports (USD bn ) Russia China 126.31 +22% +21% India 14.92 75% +29% Indonesia 0.43 Germany +25% +30% +31% US +36% +37% China S. Korea 50% +26% Turkey +32% +28% Mexico Egypt India +31%

Vietnam +22% +31% Nigeria +30% 25% Early cycle commodities e.g. steel, iron ore +27% Brazil Mid cycle commodities e.g. copper, lead, zinc Indonesia +26% +27% Late cycle commodities e.g. platinum, nickel +25% Australia 0%

0 5 +30% 10 15 20 25 30 35 40 45 50 South Africa Chile

GDP Per Capita (USD, 2010) *Notes: For 2010, only trades > USD 2 bn are considered for the calculation. Based on 2000-2010 CAGR of imports and exports in current US dollars (includes re-exports) Source: PWC; The Beijing Axis Analysis TheThe Beijing Beijing Axis Axis 1414 Source: UN Commodity Trade Statistics Database; Goldman Sachs; The Beijing Axis Analysis The Beijing Axis 15

30 years ago Asia did not occupy a very significant place in global coal Today, the picture is very different, with the Asia-Pacific region dominating trade (with the one exception of Japan). Most of the world coal trade was global coal trade concentrated in Europe and the US

Major Coal Trade Routes* in 1980 The percentage Major Coal Trade Routes* in 2010 The percentage represents the represents the share of the route in share of the route in 3.6% total world imports. 1.7% total world imports.

8.4% 1.2% Russia West Germany Canada 3.5% Canada 1.4% 1.7% 1.2% 2.6% 0.9% 3.9% France Japan US Italy US Japan China S. Korea 1.2% 2.2% India 2.8% 0.4% 4.0% 3.1% 9.2% 2.7% 14.3% Indonesia 40% 0.75% 45% 55% 60% Major routes 2.4% Major routes 3.9% 5.0% Others Australia Others Australia 1.3% Total world imports : USD 18.7 bn South Africa Total world imports : USD 108.4 bn South Africa

*Note: Major routes were identified based on analysis of top origins of top four importing countries. Red coloured countries are top importers, green coloured countries are countries of origin of the *Note: Major routes were identified based on analysis of top origins of top four importing countries. Red colored countries are top importers, green colored countries are countries of origin of the leading leading coal importers. Canada, the world's fourth-largest importer at that time, was also a major exporter to Japan coal importers. China, the world's second-largest importer, is also a major exporter to South Korea Source: UN Commodity Trade Statistics Database; The Beijing Axis Analysis The Beijing Axis 16 Source: UN Commodity Trade Statistics Database; The Beijing Axis Analysis The Beijing Axis 17 Companies from the Asia-Pacific region continue to emerge as winners in Mining companies from Asia are progressively gaining global market share global markets. Companies from China and India feature prominently in this and catching up with their foreign counterparts equation

Fortune 500 Geographic Distribution (2005-2011) Asia-Pacific Fortune 500 Country Breakdown (2011) Top 30 Mining Companies by Revenue (USD bn, 2000-2011) 2000 2011 BHP Billiton BHP Billiton 9 Japan China Middle East Latin America Asia-Pacific 8 Anglo American Rio Tinto 8 Alcan Vale SA Europe North America 8 Rio Tinto Anglo American 68 South Korea Australia Pechiney Xstrata 14 Noranda Inc China Shenhua Energy 500 Norilsk Nickel Jizhong Energy(2) BRICS-based India Taiwan Phelps Dodge Freeport-McMoRan China had Vale SA Company Jiangxi Copper BRICS-based 127 122 128 just 16 Codelco Norilsk Nickel(2) 132 145 155 Company 400 171 companies in Coal India Barrick Gold 56 Others IMC Global China Coal Energy 2005 MIM Holdings The Mosaic Company Inco Ltd. Newmont Mining Peabody Energy Coal India 300 Potash… 183 190 Asia-Pacific Fortune 500 Industry Breakdown (2011) Grupo Mexico S.A. 178 183 188 184 Freeport McMoRan 172 Potash Corp. Grupo Mexico S.A. 2000 2011 Petroleum-Refining Falconbridge Ltd. Yanzhou Coal Mining The domination of American 18 No. of Mining Total Revenue Codelco No. of Mining Total Revenue 200 Automotive Cameco Corp. BRICS BRICS companies on the global rankings 46 Newmont Mining Companies (USD bn) Peabody Energy Companies (USD bn) 16 Banking-and-Finance Industrias Penoles has decreased. Only 144 made AngloGold Ltd. China 00 China 5 94.17 Placer Dome Inc. ENRC(2) Insurance India 13.55 India 1 10.28 100 the list in 2011 compared to 189 Barrick Gold Corp. AngloGold Ashanti 189 184 15 Metals Russia 14.50 Antofagasta Russia 1 15.00 in 2005 144 Cominco Ltd. 7 Teck Corp Brazil 24.63 Consol Energy Brazil(1) 1 56.59 178 167 154 Electronics 150 13 Gold Fields Ltd South Africa 22.57 Fortescue Metals South Africa 2 11.24 9 Energy Gold Corp CAEMI* Total 6 15.25 Total 10 187.28 0 10 13 IT Xstrata Gold Fields Ltd. 2005 2006 2007 2008 2009 2010 2011 12 Ashanti Goldfields 12 Trading Newcrest Mining 0 5 10 15 20 0 1020304050607080 Telecommunications *Note: (1) CAEMI was acquired by Vale in 2006; Companies marked in red are BRICS-based companies Others (2) 2010 Revenue Source: Fortune Magazine; The Beijing Axis Analysis The Beijing Axis 18 Source: Fortune 500; Various; The Beijing Axis Analysis The Beijing Axis 19

The mineral sector plays a key role in the Asia-Pacific economies. While The Upshot China’s mining industry only accounts for 6% of its GDP, it is the world's largest in absolute terms

GDP and Mining Industry as a % of GDP of Top Mining Countries (USD bn, %, 2011) USD bn  China is striking a fine balance between curbing inflation and maintaining growth in the context of a fragile global 15,065 6,988 4,000 25% economy – look for more moderate but sustainable growth

GDP (lhs) China has the world’s largest Mining as a % of GDP (rhs) mining sector with an overall 20%  Asia occupies a far more crucial role in the global economy – the world has changed and is changing still, with 3,000 mining industry value of USD Mining Industry Value (USD bn) 419 bn (2011) many far-reaching implications

Mineral sector contributes 15% approx. 20% to Chile's GDP 2,000  Heightened market volatility and redistribution of global influence require a more informed and strategic decision- making process 10% 49

29 1,000  New global champions emerging from these markets are disrupting global competition and will shape the future 92 20 13 5% 158 38 landscape 419 106 53 11 301 50 37 4 0 0%  As demand patterns in Asia shift, cutting-edge strategic intelligence and relationship management becomes crucial USA

Peru – in Asia we find consumers, producers, investors, suppliers… China India Chile Brazil Canada Russia Vietnam Thailand Australia Indonesia Africa S. Kazakhstan Philippines Source: Research and Markets; IMF; The Beijing Axis Analysis The Beijing Axis 20 Source: The Beijing Axis Analysis The Beijing Axis 21

Agenda The Asian region is gradually becoming a prominent source of OFDI. Asia has seen the highest growth rate, but OFDI stock is still very low

OFDI Flows by Region (USD mn, 1990, 2000, 2010) OFDI Stock by Region (USD bn, 1990, 2000, 2010) 1. A Closer Look at China/Asia Resource Consumption 1,400 18 Europe Europe North America 16 North America 2. China’s Outbound Investment – with specific reference to Latin America 1,200 Latin America Latin America Africa 14 Africa 1,000 Asia 3. Implications and Future Trends 12 Asia

800 10 4. Final Word 600 8

6 400 Asia’s OFDI stock is 4 very low compared to 200 its relative economic 2 size in the world 21% 6% 7% 0 0 1990 2000 2010 1990 2000 2010

TheThe Beijing Beijing Axis Axis 2222 Source: UNCTAD; The Beijing Axis Analysis The Beijing Axis 23 China was the world’s fifth-largest investor in 2010, ahead of other Asian Chinese Outgoing Foreign Direct Investment started gathering pace in 2005 countries. China’s OFDI stock is expected to reach USD 560 billion by 2015 (graphic illustrates Jan 2005 to Dec 2011)

2005 2006 2007 2008 2009 2010 2011

World’s Top 20 Outward FDI Originators, Flows China OFDI Stock and Flows (USD bn, 2002-2015F) (USD bn, 2010) 0 50 100 150 200 250 300 350 600 US Flows Stock Germany 560.0 France Hong Kong 500 China ranked 5th in China In 2011 alone, China invested in 2010 Switzerland 1,392 overseas projects in 132 Japan 400 th countries 383.4 Russia China ranked 6 in 2009 Canada 317.2 Belgium 300 Netherlands Sweden 245.8 Australia China ranked 13th in 200 184.0 Spain 2008 and 2007 Italy Br. Virgin Is. 117.8 100 90.6 Singapore 57.2 S. Korea China ranked 18th in 44.8 USD 1 bn 29.9 33.2 Luxembourg 2006 0 Ireland 2002 2003 2004 2005 2006 2007 2008 2009 2010 20112015F

*Note: China OFDI flows for 2011 do not include financial investments from September-December 2011 Source: WIR 2011; The Beijing Axis Analysis The Beijing Axis 24 Source: The Beijing Axis Analysis The Beijing Axis 25

China’s interests are global with an emphasis on key resource markets – Resources occupy a key position in China’s OFDI story – Taking into although via offshore financial centres i.e. HK, BVI, CI is growing account the SPVs, the mining industry ranks high in overall investments

China OFDI Flow (USD bn, 2004-2010) Breakdown of Overseas Investments by Sector (USD Value of China’s Mining and Metals Investments by 2004 2005 bn, 2004-2011E) Commodity (2011E) 2006 2007 2008 2009 80 Others 45 Leasing & Commercial Service* 6.7 2010 44 Iron Ore 40 Banking and Insurance Europe 9% 3.4 Wholesale & Retail Trade 2.1 2.2 1.5 0.6 0.9 Transport, Storage and Postal Service 5% Copper 60 Manufacturing Asia Mining North America 2.6 12% 10% 31% 1.5 Aluminium 0.3 1.1 0.1 0.2 0.3 China 17 5.5 88% Africa 40 8 1.6 1.4 2.1 Platinum 0.3 0.4 0.5 4 10.5 3 8.5 HK & Singa. 17% 7.3 34% 6.5 Others Exploration Cayman & Br.Virgin 4.9 20 3.9 66% Others 1.8 28% Others 2.5 Oceania 1.9 1.8 Latin America 0.7 0.1 0.2 0.1 0 China’s investments in chrome, nickel, and manganese are still very small 2004 2005 2006 2007 2008 2009 2010 2011E compared to other commodities

*Note: Commercial services include investments in holding companies, regional headquarters or SPVs that are often established in offshore centres to invest in other countries and sectors Source: MOFCOM; The Beijing Axis Analysis The Beijing Axis 26 Source: MOFCOM; The Beijing Axis Analysis The Beijing Axis 27

In 2010, with an estimated investment of USD 15.25 billion, China's Latin America has recently seen increased investment across different investment in LatAm was more than twice the amount it invested in the sectors from China – expect more to come (i) region in the period 2006–09

Origin of FDI Latin America and the Caribbean* China FDI Destinations by Country (2010-2011) Major Announced Chinese Foreign Direct Investment in LatAm (2010) (2006-2010) Year Month Investor Status USD mn Partner/target Sector Subsector Country

Latin America Others 2010 January Hombridge Holdings Concluded 400Sul-Americana de Metals Metals Iron ore Brazil Caribbean Financial Centers Netherlands China UK Others Peru Argentina Brazil 2010 February Sany Heavy Industry Ongoing 200 Build a manufacturing plant Manufacturing Heavy machinery Brazil Japan Spain Canada US 2010 March East China Mineral and Expl & Concluded 1,200 Itaminas Metals Iron ore Brazil USD 864.17 bn USD 112.63 bn USD 15.25 bn USD 7.13 bn Development 100% 100% 8% 10% 2010 March CNOOC Concluded 3,100 Bridas Energy Oil Argentina

2010 April WISCO Concluded 4,700 A JV steel mill Metals Steel Brazil 30% 75% 28% 75% 2010 May State Grid Concluded 1,720 Cobra, Elecnor and Isolux Power Power grid Brazil

2010 May Sinochem Concluded 3,070 Peregrino Field Energy Oil Brazil 10% 7% 2010 August Tongling Nonferrous & China Planning 3,000 Copper mine Metals Copper Ecuador 50% 5% 13% 50% 4% Railway Construction 2% 10% 9% 2010 September Chery Ongoing 400 n/a Transport Auto Brazil 4% 5% 3% 25% 4% 25% 2010 October Sinopec Ongoing 7,190 Repsol/YPF Energy Oil Brazil 4% 25% 17% 0% 0% 2006-2009 2010 2010 Q1 - Q3 2011

*Note: This figure accounts for 80% of total FDI in Latin America and the Caribbean; 2010 is confirmed investments; 2011 is announced investments *Note: Highlighted deals denote those in no-resource sectors Source: ECLAC; The Beijing Axis Analysis The Beijing Axis 28 Source: China Global Investment Tracer, Heritage Foundation, Various; The Beijing Axis Analysis The Beijing Axis 29 Latin America has recently seen increased investment across different Asia continues to dominate the machinery industry – Nearly half of the top sectors from China – expect more to come (ii) 500 machinery companies are from the region

Major Announced Chinese Foreign Direct Investment in LatAm (2011-2012) Year Month Investor Status USD mn Partner/target Sector Subsector Country 2011 March Hangzhou Cogeneration n/a 3,000 n/a Manufacturing Heavy machinery Brazil Geographic Distribution of Top 500 Machinery Top 500 Machinery Companies Breakdown by Asian 2011 March Chongqing Grain Group Concluded 2,400 n/a Agriculture Soybeans Brazil Companies (2006-2011) Countries (2011) 2011 April Lenovo Ongoing 833 Positivo Electronics PC Brazil Japan 2011 April Huawei Ongoing 363 Build a plant Telecom Mobile phone, Tablet Brazil 8 21 China 2011 April Anhui Longping High-Tech Seeds Concluded n/a Sementes Guerra Agribusiness Seed Brazil Rest of the World Asia 15 Korea 2011 May Geely Concluded 40 Nordex Transport Auto Uruguay 500 India 2011 May CPIC Concluded 60 Owens Corning Plant Others Fiber glass Brazil 81 116 Singapore 2011 May Foxconn Ongoing 12,000 n/a Manufacturing Screens Brazil 400 Malaysia 2011 May XCMG Concluded 200 n/a Manufacturing Heavy machinery Brazil 2011 June TCL Corporation Ongoing 21 Radio Victoria Fueguina Telecom Mobile phone Argentina 300 2011 July BOMCO Concluded n/a BRCP, Asperbras Energy Petroleum equipment Brazil

2011 June China Northern Railway Ongoing 127 T’Trans Transport Rolling stock Brazil Asian companies continue their No. of Chinese Companies in Top 500 (2006-2011) 2011 August ICBC Ongoing 600 Standard Bank Argentina Finance Banking Argentina 200 dominance in the global 0 306090 2011 August Midea Group Concluded 223 Carrier Corp of UTC Group Manufacturing Home appliances Arg, Brazil, Chile machinery ranking 2011 81 China had 53 2011 September Taiyuan Steel, CITIC Group & Baosteel Concluded 1,950 CBMM Metals Niobium Brazil 100 195 201 209 2010 77 companies selected 225 225 223 2011 November CNOOC Ongoing 7,100 Pan American Energy Oil Argentina 2009 74 as “Top 500 Machinery 2011 November Sinopec Ongoing 4,800 Petrogal Brasil Energy Oil Brazil 2008 69 0 Companies” in 2006, 2012 January Sinochem Ongoing n/a Perenco SA, Espirito Santo Basin Energy Oil Brazil 2007 2006 2007 2008 2009 2010 2011 60 and this increased to 2012 February Sinochem Ongoing 1,000 Tempa BV Energy Oil Colombia 2006 53 81 in 2011

*Note: Highlighted deals denote those in no-resource sectors Note: (1) includes foreign-owned firms with fully integrated manufacturing in China Source: China Global Investment Tracer, Heritage Foundation, Various; The Beijing Axis Analysis The Beijing Axis 30 Source: World Executive; World Machinery Summit; The Beijing Axis Analysis The Beijing Axis 31

An increasing number of Chinese equipment manufacturers are emerging as There is a clear potential to reduce procurement costs when sourcing from global leaders in their respective segments China

Chinese Companies in the Top 50 Global Ranking of Construction Equipment Producers Anticipated Savings When Sourcing from China - The Beijing Axis Case Study Rank 2005 Rank 2011 The Global Top 5 Companies 100% 1 Caterpillar 1 Caterpillar 30% 2 Komatsu Ltd 2 Komatsu Ltd Labour 3 TEREX Corporation 3 Hitachi Construction Machinery Co., Ltd 4 Deere & Company 4 VOLVO CE 5 VOLVO CE 5 Liebherr Group Mgmt. (2) 70% Materials Ins. (1) Chinese Companies into the Top 50 Tooling Transport 33 Zoomlion Heavy Industry 7 XCMG Financing 37 Liugong Machinery 8 Zoomlion Heavy Industry 45% 40 Xiamen XGMA Machinery. 9 Sany Group 41 XCMG 18 Liugong Machinery 47 Lingong Construction Machinery 22 Lonking Holdings 48 Sany Group 24 Shantui Construction Machinery 49 Lonking Holdings 26 Xiamen XGMA Machinery 41 Foton Lovol International Heavy Industries 42 China National Machinery Industry Corp. Local Country Cost (Traditional SA Low Cost Country Price (China Final Cost from China (TCC*) 43 Yuchai Heavy Industries sources) sources) 46 Hunan Sunward Intelligent Machinery

Source: World Executive; World Machinery Summit; The Beijing Axis Analysis The Beijing Axis 32 Source: The Beijing Axis Analysis The Beijing Axis 33

Chinese manufacturers are increasingly integrating activities such R&D, Key Challenges when doing Sourcing from China product development and after sales services in their supply chains

1 • While product design and manufacturing quality may approach world class, lack of global experience China’s Role in Global Supply Chains Over Time Supplier readiness hinders Chinese suppliers’ commercial and service readiness (e.g. high customization, DDP delivery) • Sizeable domestic market and full order books often lead to supplier inflexibility in negotiations 2 • Suppliers unfamiliar with Western technical standards, often unwilling or unable to adapt design to Technical challenges 100% of customer’s requirements. Customers’ understanding of Chinese standards pays additional Stage 1 dividends Product Sales & Circa early to R&D Sourcing Manufacturing Marketing Service • To take full advantage of suppliers’ scale and domestic volume, customer needs to understand Development Distribution mid 1990s Chinese standards and supply conditions, which can be challenging • Start a few, isolated production facilities 3 • Few suppliers fully understand and apply rigorous quality management systems; or apply selectively Quality management and as a token gesture. Individual products’ quality can be world class but variability still high • Due to weak processes in place, human factor risks need to be managed by placing on-site expediting Stage 2 Product Sales & R&D Sourcing Manufacturing Marketing Service and QC engineer, aided by 3rd party quality inspectors Circa mid to Development Distribution late 90s 4 • Began to use China as a • Began to integrate • Built brand for the local market • Chinese suppliers have limited experience with complex international projects, and rather than actively procurement source production facilities and local sales & distribution Project integration participating in project as part of integrated team, prefer the narrower role of equipment suppliers. within China Active management required to integrate their work with other parts of projects • Added complexity of distances, time zones, language and cultural barriers Product Sales & Stage 3 R&D Sourcing Manufacturing Marketing Service Early 2000s Development Distribution 5 • Due to unfamiliarity with international bidding processes, Chinese suppliers may require longer times Bid and contract for bidding on equipment supply to complex projects • Integrate China into global • Integrate China in to global • Transfer global best practice to management • Chinese suppliers unfamiliar with complex commercial requirements of a typical Western equipment China sourcing network manufacturing network supply contract, e.g. insurances, transportation to site, warranties, supply in local currency, etc. Stage4 6 • Everything is different – language, culture and customs, food, business negotiations, technical Present to 5- Product Sales & Doing business R&D Sourcing Manufacturing Marketing Service standards, etc. 10 years Development Distribution in China hence • Built R&D and PD centers 7 in China • Managing Chinese supply bidding and contracts requires more effort and flexibility from project team, • Integrate China in to global value chain Owner’s team readiness commercial managers, legal advisors

Source: BCG; The Beijing Axis Analysis The Beijing Axis 34 Source: The Beijing Axis Analysis The Beijing Axis 35 There are different types of Chinese investors, each of which have their own The Upshot strengths and weaknesses

Large SOEs Medium size SOE’s Private companies  Large conglomerates that report to  Operate at the central, provincial or city  Relative young companies (10-20 years  China’s outbound capital will continue to hit the headlines as it continues to be a top FDI originator SASAC level and are more focused on one old) that experience exponential growth specific niche sector during the early-boom years of 1990s-  SASAC appoints the top executives and 2000s  Divided in two sub-tiers:  OFDI participation by private enterprises has just started – Expect this to pick up at a rapid pace approves their overseas transactions  Slow-growing: • Experienced difficulties growing in a  Managed by either self-made Chinese  Large SOEs hold leading positions in entrepreneurs with little business highly fragmented and cut-throat  While investments towards mining and oil & gas will still be a material part of China’s outward FDI, anticipate a shift their respective industries domestic market experience or by Chinese returnees • Operate in non-strategic industries educated overseas with international of attention towards other sectors, especially in Latin America  Financially supported by the government • Smaller international ambitions competencies  Large SOEs are given specific mandates  Fast-growing:  Do not benefit from government support  China’s FDI to the Latin American region has gradually increased over the years, the main benefactors of Chinese • Export-oriented enterprises but often partner with SOEs for specific investment are Brazil, Argentina and Peru and the major targets for these investments are resources  Examples: • Successfully consolidated market projects/transactions when going global • China Three Gorges share at home • China State Grid • Motivation to go global  Examples:  However, due to the attractive and growing internal markets, especially that of Brazil, Chinese firms have placed a • Provided financing by Chinese • Fosun International Limited domestic banks • China Kingho Group greater emphasis on higher value added products • Move faster than bigger SOEs  Examples: • Shandong Heavy Industry • Sany Heavy Industry

Source: The Beijing Axis Analysis The Beijing Axis 36 Source: The Beijing Axis Analysis The Beijing Axis 37

Agenda Looking Ahead: Short, Medium and Long Term

1. A Closer Look at China/Asia Resource Consumption  For 2012, we anticipate slower growth of 8.5%. We view such a sub-9% slowdown as essential for the future structural integrity and sustainability of China’s economic success 2. China’s Outbound Investment – with specific reference to Latin America  For 2015, and beyond: as the picture for the global environment becomes clearer; and as China grapples with the challenge of having to meet its pressing social and developmental objectives while growing at a rate of GDP growth 3. Implications and Future Trends of ‘only’ around 8.0% by 2015, well below the 9.2%-14.2% GDP growth rate of the past 5 years

Final Word  Despite these difficult challenges China’s broad transformation is expected to continue and will present an 4. environment that is characterised by a long term and sustained shift towards a middle income economy. This trend appears firmly entrenched, representing a profoundly different new global landscape

 This will see a further increase in China’s share of global GDP having risen from 6.5% of world output in 2006 to a resource hungry 9.5% in 2010

 Looking ahead it looks inevitable that China will become a USD10 trillion economy, making up 15% of global output within 5 years.

TheThe Beijing Beijing Axis Axis 3838 Source: The Beijing Axis Analysis TheThe Beijing Beijing Axis Axis 3939

Implications and Future Trends Strategic considerations

Implications and Future What it means for LatAm Trends Description What it means for LatAm Strategic considerations Description companies 1 1 Slower economic growth China will reengineer itself towards a more moderate growth phase with a Ramp up strategic China Increase the level of (granular) strategic intelligence on China’s economy, does not mean no growth different set of drivers. Commodity demand remains solid and Asia market industries and market potential (by sub-region/commodity) and that of other Need of strategic Moderate GDP intelligence high growth Asian markets. intelligence on China 2 growth and Its all about strategic Rates of growth in resource demand during the super-cycle 2004-2008 were sustainable demand 2 policy choices – Beijing unsustainable. Chinese policy makers allow a moderation in GDP growth Strategic marketing Become very astute at strategic marketing to China, India and other high for commodities becomes a key ‘gets’ this looking for sustainability growth markets. Dealing with brokers will no longer suffice. New competitors, differentiator for miners partners and 3 Moderating commodity Commodity demand in China will be moderate but China remains the single suppliers 3 Look into opportunities resulting from ‘offshoring’ by basic material demand (moving towards biggest global engine of resource demand and will be that for a long time to China will remain the Look into opportunities sustainability) global engine for come from ‘offshoring’ producers in China (i.e. steel mills will develop mills internationally, closer to resource demand resources). Strategic marketing 4 There will be some (individual commodity) exceptions to high growth to China Exceptions will occur 4 Explore partnering with Explore opportunities to partner with Chinese firms, whether it be on a commodity demand. It is necessary not to generalise about ‘China potential’ Chinese outbound Understand the project in Latin America, Asia or Africa – Chinese firms are demanding but to understand the detailed supply/demand of each individual commodity investors variability, volatility expertise from foreign players 5 The one-way supply/price risk for buyers in a seller’s market has now begun Partnerships beyond Balance of risks shifting and exceptions 5 resources to shift towards two-way risk where buyers and sellers will share risk Engage with China Companies without global procurement strategies, will lose competitiveness sourcing – now! over time. Integrating China into a CAPEX project or the MRO supply chain 6 Volatility could increase as the market grapples with the reality that China has its challenges but the benefits are real Increased volatility Increasing China’s 6 not be a one-way bet. Markets will adapt to the reality of more moderate but outbound investment Fully tap into China’s growth story by being the preferred resource supply China procurement Tap into China fully; but do strategy more sustainable demand in the region not neglect other emerging chain partner to raw materials consumers in China AND by not becoming 7 Chinese outbound China’s outbound capital will continue to hit the headlines. Overseas consumers too reliant on China by positioning itself as a resource supply chain partner investment will continue investment is moving beyond trade facilitation and natural resources to other large consumers i.e. India Source: The Beijing Axis Analysis TheThe Beijing Beijing Axis Axis 4040 Source: The Beijing Axis Analysis TheThe Beijing Beijing Axis Axis 4141 China faces a number of important risks on the domestic front. Similarly, the Agenda world faces a set of variables an risks as China’s rise unfolds

Internal • Leadership transition – Short-term External the handover to the fifth Bubble size: Probability of Occurrence generation of leaders in • Northeast Asian economies 1. A Closer Look at China/Asia Resource Consumption late 2012 will be crucial as Degrees of China and commodity producers are the most exposed to a it will set the tone for Politics and power dependency policy and political reform transition slowdown in China 2. China’s Outbound Investment – with specific reference to Latin America during the years ahead • For example, around 30% of Property South Korean exports go to Domestic bubble China and for Australia this 3. Implications and Future Trends government number is about 25% • Exchange rate volatility - finances (debt) the RMB must be closely Low Risk High Risk • Despite increasing 4. Final Word government efforts to cool off watched as a more FX risk EU debt volatile period could lie crisis the property market, the risk ahead of a bubble burst still exists • Also, overspending on social Aging population • Social unrest - in cases and social safety housing as a ‘substitute where peoples’ Social net stimulus’ would simply replace expectations are not met cohesion the problem of recent times • The wealth gap continues with private sector housing to widen making this a key area of concern Long-term

Source: The Beijing Axis Analysis TheThe Beijing Beijing Axis Axis 4242 TheThe Beijing Beijing Axis Axis 4343

Final Word THE BEIJING AXIS PUBLICATIONS – THE CHINA ANALYST  There are new markets that matter – a new competitive landscape is unfolding. China, India, Asia and Latin America to be central in this reconfiguration A knowledge tool for executives with a China agenda

 This new world brings about key trends, new realities and strategic issues – all actors are now (re)interpreting this future to understand the drivers of 1) broad trends and 2) exceptions – get close, be informed and strategic

 This implies the need for a new strategic approach – ‘ignoring’ Asia/China (and India, Indonesia et al), Latin America and Africa is no longer possible or wise ̵ Must see Asia for its full potential: • Sell into new, unfamiliar high-growth markets • Seek capital and partners • Find new areas for growth and project development • Access new technology and talent • Anticipate the rise of new global competitors April 2012 September 2011 March 2011 August 2010  Appreciate the ‘outward-looking’ stance of Asian players – new global leaders are emerging in Asia and they will act in Latin America presenting opportunity and threat

* NOTE: Latest / previous editions of The China Analyst are freely downloadable from our website,  Complexity and change means that resources industry to be just another ‘competitive industry’ – asset ownership and production www.thebeijingaxis.com/tca; alternatively please e-mail us at [email protected] to be added to growth not enough; exemplary use of information, strategic intelligence and strategic end-user marketing to play a crucial role in our distribution list shaping competitive advantage and mitigating risk

TheThe Beijing Beijing Axis Axis 4444 The Beijing Axis 45

THANK YOU!

Javier Cuñat General Manager, Beijing Axis Strategy, The Beijing Axis E-mail: [email protected]

COPYRIGHT© The Beijing Axis Ltd. 2012. No part of this publication may be reproduced or transmitted in any form or by any means without prior written consent of The Beijing Axis. It is based on material that we believe to be reliable. Whilst every effort has been made to ensure its accuracy, we can't offer any warranty that it contains no factual errors. We would like to be told of any such errors in order to correct them. www.thebeijingaxis.com