As China continues to upgrade its economy and add value-added services, it will transition from ‘Made in China’ to ‘Created in China’.
This presentation was created by China-based consultancy SmithStreetSolutions,
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Created in China
1. Upgrading the Chinese Economy
The Historic Transition from “Made in China” to ”Created in China”
June 23, 2010
Copyright 2010 SmithStreetSolutions. All rights reserved. 0
2. Table of Contents
1. What “Created in China” Means
2. Why China Must Create
3. Enablers of Chinese Creation
4. Challenges to Chinese Creation
5. Implications of “Created in China”
1
3. Quotes from Beijing’s 2005 China Economic Summit
I think now it’s time for Chinese companies to build their own brands.
I think now it’s time for Chinese companies to build their own brands.
The Chinese government should push healthy developments of the
The Chinese government should push healthy developments of the
economy.
economy.
Robert A. Mundell, winner of the 1999 Noble Prize in Economics
Robert A. Mundell, winner of the 1999 Noble Prize in Economics
Unique and creative designs will give China’s manufacturing a major
Unique and creative designs will give China’s manufacturing a major
boost and higher technological maturity will make Chinese products
boost and higher technological maturity will make Chinese products
more competitive.
more competitive.
Sir James Alexander Mirrlees, winner of the 1996 Noble Prize in Economics
Sir James Alexander Mirrlees, winner of the 1996 Noble Prize in Economics
Japanese products completed the transition from manufacturing to
Japanese products completed the transition from manufacturing to
creation in over 10 years, setting a good example for Chinese companies.
creation in over 10 years, setting a good example for Chinese companies.
This transition is necessary for the development of China’s
This transition is necessary for the development of China’s
manufacturing.
manufacturing.
John Forbes Nash, winner of the 1994 Noble Prize in Economics
John Forbes Nash, winner of the 1994 Noble Prize in Economics
2
4. What Makes Creation
Four basic elements are necessary for “creation” in the industrial sense to happen.
The difference between Manufacturing an
iPod and Creating an iPod
I. Sound Market Strategy
II. Smart Product Design
III. Successful Technology
IV. Shrewd Branding
Source: SmithStreet Analysis
3
5. Moving up the Value Chain
As a country’s economy transitions from basic manufacturing to innovation and
creation, it will see its industries moving up the value chain.
Case Study: The Rise of “Made in Japan”
In the 1970s, the image of Japanese brands in the
international market was defined by cheap price and
low cost
To move up the value chain, the Japanese government
did two things:
– The government stepped in to increase corporate
identity awareness among large Japanese
companies, and helped them establish their
Corporate Identity Strategies
– The government spent many resources to promote
demand for good design among consumers
Now Tokyo is one of the world’s leading innovation
capitals and “Made in Japan” is linked to high quality
and superior design
Source: SmithStreet Analysis
4
6. An Increasingly Important Service Sector
As an economy becomes more and more innovation- and creation-oriented, its
service industry becomes increasingly important.
Service Sector as a Percentage of Service Sector as a Percentage of
China’s GDP over Time GDP across Countries, 2007
100% 100%
90% 90%
80% 80%
70% 70% 68.9%, OECD Average
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
1982 1987 1992 1997 2002 2007 China Korea Germany Japan UK US
Source: National Bureau of Statistics of China; OECD
5
7. Table of Contents
1. What “Created in China” Means
2. Why China Must Create
3. Enablers of Chinese Creation
4. Challenges to Chinese Creation
5. Implications of “Created in China”
6
8. The Maturing Chinese Manufacturing Industry
Since China’s opening-up, its manufacturing industry has made great
achievements and is now at the point to usher in a new era of innovation.
For the past 30 years, the CAGR of China’s trade volume was higher than the CAGR of
Player in Global
China’s GDP (17.4% vs. 15.6%). Now, China is the third largest trading nation and the
Trade world’s second largest exporter.
The World’s China has become an indispensable part of the international division of labor, with
manufactured goods making up 94.6% of China's total exports in 2008 compared with
Manufacturing the 1980’s 49.7%. China is a major global supplier of manufactured goods, and is no
Base longer a pure exporter of resources and primary products.
Strong Domestic China’s has a huge domestic market, superior infrastructure, and the world’s largest
Resource Base talent pool to match its titanic manufacturing capability.
Source: National Bureau of Statistics of China; Ministry of Commerce of China; WTO
7
9. The Currency Factor
With the trade surplus China has accumulated, the Renminbi is bound to
appreciate, which in turn creates an environment allowing China to upgrade its
manufacturing sector.
“The China Price“ in USD Technology Price in RMB
Source: SmithStreet Analysis
8
10. Trading Prices Down
The global financial crisis drives down the price of undifferentiated goods and
erodes the margins of low-end producers.
Source: SmithStreet Analysis
9
11. Rising Labor Costs
The new labor law introduced in China last year enhances rights for Chinese
workers and requires higher product prices to cover the raised production costs.
Source: Ministry of Labor and Social Security of China
10
12. Environmental Concerns
China’s traditional low-end manufacturing has been developed at the cost of the
deterioration of the environment, and is unsustainable given the sheer size of the
country’s capacity.
Source: SmithStreet Analysis
11
13. Table of Contents
1. What “Created in China” Means
2. Why China Must Create
3. Enablers of Chinese Creation
4. Challenges to Chinese Creation
5. Implications of “Created in China”
12
14. Government Support
The Chinese government has taken the upgrading of the country’s industries
seriously and industrial technological advancement has been a repeated focus of
recent government guidelines.
“Optimizing and upgrading industrial structure” is one of the major goals in China’s
Five-Year Plan for the 2006 – 2010 period, ratified by National People’s Congress in 2006
The Guideline for the National Medium- and Long-Term Science and Technology
Development Plan (2006-2020) issued later by the State Council echoes the principles of
the Five-Year Plan
Source: Gov.cn
13
15. China Is Building its Financial Infrastructure
China is steadily building up the soundness of its financial system, against the
background of an upgrading manufacturing sector.
In December of 2008, the
China Banking Regulatory
Commission (CBRC) issued a
guideline allowing Chinese
Encouraging Yuan- banks to grant loans to
Dominated Funds enterprises, not excluding
foreign holding companies or
Private Equity, to acquire the
The Red Chip Model used to equity and assets of a target
provide an exit strategy for firm
dollar dominated funds’ Pushing Away Dollar-
China investments Denominated Funds Primarily triggered by this
new guideline, we have seen a
The Chinese government’s recent hustle of foreign PE
2006 M&A regulations firms trying to set up Yuan-
effectively froze approvals denominated funds in China
for overseas listings and
hampered the exit of foreign
venture investors
Source: Ministry of Commerce of China; China Banking Regulatory Commission
14
16. Relatively Cheaper US Assets
US assets are relatively cheaper due to falling US equity and the rising value of
the RMB.
Falling US Equity Appreciating RMB
RMB/USD
Exchange Rate
0.150
0.145
0.140
0.135
0.130
0.125
0.120
7/1/2005
10/1/2005
1/1/2006
4/1/2006
7/1/2006
10/1/2006
1/1/2007
4/1/2007
7/1/2007
10/1/2007
1/1/2008
4/1/2008
7/1/2008
10/1/2008
The Chinese Yuan has appreciated
The Chinese Yuan has appreciated
Both the S&P500 and Dow Jones have
Both the S&P500 and Dow Jones have 20.9% since the RMB was unpegged
20.9% since the RMB was unpegged
fallen over 25% in the past year.
fallen over 25% in the past year. from the USD in July of 2005.*
from the USD in July of 2005.*
*Note: Calculated based on the change from the original pegged price of 0.121 RMB/USD to 0.1463 RMB/USD on 12/17/09.
Source: Bloomberg; Oanda.com
15
17. China’s Cash Holdings
China’s foreign exchange reserve has been growing rapidly in recent years.
China’s Foreign Exchange Reserves
USD Bn
2,000
1,800
1,600
%
1,400 = 29.7
C AGR
1,200
1,000
800
600
400
200
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: State Administration of Foreign Exchange
16
18. Inbound M&A Moving Toward Value-added Industries
Foreign investments in higher value-added industries are growing faster than
investments in traditional enterprises.
China Inbound M&A 2004 China Inbound M&A 2007
Social
Services, 3%
Real Estate,
5%
Social
Services, 12%
Real Estate,
Finance &
Finance & 14%
Insurance,
Insurance,
28%
1%
Manufacturing, 50%
Manufacturing, 64%
IT, 11%
IT, 0% Retail, 2%
Transport &
Retail, 0% Logistics,
10%
Transport &
Logistics, 0%
Total = RMB 4.67 billion Total = RMB 10.47 billion
Source: China Mergers & Acquisitions Yearbook 2005, 2008
17
19. Table of Contents
1. What “Created in China” Means
2. Why China Must Create
3. Enablers of Chinese Creation
4. Challenges to Chinese Creation
5. Implications of “Created in China”
18
20. Intellectual Property Protection
To boost innovation, China has to enhance its anonymous intellectual property
protection.
Source: SmithStreet Analysis
19
21. Education System
China’s education system focuses more on memorization than on innovation ,
which can be a drawback in creating an innovative environment.
Source: SmithStreet Analysis
20
22. Distorted Financing Channels
In spite of the high amount of bad assets in China’s banking system, Small- and
Medium-sized Enterprises (SMEs), the major driver of innovation and creation in
China, find it very difficult to get loans from banks.
Source: SmithStreet Analysis
21
23. Quality Control
China’s reputation for poor quality products and the compete-on-price mindset of
Chinese manufacturers could stand in the way of China’s moving up towards
creation and innovation.
Recent product and food safety
Recent product and food safety
scandals have only worsened
scandals have only worsened
China’s reputation for poor
China’s reputation for poor
quality goods
quality goods
Source: SmithStreet Analysis; Amazon.com
22
24. Branding
Chinese companies traditionally focus on increasing sales and market share, and
have been reluctant to make long-term investments in intangible areas such as
brand building.
While the value of luxury brands is well understood, the
While the value of luxury brands is well understood, the
mentality that a brand is only a ‘name-on-a-box’ is still
mentality that a brand is only a ‘name-on-a-box’ is still
common among manufacturers
common among manufacturers
Source: SmithStreet Analysis and Primary Research
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25. Table of Contents
1. What “Created in China” Means
2. Why China Must Create
3. Enablers of Chinese Creation
4. Challenges to Chinese Creation
5. Implications of “Created in China”
24
26. Increased Outbound M&A
In 2008, China’s overseas investment doubled to $52.2 billion, a figure that has
already been surpassed this year due in large part to surging outbound M&A.
Outbound M&A Deal Value
USD Bn
60
50
%
= 97.3
40 CAGR
30
20
10
0
2003 2004 2005 2006 2007 2008
Outbound M&A will increase as Chinese manufacturing continues to move
Outbound M&A will increase as Chinese manufacturing continues to move
up the value chain and weans itself from price-based competition.
up the value chain and weans itself from price-based competition.
Source: China Ministry of Commerce; Thomson Reuters
25
27. An Emerging Group of Chinese Brands
With Chinese manufacturers’ awareness of branding aroused and more attention
being paid to product design and innovation, we expect a group of Chinese
brands to achieve global recognition in the next 10 years.
More Chinese brands, other
The rise of Japanese
than Lenovo and Haier, will
brands started in
enter global customers’
the 1970s.
horizons in the years to come.
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
A group of Korean
brands began to take
off in the late 1990s.
Leading Chinese Brands
Source: SmithStreet Analysis
26
28. The Renminbi as a Global Reserve Currency
As China’s manufacturing moves up the value chain and Chinese producers are no
longer competing on a cost basis, the Renminbi’s lack of free convertibility, a major
impediment to becoming a global reserve currency, will gradually disappear.
Source: SmithStreet Analysis
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