5 May, 2009

Guy Dru DruryChief RepresentativeCBI, China

CBI China Briefing

Consumer goods and services in China

Overview of presentation

I. CBI Beijing office – an introduction

II. Chinese economy – an overview

III. Consumer goods and services in China – potential and case studies

IV. Q&A

CBI China: an overview

• We have been on the ground for over 3 years.

• We have more than 350 members that operate in over 25 regions across the country.

• In China we represent more than half of FTSE 100 CBI member companies.

• Our China membership is split 60% UK and 40% international companies.

• We have almost 1/3 of members in services and banking/finance.

• CBI China membership is funded by CBI subscription in the UK - members in Europe, USA, China & India automatically covered.

Cities to watch:

Dalian: (20 members) outsourcing, services, consumer goods

Qingdao: (24 members) services, consumer goods, logistics, manufacturingWuhan: (27 members) outsourcing, manufacturing,

services Chongqing: (21 members) ITC, services, manufacturingChengdu: (34 members) services, finance,

manufacturing, consumer goods

Beijing over 100 members

Shanghai over 100 members

Guangzhou over 40 members

CBI China: the offering

• Regular economic, business & political analysis of key issues facing companies in

China.

• A channel for lobbying and raising profile.

• Access to Ministerial visits and events in China.

• Links and access to CBI’s national membership – currently active in 25 provinces.

• Invitations to CBI and UK/International business events, including annual UK-China

bilaterals, private members dinners, breakfasts.

• A monthly Business Voice magazine – overview of CBI’s UK and international activities.

• A bilingual website (www.cbichina.org.cn) providing information, sectoral briefings.

• A Beijing-based office providing on the ground knowledge and independent analysis.

Business in China: focal issues

• Economic crisis (business environment in China and government response)

• New legislation (anti-monopoly, labour law, health care reform)

• Intellectual property (food and beverage, pharmaceuticals, media and sports)

• Market access (medical devices and services sector)

• Regulatory issues (banking/insurance, food and beverages, and manufacturing)

• Protectionism (seven protected industries: defence, energy, oil, telecoms, mineral resources, civil aviation, and shipping)

• Climate change (sharing best practice and raising awareness)

The economy in China: a quick overview

• 3Q 2008: 9% growth, for the first time in five years China experienced single digit growth.

• October 2008: CBI survey found members cautiously optimistic about investment in China, varied depending on sector (export vs. domestic market).

• November 2008: Chinese government RMB4 trillion (US$586 billion) 2-year fiscal package. By 2Q, the government has cashed in RMB230 billion (US$33.8 billion). - 3Q will see a third injection of as of yet unannounced sum into projects in health and

education sectors, big infrastructure projects, and housing for low-income earners.

• 1Q 2009: 6.1% growth, slowest in 20 years.

Definite slowdownhowever, there are signs of recovery:

• Mid-April: Data released indicates domestic demand recovering, 1Q 2009 the bottom.

Data by RBS, CLSA

Industrial output

• Stimulus package has invigorated domestic demand

• 1Q industrial output rose 5.1% year on year to RMB 2.81 trillion (US$411.4 billion)

• Up 8.3% in March

• Rising from 3.8% in Jan/Feb

Fixed asset investment

• FAI continues strong

• 1Q FAI rose 28.8% year on year to RMB 2.81 trillion (US$411.4 billion)

• Up 30.3% in March

• Rising from 27% in Jan/Feb

Retail sales

• Sales picking up again

• 1Q retail sales rose by 15.9% in real terms, 15% nominal, to RMB2.94 trillion (US$430.4 billion)

• March nominal retail sales rose 14.7%, down from 15.2% in Jan/Feb

• Urban retail sales up by 14.1%; rural retail sales up by 17%

•   Reflecting strong home sales, 1Q furniture sales were up 24%, construction and decoration materials 20%, and vehicles 11%

BUT

• Recovery remains overly reliant on public-sector demand.

• Government needs to stimulate private consumption and correct export growth and FDI inflow.

Potential for foreign companies in China

• Population– 1.3 billion people = one-fifth of the world's population.

• Migration– In 1950, the urban population represented less than 13% of the total – in 2008

approximately 40% and is expected to reach 60% by 2030.

1950 2008 20300

20 40 60 80

100

13

4060

Urban populationRural population

Migration to urban areas (%)

• Consumers- Crucial in transforming China from a manufacturing to a service-based economy.- Improved standards of living, higher disposable income and more exposure to a

wider range of international tastes.

• Rising wealth– World Bank states that the number of rural poor surviving on less than 1.25

US$/day was lowered from 60.2% to 15.9% between 1990-2005 – April 2009 McKinsey report on Chinese affluent population (excess of RMB250,000

annual income):

• 1.6 million affluent consumers, a figure growing 16% annually• 80% under 45, compared with 30% in the US and 19% in Japan• Keen on buying foreign brands, hi-tech gadgets & paying for quality products

– Private consumption is still small part of economic demand.– The economic boom has led to a widening wealth gap, most acute between

coastal and interior regions.– The richest 10%‘s share of consumption is 33%; the poorest 10% 1.8%; the rest

65%.

33

1.865

Proportion of total consumption according to wealth

Richest 10%

Poorest 10%

Rest

BUT

Potential continued

• Aspirational goods– Foreign brands aspirational, especially in big cities.– Numerous food scandals have helped importers by reinforcing perceptions of their

superior standards.- Tainted milk scandal killed at least six infants and sickened nearly 300,000 others.

• TrendsThe European Chamber of Commerce in China on the food and beverages industry in China:– Emerging luxury markets– New products gaining a foothold in the market– A new focus on health and convenience

• Government– The 11th Five-Year Plan calls for structural transformation and growth of the service

sector. – Scope for international companies to introduce their business methodologies into the

Chinese market.– China seeks innovation and processes that will enhance its ‘harmonious’ development.

Barriers to entry

• Trade policy issues- Product labelling, sanitary (hygiene) certificates, food safety- Lack of level playing field, regulation and bureaucracy, particularly Chinese standards

• Economic issues- Price-led competition, economic downturn - Almost all supermarkets and hypermarkets in China are competing on price and by

constant sales. - A recent poll by Zenith showed that 78% of Chinese consumers are feeling the pinch.

Of those, an approximate 50% said they would cut down eating at Western fast food restaurants due to its relatively high price.

• Market issues- Lack of product awareness, need to show commitment to the market - Product differentiation/finding a niche:

- Chinese grocery chains which only stock imported goods catering for expats and rich locals.

- Wal-Mart and Carrefour stock local goods due to price factor.- High quality goods versus generic local copies. (Quality vs. price)

Sources: Zenith International, China Cuisine Association), Xinhua , Datamonitor

Examples of CBI consumer goods and services in China

• In China for over 80 years.

• Introduced over 20 brands to Chinese consumers, covering home and personal care, food and beverages and ice cream.

• Have invested over US$1 billion and hired more than 5,000 employees.

• Further remarks– Localisation: 90% managers are recruited and trained locally.

– CSR: ‘Unilever Hope Star’ project helped pay for university tuition for 200 poor students.

– Problems: Counterfeit goods with potential health hazards.

Source: Unilever China

• In China since 1988.

• Introduced over 20 brands to Chinese consumers, covering home and personal care, and food.

• Have invested over US$ 1 billion and hired over 6,300 staff.

• Further remarks– Location: Guangzhou (South China), proximity to Hong Kong, one of the

first development zones.

– Rural consumers: April 07 signed agreement to help improve outlets, build new ones, and train locals in some 10,000 villages in retailing.

– Problems: Counterfeit products containing illegal additives.

Source: P&G China

• In China since 2004.

• Started by founding a 50:50 partnership with a local partner, in 2006 increased share to 90:10. In 2008, rebranded to Tesco Legou.

• 65 outlets in 22 Chinese cities and over 21,000 staff and serving over 3 million customers every week.

• Further remarks– Localisation: Over 99% of Tesco China staff are local.

– Problems: Highly diversified marketRegional differencesLogistics

Source: Tesco China

• In China since 1999.

• 63 B&Q stores in 26 cities around China and employ over 10,000 staff.

• Further remarks– Localisation: Out of 10,000 staff, only 6 expats

– Problems: Rapid expansion/regulation to reign in emerging housing bubble.Will close 22 stores and downsize further 17.

– Long-term commitment: Trying to achieve a turnaround to generate more value to shareholders.Do not expect profits until 2011.

Source: Kingfisher

• Google China was founded in 2005.

• Launched Google.cn, Chinese-language search service, in January 2006.

• Has 27.8% of the market in China.

• Launched music search service in April 2009.

• Further remarks– Regulation: Self-imposed Internet censorship.

– New business model: Free music downloads online.Revenue from advertising.

Conclusions

• China market offers vast potential for foreign consumer goods and services companies.

• To be successful requires a number of steps:– Conduct in-depth consumer research and really get to know the

market– Build up a network of contacts– Show long-term commitment, and– React swiftly to changing consumer characteristics and emerging

trends

• CBI’s Beijing office can help members via a suite of networking, representation, lobbying and business intelligence services.

THANK YOU

CBI Beijing: 1006B, China Life Tower, 16 Chaoyangmenwai Ave, Beijing 100020

Tel (GMT + 8 hrs): (0086) 010 8525 3100 Fax: 010 8525 3116

Guy Dru Drury: (0086) 139 1103 7537

Email: guydd@cbi.org.uk

www.cbichina.org.cn