Poland – A Beacon in Central Europe

28 April 2010

Louis ChanEconomistHKTDC Research

Why Poland?

Poland was the only European country with positive GDP growth in 2009

Source: Eurostat, PAIiIZ

EU: - 4.2%; Euro area: - 4.1%

3

Consistently outperforming the EU and Euro area

2.53.2 2.9

0.7

-4.2

2.21.7

3.0 2.8

-4.1

1.5

5.3

3.6

6.26.8

5.0

1.72.6

3.2

2.01.6

0.7

0.6 0.7

-5

-3

-1

1

3

5

7

2004 2005 2006 2007 2008 2009 2010forecast

2011forecast

%

EU27 Euro Zone Poland

Average GDP growth 2004-09• 4.8% in Poland• 1.2% in the EU• 1.0% in the Euro area

Source: Eurostat, Central Statistical Office (GUS) 4

Poland is one of the largest FDI recipients in the Central and Eastern Europe (CEE)

Source: National Bank of Poland

EU85.6%

Othercountries

14.4%

Geographical sources of FDI inflow

10.2

8.3

15.717.2

10.0

7.7

2004 2005 2006 2007 2008 2009*

• At the end of 2008, the accumulated value of FDI in Poland was over 116 bn EUR

• Almost 1/5 of foreign investment was from The Netherlands

• USA was the largest non-European investor in Poland

Annual FDI inflow in EUR bn

• Manufacturing activities including especially automotive, electronics, machinery and aircraft among the most attractive sectors for foreign companies in Poland

• During the last couple of years – the developmentsof financial intermediation, real estate and IT enabled modern services have been dynamic

5

Poland – No.1 location for FDI in CEE

6

The largest CEE country in the EU

Source: PAIiIZ

7

Since 1st of May 2004 Poland is a member of the EU. Main advantages:- access to the single market

of almost 500 mn potential consumers,

- free movement of goods,- the Polish law harmonized

with the EU regulations.

A gateway to the 500-million-strong European market

On 21 December 2007 Poland joined the Schengen zone: a territory with no checks atinternal borders formed in the 25 member states.

Schengen Zone

In years 2007-2013 Poland will be the largest beneficiary of European Funds available among others to any company incorporated in Poland.

Distribution of the EU Funds(in EUR 100 mn)

Source: PAIiIZ8

The country is open for trade

Source: Central Statistical Office (GUS)

82 8896 99

118 125

145162

178

204

140 144

23 25

0

50

100

150

200

250US$ billion

2004 2005 2006 2007 2008 2009 J-F 2010

Exports Imports

9

Rising interests in sourcing outside the EU

10

Growing interest in sourcing from China

11

Other Favourable Factors

41%

15%

25%

4%

1%

1%

13%

Infrastructure and EnvironmentHuman CapitalInnovative EconomyDevelopment of Eastern PolandProgrammes of the European Territorial Cooperation ObjectiveTechnical AssistanceRegional Operational Programmes

Biggest beneficiary of the EU structural fundsover the period 2007-2013

EU Funds of more than €67 bn + Polish contribution of over €20 bn

Source: PAIiIZ

13

A top-up of €633 million from EU Funds for the years 2011-2013

…“The Inter-institutional Agreement on the 2007-2013 financial framework between European Parliament, Council and Commission foresaw automatic adjustments for countries whose GDP had variedby more than 5% cumulatively over 2007-2009 compared to the forecasts when drawing up the framework (in 2005).

Economic growth in Poland during this period reached 10.8% more than expected in the EC prognosis.”

(An excerpt from the European Commission’s communiqué dated 19 April, 2010)

Host of the Euro 2012 with Ukraine

Source: STC, Poland and Ukraine

15

Factors Favouring Hong Kong Companies

Lack of local production of quality consumer goods at competitive prices

- More focused on heavy industries such as power generation, metallurgy, mining, chemicals, etc

- Produce some consumer items, mainly domestic electrical appliances like LCD TVs, vacuum cleaners and refrigerators

- Most competitive manufacturers are usually those producing for export under processing agreements

- Production of other light consumer items falls short of ever-growing demand

17

Growing brand awareness

Source: PMR Publications18

An ideal regional distribution centre

- Situated at at the crossroads between East and West Europe

- Adopted EU’s common external trade policy and measures

- Lower operational and labour costs

- 14 Special Economic Zones (SEZs), providing tax relief as high as 65% for SMEs

Examples of Chinese enterprises in SEZs- Digital View and TPV Technology Ltd- Dong Yun- Suzhou Victory Precision Manufacture Co- Min Hoong Development Co- Sino Frontier Properties Ltd Source: PAIiIZ

1000 km radius250 mn people

2000 km radius550 mn people

19

Polish Consumer Profile & Retail Landscape

Rising consumerism with higher income

Average Per-capita Monthly Expenditure

Source: GUS

25.6%

2.6%

5.5%18.9%

5.5%

4.8%

10.1%

7.9%1.2% 17.9%

food and non-alcoholic beverages

alcoholic beverages, tobacco

clothing and footwear

housing, water, electricity, gas and otherfuelsfurnishings, household equipment androutine house maintenancehealth

transport

recreation and culture

education

others

21

Continued retail consolidation

The number of shops reduced to 386,000 in 2008 from 449,000 by end-2002

Source: GUS

Number of Retail Shops in Poland, 2008

179

167

45

15

7

9

8

8

6

7

170

116

46

13

8

9

8

8

8

9

0 200

petrol stations and others

with foodstuffs, fruit and vegetables, meat, fish

with textiles & clothing

with motor vehicles

with cosmetics & toilet goods

with footwear & leather items

with furniture & lighting appliances

with consumer electronics & household appliances

with books & stationery

with baker's products & alcoholic beverages

000 units

End-2008End-2002

22

Organised retail on the rise

8% 7%

9%

7%

32%

4%

8%

9%9%

7%

Hypermarkets

Supermarkets

Discount stores

Food/drink/tobacco stores

Health and beauty stores

Clothing and footwear stores

Home and gardening stores

Electronics and appliance stores

Leisure and personal goods stores

others

Retail Sales in Poland

Remark: Percentages shown above are calculated according to retail sales.Source: Euromonitor

23

Growing foreign participation

Hypermarket/Supermarket/Discount Stores

Ahold (incl. Hypemova) NetherlandsAuchan FranceCarrefour FranceE. Leclerc FranceGéant FranceJeronimo Martins PortugalMetro GermanyRewe Germany Tesco (incl. Savia) UK

Hypermarket/Supermarket/Discount Stores

Ahold (incl. Hypemova) NetherlandsAuchan FranceCarrefour FranceE. Leclerc FranceGéant FranceJeronimo Martins PortugalMetro GermanyRewe Germany Tesco (incl. Savia) UK

Electricals/Mobile Phone

EKO Contel GreeceMedia-Markt (Metro) Germany

Electricals/Mobile Phone

EKO Contel GreeceMedia-Markt (Metro) Germany

Footwear

Deichmann GermanyEcco DenmarkNG2 Poland

Footwear

Deichmann GermanyEcco DenmarkNG2 Poland

DIY/Furniture

Castorama (Kingfisher) UK Ikea Sweden Obi GermanyOffice Depot USPraktiker (Metro) Germany

DIY/Furniture

Castorama (Kingfisher) UK Ikea Sweden Obi GermanyOffice Depot USPraktiker (Metro) Germany

Clothing & Textiles

Arcadia UKBenetton Italy Calzedonia (incl. Intimissimi) ItalyCortefiel (incl. Springfield) SpainJack Pot DenmarkLPP PolandMango SpainMorgan FranceMothercare UKOriginal Levi’s Stores USOrsay GermanyTroll PolandZara Spain

Clothing & Textiles

Arcadia UKBenetton Italy Calzedonia (incl. Intimissimi) ItalyCortefiel (incl. Springfield) SpainJack Pot DenmarkLPP PolandMango SpainMorgan FranceMothercare UKOriginal Levi’s Stores USOrsay GermanyTroll PolandZara Spain

Source: Euromonitor

Department/Variety Store

Bhs UKGaleria Centrum NetherlandsMarks & Spencer UK

Department/Variety Store

Bhs UKGaleria Centrum NetherlandsMarks & Spencer UK

24

Performance of Hong Kong Exports

Hong Kong’s exports of selected products to Poland

+71%3+13 %14-10%13Watches and clocks

-1%6-21 %20+71%26Jewellery

+10%9-22 %47+20%60Toys and games

-30%3-52 %14+31%29Travel goods and handbags

+22%2-13 %5-40%6Footwear

-54%11-23 %54+6%69Clothing

-45%17-30 %73+7%104Fashion products

+14%7+10 %27+160%25Household electrical appliances

-1%20-21 %95+25%121Gifts and premium*

+61%18-21 %46+13%59IT equipment

-5%8-56 %39+49%87AV equipment

-4%19-29 %67+96%95Telecom equipment

+37%87-33 %260+16%387Electronics^

+13%158-27%533+19%726Total exports

GrowthValueGrowthValueGrowthValue

Jan-Mar 201020092008(US$ million)

^ Includes finished electronic products and parts and components of electronic products* Includes items covered in other categoriesSource: Census & Statistics Department, HKSAR Government

Potential Opportunities

Consumer electronics & household electrical appliances

Retail Sales of Consumer Electronics and Household Electrical Appliances

Source: Euromonitor, GUS

3.6 4.7 5.98.1

10.6 8.81.81.9

2.22.7

3.42.8

0

5

10

15

2004 2005 2006 2007 2008 2009

US

$ bi

llion

Consumer electronics Household electrical appliances

+159% or a CAGR of 27%

28

Gifts and premium

- Huge demand for quality and innovative items

- Boosted by the branding trend and customer loyalty programmes

- Euro 2012 will instigate a buying spree for souvenirs, festive and related items

- Becoming more willing to pay for exquisite gifts and premium which mix creativity and technology

- Some started to source branded promotional products from HK suppliers

- Most sought after items include: silverware, jewellery sets, battery-powered timepieces, camera cases, travelling bags, rucksacks, shopping bags, brass and leather stationery

29

Fashion products

Source: Euromonitor

5.66.6

7.39.2

12.1

9.9

0

2

4

6

8

10

12

14

US

$ bi

llion

2004 2005 2006 2007 2008 2009

The Polish clothing and footwear market

+116% or a CAGR of 21%

30

Toys and games

175 199 215 263334

276

74110

170

231

327

281

0

100

200

300

400

500

600

700

2004 2005 2006 2007 2008 2009

US

$ m

illio

n

Traditional toys and games Video gamesSource: Euromonitor

Retail Sales of Toys and Games in Poland

+165% or a CAGR of 28%

31

Jewellery and timepieces

Source: GUS

Imports of Jewellery and Timepieces in Poland

339(+29%)

263(+46%)

180(+51%)

119(+75%)68

(+21%)

110(+18%)93

(+33%)70(+41%)50

(+49%)33(-34%)

0

50

100

150

200

250

300

350

400

2004 2005 2006 2007 2008

US

$ m

illio

n

Jewellery Watches and Clocks

32

Risks and Challenges

Domino effects of global recession

Unemployment rate in Poland

19.518.2

16.2

12.79.8

11.012.9

0

5

10

15

20

25

2004 2005 2006 2007 2008 2009 Q1 2010

%

Source: GUS

34

Keys to Succeed

Some recommendations

- Target Poland but not Poland alone- Explore Poland’s potential as a regional centre for distribution in Europe

- Get ready and strive for ODM and OBM orders- Get prepared with well-designed collections featuring decent designs and

branding to set out ODM and OBM businesses

- Never settle for inferior quality- Likely to trade down, but not a dumping place for unsold products

- Leverage on Poles’ good perception of Hong Kong- Quality control, third-party testing, professional services

- Win business by taking reasonable risks and increasing flexibility- E.g. giving credit or longer credit terms to creditworthy Polish buyers, plus

accommodating smaller orders

36

Thank You