Where is China`s Economy Headed?

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Where is China`s Economy Headed?
Where is China’s Economy
Headed?
Dublin
June 26th 2014
CONFIDENTIAL AND PROPRIETARY
Any use of this material without specific permission of McKinsey & Company is strictly prohibited
Overview
Evolution of China’s Economy
Next Wave of China
Opportunities
McKinsey & Company
| 1
China economic trends: Summary
▪
Government promotes shift to domestic
consumption and services
▪
Middle class becoming the new
mainstream – far beyond tier 1 cities
▪
Urban markets continue to evolve in city
clusters
▪
Cost increase and margin pressure
across industries
▪
Digital unfolding disruptive momentum
▪
Local innovation at scale – by MNCs and
local companies alike
▪
Some broader concerns & risks to watch
out for
McKinsey & Company
| 2
Among the reforms in the 3rd Plenum , market mechanism and
sustainable development are important guiding principles
ENABLE AN EFFICIENT MARKET MECHANISM
▪ Allow the market to play a “decisive” role in resources allocation;
apply market-based pricing except for important public services
and industries with natural monopoly
▪ Reduce entry barriers to introduce competition from private sector
▪ Enhance the governance and management SOEs
STREAMLINE RELATIONSHIPS BETWEEN GOVERNMENTS AND
MARKET
▪ Streamline the responsibilities of central vs. local governments,
including the local tax breaks
▪ Increase fiscal transparency, especially for local governments
▪ Reduce government intervention and SOE advantages
▪ Separate jurisdiction system from administrative branch
Ensure top-level design with the
Leading Group for the Comprehensive Deepening of Reform
Enhance cross-department
coordination with State Security
Committee
IMPROVE SUSTAINABILITY OF ECONOMIC DEVELOPMENT
▪ Incorporate environmental protection into government officials'
performance review
▪ Enhance balanced growth in population in the long term
IMPROVE SOCIAL FAIRNESS
▪ Enhance farmers’ property/land rights
▪ Grant rural and urban residents fair access to public services
SOURCE: Literature search; McKinsey analysis
McKinsey & Company
| 3
Upper middle class becomes the new mainstream
Average annual
household income
(class)
USD
Urban households
Millions
100% = 165
2002, %
Affluent
>34,000
1
Upper
middle class
16,000-34,000
2
Mass middle
class
9,000-16,000
Poor
<9,000
100% = 256
2012, %
3
100% = 357
2022E, %
9
29
14
54
54
7
90
Change in number
of households
2002-22, millions
29
SOURCE: McKinsey Insights China – Macroeconomic model update, April 2012
188
22
16
66
-92
McKinsey & Company
| 4
Geographic epicenter of the middle class shifts
Share of middle class by city
tier1
Inland China
Coastal China
URBAN CHINA
Share of middle class by inland
and coastal China1
Tier 1 cities
16
Tier 1
Inland
13
39
40
45
Tier 2
Coastal
43
87
61
31
Tier 3
Tier 4
15
3
2002
8
2022E
2002
2022E
1 Based on the information for 266 cities
SOURCE: McKinsey Insights China – Macroeconomic model update, April 2012
McKinsey & Company
| 5
Manufacturing shift from growth to productivity
Revenue CAGR, percent
Manufacturing sectors in China
1990-2010
2010-2020
23
Automotive
Communications
equipment
Iron & steel
General & special
purpose machinery
Specialty
chemicals
7
-16
20
15
14
13
Change
11
-9
-9
6
10
-5
9
-4
McKinsey & Company
| 6
Business input costs continue to rise
Annualized cost increases
2010-2013, CAGR
11.4%
7.8%
4.6%
3.5%
2.1%
1.1%
China
Interest
rates
Shanghai
Producer Consumer Water
price
price
index
index
Office
space
Wages
McKinsey & Company
| 7
Margins falling
Operating margins of Chinese industrial companies
7.7%
7.1%
6.7%
6.2%
5.7%
4.8%
State-Owned
Enterprises
2010 2011 2012 2013
4.5% 4.6%
Listed companies1
2010 2011 2012 2013
1 WIND Industrial sector
McKinsey & Company
| 8
World’s largest e-tailing market
High case
China’s e-tailing market size, 2003-20 in 2011 USD
USD billions
Base case
Low case
CAGR
Percent
Reached
US 2011
size
Reached
US 2008
size
2008
09
11
128
35
10
100
32
8
420
259
74
10
2015-20
99
120
44
2011-15
395
37
183
22
648
12
15
21
10
Estimated penetration,
2013 end:
▪ Broadband: 40%
▪ Smartphone: 30%
Forcing new business
models on:
– Developers
– Consumer service
providers
– Financial services
– Logistics
2020
McKinsey & Company
| 9
E-tailing hotspots
Mobile
B2C apparel
Luxury
Cross-border
McKinsey & Company
| 10
Innovating sectors deepening
Internet
Mobility
Medical products
Biotech
+52%
+62%
+20%
+18%
YoY growth of
internet economy
in 2008-12
YoY growth of
smartphone installed
base in 2008-12
YoY growth of medical
products in 2010-12
YoY growth of
biopharma in 2010-12
McKinsey & Company
| 11
Locals are competing with MNCs across many segments – medical example
Estimated market size by product category and by customer segment, Bn USD, %, 20131
MNC
40
60
65
65
Market segment
75
Local
60
40
35
35
25
Capital equipments
Personal medical
equipments
Implantables
In-vitro
Diagnostics
Other highvalue medical
device
Product category
Overall local share is ~40%
1 Not including low-value medical products which accounting for ~USD 11 bn
SOURCE: McKinsey database; industry reports; McKinsey analysis
McKinsey & Company
| 12
Worries about doing business in China?
Key business issues
Percent of respondents
▪
MNCs
Chinese companies
Intensifying competition
61
▪ Inflation and rising cost of doing
54
50
business
23
47
▪ Slow-down of Chinese economy
▪ Increased pressure from retailers
37
▪ Growing sophistication / shifting
35
needs of consumers
23
38
62
32
▪ Changing channel dynamics
▪ Expanding influence of internet
19
▪ Others (e.g., Government policy)
18
69
31
0
McKinsey & Company
| 13
McKinsey & Company
| 14
Real Estate & Banking Concerns
Real Estate
Banking
▪
Property starts likely down 10-15%
this year
▪
Wealth management products
reaching US$2trn – raising cost of
funding for banks
▪
Prices falling in 3rd and 4th tier cities
▪
Property developers investing
outside China and talking down the
market
▪
New internet banks accelerating the
trend
▪
US$350bn of wealth management
products to be rolled over this year
▪
Government carefully managed any
defaults to date
▪
Supply exceeding demand as
investor demand falls, taxes rise
Common issue:
Middle class confidence and willingness to
spend
SOURCE: McKinsey Global Institute, UBS
McKinsey & Company
| 15
Mall developers go bankrupt—especially state-owned ones
New South China Mall, Dongguan – Largest shopping
center in the world when opened in 2005, now 99% empty
Vacancy rates, 2013
Percent
Shenyang
17
Chengdu
16
Guangzhou
10
Planned increase in mall
capacity, 2013-2015
+38%
McKinsey & Company
| 16
Overview
Evolution of China’s Economy
Next Wave of China Opportunities
McKinsey & Company
| 17
Drivers of Domestic Growth
▪
▪
▪
Urbanization: 15-20 million p.a.
Urban incomes rising 10-15% p.a
Urban expenditures rising 12-15% p.a.
Agricultural modernization
▪
51% households will be “New
mainstream” by 2020: trade up,
spending shifts to services
Completion of energy and social
infrastructure– modern and green
McKinsey & Company
| 18
Economy moving to private consumption and services
Real GDP growth decomposition
Percent, percentage points
11.3 10.4
7.5
6.6
Private
20%
consumption
27%
39%
Investment
Net trade
A
E-tailing
B
Protein
C
Logistics
D
Private education
11.3 10.4
43% 47%
7.5
6.6
52% 55% Services
40%
59%
Others
46%
Examples of
high-growth industries:
42%
E
Private healthcare
F
Tourism
9%
7%
3%
3%
Agriculture
36%
13%
28%
15%
-1%
18% 18%
2%
G
Entertainment
H
IT services
48% 46% 44%
42% Industry
1%
2005 2010 2015E2020E
2005 2010E2015E2020E
McKinsey & Company
| 19
Implications for Industrial Sectors
1. Smart cities with
cleaner energy, better
resource utilization
2. China Inc
going global
3. Privatization and
productivity
McKinsey & Company
| 20
By end of 2013, 193 cities in China have rolled out ‘smart city’ projects
Majors cities having ‘smart city’ projects
Tier 1 city
Tier 2 city
Tier 3 city
Daqing
Mudanjiang
Shenyang
Beijing
Tangshan
Langfang
Tianjin
Dalian
Yantai
Shijiazhuang
Jinan
Jining
Zhengzhou
Xi’an
Kaifeng
Chengdu
Chongqing
Zibo
Xuzhou
Yancheng
Yangzhou
Wuxi
Zhenjiang Changzhou Suzhou
Nanjing
Shanghai
Hefei
Wuhu
Wuhan
Jiaxing
Hangzhou
Ningbo
Shaoxing Taizhou
Nanchang
Wenzhou
Fujian
Guiyang
Kunming
Qingdao
Guangzhou
Fuzhou
Quanzhou
Xiamen
Guangxi
Shenzhen
Foshan
Jiangmen
Dongguan
Zhongshan
SOURCE: press search
McKinsey & Company
| 21
2. China Inc Going Global: Outbound M&A
Percent of 2008-2013 (Oct.) outbound M&A
100% = $267 billion
Geography
Other
5
Southeast Asia
4
Africa
5
Australia/NZ
Latam
11
Industry
Other
Travel/logistics
Tech
Auto/aeronautics
Healthcare
Consumer excl. food
Food/agriculture
1
1
2
4
1
3
4
Infastructure/RE
6
Finance
7
12
Hong Kong/Macau
12
Metals
Chemicals
2
3
Western Europe
24
Mining
19
North America
27
Energy
47
+
+
+
+
+
+
+
+
McKinsey & Company
| 22
3. Privatization and productivity
Since 3rd Plenum, local and central governments preparing to bring
more private capital in. Preparations nearing completion. Examples
include:
▪
Sinochem proposing to sell downstream retail assets
▪
Chongqing has 100 local business from food processing to steel
preparing to bring in private capital
▪
Guangdong looking to reduce holdings in water, logistics, travel
companies
▪
Shanghai selling local SOE shares to PE firms such as Hony
▪
No barriers to non Chinese capital
SOURCE: McKinsey
McKinsey & Company
| 23
Where is China’s Economy
Headed?
Dublin
June 26th 2014
CONFIDENTIAL AND PROPRIETARY
Any use of this material without specific permission of McKinsey & Company is strictly prohibited

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