1Strategic Impact of Chinas entry into the WTO On Chinese and Foreign CompaniesPresentation for CEMS Universities in St.Gallen,Stockholm,Bergen,MilanoNovember,20012ContentPageA.The macroeconomic impact of Chinas WTO entry 3B.Automotive 11C.Apparel&Textile 22D.Pharmaceuticals36E.Banking42F.Securities and Asset Management48G.Insurances523A.The macroeconomic impact of Chinas WTO entry4Already the tariffs have come down considerably in the last decade but they still differ strongly between industriesWeighted average tariff rates of manufactured productsWeighted average tariffs with and without WTO accessionSource:World Bank,199946.54440.623.217.818.5051015202530354045501992199319941995199619971998OilseedsMeat&livestockDairyOther foodBeverages&tobaccoTextilesApparelWood&paperPetrochemicalsMetalsAutomobilesOther manu.Total manu.Total27.423.55129.0320.221.597657.12123.4627.6826.7410.144.1614.8517.5420.16.246.954.829.3820.3413.766.747.997.94WithoutWith5The impact of Chinas WTO entry has a macroeconomic as well as industry-specific microeconomic impactMeasuresTariff reductionsAbolishment of non-tariff barriers Quotas(imp./exp.)Licenses Local content requirements Distribution restrictions Investment restrictions etc.Introduction of legal protection Copyrights Auti-dumpingMicroeconomic impactMore competitorsPrice pressureNew sourcing strategies,lower factor costMore product varietyIncreasing productivity,restructuringConcentration process in some industriesMacroeconomic impactMore import&exportAccelerated growth of GDPAccelerated growth of income(EDP/cap.)and wealth/capMore foreign investmentEmployment increase/decreaseStructural change towards more competitiveness6Trading short term pain against long term gain is a walk on the wireShort term painLong term gainSource:Dev.&Res.Ctr.Of the State Connect,Goldman Buck,World BankCorporate profits(ROI)Employ-mentSocial capitalGDPWealthTradeForeign Investment(direct)Price&quality competitionDecrease of profit margins Increase in bankruptcies+1%additional growth p.a.+34%until 2010High loss of labor/jobs in some industries(e.g.agriculture,automotive),but new jobs created in other industries(e.g.apparel)Increase of skilled laborRural-urban discrepancy in wealth and income(+4.6%p.a./2.1%p.a.)+1.15%additional GDP/cap p.a.60%of population 6000 USD income by 2010+1.7%additional export growth p.a.+1.3%additional import growth p.a.+50bn annually7The macroeconomic impact of Chinas accession to the WTO will be especially strong in apparel,automobiles and electronicsSome categories as exampleWithout accessionWith accessionWithout accessionWith accessionWithout accessionWith accessionFoodgrainsOther agricultureBeverages/tobaccoExtractive industriesTextilesWearing apparelPetrochemicalsMetalsAutomobilesElectronicsUtilitiesTrade/transportTotal13.119.654.667.5910.376.874.715.191.802.562.512.383.1818.3014.716.8611.6513.238.577.108.423.474.413.643.494.9518.1014.444.4511.2513.7518.406.687.951.054.663.533.434.820.302.302.491.688.1919.522.543.370.134.965.851.703.700.180.740.860.168.3418.232.814.850.457.685.012.434.580.200.790.880.2010.1743.953.225.930.779.485.742.706.345.872.590.851.4913.140.973.914.111.853.481.121.893.2115.788.181.238.1415.830.974.605.081.724.921.652.274.7515.278.7314.427.8722.303.195.185.807.425.601.412.056.14Table 10.Output,Exports and Imports as a Share of the World EconomyOutputExportsImports199520051995200519952005Source:,World Bank analysis 20008With some dramatic consequences for employment(1)Source:World Bank and Dev.Res.Ctr.of the State CouncilEmployment of skilled labor growth:19952005FoodgrainsMeat&livestockBeverages/tobaccoExtractive industriesWearing apparelWithout accession to WTOWith accession to WTO29.1130.2569.8265.29-32.852.8860.5562.95116.460.21MetalsAutomobilesElectronicsOther manufacturesBusiness/finance23.0426.5550.5936.5439.9142.1825.5224.8-48.1148.079With some dramatic consequences for employment(2)Source:World Bank,1999Jobs lost/newly created(in m)5.4-5-5.4-1-2.52.6CommerceApparel&TextileCoHonWheatRiceAutomotive10Elect.media telecomMedia publishers1)Fast moving consumer goodsHIGHMEDIUMLOWLowHighLowHighDegree of globalizationProtectionist barriers todayConstructionPharmaceuticalsConsumer electronics/durablesBrandedFMCG1)(e.g.Coke)ApparelAutomotiveAgricultural productsTrans-portationCommodity steelProtectionist barriers-Tariffs in%-Quota licenses-Investment restrictions -equity -regionalDegree of globalization-Market share of global brands-Production relocation costs in%of total turnoverDomestic companies in global industries which enjoyed high protection will suffer mostImpact11B.Automotive12In the year 2010 China will be the largest truck market in Asia and passenger car demand will have grown to 1.6m cars200020042009200020042009hi pricemid pricelow price+10%p.a.+14%p.a.6409601,650150150250+0%p.a.+10%p.a.heavymediumlightSource:Daimler Chrysler,RBP assumptions1302105004306501,00080100150Passenger carsTrucks13Source:China Passenger Car Prospect 2001,Roland Berger Strategy Consultants Santana1)Jetta1)31%26%24%25%38%31%26%24%25%9%15%23%28%17%18%18%22%30%35%34%0%10%20%30%40%1996199719981999200024%17%13%38%8%49%46%39%46%38%36%45%45%40%15%0%10%20%30%40%50%60%19961997199819992000Total sales volume by user,2000Government carsBusiness carsPrivate carsTaxiTaxiBusiness carsPrivate cars1):Santana and Jetta make up for 50%of passenger cars in 2000In%of totalIn%of totalPrivate buyers are becoming the ultimate market driver14The contracted cuts in duties and of non-tariff barriers are considerableReduction of tariffsAbolishment of non-tariff barriers Immediate increase of import quotas to 6 bn US$,growing+15%p.a until elimination in 2005 Abolishment of special taxes and license system for imported cars Abolishment of“index”system and any restrictions in preduct policy(type,category model)two years after accession Abolishment of local content restrictions Abolishment of any restrictions to operate an own sales and maintenance network from 2003 onwards Abolishment of foreign ownership restrictions and value level for automotive JVs to be approved will increase from 30 mil US$to 150 mil US$Introduction of financing options,e.g.leasing,operated by foreign non-bank institutions under Chinese regulations upon accessionSource:US-Chamber of CommerceCar-manufacturersComponent suppliers78624838302502040608010001030405060201020304050%001000002030405060110%15A further decrease of car prices is predictable1002004008001,6003,2001001502002501993199419951996199719982003Price RMB 000Until 2003 price will be below RMB 80,0002000=120,000RMBCumulated ProductionSource:RB calculation,Volkswagen production figuresVolume000Example:VW-Santana GLSSlope 19%16Small scale production is a mayor reason for the low efficiency and profitability of Chinas car manufactures43.0%19.7%14.3%9.3%8.2%6.3%3.7%1.9%1997199819992000VW SantanaVW Santana231TAIC Daihatsu100VW Jetta76Chongqing Suzuki50Dongfeng Citroen40OthersBuick 20Guangzhou Honda 10Source:China InfobankMarket share of car manufactures 1999production in 1000 units504030494035550Market Share%17050100150200250300350400TAIC Charade 2000Nanya PalioYunqueChangan LingyangChangheQinchuan ZhonghuaChangan AltoTAIC CharadeGeely HaoqingRetail price1,000 RMBEnginelMiniStandard(Economy)Lower-mediumHigh-end0.60.81.01.21.41.61.82.02.53.0Qinchuan XiaofuxinExisting models and new launches,2001Source:Roland Berger Strategy Consultants Upper-medium:New launchesExisting modelThis development trend has been anticipated by carmakers through new product launches BMW 3 seriesSAW BluebirdBrilliance ZhonghuaHonda Accord 2.0VW Audi A6 TurboVW PassatCitroen PicassoMazda PremacyVW Santana 2000Citroen EMVW BoraVW JettaRenault ScenicDingoFord IkonVW Santana GLGM SailSAIC CherryYuejin Encore/uniqueVW PoloCitroen DCKIA PrideToyota VitzGeelyToyota PlatzFAW Red FlagGM BuickHonda AccordVW Audi A618Installed capacity and its enlargement for passenger car 1000 unitsInstalled CapacityProduction(2000)Utilization(%)Planned Enlargement(yr)Model Santana Passat Polo Jetta Audi A6 Bora Citroen Alto Accord Buick Sail(compact car)Vitz/Yaris Daihatsu Charade Premacy(minivan)Ikon Cherokee Geely Cherry Encore/Unique Palio Red Flag BMW 3 or 5 series ZhonghuaVWPeugjeotSuzukiHondaGMToyotaMazdaFordDaimller ChryslerJiliSAICNanyaFAWBMWBrillianceTotalProduct Site Shanghai(SVW)Shanghai(SVW)Shanghai(SVW)Changchun(FAW)Changchun(FAW)Changchun(FAW)Wuhan Chongqin(CMC)Guangzhou Shanghai(SGM)Shanghai(SGM)Tianjin(TAIC)Tianjin Hainan(FAW)Chongqing(Changan MC)Beijing Zhejiang Anhui Nanjing Changchun Shenyang Shenyang300600150300120803010000150-10010060605020030ca.1,44025030090170545330300082-57050130067883%50%-60%57%-45%66%100%30%-55%-5%7%-8%-65%-50%over the next 510 yearsCarmakersPressure for cost reductionsIntroduce new modelsReconsider global sourcingPressure for less suppliers(modules)CompetitorsNew entries of global suppliersLower prices aggressivelyIncrease quality22C.Apparel&Textile23The WTO agreement will open the developed markets to apparel and textile imports from ChinaTariff reductionSuccessive increase of quota until abolishmentSafeguards against sudden trading imbalancesChina lowers average import tariffs from 25.4 to 11.7%Developed countries lower their import tariffs accordinglyPhasing out of import quotas of other WTO-members until 2005Phasing out of export quotas of ChinaAntidumping regulationsSafeguard mechanisms in case of sudden imbalances24The quota will be gradually abolishedQuota abolishmentExplanationTimetable-quota abolishmentStageImplementation dateMinimumintegration rateAdditional growth rate12341.Jan,19951.Jan,19981.Jan,20021.Jan,200516%17%18%16%25%27%Full integration of textile and apparel quotaIntegration means removal of textile and apparel products from quota coverage thus to be integrated into the ATC(agreement of textile and apparel)Additional growth rate refers to the requirement of ATC to ask WTO members to increase the quota growth rate for major supplying countries.The methodology is to add an annual additional growth rate on the historical quota growth rate.2546%32%9%13%Sourcing structure of major importing countries 1999%20%43%16%9%13%70%50%30%14%12%14%9%USAEUJapanOthersOthersEastern EuropeEurope(Esp.Turkey)ChinaRest of Asia1)OthersOthersThe AmericasChinaRest of Asia1)Rest of Asia1)ChinaEUUSAJapanCAGR96-99+2.1%+10.7%-5.9%Major importing countries/regions 1999%Major importing regions and supplier regionsSource:WTO,Roland Berger Strategy Consultants1):Hong Kong included in rest of Asia:EU 5.2%;USA 7.7%;and Japan 0.6%Asia is the biggest supplier for US and Japan second biggest for Europe26Value of clothing imports into Japan US$bn11,4569,54810,53811,606199619971998199919,67216,72714,69016,367ChinaMarket Share of China59%63%65%70%Source:WTO,Roland Berger Strategy ConsultantsChina has increased its market share in Japan to 70%despite a shrinking market27Based on production cost China is competitive on a global scaleCosts of given minutes for clothing production$Based on a survey of KSA for a model production site including Wages and auxilliary wages Productivity Working days and time Costs for management and administration OverheadsCheaper production cost than ChinaSource:KSA,Roland Berger Strategy ConsultantsAmericaAsiaWestern Europe+MediterreanEastern EuropeU.S.0.228Costa Rica0.123El Salvador0.105Dominican Republic0.103Jamaica0.099Guatemala0.092Honduras0.092Mexico0.091Hong Kong0.176Taiwan0.163Korea0.136Pakistan0.104Malaysia0.102Philippines0.080Sri Lanka0.079Thailand0.079China0.079Indonesia0.078India0.076Vietnam0.075Cambodia0.075Germany0.358Italy0.291France0.262U.K.0.218Israel0.188Spain0.178Greece0.178Portugal0.158Turkey0.117Tunisia0.099Morocco0.094Egypt0.075Slovenia0.167Poland0.127Croatia0.126Czech Republic0.121Hungary0.116Estonia0.113Lithuania0.107Slovakia0.104Latvia0.097Bulgaria0.091Romania0.090Russia0.086Ukraine0.082Usbekistan0.079Moldavia0.07728Volume,distance of price and growth in China relative to average of EU importsSource:Roland Berger Strategy Consultants,CITH,CIRFS,European CommissionNote:Bubble size represents market share by volume of total EU imports in this category-40-20020406080100-10-5051015202530Relative priceto average%Relative growthto average%TrousersWomensovercoatsWomenssuitsMens shirtsT-shirtsPulloverWomens blousesWomens dressesWomens skirtsTotal EU import growth of selected items,CAGR 1993-99%T-Shirts+9.2%Pullovers+13.5%Trousers+10.5%Mens shirts+0.7%Womens blouses+6.2%Womens overcoats+8.9%Womens dresses+3.9%Womens skirts+10.2%Womens suits+4.0%High quota cost in relation to product priceIn the EU,China has strong competitive advantages in womens suits,overcoats and skirts sector while pullovers and T-shirts are more expensive than the average29China has based on its strengths the potential to increase its market share in EuropeKey findings“Supplier country China”Source:Roland Berger Strategy Consultants interviewsServiceEspecially the Southern part of China demonstrates a competitive advantage in terms of Reliability compared to the AmericasCreativity compared to Central/Eastern EuropeLead timeChina is naturally(sea freight)facing a disadvantage concerning lead-time compared to the Americas(US)and Eastern/South Europe(EU).Increasing pressure on time to market based on shorter collection-cycles is driving less price sensitive customers to also use airfreightDistance to raw material marketsChina is expanding its competence in fabric production especially in technical fabrics and is therefore building up a competitive advantage towards other Asian countries without fabric production or poor fabric production(e.g.Sri Lanka,Cambodia)Cost positionBased on production costs China is competitive on a global scale.However,relative high quota costs in low-priced product categories and the strong dollar have partly resulted in a shift in sourcing to the Americas and Eastern EuropeProduction know how/qualityChina is broadly accepted as a country with excellent production know-how across all product categories with core competence in coats,suits and shirts1234530The impact of the WTO agreement differs strongly between the different market participantsTextile ManufacturersMore exports to ChinaIncreasing investments in ChinaFew competitive advantages(capital intensive)Apparel ManufacturersStrong increase in exports to Europe,US and JapanMore license agreements with European,US and Japanese brand and non brand apparel manufacturers and retail firms(labor intensive)State Trading FirmsRisking to loose their quota-selling business and profitsHave to develop into regional agents or to become manufacturersPrivate Trading FirmsIncreasing market share through global sourcing network,more value added and better client relationshipsNew market entrants in China31The advantage of state-owned trading companies in getting cheaper quota will gradually disappearAdvantage of state-owned trading companiesExample-Quota structure of a state-owned companyImpactsThe state-owned trading companies currently still own the advantage of getting quota from the government free of charge or at lower costHaving relied on the quota protection for a long time of period,most of the state-owned trading companies havent established enough competitiveness for a free market competitionThe deregulation is the absolute trend and state-owned companies will gradually lose their advantages in quota acquisitionAfter Chinas accession to the WTO,the abolishment of quota will push the state-owned trading companies into a very unfavorable situation40.0%20.0%40.0%Free quotaCheaper quotaMarket price quotaProfit contribution from subsidized quota:US$20mExample32Apparel export is still the most important business of OIE in terms of sales and profit contributionSource：OIE,Roland Berger Strategy Consultants1)Including Holding,Minhang,Baihe,Gaonan,apparel business of Rongheng,Pudong2)Jiada+Jingmao3)Including Holding,Rongheng Sales structure by business 2000US$mOperating profit structure by business 2000US$mApparel1)exportLogistics2)forwardingPharmaceu-tical exportTextile3)exportOthersTotal252.962.326.424.913.066.7%16.4%7.0%6.6%3.3%379.3Apparel1)exportLogistics2)forwardingPharmaceutical exportTextile3)exportOthersTotal11.176.3%Example3.10.40.2-0.314.533Taking into account the upcoming market liberalization,OIE will lose rapidly its competitive advantage based on governmental protectionAssessment of competitivenessBusinessMarket share developmentProfitability/cost positionGovernmental protectionBusiness modelsMatch of core competence and success factorsOverall assessmentApparel exportPhar.ExportTextile exportLogistics forwarding(sea)Logistics forwarding(air)HighMediumLowSource:Roland Berger Strategy Consultants34The apparel business will need to improve its profitability considerably to offset the loss of the quota businessAdjustment of reported profit of apparel business based on“Economic profit”US$m-1211-4-16-4-11Reported profit FY2000Elimination of non-sustainable profitsCurrency gainsProfits protected by quota“Sustainable”net profitCost of equity“Sustainable”Economic profitIIValue of apparel business is declining!Source：OIE,Roland Berger Strategy ConsultantsIRequirement to improve profitability35There are two strategic options for OIE in the apparel business:“Service-oriented manufacturer”or“Full-service regional agent”Strategic options in apparel business“Full-service regional agent”“Service-oriented manufacturer”Customer focusForeign retailers(esp.vertical chains)Chinese retailers(private label)Big retailers with own buying officesLow-medium advanced agentsRegional coverage of supplier countries for production in AsiaNational coverage(e.g.Several production plants in different labor cost areas of China)Supplier country coverageAll apparel product categories and qualitiesFocus on one/few product categories and/or qualities Product categoriesServices/competencesSupply chain partner with core competences in fabric sourcing(worldwide),factory sourcing1)and quality controlAdditional innovative services in Design(own collection)Product development(flexible and quick prototyping through own production capacity)Fabric research&developmentCore competences:Production Quality assuranceAdditional services:Product development(pattern making,prototyping)Fabric sourcing121):No own production sites36D.Pharmaceuticals37Chinas WTO entry will have a strong impact on the pharmaceutical sector and distributionTariff reductionToday1/2003Non-tariff barrier abolishment Trading rights(import)phasing in Distribution/retail restrictions phased out within three years upon acc.Better intellectual property(brand)protection Transparency(publication of regulations)National treatment(abolishment of tax privileges,fair participation in public tenders4.2%-60%drugsAverage 15%-20%10%Medical equipment and crude drugsSource:Trade/agreement China-US9.6%38In fact the consumer prices of foreign imported drugs are usually 90%to 100%higher than the manufacturing price mainly due to an inefficient distribution systemDrug-price-componentsDistribution margins in%of turnover1000100price index200110120150165193+17%VATManufacturer priceCustomsClearing charges drug inspectionDistributionHospital mark-upVAT25%10-12%3-5%0%10%20%30%ChinaJapanEuropeSource:Interviews,EIU,RB-infocenter16,000 distributors/wholesalers200 distributors/wholesalers10-20 distributors10-20distributors39Though the market share of foreign drug manufacturers is relatively high many market entry hurdles still remainTotal drug market2000:15-18 bn US$Non-WTO related Chinese walls Certification and Admission Procedure(State Drug Administration)Provincial and municipal reimbursement lists State Economic and Trade Commission permissions/licenses for pharmaceutical retail/wholesales Price-and-Profit-control-regulations Institutional/Legal environment State news Medicine Examination and Approval Committee State Pharmaceutical Administration of China(SPAC)State Drug Administration(SDA)Source:MOTT,State Administration o。