20171108 umtri dewoskin...china smart manufacturing equipment market has entered a rapid growth era....

Ken DewoskinNovember 8, 2017Inside China: Understanding China’s Current and Future Automotive Industry

China:The 19th National Party Congress. . . & China’s Future of Mobility

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Major themes

1 The 19th NPC: What has changed?

2 The “Plan” and it’s prospects

3 Responses: SOEs, POEs, FIEs, & markets

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MainlandMarket Regions

MainlandAs a Whole

NeighborhoodSphere of Influence

Global Economy, ODI, MNCs,

©2017 Ken Dewoskin: please do not redistribute without explicit permission of the author

October Outcomes: The New Standing Committee of the CPC Politburo

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The CPC’s seven most powerful leaders, typically including the successor to the current leader . . . .


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Xi declared a “New Era”– what does it mean?

“Xi Jinping Thought” written into Party Constitution. 3.5 hour Work Report outlines “new era” in all areas of political, economic, and global policy

China is now so successful and wealthy, the Deng doctrine of “bide and hide” is unnecessary

Xi claims that Party will now pursue growth quality, not quantity

Party leadership hints that growth target might be amended after 2021

Newly-elected Politburo and Standing Committee lack factional balances and tensions of previous ones – leaning heavily in Xi’s favor, with allies and advisors

No successor has been identified, stoking speculation about Xi playing an on-going role after 2022


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Deng described reforms as passing through temporary stages

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The Mao Era: China “stands up” (站起来) Century of Humiliation comes to an end with

founding of PRC Builds powerful industrial and military foundation Consolidates Party control, structure, and

membershipThe Deng Era: broad-based prosperity (富起来) Significant wealth creation from dismantling

collective economy and heavy central control Normalization of diplomatic relations w/ outside

world Separation of industry and politics (政企分开)

The Xi Era: wealth and power (强起来) Military and economic might Strong and secure CCP Increased political involvement in industry

“With decades of hard work, socialism with Chinese characteristics has crossed the threshold into a new era. This is a historic juncture in China’s development.” – Xi Jinping, October 18, 2017

“With decades of hard work, socialism with Chinese characteristics has crossed the threshold into a new era. This is a historic juncture in China’s development.” – Xi Jinping, October 18, 2017


Party Congress Work Report – Party Building

OVERSIGHTWe will intensify political inspection to identify problems and ensure that deterrence works”

• Stepped up political inspections and oversight

PENETRATION“Strengthen grass-roots level Party organizations”

• Party cells to become more alert and proactive

OBEDIENCE“The primary task of Party building is to ensure the whole Party obeys the Central Committee”

• Expect increase of Party meetings, ideological oversight, and “political correctness”

The party leads everything, everywhere – Xi Jinping, Oct 18The party leads everything, everywhere – Xi Jinping, Oct 18

5 ©2017 Ken Dewoskin: please do not redistribute without explicit permission of the author

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The Work Report Outline: the plan advances, markets retreat

State-Owned Enterprises

Bigger, stronger, redder More central SOE mergers Stepped-up efforts to boost

profitability Re-draw the boundaries of

the “commanding heights” to incorporate new industries

State-Owned Enterprises

Bigger, stronger, redder More central SOE mergers Stepped-up efforts to boost

profitability Re-draw the boundaries of

the “commanding heights” to incorporate new industries

Innovation

Huge state-led investments into quantum computing, AI, semiconductors, robotics, green

Planned innovation via pilot programs, demonstrations projects and innovation clusters.

Innovation

Huge state-led investments into quantum computing, AI, semiconductors, robotics, green

Planned innovation via pilot programs, demonstrations projects and innovation clusters.

Supply-Side Structural Reform

Written into CCP Charter The dominant economic “re-

form” framework moving forward

“Attack” on industrial overcapacity

Upstream M&A: address commodity price volatility

Supply-Side Structural Reform

Written into CCP Charter The dominant economic “re-

form” framework moving forward

“Attack” on industrial overcapacity

Upstream M&A: address commodity price volatility

Macro-Economic Policy

Across the board risk containment (i.e. monetary policy, housing, etc.)

Carefully guarded capital account

Tighter local gov’t fiscal constraints

Macro-Economic Policy

Across the board risk containment (i.e. monetary policy, housing, etc.)

Carefully guarded capital account

Tighter local gov’t fiscal constraints


13-5SSSROBOR

MIC2025Socialist Core ValuesTwo Studies, One BecomeThree Necessaries Four ComprehensivesFour Confidences Four ConsciousnessesFour Greats Five-in-One Constructions

Plans&

Campaigns

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"I've bought copies of this book for my colleagues as well. I want them to understand socialism with Chinese characteristics." — Mark Zuckerberg

The China Dream Achieving Rejuvenation Is the Dream of the Chinese People –

November 29, 2012 Hard Work Makes Dreams Come True – April 28, 2013 Realize Youthful Dreams – May 4, 2013 The Chinese Dream Will Benefit Not Only the People of China,

But Also of Other Countries – May 2013 Right Time to Innovate and Make Dreams Come True – October

21, 2013 The Rejuvenation of the Chinese Nation Is a Dream Shared by All

Chinese – June 6, 2014

Understanding Xi-- It begins with The Dream


“The Party exercises overall leadership over all areas of endeavor in every part of the country.”

– Xi Jinping, Oct 18, 2017

Applauded for his ability to “turn ideas in theory”…

Born in Shanghai in 1955, largely avoided chaos of the Cultural Revolution owing to poor health

15 years as a brilliant political scientist at Fudan University. Moved to Beijing in 1995 to serve as Jiang’s theoretician

Mid-1980s, Wang investigated the effects of the economic reforms on “state capacity”. Worried that if the decentralization of power continued apace, it would usher a return to a “feudal economy,” with localism and anarchy of the kind that typified the “warlord period” of the 1920s-30s.

Argued for increased central control in the difficult balance: “If power is not transferred to the lower level it will be impossible to invigorate the economy and move it toward modernization; but the transfer of power to the lower level brings with it extremely great difficulties to the regulation and control by the political system.”

“Unity of leadership is the prerequisite for the existence of any country… Where there is no central authority or where the central authority is in decline, the nation will be in a divided and chaotic state.” – Wang Huning, Poltical Life, 1995

“Unity of leadership is the prerequisite for the existence of any country… Where there is no central authority or where the central authority is in decline, the nation will be in a divided and chaotic state.” – Wang Huning, Poltical Life, 1995

A PBSC member who is not a politicianWang Huning

9 ©2017 Ken Dewoskin: please do not redistribute without explicit permission of the author

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What has changed and what has not . . .

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1. The 19th NPC was not the consolidation of Xi’s power, but a theatrical demonstration of the power he had consolidated over the last five years

2. Accordingly, Xi’s approach to governing China has been in play, with little competition or opposition, for at least three if not all five years

3. There is little in what was visible about the event that suggests any major change to the policy direction and business environment evolution we have been experiencing

If anything, MNCs are more critical to China achieving its growth goals, technology targets, and global engagement aspirations than before. But whether and where that is clearly recognized – from the center to the locales – will determine to what degree MNC interests are accommodated in the future.

If anything, MNCs are more critical to China achieving its growth goals, technology targets, and global engagement aspirations than before. But whether and where that is clearly recognized – from the center to the locales – will determine to what degree MNC interests are accommodated in the future.


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Big Data Instead of Market Forces“Big Data will make the market smarter and make it possible to plan and predict market forces so as to allow us to finally achieve a planned economy.” – Jack Ma, statement at an economic conference, reported by the Financial Times, Sept 4, 2017

Why Central planning should work in the 21st Century

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Socialism with Chinese CharacteristicsDeng argued that the transition to a perfected form of socialism would require the use of capitalist activities as an interim step – market forces, controlled competition, labor market flexibility, etc. – until such time that the socialist economic model was ready to be perfected…

Guiyang International Big Data Expo 2016 is held in Guiyang International Conference and Exhibition Center in Guiyang, capital of southwest China's Guizhou Province, May 25, 2016Investors in Guiyang include Apple and Qualcomm


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The Party Congress Work Report – Promises about the FIE environment, market access, and investment

We will expand foreign trade, develop new models and new forms of trade, and tum China into a trader of quality

We will adopt policies to promote high-standard liberalization and facilitation of trade and investment

We will implement the system of pre-establishment national treatment plus a negative list across the board

Significantly ease market access

Further open the services sector

Protect the legitimate rights and interests of foreign investors

All businesses registered in China will be treated equally

Prospects?


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Major themes




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MainlandAs a Whole




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Made in China 2025The blueprint for “Made in China 2025” (MIC2025) was introduced in May, 2015 with a focus on making China a dominant global high tech manufacturer by promoting innovation, building Chinese enterprises and brands, and enhancing service-oriented manufacturing. (China Daily, April 20, 2017).

Important industry sectors like rail and automotive have developed their own sub plan. There has been some evolution of focal points, but the government has laid out ten key industry sectors that they are committed to support:

6. New energy vehicles

7. Power equipment

8. New materials

9. Biological medicine & medical devices

10. Agricultural technology and machinery.

1. Information technology

2. Numerical controls and robotics

3. Aerospace

4. Ocean engineering and high tech ships

5. Railway equipment

These sectors represent 40% of China’s current total industrial value-add

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Sources: The State Council of The People’s Republic of China, Deloitte analysis

China is clear and explicit about its industrial plans


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The Plan is to become a dominant global player in Industry 4.0

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Technology guidance, subsidies, public and private R&D investment, and other incentives are pouring into the basic building blocks

IT, IOT, Digital<> Hardware

interfaces

Big Data and Analytics

Artificial Intelligence

Industry-Internet Integration

2013 2015

23%11% VS.

R&D Production

Promotion and application

Comprehensive application

China smart manufacturing equipment market has entered a rapid growth era. Around 23 percent of surveyed companies apply automation extensively in 2015, versus 11 percent in 2013


Robotics

Sources: Deloitte survey and analysis

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China has a substantial history in robotics

Legal robots deployed in China to help decide thousands of cases'Legal robots' have been deployed on thousands of cases in China to help decide sentencing.The robots - which are about three feet tall and have heads shaped like toasters - review documents and identify problems with cases.

http://www.reuters.com/video/2011/10/23/chinese-robots-display-ping-pong-prowess?videoId=223838974

Ping pong playing robotsIn October of 2011, Zhejiang University in Hangzhou unveiled a pair of piing-pong playing robots that went viral on social media platforms

http://www.telegraph.co.uk/news/2017/08/04/legal-robots-deployed-china-help-decide-thousands-cases/

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Dental robot performs procedures without human interventionChinese robot dentist is first to fit implants in patient’s mouth without any human involvementhttp://www.scmp.com/news/china/article/2112197/chinese-robot-dentist-first-fit-implants-patients-mouth-without-any-human

Sources: Reuters, South The Telegraph, China Morning Post


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Highest usage of smart equipment among auto and machinery companies

The usage of smart equipment among the surveyed manufacturers

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

尚未使用

已经使用

Not yet in use

Already in use

Source: China manufacturing informatization study 2015, Deloitte Research

12©2017 Ken Dewoskin: please do not redistribute without explicit permission of the author

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On the mobility market and service side, adjacencies and eco-systems are highly developed

The BATs, several second tier Internet companies, property developers, logistics companies, and several other business classes are aggressively pursuing and developing mobility related servicesThe intensity of market interest is already pointing to fragmentation, oversupply, and standard conflicts, but consolidation is underway

Maintenance/Repair

FinanceInsurance

Sharing

Intermodal Integration

Operating Systems Mapping and navigation

Payments

Lifestyle

e-commerce/sales

Marketing

BAT LAND


Payments at the heart of key ecosystems

Alipay is a brilliant example of a 360° value creation model . . . with Chinese characteristics

PAYMENTS– loss leader CRM– locked and layered

DATA– Product and politicsMERCHANTS– No exit dependency

• Expand with agents signing up merchants, for commission and multilayer take-offs

• Continuously invent merchant costs• Maximize available cash floats• “hook” agents in peripheral services,

marketing, logistics, ERP/inventory mgt

• Minimize visible costs, maximize convenience

• Constrain alternatives• Fee-less deposits, interbank transfers,

investment products, stored value cards

• Maximize available cash floats

• Market promotions, rebates, spree buying days, sweepstakes, and game chances to customers for merchants

• Market SEO through marketing affiliates

• Provide financing options to drive sales and create high return financial products

• Harvest and market extremely valuable data from this dense tapestry of supplier and customer information

• Integrate with Social Credit Scoring System for financial and behavioral data mining

ALIPAYGrowth and

Value Engine

Source: J Capital, Deloitte analysis

©2017 Ken Dewoskin: please do not redistribute without explicit permission of the author18

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Major themes




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MainlandAs a Whole




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MNC responses and opportunities

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1. The 19th NPC was not the consolidation of Xi’s power, but a theatrical demonstration of the power he had consolidated over the last five years

2. Accordingly, Xi’s approach to governing China has been in play, with little competition or opposition, for at least three if not all five years

3. There is little in what was visible about the event that suggests any major change to the policy direction and business environment evolution we have been experiencing

If anything, MNCs are more critical to China achieving its growth goals, technology targets, and global engagement aspirations than before . . .

If anything, MNCs are more critical to China achieving its growth goals, technology targets, and global engagement aspirations than before . . .

Evolution away from the old JV model

New forms of cooperation

New structures

New measures of success


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Several pressures will keep the door open . . .

Economic PressuresCan “top down, comprehensive planning” create a sustainable growth path for China? How long can painful structural adjustments be forestalled?

Political PressuresCan alignment and control be maintain vis-à-vis patronage frictions; elite rivalries; center-locale conflicts, and problems with the centrality and linearity of authoritarianism?

Social PressuresCan social stability be maintained, non-coercively, vis-à-vis welfare erosion and quality of life expectations, and potential household wealth erosion?

Geopolitical PressuresCan economic stability and political confidence endure the growing pushback on China’s unfair trade and investment practices, neighborly conflicts in the SCS, and fairness demands by BRI host countries?

Capital Market PressuresCan investor confidence –domestically and globally – be maintained given China’s growth challenges, inflated asset values, control weaknesses, and the probability of missing grand-plan targets?


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China’s competitiveness goals create challenges to acquire Industry 4.0 technology

More sophisticated models of IP sharing

Improved IP protection

Increased appreciation of IP value

To support Industry 4.0 realization, no one country, much less one company, will control all of the necessary IP for any kind of implementationsHistorically, China has stressed more reducing IP costs (and value), as well as other soft assets (like brands) in manufacturing value chains than incentivizing IP and brand creation

In leading tech countries’ regulators are increasing scrutiny of early stage and critical technology acquisitions.Significant push-back is creating hurdles to China’s aggressive technology-focused M&A abroad

INDIGENOUS INNOVATION + COOPERATIVE VENTURES + M&A ABROAD

Increased appreciation of manufacturing

Focus on orderly markets and asset values

Increased concern over state ownership

Increased concern about dual use tech


Adjacencies: Co-value creation networks and potential partners

AUTOMOTIVEFINANCE

INSURANCE

TRANSPORT

RETAIL/OWNERSHIP

TECHNOLOGYIT

CONNECTORS

PUBLIC SECTOR

ENERGY

REGULATORY & LEGAL

Future of Mobility

• SOE and non-SOE funds• Banks, capital markets• Leasing, Warranty

• Smart infrastructure• Municipal regulators• Municipal engineers/builders

• Standards• Safety• Testing

• Hardware, software suppliers• R&S institutions• IP regulations/ownership

• Logistics companies• Logistics efficiency: AD• Urban zone controls

• Liability: cost base• Components: battery

• Base energy suppliers• Charging, batteries, fuel cells

• Ecommerce• Social media• Telecoms• Mappers

• Materials• Suppliers• OEMs

• Dealers, fleets, leasers• Mobility services• Destinations . events


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New MNC playbook in the digital and other restricted spaces

Investee in Ecosystem via— Carve out— Rollup— MBO— etc.

MNC

China Financial MNC

China Financial

Core China Business

Core China Business

Asset Management Capital Gain

Sustainable and Defendable Growth in Operating Income

Accelerated Growth in Asset Valuation Public

and/or 3rd

Party

Formal Dividend Income $sInformal Regulatory Support

Major Liquidity

Event

Serial rounds of private equity sales and bank borrowing

1. MNC minority shareholding with total operational control2. Red Hat provided by mostly passive financial investor3. MNC KPIs expanded to include asset growth as well as operating return

Source: The Conference Board China Cetner for Ecomomics and Business, : “New China Models – Revisiting the MNC Playbook


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MNC responses: How to Win

1. Restructuring to improve regulatory positioning, generally with more Chinese investment, more “co-value creation” with Chinese entities (funds and enterprises)

2. Eco-system engagement with activities that exploit key value-adds within China’s broadening ecosystems to strengthen public and private Chinese actors in their success

3. Reconsidering AsiaPac organizations, increasingly seeing China within a broader AsiaPac context or even global EE market context

4. Strengthening banking relationships while carefully tracking tax and other regulatory changes, such as growing Free Trade Zones, to improve capital efficiency and financial management

5. Strengthening direct communications, relationship management, and transaction channels with household and industrial consumers, going digital

Five top initiatives

Deep restructuring / new playbook reference cases (2016-2017): Daimler, Continental, VW, ETCP, Tesla, Yum!, McDonalds, Uber, Walmart, HP, Microsoft, IBM, Western Digital, Tesco, Disney, Apple, Coca-Cola, Intel, GE, Cisco, Dreamworks, MGM


Examples: New Playbook partnerships

NEV R&D• Daimler introduces its NEV to BAIC-Benz JV • Daimler to buy invest in BAIC NEV subsidiary• Daimler provides technology to non-JV OEM

Autonomous driving R&D

• Baidu and Continental to co-develop solutions for autonomous driving and Intelligent Transportation

Data & User Access sharing

• ETCP (leading smart parking company) sets uppartnership with ShouQi (leading transportation group) on data and user sharing (integrated platform in long term)

Intelligent sharing on mobility

platform

• Didi and VW form a JV to develop an intelligent auto dispatching platform

Type of Collaboration Description and ImplicationKey Players

Source: Deloitte research


THANK YOU!

Ken [email protected]+1 734 657 7537+86 1370 1234 181

20171108 umtri dewoskin...china smart manufacturing equipment market has entered a rapid growth era....

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