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Strategy | Corporate Financewww.InterChinaConsulting.com

www.InterChinaPartners.com

China’s Business

Environment in 2018

Political and Economic

Clarity and Certainty – a

Boost for Business?


Preface

2017 has generally speaking been a good year for foreign business in China. This is true for consumer-oriented sectors such asretail, healthcare and the Internet, and also for steel, chemicals and other more traditional sectors. With only a fewexceptions, the 100 plus executives interviewed for this report were satisfied with 2017 and optimistic for 2018.

The recent 19th Party Congress has ensured leadership stability and policy clarity for the next 5 years. Xi Jinping hasconsolidated his position at the head of the Party, and given that “Xi Jinping Thought” has been incorporated into the PartyConstitution, he will have significant influence for as long as he is alive. Xi’s speech to the Congress was quite detailed in termsof policy direction. Some will be favorable for foreign companies, some not, and the balance depends on the given sector.Nevertheless, clarity helps build confidence and drive decisions. In our view, most foreign companies will strengthen theircommitment to China over the years to come.

Many sectors will witness a doubling down or acceleration of existing trends. Perhaps the most important is the ‘shift toquality’ in the Chinese economy. Local consumers and companies are increasingly willing to pay for product quality and safety.Meanwhile, enforcement of worker safety and environmental compliance is becoming much, much stricter. This shift favorsforeign companies, in particular in an environment with increasingly higher costs.

State control in strategic sectors such as finance, telecom, oil & gas and the Internet will likely increase. While these sectorsmay see some liberalization at the margins, they will remain difficult for foreign companies, and may become even more difficult.In contrast, non-strategic sectors account for a larger part of the economy. While the playing field hasn’t always been level forforeign companies, the advantages that Chinese companies have long enjoyed, such as weak tax and environmental compliance,will diminish or disappear. Increasingly, we are seeing the nexus of competition shifting from low cost to technologies,products and services.

Key for foreign companies will be ‘localization’ - the ability to act as a local company in terms of decision making power, andempowerment of local management. Most Western companies are still heavily constrained in this respect. But withoutlocalization, to the extent possible, it is difficult to continuously meet the needs of a fast changing local market and to competesuccessfully with increasingly sophisticated local companies. As we describe in this report, Chinese companies have upped theirgame in R&D, not just to develop better products for Chinese customers, but increasingly to deliver global solutions.

The digitalization trend also stands out. China might not be ahead of the global curve yet, but this will only be a matter oftime. Few companies in China, whether B2C or B2B businesses, will thrive without factoring digitalization into their strategies.And this is also a good example of a field where we should expect to see China generating ideas and solutions that can beapplied globally.

As we head into 2018, we expect a more positive business environment for foreign companies operating in China.The onus is now on the foreign companies to take advantage. For some, that will mean exploiting advantages they have overlocal competitors in product technologies and performance. Others will focus on seeking out acquisitions as their sectorsconsolidate. For most, they will need to further organize themselves to better respond to local market needs.

Jan BorgonjonPresident

2


Voices: Political and economic clarity and certainty; improved business prospect(selected quotations from >100 interviews with China based executives)

“Customers are much more selective, making sales more difficult. What’s missing in China is a new generation of sales people – creating sales performance is not as easy as it was a few years ago.”

- Greater China President, Healthcare

“The challenging issues on manufacturing side still exist. If you’re not innovating on the product or go to market strategy, then you will struggle.”

- GM, F&B

“We foresee the rising of Chinese competitors to become global players in the next ten years, for both competition and co-operation. We still see the investment confidential level is there in 2018, especially from more aggressive private sectors.”

- Greater China VP, Chemicals,

“China remains an attractive market, moving towards high-tech, becoming more sophisticated, also in terms of decision making. Clear topics in production are now energy-saving, space-saving, material-saving, recycling, remanufacturing. ”

- Head of Technology BU APAC, Machinery

Source: InterChina’s Interviews and Analysis

“We’re growing at double digit rates in China, and we’re going to have a great year in 2018. But our competitors (Chinese and int’l) are launching product lines at rapid pace…creating big pressure on us to innovate, too. ”

- VP Greater China, Industrial

“We will increase the no. of R&D people next year, to quicker adapt to Chinese needs (both for software and hardware). We will add some people for sales, but R&D is a bigger priority. ”

EVP Asia, Healthcare

“Finally, we have clear Political and Economic Clarity and Certainty. This, in my view, will be a clear Boost for

Business”

- President, InterChina

3

Consolidation is a key issue, driven by private listed companies and some state owned players. This is putting pressure on competition, especially in those areas where technology edge is narrowing down.

- GM, Auto Components

“We will have to digitize our business model, increasing the share of online presence. Chinese customers live in a virtual world like in no other country… everybody makes decisions and purchases online.”

- BU Head Asia, Machinery


Sources of this Report:

This China 2018 Forecast is based on a recent set of interviews with over 100 China based senior executives.

We combine these messages with our Strategy Practice´s ongoing research into China’s transformation and implications for

international companies.

Finally, we also draw from the insights derived from InterChina’sM&A Advisory Practice and the transactions closed this year.


7M&A deals to be closed in 2017.

7 deals closed in 20166 closed in 2015.9 closed in 2014.

USD 8.8+ bn.…the value of the over 177 transactions we have been

involved in.

60 ...dedicated staff members, in Shanghai, Beijing and London.

20+ years ...of doing business in China.

Top 5...independent advisory firm in

China.

32...strategic projects on top-line

growth in 2017.

5

InterChina In A Nutshell


Focused On 5 Sectors: Experience, insight and networks in China’s major growth sectors

Strong Sector Understanding & Knowledge…

InterChina has undertaken 600+ strategy projects and 170+ mandates since its founding in 1994 and >90% of our clients are from the five sectors we focus on.

Our sector focus ensures that our knowledge of market dynamics and transaction interest within each area is current.

...Lending Valuable Commercial Insights

2,000+ executive meetings have been conducted each year by InterChina with Chinese and foreign corporations active in China.

We manage a proprietary database network containing thousands of contacts established over the last twenty years.

6


InterChina Strategy Practice, 2017: 32 projects addressing transformation needs in a more sophisticated and competitive market

Main Client Issues in 2017

Restructure sales channels andways-to-market

Strategic approach for inorganicgrowth

Enter the mid-quality marketsegment; 2nd-brand strategy

New revenue streams (e.g. service)

Localization

For 20+ years, InterChina’s Sector Groupshave…

Automotive & Components

Machinery & Equipment

Chemicals & Energy

Healthcare

Consumer / F&B

Respond to profitability pressure

Digitization-driven business modelrevamp

7

© InterChinaConfidential 8

InterChina Corporate Finance 2017: 30 ongoing mandates,7 M&A deals closed in the last year for a Σ value of USD 300 m


Macro Environment:

• 19th Party Congress has established a stable, clear and predictable political and economic environment

• Top economic priorities of the government are clear and will be further implemented: control & stability, environmental compliance, overcapacity control and financial stability, innovation and globalization

• Economic Structure: Increased state (Party) control over the economy and at the same time increase efficiency

• Remains open for FDI with more certainty and clarity; more confidence by MNCs


2017 Review: Positive year with consolidation of the political power and economic conditions for continued transformation, guided by the government

2017 Long-term Prospect

• Continued strict policy implementation (e.g. environmental control, food safety, financial stability)

• Moderate growth with limited unemployment and inflation.

• Global expansion

• Risks under control

• Political: Control & stability.

• Consolidation Power (19th Party Congress, New PolitBureau, “Xi Jingping Thought”)

• “Rejuvenation” of the Chinese Nation.

• Quality vs. Quantity

• Reform progressremains timid

• Clear political and economic direction

• Higher Quality/ Green/ Consolidation

• Global low-cost innovation center.

• In China for China.

• FDI remains solid

Source: InterChina Interviews and Analysis10


动指南。

19th Party Congress – a Historic Event: Stability and clarity of direction for the next decade… and possibly beyond

• Consolidated Xi’s leadership. No clearsuccessor, which should not be interpretedas a negative issue.

• With the expectation to “steer China intoa position of global leadership on its ownterms”.

• Stronger Party legitimacy, thereby stability:• Create wealth/happiness for the nation

and its citizens (GDP, wealth distribution)• Party is selfless, not corrupt. (“为人民服务”)

• The Party earns international respectand “face” on behalf of China and allChinese.

• Consolidated Xi’s leadership. No clearsuccessor, which should not be interpretedas a negative issue.

• With the expectation to “steer China intoa position of global leadership on its ownterms”.

• Stronger Party legitimacy, thereby stability:• Create wealth/happiness for the nation

and its citizens (GDP, wealth distribution)• Party is selfless, not corrupt. (“为人民服务”)

• The Party earns international respectand “face” on behalf of China and allChinese.

Source: CCP reports, InterChina Interviews and Analysis11

Political Priority

Economic Perfor-mance

FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation

Emerging Digitali-zation

M&A


Political Trends: Stability and Control will continue to be key goals

Control & Stability, to lead China to its Great RejuvenationGlobal Projection: Influence and respect; OBOR is a key political project

Source: The CPC Central Commission for Discipline Inspection (CCDI), the State Council, InterChina Interviews and Analysis

1,03838

2,77676

2002

4498

2017 1H2015 20162014

Bureau / Director

Provincial / Ministerial

Anti-corruption Cases: Continuous High Pressure (CCDI)

ODI (mkt, resources)

Trade

Project

E-influence

Culture

Politics

OBOR Influence

CCP & State Council: Entrepreneurship With CCP Characteristics (2017.09)

• This new guideline on encouraging entrepreneurial spirit and creating a favorable environment for entrepreneurship seems quite significant.

• Importance of Party leadership over SOEs and Party construction and Party education in private enterprises.

• Patriotism is the highest priority in entrepreneurship.

State control in strategic sectors such as finance, telecom, oil & gas & Internet sectors, with rumored plan

for the gov. to invest in high-tech e.g. BAT for cyber data control.

12


Sectorde-regulation(non-core areas)

More Power to State-Owned Enterprises

What meansto be “national”?

Negative List Regulatory FlexibilityJV restrictions removed:

• E-commerce• Power TT equ.• Cranes• Paper.

Reporting not approval;

Clearer guidelines in limitations.

• Made in China 2025• Strategy outline of innovation-driven

development • Action guidelines on “Internet +” • 13th 5-year plan on Science and

Tech Development

Sources: Various gov. policies, InterChina Interview and Analysis

• Increased State Control over economy

• Key role of SOE’s reinforced; increased influence over large POE’s

• Financial Debt/ leverage control

Market Dynamics

Gov’t allows the market to self

regulate (survival of the fittest)

Some things will not change: Slow reform & protectionism

Sector de-regulation in non-politically sensitive sectors (70% of all sectors).Yet, stronger role of SOEs across the board.

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Protectionism: China’s economy is being pulled in two directions – open vs. nationalistic – by several key trends. In any case, China is likely to remain a top global FDI destination

A move towards economic nationalism by the Trump government, and counter-protectionist moves by Beijing, is a wild card over the medium term.

Source: InterChina Interviews and Analysis

Forces for a more open economy

Forces for stronger economic nationalism

Forces that influence China’s economic openness

China’s international status and

responsibilities*

Globalization of Chinese

companies

Using FDI as a temporary

catalyst

Security premised on

national championsThe hand of

domestic politics

Vocal interest groups

The economic argument**

Past Present Distant Future

StrongInfluence

Neutral

StrongInfluence

Note on reading the chart: There are several forces at play (light blue lines) that impact China’s economic direction now and in the future (horizontal axis). The vertical axis indicates in which direction the forces are pulling the economy (top is towards a more open economy, bottom towards more nationalism).

*China’s international status and responsibilities: expectations of a more open economy given China’s increasing responsibility as a global player.

**The economic argument: FIEs’ huge operations, thousands of employees and tax-payments in China make them effectively Chinese.

14

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


None Maximum

Limited Significant

Moderate

Reform: Limited progress with relatively low impact

Source: USCBC, InterChina’s Interviews and Analysis

).

• SOE reforms are slow.

• Mandates to use “secure andcontrollable” technology in key sectors(e.g. medical device, insurance, ICT)operate as a de facto market accessbarrier.

• Prohibition of cross-border data sharing.

• Lack of tangible reforms, such asreducing foreign ownership restrictionsin key sectors (e.g. oil seed processing,gas stations, biofuel production, andshipping agencies).

• Failed to implement a national-levelnegative list.

• Concern re. local favoritism (e.g.localization targets, gov’t-back support.).

• Hopeful message of “lettingthe market play a decisiverole.”

• Simplified investmentprocedures and policies,including the shortening of theForeign Investment IndustrialGuidance Catalogue.

• Relaxation of quotas for QFII.

• Nationwide expansion of a freetrade zone (FTZ) pilot.

• Revamped tax regime for theservices sector.

USCBS Tracking： “China Reform Impact” Tracking 2015 – 2017

EUCCC Survey 2017: Perceived Slow Reform

Rule Of Law

Economic Reform

-)

SOE Reform

:)

Anti-corruption

:(

15

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Target & Progress Of De-capacity Per Province: Coal Sector(Unit: million tons)

Other aspects will dramatically reshape China in 2018:A shock in the short term, yet fundamentally positive in the mid-term.

The Number of Environmental Complaint Cases Concluded Per Province, Jan. 2016 – Sept. 2017)

Debt/GDP Rate Of Key Countries(1997 – 2016)(Unit: %)

Capacity Decrease

• Mainly from closures of POEs (not SOEs) and “idle” capacity.

• Price spikes, supply problems.

Capacity Decrease

• Mainly from closures of POEs (not SOEs) and “idle” capacity.

• Price spikes, supply problems.

Stricter Environmental Protection

• Top priority & NOT to go away. • Further closure of inefficient or

polluting capacity. • Resulted increasing costs, as

‘cheap capacity’ is closed down.

Stricter Environmental Protection

• Top priority & NOT to go away. • Further closure of inefficient or

polluting capacity. • Resulted increasing costs, as

‘cheap capacity’ is closed down.

Financial Control

• Borrowing money will become more and more difficult.

• Foreign exchange fund control.

Financial Control

• Borrowing money will become more and more difficult.

• Foreign exchange fund control.

No. of Cases

Per Province

>4,000

2,000 ~ 4,000

1,000 ~ 2,000

<1,000

Source: China National Statistics Bureau, MEP, EIU, Bank for International Settlements, InterChina Interviews and Analysis

0

50

100

Gan

su

Qin

ghai

Nin

gxia

Gua

ngxi

Xinj

iang

Zhej

iang

Jian

gsu

Hub

ei

Shaa

nxi

Jian

gxi

Jilin

Shan

dong

Inne

r M

ongo

liaH

enan

Hei

long

jiang

Sich

uan

Gui

zhou

Yunn

an

Heb

ei

Hun

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Anhu

i

Fujia

n

Liao

ning

Shan

xi

Chon

gqin

g

2016 Actual 2018-2020 Goal

100

150

200

250

300

350

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

%Greece

USA Emerging Countries Average (Q3 2016)

China Developped Countries Average (Q3 2016)

16

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Economy growth of a few key countries (2005-2030)

China Long-term: Long term opportunity is astounding as GDP will triple by 2030 with revamped economic model

0

10

20

30

2005 2010 2015 2020 2025 2030

GDP at MER (market exchange rates), USD trillion

Notes: GDP at MER (market exchange rates): GDP converted from national currency to USD based on market exchange rate..

Source: World Bank, Goldman Sachs, Pwc, InterChina Interviews and Analysis

Green Development

Exports

Fixed-Asset Investment

Over-capacity Domestic Consumption

Service Sector Development

Industrial Upgrading

Financial Reform

Fair Competition

China’s Old Model (1990s – 2012)

China’s New Model (2012s Onwards)

Low-End Manufacturing

2030 Indicator

• 4% – 5% GDP growth.

• 70% Urbanization Rate.

• RMB 115,000Nominal GDP per capita.

17

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


• Yangtze River Economic Belt Development Plan• 11 provinces, >40% of

population and GDP.• 3 major city clusters to lead

growth.

• Environmental Protection Development Plan Guidelines (2016-2020)• Additional pollutants to control:

industrial dust, VOC, TN, TP.• Long-term targets for 2030.

• Robot Industry Development Plan (2016-2020)• 6-axle robots annual production

of >50,000 units.• Annual sales of service robots

>RMB 30 bn.

China’s 13th Five-year Plan (2016-2020): Extension of current policies: Urbanization, greener and tech. advancement, key in China’s rejuvenation

The 13th Five-Year Plan (2016-2020)Key Targets

Example Key Policies

Indicators 2010A 2015A 2020E

Economy

GDP Growth (%) 11.2 7.8 >6.5

Urbanization (%) 47.5 56.1 60

Urban Disposable Income Growth (%)

5 7.7 >6.5

Environment

COD reduction (%) 12.45 12.9 10

SO2 reduction (%) 14.29 18 15

NOx reduction (%) - 18.6 15

Technology

R&D (% of GDP) 1.75 2.1 2.5

Internet Penetration (%)

Fixed34.3

40 70

Mobile 57 85

Patents (per 10,000 people)

1.7 6.3 12

More Urban

More Green

More Advanced

Source: China’s National Statistics Bureau; InterChina Interviews and Analysis18

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Medium-term Trends: Consumption-related sectors lead the growth, with significant weight in global manufacturing landscape

Note: The output is measured in value-added terms at 2010 prices in this report. The sector classification is NACE rev2 Industry Code. Manufacturing sectors don’t include utilities and extraction.Note: The bubble size represents the forecasted industry output per sector by 2020.

40%

30%

20%

10%

0%7%

70%

60%

10%1% 6%5%4%3%2%

50%

9%8%

Electric fittings

Basic metals

Non-metallic minerals

Man-made fibres

CAGR (2016-2020)

Rubber & plastics

General purpose machinery

Metal products n.e.c.Paints, varnishes etc

Pesticides & other agrochemicals

Basic chemicals & fertilisers

Coke & refined petroleum products Pulp & paper

Wood & wood products

Other manufacturing n.e.c.

Other electrical equipment

Furniture manufacturing

Consumer electronics

Domestic appliances

Soaps, detergents etc

Pharmaceuticals

Printing & recorded media

Textiles, leather & clothing

Motor vehicles & parts

% World Output - 2020

Electric components & boards

Other means of transport

Motors, generators & transformers

TMT

Special purpose machinery Other chemicals n.e.c.

Food, beverages & tobacco

Forecasted Performance of China’s Manufacturing Sectors (2016-2020)

Source: Oxford Economics, InterChina Interviews and Analysis

Intermediates

Investment Goods

Consumbles

Today’s Titans of Consumption

Tomorrow’s China Consumption Champions

Yesterday’s Story

19

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Economy - 2017: GDP growth ‘less important’ compared with the past… however, is China on or close to the turning point?

Source: China’s National Statistics Bureau; Consensus Economics; People’s Bank of China

China Economy Dashboard – Are we close to the end point of de-capacity in the 4th economy cycle, with the joint efforts of regulatory (supply-side reform) and private-sector market forces?

Note: July 2016, NSB adjusted method of calculating GDP to include R&D expenditure. After the adjustment, GDP per year since 1952 has been expanded,but the effect on its annual growth is limited to an average change of 0.06 percent in the past 10 years.

6.7

2.0

4.0

-2

02

46

810

12

1416

1820

2224

26

2011

%

2016

2014

2013

2017

E

2015

2010

2009

2008

2007

2006

2005

2012

1986

2001

1994

1987

1984

1996

2004

1988

1985

1998

1981

1980

1997

1993

2002

1991

1999

1989

1992

1983

2003

1990

1995

1982

2000

Unemployment (%)GDP Growth (%) Inflation (%) Capacity Building Phase De-Capacity Phase

20

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Positive Company Performance - MNC: MNC’s adapted well to the New Normal. Majority report double-digit growth in 2017

Many MNCs perform with double-digit growth in 2017 and likely in 2018, driven by KSFs:• New Market: Increase of demand for “quality” products, creating a “good enough” segment that is groinwg a lot. • New Products: MNCs reacting well to tack this segment: simple downgrading and localizing their products, while

CHN competitors have a high technical barrier yet. • New Clients: Many MNC are aggressively targeting now a new client segment in China (regional Chinese players),

compared with the previous ones (MNC clients or large CHN national groups). This is opening high growtn. • New Corporate Growth Strategies: A lot of this is handled in the shape of New JVs and local M&A, which is

bring scale, technologies and access to market to many players.

Many MNCs perform with double-digit growth in 2017 and likely in 2018, driven by KSFs:• New Market: Increase of demand for “quality” products, creating a “good enough” segment that is groinwg a lot. • New Products: MNCs reacting well to tack this segment: simple downgrading and localizing their products, while

CHN competitors have a high technical barrier yet. • New Clients: Many MNC are aggressively targeting now a new client segment in China (regional Chinese players),

compared with the previous ones (MNC clients or large CHN national groups). This is opening high growtn. • New Corporate Growth Strategies: A lot of this is handled in the shape of New JVs and local M&A, which is

bring scale, technologies and access to market to many players.

MNC In Cyclic Sectors: Strong rebound

Company Performance yoy Growth in China (%)*

Consumption-related Sectors: Recovery, while facing strong local competition

Company Performance yoy Growth in China (%)*

Source: Annual Reports, CICC, InterChina Interview and Analysis

20

0

-20

40

12Q

4

11Q

4

13Q

2

16Q

4

11Q

2

16Q

2

12Q

2

17Q

2

14Q

414

Q2

13Q

4

15Q

415

Q2

20

-10

0

10

12Q

4

11Q

4

17Q

2

11Q

2

13Q

414

Q2

15Q

4

12Q

2

14Q

4

16Q

4

13Q

2

16Q

2

15Q

2

-20

0

10

-10

20

11Q

2

12Q

412

Q2

16Q

4

15Q

2

17Q

2

13Q

2

15Q

416

Q2

14Q

214

Q4

13Q

4

11Q

4

0

40

20

-20

-40

14Q

2

16Q

2

15Q

215

Q4

17Q

216

Q4

14Q

4

12Q

413

Q2

11Q

2

13Q

4

12Q

211

Q4

20

0

-20

40

15Q

2

17Q

2

16Q

215

Q4

14Q

414

Q2

11Q

4

12Q

4

11Q

2

13Q

2

16Q

4

12Q

2

13Q

4

10

20

30

0

-10

11Q

411

Q2

17Q

2

13Q

4

14Q

4

16Q

416

Q2

12Q

412

Q2

13Q

2

15Q

2

14Q

2

15Q

420

30

0

10

13Q

212

Q4

17Q

2

15Q

2

12Q

211

Q4

11Q

2

13Q

4

16Q

416

Q2

15Q

4

14Q

414

Q2

-20

20

60

40

0

13Q

414

Q2

13Q

2

12Q

2

16Q

2

11Q

4

15Q

2

16Q

4

12Q

4

11Q

2

17Q

2

15Q

4

14Q

4

0

20

-20

40

-40

15Q

2

16Q

215

Q4

17Q

216

Q4

12Q

4

14Q

414

Q2

13Q

4

12Q

2

13Q

2

11Q

411

Q2

10

0

-10

-20

14Q

2

12Q

2

15Q

4

14Q

4

11Q

4

17Q

2

16Q

2

15Q

2

13Q

413

Q2

11Q

2

12Q

4

16Q

4

20

10

-10

0

16Q

4

11Q

2

13Q

4

12Q

4

16Q

2

17Q

2

14Q

2

13Q

2

12Q

2

14Q

415

Q2

15Q

4

11Q

4

100

-100

0

200

12Q

211

Q4

16Q

416

Q2

15Q

415

Q2

17Q

2

14Q

214

Q4

13Q

4

11Q

2

13Q

212

Q4

*Note: Most companies are measured by revenue growth, while some by the growth of orders and the new stores etc. 21

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Positive Company Performance - Chinese: Leading Chinese players benefit, while small suffer; upstream value chain might benefit more

As a proxy for Chinese companies, listed companies reflect the economic “recovery” in 2017, but the very high margin growth rate is unlikely to continue in 2018. We expect more moderate positive growth:• The upstream of the value chain (raw materials, infrastructure, suppliers into CAPEX) benefited more than

consumption-driven sectors.• The leaders with high negotiation power in both upstream and consumption-driven sectors stood out.

As a proxy for Chinese companies, listed companies reflect the economic “recovery” in 2017, but the very high margin growth rate is unlikely to continue in 2018. We expect more moderate positive growth:• The upstream of the value chain (raw materials, infrastructure, suppliers into CAPEX) benefited more than

consumption-driven sectors.• The leaders with high negotiation power in both upstream and consumption-driven sectors stood out.

Source: Annual Reports, Shenwan Hongyuan Securities, InterChina Interview and Analysis

50%

-10%

10%

0%

30%

-20%

20%

40%

2017/9/30 2018/9/30 E2015/9/302014/9/30 2016/9/302013/9/302012/9/30

Non-financial & Non-O&GAll Listed Co. Non-financial

Profit Growth Of A-listed Companies (2012.3Q – 2018.3Q E)

22

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Chinese Competition: Varied competitive landscape poses challenges for MNC’s

100

0

125

70

60

50

40

30

20

10

5025 150 250200 275750 225 300175

Revenue Growth (%, 2011-2016)

Sichuan Kelun

Yanzhou Coal

New China Life Insurance

Bank of Communications

Goertek

Pudong Development Bank

Fuyao Glass

YiliFosun

Everbright Bank

Industrial BankJinkoSolar

GreePacific Insurance

Alibaba

CITIC Bank

Wanhua

LuxshareKangde Xin

Vanke

Lens Technology

Tencent

Huatai PaperHaitian

Shandong Iron and Steel

Merchants BankMinsheng Bank

CRRC

Hua Xia Bank

Ping An Bank

Canadian Solar

CTRIP

SOHU

Baidu

Revenue 2016 (RMB Bil)

Midea

NetEase

JD

BOE

MNCs In China: Competing with very different types of local companies

Invisible ChampionElephants In DanceDisruptive Players

Note for data scope:• Selected representative listed companies in key sectors, e.g. industrial equipment, F&B, chemical, healthcare, transportation, finance, electronics, etc.• Disruptive: Listed companies with the revenue in 2016 above RMB 10 bn. Elephants: listed companies with the revenue in 2016 above RMB 50 bn. Invisible champion:

Listed companies without revenue constraints, but with leading global or Asia market share (might contribute mainly from China, or more balanced between China andROW). The revenue growth is by a mixture of organic and inorganic growth.

• Bubble size represents the stock market capitalization at the end of 2016.Source: Annual Reports; InterChina Interviews and Analysis

Invisible Champions• Likely future stars.• Mainly POEs, but also SOEs in

certain government-supported sectors.

Disruptive players• Innovation-driven:

technology, new biz model.• Usually POE in new sectors.• Government might support.

Dancing Elephants

• Mainly large SOE, but also large POE in consolidated sectors.

• Government puts more pressure on efficiency and profitability.

• Strong support to nurture national champions.

23

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


92

126126120118

112116106

9092

61

4740

40

20

40

60

80

100

120

140

-20%

20%

0%

30%

10%

-10%

2010

2008

2005-1%

2001

17%

2004

24%

0%

2012

13%

2003

2011

2000

6%

2015

2009

2006

5%

-11%2002

1998

1997

1996

1994

23%

1993

1992

2016

1991

1999

-3%

15%

-4%

1995

2007

2014

2013

2017.01-09

-3%

60

FDI in China: Stable at about USD 120 Billion

China’s (Mainland) FDI 1991-2017

Source: China’s FYP (Five Year Plan), MOFCOM, InterChina Interviews and Analysis

Unit: USD bn

Take-off (1991-2000)• Policies and laws for FDI and FIEs

Administration established in the 1980s.

• Mr. Deng Xiaoping’s Speech on Opening Up Policy in 1992.

• Post-1997 Financial Crisis slow down.

Acceleration (2001-2010)• Further market opening upon entry into

WTO in 2001.• The negative impact of 2008 financial

crisis for attracting FDI is partially offset by the market potential.

Plateau (2011-2017)• Top 1 or 2 global FDI

destination.• More State control…• … but also more certainty and

focus in open or semi-open sectors.

• Different set of competition.

Note: FDI includes both new investments from overseas and the investments made from retained profits in China.

24

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Outbound Direct Investment: investing abroad is a political priority… However more focused and more “sustainable”

Source: MOFCOM, InterChina’s Interviews and Analysis

Chinese ODI will be more focused and selective. Large decrease in 1H 2017,

but remains political priority.

China ODI - Official figures from MOFCOM (Flow, billion USD)

16

114

7

2014

123

2013

11 20

57

2006

1088827

2011

1820

10

2012

7569

2007

2009

56

2008

36

10

North America

48196146

19

91

Asia-HK, MC & TW

17

ROW

Europe

2017

H

Rest of Asia

2016

2015

100%

*Note: MOFCOM’s data includes only the realized ODI, thereby for example, the Syngenta deal is not included yet.

Growth Rate %

51% 111% 1% 1% 22% 8% 18% 23% 14% 18% 35% -49%

国务院办公厅转发国家发展改革委(NDRC)、商务部(MOFCOM)、人民银行(PBC)、外交部(FM)关于进一步引导和规范境外投资方向指导意见的通知 - 国办发〔2017〕74号

• Excess production capacity & Market• Real estate, hotels, movie theaters, the

entertainment industry and professional sports teams.

• Overseas equity investment funds/platforms or other investment platforms without tangible industrial projects.

• OBOR – One belt, One Road (i.e. Eurasia, SE Asia, Africa and South America).

• Resources (O&G, mineral).• Technology Transactions• Investments that can bring value back

to China.

• The policy of China to ‘invest abroad’, is a state policy, and is a key element in the effort to increase China’s international influence.

25

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Sector Forecast:

Growth expected for 2018 but increased challenges. Stabilized

MNC confidence.


Industry Voices: Each sector has its own challenges and opportunities

“Our China operation contributes 14% of profits to HQ but more than 35% of our global net profitability. Therefore, profit protection is my number one priority”. (Auto)

“There is a clear trend towards high-tech, automation, Industry 4.0. Germany, US, or Japan, are still leading in the automation. China is still catching up, but quickly, not just as a market, but also as an innovator.” (Machinery)

“Our performance in 2017 is much improved, partly thanks to China’s gov. initial strict implementation of environmental protection and admonition of small & out-of-date capacity. In 2018, we would like to observe whether this might continue.” (Chemicals)

“Margins have been stable in the last 3 years. We were able to mitigate fee / price erosion by being smarter in day-to-day business. However, now it’s time to innovate again. There is a trend towards higher performance-related portion of sales people.” (Healthcare)

“Customers shift their purchasing platforms to online platforms. Online sales business of our product has been growing 4x in the last 12 months. IT solutions help us to target smaller businesses, entrepreneurs, and to work with them online.” (F&B)

Source: InterChina Interviews and Analysis 27


2018 Macro Forecast: The clarity of direction (even if not 100% liberal and reformist) provides more certainty, will boost business opportunities

Economic Performance

GDP Drivers…

• Consumption: Retail sales driven by middle class + urbanization will further increase

• Public inv.: Stimulus programs maintain base growth

• Efficiency: More rational behavior of local companies, profitability higher priority, the end of easy money

• FDI, private inv. : Keep playing an important role

• Outbound inv.: Continuity of 2017; ForEx control and focused approvals.

• Possible “Controlled Crises”:

• Internal: “Let a big co’ go”; control over real estate, IPOs.

• External: Regional APAC tensions.

Key words for 2018

• Consumer confidence

• Less financing

• Higher Cost/ Prices:

• Control excess capacity

• Environmental compliance

• Consolidation

• Innovation and technological progress (China 2025)

• Globalization and outbound investment

28Source: InterChina Interviews and Analysis

GDP Growth6.5 %

Inflation2.0 –2.5%

RMB Deprec.3 – 5%

LaborCost

4– 6%

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


MNC Confidence In China: Slower growth compared to the boom of the past; Confidence is picking up again.

China As Investment Destination: Still a very high priority, but for less companies.

Q: How does China rank in your company’s near-term global investment plans? (Amcham, 2017)

Outlook in China: The confidence level bounced back from a low point

Q: How is your prospect of the business in China (EUCCC, 2017)

15% 22%26% 26% 34%

49% 44% 36%34%

22% 21% 20% 25% 22%

13%10%14% 10%8%

49%

201720142013 2015 2016

One among many destinations

Top-three priority

First priority

Not a high priority

Source: Chamber Survey Reports, InterChina Interviews and Analysis

20152013 20162014 2017

55%

31%

14%16%19%

28%

44%

29%

14%

68%71%

23%

16%16%

58%

OptimisticAbout CompetitivePressure

OptimisticAbout Growth

OptimisticAbout Profitability

29

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


2018 Sectors: Differences in growth patterns, based on our interviews and experience.. Generally MNC are forecasting quite high growth goals.

5%

10%

15%

0%

Construction

• Inventories have been cleaned.

• Tackle domestic Infrastructure

• OBOR • JV/ M&A

outbound.

GDP 6.5%

Chemicals

• Consolidation & Environmental Compliance

• New local Product Launches/ Local R&D.

• Sales & Distribution Revamp.

• JV/ M&A.

Consumer/F&B

• Adapting portfolios.

• Revamping Root to Market

• Revamping Regional strategies

• Developing digital capabilities.

Machinery

• Premium offerings.

• Services.• Automation.• Digitization.• Rethink cost

base (local manufacturing and R&D)

Automotive(Components)

• Need to achieve Scale

• New Segments: Electric and New Materials + HMI

• Access to Chinese OEM

• Aftermarket.• Steady

Consolidation (M&A/ JV).

Healthcare

10-20%

• Rigorous compliance.

• Focused coverage.

• Higher rep productivity.

• Localization.• Local

partnerships.


5-10%5-15%

5-10%5-10%5-15%

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Machinery & Industrial Equipment: Stay on top of the demand for premium solutions, digitize, and increase productivity

WTM

Growth

Usingservicesto make a difference

Ride the premium demand wave

Workthe channels

The questfor local productivity

• Strong order books for 2018, but 2019 could be an ugly awakening. • 5 – 10% sales growth, in some cases and categories even 10 – 20%. • Customers are investing (pent-up demand, upgrades, new accounts)

across almost all sectors, light and heavy industries. Automotive remains important, but shows sign of saturation. Customers look to optimize processes, and demand quality, technology, automation, smart manufacturing, IIoT, follow green policies, and save energy.

• Longer payment cycles expected, yet less concerns re. defaults.

• Chinese competitors normally not on par with MNCs in local market, but become active in exports / int’l markets

• Value-added pre-sales services as an important differentiator against local competitors

• Automation integration, peripheral solutions an important addition to offer complete solution to a local customer

• Digitization / IIOT / Remote diagnostics / Smart services – to enable higher efficiencies for customers

• More complete market coverage (geographic penetration, experts for sectors, applications).

• Addition of competent sales people to own teams to enable value-added techn. sales calls

• Dealers & distributors remain important, but are digitally streamlined (digital platforms / portals)

• KPIs geared towards sell-out rather than dealer rebates.

• A challenged cost base: Market prices are falling by 1 – 3%., but materials / components costs go up, eroding margins.

• Most int’l players do not achieve economies of scale of Chinese competitors, despite good-enough propositions.

• Component supply bottlenecks and delivery delays. • Investment into training to build sustainable talent base.• Sales staff incentivized with higher variables, profitability KPI.• Office/production space consolidation, streamlined processes.

Your customers are looking to buy quality, energy-efficient solutions… and they pay the price for it

Use services to differentiate and protect brand reputation against local competitors

Use all available sales avenues to exploit opportunities,but manage them in a lean way

Improving productivity in 2018 is a must – in some cases requiring a complete new cost and activity model

Services

Ops


Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Materials & Chemicals: Trade-ups, revamped sales & distribution strategies, increasing investment mentality and M&A activities

Consolidation

Trade-ups and greater needs

Positive performance with increasing investment mentality

Speed-up competition dynamics

• Overall positive performance of the sector is likely to continue in 2018, with the China’s government in strict implementation of environment protection (e.g. closing small/out-of-date capacity, and pollutant capacities).

• Having said this, the overall over-capacity still remains.• Higher investment mentality, for both in-China-for-China and

in-China-for-global/Asia.

• Further demand trade-ups require new chemicals or applications. Much faster growth in promising downstream sectors related to new materials, electronics, environmental protection and green technology.

• Customers are requiring more help from Chemical companies – Chemical companies will need to go beyond product specifications and exceed expectations.

• Direct and indirect sales hybrids might become mainstream.

• Technology services (pre- and post-sales) become more important, which becomes more important as a sales tool.

• Value-added distributors likely to emerge, chance to restructure distribution model.

• Consolidation will accelerate; FIE & CHN acquisitions.• 7 petrochemical bases and key industry clusters / chemical

parks will play a more important role. • Increasing Chinese competition presents more invisible

champions in niche sectors as potential targets.

• Proactive NPD. • Portfolio revamp.• Environmental compliance.

• More frequent opportunity reviews.

• Proactive NPD. • Adjacent segment

opportunities

• Benchmark and restructure.

• Revamp distribution model.

• Identify targets early on.• Cross-border deal

capability.

Demand

Route to Market

Sales hybrids, services, distributors

Market


Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


F&B: Agility required to make the most of the fast changing consumer base and channel mix

Offering

Route to Market

Beyond Cross-Border E-Commerce(CBEC)

ShiftTowardsConvenience

• China is seeing a huge shift towards convenience, driven not only by the quickening pace of life, but also the influence of the digital economy. This is affecting what consumers are willing to do themselves, their desire for greater choice, and their waning willingness to wait.

• The implications for the F&B sector are profound: online retail continues to boom while hypermarkets are losing out to convenience stores; home-cooking is on the wane while dining out, food delivery and on-the-go consumption are surging.

• For the past 3 years, the CBEC channel has provided a route-to-market for overseas brands, while broadening choice for Chinese consumers. However, CBEC has its limits, especially in terms of penetration.

• Local F&B players are now seizing on CBEC success stories. They are working the products into their own portfolios, often with adaptations to better suit Chinese consumers. Then they are rolling out distribution through their existing networks, to consumers beyond the reach of CBEC.

Myriad of new opportunities and challenges throughout the value chain.

Exporters to China need to take the next step, or others will.

A glimpse of the future: new channel partners, and new ways of working with them.

PioneeringNewRetail

• Online retail continues to boom, but the most exciting developments are in the convergence of the digital economy and physical retail. Online platforms are pioneering the way, making shopping more fun for consumers while empowering retailers and brands.

• For example, in big cities, Alibaba is piloting its HemaSupermarkets, with a mobile app at the center of the store experience. Meanwhile, in small cities, Alibaba’snew Lingshoutong platform is supporting mom & pop stores with online ordering and inventory checking.

Growth


Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Automotive Components: More pressure; hot spots in aftermarket and NEV; Chinese OEMs are upgrading in the “quality shift”

Aggressive Consolidation.“Re Emergence” of the Joint Venture

Continued growth, Market finally pays for Quality.

Tomorrow’s battle field

Speeding upChina as Global Innovationcenter

• Still driven by China’s megatrends (urbanization) • OEM will grow at 3-4%. Local leaders are consolidating

and trading up (Geely,G.Wall,Chang’An).• Foreign Component Manufacturers planning double

digit growth. Capitalize on better quality demand, Green China trends and revamped localized (good enough, local R&D) product portfolios.

• Increasing pressure on cost/price, quality, service, R&D.

• Smaller, low-quality players face challenges; natural attrition and now open to Sale outs.

• Shift to quality, Environment and scale benefits international players.

• Steady M&A and JV activity, mainly focusing on “Access to Chinese OEMs”.

• Likely to be a growth driver in next 3-5 years. • Many MNC players are forecasting high double digit

growth. • Distribution and service capability will be key to

success.

• Emerging local players (currently, too many, future consolidation to come). Change in sector status quo with uncertainty for foreign OEMs and suppliers.

• Accelerated development through government support and increased customer acceptance.

• BEV / PHEV are the key focus. • Autonomous/ connected driving early local innovation

trade ups.

• Further Develop localization, with a focus on R&D and China ad hoc products.

• Improve efficiency to maintain profitability.

• More M&A opportunities with value for money.

• Access to Chinese OEM and Local Innovation will be main drivers.

• Invest in capacity early on.

• Be systematic instead of opportunistic.

• Already a key China growth Driver

• Huge impact on product specifications and market access.

• KSF: Selection of the right partner (the “future winner”).

• JV and M&A picking up.

Market

Consolidation

Aftermarket

NEV-Autonomous


Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Healthcare: A growing sector – yet hospitals go through a lean patch … and suppliers have to figure out how to help them

HealthServices

Aging population, large patient pool, affluent patients, maturing Class II hospitals: Key medical needs will further grow

Growth

Policies

• Transition from Fee-For-Service (FFS) to Single-DiseasePayment (SDP) / Diagnosis-Related Groups (DRG) model.

• Hospital’s 30% revenue cap on drug sales and zero-marginpolicy on drugs (except for TCM), as well as max. 10% yoydrug sales growth limitation, make it nearly impossible forhospitals to money from selling drugs, and they struggle toachieve revenues.

• “Efficiency” become a clear value priority for hospitals, aswell as “safety / “traceability”.

• China’s healthcare spending: + 8.9% in ‘18 (measured in RMB).

• Disease prevalence for cancer, diabetes, cardiovascular conditions are all expected to grow.

• Patient volumes will still go up in 2018, yet will increase faster in lower-tier cities. Overall, inpatient and outpatient volumes are growing btw. 6 – 2%, respectively.

• Hospital decision makers and personnel will be even morecareful re. compliance, making sales activities more difficult.

• Further hospital groups will emerge and further consolidate.Group purchasing starts to become a normal procedure.

• Private hospitals are coming, yet little overall impact.• Hospitals try to go the way of big data – but connecting

them remains difficult. E-health and mHealth continue to bea big promise, but yet little tangible breakthroughs expectedin 2018.

Streamlined distribution and channel mgm’t; offer value-added services to hospitals

Close relations with hospital groups more important than ever; separate teams for different hospital type / accounts


Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Life Sciences: MNC have to be bona-fide role models, and have to do more with less (more productive MRs), and find local partners

MedicalDevices

Pharma

Rebound to more growth, but strained margins

• +10% drug sales growth (more patients, extended NRDL1)• Drug prices will further fall by 5 – 15% in 2018 (extended

RDLs, tenders, hospitals are asking for add. discounts).• Coverage is costly: Increased logistics cost (2 Invoice Policy).

Lower-tier cities now account for half of the market, requiring larger coverage or strict prioritization of sales territories.

• Difficult to push sales: Sales reps’ hospital visits will be limited.

• Regulatory changes to national DAL2 and DRR3, to upgrade China’s management of novel and generic drugs closer in line with int’l standards, namely; Full adoption of MAH4 system, 60-day clinical trial review windows, and Foreign Data Acceptance.

• Evolving sector structure: Channel consolidation (distributors); toll manufacturing; local pharma’s forward-integration into healthcare services; diversification into digital products and into medical devices (more complete patient solutions).

1 National Reimbursed Drug List 2 Drug Administration Law 3 Drug Registration Regulation 4 Marketing Authorization Holder

• Growth 8% (equ.) to 15% (consumables). Mid-range segments expected to grow faster than high-end devices. Certain high-valuable consumables, implants will undergo further price cuts.

• Looming 2 Invoice System for device sector will make market access and coverage, and product availability further difficult.

• Hospitals shift priorities to OPEX; consumables, leasing and maintenance services are demanded; focus on quality of care.

• Product localization likely to increase in ‘18. Trend to outsource full equ. production (or less critical sub-systems) to local OEMs. Foreign players will keep debating what means to be “local”.

• Need for better coverage of sales & distr.; use of social media platforms for sales and services. Trend for specialized teams by hospital types (i.e. for private chains). Trend towards going direct (sell-out KPI), yet dealers persist in the system. Equ. makers will try to utilize big data fueled by their installed base.

Only the large players will survive

Ethical sales, interaction with physician and gov’t procurement agencies, price concessions

More new product developments expected, higher predictability on approval success, sped-up timelines,

Increased pro-active hospital support and services to drive account productivity.

M&A and local partners: Access to value-segments and distr. channels. Working with local partners to secure gov’t as a customer.


Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Business Trends 2018:

• Consolidation of best practices• In China for China.• China as the global low cost

innovation center.• Digitalization leads to business

model revamp.


Industry Voices: Consolidation of best practices with emerging China as the global low cost innovation center and digitalization to accelerate business model revamp

“Our R&D engineering team was supposed to take out cost, now the China team helps to transform the original from the US or Europe to adapt to local manufacturing, … to be more localized. ”

“We’re operating in the high-end segment. The growth (8-10% p.a.) has been the same for the last few years in a row, but the faster growing markets are the mid-quality segments (value segment), where we’re looking at now.”

“Raw Material prices will grow faster next year than what we can pass to our customers, so we need to look for different ways to protect our profits: further localization and replacement of traditional raw materials; further automation of our plants to increase productivity and focused acquisition of local players in China ”


“Digitalization and big data become more important. We have a software team in China, which is a strategic initiative – China is the only emerging market in our group to have such a team.”

After-sales / services are accounting for around 20 – 30% of our business (vis-à-vis new equipment sales). And we still see growth potential in terms of profitability contribution.

“China continues to be our focus for R&D investments. The China team supports our business globally - they’re doing designs for US and Europe.”


2000

-20

1620

17 O

nwar

ds

Re-vamped strategic reviews

Local decision-making autonomy

AdjacentSegments& Trade Ups

B-brandBuffers

ServiceRevenueStreams

Digitalization

OptimizedPortfolio

M&A/Consolidation

Automation

Route-to-MarketRevamp

Localization Re-align with gov’t interests

Manage HQ’s view

Best Practices: China strategy requires sophistication and fine-tuning, driving companies from their comfort zones and into greater complexity


Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Adjacent Segments & Trade-ups: New segments can create extra growth in existing or adjacent customer bases

Adjacent: Adjusting / expanding the portfolio to capture the next growth point in China

Trade-ups: Premium enjoys faster growth than the mass

Both MNCs and Chinese companies are moving into fast-growing adjacent opportunities.

Note: The % represents the volume or value CAGR (2012-2016)

Medical Device Digital Health

14%14%

50+%

50+%

ICE Value Chain

NEV Value Chain

10%10%

100+%

100+%

White Goods(Some cos)

Automation

<5%<5%

30+%

30+%

Source: Kanta Worldpanel, InterChina Interviews and Analysis

Value CAGR by Price Segments (%, 2014-16)

Food Category Other FMCGs

-10

-5

0

5

10

15

20

25

30

Yogu

rtPa

ckag

ed w

ater

Milk

Inst

ant

nood

les

Infa

nt f

orm

ula

Juic

e

RTD

tea

Beer

Non-premiumPremium

-10

-5

0

5

10

15

20

25

30

Faci

al t

issu

e

Mak

eup

Dia

pers

Kitc

hen

clea

nser

Sham

poo

Fabr

ic d

eter

gent

Skin

car

e

Small Home Appliance

20+%

20+%

40

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


B-brand Buffers: B-brand strategies are emerging across sectors as a means to defend the high end and expand the mid end

Common traits (and key success factors) of B-brand strategies (via M&A) in China

• Clear positioning creates a highdegree of brand separation.

• Sales teams and channelseparation helps to avoidcustomer confusion.

• The acquired brand’s originalteam / key managers areretained with light integration only.

• The challenges (e.g. relative lackof synergies, the culturaldissonance, and the global vsChina strategy priorities related tothe China B-brand) are activelymanaged.

• Emerging trend of Brand B to serve both the global and China.

• Some failures because of ‘over-integration’ and excessive imposition of global standards and practices.20

12

2011

2010

2009

2016

2008

2014

2013

2017

2015

2006

2004

2007

2005

2003

Industrial

Chemical

HealthCare

M&A Type M&A JV

41Source: Deal Database, Company Reports, InterChina Interviews and Analysis

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Service Revenue Streams (1/2): China’s shift to a service-oriented economy, and companies’ shift to an increasing service revenue contribution…

2010 2011 2012 2013 2014 2015 2016

5

20

50

10

0

55

40

25

45

35

15

Co. K

Co. L

Co. F

Co. S

Co. D

SecondarySector

Co. M

52%

Co. B

Co. C

Co. G

TertiarySector

40%

Co. J

%

Share of Service Economy In China’s GDP (top chart) & Share of Company’s Service Revenue (bottom chart)

Source: National Bureau of Statistics of China, InterChina Interviews and Analysis

• China moves to a “service society”…

• …resulted in new models, new offerings, new business system.

• Both defensive strategy (to deal with the slow-down of new equipment sales) and proactive strategy (to have a high service level, e.g. with more sophisticated machines)…

• …together with the higher margin from service stream.

42

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Customer machine performance

Short-coming (operator knowledge)

Performance guarantee

measured by output, waste, etc.)

Service Revenue Streams (2/2): …Business model expansions or pivots may tap into new growth with new and innovative services concepts are being considered, but also risks short-term “shocks”

WeChat orderprocessing

(customer sending picture of part)

Loyalty programValue of purchased services linked to

new equ. discounts

Installation

Life-cycle

Separateservice teams for different activities

2nd hand equ.business (trade-inold equ., re-sell to

other cust.)

Rent out operatorsto customers, on the

payroll of themachinery maker

Sector strategyA different offering

for each sector

Rent-out equ.,customer pays by-use (Asset Management)

GuaranteeNow

Emerging modelsTraditional Models & Quick-wins

Easi

er t

o re

aliz

eD

iffic

ult

to m

ake

it w

ork

Predictive diagnosis (remote

monitoring, efficiency improvement)


Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


RTM Revamp (B2C): Route-to-market models must take into consideration changing customer behavior

China’s leading position in the e-commerce… …with the on-line becomes critical in many B2C sectors

China’s Shares In E-commerce & Mobile Payments Online Business Growth In China’s Key B2C Sectors

*Penetration by categories are adjusted for returns and unfulfilled orders.

Source: PitchBook, Dealogic, eMarketer, Iresearch, Euromonitor, Kantar, Goldman Sachs, InterChina Interviews and Analysis

2016

100%

2005

<1%

35% 42%

495 1,915

24%

Rest of the world ChinaUnited States

Retail e-commerce transaction value %, USD billion

Mobile payments 2016,USD billion

74

790

11X

China United States

1,110

440

83060

0

10

20

30

40

0 10 20 30 40 50

Online penetration 2016E* (%)

2016

E-20

20E

ave.

grow

th -

Onl

ine

(%)

FMCG Groceries (Personal Care, Food)

Furniture & Finishings

Electronics (3C) & Appliances

Apparel, Shoes & Accessories

Incremental market scale – Online 2016-2020 (RMB billion)

44

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Route-To-Market Revamp (B2B): Co’s explore new ways to engage with a new types of customers more effectively and more efficiently…


Brand-B strategy more important (i.e., production machinery)…

…(Case) deploying dealers for sales and services to cover good-enough segments more effectively and efficiently since launching Brand-B in 2015,

and maintain the direct model for premium brand

High-end

Medium-end

Pre

miu

m B

ran

d

• Own local production…

• …+ import sales.

• Premium customers

• Tech-oriented Sales & Service process.

• Customized

• Own sales team (direct sales).

• Own service team.

Ow

n C

hin

a B

ran

d • Same customer base, for different applications.

• Standard configurations

• Easy sale.

• Own production in China.

• … or via local OEM

• All sales and all services done by dealers.

45

Brand-B • 70% of Premium

(Primary Brand)• 4X larger

addressable market

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


RTM Revamp (B2B): ... And responding to the regulatory challenges

Before 2017

Implementation Timeframe

2017.1H

2017 Pilot (Up to 2018)

2017.2H

2018

• The National Platform is issuing Invoice I.

• Least complex option for manufacturer.

• Decent bargaining power by National Platform, and loose control of T2.

• Significant resources for distributor management.

• More compliance risk exposure.

Two-invoice System is rolled-out in most of China’s provinces…

…and triggere the debate of the new RTM to comply with this regulatory challenge

Local Dist. (Tier-2/3)Local Dist. (Tier-2/3)

Medical Device PlayerMedical Device Player

National Dist. PlatformNational Dist. Platform

Service ProviderService Provider

HospitalHospital

Medical Device PlayerMedical Device Player

Local Dist. Local Dist.

HospitalHospital

3PL3PL

Service ProviderService Provider

Nat

ion

al P

latf

orm

Mo

del

3P

L M

od

el

Source: NHFPC, InterChina Interviews and Analysis 46

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


50%+ European companies plan further investment in China.50%+ European companies plan further investment in China.50%+ European companies plan further investment in China.

70%- US companies plan further investment in China.70%- US companies plan further investment in China.70%- US companies plan further investment in China.

Localization (1/2): Need for localized products requires further investment, both in the Coastal Areas and in emerging Western China…

MNC Investment Intention 2017

Source: Chamber Survey Reports, MOFCOM, InterChina Interviews and Analysis

Scope: new projects announced/registered with MOFCOM during Jun-Oct 2017, with investment over RMB 50 million

57% 51%47%56%

20172014 2016

Will Expand

2015

N/A

Not Expand

59% 54% 56% 58%

14% 16% 12%

2015

11%

2014 2016

>20% More

Invest.

N/A

2017

1-20%

47

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Company A

Company B

Company C

Company D

Company E

Company G

Company F

Localization (2/2): ...Market access is the key reason for the 2nd wave of localized production

Top reason Second most important reason Third most important reasonLegend:

Case – Medical Devices: Top reasons / purpose to produce in China (or consider local production)

Note: Company A-D is of Do not (yet) produce Class III devices in China locally, while Company E-G is of already produce Class III devices in China locally

Market access (as a “local” product)

Lower production and logistics costs for APAC

Time to market, registration speed

Local development, proximity to market

Guarantee local supply stability

Local high-end market reached an attractive size

Local competition more on par

Source: InterChina Interviews and Analysis48

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


M&A 2018: China M&A Outlook and Main Trends for 2018

Deal Value and Deal Volume by Investor

Deal Value by Investors

Deal Volume by Sectors (1H 17)

15%

15%

13%

9%7%

6%

6%

6%

4%3%

18%Internet

IT

Manufacturing

Finance

Healthcare

Utilities

Resources

Media

Real Estate

Telecom

Others

Deal Volume by Investors

473 4822,449 2,112

139172

649708

3,7103,474

1H 16 1H 17

(USD bn)

131 64

166

133

4

6

94

92

395

296

1H 16 1H 17

China Mainland Ourbounnd Domestic Strategic Buyers

Foreign Strategic Buyers Private Equity Deals

• China M&A activity (1H 07) fell by ~25% y-o-y to USD 296 billion. This drop is connected to significant drop of Outbound Transactions (due the investment and capital controls).

• Foreign Investment via M&A into China increased in terms of volume and values, driven by the need to achieve scale and protect profits. We expect 2018 will be a hot year for foreign strategic buyers doing transactions in China.1. Achieve Scale and participate in domestic consolidation2. Acquire into high growth/ profit segments. 3. Acquire into indigenous innovation/ product localization.

• Outbound activity, though down 51% in value terms due to aggressive capital controls, increased slightly by number of deals. We expect a gradual recovery in deal values and further growth in volumes in 2018, given that:1. With the continuous structural reform on China’s economy,

the confidence in China would be restored and capital control will be loosened

2. Government push to integrate technology and product upgrades via global M&A.

3. Mid Market Transactions will be preferred (below 300 million Usd).

• Main Sectors: We expect large activity in the China 2025 Industry Revamp fields…1. High End Manufacturing2. New Materials/ Auto Parts/ NEV3. Chemicals (consolidation and high profit areas). 4. Retail


Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


M&A as a key tool for growth2018 will be a very strong year for both inbound and domestic deals

What will be available for sale?

• Target rev.: RMB 0.3 - 1 bn• POEs: Lack of competitive

advantages in the “New Normal”; 1st Generation owners retiring.

• JV with listed players: Due to pressure to keep multiples up and bring new products intoexisting national channels.

• Sectors to further consolidate:• Chemicals• Industrial products• Automotive • Medical devices• Life science product distribution• Machine Tools

What will be the main drivers? • Scale• Access local customer bases (i.e. car OEMs)• B brands: Good-enough product ranges• Local innovation and localization capabilities• Access to distribution channels

Who will be buying?• MNCs. • In competition with Chinese listed companies. • PE reinvents its role, moves to a Western model

(controlling stakes).• “IPO hopes” will return in many segments

At what price?In 2017, acquisition prices: EBITDA x8-x13

2018 shows stable price expectations


Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


M&A For MNCs: M&A in 2018 will become a key growth strategy for multinationals. Many players are considering Multiple Bolt On M&A

35%

42%

23%

Platform Bolt-on Local brands

21%

39%

40%

2nd brand

Access todistributionchannelLocal productioncapacity

43%

57%

Yes

No

Consider Minority Investment? Acquisition in China directly relates to core business?

96%

4%

Yes

No

“ Stick to the core” is the predominant strategy*InterChina Survey results November 2017: 100 China based executives

51Source: M&A Database, InterChina Interviews and Analysis

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Post-M&A Integration: 70% of Multinationals are avoiding deep integration in the first 3-5 years

52

• Try to retain previous shareholder (leave minority shares with Put/Call Option) and key managers (Golden parachute and career path).

• Avoid sending many HQ Expatriates. Avoid Imposingglobal ERPs (SAAB, etc) unless strictly necessary.

• Avoid imposing heavy HQ overheads (licensing, royalties). • Avoid imposing supply chain from abroad or HQ.

Many synergies acquired are connected to “being truely local”. MNCs are learning to have flexible integration process, oriented not to destroy existing strengths and advantages.

Some Best Practices:

• Focus on Financial Control, avoidance of ilegal practicesand Quality Control. Let the Company run the other areas.

• Establish flexible “Working Groups” (not fixed cost to thetarget) to develop Technical and Quality Process Synergies.

• Establish Key staff Exchange programs (ensure that bothHQ and Key China staff are regulary traveling and involved).


Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Corporate Trends- Availability of Good Targets for Strategic Buyers… Finally!!

• IPOs… • +900 companies on the waiting

list• Some “bad experiences” by listed

players

• Third Board… lack of liquidity

• PEG… minority positions have provennot to bring value. Mostly target Pre IPO.

• MNCs are restructuring

• First gen. entrepreneurs retiring

• Excess Capacity/ Domestic consolidation: Excess Capacity-Distressed Assets (only for geographical growth or Asset deals)


Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Local Shareholders: Consider keeping owners as shareholders (this will not be a “JV between equals”, but a key way to reduce entry price and retain value).

Target Pipeline: Be proactive and structured in your search of Targets… good companies will not come to you.

Avoid Waste of Time: Early Red Flagging and Detailed LOI negotiations based on Pre DD.

Compliance… and Accept that margins under your ownership will be lower… Plan ahead to restructure compliance issues in a well agreed plan.

Manage The Valuation Gap: Try to swift negotiations from pure Price into Synergy discussions… prepare your case with objective synergies.

Integration: Avoid “over integration” of an acquisition. Best success cases lay on slow and partial integration.

A Very Clear Exit Strategy: Put/Call; Deadlocks, etc.

54

Tips for China M&A for 2018

1

4

5

6

7

3

2


Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


China is forecasted to overtake the USA in R&D spending within 10 years

from today (USD bil PPP)

China’s R&D: Becoming big, and with increased “quality” as well

Leading in patents already… …and quality of innovation is on improving

Explosion in patent growth in China (Unit: The number of patents)

China now ranks in the top 25 globally in innovation, amongst 128

countries

…likely to become the largest spender in R&D…

7,000

6,000

4,000

9,000

1,000

20101990 20000

2020

3,000

11,000

5,000

16,000

15,000

14,000

13,000

2,000

10,000

12,000

8,000

Semi-conductors

Optics

Computer

Mechanical

All the above techn. accumulated

Medical

Audio-visual

Invention patents filed in China

Invention patents filed in Germany

1st

Score1000

4th

10th

25th

66th0

200

400

600

800

1,000

202420222016 202020182014 2026 2028

Source: 2016 Global R&D Funding Forecast, WIPO, Global Innovation Index 2016

66.3

61.4

57.9

50.6

33.6

55

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


100

40%

10%

10,00010

20%

50%

100,000

30%

01,000

Smartphones

Industrial Robotics

Internet retailing

Digital Health

VR

3D printing

Cloud computing

Gene Sequencing

Mobile apps

CNC

Video Surveillance

UAV

NEV

2020

2015China market relevance1

Patents2

Notes:1. A technology’s market relevance in 2020 is calculated by the ratio of its forecasted 2020 China market size vs. forecasted 2020 global market size (dollar value). Same

method applies for 2015 market relevance. Except Industrial Robotics, NEV and Smartphone, which are calculated based on volume. Given the low-cost driven market nature, China’s share, if measured by volume, could be higher than normal; on the contrary, China’s shares that measured by value would be higher.

2. Measures patents published in China in 2015 and est. for 2020.

China market sales

Technology CAGR 15-20

VR/AR 125%

Digital Health 50%

UAV 40%

Cloud computing 32%

NEV 31%

Internet retailing 31%

3D printing 30%

Mobile apps 27%

Gene Sequencing 22%

Industrial Robotics 20%

Video Surveillance 18%

CNC machines 15%

Smartphones 3%

LegendHealthcareIndustry 4.0ConsumerInternet Services

China’s R&D Focus: China is becoming a hotbed for low-cost and scalable innovation


Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


China R&D Environment: China’s policy environment supports the fast development of high technologies

Policy Description

Made in China 2025中国制造2025

• Master the core technology in high-end equipment industries.• Support the R&D of green technology in manufacturing industry and

energy-saving initiatives.• Focusing on the R&D of high-end CNC and industrial robots.

Strategy outline of innovation-driven development 国家创新驱动发展战略纲要(2015)

• Develop the next-generation internet technologies and promote the application of IT technologies like cloud computing, big data and so on.

• Develop the modern clean energy technology to optimize the energy structure.

• Develop smart city technology to speed up digitalization process for major cities.

• Support new business models and modern service technologies.• Support “disruptive innovations” to create new jobs and industries

Action guidelines on “Internet +” 推进“互联网+”行动的指导意见 (2015)

• Leverage “Internet+” to improve intelligent manufacturing.• Using “Internet+” to explore new business models in service industry,

especially on the mobile-end.• Continue strength the leading position of internet retailing.

13th 5-year plan on Science and TechDevelopment“十三五”国家科技创新规划 (2015)

• Start important state-oriented projects for a series of high-tech products/projects.

• Develop next-generation information technology.• Develop modern transportation technologies and equipment.• Develop green manufacturing and new material technologies.

Healthcare

• Develop digital diagnostics equipment and aim for domestic production.• Build healthcare cloud platform; encourage the innovation on healthcare

IT solutions and applications of “Internet +”.• Develop on intelligence healthcare, applications of IoT and wearable

devices to master the core technologies in building active healthcare system.

Note: NEV=New Energy Vehicle; VR=Virtual Reality; UAV=Unarm Aerial Vehicle

High Technologies

Policy Coverage

VR/AR

Digital Health

UAV

Cloud computing

NEV

Internet retailing

3D printing

Mobile apps

Gene Sequencing

Industrial Robotics

Video Surveillance

CNC machines

Smartphones


Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


MNC’s R&D Centers: 50%+ MNCs implemented R&D in China; but need time to deliver real innovation

China as global center for low cost innovation: The Focus Of China R&D center Of Sampled co’s (Medtech & industrial companies)

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Extended Workbench For Global Specs

China Product (“In China For China”)

Global Product (“In China For China For Global”)

58Source: Company Reports, InterChina Interviews and Analysis

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A

• The only way to mitigate the lack of competitive advante for higher costs (linked to consolidation and green china + new wave of middle class).

• The investments and aggressive plans of government, listed players and MNC that see China as a global R&D center.

• The need of speed and practical designed applied to the “good enough” quality segment (China as a test, and then export to similar countries in the world-LATAM, SEA, Middle East, etc).

• The only way to mitigate the lack of competitive advante for higher costs (linked to consolidation and green china + new wave of middle class).

• The investments and aggressive plans of government, listed players and MNC that see China as a global R&D center.

• The need of speed and practical designed applied to the “good enough” quality segment (China as a test, and then export to similar countries in the world-LATAM, SEA, Middle East, etc).


2005 - 2012:ProductionEquipment

2012 – 2016:Automation

Since 2016:New, disruptive tech.

Lower-end market access Strategy and acquisition for a leading int’l machine tool maker

Localization strategy Business plan and strategy for new China plant for an int’l machine tool maker

New machine design Market research and specification for a leading int’l machine tool maker

Total laboratory automation Growth strategy for a novel test method for an IVD player

Industrial robotics Sector assessment and target search for a leading private equity house

Assembly automation Strategy for an autom. player related to electric devices, white goods

Peripheral automation Strategy and alliance creation for a leading industrial presses maker

Plant modularization Module market opportunity assessment for a leading int’l DCS maker

Cell phone dispensing Acquisition of a local automation equ. maker for consumer electronics

Industrial IoT China digitization strategy for an int’l elevator and escalator maker

3D Print / additive mfct Acquisition of a Chinese metal 3D print machinery maker

Wearable devices Partnership strategy for a wearable medical diagnostics maker

Brain surgery Localization strategy for an neurovascular device maker

Assisted reproduction Strategy for a novel IVF biotech product

Digital health Innovation strategy for an int’l medical player

EV batteries / electric drives Strategy for an int’l automotive component maker

Train communication networks CDD for an int’l maker of computing & communication tech.

Illustrations Of Our Projects

New Disruptive Technologies: Increasing presence into unchartered waters driven by China’s thirst for innovative technologies and solutions


Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


MNC R&D Best practice: In-China-For-China New Product Development

Before… Best Practice action Results

China: Only extended workbench of global

China R&D process driven by key account managers

for Chinese customers

Joint NPD with customers

Solutions for China-specific problems or sectors

Better account relations, higher margins

China CEO

R&DTeam

KAManager

Localaccount


Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Consumer-related industry members are most likely to view China as their leading-edge digital market, including

e-commerce

Digitalization: Digitalization is taking a more important than traditional business; China leads the global field in some sectors especially B2C

• In China for China: the market in China is unique to requires the indigenous innovation on digitalization in China

• Practical speed response to the market, rather than “perfect” applications.

• Develop and build the ecosystem along the value chain, or partnership with lading platform players in China.

• Effectively deal with the challenges, especially insufficient talent, and restrictive policies on data security in innovation.

61

(Amcham Survey, 2017) How does your company’s adoption of digital technologies in China compare to your company’s adoption of digital technologies in other markets globally?

20% 19% 19% 18%

44% 44% 39%55%

29% 24%23%

24%13% 19%

7%

Tech and Other R&D

C&R Industrial & Resources

3%

Services

100%

China is our leading-edge digital market

China is more advanced than most markets

China is on par with other markets

China is behind other markets

China-specific key success factors are reported in the study

Source: Amcham, InterChina Interviews and Analysis

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Infrastructure: The growth of China’s internet provides robust and evolving infrastructure for digitalization innovation

*: the data is as of July, 2016**: 2013 data

Source: InterChina Analysis, iResearch, China Internet Network Information Center, US Census Bureau, McKinsey Global Institute

Internet Usage in China vs. USA, 2016

287

731

Internet users, mn people

88

53

Internet penetration, %

342

784

E-tailing Size, USD bn

11

15

E-tailing of total retail, %

167

438

Active buyers of E-commerce platforms, mn people

90

80

Smartphone penetration

(Taobao/Tmall*)

(eBay)

21

Enterprise cloud adoption rate**, %

55-63

72-85

20-25

SME’s internet adoption ration**,%

Consumer – Internet Use

Consumer – Online purchasing and smartphone use

Consumer / Enterprise – E-tailing

Enterprise – Cloud and internet adoption

62

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Industry Initiatives In Action: Is impacting all aspects of the value chain

Digitalization Initiatives Example Cases Example MNC-ChineseAlliance

DigitalizationProcess Revamp

Automated production, intelligent scheduling, improved efficiency, faster product development

Supply Chain Optimization

Product traceability through whole supply chain, automatic quality inspection

Energy SavingEnergy use reduction through intelligentenergy management in whole production process

B2B E-service Remote maintenance and repair, improved service efficiency

Mass Customization Fast process of tailor made products, fast R&D

Passenger e-Transport

Efficient and convenient passenger transportation and parking, automateddriving

B2B e-LogisticsIntelligent logistics scheduling, efficient supply chain management

Digital HealthcareEfficient access to health resources, cost reduction, customized health management solutions

Fintech Intelligent solutions for online payment,credit checking, automobile financing, etc.

Source: Alliance of Industrial Internet, CCID, Gongkong63

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Case (1/3): Though Smart City is a broad and “vague” government IoTinitiative for improving urban planning and development, the sub-initiative of “Ping’an City” triggered a trillion-level business opportunity…

Source: InterChina Interviews and Analysis, MOHURD, Huawei

Typical Sub-initiatives of Smart City

Smart community

Stability

People’s Livelihood Growth

Smart City

Gov. hotlineDigital urban admin

Emergency system

Intelligent public security (“Ping’an city”, food safety, etc.)

Smartenvironmental protection

Smart logistics

Smart energy

Intelligent transportation

SmartfinanceSmart

pay

Smarthealthcare

Smart home

Green building

Digital supervision

E-government

Digital law enforcement

64

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Case (2/3): …the investment was triggered by government demonstration projects, then shifted to the private side…

Source: InterChina Interviews and Analysis, CCID China Ping’an City White Paper65

The “Ping’an City” initiative led to a multitude of business opportunities:• An initiative lead by the Ministry of Public Security, for the purpose of maintaining social stability.• A huge comprehensive information management system, with video surveillance system as the core, shared among

city and district level data exchange platforms.• Main Hardware: Cameras, routers, switchboards, servers, DVR/NVR and display.• Main Software: Operating system, database, intelligent analysis system, and various management platforms.

333

188

88

22

2008 201520062005

Number of Demonstration Cities(Cumulated)

2,000

1,128904

485

20152005 20082006

Number of Counties/Districts Under Demonstration Cities

(Cumulated)

565

652510

2005 2015e20082006

Total Investments(Government + Private, Cumulated, RMB bn.)

*3111 Project: City Alarm and Monitor System Construction Demonstration Project, lead by Ministry of Public Security, for the purpose of maintaining public security.

• 100% of the cities were covered by 2015.

• 70% of the counties/districts were covered by 2015.

• “Ping’an City” investment was estimated to take 20% of all IT investments of smart city.

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Case (3/3): …both MNC’s and Chinese players try to use their competitive advantage to position themselves in the value chain

Ping’an City Industry Value Chain Map

Source: InterChina Interviews and Analysis, CCID China Ping’an City White Paper

Protection Platform

Protection Platform

Detection PlatformDetection Platform

Monitoring Platform

Monitoring Platform

System Integration

System Integration

Operation & MaintenanceOperation & Maintenance

Engineering ConstructionEngineering Construction

ChipChip Network EquipmentNetwork

Equipment

Internet Protocol Camera

Internet Protocol Camera

CameraCamera Digital Video Recorder

Digital Video Recorder Video ServerVideo Server Operating

DeviceOperating

DeviceDisplay SystemDisplay System

FIEs dominating

Domestic players aggressive

66

HardwareSoftware Service

Political Priority


FDI Confi-dence

2018 Forecast

Sector Forecast

Best Practices

Low-cost Innovation


M&A


Conclusion


Transformations• Optimize portfolios• Revamp RTM• Automate operations• Divest low-performing

assets

Additions• New/adjacent segments• New Chinese customer base• Introduce B-brands• Develop services revenues• Digitalize customer relationships

“Despite the challenges ahead, there is cause for optimism. The better prepared companies will flourish if they focus on their sector opportunities, embrace

change and don’t get too distracted by the volatility and uncertainty”

Accelerations• JV revamp• Acquisitions

Consolidation of the “New Normal”:After 3 years, a new pattern has manifested to do business in China


www.interChinaconsulting.comwww.interchinapartners.com

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