deep dive - ww1.prweb.com

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OCTOBER3,2016

DEBORAHWEINSWIG,MANAGINGDIRECTOR,FUNGGLOBALRETAIL&[email protected]:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2016TheFungGroup.Allrightsreserved.

1) TheChina-ledOneBeltOneRoad(OBOR)initiativewillfunda network of infrastructure such as roads, railroads, ports,electricity and energy, and trade and finance ties betweenChinaandthecountriesalongtworoutes:anoverlandroutethatlinksChinawithSouthandSoutheastAsia,CentralAsia,Russia and Europe, and a sea route that goes through theSouth China Sea and the Indian Ocean, and eventuallyreachestheMediterraneanSea.

2) We think that the following are key benefits for Westernmultinationalcompanies:

• Infrastructure improvements will probably result inlowertransitcosts.

• EnhancedinfrastructurewillmakeiteasierforWesternfirms to tap into the lower-wage economies along theOBOR.

• TheOBORinitiativeislikelytoresultinimprovementsinthe business climate and in disposable income, whichshouldbolsterdemandforconsumergoods.

• Multinationalbrandswillgainfromenlargedcatchmentareasasaresultofinfrastructureupgrades.

3) Additionally, infrastructure improvements are set to havedirect positive impacts on companies in sectors such aslogisticsandtourism.

4) We foresee challenges in the short-to-medium term as USand Western multinational companies grapple with theenvironment in some of the emerging markets along theOBOR. In the long run, we expect these challenges to bemitigated by gradual improvement in domestic regulatoryenvironments and believe the rewards are more thanjustifiedbytherisks.

DEEP DIVE: One Belt One Road - Impact on Western

Multinational Companies

D E B O R A H W EI N S W I G M a n a g i n g D i r e c t o r ,

F u n g G l o b a l R e t a i l & T e c h n o l o g y d e b o r a h w e i n s w i g @ f u n g 1 9 3 7 . c o m

U S : 6 4 6 . 8 3 9 . 7 0 1 7 H K : 8 5 2 . 6 1 1 9 . 1 7 7 9

C N : 8 6 . 1 8 6 . 1 4 2 0 . 3 0 1 6

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TABLEOFCONTENTS

EXECUTIVESUMMARY........................................................................................................................3

INTRODUCTION..................................................................................................................................4

THEOBORASAFACILITATOROFGLOBALTRADE................................................................................4

OBORIMPLICATIONS..........................................................................................................................7

ADVANTAGESANDCHALLENGESFORWESTERNMULTINATIONALCOMPANIES................................13

CONCLUSION....................................................................................................................................14

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EXECUTIVESUMMARY

The One Belt One Road (OBOR) initiative involves 65 countries andencompassesmassiveinfrastructureinvestmentinEurasiaandAfrica.Eventhough OBOR is led by China, the initiative will benefit not only Chinesecompanies but also Western multinational companies in terms of thenumerous emerging trade opportunities that will result from the lowertransitcostsandthe improvements in infrastructure,businessclimateanddisposableincomeintheregion.

Webelievethekeysectorsthatstandtobenefitfromtheinitiativearetrade,tourism,logistics,energyandinfrastructureinthecountriesalongOBOR.

ForWesternmultinational companies thatare looking tocapitalizeon theopportunity,theywillenjoytheadvantagesoftheirIPandbrandequitythatthey have established in their country of domicile and internationally.However, theywill likely facechallenges intheregionsuchascompetitionfromlocalplayers,regulatoryrisks,creditrisk,andsupplychainrisk.

WehighlightthatpartneringwithcarefullyselectedlocalplayersisameanstomitigatetherisksuponentryintotheOBORregions.

Source:Shutterstock

TheOBORinitiativewillbenefit

Westernmultinationalcompanies

inthelongerrun,inourview.

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INTRODUCTION

Led by China, the One Belt One Road (OBOR) initiative involves massiveinfrastructureinvestmentinEurasiaandAfrica.Thisisexpectedtoimproveconnectivityandthebusinessclimateinthoseregions.TheUSisnotoneofthe65countriesincludedintheOBOR.However,webelieveUScompanieswillalsobenefitfrombetterconnectivityinthelong-termbecauseemergingmarketswillbefurtherdeveloped.

ThisreportlooksathowWesternmultinationalcompaniescancapitalizeontheseemergingopportunities,withafocusonconsumer-goodscompanies.First,weoutlinethedetailsofOBOR,includingitsfundinganditspositioninthelandscapeofglobalcooperationandintegration.

THEOBORASAFACILITATOROFGLOBALTRADE

The OBOR initiative refers to the Silk Road Economic Belt and the 21st-Century Maritime Silk Road; two routes that connect China with 64countriesinAsia,EuropeandAfrica.Onerouteisbylandandtheotherbysea.

• TheSilkRoadEconomicBeltisthelandroutethatlinksChinawithSouthandSoutheastAsia,CentralAsia,RussiaandEurope.

• The 21st-Century Maritime Silk Road is the sea route that goesthroughtheSouthChinaSeaandtheIndianOcean,andeventuallyreachestheMediterraneanSea.

ThisChina-leddevelopmentstrategywillcreateanetworkofinfrastructuresuchasroads,railroads,ports,electricityandenergy,andtradeandfinanceties between China and the countries along the two routes. It will alsoprovide opportunities for China to export overcapacity and to makeinvestments overseas. The initiative focuses on numerous infrastructureinvestments in countries along the routes, and is expected to increaseregionalconnectivityandfacilitatetrade,andwilllikelysetthestageforthenext round of global economic growth. The developmentwill benefit not

UndertheOBORInitiative,China

hassignedcapacitycooperation

agreementswithmorethan20

countries.

Source:LinkedIn

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only China: in our view, Western multinational companies also stand tobenefitfromthenumerousemergingtradeopportunities.

Figure1.TheSilkRoadEconomicBeltandthe21st-CenturyMaritimeSilkRoad

Thismapisbasedontheproposedcooperationasdescribedinthe“VisionandActionsonJointlyBuildingSilkRoadEconomicBeltand21st-CenturyMaritimeSilkRoad,”issuedbytheNationalDevelopmentandReformCommissionofChina.Orange,yellowandredlines:TheSilkRoadEconomicBelt.Bluelines:The21st-CenturyMaritimeSilkRoad.

Source:HongKongTradeDevelopmentCouncil

As illustratedinFigure2,theSilkRoadEconomicBeltandthe21st-CenturyMaritimeSilkRoadwillformsixeconomiccorridors.

Figure2.SixEconomicCorridorsIntheOBORFramework

Source:China-BritishBusinessCouncil

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The OBOR initiative focuses mainly on infrastructure development indevelopingcountries in the regionsandon removingnon-tariffbarriers totrade.

Below,inFigure3,weprovideasummaryofthekeyfinancingmechanismsthat have been established to fund infrastructure projects as part of theOBOR.

Figure3.KeyFeaturesoftheOBORInfrastructureFinancingInstitutions

AsiaInfrastructureInvestmentBank(AIIB)

SilkRoadFund NewDevelopmentBank(NDB)

• LedbyChina.Ithas57foundingmembers.

• Initiallyauthorized$100billionofcapitalstock.

• AimedatcooperatingwithmultilateraldevelopmentbankstoaddressinfrastructureneedsinAsia.

• Focusesoninfrastructureprojectsincludingenergy,power,transportation,telecommunications,ruralinfrastructure,agriculturedevelopment,watersupply,sanitation,environmentalprotection,urbandevelopmentandlogistics.

• The fund has total capital of $40billion.

• Thefirstcapitalinstallmentof$10billioncamefromChina’sStateAdministrationofForeignExchange,theChinaInvestmentCorporation,andpolicybankssuchastheExport-ImportBankofChinaandtheChinaDevelopmentBank.

• EstablishedtofinancetheOneBeltOneRoadinitiative.

• Thefundisdedicatedtosupportinginfrastructure,resources,energyandindustrialcapacitydevelopmentprojects.

• Brazil,Russia,India,ChinaandSouthAfrica(theBRICScountries)arethefoundingmembers.

• Setuptofinanceinfrastructuredevelopmentindevelopingcountries.

• Ithasinitiallyauthorizedcapitalof$100billion.

• ThebankissuedaRMB3billion($450million)greenbondinChinainJuly2016tofinanceinfrastructureandsustainableprojects,suchasrenewablyenergy,intheBRICScountries.

Source:AIIB/SilkRoadFund/NDB/HongKongTradeDevelopmentCouncil

The first four loans approved by AIIBwere for power, transportation andurban investments in Bangladesh, Indonesia, Pakistan and Tajikstan. Theytotaled$509millionandweremadeinJune2016.RefertoAppendix1forselected examples of projects planned under the OBOR framework,including action plans of Chinese local and provincial governments andagreementsbetweenChinaandcountriesalongtheOBOR.

OBORandOtherMultilateralAgreements

Inaglobalcontext,theOBORisoneofmanyeffortsunderwaythatpromoteregional cooperation and integration. There are other multilateral tradeagreements aiming at building closer regional ties, and a noteworthy oneinvolving theUS is Trans Pacific Partnership (TPP),which is led by theUSand signed by 11 other Pacific Rim countries (Australia, Canada, Japan,Malaysia,Mexico,Peru,Vietnam,Chile,Brunei,SingaporeandNewZealand.

TheOBORisoneofmanyglobal

effortsunderwaythatpromote

regionalcooperationand

integration.TransPacific

Partnership(TPP)ledbytheUSis

alsonoteworthy.

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Figure4.KeyFeaturesofTPP

• LedbytheUS,with11PacificRimcountriesassignatories.

• Expected to create additional job opportunities for the US and increaseinvestmentsandtradeamongmembercountries.

• Expected to consolidate the economic and political ties between the USandJapan/AssociationofSoutheastAsianNation(ASEAN)countries.

Source:TheUSDepartmentofState/China-BritainBritishCouncil

TheUSisalsoforgingclosereconomictieswithASEANcountriesviatheUS-ASEAN Connect, a US government initiative launched in February 2016intendedtopromotetradeandeconomicintegration.ThefourpillarsundertheumbrellaoftheUS-ASEANConnectare:

• Business Connect, which supports more commercial engagementbetweentheUSandASEANbusinessesinsectorsincludinginformationandcommunicationtechnologyandinfrastructure.

• EnergyConnect,whichassistsinthedevelopmentofenergysectorsinASEAN,withanemphasisonsustainableandcleanenergy.

• Innovation Connect, which supports the emerging entrepreneurialecosysteminSoutheastAsiaandprovidespolicysupportandtechnicalassistance.

• PolicyConnect,whichsupportstheASEANcountriesincreatingapolicyenvironmentthatisconducivetotradeandinvestment.

OBORIMPLICATIONS

Improved Connectivity Translates to More Business Opportunities forWesternMultinationalCompanies

Source:Shutterstock

Webelievethereismuchscopefor

multinationalstoleverageon

increasedconnectivityinOBOR

regions.

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WebelievethereismuchscopeformultinationalstocapitalizeonincreasedconnectivityintheOBORregions.Improvedinfrastructureinvestmentsandconnectivity may open newmarkets for US and multinational companiesandultimatelydriveUSeconomicgrowth.TheUScurrentlyhasclosetradetieswith countries along the OBOR andwe believe they stand to benefitfromimprovedconnectivityandbusinessclimateintheregion.

TheUSeconomyis,inpart,dependentontheabilityofUSfirmstocompetesuccessfullyinoverseasmarkets.Morethan95%oftheworld’sconsumersliveoutsidetheUS,andapproximately18%ofUSmanufacturedexportsaresentbyAmericanparentcompaniestotheirforeignaffiliates,accordingtotheUSBureauofEconomicandBusinessAffairs.

For Western companies, the OBOR initiative means new businessopportunitiesintheASEAN,CentralAsiaandAfricancountries.Inparticular,ASEAN—a $2.5 trillion economy that is the world’s seventh-largest andAsia’s third-largest, just behind China and Japan—is poised for stronggrowth on the back of a young workforce, improving infrastructure andrisingincomes.

AnyeconomicimpactfromtheOBORinitiative,however,willlikelybefeltinthe longer-term because infrastructure projects in the underdevelopedregionsalongtheOBORwilltakeyearstocomplete.

• We see the following benefits to businesses, including Westerncompanies, from the OBOR initiative: Improved infrastructureconditions along the OBOR countries will likely be positive forWestern multinational companies in their continuous drive tooptimize manufacturing costs: not only will it probably result inlower transit costs, but the infrastructurewill enable companiesto tap into the lower wages of emerging economies along theOBOR. Although Western multinational companies already havemanufacturing bases in many of these countries, higherconnectivity will likely reinforce this trend going forward. As aresult, Western consumers stand to benefit from lower priceswhenlowercostsarepassedthroughtoendusers.

• Improvements inthebusinessclimateand indisposable incomealongtheOBORwillalsolikelydrivedemandforconsumergoodsand food and beverage (F&B) categories, in turn benefittingmultinationalcompanies.Multinationalcompaniesandbrandswillfurthergainfromenlargedcatchmentareasfortheirproductsdueto improvements in infrastructure and the removal of non-tariffbarriersthatwillmakeiteasierforthemtocarryoutbusiness.

• Finally,sectorsasdiverseastrading,tourism,logistics,energyandinfrastructure in countries along theOBOR are poised to benefitfrom upgrades in infrastructure, utilities, energy and relatedindustries.Wediscussthepossibleimpactsonalogisticsfirm,DHLExpress, and the tourism industry later in this report, and weprovideacasestudyofKerryLogisticsdirectlybelow.

Inthelongrun,webelievethat

OBORinitiativewilllowertransit

costs,improvebusinessclimate

andbenefitsectorssuchastrading,

tourismandlogisticsintheregion.

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StructuralShiftInManufacturingAndTradeSetsANewParadigmForSourcing

ShiftinLow-endManufacturingfromChinatoOtherEmergingEconomies

China’slow-endmanufacturingisshiftingtoSoutheastandSouthAsia,duetothe country’s relatively higher labor costs. Labor costs in China have beengrowingfasterthanconsumerinflationforyears,andarecurrentlynearlyfourtimes those inBangladesh, Laos,CambodiaandMyanmar.Asa result, thesecountries’shareofUSlightmanufacturedimportshasincreasedsignificantly.

FootwearimportedtotheUSfromBangladesh jumped71%in2015overtheprevious year. Apparel imported to the US from Bangladesh also increased20.6%yearoveryear.

ChinaMovedUptheManufacturingValueChaintoCommandaLargerShareofHigh-endManufacturingTrade

China’s shareofdomestic valueadded inexports,whichmeasuresthevalueadded byaneconomy inproducing goods and services, increased to 70% in2007from65%in2000,accordingtotheWorldBank,amidaglobaltrendofdecliningdomesticcontentinexports.AsChinamovesupthemanufacturingvalue chain, the country will become an increasingly important supplier ofhigh-endproducts,suchaselectronicequipment,totheUS.

The Made in China 2025 strategy (MiC2025) will further accelerate theupgrade ofmanufacturing value chain in China. It has identified key sectorsandproductsthatChinahopes toproducedomesticallyby2025andspansavariety of industries that range from information technology (IT) and newenergy vehicles to advanced biomedical engineering. There is room forcollaborationbetweenChinaandothercountriesinhighendmanufacturing:

• UK: In 2015, the UK Department for International Trade signed aninfrastructure and energy project memorandum with the ChinaDevelopment Bank for investments to support British companies’involvementin“MadeinChina2025.”

• Germany: In July 2015, Germany and China signed a memorandum ofunderstanding to step up cooperation in the development of smartmanufacturingtechnology.

Figure5.USImportsFromSelectedAsianCountries,2015

USImports(USDMil.) Cambodia Vietnam Indonesia India Bangladesh

Footwear $217.9 $4,474.1 $1,425.5 $468.0 $115.0

YoYChange 70.0% 23.5% 15.5% 34.0% 71.4%

Apparel,KnittedorCrocheted $1,887.1 $6,162.8 $2,652.3 $1,620.6 $1,446.9

YoYChange 0.0% 13.7% -0.9% 7.7% 20.6%

Source:USCustoms,OfficeofInternationalTrade

CaseStudy

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AnumberofindustriesinSoutheastandSouthAsia,CentralAsiaandAfricawillbenefitfromtheOBORinitiative,asshowninFigure7.

Figure6.IndustriesinSoutheastandSouthAsiaExpectedtoBenefitfromOBORInvestment

Industries SupportingFactors Companies

Tradingandlogistics • Improvedinfrastructure• Reducedlogisticscosts• Furtheropportunitiesfore-commerce

DHL

Energy • Increasedinvestmentinenergysector Shell

Infrastructure • Increasedinvestmentwillbenefitbothinfrastructureconstructioncompaniesandconstructionequipmentproviders

Caterpillar

Consumergoods • Improvedconnectivitywilldrivemoree-commercetraffic• Increasedincomelevelsandconsumerdemand

Nike,Apple

F&B • Increasedincomelevelsandconsumerdemand Coca-Cola,Nestlé

Source:FungGlobalRetail&Technology

In summary, although the OBOR infrastructure projects will be led byChina’s state-owned enterprises and financial institutions, multinationalsare likely to benefit from urbanization and the growing consumer goodsmarketsintheseregionsduetotheiralreadyestablishedstrongbrands.

Inthefollowingsections,wediscuss inmoredetail thetypesofconsumerindustriesandcompanies that stand togain fromtheOBOR initiative.Wediscuss two multinationals with a presence in Southeast and South Asia:NestléandDHLExpress. First,we lookat the substantial and fast-growingChineseoutboundtourismsector.

TheTourismIndustryWillBenefit

TheOBOR initiativepresentsopportunities topromote integrated tourismdevelopmentbetweenChinaandthecountriesalongtheOBORandhencedrive up Chinese outbound tourism. According to the World TourismOrganization,thenumberofChineseoutboundtouristsreached120millionand theyspent$200billionoverseas in2015.ThismadeChina the largestsourceofoutboundtouristsintheworld.

Using Thailand as an illustration, tourism is amajor income source for itseconomyandaccountsfornearly16%ofitsgrossdomesticproduct(GDP).ThailandreceivedabouteightmillionChinesevisitswhichgenerated$10.7billionincomein2015,higherthananyothercountry’scontribution.

The OBOR development has also brought opportunities for the ChineseairlinestoopennewroutestocovercitiesalongtheOBOR.Forexample,AirChina is planning new routes connecting cities in Western China withCentralAsiaandAfrica,whichwillopenupnewtouristdestinationsfortheChineseoutboundtravelers.

Some US airlines have already formed strategic partnership with Chineseairlines – for example, United Airlines is cooperating with Air China, andDeltawithChinaEastern.WhiletheircooperationfocusesprimarilyonUS-

Chineseoutboundtourism

illustratesthespillovereffectof

Chineseconsumptionabilityon

othercountries.

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OCTOBER3,2016


Chinaroutes,theairlinesmaytheirstrategiccooperationtocovertheOBORregions.

Consumer Goods and F&B: Set To Benefit From Growing ConsumerDemand

Nestlé, a global food and beverage company, has positioned itself as abeneficiary of emerging market growth, with more than one-third of itssalescontributedbyEurope,theMiddleEastandAsia(itdoesnotsplitoutthe regions inmoredetail). For thepast fiveyears, sales fromChinagrewthe fastest at a 27%CompoundAnnualGrowth Rate (CAGR), followed byrestoftheworldat+11%,theUSat+1%andSwitzerland+2%.

NestléIndochina,adivisionofNestlé,currentlyhas4.5%ofthecompany’stotalworkforceinASEAN.

The Asia, Oceania and sub-Saharan Africa region collectively contributed16.1%oftotalrevenuein2015,andVietnamandIndonesiawerethebrightspots.WeexpectcompaniessuchasNestlétobenefitfromthesupporttheOBORinitiativeprovidestoincomelevelsanddemandforconsumergoodsintheregion.

Figure7.NestléRevenuebyBusinessSegment,2015

Source:CapitalIQ

The18%operatingprofitmarginforNestlé’sAsia,OceaniaandAfricaregionin2015wassecondbehindtheAmericasandbetterthanEMENAregion.

ZoneEurope,MiddleEastandNorthAfrica,

18.5%

ZoneAmericas,29.1%

ZoneAsia,OceaniaandSub-SaharanAfrica,16.1%

OtherBusinessSegments,36.3%

Nestleisoneofthemany

multinationalfoodandbeverage

companiesthatstandtobenefit

fromOBORinitiativeonthebackof

increasingincomelevelsand

demandforproducts.

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Figure8.NestléTradingOperatingProfitMarginbyBusinessSegment,2015

Source:CompanyReport

Figure9.FiveYearCAGRofNestlé’sRevenue,2010–2015,byGeography

Source:CapitalIQ.

LogisticsIndustry:MultinationalCompanyCooperatingWithLocalPlayers

DHLExpressisaGermanrapidfreightcompanythatstandstobenefitfromtheimprovedinfrastructurealongtheOBOR.

DHLExpresshas27%of its globalwork force in theAsiaPacific region. Inorder to benefit from improving connectivity, DHL Express is cooperatingwith local logistic players so they can penetrate the more remote areaswhere the company does not have extensive presence. For example, DHLExpress works with local postal agencies to make deliveries in outlyinglocations.

The e-commerce development in ASEAN countries has been hindered bypoor transport infrastructure in the region and inefficiency in last miledelivery, according to CIMB ASEAN Research Institute. The upgrade oftransportationnetworksandimprovementsinconnectivitycouldhelpsolvethe lastmileproblemanddrivee-commerce in theregion,andasa resultbenefitlogisticanddeliverycompanies.

16%

19%

18%

0% 5% 10% 15% 20% 25%

ZoneEurope,MiddleEastandNorthAfrica

ZoneAmericas

ZoneAsia,OceaniaandSub-SaharanAfrica

1.0%

26.6%

(2.4)%

11.3%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

USA GreaterChina Switzerland RestoftheWorldandCorporate

DHLExpressisanexampleof

internationallogisticscompany

cooperatingwithlocallogistic

playerstoexpanditspresencein

theregion.Itshouldbenefitfrom

theimprovementinconnectivity

anduptickine-commerce

transactions.

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ADVANTAGESANDCHALLENGESFORWESTERNMULTINATIONALCOMPANIES

In the following section,we discuss the challengesWesternmultinationalcompaniescouldfacewhentheyexpandandtapintothegrowingmarketsin the OBOR regions, as well as the advantages Western they will likelyenjoy.

KeyAdvantages:IPandBrands

WeseeIPandbrandequityasmajoradvantagesforWesterncompanies:

• IP: Advanced and innovative technology is one of the biggestadvantages held byWesternmultinational companies when theyexpand into emerging markets. However, IP protection in thesemarketsisstillrelativelyweakandregulatorysystemsneedfurtherimprovement. India ranked the second lowest in IP protectionregulations, according to the US Chamber of CommerceInternational Intellectual Property Index of 2016. The gradualimprovement of the regulatory environmentwill raise awarenessandoffermoreIPprotectionformultinationals.

• Established brands: Multinational companies can harness thepower of their brands to capture the loyalty of emergingmarketcustomers. Tapping into emergingmarkets that are characterizedby structural increases in disposable income and a rising middleclass will be an important part of the global strategies ofmultinationalcompanies.

KeyChallenge:CompetitionfromLocalandRegionalPlayers

Multinational companies, with their established franchises, have enjoyedcompetitive advantages as they expand into emerging markets. The gapmay close in the future, however, as Chinese companies intensify theiroverseasexpansion.Weoutlinesomeofthekeychallengesforinternationalretailersbelow:

• Localcompetition:Weseelocalcompetitionasthemainchallengeforglobalbrands.Localplayersarebetterattunedtothetastesoflocal customers than their international counterparts. They arelikely tohave lowcost structures,betteraccess to regulatorsandarealsopositionedtobenefitfromOBOR.Forexample,Carrefour,aFrench hypermarket experienced difficulty keeping up with theshoppinghabitsoftheChinesecustomersafteritenteredChinainthe1990s.ThehabitofChinesecustomersistoshopdailyforfreshfoodandtheytreatedhypermarketsasconveniencestoresinsteadofbuyinginbulkasmanyWesternshoppersdo.

• Regulatoryrisk:Inaddition,theregulationsofmanymarketsalongOBORmay have opaque decision-making process and incentives,whichmayprovechallengingforinternationalcompaniestoadaptto.

Multinationalcompaniesface

challengessuchaslocal

competition.Forexample,Chinese

firmsarealsoabletooperatein

riskierenvironmentsatlowercosts.

Multinationalcompaniespossess

advantagesinIPandbrandequity.

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• Credit risk: International companies have developed credit andpayment systems that protect them against counterparty anddefault risk.Inoverseasmarkets, internationalcompanieswill facecustomers that may operate on different credit, payment andenforcementprinciples.

• Supplychainrisk:Supplychainrisksstemsfromfirmsoperatinginemergingmarketswhichmayhavelimitedvisibilityofsuppliersanddistributors and may lead to delivery delays and quality controlissues.

In some cases, we expect multinationals will cooperate with local orregionalplayersasameansofmitigating localrisk,especially inareasthatprove too costly for the multinational companies’ expansion. DHL’scooperationwith localpostalagencies inremoteareas inASEAN isagoodexample.

CONCLUSION

In summary,Western multinational companies stand to benefit from theoutsized opportunities in the markets along the OBOR in the longer run,because improving infrastructure leads to anenlarged catchment area fortheirproductsandincreasedinternationalsales.

More specifically, the OBOR will likely deliver benefits for Westernmultinationalcompaniesoverthemediumtolongterm:

• All partieswill benefit from lower transit costs as a result of thebuild-outandimprovementinlandandseainfrastructurealongtheOBOR. Additionally, multinational companies will benefit fromlower manufacturing costs as improved infrastructure conditionswill better enable them to tap into the lowerwages of emergingeconomies along the OBOR. As a result,Western consumers willsubsequently benefit as cost reductions are passed through tothemintheformoflowerprices.Westernbrandswilllikelybenefitfromanenlarged catchment area for their products as theOBORunlockskeymarkets inSoutheastandCentralAsiaandAfrica.Theopening of markets would likely lead to lower non-trade tariffs,such as reduced complexity and regulatory costs and wouldpotentiallyopenthemarkettocompetitionwithdomesticplayers.Moreover,improvementsinthebusinessclimateandindisposableincome along the OBOR will also likely support demand forconsumergoods.

WebelievetheOBORinitiativewill

benefitWesternmultinational

companiesinthelongerrun.

Werecommendestablishinga

partnershipwithlocalplayersasa

meansofmitigatinglocalrisk.

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Appendix1

Figure12.PlannedProjectsandInternationalCooperationUndertheOBORFramework

Quanzhou’sMaritimeSilkRoadPilotZoneActionPlan

Quanzhou,acityinsoutheastChina,aimstobecomeanewgatewayforChina’scooperationwithSoutheastAsia,SouthAsia,theMiddleEast,andAfricaby2025.Itaimstoderive30%ofGDPfromtradeinserviceswithcountriesandregionsalongtheMaritimeSilkRoad.

Guangxi'sImplementationPlan Guangxi,aprovinceinsouthwestChina,planstopromotetradeandlogisticscooperation,buildcross-borderindustrychains,promotecross-borderfinancialcooperation,andbuildtheChina-ASEANportcitiescooperationnetwork.

China-ASEANInformationPort Between2015and2017,anumberofinfrastructureprojectswillbeinitiatedtoidentifyseveralkeyindustrialbasesthatserveASEAN,andtoestablishanoverallframeworkfortheChina-ASEANinformationport.

China-UzbekistanJointStatement

Thetwocountrieswillimplementmutuallybeneficialprojects,especiallywithregardtothehigh-techsector,andwilldeepentheircooperationwithregardtoeconomic,trade,investmentandenergyinitiatives.

China-RussiaJointStatement ThetwocountrieswillgrowbilateraltradetoUS$200billionbytheyear2020,andenhancetheircooperationwithregardtothedevelopmentofoil,gas,coal,electricpower,renewableenergyandenergyequipmentresources.

China-SerbiaJointStatement Bothcountriesagreedtostrengthencooperationinanumberofareas,includingtheconstructionofenergyandtransportationinfrastructure,productioncapacity,andagriculture.

China’sArabPolicyPaper Inadditiontostrengtheningpoliticalexchangesandcooperationininvestmentandtrade,anumberofjointChina-ArabprojectswillbeundertakenaspartoftheOBORinitiative,includingenergycooperationandinfrastructureconstruction.

China-SwitzerlandJointStatement

ThetwocountrieswillcontinuetocooperatewithintheframeworksoftheAIIBandtheEuropeanBankforReconstructionandDevelopment,andstrengthencooperationintheareaofinfrastructure.

Source: National Development and Reform Commission/Hong Kong Trade Development Council/Fung Global Retail &Technology

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DeborahWeinswig,CPAManagingDirectorFungGlobalRetail&TechnologyNewYork:917.655.6790HongKong:852.6119.1779China:[email protected]

KirilPopovSeniorAnalyst

EsmePauAnalyst

ChimSauWaiResearchAssociateHONGKONG:8thFloor,LiFungTower888CheungShaWanRoad,KowloonHongKongTel:85223004406NEWYORK:1359Broadway,9thFloorNewYork,NY10018Tel:6468397017LONDON:242–246MaryleboneRoadLondon,NW16JQUnitedKingdomTel:44(0)2076168988FungGlobalRetailTech.com

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