Swedish Industrial Corporations in China

2010 Situation ReportOctober 2010

3

Foreword 5

Executive Summary 7

Introduction 11

Swedish Companies 2005-2010 15...coming to China and coping with a new global business code 16

...research & development 18

...updates on foreign direct investments 18

...sentiments on investment requirements in the Swedish Companies in China 21

...chinese Labour Laws and Swedish Multinationals 23

...merits for Swedish Industrial Companies present in China 27

...final remarks 28

The Chinese Growth Story 31...the Infrastructural Grid & Transportation Sectors 31

...the RMB¥ 4.0 trillion Stimulus Package 35

...consumerism 39

...the story of repeat 42

Conclusions 45

Appendix 47

Characteristics of Swedish Industrial Manufacturing Companies 47

Survey Questions 48

SNI Classifications Review 51

Table of Contents

PHO

TO: C

aR

OLI

ne

Lun

dén

-WeL

den

/SVId

Carnival masks found at a souvenir stand

in down town Shanghai

PHO

TO: C

aR

OLI

ne

Lun

dén

-WeL

den

/SVId

5

China’s upbeat industrialization and forward-looking economic fundamentals is no longer considered as something extraordinary or unexpected. Belonging to the top 2 global econo-mies, the Chinese growth story is today built upon an ample infrastructural expansion which in turn is driven by rapid urbanization and various private and government investments schemes.

Sweden’s many engineering and industrial corporations – together accounting for nearly 50 percent of the country’s annual exports and contribution to the national economic prosperity – offer an extensive range of products and services to build and grow infrastructures like those in China. Their recent Swedish business expansions or the decade long geographical footprint in China has recurrently been debated in Sweden particularly in the context of how an increasing economic influence of China would respond to the long term socioeconomic prosperity inside Sweden.

Following the 2005 report on this topic, the Association of Swedish Engineering Industries has with the support of Mr. Meysam Sadegh put forward an updated view pursuing a select number of these companies and their progression in China. Already in the 2005 report, we concluded that Swedish companie’s expansions in China were in favour of the operations in Sweden. The more business these companies won in China, the more activities took place at the Swedish operations. Equally non-manufacturing activities such as R&D and innovation engagements were concluded to increase in importance in the near future as China is expec-ted to climb the learning curve justifying such activities inside China.

The 2010 report takes a far more qualitative approach. Although the Swedish companies are still in an expansion mode, they are today much more sophisticated with significant local footprint across a multitude of operations. Whilst building a local legacy inside China, these companies have also shifted views from seeing China as an emerging market to a China which is, more than ever, a crucial customer and / or partner they would not walk away from. With sophisticating policies revolving intellectual property rights, labour laws and financial markets, international companies enter a relatively more familiar marketplace to keep doing business. Nevertheless, the revisited question we ask is while China keeps climbing the ladder towards a knowledge economy, how is Sweden harvesting its crucial “haves” in this arena? How is Sweden, its government and its prominent business leaders, leveraging the existing knowledge and innovation base across various industrial sectors and academia ultimately to better prepare for the future?

Anders RuneChief Economist Association of Swedish Engineering Industries

Foreword

Stockholm October 2010

Disclaimer: The contents in this report, other than reported statistics and interviewee responses, in addition to the analysis and conclusions are strictly those of the authors and do not necessarily reflect the views of the interviewees and the studied companies.

Boy on a Dalecarlian Horse outside the

Swedish Pavilion at the 2010 World Expo.

PHO

TO: C

aR

OLI

ne

Lun

dén

-WeL

den

/SVId

7

The Swedish industrial companies continue their expansions in South East Asia and most significantly in China in order to better cater for the vast market demands across various industries and consumer sectors.

Today, over 11,500 Swedish companies trade with China while nearly 600 Swedish companies uphold local presence primarily in manufacturing and sales of industrial products as well as consulting services. In contrast to 2005, when the first edition of this report was published1, around 340 Swedish companies had established in China and although the local presence has nearly doubled in 5 years, it is important to point out that only a dozen of the Swedish engineering groups2 account for an addressable business in terms of market size and invest-ments that benefit the Chinese and the Swedish operations. During the last five year period, total headcount of these companies in China had a twofold increase from close to 20,000 employees to 41,000.

What characterizes these few companies is their customer base which could be represented by directly or loosely coupled developers of complex infrastructures. They include developers of commercial and residential properties, transportation companies building highways, railroads, harbours or airports or sole manufacturers of personal and commercial vehicles as well as machinery equipment for industrial use.

Considering the rapid industrialization and urbanization of China fuelled by foreign direct investments as well as governmental stimulus programs, it becomes evident that industrial suppliers such as the addressed Swedish industrial companies are able to capture a unique market opportunity. Therefore, the Swedish industrial companies’ expansions in China is, predominantly by the interviewees, viewed as an irrevocable process where continued investments in China not only add to local business growth and increased market shares, such progression also enables growth opportunities in Sweden.

Furthermore, China is today Sweden’s leading trading partner in Asia. By 2009 year end, Sweden exported engineering goods worth SEK 19.0bn to China (SEK 14.0bn in 2005) while China sold SEK 17.6bn of the very trading categories (SEK 4.0bn in 2005). Aside from expan-ding sales organizations and manufacturing facilities in China, the interviewed companies underscore continued expansions in other capabilities including comprehensive local or regional sourcing as well product development to respond to the Chinese customer demands and local standards. Increasing local support also requires in increasing local market and customer awareness. The interviewed companies expect an intensified recruitment of locally seasoned business leaders not only to leverage the existing local footprint, but also to ensure a solid response to the local competition from either international or Chinese peers.

To some of the interviewed companies, the Chinese market is not only outpacing other customer markets, China is also becoming the out most important partner to develop and deliver new products and services. To “win” China, interviewees also emphasize that China is today no longer a playground or a learning school but a rather forcefully expanding market requiring extensive business acumen to understand market drivers and consumer behaviours.

Executive Summary

1 ”Svenska Företag i Kina”, vad betyder de för produktionen i Sverige?” June 20052 2010 Company mix include: aBB, alfa Laval , atlas Copco, autoliv, electrolux, ericsson, Haldex, Munters, Sandvik, Scania, SKF and Volvo

Group

PHO

TO: C

aR

OLI

ne

Lun

dén

-WeL

den

/SVId

8

For continued expansions in China, selected interviewees stress that companies entering China should do so by leveraging company strengths before their weaknesses. Another revisited theme points out the views on corporate culture. The interviewed companies present a rather mixed view on what layers of the corporate culture to establish in China. While some of the interviewed companies seek to replicate their very original corporate DNA whichever market they enter, others aspire to adopt the local business code. Nevertheless, some intervie-wees believe that with the range of international corporations present in China, a new global code is to expect where a rather unique business code will evolve toward which most parties would aspire to grow upon.

However, what is observed to be a coherent feature for all interviewed companies is the views on labour laws, social security and overall employee protection. With a heritage of promoting employee rights, the interviewed companies express no complications in adapting to existing and rather sophisticated Chinese labour laws in their China-based organizations. Furthermore, the interviewees see the decent employment terms offered at their Chinese organization as a competitive advantage which local or migrant workers appear attracted to when comparing with peers.

Another important observation is that a predominant number of these companies recognize a strong Chinese presence as a commercial commitment rather than any other strategic reason. Reflecting the establishing costs in China, e.g. building a new manufacturing plant, it is argued that the cost of land and seasoned construction workers to build these plants is significantly lower than in the Western hemisphere which implies the initial investment costs in China to be small and hence favourable. However, once accounting for costs of basic materials and advanced machinery and equipment required inside these manufacturing plants, the total cost would typically nearly par with the global prices. Therefore, for Swedish companies, the lower cost of labour to run manufacturing plants in China could arguably be a less important determinant for investing in China. Moreover, it is the immense market demand and strong business fundamentals that ultimately drive these companies’ agenda to continue expanding and exploiting the Chinese market.

Conclusively, this dozen of companies employ well over half a million people globally of which around 87,000 in Sweden and over 41,000 employees in China. While many of these companies evolved to become solid global players, most of their core operations and capital intensive manufacturing, R&D and innovation activities have remained in Sweden. Whereas many underlying strategic reasons may prevail as determinants to keep these operations in Sweden, a question raised is what implications China will have on the prolongation of these operations in Sweden?

More specifically, it is important to underline that the success of these companies once manifested in today’s knowledge intensive Swedish economy. Thus, while other developing economies keep prospering at a much faster pace and adopting the very similar knowledge, it is imperative to underline how a developed economy such as Sweden with its existing capabilities can better prepare for the future. Moreover, assuming China to be perhaps the last significant economy to undergo such a vast industrialization at modern age, it becomes relevant to ask ourselves how Swedish industrial companies – acting as dedicated suppliers to China’s in-frastructural prosperity – will keep pace once the Chinese economy begins reaching maturity?

To support the future wealth of these companies – once enabled in Sweden and built up on the industrialization of the western world – senior leadership of these companies and regulators are to better formulate the long term agenda and attract both fresh and sizable investments to Sweden. In addition, such an agenda should formulate how to harvest existing capabilities to enter adjacent industry sectors ultimately to appreciate the value of the existing industrial foundation in Sweden and to better prepare for the future economic prosperity of Sweden.

8 9

Tiger Hill, Suzhou – a city famous for its beautiful gardens, silk gar-ments and water canals. Often referred to as ”The Venice of the East”.

PHO

TO: Le

na

Ru

ne

10

PHO

TO: Le

na

Ru

ne

Nanjing Dong Road, Shanghai.

10 11

In July 2005, the Association of Swedish Engineering Industries published a comprehensive analysis report investigating how the expansion of 20 multinational Swedish corporations3 across the industrial goods, machinery equipment and automotive sectors in China had influenced the economic prosperity in Sweden.

That report aimed at understanding several dimensions regarding the long-term agenda of these companies in the context of whether their prolonged expansions in a low-cost China would lead to a gradual migration of labour from a high-cost country such as Sweden.

One assumption was that the China-led expansions would imply a jobless growth in the Swedish economy, where companies grew volumes on behalf of non-Swedish investments or operations. In addition, the 2005 report framed in what priority Swedish companies expan-ded capabilities in China with a corresponding implication of whether expansions in China would benefit investments in R&D and capital intensive manufacturing in Sweden.

The report also investigated whether a presence in China would benefit from low-cost labour in China that could reduce overall manufacturing costs or if a presence in China was a star-ting point to supply the local market. In Figure 1 from the 2005 report, the illustration aims at presenting the four categories of business relationships Swedish companies established with China.

FIGuRE 1: DEGREE oF opERATIoNAl ExpANSIoN IN ChINA – FRAMEwoRk

Source: Swedish Industrial companies in China – 2005 report

Introduction

3 2005 Company mix include: alfa Laval, atlas Copco, autoliv Inc., Car-O-Liner, electrolux, ericsson, Flexlink, Flextronics, Haldex, Lesjöfors, Mun-ters, Sandvik, Sapa Group, Scania, SKF, Tradex and Volvo Group including Volvo Trucks, Volvo Construction equipment, Busses and Volvo Penta

Market Driven Expansion

Cost & Competetively Driven

Localized Companies

Globalized Companies

1. Exports to China

2. Imports from China

3. Manufacturing in China for China

4. Manufacturing in China to Export

PHO

TO: Le

na

Ru

ne

12

Figure 2 summarizes the comparable operational expansions in China between 1996 and 2004. While some of the interviewed companies recently had established in China, others had been present for decades and are today successful local industrial producers in China. Evidently, many of the studied companies that solely exported to China in 1996 had gradually expanded into China to serve the Chinese market more firmly than exporting back to their assembly lines in the western hemisphere. The companies had demonstrably either relocated existing manufacturing capabilities to China or invested in new plants most relevantly to serve the local market.

FIGuRE 2: DEGREE oF opERATIoNAl ExpANSIoN IN ChINA

Source: Swedish Industrial companies in China – 2005 report

A final dimension in the 2005 report investigated the companies’ long terms intensions with their business presence in China. The question raised was whether these companies would commit further investments other than in various layers of manufacturing. Such investments could include the establishment of R&D functions, collaborative Science Parks, high-end manufacturing sites as well as corresponding investments in logistics and sales ultimately to make China the hub for the Asian (and at later stages global) markets.

By 2005, most interviewed companies had expanded distinct operations to the eastern coastline of China and within various industrial zones of Shanghai, Beijing and Shenzen. Capabilities included anything from small-scale sales representative offices to fully-fledged manufacturing factories as well as R&D and innovation centres for local academic colla b-orations. Figure 3 illustrates an expression for the “merit order” of asset migration to new markets ranking from less capital demanding functions to distinct capital intensive functions within manufacturing as well as R&D capabilities.

I = Industrial ManufacturersS = Suppliers

1996 2004

Market Driven Expansion

Cost & Competetively Driven Cost & Competetively Driven

Localized Companies

Globalized Companies

Localized Companies

Globalized Companies

Market Driven Expansion

12 13

FIGuRE 3: MERIT oRDER – 2005 CApAbIlITIES FoR REloCAlIzATIoN (IlluSTRATIvE)

Source: Swedish Industrial companies in China – 2005 report

Among the conclusions made in the 2005 report, the technological leadership of an organiza-tion served as a key determinant for what functions the surveyed companies would relocate to China. The more technologically advanced organizations called for relocation of less value additive and labour intensive functions to low cost countries including China.

Between 1996 and 2004, the Swedish industrial companies had in aggregated terms increased headcount in China by threefold from 6,744 to 20,246. Equally in 2004, Swedish exports of engineering goods4 produced by these companies rose by 50% to SEK13.0bn while China’s exports of corresponding goods to Sweden increased 11 times to SEK 8.0bn.

The economic prosperity witnessed in China had also led to an increased growth in Sweden. Looking at the Swedish industrial suppliers that established in China during 1996-2004, the overall headcount in Sweden grew from 5,920 to 6,446 employees while the corresponding growth in China went from 141 to 1,301 employees. In the automotive sector in specific, companies grew headcounts by 7.4% to 44,123 employees in Sweden of which the correspon-ding global headcount more than doubled to 149,890.

Although, these companies’ expansions in China (in terms of headcount and establishing versatile business units) may have a limited correlation with the Swedish equivalents, a consistent conclusion from the 2005 study showed that these expansions in China have no immediate or negative impact on the workforce developments within the industrial sectors in Sweden. Moreover, the workforce within the industrial sector in Sweden grew at a higher pace relative to the entire engineering workforce in Sweden5.

Nevertheless, the rapidly increasing market demand from China has enabled Swedish multinationals to establish more capabilities around assembly, local customization and at the

4 See The Swedish engineering industry refers to some number of Swedish MnCs and SMes with major contribution to Sweden’s economic growth and long term prosperity. These companies operate predominantly within the automotive, telecommunication, and the industrial and capital goods sectors and combining SnI 2002 and 2007 for SnIs 25, 26, 27, 28, 29, 30 and 32, which corresponds to naCe Revision 2. Please also see appendix Section for a SnI Classifications Review

5 “Jobben har inte flyttat till Kina”, 1 July 2005 Pressrelease association of Swedish engineering Industries

1. Sourcing/Purchasing activities

Primary

HQ

Current L ocation

Ope

ratio

n Siz

e

Ope

ratio

n Siz

e

NewLocation

Secondary

Tertiary

2. Manufacturing

3. Technology Sharing

4. Support & Competence Centers

5. Technology Transfer

6. R&d and Innovation

14

commercial front-end, only to better supply capital intensive products and services. What, however, diverged was the order of assembly where the labour intensive low value additive production was increasingly “pooled in” from China.

In summary, the 2005 report clearly set the foundation for understanding how a smaller and significantly export dependent Nordic country such as Sweden captures opportunities in what is yet to become one of the major driving forces of the global economy. Equally, the 2005 report brought ample incentives to pursue the progressions since for which the findings will be summarized in the subsequent chapters.

Tongji University College of Design & Innovation: Students examining a Bahco Hand Saw ranked among the final nominees of the 2010 Grand Award of Design issued by the Association of Swedish Engineering Industries (Stora Designpriset 2010, www.storadesignpriset.se).

PHO

TO: C

aR

OLI

ne

Lun

dén

-WeL

den

/SVId

14 15

The 2010 report has taken the two macroeconomic and qualitative perspectives to update on how much more the Chinese market and the Swedish industrial companies6 have advanced in the recent five years. We also aimed at understanding what day-to-day business challenges Swedish companies perceive, sentiments on a post-financial crisis market environment and finally, the general views on doing business with China in the near future. In our pursuit, we learned that the Swedish industrial companies are today far more sophisticated than in 2005.

In summary, the Swedish industrial companies have in recent years gradually secured a significant local footprint across capabilities including sourcing, manufacturing and sales ultimately to meet head-on competition from either international or Chinese peers. In principal, a predominant number of the interviewed companies are also in the process of either establishing or expanding local R&D activities that focuses on development of products and services for local customer requirements and standards.

Today, it is expected that over 11,500 Swedish com-panies trade with China while nearly 600 Swedish companies have in various forms a local presence in China (compared to around 340 in 2005) active in manufacturing and sales of industrial products as well as consulting services7. Other sectors in which Swedish companies do business include global retailers of consumer goods with manufacturing, distribution and sales arms in China. In spite of the recent economic downturn in the global economy, China reaffirmed a solid economic output of nearly 9% growth in its 20098 .

Swedish Companies 2005 – 2010

6 detailed content of the survey questionnaire is found in the appendix Section 7 SeB & Swedish Trade Council China Survey 2008 8 Swedish Business in China: Trends and Challenges, STC 2009

Commercial Vehicles

TelCo

Construction & Industrial

Manufacturing

Power Infrastructure

Industrial Assembly Tools

Advanced Machinery &

Systems

Home and Commercial Appliances

Automotive Systems

10,000 20,000 30,000 40,000

34,057

18,217

15,241

8,656

3,863

2,882

2,445

2,064

FIGuRE 4: 2009 YEAR END: ovER 87,000 EMploYED AT SwEDISh INDuSTRIAl CoMpANIES IN SwEDEN

Sources: Company annual accounts 2009 and Company Interviews. 2010 Company mix include: aBB, alfa Laval, atlas Copco, autoliv, electrolux, ericsson, Haldex, Munters, Sandvik, Scania, SKF and Volvo Group

16

Another important finding is that only a fraction of employees in the interviewed companies are today from other ethnicities than local. According to the Swedish Trade Council, 98% of the companies’ workforce is locally employed9 .

Throughout the recent years, China has also become Sweden’s leading trade partner in Asia. In 2009, Sweden exported engineering goods worth SEK 19.0bn to China while receiving SEK17.6bn. Summarized in Figure 5, Sweden maintained a positive balance in trading engine-ering goods up until 2006 with an interim deficit. For three years to follow, China, amongst other goods, exported around SEK 2.0bn telecom equipment (SNI26) resulting in a net deficit in Sweden’s total balance of trade with China. In 2009, however, increased exports of electric machinery (SNI 27) led to a rebalance of Swedish export achieving a SEK 1.4bn surplus.

FIGuRE 5: 2000-2009 SwEDISh bAlANCE oF TRADE IN ENGINEERING GooDS*

Sources: SCB, association of Swedish engineering Industries*) Selected economic activities within SnIs 25, 26, 27, 28, 29, 30 and 32

…coming to China and coping with a new global business code Interviewed companies put significant emphasis on various approaches to enter China. A described situation is when companies that entered China also brought functional aspects that were not compatible with the local market. Such moves were argued to bring layers of inefficiencies across that business yielding mediocre business performances that ultimately could have a negative impact on the local and sought-after competitiveness.

In general, the interviewed companies present their market entry strategy to focus on tracking the feasibility of every capability considered for expansion in China. An iterated message has been that as China can be a sensitive marketplace, companies should diligently expand on their absolute strengths before any weaknesses – ultimately to enhance precision in “winning” China.

Interviewees also underline that China is today no longer a playground or a learning school. It’s a forcefully expanding market with a specific code of conduct. It requires extensive business acumen from anything revolving business making to understanding the market drivers or the local consumer behaviour.

Furthermore, an important metric is how well companies maximize their global capabilities through the harvesting of local employees. Coming to China today should be less perceived as an adventurous endeavour where one serves duty for a couple of years and then decides to leave. In order to “win” China, the interviewed companies highlight that managers need

9 Ibid

Total Balance of Trade

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Y-o-Y Change

15,000

13,000

11,000

9,000

7,000

5,000

3,000

1,000

-1,000

-3,000

-5,000

-7,000

250 %

150 %

50 %

-50 %

-150 %

-250 %

SEK

Mill

ion

10,628 11,117

6,7226,104

5,406

2,041

-1,473

-4,682

-2,301

1,429

5% -40% -9% -11% -62%

-172% -218%

51%

162%

16 17

to shortlist the intracompany top lieutenants possessing the right expertise from which the best-in-class candidates should be considered for long-term service in China. Some of the companies also express the importance to have an increased number of senior staff with significant understanding of the local code and relationships particularly within the sales organizations. Other than in the R&D functions, most interviewed companies expect future succession plan for leadership positions from current expatriate pool to shift towards seaso-ned local professionals to lead sales growth and expand the local footprint.

Another aspect of the local code relates to the fact that local Chinese companies could posses a rather partisan spirit when doing business with western companies. Such a business

approach is explained to be induced as being insistent rather than being adamant. Another perceived discrepancy is how Chinese companies, at initial stages, are not as much at ease to expose themselves to the same direct extent Swedish companies may. Chinese companies tend to be more vigilant and require more time to build trustworthy relationships which may linger business origination and execution processes.

Many international companies appear however convinced that China is probably too small to establish and steer a global business code of conduct by itself. Nevertheless, as an

outmost important economy with multilateral economic relationships, China is expected to be one of the significant contributors in formulating such a global code.

The compelling fact is that most international companies that establish in China introduce important elements of their corporate culture origins. Such compositions in which companies interact could bring to the forefront a melting pot of different commercial behaviours which may help in shaping a new vibrant form of business code. For the Chinese employee, mixtures as such could open for a rather diverse work environment and in the prolongation, new ideas may help cultivate (or perhaps dawdle) the business performance.

Intuitively, the most obvious avenues in which the corporate culture will develop could either be a revised Chinese corporate culture (inspired by the country’s overall internationalization) or an international code comprising instances from all corporate cultures present in China.

The interviewed companies in China depict a rather mixed view on what corporate culture to establish in China. While, some companies seek to replicate the very original corporate identity of theirs wherever they establish new operations, others aspire to adopt local business

PowerInfrastructure

TelCo

AutomotiveSystems

Commercial Vehicles

Advanced Machinery arts &

Systems

Industrial ’Assembly Tools

Construction & Industrial

Manufacturing

Home & Commercial Appliances

5,000 10,000 15,000 20,000

14,911

5,245

4,645

4,123

4,076

3,660

3,268

1,411

FIGuRE 6: 2009 YEAR END: ovER 41,000 EMploYED AT SwEDISh INDuSTRIAl CoMpANIES IN ChINA

Sources: Company annual accounts 2009 and Company Interviews. Company mix include: aBB, alfa Laval, atlas Copco, autoliv, electrolux, ericsson, Haldex, Munters, Sandvik, Scania, SKF and Volvo Group

18

codes replicating the inherited DNA. The latter could be further evidenced by the fact that near future succession plans of senior leadership in China is according to several of the interviewed companies aiming at lesser recruitment of international expatriates and instead increase the executive research for locally seasoned managers.

In conclusion, attempting to answer which cultural approach would be best suited for business making in China and be of the most strategic benefit in China is rather difficult to answer since each business relationship may depend on a multitude of factors relevant to the market, the customer and the company itself.

…research & development Although there still is much to be done, the Chinese market is in principal perpetually improving its stances on Intellectual Property Rights (“IPR”) and protective legislation prohibiting piracy on various products and technological content. With prolonged western influences on trademarks and patent regulations, the Chinese market is also becoming more inspired to align.

As explained by one company interviewee, it could be argued that reverse engineering a product could be done anywhere in the world. Therefore, in spite of gradually stipulated legislation in China, the interviewed companies assert that risks for patent intrusion should not be perceived as a means of depriving from an opportunity to enter the Chinese market.

Equally, the environmental trend for IPR in China is generally moving in a positive direction, not only because a foreign company needs the protection, many local Chinese competing with international companies would also need the protection to better globalize volumes and compete on new product innovations. For the case of some of the most innovative Swedish industrial companies in China, the complexity of some machinery and equipment inhibits the effort of piracy and hence encourages all players (other than the rather strict OEMs) to compete on their own merits.

In conclusions, the interviewed companies express that in order to fight back against a potential brand equity dilution; the various legal measures are taken in China as in any other markets they operate.

…updates on foreign direct investments Taking a global view on investments, the graph in Figure 7 compares net flows of Foreign Direct Investments (FDIs) across all sectors for three selected countries based on the diffe-rence between investment outflows and inflows during 1996-2008. It is clear that in 2008 year end, China and the United States were net recipients of FDIs from the outside world while more divestments had taken place in Sweden.

18 19

FIGuRE 7: 1970-2008 NET FlowS oF FoREIGN DIRECT INvESTMENTS

Source: www.unctad.org, united nations Conference for Trade and development, accessed July 19, 2010

Considering the three to four recent decades however, it becomes evident that China and US have relative to Sweden experienced rather volatile investment cycles where Sweden appears to rebalance its FDI in and outflows over only some few years.

FIGuRE 8: 1996-2008 NET FlowS oF FoREIGN DIRECT INvESTMENTS

Source: www.unctad.org, united nations Conference for Trade and development, accessed July 19, 2010

Furthermore, looking at a similar data sample from the Swedish central bank which also accounts for annual reinvestments of capital gains, the FDI evolution over the 1998-2009 time frame appears more smoothened over the years.

FIGuRE 9: SwEDEN NET bAlANCE oF FoREIGN DIRECT INvESTMENTS wITh All pARTNERS

(All SECToRS)

Sources: Swedish Central Bank authority, July 2010

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

200,000

150,000

100,000

50,000

0

-50,000

-100,000

-150,000

-200,000

(mill

ion

USD

)

net FdI Inflows

net FdI Outflows

China Total united States Sweden

1996 1998 2000 2002 2004 2006 2008

200,000

150,000

100,000

50,000

0

-50,000

-100,000

-150,000

-200,000

(mill

ion

USD

)

net FdI Inflows

net FdI Outflows

China Total united States Sweden

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

400,000

300,000

200,000

100,000

0

-100,000

-200,000

(mill

ion

SEK

)

net FdI Inflows to Sweden from all Partners

net FdI Outflows from Sweden to all Partners

Sweden all Sectors – net flows of Foreign direct Investments

20

In Figure 10, however, the FDI trend for Sweden and China is rather clear. Regardless of the origin of the legal entities (i.e. Swedish or Chinese companies operating in either of the two countries); more capital investments and capital gains appear to have been lifted out from Swedish books onto corresponding balance sheets in China. Simultaneously in 2009, Swedish FDIs into China accounted for less than 1% of Sweden’s 217bn SEK FDI outflows while Chinese FDIs into Sweden accounted for even lesser percentage10. Thus, the investments Sweden makes into China, relative to those in other markets, seem rather negligible.

It should however be clarified that most of the direct investments reported are those announ-ced by companies themselves where monetary values of investments disclosed are self-reported and not always complete. Furthermore, these investments could include divestments from China (or Sweden) for which equity stakes are principally booked back into the balance sheet of the parent company headquarter (which in often cases is located in Sweden).

FIGuRE 10: 1998-2009 SwEDEN NET bAlANCE oF FoREIGN DIRECT INvESTMENTS wITh ChINA

(All SECToRS)

Sources: Swedish Central Bank authority, July 2010

It should also be argued that as inter-company investments or divestitures appear to outpace other flows of funds that arrive in Sweden, an open question is how competitive Sweden really is in winning investor appetite for future investments when compared to its European peers? As it stands, most bilateral flows of investments between China and Sweden are related to the larger Swedish industrial manufacturing companies which in effect adjust for annual capital expenditure (and divestments) programs.11

One example is the case of Ford Motor’s US$1.8bn12 (or SEK12.5bn) sale of Volvo Cars to the Chinese automaker Geely. Although predominant operations of Volvo are for the time being retained in Sweden, the acquisition cost will most likely never by-pass Sweden as Geely pays directly into Ford’s Dearborn headquarters in Michigan, US. In effect, as these owners exchange assets for a cash consideration, an important question is what drives the next generation of new capital expenditures and based on what merits these investments will be made in certain geographical locations, including Sweden and China.

Intuitively, it could be claimed that most flows of direct investments to and from Sweden’s industrial sectors occur when operating assets of various forms exchange legal owners – hitting the ranks in the national FDI accounts. Going back to the previous subject of Sweden’s competitive position to attract local and foreign investments; a proposition is to investigate

10 Swedish Central Bank authority, annual Investment accounts, July 201011 discussions with the Swedish Central Bank, May 201012 Volvo sale signed by Geely and Ford, BBC 28 March 2010

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

1,000

500

0

-500

-1,000

-1,500

-2,000

-2,500

(mill

ion

SEK

)

net FdI Inflows to Sweden from China

net FdI Outflows from Sweden to China

Sweden all Sectors – net flows of Foreign direct Investments

Continued divestments from Sweden and further investments in China

20 21

Sweden’s industrial landscape of capability platforms13 and how it could be leveraged for other than the existing industry applications.

For example, it could be argued that some of these platforms could either be replicated elsewhere in the world or perfectly relocated. Other capability platforms are however more difficult to replicate or relocate as they are knowledge driven and possessed by individuals employed by a certain organization. Thus, having such mesh of intellectual capital and tangible assets which for decades have been rooted in one geographic location, one could ask how such platforms could be “better” utilized ultimately to better prepare for future?

In this context, reflecting Sweden’s capability platforms particularly in the industrial manufacturing sectors, it could clearly be argued that many of the companies need to better examine current capabilities and find ways to create new opportunities to do business tomorrow. A coherent example in this vein is how automotive sector can expedite at a higher pace than the current, a significant globalization of environmentally friendly transportation vehicles? Another example could be how industrial companies active in certain business sectors today either move around in the value chain entering or leaving adjacent business areas and markets that today may not be of priority – though accounting for significant future business opportunity leveraged through existing capabilities? A resulting question is also how companies could in such strategic moves attract fresh capital investments other than the previously described exchanges in asset ownership?

Conclusively, enabling new investment whether from domestic sources or via foreign direct investments could not only leverage existing capability platforms within innovation, R&D and manufacturing, it also suggests securing an extended economic prosperity and a forum of new products, services and ultimately new ideas and perspectives.

…sentiments on investment requirements in the Swedish companies in China The interviewed companies maintained a relatively even perception on their business progressions in China regarding what sources of investments would be necessary to continue expansions in China.

As summarized in Figure 11, as most companies expect higher flows of investments in China, predominant focus is, in the near term, on the expansion of capabilities that facilitate product development and customization for the local market as well as cross-provincial sales force and more local manufacturing capacities.

13 Capability platforms are in this context defined as those operating assets and human resources through which innovation, R&d, manufacturing and sales capabilities align to bring value to a company’s local and global prosperity

22

80 %

70 %

60 %

50 %

40 %

30 %

20 %

10 %

0 %

Business is Under-performing

Business Perform-ance is On Par

Business Performance is Exceeding Expectation

Business will Under-perform

Business Perform-ance will be On Par

Business Performance will Exceed Expectation

Strongly Disagree

Competition is Healthy

Strongly Agree

14%

43% 43%

71%

43%

57%

29%

FIGuRE 11: buSINESS pERFoRMANCE IN ChINA

Sources: Company Interviews

For some companies however, the increasing competition inside China is requiring significant efforts to align the manufacturing cost base and better respond to the required cost control. Competing on price is expressed as a concern that is gradually materializing in China. However, outlays are less polarized towards cost of headcount but rather on the product side of the cost matrix requiring the right pool of basic materials, components and technologies for the companies to offer equal standard of products and corresponding services.

Other manufacturing overheads that are considered significant are those measures put in place to counter the detected patent intrusions in China, which, according to the inter-viewees, will require continuous attention in the future. For OEM manufactures however, purchasing agents and the entire sourcing force are rather stringent on assuring original material inflows to meet company policy standards. As presented in Figure 12, predominant respondents foresee greater expansion needs in China in part to cater for a continuously strong demand of their products and services, and partly to meet the gradually increasing competition.

Historical Performance of

Business (2005-Current)

Q: In your perception, the

local business performance

compared to internal targets

is best ranked as follows:

Current and Future Performan-

ce of Business (2010-2015)

Q: In your perception, the

overall current and future

performance of the business

compared to internal targets

is best ranked as follows:

Competitive Threats

Q: There is a certain level of

increasing threat perceived

from competition to the

cu rrent business which

needs to be addressed.

22 23

FIGuRE 12: SENTIMENTS oN INvESTMENTS IN ChINA & REloCAlIzATIoN REQuIREMENTS To ChINA

bY SElECTED CApAbIlITIES

Sources: Company Interviews

Interviewed companies ultimately see their broadening mobilization into China as a one-way route on which further capabilities need to be built upon. Whether it is an increased manu-facturing capacity, extended sales force, deepened local sourcing requirements or improved customer service and product development, China is a crucial market to what the Swedish industrial manufacturers have on offer. Therefore, gathered sentiments from the interviewees can only confirm the principal investments required to grow in China.

In conclusion, Swedish industrial companies are today taking a much harder view on their position in the Chinese market compared to what was witnessed in the 2005 report. Today, China has over 600 million of urban population and increasing at a steady 2.9% annually14. Comparing such development to the nearly 75% urbanized population of EU27’s 501 million (or 80% of EA16’s 330 million population)15, it brings another dimension to what pace the Chinese economy is growing at and what the implications would be on the overall market fundamentals and demand. Thus, retaining local presence to cater for such demand could only bring more business to the Swedish companies both in China and in Sweden.

…Chinese labour laws and Swedish multinationals China has in recent years established extensive labour laws similar to those found in the western hemisphere. In the early days (prior to the 1980’s), principal employment and cor-responding social security was administered by the Central Government of China. In broad terms, citizens were entitled to lifetime employment at various state-controlled programs which consequently led to over-employment and declining productivity.

After the 1980’s, the labour system continued to evolve in China opening for new forms of ventures, where established companies began gauging the once rigid and policing system by recruiting from the open market based on meritocracy in exchange for more competitive compensation and employment contracts. By 1986, with the introduction of performance-

14 CeIC & JP Morgan analysis, 4 June 201015 eu27 population 501 million at 1 January 2010, eurostat news release 27 July 2010

Relocation of Selected Headquarters

Centre of Excellence & Support Functions

Legal and Intellectual Property

Local Education and Training

Sales & distribution

Quality Assurance and Standards

Manufacturing Capabilities

R&D and Innovation

disagree SomewhatStrongly disagree Indifferent agree Somewhat Strongly agree

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

24

based employment contracts at governmental workplaces, a wider movement towards a market oriented economy had been established ultimately to drive wages and salaries based on a competitive labour market system.

During the past three decades of continuous reforms, the transition towards labour contracts combined with the deregulation of a once centralized labour system could indisputably be argued to have set the foundation for the rigorously growth-oriented economic development system in China.

Thus, it was clear that neither the feudal system nor the preceding communist regime models for job security, health insurance or the principal of social welfare had the labour market’s adequate incentive to grow on competitive and market oriented grounds.

In light of such labour market deregulation, it also initiated a significant movement of migrants to urban areas. Unlike earlier labour conditions, these migrants where given a much higher degree of freedom to choose employer and work on ad hoc freelance basis.

Such movement, however, came at relatively hefty price since migrant workers were not subject to the social security laws or the labour protection rights stipulated for those workers classified as permanent residents in a city or province as the migrants worked in. The social security “benefits” of migrant workers were instead designed as their right to crop designated lands in their previous rural provincial homes.

The transition of the labour market from the old systems has not been free from conflicts. Between the late 1990’s and early 2000’s, the Central Government launched an unprecedented reform campaign of the state-owned enterprises (particularly those in the engineering, mining and coal sectors) which in total left a couple of million workers without jobs.

Today, however, there are around 130 million migrant workers in China16 and growing. Their commitment to offer labour at a steadily low cost and equally, the near to non-existing social security employer obligations have been of significant importance to China’s ample economic growth and modernization.

Equally however, impressions tell that the new generation of migrants is less keen to accept the current work conditions. They induce new requirements and more savvy in preferences and employment options. Therefore, a probable outcome could be that future migrant workers will be rather selective to work conditions offered which in relative terms also imply that work conditions for current migrants will, in the near future, require more appreciation.

These views could also be further strengthened considering the recent wave of strikes hitting Chinese factories – international companies’ factory outlets inclusive – where migrant workers’ demand for increased salaries and improved working conditions seem to have lead to meaningful results17.

Notably, Swedish companies or those legally owned entities in China have thus far not been hit by considerable strikes. However, one should not expect Swedish companies operating in China to regularly put through significant salary revisions or enhanced benefit schemes other than the instated minimum wage guidelines while preserving social security in conditions that are better than those of the peers.

Throughout the 1980, the Central Government continued to issue a wide range of labour

16 The economist, July 3, 201017 Strikes in China signal end to era of low-cost labour and cheap exports, The Guardian June 17, 2010

24 25

regulations covering employment, labour protection, wages and social securities. However, these regulations were merely a way for the Communist Party’s to put an expression for its policies, which included (not comprised) such specifications or precision which characterizes a law. In principal, laws in China are to a great extent just established guidelines to codify (or justify) existing policies18.

As China adopted a market oriented economic systems – more so in early 1990’s – the Central Government drafted the fist Chinese Labour law by 1994 stipulating conditions for individual labour contracts, collective labour negotiation terms and how to manage labour disputes. By relinquishing the lifelong employment system, it also gave employers the right to make employees redundant under the newly established terms including means such as economic difficulties and argumentations alike.

In spite of the newly established laws, it would be an overstatement to claim that employers in China are fully informed or opting in on the labour law rights. Several employer-related misconducts have been dealing with limitations of working hours (denoted to 8 hours per day or 40 hour weeks) which initially was set to 44 hour weeks and in 1995 reduced to 40-hour weeks. However, it wouldn’t be surprising that poorly paid workers would work additional hours to collect income. In addition, considering the labour conditions for migrant workers, they were not subject to the labour laws of China until very recently. One explanation could be that the flow of excessive migrant workers from rural areas into the urban China has lead to suppressed wages and resultantly, a systematic neglect towards migrant workers’ rights in terms obeying to the stipulated labour laws.

By adopting new labour jurisdictions, China further positioned itself with new standards which in the context of working hours, minimum wages, holidays as well as other social rights, such as prohibiting child labour, is together a more comparable labour market to the international labour principles.

Effective 1 January 2008, the Labour Contract Law was adopted which aims at enhancing employee conditions particularly for formerly alien migrant workers. It should however be noted that in spite of the Labour Contract Law, many migrant workers are employed without formalized employment contracts and regardless of the new law’s protective measures in non-contractual work conditions, migrants workers could still be at the risk for unequal treatment due to other policies adopted by local governments19.

Furthermore, some more debated areas within this new law revolve around extended protective measures towards permanent employment status towards pensions and protective measures that could terminate employment contracts. The new law seems more strict and extensive, however some people argue that there is marginal differences to previous laws which may weaken its enforcement. Notably, others debate that it would be more accepted to follow the new legislations than getting followers to the older labour laws.

The revolutionizing change is however that employment conditions for migrants worker have been enhanced and included in the revised regulating labour laws. A direct consequence could be that the demand for migrant workers improves compared to the previous imbalance creating an excess pool of migrant workers (which also opened for consistent mistreatments).

With regards to the interviewed Swedish companies in China, and with respect to rather protective employment laws in Sweden, the interviewees express not having any issues to cope with existing labour laws in China. Confirming the findings in the 2005 report, Swedish

18 International Labour and Working-Class History no. 73, Spring 2008 p 4819 Ibid p.60

26

companies in China continue to extend a reputation as employers which in relative terms offer upright employment conditions.

Over the years, Swedish corporations express in a measure towards a “Fair Swedish Pathos” which in turn is an expression warranting for events of abuse and disparate treatment. Further-more, it could be argued that many international companies carry in their DNA common po-licies and codes of ethics which also requires its enforcement wherever they operate, whereby special treatments towards employed workforce in China is considered beyond matters. Other companies that prioritize to be perceived as genuinely Chinese would in this context most likely act as more Chinese as far as their standings toward labour law obligations.

In addition, Swedish companies tend to value meritocracy in the context of appreciating employee expertise as a measure to compete placing cheap labour amongst the lowest in the rank of priorities. Equally, these companies have not spelled out any concerns about there being competitive threats from companies that mainly compete on low wages. Thus, global companies uphold an organizational structure with competencies that need, to predominant extents, be identical no matter in which geographical location these companies operate.

Correspondingly, the human resources need to align in order to follow the established ways of working. It should also be noted that for the Swedish manufacturing capabilities observed in China, it has been rather difficult to notice material cases where a lower level of automation in various manufacturing processes would explain the need for cheaper labour and hence its labour regulated implications. What however seems to be of the outmost importance for these companies’ throughput is to sustain global standards in quality and delivery of products sold in China as in any other market.

Considering the general cost of production along the eastern coastline of Mainland China – home of many Swedish industrial companies – it is in repeated instances claimed that a 10 percent lower average cost of overall production would be an adequate requirement to place that production elsewhere (such as other locations than in Sweden or other developed markets). Thus, such a discrepancy in norm would be feasible enough to argue that lower wages would not be the first in rank to drive these companies’ increased activities in China.

In terms of wages in China and for increasingly qualified employees, compensation is expected to rise relative to international benchmarks particularly when considering the fact that salaries have been increasing between 7-10 percent annually. In return however, with a stronger Yuan (and probable relaxation of the currency pegging to the USD) it will put more pressure on increased productivity and profitability in China.

Conclusively and as already learned from the 2005 report, Swedish industrial companies are not primarily expanding in China to benefit from lower wages but rather to cater for the mas-sive Chinese demand for the these companies’ quality products and services. Notably, some interviewees also claim that cost benefits of establishing China is rather small particularly considering the establishment of manufacturing capabilities that could deliver upon these companies’ global offerings. Considering the cost of establishing a manufacturing plant in China – with respect to its nowadays seasoned and competent Chinese construction industry and relatively speaking lower labour and other costs of construction – such local expansion would inevitably be to benefit of a company who wants increase local offerings.

A final and perhaps loosely coupled question relating to this section is how the rate of salary increases which in collective terms correspond to half of the annual GDP growth rate in China could come to put greater expectations on the domestic spending and thereby shift away the focus on GDP growth through local and international investments? A reasonable answer could be that such trend is perceived as rather premature at this point in time as the

26 27

GDP growth will in the near term continue to be driven by the principal investments in urbanization and infrastructure.

...merits for Swedish industrial companies present in ChinaChina is rapidly advancing and earning its own merits to offer an economic platform on which labour still is inexpensive and extensive. Equally, academic and managerial skills are sophisticating and globalizing while growing legislative systems are instated against piracy intrusion as well as biased labour conditions. In the 2005 report (also as previously illustrated in Figure 3), impressions for the interviewed companies tell that the manufacturing base is, as a natural effect of a unique market demand, gradually expanding in China. Equally, there is increasing technology transfer to China while technology sharing comes in a lesser extent, i.e. technological needs are transferred to enhance local product development and customization but technology secrets are still kept in a black box and details are not disclosed inside China.

Figure 13 aims to illustrate a revised view on how capabilities could continue to migrate from high-cost countries to low- to medium- cost economies. Rightsizing a company’s manufac-turing base is driven by many factors. Some capabilities could be outsourced to other suppli-ers while others need to be expanded in closer proximities to the target markets. In addition, some capabilities such as product development or R&D could be considered unique or highly interdependent to adjacent functions whereby the economic merits of a relocation would not be justified. In these cases, semi-assembled goods may need to be rotated to destination markets for final fusing. The imposed shipping and handling costs would most viably intake operating profits or they could more preferably be transferred to the end customer.

For the illustrative purpose in Figure 13, the objective is to present what issues a company is facing in a globalized environment where established assets need to be relocated to better suite market demand both from a geographical and a cost standpoint.

Notably, local headquarters depicted in Figure 13 address the fact that some of the interviewed companies are also establishing local decision owning headquarters for certain business divisions since these companies operate across diversified industrial sectors where their

FIGuRE 13: MERIT oRDER – 2010 CApAbIlITIES FoR REloCAlIzATIoN (IlluSTRATIvE)

HQ

Current location(Sweden)

ope

rati

on S

ize

Newlocation(China)

1. Sourcing/Purchasing activities

Primary

Secondary

Tertiary

2. Manufacturing

3. Technology Sharing

4. Support & Competence Centers

5. Technology Transfer

6. R&d and Innovation

ope

rati

on S

ize

Local HQ

28

largest markets would also decide on the location in which divisional headquarters could be located.

Conclusively, the Chinese market is not only outpacing others in terms of size, China is becoming the outmost vital partner to develop new products and services, i.e. these compa-nies may in the future develop some products in China and then launch a global offering. Although such moves are still small in scope and scale, a few of the companies do however consider establishing the decision-making units in China while maintaining (and expanding) their manufacturing and supplying bases in the existing origins (such as in Sweden). By other means, relocation of headquarters of a business unit doesn’t explicitly signal the relocation of the entire manufacturing units because it depends, as described earlier in this section, on the complex interdependence of adjacent operating functions that cannot be restructured in dissociated operating modules.

Notably, one may also reflect on how newly established R&D capabilities in a country such as China will shape the future of product development particularly when considering various cultures and consumer sentiments. Another consideration could be the fact that because many companies are heavily occupied with both supplying as well as competing in China, these companies are suggestively rather “busy” to engage in many other activities than those that are competitively required to “win” China.

…final remarks Swedish companies have been doing business with China since the 18th century from the times of The Swedish East India Company in 173120 . The recent few decades of intensified trade and recent few years of unprecedented investments in China only denotes the direction towards which these companies are yet to progress.

China’s impact on Swedish industrial companies has never before been as influential as witnessed in 2010. China is today Sweden’s largest trading partner in Asia in industrial and engineering goods. It attracts increasing investments in modern manufacturing capabilities and manpower to cater for a perpetually increasing market demand.

Private investments in addition to vast government stimulusprogrammes along with a paced urbanization in China only speaks of an expanding market over the coming decades requiring more supply of housing, transportation infrastructure and energy. Nevertheless, the relaxing of the Yuan peg to the US dollar, stabilization of world markets after a severe financial crisis only highlights a few of the most important industry fundamentals on how markets are recuperating. Another compelling driver of the economy in China is the steadily increasing household incomes – that may be leading to a rising consumer spend.

Particularly, the infrastructural growth in China requires amongst others the range of pro-ducts and services Swedish industrial companies are offering. For these companies in return, China has over the recent years evolved from being a vibrant emerging market to becoming a vital and at times decisive partner. As the Chinese market sophisticates in its internationa-lization and modernization, a new perception also arises introducing an untapped consumer market with specific needs as well as a forum to grow new codes of business conduct. Clearly, for Swedish companies to keep pace with global competition, they are and will continue to align practises in a more global manner, i.e. entering and procuring those markets that bring return on investments and profits.

20 archives of the Swedish east India Company, www.ub.gu.se accessed 27 July 2010

28 29

30

Shanghai: A world hub for socioeconomic

contrasts.

PHO

TO: Le

na

Ru

ne

30 31

The Chinese Growth Story

It is evident that myriads of events continue shaping the Chinese economy and sophisticating the nation’s global standings. Correspondingly, the Swedish industrial companies have since 2005 continued making significant efforts to establish solid grounds in China. Many smaller manufacturers and suppliers are today in the process of establishing operations in China to benefit more directly from the vast market.

Together, the selected Swedish companies investigated in the 2005 study represent the largest and outmost international Swedish companies. With a distinct global footprint and a legacy of operational stronghold in Sweden, the engineering companies together account for nearly half of the year-on-year exports corresponding to more than 50% of Sweden’s annual GDP.

From a historical perspective, while the prosperity and globalization of these companies paced progressively over several decades, the economic growth in China has in a short period expressed an “abnormal” demand for anything from commodities and basic materials to finished goods and services.

By and large, once such gripping growth opportunity presents itself particularly in a rigo-rously competitive and global marketplace, it would evidently bring not only a new world order inside an organization, including the larger Swedish industrial companies to rethink its growth strategies, it also helps shaping business priorities for how to leverage existing capabilities and benefit from the Chinese growth story.

…the Infrastructural grid & transportation sectorsPredominant design and construction of China’s transportation systems occurred after the foundation of the People’s Republic of China in 1949. Although air traffic has gained signifi-cant grounds in the last two decades, railways have historically been the most common means for transportation in China carrying around 24% of global railway volumes. By the 1950’s the Chinese railway system had in total reached a length capacity of 22,000 km and is expected to grow from 78,000 km in 2007 to 100,000km by the end of 201021.

In 2009, the railway operators owned about 585,000 train wagons, 43,000 coaches and 18,500 locomotives running more than 36,300 trains daily, including about 3,000 passenger trains and 33,300 freight trains.

21 http://www.eeo.com.cn/ens/Industry/2008/10/30/118097.html

PHO

TO: Le

na

Ru

ne

32

FIGuRE 14: CRoSS CouNTRY ExpRESSwAY CoNSTRuCTIoN IN ChINA

Source: national Bureau of Statistics of China 2010

In terms of road networks, the country had by 2004 about 1.8 million km of cross-country highways with speed limits of 80km/hr. According to the plan of Ministry of Communi-cations of China, by 2010, the total highway mileage will achieve 2.1-2.3 million km, and 5 vertical and 7 horizontal national trunk highways will be completed22.

Faster vehicle speeds are carried on the Chinese expressways which in 2009 had reached 65,000km in total cross country length23. In 2009 alone, China constructed around 4,700 km of expressways and 16,000km will be completed in 2010. With the steady increasing local demand and rapid urbanization of central and western rural areas of China, about RMB¥ 1,800bn of the stimulus package, intends to not only expanding highways, roads, airports or ports, but also to maintain existing transit networks.

In addition to the stimulus package (which will be detailed in the subsequent chapters) and as presented in below chart, China’s annual fixed asset investments (“FAI”) will between 2010 until 2012 a mounting RMB¥ 7,500bn.

FIGuRE 15: ChINA TRANSpoRTATIoN FIxED ASSET INvESTMENTS bY woRk TYpE, 2007~2012E

Source: Ministry of Railway; Ministry of Communications; CeIC and J.P. Morgan, July 2010

22 Chin daily, Chinese highways for fast traffic add up to 65,000km, Jan 16, 201023 Li Shenglin, minister of Communications, Jan 16 2010

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2020 2050

Completed (LH) Projected (LH) YoY Change % (RH)

200,000

180,000

160,000

140,000

120,000

100,000

80,000

60,000

40,000

20,000

0

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

84%

93%

10%14%

76%

40%

34%

60%

83%

39%

41%

33%

19%

30%

18% 20%

15%11%

19%

12%8%

8%

21%

41%

up 168%

46%

175,000(R

MB

¥ b

n)

RailwayHighway/Tollroads urban Public Water transports (Ports) airports

2007 2008 2009 2010E 2011E 2012E

CaGR 18,7%

1,0821,314

1,939

2,2822,476 2,546

32 33

The continued urbanization also brings further intra city grids including expanded subway and sky train systems in the metropolitan areas. Today, the Shanghai subway system is considered amongst the vastest and most sophisticated underground grids in China. The total subway length in China is expected to grow from its 241km in 2008 to 970km by 2020. China’s total subway grid is expected to triple from current 770km to 2,400km by 201524.

Although China is today in not as an advance stage as Sweden to make home-grown heavy trucks or the buss ranges, it has in a proactive manner established a modern systems for a cross-country logistics network ultimately to manage the pending heavy truck trans-ports.

Furthermore, with its vast bargaining power and solid appetite, the Chinese consumers are more than ever addressing their preferences and functional needs. International companies, particularly in the automotive sectors have also realized that the US or European consumer behaviours are not always driving the source of inspiration in other markets. Savvy Chinese consumers need to be increasingly catered for according to their needs or else, international automakers will most likely not succeed in competing with the more customer-focused local or international peers.

FIGuRE 17: ChINA MoNThlY pASSENGER vEhIClE SAlES voluME TREND

Source: China auto Market, Morgan Stanley Research, July 2010

Looking at the automotive industry in China, e.g. local design of the stretched passenger vehicles (other than traditional limousines) would in return require different dimensioning of the overall engineering and safety systems. In turn, since such specifications are very local to the Chinese markets, engineering capabilities are consequently required on the ground to support and supply the local and international automakers in China.

FIGuRE 16: ChINA SubwAY plANS

Sources: Local government & railways companies, China South Locomotive and Rolling Stock Corp. CeIC and J.P. Morgan, July 2010

24 J.P. Morgan asia Pacific equity Research June 3, 2010

s2008 2015E

3,000

2,500

2,000

1,500

1,000

500

0

Planned Subways Length (km)

M-o-M Growth % (RH)Passenger Vehicle units (LH)

1,200,000

1,000,000

800,000

600,000

400,000

200,000

Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10

80%

60%

40%

20%

0%

-20%

-40%

-60%

up more than 2x

34

FIGuRE 18: INTENSIFIED CoMpETITIoN, lEANER oRGANIzATIoNS AND INCREASED pRoDuCTIvITY

DRIvE pRICES

Passenger Vehicle Price Index by Segment (rebased to Jan 2004)

Sources: China auto Market, Morgan Stanley Research, July 2010

The voice of the customer and local consumer preferences also drive the need for local customization and thereby necessary engineering and manufacturing resources to fulfil such customer needs.

In conclusion, with the government’s commitment to grow a solid infrastructure, it is a solid opportunity for Swedish suppliers of infrastructure, pas-senger and commercial vehicles particularly those trailer or buses with heavier weight limits, to grow and expand solids grounds on the Chinese and regional markets.

As a final remark, in Figure 19, looking at Geely’s passenger vehicles market share in China and its recent acquisition of VolvoCars with key manufac-turing capabilities in south western Sweden, it becomes evident that greater export sales of equipment and assem-bled goods can originate from Sweden – ultimately to cater for the increasing infrastructural and consumer appetite available across China.

Mini Small Medium High Class Luxury

Jan-04 Jun-04 Nov-04 Apr-05 Sep-05 Feb-06 Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10

105

100

95

90

85

80

75

70

65

60

VW

GM

Toyota

nissan

Hyundai

Honda

BYd

Chery

Geely

PSa Citroen

Kia

Suzuki

Tianjin auto

Great Wall

JaC

Mazda

Chang’an

Shonghua

Shangahi auto

Haima auto

FaW Bestum

Mitsubishi

BMW

Hafel auto

Mercedes Benz

Fiat

0% 2% 4% 6% 8% 10% 12% 14% 16%

15.4%

9.8%

7.1%

6.1%

6.1%

5.9%

5.6%

5.3%

3.8%

3.3%

3.0%

2.7%

2.4%

2.3%

2.0%

1.8%

1.8%

1.7%

1.4%

1.3%

1.3%

1.2%

0.4%

0.2%

0.2%

0.0%

Sources: China auto Market, Morgan Stanley Research, July 2010

FIGuRE 19: ChINA pASSENGER vEhIClES oEMS MARkET ShARES YTD10

34 35

Thus, in scenarios as such, China as a market and owner of a Swedish company brings more could bring great opportunities also to the long-term economic prosperity in Sweden.

It should be noted that such an example is neither an exception to the rule or setting examples for future situations, it rather presents a win-win situations shapes at this point in time that could encourage future relationships as such.

…the RMB¥ 4.0 trillion Stimulus Package Many reasons have been debated regarding the Central Government’s 2008 stimulus package. Whereas some analysts argue it is deemed to cool down pricing of China’s property market, others believe it aims to cushion near term economic slow down as well as close a potentially destabilizing income gap between the rich coastal cities and the poorer interior countryside25. As presented in Figure 20, the annual urbanization rate during 1976-2008 was 2.9% which in absolute numbers corresponds to an average of 12.8 million Chinese who migrated annually from rural areas into the larger cities.

FIGuRE 20: ChINA uRbANIzATIoN EvoluTIoN

Sources: CeIC and JP Morgan, July 2010

Furthermore, the record RMB¥ 4.0 trillion stimulus package (circa SEK4.8 trillion or 12% of China’s 2009 GDP) was announced in 2008 to target 10 provincial focus areas across China and to boost domestic demand for industrial growth as well as prolongation of the country’s urbanization plans. In this package and as presented in Table 1, the build-up of social welfare housing has been short-listed a top priority in all 10 provincial focus areas with RMB¥ 280bn (or SEK 336bn) earmarked during a drawdown period during 2009-2011.

TAblE 1: ThE RMb¥ 4 TRIllIoN pACkAGE bREAkDowN

¥ bn %

Social Welfare Housing 280 7.0

Rural Household and Infrastructure 370 9.3

Railway, Highway and Infrastructure 1,800 45.0

Healthcare and education 40 1.0

environmental Protection 350 8.7

Innovation and Structural adjustment 160 4.0

Sichuan earthquake Rebuilding 1,000 25.0

Total 4,000 100.0

Source: Government Website, Citi Investment Research and analysis, July 2010

25 China announces Massive Stimulus Package, nov 9 2008, Forbes.com

urban Population as % of Total Populationurban Population (Person mn)

700

600

500

400

300

200

100

0

1976 1980 1984 1988 1992 1996 2000 2004 2008

CaGR 2.9%

50%

40%

30%

20%

10%

0%

Economic Housing

36

Since the Chinese housing reform in 1998/1999, commodity housing has come to China’s property market to replace state provided housing mechanisms. Furthermore, collecting inspiration from public housing systems established in Singapore and Hong Kong, revised policies by the Central Government aimed to respond to housing shortages for personal use (instead of private property investments) for local residents.

In a March 2010 government working report, Premier Wen presented a sustainable social welfare housing plan that would correspond to the Stimulus Package program. Summarized in Table 2 in 2010 alone, around 5.8 million housing units of which 3.0 million public rental units and economic housing in addition to 2.8 million squatter settlements was proposed for construction across the country.

TAblE 2: CENTRAl GovERNMENT’S CoMMoDITY houSING TARGETS 2009-2010

2010 Target units

2009 Actial units

% Chg

Public Rental Housing (Social Welfare Housing)economic Housing (Social Welfare Housing)

3,000,000 2,000,000 50 %

Squatter Settlement units 2,800,0001,300,000

upgrade of damaged/dangerous units in Rural areas 1,200,000

Total 7,000,000 3,300,000 112 %

Source: Government Websites; Xinhua; Hexun; Citi Investment Research and analysis, July 2010

The Central Government’s aggressive shift in the 2010 targets (only to compare with the 2009 commodity housing plans) could also be explained by the private sector’s polarized appetite for investments in mid-to-high and to luxury properties with significant economics that commodity housing cannot yield.

With the 2010 working report, local governments also agreed with the Central Government to allocate 70% of new land sales for build-up of Economic Housing plans.

FIGuRE 21: ChINA: ANNuAl SpACE uNDER CoNSTRuCTIoN FoR ECoNoMIC houSING

Source: CeIC and J.P. Morgan estimates, July 2010

However, considering the overall gross floor area (“GFA”) sold in China, it becomes evident that Economic Housing makes a rather small proportion of total GFA in China both in terms of sold properties and those under construction.

350

300

250

200

150

100

50

0

Y-o-Y Growth (LH)million sqm (RH)

160%

140%

120%

100%

80%

60%

40%

20%

0%

-20%

-40%1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2010E

19.8%

46.3% 42.9%

23.3% 8.1% -4.1% -2.6% -5.4%-15.0%

13.3%17.6%

15.0%

135.5%

(mn

sqm

)

36 37

FIGuRE 22: GRoSS FlooR AREA (”GFA”) SolD

Source: CeIC, national and Local Bureau of Statistics, Citi Investment Research and analysis, July 2010

FIGuRE 23: GRoSS FlooR AREA (”GFA”) IN CoNSTRuCTIoN

Source: CeIC, national and Local Bureau of Statistics, Citi Investment Research and analysis, July 2010

One recurrent explanation has been that even with such vast expenditure programs, China has also shown a rather poor track record on execution. Taking a ten-year view, Economic Housing units sold relative total real estate sales went declined from 20.8% in 1999 to 6.0% in 2009. Analysts also believe that, even with a rather small output of Economic Housing measured in GFA, there may be a greater supply for such housing units in absolute numbers than the actual near to mid term demand.

Looking at Figures 24 and 25 (page 38), the decade long real estate boom, overheating con-cerns and the general burst of the global “debt bubble” driven by sub-prime mortgages has together returned a rather volatile pricing development. It is also noteworthy to point out that the fiscal balances for the Central Government and local governments have historically been in a perfect asymmetry.

By 2009 year end, the Central Government was for the tenth consecutive year able to maintain a fiscal surplus of RMB¥ 2,026bn while the aggregated deficits of local governments reached RMB¥ 2,2801bn26. To reduce the imbalance, local governments have for many years used residuals of land sales as a significant income model, in 2009, total land sales were estimated to nearly 50% of local government’s deficits27.

1,000,000

800,000

600,000

400,000

200,000

0

25%

20%

15%

10%

5%

0%1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Residential Floor area Sold economic housing Sold % of economic Housing

(’00

0 s

qm)

20.8%

22.7%

20.2%

16.9%

13.5%

10.0%

6.5% 6.0% 5.0% 6.1% 6.0%

2,800,000

2,400,000

2,000,000

1,600,000

1,200,000

800,000

400,000

0

25%

20%

15%

10%

5%

0%1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

)

Residential Floor area Sold economic housing Sold % of economic Housing

(’00

0 s

qm)

19.2%

20.2%

17.8%

14.6%

11.1%

8.7%

6.3% 6.2% 5.9% 5.7% 5.7%

26 Citi Investment Research 27 Ibid

38

With the 70% allocation obligation of land reserved for social welfare housing and with existing fiscal imbalance, it is not surprising that implementation of such large-scale housing programs is found extremely challenging – in spite of the RMB¥ 650bn stimulus package al-location. Given local governments’ prolonged deficits, the commitment to co-invest in social housing appears difficult to achieve unless local governments could create alternative income sources from the private sector ultimately to rebalance the fiscal budgets.

In summary, with 2.9% annual urbanization rate and with respect to existing property legislations in China, private investors appear to continue benefiting from market-driven profits. Concurrently, the Central Government may struggle to realize its economic housing programme as it will have to deal with highly indebted provincial governments and find measures to balance the supply and demand for such housing units.

Nonetheless, one may ask how a stimulus packages as the likes of the Central Government’s really for example impacts infrastructural planning, consumption and thereby inflation while bearing in mind the thus far regulated financial system in China.

Furthermore, bearing in mind that the 2010 completion of 7 million economic housing units may ease the GFA requirements (and reduce public pressures on the government), it could equally be perceived as a problematic endeavour.

Contemplating the Swedish Million Programme28, an important lesson learned came in that it was inexpensive to build such residential areas in the 1970, however they ended up beco-ming much more expensive to maintain throughout the decades, and lacking a solid quality and structural sustainability program.

FIGuRE 24: pRopERTY pRICES IN ChINA’S 70 lARGE- AND MEDIuM-SIzED CITIES

FIGuRE 25: pRopERTY pRICES IN ChINA’S TIER-1 CITIES

28 The Million Programme is the common name for an ambitious welfare housing programme implemented in Sweden between 1965 and 1974 by the governing Swedish Social democratic Party to make sure everyone could have a home at a reasonable price. The aim of the programme was to build a million new dwellings in a 10-year period around the metropolitan areas of Stockholm, Gothenburg and Malmo in Sweden. The Million Programme resulted in an expensive aftermath with high maintenance costs in addition to government’s failure to control the expanding segregation of, at the time, peaking arrival of new immigrants to Sweden which predominantly fore designated to these residential areas. Sources: www.ibf.uu.se

Source: CeIC, nBS and Bofa Merrill Lynch Global Research, July 2010

Beijing Shanghai Shenzhen

2006 2007 2008 2009 2010

4.0

2.0

0.0

(2.0)

(4.0)

Y-o-Y % Change M-o-M % Change

2006 2007 2008 2009 2010

14

12

10

8

6

4

2

0

(2)

2.0

1.5

1.0

0.5

0.0

(0.5)

(1.0)

(% Y

-o-Y

)

(% M

-o-M

)

(% M

-o-M

)

38 39

A remark is therefore that a government-led remedies as the likes of the economic housing program in China may demonstrably mismanaged as well as turning out to be much more expensive than initial accounts – particularly considering the scale of expansions in China. Although the scale may be fractional when compared to the private housing sector, a govern-ment-led scheme could trigger the repeatedly voiced burst of a housing bubble in China.

A third driving force for many engineering companies is the power utility sector and especially investments in the nuclear electrical production.

Apart the from the recent issues of the potentially upcoming trade wars and exchange rate disputes, a new concern is the future institutional framework for foreign investors in general. It appears that incentives available to international investors will be gradually reduced and the Central Government may place restrictive measures or barriers on investments in the traditional manufacturing industries.29.

…consumerismIn Figure 26, domestic consumptions account for many global economies’ annual GDP contribution. In this context, it may be perplexing why China is, relative to its peers, rather poorly ranked while it experiences an unprecedented industrial revolution.

Nevertheless, with some 1.3bn in population and a perpetually increasing prosperity for inhabitants along the Chinese coastline, one would equally expect to see a higher domestic consumption than 37% of GDP.

Beyond doubts, the de-bate revolving around China’s transition from being an investment-led economy to a consumer-driven one (and its commensurate consequences for the global economy) has been one of the most discussed common macroeconomic topics.

For China to become more self-sufficient, it is argued that a wide range of measures that would be required to enhance domestic consumption while mitigating dependencies both on international investment and government stimulus programs. Additionally, recent signalling to end the Yuan’s fixed rate to the dollar may accelerate domestic demand and shield exporters ultima-tely to strengthen household incomes.

29 State Council april 6, 2010. http://www.lpacn.com/news/details.aspx?id=2010520233307

Mexico

Chile

united States

South africa

united Kingdom

Brazil

Russia

Poland

Canada

France

India

Japan

Germany

Taiwan

Thailand

Hog Kong

Malaysia

South Korea

Singapore

China

20% 40% 60% 80%

73%

71%

67%

65%

68%

71%

62%

61%

60%

58%

57%

55%

54%

54%

54%

53%

52%

48%

40%

37%

FIGuRE 26: 2008 pRIvATE DoMESTIC CoNSuMpTIoN AS % oF GDp1

Source: McKinsey Global Institute 1) In real 2000 dollars

40

FIGuRE 27: GDp EvoluTIoN SElECTED CouNTRIES 1981-2008

Source: OeCd (billion uSS, current prices and PPPs, based on based on YoY growth), accessed July 2010

Abandoning the 6.83 Yuan peg to the US dollar, the People’s Bank of China however announ-ced that there is no basis for “large scale” moves in the currency, the exchange rate will be allowed increased “flexibility”30. The current peg could be compared to the 1970’s 2.46 Yuan to the US dollar before devaluation to record low 8.62 Yuan by 1994 and thereafter gradual appreciation toward 8.27 Yuan per USD from 1997 to 200531. Thus, a more flexible currency would give China more freedom to decide on monetary policy and reduce inflationary pressures by lowering import costs32.

Moreover, China’s one-child policy introduced in 1979 to better blend education and increasing affluence would come at the cost of affecting the country’s birth rate. The number of births is expected to decrease by almost one third from 12.7 million in 2007 to 8.9 million in 2026. The reduced birth rate combined with increasing life expectancy due to improved nutrition and access to healthcare will have dramatic effects on the population age profile of China33.

In addition, the number of people under 25 years of age is predicted to decline 47%, from 437 million in 2007 to 297 million in 2026. Simultaneously, the number of people over 40 years of age is predicted to increase from 566 million people to 740 million people. Within the next decade, 50% of the population will be over 40 years of age and 25% will be over 60 years of age34.

30 Yuan Loosened May aid China Shift to domestic demand, Bloomberg / Business Week 10 June, 201031 Xe.com, accessed July 20, 2010 32 China Signals end to Yuan’s Peg to dollar Before G-20 Summit, Bloomberg / Business Week 20 June, 201033 demographic factors in the Chinese health-care market, nature 28 May, 200834 Ibid

China Sweden eu27 uSa

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20%

15%

10%

5%

0%

(GD

P %

)

40 41

FIGuRE 28: AGE pRoFIlE ChINA 2007 vS. 2026

Sources: nature drug discovery, May 2008

Sweden’s aging demographics seem to be more uniformly distributed across the age groups with the exception for net effects age groups above 80 years old.

FIGuRE 29: AGE pRoFIlE SwEDEN 2007 vS. 2026

Sources: Swedish Bureau of Statistics (SCB), accessed July 2010

In summary, many economic fundamentals keep changing and equally shaping the Chinese economy. Stimulus packages and issuance of new loans, shifting demographics with increa-sing consumer affluence and appetite, an economic system that originated in an inexpensive labour market with mounting demand are only a few scattered dimensions of the Chinese economic model.

Adding to the complexity, trade policies, environmental concerns and government’ tendency that may linger business flexibility and promote fair competition all adds to the complexity of the Chinese economy. The interviewed companies, however, present an informed understan-ding of the Chinese marketplace and express a common view on the fact that in order to win China, its market challenges has to be dealt with to capture the vast opportunities that may not be found in any other market in the near future.

0-4

5-9

10

-14

15

-19

10

-24

25

-29

30

-34

35

-39

40

-44

45

-49

50

-54

55

-59

60

-64

65

-69

70

-74

75

-79

80

+

140

120

100

80

60

40

20

0

Pop

ulat

ion

(mill

ions

)

Age Range (Years)

2007 2026

0-4

5-9

10

-14

15

-19

10

-24

25

-29

30

-34

35

-39

40

-44

45

-49

50

-54

55

-59

60

-64

65

-69

70

-74

75

-79

80

+

800

700

600

500

400

300

200

Pop

ulat

ion

(tho

usan

ds)

Age Range (Years)

2007 2026

42

…the story of repeat Taking a rather vivid standpoint by picturing if Sweden was a neighbouring country to China, many of the perceived dilemmas and threats of labour migration could have been dis-missed. A drastically reduced proximity to such a vast market as China could help ensuring a solid manufacturing base in the “neighbouring” Sweden.

Because this is clearly not the case, companies have to undertake strategic decisions by which business strengths they may enter China and how to safeguard future capabilities in the two countries without compromising on quality, secure of supply and continued innovation and product development.

What China is currently witnessing is something we would like to refer to as the “the story of repeat”. In effect, both international and local companies in China are today being kept busy to supply the Chinese market demand in a rather repetitive manner most correctly due to China being such a large customer market measured in geography, inhabitants and wealth.

Considering China’s monthly sale of one million passenger vehicles, it could be seen as a repetitive process through which one million passenger vehicles need to be “repeated” in production and sales. In the continuation of the Chinese market prosperity, considerable pro-ducts, infrastructure systems as well as services need to be established and “repeated”. What, however, distinguish China from any other market today is that the story of repeat comes at a much higher pace and volumes – keeping many of the companies in the opportunity loop to keep busy by repeating.

42 43

44

Le Royal Meridien Shanghai: Sunset

footage from the People’s Park.

PHO

TO: Le

na

Ru

ne

44 45

Conclusions

Sweden has had a long standing reputation of being a small albeit progressive economy with a high degree of development across various industries as well as taking people and the environment into consideration. Built upon a history of intellectual capital from scientific research to fully-fledged manufacturing operations and sales of global industrial and consu-mer brands, it has also instated a legacy for academic research and innovation.

China, by contrast, is gradually evolving from being a manufacturing centre of the world to becoming a rich nation accentuating a large consumer demand while sophisticating its socioeconomic standings.

Putting China and Sweden in the same basket, it is rather easy to capture the vast opportuni-ties each market may bring to one another. Sweden can continue expanding on state of the art manufacturing platforms to supply the Chinese market as it is sophisticating. China in turn could pick up on areas of manufacturing Sweden nowadays can outplace to other locations. A solid business challenge in this context is where to localize which modules of manufacturing to better enable customer supply while accounting for the market environment in terms of costs, materials sourcing and quality as well as protecting against potential intrusion.

Assuming that the Swedish industrial companies will increase their manufacturing volumes at a higher pace in China than elsewhere, it could intuitively be seen as opportunities foregone to expand on the very same merits inside Sweden. What is, however, important to account for is that more manufacturing will be required in China since it comes with greater demands than markets adjacent to where Sweden is located.

Comparing the Swedish industrial setup with those in China, manufacturing in Sweden and shipping to China will to the outmost extent not be an option to maintain necessary profit margins or enable healthy competition with those peers already established in China.

Conclusively, it should be underlined that China comes as a greater opportunity to Sweden than an economic threat. Partnering with China has proven to help growth for the Swedish companies, its operations in Sweden (and outside China) as well as its shareholders. Consi-dering the flows of investments into China (or vice versa) they are previously evidenced to be negligible compared to those bilateral flows amidst Europe, the United States and Sweden. Although China is Sweden’s largest trading partner in Asia, most bilateral trade flows of engineering goods are today still going to the western partners, i.e. it would require ample volume increases for the total trade between Sweden and China before material opportunities (or threats) could be accounted for.

The country’s sophistications in terms of labour laws and IPR also prove the fact that establis-hing as a larger corporation in China comes nowadays at lesser risks and implied economic consequences than earlier. Thus, China is today nothing but a rather imperative opportunity for the Swedish industrial companies to pursue whereby existing strength can both be leveraged and developed ultimately to better prepare for the future. The finite threat of China would ironically be if these companies decide to ignore or exit China.

PHO

TO: Le

na

Ru

ne

46

Though, an arising challenge in this context could be how well these companies can repeat their manufacturing output while securing quality and delivery and at the same time be inno-vative and creative. Contrary, one may consider China as the future driver of innovation and creativity with the caveat that consumer needs may be significantly varying region to region. Expanding in China dictates that it is only a question of time where other vital elements of the value chain need to be injected onsite where the corresponding manufacturing platforms exist. Therefore, while western companies enjoy higher profits from low-cost labour intensive production capabilities, China too is perpetually advancing in areas such as R&D and innova-tion which gradually may also normalize the low cost effect toward competitive salaries and overall output costs.

As China, as a whole, keeps transforming to a modern state and begins compare to what took the western societies decades to grow, the Swedish public needs to be better informed about the fact that the increasing business for Swedish companies in China also drives increased opportunities in Sweden. For example, increased sales of advanced equipment, academic collaborations, joint commercial programs could be amongst the few imminent opportunities that Sweden could expand upon. As describe by one of the interviewees, “if any prospering market is seen as a threat, that market will eventually turn into one.”

Tiger Hill, Suzhou – a city famous for its

beautiful gardens, silk garments and water

canals. Often referred to as ”The Venice of the

East”. (Repeated from page 9)

PHO

TO: Le

na

Ru

ne

46 47

Appendix

Characteristics of Swedish Industrial Manufacturing CompaniesFrom a historical perspective, many of the traditional Swedish industrial manufacturing companies35 were established up until the 1960’s. In simple terms, these companies provide diverse products and services vital to develop and maintain large scale and complex in-frastructures.

With the accelerating globalization in the western hemisphere in the 1970’s, these companies continued their global expansion into new markets through by offering their core products and services to construct roads, railways and other categories of transportation including tunnels, harbours, airports as well as passenger and commercial vehicles and finally energy grids for transportation of electricity, oil and gas.

As a result, a larger base of supplier companies were also established in Sweden to cater for supply those necessary supplies the larger industrial manufacturers decided to exclude from their value chains. With recent decades of increased investments in innovation and R&D, the companies are today capable of competing on world-class quality and sustainability, as well as efficiency and shareholder profitability. Together, this group of industrial manufacturing companies has also been able to build their corporate success on solid brand equity in the global marketplace.

Aligning China’s “asks” for infrastructural growth with offerings of Swedish industrial companies, it becomes less of a revela-tion why these companies have in recent 5-10 years intensified their agenda to compete over long-term strongholds in China. As summarized in Figure 30, these companies employed by 2009 year end over half a million people around the globe active in various functional areas including R&D, manufacturing, sales and distribution.

40,000 80,000 120,000 160,000

Sources: Company annual accounts 2009 and Company Interviews. 2010 Company mix include: aBB, alfa Laval, atlas Copco, autoliv, electrolux, ericsson, Haldex, Munters, Sandvik, Scania, SKF and Volvo Group

Commercial Vehicles

PowerInfrastructure

TelCo

Construction & Industrial

Manufacturing

Home & Commercial

Appliance

Advanced Machinery arts &

Systems

AutomotiveSystems

Industrial ’Assembly Tools

122,538

116,000

82,493

73,509

50,633

41,172

34,481

31,085

FIGuRE 30: 2009 YEAR END: ovER 550,000 EMploYED GlobAllY AT SwEDEN’S Top12 INDuSTRIAl CoMpANIES*

35 Company mix 2010 include: aBB, alfa Laval, atlas Copco, autoliv, electrolux, ericsson, Haldex, Munters, Sandvik, Scania, SKF and Volvo Group

48

Survey Questions Swedish Industrial Companies in China

SECTIoN A – Company Meeting Discussion Material We are pleased to have the opportunity to discuss with you a selected number of high level to-pics regarding the company’s local business activities in China and the long term implications on the Swedish manufacturing capabilities.

1. Current Status of operations in China Please describe landmark changes in business conduct, e.g. additions to or dispositions of

local capabilities, new strategic targets and / or financial performance since 2005?

2. Service operations in China How has the service business of the company evolved in China? does the company offer

service solutions that enhance the overall competitiveness of company offerings and custo-mer satisfaction? If no standardized services are offered in China, are there any interim plans to do so?

3. Supply Chain & Sourcing How do company suppliers in China compare to those in e.g. Sweden? are there increa-

sing local suppliers or is the company using traditional suppliers, e.g. Swedish suppliers present in China or alternative global sourcing?

4. “Made in China” Sold in China vs. “Made in China” Sold Globally depending on company, what are the short- and long- term sales strategies? Has the

company objectives on local manufacturing shifted from local sales to regional and global sales?

5. Challenges and opportunities in China What are the major interim and long-term challenges imposed to the local operations in

China and what are the distinguishing opportunities for continued profitability and sustai-ned growth in China?

6. A) Future of the Chinese organization (5 year perspective) In general terms, what are the long-term commitments to China? b) Influences on Swedish Activities (5 year perspective) Will the company continue expanding China and, if so, how would such expansions influ-

ence those in Sweden?

7. Innovation, IpR & Governmental Influences What are the company sentiments on engaging in advanced R&d activities in China provi-

ded the existing academic, innovation and legal platforms? How has the relationship with (provincial) governments evolved? are there future incentives to promoting growth of inter-national companies or will there be more barriers to consider including shifting legislation favouring indigenous companies?

8. long Term perspective – 5 years ahead What are the long term market drivers for business continuity? How does the business

strategy of the company align with the economic environment, market appetite as well as the overall company goals and objectives?

49

SECTIoN b - project East – Survey Questionnaire

Please provide your perception on the following questions by circling the most appropriate answer.

1. historical performance of business (2005 – Current) In your perception, the local business performance compared to internal targets could best

ranked as follows:

1 2 3 Business is Business Performance Business Performance

underperforming is On Par is exceeding expectation

additional Comments:

2. Current and Future performance of business (2010-2015) In your perception, the overall current and future performance of the business compared to

internal targets could best ranked as follows:

1 2 3 Business will be Business Performance Business Performance

underperforming will be On Par will be exceeding expectation

Additional Comments:

3. Competitive Threats There is a certain level of increasing threat perceived from competition to the current

business which needs to be addressed in the short to medium term

1 2 3 Strongly disagree Healthy Competition Strongly agree

additional Comments:

4. Investment Needs In your perception, there would be more investment needs in the company for improved

profitability and sustained growth.

Please highlight your answer with “X” wherever applicable with following ranking scale: 1 = Strongly disagree to 5 = Strongly agree.

Investment Needs In: 1 2 3 4 5

R&d and Innovation

Manufacturing Capabilities

Quality assurance and Standards

Sales & distribution

Local education and Training

Legal and Intellectual Property

Centre of excellence & Support Functions

Relocation of Selected Headquarters

Additional Comments:

5. Average Number of Employees in China

2004 2005 2006 2007 2008 2009 2010* 2011*

Company Sources

Restatement(if applicable)

1996 1997 1998 1999 2000 2001 2002 2003

Company Sources

Restatement(if applicable)

*) denotes estimated headcount outlook in China in 2010 and 2011

Additional Comments:

50

SNI Classifications ReviewSection 1: SnI classifications corresponding to companies covered in this report combining SnI 2002 and 2007, which corresponds to naCe Revision 2 (english).

SNIClassification

Economic Activities

25 Manufacture of fabricated metal products, except machinery and equipment

26 Manufacture of computer, electronic and optical products

27 Manufacture of electrical equipment

28 Manufacture of machinery and equipment n.e.c.

29 Manufacture of motor vehicles. trailers and semi-trailers

30 Manufacture of other transport equipment

32 Manufacture of medical instruments an devices

Section 2: detailed breakdown of SnI classifications corresponding to companies covered in this report combining SnI 2002 and 2007, which corresponds to naCe Revision 2 (Swedish).

Detailed SNIClassification

Economic Activities

251 Byggnadsmetallvaror

252 Cisterner, tankar, kar och andra behållare av metall

253 Åggeneratorer utom varm-vattenpannor för centralupp-värmning

254 Vapen och ammunition

257 Bestick, verktyg och andra järnhandelsvaror

259 andra metallvaror

261 elektroniska komponenter och kretskort

262 datorer och kringutrustning

263 Kommunikationsutrustning

264 Hemelektronik

265 Instrument och apparater för mätning, provning, och navigering samt ur

266 Strålningsutrustning samt elektromedicinsk och elek-troterapeutisk utrustning

267 Optiska instrument och fotoutrustning

268 Magnetiska och optiska medier

271 elmotorer, generatorer och transformatorer samt el-distributions- och elkontroll-apparater

272 Batterier och ackumulatorer

273 Kablar och kabeltillbehör

274 Belysningsarmatur

Detailed SNIClassification

Economic Activities

275 Hushållsmaskiner och hushållsapparater

279 annan elapparatur

281 Maskiner för allmänt ändamål

282 andra maskiner för allmänt ändamål

283 Jord- och skogsbruks-maskiner

284 Maskiner för metallbearbet-ning och verktygsmaskiner

289 andra specialmaskiner

291 Motorfordon

292 Karosserier för motorfordon; släpfordon och påhängsvag-nar

293 delar och tillbehör till motor-fordon

301 Fartyg och båtar

302 Rälsfordon

303 Luftfartyg samt rymd-farkoster

304 Militära stridsfordon

309 Övriga transportmedel

325 Medicinsk och dental utrustning

www.teknikforetagen.se

On the cover: S

hanghai Science &

Technology Museum

, Pudong. Photo: Lena Rune