China’s Rapid Progress up the Value Chain

© 2008 Sino-Consulting, Inc. (www.s-c-i.com) January 2008

“So in 30 years we have gone from ‘sold in China’ to ‘made in China’ to ‘designed in China’ to ‘dreamed up in China.’”

Thomas Friedman, The World is Flat

© 2008 Sino-Consulting, Inc. (www.s-c-i.com) January 2008

Unprecedented GrowthAverage annual GDP growth near 10% over past 20+ yearsOver 500,000 foreign invested companies todayWorld’s #1 target for FDI; Over $1 billion per week Middle class between 100 and 250 million people (depends on data source)– 410 million mobile phone users– Fastest growing auto market in the world (& terrible pollution)– 5th largest pharma market by 2010…….and so on

GDP ViewsAbsolute: 4th in the world3rd in global outputPer Capita: 107th place globally – so lots of room for continued growth

© 2008 Sino-Consulting, Inc. (www.s-c-i.com) January 2008

Past: The World’s Workshop

30% of TVs50% of cameras30% of air conditioners25% of washing machines20% of refrigerators34% of mobile phones17% of digital cameras20% of DVD players28% of broadband routers & modems

From ZERO 25 years ago to….

© 2008 Sino-Consulting, Inc. (www.s-c-i.com) January 2008

1978 1998 2003- Public sector employment- % value add- % of GDP

≥ 99% 30%5760

16.4%4340

- Private sector employment- % value add- % of GDP

≤ 1% 70%4340

73.6%5760

Source: OECD

Transition to a Market Economy

© 2008 Sino-Consulting, Inc. (www.s-c-i.com) January 2008

Transition

Value Added

Direct State

Direct State

Indirect State

Indirect State Collective

CollectivePrivate

Private

0%

20%

40%

60%

80%

100%

1998 2003

Number of Firms

Direct State

Direct State Indirect State

Indirect State

Collective

Collective

Private

Private

0%

20%

40%

60%

80%

100%

1998 2003

Employees

Direct State

Direct StateIndirect State

Indirect State

Collective

Collective Private

Private

0%

20%

40%

60%

80%

100%

1998 2003

Source: OECD

© 2008 Sino-Consulting, Inc. (www.s-c-i.com) January 2008

Huge Contribution from FIEs35% of industrial output (from 2.3% in 1991)

Control assets in 21 of 28 leading industrial sectors

20% of China’s tax revenues25 million employees (10% of urban workforce)60%-plus of exports out of China750 foreign R&D centers in 2005 (near zero in late 90s)Most tech transfers into ChinaRole of ETDAs (e.g. SIP)

© 2008 Sino-Consulting, Inc. (www.s-c-i.com) January 2008

Export Ratio of FIEs

0

150

300

450

600

750

1997 1998 1999 2000 2001 2002 2003 2004 2005Year

Bill

ion

of U

S D

olla

rs

Total exports

Exports by foreign-funded companies

Source: National Bureau of Statistics

© 2008 Sino-Consulting, Inc. (www.s-c-i.com) January 2008

11th 5-Year Plan, 2006-2010Key policy focus: Develop technology-led sectors and high-value capabilities, while maintaining the manufacturing base– Increase R&D spending from 1.3% of GDP in

2005 to 2% by 2010– Targets include biotechnology, nanotechnology,

renewable energy, etc.China currently holds 12% of the world’s patents in nanotechnology

– Tax equalization between FIEs and domestic firms, but

– 150% deduction for qualified R&D expenditures– Major biotech centers in Beijing and Tianjin, etc.

© 2008 Sino-Consulting, Inc. (www.s-c-i.com) January 2008

Investment Catalog Comparison

127 113(36% growth) (12% growth)

© 2008 Sino-Consulting, Inc. (www.s-c-i.com) January 2008

Current TrendsUniversity-industry collaboration on the rise:– Tsinghua University has research contracts with GE, Alcatel,

Lucent, P&G, etc.

VC on the rise - corporate, traditional, PE – but still small

Major Industrial advances– Exporter of power gen equipment– Developer of TD-SCDMA 3G wireless standard– 3rd largest auto producer (Look for Chinese cars in US soon…)– World’s largest shipbuilder– Domestic aviation and aerospace industry on the rise (Regional

jet ARJ21 now in testing; Airbus A320 assembly)

Still, only a fifth of China’s top 500 companies invest over 2% of revenue in R&D (Huawei invests 10%)

© 2008 Sino-Consulting, Inc. (www.s-c-i.com) January 2008

The Future: The Entrepreneurial Challenge

200,000 – 300,000 engineers graduating every year, compared with about 60,000 in US– In 1999, all MBA grads from Shanghai’s China-EC

Business School went to work for FIEs. In 2006, 25% went with domestic firms

Still, China only spends about half what average OECD country spends on education and health

© 2008 Sino-Consulting, Inc. (www.s-c-i.com) January 2008

China’s Business Incubators –Invented in America

“International” Business Incubators– In every city for returning expats

Shanghai National IC Design Center– Based on fact that over 80% of IC products were imported– Established in 2000 to support entrepreneurs in IC design– Provides multi-million dollar design tools & testing computers

for all users at no cost– Training and general partnership with

LSI Logic– Top floors for R&D, lower floors to

incubate resulting companies

© 2008 Sino-Consulting, Inc. (www.s-c-i.com) January 2008

Sino-Consulting, Inc.

Thank you. Please feel free to call if you have questions

Timothy Weckesser, 610-828-8060Shiqiang Gu, 610-828-8061

www.S-C-I.com