China: Business Opportunities and Challenges

Transcription

1 China: Business Opportunities and Challenges March 3, 2005 Agenda Vitro Overview Business Opportunities in China Business Challenges in China 1

2 Vitro's Profile Q-LTM Sales 1 : US$2,261 Mill 90% of total sales are glass related Construction Binswanger Glass Supersky Glasscraft Duo-Vent Automotive OEM Replacement ACI Vitrocar Flat Glass 49% Glassware 10% Glass Containers 41% Retail Wholesalers Food Service OEMs Food & Beverages Beer Wine & Liquor Pharmaceutics Cosmetics Molds & Machines Raw Materials 1-Nominal US$, Latest twelve months as of September 30, 2004 Glass as Vitro s Strategic Advantage Vitro has modified its business portfolio in order to strengthen its competitive advantages, focused on the glass industry Key Glass Competencies Melting Formation Transformation into value added products Distribution Service Quality Innovation /Design New Product Development Technology Molds y Machines Business Flat Glass Containers Glassware Industry-Client Automotive Construction Food Beverage Cosmetics Supermarket Distribution/ Installation Consumption 2

3 Flat Glass: sales of US$1,093 Million Largest producer of Flat Glass in Mexico and second largest in Latin America Over 320 operating centers in Mexico, Colombia, USA, Spain and Portugal Main Competitors Saint-Gobain Guardian Asahi PPG Carlex CITSA Vitro America 37% Construction Europe 11% Vitro America Auto replacement 8% Vitro America Construction 27% Fiber Glass 5% Other 7% Construction Mexico 22% Auto - OEM 13% Auto - Replacement 7% Sales Breakdown Foreign Subsidiaries 49% Mexico 28% Exports 23% Sales Breakdown Construction 60% Automotive 32% Other 8% Glass Containers: sales of US$913 Mill Largest glass container producer in Mexico and Central America Operations in Mexico, USA, Central & South America Certified ISO 9001 Main Competitors in Mexico Fanal Sivesa Fevisa Foreign Subs.(2) 11% Vertical Integ. Prods. 20% Wine & Liquor 15% Cosmetics 10% Soft drinks 17% Food 20% Beer 7% Sales Breakdown Mexico 59% Exports 30% Foreign Subsidiaries 11% 3

4 Glassware sales: of US$229 Million Glassware leader in Mexico and Latin America JV with Libbey (51%Vitro, 49% Libbey), leader in USA Operations in Mexico and exports to 60 countries OEMs 16% Plastics 18% Industrial 14% Whole salers 12% Retail 40% Sales Breakdown Mexico 64% Exports 36% Vitro today: multinational player with global operations. United States. Switzerland. Spain Portugal. Mexico.. Guatemala.. Costa Rica Colombia Bolivia. Operating Assets Distribution and Sales 4

5 Agenda Vitro Overview Business Opportunities in China Business Challenges in China China s Attractiveness for Vitro Flat Glass Automotive OEM Construction Housing Glass Containers Beverage & Beer Food Pharmaceutical Glassware Commercial Glassware Food Service Electric Appliances 5

6 Growth of the flat glass industry in China Annual Volume Growth Y-o-Y CAGR % 25% 20% 15% 10% 5% 0% -5% -10% -15% Luoyang Qinhuangdao Fuyao Shangai Zhejiang Hubei Anhui CSG Shandong PPG Pilkington St. Gobain Trakya Cam Asahi Central Nippon Taiwan China 18.0% ROW 3.4% Source: Annual Reports, Analysis China s consumer markets and demographics Western GDP(US$ B): 40 Population (M): 55 GDP/capita (US$): 719 China GDP(US$ B): 1,289 Population (M): 1,221 GDP/capita (US$): 1,056 Heilongjiang NorthEast GDP(US$ B): 154 Population (M): 150 GDP/capita (US$): 1,024 Inner Mongolia Jilin Xinjiang Beijing Liaoning Midlands GDP(US$ B): 316 Population (M): 437 GDP/capita (US$): 723 Tibet SouthWest GDP(US$ B): 113 Population (M): 190 GDP/capita (US$): 593 Sources: 2002 China Statistical Yearbook; BDC analysis Qinghai Yunnan Ningxia Gansu Shaanxi Hebei Tianjin Shanxi Shandong Henan Hubei Anhui Sichuan Chongqing Hunan Jiangxi Guizhou Fujian Guangxi Guangdong Hainan Jiangsu Shanghai Zhejiang Shanghai GDP(US$ B): 60 Population (M): 16 GDP/capita (US$): 3,776 Shanghai, Beijing Region, Guangdong and the Coastal Region combined represent over 56% of the total GDP but only 35% of the population 6

7 China s addressable market quickly shrinks when accounted for income differences million 1, NorthEast Midlands Western SouthWest 186M 268 Coastal Shanghai Beijing Region Guangdong Total Rural Basic urban Value urban Premium urban Per capita income Per capita income Per capita income > US$600 > US$840 > US$1, In addition to low spending power, it is also difficult to penetrate the rural markets due to poor infrastructure, weak distribution and wide geographic dispersion. Sources: 2002 China Statistical Yearbook; BDC analysis Sheer size of China s consumer markets driving investment % total world FDI inflows 12% FDI Inflows, Emerging Markets 11.0% 10% 8% 6% 4% 2% 0% 8.9% 7.6% 6.2% 4.0% 3.8% 4.0% 3.6% 2.5% 3.8% 1.8% 1.8% 2.0% 1.8% 1.0% 0.0% Mexico China Source: Datastreem, CSFB research 7

8 Compelling fundamentals from the production point of view General Comparative Cost of Inputs Mexico vs. China Basket of Consumer Products 100-5% -20% -30% -80% -70% Raw Materials Index Energy Packaging Labor Freight Sources: 2002 China Statistical Yearbook; BDC analysis, Mexico Market Research Investor-friendly environment, by design Development of China s Economic and Technological Development Zones (ETDZ) ETDZ were designed to: Open up China s economy Attract capital investment Facilitate hi-tech development Promote the regional economy Focus on industrial projects Encourage foreign investment Build up export-oriented economy In 1984, following the success of SEZ, China Economic & Technological Development Zones (ETDZ) were introduced to further open China s coastal areas to the outside world In 1992 and 1993, 18 other ETDZs were set up: Yingkou Changchun Shenyang Harbin Weihai Kunshan Hangzhou Xiaoshan Wenzhou Rongqiao Dongshan Guangzhou Nansha Huizhou Dayawan Wuhu Wuhan Chongqing Beijing Urumchi From 2000 to 2002 the 3 rd group of ETDZ were established: Hefei Zhengzhou Xi'an Changsha Chengdu Kunming Gunyang Nanchang Shihezi Xining Huhhot Taiyuan Nanning Yinchuan Lanzhou Lasa Lanzhou By the end of 1988, 14 ETDZs were established by the approval of the State Council: Dalian Qinhuangdao Tianjin Yantai Qingdao Nantong Lianyungang Minhang Ningbo Hongqiao Caohejing Fuzhou Guangzhou Zhanjiang In a strategy to develop the western area, the State Council made a decision in 1999 that middle west provinces under the central government could choose one qualified and established provincial - level ETDZ from its capital city to bid for a national -level ETDZ Shanghai Pudong (1990) Suzhou Industrial Park (1990) Daxie ETDZ (1994) were upgraded to statelevel, whereby enjoying preferential policies Sources: China Association of Development Zones; BDC analysis 8

9 In China there are thousands of ETDZ & Industrial Parks, however there are only 54 national level development zones National/State level Provincial level National Level Development Zones Able to offer FIE's greater preferential tax policies and exemptions because they have jurisdiction over the collection of a greater number of taxes in China and at higher rates, for example, those including corporate income tax, VAT, customs duties, etc. Number of ETDZ Local Government level/ trial zones State Level Development Zones Have jurisdiction over certain (locallycollected) taxes and tax policies (for example, depreciation rates). The availability of preferential tax policies is heavily dependent on the type, size and length of investment, along with relationships with local govt 54 Enjoy better policies & incentives ~3000+ Sources: China Association of Development Zones ; Lehman Brown International Accountants; BDC analysis Jiangsu, Guangdong, and Shandong are the largest recipients of foreign direct Investment in China Number of projects Beijing % 2002 Growth % y-o-y Heilongjiang Inner Mongolia Jilin Shandong 4, % Xinjiang Beijing Liaoning Tibet Qinghai Hebei Tianjin Shanxi Ningxia Shandong Gansu Jiangsu Henan Shaanxi Jiangsu 5, % Hubei Anhui Sichuan Chongqing Hunan Jiangxi Guizhou Fujian Shanghai Zhejiang Fujian 1, % Yunnan Guangxi Guangdong Guangdong 6, % = 1,000 projects Hainan Source: TDC Trade; BDC analysis 9

10 Agenda Vitro Overview Business Opportunities in China Business Challenges in China Investment Challenges doing business in China Operational 10

11 Currency appreciation as one major risk 10% 5% 0% Comparative Indexed Exchange Rates Depreciation / Appreciation vs. US Dollar -5% -10% 1/1/ % -20% 12/16/1996 1/12/ /16/1998 1/11/ /16/2000 1/10/ /16/2002 1/9/ /16/2004 Peso Yuan -25% -30% -35% -40% China s foreign exchange policies Foreign Invested Enterprise Designated foreign exchange banks Current Account Capital Account No restriction After-tax profit repatriation After-tax wages After-tax share dividends payable Imports/exports Strict control Investment External debt/loans Overseas share issues When a FIE have to make external payments within its business scope, it may draw the required amount from its foreign exchange current account and any shortage can be made up for by purchasing foreign exchange with RMB at designated banks Any sale of foreign exchange to the capital account must be approved by SAFE (State Administration of Foreign Exchange), the supervisory authority over foreign exchange in China People s Bank of China determines the exchange rate. Designated foreign exchange banks can set buy and sell prices within the floating range specified and conduct foreign exchange business 11

12 Investment Challenges doing business in China Operational China s logistics options are rudimentary Mode of Transport Duration* Arrival Window Tracking Information Chance of Damage Route Flexibility Schedule Flexibility Regulatory Restrictions Shipment Requirements Overall Remarks Rail >9 days 1 to 4 weeks, depending on route congestion Minimal information; Routine failures to notify cargo arrival 2 3 times of trucking Most plants and ports do not have efficient rail sidings Min requirement is 10 tons More suitable for commodity (90% of load) Shipping 7-8 days More used to handling bulk goods than finished products Onward trucking must be used in most cases Very low frequency for intra-china shipping Large scale of shipment makes it more suitable for bulk goods Trucking 5-6 days *From QinHuangdao to Guangzhou Source: Interviews, Chamber of Commerce Reports; BDC analysis Local Less-thantruckload system governments maintain strict is far from entry access, established making interprovincial transportation difficult. Need to use big - name operators Toll payments must be taken into account, and can change rapidly 12

13 China s Trunk Highway System will also double its current size by 2010 China s Trunk Highway System Thousands of Km 100 Km Completed before 2000 Under construction, To be constructed from 2005 to 2010 Total System by 2010 Sources: Xinhua, Literature Search; BDC analysis 21 provinces, municipalities and autonomous regions in China suffered a large-scale electric power shortage in 2003 Reasons Dry spells - water levels are especially low and hydroelectric plants are unable to operate to their full capacity Shortage of electric generators Many thermal power plants are operating below their capacity because of inadequate coal supply China s high-gear economic growth, especially with energy intensive industries e.g. steel and nonferrous metals Where Grids with electricity shortage are mainly north China, northwest China and central China Provinces covered by the north China grid, except Shandong, all experienced shortages during the summer peak Regions with smooth electricity supply and demand are mainly the northeast e.g. Shandong, Anhui Outlook The electricity strain is expected to linger throughout 2004, with an estimated shortage at over 20 m kwh The government is looking at establishing an emergencyresponse procedure for dealing with possible power problems Plan to manufacture new electric generators with a combined electricity generating capacity of million kilowatts 2004 will see a record in the power generator installment and construction of power grids - spending over US$9.6 b Xinjiang Sources: 2003 China Electric Power Publications; Center for Energy; ISI emerging market; BDC analysis Tibet Shortages are expected to reach approx 7 million kw between Shanghai, Jiangsu and Zhejiang Qinghai Yunnan Gansu Sichuan Ningxia Sufficient supply Shaanxi Chongqing Guizhou Guangxi Hainan Inner Mongolia Hebei Tianjin Shanxi Shandong Henan Hubei Beijing Anhui Hunan Jiangxi Guangdong Liaoning Fujian Experiencing or have experienced shortages Major shortages Jilin Jiangsu Estimates Heilongjiang Shanghai Zhejiang 13

14 China in light of Vitro s Strategy and Vision To become a leader in the global glass industry in terms of profitability, efficiency, quality and service. With the strategy One Vitro we are transforming to better compete in the world markets, holding to our greatest competitive advantage: Almost 100 years of knowledge in the glass industry Thank You 14