Future of China

Introduction The Big Picture: What is next for China and the world’s multinationals? Business Challenges: The end of ‘cheap China’? Rising Consumption: China’s middle class – myth or reality? Regulatory Challenges: A harder place to do business? Regional Differences: There is more than one China The Future: Looking forward to the next decade KPMG Insights: Adapting Strategies for the China Market About KPMG About Silk Road Associates Contact us Case studies Asahi Avery Dennison Bluebell FedEx Genpact Honeywell Jebsen JLL KPMG Maersk OMM Tesco The Executive Centre 41 42 1 3 9 15 21 27 33 37

© 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 1 | The Future for MNCs in China

China continues to attract the world’s top multinationals seeking to establish a presence and expand their footprint in the world’s second largest economy. Multinationals will continue to play an important role but China has evolved quickly, as have Chinese homegrown businesses. Opportunities abound however, as the CEOs we spoke to point out, it is increasingly important to be flexible in this market and prepared to adapt. It is a competitive environment and Chinese domestic players are now raising the stakes, with global aspirations for their own brands.

In terms of the changes that we see taking place, as multinationals move further inland to the tier 3 and tier 4 cities, they face new challenges and may need to consider their investment options, including the joint venture route. We also see a new generation of savvy entrepreneurial business executives in China and as the economy rebalances to emphasise domestic consumption, there will be increasing focus on innovation and on sectors such as clean energy, high tech and services. Stephen Yiu Chairman, KPMG China

KPMG has mostly grown organically in China and our business focus has also adapted to help both multinationals looking inbound and Chinese domestic companies seeking outbound opportunities. In response to these changes, we launched our Global China Practice (GCP) in September 2010 and we now have China practice teams in over 40 countries around the world. These teams combine China cross-border investment experience, Mandarin language capability and local knowledge to help Chinese firms expand outside China, and assist multinational clients address opportunities in China.

Our China business is set to continue to grow and we see Chinese firms’ expansion overseas as a key factor in that growth. Within five years, China’s mainland will be among the top ten markets for KPMG International globally. We also plan to double the size of our Chinese workforce to 18,000 employees in the next four years. In terms of our business strategy, we will focus on building our auditing, tax and advisory services. And as a further demonstration of our commitment to this region, KPMG International last year relocated its Global Chairman office to Hong Kong, the only Big Four accounting firm to do so.

Our report highlights the strategic importance of the China market for multinationals and longer-term opportunities for them to establish fully-fledged operations focusing on the domestic market. I would like to thank all of our contributors for their insights and input. © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The Future for MNCs in China | 2 China’s economy has made remarkable gains over the past three decades.

The ongoing global crisis represents yet another challenge, but one that China has so far dealt with successfully. Nonetheless, there is a growing recognition that only fundamental economic reform in all countries will successfully bring an end to today’s global challenges. Chinese policymakers have a long history of carrying out such reforms. Yet, the challenge is greater today given China’s economy is now larger than the combined economies of the three other BRICs members–Brazil, Russia and India–and to decide the appropriate reform for such a large economy is not always straightforward.

The world’s multinationals can help in this respect. Not only do they provide insights into economic developments that are not always apparent in the economic data itself. They can also contrast their experience with that in both the developed and developing world, providing an important source of best practice for China. Ben Simpfendorfer Managing Director Silk Road Associates The case studies in this report are taken from a variety of industries.

The CEOs and senior executives also typically have twenty years of experience, having watched China’s economy evolve from the early 1990s until today. That is crucial, as understanding where China has come from helps to understand where it needs to get to. For the most part, the world’s multinationals remain optimistic towards the country’s outlook. There is recognition that China still offers plenty of untapped opportunities and an entrepreneurial spirit. Few markets also change as fast: the rapid emergence of the autos and housing sectors is a case in point.

However, there is also a general recognition that the next five years will be more difficult than the last ten, and robust changes are needed if the country can fully tap those opportunities and maintain its strong rate of growth. The fact that both foreign multinationals and Chinese firms are again eager to set up joint-ventures is perhaps the most positive trend highlighted of the report. On the one hand, foreign multinationals are looking for help to enter China’s interior markets and third- and fourth-tier cities. On the other, Chinese firms are looking for assistance to expand abroad.

It is a development that needs to be encouraged by all parties, especially at a time when the global crisis is producing new national divisions. If multinationals and Chinese firms can find new grounds to cooperate and grow, then we should rightly feel more optimistic about the global outlook and the chances we will find a path through the current global economic crisis. © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

All rights reserved. 3 | The Future for MNCs in China The big picture What next for China and the world’s multinationals? The fate of China and the world’s multinationals is bound tightly together. In the past two decades, both benefited from the spectacular growth in global trade and investment: China’s share of the global economy rose from four percent in 1990 to fourteen percent today, even as the world’s multinationals saw their combined share of the global economy reach 25 percent and sales by foreign affiliates grow to USD32 trillion1.

It is perhaps no surprise that the recent global crisis has seen some subsequent changes to this relationship: China is rethinking its open-door policy to foreign firms, whether by introducing new requirements for licensing or technology transfer; some multinationals are less convinced that China is their only answer to growth, as other emerging economies, though smaller in size, enjoy similarly robust economic expansion.

With the global crisis continuing and the benefits of globalisation being reconsidered, the relationship between China and multinationals is set to continue to evolve. 1 UNCTAD, World Investment Report 2011 © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The Future for MNCs in China | 4

To better understand the changes, we have interviewed senior executives working for a range of multinationals, both large and small, across a variety of sectors, all with responsibility for China. Our interviews included questions on China’s economic outlook; where multinationals saw the greatest challenges to their business and, equally the greatest opportunities for growth, and what policy changes they would most like to see in the coming years. China and MNCs account for a rising share of the world’s GDP