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Global Strategy 
Global Challenges 
Executable Solutions 
France Houdard 
Managing Director 
france.houdard@exolus.com 
November 2010 
Copyright © 2010 Exolus. All rights reserved. 
China 2020: How to Structure Companies around Mega-Cities 
Your Corporate Platform – Globally Competitive or Obsolete for Tomorrow’s World? 
France Houdard 
Managing Partner 
Phone US: 1 (917) 285.6528 
Phone China: (00 86) 135.8591.0838 
france.houdard@exolus.com 
September 2014 
-- UPDATED --
1 
Copyright © 2014 Exolus. All rights reserved.. 
If so … How? 
Preface: Can this Picture from Space help us Structure Business Platforms? 
Source: NASA (United States – National Aeronautics and Space Administration)
2 
Copyright © 2014 Exolus. All rights reserved.. 
China Market 2020
3 
Copyright © 2014 Exolus. All rights reserved.. 
This Section is about Opportunities and Challenges around … 
Revenues … Costs … Efficiency 
2. Supply Chain 
COSTS 
Sales 
Engineering 
R&D 
Sourcing 
Production 
Distribution 
Marketing 
Shared Services 
IT HR 
F&A Procure 
1. Market 
3. Innovation 
DRIVING Shareholder Value 
Research & Development 
Shared Service Centers 
Virtually Integrated Models 
Production / Sourcing 
Sales / Marketing
4 
Copyright © 2014 Exolus. All rights reserved.. 
Source: World Bank 
GDP* 2013 
6,4 trillions de $ 
3,6 trillions de $ 
$6.8 tr 
$4.2 tr 
$16.2 tr 
$17.3 tr 
US 
China 
India 
$16.8 tr 
India 
Japan 
GDP* 2020 
$30.0 tr 
$13.4 tr 
$28.8 tr 
$6.8 tr 
$29.6 tr 
US 
India 
China 
Japan 
EU-27 
France 
UK 
Germany 
GDP* PPP-adjusted 
GDP* PPP-adjusted 
EU-27 
France 
UK 
Germany 
1. Future China: Projected to be #1 Largest Economy in World by 2020
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Copyright © 2014 Exolus. All rights reserved.. 
29% 
10% 
5% 
4% 
6% 
46% 
Future GDP Growth by Geography 
(2007 – 2025) 
Greater China 
United States & Canada 
Latin America 
Western Europe 
Asia 
Rest of The world 
Source: 2012 Annual Chinese Consumer Report by McKinsey & Company 
China a MUST for Future Competitiveness 
1. Future China: Accounts for 29% of Future Global Economic Growth
6 
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1. Future Market (Auto): China Growth Explosive … US Flat Saturation 
China Market 2x Larger than US Market by 2020 
Source: National Bureau of Statistics of China, IHS 
0 
5 
10 
15 
20 
25 
30 
35 
Million 
Car Sales Volume – China & US (2000 – 2020f) 
China 
US 
China Car Sales 
10 MM (2008) 
20 MM (2013) 
30 MM (2017)
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Already World’s Largest Auto Market 
26% 
21% 
21% 
32% 
China 
North 
America 
Europe 
Other 
34% 
14% 
10% 
42% 
China 
North 
America 
Europe 
Other 
Source: China Association of Automobile Manufacturers 
Global Car Sales by Geography 
2013 
2020 
1. Future Market (Auto): China Tracking to 35% of Global Sales by 2020
8 
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Already World’s 2nd Largest Pharma Market 
Pharmaceutical Market Size Country Ranking (USD billion) 
Sources: IMS Health Market Prognosis, 2013; Exolus 
1. Future Market (Pharma): Tracking to US$245 bn Market by 2015 
2000 Top 7 
USA 
150 
Japan 
58 
Germany 
17 
France 
17 
UK 
11 
Italy 
11 
China 
6.8 
Brazil 
6.7 
Canada 
6.3 
Spain 
6.2 
2005 Top 7 
USA 
262 
Japan 
65 
Germany 
24 
France 
21 
UK 
16 
Italy 
15 
China 
13 
Brazil 
10 
Canada 
10 
Spain 
9.8 
2010 Top 5 
USA 
441 
Japan 
75 
Germany 
48 
France 
39 
China 
34 
UK 
32 
Italy 
28 
Brazil 
24 
Canada 
22 
Spain 
21 
2015f Top 2 
USA 
506 
China 
245 
Japan 
130 
Germany 
82 
Brazil 
64 
France 
49 
UK 
38 
Russia 
35 
India 
33 
Italy 
32
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15% 
39% 
24% 
32% 
10% 
2011 
China 
North America 
Europe 
Japan& South 
Korea 
Others 
25% 
33% 
19% 
13% 
10% 
2015 
China 
North America 
Europe 
Japan& South 
Korea 
Others 
Source: SFDA (State Food and Drug Administration of China) 
China a MUST for Future Competitiveness 
1. Future Market (Pharma): Tracking to 25% of Global Sales by 2015 
Pharmaceutical Sales by Geography
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0 
100 
200 
300 
400 
500 
600 
700 
800 
900 
2005 
2006 
2007 
2008 
2009 
2010 
2011 
2012 
2013 
2014f 
2015f 
2016f 
2017f 
Number of Users 
Sales 
US 
Already World’s Largest Internet Population and Still Growing 
Source: CNNIC; iResearch 
Internet Users – China & US (2005 – 2017f) 
1. Future Market (Ecommerce): Internet Users Soon 3x Size US Population 
China
11 
Copyright © 2014 Exolus. All rights reserved.. 
0% 
5% 
10% 
15% 
20% 
25% 
30% 
35% 
40% 
45% 
50% 
0.0 
0.5 
1.0 
1.5 
2.0 
2.5 
2009 
2010 
2011 
2012 
2013 
2014f 
US$ trillion 
Sales 
Growth 
Ecommerce Volume has Quadrupled in past 5 Years 
Source: Ministry of Commerce, China 
Ecommerce Trade (2009 – 2014f) 
1. Future Market (Ecommerce): Explosive Growth in China Ecommerce 
Volume 
Growth
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1. Market Drivers: Explosive Growth in Middle Class 
China’s Middle Class: 400 million (2010) … 756 million (2020) 
Middle Class Income Bands (Measured against Urban Population) 
Urban Population (millions) 
Urban Household Income (US$ – PPP-Adjusted) 
Global > US$107,800 
Affluent US$3,800 - 107,800 
Upper Middle US$21,501 – 53,900 
Lower Middle US$13,500 – 21,500 
Poor < US$13,500 
607 
684 
822 
239 
255 
157 
106 
73 
53 
170 
355 
461 
525 
90 
99 
0 
100 
200 
300 
400 
500 
600 
700 
800 
900 
2005 
2010 
2015F 
2020F 
2025F 
531 
756 
Upper Middle Class 
Lower Middle Class 
Sources: Urbanization Rates, Population based on UN, World Urbanization Prospects 2007; MGI Consumer Demand 2008
13 
Copyright © 2014 Exolus. All rights reserved.. 
1. Market Drivers: Driven by an Explosion in Urbanization 
China’s Urban Population: 600 million (2010) … 822 million (2025) 
China’s Urban Population (Measured against Total Population) 
1.4 billion 
1.3 billion 
1.2 billion 
1 billion 
245 
381 
531 
684 
822 
822 
833 
782 
705 
624 
0 
200 
400 
600 
800 
1,000 
1,200 
1,400 
1,600 
1985 
1995 
2005 
2015 
2025 
1.45 billion 
Urban Population (million) 
Rural Population (million) 
Source: World Urbanization Prospects 2007 
Urban Population (millions)
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Mega-City Profile: 60 Million Population + World-Class Infrastructure 
1. Future China: Driving Emergence of Mega-Cities and Mega-Corridors 
Source: NASA (United States – National Aeronautics and Space Administration)
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Copyright © 2014 Exolus. All rights reserved.. 
1. Future China: A Fundamental Change in Economic-Geography 
Framework for Investment Decisions around Structuring Corporate Platforms 
Heilongjiang 
Jilin 
Liaoning 
Hebei 
Beijing 
Inner Mongolia 
Shandong 
Jiangsu 
Shanghai 
Zhejiang 
Fujian 
Guangdong 
Guangxi 
Hunan 
Jiangxi 
Anhui 
Hubei 
Henan 
Guizhou 
Yunnan 
Sichuan 
Chongqing 
Gansu 
Ningxia 
Shaanxi 
Shanxi 
Qinghai 
Xinjiang 
Tibet 
Tianjin 
Mountains 
China’s Emerging MEGA-CITIES 
Mega-Cities 
Mega-Corridors
16 
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Production / Supply Chain: Opportunities and Challenges
17 
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2. Supply Chain: World’s Major OEM’s Aggressively Expanding in China 
Investment Decisions made with China JV Partners 
China Automotive Production 
Sources: Company Websites, Publically Available Information
18 
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2. Supply Chain: Big Pharma Aggressively Expanding in China 
Investment focused in Yangtze River Delta, Bohai Rim, Pearl River Delta 
Heilongjiang 
Jilin 
Liaoning 
Hebei 
Beijing 
Inner Mongolia 
Shandong 
Jiangsu 
Shanghai 
Zhejiang 
Fujian 
Guangdong 
Guangxi 
Hunan 
Jiangxi 
Anhui 
Hubei 
Henan 
Guizhou 
Yunnan 
Sichuan 
Chongqing 
Gansu 
Ningxia 
Shaanxi 
Shanxi 
Qinghai 
Xinjiang 
Tibet 
Tianjin 
Pharma Manufacturing Operations 
Mountains 
Mega-Cities 
Mega-Corridors 
Sources: Company Websites, Publically Available Information
19 
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2. Supply Chain: World’s Major MNC’s Aggressively Expanding in China 
Production Largely in Eastern Part of China 
Heilongjiang 
Jilin 
Liaoning 
Hebei 
Beijing 
Inner Mongolia 
Shandong 
Jiangsu 
Shanghai 
Zhejiang 
Fujian 
Guangdong 
Guangxi 
Hunan 
Jiangxi 
Anhui 
Hubei 
Henan 
Guizhou 
Yunnan 
Sichuan 
Chongqing 
Gansu 
Ningxia 
Shaanxi 
Shanxi 
Qinghai 
Xinjiang 
Tibet 
Tianjin 
Mountains 
Mega-Cities 
Mega-Corridors 
Production Operations in China
20 
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2. Supply Chain: China Still Provides Major Labor Arbitrage Opportunity 
Major Labor Cost Differential 
Manufacturing Labor Costs (2003 - 2012) 
Source: National Bureau of Statistic of China; U.S. Bureau of Labor Statistics, International Labor Comparisons, August 2013 
0 
1,000 
2,000 
3,000 
4,000 
5,000 
6,000 
7,000 
2003 
2004 
2005 
2006 
2007 
2008 
2009 
2010 
2011 
2012 
China 
United States 
Singapore 
Brazil 
Philippines 
China 
USA 
US$ per month
21 
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2. Supply Chain: Labor Costs Significantly Lower in West (35%) 
Intersection: Low Cost Bands + Emerging Mega-Cities 
Heilongjiang 
Jilin 
Liaoning 
Hebei 
Beijing 
Inner Mongolia 
Shandong 
Jiangsu 
Shanghai 
Zhejiang 
Fujian 
Guangdong 
Guangxi 
Hunan 
Jiangxi 
Anhui 
Hubei 
Henan 
Guizhou 
Yunnan 
Sichuan 
Chongqing 
Gansu 
Ningxia 
Shaanxi 
Shanxi 
Qinghai 
Xinjiang 
Tibet 
Tianjin 
Mountains 
Wage Bands / Mega-City Overlay 
(Normalized to Highest Wages) 
Wage Bands 
Mega-Cities 
Mega-Corridors 
1.0 
1.0 
1.0
22 
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2. Supply Chain: Where are Pareto Optimal Deployment Envelopes? 
Low Cost Bands + Emerging Mega-Cities + High-Income Geographies 
Heilongjiang 
Jilin 
Liaoning 
Hebei 
Beijing 
Inner Mongolia 
Shandong 
Jiangsu 
Shanghai 
Zhejiang 
Fujian 
Guangdong 
Guangxi 
Hunan 
Jiangxi 
Anhui 
Hubei 
Henan 
Guizhou 
Yunnan 
Sichuan 
Chongqing 
Gansu 
Ningxia 
Shaanxi 
Shanxi 
Qinghai 
Xinjiang 
Tibet 
Tianjin 
Per Capita Income / Wage Band Overlay 
1 
1 
1 
Mountains 
Per Capita Annual Income 
(USD, PPP-Adjusted) 
> 40,000 
30,000 - 40,000 
25,000 - 30,000 
20,000 -25,000 
17,500 - 20,000 
0 - 17,500 
Wage Bands 
Mega-City 
Mega-Corridors
23 
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2. Supply Chain: Major Opportunities, but Significant Risks 
China Investment Process – Key Challenges 
Strategy 
Transaction Execution 
Investment Strategy Development 
Zone Screening 
High Level Due Diligence 
Zone & Site Evaluation & Ranking 
Negotiate Investment Agreement 
Detailed Due Diligence 
Business Registration 
Land Auction/ Construction Contracts 
Zone Screening Challenges: Given that China has 8,000 zones, the process of filtering through to a suitable zone and site represents significant complexity, time commitment and high risks rooted in: wide-ranging and ambiguous regulations, hidden land quotas, unclear ownership/ zoning, investment hurdles, utility infrastructure, tax regimes, etc. 
Due Diligence: Most information presented during DD unreliable as representations tend to be made by (promotion) officials pushing to hit their quotas, rather than by the broad array of officials with actual authority and responsibility for all aspects of planning, land ownership, utility availability/extensions/upgrades, geotech and so forth. 
Negotiations: Negotiations involve significant counterparty risk, as representations tend to be made by those without actual authority to implement agreements. Further, there is a tendency for legal advisors to lack engineering expertise; agreements thus often lack relevant contractual terms – exposing projects to significant potential costs, delays and even failure.
24 
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R&D / Innovation: Opportunities and Challenges
25 
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3. Innovation: Where are Auto OEMs Migrating R&D Functions in China? 
“R” of R&D Seeks Universities … “D” Seeks Markets & Production 
Heilongjiang 
Jilin 
Liaoning 
Hebei 
Beijing 
Inner Mongolia 
Shandong 
Jiangsu 
Shanghai 
Zhejiang 
Fujian 
Guangdong 
Guangxi 
Hunan 
Jiangxi 
Anhui 
Hubei 
Henan 
Guizhou 
Yunnan 
Sichuan 
Chongqing 
Gansu 
Ningxia 
Shaanxi 
Shanxi 
Qinghai 
Xinjiang 
Tibet 
Tianjin 
Source: Company Websites; Exolus Research 
1 
1 
1 
Mountains 
Wage Bands 
Mega-Cities 
Mega-Corridors 
> 800 
> 1,500 
> 2,000 
R&D Centers 
(# Operations) 
Auto R&D Operations
26 
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3. Innovation: Where is Big Pharma Migrating R&D Functions in China? 
“R” of R&D Seeks Universities … “D” Seeks Markets & Production 
Heilongjiang 
Jilin 
Liaoning 
Hebei 
Beijing 
Inner Mongolia 
Shandong 
Jiangsu 
Shanghai 
Zhejiang 
Fujian 
Guangdong 
Guangxi 
Hunan 
Jiangxi 
Anhui 
Hubei 
Henan 
Guizhou 
Yunnan 
Sichuan 
Chongqing 
Gansu 
Ningxia 
Shaanxi 
Shanxi 
Qinghai 
Xinjiang 
Tibet 
Tianjin 
1 
1 
1 
Mountains 
Wage Bands 
Mega-Cities 
Mega-Corridors 
> 800 
> 1,500 
> 2,000 
R&D Centers 
(# Operations) 
Pharma R&D Operations 
Source: Company Websites; Exolus Research
27 
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3. Innovation: MNC’s Migrating R&D Functions to China 
“R” of R&D Seeks Universities … “D” Seeks Markets & Production 
Heilongjiang 
Jilin 
Liaoning 
Hebei 
Beijing 
Inner Mongolia 
Shandong 
Jiangsu 
Shanghai 
Zhejiang 
Fujian 
Guangdong 
Guangxi 
Hunan 
Jiangxi 
Anhui 
Hubei 
Henan 
Guizhou 
Yunnan 
Sichuan 
Chongqing 
Gansu 
Ningxia 
Shaanxi 
Shanxi 
Qinghai 
Xinjiang 
Tibet 
Tianjin 
Mountains 
Wage Bands 
Mega-Cities 
Mega-Corridors 
> 800 
> 1,500 
> 2,000 
R&D Centers 
(# Operations) 
Source: National Bureau of Statistics, 2nd R&D Census, 2009 
1 
1 
1 
c 
Consumer Business R&D Operations
28 
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3. Innovation: Driven by Rapid Increase in Educated Workforce 
China Science and Engineering: 1.2 Million Graduates per Year 
Thousands 
University Natural Sciences & Engineering Degrees (1985 – 2010) 
Sources: National Science Board, Science & Engineering Indicators 2014 
0 
200 
400 
600 
800 
1,000 
1,200 
1,400 
U.S. 
China 
UK 
Japan 
South Korea 
Germany 
China 
USA
29 
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3. Innovation: Organization Models for Foreign R&D in China 
Satellite Laboratories (Bottom-up Approach to R&D) 
Mostly “adaptive” – adapting existing products to better fit local market conditions 
Usually do not work on “innovation” as part of global teams 
That is, they act more as listening posts for parent company/ business unit -- helping detect new ideas and product innovations based on the unique characteristics of the local market 
Vulnerable to budget cuts 
Contract R&D (Top-Down Approach to R&D) 
More focused on “innovative” research 
Usually support global team in carrying out specific module as part of global research project -- closely interacts with R&D teams at headquarters & other affiliates 
Used to exploit lower cost engineers, capabilities and infrastructure 
Has dense information flows, but unequal knowledge exchange -- Requires tight mechanisms to control IPR leakage 
Integrated Global Partnerships (Balanced/Integrated Approach to R&D) 
The China R&D Center has regional and/or global product innovation mandate 
Equal participant in all corporate decisions, R&D work, & other global corporate activities 
No barriers to full-fledged knowledge exchange between China R&D center and the company‟s headquarters and the company‟s other global R&D centers 
Models Vary Considerably in China 
Sources: National Science Board, Science & Engineering Indicators 2014
30 
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3. Innovation: Migrating Upstream to Innovative and Global Models 
China-Adaptive Focus  Global-Innovative Focus 
Sources: National Science Board, Science & Engineering Indicators 2014 
R&D centers designed to support production and adapt technologies; be near customers; cooperate with local partners; access markets; improve the local “image” of a company; launch a product simultaneously; facilitate rapid scale-up in manufacturing; and overcome protectionist barriers against imports. 
As national markets become regionally more integrated, some countries may become the preferred base for adaptation, not only for the local market but for the region as a whole. 
Adaptive R&D has evolved into more advanced forms of innovation, with the local market serving as a test-bed for new products for regional or even global markets. 
Facilities able to do both R&D with output aimed at global exploitation by parent company. 
May evolve out of locally integrated laboratories & retain tight links with production in host economy, or 
Set up independently of local production to tap local innovation clusters and skills 
CHINA FOCUS 
ADAPTIVE 
REGIONAL / GLOBAL FOCUS 
INNOVATIVE
31 
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3. Innovation: Footprint Drivers Vary for Innovative and Adaptive R&D 
Functional Objectives Drive Platform Decisions for R&D 
Sources: National Science Board, Science & Engineering Indicators 2014 
Adaptive R&D Center 
Primary Drivers 
Customer Locations & Business Opportunities 
Proximity to Inter-Company Production Operations 
Skills Availability 
Fresh graduates and mid-level engineers 
Experienced management (secondary) 
Local Government Support 
Local Resources at Universities 
Secondary Drivers 
Living Environment 
Facilities 
Utilities 
Transportation 
Incentives 
Innovative R&D Center 
Primary Drivers 
Skills Availability (experienced engineers) 
Local Resources at Universities 
Low Labor Costs 
Secondary Drivers 
Living Environment 
Facilities 
Utilities 
Transportation 
Incentives
32 
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3. Innovation: Where are Key Nodes for Structuring R&D Platforms? 
“R” of R&D Seeks Universities … “D” Seeks Markets & Production 
Heilongjiang 
Jilin 
Liaoning 
Hebei 
Beijing 
Inner Mongolia 
Shandong 
Jiangsu 
Shanghai 
Zhejiang 
Fujian 
Guangdong 
Guangxi 
Hunan 
Jiangxi 
Anhui 
Hubei 
Henan 
Guizhou 
Yunnan 
Sichuan 
Chongqing 
Gansu 
Ningxia 
Shaanxi 
Shanxi 
Qinghai 
Xinjiang 
Tibet 
Tianjin 
Mountains 
Wage Bands 
Mega-Cities 
Mega-Corridors 
> 800 
> 1,500 
> 2,000 
R&D Centers 
(# Operations) 
Research & Development Centers (Number of Operations in Select Cities) 
Source: National Bureau of Statistics, 2nd R&D Census, 2009 
1 
1 
1
33 
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Platform Structuring: Where are Pareto Optimal Deployment Envelopes? 
Spatial Framework for Platform Optimization Decisions 
Heilongjiang 
Jilin 
Liaoning 
Hebei 
Beijing 
Inner Mongolia 
Shandong 
Jiangsu 
Shanghai 
Zhejiang 
Fujian 
Guangdong 
Guangxi 
Hunan 
Jiangxi 
Anhui 
Hubei 
Henan 
Guizhou 
Yunnan 
Sichuan 
Chongqing 
Gansu 
Ningxia 
Shaanxi 
Shanxi 
Qinghai 
Xinjiang 
Tibet 
Tianjin 
Spatial Framework for Platform Optimization Decisions 
1 
1 
1 
Mountains 
Per Capita Annual Income 
(USD, PPP-Adjusted) 
> 40,000 
30,000 - 40,000 
25,000 - 30,000 
20,000 -25,000 
17,500 - 20,000 
0 - 17,500 
Wage Bands 
Mega-Cities 
Mega-Corridors 
> 800 
> 1,500 
> 2,000 
R&D Centers 
(# Operations)
34 
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Contract Outsourcing Models & Shared Service Centers
35 
Copyright © 2014 Exolus. All rights reserved.. 
This Section is about Next Generation Operating Models … 
Virtually Integrated Models + Shared Service Centers (SSC) 
Supply Chain 
Sales 
Engineering 
R&D 
Sourcing 
Production 
Distribution 
Marketing 
Market 
Innovation 
Sales / Marketing 
DRIVING Shareholder Value 
Production / Sourcing 
Research & Development 
Shared Service Centers (SSC) 
Virtual Integration 
SSC 
IT HR 
F&A Pro’c
36 
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FIPCO MODEL  VIPCO MODEL (CSO, CMO, CRO, PC-CRO, INSTITUTIONS) 
4. Virtual Integration Models: Outsourcing Core Functions 
FIPCO (Fully Integrated Pharma Co.) 
Research 
Technology 
Manufacturing 
Clinical & 
Regulatory 
Sales & 
Distribution 
CSOs 
CMOs 
CROs 
Partnerships 
Academia, Scientific, Institutions 
R&D 
Preclinical 
Support 
Clinical 
Development 
Manufacturing 
Sales & 
Distribution 
Preclinical CROs 
VIPCO (Virtually Integrated Pharma Co.) 
Source: G. S. Burrill, „Biotech 2008: A 20/20 Vision to 2020‟, The Burrill Indiana Life Sciences Meeting, October 2008.
37 
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MIGRATION to ADVANCED OPERATING MODELS in CHINA: CSO, CMO, CRO 
4. Virtual Integration Models: Big Pharma Adoption in China 
Sources: Goldman Sachs: Healthcare Services: CROs, December 2007; Exolus Research 
Boehringer Ingelheim (CSO) 
First Big Pharma to have entrusted a sole distributor for all of its products in China: Sinopharm. 
Sinopharm is China‟s largest pharmaceutical distributor by sales and the only China distributor to cover the entire PRC. 
Boehringer Ingelheim‟s sales spiked upward by 45% from 2006 to 2007; Sinopharm saw an annual growth rate of 32%. 
AstraZeneca (CSO) 
In a recent move, AZ licensed Cubicin, an antibiotic for skin infections, for development and commercialization on the Chinese market. 
Pfizer (CRO) 
Outsources to Wuxi PharmaTech: synthetic chemistry, parallel medicinal chemistry, and bio-analytical services. It also has a 3-year CRO contract with Wuxi PharmaTech to provide services in the areas of: in-vitro Absorption, Distribution, Metabolism and Excretion (ADME) services. 
GSK (CRO) 
Outsources to Shanghai Institute of Materia Medica (SIMM) chemistry requirements. 
AstraZeneca (CRO) 
Invested USD14 million in Wuxi Pharma Tech for the synthesis of 150,000 compounds. 
AZ has contracted WuXi Pharmatech, a Chinese CRO, for the synthesis of collections of drug candidates, and signed an agreement with Shanghai‟s Jiao Tong University for research on the genetics of schizophrenia. 
CSO/CRO Extended Cases 
China’s CRO Market 
0 
2 
4 
6 
8 
10 
12 
14 
16 
18 
Clinical 
Development 
Preclinical 
Development 
US$ billion
38 
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4. Shared Service Centers: Opportunity Map for China 
Efficiencies … Economies of Scale … Knowledge Sharing … Standardization 
Source: KPMG “A new Dawn: China‟s Emerging Role in Global Outsourcing”, 2009 
Heilongjiang 
Jilin 
Liaoning 
Hebei 
Beijing 
Inner Mongolia 
Shandong 
Jiangsu 
Shanghai 
Zhejiang 
Fujian 
Guangdong 
Guangxi 
Hunan 
Jiangxi 
Anhui 
Hubei 
Henan 
Guizhou 
Yunnan 
Sichuan 
Chongqing 
Gansu 
Ningxia 
Shaanxi 
Shanxi 
Qinghai 
Xinjiang 
Tibet 
Tianjin 
Mountains 
1 
1 
1 
Shared Service Center Hubs 
Wage Bands 
Mega-City 
Mega-Corridors 
Shared Services
39 
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Platform Structuring: Where are Pareto Optimal Deployment Envelopes? 
Spatial Framework for the Range of Platform Optimization Decisions 
Heilongjiang 
Jilin 
Liaoning 
Hebei 
Beijing 
Inner Mongolia 
Shandong 
Jiangsu 
Shanghai 
Zhejiang 
Fujian 
Guangdong 
Guangxi 
Hunan 
Jiangxi 
Anhui 
Hubei 
Henan 
Guizhou 
Yunnan 
Sichuan 
Chongqing 
Gansu 
Ningxia 
Shaanxi 
Shanxi 
Qinghai 
Xinjiang 
Tibet 
Tianjin 
Spatial Framework for Platform Optimization Decisions 
1 
1 
1 
Mountains 
Per Capita Annual Income 
(USD, PPP-Adjusted) 
> 40,000 
30,000 - 40,000 
25,000 - 30,000 
20,000 -25,000 
17,500 - 20,000 
0 - 17,500 
Wage Bands 
Mega-Cities 
Mega-Corridors 
> 800 
> 1,500 
> 2,000 
R&D Centers 
(# Operations) 
Shared Services
40 
Copyright © 2014 Exolus. All rights reserved.. 
Spatial Framework for the Range of Platform Optimization Decisions 
Platform Structuring: Where are Pareto Optimal Deployment Envelopes? 
Source: NASA (United States – National Aeronautics and Space Administration)
41 
Copyright © 2014 Exolus. All rights reserved.. 
China Economic Health Report
42 
Copyright © 2014 Exolus. All rights reserved.. 
5. Health: Senior Executives Select China as Most Attractive in World 
Investor Confidence in China #1 in World 
Source: World Investment Prospects Survey 2013 - 2015 
Top 14 Most Attractive Destinations for Future Investment (2013 – 2015) 
Percent of Responses 
% 
0 
10 
20 
30 
40 
50 
60 
70
43 
Copyright © 2014 Exolus. All rights reserved.. 
Source: China Statistical Yearbook 
Record FDI of USD118 billion in 2013 
0 
20 
40 
60 
80 
100 
120 
140 
USD billion 
Foreign Direct Investment Inflows (1990 – 2013) 
5. Health: Foreign Direct Investment Continues to Soar in China
44 
Copyright © 2014 Exolus. All rights reserved.. 
Source: World Investment Report 2014 by UNCTAD 
China Ranks #2 for Inbound FDI … or #1 when HK Included 
USD billion 
Foreign Direct Investment Inflows (2013) 
0 
20 
40 
60 
80 
100 
120 
140 
160 
180 
200 
220 
Hong Kong Portion of FDI 
5. Health: China and US Top Global Destinations for FDI
45 
Copyright © 2014 Exolus. All rights reserved.. 
5. Health: Balance Sheets – Banks, Enterprises, Households 
USD4 trillion in Foreign Reserves … Insulation of Financial System … Clean Balance Sheets 
China’s Financial System Healthy, Benefits from Insulation, Abundant Liquidity 
China banks cleaned up in 1990s: Non-performing loans in 1997 averaged 40 – 50%; only 1% in 2014. 
Financial institutions extended approximately USD1.44 tr in new loans in 2013; and USD1.32 tr in 2012, USD 1.21 tr in 2011. 
Forex Reserves Achieve Record High in 2013 
The Central Bank has accumulated over USD 4 trillion in foreign reserves. 
The accumulation of large external surpluses means financial system enjoys abundant liquidity. 
Clean Balance Sheets for Enterprises and Households 
State Owned Enterprise net profits as share of GDP has grown from (-1%) in 1997 to (+3.34%) in 2013. 
Record corporate profit growth over past 5 years (industrial profits rose 100%); liability ratios declined. 
Urban incomes have quadrupled in past 10 years. 
Source: Deutsche Bank; Standard Chartered; UBS; IMF; Other
Exolus Group Overview
47 
Copyright © 2014 Exolus. All rights reserved.. 
About Us: Leading Investment Advisory Firm 
Global Scale: Established in 1931 • 3,000 Employees • 250 Offices Worldwide 
Leading Expertise: Acquisitions • Dispositions • RE Funds • Agency • Structuring 
Real Estate Advisory: Industrial, Office, Residential, Retail 
Business Advisory: Strategy, Targeting, Due Diligence, Structuring, Negotiations 
Investment Formats: Greenfield, JV's, Acquisitions, Dispositions, Outsourcing Multi-Disciplinary Expertise: Legal-Tax, Supply Chain, Engineering, HR, Real Estate 
Investment Advisory: Financial Advisory, Capital Raising, Fund Structuring Investment Sectors: Automotive, Life Sciences, Manufacturing, Technology, Real Estate Geographic Focus: Greater China and US 
Leading Global Investment Advisory Firm
48 
Copyright © 2014 Exolus. All rights reserved.. 
Services: Align Directly with China (M&A) Investment Process 
Strategy 
Client 
Approval 
LOI 
Term 
Sheet 
Purchase 
Agreement 
Ownership 
Transfer 
Transaction Execution 
Acquisition Strategy Development 
Target Screening 
High Level Due Diligence 
Evaluation & Ranking 
Negotiate LOI 
Detailed Due Diligence 
Structure & Negotiate Transaction 
Transaction Closing 
Exolus Group 
China 
Expertise 
Cross-Industry 
Expertise 
Facility & Engineering 
Expertise 
Structuring & Negotiating Expertise 
Due Diligence 
Expertise 
Client Involvement 
Targets & Counterparties 
Mergers & Acquisitions 
M&A and JV’s
49 
Copyright © 2014 Exolus. All rights reserved.. 
Exolus Group 
China 
Expertise 
Cross-Industry 
Expertise 
Facility & Engineering 
Expertise 
Structuring & Negotiating Expertise 
Due Diligence 
Expertise 
Services: Align Directly with China (Greenfield) Investment Process 
Strategy 
Client 
Approval 
Investment 
Agreement 
DD 
Findings 
Legal 
Entity 
Land/Facility 
Ownership 
Transaction Execution 
Investment Strategy Development 
Zone Screening 
High Level Due Diligence 
Zone & Site Evaluation & Ranking 
Negotiate Investment Agreement 
Detailed Due Diligence 
Business Registration 
Land Auction/ Construction Contracts 
Client Involvement 
Targets & Counterparties 
Direct Investment 
Greenfield Investment
50 
Copyright © 2014 Exolus. All rights reserved.. 
New Entity 
Philosophy: Provide Holistic Solutions that Benefit Entire Organization 
Establish Manufacturing Operations 
Research & Development (R&D) - Marketing, Sales & Distribution 
Sales & Marketing 
Shared Services 
Solutions Rooted in Multi-Disciplinary Expertise: 
 Real Estate, Facilities, Engineering 
-Facilities, construction, geotechnical, environmental, utilities, critical paths, permitting 
 Supply Chain, Sourcing, Distribution, Transportation - Logistics, distribution, taxes, modes, physical transportation, rates, providers 
 Labor-Force Dynamics - Structure, laws, trends, skills, costs, quality, scalability, sustainability 
 Financial Analysis & Structuring (Tax, Legal) 
-Legal structures, tax structures, financial analysis, feasibility, business case, incentives 
Corporate Stakeholders 
Corporate Real Estate, Engineering, Manufacturing 
Supply Chain, Logistics 
Human Resources 
Finance, Tax, Legal 
Exolus 
Client 
China Solutions Require a Multi-Disciplinary Approach
51 
Copyright © 2014 Exolus. All rights reserved.. 
Exceeding our Clients’ Expectations 
Representative Clients: Serving World’s Leading Companies
2014 52 
Copyright © 2011 Exolus. All rights reserved.. 
For a Comparative Perspective with the other BRIC Countries Please Refer to the Following Research Reports 
Found on Slideshare @ 
http://www.slideshare.net/Exolus/india-2020-what-india-will-look-like-in-the-future 
http://www.slideshare.net/Exolus/brazil-2020-what-will-brazil-look-like-in-the-future 
http://www.slideshare.net/Exolus/russia-2020-what-will-russia-look-like-in-the-future 
http://www.slideshare.net/Exolus/bric-2020-what-will-the-brics-look-like-in-the-future 
Download Reports @ 
www.exolus.com/en/knowledge/research.html 
Brazil 2020 
Russia 2020 
India 2020 
BRIC 2020
China 2020:  What Will China Look Like in the Future?

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China 2020: What Will China Look Like in the Future?

  • 1. Global Strategy Global Challenges Executable Solutions France Houdard Managing Director france.houdard@exolus.com November 2010 Copyright © 2010 Exolus. All rights reserved. China 2020: How to Structure Companies around Mega-Cities Your Corporate Platform – Globally Competitive or Obsolete for Tomorrow’s World? France Houdard Managing Partner Phone US: 1 (917) 285.6528 Phone China: (00 86) 135.8591.0838 france.houdard@exolus.com September 2014 -- UPDATED --
  • 2. 1 Copyright © 2014 Exolus. All rights reserved.. If so … How? Preface: Can this Picture from Space help us Structure Business Platforms? Source: NASA (United States – National Aeronautics and Space Administration)
  • 3. 2 Copyright © 2014 Exolus. All rights reserved.. China Market 2020
  • 4. 3 Copyright © 2014 Exolus. All rights reserved.. This Section is about Opportunities and Challenges around … Revenues … Costs … Efficiency 2. Supply Chain COSTS Sales Engineering R&D Sourcing Production Distribution Marketing Shared Services IT HR F&A Procure 1. Market 3. Innovation DRIVING Shareholder Value Research & Development Shared Service Centers Virtually Integrated Models Production / Sourcing Sales / Marketing
  • 5. 4 Copyright © 2014 Exolus. All rights reserved.. Source: World Bank GDP* 2013 6,4 trillions de $ 3,6 trillions de $ $6.8 tr $4.2 tr $16.2 tr $17.3 tr US China India $16.8 tr India Japan GDP* 2020 $30.0 tr $13.4 tr $28.8 tr $6.8 tr $29.6 tr US India China Japan EU-27 France UK Germany GDP* PPP-adjusted GDP* PPP-adjusted EU-27 France UK Germany 1. Future China: Projected to be #1 Largest Economy in World by 2020
  • 6. 5 Copyright © 2014 Exolus. All rights reserved.. 29% 10% 5% 4% 6% 46% Future GDP Growth by Geography (2007 – 2025) Greater China United States & Canada Latin America Western Europe Asia Rest of The world Source: 2012 Annual Chinese Consumer Report by McKinsey & Company China a MUST for Future Competitiveness 1. Future China: Accounts for 29% of Future Global Economic Growth
  • 7. 6 Copyright © 2014 Exolus. All rights reserved.. 1. Future Market (Auto): China Growth Explosive … US Flat Saturation China Market 2x Larger than US Market by 2020 Source: National Bureau of Statistics of China, IHS 0 5 10 15 20 25 30 35 Million Car Sales Volume – China & US (2000 – 2020f) China US China Car Sales 10 MM (2008) 20 MM (2013) 30 MM (2017)
  • 8. 7 Copyright © 2014 Exolus. All rights reserved.. Already World’s Largest Auto Market 26% 21% 21% 32% China North America Europe Other 34% 14% 10% 42% China North America Europe Other Source: China Association of Automobile Manufacturers Global Car Sales by Geography 2013 2020 1. Future Market (Auto): China Tracking to 35% of Global Sales by 2020
  • 9. 8 Copyright © 2014 Exolus. All rights reserved.. Already World’s 2nd Largest Pharma Market Pharmaceutical Market Size Country Ranking (USD billion) Sources: IMS Health Market Prognosis, 2013; Exolus 1. Future Market (Pharma): Tracking to US$245 bn Market by 2015 2000 Top 7 USA 150 Japan 58 Germany 17 France 17 UK 11 Italy 11 China 6.8 Brazil 6.7 Canada 6.3 Spain 6.2 2005 Top 7 USA 262 Japan 65 Germany 24 France 21 UK 16 Italy 15 China 13 Brazil 10 Canada 10 Spain 9.8 2010 Top 5 USA 441 Japan 75 Germany 48 France 39 China 34 UK 32 Italy 28 Brazil 24 Canada 22 Spain 21 2015f Top 2 USA 506 China 245 Japan 130 Germany 82 Brazil 64 France 49 UK 38 Russia 35 India 33 Italy 32
  • 10. 9 Copyright © 2014 Exolus. All rights reserved.. 15% 39% 24% 32% 10% 2011 China North America Europe Japan& South Korea Others 25% 33% 19% 13% 10% 2015 China North America Europe Japan& South Korea Others Source: SFDA (State Food and Drug Administration of China) China a MUST for Future Competitiveness 1. Future Market (Pharma): Tracking to 25% of Global Sales by 2015 Pharmaceutical Sales by Geography
  • 11. 10 Copyright © 2014 Exolus. All rights reserved.. 0 100 200 300 400 500 600 700 800 900 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014f 2015f 2016f 2017f Number of Users Sales US Already World’s Largest Internet Population and Still Growing Source: CNNIC; iResearch Internet Users – China & US (2005 – 2017f) 1. Future Market (Ecommerce): Internet Users Soon 3x Size US Population China
  • 12. 11 Copyright © 2014 Exolus. All rights reserved.. 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 0.0 0.5 1.0 1.5 2.0 2.5 2009 2010 2011 2012 2013 2014f US$ trillion Sales Growth Ecommerce Volume has Quadrupled in past 5 Years Source: Ministry of Commerce, China Ecommerce Trade (2009 – 2014f) 1. Future Market (Ecommerce): Explosive Growth in China Ecommerce Volume Growth
  • 13. 12 Copyright © 2014 Exolus. All rights reserved.. 1. Market Drivers: Explosive Growth in Middle Class China’s Middle Class: 400 million (2010) … 756 million (2020) Middle Class Income Bands (Measured against Urban Population) Urban Population (millions) Urban Household Income (US$ – PPP-Adjusted) Global > US$107,800 Affluent US$3,800 - 107,800 Upper Middle US$21,501 – 53,900 Lower Middle US$13,500 – 21,500 Poor < US$13,500 607 684 822 239 255 157 106 73 53 170 355 461 525 90 99 0 100 200 300 400 500 600 700 800 900 2005 2010 2015F 2020F 2025F 531 756 Upper Middle Class Lower Middle Class Sources: Urbanization Rates, Population based on UN, World Urbanization Prospects 2007; MGI Consumer Demand 2008
  • 14. 13 Copyright © 2014 Exolus. All rights reserved.. 1. Market Drivers: Driven by an Explosion in Urbanization China’s Urban Population: 600 million (2010) … 822 million (2025) China’s Urban Population (Measured against Total Population) 1.4 billion 1.3 billion 1.2 billion 1 billion 245 381 531 684 822 822 833 782 705 624 0 200 400 600 800 1,000 1,200 1,400 1,600 1985 1995 2005 2015 2025 1.45 billion Urban Population (million) Rural Population (million) Source: World Urbanization Prospects 2007 Urban Population (millions)
  • 15. 14 Copyright © 2014 Exolus. All rights reserved.. Mega-City Profile: 60 Million Population + World-Class Infrastructure 1. Future China: Driving Emergence of Mega-Cities and Mega-Corridors Source: NASA (United States – National Aeronautics and Space Administration)
  • 16. 15 Copyright © 2014 Exolus. All rights reserved.. 1. Future China: A Fundamental Change in Economic-Geography Framework for Investment Decisions around Structuring Corporate Platforms Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Mountains China’s Emerging MEGA-CITIES Mega-Cities Mega-Corridors
  • 17. 16 Copyright © 2014 Exolus. All rights reserved.. Production / Supply Chain: Opportunities and Challenges
  • 18. 17 Copyright © 2014 Exolus. All rights reserved.. 2. Supply Chain: World’s Major OEM’s Aggressively Expanding in China Investment Decisions made with China JV Partners China Automotive Production Sources: Company Websites, Publically Available Information
  • 19. 18 Copyright © 2014 Exolus. All rights reserved.. 2. Supply Chain: Big Pharma Aggressively Expanding in China Investment focused in Yangtze River Delta, Bohai Rim, Pearl River Delta Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Pharma Manufacturing Operations Mountains Mega-Cities Mega-Corridors Sources: Company Websites, Publically Available Information
  • 20. 19 Copyright © 2014 Exolus. All rights reserved.. 2. Supply Chain: World’s Major MNC’s Aggressively Expanding in China Production Largely in Eastern Part of China Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Mountains Mega-Cities Mega-Corridors Production Operations in China
  • 21. 20 Copyright © 2014 Exolus. All rights reserved.. 2. Supply Chain: China Still Provides Major Labor Arbitrage Opportunity Major Labor Cost Differential Manufacturing Labor Costs (2003 - 2012) Source: National Bureau of Statistic of China; U.S. Bureau of Labor Statistics, International Labor Comparisons, August 2013 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 China United States Singapore Brazil Philippines China USA US$ per month
  • 22. 21 Copyright © 2014 Exolus. All rights reserved.. 2. Supply Chain: Labor Costs Significantly Lower in West (35%) Intersection: Low Cost Bands + Emerging Mega-Cities Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Mountains Wage Bands / Mega-City Overlay (Normalized to Highest Wages) Wage Bands Mega-Cities Mega-Corridors 1.0 1.0 1.0
  • 23. 22 Copyright © 2014 Exolus. All rights reserved.. 2. Supply Chain: Where are Pareto Optimal Deployment Envelopes? Low Cost Bands + Emerging Mega-Cities + High-Income Geographies Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Per Capita Income / Wage Band Overlay 1 1 1 Mountains Per Capita Annual Income (USD, PPP-Adjusted) > 40,000 30,000 - 40,000 25,000 - 30,000 20,000 -25,000 17,500 - 20,000 0 - 17,500 Wage Bands Mega-City Mega-Corridors
  • 24. 23 Copyright © 2014 Exolus. All rights reserved.. 2. Supply Chain: Major Opportunities, but Significant Risks China Investment Process – Key Challenges Strategy Transaction Execution Investment Strategy Development Zone Screening High Level Due Diligence Zone & Site Evaluation & Ranking Negotiate Investment Agreement Detailed Due Diligence Business Registration Land Auction/ Construction Contracts Zone Screening Challenges: Given that China has 8,000 zones, the process of filtering through to a suitable zone and site represents significant complexity, time commitment and high risks rooted in: wide-ranging and ambiguous regulations, hidden land quotas, unclear ownership/ zoning, investment hurdles, utility infrastructure, tax regimes, etc. Due Diligence: Most information presented during DD unreliable as representations tend to be made by (promotion) officials pushing to hit their quotas, rather than by the broad array of officials with actual authority and responsibility for all aspects of planning, land ownership, utility availability/extensions/upgrades, geotech and so forth. Negotiations: Negotiations involve significant counterparty risk, as representations tend to be made by those without actual authority to implement agreements. Further, there is a tendency for legal advisors to lack engineering expertise; agreements thus often lack relevant contractual terms – exposing projects to significant potential costs, delays and even failure.
  • 25. 24 Copyright © 2014 Exolus. All rights reserved.. R&D / Innovation: Opportunities and Challenges
  • 26. 25 Copyright © 2014 Exolus. All rights reserved.. 3. Innovation: Where are Auto OEMs Migrating R&D Functions in China? “R” of R&D Seeks Universities … “D” Seeks Markets & Production Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Source: Company Websites; Exolus Research 1 1 1 Mountains Wage Bands Mega-Cities Mega-Corridors > 800 > 1,500 > 2,000 R&D Centers (# Operations) Auto R&D Operations
  • 27. 26 Copyright © 2014 Exolus. All rights reserved.. 3. Innovation: Where is Big Pharma Migrating R&D Functions in China? “R” of R&D Seeks Universities … “D” Seeks Markets & Production Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin 1 1 1 Mountains Wage Bands Mega-Cities Mega-Corridors > 800 > 1,500 > 2,000 R&D Centers (# Operations) Pharma R&D Operations Source: Company Websites; Exolus Research
  • 28. 27 Copyright © 2014 Exolus. All rights reserved.. 3. Innovation: MNC’s Migrating R&D Functions to China “R” of R&D Seeks Universities … “D” Seeks Markets & Production Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Mountains Wage Bands Mega-Cities Mega-Corridors > 800 > 1,500 > 2,000 R&D Centers (# Operations) Source: National Bureau of Statistics, 2nd R&D Census, 2009 1 1 1 c Consumer Business R&D Operations
  • 29. 28 Copyright © 2014 Exolus. All rights reserved.. 3. Innovation: Driven by Rapid Increase in Educated Workforce China Science and Engineering: 1.2 Million Graduates per Year Thousands University Natural Sciences & Engineering Degrees (1985 – 2010) Sources: National Science Board, Science & Engineering Indicators 2014 0 200 400 600 800 1,000 1,200 1,400 U.S. China UK Japan South Korea Germany China USA
  • 30. 29 Copyright © 2014 Exolus. All rights reserved.. 3. Innovation: Organization Models for Foreign R&D in China Satellite Laboratories (Bottom-up Approach to R&D) Mostly “adaptive” – adapting existing products to better fit local market conditions Usually do not work on “innovation” as part of global teams That is, they act more as listening posts for parent company/ business unit -- helping detect new ideas and product innovations based on the unique characteristics of the local market Vulnerable to budget cuts Contract R&D (Top-Down Approach to R&D) More focused on “innovative” research Usually support global team in carrying out specific module as part of global research project -- closely interacts with R&D teams at headquarters & other affiliates Used to exploit lower cost engineers, capabilities and infrastructure Has dense information flows, but unequal knowledge exchange -- Requires tight mechanisms to control IPR leakage Integrated Global Partnerships (Balanced/Integrated Approach to R&D) The China R&D Center has regional and/or global product innovation mandate Equal participant in all corporate decisions, R&D work, & other global corporate activities No barriers to full-fledged knowledge exchange between China R&D center and the company‟s headquarters and the company‟s other global R&D centers Models Vary Considerably in China Sources: National Science Board, Science & Engineering Indicators 2014
  • 31. 30 Copyright © 2014 Exolus. All rights reserved.. 3. Innovation: Migrating Upstream to Innovative and Global Models China-Adaptive Focus  Global-Innovative Focus Sources: National Science Board, Science & Engineering Indicators 2014 R&D centers designed to support production and adapt technologies; be near customers; cooperate with local partners; access markets; improve the local “image” of a company; launch a product simultaneously; facilitate rapid scale-up in manufacturing; and overcome protectionist barriers against imports. As national markets become regionally more integrated, some countries may become the preferred base for adaptation, not only for the local market but for the region as a whole. Adaptive R&D has evolved into more advanced forms of innovation, with the local market serving as a test-bed for new products for regional or even global markets. Facilities able to do both R&D with output aimed at global exploitation by parent company. May evolve out of locally integrated laboratories & retain tight links with production in host economy, or Set up independently of local production to tap local innovation clusters and skills CHINA FOCUS ADAPTIVE REGIONAL / GLOBAL FOCUS INNOVATIVE
  • 32. 31 Copyright © 2014 Exolus. All rights reserved.. 3. Innovation: Footprint Drivers Vary for Innovative and Adaptive R&D Functional Objectives Drive Platform Decisions for R&D Sources: National Science Board, Science & Engineering Indicators 2014 Adaptive R&D Center Primary Drivers Customer Locations & Business Opportunities Proximity to Inter-Company Production Operations Skills Availability Fresh graduates and mid-level engineers Experienced management (secondary) Local Government Support Local Resources at Universities Secondary Drivers Living Environment Facilities Utilities Transportation Incentives Innovative R&D Center Primary Drivers Skills Availability (experienced engineers) Local Resources at Universities Low Labor Costs Secondary Drivers Living Environment Facilities Utilities Transportation Incentives
  • 33. 32 Copyright © 2014 Exolus. All rights reserved.. 3. Innovation: Where are Key Nodes for Structuring R&D Platforms? “R” of R&D Seeks Universities … “D” Seeks Markets & Production Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Mountains Wage Bands Mega-Cities Mega-Corridors > 800 > 1,500 > 2,000 R&D Centers (# Operations) Research & Development Centers (Number of Operations in Select Cities) Source: National Bureau of Statistics, 2nd R&D Census, 2009 1 1 1
  • 34. 33 Copyright © 2014 Exolus. All rights reserved.. Platform Structuring: Where are Pareto Optimal Deployment Envelopes? Spatial Framework for Platform Optimization Decisions Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Spatial Framework for Platform Optimization Decisions 1 1 1 Mountains Per Capita Annual Income (USD, PPP-Adjusted) > 40,000 30,000 - 40,000 25,000 - 30,000 20,000 -25,000 17,500 - 20,000 0 - 17,500 Wage Bands Mega-Cities Mega-Corridors > 800 > 1,500 > 2,000 R&D Centers (# Operations)
  • 35. 34 Copyright © 2014 Exolus. All rights reserved.. Contract Outsourcing Models & Shared Service Centers
  • 36. 35 Copyright © 2014 Exolus. All rights reserved.. This Section is about Next Generation Operating Models … Virtually Integrated Models + Shared Service Centers (SSC) Supply Chain Sales Engineering R&D Sourcing Production Distribution Marketing Market Innovation Sales / Marketing DRIVING Shareholder Value Production / Sourcing Research & Development Shared Service Centers (SSC) Virtual Integration SSC IT HR F&A Pro’c
  • 37. 36 Copyright © 2014 Exolus. All rights reserved.. FIPCO MODEL  VIPCO MODEL (CSO, CMO, CRO, PC-CRO, INSTITUTIONS) 4. Virtual Integration Models: Outsourcing Core Functions FIPCO (Fully Integrated Pharma Co.) Research Technology Manufacturing Clinical & Regulatory Sales & Distribution CSOs CMOs CROs Partnerships Academia, Scientific, Institutions R&D Preclinical Support Clinical Development Manufacturing Sales & Distribution Preclinical CROs VIPCO (Virtually Integrated Pharma Co.) Source: G. S. Burrill, „Biotech 2008: A 20/20 Vision to 2020‟, The Burrill Indiana Life Sciences Meeting, October 2008.
  • 38. 37 Copyright © 2014 Exolus. All rights reserved.. MIGRATION to ADVANCED OPERATING MODELS in CHINA: CSO, CMO, CRO 4. Virtual Integration Models: Big Pharma Adoption in China Sources: Goldman Sachs: Healthcare Services: CROs, December 2007; Exolus Research Boehringer Ingelheim (CSO) First Big Pharma to have entrusted a sole distributor for all of its products in China: Sinopharm. Sinopharm is China‟s largest pharmaceutical distributor by sales and the only China distributor to cover the entire PRC. Boehringer Ingelheim‟s sales spiked upward by 45% from 2006 to 2007; Sinopharm saw an annual growth rate of 32%. AstraZeneca (CSO) In a recent move, AZ licensed Cubicin, an antibiotic for skin infections, for development and commercialization on the Chinese market. Pfizer (CRO) Outsources to Wuxi PharmaTech: synthetic chemistry, parallel medicinal chemistry, and bio-analytical services. It also has a 3-year CRO contract with Wuxi PharmaTech to provide services in the areas of: in-vitro Absorption, Distribution, Metabolism and Excretion (ADME) services. GSK (CRO) Outsources to Shanghai Institute of Materia Medica (SIMM) chemistry requirements. AstraZeneca (CRO) Invested USD14 million in Wuxi Pharma Tech for the synthesis of 150,000 compounds. AZ has contracted WuXi Pharmatech, a Chinese CRO, for the synthesis of collections of drug candidates, and signed an agreement with Shanghai‟s Jiao Tong University for research on the genetics of schizophrenia. CSO/CRO Extended Cases China’s CRO Market 0 2 4 6 8 10 12 14 16 18 Clinical Development Preclinical Development US$ billion
  • 39. 38 Copyright © 2014 Exolus. All rights reserved.. 4. Shared Service Centers: Opportunity Map for China Efficiencies … Economies of Scale … Knowledge Sharing … Standardization Source: KPMG “A new Dawn: China‟s Emerging Role in Global Outsourcing”, 2009 Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Mountains 1 1 1 Shared Service Center Hubs Wage Bands Mega-City Mega-Corridors Shared Services
  • 40. 39 Copyright © 2014 Exolus. All rights reserved.. Platform Structuring: Where are Pareto Optimal Deployment Envelopes? Spatial Framework for the Range of Platform Optimization Decisions Heilongjiang Jilin Liaoning Hebei Beijing Inner Mongolia Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangxi Hunan Jiangxi Anhui Hubei Henan Guizhou Yunnan Sichuan Chongqing Gansu Ningxia Shaanxi Shanxi Qinghai Xinjiang Tibet Tianjin Spatial Framework for Platform Optimization Decisions 1 1 1 Mountains Per Capita Annual Income (USD, PPP-Adjusted) > 40,000 30,000 - 40,000 25,000 - 30,000 20,000 -25,000 17,500 - 20,000 0 - 17,500 Wage Bands Mega-Cities Mega-Corridors > 800 > 1,500 > 2,000 R&D Centers (# Operations) Shared Services
  • 41. 40 Copyright © 2014 Exolus. All rights reserved.. Spatial Framework for the Range of Platform Optimization Decisions Platform Structuring: Where are Pareto Optimal Deployment Envelopes? Source: NASA (United States – National Aeronautics and Space Administration)
  • 42. 41 Copyright © 2014 Exolus. All rights reserved.. China Economic Health Report
  • 43. 42 Copyright © 2014 Exolus. All rights reserved.. 5. Health: Senior Executives Select China as Most Attractive in World Investor Confidence in China #1 in World Source: World Investment Prospects Survey 2013 - 2015 Top 14 Most Attractive Destinations for Future Investment (2013 – 2015) Percent of Responses % 0 10 20 30 40 50 60 70
  • 44. 43 Copyright © 2014 Exolus. All rights reserved.. Source: China Statistical Yearbook Record FDI of USD118 billion in 2013 0 20 40 60 80 100 120 140 USD billion Foreign Direct Investment Inflows (1990 – 2013) 5. Health: Foreign Direct Investment Continues to Soar in China
  • 45. 44 Copyright © 2014 Exolus. All rights reserved.. Source: World Investment Report 2014 by UNCTAD China Ranks #2 for Inbound FDI … or #1 when HK Included USD billion Foreign Direct Investment Inflows (2013) 0 20 40 60 80 100 120 140 160 180 200 220 Hong Kong Portion of FDI 5. Health: China and US Top Global Destinations for FDI
  • 46. 45 Copyright © 2014 Exolus. All rights reserved.. 5. Health: Balance Sheets – Banks, Enterprises, Households USD4 trillion in Foreign Reserves … Insulation of Financial System … Clean Balance Sheets China’s Financial System Healthy, Benefits from Insulation, Abundant Liquidity China banks cleaned up in 1990s: Non-performing loans in 1997 averaged 40 – 50%; only 1% in 2014. Financial institutions extended approximately USD1.44 tr in new loans in 2013; and USD1.32 tr in 2012, USD 1.21 tr in 2011. Forex Reserves Achieve Record High in 2013 The Central Bank has accumulated over USD 4 trillion in foreign reserves. The accumulation of large external surpluses means financial system enjoys abundant liquidity. Clean Balance Sheets for Enterprises and Households State Owned Enterprise net profits as share of GDP has grown from (-1%) in 1997 to (+3.34%) in 2013. Record corporate profit growth over past 5 years (industrial profits rose 100%); liability ratios declined. Urban incomes have quadrupled in past 10 years. Source: Deutsche Bank; Standard Chartered; UBS; IMF; Other
  • 48. 47 Copyright © 2014 Exolus. All rights reserved.. About Us: Leading Investment Advisory Firm Global Scale: Established in 1931 • 3,000 Employees • 250 Offices Worldwide Leading Expertise: Acquisitions • Dispositions • RE Funds • Agency • Structuring Real Estate Advisory: Industrial, Office, Residential, Retail Business Advisory: Strategy, Targeting, Due Diligence, Structuring, Negotiations Investment Formats: Greenfield, JV's, Acquisitions, Dispositions, Outsourcing Multi-Disciplinary Expertise: Legal-Tax, Supply Chain, Engineering, HR, Real Estate Investment Advisory: Financial Advisory, Capital Raising, Fund Structuring Investment Sectors: Automotive, Life Sciences, Manufacturing, Technology, Real Estate Geographic Focus: Greater China and US Leading Global Investment Advisory Firm
  • 49. 48 Copyright © 2014 Exolus. All rights reserved.. Services: Align Directly with China (M&A) Investment Process Strategy Client Approval LOI Term Sheet Purchase Agreement Ownership Transfer Transaction Execution Acquisition Strategy Development Target Screening High Level Due Diligence Evaluation & Ranking Negotiate LOI Detailed Due Diligence Structure & Negotiate Transaction Transaction Closing Exolus Group China Expertise Cross-Industry Expertise Facility & Engineering Expertise Structuring & Negotiating Expertise Due Diligence Expertise Client Involvement Targets & Counterparties Mergers & Acquisitions M&A and JV’s
  • 50. 49 Copyright © 2014 Exolus. All rights reserved.. Exolus Group China Expertise Cross-Industry Expertise Facility & Engineering Expertise Structuring & Negotiating Expertise Due Diligence Expertise Services: Align Directly with China (Greenfield) Investment Process Strategy Client Approval Investment Agreement DD Findings Legal Entity Land/Facility Ownership Transaction Execution Investment Strategy Development Zone Screening High Level Due Diligence Zone & Site Evaluation & Ranking Negotiate Investment Agreement Detailed Due Diligence Business Registration Land Auction/ Construction Contracts Client Involvement Targets & Counterparties Direct Investment Greenfield Investment
  • 51. 50 Copyright © 2014 Exolus. All rights reserved.. New Entity Philosophy: Provide Holistic Solutions that Benefit Entire Organization Establish Manufacturing Operations Research & Development (R&D) - Marketing, Sales & Distribution Sales & Marketing Shared Services Solutions Rooted in Multi-Disciplinary Expertise:  Real Estate, Facilities, Engineering -Facilities, construction, geotechnical, environmental, utilities, critical paths, permitting  Supply Chain, Sourcing, Distribution, Transportation - Logistics, distribution, taxes, modes, physical transportation, rates, providers  Labor-Force Dynamics - Structure, laws, trends, skills, costs, quality, scalability, sustainability  Financial Analysis & Structuring (Tax, Legal) -Legal structures, tax structures, financial analysis, feasibility, business case, incentives Corporate Stakeholders Corporate Real Estate, Engineering, Manufacturing Supply Chain, Logistics Human Resources Finance, Tax, Legal Exolus Client China Solutions Require a Multi-Disciplinary Approach
  • 52. 51 Copyright © 2014 Exolus. All rights reserved.. Exceeding our Clients’ Expectations Representative Clients: Serving World’s Leading Companies
  • 53. 2014 52 Copyright © 2011 Exolus. All rights reserved.. For a Comparative Perspective with the other BRIC Countries Please Refer to the Following Research Reports Found on Slideshare @ http://www.slideshare.net/Exolus/india-2020-what-india-will-look-like-in-the-future http://www.slideshare.net/Exolus/brazil-2020-what-will-brazil-look-like-in-the-future http://www.slideshare.net/Exolus/russia-2020-what-will-russia-look-like-in-the-future http://www.slideshare.net/Exolus/bric-2020-what-will-the-brics-look-like-in-the-future Download Reports @ www.exolus.com/en/knowledge/research.html Brazil 2020 Russia 2020 India 2020 BRIC 2020