1. China’s Competitive Threat A Sector Perspective Presented by Mark Killion, CFA Managing Director Global Insight’s World Industry Services

2. Copyright  2004 Global Insight, Inc. 2 Agenda 1) China’s Market Size and Growth Patterns 2) China’s Manufacturing Sector, Role in World Markets 3) China’s Trading Patterns, Sector Winners & Losers

3. Copyright  2004 Global Insight, Inc. 3 Manufacturing Sector is Leading Overall Growth (% Growth in Inflation Adjusted Chinese Sector Sales – Includes Domestic Sales + Exports) What is the Outlook for Growth in China? Source: World Industry Service

4. Copyright  2004 Global Insight, Inc. 4 What is the Outlook for Manufacturing Sectors? Growth Rates of Chinese Electronics & Autos (% Growth in Inflation Adjusted Sector Sales – Includes Domestic Sales + Exports) Source: World Industry Service

5. Copyright  2004 Global Insight, Inc. 5 Growth Rates of Key Chinese Manufacturing Sectors (% Growth in Inflation Adjusted Sector Sales – Includes Domestic Sales + Exports) Source: World Industry Service What is the Outlook for Manufacturing Sectors?

6. Copyright  2004 Global Insight, Inc. 6 Growth Rates of Key Chinese Manufacturing Sectors (% Growth in Inflation Adjusted Sector Sales – Includes Domestic Sales + Exports) Source: World Industry Service What is the Outlook for Manufacturing Sectors?

7. Copyright  2004 Global Insight, Inc. 7 Chinese Manufacturing Has Lagged in Employment Share of Manufacturing Employment in Total Employment Growth Rate of China Manufacturing Output Versus Growth Rate of Manufacturing Employment Source: National Statistics Agencies of Above Countries

8. Copyright  2004 Global Insight, Inc. 8 Share of U.S. Consumption of Manufactured Goods Supplied by Imports from China and Others Share of US Imports from Regions, Manufacturing How Important is Chinese Manufacturing to U.S. Markets? Source: World Industry Service

9. Copyright  2004 Global Insight, Inc. 9 What is the Size of Chinese Manufacturing Sectors? Source: World Industry Service

10. Copyright  2004 Global Insight, Inc. 10 What is the Size of Chinese Manufacturing Sectors? Source: World Industry Service

11. Copyright  2004 Global Insight, Inc. 11 What is the Size of Chinese Manufacturing in the World Economy? Share of World Sales and Share of Sales Growth – Manufacturing Sector Source: World Industry Service

12. Copyright  2004 Global Insight, Inc. 12 What is Role of Chinese Exports in World Trade? Greater China Manufacturing Exports Percent Share of Total World Manufacturing Exports * Export totals from China, Hong Kong and Taiwan exclude trade with each other. These are included in Intra-Regional. Source: World Industry Service

13. Copyright  2004 Global Insight, Inc. 13 Change in World Manufacturing Export Shares (Delta on the Shares: Share at End of Period less Share at Start of Period) What is the Chinese Competitive Threat? 2004--2009: +1.7% 2000--2003: +2.5% Source: World Industry Service

14. Copyright  2004 Global Insight, Inc. 14 Manufacturing Exports as % of World Manufacturing Exports, 2003 Note: Greater China includes China, Hong Kong & Taiwan Manufacturing Exports as % of Total Domestic Economy Sales, 2003 What is Role of Chinese Exports in the Economy? Source: World Industry Service

15. Copyright  2004 Global Insight, Inc. 15 China Trade Balance as a Percent of Total Chinese Sales – 2003 Selected Industrial Sectors Sectors with Trade Surplus W1: Textiles, Apparel, Wood & Paper (Rising) W2: Rubber Products & Plastics (Rising) W3: Office & Computing Machinery (Rising) W4: Small Household Appliances (Rising) Sectors with Trade Deficit L1: Primary Metals & Non-Metals (Deteriorating) L2: Chemicals (Steady) L3: Communication Equipment (Deteriorating) L4: Motor Vehicles (Steady) % In Which Sectors Are Imports Outpacing Exports? Source: World Industry Service

16. Copyright  2004 Global Insight, Inc. 16 Trade Shares for Textiles, Apparel & Leather (Percent, 2003) Trade Shares for Wood & Wood Products (Percent, 2003) Source: World Industry Service How Does China’s Trade Compare to Other Countries?

17. Copyright  2004 Global Insight, Inc. 17 Trade Shares for Paper, Paper Products & Printing (Percent, 2003) Trade Shares for Primary Metals & Non-Metals (e.g. Glass & Cement) (Percent, 2003) Source: World Industry Service How Does China’s Trade Compare to Other Countries?

18. Copyright  2004 Global Insight, Inc. 18 Trade Shares for Rubber Products & Plastics (Percent, 2003) Trade Shares for Chemicals (Percent, 2003) Source: World Industry Service How Does China’s Trade Compare to Other Countries?

19. Copyright  2004 Global Insight, Inc. 19 Trade Shares for Office & Computing Machinery (Percent, 2003) Trade Shares for Small Household Appliances (Percent, 2003) Source: World Industry Service How Does China’s Trade Compare to Other Countries?

20. Copyright  2004 Global Insight, Inc. 20 Trade Shares for Communication Equipment (Percent, 2003) Trade Shares for Motor Vehicles (Percent, 2003) Source: World Industry Service How Does China’s Trade Compare to Other Countries?

21. Copyright  2004 Global Insight, Inc. 21 Chinese Competitive Threat: Summary Competitive manufacturing threat from China is real Degree of threat varies quite a bit among sectors US and Europe do also benefit from lower consumer prices, and by pulling China into their supply chain China’s competitive threat felt more strongly in other developing countries Sizable increase in world manufacturing market share still to come Driven by FDI, MNCs, fast growth differential with rest of world Sovereign influence on commerce still pervasive, But Will it Slow Growth? Brutal competition, low domestic price gains Domestic pricing conditions exported to rest of world Fast growth and development requires a lot of imports Domestic demand pulls in commodities and technology Production requirements supporting commodity input prices Low Chinese export prices, along with fast Chinese growth supporting higher commodity input prices, will continue to pinch the profits of many western producers and emerging economy competitors

22. Copyright  2004 Global Insight, Inc. 22 Thank you! Mark Killion, CFA Managing Director World Industry Services Phone: 610-490-2547 Email: mark.killion@globalinsight.com