GDP Growth Rate

! "
Composition of GDP in 2005
CAGR 20002007E In 2005, the Government made an official adjustment to the 2004 GDP to account mainly for tertiary sector GDP which previously was not included

USD, Percent, 2000-2007E

Billion USD, Percent, 2000-2005

CAGR 2000-2005

100%= Primary

1,118 16.4%

1,875 12.5%

+10.9% +5.0%

9.6% 8.1%
8.8% Secondary 50.2% 47.3%

Tertiary

+15.1%

2007E In 2005,

Total GDP (Bln)

1,216 956

1,315 1,027

1,467 1,139

1,711 1,320

1,875 1,434

2,053 1,483

2,234 1,524

GDP Capita 886 (USD/cap)
- Gross capital formation/GDP: 45.2 (2004) - Export of goods and services/GDP: 39.7 - Gross national savings/ GDP: 46.1
Note: fixed exchange rate of 8RMB/1USD Source:. 6

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In 2005, China overtook both France and the UK to become the fourth largest economy in the world; its GDP increased by 9.9% in real terms compared to 2004, reaching a total of 2.25 trillion USD, representing 5.0% of the worlds GDP.

Billion USD, Percent

GDP in 2004

GDP in 2005

% on world

2004-2005 growth

% on world US Japan Germany China UK France Italy Canada Spain S. Korea 2,797 2,225 2,201 2,106 1,766 1,130 1,4,571 12,486 28.1% 10.3% 6.3% 5.0% 5.0% 4.7% 4.0% 2.5% 2.5% 1.8% 3.5% 2.7% 0.9% 9.9% 1.8% 1.4% 0.1% 2.9% 3.4% 3.9%
US Japan Germany UK France China Italy Canada Spain Brazil 2,772 2,161 2,076 2,005 1,764 1,097 1,4,448

12,049

29.5% 10.9% 6.8% 5.4% 5.1% 4.9% 4.3% 2.7% 2.7% 1.9%
Source: Worldbank , IMF, Value Partners analysis 7

VPCH-060720-RuJenn-P8

GDP per capita growth has been driving the increase in household expenditure, with average annual growth rates of 9.0% and 8.2% respectively between 1995 and 2004. In recent years, the relative amount of expenditure in Health Care and Transport & Communications has gained increasing importance.

Consumption segmentation

CAGR 1995 -2004
GDP per capita and household expenditure growth

USD, Percent, 1995-2004

Percent, 2005

GDP/capita

9.0% Other Goods and Services Housing 3% Education, Cultural and Recreation Services 8.2% Transport & Communications 10% 14% 38% Food

10,000

1,139 1,027

477 511

Household expenditure

12% 7% 6% 10% Clothing

354 372

In 2004: Rural Urban

328 1,138
Health Care and Medical Services
Household Appliances and Services

2003 2004

Note: fixed exchange rate of 8RMB/1USD Source: China Statistical Yearbook, 2005 8

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State power within the People' Republic of China (PRC) is divided among three bodies: the Party, the State and the Army. The primary s organs of state power are the National People' Congress (NPC), the President and the State Council. s
Proposed by Politburo and elected by NPC Politburo & Standing Committee

PRC Presidency

. President: Hu Jintao. Vice P.: Zeng Qinghong
NPC: National Peoples Congress (legislative)
- NPC: The NPC has approximately 3,000 members and is the highest legislative body in the PRC, with power to:. Elect the President of the Republic. Supervise and modify the Constitution. Issue ordinary legislation. Choose the Premier nominated by the President. Elect the president of the Supreme Court. Make final decisions on war - Politburo: The Politburo is a group of 19 to 25 people who oversee the Communist Party of China, with centralized power in the Standing Committee (5-9 members). The Politburo is nominally appointed by the Central Committee of the Communist Party but in practice has been self-perpetuating since the 1980s. It has ample power/influence on major political issues; decisions are made by consensus rather than by majority vote.
State Council (administrative) Premier: Wen Jiabao
- Main Administrative Ministries and Commissions of the State Council. Ministry of Foreign Affairs Ministry of National Defense Ministry of Culture Ministry of Health Ministry of Justice Ministry of Public Security Ministry of State Security Ministry of Civil Affairs Ministry of Supervision National Population and Family Planning Commission. State Ethnic Affairs Commission. National Audit Office
Ministers are proposed by the President and elected by the NPC - Other Main Administrative Departments. Ministry of Science and Technology. Ministry of Education Ministry of Labour and Social. Security. Ministry of Personnel. Ministry of Land and Resources
Central Military Commission (defense) President: Hu Jintao
- Armed Forces. Peoples Liberation Army. Police Force. City Militia
Supreme Peoples Court (judicial) President: Xiao Yang
- Main Administrative Departments with Economic function. Ministry of Railways Ministry of Communication Ministry of Construction Ministry of Agriculture Ministry of Water Resources Ministry of Commerce (MOFCOM) Ministry of Information Industry State Commission of Science, Technology and Industry for National Defence
- Main Departments for Macroeconomic control. National Development and Reform Commission. Ministry of Finance. Peoples Bank of China (central bank) Supreme Peoples Procuratorate (prosecution) Procurator-General: Jia Chunwang

VPCH-060720-RuJenn-P14

VPCH-060720-RuJenn-P15
GuangDong is one of the most populated and at the same time most industrialized Chinese Provinces. In 2005, it had a population of 92 Million (7.1% of China total) and a GDP of 230.6 Billion USD (12.2% of China total), so its GDP per capita is 2,510 USD (1.7 times greater than national average) Automotive, chemical and industrial machinery are the strongest industries in GuangDong, representing almost half of the regional production value and all showing annual growth rates above 30 percent The largest Chinese enterprises in GuangDong are in the Automotive (GAIG: Guangzhou Automobile Industry Group) and in the Electronics (TCL, Huawei, Skyworth) industries GuangDong attracts around 20% of total Foreign Direct Investments in China (i.e. around 12 Billion $/year). In terms of Italian presence, ICE reports 52 Italian companies registered in GuangDong, roughly equally divided between manufacturing and services. Among the most known ones are De Longhi, Magneti Marelli, Piaggio, Esaote and De Coro GuangDong has 13 main industrial parks, most of which are concentrated in the areas of Guangzhou, Dongguan and Shenzhen. These industrial parks are characterised by different sector focus and different incentive schemes, while the cost of production factors tends to be aligned among them The political structure of GuangDong replicates at Provincial level the structure of the Central Government and is articulated in a high number of Departments and Offices.

VPCH-060720-RuJenn-P16

GuangDongs GDP has maintained much higher growth rates at 17.6% annually from 1999 to 2005 compared to the national average (10.4%); in 2005, it represented 12.2% of national economy with only 7.1% of the population (GDP per capita was 1.7 times greater than the national average). The high incidence of the tertiary sector also manifests the higher level of development (44.1% vs. 40.2%)
Composition of GDP in 2005 17.7% 16.1% 14.2% 13.8% 10.2% 9.0% 8.8% 10.2% 11.6% 8.1% 9.6% Tertiary 6.3% 16.6% 15.0% 100% = 230.6 bln USD Primary

GDP Growth Rate (%)

CAGR 2000 -2005 China National
44.1% 2000 GDP (billion USD) As% of China total 120.8 10.8% 2001 133.1 10.9% 75.7 5.9% 1,759 1.146.8 11.2% 78.6 6.1% 1,867 1.170.4 11.6% 79.5 6.2% 2,143 1.200.5 11.7% 83.0 6.4% 2,416 1.230.6 12.2% 91.9 7.1% 2,510 1.7
Note: the First China Economic Census in 2005 adjusted 2004 GDP of Guangdong Province from 200.5 bln USD to 235.8 bln USD due to the different statistical method. The unchanged number was used in this analysis in order to make the data more easily comparable.

HuaWei

Skyworth RCB Electronics Guangzhou Wanbao Group

VPCH-060720-RuJenn-P19

Billion USD
0.2% 15.6 12.2 13.0 13.1 10.0 12.4
From 2004, the statistical caliber of FDI has been adjusted to exclude external loans, making it inaccurate to compare with previous years
2000 As % of total FDI into China FDI projects As % of total projects in China 30.0% 4,245 19.0%

2001 27.7% 5,317 20.3%

2002 24.9% 6,614 19.4%

2003 29.1% 7,039 17.1%

2004 16.5% 8,322 19.1%

2005 20.5% 8,384 19.1%

Note: FDI projects data refer to companies headquartered in Guangdong province, thus may be inflated with funds that are then destined to other parts of China.
Sources: National Bureau of Statistics of China, China Statistical Yearbook 2004, China Info bank 19

VPCH-060720-RuJenn-P20

A total of 52 Italian companies are registered with ICE, roughly equally divided between manufacturing and services
Sector Number of enterprises WFOE Trading/Promotion Machinery Textile Auto Electric/Electronic Food/Beverage Banking Others Total

Source: ICE

Type* JV 12 RO 19

Manufacturing Services

* WFOE: wholly foreign owned enterprise; JV: joint venture; RO: representative office 20

VPCH-060720-RuJenn-P21

Location De Longhi Huizhou China Operations - In 2005 established a JV with TCL in Huizhou with production base in Zhongshan - Plan to produce and sell (under the TCL and DeLonghi brand) 500,000 portable A/Cs and dehumidifiers in 2006 - Production of lighting (JV in Wuhu/Anhui), electrical components and dashboards (Guangzhou) and exhausts (Shanghai) - Revenues in 2005 = 13.5 mln Euro (30% exports to EU/US, planned to increase to 50%) - Started production in 2003 as China based producer of leather upholstery, sofas, ottomans and chairs - Workforce of 2,800 and daily production of 55 containers - 2006 increase to workforce of 5,500 and 70-90 containers - JV with Zhongshen Group for production of scooters (50cc) and high-end motorcycles - Annual output about 100,000 scooters in 2005 - Plans to set up a motorcycle engine plant in Chongqing - In 2004 established the JV Shenzhen Esaote Medical Technology Co for R&D and production - Sales of ultrasound, dedicated MRI and cardiology systems in the domestic market

Magneti Marelli

Shanghai Wuhu Guangzhou

De Coro

Shenzhen

Piaggio

Foshan

Esaote

Beijing Shanghai Guangzhou Chengdu

VPCH-060720-RuJenn-P22

The region has a total of 13 industrial parks, most of which are concentrated in the GuangZhou/ShenZhen region
GuangZhou Development District NanSha ETDZ FoShan HTP ZhongShan HTP ZhuHai FTZ GuangZhou DongGuan ShenZhen Zhongshan Zhuhai

VPCH-060720-RuJenn-P32

Manufacturing
Sector Number of enterprises WFOE Auto Textile Electric/Electronic Machinery Mechanical Trading/Promotion Materials Others Total

Services

Type* JV RO 18
* WFOE: wholly foreign owned enterprise; JV: joint venture; RO: representative office 32

VPCH-060720-RuJenn-P33

HQ Location Fiat Group New Technology Park Nanjing Wuxi China Operations - JVs with NAC in Nanjing and with China' Yuejin Motor for s Iveco Daily range of medium-duty CVs - Plans 150,000-200,000 vehicles annually in 2006 and to introduce more passenger cars (i.e. Alfa Romeo and Stilo) - Merloni Progetti (technical consulting) already in China for over 20 years with projects in 25 plants - Manufacturer of household appliances - In 2005, established a JV with WuXi Little Swan for the manufacture of dishwashers - Since 1996 in China with 20 branches throughout China - Present in 3 sectors: domestic water and solar heating, central heating and components - Turnover of 60 mln, production of ~1 mln units - JVs in Wuxi, Tianjin and Baosheng - Manufacturing of copper and optical cables for Telecommunications, Plants and Industrial applications, etc - Revenues of about 800 mln RMB in 2004 in China - Established in April 2006 to produce trigger sprayers and pump dispensers with a manufacturing plant of ~6,500 sqm - Serves multinational clients such as Colgate, Unilever and Henkel

Indesit Co.

Merloni Termo Sanitari Prysmian

Guala Dispensing

Suzhou

VPCH-060720-RuJenn-P34

Lianyungang Xuzhou ETDZ Xuzhou Suqian Huaian ETDZ Huaian Lianyungang ETDZ
Taizhou EDZ Nanjing HTP Yangzhou Nanjing Nanjing ETDZ Changzhou New District Wuxi New District Suzhou New District 100km

Nantong

Nantong ETDZ Zhuangjiagang FTZ

Wuxi Suzhou Kunshan

Taicang ETDZ Kunshan ETDZ Suzhou Industrial Park

VPCH-060720-RuJenn-P35

VPCH-060720-RuJenn-P36

VPCH-060720-RuJenn-P37

General Office, the Peoples Government of Jiangsu Province Governor: Liang Baohua
Main Administrative Offices and Commissions Auditing Office Office of Finance Vice Governor Li Quanlin Adm.ve Vice Governor Zhao Kezhi Vice Governor Zhang Yaolin Vice Governor Zhang Weiguo Vice Governor Huang Lixin Vice Governor He Quan Vice Governor Zhang Jiuhan Vice Governor Tongxing
CPC Jiangsu Committee Secretary Li Yuanchao
Special Departments Directly under the State Council State-owned Assets Supervision and Administration Commission Departments Directly under the State Council Radio Administration Bureau Regional Administration of Taxation Bureau of Statistics Price Control Administration

VPCH-060720-RuJenn-P50

Chinas electricity consumption rose at an average annual rate of 12.4% between 2000 and 2005, and today is the second largest market in the world; growth is driven mainly by industrial and residential users

TWh, 2000-2005

Electricity consumption by value in 2004: China World Avg Industrial 34% 59% Residential 35% 20% Commercial 6% 7% Other 25% 14% 1.888 1.638 1.468 1.361 Other Commercial Agricultural Residential 3% 5% 5% 12% 3% 5% 5% 13% 3% 5% 5% 12% 3% 4% 5% 12%

CAGR 00-05

2.444 2.175 3% 4% 5% 11% 3% 3% 4% 14%

12% 12% 2% 8% 16%

77% 76%

75% Industrial 75% 74%

2000 As % of world total 9%

2001 9%

2002 10%

2003 10%

2004 11%

2005E 12%

China is the second largest electricity market in the world after the US (24%)
Source: China Electricity Council (CEC), EIA, China Statistical Year Book 2005 50

VPCH-060720-RuJenn-P51

The Government is in complete control of the main institutions regulating the power sector through a series of regional/provincial agencies

Main Responsibilities

National Development and Reform Commission (2003) NDRC State Council Chinas Central Government State Electricity Regulatory Commission (2003) SERC

Regional Agencies (6)

- Devising political and social macro-economic policies for all industrial sectors - For the Power sector,. Devising strategic plans. Defining tariffs (retails, transmission, distribution and part of generation) - Regulating of the electricity sector:. Preparation of laws and amendments. Participating in the preparation of development plans. Supervising market operations. Setting technical standards. Issuing business licenses. Proposing tariffs and adjustments to NDRC based on market conditions

supervision

Provincial Bureaus (11)
China Electricity Council (1998) CEC

Source: NDRC; SERC; CEC

- An association representing all companies and institutions operating in the electricity sector - Main responsibilities:. Providing consulting services to operators (strategy, legal, ). Forwarding to SERC any proposals or suggestions involving policies or new regulations. Preparing statistics and market analyses

Company name Peak Pacific* Siemens

AES (USA)

Zhonglian Power Financial (HK) Asia Power (Singapore)

KEPCO (Korea)

- Invested in two coal power plants in Henan Province that will be operative in 2008 - Total investment of 625 million USD
Note: fixed exchange rate of 8RMB/1USD * Chinese Company hold by the World Bank and Florida Power and Light Co. Source: China Industry Daily News, companies web sites 55

VPCH-060720-RuJenn-P56

China is subdivided into 6 poorly interconnected transmission subsystems (3 in surplus, 3 in deficit); the State controls ownership/management of power transmission through the two only companies present in the sector, State Grid Corporation and Southern Power Grid
Characteristics and main issues
Isolated Province +/Surplus/Deficit Annual Consumption Annual Production
Transmission subsystems TWh, 2004
China Total = ~500.000 km lines
North-East & North 4.27TWh
- Market subdivided into 6 poorly interconnected transmission subsystems (only 5 interconnections) - In the North-Western and Southern areas, 3 isolated provinces (Xinjiang, Hainan and Tibet) - Ownership and management of the transmission infrastructure controlled by only two companies:. State Grid Corporation, with 5 subsystems. Southern Power Grid, with 1 subsystem - To date, the highest transmission voltage reaches 500 kV, but it is lower in the North-East (330 kV) - Coal mines and hydric resources represent the main sources for generation of electricity and are located in the North-West and South-West regions respectively, while consumption is concentrated along the East coast - Long transmission lines are necessary due to the strong imbalances between demand and supply

Northwest

Xinjiang

Northeast

153 153,7

1.150 km

State Grid Corporation
150.000 km lines @ >220 kV
1 interconnection (500 kV)

1.400 km

400 439,6

660 km

521 488

1.100 km
2 interconnections (500 kV)

1 interconnection

Southern Power Grid Corporation
100.000 km lines @ >220 kV

Hainan

Fonte: CEC, SERC, China Statistical Yearbook 2005, China Electric Power Year Book 2005 56

VPCH-060720-RuJenn-P57

Two state-owned companies have a complete monopoly on power transmission throughout the country and control all activities in the sector (ownership, management, dispatching, )

Bonds Turnover

China International Capital

2002 1,1,1,n.a.

2001 1,180
Morgan Stanley GIC Mingly Merrill Lynch IM

33% 7.5% 7.5% 16.5%

Nlisted companies (unit) NSFs (unit)

109 66.5

127 68.8

133 69.2

133 72.1

132 n.a.

BOC International China
Stock investment Accounts (mln unit) 58.0
Note: fixed exchange rate of 8RMB/1USD Source: CSRC Chinas Securities and Futures Market, Goldman Sachs 64

VPCH-060720-RuJenn-P65

From 2000 to 2005, Chinas fund management industry witnessed rapid growth of 36% annually. Securities funds are the most purchased funds and account for almost 2/3 of the total. The main customer of Chinese fund are private investors, their incidence is expected to grow further. Only around 7% of total NAV is owned by foreign players
Funds NAV breakdown by products
Evolution of Asset Under Management USD Billion, Percent
USD Billion, Percent, 2004

Total = 44.8 Others

43.8 +36% 25.0 12.N Companies
44.8 31.4 Money Market Funds

Equity Funds

2005E Balanced Funds

2% Bond Funds

N Funds
Funds NAV breakdown by customer USD Billion, Percent, 2004 Total = 44.8
Funds NAV breakdown by shareholding USD Billion, Percent, 2004 Foreign Investors Government 9% 43% Institutional Client Industrial 23% 39% Securities Firms Total = 44.8 Others 7% 2%

Private Clients

20% Trust
Note: fixed exchange rate of 8RMB/1USD Source: Morning Star China, China Fund Management, Value Partners Analysis 65

VPCH-060720-RuJenn-P66

Chinas insurance market is growing rapidly and still has large room for future growth. In life insurance, 17 domestic insurers and 22 foreign insurers are competing in the market. Foreign entrants are growing faster than domestic players. China Life is by far the largest player in Life Insurance, while PICC is the strongest in Property & Casualty.
Insurance industry growth USD Billion, %, 2000 - 2005

Top 5 Life insurer

CAGR 2002-2005 Proprty & Caualty

Premium (Mln USD)

Life Insurance Top 5 China Life Ping an Life 7,362 4,526 2,633 2,226 20,085 Dai-Ichi Life, MS, HSBC ING**

VPCH-060720-RuJenn-P74

Some major international brands started expanding form eastern costal regions to westerns provinces
November 2005, number of outlets

: "

Examples: Gucci Zegna Louis Vuitton Bally

Urumqi

Inner Mongolia Liaoning

Changchun

Shenyang 2 Dalian

Beijing

Ningxia Qinhai

Yinchuan

Taiyuan

Shanxi

Tianjing

Shijiazhunag

Shandong

Qingdao

Total stores: - Gucci 7 - Zegna 50 - Louis Vuitton 12 - Bally 31 - Hugo Boss 57

Gansu Tibet

Chengdu

Shaanxi Zhengzhou Henan

Jiangsu

Sichuan & Chongqing

Chongqing

Wuhan Changsha

Nanjing

Ningbo

Hangzhou 3

Zhejiang

Guiyang

Nanchang

Wenzhou Fuzhou

Kunming

Guizhou

Nanning

Jiangxi

Fujian

Yunnan

Shenzhen 3 Zhuhai

Xiamen

Guangzhou

Hainan 74

VPCH-060720-RuJenn-P75

Major Italian designer brands are already well positioned in China, led by Ermenegildo Zegna who was one of the earliest to enter in 1991, has the largest amount of outlets (50) and has a local manufacturing base

Year, number of outlets

Established Ermenegildo Zegna 50 Ferragamo 29 Prada 8 Gucci 7 Bulgari 2

Source: Company websites

Number of outlets in Mainland China
China Operations - First investments in China in 1991 - In 2003, acquired 50% of manufacturer of high-quality mens suits and jackets in Wenzhou (Zhejiang) - Retail outlets in 24 cities with a total of 57 stores - First store in China was opened in 1994 - In 2006, 29 outlets throughout China, of which 5 are located in Shanghai (including its China flagship) - Importer with no plans to produce in China - Prada is building a Shanghai flagship store with a new concept, in addition to its existing 8 outlets in China and 14 in HK and Taiwan - Opened its first 2 stores in 1996, owned 7 stores at the end of 2005, and plans to open 3 more in 2006 - Revenue growth of 28.2% in 2003 - Opened its first franchise store in China in April 2005 - Importing jewelry retailer with no plans to produce in China - First store opened in 2003 in Beijing, then Shanghai (plus 7 in Taiwan and 6 in HK)

VPCH-060720-RuJenn-P79

Consumer Electronics sales in China have been climbing rapidly with average annual growth rates of 12%; video and audio products make up the largest part of the market with roughly 1/3 each, computers & peripherals are the fastest growing at 17-19% CAGR

USD Billion, 2001 - 2008

CAGR 01-08E
50.5 44.6 40.8 36.9 33.0 25.8 9% 16% 36% 27.5 9% 18% 36% 36% 34% 35% 35% 9% 18% 35% 34% 10% 19% 33% 10% 21% 20% 11% 11%

12% 17%

Computer peripherals Personal computers Audio Products

22.4 8% 14% 39%

Video Products

39% 2001

2002 67.0

2003 81.4

2004 92.1

2005 101.5

2006E 110.0

2007E 115.4

2008E 121.8 11%
Mobile phone sales (mln units)
Note: fixed exchange rate of 8RMB/1USD Source: Euromonitor 2006 79

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The two leading regions in electronic component manufacturing are GuangDong (14.7 billion RMB revenues in 2005) and ZheJiang (13.7 billion RMB), together accounting for ~54% of the total revenues in the country
Sales Revenues by Region Million, 2005, USD
Revenues of Major Regions
TOTAL = 5,316,739 Guangdong
Heilongjiang Beijing Inner Mongolia Jilin
As% of total China 1,842 27.7%

Liaoning

Ningxia Qinhai Gansu Tibet Sichuan Shaanxi Shanxi

Tianjin

Henan Hubei Anhui

Jiangsu Shanghai

Chongqing Hunan
Zhejiang Jiangxi Fujian Guangdong
Guizhou <12.5 million USD 12.5-125 million USD 125-1,250 million USD >1,250 million USD Yunnan
Hainan Note: fixed exchange rate of 8RMB/1USD Source: China Statistical Yearbook 2005 80

VPCH-060720-RuJenn-P81

The total market for white goods in China reached 16.6 billion USD in 2005 and is expected to maintain an average annual growth rate of 6.7% between 2000 and 2009; refrigerators with 37% and air conditioners with 32% represented the largest categories in the market in 2005.
CAGR 2000--2009 4.49% 2.14% 1.86% 0.91% 0.84% 0.04% 0.03% 0.01% 10.3%

Billion USD*, Percent

In 2005, Others included: -Microwave Ovens -Cookers -Electric showers -Electric Heaters -Dryers - Sewing machines -Dishwashers -Water dispensers Subtotal:

18.3 16.1

10.0% 3.7% 17.8%

10.7% 2.9% 17.8%

10.8% 2.7% 17.8% 7.9% -3.2% 6.2%

10.3% 3.4% 17.8%

10.4% 3.2% 17.8%

10.6% 3.0% 17.8%

13.3 11.2
Others Cooling Fans Washing Machines Air Conditioners Fridges, Freezers & Combos 9.7% 6.5% 18.5%

9.9% 3.7% 17.9%

9.8% 5.7% 18.2%

9.9% 4.9% 18.1%

8.9% 32.3% 32.9% 33.5% 34.1%

31.0% 29.8% 30.5%

29.2% 36.9% 36.3% 35.7% 35.2% 34.7% 5.9%

ZhuHai Gree Corporation

Little Swan Group

Revenu es

VPCH-060720-RuJenn-P84
HQ Location China operations - Established in 1981 in Beijing - Manufacture and sales of consumer electronics, office equipment and electronic components; design and development of consumer electronics - Production in Shanghai, Nanjing, Changshu and Wuxi - Since 1987 in China (JV with Beijing government) - 47 manufacturing operations, 6 R&D centers, and a number sales and support offices - Revenue of about US$6.8 billion in 2004 - Panasonic is Matsushitas home appliance brand - 1993 establishment of subsidiary in Huizhou (LGEHZ) - Electronics products include PDP plasma TV, notebooks, DVD recorder, dishwasher, navigation system, mobile phones, etc. - 11 manufacturing facilities produce for the local market and for LG markets overseas - Manufacturing in Tianjin, Guangdong, Shandong, Shanghai and Jiangsu focused on TV, mobile comm. and semiconductors - Production for domestic market and for export to Korea - Since 1992 manufacturing in China

Matsushita

Samsung

VPCH-060720-RuJenn-P85

Location De Longhi Huizhou China Operations - In 2005 established a JV with TCL in Huizhou with production base in Zhongshan - Plan to produce and sell (under the TCL and DeLonghi brand) 500,000 portable A/Cs and dehumidifiers in 2006 - Merloni Progetti (technical consulting) already in China for over 20 years with projects in 25 plants - Manufacturer of household appliances - In 2005, established a JV with WuXi Little Swan for the manufacture of dishwashers - Since 1996 in China with 20 branches throughout China - Present in 3 sectors: domestic water and solar heating, central heating and components - Turnover of 60 mln, production of ~1 mln units - 2 production sites:. Plastic packaging in BeiJing. White goods heating elements and other components in HangZhou (ZheJiang province)
Merloni Termo Sanitari Zoppas

HangZhou BeiJing

VPCH-060720-RuJenn-P86

VPCH-060720-RuJenn-P87

The media sector in China is a large and growing industry and, even though it is still highly regulated by the government, interesting opportunities exist for foreign players: In 2003, the media sector in China generated revenues of ~24 billion USD and with more than 85 thousand companies operating; the greatest amount of revenues was generated by publishing (52% of the total), with books representing the largest single sector (28%), and the vast majority of companies are agencies Advertising expenditure is growing rapidly and is expected to reach 11.2 billion USD in 2006 having maintained average growth rates of 14.1% since 2002, though it is still low as a fraction of GDP (0.5%) if compared to developed countries (1.3%) The media sector is heavily regulated by the government at central and local level, with significant restrictions for foreign players still existing in TV and publishing (e.g. compulsory JVs with minority share) Most major foreign players have already entered or are in the process of entering the Chinese market; among Italian operators, Mondadori is the only one which has already made a first step into China

State Council for Party Propaganda
- Ministry of Commerce (MOFCOM) - State Administration of Industry and Commerce (SAIC)
State Administration of Radio, Films and Television (SARFT)
Ministry of Information Industry (MII)
General Administration of Publishing Sector

Advertising

Radio, film and TV

New media

Publishing
Presence of monitoring agencies at municipal/provincial level

VPCH-060720-RuJenn-P92

Significant restrictions are still exist for the entry of foreign players
Field Production of TV programs
Regulatory environment - Minority stake (49%) JV with local players. Only 1 JV per media type (e.g. film, TV). 65% of the contents about Chinese topics - Wholly foreign owned advertising agencies have been allowed since December 2005
Alternative strategies are also possible, for example:. Foreign magazines such as Forbes and Fortune are translated abroad and imported to China. Special agreements (e.g. Financial Times)
- Publishing: not allowed - Distribution:. Allowed only through a JV with a local partner. Controls on the distribution of books, newspapers and magazines - Printing:. Allowed only through a JV with a local partner. Allowed WOFE only in the packaging business - Possibility to engage in the commercialization of copyrights

VPCH-060720-RuJenn-P93

Opportunities exist for the entry of foreign players into the Magazine/Newspaper segment, but they must rely on the formation of a JV with a local partner who has one or more licenses, and can only be with minority stake

* " :

Model agreement Chinese publishing group
Situation - Chinese publishing groups own several publishing licenses of newspapers/ magazines granted by SPPA:. Usually are wide licenses, suitable for different segments/formats. Some licenses are operative, others are in stand-by. Among the operative licenses, many are losing money. The ownership of licenses must remain in the hands of Chinese companies

49% Foreign group

License A License B License C

Use of license A

- A JV is established (with a compulsory minority stake for the foreign operator) - The Chinese side grants the JV the use of one/more licenses - The foreign side supplies the investments necessary for development - The roles and profit sharing rules within the JV depend on agreements between the parties (its also possible that 100% of the profits go to the foreign Group)

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Most major foreign players have already entered or are in the process of entering the Chinese market; among Italian operators, Mondadori is the only one which has already made a first step into China
- Present since the 60s with a initial focus on education (co-publishing of books in English) - Gradual strengthening of the presence and entry in others segments:. Launch of Financial Times Asia. Licensing of Penguin copyrights. Agreements between the Brand and Chinese operators for the supply of contents - In 1993 made the first step into China and launched the book club in 1997 - In 1997, opened point of sales in a 49% JV partnership (21st Century Book Chain) with a wholesale distributor for the creation of a modern distribution network - In 1986, entered in the Chinese market with the publishing of the Chinese version of Business Week - In 1999, opened a Chinese branch with focus on:. Higher Education. Specialized reviews. English books - Present with a representative office - Publishes 2 magazines: "Elle Deco and 25 ans - In September 2004, lunched a special insert in Chinese on Italy, structured with 6 themes: Fashion, Interior Design, Food, Travel, High Tech and Business (distributed trough and agreement with a Chinese partner)

* HDPE price as June 2006 Source: Indonesia Investment Coordinating Board, Vietnam Trade Promotion Agency, Alibaba, China Info bank, ISI, Value Partners analysis

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When analyzing the differences between cost structures for production in the USA or China, approximately 38% reduction of sale price can be obtained with lower direct costs (mainly labor), investment and overheads. Only raw materials are slightly more expensive. 3
Made in USA Profit Overheads Equipment depreciation Other direct costs (labor, land, energy, ) 10% 10% 15%

Made in China

According to a survey of 1,423 Italian companies in China by Observatorio Asia, the actual savings obtained on production costs were: Cost Savings less than 10% 10-20% 20-50% 50-70% over 70% % of Co.s 1% 15% 60% 21% 3%
~38% potential savings 10% 8% 12% 10%

Raw materials

Note: Savings of Italian companies according to a survey of 1,423 Italian companies in China by Observatorio Asia Source: Observatorio Asia 102

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China is a complex and difficult market that shows many issues that need to be carefully addressed 3

Issue Market complexity

Evidence - Most known suppliers are flooded by RFQs* due to a widely used practice of trial request for quotation - Logistics inside China is still underdeveloped
Implication - Communicate seriousness of the approach - Look for alternatives - Lead times and transportation costs should be carefully considered when selecting the right supplier - A logistic solution should be developed for suppliers in remote regions - Need time to select the right supplier - Any on-field activity should be carefully planned to avoid waste of time and resources - As much information as possible should be collected and verified prior to visits - Any information should be carefully checked - Companies information should be verified through on-site visits - Direct contact to explain the importance of the information exchanged - Need to interact with potential supplier by using local resources - Need for support in final negotiations - Do not rely too much on e-mails

Logistics

Geography
- Long distances - Component production very fragmented, (e.g. in automotive industry, almost every province has some vehicle manufacturers and thus a component supplier base) - Information in China is often:. Difficult to find. Not reliable. Out-of-date - Companies are not used to sharing information and sometimes deliver incorrect information - Language is an important barrier - Cultural/behavioral barriers are frequent - Companies in some cases uncomfortable with new technologies

Information

* RFQ = Request for Quotation 103

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Clarify the objectives that the company wants to achieve in China