Why? Preface: What Does China Look Like from Space? At Night? Source: NASA (United States – National Aeronautics and Space Administration)

Table of Contents – Corporate Series (Part 1 of 6) Introduction – What China Will Look Like in the Future STRUCTURAL FRAMEWORK: Determinants of China’s Economic Geography The PAST: China’s Economic Growth - WEALTH: Forward Trend in Middle Class Growth - URBANIZATION: Forward Trend in Mass Migration / Urbanization - The FUTURE: China’s Future Country-Sized Mega-Cities and Mega-Corridors Next Generation Structural/Functional Strategies TODAY’S BURNING PLATFORM: Structural Optimization (Cost / Revenues) 1. Cost Reduction / Resources: Opportunity Envelopes for Emerging Structural Cost Optimization 2. Revenue Growth / Markets: Pareto-Optimal Cost-Revenue Platform Solutions FUTURE BURNING PLATFORMS: Next Generation Optimization Opportunities 3. Innovation Enhancement / Talent: Innovation-Seeking Investment Trend 4. Shared Service Centers: SSC and BPO Trends, Strategic Opportunities 5. Virtually Integrated Operating Models: Migration to Virtually Integrated Operating Models China’s Economic Health and Opportunities for Investors - China Investor Confidence: China Ranks #1 as Most Attractive Investment Destination of Future - Financial & Economic Health: China Balance Sheets - Banks, Enterprises, Households - Stimulus Plan: Composition and US Comparison - Investment Opportunities: What are Investment Opportunities? For which Sectors?

INTRODUCTION: What China Will Look Like in the Future …

67% Mountains, Deserts, Steppe … 90% of 1.3 billion Population in EAST Structural Determinants of China’s Economic Geography … People Mountains Deserts Steppe

The PAST: Fastest Growing Large Economy in World China’s Economy: Doubles every 7 Years … Tripled most Recently Source: IMF 3x 2x 2x China Opens to the World Applied to join GATT Eliminated its dual exchange rate Accepted full convertibility for current account transaction Admitted to WTO Hosts OLYMPIC games China GDP (USD trillion) USD (Real Market Rates)

WEALTH: Forward Trend in Exploding Middle Class China’s Middle Class: 400 million (2010) … 500 million (2015) Sources: Urbanization Rates, Population based on UN, World Urbanization Prospects 2007; MGI Consumer Demand 2008

URBANIZATION: Forward Trend in Mass Migration into Cities China’s Urban Population: 600 million (2010) … 700 million (2015) Source: World Urbanization Prospects 2007

The FUTURE (2020): Emergence of 10+ Mega-Cities the Size of Countries Mega-City Profile: 60 Million Population + World-Class Infrastructure Mountains Deserts Steppe China’s Emerging MEGA-CITIES Mega-Cities Mega-Corridors

Source: World Bank The FUTURE (2020): World Bank Projects China as #1 Economy in World GDP* PPP-adjusted GDP* PPP-adjusted

TODAY’S BURNING PLATFORM: Structural Optimization (Cost / Revenues)

TODAY’S BURNING PLATFORM: Structural Cost Reduction, Revenue Growth Global Structural’ Cost Reduction … Revenue Growth Cost Reduction 3) INNOVATION MARKETS KNOWLEDGE RESOURCES Sales Engineering R&D Sourcing Production Distribution Marketing Shared Services IT HR F&A Procure DRIVING Shareholder Value RESEARCH & DEVELOPMENT SHARED SERVICE CENTERS CONTRACTS, PARTNERSHIPS PRODUCTION / SOURCING SALES & MARKETING Revenue Growth

1. COSTS: Does First-World Infrastructure with Third-World Wages Exist? Asia Labor Costs: 10 – 20 Times Cheaper than in West Note: Units for Electricity $/kWh; Water in USD/m3; Waste Water in USD/m3 Utility Costs Labor Costs (USD per month) Source: Wage Data from the International Labor Organization; Utilities Rates from Public Utilities (non-negotiated rates)

1. COSTS: China Yields Major Cost Savings through Production & Sourcing Is it POSSIBLE for a Company’s Economy … to Surpass that of Countries?

1. COSTS: Significant Stratification Trend for Wage Bands Mountains Deserts Steppe Low Cost Labor (Bands Normalized to Highest Wages for Operators) 1 1 1 0.65 - 0.75 0.8 - 0.9 0.7 - 0.8 Labor Costs: Western China @ 65% of Costs compared to EAST Wage Bands Source: Exolus Research

1. COSTS: Where are Emerging Structural Cost Reduction Opportunities? Intersection: Low Cost Bands + Emerging Mega-Cities Mountains Deserts Steppe Wage Bands / Mega-City Overlay (Normalized to Highest Wages) Wage Bands Mega-Cities Mega-Corridors 1 1 1 0.65 - 0.75 0.8 - 0.9 0.7 - 0.8

2. REVENUES: Significant Income Stratification Trends across China Coastal Wealth Spreading Across the Country 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 China Per Capita Annual Income (USD, PPP-Adjusted) Per Capita Annual Income (USD, PPP-Adjusted)

2. REVENUES: Car Sales/Production Proxy for Directional Market Sizing? China Cars: World’s #1 Consumer … World’s #1 Producer China Automotive Production Sources: Company Websites, Publically Available Information

2. REVENUES: High Spending Growth Sustained Through Global Crisis Sustained Retail Sales Growth … Huge Shift in Discretionary Spend Personal Expenditure 15.5% Growth (2009) 1.8 0.7 0.4 Retail Sales Growth USD Trillions Source: China National Bureau of Statistics

2. REVENUES: Immense, Rapidly Growing Markets across Verticals Exploding Middle Class+ High Speed Urbanization = Explosive Growth in Consumption Source: China National Bureau of Statistics, EIU 2008, Various

COSTS/REVENUES: Where are Pareto Optimal 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 Per Capita Annual Income (USD, PPP-Adjusted) Wage Bands Mega-Cities Mega-Corridors 1 1 1 0.65 - 0.75 0.8 - 0.9 0.7 - 0.8 1 1 1

FUTURE BURNING PLATFORMS: Next Generation Strategic Optimization

The FUTURE: Third, Fourth & Fifth Generation Global Strategies KNOWLEDGE RESOURCES SSC IT HR F&A Pro’c MARKETS REVENUES COSTS INNOVATION Sales Engineering R&D Sourcing Production Distribution Marketing PRODUCTION / SOURCING DRIVING Shareholder Value SALES & MARKETING RESEARCH & DEVELOPMENT SHARED SERVICE CENTERS (SSC) CONTRACTS, PARTNERSHIPS

3. INNOVATION: China Mobilizes all Resources to Develop Talent China Science and Engineering: 1.6 Million Graduates per Year Sources: National Science Board, Science & Engineering Indicators 2008

3. INNOVATION: Where are Key Nodes for Structuring R&D Platforms? “R” of R&D Seeks Universities … “D” Seeks Markets & Production Mountains Deserts Steppe 1 1 1 0.65 - 0.75 0.8 - 0.9 0.7 - 0.8 Wage Bands Mega-Cities Mega-Corridors > 10 > 50 > 150 R&D Centers (# Operations) Research & Development Centers (Number of Operations in Select Cities) Source: UNCTAD, WIR

Wage Bands Mega-Cities Mega-Corridors > 10 > 50 > 150 R&D Centers (# Operations) Research & Development Centers (Number of Operations in Select Cities) Source: UNCTAD, WIR 3. INNOVATION: Even Big Pharma Migrating R&D Functions to China Costs Disease Diversity R&D Clinical Trials

4. SHARED SERVICE CENTERS (SSC): Strategic Solution Envelopes Efficiencies … Economies of Scale … Knowledge Sharing … Standardization Mountains Deserts Steppe 1 1 1 0.65 - 0.75 0.8 - 0.9 0.7 - 0.8 Strategic Sourcing / Mega-City Overlay Wage Bands Mega-Cities Mega-Corridors Shared Services Source: KPMG “A new Dawn: China’s Emerging Role in Global Outsourcing”, 2009

5. Global Virtual Integration Models: Extension of Core Functions Global Virtual Integration Models … Even Big-Pharma LEAP-FROGGING Generations China’s CRO Market Boehringer Ingelheim 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%. Pfizer 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 Outsources to Shanghai Institute of Materia Medica (SIMM) chemistry requirements. AstraZeneca Invested USD14 million in Wuxi Pharma Tech for the synthesis of 150,000 compounds. CRO Extended Cases CSO Extended Cases Sources: Goldman Sachs: Healthcare Services: CROs, December 2007; Exolus Research

China’s Economic Health … Opportunities for Investors

Senior Executives Select China as Most Attractive in World Investor Confidence in China #1 in World Source: World Investment Prospects 2009 - 2011 Top 14 Most Attractive Destinations for Future Investment (2009 – 2011) % Percent of Responses

Healthy Balance Sheets – Banks, Enterprises, Households USD2.85 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 6% in 2007. Financial institutions extended approximately USD1.4 tr in new loans in 2009; almost double that of 2008; and USD1.2 tr in 2010, slightly down from 2009. Forex Reserves Achieve Record High in 2010: USD 2.85 trillion The Central Bank has accumulated over USD 2.85 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 (+4.3%) in 2007. Record corporate profit growth over past 5 years (industrial profits rose 38 ppa); liability ratios declined. Urban incomes have nearly doubled in past 10 years. Source: Deutsche Bank; Standard Chartered; UBS; IMF; Other

Stimulus Plan Well Structured, Strong Ability to Implement Large Stimulus Package … Authorities able to Deploy Quickly … China Early Recovery China Stimulus Distribution Economic Stimulus - Comparative Source: China’s Stimulus vs. America’s Bailout, Housel 2008 ; National Development and Reform Commission March 2009

Stimulus Plan will be of Direct Benefit to Range of Investors Source: MOFCOM; NAROS; Various :

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 Download Reports @ www.exolus.com/en/knowledge/research.html India 2020 Brazil 2020 Russia 2020

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