 Yes, I've been living in China for just over 20 years at this point in time and when I went there one of the privileges that I had was to try and create the consulting industry in China because actually back in the early 1990s consulting wasn't legal in China Although we hadn't bothered to check that before we showed up and so we had to find out how to how to register a legal entity, how to do it without creating a joint venture because better or worse, McKinsey doesn't do joint ventures and then we had to work out how to explain what we do not just to potential clients but to future colleagues You know at that point in time everyone graduating from the university got a you know encouraged position to go work for for the government or go work for a state-owned enterprise So we had to get them to step out of that and one thing you did become was was actually pretty good at describing What it is that that that McKinsey McKinsey does And I think you know a lot of what I've done over the last 20 years is about building a business myself Not just advising other people on that What I wanted to to talk about today was you know where at this point in time You know I see you know the economy heading overall and then push down a little bit into Where we might see the next the next wave of opportunities because certainly some industries are actually getting relatively mature and China at this point and the number of industries that are about to go through the inflection point the S-curve of You know four or five years of 50 60% growth. We're just being in the right place at the right time is the key to success It's going to be a new set of industries over the next four or five years So what are the key key elements in in the trends you know clearly got to frame, you know what role is the government playing and certainly the Consistency of purpose around a push towards domestic driven growth consumption driven growth Services driven growth is there and it is happening, but it's happening slowly and steadily And given how dependent the economy has been on infrastructure It's not going to change overnight The other thing that I think I would just highlight from the government's actions at the moment is you know the the anti-corruption initiative is still going strong and I think it's certainly in terms of the Local level government officials conspicuous consumption It's a fact of life going forward No one expects that they'll ever be a return to the era of very high-level conspicuous consumption by local government officials And that does create some interesting challenges down the road because of course government officials get paid relatively little And therefore, you know the relative attractiveness of being a government official is Diminished in the same way that the relative attractiveness of being a teacher Relative attractiveness of being a doctor in China has become very low over the last 20 years because those jobs used to have enormous status and In a society where income levels for everyone were low That was great, but in a society where the the sales agent coming to the hospital to sell the drugs gets paid Three times what the doctor gets paid You know, why would the doctor be the doctor? I'll talk a little bit about the middle class becoming the mainstream and that and how that Is continuing to drive overall consumption the fragmentation of urban markets what that means for businesses is You know an ongoing process of cost increases and margin pressures and so we see much much more focus on To use the broad word productivity Whether you're a multinational private Chinese company or in many ways most excitingly state-owned enterprises Actually care about productivity now and really they never have in the past Digital the pace of digital Disruption in the economy in China is if anything faster than we see in the West whether it's the Well particularly in the emergence of of online retail and what that is doing to disrupt Physical retail and as I'll touch on in some cities you may never get Modern retail as we've known it. I mean the moles haven't been built and they may never get built at this point Local innovation we are seeing a tipping point in a number of industries and I'll highlight a few You know solar energy wind farms where as the wind turbines medical equipment Where you're seeing genuine innovation by Chinese companies today And then I'll close with you know a little bit of what could go wrong You know, I think on balance We're continuing to in all likelihood have a six seven percent growth year But there are some discontinuities that could come there out of the plenum the I'd say first of first and foremost actions from the plenum last year have actually been pretty slow in implementation and we hear a lot about the new authority and and strength of leadership of She and his team, but there's still a lot of checks and balances particularly when it comes to dealing with the economy And so well, they've they've moved on the market mechanism in terms of raising prices of a lot of utility inputs energy water land capital minimum wages In terms of streamlining relationships in terms of actually introducing more private capital That's going very very slowly Very little has been happened on that in terms of the urban urban property urban residential residential rights for Citizens from the countryside also going very slowly in terms of pace of change This slide just illustrates where we're headed with the evolution of the middle class and you know by the This is why when Some some product categories in China have the you know the the cognac guy is probably the most extreme You know, they've seen 60 70% reduction in demand as a result of the anti-corruption Mercedes has continued to see double-digit growth BMW sees double-digit growth. So Cars cars are being bought by the middle class Vast vast majority they're not being bought by by government officials and it just illustrates the strength of consumption power Of this middle class that's buying the homes often buying multiple homes buying cars buying the iPhone mean Apple now sells 25 billion dollars of product in China to Chinese consumers Up from by the way almost zero four years ago They only started to take the market seriously after Tim Cook took over But the the the depth of consuming capacity in the middle class there You know is very very strong and is the the most important underpinning Driving the growth of the economy going forward, but is that the pivot on that is? It's these middle-class consumers lose confidence If these guys lose confidence, they could easily pull back the spending and remember There hasn't really been a recession in China for more than 20 years So you have to be 40 45 to have experienced a recession while you've been in the workforce And you know what many government officials are so hyper concerned about is Overreaction from unsophisticated consumers and you see this all the time in that whether it's the the reaction to wealth management products and defaults whether it's reaction to a fear of dropping housing prices and So the government is very much framing its actions around how do we sustain consumer confidence? And at some point this will become a difficult you know a very difficult pressure to deal with Moving in the Middle-class that there's middle-class folks that I've just been describing Historically were you know predominantly in the tier one cities that we tend to visit But you know looking forward all these and the new the new citizens coming into this class are in the tier 2 and tier 3 Cities. Yes, they'll still largely be coastal You know within 500 miles of the coast But it will be another 60 to 100 cities where these citizens are that creates a lot more complexity in building your business and and and running your operations in China I Mentioned earlier that a lot of industries are growing a lot more slowly, you know the golden era of communications of you know steel production Of chemicals and the like is past These are much these are yes, then they're still growing and maybe you know both by European standards These are nice exciting growth numbers But by Chinese standards, these are very mature industry growth numbers six seven eight anything that single digit And this is where you know throw money at the problem throw people at the problem no longer works And so they're having to become much more sophisticated sophisticated in in how they operate and Bringing in a lot more international talents in many ways. I touched on the pressure that we're seeing in terms of you know water, you know real estate wages Let me just touch on on wages because in many ways this There's two wage economies going on in China today There's actually a shortage of Skilled factory workers the shortage of skilled factory workers So you know even as the government pushes up the minimum wage It's actually not doesn't have to push very hard Because people factories are having to pay more just to find people that attract them The sec but the second way second wage phenomena is for university graduates University graduates in 2014 again. It's paid the same They were paid in 2008 In fact may actually be getting paid less in 2008. There's seven million graduates a year There's maybe one and a half million get jobs that require being a graduate It's five million these folks that are coming out of the university every year and are really struggling to find a job They end up in call centers. They end up selling insurance their insurance agents Very high level of frustration and in fact that the wage wages have crossed over If you're a skilled factory worker, you will get paid more than one of these second-tier graduates Coming out doing a white-collar job But there's a prestige problem graduates can't go work in factories That's a pressure that's building up in the economy And it's certainly one of the things that concerns me and that I worry about As a result of these increased costs profits going down. I just wanted to Sort of bring bring that to life. We're still in positive territory, but your typical state-owned enterprise is about 40% less profitable than it was three or four years ago E-tailing what's going on with with e-commerce a couple of example if you live in a tier three city And you've got income and you say I want to buy, you know a Branded handbag a coach handbag. There is no coach store in that city the department store doesn't have it you buy it online and it gets delivered the next day and That's how you become accustomed to buying your luxury goods It's how you become accustomed to buying more all of your electronics, you know your your your clothing and Now in the first tier cities, it's how you become accustomed to buying your groceries as well I'm not going to claim. I'm typical, but you know We don't go to the supermarket anymore Everything gets you know from and it's not just from these mass markets There's all of these niche online players, too So can be from the online from the organic farm delivering directly to your home The convenience factor the comfort factor is just really really really high and Even there's a couple of other things that are going on with this the the economic model of running a mall in China It's typically you take a percentage of revenue of the stores that are that are in your in your mall So The customer comes into the mall has their mobile phone. They look it up online They try it on there They may just order it online That's nothing much you can do about it But you may actually find that the store has iPads or tablets in there and says why don't you order it online? Rather than buying it from me because it's actually Higher margin for the retailer to have you buy it online than buy it in the store So, you know, Burberry's is a great example because they explicitly do this and They you know, so they're now, you know, essentially under the old model They're getting the renting their space for free because they have no revenue in the store It's kind of interesting dynamic The second thing that I'd really high is the cross-border aspects of this You know what Alibaba and JD and others are doing 60% of small packages going into Russia Chinese e-commerce sites shipping products into Russia at this point Scythe Asia is starting to see the same thing You know, the Chinese companies have set up local language websites Alibaba JD and the others They're doing it in India now and they they could they got the logistics infrastructure and the cost structure in the supply chain To fundamentally disrupt retail in Malaysia or Indonesia and the lights You think we're going to see some interesting geopolitical challenges with this going forward I talked about innovation Biotech, you know, these these Chinese companies are stuffed with PhDs from from MIT from Caltech And the like they've come back. They've got they've taken advantage of the availability of enormous amounts of funding to back them in China they've got world-class research facilities and The the ability to test drugs in China is actually a very benign environment It's very easy to if you're a Chinese company to bring to bring drugs out of the market to test And do it at a pace that you just can't do in the US. So you're seeing new cancer drugs You're seeing new diabetes drugs, which is a big problem in China coming coming to life Seeing innovation in a lot of these medical products new soft, you know started as a supplier to Phillips Start as a supplier to Phillips worked out that of these medical devices. They were manufactured They were they were actually they were contracted to develop a software Fulfill its medical devices They realized over time that 90% of the value add was in the software So they actually just flipped it round and started getting someone to manufacture the devices with their software put into it No very competitive mind ray, you know billion dollars competing in the market This just brings it to life a little bit in terms of market share The orange is the share of a whole set of different different markets that are now captured by Chinese And you know see the MRIs You know implantables of the stents that you put put put it put in and into your arteries And and the like and basically if you go into a hospital today in China You know that the doctor will ask you do you want the premium or do you want the You know the mass product and the premium will be the the J&J and the mass will be be the Chinese Share is share is growing and that their quality reliable products What do businesses worry about in terms of doing China and operating in China? Yes, clearly everyone worries about competition Multinationals worry a lot more about costs Chinese companies are rather more optimistic so they can they can manage the cost But the two down here the ones is that this the Chinese companies are really struggling with my customers are getting much more sophisticated Historically Chinese companies didn't value functional excellence trying to find the chief marketing officer or You know chief branding officer or supply chief, you know Every typically you would rotate around You wouldn't develop a deep expertise and if anything what you wanted to be is the general manager of a business unit that's that's the definition of success in a Chinese company and Now there's a real recognition, which I think is fantastic of Functional excellence is really really important and it's starting with the need to understand the consumer The need to get information out of you know, what's going on on the internet and how do I deal with that? How do I bring some science into pricing? I mean most Chinese companies completely brute force about how they deal with pricing to this point in time What could go wrong? Touched on you know a little bit as we're going through this top left is really about Students if you ever go to any of these job fairs in China, they're incredibly depressing Incredibly depressing events Just the number of people that are looking for jobs that don't exist on the banking side of things I think there's very little chance of a you know of a banking crisis What I do think is there's a very real chance of loss of confidence in a lot of the wealth management products that are that are out there You know some of that links to to the internet folks and the pace at which they have they've developed on housing I Mean in many cities there is no longer a true market for housing in the sense that Developers Developers aren't able to lower the price Why the developers not able to lower the price? Developers aren't able to lower the price because if they lower the price in a building where they've already sold some of the properties The people they've already sold the properties to come back and demonstrate and cause trouble That they want the reap they want to refund they want to discount down to the new price and anything They want compensation for the fact that the value of the house has gone down Over and above the discount So you see developers holding the line on price And so the market is getting very very sticky stuck basically And you see you see many of the developers being very honest the vanker CEO earlier this week So, you know, I think the you know the era of making money and housing and property development China's over you see others just voting with their feet of Putting billions of dollars into property developments in Malaysia or coming to London or LA And you know to me the property developers ought to be the people who know best what's going on in the housing market Hey gradual evolution of price is fine What the you know what a? Discontinuity leading to loss of confidence. That's the big issue that we would be concerned about And then fine. This is more just the the Beijing pollution issue That you know Beijing isn't the worst city, but it is the most prominent city for pollution in China That You know, I don't think anyone has any doubt it will get cleaned up over time It's just a question of the patience of citizens for the how long it's going to take And you know of the three big levers they've already pulled the easy one of Buying out polluting industries, you know, there's no public number on this bit Antidote just looking at the number of factories that are gone anecdotally people talk about five or six billion dollars worth of spending by the Beijing government to shut down steel mills in the surrounding province Since since it got so bad You know upgrading the quality of cars the quality of gasoline Upgrading construction practices, you know, that's going to take a lot longer So again, I don't think that's It just can lead to problem and get problems of lack of confidence in Chinese consumers a lack of willingness to live there to work there to study that I think I touched on the real estate and banking Yeah, yeah, I mean it really does all come down to to consumer confidence Okay Spend a couple of minutes on where I see that the new opportunity is coming as I said most of Successful change economy going forward is driven by domestic growth urbanization urban incomes. What the households want? A couple of critical themes supporting that then one is agricultural modernization land consolidation consolidation land ownership creation of Scale farms that you can industrialize that you can invest that it justifies having the basics attractors Modern seeds modern fertilizer modern irrigation to improve yields and then you know the finishing off of the City infrastructure, whether it's Public trams in this likely to be another 300 billion or so spent on City-level public transport trams Undergrounds and the like over the next ten years Trying to make the cities more user friendly Bring this to life that the left-hand side is is our sense of how the evolution of What a GDP growth and get going private consumption going 20% which is ridiculously and unsustainably low to hopefully about half And the growth in services that comes with that Let me illustrate a little bit on some of these these in this I mean talked about detailing on protein China's protein consumption is growing 5% per annum On a per capita basis You know, it's still only a hundred kilograms a year beef imports have grown six-fold over the last three years You know China's invested ten billion dollars in soybeans production in Australia in Brazil sugar cane and Milk in New Zealand one thing I did want to emphasize it a lot of this investment almost all of this investment is by private Chinese companies This isn't the state going out and saying, you know, we need to you know, own cows in New Zealand as private entrepreneurs actually some of my friends who Become wealthy by succeeding in technology. They see agriculture as the net as the next technology opportunity the equivalent of the next technology opportunity in China that Feeding feeding China's middle class in the way they want with high quality safe And you know value-added foods So, you know buying, you know apple farms in Oregon buying Cherry farms in Chile Fish farms in Malaysia, you know a lot of this goes on below the radar screen because it's it's 50 million dollars a hundred It's not there the ten billion dollar kind of investments A lot of it's going on Until the Ukraine crisis happened There was this enormous initiative to try and build a dedicated wheat pipeline What wheat flow from Ukraine growing it put it on the ships in the Black Sea have it come round to a dedicated port? Up by Tianjin and bring wheat into China That's off obviously a bit off the table at the moment Milk milk, I mean it will be another generation before the Chinese middle-class trust domestic milk again It's not gonna happen anytime soon But convenience Processing that you know the growth of chilled the growth of frozen prepared foods the growth of Demand for food processing equipment is actually one of those industries that is on an S curve right now It's growing 25% a year the demand for food processing equipment the Logistics goes a lot with the e-tailing private education. You may not really mean China private education is actually enormous in China and the pre in the in the pre-primary More more places are private than state owned There's the tutoring side of things that's like in all parts of North Asia enormous online learning We're coming very very large and private universities Is an established part of the Chinese education system? Private healthcare there were 1500 private hospitals opened in China last year 1500 private hospitals opened last year This is this is a classic of Chinese government saying we need to improve the performance of our sector so we open it up to private partisan We open it up to foreign participation, you know We could all go open a hospital in China today 100% foreign owned no problem A big challenge will be getting any doctors to work there, but The there's a shortage of shortage of doctors But assuming we could we could run that and we could run clinics You see everything from you know the boopers the Chinese that the American hospital chains through to private equity Playing in this space right now and my guess is this will run for three or four years Then China will say we've got enough investment. Thank you We don't want to wipe out the domestic guys and It'll move forward and we will probably at that point have oversupplied and It may actually be quite unattractive for the foreign investors at that point If you know, I wouldn't be investing in the hospitals right now. I might invest in building the hospitals, but running them would be Is is likely to be relatively low returns unless you're careful tourism obviously People have more time. They're traveling at the moment domestically Demand for tourism very high You know, we were talking earlier around, you know, how do you stimulate demand for? Chinese tourists to come come come visit Ireland, you know first second and third would be direct flights Reason so many Chinese go to Istanbul. It's not because they have a great passion for Turkey. It's because there's direct flights And there are There's passion to go to different places to go to new places is really really high and Can enable that? And it doesn't have to be from Beijing or Shanghai could be from Chengdu. It can be from Guangzhou you know It makes an incredible difference Entertainment with you know, there's about a thousand new cinemas opened in China every year Most of them are very luxury high-end you pay $15 15 US dollars to go watch your 3d movie in I max in China. It's the second largest movie market in the world at this point There's a there's a lot of money again, this is the you know, Disney's opening the theme park in Shanghai next year just the general Theme of middle-class demanding middle-class quality kind of services That we're all familiar with that many Chinese companies are actually struggling to to to develop and deliver at this point Just I'm almost about to close But there's just one industry that I just want to highlight when if anyone ever asks You know if I want to have so stats us to say no one makes any money in China Just remind them about the automotive industry the short version of this is one third one third of the global automotive industry profits are made in China and If you're selling luxury cars, it's almost half of the global industry profitability is made in China It's been a fantastic decade if you're BMW or Audi Guess at some point this is likely to end But right now They're making 30 billion dollars of profits in China. I talked more about consumer than industrial Opportunities for industrial tend to be less at this point because they're many of the more mature sectors The smart cities I think is still there as an opportunity Working with and helping partnering with Chinese companies as they go global as an opportunity And at some point the the privatization wave will pick up again local governments need to You know monetize the assets they have to pay down debts And Some of the remaining assets they have is less and less land and more and more businesses And so they may not be particularly high-performing And you'll have to be selective and thoughtful about how to participate this But there's a lot of both Chinese and international private equity looking at those opportunities at this point So that's where I'd like to to close them this sort of this the summary and then open it up for the questions and Conversations, you know net net I do think you know the base case We should all have is the economy will continue to grow at the five to six percent a year going forward I do think there's some stresses that are building up because of the the government's avoidance of taking bolder actions that could Reduce the confidence of the Chinese middle-class and the consumers And that at some point That's going ahead doesn't create a bit of a discontinuity, but that's likely You know quite a number of years down the road. So thank you