Presented at the Bankers Association for Finance and Trade 16th Annual Conference on International T

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(No Transcript)
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George Nast
Partner McKinsey Company Banking on Trade C
apturing Chinas extraordinary trade opportunities
Presented at the Bankers Association for
Finance and Trade16th Annual Conference on
International TradeConnecting the Dots November
2 - 3, 2006Renaissance Chicago Hotel, Chicago,
IL
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Summary of trade finance opportunities in China

• Like the country itself, trade and trade finance
  opportunities are growing rapidly in China
  
• Customer needs are diverging with the emergence
  of 4 distinct segments each with unique needs
  
• Although the opportunity is attractive,
  competition is tough and unique business models
  are required for success

Large revenue upside By 2010, revenue pool fro
m trade finance expected to exceed USD5 billion
4
Cross-border trade payment is growing rapidly ...
2,315
CAGRPercent
2003-05
2005-10
4,510
25
15
208
27
17
391
17
8
25
9
21
10
657
13
9
2,230
India
Taiwan
1,432
Korea
37
22
195
423
Singapore
198
Hong Kong
332
China
2010E
2003
2005
Merchandise trade related only and only
refers to corporate cross-border payments to
another corporate through banking system does
not include fund transfer between financial
institutions
5
driven by strong growth in global trade
5,557
CAGRPercent
2003-05
2005-10
9
9
18,362
1,980
8
7
4
8
2,478
12,099
1,420
10
8
1,681
8,347
7,954
RoW
970
1,404
5,789
U.S.
3,567
Europe
10
12
5,557
3,209
2,013
Asia
2000
2005E
2010E
Services include travel transport services,
communication services, construction services,
insurance services, financial services,
professional technical services and use for
intangible non-financial assets and proprietary
rights Rest of World includes Africa, Latin A
merica, the Middle East and Oceania
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and increased use of open account settlement
Breakdown in settlement method Imports Percent
Breakdown in settlement method Exports
Percent
OA
DC
LC
OA
DC
LC
10
60
1999
30
60
35
5
China
55
5
40
2005
75
5
20

59
5
1999
36
75
4
21
Taiwan
2005
24
2
74
84
2
14

1999
56
10
34
33
33
34
Korea
5
39
2005
56
41
33
26

35
5
60
1999
55
5
40
India
45
5
50
2005
5
35
60

70
2
28
1999
70
2
28
Hong Kong
75
2
23
2005
75
2
23

Average of 5 key markets
45
50
1999
5
10
40
50
55
5
40
2005
70
10
20
Note OA Open account DC Documentary
collection LC Letter of credit
Source Central Banks data Celent report
interviews
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Intra-Asia trade has grown faster than trade with
North America and Europe
3
USD billions
CAGR,1999-2004
Share of total Asia trade, 2004
1999
2004
15
55
1,185
Intra-Asia
2,400
Asia-North America
573
780
6
18
537
Asia-Europe
730
6
17
208
Asia-RoW
470
18
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China accounts for 40 of growth in intra-Asia
trade
Intra-Asia trade includes trade between China,
Hong Kong, India, Japan, Malaysia ,Philippines,
S. Korea, Singapore, Taiwan, Thailand
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China is becoming the hub of major regional and
international trade corridors
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( ) of totalAsia trade in 2004
Top Asia-related trading corridors
USD billions, percent
CAGR, 1999-2004 Percent
1999
2004
0
Asia-US related trading block (35)
190
Japan US
192
11
100
China US
170
2
65
Korea US
72
-2
54
Taiwan US
49
Asia-EU related trading block (36)
18
75
China EU
168
2
126
Japan EU
141
10
35
Korea EU
57
North-Asia triangle (16)
66
China Japan
168
21
23
China Korea
90
31
40
Japan Korea
66
11
Greater China triangle (11)
85
China HK
113
6
China Taiwan
78
20
28
HK Taiwan
26
-1
Represents Asias trade with ROW
9
Large retailers in the global marketplace command
greater bargaining power
3
Dominant large retailers have emerged in the
global market place . . .
. . . resulting in greater bargaining power
2001-04 CAGR Percent
2004 revenue USD billions
285
Walmart
12
90
Carrefour
13
73
Home Depot
11
17
70
Metro
10
65
Koninklijke
62
Tesco
23
56
Kroger
4
48
Costco
11
10
China accounts for the lion share of the trade
and cash revenue pools in Asia
8
Revenue pools overview USD billions
Revenue pools of major Asian markets, 2010
USD billions
Trade-fee
Trade-financing
Forex
7
11
0.7
1.1
China
3.3
0.4
0.2
India
0.4
7
0.4
Korea
0.4
0.7
Forex
0.1
Taiwan
1.4
0.4
Tradefinance
Hong Kong
0.4
0.3
0.5
3.2
2.1
Total
6.0
2005
2010
Include estimation and projection from the
five countries on this page
Include estimation and projection from the
five countries on this page and Singapore
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Summary of trade finance opportunities in China

• Like the country itself, trade and trade finance
  opportunities are growing rapidly in China
  
• Customer needs are diverging with the emergence
  of 4 distinct segments each with unique needs
  
• Although the opportunity is attractive,
  competition is tough and unique business models
  are required for success

Large revenue upside By 2010, revenue pool fro
m trade finance expected to exceed USD5 billion
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Customers can be segmented based on volumeand
complexity of their transaction needs
High
Transaction heavy Large transaction volume wit
h local and regional trade and cash product needs
Transaction complex Large transaction volume w
ith varied cross-border trade and cash needs
along the supply chain
Example Top buyers in the world linked up wit
h Asian suppliers
Example Large regional and local corporates
Transaction volume
Small simple Limited transaction volume with b
asic product needs, and strong demand for
financing
Spot complex Limited transaction volume but wi
th complex financing/ structuring needs
Example Commodity producers and
trading companies infrastructure construction
Example Small and mid-sized companies not linke
d up with global buyers
Low
Transactional (using basic products)
Complex (using value-added products)
Complexity of transaction
Basic products include international
remittance, LC, trade finance and FX settlement
value-added products include supply chain
financing, ARP, other complex trade finance
products , and FX derivatives
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Customer needs have become differentiated
Customer behavior shift
leads to demand for new trade finance services
From
To

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Retailers are dramatically increasing their
China sourcing
Value of goods procured from China USD billions

25-30
2.6
1.5
2.0
CAGR 26
CAGR 33
1.6
15
CAGR 20
1.3
12
10.3
0.5
4
2000
01
02
2007
2001
02
2004
2000
2006
03
03

• Over 300 employees in the Shenzhen global
  procurement center
  
• 18-20 of 2003 volume (approx. USD2.5 bn)
  sourced direct

• Procurement centers in 10 different cities of
  China
  
• 25 of 2003 volume (approx. USD0.5 bn) sourced
  direct, with growth of 30 per year

• Aims at consolidating volume at country level to
  drive cost savings, while simultane-ously
  capturing country-specific advantages e.g., in
  fleece fabric from Taiwan

Target value Including all categories glo
bal sourcing in non-food categories would be
approximately 80 of the total

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Integrating into major supply chains can be a
source of value
Example computer manufacturer
Demand
Commitment
Supplier collaboration
Customer collaboration
Seperated sales and buying departments with
little coordination
Committed customer demand (constrained optimized
plan)
Supplier co-llaboration hub (VMI)
Purchasing
Sales
Customer demand and mid-term forecast
(unconstrained plan)
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Economic growth will drive energy demand and
need for structured trade finance
21
Total oil demand MM b/d, percent
CAGR Percent
Key product demand
60
66
100

• Structured L/Cs
• Multi-year structured trade
• Infrastructure finance collateralized by trade
• Transaction logistics
• Related commodities, rates, and FX hedging

2
1
Europe
1
U.S.
5
China
Rest of Asia ex-Japan
3
2005
2010E
Inland demand plus international aviation and
marine bunkers and refinery fuel
Central Asian republics included

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SMEs are currently underserved, implying future
growth potential
42
Percent
Number of companies
Employment
7.05 MM
3.0 MM
752 MM
10.6 MM
25
13
1.0
0.2
China
Korea
China
Korea
GDP
Bank loans
USD1,055 bn
USD220 bn
USD1,705 bn
USD340 bn
16
84
58
49
45
China
Korea
China
Korea
SMEs in Korea are defined as firms with
between 10 and 300 employees, less than USD30
million assets,less than USD20 million sales
(which varies depending on sector)
Estimated from output shares
18
Informal lending and banks reluctance of SME
lending have contributed to the low penetration
36
Primary sources of capex Percent
Local government
Bank
4
Friends
20
Under- ground market
4
400-800
Own fund
Informal lending
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Summary of trade finance opportunities in China

• Like the country itself, trade and trade finance
  opportunities are growing rapidly in China
  
• Customer needs are diverging with the emergence
  of 4 distinct segments each with unique needs
  
• Although the opportunity is attractive,
  competition is tough and unique business models
  are required for success

Large revenue upside By 2010, revenue pool fro
m trade finance expected to exceed USD5 billion
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There are sizable local players in China
7
Market share, 2004 Percent
BOC
ICBC
Low product sophistication but Extensive ne
tworks and customers
ABC
CCB
Foreign banks
21
In China, competition is heated
0
Perception of competition in the marketplace,
China
Percent
Number of foreign banks offering selected
products in China
Sample size 35
Trade financeSample size 32
Trade finance
Corporate banking
91
Intensive
Treasury/FX/market
Moderate
Project finance
Light
Corporate finance
Investment banking
SME lending
Transaction and custody services
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Different business models focusing on different
segments are emerging in China
High
Transaction heavy
Transaction complex
Transaction volume
Multi-local
Spot complex
Small simple
Low
Transactional
Complex
Complexity of transaction
In this map, we do not show In-sourcing
specialist, as it provides in-sourcing services
to local champions, not directly serving the end
customers
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Questions