The impact of China’s continuing growth on the Eyre Peninsula

Sean Keenihan, Chairman of Partners

24 February 2014

Presentation Overview

• Discussion 3 years ago about how EP’s future prosperity linked to China

• Since then we have seen a lot of change – globally and more specifically in China and Australia

• Were we on the right track 3 years ago?

• Does LG have a role supporting engagement with China

EPLGA Conference - 2011

At the EPLGA Conference in 2011 we talked about –

• Compelling story in China that entitles big thinking about Eyre Peninsula’s future

• Australia’s economic prosperity is linked to China’s economic growth and transformation

• China’s and Australia’s economies are highly complementary – Australia has what China needs to fuel and sustain its continuing growth

• EP is one of SA’s most productive regions – highly export oriented and has what China wants to sustain its growth and economic transformation

EPLGA Conference – 2011 (cont)

• EP would benefit from China’s demand for resources, agribusiness products and tourism

• Despite tough times ahead Australia’s and SA’s trade with China would continue to surge

• More Chinese companies would be seeking investment beyond resources into agribusiness and other industries

• EP needed to think big and boldly about engagement with China to secure markets and investment dollars that support key EP industries

So what has happened in the last 3 years?

Change in the landscape – China perspective

In China:

• Change in China’s senior leadership – once in a decade event

• China has embarked on a new growth model – consumption driven growth and an increased focus on private sector participation in the economy

• Restructuring of China’s state owned enterprises

• Analysis of outbound investment thinking and strategies

• Overhaul of China’s financial system

• Bilateral relationship with Australia upgraded

Change in the landscape – Australia and SA

In Australia and SA:

• Challenges in traditional manufacturing sector

• Sustained high AUD$ and associated challenges for agri sector

• Less favourable global mineral/commodity prices impacted resources sector’s growth

• More and different industries increasingly looking to understand how China might be an opportunity for them – export, import, investment

• More business groups and industry sectors and all tiers of government openly engaged around China increasingly strengthening that engagement

• SA has a strategy for engagement with China

Where do we stand in 2014

Where we are at now

• Despite economic headwinds SA goods exports to China up 30% in 2013

• China is SA’s largest 2-way trading partner by considerable margin - 24% of SA’s exports go to China

• Chinese tourist numbers up 47% in 2013 – outspent all other tourists – outspent US tourists 2:1 and Europeans 3:1

• Over 40% of SA’s overseas students are Chinese

• More and broader Chinese interest in investment in SA – private sector investment and business migrant investment

China slowdown?

Year $GDP % GDP Growth Real GDP Growth ($)

2008 $4.5 trillion 10% $450 bn

2013 $8.2 trillion 7.7% $630 bn

SA China Engagement Strategy

• One year into SA’s China Engagement Strategy

• Big opportunity that demands a planned approach.

• By strengthening our partnership with China now, we will provide future opportunities for our businesses to grow as China grows.

• The essence of the Strategy can be summarised as follows:

• Developing the SA value proposition

• Building platforms for engagement

• Getting business ready to engage

• Resourcing government to better coordinate and support this engagement

Shandong – SA’s sister state

• #3 China Provincial GDP

• 90x larger than SA GDP

• 2013 GDP US$890 billion

• Similar size to Indonesian economy

• Growth rate 9.8% in 2012

Rise of China’s middle class

• China’s growth a key driver of Asia’s burgeoning middle class

• It will be lumpy but we will see a transformation into a voracious middle class consumer market right on our doorstep

• Sustained growth driven by continued urbanisation and substantial capacity for improved productivity and efficiency

• Continued outbound foreign investment

• Not without significant challenges and risk but consensus is China’s rise will continue and this middle class will emerge

Rise of China’s middle class (cont)

Source: Peter Drysdale

What this means for the EP

• Continuing demand for resources to fuel China’s growth

• Continuing demand for agribusiness commodities to feed China

• Increasing demand for premium, clean food and wine demanded by middle classes

• Emerging and growing market for premium seafood

• Growing tourist demographic from China seeking food, wine and nature experience

• Growing interest by Chinese companies in trading and/or investing directly with EP businesses in these growth industries

The Agribusiness Landscape in China

• China’s rising middle class is driving demand for agribusiness products

• China is now the world’s largest food importer

• Middle class diet is replacing plant protein with animal protein

• China’s food industry plagued by scandal and poor reputation

• Australia’s reputation for food safety and quality assurance a big plus.

• Competition is fierce – our stocks of supply are limited – South Australia must compete on value – not price

Competition is stiff

• This won’t just fall in our lap – the whole world wants the Chinese market

• How do we differentiate our product and selling proposition?

• Strategically promote and place our product – position for sustainable long term markets

Challenged by :

• High Australian dollar and tariff barriers• Scale • Two-way knowledge and capability gap

Common stumbling blocks - broadly

• Language – effective communication

• Different business culture - interpersonal and government interface

• Lack of understanding of local issues that dictate value and impact production costs and outcomes

• Unfamiliar with the business and regulatory environment in which product and projects are developed and delivered in SA

• Relatively high cost of doing business relative to our competitors

• We must compete on value – not price – and leverage relationships and platforms that underpin our value proposition

The role of LG

• Challenge of scale for SA businesses engaging with China

• Growth opportunity for SA businesses likely to be in second and third tier cities

• Interlinked nature of government and business in China

• Fundamental role of Government in establishing frameworks for business engagement with China

The role of LG (cont)

• Small business needs assistance dealing in a new business environment

• LG sector the right tier of government to support entry to 2nd and 3rd tier markets

• Legitimate role – refer the SA China Strategy

• Councils have a crucial role to play in supporting business engagement with China

Specifically…

• Capitalising on Federal and State platforms to establish B2B engagement frameworks in 2nd and 3rd tier markets

• Show support for business in its engagement with Chinese counterparts

• Facilitate China literacy and business education for local business

• Nurture a supporting environment for greater cultural and people to people links

What we will see in the short term in SA

•  More Chinese students and parents, skilled, business and family reunion migrants, tourists in SA

• Chinese FDI will continue – resources, agribusiness and property

• Greater trade volumes with China as its economy grows and middle class consumers change buying patterns

• More activity from SA Government and SA industry bodies who have an important leadership role in China engagement

•  Councils more active and hands on in supporting business engagement with China

• Increased prosperity for SA businesses through grasping the China opportunity

When opportunity knocks, grab it

3 years later…..

• Give the nature of China’s growth, China’s impact on EP could be profound

• Opportunity is growing each year - real and present

• As China’s second and third tier cities and markets grow, can LG assist business to grow with those markets

• ‘How’, ‘where’ and ‘what are the challenges’ – a separate discussion

• SA has a strategy – and it’s working – good starting point