Belt & Road Initiatives GA China

July 2019

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Belt & Road Initiative (BRI) proposed by President XI in 2013

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An ambitious platform designed to help China enhance its geo-political standing and soft power while soaking up acute overcapacity and supporting growth for distressed State industry

Encompasses both increased land connectivity via rail, road, and pipeline construction as well as increased seaborne engagement through the South China Sea and Indian Ocean

The publicly proclaimed notion is that BRI is about driving newfound China-ASEAN-Central Asia-Middle East (and beyond) trade connectivity, cooperation, and integration –and associated growth.

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How to think about Belt & Road Initiative• The “Belt & Road Initiative” is first and foremost an

umbrella brand-name, under which China has positioned any regional initiative rolled out by the AIIB, the BRICS Bank, CDB, the Exim Bank, etc., and even some big infrastructure developments already underway that were started or conceived by others.

• For Chinese government, BRI is meant to engender a triple benefit of putting excess Chinese capacity to work, accumulating vast diplomatic capital, and potentially delivering better returns on its foreign exchange reserves.

• Although it may achieve some of this, there will be as many failures and missteps along the way as successes, and the likelihood of any of it moving the needle on domestic or regional economic challenges is uncertain.

• Meanwhile, there is an emerging role for MNCs to play, but mostly in sub-contracting, technical services-provision, logistics, consulting, and providing the “software” of development projects –rather than as operators or equity or long-term investors.

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Multiple Channels to Promote BRI from Government

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BRI Promotion

Energy dealsDiplomacy

• Bilateral diplomacy • Multilateral fora like APEC,

G20, the Shanghai Cooperation Organization (SCO), Forum for China-Africa Cooperation (FOCAC), etc.

• New currency swap deals • Gradual liberalization of

cross-border capital flows spearheaded by FTZ (free trade zone)

• Continue to work actively on bilateral and multilateral free trade agreements (FTA)

• Regional Comprehensive Economic Partnership (RCEP)

Trade agreements

• Chinese policy banks• New platforms: Total 240$B planned to

support OBOR initiative (New Silk Road Fund, AIIB, NDB, SCO)

• Nuclear reactor construction contracts

• Hydropower

• New ports, roads, high-speed railways, airports, and logistics hubs to reduce trading cost

Internal Use Only

RMB inter-nationalization

Transp. infrastructure

Financing mechanism

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BRI Funding: primarily government-led, relatively small compared to demand, private sector still disinterestedMajor multilateral BRI financing institutions are insufficient AIIB and BRICS bank

launched with $200bn in total

Even including investment from ADB and World bank, multilateral development funding would not be needle-moving in the region

Therefore: China’s policy banks are doing the heavy lifting The China Development

Bank, the China Exim bank, and China’s other state banks are the only reason BRI is happening

Private capital now Welcomed Chinese institutions are seeking

injections from international pension funds, insurance companies, PE and other organizations

But private participation in infrastructure investment is usually low due to high risk / low returns

Private sector financial uptake has been minimal, by all accounts

But: much BRI investment is not commercially viable – CPEC for instance China–Pakistan Economic Corridor (CPEC) – a collection of

infrastructure and energy projects under construction through Pakistan (since 2015); $62bn plan motivated partly by China’s energy security considerations – specifically the need for alternative oil routes that reduce China’s reliance on its Malacca “chokepoint”.

A huge investment loss is overtly expected by most players (FT.com).

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For MNCs the Belt & Road Initiative is too big to ignoreThere are good opportunities for MNCs to follow their Chinese clients and partners “out” – but organizational enablers need to be in place in order to do so effectively.

As of now, SOEs are the primary water bearers for BRI in the infrastructure building arena

MNCs with SOE clients and partners active in these projects are finding commercial opportunities in the after-market and service segments of the business

China human capital resources can be applied to the projects and add significant value

Organizational barriers need to be resolved internally to effectively follow SOE clientele out of China, and to coordinate China and host country company resources (staff and distribution and service partners)

The simple logic –1. If BRI is even half-successful, when considering leverage amplifications, it would be “needle moving” for specific

sectors and geographies

2. Some BRI projects, if fully implemented, would significantly change supply chain calculations – e.g. the China-Pakistan Economic Corridor on East Asia commodity processing and transport, or the wholly contained value-chain processing and shipping flowing through Sri Lanka

3. The play space for MNCs relates to the competency gaps of Chinese BRI players, and in host country resistance to China economic influx and influence Cummins confidential

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Best case scenario for MNCs: some direct involvement, hope for indirect long-term benefitsDirect

Opportunities in BRI projects: • Sub-contracting, technical service provision,

logistics, consulting, security, and providing the “software” of development projects, rather than as operating, equity, or long-term investors

But: exercise caution on direct investment: • Long-term rate of return on public infrastructure

is generally poor• Host state political volatilities create abnormal

uncertainties: project sustainability• China’s outsize involvement means Beijing’s

fiscal capacity and political attention is required at each step; market demand is not enough

Indirect• Improved regional connectivity could

translate to independent business opportunities for MNCs

• Relevant industries could see aggregate growth: trading & logistics, construction, energy, etc.

• Possible improvements in the business climate and in disposable income, which could bolster consumption in BRI countries

• Enhanced infrastructure could make it easier for MNCs to tap into the lower-wage economies along the Belt and Road

Outward investment from China to BRI countries in 2017 : $14.4 bn vs. China’s FAI in infrastructure at home in 2017: $2072.7 bn

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Investment spurred BRI countries

Two-way investment between China and economies related to the Belt and Road Initiative exceeded $130 billion between 2013 and 2018.

China's direct investment in BRI-related countries grew by 5.2% annually on average to surpass $90 billion between 2013 and 2018.

Within the five years, the value of the projects completed by Chinese companies in BRI economies amounted to $400 billion.

The value of trade in goods between China and BRI-related economies exceeded $6 trillion in the same period, an average annual growth of 4%, higher than the overall growth of China's foreign trade

Source: Ministry of Commerce, ChinaCummins confidential

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China’s contracting foreign projects new-signed value in OBOR countries keeps increasing

9Note:Source: Ministry of Commerce. Data of Contracting Foreign Projects New-signed Value in OBOR countries before 2013 not available.

China’s Contracting Foreign Projects New-signed Value ($Bn)

137.14

56.09 61.43

33.39 24.2743.26

0

86.3292.64

126.03 144.32125.78

0

20

40

60

80

100

120

140

160

180

2013 2014 2015 2016 2017 2018

Other Countries Value B&R Countries Value

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Cummins’ presence along B&R Countries

10Belt

Cummins Africa and Middle East：

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Cummins presence along B&R countries:

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1 2

3

4

5

丝绸之路经济带21世纪海上丝绸之路

Cummins in Russia： 4

Cummins China ABO: 3

Cummins APAC： 2 5

Cummins Europe： 3

Cummins India ABO： 2

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Road

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BRI Key Stakeholders

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Central Government

• Leading Group on Construction of the Belt Road Initiative – group of senior officials that engage top-level policymaking andcoordination

• State Council – coordination between ministries and approval for major BRI policies and projects• National Development and Reform Commission (NDRC) –plays a key role in planning and coordination.

• Ministry of Commerce (MOFCOM) – leads on managing economic and commercial relations with BRI countries.

• Ministry of Finance (MOF) – major shareholder in the main BRI-related policy banks and has final approval overconcessional loans for BRI projects.

• Ministry of Foreign Affairs (MFA) – Provides diplomatic support for BRI.

• State-owned Assets Supervision and Administration Commission of the State Council (SASAC), which oversees thedevelopment strategic of central SOEs.

Funders

• Chinese policy banks supply the bulk of Chinese funding for BRI projects, in particular China Development Bank and ChinaExport-Import Bank.

• Chinese commercial banks are playing a growing role in funding smaller, bankable BRI projects

• Multilateral lenders, e.g. Asian Infrastructure Investment Bank (AIIB), Asian Development Bank.

Local Government • Local governments (provincial and municipal level) should not be ignored as they play an important role in implementingBRI.

Embassies • The Economic Counselors Office (ECO) of embassies and consulates of China abroad play a role in BRI projects, for examplehandling inter-governmental affairs regarding concessional loans and overseeing in-country projects.

Industrial Associations• Industrial associations play a role in BRI implementation and can be a useful source of intelligence. Relevant organizations

include: China Association of International Contractors (CICA); China Council for the Promotion of Investment and Trade(CCPIT); China Overseas Investment Union; and China Association of International Engineering Consultants.

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Direction of BRI Funds

12Insert Data ClassificationCummins confidential

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Projects along BRI regions

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Region No. of Projects

Est. Value($B)

Sectors

Transportation Water &waste

Social & Health Energy Telecom/

Data Center Others (Ports…)

Africa 78 21.5 ✔ ✔ ✔ ✔ ✔

Central Asia 67 87.6 ✔ ✔ ✔

Eastern Europe 80 25.3 ✔ ✔

Higher end sectors: technology, finance, manufacturing

Middle East 124 454.7 ✔ ✔ ✔ Nuclear energy, finance,

telecom cooperation

Russia 52 127.5 ✔ ✔ ✔ ✔

South Asia 88 90.8 ✔ ✔ ✔

South-eastAsia 132 248.6 ✔ ✔

Kuala Lumpur-Singapore High-speed Rail; Singapore Tuas Terminal PhaseI; Kuala Lumpur Mass Rapid Transit, Line 2

Cummins ConfidentialSource: Economist Corporate Network

• Projects investment in infrastructures will bring opportunities to construction machinery, power generation products and commercial vehicles

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Sectors of BRI Investments

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1. Transport & Logistics –US$330bn

2. Energy & Utilities –US$266bn

- Represents more than 75% of total tracked investments

Transport & Logistics1. Railway – US$190bn2. Road & Automotive –

$US66bn3. Ports & Shipping –

US$39bn

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BRI projects in ASEANValue of BRI projects in each country

Top 10 largest BRI projects in ASEAN

BRI projects in ASEAN

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Chinese OEMs Strategies

16Insert Data Classification

Objectives Enter new markets; Build global competitiveness with outbound investment to penetrate into more markets (Europe); Alleviatepressure from overcapacity;

Access to Market

Direct Export (EPC) Overseas subsidiariesLocal assembly

Tactics Leverage government-to-government relationship Partnership with local owners/investorsLeverage CSR to open door or build positive image High-level high profile Summit to promote reputation

Chinese OEMs Strategies

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Process of EPC Contracting

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Project Selection Financing Contractor Selection

Host countries submit project request to Chinese policy bank and

MOFCOM for assessment

Form candidate project list

Government-to-Government Agreement around visits or summits

EPC contractor identify project

Conduct feasibility study

Lobby host country for the project

Submit project application to Chinese government

Host country acquire funding from banks

Top -Dow

n

Bot

tom

-U

p

Chinese Concessional Loan

Host country makes application to MOFCOM through local Chinese Embassy

MOFCOM and policy bank review and approve

MOF approve

Borrowing country and policy bank sign loan agreement

Chinese Commercial Loan

Faster approvals but higher financing costs. Used for projects with more certain economic returns. Chinese commercial

banksMultilateral Funding (AIIB, ADB, etc.)

More rigorous requirements regarding project assessment and competitive bid

tendering

Underdeveloped host countries receiving concessional loans from the Chinese government

Opaque Process

Central government select a preferred EPC Contractor, or invite a select group of EPC

Contractors to tender

Nominate EPC Contractor by Chinese government

Open Process

Countries that have more transparent government procurement processes that require

competitive bidding or for projects involving funding from multilateral financial institutions

EPC contractors prepare tenders in response to an Invitation to Tender (ITT)

Host country decide the contractorCummins confidential

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China EPC Strength and Weakness

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Strengths Weakness/Challenges• Expertise in project delivery and

resources mobilization• Cost competitiveness• Willingness to take risk (e.g. EPC

contract model as opposed to othertypes of contract preferred by manycompanies)

• Offer of flexible financing supportedwith government help (This has beenan important factor in China’ssuccessful HSR bids)

• Strong economic and politicaldrivers

• Inadequate quality control and assuranceprocedures (though reputation is improvingwith time)

• Challenge from China OEM products quality• Less familiarity with international codes and

standards in some cases• Communication with project owner and local

stakeholders• Less developed mechanisms for knowledge

transfer during project handover• Weak control of negative social and

environmental consequences of projects

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Cummins Has Wide Spectrum of Offerings

Internal Use Only

EPC ProjectRoad

Railway

Port

Building

Electric Power

Oil%GasWater Treatment

Airport

Telecom

Manufacturing

Equipment

Construction Machinery

Truck

Power Generation

Rail Machinery

Oil&GasMachinery

MiningMining Equipment

Marine

Cummins Opportunity

Off-highway Engine

On-highway Engine

G-drive and Genset

HHP Engine

Other…

Mobile Crane

Other…

Service Solution

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