Global Enterprises in China

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Global Enterprises in China win-win partnerships for sustainable development

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Contents Acknowledgement.................................................................................................................... 1 Chapter 1 China, a Stimulus for the Evolution of Global Enterprises........................................................... 2 What is a Global Enterprise?................................................................................................. 3 The Evolution of Global Enterprises in China........................................................................... 4 Chapter 2 Illuminating Various Impact Areas of Global Enterprises with the Developmental Prism................................................................................ 6 Direct Economic Benefits...................................................................................................... 7 World-leading Manufacturing Systems.................................................................................. 9 Contributing to Development of an Innovation-based Economy.............................................. 11 Developing Local Partnerships and the Industry Value Chain................................................. 13 Introduction of Innovative Concepts..................................................................................... 15 Strong Corporate Citizenship............................................................................................... 17 Talent Development............................................................................................................ 19 Environmental Performance................................................................................................ 20 Chapter 3 Becoming Global with China................................................................................................... 22 Understand and Align with Local Stakeholders..................................................................... 23 Innovate and Integrate Globally........................................................................................... 24 Adopt a Long-term View of Building Intangible Assets........................................................... 25 Adopt a Global Perspective................................................................................................. 26 Develop Strong Culture and Human Resource Systems......................................................... 27 Global Partners for Progress............................................................................................... 28 Chapter 4 In the Decades to Come.......................................................................................................... 29 China’s Future Landscape.................................................................................................. 29 How Global Enterprises will Contribute in Future China......................................................... 31 Conclusion........................................................................................................................ 34

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1 Acknowledgement The story of China’s modern development is intertwined with the story of corporations going global. As China continues to grow in importance and become a major economic powerhouse through internal reform and global integration, multinational companies have leveraged revolutions in communications and advancements in international trade to become more globally sophisticated and integrated— structurally, operationally and culturally. As part of this coevolution, China operations for multinational companies have played a growing part in global success, while simultaneously contributing to China’s rapid development. It has in many respects been a great example of "winwin" development. The demand for investment and other cooperation continues to grow and evolve in the "new normal" phase of China’s economic development, which requires new development models and changing economic structures. A feature of China’s reform and opening-up has been increasing utilization of foreign investment. Foreign enterprises have not only provided important capital resources for China’s economic development, but also created employment and related opportunities, promoted the development of technology and advanced the progress of industrial optimization and upgrading. During this process, foreign enterprises also evolved from foreign companies primarily selling products in the China market into integrated partners making contributions through investments in manufacturing, R&D, services and in myriad other ways. Many of them have transformed from “multinational companies” to “global enterprises” in the process. Now, China’s own corporations are increasingly going global themselves, learning from the successes and setbacks of their international peers. This parallel development has in many ways created modern China, and the modern global enterprise, and is set to continue in the decades to come. The experiences of foreign enterprises in China, especially their transformation from foreign multinational enterprises into global enterprises, can be a source of inspiration for Chinese enterprises aiming to enter and develop in the global market. The manufacturing, construction and energy industries have been critical for economic development, forming the foundation of China’s economy and sustaining the country’s export-oriented economy throughout the reform and opening up period. Moreover, these industries also benefited greatly from foreign investment, technology transfers and the integration of foreign companies into China. With this background, The Chinese Academy of International Trade and Economic Cooperation of the Ministry of Commerce and Burson-Marsteller worked together to research and analyze global enterprises, especially in manufacturing, construction and energy industries in China. By examining the innovation mechanisms and development models of global enterprises in China, we sought to understand the impacts that global enterprises have had on the Chinese economy and social development during the period of Chinese economic reform, and to explore new ideas, new methods and new pathways for Chinese enterprises to improve their capacity for global cooperation and development. During the writing of this report, we gained support from various stakeholders in government, industry, academia and other relevant institutions, including the National Development and Reform Commission, Ministry of Land & Resources, State Administration of Work Safety, National Energy Administration, the Party School of the Central Committee of the Communist Party of China, the China Academy of Social Sciences, China University of Petroleum, China Overseas Development Association, China Academy of Science and Technology for Development, China Construction Machinery Association, the Beijing Energy Club and the China National Petroleum Corporation Economics & Technology Research Institute. We would like to express our sincere thanks to these institutions for sharing their knowledge and insights. This report was produced with the support of Caterpillar. The company shared extensive information with regard to its 40 years of development and operations in China, providing us with both case studies and firsthand perspectives. As a leading global enterprise in the construction machinery, mining equipment, energy and power system manufacturing industries, Caterpillar’s development in China illustrates how global enterprises have made an impact on China’s economic, industrial and social developments. We have used Caterpillar as a dynamic and multifaceted example of a global enterprise in China throughout this report.

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22 Chapter 1 China, a Stimulus for the Evolution of Global Enterprises The ongoing industrial revolution continues to increase productivity and revolutionize existing production systems with innovative technology and new thinking, while accelerating the transformation of global economic growth patterns. Through the process of economic globalization enabled by the information technology and communications revolutions, advanced value chains with increased specialization, division of labor and integration have extended around the globe. This has boosted productivity in all industries, including manufacturing, construction and energy—the primary engines of China’s development in the closing decades of the 20th century. While China pushed ahead with its reform and opening-up policy, it experienced rapid economic development. Indeed this development was propelled to a significant extent by exports, foreign investment and the absorption of foreign technologies and expertise in China—enabled by foreign multinational companies. During this period, beginning in 1978, China developed and implemented policies to attract and utilize foreign investments, introduce advanced technology, obtain management experience, promote industrial upgrading and boost overall industrialization. This led to one of the greatest economic transformation and development stories in human history. It meanwhile contributed to a range of foreign companies evolving from multinational companies (MNC) into "global enterprises" as China operations and the China market became more integral to global success and more fully integrated into a global whole.

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What is a Global Enterprise? "Global enterprises" can be viewed as a more advanced form of the MNC, which has adapted and evolved to succeed in a world that is more integrated and interconnected or globalized. They transcend national boundaries, with global strategies, management systems and operations and by taking on global responsibilities. They operate to a much greater degree as one global entity rather than as a collection of international operations tied back to an international headquarters. Over half of a global enterprise’s revenues, sales and employees originate from international markets. Global enterprises focus more on their overseas businesses and globalizing their development strategies, management structures and culture—than typical MNCs. This new model is a natural evolution from previous business strategies. Operating in the 1700s, the earliest international companies were usually trading enterprises that worked on behalf of states. These organizations evolved into "hub-andspoke" private companies in the 1800s and earlier versions of what we today call the MNC. In the same way that earlier forms of business organizations made dramatic leaps from one structure to the next, today’s globally integrated enterprises have made a similarly large leap (see Figure 1). China’s growing role on the world stage has contributed significantly to the emergence of global enterprises, as global firms, both Chinese and foreign, utilized China’s deep-pool of resources to generate new products, services and production systems for global and domestic markets. This process has also stimulated new forms of innovation. Beyond novelproduct innovation, global enterprises also innovate in the way they do business globally, by changing the way services are delivered, supply chains are integrated and companies are managed. As Jinglian Wu argues in his book, "Understanding and Interpreting Chinese Economic Reform," integration into the world economy has been an important aspect of China’s economic growth because it allows China "to obtain valuable capital resources and, more importantly, it brings advanced technology, management skills, access to overseas markets and competitive pressure." 3 China’s manufacturing and export industries have become an indispensable part of global enterprises’ production systems. Global enterprises have meanwhile implemented operational globalization and integration involving many other countries. For example, an Indian company creates design solutions for a British construction company in the Middle East. Australian engineers develop solutions for French energy operators in Africa and so on. Unified global business, scientific and technical standards enable global enterprises to enter and leverage the global production system to generate maximum value and output. This process of globalization is also extending to the development of new products and R&D. Previously MNCs from advanced economies typically innovated products and technologies in the markets in which they were headquartered or in other developed economies. However, as global enterprises increasingly leverage talent around the world in global R&D networks, they are now even bringing products innovated in developing countries to the developed world—in a process that some have referred to as "reverse innovation." This development of world-wide innovation capacities and systems has promoted technology convergence and collaboration with stakeholders across the global value chain, including enterprises, government, consumers, NGOs, academic and research organizations, which has promoted the further development of China’s economy and global economic integration. A globally integrated value chain provides enterprises with new ways to develop and integrate into the global economic system. At present, with the aim to play a more creative and service-oriented role in the global value chain, many Chinese enterprises are deepening integration with the global ecosystem and value chain. They are well on their way in transforming to become global enterprises themselves. Figure 1: The Evolution of Global Enterprises 1700s: 1800s: 1900s: Now: • Corporations largely performed specific duties on behalf of nations • Companies were often agents of the State • Invention of Limited Liability Company • International "hub-and spoke" networks • Home-country manufacturing and international distribution • Rise of the Multinational Corporation • Pursued international business through local production bases • Some tasks, such as R&D and product design, performed globally • Trade and investment barriers recede • Revolution in IT increased global operations/ communications • Business operations began to standardize globally

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4 The Evolution of Global Enterprises in China In China, economic development since the start of the reform and opening up has been enabled by the capabilities and operations of global enterprises to a significant degree. Throughout China’s economic development period, there has been a great deal of exchange between Chinese stakeholders and stakeholders at global firms, as each organization worked to understand what the other one wanted and was capable of, and how they could best work together for mutual benefit. As global enterprises pushed the boundaries of innovation, embracing new ways of working and creating value, China similarly innovated and found new ways of developing and "plugging-in" to the world economy. Caterpillar has been operating in China for over forty years, and throughout that time it has contributed to China’s development and gradual movement up the value chain. During earlier phases of China’s economic development, Caterpillar focused on importing products to support infrastructure building and economic upgrading. During later phases, it focused on investment and development in China, establishing manufacturing and R&D facilities, developing and working with local suppliers, dealers and other business partners. More recently, Caterpillar has continued to invest in and improve the value chain through a long-term approach that aligns business operations with Chinese development goals. Phase 2 Phase 1 Early opening up (1978-1984) China was just beginning to open up to the outside world, and most global firms used "hub-and-spoke" operational models. Most international firms focused on selling imported products, such as much needed construction machinery to Chinese firms, governments and SOEs. Some firms opened their China offices during this time. In 1975, Caterpillar sold construction and mining equipment to the China market, beginning with 38 pipe layers and opened a Beijing sales office. Market economy development (1984-1993) Foreign enterprises continued to facilitate China to develop economically by providing products and services essential for China’s development while market-oriented reforms sought to develop private firms in addition to SOEs. Foreign firms were seen as key partners, suppliers or competitors during this development process. China began to develop stronger "innovation" capabilities, as Chinese firms began to develop export capabilities, plugging into the global economy. In 1987, Caterpillar transferred technology to Chinese SOEs, (the former Ministry of Machine Building Industry even set up a specialized "Caterpillar technology introduction office"), which helped lay a foundation for the growth of China’s construction machinery industry.

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5 Phase 4 Phase 3 Coexistence of different ownership structures, increased trade and globalization (1993-2005) China integrated with the world economy more fully though pubic polices focused on developing Chinese enterprises, while China’s successful accession to the WTO allowed the country to continue attracting large foreign direct investment (FDI) inflows. Global firms were beginning to emerge as true "global enterprises," as increasingly integrated global production systems spread production and value creation to different locations around the world. China was a major beneficiary of these global shifts, as the country utilized innovation promoting policies and business innovation at the local level to partner with global enterprises as new "entry points" to the global economy began to open up. Moreover, FDI flows during this time increased the speed of China’s development by further increasing exports, creating technology transfers and stimulating local development. In the 1990s, Caterpillar opened local production facilities and continued focusing on further developing its independent dealer network. Development of "harmonious society" and the "China Dream" (2005-2013) China progressively rolled back preferential policies for both foreign and local firms. This period saw China’s developmental priorities, and the activities of global enterprises focusing more on developing human, intellectual, institutional, environmental, and infrastructure capital, as well as on financial and economic success. Priorities during this phase started to further balance GDP growth with other sustainable developmental needs. In the 2000s, Caterpillar started to fully deploy its business model in China, from suppliers to components, manufacturing, products, dealers and a full array of services, including financial leasing, remanufacturing, etc.

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66 Chapter 2 Illuminating Various Impact Areas of Global Enterprises with the Developmental Prism Since the beginning of the "Opening and Reform" period, the key to success for global enterprises in China has always been alignment with China’s development agenda and the ability to make a positive impact on China’s economy. As that agenda has evolved and grown increasingly complex over time, global enterprises have needed to maintain an increasingly sophisticated understanding of China’s priorities and goals, so as to both mitigate risks and to capitalize on opportunities for mutual benefit. This includes an understanding of China’s strategy to utilize foreign investment, and the presence of global enterprises is being continuously calibrated to serve wider strategic objectives. Historically and today, companies are seen as instruments of or supportive of China’s development efforts and goals have stood to gain, while those viewed as impediments have found it difficult to achieve their goals. China has, over time, steadily raised the bar in many aspects, with much more emphasis now on the intangible "quality" of foreign investment. With 3.5 trillion dollars in foreign exchange reserves expected by 2016 (accumulated via those decades of rapid growth), a drive to continue moving up the industrial value chain (from "made in China" to "created in China"), and an agenda to address the ills of over-rapid development, China has become choosier about FDI over the last decade in particular. This report uses a sophisticated development prism to refract the full spectrum of China’s growth, illuminating all the potential areas of alignment for global enterprises, and the various instruments and impediments a company may pose— at a given point in time—and with an eye to the future. The development prism (see Figure 2: A Developmental Prism) illuminates global enterprises and their actions in terms of productivity-driven economic growth, manufacturing-industry upgrading as well as ways to address the unique social, technological, environmental or economic dynamics that face China. Moreover, the prism highlights, for global enterprises, their actual or potential role in efficiency promotion, industry upgrading, infrastructure, education, rural and regional development, local industry enablement and resource/energy security—in light of evolving local priorities and expectations. Figure 2: A Developmental Prism Impact Areas DIRECT ECONOMIC BENEFITS WORLD-LEADING MANUFACTURING SYSTEMS CONTRIBUTING TO DEVELOPMENT OF AN INNOVATION-BASED ECONOMY DEVELOPING LOCAL PARTNERSHIPS AND THE INDUSTRY VALUE CHAIN INTRODUCTION OF INNOVATIVE CONCEPTS STRONG CORPORATE CITIZENSHIP Global Enterprises TALENT DEVELOPMENT Developmental Prism As development guru Jeffrey Sachs puts it, each country’s approach to development must be continuously calibrated based on evolving national and global socio-economic, geopolitical, environment, technological and other dynamics. China’s capacity to innovate, access and utilize resources ENVIRONMENTAL PERFORMANCE and energy, manage health and education systems for a huge population, balance growth in exports and infrastructure, tax systems and capital markets, savings and consumption rates and many other factors are all facets of the classic struggle to move from a developing to a developed country. And the role of global enterprises in China can—and should—be understood in light of all these various factors.

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7 Below, we illuminate eight developmental hues or "impact areas" where global enterprises contribute to China’s development. We also highlight Caterpillar as an example throughout, noting the way that the company contributes to China’s economic development and other goals in each area. Direct Economic Benefits FDI and the presence of foreign companies in China have been utilized by the Chinese government to advance China’s development in myriad aspects since the beginning of the "Opening and Reform" period. This is both qualitative and quantitative. While today there is more emphasis than before on the intangible and qualitative impacts of FDI—the direct economic benefits of foreign investment continue to be viewed as very important. Below we elaborate on different aspects of the direct economic benefits China derives from the presence of global enterprises. Figure 3 : Global Enterprises’ Contributions to China’s Economic Development • Global enterprises invested over $128 billion in 2014 alone Investment Employment Tax Revenue Employment • Since the "Opening and Reform" period began, China has grown to become one of the largest recipiants of FDI globally • From 1991 to 2013, employment in urban areas by foreign-funded enterprises increased from 960,000 to 15.66 million with an average annual increase of 0.6 million jobs • This increase contributed 28% of new urban employment in 2013 • Taxes from global enterprises have generated over $50 billion for local governments in 2013 alone • This tax revenue has helped to generate growth and investment in China • Studies have shown that FDI increasees employement within private domestic firms within the same sector Spillovers International Integration Procurement • Global enterprises connect Chinese producers with foreign markets providing valuable investment and partnership opportunities • In 2014, China exported $2.34 trillion worth of goods; between 1980 and 2012, China’s exports increased 122 times • The spillover effects of global enterprises’ procurement in China have been calculated to have an astounding impact. In theory, every dollar that global enterprises invest in China can result in USD $2.15 of GDP growth

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8 Figure 4: Foreign Enterprises Remain Important Employers in China Figure 5: Employment and Output of Foreign-funded Construction Enterprises in China 200 5 0 0% 0 0 1,000 20 800 15 600 10 Foreign enterprise employment in China (10,000) 2013 2012 2011 Gross output value (100M RMB) Percentage of urban employment in China 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 400 1995 2014 1% 2013 500 2012 2% 2001 1,000 2010 3% 2009 4% 1,500 2008 2,000 2007 5% 2006 2,500 2005 25 6% 2004 1,200 3,000 2003 30 2002 1,400 7% 2001 8% 3,500 2000 4,000 Employment (10,000) Source: CAITEC Source: China Statistical Yearbook, 2014 FDI, and investment in general, creates GDP output and income throughout China’s economy – an effect known as the Keynes’ Investment Multiplier. In China, based on data from the National Bureau of Statistics, each RMB global enterprises invested in 2014 could drive up to RMB 2.15 in GDP output. Figure 6: Effects of FDI on GDP Growth in China Year Yield of 1 RMB of Investment 2006 1.72 RMB 2007 1.81 RMB 2009 2.10 RMB 2010 1.78 RMB 2011 2.27 RMB 2013 2.14 RMB 2014 2.15 RMB Caterpillar’s China operations have had many direct economic impacts in China (see Figure 7). 2.31 RMB 2012 Caterpillar has been in China for forty years, contributing to China’s strong economic growth and other aspects of development throughout that time. In addition to providing Chinese companies and projects with world-class products and services, Caterpillar has helped integrate Chinese partners into their global operations and the global economy more generally. 1.76 RMB 2008 Caterpillar Economic Impacts in China Source: Based on data from China Statistical Yearbook, 2014 Figure 7: Caterpillar Presence in China Facilities 29 manufacturing facilities • 4 R&D centers • 3 logistic & component centers • Employment 13,000 employees • 4 dealers with 8,500 employees • 350+ suppliers with 18,000 dedicated employees •

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World-leading Manufacturing Systems Manufacturing has been a key driver of China’s economic growth in recent decades, and will remain so in the coming decades. Globally, manufacturing is a major contributor to GDP (16%) and employment (14%) in both developing and developed countries. In China, manufacturing accounts for more than one third of China’s GDP. Major policy initiatives have sought to advance China’s manufacturing industries through technological upgrading in key sectors. China has been seeking to maintain and enhance its competitive edge in the global manufacturing industry by focusing on emerging industries like new materials and advanced equipment manufacturing, while also improving overall manufacturing quality and worker safety, stimulating indigenous innovation, reducing costs and environmental impacts, and moving to center-stage in global technological research. Global enterprises have contributed to these goals by serving as role models, bringing their experience in the industrial internet, training local talents, promoting the development of industrial clusters, and helping to develop and upgrade capabilities among suppliers and the wider industrial ecosystem. With continuously rising expectations and 9 standards for quality, variety, and value, global enterprises have constantly sought new ways to improve the quality of inputs to production, to innovate and implement efficient new manufacturing processes, and develop and adhere to exacting standards to deliver products and services to their customers globally. This has also influenced domestic firms in China to improve their own manufacturing capabilities, both to compete as suppliers and as direct competitors. As a result of this manufacturing activity and upgrading, both within global enterprises and local Chinese firms, China has rapidly ascended the global manufacturing value chain (see Figure 8 i ). Globally-defined quality management standards like ISO 9000, as well as company-driven process improvement strategies like Six Sigma were developed with support of global enterprises to ensure safety, product quality and cost effectiveness, all in pursuit of meeting exacting consumer demands. Learning from global enterprises, some Chinese enterprises have greatly improved their own manufacturing systems. Global enterprises have provided consulting services, products and technologies that are directly aligned with China’s advanced manufacturing agenda. Figure 8: Large Developing Economies are Moving Up in Global Manufacturing Top 10 manufacturers by share of global nominal manufacturing gross value added Rank 1980 1990 2000 2010 1 United States United States United States United States 2 Germany Japan Japan China 3 Japan Germany Germany Japan 4 United Kingdom Italy China Germany 5 France United Kingdom United Kingdom Italy 6 Italy France Italy Brazil 7 China China France South Korea 8 Brazil Brazil South Korea France 9 Spain Spain Canada United Kingdom 10 Canada Canada Mexico India Source: McKinsey, "Manufacturing the Future: The Next Era of Global Growth and Innovation"

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10 Caterpillar in Pursuit of Manufacturing Excellence and Safety Throughout its 90 years of operation, Caterpillar has established a strong reputation in the industry for manufacturing excellence with focus on delivering highquality machines to customers while manufacturing them in a safe, efficient way and constantly introducing new measures in pursuit of these goals. The company started implementing Six Sigma programs company-wide in 2,000, which focuses intently on improving product quality and the elimination of defects. The company introduced its own Caterpillar Production System (CPS) in 2005, to use a common language to improve operational efficiency in terms of worker safety, quality, speed and cost through the organization globally. In 2013, Caterpillar began rolling out its manufacturing excellence principles, which leverage the tools and processes of Six Sigma and CPS to eliminate waste and drive efficiency. Caterpillar’s China facilities are also contributing in the company’s pursuit of lean principles. Beginning with the implementation of Six Sigma in 2002 and the Caterpillar Production System (CPS) in 2005, today, 11 Caterpillar locations in China are implementing lean methodologies. These efforts have achieved significant results, including defect reductions of 85 percent within various value streams. Caterpillar is using the methodology to improve process and product quality, while also empowering employees to better meet the needs of customers. In addition, these advanced methodologies are also applied to the extended enterprise including Cat suppliers and dealers in China, so as to improve the efficiency of the entire value chain and address customer needs from order to delivery. Caterpillar considers safety as the number one priority for its facilities around the world, and adheres to a zero-injury policy and internalization of global safety standards. In 2014, Caterpillar decreased its enterprise Recordable Injury Frequency (RIF) to 0.71, a significant improvement over when the program began over a decade ago (see Figure 9). For example, Caterpillar’s China components facility began implementing a new observation program to detect unsafe behaviors in December 2012 and achieved a 43 percent drop in RIF by 2014. The facility was named a safety culture demonstration enterprise by the Wuxi City government in 2013. Figure 9: Caterpillar Workplace Safety Measures 7 6.22 6 5 4 3 2.97 2 1.03 1 0 1.02 0.28 2003 2010 0.78 0.3 2012 0.71 0.29 2013 0.23 2014 Recordable injuries per 200,000 hours worked Work-related injuries resulting in lost time per 200,000 hours worked

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Contributing to Development of an Innovation-based Economy Innovation is a key driver of economic growth. Developing an innovation-based economy and better technologies to address development challenges, and ultimately become a global innovation hub, have been the goals of national development policies in China for some time. By establishing R&D centers, engaging in vertical and horizontal technology transfers, developing and introducing new technologies, providing technical training to employees, engaging universities and local research organizations, supporting education in science and technology, outsourcing elements of research and development, granting internships and so on, global enterprises have contributed to China’s goals with win-win partnerships that generate many innovation spillover benefits. Global enterprises also advocate for stronger protections for intellectual property rights (IPR) in all markets they engage, and studies have shown a strong positive relationship between IPR enforcement, innovation and economic growthii. The 2014 Global Innovation Index found that market dominance by established enterprises and limited competition are inhibitors of innovation. By their presence in China, global enterprises have helped stimulate innovation through competition as well as open innovation collaborations. Vertical knowledge and technology transfers are a common way for local supply-chain partners to gain knowledge and technology from global enterprises. Global enterprises move knowledge and technology to all of their touch points throughout the value chain, including local manufacturers, partner firms and applied research centers that can develop know-how into functioning goods and services. Horizontal knowledge transfers move technologies and knowledge across the value chain, from one area to another, a common practice as competitors, partners and other cross-industry players absorb and innovate technology and knowledge. Industry competitors and partners benefit greatly from the presence, products, transfers and spillovers global enterprises bring to local markets (see Figure 11). 11 The Impact of Caterpillar R&D in China Headquartered in the Wuxi High and New-Tech Industrial Development Zone of Jiangsu province, with branches in Qingdao, Tianjin and in close association with the Asia Pacific Proving Ground in Nantong, Caterpillar R&D Center (China) Co., Ltd. (CRDC) has grown to be Caterpillar’s largest comprehensive R&D center outside the United States, employing over 900 engineers and supporting staff, nearly all of them local hires. As part of Caterpillar’s global R&D network, China R&D centers play the leading role on innovation and product development for growth markets. In the past few years, Caterpillar China’s R&D Centers have participated in developing new engines and machines for growth markets, obtained over 170 patents. As a flagship R&D center and an integral part of Caterpillar’s global R&D network, the CRDC has pursued product and process development, product validation, localization and technological training based on the unique requirements of China and other growth markets. It has provided intellectual property management and IT support to Caterpillar facilities in China and other growth markets. The innovative technologies and products developed by CRDC have been sent from China to other emerging markets, as well as developed markets in a phenomena known as "reverse innovation." For example, in collaboration with Caterpillar’s global team, the CRDC leveraged its innovative local talent and global resources to develop the Cat 986H wheel loader, specifically tailored to China’s needs for a smaller loader for use in its booming cement quarries. This product was also made available in other markets. A sound R&D eco-system consisting of strategically collocated R&D centers, proving grounds, suppliers, manufacturing facilities, universities and national labs has been formed. Figure 10: Impact of Foreign R&D in China As of 2014, foreign firms had established over 1,500 R&D centers in China, up from less than 200 in year 2000 Improves production technology, and influences other firms through spillover effects Setting up R&D activities in China can help reduce and reverse "brain drain"

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12 Caterpillar has implemented a robust engineering talent pipeline strategy, including global engineering programs such as the Engineering Rotational Development Program (ERDP) and the Engineering Development Program (EDP), which help new hires, graduates, experienced professionals and senior leaders alike, enter the Caterpillar product development pipeline smoothly by working with Caterpillar employees to go through rotational program assignments and other on-the-job training assignments. Since the launch in 2012, approximately 20 percent of Caterpillar China’s R&D engineers have graduated from these programs. These engineers are also encouraged to internally move across different functions, business units and regions. In addition, leveraging Caterpillar’s multifunctional R&D strengths within science, technology, engineering and mathematics (STEM) fields, over 400 students across 25 teams have been sponsored by CRDC to participate in a the FIRST Tech Challenge (FTC) robotics competition. Since 2012, over 1,000 volunteering hours have been contributed to coaching and mentoring programing software and machine design by the students. Figure 11: Vertical/Horizontal Technology Transfers and Spillover Vertical technology transfers and spillovers Foreign companies create economic development and upgrading, closing the gap between Chinese and foreign firms, making way for later technology transfers Horizontal technology transfers and spillovers Local economy Research and Development Components manufacturers Service providers Joint Venture and other business partnerships create vertical technology transfers to Chinese partners and other firms Organic and second generation technology and knowledge R&D is developed by local partners and other industry players Investment and industrial development creates a more conducive environment for innovation and industry upgrading GLOBAL ENTERPRISES Local manufacturing Finished products Local companies and partners utilize knowledge of local markets and consumer tastes to refine and innovate global enterprises’ products and business models for the China market Technology and knowledge transfers create home-grown firms with strong products and cash flow, who are capable of expanding globally, including into certain niches of developed markets

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Devoloping Local Partnerships and the Industry Value Chain 13 Global enterprises have had a positive impact by partnering and collaborating with local economic actors in many ways. Aside from the shared direct economic benefits of such partnerships—leveraging comparative advantages to provide competitive goods and services and generate profit—these partnerships have facilitated knowledge sharing and other spillover effects of foreign investment, serving to develop local employment and expertise in addition to building up industrial and economic capabilities across the industry and innovation value chain in China (see Figure 12). Figure 13:FDI by sector (utilized investment), 2013 FDI Utilization by Sector Manufacturing 14% 4% Real Estate Wholesale and Retail Trandes 39% 9% Leasing and Business Services 10% The story of a Chinese company that started out as an OEM or even a distributor for global brands—ultimately building its capacity to the point where it could begin to introduce its own products and services—is quite familiar and representative of one aspect of the potential of such partnerships. In many cases, global firms have a clear goal to increase the capacity of Chinese partners and collaborate with them globally by working with them to improve quality and various other aspects of their business performance. While expanding to include a wider range and a higher-level of partnerships, the cooperation between global enterprises and Chinese enterprises has gradually shifted from equipment processing to design and R&D. Geographically, such operations have also extended to the middle and west of China. Transport,Storage and Post 24% Othes Source: China Statistical Yearbook, 2014 contribute to global collaborations and play a much more dynamic role than was previously expected of a Chinese company. Strong Chinese partners have also brought opportunities for global companies to partner with Chinese companies in other regions. The energy and resources sectors are obvious examples—in these sectors, global companies have formed JVs, investment-partnerships and other joint projects with China’s energy companies in Africa, North America, the Middle East and other parts of the world. In many instances, these Chinese companies have been transforming into global enterprises themselves. It has of course not been a one-way transfer of knowledge and expertise. Global enterprises have leveraged and benefited from the capabilities of partners in local markets and local supply chains, such as invaluable local knowledge, skills and cost-effective solutions, to achieve successful global operations. Some Chinese firms are also at the global technology and innovation frontier in specific areas— for example in e-commerce—and so this enables them to For local partners, global firms offered strong global networks and resources, industry-leading technology and management and the potential for further development and partnership agreements in China and around the world. Figure 12: Statistics on R&D and Related Activities of Large and Medium Foreign-Funded Enterprises in China Full-time Equivalent of R&D Personnel (man-year) Expenditure in R&D Institutions (10,000 yuan) Region 2000 2005 2009 2010 2011 2012 2000 2005 2009 2010 2011 2012 Total 9,375 33,860 78,235 113,156 85,971 112,477 148,968 476,070 1,754,756 2,137,613 2,061,718 3,516,320 Eastern Region 6,938 31,656 71,943 107,563 80,675 107,887 141,995 464,129 1,683,815 2,077,867 2,008,759 3,424,581 Middle Region 183 118 1,773 1,785 2,027 2,408 198 2,225 31,296 33,872 17,860 58,890 Western Region 1,123 506 1,494 1,936 1,429 793 4,188 3,233 25,819 16,937 18,246 16,859 Northeastern Region 1,131 1,579 3,025 1,873 1,840 1,387 2,588 6,483 13,826 8,937 16,853 15,989 Source: CAITEC

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14 Local Partnerships and Development Dealer Network Build-up Supplier Collaboration 20 years ago, Caterpillar was one of the very first global companies to introduce a dealer-focused business model to China’s construction machinery industry, as compared to the norm of direct selling by manufacturers. Now, the dealership model has become a common way of doing business between machine manufacturers and buyers. Most domestic manufacturers have publicly expressed a desire to set up dealer networks like Caterpillar’s. China is one of the largest sourcing markets for Caterpillar in the Asia Pacific region, with significant direct procurement spending as well as a high-level of exports. Over the past 20 years, Caterpillar’s supplier base in China has grown from five to more than 350. Caterpillar began establishing its dealer network in China in the mid-1990s and has been consistently investing in developing its China dealers—Lei Shing Hong, WesTrac China, China Engineers and ECI-Metro. Focusing on building a long-term relationship is a different strategy from appointing a trading company or a selling agent that can be terminated and replaced for not meeting a sales quota on a yearly basis. Customers have been attracted to and supported by its trusted dealer network and have developed long-term loyalty to Caterpillar. The relationships between Caterpillar and its dealers have grown from sharing similar corporate values and long-term thinking that work together to improve the overall customer experience. The enduring trust has been put to the test during the ups and downs of industry cycles. According to the China Construction Machinery Association (CCMA), more than one third of construction equipment dealers, large and small, closed down between 2011 and 2014 due to a downturn in the industry. However, Cat dealers all persevered thanks to the diversified product line and financial leasing support from Caterpillar. Caterpillar demonstrated to the industry the value of engaging with a network of dealers who are financially strong, have long term commitment to Caterpillar and China and are able to develop deep local knowledge and close relationships with local customers. As Caterpillar noted, competitors can replicate the products, but they cannot replicate the solid relationships and trust that has been built up with dealers over 50 years on average globally. Suppliers have been a critical part of the industry value chain and cannot simply be regarded as low-cost components providers. Caterpillar has invested in developing long-term mutually-beneficial relationships with its suppliers, providing opportunities for business training, technical exchanges, joint research and development and corporate culture development. However, in the mid-1990s, only a few Chinese suppliers could meet Caterpillar’s stringent criteria for supplier selection in terms of quality, cost, logistics, development and management. By providing opportunities for business training, technical exchanges, joint R&D and corporate culture development over the years, Caterpillar worked to improve supplier performance. The company introduced advanced production systems and management philosophies like Six Sigma, Caterpillar Production System and the lean model to suppliers. Caterpillar assigned dedicated "black belts" in these Chinese suppliers to improve their product quality, technical and manufacturing capabilities and operational management, believing that only an advanced and sophisticated supplier base can enable further development for the overall industry. Notably, some suppliers have expanded their business beyond China, constructing facilities abroad and supplying Caterpillar globally, leveraging the skills they obtained from Caterpillar. Furthermore, Caterpillar has started to bring its overseas suppliers to a supplier park in Xuzhou, as the Chinese construction industries continues to evolve. To illustrate how far the supplier base has come, 20 years ago, Caterpillar relied primarily on imported components to support its business operation in China. CCMA has acknowledged Caterpillar as a role model for development in China’s construction machinery industry. Indeed, the long-lasting and excellent relationship between Caterpillar, suppliers and dealers has been a differentiating factor for the company’s success.

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Introduction of Innovative Concepts 15 For many global enterprises, succeeding globally has as much been driven by innovating new business concepts and adapting them in different markets, as it has by technology and product innovation. Those that have succeeded in China have had a significant impact on the business landscape by introducing new business concepts that Chinese firms then emulate, adapt or improve. Examples include "just-in-time" supply chain management in manufacturing, demand side management and energy performance contracting, modular construction in buildings and infrastructure and many others. Global enterprises have inspired domestic enterprises to innovate and develop new business models of their own, helping China move up the product and services value-chain from low margin manufacturing activity to higher-valueadded activity (see Figure 14). In the majority of cases, successful and reputable global enterprises replicated their globally-proven business concepts and practices in China while innovatively adapting to the local operating environment. In some instances, global enterprises engage in direct capacity building with Chinese regulators to help inform policies that could allow growth of new industries. As China pursued innovation-driven development, global enterprises continued to play a very positive role as business and institutional innovators in addressing specific needs for technology or services, promoting favorable business environments for new industries and as models of success. Figure 14: Margin Movement within the Product Value Chain High-value, low energy use design, engineering work High-value distribution, marketing, retail Remanufacturing as an Advanced Form of Recycling Caterpillar’s remanufacturing ("reman") service illustrates how a Caterpillar capability can come to benefit both the company’s business and China’s economy. Reman is a process of returning end-of-life products to the "same-as-whennew" condition or even better at a fraction of the costs of new product manufacturing. This is a win for the business, customers and also the environment. In spite of the environmental and business benefits, the awareness of reman was low in China. Caterpillar was among the first global enterprises to introduce product remanufacturing to China, drawing from its decades of experience with process and technology best practices from its 17 remanufacturing facilities worldwide. It built a dedicated remanufacturing facility in Shanghai in 2005. To jointly promote the development of the reman industry in China, Caterpillar and China’s National Development and Reform Commission (NDRC) signed a letter of intent in 2006, in which Caterpillar agreed to provide expertise to assist the NDRC and Chinese research institutions in supporting the development of the reman industry. Reman came to be regarded as "encouraged" for foreign investment. Some estimate the total output value of China’s remanufacturing industry to reach 150 billion yuan ($24 billion) by 2015. R e m a n c a n m a k e a m a j o r c o n t r i b u t i o n t o C h i n a ’s unprecedented efforts to build a circular economy. Given China’s market size and growing sophistication, China is expected to become a leader in reman in the Asia Pacific region and globally. Figure 15: Product to Reman Life Cycle MATURES Margin High Product Value Chain Innovative Business Concepts and Advanced Service for Industry Upgrading Relatively low-value manufacturing work, high energy use Low REGULARLY MAINTAINED PERFORMS Development Production Services RE-ENTERS REPLACED SUPPLY BEFORE FAILURE CHAIN Product Life cycle TESTED Renman Life cycle CORE RETURNED TO CATERPILLAR CLEANED PRODUCT BEGINS LIFE CYCLE REMANUFACTURED SALVAGED

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16 Figure 16: Small Customer’s Market Environment Changing economic dynamics As a role model of foreign financing and leasing enterprise, Caterpillar has an advanced management system. Moreover, Caterpillar manages its business under a strict code of conduct. Being a role model for enterprise management and business risk-control is one of Caterpillar’s most important contributions. Since 2004, CCFL has: Massive labor migration Small individual contractors/ users Financial Leasing Enabling Success of Small Customers & Medium Sized Enterprises As the changing economic landscape created a need to empower more small Chinese construction clients and medium sized enterprises, Caterpillar leveraged its global experience in the financial leasing industry to enter and serve the Chinese market. Although the low availability of credit information posed a major challenge for Caterpillar, the company adapted its global credit analysis techniques and leveraged its access to capital from foreign markets to create competitive and innovative solutions for local customers. In 2004, Caterpillar China Financial Leasing Co., Ltd. (CCFL) was established, becoming the first wholly foreign manufacturer owned financial leasing company in China’s construction machinery industry. CCFL’s risk management and corporate governance policies, the bedrock of Caterpillar’s world-leading credit and risk management capabilities, were at first adapted to suit the China market (localized), then improved, and expanded upon (innovated) through the years. CCFL was also invited to share best practices with others in the financial leasing industry and with relevant government institutions. In this way, CCFL helped introduce and expand the financial leasing industry in China, while at the same time creating brand loyalty with Caterpillar customers. CCFL has so far provided financial leasing services to over 50,000 customers for 70,000 machines in China. • Provided customers access to the same, best-in-class products that were formerly only available to large, cashrich, State-backed enterprises • Supported productivity improvements through the leasing of Cat machines and helped customers excel through financial service excellence • Served as a role model for other companies in the industry for management systems and risk control • Helped upgrade the financial leasing industry by developing and improving credit processes, maintaining robust portfolio health performance and providing customer focused solutions to help customers through tough times; thus leading the industry with leasing services to meet customer needs China’s financial leasing industry developed to be one of the most dynamic in China, as the number of financial leasing companies grew to well over 2,000. Industry spillovers from leading companies like Caterpillar, and rapid growth in the industry generally, created an environment in which equipment manufacturers and other industrial companies were able to establish their own leasing companies. Additionally, many professional service firms in legal, strategy consulting and leasing tax-consulting services have also proliferated in the market. The government has also recently announced its plan to promote financial leasing as it sees it as a strong driver to support economic growth in China. Figure 17: Year-on-Year Capital Leasing in China Annual Amount of Capital Leased in China 2,500 2,000 Billion RMB Fragmented industrial and financial systems 1,500 1,000 500 0 2007 2008 2009 2010 Source: China Industry News Network, 2014 2011 2012 2013

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Strong Corporate Citizenship 17 Strong corporate citizenship and well-developed corporate social responsibility (CSR) programs are top priorities for global enterprises that realize that their business impact goes beyond financial impact or performance—and that their "social license to operate" depends on much more than complying with relevant laws and regulations. It can be argued that being viewed as socially responsible and trustworthy is, today, just as important as is the "core" business activities companies engage in. Caterpillar CSR and CSI As China has reintegrated with the global community over the past four decades, global enterprises operating in China have brought CSR best practices with them and have been expected to serve as CSR role models in China. Global enterprises’ CSR efforts in China focus on participating in, promoting or even leading China’s sustainable development. They can leverage their advantages of advanced concepts, energy conservation and emissions reduction and standardized operation to continuously participate in the transformation, upgrading and sustainable development of Chinese industries. Through a combination of intrinsic motivation and government encouragement, Chinese companies have also engaged in CSR as they grow domestically and reach abroad, learning by example as well as through sharing of best practices (see Figure 18 and Figure 19). Caterpillar has supported the philanthropic work of the Caterpillar Foundation, which has contributed more than $600 million to charitable causes, including many that help make sustainable progress possible around the world. Different from traditional CSR, Caterpillar’s approach is defined as "corporate social innovation" (CSI) or "catalytic philanthropy." It begins by understanding the major human needs and then seeks and establishes partnerships with organizations, which provides those basic necessities— creating an economic landscape in which economies can grow and girls and women in particular can thrive. Citizenship and CSR initiatives have enabled companies to "give back," while also addressing issues of concern to local stakeholders—in creating shared value. Global enterprises have succeeded in this area, in part, by building the institutional capacity to understand and engage with local stakeholders—to collaborate in addressing and achieving common interests. Caterpillar is committed to upgrading the entire value chain, contributing new concepts to the industry and making upgrades across China, including innovations in social dimensions. In terms of CSR, Caterpillar represents some of the best practices in terms of industrial standards and experience sharing, which make it a leading figure in the industry. Caterpillar’s CSI approach considers the human implications of business at the front end of the value creation chain and integrates philanthropy and business needs to conquer global issues. Philanthropy allows an entry point for business in markets not yet ripe for "for profit" solutions to human need. Figure 18: CSR Value Chain CSR as Value Creation CSR as a fundamental element of business strategy, drives real operational impact and creates shared value by promoting competitiveness, innovation and human capital, harmonizing economic, social and environmental sustainability. CSR as Risk Management Compliance measures have medium strategic and operational impact, mostly mitigating operational risks and potential impacts. CSR as Corporate Philanthropy Corporate programs provide funds and capabilities, creating some strategic/operational impact.

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18 Figure 19: Caterpillar’s CSI Impact in China Caterpillar Foundation Charity Forest - 7,340 kg of dust reduced per year (2014) Poverty Alleviation - Goal: 50 million people worldwide on the “Path to Prosperity” by 2020 - 48,771 tons of carbon stored per year (2014) - 125 rural families supported. 1,800 farmers trained on agriculture practices and accounting. Average incomes rose 20% (collaboration with China Foundation for Poverty Alleviation, 2014) - 33,639 tons of oxygen released per year (2014) - Over 300,000 trees planted (end of 2015) Great River Partnership - Environmental protection planning, policy research, environmental flow practice and aquatic life monitoring standardization along the Yangtze River - 186,401 jobs and training for 5,540 people in rural areas (collaboration with Opportunity International, 2014) Disaster Relief - 2008 Snow Disaster - Identified 24 biodiversity conservation priority areas - Aquatic life monitoring network established - 2008 Wenchuan earthquake - Environment flow proposal for dams along Yangtze River - 2010 Qinghai earthquake Sustainable Urbanization and Livable City Construction Project - GHG reduction, energy efficiency improvement, water quality and urban transport improvement and land use research - Three main phases: 1) Blueprints for environmentally smarter growth; 2) Demonstration projects; 3) Spreading success to other emerging cities - 2013 Ya’an earthquake - 2014 Ludian earthquake - Established Disaster Preparedness and Mitigation Special Fund with the China Foundation for Poverty Alleviation in 2015 - Pilot cities in Chengdu and Qingdao Environment Basic Human Needs Caterpillar’s CSI Education - Pre-school to vocational education for rural students - Programs in STEM education, reading, language and emergency safety - Providing school buildings, books, school kitchens, computers and eye-glasses - Hundreds of thousands students benefitting Employee Volunteerism Employee Giving - In past five years, over 3,000 Caterpillar employees held and participated in various volunteer activities - Over 4,000 Caterpillar China and Cat dealer employees donated RMB 450,688 for Ya’an earthquake relief - Caterpillar employees in different cities make regular donations to their communities

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Talent Develoment 19 Attracting and retaining top global as well as local talent is of critical importance to global enterprises, and competition for this talent is exceptionally intense in China. In AmCham’s annual China Business Climate Survey, 66 percent of global companies in China’s resource and industrial industries reported 75 percent or more of their top country management was Chinese. This growing majority of local leadership illustrates global enterprises’ understanding of the importance of strong local teams with technical expertise and understanding of the business and wider operating context. • Making global talent local, by expecting longer-term commitments from executives transferring to China from abroad, along with extensive training on the local culture and business environment. In this way, global enterprises developed much more integrated and effective leaders in China • Importantly, the most successful global enterprises also understood that fostering a strong sense of community and commitment among employees through a strong company culture is a critical factor in retaining talent. From a Chinese developmental perspective, it has been a healthy phenomenon to see senior executives of global enterprises move on to Chinese companies or start their own firms. This has been one of the most obvious ’spill over’ benefits of foreign investment in China, as it is in other developing countries. Indeed, many of China’s most innovative and dynamic companies are now led by executives with experience and expertise from working with leading global enterprises. Caterpillar Talent Development Caterpillar’s talent development efforts have created a strong environment for cultivating leadership. The company makes employee career development a high priority, understanding that fostering a high sense of self-fulfillment among employees is a win-win proposition. 80% Chinese Employees trained in 2014: 8,000 Leadership training investment: $70 million Senior managers in China: Global enterprises are commonly seen as a "university" for local talent to develop professional skills. In the short term, these efforts have helped develop talents in China, and, in the long run, the talent development spillovers from global enterprises to the rest of the Chinese economy will help China move up the value chain and develop a more servicesbased economy (see Figure 20). The Caterpillar Career Development Plan is a centerpiece in building this employee satisfaction. This is a highly interactive process where employees take initiative to form their own career development plan, receive feedback from their managers and get support from the company. Successful global firms have elevated their talentdevelopment strategy to the level of overall business strategy. This includes: • Making local talent global, by working to understand what local employees truly value, such as a healthy worklife balance, taking a long-term view to training and developing local employees and providing top talent with global opportunities In 2014, Caterpillar provided training for employees in China, with an average of two trainings per person. This encompassed management, operations, production, professional skills, exchange programs, mentoring and coaching and general career development. This philosophy of helping employees achieve their potential helped the company achieve a turnover rate of about half the market average. Figure 20: Chinese Companies and MNCs Innovation Challenges Average responses where 1 = don’t agree and 5 = strongly agree. Average responses to the question, “In the process of conducting innovation in Mainland China, is your company facing the following challenges? 5 4 3 2 1 0 Talent Access Chinese Companies Talent Retention MNCs Inadequate in tellectural property protection Rapid cost increases Source: Strategy & 2014 China Innovation Survey: China’s innovation is Going Global Inadequate infrastructure and innovative ecosystem Difficulties in understanding market needs

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20 Environmental Performance Through years of operating in various markets throughout the world, global enterprises have realized that environmental performance makes good business sense. As China’s economy became more developed and sophisticated, global enterprises considered the environmental impacts of their business operations earlier and acted more swiftly to promote sustainability. Global enterprises have contributed to China’s sustainable development and environmental protection by serving as role models for Chinese firms by developing and leveraging environmentally friendly technologies and practices and by supporting China as it continued to strengthen its policies to improve the energy and carbon efficiency of its economy. They have helped to develop global and local environmental management standards, such as ISO 14000, which have been shown to help enterprises improve performance, identify savings and position themselves to compete more effectively in the global market by demonstrating commitment to and alignment with the needs and requirements of customers, shareholders, local communities and relevant regulatory agenciesiii. This context motivated global enterprises to advance their developmental agenda in a sustainable way that does not put their future business operations and resources at risk. This has frequently involved encouraging or even requiring suppliers and dealers to undertake sustainability measures themselves. Studies have concluded that China could attract $620 billion in clean energy investment between 2010 and 2020. Global enterprises that have developed the needed technologies for other markets, or that are developing new technologies Figure 21: Social Impact-Sustainable Development Integration Environment impact tailored for Chinese needs, stand ready to supply this growing demand as we will explore in Chapter 4. With their active engagement in the China market, these enterprises have supported official policies and the achievement of higher efficiency of energy use in electricity generation, transportation, green buildings and other areas. Many also collaborated with Chinese partners in R&D to develop the next generation of environmental technologies with global applicationsiv. Caterpillar and Environmental Sustainability Caterpillar recognizes the value of sustainability and has worked to integrate sustainability into their business operations by promoting environmental stewardship, social responsibility and efficient economic growth. In China, these enterprise-level contributions are significant. However, greater potential impacts are possible through contributing innovative business models and processes, as mentioned above (see: Introduction of Innovative Concept). For example, Caterpillar’s facilities in China have achieved significant results in emissions reduction, energy saving and waste reduction, including: • Wuxi facility: Reduced total phosphate emissions by 30 kilograms per year, and VOC emissions by around 8.4 metric tons in 2013 • Suzhou facility: A natural gas conversation project launched in 2012 saved 116,000 cubic meters of natural gas in eight months and was recognized as a role model for saving energy in the Suzhou Industrial Park • Over the last three years, Caterpillar’s Shanghai reman facility has saved 13,000 tons of CO2 emissions and 7 million kWh of electricity. Compared with new production, reman can save 50 percent in costs, 60 percent in energy, and 70 percent in the materials • Reduce pollutants and contamination • Save natural resources Caterpillar’ global operations reduce: Better social impact-sustainable development Business impact • Reduce operational costs and organzational complexity • Build stakeholder acceptance Greenhouse gas emissions intensity by 38% Water consumption intensity by 34% Operational energy intensity by 28% since 2006 90.6% … and achieved enterprise recycling rate in 2014.

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21 Equally important, Caterpillar has helped many of its Chinese customers make improvements in sustainability. Shanxi Liheng Steel Co., Ltd. (Liheng Steel), one of Caterpillar subsidiary Solar Turbines’ customers, received a Certificate of Avoided GHG Emissions from the U.S. Environmental Protection Agency for its achievement in reducing carbon emissions through its combined heat and power (CHP) system. The company has used specialized gas turbine generator sets to burn the coke oven gas that is a byproduct of steel making. The process reduces the coke oven gas being released into the atmosphere while at the same time producing electricity. 300,000 metric tons Shanxi Liheng Steel Co., Ltd. avoided over 300,000 metric tons of CO2 emissions per year, roughly equal to removing 55,000 cars from the roads each year, through use of Solar Turbines’ CHP system. Figure 22: Remanufacturing Resource Savings-Caterpillar Shanghai Facility Remanufacturing Resource Savings Caterpillar Shanghai Facility 8,000 Saved raw materials (t) 6,000 Saved energy (tce) 4,000 Saved water (t) 2,000 CO2 emission reduction (t) 0 2012 2013 2014 By viewing their role in China through the developmental prism, global enterprises have made significant contributions to China’s development in the "impact areas" discussed in this chapter. Going forward, as China develops in the "new normal" period, global enterprises continue to have a positive role to play in supporting China’s development in a wide range of areas for sustainable development. What’s more, as more and more Chinese companies strive to become global enterprises themselves, they can learn from the experience of established global enterprises—from their success not only in China but also in global markets.

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2222 Chapter 3 Becoming Global with China Developing strong companies and integrating them in the global economy has been among China’s national priorities for decades. In the current new normal stage of development, developing strong companies is more vital than ever, as China works to move its industries up the value chain and to rebalance its economy so it is more sustainable. This chapter discusses how the experience of global enterprises in China is relevant to the growing number of Chinese companies that are now going global themselves. With China’s economic growth momentum, strategic policy support and competitive advantages in certain industries, many Chinese companies, including State-owned enterprises (SOEs), have grown to sizes rivaling or surpassing top firms around the world. Chinese-headquartered companies on Fortune’s Global 500 list have risen from 12 in 2001, to 98 in 2015 (second only to the U.S., with 128 companies v ). Chinese companies have meanwhile developed operations and a presence all over the world. However, big does not necessarily mean effective or efficient. And having an international presence does not mean they are truly global. Key considerations for going global Understand and align with local stakeholders Innovate and integrate globally Adopt a long-term view of building intangible assets Adopt a global perspective Develop strong culture and human resource systems While there are excellent examples of Chinese companies already succeeding globally, on the whole they still face many challenges and obstacles on the path to global success. While some Chinese firms have been able to apply competitive China-specific advantages such as cost innovation and manufacturing strengths to succeed globally, many struggle due to limited customer and stakeholder knowledge abroad,low brand recognition and a lack of global management experience and related systems. However, as more and more expand internationally, they can overcome these challenges, including by leveraging the experience and approaches of global enterprises. The report highlights below five areas where global enterprises excel, and the implications for Chinese companies as they transform to become truly global. China’s overseas investments in the developmentcritical industries of construction, manufacturing, energy and resources extraction have seen impressive growth over the past decade—and provide a useful focal point for discussion. Chinese companies in these sectors entered the global market as a result of both market drivers pushing firms to expand abroad and government policies guiding and supporting such activities. The new One Belt, One Road (Belt and Road) Initiative is an example of a government initiative that supports Chinese companies to expand internationally in these industries. The new Asian Infrastructure Investment Bank (AIIB) will meanwhile help supply $100 billion in capital for infrastructure projects, and the Chinese Government has also dedicated $40 billion for the Silk Road Fund to develop infrastructure projects. Such investments will create myriad opportunities for business.

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23 Understand and Align With Local Stakeholders Global enterprises succeed in different markets by understanding and systematically engaging local regulatory, government, business, general public and other stakeholders. They align their business strategy and operations with national development priorities and local stakeholder expectations. They work to develop partnerships with local stakeholders with shared benefits and to introduce the positive impacts they are making to local audiences.They engage their local partners as advocates to enhance their acceptability—while continuously mapping and building relationships with the stakeholders that are essential for business success and acceptance of a social license to operate. These approaches help global firms stand out as trusted partners in the economic development process and as responsible and productive members of local communities. This approach has worked well for global enterprises in China. As discussed in Chapter 2, Caterpillar’s extensive network of local dealers is widely considered one of the company’s greatest assets for understanding and reaching its local stakeholders. For example, while Chinese companies are participating in overseas construction projects, they may face different situations than in China, where it is common for a construction project to be subcontracted among many different individual subcontractors. When it comes to overseas projects, Chinese companies need to compete with bidders from other countries. In these circumstances, the brand and the local connections the bidders have will make a big difference in securing the project. In Caterpillar’s case, its partnership with dealers and collaboration with suppliers consistently developed over the past 20 years are one of the company’s greatest assets for understanding local markets and providing customers suitable products and services. Changing perceptions and behavior through communication and education The initial selling prices of Cat products are higher than many other brands, which can be a barrier for customers. However the total costs of ownership and operation can be significantly lower when product reliability, component availability, dealer support, value of second-hand equipment and other factors are considered. Caterpillar has invested much time and effort into helping customers understand the benefits of this perspective. For example, Caterpillar developed a Value Estimating Tool that dealers use to help customers and industry calculate the total costs of ownership over entire product lifecycles. With customers becoming more sophisticated and the industry trending toward sustainable development, the acceptance of this perspective is becoming more widespread.

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24 Innovate and Integrate Globally Global enterprises generally outsource non-core business activities to service providers or partners around the globe so that they can focus their in-house efforts in areas that are either more profitable or that will enable the firm to develop a competitive advantage. They also create global business practices through complex, often highly fragmented, global value chains, which allow them to integrate globally. Operating as a systematic global value chain enables global enterprises to leverage relevant local and global expertise to support their expansion across markets, cultures and geographies. Firms like Caterpillar have succeeded globally because they have developed the institutional frameworks and capacities that enabe them to operate, innovate and collaborate on a truly global level.Their China-based operations are one part of the fully integrated global whole. As Chinese companies move up the value chain into innovation-focused, high-technology areas of the global economy, they will continue to become better integrators and collaborators with both internal and external partners. Made in China 2025, for example, will encourage diversity and partnerships among Chinese firms going global, with a stated goal of "guiding enterprises to integrate into local cultures, enhance social responsibility and improve risk management in foreign investment and operation as well as localization capacity in the global market." Caterpillar’s Global Business Integration Currently, over 60 percent of Caterpillar’s revenue comes from outside the United States, its home market, as Caterpillar has taken many measures to transform itself from a U.S. company to a global enterprise, including, but not limited to: • Streamlined its global supply chains • Initiated significant cost controls globally • Brought to market a continuing series of best-in-class products developed by global teams • Created the internal culture and management training necessary to develop a strong, internationally experienced global teams • Made and integrated strategic acquisitions around the world to develop a competitive advantage in strategic industries • Developed and created a highly-regarded global dealership network • Opened numerous facilities and offices in strategic locations throughout key markets globally • Leveraged partners and service providers with local and global expertise

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Adopt a Long-term View of Building Intangible Assets 25 Building intangible assets takes time, is costly and doesn’t always provide immediate benefits, particularly in the industries discussed in this report. Yet intangible assets are essential to the success of global enterprises aiming to prosper over the long-term. Indeed, these intangible assets can provide a major area of strategic differentiation and value on both a global and local level. Chinese firms need to develop these assets by adapting a long-term view of their global operations. This may involve partnering with specialist global professional services firms, where necessary, to develop relevant in-house capacities. Figure 23: Intangible Assets Caterpillar executives often refer to their robust network of dealers as a valuable asset that has taken decades to fully cultivate. At the root of the unique relationship that Caterpillar has with its dealers is a mutual respect and trust arising from a truly balanced partnership. Caterpillar is dependent on its dealers for sales and servicing its products, while the dealers are dependent on Caterpillar for products and technology to win customers. This relationship has developed because both parties have invested in the relationship over the long-term, adopting similar value systems and upholding a sense of responsibility that benefits both. This type of asset cannot be easily replicated, and few companies in existence today, global or local, are able to sustain such a strategy. W ith brands and reputational assets, world-leading environmental and social stewardship are also paramount for global success—especially in industries where companies face challenges to maintain local stakeholder acceptance. Brands Talent Intellectual Property Experience & Knowledge Culture Innovation Legacy Business Relationships Intangible Assets Distribution networks are an example of intangible assets that are especially critical to an enterprise’s success in overseas markets. In addition to driving sales, these networks can provide important local knowledge, pathways to developing trust and a more nuanced understanding of and access to important stakeholders. Developing strong distribution networks can be one key to success for Chinese companies seeking to go abroad in line with the One Belt, One Road (Belt and Road) Initiative. The Belt and Road Initiative covers 63 percent of the world’s population, accounting for 30 percent of the global economy. The initiative brings about an unprecedented broad market for manufacturing industries with regional infrastructure upgrading, connection and communication. However, this initiative also requires local contractors to enhance their overall asset management capacities, safety and working efficiency, sustainable development as well as to create win-win opportunities. This is vital, for example, in constructing large-scale, complex and sustainable engineering projects with international cooperation.

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26 Adopt a Global Perspective Chinese companies going global must become "global" companies, not simply "Chinese" companies with international operations. Becoming global requires the development of a global perspective, the ability to think across disciplines, geographies and cultures—while seeing a larger global picture that is greater than the sum of its parts. This kind of viewpoint on global business operations enables firms to succeed in the fast-paced global business arena. It is important to know how to act on that perspective, how to leverage global market dynamics and adapt sufficiently to local market conditions. This dynamic market perspective enables firms to build out successful local operations into dynamic global value chains. A global perspective provides advantages in building stakeholder acceptance, finding and retaining key staff and partners and in developing international brand value and reputation. A key approach to making this credible—in addition to acting like a global company—is to develop and share global thought-leadership on topics that resonate with audiences around the world. Having a global perspective also means recognizing the importance and influence of different cultures around the world—and being effective in crosscultural situations. Caterpillar, for example, has adapted and stayed on top of various market developments in an effort to maintain its global leadership position. Today, recognizing the significant changes in the market place, Caterpillar is focusing on creating innovative solutions that will enable the company to succeed in the 21st Century. As Caterpillar Chairman and CEO Doug Oberhelman noted, "We’re investing in companies that think and act differently than we do. That’s intentional and it’s new for Caterpillar. We are trying to disrupt ourselves in our own way, before others can disrupt us." There are expanding opportunities for global companies to partner with Chinese companies in other regions. The energy and resources sector are obvious examples— in these sectors, global companies are forming JVs, investment-partnerships and other joint projects with China’s energy companies in Africa, North America, the Middle East and other parts of the world. In many instances, these Chinese companies are transforming into global enterprises themselves.

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Develop Strong Culture and Human Resource Systems Strong culture, specifically shared values, attitudes, principles, standards and beliefs, enable an organization to expand globally. In fact, effective culture can account for 20-30 percent of the differential in corporate performance when compared with "culturally unremarkable" competitors. Companies with strong culture have better operational, financial, social, environmental and other performance. Global enterprises have succeeded on a global scale, in part, because they develop strong cultural principles, which can be applied to different scenarios in different countries. Strong culture provides a company with the DNA that enables it to sustain growth in an ever evolving and increasingly complex global economy. For global enterprises with publically traded stocks and accompanying high demands for solid financial performance, culture is what enables the balancing of shortterm demands with long-term vision. Additionally, global firms are successful in many different markets because they employ dynamic human resource management systems to attract, develop and retain top global as well as local talent. At the global scale, many global enterprises have a designated HR unit specifically to coordinate international HR policies and concentrate some tasks in shared service centers to provide standard HR services for all locations. At the local level, global enterprises tailor HR measures to local conditions and empowering local leaders, enabling them to succeed and adapt to different operating and regulatory environments. Some successful global enterprises utilize a non-hierarchical, localized management structure that enables them to be more dynamic and capable in specific local markets. They also provide incentives for their employees that reflect individual performance, and factor in local cultural norms and sensitivities. As Chinese companies go global, they will have to move away from centralized management structures to adapt to more dynamic and adaptable structures that suit a wide range of local market conditions and cultures. Figure 24: Caterpillar’s "Vision 2020" les . R yc E he c L hro D ug ht O st H urn ret K O T er s S de liv t. en tal C U S T O M E R S We take pride in helping our customers succeed. st OUR VALUES IN ACTION be OPERATING PRINCIPLES E the up C eri or L p elo P We O v de nd E ta STRATEGIC GOALS P ac r att We S VISION 2020 27 Caterpillar’s Corporate Culture and Management Systems Caterpillar’s global success benefited greatly from its strong corporate culture. It has developed a mature and thorough management system for enterprise culture. For instance, all the leaders of Caterpillar are required to participate in a number of trainings throughout the year. All employees are required to annually review the Worldwide Code of Conduct, a set of standards dating back to 1974, which define what behaviors are prohibited and what behaviors are encouraged at Caterpillar. Building a strong local talent pipeline is set as a key part of Caterpillar’s strategy in China. Approximately 80 percent of the leaders of Caterpillar in China are local Chinese, and 28 out of the 29 manufacturing facilities are led by home-grown Chinese talents. This localized management helps Caterpillar better understand and serve its employees, local industries, markets, customers and communities. At the same time, Caterpillar also recognizes the need to integrate international talents in its operations in China for the purpose of diversity of culture and ideas. The company utilizes global HR systems that are adapted as appropriate to local market requirements—to enable it to attract, develop and retain the optimal mix of talent. Figure 25: Caterpillar’s Talent Management, Safety and Development Indicators Employee attrition rate in China 0.8% 2600+ 90% 31% Percentage of foreign employees in China Longest facility safety record - days without injury in China Percentage of local leaders in manufacturing facilities in China Percentage of employees with college diploma or above in China

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28 Global Partners for Progress As Chinese firms look to enter the global market, global enterprises can serve as important role models and partners. Chinese companies are expanding abroad not just for the sake of reaching foreign markets (which many have been doing for some time), but also in order to integrate global management expertise, access advanced technologies, build global R&D capabilities and acquire or build globally recognized brands. Initiatives like the Belt and Road will help Chinese companies develop new capabilities abroad. Moreover, partnering with successful global enterprises like Caterpillar can offer Chinese companies valuable resources and partnership opportunities as they continue to expand abroad. Going forward, global enterprises of all origins will continue supporting the sustainable development of the global economy. Working together with governments, civil society and other stakeholders, global enterprises will continue playing important roles in addressing existing and new developmental challenges in China and around the world. This report’s final chapter discusses the future outlook for China’s development, some of the key dynamics that global enterprises will need to navigate and how they will continue positively impacting China’s economic development in the decades to come.

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Chapter 4 2929 In the Decades to Come Now, China is entering a new stage of an attempted transformation of its development mode—as the country adapts to a "new normal" of lower speed but better-quality, more sustainable economic growth. Global enterprises need to refine their understanding of the spectrum of challenges and opportunities that China faces, in order to find their own place and to be part of the solution. the development of free trade zones (FTA), "connecting into" the global value chain, tax and financial reforms, the "Internet+" action plan, "Made in China 2025", as well as a series of new measures in promoting industrial cooperation. The combined impact will be greater market and innovation dividends as China achieves higher quality and more sustainable development in the future. To drive an economic transition and transformation, the Chinese government has formulated and is implementing several complementary economic strategies. This includes the Belt and Road Initiative, the Coordinated Development of Beijing, Tianjin and Hebei and the Yangtze River Economic Belt. It also includes efforts to drive State-owned enterprises (SOE) reform, decentralization of administrative approvals, To further understand China’s future development and the role that global enterprises can and will be expected to play in the coming decades, we need to envisage how China will develop. We can utilize the prism of Chinese development from a longer-term perspective to anticipate the nature of the Chinese economy, society and environment—for example in 2030 or 2050. China’s Future Landscape So what will China look like in decades to come? This report will not provide a comprehensive overview—but here are some key dynamics for the scenario where China continues to develop stably along the path it is currently on—in line with Party / government plans. Demographic shifts: China will be more urbanized. By 300 to 400 million more people will move into China’s cities, requiring an investment of between 41 and 75 trillion RMBvi. The urban population in 2035 will reach one billion (71 percent)—up from 763 million (56 percent) today. China will have an older population with a much lower percentage of working age people (leading to labor shortages and rising wages) (see Figure 26 and Figure 27vii ). 2025, China will have over 200 cities with a population over 1 million. Europe has only 35 such cities today. By 2030, Figure 26: Projected Percentage of Population Age 60 and Over Figure 27: Ratio of Working-age Population to Old-age Dependency in China Number and share of population age 60 and over,1950-2050 35 500 450 Ratio 1,050 30 350 25 1,000 25 300 20 950 20 900 15 10 850 10 5 800 250 15 200 150 100 50 0 0 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 Population age 60 and over Source: World Bank, China 2030 % of total population Percent Population (millions) Millions 30 400 China: Working-age population and old-age dependency ratio 5 Forecast 750 2000 0 2005 2010 2015 Working-age population (LHS) Source: Deloitte, 2014 2020 2025 2030 Old-age dependency ratio (RHS)

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30 Economic shifts: China will be wealthier. By 2025 China is expected to have doubled the size of its middle class— and will very likely be the world’s largest economy. With wages constituting a larger share of GDP, wealthier Chinese will consume more and have a much wider range of tastes and preferences—even if they are still not as wealthy per capita as the Americans or Europeans. They will also be more focused on life quality and have a more global outlook— informed for many by more experience travelling and living abroad and more awareness of environmental quality. China will be more connected. Currently, there is still vast potential for development in China’s interior regions, with an underserved potential market of 720 million people and a combined $3.15 billion GDP, roughly equivalent to Africa or Latin Americaviii. China’s interior will also be where the majority of the new megacities will arise. With a wealth of natural resources and favorable terms on non-capital factors of production, global enterprises are eager to access this potential. China is already expanding infrastructure to connect the interior with the coast, making it easier and more profitable to transfer energy and products to China’s coast and the world beyond. China will be more innovative—with stronger capacity for novel technology innovation—as well as organizational and business model innovation. It remains to be seen however how fast China can reach the technology frontier, if at all in certain areas, given the lead currently enjoyed by advanced economies and the challenges it faces to develop innovation capabilities across the economy. International shifts: China will be even more integrated in the global economy—with Chinese companies expanding globally and China playing a larger role in relevant international organizations. China will continue to welcome foreign investment and global enterprises on a discerning and targeted basis (favoring "technology partners" for example). China will also ensure continuing—and potentially even expanded in some areas—market access in return for Chinese companies having access to global markets and to achieve its development goals. In the most recent guideline issued by the State Council for the reform of SOEs, for example, non-state capital was introduced in to the energy, railway, telecommunication, resource development and public service sectors while state capital was introduced into non-state enterprises through commercialization in key areas such as public services high technology and environmental protection. There is in fact continuing and renewed emphasis on the benefits of "openness" and "global integration" in China today—for example in relation to innovation and the importance of being integrated in the global innovation ecosystem where the ability to collaborate, partner and share in fast evolving combinations of actors is key. All these shifts bode well for global enterprises in China— even if they may face more direct competition from Chinese players moving up the value chain and becoming global enterprises themselves. China will be more rules-based—with stronger emphasis on the "rule of law" and more narrowly defined role for government. Industrial shifts: While much attention has focused on the promise of information technology, biotechnology and other new industries for future economic growth, it is important to remember that the construction, manufacturing and energy industries still forms the bedrock of significant economic activity in developed economies. The U.S., Germany and Japan, three of the world’s most developed economies, are also still three of the world’s most advanced manufacturers. The focus will shift from labor-intensive, lowvalue added manufacturing to higher-value added, more innovative and services-driven manufacturing operations. Moreover, these industries make outsized contributions to commerce, research and development and productivity, comprising large portions of trade and exports. Going forward, China will likely provide a growing share of the world’s production in machinery and manufactured goods (see Figure 28 ix), as it seeks to transform itself "from a manufacturing giant into a world manufacturing power" through the Made in China 2025 planx. Figure 28: Global Share in Machinery and Engineering Goods % of world output 45 40 35 30 Forecast 25 20 15 10 5 0 2000 2004 China 2008 U.S. Source: Deloitte, 2014 2012 Germany 2016 2020 France 2024 Japan 2028 2032 South Korea

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How Global Enterprises Will Contribute in Future China The impacts of global enterprises will continue to be substantial, not just for China’s domestic development, but also for the country’s growing international influence, through partnerships with China and Chinese firms around the globe. Below the report highlights some of these projected impacts. Urbanization, Infrastructure, & Energy Global enterprises will support China’s urbanization in myriad ways—including by enabling smart cities and supplying products and services to build relevant infrastructure. By 2020 China will build 43,000 km of expressways and 70 new airportsxi. By 2025, it will need to build five billion square meters of roadways and 170 mass transit systems, and 40 billion square meters of floor space in five million new buildings. Between 700 and 900 gigawatts of new electrical generation capacity will be needed to power and sustain this developmentxii, as energy consumption is projected to double from 2005 to 2050xiii. 31 S i m i l a r t o h o w C a t e r p i l l a r p ro v i d e d m u c h - n e e d e d technologies to China in the early stages of the opening and reform of the late 20th century, global enterprises will continue to do the same in other emerging economies around the world during the 21st century. Chineseoriginating global enterprises will be key partners in this regard, bringing their own years of experience building China’s infrastructure, and applying the newly-gained insights of the global enterprises’ development prism. Global enterprises originating in other regions will play a key role in meeting China’s growing need for a larger and more diversified energy supply—as reliance on energy imports continues to rise. This will include energy projects in China as well as increasing collaboration with Chinese energy companies around the world. Figure 29: Future Impact Areas for Global Enterprises in China Urbanization & Infastructure Economic Restructuring Management Systems & Culture Energy Global Environmental Harmony Innovation & New Strategic Industries Developing China’s Interior Global Trade

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32 Economic Restructuring Harmonizing with Global Environmental Needs Global enterprises will support the development of China’s service sector—such as civil engineering, insurance, remanufacturing, and financial leasing—which will in turn enable higher quality growth. The desired transition from an industrial to services base will provide myriad opportunities to global enterprises. A more efficient services sector enabled by global enterprises will for example advance the competitiveness of manufacturing as China moves up the value chain—in line with the Made in China 2025 initiative. Global enterprises will play a key role in meeting China’s environmental protection challenges. They will increasingly leverage China as an innovation hub and less as a base for low-value, high polluting and resource intensive manufacturing. This will be driven by stricter environmental policies (as well as by more scarce and expensive labor resources and rising education standards—among other factors).Meanwhile, they will provide technologies and expertise to drive much-improved environmental performance—in line with government environmental targets (given that global enterprises have experienced much more stringent environmental requirements in other high-regulating counties). As China is now set to tighten environmental protection, global enterprises can serve as a valuable advisor in terms of policy or regulation promulgation and implementation. Global enterprises will have a major role in China’s efforts to develop strategic emerging industries. The key to unlocking the potential of these advanced industries will be developing China’s innovation system and capacity in the coming decades. China will not be able to reach the technology frontier in many areas without global integration and collaboration, including by establishing R&D centers and industrial manufacturing parks abroad. Global enterprises will help by sharing technologies and expertise, being active partners and collaborators in developing new technologies, and helping link China to the wider global innovation system. Encouraging global enterprises to contribute in this regard has been made a priority of the Made in China 2025 policy. Global enterprises that can demonstrate a role in supporting China’s development in this regard will be especially welcome in the coming decades. Promoting China’s Interior Development and Global Trade China will continue to utilize economic openness to enable global economic integration—both integration of the world into China and of China into the world. The Belt and Road Initiative will encourage this development and increase involvement from global enterprises, particularly in the areas of infrastructure and energy development. Global enterprises will contribute foreign capital investment, job creation and tax payments to China, particularly in western China, which has large land and labor resources awaiting exploration (just as East China had 20 years before). Many lower tier cities in east China will also welcome global enterprise investment as a way to raise their reputation and attract other forms of investment besides the FDI from global enterprises. The old industrial base in northeast China can also leverage partnership with global enterprises to improve the quality of manufacturing and develop advanced manufacturing in the region. In the manufacturing industry, Made in China 2025 seeks to support Chinese firms in becoming global enterprises. It emphasizes support for Chinese firms becoming global through utilizing global resources, including through overseas M&A, investments, establishing R&D centers and global marketing and service systems. It guides enterprises to integrate into local cultures, enhance social responsibility and improve risk management in foreign investment and operations as well as localization capacity in the global market.

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33 Promoting International Partnerships Global enterprises will increasingly be collaborating and partnering with Chinese firms on the global stage. This is as companies from China move up the value chain and evolve into global enterprises themselves—and as outward foreign investment (ODI) from China becomes even more significant and diversified. Global professional services firms will for example play a key role in helping Chinese companies navigate globally and in building global brands. Global enterprises will increasingly advocate for China’s interests and support its agenda globally in return for wider access to the world’s to-be largest economy. This dynamic will evolve as China becomes more assertive and active in multilateral forums to influence global governance and address issues, such as climate change, global financial and geopolitical stability. As China moves up the value chain, it will very likely also have to manage rising trade and investment tensions associated with its rise—in part because it will compete globally in many of the same areas as developed countries. Meanwhile it will also face growing competition from other emerging economies that are aiming to transform themselves and move up the value chain. In many situations, global enterprises with an interest in open markets will support China’s case directly or indirectly— as long as they have access to the China market and opportunities in return. Caterpillar in Future China As China reaches for its long-term development targets, Caterpillar will continue adapting to the changing landscape and aligning its contributions in many of the areas described above. Caterpillar is already making major efforts to increase its innovation capacity, frequently using the phrase "innovate or die" to describe the importance of innovation to its future. For example, Caterpillar has recently made some investments the U.S. for big data applications. Given the large size of the China market, it will likely make more investments on local technology & research and in forming partnerships with private or State-owned Chinese companies to jointly innovate. As an industry-leading company with a track record of contributing to development in China, Caterpillar is expected to continue advocating for and supporting the healthy and sustainable development of the value chain and fostering partnerships along the value chain. In addition, partnerships with other global enterprises, including Chinese-originating ones, will likely be pursued for further win-win benefits in China and around the world. Indeed, we see great potential for Caterpillar to support China’s Belt and Road Initiative agenda by partnering with Chinese infrastructure and energy companies in the wider region. With very significant China-based operations, Caterpillar believes that free trade and open competition are critical ingredients for its own expansion, as well as for global economic growth. It is therefore strongly advocating for free trade in and with China and promoting China’s developmental interests as they relate to free trade. For example, Caterpillar has remained neutral on China’s RMB policies and "market economy status" investigations, choosing instead to help promote free trade, imports/exports and China’s movement up the global value chain. We would anticipate such support to continue as long as market conditions in China remain favorable.

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34 Conclusion Global enterprises have an opportunity to be part of one of the greatest transformations in human history in the decades to come. It will be fascinating to observe how this story unfolds and to be a part of it. While we cannot predict the future with certainty—we’re confident that global enterprises will be served well by continuing to use "prisms of Chinese development" to illuminate the opportunities and adapt to the risks of doing business in and in relation to China. By having a clear understanding of China’s development status and strategies—global enterprises can identify opportunities for shared value and mutual benefit while avoiding areas and approaches that don’t match China’s goals. China will still need and welcome global enterprises in myriad dimensions as it transforms. Meanwhile, a transforming China will make an even larger contribution to global prosperity and progress in the decades to come—including through global enterprises originating from China.

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Endnotes i. See: "Manufacturing the Future: The next era of global growth and innovation." McKinsey. November 2012. manufacturing ii. See: "The Economic Benefits of Intellectual Property Rights in the Trans-Pacific Partnership." Contributors: Nam D. Pham, Ph.D., Joseph Pelzman, Ph.D., Justin Badlam, and Anil Sarda. February 2014. iii. See: "A Review of the Impact of ISO 9000 and ISO 14000 Certifications." Aba, Eli Kofi, and M. Affan Badar. The Journal of Technology Studies 39.1 (Spring 2013). iv. LP Amina, for example, has developed a coal classifier that increases efficiency of power generation, and field tested the technology in Chinese power generator partners’ power plants. Caterpillar’s Solar Turbines subsidiary is also improving the efficiency of power generation from natural gas. v. See: "China's Global 500 companies are bigger than ever—and mostly state-owned." Scott Cendrowski. Fortune Magazine (online). July 22, 2015. vi. See: “China’s urbanization: Funding the future.” KPMG. December 2013. ArticlesPublications/Newsletters/China-360/Documents/China-360Issue14-201312-China-urbanization-funding-the-future-v1.pdf vii. See: World Bank. China 2030 and Deloitte, "Competitiveness: Catching the next wave in China." 2014. viii. See: “The Future for MNCs in China.” KPMG. 2012. documents/future-for-mnc-in-china.pdf ix. See: "Competitiveness: Catching the next wave in China.” Deloitte. 2014. About-Deloitte/gx-china-competitiveness-report-web.pdf x. See: “Made in China 2025 plan unveiled.” Xinhua. 19 May 2015. c_134252644.htm xi. See: “Ten forces forging China’s future.” McKinsey. July 2013. chinas_future xii. See: “Preparing for China’s Urban Billion.” McKinsey. February 2009. urban_billion_in_china xiii. See: “China’s Energy and Carbon Emissions Outlook to 2050.” Lawrence Berkeley National Laboratory, China Energy Group. April 2011. Bibliography 1. Bouchard, Craig T., and James V. Koch. The Caterpillar Way: Lessons in Leadership, Growth, and Shareholder Value. Print. 11. Li, Keqiang. "Report on the Work of the Government." Xinhua News Agency, 5 Mar. 2015. 2. Zeng, Ming, and Peter J. Williamson. Dragons at Your Door: How Chinese Cost Innovation Is Disrupting Global Competition. Boston, MA: Harvard Business School, 2007. Print. 12. China Energy Statistical Yearbook. Beijing: China Statistics, 2013. Print. 3. Naughton, Barry. The Chinese Economy: Transitions and Growth. Cambridge, MA: MIT, 2007. Print. 13. Ma, Damien. "Rebalancing China’s Energy Strategy." Paulson Papers on Energy and Environment. Paulson Institute, Jan. 2015. 4. 2014 American Business in China White Paper. Beijing: the American Chamber of Commerce in the People’s Republic of China, 2014. Print. 14. World Bank and the Development Research Center of the State Council, P. R. China. “China 2030: Building a Modern, Harmonious, and Creative Society.” 2013. Washington, DC: World Bank. DOI: 10.1596/978-0-8213-9545-5. 5. Breznitz, Dan, and Michael Murphree. Run of the Red Queen: Government, Innovation, Globalization, and Economic Growth in China. New Haven: Yale UP, 2011. Print. 15. Goh, Chorching, Wei Li, and Lixin Colin Xu. "R&D Returns, Spillovers, and Firm Incentives: Evidence from China." Policy Research Working Papers (2015). 6. Wu, Jinglian. Understanding and Interpreting Chinese Economic Reform. Mason, OH: Thomson/South-Western, 2005. Print. 16. Le, Wang Zhi. Quan Qiu Gong Si. Shang Hai: Shang Hai Ren Min Chu Ban She, 2014. Print. 7. Jiang, J.J., Li, Z.M. and Lin, C.Y. (2014) Financing Difficulties of SMEs from Its Financing Sources in China. Journal of Service Science and Management, 7, 196-200. 17. Fang, Gang. “The Research and Analysis of R&D in China of Multinational Companies." China Academic Journal (2014). 8. Liu, Jing. "Analysis on Technology Spillover Influencing Factors of Multinational Corporations R&D Localization in China." Journal of Changsha University, 2014. 9. Ben Simpfendorfer, Silk Road Associates and Anson Bailey, KPMG China. "The Future for MNCs in China." Http:// Pages/Future-for-MNC-in-China-201206.aspx. Ed. Nina Mehra, KPMG China. N.p., 2012. 10. James Manyika, Jeff Sinclair, Richard Dobbs, Gernot Strube, Louis Rassey, Jan Mischke, Jaana Remes, Charles Roxburgh, Katy George, David O’Halloran and Sreenivas Ramaswamy. "Manufacturing the Future: The next Era of Global Growth and Innovation." McKinsey Global Institute, 2012. 18. Ximin Yin, Qianyu Fan. “The Reasons of Weakening of Social Responsibility in China of Multinational Companies: An Analysis Based on Multi-case Study.” Economic Research Guide (2014). 19. Zhiyong Yang, Jianyong Yang, Zhixiong Gao.”The New Changes of R&D Centers in China of Multinational Companies.” International Business Forum (2013). 20. Shu Chen. “An Analysis of The New Challenges and Strategic Adjustment of Multinational Companies in China.” New West (2014). 21. China Industry News Network. "2014--2019 China's financial leasing industry market monitoring and future prospects assessment report." 2014.

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