Manufacturing and Distribution in China at a Time of Change

Transcription

1 Manufacturing and Distribution in China at a Time of Change Kansas City, MO February 29, 2016

2 Positioning for Change in China William Soileau Legal Director Pinsent Masons LLP THE BASIC SITUATION 2016 Pinsent Masons. All Rights Reserved.

3 China s traditional strengths Culture of learning Literate and productive population Low wages Basic industrial infrastructure / knowhow Central government coordination / control Successful activist industrial policy Trade surpluses Foreign exchange reserves Protected markets + foreign investment High growth rates China in transition Rising wages and costs Shift away from (esp. low-value) export manufacturing Transition from investment- and export-driven to consumption- and service-driven growth Rise of domestic competitors Significant overcapacity in some industrial sectors Liberalization of outbound investment Strengthened administration -> Big government compliance / complexity > streamlining Slowing rates of growth RMB depreciation and stock market volatility 2016 Pinsent Masons. All Rights Reserved.

4 By the numbers Capital outflows of US$500 billion in 2015 GDP growth of 6.9% in 2015, vs. 7.3% in 2014 (World Bank). Manufacturing growth of 6% vs 7.3% in 2014 Services growth of 8.3% vs 7.8% in 2014 (Some SOE contacts estimate actual GDP growth at 2 or 3%) Electricity demand grew by 0.5% in 2015 (slowest rate since 1998) Automobile sales grew 4.7% YOY vs. 6.9 in 2014, and 13.9 in 2013 Taobao sales of US$14.3 billion on Singles Day, (up 60% from 2014) Amcham Shanghai China Business Report 2016 Companies are still profitable, but report decreasing revenues 80% of firms are optimistic, overall, about the Chinese market (down from >90% in 2012) 71% of China operations are profitable 61% report revenue increases for 2015 (down from 75% in 2014) 76% expect revenue growth next year, but at lower rates 23% report declining revenues (up from 11% in 2014) Manufacturing is being hit hard, with1/3 expecting falling 2015 revenues Retail is more buoyant, with 57% of companies expecting 2015 revenues to grow by more than 11% 2016 Pinsent Masons. All Rights Reserved.

5 Amcham Shanghai China Business Report 2016 US companies are also still investing in China, but at decreasing rates. 84% increased investment in 2015 More companies investing less: investment in 1-15% range increased from 39% in 2014 to 56% in 2015 The number of companies reporting decreased investment increased from 4% in 2014 to 16% in 2015 In % expect to decrease investment 61% expect to increase in 1-15% range Amcham Shanghai China Business Report looks like more of the same. 81% of companies plan to increase investment in % of retail operators 85% of service companies 76% of manufacturers By industry: Real estate, engineering and construction: 94% Financial services: 87% Healthcare: 83% But 61% expect to increase in the lowest 1-15% range And 19% expect to decrease investment Over 25% of automotive, chemicals and industrial companies 2016 Pinsent Masons. All Rights Reserved.

6 Amcham Shanghai China Business Report 2016 Companies reporting China as global #1 investment priority Manufacturing: 22% Services: 35% Retail: 42% AmCham Shanghai China Business Report 2016 Top investment priorities: Sales, marketing and BD: 71% R&D: 40% Automation and productivity: 27% New manufacturing facilities: 25% E-commerce and digital: 24% Distribution channels: 20% Compliance and governance: 18% Environmental compliance: 12% Logistics and transportation networks: 11% Corporate and social responsibility: 8% 2016 Pinsent Masons. All Rights Reserved.

7 Amcham Shanghai China Business Report 2016 Top risks to future business expansion Increasing costs Domestic competition Slowing market growth RMB volatility Regulatory and policy changes Top challenges Inefficient government bureaucracy Internet access restrictions and quality Domestic bias in procurement Unequal regulatory treatment of foreign companies Data security and protection of commercial secrets Some strategic alternatives Defensive Downsizing Cost-cutting generally Disposals Move production Within China Abroad Offensive Expand / upgrade production for economies / efficiencies Expand distribution channels Acquisitions Alliances 2016 Pinsent Masons. All Rights Reserved.

8 OPERATIONAL ADJUSTMENTS Overdue receivables Active sales efforts to find new customers / channels Focus on premium products / markets Active due diligence on new customers Improved credit rating systems Approval procedures for trade credit and new customer approval Active collections dunning and escalation process for overdue customers Willingness to litigate 2016 Pinsent Masons. All Rights Reserved.

9 Refocus on compliance Areas Corporate governance and secretarial generally Tax Anti-trust (horizontal and vertical) Anti-corruption Environmental Advertising law Approaches Message from the top Systems and procedures Values statements, manuals and policies Compliance audits Training DOWNSIZING 2016 Pinsent Masons. All Rights Reserved.

10 Layoffs No at will employment regime Difficult to fire Labor authorities and arbitrators are employee-friendly Labor Contract Law layoff provisions 20 or more employees, or (if less) 10% of the workforce Conditions Bankruptcy re-organization serious difficulties in production and business operation Changes in production Changes in basic economic situation Procedures Report to labor bureau Solicit opinions of employees / labor union Priority retention requirements (and some prohibitions) Statutory severance must be paid Business closures Closing even a solvent business is a time- and resource-intensive process 2016 Pinsent Masons. All Rights Reserved.

11 Business relocation Two alternatives: Close and re-establish Transfer the registration Real estate Employees Tax settlement Agreements with local authorities in place of origin Asset transfers NEW FUNDING 2016 Pinsent Masons. All Rights Reserved.

12 Shareholder or offshore loans Many limitations plan ahead Maximum aggregate borrowing limited to the borrowing gap total investment registered capital statutory ratios Actual borrowing limited to the percentage of capital paid in (total investment amount registered capital) x contributed capital registered capital SAFE registration / approval (file within 15 business days after signing) Short-term loans can be used for working capital only Care in structuring security (pledge of equity; guarantees) Domestic bank loans Domestic banks have been reluctant to lend to private businesses Easier to obtain with help of local partner (if a JV) Not subject to F/X controls Borrowing gap limits may be ignored (esp. for short-term loans) May be in the form of bank notes or cash Security will be required (assets; accounts receivable; guarantee) 2016 Pinsent Masons. All Rights Reserved.

13 Capital increase Generally unproblematic (welcomed by officials), but Subject to approval Original capital must have been contributed Procedures take time (at least a month or so) Need to amend the Articles of Association and (if any) JV contract (and SOE partner will need approval). Increases the borrowing gap, proportionately ACQUISITIONS 2016 Pinsent Masons. All Rights Reserved.

14 Approvals generally Targets limited by Guidance Catalogue MOFCOM approval required for direct transfers of equity in Chinese companies (not for indirect transfers of offshore SPVs) But NB tax reporting required for both direct and indirect transfers Proofs and documentation required for new investor (some notarized and legalized) and officers Parties generally free to contract as they please, but NB: Limits on deferred consideration Possible limit on nominal consideration Need for valuation if a domestic target Special requirements for asset transfer Special requirements for state assets Anti-monopoly review Applies to offshore transactions of groups with operations in China Applies to the establishment of joint ventures in China Full review required if: A. the PRC turnover of each of at least two of the parties to the transaction in the previous financial year exceeded RMB400 million AND EITHER B1: the aggregate worldwide turnover of all the parties to the transaction in the previous financial year exceeded RMB10 billion OR B2: the aggregate PRC turnover of all the parties to the transaction in the previous financial year exceeded RMB2 billion A burdensome, uncertain, and time-consuming process Simplified review? not so simple 2016 Pinsent Masons. All Rights Reserved.

15 Security review Applies to range of transaction types: acquisition of equity in a domestic enterprise (direct or indirect) increase in shareholding by a foreign investor asset acquisition greenfield investments (within the FTZs) Applies to broad range of targets with an impact on national security: military industry, support enterprises, and those around military facilities important agricultural products, energy and resources, infrastructure, transport services, key technology and major equipment manufacturing Procedures Initiated by investors, MOFCOM, or 3 rd parties Extensive documentation requirements 30 or 60 business days thereafter, indeterminate MOFCOM Inter-ministerial Review Meeting State Council A variety of orders are possible (prohibition or conditions) State-owned assets A uniquely Chinese institution For all state-owned enterprises Sale of its shares (by its shareholders) or assets (by itself), or decrease of equity in JV, is subject to review and approval What is a state owned enterprise? Unclear rules No de minimus threshold any state share (including listed companies) Procedures Internal group approvals SASAC approval Valuation and approval Use of exchange center 2016 Pinsent Masons. All Rights Reserved.

16 Manufacturing and Distribution in China at a Time of Change Recent Legal Developments in Foreign Direct Investment in China February 29, 2016 By: Fang Shen, Partner 2016 Husch Blackwell LLP. All Rights Reserved. 1

17 ROAD MAP 1. Review of current FDI system 2. Change in Registered Capital 3. Reform in Shanghai Pilot Free Trade Zone 4. Changes of the new Foreign Investment Law Introduction of Current FDI System 2016 Husch Blackwell LLP. All Rights Reserved. 2

18 Direct Investment Governmental approval required for Foreign Invested Enterprise ( FIE ) Typical approval process Preliminary proposal to local people s government (30 days) Examination and approval by MOFCOM (or local branch) (3 months) Business Registration with the State Administration of Industries and Commerce (within 30 days of approval) Other Registrations (Other registration within one month after the business registration: tax, foreign exchange, customs, etc.) Foreign Direct Investment Regime Four categories of investment Encouraged Permitted Restricted Prohibited 2016 Husch Blackwell LLP. All Rights Reserved. 3

19 Encouraged Easily granted & sometimes preferential treatment available Projects using new agricultural technology Construction of energy sources, raw materials for industry (limited to JV) Most manufacturing (especially pharmaceuticals, new materials, industrial equipment, electronic equipment) Projects that meet international market demand and increase exports Projects that involve integrated use of resources, renewable resources, and control environmental protection Projects that can develop central and western China Restricted More stringent scrutiny Telecommunication Wholesales and retail trade Banking and insurance Real estate Securities and investment management Freight, warehousing and logistics Professional service 2016 Husch Blackwell LLP. All Rights Reserved. 4

20 Prohibited Projects that endanger state security or public interest Projects that occupy large tracts of farmland Projects that utilize manufacturing techniques or technologies unique to China (e.g., Chinese traditional medicine, weapons and ammunitions) History of Registered Capital ( RC ) RC and Total Investment Enumerated Minimum capitalization depending on the size of company and type of business (e.g., all LLCs must have at least RMB 30,000 registered capital) Proposed timeline for payment of RC specified in FIE application, but must meet statutory deadlines (e.g., for WFOE, first payment within 90 days of business registration and at least 15%; last payment within 3 years of business registration) Change in RC must be approved by Approval Authority 2016 Husch Blackwell LLP. All Rights Reserved. 5

21 Amendment to Company Law and Regulations by the SAIC in 2014 made various changes to simplify the capitalization requirements and steps RC -- Change 1 Elimination of the following minimum RC requirement: RMB30,000 for non sole proprietorship limited liability company; RMB100,000 for a sole proprietorship limited liability company; RMB5,000,000 for a joint stock limited company. Exceptions: unless required by other specialty laws and regulations ; e.g., banks, financial firms, trust companies, investment management companies, etc Husch Blackwell LLP. All Rights Reserved. 6

22 RC -- Change 2 From paid in capital system to subscribed capital system: The prior capital verification requirement is eliminated However, the total subscribed capital shall be in the registration with the State Administration of Industry and Commerce (SAIC); the Articles of Association shall set forth the total subscribed capital, form of capital contribution, and time for contribution The shareholders are liable for company debt to the extent of their subscribed amounts RC-- Other Changes Further elimination of: Minimum first installment: It is also eliminated that the first installment of capital contribution should be no less than 15% of WFOEs and 20% of JVs Time limit for completion of all contributions: eliminated that all contributions should be made within certain time period (3 years for WFOEs and 2 years for JVs) after the incorporation of a company 2016 Husch Blackwell LLP. All Rights Reserved. 7

23 Remaining Restriction Despite of the relaxation of restrictions, the FIEs still need to meet the registered capital and total investment ratio requirements: 70% if total investment is 3 million or under 50% if the total investment is between 3 million and 10 million (inclusive) (no less than 2.1 million if total investment is less than 4.2 million) 40% if the total investment is between 10 million and 30 million (inclusive) (no less than 5 million if total investment is less than 12.5 million) 30% if the total investment is greater than 30 million (no less than 12 million if total investment is less than 36 million) China (Shanghai) Pilot Free Trade Zone Launched on September 29, 2013 To pioneer unprecedented degree of openness in foreign investment and international trade in both goods and services New measures are expected to be tested in the Pilot Zone and then expanded to the entire economy 2016 Husch Blackwell LLP. All Rights Reserved. 8

24 Reform One Investment Liberalization Foreign investors will be able to obtain national treatment and be allowed to invest in any activities that are not on the negative list Pre-approval no longer required for a broad range of matters Foreign investors gradually will be allowed to invest freely in six modern service sectors: financial services, shipping and logistic services, commerce and trade services, professional services, cultural services, and public sector services. Subsectors Where Restrictive Measures are Substantially Removed Sectors Subsectors where special (restrictive) measures are substantially removed Manufacturing Farm food processing; manufacturing of alcohol, drinks and refined tea; manufacturing of chemical raw materials and chemical products; manufacturing of pharmaceutical products (excluding traditional Chinese medicine); manufacturing of general and specialty equipment; and manufacturing of electrical machinery and materials Construction Construction and operation of city subways and light railways Wholesale and Wholesaling of grains and cotton; distribution of audio and video retail products, pesticides; chain stores retailing books, newspapers and periodicals; establishment and operation of gasoline stations; direct selling and online retailing IT services E commerce business Financial services Real estate Business services Insurance intermediary institutions (including insurance brokers, agents and assessment companies); securities investment consulting institutions Investment in luxury hotels, high class office buildings, international conference centers; real estate development HR agencies; overseas travel agencies 2016 Husch Blackwell LLP. All Rights Reserved. 9

25 Reform Two Trade liberalization Measures aimed at promoting the zone as a center for international trade and shipping Relevant customs procedures will be updated and streamlined to be in line with internationally accepted best practices Additional facilities, trading platform, warehouses etc. are expected to be built Reform Three Financial Reform Interest rate liberalization Fully convertibility of RMB Cross-border use of RMB 2016 Husch Blackwell LLP. All Rights Reserved. 10

26 Reform Four Transition of Government Function Negative list approach Newest Negative list released on April 20, 2015 Fundamental change on the existing concept of administrative process Observation: In launching the Shanghai Pilot FTZ, the government appears to intend to change the game. The anticipated reforms are fundamental and far-reaching and, if fully implemented nationwide, will dramatically change China s foreign investment landscape. It remains to be seen whether the reforms can be implemented successfully in the Shanghai Pilot FTZ and eventually nationwide Husch Blackwell LLP. All Rights Reserved. 11

27 Trends: April 20, 2015, the State Council released framework for Guangdong, Tianjin and Fujian Pilot Free Trade Zones Many of the reform measures in the Pilot FTZs continue to roll out and be tested. Current observation is that many sectors have been opened to foreign investment in the Pilot FTZs; however, reform of interest rate liberalization and convertibility of RMB seems to be behind the projection. New Foreign Investment Law Released draft for public comment in January 2015; promulgation expected in the next year? Background of new law Current FDI system overregulates foreign investments, increases the cost in doing business in China, imposes great inflexibility and inhibits free flow of international capital Current laws governing the Foreign Invested Enterprises are standing alone laws that contain inconsistency with the Company Law An effort to codify the regulations regarding direct investment, foreign acquisitions, foreign finance, and other forms of investment 2016 Husch Blackwell LLP. All Rights Reserved. 12

28 Primary Change Replace the Universal Approval System with the Negative List and Information Reporting System Unless the underlying business falls within the Negative List, the FIEs would not have to be approved to be incorporated FIEs outside of the Negative List will only need to comply with informational reporting requirement From Form to Substance Investment regulated by the new law includes establishment of entity, acquisitions of equity, assets or voting rights or other similar interests of Chinese entities, real estate investment, financing that is longer than one year, and obtaining "control" of Chinese business by contract and trust etc. Have extraterritory effect 2016 Husch Blackwell LLP. All Rights Reserved. 13

29 What will the Chinese Authority Review? Moving from Company Structure and Governance to Policy Review National security Project impact on energy consumption, technology renovation, employment, environment, production safety, local economic development, competition, and common social benefit Impact and dominance on industry development Who are the foreign investors Informational Reporting System Initial reporting of the investment to be submitted within 30 days of transaction Any change in reported information shall be reported within 30 days of change All investors shall make annual report by April 30 for information relating to previous year Significant company may be required to make quarterly filing (company size greater than 10 billion RMB or more than 10 subsidiaries) Required information includes information about investor, amount and features of investment, and information about the FIE 2016 Husch Blackwell LLP. All Rights Reserved. 14

30 National Security Review Similar to the CFIUS review concept of the U.S. can be submitted by the investor or the Chinese review authority if it appears to have national security concern It is anticipated that the NDRC will issue Guidance on National Security Review Currently the following types of investment will require National Security Review: Foreign investment or acquisition in military or defense related enterprises Investment located in proximity of significant or sensitive military facility or defense units Mergers and acquisitions in crucial agriculture products, energy or natural resource businesses Investment or acquisition in crucial infrastructure, transportation enterprises or crucial technology, or crucial equipment manufacturing Framework Set, but some Details left out for Guidance or Implementation Measures Negative List Expected to provide grace period for transition and compliance by existing FIEs National Security Review Guidance How foreign exchange rules will be reformed for FIEs Implementing Measures for Informational Reporting 2016 Husch Blackwell LLP. All Rights Reserved. 15

31 Fang Shen Partner Kansas City Husch Blackwell LLP. All Rights Reserved. 16