Go to China? Produce

Transcription

1 Go to China? Sell Buy Produce

2 Strategy

3 Organization Location People Institutions Produce (Jv / Wfoe/Rep Off?) Technologies Production site? Human resources Relations with suppliers and clients Laws and regulations Taxes Institutional networks Buy Direct buying? Third parties? Supply Chain Where to buy? Where to localize a purchasing office and warehouse? Who are our supplier? Who are our buyers? Laws and regulations Institutional networks Buy from Soes Sell Direct sales? Distribution networks Where to sell? Sales network Who are our clients? Distribution Sell to Soes Public procurment

4 Business organization: entry model Rep. Off. Branch office JV Wholly Owned foreign enterprise (Wofe) Foreign Invested Commercial Enterprises (FICE) M&A

5 Rep. Off. Branch Office Rep. Off. All operations have to be officially managed by the head quarter abroad (or any other official entity outside China). Rep Off. Can only do: Management of clients Marketing Coordination activities Consulting activities More constraints since 2010 Branch Office Usually support for Wofe Can be a cost center (invoices) Opportunity for service companies like foreign banks in Pudong

6 JV Pros You can exploit the network relations of your Chinese partner Local governs welcome more JV than Wfoe In some sectors is the only possibility to enter the Chinese market (see Catalog for the Guidance of Foreign Invested Enterprises) Cons Less control on operations and strategies IPR under threat (not only if you do JV) Partner selection? Personal Relations are more important than shares Different goals and growth trajectories

7 Wofe Pros Operations more under control (if you have the right people) IP protection You can choose where place your investment (easier shut down) Cons Not very supported Lack of network relations, lack of market knowledge

8 Wofe: what you need to start Legal Name and Structure Company Registration Document Proof of Shareholder Existence Name of WFOE in Chinese and English Lease of Space for the WFOE Scope of Business Feasibility Study Registered Capital Management Documentation for each person Proof of financial status

9 M&A Not Much and getting worst Very complicated process. Antitrust is a policy tool Buy what? Why is it on sale? Shanghai stock Exchange very foggy

10 Due diligence: M&A Need a strong team. You cannot outsource all the process but you need support of local expert in reading Chinese balance sheets. Senior managers have to be particularly involved In the process because, at the end you cannot take a decision only on numbers. You have to contact more person than you usually do in easier markets (managers, workers, costumer, distributors, supplier, industry experts, consulting firms, go between that know the local environment)

11 When you have to worry Unclear source of capital Opaque ownership structure (check also if they have other activities in the same industry) Inconsistent data Poor regulatory track record Weak internal controls regarding corporate governance and business ethics Dependency on political relationship Possible criminal links When things are too easy

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17 Dezan Shira

18 ITEMS WFOE/ JOINT VENTURE REPRESENTATIVE OFFICE Minimum Capital Starts from 100K RMB Not register capital Business Scope Office Specific Industry: Trading WFOE; Consulting WFOE, Manufacturing WFOE(*1) etc. In an office building which can register business Liaision; Quality Control; Factory Visits Shanghai: Grade A building; Beijing: office building Working Visa 1 year multientry Visa(*2) 1 year multientry Visa Recruiting Staff recruits staff directly Through Local HR agency: FESCO, CIIC Taxation Turnover tax; Income tax, Dividend tax (*3) approx. 1015% (*4) on expenses; individual income tax Maintenance Monthly; Quarterly; Annually Monthly; Quarterly; Annually Bank Account Access & receive money; pay bills; issue cheques; withdraw cash in China; RMB account and foreign currency Can only receive money from parent company; Can only pay for expenses; Can't pay for products Invoicing Official invoice in China Can't issue invoice or receipt Receiving payments Liability of equity participants World Wide Limited to amount of registered capital Not allowed to receive payments from clients Parent Company must be established for over 2 years (*5)

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20 FDI by Vehicle Type Year Number of Projects Utilized FDI Value ($ billion) % Change % Change Total FDI 27,712 27, EJVs 5,005 4, CJVs WFOEs 22,388 22, Foreigninvested shareholding ventures Not included banking and financial services Source: USCBC

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22 Catalog for the Guidance of Foreign Invested Enterprises Catalogue of Encouraged Foreign Investment Industries Catalogue of Restricted Foreign Investment Industries Catalogue of Prohibited Foreign Investment Industries (industries don t included in this catalog are usually permitted) in few years you can have huge changes investments higher than $100m need central government approval implementation at local level can be fuzzy linked with 5 year plan goals (Defense Telecommunications oil electricity coal transoceanic shipping airlines under state control, Sasac)

23 2015 Catalogue The 2015 Catalogue lists 349 encouraged, 38 restricted and 36 prohibited industries. As compared to the 2011 Catalogue, the restricted industry sectors have been significantly reduced from 79 to 38, and the prohibited sectors have also been slightly reduced from 38 to 36. The overall trend is therefore clearly towards greater openness and liberalization.

24 Encouraged industries category: change from 2011 Construction and operation of grids (this still requires a majority shareholding by the Chinese partner): this is newly added into the encouraged category; accounting and auditing:the restrictions are changed from limited to cooperation or partnership to the chief partner must hold the Chinese nationality ; Construction and operation of urban subway, light railway and other track transport: the restriction of Chinese partner with majority shareholding was removed; Senior care institutions: this was newly added into the encouraged category, following a circular issued by MOFCOM and the Ministry of Civil Affairs to encourage foreign investments in forprofit aged care institutions, which reflects the urgent need for senior care facilities in China given the now rapid decline of its workforce; and The establishment of research and development centres for new and advanced technology and incubators are still within the encouraged category. This is in line with the technology oriented policies currently implemented by the Chinese government in an attempt to further close the gap with the developed world and to avoid the middleincome country trap.

25 Restricted industries category: change from 2011 The industries of chemicals manufacturing (such as calcined soda) and eneral apparatus manufacturing (such as various types of pograde bearings and their components) were removed from the restricted category, which means they are now permitted for foreign investment with no special restrictions; other manufacturing industries were also removed from the restricted category, such as medicine manufacturing, but excluding arms and ammunition manufacturing (which remains prohibited ) ;

26 Restricted industries category: change from 2011 development of tracts of land, construction and operation of highclass hotels, highclass office buildings and international exhibition centers, investment in real estate secondary market and real estate brokerage were removed from the restricted category; and Finally, it is worth noting that in the 2011 Catalogue, banks, nonbank financial institutions, trust companies, and currency brokerage companies were listed in the restricted category. In the 2015 Category, only banks still remain in the restricted category and subject to restrictions such as, the shareholding in one single Chinese commercial bank by a single foreign financial institution or any affiliate controlled or jointly controlled by it (either acting as a promotor or strategy investor), shall not exceed 20% (etc.).

27 Restricted industries category: change from 2011 the manufacturing of whole units of automobile, special automobiles and motorcycles (Chinese shareholding not less than 50%, and the same foreign investor can establish less than (including) two joint ventures to produce the same type of whole units of automobile, the aforementioned restrictions on two joint ventures do not apply in case of merger of other domestic automobile manufacturing enterprises with Chinese joint ventures) were newly added into the restricted category; Ecommerce for technology, media and telecommunications business (TMT) were removed from the restricted category, but other valueadded and basic TMT businesses remain in the restricted category and subject to 50 percent or more Chinese shareholding requirement;

28 Prohibited industries category: change from 2011 Although the total number of prohibited industries has been reduced in the 2015 Catalogue, new prohibited industries have nevertheless been added into the list, including the following: The wholesale and retail of tobacco (this was considered a restricted industry in the 2011 Catalogue); The consultancy on Chinese legal issues (except for providing information about the impact of Chinese legal environment) accordingly, the market for foreign law firms is still very much closed in China, and this notwithstanding the proliferation of nonchinese firms in the PRC and recent initiatives in the Shanghai FTZ to allow for joint ventures between Chinese and foreign firms; Online publishing services; and Construction of golf courses and villas (but note that the operation of golf courses and villas is not prohibited, and shall be deemed as permitted)

29 Produce in China: Produce in China? Where to produce, Alone or in JV? What to produce, For who?.

30 Structural differences in China cost structure Savings depend on cost structure and can vary across product categories. Categories with high labor content are the ones that benefit most from sourcing in China Made in USA Made in China Profit 10% ~40% potential savings Overheads 10% Equipment depreciation 15% 10% 8% On raw materials there might be some cost disadvantages in China Other direct costs (labor, land, energy, ) Raw materials 50% 20% 12% 10% 22% Labor cost is the major cost advantage Some opportunities for equipment cost reduction exist but are still untapped

31 Structural differences in China cost structure things change fast Made in USA Made in China Profit Overheads 10% 10% = ~??% potential savings Equipment depreciation 15% = Other direct costs (labor, land, energy, ) 50% Raw materials 20%

32 Where to produce

33 Geography of industrial clusters Coastal regions of East China are the aggregation area of manufacturers across a number of sectors Telecommunications Auto cars Valve& accessories Heavy engineering devices 500km Source: ISI, China Info Bank Light machinery Auto cars Valve& accessories Electrical devices Auto cars Auto parts Mechanics Xinjiang Tibet Qinhai Telecommunications Auto cars Electronic goods Valve& accessories Sichuan Yunnan Gansu Shaanxi Chongqing Guizhou Engineering goods Construction machines Ningxia Guangxi Hainan Shanxi Henan Hubei Hunan Inner Mongolia Beijing Tianjin Hebei Shandong Jiangxi Guangdong Anhui Liaoning Zhejiang Fujian Hong Kong Macau Jiangsu Taiwan Heilongjiang Jilin Shanghai Electrical home appliances Electronics goods Textiles Toys Light machineries Auto cars Telcommunications Food& beverages Auto car Auto parts Pharmaceuticals Electronics Construction machines Electrical home appliances Textiles Plastics Electrical devices Electric home appliances Auto parts Auto cars Valves& accessories Toys& gifts Light machineries Leathers Construction machines Electronic goods Food& beverages Heavy industrial equipments Mechanicals Electrical home appliances Agriculture machinery Auto parts Construction machines Food& beverages Industrialized area Most important industrialized area

34 PROVINCES TIANJIN HEBEJ STRENGTHS General: Used to be one of China s major industrial base By Industry: Heavy machinery Metal products & components GUANGDONG STRENGTHS General: Many factories invested by HK companies Exportoriented Cheap imported material & components (free of import duties due to exportprocessing arrangement or smuggling) Medium to high end products Benefit from services of HK (financial logistics, R&D) By Industry: Home electrical appliances Watch & clock Furniture Building material Textile & garment Electronics &telecom equipment Metal products SHANDONG General: A lot of Korean investments Used to be one of China s major industrial base By industry: Rubber & tyre Watch & clock Wine Fitness equipment SHANGHAI JIANGSU ZHEJLANG General: Used to be one of China s major industrial base Concentration of key strategic industries (eg. Iron & steel, petrochemical) Strong MNC presence & industrial investments High domestica market share for many industries Shanghai growing into the service center (financial, logistics, R&D) By Industry: Automotive Iron & steel Petrochemical Electronics & telecom equipment Power equipment Heavy machinery Shipbuilding Textiles

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36 Investment zone Special Economic Zone Pros Infrastructure Location Test Lab for new reform Flexibility Status Cluster (taxation) Cons Cost of land Cost of labour Few local partner Control for limitations on local market Some are in disadvantaged areas Double check if it is real

37 Investment zones Free Trade Zone (FTZ) Export Processing Zones (EPZ) Close to port industrial areas, technology parks Support incentives, easier burocracy for foreign companies No import duty, vat exemption. You can trade within the zone. Generally, you cannot sell in China Need to transform products There are zone where you can store and modify products and you pay duties only when you sell products in China

38 Economic Technological Development Zone

39 New Shanghai Free Trade Zone Waigaoqiao Free Trade Zone; Waigaoqiao Free Trade Logistics Park; Pudong Airport Comprehensive Free Trade Zone; Yangshan Free Trade Port Area.

40 Task 1: Further Opening Up Investment Sectors According to the Plan, the Shanghai FTZ will offer easier investment access to both foreign and domestic capital and further open up the following 18 service sectors: Finance Services 1. Banking services Allowing qualified foreign finance organizations to set up foreign banks in the Shanghai FTZ and permitting qualified private capital and foreign finance institutions to set up joint venture banks Allowing qualified Chinese banks to conduct offshore business in the Shanghai FTZ 2. Professional healthcare medical insurance Allowing wholly foreignowned professional healthcare medical insurance organizations to be established in the Shanghai FTZ 3. Financial leasing Cancelling the minimum capital requirements for the establishment of single aircraft or single vessel company subsidiaries in the Shanghai FTZ by financial leasing companies Allowing financial leasing companies to concurrently operate factoring businesses that are associated with their primary business

41 Shipping Services 4. Ocean cargo transportation Relaxing the restriction over the proportion of foreign equities in joint venture international shipping enterprises 5. International ship management Allowing wholly foreignowned shipping management enterprises to be established in the Shanghai FTZ Trade and Commerce Services 6. Valueadded telecommunications Allowing foreign enterprises to run certain designated telecommunication businesses in the Shanghai FTZ 7. Selling and servicing of gaming consoles Allowing foreign enterprises to produce and sell gaming consoles in the Shanghai FTZ

42 To start with.. The ban on game console was in place since now consoles assembled in the Zone can be sold nationwide. It is roughly 15 billion US$ market!

43 Professional Services 8. Legal services Exploring mechanisms to enhance cooperation between mainland Chinese law firms and foreign law firms 9. Credit investigation services Allowing foreign investigation enterprises to be established in the Shanghai FTZ 10. Travel agency Allowing Sinoforeign joint venture travel agencies registered in the Shanghai FTZ to provide overseas travel services (with the exception of Taiwan) 11. Human resource agencies Allowing Sinoforeign joint venture human resource agencies to be established in the Shanghai FTZ (provided that the foreign shares thereof do not exceed 70 percent of the total shares) Hong Kong and Macau service provides are allowed to establish wholly selfowned human resource agencies Reducing the minimum registered capital for foreign human resource agencies from US$300,000 to US$125,000

44 12. Investment management Allowing joint stock foreign investment companies to be established in the Shanghai FTZ 13. Engineering design Cancelling the engineering design performance requirement for foreign engineering design enterprises (excluding engineering investigation enterprises) in the Shanghai FTZ when applying for the qualification to provide services in Shanghai for the first time 14. Construction services Cancelling the equity caps for Sinoforeign construction projects in Shanghai taken over by wholly foreignowned construction enterprises established in the Shanghai FTZ

45 Cultural Services 15. Performance brokerage Cancelling the equity caps for foreign performance agencies and allowing wholly foreignowned performance agencies to be established in the Shanghai FTZ 16. Entertainment venues Allowing wholly foreignowned entertainment venues to be established in the Shanghai FTZ Social Services 17. Educational and vocational training Allowing Sinoforeign education and vocational training organizations to be established in the Shanghai FTZ 18. Medical service Allowing wholly foreignowned healthcare organizations to be established in the Shanghai FTZ

46 Moreover, the Plan provides that the Shanghai FTZ will adopt a negative list approach towards foreign investment management, meaning foreign investment in all sectors should be allowed unless listed as prohibited or restricted under the negative list. A negative list which details the different treatment of foreign investors and Chinese investors will be created and issued by the Shanghai government at a later date. Source: Dazen Shira

47 Task 2: Deepening the Openingup of the Financial Services Sector According to the Plan, the Shanghai FTZ will implement the following measures to deepen the openingup of the financial service sectors: The Shanghai FTZ will start trial programs of RMB convertibility under the capital account, marketoriented interest rates, and crossborder RMB transactions; The Shanghai FTZ will facilitate marketoriented pricing of financial institution assets; The Shanghai FTZ will pilot a new mechanism for the management of foreign exchange to facilitate trade investment;

48 The Shanghai FTZ will encourage enterprises to take advantage of both onshore and offshore markets; The Shanghai FTZ will deepen foreign debt management reform to facilitate crossborder financing; and The Shanghai FTZ will encourage multinationals to establish regional or global capital management centers within the zone. Moreover, the Shanghai FTZ will gradually allow foreign companies to engage in commodity futures trading.

49 Task 3: Improving and Perfecting the Legal System With the view to accelerate the formation of a highstandard investment and trade rule system, starting from October 1, 2013, 11 administrative examination and approval items regulated under the following three laws will be suspended in the Shanghai FTZ on a threeyear trial basis. The Law of the People s Republic of China on Wholly ForeignOwned Enterprises; The Law of the People s Republic of China on SinoForeign Equity Joint Ventures; and The Law of the People s Republic of China on SinoForeign Cooperative Joint Ventures. In addition, in order to better promote investment into the Shanghai FTZ, the Plan also allows enterprises or individual shareholders registered in the Shanghai FTZ to pay income tax in installments within a fiveyear period for valueadded assets arising from asset restructuring

50 Is cost of labour still a competitive advantage?

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52 Minimum Wage

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56 (curse of) labour Chinese workers prefer to work either for large domestic Soe or large Chinese private company. Second, they want to work for large MNC possible with wellknown brand. Third they want to work for Chinese smaller company and, last for small foreign companies. Training is very important, more than you can think Labour Turnover is an issue Shortage of labour is starting to be a problem As a consequence salaries are increasing very fast Expatriate are very expensive

57 New legal environment for work force New labour contract law in 2008 More long term contract More protection for workers Some space for unions (2% of total salary) 40 working hours per week plus overtime (150% to 300% of normal wages) Social Insurance programs (pensions, medical insurance, etc.. 35/40% of salary cost)

58 How to reduce turnover Incentive scheme: pension, healthcare insurance, etc. Training (included Mba) Try to pay bonuses after Chinese new year (when most workers change job)

59 Labour: cultural differences (lack of) Initiative Harmony Status and selfrespect (save face) Communication (lost in translation and hierarchy) Ethic code Nationalism

60 Expatriates Usually you don t have china experts in your company: is it better a china expert from outside or an insider that goes to China? Expat costs are extremely high (salary plus incentive packages) With or without families? It is easy to find people that likes Shanghai. Try with Zibo (and it could be much worse) It happen that foreign managers become too Chinese Some time you need to send technicians full time and this can be even more complicated. Overseas returnee (second generation and Haigui Sea turtles)?

61 Guangxi It start from the concept of Mianzi face, or selfrespect It is the network of your personal relations. You can consider it like some concentric circles, starting from the family going to business and institutional relations. It implies mutual cooperation and needs to be cultivated If you ask a favor you have to give it back. There is exchange of presents (same level, you can ask what the other likes, you can give also coupons) for Chinese new year and special occasion. It Is not corruption but can be very close to it. It is very useful in an unknown market with a variable rule of law, with a complex burocracy. Guangxi needs time to grow, you cannot sell it. There is a limit to transitivity. You start always from a disadvantageous position compared to long term expat and Chinese native. Guangxi are important but don t overestimate