Navigating The New China Eric Wolff Commercial Officer U.S. Department of Commerce Charlotte U.S....

Navigating The New China

Eric WolffCommercial Officer U.S. Department of CommerceCharlotte U.S. Export Assistance Center(Recently with U.S. Embassy in China)

China By the Numbers ...

China ends America’s reign as top auto market Now the largest exporter, edging out Germany Trade > 70% of China’s GDP (Integrated Asia Supply Base) #1 in FDI for developing nations 17th year in a row GDP - 48% industry, 40% Service, and 12% agriculture Total Urban Population > 400mn (larger than US) 2 of the 3 top container points in the world (Hong Kong and

Shanghai) Substantial investment by global Fortune 500

Long-Term Dimensions

China has been the world’s largest manufacturer for at least 3,600 of last 4,000 years.

In 1820, China represented 36% of world GDP, compared to 32% for USA (WB).

Historic tide shifted in 1842 with Opium War, colonialism, WW2 and communism.

In 1979, Deng XiaoPing introduced the first rational economic policies.

Initiated a 30 year process of 6–14% annual GDP growth. Average 9% growth.

Chinese GDP has grown over 5 times during that time

Stimulus Effective?

• Economy stabilizing… – Industrial output up 12.3% in

August ’09– Investment up, reaching 33% in

first 8 months of ’09– GDP up to 7.9% in Q2 ’09– Effective in short term

• However: – Excess capacity- deflation– Unemployment– SOE loans– Price pressures – Emphasizing structural

issues

China Economic Data Tops Forecasts. Reuters, 2009.

China’s Stimulus- By Sector

Project Allocation% Allocation RMB Allocation USD

Infrastructure: Railway, Highway, Airport, Power Grid 45 1.8 tril 262.2 bil

Sichuan Earthquake Reconstruction 25 1 tril 145.7 bil

Rural livelihood & infrastructure 9 370 bil 53.9 bil

Ecological/Environmental Protection 9 350 bil 51 bil

Housing Projects 7 280 bil 40.8 bil

“Indigenous Innovation” Structure Reform 4 160 bil 23.3 bil

Health, Culture, Education 1 40 bil 5.8 bil

TOTAL 4 trillion RMB approx 582 bil USD

Re-Balancing Act

Dilemma:

• Export heavy economy

• Low consumption

Re-Structuring Needed:

• Consumer-centric economy

– Encourage spending– Social safety net– Increase income

www.export.gov

Economic Challenges

• Unemployment Rural Migration • Over supply Bad debt Deflation• Poor legal environment Corruption• Strengthening the financial system• Pollution control and lack of water• Electric Power demand / supply equilibrium

Keeping up with the Chans: The Mega-Trend of China’s Emerging Middle Class

20-year olds have known nothing but upward mobility

Luxury goods hot – from caviar to Harley-Davidson to Louis Vuitton

Western brands sell

‘Hypermarkets’ and retail chains booming along with new construction

Studies show most consumers planning big ticket item purchases in next 12 months

Snapshot: 2nd Tier Cities

Driving force behind China’s new growth

The top 15 account for: Over 54% of total US imports ¼ of overall import consumption

China Regional Forecasting Service. Economist Intelligence Unit, 2009. China 40: The Rising Urban Stars. Jones, Lang, LaSalle, 2009.

Highest growth: ‘06-08 Zhengzhou, Chongqing, Hefei & Kunming

Snapshot: 2nd Tier Cities

Aftermath of the May 2008 Sichuan Earthquake

• 8.0 magnitude earthquake left over 80,000 dead, millions homeless

• Central Government has committed nearly $150 billion to reconstruction

• Major investments in housing, schools, medical facilities

• Transportation focus: railway, highway and airports

• Sichuan and the west will remain key focus for China’s development

• Healthcare

• Infrastructure

• Energy

• Environment

Opportunity Sectors:

Energy Sector

China: 15% of world energy consumption

Over 30 billion USD of stimulus to energy projects

www.export.gov

Energy Sector

Environmental Initiatives

Demand for Specialized Services & Equipment:

Best Prospects:

– Clean energy- wind & solar

– Improve tainted water sources

– Energy saving

– Emissions reduction

• Water: Sludge treatment, municipal /industrial waste water treatment, drinking water treatment, water body cleanup, monitoring equipment

• Air: DeNOx technology, Continued Emission Monitoring System (CEMS)

• Solid waste: Waste-to-energy, E- waste, Sanitary Landfill

Increased spending on environmental protection 3.6 billion USD of stimulus to renewable energy

Healthcare Sector

124bn USD to provide basic medical coverage

China: World’s 3rd largest medical equipment market

High demand for:

– Pharmaceuticals

– Medical equipment products

– Hospital management systems

China Assoc. for Medical Devices Industry, (CAMDI)China’s Pharmaceutical Market Primed to Explode. Reuters, 2009.

Infrastructure:Opportunity areas for US Companies

What is Working

Best Practice: Local Government Protectionism

Know Decision Makers/Influencers

Party Secretary Youth League Central Committee Secretariat Director General at ministry Governor/Mayor Key Think Tanks Design Institutes Universities Local Industry Groups Retirees

Different City Cultures

Tianjin: PS Zhang- secured favorable policies from Central Gov., unannounced visits to check on progress of key Tianjin projects, nationwide hunt for DG of key economic bureaus.

Guanxi: PS Guo CEO CHALCO- Lead Northern Gulf Economic Zone strategy approved by State Council -logistical air hub, sea and highway connecting Southwest China and ASEAN.

Guangdong: PS Wang MBA, focus on environmental regulations, industrial upgrade solutions.

Best Practice: Navigating Local Markets

U.S. Company Objectives

Source: 2004 AmCham White Paper, American Business in China

Export to China from the U.S. 14%

Produce goods or services in Chinafor non-U.S., non China markets 3%

Establish or expand regional base 5%

Export to China from countries other than the U.S. 2%

Shift manufacturing to lower cost location 2%

Produce goods or services in China

for the China market 58%

Support global customers 6%

Produce goods or services in China for U.S. market 10%

Anticipate Problems - Macro

Intellectual Property Rights– Patent - Trade Secrets

– Copyright - Trademark

Industrial Standards and Certification Transparency/Corruption Payment issues and Dispute Resolution Price Controls and competition Approvals and certifications

Anticipate Problems - Micro

Management-level human resources Navigating Bureaucracy Unclear Regulations / Inconsistent Interpretation Lack of Transparency Contract Enforcement Economic nationalism: “Indigenous Innovation”

and Local Protectionism

Market Entry RoadmapAre you China Ready?

Avoid “Chinaforia”: research, filter, include many data points Build IP protection into your business plan Consider regulations – US and China Due diligence, due diligence, due diligence

Set long- and short-term goals, including an exit strategy Consider regional and industry specialization Consider outsourcing back-office functions Seek competent China-savvy legal advice and professional

assistance (avoid guanxi brokers)

Market Entry Roadmap

Direct Exports

Sales Agent / Distributor

Representative Office

Wholly Owned Foreign Enterprise (WOFE)

Foreign-Invested Commercial Enterprise (FICE)

Joint Venture / Acquisitions / Various Partnering

Gateways

Sales Agent / Distributor ( I )

Advantages– no investment in office overhead– no registration requirements, no physical presence– lower likelihood of non-payment– no responsibility for customs clearance

Responsibilities– Comply with safety and quality certifications, China Compulsory

Certification, other standards requirements– Comply with the U.S. Foreign Corrupt Practices Act– Comply with U.S. Export Control regulations– Prepare a contract that protects your legal interests, see a local attorney– Closely monitor the agent / distributor’s activity

Sales Agent / Distributor ( II )

Manage Expectations

– use worldwide selection criteria, then evaluate skill sets

– explore their view of market prospects, approach to business development

– ask to see a prior marketing plan and market research report

– discuss cost sharing for Chinese language brochures, participation in trade shows, demonstration equipment, training in the U.S.

– contract should contain clear reporting requirements and performance goals to monitor whether the Chinese company can do what it purports to be able to do

– evaluate capacity to stock and warehouse

– consider profit motive of STE versus private firm.

Sales Agent / Distributor ( III )

Due Diligence

– Many exaggerate trade experience, check trade references

– Ask for a copy of the firm’s business license, SAIC inspection, trading rights license, visit business premises

– Triangular debt common for entities lacking trading rights and foreign exchange

– Obtain a DD report through local service providers or CS.

China lacks a corporate credit rating system

– Government system for verification of business registration on line is emerging – SAIC Red Shield (Hong Dun) Program

Sales Agent / Distributor ( IV )

Contract Terms

– seek professional legal advice before contracting, do not rely upon your Chinese business partner

– ensure the dispute resolution clause limits time for “friendly discussion or mediation”

– do not accept obligations outside of your control: visas, export licenses

– do not export on open account or D/P terms

– ensure contract has non-competition and non-disclosure clauses to protect trade secrets, in the event the relationship ends badly

Representative Office

RRO may perform a useful government liaison and marketing function, contract implementation. Useful for getting into government procurement projects.

Restrictions on business scope apply:– not allowed to engage in profit-making activity– not allowed to directly import and distribute product– not allowed to service equipment or warehouse spare parts

Establishment of physical presence now requires only local registration. The cost to support a modest RRO $250,000-500,000 depending on location and size.

Registered capital in the amount of $10,000 still required.

Foreign-Invested Commercial Enterprise

Market entry vehicle for domestic wholesale and retail distribution

Scope of operation includes “trading rights,” meaning the right to import or export goods manufactured by third parties into or out of China.

Scope of operation includes “distribution rights,” meaning right to sell products for its own account on retail or wholesale basis, import for sale within China, purchase domestic products for export and perform related services.

Hong Kong as a Gateway

Ease of Doing Business Rule of Law Free Trade Port Secure banking system

Strategic Asia Hub Location Test products for market Huge re-export market to China Access to Pearl River Delta – China’s manufacturing hub

What the Commercial Service Can Do for You

• Market research• Find and vet partners & distributors• Background checks on potential partners• Trade missions• Trade shows – American Pavilions• Advocacy• Facilitate with Ex-Im Bank, SBA, TDA and

Development Banks

In China…Everything is possible, nothing is easy

Where to go for help?

www.export.govwww.export.gov 1-800-USA-TRADE1-800-USA-TRADE

Wherever You Need to Be

CS China: 19 Cities 5 Commercial Service Offices14 Secondary markets

157 Commercial Service officers & Trade Specialists

Contact us today to connect with a world of opportunity.

Eric.Wolff@mail.doc.gov

704-333-4886 ext 221

www.buyusa.gov/northcarolina

(or www.export.gov for all our offices)