Doing Business in China

Jari HietalaJari HietalaHelsinki 24.4.2012

Expertise Areas– Market access consulting, sales channel

development– International business development– General management– Asian markets– Western European markets

Position– Vice President, Head of Region Asia, location

Hong Kong

Education– M. Sc (Economics)– CMC (Certified Management Consultant)

International Experience– UK (7 years), Belgium (3 years), Thailand (8

years, China 1 year)

CV Jari Hietala

12/12/2011

Industry Sector Experience– Cleantech- industries

– Forest

– Machinery

– Metal engineering

– Industrial equipment

Previous Employments– Finpro, various management positions in Asia,

Finland and Western Europe since 1994– Rocla Oyj, Marketing Director 1994– GWS Mertens N.V. Belgium, Managing Director

1991-1994– GWS (UK) Ltd, Managing Director 1990-1991– GWS Shop Equipment Division, Marketing

Manager Finland 1988-1990 – Partek Oyj, Marketing Planning Manager 1985-

1988

years, China 1 year)

Professional Experience– 25 years

Content

• The Importance of China for Finnish Companies• Market Entry Modes & Nature of the Business Environment• Recommendations• Finpro in China

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The Importance of China For Finnish Companies

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Asia looks set to return to its natural“half share” of the world economy

5

Source: Angus Madison’s “Historical Statistics for the World Economy:1-2004AD”, Deutsch Bank Global Market Research

Asia, Middle East and Finland in 2010

China

India

1

1,2

1,4

1,6

billi

ons

)

Asia and Middle East in 2010

The bubble size indicates GDP based on PPP in 2010. The bubble size indicatesalso the country's share of the total GDP

of all countries included in the graph.

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Australia

HongKong

IndonesiaJapan

Korea

Malaysia

Philippines

SingaporeThailandVietnam

Finland

-0,2

0

0,2

0,4

0,6

0,8

-10 0 10 20 30 40 50 60 70 80

Pop

ulat

ion

(bi

llion

s

GDP based on PPP per capita (thousands)

Source: IMF, World Economic Outlook, September 2011Note: Amounts in current international dollar

Maailmantalouden kasvun jakautuminen 2011e

6

7

8

9

10

11

Kiina

Intia

Muu

Muu

itäi

nen

Eur

oopp

a

Ven

äjä

Mek

siko

-itä

ja A

frik

ka

BKT:n kasvu 2011, %

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0

1

2

3

4

5

6

0 10 20 30 40 50 60 70 80 90 100

Pohjois-Amerikka

Länsi-EurooppaJapani

Muu Aasia

Muu

itäi

nen

Eur

oopp

a

Ven

äjä

Bra

silia

Mek

siko

Lähi

-itä

ja A

frik

ka

Pylvään leveys kuvaa osuutta (ostovoimapariteetilla korjatusta) maailman bkt:stä vuonna 2010, %

Kasvu keskimäärin: +4,4 %

5-year plan – estimated growth

Forecast summary

(% unless otherwise indicated)

2010a 2011b 2012b 2013b 2014b 2015b

Real GDP growth 10.3 9 8.7 8.4 8.1 8.2

Industrial production growth 15.7 13 12.5 12 11.7 11.1

Gross agricultural production growth 4.3 2.6 3 2.7 2.8 2.8

Unemployment rate (av) 6.1 6.5 6.4 6.6 7 6.3

Consumer price inflation (av) 3.2 5 4 4.1 4 3.8

Consumer price inflation (end-period) 4.8 4.1 3.8 4.5 3.7 3.8

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Consumer price inflation (end-period) 4.8 4.1 3.8 4.5 3.7 3.8

Short-term interbank rate (end-period) 5.8 6.8 7.3 7.1 7.3 7.3

Government balance (% of GDP) -1.6 -1.7 -1.7 -1.5 -0.9 -0.8

Exports of goods fob (US$ bn) 1,581.50 1,783.90 1,990.90 2,226.40 2,482.40 2,781.20

Imports of goods fob (US$ bn) 1,327.50 1,615.90 1,813.40 2,074.90 2,344.00 2,638.80

Current-account balance (US$ bn) 306.2 268.9 299.9 275.6 259.6 257

Current-account balance (% of GDP) 5.2 3.9 3.7 2.9 2.3 2

External debt (end-period; US$ bn) 401c 477.8 536 613.3 689.7 782

Exchange rate Rmb:US$ (av) 6.77 6.49 6.23 5.98 5.77 5.61

Exchange rate Rmb:US$ (end-period) 6.62 6.34 6.12 5.87 5.7 5.54

Exchange rate Rmb:¥100 (av) 7.7 7.96 7.7 7.39 7.03 6.72

Exchange rate Rmb:€ (end-period) 8.99 7.99 7.47 7.1 7.09 7.14

a Actual. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimates

11th Five-Year Plan target and achievement until 2010

Index 2005 2010 E 2010 real CompletionEconomic

growthGDP (Trillion RMB) 18.2 26.1 39.8 Over-achievedPer capita GDP (RMB) 14185 19270 29748 Over-achieved

EconomicStructure

Service added value proportion (%) 40.3 43.3 43 UnmetR&D expenditure (% of GDP) 1.3 2 1.75 UnmetUrbanization rate(%) 43 47 47.5 Over-achieved

Population

The country's total population (10,000) 130756 136000 134100 Over-achievedReduction rate of energy consumption per unit of GDP (%) 20 19.1 UnmetReduction rate of water consumption per unit of industrial added value (%) 30 36.7 Over-achieved

Effective utilization rate of agricultural irrigation water 0.45 0.5 0.5 Achieved

9

n&Resourc

e&Environ

ment

Effective utilization rate of agricultural irrigation water 0.45 0.5 0.5 AchievedThe comprehensive utilization rate of industrial solid waste(%) 55.8 60 69 Over-achievedThe total amount of cultivated land(10 billion hectares) 1.22 1.2 1.212 Over-achieved

Emission reduction rate sulfur dioxideof selected pollutants (%) chemical oxygen demand

1010

14.2912.45

Over-achievedOver-achieved

Forest coverage rate (%) 18.2 20 20.36 Over-achieved

Publicservice

&People's life

National average education (year) 8.5 9 9 AchievedThe number of urban basic endowment insurance coverage(10 billion people) 1.74 2.23 2.57 Over-achievedThe new rural cooperative medical insurance coverage rate (%) 23.5 >80 96.3 Over-achievedRural new employment in 5 years (10,000 people) 4500 5771 Over-achievedTransfer of agricultural labor force in 5 years (10,000 people) 4500 4500 AchievedRegistered urban unemployment rate(%) 4.2 5 4.1 Over-achievedDisposable income of urban residents per capita (RMB) 10493 13390 19109 Over-achieved

Disposable income of rural residents per capita (RMB) 3255 4150 5919 Over-achieved

Source: China Statistic Year Book; Analyst report; Roland Berger

Finnish Companies in China(estimate)

• 300+ Finnish companies in more than 340 locations

• 100+ companies with own local manufacturing operati ons

• Employees > 60,000

• Investments ~ 10 billion EUR; growing

• Turnover ~ 15 billion EUR; growing• Turnover ~ 15 billion EUR; growing

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What is China’s role in Finnish companiesbusiness?

• Ericsson 53%• Nokia (APAC) 40%• Outotec 32%• Wärtsilä 30%

• Metso 20%• SKF 18%• Kone 14%

The share of Aasia of the turnover of some selected Nordic companies in 2008 (estimates)

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• Wärtsilä 30%• Alfa Laval 28%• ABB 25%• Vestas 25%• Atlas Copco 22%• Cargotec 22%• Sandvik 22%

• Konecranes 13%• UPM 10%• Assa Abloy 9%• M-Real < 9%• Volvo 8%• Stora Enso 5%

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FBCS Survey 2012 Key Points

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FBCS Survey 2012 Key Points

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Market Entry Modes & Nature of the Business Environment

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Comparison of international market entrymodes

Co-operation

Join Venture

Foreign Subsidiary

Inve

stm

ent

Franchising

High

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Indirect Exports

Outsourcing Sales Channel

Direct Sales Internet

Co-operation

CommitmentControllability

Inve

stm

ent

Ris

k

Source: Adapted from Ahokangas & Pihkala, 2002

Licensing

Franchising

Low High

The most typical partnering pitfalls

• We expect that we can get additional sales with no cost • We expect that we are automatically an interesting

discussion partner for them – only because we have arranged a meeting...

• We expect them to see the future as we do • We expect that they know as much as we do and updat e • We expect that they know as much as we do and updat e

themselves constantly • We expect that by telling once the responsibility h as shifted

from us to them • We expect them to understand their role fully • We expect their interest to be aligned with ours • In a partnership model no single entity is in charg e of the

total value chain – can we live with this?

Source: Pekka Rissanen, Teleste Oy

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Topic Embryonic business Growth business Mature busine ss

Markets Markets/clients do not exist in advance

Market is growing in volume Long term growth of the market has stopped

Number of competitors Hardly any direct competitors Many and growing number of competitors, but not necessarily at all markets or product segments

Big number of competitors, but not increasing. Lots of take-overs and mergers. Both local and global competitors

Market segments Difficult to decide to which market segment to focuss the product development based on market potential (difficultto find clients)

Growing markets and/or niches can be identified

Markets have been divided between competitors, difficult to find niches ornew opportunities

Product differences No direct comparisons in Differences can be found in No fundamental differences

Nature of the business environment in China

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Product differencesin the markets

No direct comparisons in terms of technical characteristics; company is often alone in the market

Differences can be found in technical characteristics (which will even out in time)

No fundamental differencesin technical characteristicsof products

Successful productstrategy and basisof competitiveness

OEM- strategy is better than production of the end product (pioneer of the business); technological know-how related to the innovation

Technology leader: technology driven strategy; from the client view we have superior technical characteristicsTechnology follower: competition situation- driven strategy: we will fill the gaps left by competitors

Strategy focusing on service: superior service when compared to competitors (take benefit of the service weaknessesof competitors)

Price setting Pricing principle stillunclear (market based,cost based or other

Technology leader: relatively high priceTechnology follower: market price, low price in the entry phase

Market price; low priceprobably in the entry phaseof industrial markets

Parameters of competitiveness favor local presence

Product factors

Service factors• easiness to buy• product support (incl.

Price factors• purchase price• delivery costs• assembly costs• usage costs

Communicationfactors• identification of

client needs• foreseeing changes

in demand

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Product factors• performance• adaptability• reliability• durability• user friendliness• easy maintenance• design/looks• quality image• complementing range

of products

• product support (incl.training, help desks etc.)

• assembly service• after sales service• flexibility• delivery reliability• delivery time•JOT- deliveries• financial services

• usage costs• service costs• training costs• payment terms• guarantee• finance terms• price reductions

in demand• physical proximity

with clients• co-operation with

clients• other business networks• personal client care• face to face sales• marketing communication• references• language skills• company image

Can you have the same clock frequency whenoperating from Finland?

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Conclusions & Recommendations

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Recommendations

• Localising operations in China is a must for long term success– To be close to customers and understand their needs– To speak the same language– To get access to the local innovation and business eco-systems– To establish your own Guanxi– To lower your production costs– To be a credible player

• Operating mode options:• Operating mode options:– Fully owned subsidiary (green field or acquistion)

• Sales & marketing• Sourcing• Local manufacturing/assembly• After sales

– (JV with Chinese companies)– Get Chinese ownership– Alliance with local companies (partnership- model)?– OEM- model with Finnish ”integrators”

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Finpro’s Global Network – Asia and Russia

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Finpro’s Global Network – Australia, Malaysia, Philippines and Singapore

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Finpro’s Network in China

Sep 2009 © Finpro ry

FINCHI – a platform of optimizing your value in China entrance

� Plug & Play style of equipped office space

� State-of-art services assist your daily operation

� Full access to local contacts and bussiness networki ng

No Registration or Injection Capital needed, but al l local activities could

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No Registration or Injection Capital needed, but al l local activities could

be realized with FinChi turn-key solution. www.finchi .cn

FinChi Innovation Center - www.finchi.cn

Thank You!

25/04/2012 28© Finpro