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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.
704-333-4886 ext 221
www.buyusa.gov/northcarolina
(or www.export.gov for all our offices)
