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Emerging China market opportunities.

Emerging China market opportunities.
China\\’s 12 5yr plan.
Key Success Factors in China.
Case studies highlighting pitfalls.

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    China Newcomer Opportunities China Newcomer Opportunities Presentation Transcript

    • The Dbriefs China Issues series presents:Doing business in China:opportunities for newcomersClarence Kwan, Managing Partner, U.S. Chinese Services Group, Deloitte LLPWarren Clark, Partner, Deloitte & Touche LLPShelley Chia, Partner, Deloitte & Touche LLPOctober 14, 2010
    • Agenda• Emerging market opportunities• Key success factors for doing business in today’s China• Case studies of typical market entry pitfalls in China Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • Poll question #1What is your company’s China investment plan over thenext 6 to12 months?• Pursue new investments in China• No new investments in China• Scale-back investments in China• Pull out of China• Don’t know/not applicable Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • Emerging marketopportunities: newindustries and services
    • China’s rapid economic ascent China’s nominal GDP growth (1978-2009) $5 $1,200 Exports (US$B) $1,000 (1980–2009) $4 $800 China joins $600 WTO $400US$ trillions $3 $200 Deng Xiaoping’s $0 ―Journey South‖ $2 Launch of China’s Open Door Policy $1 $0 From 1978 through 2009, China’s average annual GDP growth rate was 9.8% - 3x the global average Sources: PRC National Bureau of Statistics, IMF, U.S. Bureau of Economic Analysis 1 Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • U.S. investors have grown with China After investing US$64 billion through 2008 (7.5% of China’s cumulative total FDI) U.S. investors continued to favor China in 2009 Flow of U.S. FDI in China U.S.$ billion (2000–2009) 6 5.4 4.9 5 4.4 4.2 3.9 4 3.6 3.1 3 2.9 3 2.6 2 1 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 U.S. FDI into China last year was US$3.6 billion — a 24% increase over 2008 despite the economic crisis and the best showing since 2004 Sources: PRC Ministry of Commerce2 Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • U.S. SMEs are finding successDespite less time on the ground than larger U.S. investors, many U.S. SMEsreported profitable China operations during 2009. Length of time in China Profitability of China operations (2009) > 20 yrs. Large loss 10-20 yrs. 6-9 yrs. Break even, 2-5 yrs. small loss Profitable < 2 yrs. Very profitable SMEs Large companies SMEs Large companies How can this success be replicated, especially with more uncertainty ahead? Source: American Chamber of Commerce 2010 White Paper – survey of 388 U.S. companies with investments in China SMEs = Small and medium-sized businesses, defined as those with fewer than 500 employees3 Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • Navigating risk in a land of opportunity To create (and preserve) value in China, successful foreign investors: 1. Seek to understand China’s business environment and anticipate the direction of change 2. Adapt their strategy, structure, people and processes to the China environment4 Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • What does China’s leadership want for China?• A shift to a more sustainable development model – Lessen dependence on exports by spurring domestic demand – Promote service sector as an engine for job creation alongside manufacturing – Strive for “inclusive growth” (包容性增长) – spreading benefits more evenly across urban-rural, provincial and regional divides – Green, green, green• Respond to the Chinese people’s desire to see China achieve global standing commensurate with its growing economic leadership5 Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • How will Chinese leaders try to get there?A few examples• Consensus-building – Harness the Five-Year Planning (FYP) Cycle to build consensus around a sustainable growth path• Targeted industrial policy – Revitalize old strategic sectors while spurring the competitiveness of Chinese enterprises in new ones• Accelerated urbanization – Shift residential patterns to improve access to employment and social services• Recalibrated role in the global economy – Inbound FDI more carefully vetted for alignment with balanced growth goals; outbound FDI encouraged 6 Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • Consensus - building China’s 12th Five Year Plan takes form Research Drafting Review & approval Implementation 2009 2010 2011 October November 2009 March 2010 March 2011 2008 NDRC announced Premier Wen Final approval at 4th2nd National that drafting of the submitted guidelines Plenary session of 11th Economic 12th FYP is under to 3rd Plenary NPC Census way, drawing on input Session of the 11th launched from across China NPC for approval, allowing drafting to move to next phase November 2008 Early 2010 Planning division of NDRC NDRC submitted released draft outline of 12th guidelines for October 15-18, 2010 FYP State Council Review and approval of draft at 5th approval Plenary Session of 17th the CCP Central Committee 7 Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • What we expect to see emerge this week Consideration of the 12th FYP is the sole agenda item for this week’s four- day annual meeting of China’s party leadership (Oct. 15-18) 12th FYP Policy Thrust Potential 12th FYP Targets Accelerated urbanization Increase national urbanization rate from 47% to 52% by 2015 Create an energy-efficient, low-carbon society 2015 interim goal to China’s public pledge to reduce carbon intensity by 40-45% from 2005 levels by 2020 Reduce income disparities through regional Increase urbanization rate of Central China from integration & specialization 40% to 48%; reduce energy intensity of Central China’s economy by 25% from 2008 levels by 2015 Extend social safety net Universal basic healthcare coverage by 2020 Lessen reliance on global markets for growth; Increase domestic consumption to 50% of GDP from achieve economic rebalancing 36% nowSource: State Council, NDRC, Chinese media, ACMR8 Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • Targeted industrial policy Seven new strategic sectors unveiled in September 2010• Alternative Energy• Biotechnology• Information Technology• High-end Equipment Manufacturing• Advanced Materials• Alternative Fuel Cars• Environmental Protection Detailed industry support plans - similar to the 2009 revitalization plans for 10 old strategic sectors - are expected before January 1st9 Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • Meeting the challenge of faster urbanization 100 Urbanization rates (1975-2030) 90 82% 80 Percentage Urban (%) 70 51% 60 50 47% 40 30 20 10 0 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 Year U.S. China Global Average • Although cities account for just 3% of global surface area and 51% of the world’s population, they consume 75% of energy and emit 80% of greenhouse gases • China has 622 million urban residents today but is still just 47% urban - plans to urbanize an additional 280 million Chinese by 2030 will place tremendous strains on sustainability Sources: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: The 2009 Revision and World Urbanization Prospects: The 2009 Revision, Chinese Academy of Social Sciences, China Daily10 Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • “Inclusive growth” – narrowing regional disparities Heilongjiang ―Rejuvenate the Northeast‖ (October 2003) Jilin Xinjiang Liaoning Inner Gansu Mongolia Beijing Hebei Tianjin ―Open Up and Reform‖ Shanxi (December 1978) Ningxia Shandong Qinghai Shaanxi Jiangsu Henan Shanghai Tibet Anhui 2008 East Northeast Central West Hubei Sichuan Chongqing Zhejiang Population (m) and 480 109 355 365 Jiangxi as % of total (37%) (8%) (27%) (28%) Hunan Guizhou Fujian GDP (US$B) (% of 2,555 406 909 838 ―Go West‖ Yunnan total) (54%) (9%) (19%) (18%) Guangxi Guangdong (September 1999) Average Per 5,908 3,665 2,551 2,405 Capita GDP (US$) FDI inflows 86.2 12.0 16.5 7.9 ―Go Inland‖ Hainan (US$B), and as % (70%) (10%) (13%) (6%) (September 2006) of total* The 12th FYP is expected to strongly emphasize regional development Sources: National Bureau of Statistics, MOFCOM and local trade & investment promotion agencies11 Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • Poll question #2Has your company begun to look at the implications ofthe 12th Five Year Plan for its future plans to invest inChina?• Yes• No• No, but we intend to• Not applicable Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • Recalibrated role in the global economy China as a major source of capital Chinese outbound US$60 billion US$ billions projected FDI flows 60 (2002-2010) 50 40 30 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 (Jan.-May) Overseas FDI in financial sector Overseas FDI in non-financial sectors By the end of 2009, Chinas cumulative overseas investment had exceeded US$230 billion, up from just US$28 billion at the end of 2000 Sources: PRC Ministry of Commerce (MOFCOM), NBS, State Administration of Foreign Exchange (SAFE)12 Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • Align China’s objectives with yours Share the same bed, and the same dreams How will you leverage China’s future development to achieve your business objectives? • Where does your product/service fit in the 5-year plan? • Are you in one of the seven new strategic sectors? – If not obvious, could you at least support these sectors? • Will you invest in an “encouraged” region? • Will you collaborate with a Chinese company to expand your global footprint? – Leverage partner’s local knowledge, financial strength, R&D capabilities, and distribution network to expand market coverage – Relationship goes both ways13 Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • Success factors andexamples of typical marketentry failures into China
    • Poll question #3Which of the following best describes the likely mode ofentry for your next investment in China?• Wholly-owned greenfield/organic entry• Minority stake acquisition• Majority state acquisition• Other forms of strategic alliance (joint venture etc)• Not applicable Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • Deal-making in China - creating lasting value Five Questions Companies Should Ask • At what point should we walk away from a deal? • What is an acceptable price to both parties? • How should the deal be structured? • Does the deal present a compliance risk? • How can the acquisition be integrated in to the global organization?14 Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • Potential deal breakers War stories from our colleagues on the ground in China  At what point should we • Lack of integrity on the part of target’s walk away from a deal? management • What is an acceptable price to both parties? • Disagreements over management • How should the deal be control structured? • Does the deal present a • Inability to establish clear title to assets compliance risk? • How can the acquisition • Diverging expectations over price be integrated in to the • Conflicting stakeholder obligations global organization? • Case: A U.S. manufacturer acquiring an operation in Southeast China realized that the target’s managing director had been making large payments to a “non-existent” overseas consultant – It was revealed that the “consultant’s” offshore account belonged to the managing director15 Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • Pricing considerations War stories from our colleagues on the ground in China • At what point should we • Availability of basic financial information walk away from a deal? • Conflicting valuation  What is an acceptable price to both parties? procedures/methodologies • How should the deal be • Contingent/hidden liabilities structured? • Does the deal present a • Redundancies and non-core assets compliance risk? • How can the acquisition be • Sustainability of sales integrated in to the global organization? • Case: A European chemical company seeking to acquire a privately- owned manufacturer in China found that no social security payments had been made for its 3,000-strong sales support staff. This would have potentially resulted in huge un-accrued liabilities for the acquirer.16 Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • Structuring and compliance considerations War stories from our colleagues on the ground in China Remember the “3 Cs” of Deal Structuring • At what point should we walk away from a deal? • What is an acceptable Contain: Insulate the investment from hidden or price to both parties? contingent liabilities associated with previous  How should the deal be structured? operations or from potential liabilities created  Does the deal present a during the transaction itself compliance risk? • How can the acquisition Comply: Ensure that the terms of the deal and be integrated in to the global organization? subsequent operations are in compliance with pertinent regulations from the outset, both in China and in the home country Compete: Create a sustainable business model that minimizes the net global tax position and maximizes the flexibility of cross-border capital deployment17 Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • Common containment mistakes War stories from our colleagues on the ground in China • Failure to detect legacy liabilities and adjust structuring accordingly • Failure to uncover improper related-party transactions • Assuming unnecessary risk in a seller’s market • Over-reliance on personal relationships • Failure to assess the consequences of offshore payments • Case: A U.S. firm purchasing a majority stake in a Chinese consulting company was pleased with the three years of financial data presented by the seller, but due diligence advisers found the virtually flawless financial statements suspicious and recommended searching further in the past – It was revealed that the seller had enhanced the most recent accounts and buried significant unpaid taxes in the preceding years – The buyer avoided the tax liability by executing an asset deal rather than an equity deal18 Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • Common compliance mistakes War stories from our colleagues on the ground in China • Following common business practices without a full understanding of their legal basis • Failure to recognize the potential for inconsistent regulatory interpretation between local and state-level officials • Failure to anticipate and adapt to changes in the regulatory environment • Ignoring industry-specific regulations • Violation of foreign exchange rules • Misunderstanding of circumstances under which a license can or cannot be transferred • Case: A Canadian enterprise sought to acquire the exploration rights from a gold and platinum mining facility in southwest China – After making payment, the buyer was informed by the central government that the exploration rights were non-transferable – The buyer was forced to invest an additional US$8 million to set up a joint venture with the Chinese company19 Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • Common competitive positioning mistakes War stories from our colleagues on the ground in China • Failure to use an offshore intermediate holding company or forming one in a sub-optimal jurisdiction • Giving insufficient consideration to exit strategies • Using legal entities that are incompatible with the business model • Failure to capture specific tax incentives • Failure to correctly estimate the long-term capital needs of the China operation • Inability to repatriate cash in excess of dividend capacity Case: A U.S. firm acquired a contract manufacturing facility in Shenzhen to do final product assembly for export – The company’s structure was intended to minimize the Chinese tax burden but they were precluded from selling directly in to the Chinese market – As local demand products grew, the firm sought to sell domestically but to do so they had to export and re-import its products, incurring customs and shipping costs, thus making their prices uncompetitive vis-à-vis local Chinese competitors20 Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • Poll question #4Which of the following issues strikes you as the mostsignificant challenge to pursuing a deal in China?• Lack of transparency• Legacy liabilities• Management/Control issues• Difficulty agreeing on price, including the valuation method• Regulatory/licensing issues Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • Deal-making in China - creating lasting valuePeople issues dominate the list of transaction headaches Potential deal-breakers • Lack of integrity on the part of target’s management • Disagreements over management control • Inability to establish clear title to assets • Diverging expectations over price • Conflicting stakeholder obligations Pricing considerations • Availability of basic financial information • Conflicting valuation procedures/methodologies • Contingent/hidden liabilities • Redundancies and non-core assets • Sustainability of sales21 Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • Putting people first - before the deal Understand the stakeholder environment 1. Find out not only In China, these 跨  At what point should we walk away from a deal? who can make the individuals can be both deal but who can inside and outside the 国  What is an acceptable price to both parties? break it. company. • How should the deal be 经 structured? 2. Learn everything Lack of management • Does the deal present a you can about the integrity is one of the 营 compliance risk? stakeholders in most frequent deal- • How can the acquisition be advance. breakers in China. integrated in to the global organization? 3. Secure a firm mandate from your This will help you to negotiate with 以 top management, confidence in China’s 人 including clear unpredictable and less “go/no go” decision than transparent M&A 为 points. environment. 本22 Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • Putting people first - during the deal Establish trusting relationships 4. Negotiating in China Strong-arm tactics can • At what point should we is not just about be effective but should 跨 walk away from a deal? • What is an acceptable price getting the best deal possible but also be applied judiciously. 国 to both parties?  How should the deal be building lasting 经 structured?  Does the deal present a relationships. 5. Trust takes time but If they trust you, you will 营 compliance risk? • How can the acquisition be once you have it, get the information integrated in to the global organization? nothing moves a needed to support your deal forward faster. decisions. 以 6. You do not need to Be creative – Look for be Chinese to get occasions where acting 人 what you want in like an American China. advances your cause. 为 0 7. Better to communicate too But more importantly, make sure you can trust 本 much than too little. your translator.23 Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • Putting people first after the deal Transform relationships into lasting China value • At what point should we 8.Signing the Use the relationships 跨 walk away from a deal? contract is often you have established to • What is an acceptable price just the beginning protect your China 国 to both parties? of real negotiations value. • How should the deal be in China. 经 structured? • Does the deal present a 9.Loyalties in China The best way to retain 营 compliance risk?  How can the acquisition be are more often to critical employees, integrated in to the global individuals than to customers and organization? companies. suppliers is to retain key leaders. 以 10.Anything is Without the right 人 possible in China, but nothing is easy. people, nothing is possible. 为 本24 Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • Question and Answer
    • Join us on November 11 at11 AM ET as our China Issuesseries presents:China Tax andRegulatory Update
    • Contact infoShelley Chiashelleychia@deloitte.com.+1 213 688 3232Warren Clarkwarclark@deloitte.com+1 215 246 2503Clarence Kwanclkwan@deloitte.com+1 212 436 5470 Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • Thank you for joining today’s webcast.To request CPE credit, click the link below. Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • This presentation contains general information only and is based on the experiences andresearch of Deloitte practitioners. Deloitte is not, by means of this presentation, renderingbusiness, financial, investment, or other professional advice or services. This presentation is not asubstitute for such professional advice or services, nor should it be used as a basis for anydecision or action that may affect your business. Before making any decision or taking any actionthat may affect your business, you should consult a qualified professional advisor. Deloitte, itsaffiliates, and related entities shall not be responsible for any loss sustained by any person whorelies on this presentation. Copyright © 2010 Deloitte Development LLC. All rights reserved.
    • About DeloitteDeloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee,and its network of member firms, each of which is a legally separate and independent entity. Please seewww.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited andits member firms. Please see www.deloitte.com/us/about for a detailed description of the legal structure ofDeloitte LLP and its subsidiaries. Copyright © 2010 Deloitte Development LLC. All rights reserved.