Marketmap                           How emerging markets change the global economy          04                      06    ...
Contents04 East Asia’s flashiest attraction   Ready for a journey of a thousand miles? Get to   know the ins and outs of d...
East Asia’s balancing act4
“Emerging economies like China, India, and Brazil aregrowing at rates that far surpass the developed nations. Theshift in ...
China rises6
“Pearls lie not on the seashore.                                     to continue at a robust clip of about If you desire o...
designed solely for other markets                                              the selling of goods and services as       ...
World Bank : GDP Contribution by sector: Chinas rapid industrialization 60%                                               ...
Canada 1.14                                                                                       United States 1.14      ...
United Kingdom 1.64                            Netherlands 0.95          Luxembourg 3.21            France 1.24           ...
China’s presence in Africa alone                                         since the early days of the 20th century.     has...
response to opportunities there, with       some businesses looking toward these64% naming China as important to          ...
Growth and change                         glass. Once the jet lag dissipates, savvy   Transitioning markets,in today’s Chi...
workingrelationships with local            exercise authority over the direction      rife with potholes for the uninitiat...
China challenges: A closer look16
Corruption crackdown,                     laws governing taxes, labor practices,regulatory renovation                     ...
States, a multiagency national security    abuse. And completing the necessary     group that reviews transactions that   ...
of regulatory shifts, some of which        boost enforcement, seeking to raise                             Despite progres...
The made-in-China brand: The                                               The issue came to international     drive to re...
try to address the matter by keeping an      Regardless of which measure one looksPinyin: A method by which               ...
EIU’s assessments are                        fair judicial proceedings.16 However,                                 has inc...
The ‘World’s      Hong Kong has actually been ranked                         A Special Administrative Region ofFreest Econ...
Complex, yes. Compelling, probably.Inscrutable?24
“Deep doubts, deep wisdom;                 Anticorruption starts at the top withsmall doubts, little wisdom.”             ...
Acknowledgements   Managing Editor            DesignerIssue 1                   of Marketmap               Jacqueline Corl...
www.pwc.comContactsHarry G. Broadman(202) 312-0807harry.g.broadman@us.pwc.comSteven Skalak(646) 471-5950steven.skalak@us.p...
China: Pearls, Pitfalls and Possibilities
China: Pearls, Pitfalls and Possibilities
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China: Pearls, Pitfalls and Possibilities

  1. 1. Marketmap How emerging markets change the global economy 04 06 14 222011 East Asia’s flashiest China rises China challenges: Complex, yes.Issue 1 attraction A closer look Compelling, probably. Inscrutable? China: Pearls, pitfalls and possibilities
  2. 2. Contents04 East Asia’s flashiest attraction Ready for a journey of a thousand miles? Get to know the ins and outs of doing business in China.06 China rises It’s poised to become the world’s largest economy by the time babies born today embark on their careers.14 China challenges: A closer look As China increasingly takes its place on the world stage, the government has been cracking down.22 Complex, yes. Compelling, probably. Inscrutable? Tie profit to disciplined, risk-based decision making.
  3. 3. East Asia’s balancing act4
  4. 4. “Emerging economies like China, India, and Brazil aregrowing at rates that far surpass the developed nations. Theshift in the economic balance of power creates challenges forCEOs in deciding how and where to invest in facilities, peopleand innovation. Companies that understand and capitalizeon the diverging growth patterns of the developed andemerging economies will be the winners in the years ahead.”— Dennis M. Nally, Chairman of PwC InternationalToday’s China has become virtually premium. Due diligence is indispensible,synonymous with global possibilities. yet elusive. Those in search ofAnd companies in advanced markets, transparency often find translucencyeager to shake free of mature home turf at best. And intellectual propertyto explore the potential of the BRICS1 protection and surer safety standardsand beyond, are making serious forays remain works in progress.into East Asia’s flashiest attraction. The resulting environment can beThe intrigue doesn’t stop with Beijing. rife with risk. To assess and mitigateAs China expands its horizons from its these challenges, it’s not enough tocoastal cities to its traditionally rural ask questions. It’s no exaggeration tointerior, opportunities seem as bright suggest that mastering the Socraticand bountiful as a Chinese Lantern method can become business as usualFestival in celebration of an autumn for the sharpened business personharvest. Those eager to rise along with around Shanghai.China’s growing economy will needto illuminate their way forward on an The Chinese have long said that aongoing basis, or risk costly stumbles journey of a thousand miles begins withon unfamiliar terrain. a single step. If you’re among the many who are intrigued by the possibilitiesChina’s ascension, while impressive, has that can be found along this path, yournot followed a straight trajectory — an first step should include getting to knowinsight that often gets overlooked amid the ins and outs of doing business inthe hoopla. Some substantially stalwart today’s China. As you’ll see, China surelybusinesses have forged successful beckons with the luster of pearls. Butpaths. But the sheer magnitude of their astute entrepreneurs will take measuredoperations and depth of their pockets steps to string together a tightly boundhave been significant in enabling strand of high-quality gems.them to overcome what can often be adaunting slog through a nascent and Read on to learn more about theunfamiliar market. rewards and realities of China today and how best to position yourThe challenges are myriad, complex, enterprise to share wisely in theand often interrelated. The emerging wealth.government’s role in business life loomslarge; the lack of separation betweengovernment and business is the Chineseway. Business partner pedigrees are at a1 Brazil, Russia, India, China, South Africa 5
  5. 5. China rises6
  6. 6. “Pearls lie not on the seashore. to continue at a robust clip of about If you desire one, you must dive 8% a year over the next five years,5for it.” as prosperity unfolds like a fan,— Chinese proverb wafting consumption growth through an economy that will continue to seem more inspired by Wall Street than theChina has come a long way since Great Wall — complete with cyclicalembarking on economic reform in fits and starts.1978 under Deng Xiaoping. And ithas done so quickly, albeit not alwaysin a linear fashion. Since the late Among emerging markets, China has‘70s, its economy has grown tenfold, unleashed performance and prospectsindustrialization supplanting agrarian that outpace Brazil, Russia, India, andtrade — not over the course of 200 South Africa as well as up and comersyears, as in Europe, but in three such as Mexico, Egypt, and Taiwan.decades. China’s cumulative real GDP China’s 10% average growth per yeargrowth is projected to outpace that of between 1999 and 2009 is highestdeveloped economies and the rest of among the emerging markets, andthe world by 2015.2 Along with one topped 14% in 2007. Its 2010 GDPof the hardest-charging income level was second only to the United States,increases in history, China’s economic landing it ahead of Germany, Brazil,awakening has resulted in the largest India, Russia, Mexico, and Indonesia.poverty decline ever. CEOs responding to our 14th AnnualThe interest in China among investors Global CEO Survey liked what theyis a long-term secular one. One saw. Many pointed to China as thedramatic indication of the global most important country for futurerebalance: China, which in 1980 growth; of the 1,201 CEOs surveyed,didn’t rank among the top 10 global 39% saw the greatest opportunityeconomies by size, looks poised to there, well ahead of the United Statestop the United States as the world’s (21%), Brazil (19%), and India (18%).6largest economy by the time babies China also tops the list as the mostborn today embark on their careers in important venue for meeting futurethe mid-2030s.3 The current economic sourcing needs, with 37% of leaderscycle is a major factor influencing surveyed planning to shift sourcingnearly 85% of CEOs we surveyed to there, primarily inspired by theshake up their business strategy in potential for cost competitiveness.recent years. Market growth has long been China’sChina has surpassed Japan as the golden goose, as the country’s workerssecond-largest economy in the world, grow increasingly capable of buyingbehind only the United States.4 In the the goods and services that were oncenear term, China’s growth is projected 5 Building a presence in today’s growth markets, The experience of privately held companies, PwC, 20112 Building a presence in today’s growth markets, The experience of 6 Prospects in emerging markets drive global CEO confidence to pre privately held companies, PwC, 2011 financial crisis levels and 14th Annual Global CEO Survey, Growth3 The World in 2050, PwC (January 2011 update) Reimagined, PwC, 2011; created in cooperation with the Economist4 The World in 2050, PwC; View, issue 13, Doing business in a Intelligence Unit (EIU). The findings presented in the main reportchanging China, seeking similarities, respecting differences, PwC, are based on a survey and analysis conducted in 2010 by the EIU on2010-2011 behalf of PwC. 7
  7. 7. designed solely for other markets the selling of goods and services as and demographic groups. The their top opportunity in China. By transformation is readily apparent, comparison, the other BRICS hover and businesses large and small have around the 40% mark. Business noticed. The experience of one leaders are eyeing emerging markets, international hotel illustrates the countries such as Colombia and transformation; Starwood Hotels Argentina, which represent a second & Resorts Worldwide opened the wave of overseas markets, to a lesser Sheraton Great Wall in Beijing in 1985 extent, with about 20% of company to serve Western travelers seeking leaders venturing into countries familiar surroundings in China. At the such as Mexico and South Korea, or time, less than a decade into China’s contemplating it. economic awakening, the only local Chinese nationals who could be seen Doing deals: Robust times around the facility were staff members. for China Today, local Chinese visitors comprise 60% of the Sheraton’s guests. China’s recent deal market might remind one that it is, after all, the country that invented fireworks. Private companies, too, want in on Deal volume in China shot up more the action. More than 60% of the 158 than 15% and deal value rose nearly non-financial private company leaders 30% in 2010 as compared to 2009. PwC recently surveyed say they’re In contrast, US deal volume around already doing business in China or that time remained relatively flat, with are considering such a move, citing deal value edging up less than 10%.7 7 Ten minutes on doing deals in China, PwC, 2011 IMF Projections for percentage of GDP growth, September 2011 10% 9.5% 9.5% 9.0% 8.1% 7.8% 8 7.5% 6 4.2% 4.3% 4.1% 4 4.1% 3.8% 4.0% 3.4% 3.6% 2.5% 1.8% 2 1.6% 1.5% 1.5% 1.1% 0 2011 2012 2013 China India Russia Brazil South Africa Source: IMF World Economic Outlook September 2011 Estimate Note: World Bank forecasts are frequently updated based on new information and changing (global) circumstances. United States http://web.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/EXTGBLPROSPECTSAPRIL/0, Euro area contentMDK:20370107~menuPK:659160~pagePK:2470434~piPK:4977459~theSitePK:659149,00.html8
  8. 8. World Bank : GDP Contribution by sector: Chinas rapid industrialization 60% 48% 47% 47% 50 46% 46% 46% 45% 43% 40% 41% 38% 45% 40 33% 32% 33% 41% 32% 39% 30% 29% 35% 35% 30 28% 27% 27% 24% 20 22% 22% 22% 20% 15% 10 12% 10% 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Agriculture Industry ServicesSource: World Bank Database http://data.worldbank.org/indicatorWe’re seeing an evolving global and Asia’s largest private equity (PE)domestic M&A picture, with China at market resides in China — and it’sthe forefront of change. Amid a flurry in a state of flux. PE transactionsof inbound and domestic deals, critical there grew to 580 in 2010, an increasesectors such as auto parts, cement, of more than 65% over the previousand metals are coalescing around year, with more than two-thirdsnumerous smaller enterprises. At the initiated by domestic funds. Almostsame time, Chinese companies are half of the funds raised by privateacquiring resources through megadeals equity were in Chinese currency, thein Africa and South America and renminbi (RMB) with yuan the basicexpanding globally into sectors such unit. It’s a significant challenge,as automotive and chemicals. but some foreign funds are teaming with Chinese municipal governmentsWe also see a trend toward a growing and private entities in RMB funds tonumber of joint ventures (JVs) formed further penetrate the market. China’sin China; companies are increasingly market holds significant ‘dry powder’;using local partners’ market knowledge the emergence in RMB funds hasand relationships with customer fostered substantial fundraising,and the government to adapt to fueling continued upward pressurean ‘in China, for China’ strategy. on deal valuations.Multinationals should recognize thatlocal partners need a distributionnetwork to realize market penetrationand intellectual property (IP) toenable them to appeal to the localconsumer base. 9
  9. 9. Canada 1.14 United States 1.14 United States 1.31 Caymen Islands 5.50 British Virgin Islands 6.12 China’s 2010 inward/outward Foreign Direct Investment (FDI) by country (in US$ billions) Inward FDI to China Outward FDI from China Source: China FDI.govcn http://zfxxgk.dongying.gov.cn/gov/jcms_files/jcms1web46/site/art/2011/1/18/art_2 *Not including banking, securities, and insurance *Above figures include FDI done through free ports including Virgin Islands, Caymen Islands, Barbados, Mauritius For multinationals whose sights While Chinese investors have been are set on long-term growth in providing capital to gain access to China, indigenization is crucial. global markets, Chinese businesses Business models must be adapted to and their partners are thinking more accommodate a dual perspective: creatively about mutually beneficial one, the traditional multinational arrangements. For example, some context (focused, for example, on Western companies are making shareholder value and corporate inroads into China’s domestic market citizenship), the other, the domestic by providing Chinese businesses with Chinese view. To grasp the latter, an entree into the global marketplace. businesses must cultivate an Some observers see outbound Chinese understanding of and respect for investors gearing up to acquire the views of a number of Chinese sizable stakes in Western markets, but stakeholders, including central Chinese investors going abroad face and local governments, suppliers, steep learning curves in executing customers, employees, and and integrating their acquisitions, a universities. Success will be largely development that closely parallels the predicated on their ability to fuse Japanese history of investing in the business-as-usual with business- United States. as-usual in China, which can be distinct, but not necessarily mutually Despite inroads, some investors exclusive, approaches. question whether China remains too economically nationalistic to truly10
  10. 10. United Kingdom 1.64 Netherlands 0.95 Luxembourg 3.21 France 1.24 Germany 0.93 Korea 2.69 Japan 4.24 Taiwan 6.70 Hong Kong 38.51 Myanmar 0.88 Hong Kong 67.47 Singapore 1.12 Singapore 5.66 Australia 1.70 seek such relationships, as many deals Thanks to its strong export platform, since the economy began opening still flounder far short of success. China is already a preferred up a few decades ago, is spreading Others view these disappointing forays destination for the relocation of global from the coastal regions to the as part of the country’s economic manufacturing facilities. It’s also second- and third-tier cities inland, growing pains rather than investment cited along with the United States and where lower-cost labor and property isolationism. Through any lens, India as among the most important are still the norm. In fact, some China’s economy delivers significant future sources for products and raw 60% of the Chinese government’s opportunities; their realization requires materials by participants in PwC’s 4-trillion-RMB stimulus package foreign investors to identify mutual CEO survey. And although the cost has been allocated to developing touch points for strategic growth while of manufacturing there is rising as transportation, affordable housing, identifying, managing, and cutting risk. Chinese workers enjoy higher wages and rural infrastructure in the central and a growing consumer footprint, and western regions, according to Where the industry action is the export platform remains the most some estimates, yielding significant appealing opportunity in China among opportunity.8 Foreign investors China’s admission as a full World in heavy industries such as steel the private company leaders we polled. Trade Organization (WTO) member manufacturing are eyeing inland This factor is now being challenged in November 2001 spawned a boom China’s immensely rich stock of iron by China’s rapidly growing domestic period for foreign investors in sectors ore and other natural resources. markets. such as distribution, logistics, financial services, and telecommunications, Amid China’s increasingly invigorated China is also casting its eyes beyond its as well as a customs duty cut. market, the country’s robust own borders. In the past decade, manufacturing base, building steadily 8 View, issue 13, Doing business in a changing China, seeking similari- ties, respecting differences, PwC, 2010-2011 11
  11. 11. China’s presence in Africa alone since the early days of the 20th century. has spread across the continent, And it did so in the fast lane. A decade from Angola to Zimbabwe and ago, the United States consumed twice beyond, including business interests as much energy as China. But several in energy, mining, infrastructure years of double-digit growth rates in development, and financial services.9 China and the recession’s deeper dig It’s also emerging as a prime investor in the United States accelerated this in energy around the world, notably dynamic. (On a per capita basis, green energy, standing alongside the China remains at about one-third United States as a global cleantech of the Organisation for Economic leader, aggressively backing emerging Co-operation and Development industries in the hope of boosting its [OECD] average.) economy, environmental performance, and brand. While China’s increased energy demand is not largely a reflection of China’s economic climb, with consumer behavior, the country’s recent its inherent reliance on energy- dominance of the automotive sector intense industry and infrastructure is. China has grown into the world’s development, thrust it past the United largest automotive market, with sales States as the world’s largest energy surpassing the United States in 2009 consumer in recent years — a position and more automotive assembly plants the homeland of Henry Ford had held than any other country. Automotive CEOs are revving their engines in 9 For more information, please see China and India go to Africa, New Deals in the Developing World, Foreign Affairs, published by the Coun- cil on Foreign Relations, by Harry G. Broadman, March/April 200812
  12. 12. response to opportunities there, with some businesses looking toward these64% naming China as important to less-conspicuous destinations for moretheir business growth, well above the affordable manufacturing support.global average. PwC expects that some Malaysia, with its history of British80% of global growth in the sector rule and law, has drawn interestby 2017 will come from emerging among those wary of one of China’smarkets — 34% from China.10 perceived Achilles heels: less stringent IP protections, particularly in theAs China’s economic rise continues, technology field, where IP risks remainFar East neighbors such as Malaysia, a paramount concern.Vietnam, Cambodia, Bangladesh, andThailand all stand to prosper. Already,Indonesia, Malaysia, and Vietnamhave been prettying themselves up forsmall and mid-sized businesses withloosened permitting and propertyregistration and more fluid creditinformation sharing. At the same time,China’s rising labor costs have10 PwC Autofacts, March 201160 years of strategyThe Twelfth Five-Year Plan, recently endorsed by the National People’s Congress, lays out economic, social,environmental, geographic, regulatory, and legal strategy. The plan looks to these strategic industries to provide8% of GDP by 2015 and 20% by 2020:• Alternative energy• Next-generation information technology• High-end equipment manufacturing• New materials• Clean-energy vehicles• Energy conservation and environmental protection• BiotechnologyAccording to the current vision, the China that emerges over the next five years will embrace a ‘softer’ side of thegrowth agenda, with a commitment to issues such as social equality, environmental consciousness, and resourceavailability. The plan looks to:• Lessen discrepancies between coastal and interior regions• Target 7% economic growth (versus prior 7.5% goal)• Enhance social infrastructure• Increase and spread wealth• Cut reliance on exports and boost household consumption• Balance growth and sustainability 13
  13. 13. Growth and change glass. Once the jet lag dissipates, savvy Transitioning markets,in today’s China business leaders will awaken to a new intransient rules and roles world of cultural, operational, andRapid growth and change can have Like its climate, tropical in the south, regulatory realities. Many investors citeits drawbacks. Just ask any teenager. subarctic in the north, China is a land challenges in navigating a general lackOr take a closer look at today’s China; of dramatic contrasts. The nascent of transparency, an unreliable legalbeneath the shimmer of economic nature of China’s role as a global system, industrial policies that can bemetamorphosis, vigor, and burgeoning economic power means its financial skewed in favor of local businesses,opportunity, we also find that the markets are still young while its banks and concerns about corruption and IP,underpinnings of this new paradigm are still working through rebalancing which is a characteristic challenge ofremain unrefined in many respects, issues. Maintaining social and economic emerging markets generally.as does the understanding of many stability is a top objective of the Chinesewho are looking to do business in any government and its officials in theemerging market. China presents its Much of this reflects the reality that current transitional environment.own distinct challenges. These needn’t China’s economic strides have beenbe deal-breakers. But neither should a hemispheric hybrid, incorporating China’s one-party government (thethey be ignored. Western economic ideals alongside Chinese Communist Party or CCP) steadfast loyalty to China’s political, wields substantial influence as historical, and cultural roots. As we’veFor those who would seek their fortune the country’s leading corporation, seen, the resulting entity has beenin a land where time runs 12 hours regulatory, and pricing body. It’s a spectacularly effective in pushingahead of any given New York minute, degree of influence that may present China into the major leagues ofthe adjustments don’t stop when a challenge to many Westerners economic expansion — a rapidyou reset your watch. Operating on striving to develop positive transformation that can belie thethe other side of the world can be as implications of governmentalpuzzling as a trip through the looking involvement and influence in business affairs.14
  14. 14. workingrelationships with local exercise authority over the direction rife with potholes for the uninitiatedstakeholders in markets while of investment money, targeting the and raising questions even forremaining in compliance with regions and industries deemed ripe those who have experience. Manyanticorruption laws, engendered by for development. While this has corporations and their legal advisorspolicymakers intention of creating presented challenges for some foreign struggle to determine the right balanceclearer separation between government companies, others have been successful between the appropriate deferenceand commerce. in recognizing it as an opportunity to guanxi on the one handand anti- to collaborate with local players and corruption regulations, such as theBecause the notion of privatization in develop mutually beneficial China FCPA, UK Bribery Act, and the OECD,China doesn’t jibe with the assumptions strategies that are aligned with Chinese on the other. For example, althoughof businesses accustomed to operating stakeholder interests. expense reporting for such forays asin mature markets, success will hinge business meals remains a fundamentalon the ability to understand the gov- It’s not what you know practice, Chinese government officialsernment’s role and China’s operating might not want their names recorded Yes, of course, it’s who you know. Butenvironment while remaining poised on such documentation. And some in China it’s also what you don’t know,to keep operations clear of corruption companies look the other way in the or know enough about to ask whatthrough assiduous risk management. interest of building the relationship. you need to know. That’s why it makes sense to strive for a real understandingThe government’s reach is evident in No one wants to alienate one’s of Chinese culture and the waypotential investment restrictions, which business associates. But the prospect business there gets done. ‘Guanxi’, theare far broader than those seen in the of the hammer falling from a foreign notion that cultural differences can beUnited States and other developed investor’s home country anti-bribery bridged by building and maintainingnations. China’s legal and regulatory law liability is hardly appealing either. relationships can be a two-way streetframework enables its leaders to 15
  15. 15. China challenges: A closer look16
  16. 16. Corruption crackdown, laws governing taxes, labor practices,regulatory renovation exports, trade, and the environment.Corruption can cause businessaspirations to fizzle like fireworks China’s own anti-bribery law, basedin a monsoon. Investors need to on Article 16 of the United Nationsremain attuned to FCPA and Convention Against Corruption,UK Bribery Act restrictions, along recently took effect when Thewith local anticorruption regulations. Standing Committee of China’sA significant segment of China’s National People’s Congress passed anpopulation is involved in governmental amendment to China’s Criminal Law.activities, which can increase the This criminalizes bribery of officials ofpotential for both local an home public international organizations orcountry bribery violations. foreign government officials by Chinese individuals and companies.While corruption can undermineany business environment, how The development reflects an ongoingit’s perceived is subject to cultural evolution, coming in the wake oftranslation and transformation, China’s WTO accession a decade agomuch like attitudes toward diversity and creating an ongoing impetus foror smoking. As China increasingly investors to remain nimble and abletakes its place on the world stage, the to adapt their operations and structure.government has been cracking down. By 2007, China had enacted its own antimonopoly law, which took effect the following year and is enforcedReform efforts have met with mixed by the Ministry of Commerce (mergersresults, but in recent years, the and acquisitions); the Nationalgovernment has gone so far as to Development and Reform Commissionexecute public officials convicted of (anticompetitive conduct pertaining tobribery, embezzlement, and abuse of pricing); and the State Administrationpower. Chinese officials haven’t shied for Industry and Commerce (otheraway from punishing corporate players anticompetitive conduct). Moreperceived to have bent or broken such recently, the US Department of Justice’slaws. High-profile arrests of foreign (DOJ) Antitrust Division signed aemployees accused of bribery and memorandum of understanding withIP infringement have raised flags for those agencies as a nod to ongoingbusinesses around the world as to communication and cooperation.11where the lines are drawn when itcomes to acceptable versus criminalcommercial behavior in China. Enhanced regulatory guidance for M&A activity in China can be challenging for investors, even asOnce viewed as lagging in regulatory it brings increased transparency toreform relative to its growing global decision making. Some see the newimportance, China has lately embraced guidance on China’s national securitya more stringent anticorruption stance. reviews as a parallel to the CommitteeAlong with anti-bribery regulations, on Foreign Investment in the Unitedcompanies operating in China needto remain in step with numerous 11 US Department of Justice, http://www.ftc.gov/opa/2011/07/ chinamou.shtm 17
  17. 17. States, a multiagency national security abuse. And completing the necessary group that reviews transactions that paperwork by Chinese standards is could result in control of a US business no panacea. That’s because the onus by a foreign person. for requesting business tax invoices, known as ‘fapiao’, remains not with China’s tax authorities are also the business service provider, but with moving to tighten the enforcement the consumer, injecting the process and consistency of related policies. with considerable variance and Tax policy perks, such as tax holidays vulnerability. In the last decade, Beijing and reduced income tax rates, have introduced cash incentives to induce served the government’s aim to attract more consistent and reliable reporting foreign investors. These investors also and boost tax revenue. But corrupt are protecting themselves from picking practices persist; it’s not unheard of for up sellers’ tax liability amid fallout such documents to be forged, or even from anti-tax avoidance measures, crafted on a street corner. As such, which often requires intensified due home country enforcement agencies diligence and the ability to demonstrate often look upon this paperwork with a legitimate business operations among healthy dose of skepticism. special purpose vehicles that are sometimes used to mask tax avoidance. Where piracy meets progress: Intellectual property rights An often unreliable business tax and wrongs documentation system poses another As China’s business environment challenge. While the system is heavily continues to undergo transformation, bureaucratic, it’s also subject to we can expect an ongoing parade18
  18. 18. of regulatory shifts, some of which boost enforcement, seeking to raise Despite progress, improvementswill gain better traction than others. awareness of IP issues among the public often remain insufficient for manyRegardless, the pace of change will no while expanding the State Intellectual multinational corporations (MNCs),doubt be brisk, at times sudden, with Property Office (SIPO), State Copyright which should focus on IP valueconsiderable implications for business Bureau, and similar agencies, and management strategies to preserve IPoperations; it will be crucial to stay assigning IP protection roles to other value by leveraging the core operationstuned in to the changing tides and state organizations. of the enterprise.13 We see a trendtuned up operationally. toward sector-specific risk profiles to But such strides have often come with determine an appropriate level of entryPerhaps nowhere are China’s crossroads setbacks and caveats. According to the into China. If the decision is made tobetween old and new, public good and US DOJ, a WTO dispute settlement enter the market, companies need toprivate profit, more evident than in its panel found that some elements of ensure their understanding of the legal,attempts to rein in IP infringement. China’s intellectual property rights commercial, and stakeholder interests, (IPR) regime are ‘inconsistent with particularly as they relate to theChina began shoring up its IP protection its obligations under TRIPS’.12 And government. They also must maximizeenforcement efforts, passing patent, software, entertainment, and consumer the use of the company’s existing IPtrademark, and copyright protection goods groups report ongoing — and protection laws and practices andlaws in the early 1980s, shortly after often high-profile — piracy incidents. pursue both commercial solutions andDeng Xiaoping unleashed economic legal remedies, for example, throughreform. That was followed two decades Violations continue to outpace enforce- such means as local IP co-development,later, in 2001, by China’s WTO acces- ment. Lack of government agency bimodal product strategy, and minoritysion, along with refinements to IP laws coordination hampers efforts to quash cross-ownership.to comply with the Agreement on Trade IP abuse, and regional enforcementRelated Aspects of Intellectual Property inconsistencies create an environment Indeed, from IP to JVs, the ability toRights (TRIPS). in which some areas offer relatively identify solid business partners is a stringent IPR protection while others critical challenge. Unwary investorsMore advances followed. In 2007, remain relatively lax. who choose poorly can find themselvesChina signed onto further global in a league with the wrong crowd,initiatives, including the World This is an area in which the would-be setting up the venture for failure andIntellectual Property Organization seller must be wary. Patent and copy- jeopardizing their brand and bucks.(WIPO) Copyright Treaty and WIPO’s right infringement, piracy and coun- Affirming partner integrity is a criticalPerformances and Phonograms Treaty. terfeiting, and product diversion can and challenging endeavor in China,It’s also involved in organizations cost you dearly in the marketplace and where gaining a foothold in the marketsuch as: in the media. Chances are your IP is depends on high-touch, high-stakes your most valuable asset, as a source business relationships. Though success• Paris Convention for the Protection of revenue outright or as the basis for can ride on the ability to tap the right of Industrial Property competitive advantage. As such, it partners, outdated or elusive financial must be carefully cultivated and tightly and ownership data can compromise• Berne Convention for the Protection otherwise seemingly thorough due guarded. Protecting these assets against of Literary and Artistic Works diligence, making it tough to assess unauthorized use and finding trustwor-• Madrid Trademark Convention thy potential partners will be crucial to intermediaries, agents, JV partners, maintaining a successful IP strategy and and other liaisons on whom so much• Universal Copyright Convention running a successful business in China. can depend.• Geneva Phonograms ConventionAlong with these global IP protectionefforts, the government has also 12 US Department of State, 2011 Investment Climate Statement, Bureau of Economic, Energy and Business Affairs, March 2011, 13 Redefining Intellectual Property Value, The Case of China, PwC,worked to curb violations and http://www.state.gov/e/eeb/rls/othr/ics/2011/157258.htm 2005 19
  19. 19. The made-in-China brand: The The issue came to international drive to revive damaged goods notoriety when, in 2005, tainted Product quality is not an issue reserved Chinese-manufactured drywall made only for those with IP concerns. its way into post-Hurricane Katrina Although China has moved closer construction projects on the US gulf to mature market comfort zones in coast, at a time when many eyes were some crucial ways, US and EU leaders cast upon the devastated region. recently expressed concern that China’s More was to come. In 2007, toxins were efforts to shore up product safety have found in other products made in China, not gone far enough. In response, including wheat flour, frozen fish, China recently announced plans to and toothpaste. The flour, tighten regulations, stop defective contaminated with the industrial and dangerous exports, and soothe chemical melamine, made its way into potentially trade-defeating doubts.14 pet food, reportedly killing thousands of dogs and cats worldwide. China’s consumer-protection officials vowed in 2010 to hold Chinese As if all of this wasn’t damaging enough manufacturers accountable for product to the made-in-China brand, numerous safety, to work with its counterparts 2008 recalls amplified trade jitters in advanced economies to set safety further when toys exported from China and testing standards, and to keep to the United States were found to dangerous materials such as lead out contain dangerous amounts of products made in China. of lead. Again, the timing may well have exacerbated trade tensions; just as the global economy had started 14 The Wall Street Journal, October 2010, http://online.wsj.com/article/ to sour, it seemed that even toys SB10001424052702303891804575576272885290234.html20
  20. 20. try to address the matter by keeping an Regardless of which measure one looksPinyin: A method by which arms-length relationship with suppliers at, these indices should not be viewedChinese ideograms are and assessing quality only on the as having great precision, but rather astranscribed as Roman-style back end. But sheer volume and gaps assessments of orders of magnitude;words. that enable Chinese vendors to evade they tend to be correlated with one such controls increasingly erode the another and paint a picture of China as effectiveness of these reviews. a country that has been improving butcould sow apprehension and doubt. remains at a comparatively low level ofThe impact was significant, as toys When proper due diligence has been good governance overall.associated at least in part with Chinese performed, greater collaborationmanufacturing comprise 80% of the with vendors can increase supply chain TI, which publishes an annualUS kid market. transparency, accountability, and Corruption Perceptions Index (CPI), quality. Many companies are now uses survey participants’ insights toThat year also saw alarming reports trying to build: identify public sector corruption hotthat melamine had surfaced in spots, scoring countries on a scale frombaby formula made by more than • Greater supply chain visibility so they 10 (very clean) to 0 (highly corrupt).20 manufacturers in China, where can understand the cost structure for For compliance decision-making andit sickened thousands of children themselves and better assess vendor risk assessment purposes, entities oftenand even resulted in some fatalities. quality and integrity up front assign a threshold risk level, typicallyAlthough this threat didn’t cross • Collaborative, not arms-length, 4 or 5 on TI’s CPI scale. Someborders, it did nothing to burnish relationships in which they work companies have broken the rankingsChina’s image as a trustworthy closely with vendors to improve down even further, identifyingproducer and partner. quality and cost efficiency; for corruption as rampant in countries example, providing more favorable that score 0 to 3 and presuming a highA spokesman with China’s likelihood of experiencing corruption inAdministration of Quality Supervision, contractual terms for vendors that provide greater transparency countries that score between 3 and 5.Inspection, and Quarantine recentlycited international standards as a • Increased traceability for sectors, In the 2010 CPI ranking of 178means of mitigating these concerns. such as auto parts, in which quality is countries, China scored a 3.5 andAt the same time, the onus could of higher importance ranked 78th, tying with Colombia,simultaneously be shifted away from With these measures in place, we see an Greece, Lesotho, Peru, Serbia, andregional determinations, which can emerging trend toward the transfer of Thailand. Although this placed Chinastir up disparities and hike costs — accountability for maintaining supply in the bottom half of the index, itnever welcome circumstances and chain integrity to vendors. This is demonstrates a marked improvementless so in a volatile economy with distinct from the arms-length approach, since 1995, the first year TI producedunpredictable demand. as the focus is on enlisting vendors’ help the survey; at that time, China scored in improving transparency and opening 2.16, finishing next to last, sandwichedShoring up supply access to the production process. between Indonesia (1.94) and Pakistanchain integrity (2.25).15 For the sake of comparison,Vendor and supply chain integrity Alphabet soup in Pinyin the United States ranks 22nd with aissues have emerged from the margin spells ‘anticorruption’ 7.1 rating, while the United Kingdomsqueeze on Chinese vendors based ranks 20th with a 7.6 rating. China’s growing significance as a playeron input cost inflation and pressure with global deal appeal is reflectedfrom Western buyers for higher pricing, EIU’s ratings, which date back to 1982, not only in emerging regulatory vigor,which has accelerated amid the show similar improvement in China’s but also in an improved showing ineconomic slowdown. legal and regulatory risk profile since assessments conducted by international 2002, especially with respect to fair organizations such as TransparencyThis is often more of a systemic competitive practices and prompt and International (TI), the Economistproblem that requires a systemic Intelligence Unit (EIU), and Thesolution. US companies frequently World Bank. 15 Transparency International and the University of Goettingen 21
  21. 21. EIU’s assessments are fair judicial proceedings.16 However, has increased imports, access to somebased on information this analysis also indicates ongoing sectors remains an uphill climb becauserelated to numerous risk concerns about contract disputes, of government restrictions in the high- corruption, and corporate governance. tech industry, petroleum, and certainindicators, including: mineral resources that are crucial to the The organization’s business risk country’s manufacturing base; foreign1. Security: armed conflict, terrorism, companies can face challenges in framework scores 180 countries violent crime and unrest, organized setting up direct subsidiaries in on a scale of 0 to 100, with 0 being crime, kidnapping and extortion these industries. At the same time, least risky, in an effort to quantify business profitability risks. The current the government might seek an2. Political stability: social unrest, EIU analysis, for example, deems ownership stake. disorderly transfer of power, Switzerland as presenting the lowest excessive executive authority risk with a score of 10; Somalia is Similarly, The World Bank, which rates3. Government effectiveness: excessive assessed as holding the highest risk countries on ease of doing business, bureaucracy, cronyism, corruption, to profitability, at 83. ranks China 91 out of 183 economies human rights abuses in its 2011 report.17 Note that a more4. Legal/regulatory: investment China falls somewhere in between, nuanced picture of China’s commercial protection, contract enforcement, with an overall score of 46, reflecting environment emerges when one fast and fair judicial process its improved business climate, considers its scores on specific elements substantial social change, and complex of doing business there as shown to5. Macroeconomic: recession, inflation, bureaucracy. Specific risk ratings for the left. currency, and interest rate volatility China include a 60 in regulatory risk6. Foreign trade/payments: capital and a 55 in political stability risk on In contrast, Hong Kong is ranked controls, trade restrictions, the higher (riskier) end; and, on the second, while Singapore earns the discriminatory tariffs lower (safer) end of the risk scale a top spot and the United States is7. Financial: availability of local 47 in infrastructure, a 38 in tax policy, fifth, based on a set of regulations financing, liquidity of local markets, and a 36 in foreign trade and payments. affecting nine stages of the business bank risk EIU’s findings reflect advancements life cycle, from getting started to in business law that are undercut by closing up shop and pivotal points8. Tax policy: tax rates, predictability, socioeconomic changes that could in between: managing construction and transparency, risk of retroactive threaten stability; rapid infrastructure permits, registering property, obtaining taxation advances; and high tax rates relative to credit, protecting investors, paying9. Labor market: trade union power, international levels. Although China taxes, cross-border trading, and labor unrest, right of free association contract enforcement.10. Infrastructure: port facility quality 16 Building a presence in today’s growth markets, The experience of 17 Doing Business 2012, 18 Making a Difference for Entrepreneurs, A Copublication of The privately held companies, PwC, 2011 and reliability, air transport, World Bank and The International Finance Corporation, 2011 19 Doing Business in Hong Kong, PwC, 2010 distribution, utilities, the Internet 20 http://www.gov.hk/en/about/abouthk/facts.htm Transparency International Corruption Perceptions Index 2010 Overall corruption score (1 = highly corrupt 10 = very clean) Overall ranking (178 countries surveyed) 54 S. Africa 4.5 69 Brazil 3.7 78 China 3.5 High 87 India 3.3 Medium Russia 2.1 Low22
  22. 22. The ‘World’s Hong Kong has actually been ranked A Special Administrative Region ofFreest Economy’ the ‘World’s Freest Economy’ for the People’s Republic of China, Hong nearly two decades in a report issued Kong was under British rule from the annually by The Heritage Foundation. mid- 1800s to 1997, when China took A regional business hub with over sovereignty under a ‘one country, international business chops, Hong two systems’ model. The Basic Law, Kong simply could not be any closer the Hong Kong Special Administrative to China geographically, linguistically, Region’s constitutional document, or culturally. As such, it’s a great place ensures that the political situation from which mainland investors can will remain in effect for 50 years; enter regional and global markets. individuals’ rights and freedoms are The Hong Kong government embraces based on the impartial rule of law a policy of ‘market driven with minimal and an independent judiciary.22 government interference’, in which foreign investment is welcome. It’s devoid of policies protecting local industry against foreign competitors.21 Chinas overall ease of doing business ranking of 91, the World Bank rated China as follows in these categories Ease of doing business: 1 = easiest; 183 = most di cult More challenging aspects of doing business in China Dealing construction permits 179 Starting a business 151 Paying taxes 122 Protecting investors 97 Accomplished in China with greater ease Enforcing contracts 16 Registering property 40 Trading across borders 60 Getting credit 67 23
  23. 23. Complex, yes. Compelling, probably.Inscrutable?24
  24. 24. “Deep doubts, deep wisdom; Anticorruption starts at the top withsmall doubts, little wisdom.” the board of directors and senior— Chinese proverb management. These efforts also demand support by rigorous internal and external communication andAre you ready to take a bite of the ongoing monitoring. A risk-basedpomegranate? You can enjoy the approach to your anticorruptionfruit without choking on all those program can help steer program focussmall seeds — if you can tie profit to and maintenance on an ongoing basis.disciplined, risk-based decision making. Be sure to perform enhanced dueSeven ways to protect your diligence before you head for thereputation, from your home base to airport. Independent businessthe streets of Beijing and beyond: intelligence collection and stepped- up due diligence gives leaders critical1. Prevent, control, and contain information to sharpen risk-based direct and indirect losses related decisions. It also shows regulators to corruption. that the company takes its commitment2. Choose your partners wisely and to integrity and corporate governance protect your intellectual property seriously. like a mother panda.3. Remain aware of local, regional, and Addressing anticorruption, home- jurisdictional quirks and nuances. country regulations and related provisions means increased4. Keep a watchful eye on operating collaboration across the risk, model efficiency when navigating compliance, finance, operations, the challenges of sustaining profits IT, HR, and business development amid pressure to salvage margins. functions. It also means building5. Bring local Chinese talent into the and maintaining an understanding business and bring your leadership of international anticorruption to the streets. frameworks, monitoring how policies and enforcement are changing, and6. Bring your market savvy: Know your assessing the implications for business customers and partners in China. strategy. Leading Multi-national - Know their income levels, their corporations (MNCs) have successfully cities, provinces, and towns. developed and implemented strategies - Know whether they work for or to reconcile Chinese commercial with the government. practices and FCPA requirements. - Understand how they do business. China is not inscrutable. But if you7. Be a model of unflinching business don’t ask the right questions, of your ethics on the world stage. operations and your aspirations, of your partners and your prospects, youThe first step: safeguard your won’t successfully complete the journeyoperations from corruption with that began so hopefully with that firsta thorough review of economic step. When it comes to corruption andopportunities and a risk analysis. corporate crime, strive to be a rat — the kind described by the Chinese zodiac: wise, perceptive, focused on the big picture, exercising good judgment, and poised to solve problems proactively. 25
  25. 25. Acknowledgements Managing Editor DesignerIssue 1 of Marketmap Jacqueline Corliss, Harry G. Broadman US Studio Contributors and Authors Beverly Barna Denise Messemer Ewa Knapik Alan Chu Curt Moldenhauer Clare Allenson
  26. 26. www.pwc.comContactsHarry G. Broadman(202) 312-0807harry.g.broadman@us.pwc.comSteven Skalak(646) 471-5950steven.skalak@us.pwc.comAlan Chu(213) 356-6520alan.chu@us.pwc.comCurt Moldenhauer(415) 498-6166curt.moldenhauer@us.pwc.com© 2011 PwC. All rights reserved.“PwC” and “PwC US” refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a memberfirm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is for general informationpurposes only, and should not be used as a substitute for consultation with professional advisors. LA-12-0022 Cyber Crisis Management VC

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