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China’s Business Environment

                            October 22, 2009




    Prepared by The JLJ Group – Solutions f...
AGENDA


• China at a Glance
• The Chinese Consumer
• The Tier-2 Cities
• Development Zones
• Modes of Entry in China




...
China at a Glance
                                                                                              Category  ...
China is Similar to Europe More Than the US…
                • Relatively homogeneous market
                • Relatively ...
China by the Numbers
                                       Real GDP of Top 10 Countries (2008)
               [US$ Tril]
...
China by the Numbers II


                                                     China Real GDP: 1985-2008
                 ...
China by the Numbers III


                      [US$ B]                   China Utilized FDI: 1985-2008
                 ...
The Income Gap
                                                     GDP per Capita in 2008




                           ...
DOING BUSINESS IN CHINA
                                       Overview
• Opportunities in China do exist - country has be...
AGENDA


• China at a Glance
• The Chinese Consumer
• The Tier-2 Cities
• Development Zones
• Modes of Entry in China




...
The China Consumer

                                      Growth of Consumer Spending,
                                Urb...
The China Consumer II
                                                   Consumer Spending by Goods,
                     ...
The China Consumer III
                        Localization - The KFC Model




                         KFC – China Menu
...
AGENDA


• China at a Glance
• The Chinese Consumer
• The Tier-2 Cities
• Development Zones
• Modes of Entry in China




...
Tier-1 vs. Tier-2 Cities



                        • Most expensive cities in China
 Tier-1 Cities          • Highly satu...
Tier 2 Cities
                                             15 Tier-2 Cities with ~10% of Total Population…




           ...
Tier-2 Cities II
                               The Approach
                       • Each city is a different market, off...
Tier-2 Cities III
                                                     The Costs of Doing Business
                       ...
AGENDA


• China at a Glance
• The Chinese Consumer
• The Tier-2 Cities
• Development Zones
• Modes of Entry in China




...
Development Zones
                                        History

•   Implemented by the government to encourage foreign ...
Development Zones II
          Economic and Technological Development Zones (EDZ)




•   54 EDZ’s throughout China
    pr...
Development Zones III
                        Free Trade Zones (FTZ)




•   12 FTZ’s located in China
•   Established to ...
AGENDA


• China at a Glance
• The Chinese Consumer
• The Tier-2 Cities
• Development Zones
• Modes of Entry in China




...
Modes of Entry
                                           Overview

•   Business setup process difficult for foreign compa...
NATURE OF THE INVESTMENT
                                        Foreign Investment Catalog


Status of
                  ...
FOREIGN INVESTMENT CATALOG
                                                              Legal Set up Options


          ...
Nature of Business


                 Import/Export          Domestic               Service               Capital     Regi...
Entity Options Analysis
                                                        Sourcing


                               ...
Entity Options Analysis
                                                           Services




                          ...
Capital Requirements
                                     Injection Methods

  Total Investment             Registered Cap...
Capital Requirements
                Investment Ratio Examples


Example 1

                                              ...
Business Registration Process
                                                               WFOE
                        ...
China by the Numbers


                                           FDI By Investment Vehicle
                              ...
A Few Last Points…

•   China is not a mystical land of dragons and forbidden cities
       The Chinese have many of the s...
THANK YOU FOR YOUR ATTENTION!
The JLJ Group

SHANGHAI OFFICE                                                              ...
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China Business Environment Oct 2009

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Brief introduction to China\'s market conditions

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Transcript of "China Business Environment Oct 2009"

  1. 1. China’s Business Environment October 22, 2009 Prepared by The JLJ Group – Solutions for China Entry & Growth Copyright @ 2009 The JLJ Group. All rights reserved. 1 1
  2. 2. AGENDA • China at a Glance • The Chinese Consumer • The Tier-2 Cities • Development Zones • Modes of Entry in China Copyright @ 2009 The JLJ Group. All rights reserved. 2
  3. 3. China at a Glance Category Description 9.56Mil sq. KM ( Europe: 10.18Mil Area sq. KM; 28x the size of Finland.) Population 1.34 B (Europe: 731 Mil; Finland 5 Mil; 1/5 of world’s pop.) GDP1 (’08) US$ $4.2 Trillion (Europe GDP / capita US$ (’08) $3,134 • 656 cities, 48,000 districts • 22 Provinces (not including Taiwan) • 2 Special Administrative Regions – Hong Kong, Macau Administration • 5 Autonomous Regions – ~2,170 miles Guangxi, Inner Mongolia, Ningxia, Tibet, Xinjiang • 4 Municipalities – Beijing Chongqing, Shanghai, Tianjin Language Mandarin Chinese +7 major dialects and 80+ minority ~3,100 miles languages Slightly Smaller Than Europe; Almost Twice the Population Copyright @ 2009 The JLJ Group. All rights reserved. 1) GDP - Gross Domestic Product based on current exchange rate, does not take into account purchasing 3 power parity.
  4. 4. China is Similar to Europe More Than the US… • Relatively homogeneous market • Relatively similar cultural background • Common language • Common Law • Highly segmented market • Multiple countries and cultures • Multiple languages • Predominately Civil Law • Segmented market • Regional cultural differences • Multiple language dialects • Civil Law …with a non-homogeneous market and significant segmentation Copyright @ 2009 The JLJ Group. All rights reserved. 4
  5. 5. China by the Numbers Real GDP of Top 10 Countries (2008) [US$ Tril] 16 14.3 14 12 10 8 6 4.8 4.2 3.8 4 2.9 2.8 2.4 1.7 2 1.6 1.2 0 GDP / Capita 46,400 38,700 3,100 35,400 44,700 43,700 39,800 12,000 10,000 1,000 US $ Per Capita GDP Significantly Lower than Developed Countries Copyright @ 2009 The JLJ Group. All rights reserved. 5
  6. 6. China by the Numbers II China Real GDP: 1985-2008 [US$ Tril] 4.5 4.2 Tril 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Growth has Slowed to 6-8% Since Economic Crisis at the End of 2008 Source: JLJ analysis based on multiple sources Copyright @ 2009 The JLJ Group. All rights reserved. including the National Bureau of Statistics 6
  7. 7. China by the Numbers III [US$ B] China Utilized FDI: 1985-2008 100 92.4 Bil 90 80 70 60 50 40 30 20 10 0 China is the Second Largest Recipient of FDI * FDI - Foreign Direct Investment Copyright @ 2009 The JLJ Group. All rights reserved. Source: National Bureau of Statistics 7
  8. 8. The Income Gap GDP per Capita in 2008 BEIJING Bohai Bay Area Yangtze River Delta Legend - Annual Income (US$) SHANGHAI Pearl River Delta Most FDI and growth concentrated along coastal areas Two thirds of Tier-2 cities are in coastal area Source: National Bureau of Statics of China Copyright @ 2009 The JLJ Group. All rights reserved. 8
  9. 9. DOING BUSINESS IN CHINA Overview • Opportunities in China do exist - country has been opening up, growth rates are impressive, population is getting wealthier, FDI has been pouring in… • However, competition is fierce; China market should be approached gradually, un-emotionally and with realistic expectations • Long-term vision is a must, quick profits are unlikely – time, money and effort are necessary • There is no such a thing as one China market, rather several regional/ provincial/ local markets • Gaining local knowledge is crucial – adapt your business practices to the local environment • Conducting proper due diligence, developing a sound strategy, and legal framework are key success factors Proper Preparation and Planning are Key Copyright @ 2009 The JLJ Group. All rights reserved. 9
  10. 10. AGENDA • China at a Glance • The Chinese Consumer • The Tier-2 Cities • Development Zones • Modes of Entry in China Copyright @ 2009 The JLJ Group. All rights reserved. 10
  11. 11. The China Consumer Growth of Consumer Spending, Urban consumption 2004-2007 [US$ B] CAGR*= 14% Rural consumption 1,500 1,200 900 1020 764 873 600 680 300 258 283 310 352 0 2004 2005 2006 2007 Consumer Growth is Being Driven by the Urban Population *CAGR = Compound Annual Growth Rate Copyright @ 2009 The JLJ Group. All rights reserved. Note: Exchange Rate: US$ 1 = RMB 6.8; Figures will be updated after consumer spending statistics of 2008 are published in October 2009 11 Source: JLJ analysis based on figures from National Bureau of Statistics of China
  12. 12. The China Consumer II Consumer Spending by Goods, 2007 5% 3% Food 5% 33% 8% Housing Transport & communication 8% Education & entertainment Clothing & footwear Medicine & healthcare Household durable goods 11% Financial services 16% Other 11% Almost Half of Consumer Spending is Still on Basic Necessities *CAGR = Compound Annual Growth Rate Copyright @ 2009 The JLJ Group. All rights reserved. Note: Exchange Rate: US$ 1 = RMB 6.8; Figures will be updated after consumer spending statistics of 2008 are published in October 2009 12 Source: JLJ analysis based on figures from National Bureau of Statistics of China
  13. 13. The China Consumer III Localization - The KFC Model KFC – China Menu Youtiao Congee Egg Tarts Localization Even More Important in Tier-2 Cities, Which are not as Cosmopolitan Copyright @ 2009 The JLJ Group. All rights reserved. 13
  14. 14. AGENDA • China at a Glance • The Chinese Consumer • The Tier-2 Cities • Development Zones • Modes of Entry in China Copyright @ 2009 The JLJ Group. All rights reserved. 14
  15. 15. Tier-1 vs. Tier-2 Cities • Most expensive cities in China Tier-1 Cities • Highly saturated markets • More sophisticated consumers • Usually lower overall operating costs Tier-2 Cities • More fragmented and nonexistent markets • Burgeoning middle class Tier 2 Cities May Offer Greater New Entry and Growth Opportunities Copyright @ 2009 The JLJ Group. All rights reserved. 15
  16. 16. Tier 2 Cities 15 Tier-2 Cities with ~10% of Total Population… Macro- Tier 1 Tier 2 China Economic cities cities Total Criteria (3 cities) (15 cities) Population 46 M 133 M 1,328 M GDP (’08) 473 B 893 B 4,200B (US$) FDI (’08) 20 B 57 B 92 B (US$) Teir-2 Cities receive nearly 62% of China’s total FDI inflow Source: National Bureau of Statistics (2008); JLJ analysis Copyright @ 2009 The JLJ Group. All rights reserved. Exchange rate : US $ 1 =RMB 6.83 16
  17. 17. Tier-2 Cities II The Approach • Each city is a different market, offering different opportunities and barriers • Many factors to consider: disposable income, openess Business to to foreign concepts, existing competition, local taste & Consumer preferences, etc. • Company-specific research & analysis necessary to develop Tier 2 strategy • Location analysis • Type of industry and size of investment Business-to-Consumer Business to Business • Customer & supplier analysis / logistics • Operating costs • Possible special policies or preferential treatment Often no obvious answers, doing “homework” is needed!!! Copyright @ 2009 The JLJ Group. All rights reserved. 17
  18. 18. Tier-2 Cities III The Costs of Doing Business Labor Costs (2008) - Shanghai as Baseline 1.20 1.00 0.93 1.00 0.87 0.92 0.77 0.77 0.78 0.78 0.79 0.80 0.81 0.71 0.72 0.72 0.74 0.74 0.74 0.75 0.80 0.65 0.67 0.68 0.69 0.60 0.53 0.57 0.58 0.40 0.20 0.00 Energy Costs (2008) - Shanghai as Baseline 1.20 1.00 1.00 0.84 0.88 0.75 0.80 0.69 0.58 0.61 0.61 0.62 0.51 0.51 0.52 0.53 0.53 0.53 0.56 0.60 0.43 0.43 0.44 0.44 0.45 0.46 0.49 0.49 0.36 0.40 0.20 0.00 Copyright @ 2009 The JLJ Group. All rights reserved. Source: Compensation survey of ChinaHR.com, Literature research; Booz & Company analysis 18
  19. 19. AGENDA • China at a Glance • The Chinese Consumer • The Tier-2 Cities • Development Zones • Modes of Entry in China Copyright @ 2009 The JLJ Group. All rights reserved. 19
  20. 20. Development Zones History • Implemented by the government to encourage foreign investment in specific industries and to provide incentives to promote investment in underdeveloped areas • First Zone was established in 1980s; there are approximately 6,000 zones in China 3 of the Major Zones: • Economic and Technological Development Zone (EDZ) • High-Tech Industrial Development Zone (HTDZ) • Free Trade Zone (FTZ) Other Zones Include: Logistic Parks, Costal Open Economic Zones, Tourist and Holiday Resorts, Taiwanese Investment Zones, Export Processing Zones, Special Economic Zones, Border Open Cities… Copyright @ 2009 The JLJ Group. All rights reserved. 20
  21. 21. Development Zones II Economic and Technological Development Zones (EDZ) • 54 EDZ’s throughout China predominately in urban areas • Primarily for Foreign Manufacturing enterprises • Tax Incentives normally include reduction of EIT rate to 15% for encouraged statuses Copyright @ 2009 The JLJ Group. All rights reserved. 21
  22. 22. Development Zones III Free Trade Zones (FTZ) • 12 FTZ’s located in China • Established to improve Import/Export and International Trade • Intended for assembly / processing of imported goods and export purposes • Streamlined customs clearance procedures • Various preferential tax treatments depending upon the FTZ Copyright @ 2009 The JLJ Group. All rights reserved. 22
  23. 23. AGENDA • China at a Glance • The Chinese Consumer • The Tier-2 Cities • Development Zones • Modes of Entry in China Copyright @ 2009 The JLJ Group. All rights reserved. 23
  24. 24. Modes of Entry Overview • Business setup process difficult for foreign companies to navigate due to complex bureaucracy and regulations - laws & regulations constantly changing • Regional differences may exist; national regulations may differ from local applications • There are three main legal setup options in China – Rep. office, WFOE and JV, with different capital requirements and business scopes • No one solution for all companies; solution depends on specific company’s business and objectives for China • When deciding on the optimal legal entity, look for advice and assistance from professional service providers – getting it right from the start is key Copyright @ 2009 The JLJ Group. All rights reserved. 24
  25. 25. NATURE OF THE INVESTMENT Foreign Investment Catalog Status of Description Examples industry/activity • Manufacture of high-performance welding • Special incentives possible Encouraged robots • Usually high-tech or agriculture industries • Operation of nurseries • All activities not mentioned in catalog are permitted Permitted • All sectors not mentioned in catalog • But may be difficult to get approval for uncommon activities • Special approval required – usually JV • Production of cigarettes Restricted partner necessary • Operation of oil refineries • Usually are protected sectors • Media production • Activities are disallowed • Arms manufacturing Prohibited • Harms national interests or • Operation of gaming industry environmentally damaging When considering setting up in China, first step is to check the catalog Copyright @ 2009 The JLJ Group. All rights reserved. 25
  26. 26. FOREIGN INVESTMENT CATALOG Legal Set up Options Investment Restrictions Setup Options Description Encouraged Permitted Restricted Prohibited • Liaison office for parent Representative Office (RO) company Foreign Invested Enterprises (FIE’s) Wholly Foreign Owned Enterprise (WFOE) • Service WFOEs • 100% invested and owned • FICE by foreign entities • Manufacturing WFOE •Trading WFOE • Capital investment from Equity Joint Venture (EJV) both foreign and Chinese entities Cooperative Joint Venture • Partnership between foreign (CJV) and Chinese entities Allowed business scope depends on specific sector and type of entity Copyright @ 2009 The JLJ Group. All rights reserved. 26
  27. 27. Nature of Business Import/Export Domestic Service Capital Registration Rights Distribution Activities Requirements Complexity Rep. Office Service WFOE Manufacturing WFOE FICE WFOE’s provide greater flexibility for future operations Copyright @ 2009 The JLJ Group. All rights reserved. 27
  28. 28. Entity Options Analysis Sourcing • Simplifies tax exposure (~8.8% on expenditures), registration complexity, & initial Conduct negotiations, QC for Parent investment company . Rep. Office • Heavy reliance upon 3rd party agents to facilitate trade • May cause additional tax exposure if effective Legal Gray Illegal management is within China • Not scalable • Allows more sophisticated means of tax Provide sourcing consulting services optimization Service exclusively to Parent Company • Heavy reliance upon 3rd party agents to WFOE facilitate trade • May cause additional tax exposure if effective Legal Gray Illegal management is within China • Not scalable • Allows for the flexibility to bring more of the supply chain in-house Source from within China then sell to • Platform for future domestic distribution FICE Customer direct • More sophisticated tax optimization • Allows more flexibility for future expansion of business scope and scalability Legal Gray Illegal • Greater administrative costs/overhead • May cause tax complications if used as a captive business model Copyright @ 2009 The JLJ Group. All rights reserved. 28
  29. 29. Entity Options Analysis Services • Simplifies tax exposure (~8.8% on Conduct services through local office expenditures), registration complexity, & initial while all invoicing is conducted offshore. investment Rep. Office • Not a substantial presence in the market; may deter potential clients • May cause additional tax exposure if effective Legal Gray Illegal management is within China • Must setup a separate RO to expand presence • Allows more sophisticated means of tax optimization • Direct hire of local employees Provide services and invoicing directly to • Substantial presence within China with ability Service local & International clients to issue Fapiao WFOE • Option to establish branch office to expand presence Legal Gray Illegal • May require higher upfront costs and greater overhead • May cause tax complications if used as a captive business model Copyright @ 2009 The JLJ Group. All rights reserved. 29
  30. 30. Capital Requirements Injection Methods Total Investment Registered Capital No less than 70% of total • Complete injection within 6 Less than 3 million investment, with a months minimum of 3,700 -or- • Capital contributed in No less than 50% of total installments: 20% within investment with a first 3 months with the Between 3 and 10 million minimum of 2.1 million if remaining injected within 2 total investment is below years 4.2 million Currency: US Dollars No less than 40% of total investment with a Between 10 and 30 million minimum of 5 million if total investment is below 12.5 million No less than 1/3 of total Between 30 and 36 million investment with a minimum of 12 million Copyright @ 2009 The JLJ Group. All rights reserved. 30
  31. 31. Capital Requirements Investment Ratio Examples Example 1 Registered Capital Equity (100%) Total Investment Example 2 Registered Capital Equity (70%) Debt (30%) Total Investment Shareholder loans are an alternative means of profit repatriation Copyright @ 2009 The JLJ Group. All rights reserved. 31
  32. 32. Business Registration Process WFOE Company’s Chinese Name Approval Stage I: Licensing Approval to Establish Company Registration of Business License Filing and Carving Seals* Enterprise Code Certification** Foreign Exchange Approval Registration with Tax Bureau Stage II: Post- Licensing Statistics Bureau Registration† Open RMB & Foreign Currency Bank Accounts Stage III: Capital Verification Post-Capital Injection Update Business License *Official company stamps required for many business and banking transactions in China ** Equivalent to a personal identification number for the licensed company •† This process can be completed at any stage following foreign exchange approval and registration with the tax bureau Copyright @ 2009 The JLJ Group. All rights reserved. 32
  33. 33. China by the Numbers FDI By Investment Vehicle WFOE EJV CJV 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Copyright @ 2009 The JLJ Group. All rights reserved. Source: National Bureau of Statistics 33
  34. 34. A Few Last Points… • China is not a mystical land of dragons and forbidden cities The Chinese have many of the same desires and needs as all of us It is possible to understand China and the Chinese in the context of your business, but… • There is no such thing as the “China Expert” The more that you know about China the more questions you will have Even the Chinese cannot grasp, in its entirety, the socioeconomic changes that are occurring within their own country • Cultural differences should not preclude standard business practices Chinese hospitality is often mistaken for commitment to a mutually understood business objective; do not let this undermine proper legal contracts Investing in market research, regulatory compliance and due diligence will increase your chances of developing sustainable business model • Foreign Invested Enterprises should not behave like locally owned companies Foreign firms are scrutinized more closely and held to stricter standards Train your staff to understand the difference Copyright @ 2009 The JLJ Group. All rights reserved. 34
  35. 35. THANK YOU FOR YOUR ATTENTION! The JLJ Group SHANGHAI OFFICE Shanghai Suite 603-605 Oriental Center 699 Nanjing West Road Shanghai, 200041 China Tel: +86 21 5211 0068 Fax:+86 21 5211 0069 BEIJING OFFICE Suite 1008, Tower B, Building 3, 22 International Art Plaza / Pingod North 32 Baiziwan Road, Chaoyang District Beijing, 100022 China Tel: +86 10 5876 9437 Fax:+86 10 5876 9467 Beijing BOSTON OFFICE 162 Chapel Street Newton, MA 02458, USA Tel: +1 857 636 2596 Email: info@jljgroup.com Web site:www.jljgroup.com Copyright @ 2009 The JLJ Group. All rights reserved. 35
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