Transcript Slide 1

Four Steps to China
One billion hungry customers await you
Sponsored by
in conjunction with
&
China: What is Different and What Do You
Need to Know?
• China is not a country but a
continent!
• Branded consumer products
reach no more than 400 Million
consumers.
• There are 100 Million middle
class Chinese consumers.
• Major retailers account for no
more than 4% of a
manufacturer’s sales.
• The Chinese have a large and
invisible purchasing power.
You Can’t Be The World Leader in Anything
Without Being in China
• The most populous, fastest growing
economy in the world.
• Since the late 1970’s, China’s
economy has doubled 8 times.
– And, the US economy has doubled
once!
• The Chinese have 10 times the
purchasing power of 25 years ago.
– They will surpass US purchasing
power in 3 decades!
• The Chinese already consume…
– 12% of the worlds luxury goods
– 50% of the world’s concrete
– 33% of the world’s cigarettes
Speakers
Dave Fusaro, Editor in Chief of Food Processing, moderator
Alex Bryant, President of East West Associates (EWA), a consulting firm for U.S.
manufacturing companies accessing the global market, particularly Southeast
Asia and China. EWA assists clients with the formation of joint ventures and
wholly owned foreign enterprises, site selection for Asian manufacturing facilities
and sales offices, strategic planning and global logistics.
James M. Rice, Tyson Foods Inc.’s Vice President and general manager
Greater China, has been guiding the animal protein company’s successful
operations in China since 2004, Before that, he had 14 years of experience
setting up American businesses in China.
Jeff Olin, managing partner-international tax services U.S. for accounting firm
Grant Thornton LLP, specializes in preparing businesses for the world in terms of
global tax planning and analysis He consults with clients for both inbound and
outbound international transactions and assists with multinational tax planning to
reduce worldwide effective tax rates. He has degrees in both accounting and law.
Key Drivers Ensure Continued Positive
Outlook for China
• The country’s leadership is
committed to maintaining the
economic momentum.
• China is “Open for Business”
to foreign companies.
• WTO
• Clarity of Rules
• Rule of Law
• Privatization of state owned
enterprises.
Successful Companies Operating in China Follow
Simple Principles
• Don’t have a China strategy.
– Have a China vision and ambition, but focus within your
resources to understand and execute.
• Get your value proposition and route-to-market right.
• Adapt to a “Made in China” business model.
– Flexibility to approach the market is critical, KFC and Carrefour
are the best examples in China.
• Speed, Innovation, and Focus.
• Recruit and retain good local talent.
– The Achilles’ heel of company operations in China.
• Build two tier pricing strategy with existing local brands and the
Tyson brand.
Strategic & Tactics/ Thinking:
Phase 1
• Types
of Organizations
• Business Plan
• China Management Structure and Integration
• Site Selection/Negotiation
Hong Kong/ China investment typical
structures
1.
Parent
2.
Parent
3.
China
Hong
Kong
Hong Kong
4.
Parent
5.
Parent
Parent
Hong Kong
Holding Co.
China
Option 1 to 4
above
China
Types of Organizations
• Representative Office
• Foreign Investment Enterprise
(FIE)
– Equity Joint Venture (EJV)
– Cooperative Joint Venture
(CJV)
– Wholly Foreign-Owned
Enterprise (WFOE)
• Others – China Holding Co.
Representative Office - Setup
• Limited scope of activities
–
Not permitted to perform direct business or receive business
income
• Simple to setup, no capital commitment and less
statutory compliance requirements
• Still common
–
–
–
Market research, liaison services, and other preparatory &
auxiliary activities
RO can sponsor non-Chinese citizen to work in China
RO can hire local Chinese via specified local HR agents
(FESCO)
China Structures – Tax Summary
Representative
Office
•
•
•
•
•
•
Tax Rate 33% (or 15% in
Special Economic Zones)
This will ??? to 24% to 27%
Business Tax 5% on taxable
services
Business Tax 5% on grossed
up services under cost plus
method
• Methods
– Actual Income Methods
– Deemed Income Methods
– Cost Plus Method
Wholly Owned
Equity/Contractual
Foreign Enterprise
Joint Venture
Absent incentives taxed at 33%
15% (or lower) in Special Economic Zones
Ultimate rate will decrease to = 24% to 27%
Your Business Plan Must Include
•
•
•
•
•
•
•
•
•
•
Salary/Salary inflation/social programs/housing schemes
Sensitivity analysis with assumptions of worst case scenarios and effect on
business viability
Detailed list of needed equipment by vendor and cost
Tax implications for imported equipment – new & used- capital equipment
purchases
Duties and tariffs on raw material and finished goods imported and exported
Complete staffing, training and associated costs, including manufacturing and
administrative staffs
Cost of service providers: accounting, law firms, consultants, insurance, executive
search firms, etc.
Cash flow management and GAAP (China and U.S.)
Tax and tax minimization
CPA costs for financial oversight and auditing
Tyson’s China Management Structure and Integration
• Acquire majority ownership in successful regions
companies in our categories (Chicken, Beef, and
Pork).
• Retain existing local management team and business
model, without high overheads and expatriates.
China Management Structure and IntegrationQuestions you must answer before you move forward
• What does your company envision as the model for
management of the China facility and subsequent oversight?
• What is your company’s vision of the eventual steady state
business model and how will this evolve?
• How will key executive positions be staffed (expat vs. local)?
• Is there a senior executive appointed exclusively to manage the
China operations?
• Is there a “mapping process” which identifies appropriate
partner to partner interactions (i.e. U.S. executive to specific
China executive)?
Site Selection
& Negotiation
• Identify site selection (SS) criteria for
company
• Confirm services provided by various
Chinese business park, tax
incentives, documentation support,
etc.
• Identify company’s fit-up and base
building needs and renovation costs
• What is the optimal negotiation
strategy based on financial
projections of the BP, including lease
costs, lease period and extensions,
fit-up an decoration expenses, tax
rate and incentives?
Formation and Post Formation Activities:
Phase 2
• Identify U.S. and Chinese service
providers like accounting, legal,
insurance, executive search firms,
payroll outsourcing firms and their
local representatives
• Obtain required documentation and
permits
– Environmental Impact Statement
– Feasibility Study
– Articles of Associations
– Registered Capital Declaration
Business License
Logistics and Forecasting/PO/Invoicing,
Operation Set-up, and Key Staffing and
Training: Phase 3
Logistics and Forecasting/PO/Invoicing
• Has your company completely validated the Business model with
existing suppliers? Has your company identified PRC suppliers?
• Develop a process to ensure invoicing integrity based on order
changes and modifications to customer’s specifications
• Your company must develop in-depth profiles on the flow of parts
into/out of the new China facility.
• Confirm your company’s policy for inter-company business (i.e.
consign materials or sell using Transfer Pricing or full market
price model)
Operation Set-up
• Define and prioritize integration strategy for IT’s immediate and
long-term needs.
• Develop Quality Assurance and Validation Plan for entire process
(i.e. supplier qualifications, incoming qualification of suppliers,
operations training).
• Define factory material flow with process and routings.
• Identify your equipment’s import/export compliance, logistics or
ordering and receiving, installations and qualification.
• Define your company’s Environmental/OHS plan to ensure
compliance and oversight
Key Staffing and Training
• Outline initial staffing process for
key hires: GM, CFO, H/R, Supply
Management and Logistics (SML,
Product Development and future
staffing schedule for additional
hires.
• Create job descriptions.
• Create process to execute
government mandated programs
(i.e. pensions, unemployment
insurance, housing fund,
hospitalization and maternity
insurance).
Employee Taxes
• If expats employed by China or costs are charged back, full China
tax
• If not employed, then the standard 183 day test applies provided the
citizenship is with a treaty country
• Tax rates vary from 5% to 45% (45% applied after taxable income of
RMB100,000)
• work visas are required
• For local employees, Social Security costs range from 20% to 61%
(but change from time to time)
• Social Security now applies to employees from Hong Kong, Macau
and Taiwan
Cash Flow, Capital Strategy and
Asset Protection and PRC Taxes :
Phase 4
Cash Flow, Capital Strategy and Asset Protection: Phase 4
• Identify expected short term costs and annual expenditures
• Compare basic assumptions in the BP with existing costs on
salaries, raw materials, freight forwarding, start-up and facility
costs, and renovation expenses
• Define your company’s internal financial benchmarks for
measuring success (ROI, profit margins, sales growth) and
ensure process for gathering this information and dissemination
of it to senior executives
• Is your U.S. company being paid licensing, trademark or other
fees? If so , what U.S. tax is the company paying on these fees?
• Identify your company’s policy governing profit generated in
China. Will these profits remain in China to fund capitalization
efforts or will the profits be repatriated back to the U.S.? What
US. Tax is paid on the repatriated profits?
PRC tax exposure
Rate
Foreign
Enterprise 33% (also 24%
and 15% rates)
Income Tax (FEIT)
Comments
Tax holiday 2 years, plus
3 years half tax
Business Tax
3% to 20%,
normally 5%
Applies to services
VAT
Normal rate 17%
Refund rate reduced to
13% (normally)
Key Considerations
Business Objectives
Type of Business
Exit Strategy
Property Issues
Human
Resources
China
Exchange Control
Financing/
Capital
Requirements
Business Plan
IP Protection
Where to organize
Transfer Pricing
Structuring
Profit Repatriation