Transcript THE U.S. COMMERCIAL SERVICE AND CHINA

China: Opportunities,
Challenges & Market Entry
Strategies
Barry Friedman
Minister-Counselor for Commercial Affairs
U.S. Commercial Service
U.S. Embassy, Beijing
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The China Opportunity
and Challenge
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The China Dream
• China consumes 40% of the world’s cement, 41% of
the iron ore and 35% of the coal
• Second largest consumer of oil after the US
• Second largest market for vehicles after the U.S. with
sales of 7.22 million units
• 100 million mobile phones were sold in 2006
• 140 million internet users – 77 mil via broadband
• China’s GDP growth continues at over 10% and will
likely continue at that level for some years to come
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Long-Term Dimensions
• China has been the world’s largest manufacturer for
at least 3,000 of last 4,000 years.
• In 1820, China represented 33% of world GDP, vs.
2% for USA. In 2006, China 15% vs. U.S. 20%
• Historic tide shifted in 1842 with Opium War,
colonialism,disintegration, WW2 and Communism.
• In 1979, Deng Xiaoping introduced economic reforms
and opening to the outside world. Confirmed in 1992.
• Initiated a 28 year process of 6–14% annual GDP
growth. Average 9% growth.
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Annual GDP Growth (YoY, %)
11
10.5
10
9.5
9
8.5
8
7.5
7
6.5
6
5.5
5
1997 1998
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1999
2000 2001
2002 2003
2004
2005 2006
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China in a Time of
Transition
– Confucian to modern
– Communist to market-driven (not capitalist)
– Rural and agrarian to urban and industrial
– Development of Rule of Law
– Economic Autarchy to global integration
– Rise in expectations -- “consumer culture”
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Headline News – 2006
• Fastest growing export market for the US
• U.S. exports to China $55 bn. in 2006, up 31%
• Trade deficit record $233 bn. FX reserves $1 trillion
• Per capita GDP up to approximately $ 1740 (nominal)
• China’s goal is to quadruple GDP in 20 years, which
implies an average 7.3% annual growth.
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US Deficit (USD billion)
U.S-China Bilateral Trade
Balance
232.55
250
201.6
200
162
150
124
103.1
83.8
83.1
2000
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2001
100
50
0
2002
2003
2004
2005
2006
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U.S. Exports to China
Jan – Dec (year on year)
60.00
55.22
50.00
41.84
40.00
USD(b) 30.00
20.00
34.70
28.40
22.10
16.30 19.20
10.00
0.00
2000
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2001
2002
2003
2004
2005
2006
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Chinese Trade Balances
In USD billion
969.32
791.79
762.3
800.0
700.0
600.0
500.0
400.0
300.0
200.0
660.2
560.8
593.6
413.1
438.5
295.3
225.1 243.6 325.6
249.2 266.4
100.0
0.0
Imports
Exports
177.5
102.1
Trade B
24.1 22.8 30.3 25.4 32.8
2000 2001 2002 2003 2004 2005 2006
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Composition of U.S.- China
Trade 2006, Top 12
HS
1
2
3
4
5
6
7
8
9
10
11
12
U.S.-Exports to China
85
Electrical Machinery, Etc.
84 Machinery; Reactors, Boilers
88
Aircraft, Spacecraft
90 Optical, Medical Instruments
12
Misc. Grain, Seed
39
Plastic
72
Iron and Steel
29
Organic Chemicals
52
Cotton and Yarn, Fabric
47
Woodpulp, Etc.
76 Aluminum and Articles Thereof
87
Vehicles, Not Railway
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(m USD)
% Change
10177.9
7704.3
6089.6
2941.3
2584.6
2715.6
1800.3
1418.3
2081.8
1473.6
1735.4
1291.0
48.2
21.1
40.3
22.5
13.1
20.0
12.8
-6.3
46.9
48.1
83.4
37.3
1
2
3
4
5
6
7
8
9
10
11
12
HS
U.S. Imports from China
(m USD)
% Change
85
84
95
94
64
62
73
61
39
42
87
90
Electrical Machinery, Etc.
Machinery; Reactors, Boilers
Toys and Sports
Furniture and Bedding
Footwear
Woven Apparel
Iron and Steel Products
Knit Apparel
Plastic
Leather Art; Saddlery, Etc.
Vehicles, Not Railway
Optical, Medical Instruments
64905.5
62266.1
20891.81
19358.48
13890.02
11857.62
8366.51
8010.007
7464.863
6835.478
5134.472
4787.12
22.3
18.1
9.1
13.5
9.2
15.9
35.0
21.8
12.5
9.2
22.0
16.0
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Economic Challenges
•
•
•
•
•
•
Unemployment  Rural Migration
Over supply  Bad debt  Deflation
Poor legal environment  Corruption
Strengthening the financial system
Pollution control and lack of water
Electric Power demand / supply equilibrium
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Best Export Prospects for
US Companies in 2006
• Agrochemicals
• Air Traffic Management
Equipment Market
• Safety and Security Market
• Automotive Components
Market
• Coal Mining Equipment
• Construction Equipment
Market
• Banking Technology
• Credit Card Market
• Education and Training
• Franchising
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•
•
•
•
•
•
•
•
Semiconductor Industry
Machinery
Marine Industries
Liquefied Natural Gas
Power Generation
Software
Telecommunications Market
Water and Wastewater
Treatment
• Medical Equipment
Find research on these sectors:
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Best Prospects for US
Companies in China
• Coal Mining Equipment
– 75% of electricity is generated by coal, will be
going up to 85% in the next 7 years
• Commodities
– Minerals, Agriculture, Scrap
• Construction Equipment
– Building boom going on in China: 2008 Olympics,
2010 World Expo, 2010 Asian Games
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Best Prospects for US
Companies in China
• Cosmetics and Toiletries
– As income has risen, so have sales
• Education and Training
– 10% of income is spent on education
– E-learning
• Environmental Protection and Clean-Up
– Water, solid waste, medical waste
– Scrubbers, de-NOX, de-SOX
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Best Prospects for US
Companies in China
• Financial Services
– Banking, Insurance, and investment vehicles open up
to foreign investment, Credit Cards
• Franchising
– Food/beverage are doing well: Starbucks, KFC,
McDonalds. Beyond F&B
• Medical Equipment
– 70% of medical devices are imported
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Best Prospects for US
Companies in China
• Nuclear Power
– Start building 30 new reactors over the next 15 yrs
• Oil & Gas Exploration & Processing Equipment
– Pipeline and Storage
– Compressors
– Offshore Exploration Equipment
• Retail
– Wal-Mart, Office Depot, Home Depot
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Best Prospects for US
Companies in China
• Software
– Specialty software is 70% imported
• Telecom
– 3G applications
– Equipment
– Wireless LAN
– On-Line Gaming
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Market Drivers Rising Middle Class
• China’s GDP has exponentially increased in the past 10
years, resulting in a larger portion of the population in the
Middle Class.
• They are able to consume non-essential goods.
• Pent up demand for housing: 253 sq ft vs. 793 sq ft
• Domestic tourism growth: 25%
• Higher disposable income provides firms with a larger
market.
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Keeping up with the Chans
 20-year olds have known nothing but
upward mobility
 Luxury goods hot – from caviar to
Harley-Davidson to Louis Vuitton
 Western brands sell
 ‘Hypermarkets’ and retail chains
booming along with new construction
 Studies show most consumers
planning big ticket item purchases in
next 12 months
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Sectors to Watch: Lifestyle
 Health and beauty
 Travel and related services
 Entertainment
- music, movies and related
accessories
- outdoor activities & sporting
goods
 Home furnishings, fixtures
and appliances
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Market Drivers –
WTO Implementation
• Banking, financial services, insurance
• Logistics, distribution, trading rights,
retail
• Architecture, engineering and urban
planning services
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Improvement in
Market Conditions
• Most AmCham companies are
doing quite well in China. 73%
of companies say they are
profitable, while only 4% say
they are experiencing large
losses.
• Year over year results show
more companies moving from
profitable to very profitable.
• Ten years ago, the results
would have been reversed.
16%
Very Profitable
57%
Profitable
23%
Break Even/Small Loss
4%
Large Loss
Source: 2004 AmCham White Paper, American Business in China
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U.S. Company Objectives
Produce goods or services in China
for non-U.S., non China markets 3%
Export to China from countries
other than the U.S. 2%
Establish or expand regional base 5%
Support global customers 6%
Produce goods or services in
China for U.S. market 10%
Export to China
from the U.S. 14%
Shift manufacturing to
lower cost location 2%
Produce goods or
services in China
for the China
market 58%
Source: 2004 AmCham White Paper, American Business in China
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Anticipate Problems Macro
• Intellectual Property Rights
– Patent
- Trade Secrets
– Copyright - Trademark
• Industrial Standards and Certification
• Transparency/Corruption
• Payment issues and Dispute Resolution
• Price Controls and competition
• Approvals and certifications
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Anticipate Problems Micro
• Management-level human resources
• Navigating Bureaucracy
• Unclear Regulations / Inconsistent
Interpretation
• Lack of Transparency
• Contract Enforcement
• Economic nationalism: “Indigenous
Innovation” and Local Protectionism
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Market Entry Roadmap
Are you China Ready?




Avoid “Chinaforia”: research, filter, include many data points
Build IP protection into your business plan
Consider regulations – US and China
Due diligence, due diligence, due diligence




Set long- and short-term goals, including an exit strategy
Consider regional and industry specialization
Consider outsourcing back-office functions
Seek competent China-savvy legal advice and
professional assistance (avoid guanxi brokers)
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Market Entry Roadmap
 Direct Exports
 Sales Agent / Distributor
 Representative Office
 Wholly Owned Foreign Enterprise
 Foreign-Invested Commercial Enterprise (FICE)
 Joint Venture / Acquisitions / Various Partnering
 Gateways
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Sales Agent / Distributor ( I )

Advantages
– no investment in office overhead
– no registration requirements, no physical presence
– lower likelihood of non-payment
– no responsibility for customs clearance

Responsibilities
– Comply with safety and quality certifications, China Compulsory
Certification, other standards requirements
– Comply with the U.S. Foreign Corrupt Practices Act
– Comply with U.S. Export Control regulations
– Prepare a contract that protects your legal interests, see a local attorney
– Closely monitor the agent / distributor’s activity
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Sales Agent / Distributor ( II )

Manage Expectations
– use worldwide selection criteria, then evaluate skill sets
– explore their view of market prospects, approach to business
development
– ask to see a prior marketing plan and market research report
– discuss cost sharing for Chinese language brochures, participation in
trade shows, demonstration equipment, training in the U.S.
– contract should contain clear reporting requirements and performance
goals to monitor whether the Chinese company can do what it purports
to be able to do
– evaluate capacity to stock and warehouse
– consider profit motive of STE versus private firm.
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Sales Agent / Distributor ( III )
 Due Diligence
– Many exaggerate trade experience, check trade references
– Ask for a copy of the firm’s business license, SAIC inspection,
trading rights license, visit business premises
– Triangular debt common for entities lacking trading rights and
foreign exchange
– Obtain a DD report through local service providers or CS.
China lacks a corporate credit rating system
– Government system for verification of business registration on line
is emerging – SAIC Red Shield (Hong Dun) Program
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Sales Agent / Distributor ( IV )
 Contract Terms
– seek professional legal advice before contracting, do not rely
upon your Chinese business partner
– ensure the dispute resolution clause limits time for “friendly
discussion or mediation”
– do not accept obligations outside of your control: visas, export
licenses
– do not export on open account or D/P terms
– ensure contract has non-competition and non-disclosure clauses
to protect trade secrets, in the event the relationship ends badly
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Representative Office

RRO may perform a useful government liaison and marketing function,
contract implementation. Useful for getting into government procurement
projects.

Restrictions on business scope apply:
– not allowed to engage in profit-making activity
– not allowed to directly import and distribute product
– not allowed to service equipment or warehouse spare parts

Establishment of physical presence now requires only local registration. The
cost to support a modest RRO $250,000-500,000 depending on location and
size.

Registered capital in the amount of $10,000 still required.
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Foreign-Invested Commercial
Enterprise
 Market entry vehicle for domestic wholesale and retail
distribution
 Scope of operation includes “trading rights,” meaning the
right to import or export goods manufactured by third
parties into or out of China.
 Scope of operation includes “distribution rights,” meaning
right to sell products for its own account on retail or
wholesale basis, import for sale within China, purchase
domestic products for export and perform related
services.
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Foreign-Invested Commercial
Enterprise
 Restriction on ownership share lifted - WFOE generally
allowed
 Geographic restrictions abolished.
 Minimum registered capital reduced from $6 million for
retail and $9.6 million for wholesale to $36,000 and
$60,000 respectively.
 No minimum on prior annual sales, was $10 million or
more per annum prior to 12/11/04.
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In China…
Everything is possible, nothing
is easy.
~ McDonald’s theorem
Where to go
for help?
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Find the right markets and
partners with our proven
products and services
 Trade counseling
 Major project advocacy
 Customized Market Research
 Tailored appointments
 Partner searches
 Basic due diligence
 Marketing promotions
 Trade Missions, Trade Fairs and Catalog Exhibitions
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IPR Resources
 The US Embassy in Beijing has an IPR Toolkit website
http://beijing.usembassy-china.org.cn/ipr.html
 China IPR Advisory Program one hour of free IPR consultation with
a legal expert
 US Patent & Trademark Office offers
free China conferences
 IP webinar series (www.stopfakes.gov)
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14 Secondary Cities with
American Trading Centers
More Market Access. Same Quality Service.
 Dalian
 Qingdao
 Chongqing
 Shenzhen
 Hangzhou
 Tianjin
 Harbin
 Wuhan
 Kunming
 Xiamen
 Nanjing
 Xian
 Ningbo
 Zhuhai
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We have trade experts on the
ground in China who can help
you succeed
The U.S. Commercial Service has approximately 125
Commercial Service officers and trade specialist living and
working in China.
You’ll find us in:
 Beijing
 Shanghai
 Guangzhou
 Shenyang
 Chengdu
 Hong Kong
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