A guide for retailers on expansion in China

Alvise Donà dalle Rose, Partner Eversheds BianchiniMilan, 8 April 2013

Retail in China

• Macro Dynamic• Legal Framework• IP Protection• Corporate• Commercial contracts

Topics

Eversheds retail team

• One of the largest full service law firms across Asia, Europe, the Middle East and Africa

• Offer sector specific advice on the options for expansion• Extensive experience in advising regulatory environment,

advertising and promotions, branding and competition

Ranked in the top tier of retail practices and recommended for client service by Chambers and Partners every year from 2006-2012

Commercial ContractsCommercial Contracts

China offices key Areas of Practice

Litigation and Dispute Management

Litigation and Dispute Management

M&AM&ACompliance and

RegulatoryCompliance and

Regulatory

General CorporateGeneral

CorporateIPIP

Debt and equity capital markets

Debt and equity capital markets

Private Equity and Restructuring

Private Equity and Restructuring

TechnologyTechnology

EmploymentEmploymentBanking and FinanceBanking and Finance

Our clientele includes major MNCs, state-owned and private PRC companies, international banks and financial institutions, professional services companies, government and regulatory bodies. We service a wide range of sectors as detailed below

InsolvencyInsolvency

China offices key Industry Sectors

TransportTransport

Defence and Security

Defence and Security

AerospaceAerospaceEnergyEnergy

Industrial EngineeringIndustrial

Engineering

Financial InstitutionsFinancial

Institutions

RetailRetail

Food and DrinkFood and Drink

EducationEducation

TMTTMTHealthcareHealthcare

With one of the largest employment teams in the

UK, we manage over 5.500 employment cases

per year

With one of the largest employment teams in the

UK, we manage over 5.500 employment cases

per year

One of two law firms to pass the 100 mark in number of rankings

in the independent legal directory Chambers, leading the

way with 128 firm rankings

One of two law firms to pass the 100 mark in number of rankings

in the independent legal directory Chambers, leading the

way with 128 firm rankings

Polls show that Eversheds is the leading non-US law

firm working with US clients

Polls show that Eversheds is the leading non-US law

firm working with US clients

Eversheds – The Facts44 offices across 26 jurisdictions within Europe, the Middle

East, Asia and Africa

44 offices across 26 jurisdictions within Europe, the Middle

East, Asia and Africa

Service Ethos:Excellence in service delivery is

our first commitment; a service which is tailored and

guarantees to exceed your expectations

Service Ethos:Excellence in service delivery is

our first commitment; a service which is tailored and

guarantees to exceed your expectations

Preferred law firms across 150 countries including

Africa, India, Latin America, Russia, USA

Preferred law firms across 150 countries including

Africa, India, Latin America, Russia, USA

Providing control over

costs

Providing control over

costs

Relationship lawyers –

pioneers of partnering in

the legal market

Relationship lawyers –

pioneers of partnering in

the legal market

Advocates of transparency,

value based billing and

closer working relationships – aiming to reflect value of work done;

not the cost of providing it

Advocates of transparency,

value based billing and

closer working relationships – aiming to reflect value of work done;

not the cost of providing it

Highly rated for corporate finance work

Highly rated for corporate finance work

Over 4,000 people, including more than

500 partners and 1900 legal advisers

Over 4,000 people, including more than

500 partners and 1900 legal advisers

The most top tier rankings of any

firm in the independent legal

directory Chambers UK

2012

The most top tier rankings of any

firm in the independent legal

directory Chambers UK

2012

Practising proactive legal and risk management:

prevention not cure

Practising proactive legal and risk management:

prevention not cure

Global reach

Global reach Asia

Macro dynamics

Setting the scene

Alvise Donà dalle Rose, China deskEversheds Bianchini

China in one wordUrbanisation

China’s urban billion

• China has more than 1,3 billion residents more than 500 million of which live in towns. McKinsey predicts near 400 million new urban residents by 2030

• The most important China towns are usually divided in four Tiers

Tier 1: Beijing, Shanghai, Guangzhou, Shenzhen Tier 2: Chongqing, Xi’an, Changsha and other 40

towns Tier 3: Changzhou, Xining, Nanyang, Xuzhou

and other 130/135 towns Tier 4: around 90 towns

People/place

Shanghai

Shanghai too

FYP 2011-2015

• China's 12th Five-Year Plan (FYP, 2011-15), is expected to continue funnelling major investments into Tier 2 cities

• The plan focuses on seven strategic emerging industries: biotechnology, high-end equipment manufacturing, new energy, new-energy vehicles, new materials, and next-generation information technology

• According to PRC state media reports, the government is considering a $738 billion 10-year energy plan that will develop clean energy sources

Planned economy

• 12th Five Year Plan– Investment Catalogue

• Economic targets– GDP growth 7% annually on average– 45m+ jobs created in urban areas– Urban registered unemployment no

higher than 5%– Prices to be kept generally stable

12th five year plan• Innovation

• Environment and clean energy

• Agriculture

• Livelihood

• Social management– Improved public service for both urban and rural residents– Better social management system for greater social harmony

Innovation: e-tailing

• 700 million Chinese registered with Alibaba.com*• Since 2003 e-tailing industry posted more than

100% compound annual growth**• In 2012 e-tailing produced sales of little less than

200 billion $ with a broadband penetration of 30%.

• On 11 November 2012 through Taobao and T-mall (B2B) 3 billion $ of products were sold

(double of 2001 offline sales of Black Friday)*• In 2020 online sales could reach 700 billion $* Corriere.it 30 November 2012 **MKI March 2013

Tier 2 towns: a huge market

• Chongqing:10 million residents (southern China)• Xi’an: more than 9 million residents only in the

old town (at least 18 million within the city belt)• Changsha:7 million residents – head of Hunan

province• In Tier 1 towns prevails the “brick and mortar”

business• In Tier 2 towns prevails the e-commerce. Huge e-

marketplaces allow small enterprises and individuals to sell products online without paying intermediation fees and distribution costs.

Development of ancillary services

• The e-tailing marked dimension entails the growth of ancillary services like:- Warehousing and delivery- Payment services- Online advertising and search engines- Software to manage the business (ERP) - Consulting services

• The full value chain generated 13 million $ revenues in 2011*

* MKI March 2013

Environment and clean energy

Pollution smog in Shenyang, (province of Liaoning) (Reuters)

TreatmentsWastewater treatment

•Analysts expect that the country's total wastewater output will reach 79 billion tons by 2015 because of rapid urbanization and industrialization

•The PRC government plans to build new facilities and upgrade existing ones, resulting in a large demand for technology and components.

Solid-waste treatment

•China is the world's largest producer of municipal solid waste (MSW).

•To reduce the amount of MSW, the PRC government is making investments to improve its solid-waste treatment capabilities.

•A very high per cent of China's landfills do not meet international standards because of capacity constraints and unsanitary conditions.

China State Council Guidelines Feb 2013

• Change to the economic development strategy

• Sustainable “scientific development”

• Driving the economy by domestic demand

•Moving to higher value-added and high-tech products

• Higher wages

•New cities to be built as population shift from rural to urban

• Spending more for social services for the people

China State Council Guidelines Feb 2013

Aims •increase resident’s income

•narrow income distribution disparity

•regulate the distribution order

Targets

•state firms and government employees and officials

•tax and financial sector

•rural poor and social safety net

(continue)

China State Council Guidelines Feb 2013

Wall Street Journal (February 5, 2013)Sweeping policy guidelines to narrow the growing gap between rich and poor…and pay for ambitious welfare programs

The Guardian (February, 6, 2013)“China unveils major tax reforms to make rich pay more”

But even before the changes were apparent

Wall Street Journal (January 17, 2013)“A long-term trend of rising wages and other costs has made china less attractive, specially for basic manufacturing…total foreign direct investment flowing into China fell 3.7% in 2012”

(continue)

Costs are soaring

• Coastal provinces– Labour– Land prices– Regulations– Taxes

The end of cheap China (The Economist, 10 March 2012)

What will replace cheap China?

5% annual rise in currency and shipping costs

+30% annual rise in wages

=Cheaper to make in US than China (incl. shipping) by 2015

Proverbs

• 同床异梦 Same bed, different dreams• 创业难 守业更难 To open a shop is difficult,

to keep it open is the art of survival• 木秀於林 风必摧之 It is the beautiful bird that

invariably gets caged• 不知则问 其惑一时 不知不问 惑其一生 He who

asks a question is a fool for five minutes; he who does not ask a question remains a fool forever

Questions & Answers

Thank you !

www.eversheds.it

Eversheds Bianchini

Eversheds Bianchini contact detailsFor further information please contact:

Alvise Donà dalle RosePartner, China Desk+39 02 89287 733+39 335 5400631alvisedona@eversheds.it