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China: Opportunities, Challenges & Market Entry Strategies

China: Opportunities, Challenges & Market Entry Strategies

Barry Friedman

Minister-Counselor for Commercial Affairs

U.S. Commercial Service

U.S. Embassy, Beijing

Barry Friedman

Minister-Counselor for Commercial Affairs

U.S. Commercial Service

U.S. Embassy, Beijing


The China Opportunity and ChallengeThe China Opportunity and Challenge


The China DreamThe 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

• 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


Long-Term DimensionsLong-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.

• 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.


Annual GDP Growth (YoY, %)Annual GDP Growth (YoY, %)

55.5

66.5

77.5

88.5

99.510

10.511

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006


China in a Time of TransitionChina 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”

– 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”


Headline News – 2006Headline 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.

• 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.

Jenn Lee

Check if this figure is right for Shanghai. Should be higher?


U.S-China Bilateral Trade BalanceU.S-China Bilateral Trade Balance

83.8 83.1103.1

124

162

201.6

232.55

0

50

100

150

200

250

2000 2001 2002 2003 2004 2005 2006

US

Defi

cit

(U

SD

billio

n)

83.8 83.1103.1

124

162

201.6

232.55

0

50

100

150

200

250

2000 2001 2002 2003 2004 2005 2006

US

Defi

cit

(U

SD

billio

n)


U.S. Exports to China Jan – Dec (year on year)U.S. Exports to China Jan – Dec (year on year)

16.30 19.20 22.1028.40

34.70

41.84

55.22

0.00

10.00

20.00

30.00

40.00

50.00

60.00

USD(b)

2000 2001 2002 2003 2004 2005 2006

16.30 19.20 22.1028.40

34.70

41.84

55.22

0.00

10.00

20.00

30.00

40.00

50.00

60.00

USD(b)

2000 2001 2002 2003 2004 2005 2006


Chinese Trade BalancesChinese Trade Balances

243.6295.3

560.8

660.2

791.79762.3

969.32

24.1 22.8 30.3 25.4 32.8102.1

177.5225.1

413.1

249.2 266.4325.6

593.6

438.5

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

2000 2001 2002 2003 2004 2005 2006

Imports

Exports

Trade B243.6

295.3

560.8

660.2

791.79762.3

969.32

24.1 22.8 30.3 25.4 32.8102.1

177.5225.1

413.1

249.2 266.4325.6

593.6

438.5

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

2000 2001 2002 2003 2004 2005 2006

Imports

Exports

Trade B

In USD billionIn USD billion


Composition of U.S.- China Trade 2006, Top 12

HS U.S.-Exports to China (m USD) % Change HS U.S. Imports from China (m USD) % Change

1 85 Electrical Machinery, Etc. 10177.9 48.2 1 85 Electrical Machinery, Etc. 64905.5 22.32 84 Machinery; Reactors, Boilers 7704.3 21.1 2 84 Machinery; Reactors, Boilers 62266.1 18.13 88 Aircraft, Spacecraft 6089.6 40.3 3 95 Toys and Sports 20891.81 9.14 90 Optical, Medical Instruments 2941.3 22.5 4 94 Furniture and Bedding 19358.48 13.55 12 Misc. Grain, Seed 2584.6 13.1 5 64 Footwear 13890.02 9.26 39 Plastic 2715.6 20.0 6 62 Woven Apparel 11857.62 15.97 72 Iron and Steel 1800.3 12.8 7 73 Iron and Steel Products 8366.51 35.08 29 Organic Chemicals 1418.3 -6.3 8 61 Knit Apparel 8010.007 21.89 52 Cotton and Yarn, Fabric 2081.8 46.9 9 39 Plastic 7464.863 12.5

10 47 Woodpulp, Etc. 1473.6 48.1 10 42 Leather Art; Saddlery, Etc. 6835.478 9.211 76 Aluminum and Articles Thereof 1735.4 83.4 11 87 Vehicles, Not Railway 5134.472 22.012 87 Vehicles, Not Railway 1291.0 37.3 12 90 Optical, Medical Instruments 4787.12 16.0


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


Best Export Prospects for US Companies in 2006Best 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

• 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

• Semiconductor Industry• Machinery• Marine Industries• Liquefied Natural Gas• Power Generation• Software• Telecommunications Market• Water and Wastewater

Treatment• Medical Equipment

Find research on these sectors:www.export.gov/china

• Semiconductor Industry• Machinery• Marine Industries• Liquefied Natural Gas• Power Generation• Software• Telecommunications Market• Water and Wastewater

Treatment• Medical Equipment

Find research on these sectors:www.export.gov/china


Best Prospects for US Companies in ChinaBest 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

• 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



• 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

• 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



• 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

• 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



• 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

• 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



• Software– Specialty software is 70% imported

• Telecom– 3G applications– Equipment– Wireless LAN– On-Line Gaming

• Software– Specialty software is 70% imported

• Telecom– 3G applications– Equipment– Wireless LAN– On-Line Gaming


Market Drivers -Rising Middle ClassMarket 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.


Keeping up with the ChansKeeping 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

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


Sectors to Watch: LifestyleSectors 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

Health and beauty

Travel and related services

Entertainment

- music, movies and related accessories

- outdoor activities & sporting goods

Home furnishings, fixtures and appliances


Market Drivers – WTO ImplementationMarket Drivers – WTO Implementation

• Banking, financial services, insurance

• Logistics, distribution, trading rights, retail

• Architecture, engineering and urban planning services

• Banking, financial services, insurance

• Logistics, distribution, trading rights, retail

• Architecture, engineering and urban planning services


• 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.

• 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.

Source: 2004 AmCham White Paper, American Business in China

Very Profitable

Large Loss

Profitable

Break Even/Small Loss

16%

57%

23%

4 %

Improvement in Market ConditionsImprovement in Market Conditions


U.S. Company ObjectivesU.S. Company Objectives

Source: 2004 AmCham White Paper, American Business in China

Export to China from the U.S. 14%

Produce goods or services in Chinafor non-U.S., non China markets 3%

Establish or expand regional base 5%

Export to China from countries other than the U.S. 2%

Shift manufacturing to lower cost location 2%

Produce goods or services in China

for the China market 58%

Support global customers 6%

Produce goods or services in China for U.S. market 10%


Anticipate Problems - MacroAnticipate 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

• 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


Anticipate Problems - MicroAnticipate Problems - Micro

• Management-level human resources• Navigating Bureaucracy• Unclear Regulations / Inconsistent

Interpretation• Lack of Transparency• Contract Enforcement• Economic nationalism: “Indigenous

Innovation” and Local Protectionism

• Management-level human resources• Navigating Bureaucracy• Unclear Regulations / Inconsistent

Interpretation• Lack of Transparency• Contract Enforcement• Economic nationalism: “Indigenous

Innovation” and Local Protectionism


Market Entry RoadmapAre you China Ready?

Market Entry RoadmapAre 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)

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)


Market Entry RoadmapMarket Entry Roadmap

Direct Exports

Sales Agent / Distributor

Representative Office

Wholly Owned Foreign Enterprise

Foreign-Invested Commercial Enterprise (FICE)

Joint Venture / Acquisitions / Various Partnering

Gateways

Direct Exports

Sales Agent / Distributor

Representative Office

Wholly Owned Foreign Enterprise

Foreign-Invested Commercial Enterprise (FICE)

Joint Venture / Acquisitions / Various Partnering

Gateways


Sales Agent / Distributor ( I )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

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


Sales Agent / Distributor ( II )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.

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.


Sales Agent / Distributor ( III )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

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


Sales Agent / Distributor ( IV )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

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


Representative OfficeRepresentative 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.

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.


Foreign-Invested Commercial EnterpriseForeign-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.

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.


Foreign-Invested Commercial EnterpriseForeign-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.

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.


In China…Everything is possible, nothing is easy. ~ McDonald’s theorem

In China…Everything is possible, nothing is easy. ~ McDonald’s theorem

Where to go for help?


Find the right markets and partners with our proven products and services

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


IPR ResourcesIPR 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)

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)


14 Secondary Cities with American Trading Centers14 Secondary Cities with American Trading Centers

More Market Access. Same Quality Service.

Dalian

Chongqing

Hangzhou

Harbin

Kunming

Nanjing

Ningbo

Qingdao

Shenzhen

Tianjin

Wuhan

Xiamen

Xian

Zhuhai


The U.S. Commercial Service has approximately 125 Commercial Service officers and trade specialist living and working in China.

You’ll find us in:

The U.S. Commercial Service has approximately 125 Commercial Service officers and trade specialist living and working in China.

You’ll find us in:

We have trade experts on the ground in China who can help you succeed

We have trade experts on the ground in China who can help you succeed

Beijing Shanghai Guangzhou Shenyang Chengdu Hong Kong

Www.export.gov 1-800-USA-TRADE China: Opportunities, Challenges & Market Entry Strategies Barry...

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