Navigating China Guide (2012) - New Zealand Trade and Enterprise

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3. ENTERING THE MARKET ENTRY MODES Non Equity Direct selling Appointing agent or distributor Forming an alliance Technology transfer Equity Representative office Wholly foreign owned enterprise Joint venture TIME, RESOURCES AND COMMITMENT This illustration is only indicative of the time and resources you will need to dedicate to a particular entry mode – these will vary case by case. Any decision on mode of entry needs to be based on a thorough understanding of the market. 3.1 TYPICAL MODELS FOR SETTING UP IN CHINA Getting your presence in China right You need a local presence if you want to grow your business and have a long-term future in the Chinese market. Entering and setting up in this market involves a unique set of regulatory issues. The structure you choose should be based on research specific to your industry and your product. Follow a strategy Before deciding what model you want to use to set up in China, you should complete your China strategy covering objectives, finance, experience, capacity, markets, products and pricing. This strategy must guide any decisions on how you plan to enter China. In preparing a plan for China, remember some hurdles in China are larger than most other markets. For example: • the level of time and financial commitment needed • cultural and language difficulties • intellectual property management. KIWI SUCCESS – STICK TO THE PLAN “We have a good plan, we are following that plan and now we just have to remain focused and build on the solid base we have. That’s quite often the hardest thing for companies to do. There’s an enormous amount of opportunity available to companies like ours in China and it’s simply not possible to follow all options. By having a tight strategic framework we have a guide for what we should and shouldn’t spend our time on. Otherwise, one could waste an enormous amount of resource and energy.” – Scott Coulter, Chief Operating Officer, Comvita “Our biggest success was taking the time for a planned entry and finding the best professional advice at each step.” – Mark Radburnd, Chief Financial Officer, Commtest Instruments 22
Testing the waters New Zealand companies typically take a staged approach to setting up in China. They start by exporting a small amount to test the market, then engage an agent or distributor, then set up an office in China, and finally they set up a Chinese company or joint venture and, where applicable, their own manufacturing operation. The least complicated business models are licensing into China or having a contractual relationship with a Chinese company or simply setting up your own Chinese company. Testing the market is relatively straight forward if your goods are exported from New Zealand to China. However, if your goods are made in China and delivered in China it is deemed a domestic sale and the transaction must be completed in renminbi (RMB). You can only repatriate profits with a registered entity after taxes have been paid. (The exception is the representative office.) Also not having your own registered China entity to issue a China value added tax (VAT) invoice raises the issue of who does this for you. Be aware if it’s your factory filling this role, you are both putting them in direct contact with clients and entrusting them with your revenues. If you are providing a service it may be possible for the client to pay offshore as long as you can prove the work was not executed in China. Otherwise a business wanting to pay hard currency overseas must have proper justification and importation documents or it will be subject to withholding tax of up to 20 percent. China now allows foreign companies to set up direct sales channels and to sell directly to store buyers. But setting up these direct sales channels can be a big undertaking. Using agents and distributors Companies that need to manage their business in China from New Zealand can use China-based agents and distributors. An agent sells goods on your behalf and is paid a commission. A distributor buys goods from you at one price and sells them to others at a higher price, making their income from the margin. Using an agent or distributor in China can be an attractive option because they: • provide access to established sales channels and potential customer bases • can greatly reduce set up costs and time taken to enter the market • give you access to local knowledge and contacts when dealing with regulatory problems and other issues. However, using agents and distributors can have drawbacks, including: • raising your costs and selling price • reducing your control over sales and marketing • potentially increasing the risk of your product being counterfeited. Many Chinese agents and distributors work for trading companies which are authorised to deal in a wide range of products. Some of the larger companies have offices in other countries, along with a network of offices and affiliates in China. However, large agents and distributors sometimes manage so many products that yours may not get enough attention. China’s size and regional diversity also means you will need to engage several agents to cover different areas. Remember, payments can only be repatriated easily if the goods were imported. If they are China produced, agents can only repay funds after end of year tax has been paid. KIWI LESSONS – GOOD DISTRIBUTORS ARE EXPENSIVE “If a distributor is very good, they will be very expensive and using a product from a multi-national. They will invariably run their own brand and will not be willing to deal with you exclusively. If a distributor is interested in selling only your products, you have to ask about their track record.” – David Percy, Chief Executive, Pertronic Industries 23
Page 1 and 2: NAVIGATING CHINA For New Zealand Bu
Page 3 and 4: This booklet provides practical adv
Page 5 and 6: is somewhere between half a million
Page 7 and 8: KIWI LESSONS - LOCAL EXECUTION IS V
Page 9 and 10: For China, and the rest of the worl
Page 11 and 12: Telecommunications China’s teleco
Page 14 and 15: 2. RESEARCHING THE MARKET 2.1 RESEA
Page 16 and 17: 2.2 MARKET VISITS Visiting the mark
Page 18 and 19: However, cold calling (for self int
Page 20 and 21: • Seek advice on the choice of ch
Page 22: If the Chinese side is hosting a di
Page 27 and 28: much higher than this. The authorit
Page 29 and 30: Other options • Coat-tailing - ta
Page 31 and 32: closely with them at all levels, on
Page 33 and 34: KEY LEARNINGS • thoroughly resear
Page 35 and 36: It is also important to put IP issu
Page 37 and 38: Administrative enforcement The main
Page 39 and 40: 3.5 BUILDING RELATIONSHIPS Building
Page 41 and 42: WAIKATO UNIVERSITY CASE STUDY My cu
Page 43 and 44: Meetings Understanding meeting prot
Page 45 and 46: Deep guanxi is a strong feeling of
Page 47 and 48: Entertaining Evening banquets are n
Page 49 and 50: On it’s website, NZTE has a list
Page 51 and 52: • ask for details on the company
Page 53 and 54: KIWI LESSON - BEWARE OF OVERPROMISI
Page 55 and 56: Before signing a contract with a di
Page 57 and 58: KIWI LESSON - LOGISTICS ARE STILL A
Page 59 and 60: You should also build into your pri
Page 61 and 62: Trade media CATEGORY Food and Bever
Page 63 and 64: “Recommendations are a company’
Page 65 and 66: Chinese television personality and
Page 67 and 68: • registration information and qu
Page 69 and 70: agreement was missing (should be A8
Page 71 and 72: How to make contact with ‘half-pa
Page 73 and 74:
Accounting records must be kept in
Page 75 and 76:
If you have a long-standing relatio
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These foreign exchange controls are
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translations in all cases - it’s
Page 81 and 82:
Using e-logistics China faces a num
Page 83 and 84:
6.6 LANGUAGE AND USING INTERPRETERS
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Things to avoid: • leaving senten
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7. MANUFACTURING IN CHINA 7.1 PROS
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BUSINESS MODELS Least Cost and oper
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Finding and building a relationship
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ATRAX CASE STUDY Sourcing from Chin
Page 96 and 97:
Protecting intellectual property In
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The contents of this brochure are t
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