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

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Disadvantages: • significant set-up costs • differences in management styles and company culture • potential conflicts of interest with the Chinese partner. (Source: China Business Solutions) Note: In some sectors representative offices and WFOEs are not an option for foreign investment, for example education. KIWI LESSON – BE CAREFUL… “Scott looked at a joint venture but these are fraught with danger. Setting joint ventures up is a very complex process and you may find you are still negotiating details of the agreement through to the termination of the contract term.” – Chris Hopkins, Managing Director, Scott Technology “Our experience with the JV mode of operation in China has been ambiguous.” – Dr Anatole Bogatski, former Student Services and Marketing Director, AIS St Helens …BUT CAN BE GOOD “It won’t work for everybody, but for us it has been a very successful business structure to have that JV because it does open all sorts of doors for us that don’t exist if you come in simply as a foreign company.” – Garth Smith, co-founder, BioVittoria Investing in China The wholly foreign-owned enterprise (WFOE) and joint venture (JV) options will require capital investment. A number of Kiwi companies have successfully invested in operations in China, though total New Zealand investment into China is a fraction of that into longer established markets such as Australia. Like other foreign direct investment into China, most New Zealand investment is orientated towards re-export. However, as the Chinese economy develops, particularly with the rapid growth of the consumer market and easing of restrictions, the proportion of goods and services going into the domestic market is increasing. Investment aimed at supplying the China market enters you into what is often a much tougher game where you will face intense competition and possible IP protection issues. Foreign investment is welcomed in China, particularly in priority or encouraged industries such as high-tech manufacturing, including new and alternative energies. Incentives, such as greater flexibility of foreign ownership, lower levels of governmental review and tax and other investment incentives, are available for these priority sectors. The Free Trade Agreement (FTA) has given New Zealand businesses thinking about investing in China a stable base to work from. Knowledge of when a tariff will be phased out, gives you more certainty about the future than competitors from other countries. The FTA also offers Kiwi businesses a level of political endorsement that can be handy in China. It is a signal to your partners, and people you have to deal with, that China has a good relationship with New Zealand. Difficulties Investing in China is difficult and high risk. It is costly and absorbs time and money. Even large companies experience problems. Make sure you get the right partners and do as much due diligence as you can. You need to get professional help There are four foreign investment categories: encouraged, permitted, restricted and prohibited. Encouraged, restricted and prohibited categories are detailed in the Foreign Investment Industrial Guidance Catalogue. Industries not listed are permitted. Investment in some encouraged and restricted industries can only be done through Sino-foreign joint ventures or other entities with limited foreign investment. Restricted and prohibited sectors include value-added telecommunications, mining, domestic trade, wholesale and retail, banking and insurance, leasing, public utilities and domestic transportation and the production of wine and liquor. Investment in these sectors requires additional government approvals. An English version of the 2012 catalogue is available on the Dezan Shira & Associates website. Chinese investment in your business Another route to establish a market presence in China is to attract Chinese investment in your business. This can represent an injection into your business of customers, market knowledge, networks and expertise, as well as capital. Food businesses, especially dairy, are attractive to Chinese investors. The other popular category is high technology, including clean technology and high-value manufacturing. KIWI LESSON – BRING SOMETHING SPECIAL TO THE TABLE “You need to approach potential Chinese partners with a sharp focus on what they can offer that is special. You have to bring something to the table that’s unique, that they want and which gives them an edge.” – Tony McKenna, Head of Market and Product Development, Synlait. The Canterbury-based dairy company is 51 percent owned by China’s Bright Dairy. The type of Chinese investor interested will depend on the size of your company. Sovereign wealth funds and large companies gravitate towards large companies and natural resources. If you are smaller, a possible source of investment is potential migrants – high net worth individuals who want to set up a base in New Zealand. One recent survey showed that more than half of China’s millionaires want to secure residency offshore for their family. The hard part is finding and attracting them. A lot of investors are not good English speakers and are worried about investing in what they see as risky small businesses. Chinese investments typically seek control, in particular of natural resources. Most of the Chinese investments into New Zealand to date have had a controlling interest. 26
Other options • Coat-tailing – taking advantage of established channels set up by larger companies in China can be a good way for smaller Kiwi companies to get started. For example, production systems maker Scott Technology says it found life easier working with multi-national companies where quality was demanded and a premium was paid. • Selling online – more and more foreign and Chinese companies are using the internet to promote and sell their products. Holding the e-commerce sector back are the low use of credit cards and inadequate operator billing systems, but both situations are rapidly improving. KEY LEARNINGS • Develop a China strategy before deciding on how to enter the Chinese market. • Avoid going into China cold – get a foot in the door first. • Use China-based experts who are familiar with the bureaucracy and can keep up with the rapidly changing rules and procedures. • Take care over who you use. • Make sure you are directly involved in the setting up process. • Allow time for bureaucracy, both filling in forms and waiting for approvals. COMMTEST INSTRUMENTS CASE STUDY When a distributor is not enough – setting up a base in China Commtest Instruments began exporting to China through a China-based distributor. But the Christchurch-based company soon realised it needed to set up its own base in China. Pros and cons of a distributor Commtest makes vibration analysis and data collection instruments which enable engineers to diagnose faults in industrial machinery before these faults develop into catastrophic breakdowns. The company began selling in China in 2002 after being approached by a well-qualified distributor who had previously worked for one of its competitors. It was a good time to enter the market, says Commtest’s former General Manager John Cochrane. “With China’s State Owned Enterprises modernising and factories moving from the US and Europe to China the timing was spot on.” The distributor focused on Beijing and northern China, and was so competent he required little management oversight. Initially sales grew strongly but a little more than two years later they began to flatten, Cochrane says. “We realised that, like many independent sales channels, our China distributor worked his existing customers until sales began to plateau. Then, rather than find new customers for us, he took on other product lines to sell to the familiar customers. These products didn’t compete directly with ours, but they caused a loss of mind share.” Adding sales channels Commtest realised it needed additional sales channels in China; knowing that these couldn’t be managed effectively from New Zealand it decided to set up a China office. “We thought that if we could do so well in a small part of China (Beijing and the north) with one distributor, how much better could we do with several distributors and a much wider geographical coverage?” With the help of NZTE in Beijing, Commtest found several China-based advisers to help it set up a representative office. Representative offices are the easiest type of entity to set up in China but they have limited uses. Officially they can only be used for market research and liaison activities, and they can’t conduct sales or issue invoices. Commtest’s representative office opened in Beijing in May 2007. Local staff versus expatriates The company opted to hire Chinese locals, largely because of the cost of hiring non-Chinese expatriates (expats) already living in China. “We were bowled over by the size of the packages expats expect – I can hire three or more local staff for the same cost. Many expats I met also live in a peculiar expat bubble separated from the local people. And in China having strong local connections (Guanxi) is paramount.” The quality of local staff is excellent, Cochrane says. “Many of them have been educated overseas and they are bilingual, bicultural and professional. As of 2011 Commtest had 14 staff in China, all Chinese nationals.” Commtest used Mahon Investment China, a Chinese firm run by an expat New Zealander, to shortlist and conduct due diligence on candidates for the post of country manager. Cochrane says there was over-choice when it came to hiring sales and support staff, and the few regulatory requirements around employment were easy to complete. One unexpected cost, however, was the “13th month” – a traditional payment relating to the Spring Festival and Chinese New Year. “It’s not mandatory but it’s a very common practice so we included it in our annual salary calculations.” Setting up an office The company chose Beijing to be close to its State Owned Enterprise customers. Having ready access to key financial decision makers should be among the highest criteria in deciding the physical location of the China operation. Cochrane says the regulatory requirements of opening a representative office were fairly easy and quick to comply with, but setting up the physical office took longer than expected – five months in all – largely because the building owners didn’t have any experience of foreign tenants. “It was easy to purchase office equipment but top quality electronics equipment was surprisingly often more expensive than in other countries 27
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 25 and 26: Testing the waters New Zealand comp
Page 27: much higher than this. The authorit
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
Page 77 and 78: 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
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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
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Protecting intellectual property In
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The contents of this brochure are t
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