Experiencies in financing Finnish companies' operations in China

Experiencies in Financing Finnish
Companies’ Operations in China
Helena Arlander
12.4.2012

Finnish Fund for Industrial Cooperation Ltd. (Finnfund)
in brief
• State-owned development finance institution
• Risk capital for profitable private projects in developing countries
and Russia since 1980
• From small and medium-sized companies to large companies
in different sectors, both green-field and expansion projects
• Long-term financial investor with minority stake, EUR 1-10 million
- loans, mezzanine financing or equity
• Market-based interest rate – compensation for the risk-taking
• Investment criteria include profitability, social and environmental
responsibility, development impacts and Finnish interest
• Co-financing with other European development financing institutions
and commercial banks.
www.finnfund.fi

Finnpartneship: financial support and advisory services
• Government program to increase commercial cooperation
between Finland and developing countries
• Finnish companies can apply for a grant type of financial
support for planning of commercially viable activities aimed
at long-term economic cooperation in developing countries
• Grants for SME’s may cover 50-70 % of cost of
– Feasibility studies
– Market studies
– Environmental studies
– Training of employees
– Etc.
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www.finnpartnership.fi 3

Finnfund in China
• Preliminary discussions about 191 projects during the years
• 32 projects realized
• 10 existing investments in portfolio
• 9 projects under investigation at the moment, even small
companies plan starting operations in China
• Only investments together with Finnish companies possible
in China
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Examples of Finnfund’s projects in China
• Fibox (Guangzhou) Engineering Plastics Co. Ltd.
• Oilon Burners (Wuxi) Co. Ltd.
• Polar (Guangzhou) Electronics Co. Ltd.
• Ceiko China Ltd
• Beijing DT Electronic Technology Co. Ltd.
• Elecster (Tianjin) Aseptic Packaging Co. Ltd.
• Shanghai Fimet Medical Instrument Co.
• Neorem Magnets Ningbo Co. Ltd.
• Teknikum Suzhou Technology Co. Ltd.
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Sources of funding for SMEs expanding to China
• Funding for the Finnish parent company:
– House bank
– Finnvera
– Private equity investors
• Funding for the subsidiary in China:
– Finnfund
– House bank (if they have operations in China)
– Local Chinese bank (local collateral + parent guarantee or bank
guarantee probably required)
– Private equity investors
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Regulatory issues in financing projects in China
• Strict rules about the capital structure depending on the total
project size (foreign loans, incl. parent company loans)
– Projects under USD 3 million: 70 % equity required
– Projects USD 3-4,2 million: USD 2,1 million equity required
– Projects under USD 10 million: 50 % equity required
– Projects USD 10-12,5 million: USD 5 million equity required
– … Projects above USD 36 million: 33,3 % equity required
• Holding company structures often used (various reasons)
• Only loans or equity possible, mezzanine not allowed
• RMB financing not included in the loan quota of the
investment license (above percentages)
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Taxes connected to financing
• Withholding tax 10 % for interest payments of foreign loans,
Finnfund’s loans exempted
• Also Finnfund and Finnvera guaranteed loans exempted
• 5 %business tax on interest payments and some local
payments with no exemption for Finnfund
• Tax on profit on sale of assets 10 %
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Holding company structures
• Holding companies in Hong Kong often used: tax treaty
between China and Hong Kong favorable, also an
agreement regarding economic cooperation exists
• Regulation in Hong Kong not as strict as in China: easier to
make changes to the ownership structure etc. => less
regulatory burden
• Profit on sale of assets tax free in Hong Kong
=> Finnfund’s ownership can be in the Hong Kong
company and then sold to the Finnish parent after 5-7
years of successful operations
.
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Experiences
• 100 % Finnish owned companies easier than joint ventures
• Starting with a Finnish management makes life easier
• Finnish company’s commitment, willingness to take risk and
expertize extremely important
• Enough resources (both money and people) and time have
to be reserved for the project
• Local partners need to be carefully chosen and written
agreements made before starting the cooperation
• Investing without existing clientele is a big risk,
overestimating the market potential often happens
• China is a developing country with its own culture, things
don’t work the way they do in Finland or in Europe
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Other challenges
• Global turbulence in financing: supply vs. demand
• Development of currency rates and interest rates in different
countries and different markets
• Development of different markets
• Development of the competitive situation
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Contacts
• www.finnfund.fi
• firstname.lastname@finnfund.fi
• tel. +358 9 348 434
• Uudenmaankatu 16 B
FI-00120 Helsinki, Finland
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