New Zealand China Trade Association: China Now

How to Crack China

Sun, 05 Sep 2010 00:00:00 +1200

by Mitch Cosani and Charles Avery.

Switching your sourcing to the world’s third largest economy can save you 30%. But getting in there is no easy matter.

China’s development has been one of the great marvels of the modern age. Its output was regarded as a mere statistical anomaly on the international landscape just a generation ago, but has since ascended to become the world’s third largest economy. Chinese exports dramatically expanded after the country’s admittance to the World Trade Organization in 2001, culminating in China’s current status as the number one exporting nation.

In 2009, roughly USD1.2 trillion of Chinese goods reached consumers at every corner of the globe, with sub-Saharan Africa accounting for USD26.27 billion, the Southern African Development Community region accounting for USD12.9 billion and South Africa USD7.37 billion. If businesses wish to remain competitive, it is no longer possible to ignore China’s export potential. For those involved in sourcing, incorporating China into the supply chain presents numerous opportunities.

But before you call the bank to open a letter of credit, you first need to understand how China sourcing can and should be done. Success depends very much on appreciating a few critical drivers and constraints.

Low wages, good infrastructure

The main reason for China’s prominence as a sourcing destination is low costs. Average cost savings of around 30% (depending on product and industry) can be achieved by shifting procurement to China. At the heart of this is labour costs. Average wages in developed nations such as the US are nearly 30 times those of China. Even other developing nations are unable to compete with China on a labour cost basis. The average wage in Brazil is more than six times that of China, and in Mexico, three times. Other factors that contribute to cost savings include lower product input costs and lower finance costs including access to finance and cost of capital.

China’s infrastructure also affords it a distinct advantage over other developing nations. The country ranks 27 on the World Bank’s Logistical Performance Index, higher than Brazil, Russia and India. Numerous new highways and 78,000 km of railway end in six of the world’s 10 busiest ports. Five hundred airports are available to link Chinese products with their end-users abroad. This network of thoroughfares effectively link China’s low labour costs with the world.

Risks and challenges

How then does a procurement manager access China’s significant potential? The answer lies in appreciating that one size does not fit all and the process is time-consuming and requires effort. Distance (time zones), language and culture are significant constraints, and Chinese specifications and standards – especially when it comes to technical industrial pieces and equipment – are not always easily comparable and require clarification.

When these factors have been accounted for, a comprehensive China strategy can be developed. The pivotal element of this is deciding on the conduit between decision-makers at home and Chinese producers. To manage this crucial task there are three options: to work with a local Chinese agent; to work with an international company with a presence in China; or to dispatch your own employees to China.

Using a local Chinese agent is the cheapest option. Such agents have the potential to be well connected, with the most experienced able to find products for their foreign partners at significantly favourable prices. The major downside to this arrangement is that potential cultural barriers can be a serious hindrance. A common complaint is Chinese counterparts are often less responsive to emails and may be less direct regarding true circumstances. A straightforward 'no' is rare. Thousands of agents exist, making the best ones more difficult to find. Many of these agents may not also have the appropriate import/export registration.

Other routes

An alternative is to use an international firm with a presence in China. These firms typically employ international staff alongside local Chinese to obtain the best of both worlds. A more acute understanding of the buying company’s procurement requests can be obtained through the use of these agents and it may even be possible to find such an agent from the same country of origin in the more cosmopolitan cities of Shanghai and Beijing. These foreign-owned companies are able to obtain import/export rights, and often do. But they tend to charge higher fees for their services and are subject to stricter administrative controls, which may cause further delays or unexpected costs in the procurement process.

Lastly, there is the option of directly dispatching employees to China. This may be the most attractive option for those considering large-scale operations abroad. Expatriate staff will already be aware of the product requirements, eliminating communication problems. This option could be considered if relationships have previously been established with Chinese suppliers as the China-focused strategy matures. But this is a less feasible option for companies still in the early stages of their China strategy. It can be difficult for newcomers to find appropriate suppliers and to successfully manage all steps in the production-to-port process.

Objectives and challenges

Having a representative of the company physically present in China greatly eases the business interaction with suppliers. Business in China is very much centred on relationship building. The ability to associate a face with a voice over the phone or the signature line of an email will foster greater personal commitment from the Chinese supplier. This process involves regular visits and is an important cultural aspect in dealing with Chinese suppliers. Concurrent on-site inspections ensure greater quality control.

As with all long-distance international trade activity, there are many risks and it is critical that companies understand them. An on-site presence allows final inspection of the product to take place at the factory rather than when it arrives at your port. This allows immediate adjustments to be made, saving weeks in shipping time and legal complications that may arise with payment terms. Carrying safety stock is another simple technique in preparing oneself for potential supply chain interruptions. It is also useful to arrange supplemental agreements with separate suppliers so as to avoid an over-reliance on any single supplier.

Once relationships have been established with Chinese suppliers, procurement professionals may be pleasantly surprised by some of the added benefits. Long-time partners in China will frequently share information with international clients, including referrals to other Chinese suppliers in noncompeting industries. Advanced payments often become unnecessary. As stated earlier, Chinese professionals are more responsive to personal affiliations often making it unwise to switch Chinese partners on the basis of marginal price differences. Information sharing, consistent production quality and faster enquiry response times quickly make up for small price discrepancies.

Why choose China?

The potential to obtain significant cost savings because of China’s lower cost base, particularly for labour
You can use the 'China price' to negotiate reduced prices from existing domestic suppliers by gaining greater visibility into the true cost base in low-cost countries
You will avoid the risk of delays or disruptions in material shipments by diversifying your supply base, specifically with critical items

When should China be considered?

Whether to source items from China should not be a one-off decision, but should rather be based upon a series of systematic decisions. Some initial questions to ask are:

Is the category large enough to warrant the effort?
Do Chinese suppliers have experience exporting these items?
Is there reason to believe that Chinese suppliers are significantly cheaper than our current/existing suppliers?
Do we want to diversify our risk from relying on local suppliers?

If 'yes' is the answer to any of the above questions, then consider China, but only with a reliable, on-the-ground partner to support you.

Mitch Cosani is manager and Charles Avery is an analyst at supply chain consultancy Bateman Beijing Axi.

This article first appeared on The China Sourcing Blog. CSB is sponsored and administered by THE BEIJING AXIS, a cross-border business bridge to/from China in three principal areas: Strategy, Sourcing and Investment. Aiming to be the leading provider of cross-border China business solutions, THE BEIJING AXIS serves to facilitate, enhance and support an appropriate cultural, political and economic integration of China with the rest of the world.

Source: How to Crack China

NZCTA: Opening Up Elements of a China Strategy

Sat, 04 Sep 2010 00:00:00 +1200

In its most recent publication, “A Goal is not a Strategy”, the NZ Institute scolds the lack of strategy to accompany our current heady goal to match Australia’s per capita GDP by 2025.

In fact, we seem to recall that former Opposition Leader and career strategist, Don Brash actually did come up with a strategy to catch up with our Transtasman neighbour, but which very quickly got swept under the carpet as politically unsustainable.

But it appears that the Prime Minister agrees you need more than just a goal, as this transcript of his TV interview in China seems to show:

PM: ...it’s one thing to have an FTA, I think it’s quite a different thing to have a China strategy. And why would you want to have a China strategy? Well you’re not going to double two way trade from 10 billion to 20 billion, crossing your fingers and hoping it might happen. I think you’ve actually gotta sit back and say what are the component parts...

The interview goes on to discuss what would be an important element of any China Strategy

INTERVIEWER: So what are you going to do about the fact that we have by your own admission, a woeful level of tuition in Mandarin and Cantonese and Chinese languages in New Zealand schools? Are you going to make it compulsory to learn Chinese?

PM: I don’t think we’ll make it compulsory, but I do think we should start talking much more actively about thinking about what are the skills that we will need.

Is an involvement of Chinese or other Asian culture and language training in schools also politically unsustainable? Whether it is or not is probably secondary to some of the practical issues.

Asia NZ Foundation has a laudable project, supported by the business sector, to increase the level of Asian awareness in our education system.

It brought together representatives of both in a lively, inter-active workshop, where both parties tried to understand each other’s perspective but probably in the event narrowly failed.

The message from principals was don’t even think about promoting Asian programmes in secondary schools until the subject gets accreditation. The Foundation’s target might well have been NZQA or primary schools rather than secondary schools (even though many are robustly recruiting students in Asia).

Then, would “investment” , that is Chinese investment in New Zealand, be an important component of a China Strategy?

Professor Gary Hawke of NZIER writes:

There has been little concern about competition from Chinese products—they are too familiar and ingrained in the New Zealand psyche. There is concern over Chinese investment in New Zealand land. Conventional convictions about farmer control—which constrain capitalisation of Fonterra—is linked with nostalgia for a closed community. Participation in international supply chains cannot be restricted to only New Zealand ownership of assets overseas.

The FTA encourages mutual investment and the New Zealand economy cries out for investors. Currently investment from China is way down the league table of FDI in New Zealand.

So is investment from China (or anywhere else) in the pastoral sector politically sustainable? And exactly what is regarded as a “strategic asset”?

Is the increasingly ready availability of expertise from the Chinese ethnic business community in New Zealand a “strength / opportunity” in our SWOT analysis? Surely it is, so the consideration here is more a “how” – the action plan rather than the strategic consideration.

Our deficit of skilled labour availability is ongoing (except arguably in recessionary times).

China has resources it can offer to plug gaps. Another difficult strategic path to go down maybe but surely a component part.

A natural component part of a China strategy would concentrate on trade promotion and assisting particularly the niche products and services, which are likely to be attractive in China. Whilst new posts have been opened in China in the past 12 months, we still fall well short of the Australian presence and level of resource in China. That surely is politically achievable!

Do we actually need a China strategy? After all , businesses engaging in China are ultimately going to be maximising their own interests and returns and making their own strategic decisions on what resource, investment and commitment they apply to their engagement in the market.

But a China Strategy has to encompass much more than trade levels and export promotion. And as the Prime Minister and the NZ Institute aver, much more than setting an ambitious trade goal.

Both the growing proportion of our population which is ethnically Chinese (Asians in NZ population are predicted to reach 16% of our total population by 2026) and the rapidly increasing influence of China on the World stage dictate that we should confront the broader issues comprehensively and frankly.

But to be sustainable, we probably have to raise our level of strategic thinking above our “nostalgia for a closed society”.

Source: NZCTA: Opening Up Elements of a China Strategy

Interview with a Chinese “Balinghou”

Sat, 04 Sep 2010 00:00:00 +1200

Keen to see the world through the eyes of a 28 year old Chinese graduate working in Beijing?

Linda Liu is as an HR Assistant for Founder Century, a Chinese IT distributor. She belongs to China's "balinghou" generation. See what Linda has to say about her generation, the Shanghai Expo and Lord of The Rings.

What does “balinghou” actually mean?

Ba ling means 80 and hou means after so balinghou people are people born in the period 1980-1989.

What are balinghou people supposed to be like?

Well, we are the first generation born after China started its reforms. Our parents lived in a tougher, less open world than the one we grew up in; material conditions were much better for us. When we were born, the one-child policy was firmly established, just one child in the home so, according to the media, we are spoilt and self-centered. I remember, when I was 12 or 13, becoming aware of the negative stories about us in the media. Older people said that we would be incapable of continuing to build China.

What are the positive characteristics of the balinghou generation?

We are supposed to be open-minded, and dynamic, and more creative than our parents. There is a famous film by Jia Zhangke called 24 City. There is a woman character in that film who is supposed to be a typical balinghou. She’s very fashionable, she dresses well, she doesn’t want to work full-time, she travels a lot, she’s not married, doesn’t have a steady boyfriend, she lives in a small town but she doesn’t want to stay there. She values freedom and movement and consumerism. Her job is shopping! She goes to Hong Kong to buy things for rich people.

How do balinghou people feel about working for foreign companies?

They like to work for foreign companies because they are open. They can speak foreign languages and are better able to adapt to other cultures than their parents’ generation.

Can they work well without supervision?

If they really love the job and want to make it their career, they can. But they may not always understand what work methods they are supposed to use… And some balinghou people just want to get some money, some experience or learn some new stuff in the company, and so they may be lazy and may not work well without supervision.

Linda, you went to Wuhan University which is one of the top universities in China. What percentage of your classmates can speak English?

All of them can speak some English and about half of them would be operational in English. If they work for foreign companies, obviously their English is better. If they work for the government, they do not have the same opportunities.

So one of the attractions in working for a foreign company is to be able to keep practicing English, is that right?

Sure. One of my roommates was very good at school, she was much better than me at English. When she found out that I was working for a foreign company and was able to speak English every day, she was quite jealous.

When you graduated from Wuhan University, you initially worked for an NGO and then you decided to work for a foreign company. Is that right?

Yeah. At Wuhan I majored in social work and psychology so that led me to the NGO but I didn’t really like it there – it was like a state-run company and there wasn’t much room for initiative and creativity. I remember when I tried to push things ahead fast on the update of our website I got told off; that was two years ago and they still haven’t done the update. Then I got an opportunity to work in an Italian environmental consulting company that was setting up in Beijing and I thought it would be a good way to improve my knowledge, speak English and work with Europeans.

How did the Italian company go about setting up in Beijing?

Italians have a saying about “fare la bella figura” (to make a good figure)! When they arrived in Beijing, they rented a large, expensive office in a prime location and had a big party to launch the new operation. Even the Italian ambassador came! But the business plan, and the obstacles, had not really been thought through.

What happened?

Eight months later almost all the staff had been laid off and the office was empty. A technical manager and me and a Chinese guy who spoke Italian were the only ones left! At the beginning we all thought the company was going to be big and successful and we were excited. I think Italians are optimistic people and I guess they thought they would be able to succeed relatively easily in the Chinese market. They thought, “look, we have good staff, good skills, a beautiful office and a proven track record in Italy, things will work out!” But problems arose very quickly. The General Manager travelled back to Italy a lot and when he was gone staff were not supervised well and were not clear about what they were trying to achieve. Also they didn’t have good connections to Chinese government officials and didn’t really understand how to do business in China.

On a different tack, Linda, have you visited Shanghai Expo?

Yes. I went there in July. We visited six pavilions: France, Spain, New Zealand, Iran, North Korea and Pakistan.

Which one was the best?

I think I liked the Spanish one the most because they were very smart. They divided their pavilion into three sections. The first section attracted us because the theme was passion and it was presented really strongly. You walk into a big dark space, there’s a film with powerful images of sea waves and horses galloping on the wall, there’s music and, on a very simple stage with no barriers around it, a Spanish woman dancing flamenco. The crowd was mesmerized. The second section was a bank of images from the last hundred years of Spanish history, it was interesting too. And the third section was a kind of weird baby, I’m still not sure what it really meant! And also the construction of the pavilion was simple and easy to take down.

What did you think of the NZ pavilion?

It was the first one I went to but I wasn’t really attracted by it. There were screens showing lots of different elements of NZ life, like green pastures and blue skies and also city life but it all seemed to me to be jumbled together and there was no clear theme, I didn’t know what to focus on. Then I went to the outside part and saw the big stone but I didn’t realize it was jade until a NZ guy explained it to me! I could tell they had spent lots of time preparing the pavilion but it didn’t seem to me to work very well.

So you didn’t have any emotional reaction in the NZ pavilion?

No, I didn’t… but other people have told me that there are performances there now. That would make a big difference. On the internet now, the NZ pavilion has become quite famous!

What image do you have of NZ?

I think it must be very quiet and clean, and very beautiful, with a good environment. And I guess there are lots of Maori people there and they are quite mysterious to me.

Did you get this image from the pavilion or did you already have it?

I already had it.

Have you ever seen a NZ movie?

I’ve seen Lord of the Rings and at first I didn’t know it was made in New Zealand. I was fascinated by the beautiful mountains and the beautiful nature, I think everyone in the whole world had the same feeling. New Zealand is now a famous place to shoot movies.

Red Crown Consulting is a marketing and consulting company based in Beijing. They have recently developed a China Office Assistant service for NZ SMEs, details of which can be found on their website: Red Crown Consulting.

Source: Interview with a Chinese “Balinghou”

Is China Growing Too Big?

Sat, 04 Sep 2010 00:00:00 +1200

by Chris Devonshire-Ellis.

For many years now, as I’ve traveled China on business, I’ve been skeptical of the GDP growth figures. From Shenzhen to Changchun and from Wuhan to Kashgar, via Chongqing, buildings have been going up, rather like mushrooms after a rain storm, as signs of the new prosperity and growth of China.

In fact, every single Chinese city, large and small, seems to have acres of new developments – but all lying empty. The giveaway is a quick evening tour of residential and business blocks. If no lights are on, why were they built? Entire development zones with no businesses. Blocks upon blocks of high rise apartments for tens of thousands of families – all unused, empty shells instead of the dream homes the advertising hoardings proclaim they are.

Local governments and real estate developers have been working together to “improve the value of the land,” and reap income and gain growth credits for doing so, but how is the land improved if no-one is using it? In fact, land in which money has been spent to build a block of high-rises may show an increase in value on paper, but until those units are sold or rented out they have been erected at a loss. Value of land is a key indicator in China’s GDP growth figures, yet if no one is utilizing it, obviously those figures are wrong. Traveling from the airport to downtown Chongqing for example, there are masses of expensive, premium apartments and villas for sale. Chongqing’s minimum wage level is US$1,221 per annum. But priced at US$1 million each, who is going to buy them? Adding value to land only works if you have a market for the property, otherwise the valuation is just a paper exercise representing no real financial asset or gain.

The central China cities of Changsha, Hefei, Nanchang, Taiyuan, Wuhan, and Zhengzhou for example, are all part of the governments “Go Inland” campaign – encompassing these cities specifically to encourage foreign investment and to jointly promote them as alternatives to the country’s coastal cities. Yet what has happened is that these cities have taken this mandate to actively compete – not just in growth figures to make their GDP look good, but also with each other. Accordingly, we have situations like those occurring in Zhengzhou, an inland city of five million. It’s a typical Chinese city, reasonably modern, yet somewhat quiet and unassuming. FDI is present, but the logistic costs of manufacturing in Zhengzhou and then shipping globally render it unsuitable for most international exports. For Chinese domestic sales, Zhengzhou is in a great location, but it will always remain a relatively small player when it comes to pan-Asian or global trade. The geographical positioning of the city dictates this. However, the city government has built Asia’s largest exhibition and conference site there, and the statistics are impressive:

Zhengzhou’s New Exhibition and Conference Center

69 hectares – twice the size of Vatican City

34,000 square meters – five times the size of Old Trafford, the home of Manchester United

Cost: RMB2.2 billion (US$324 million)

Zhengzhou is not content with that. It’s building an entirely new city – the Zhengdong New Area.

Zhengdong New Area

115 square kilometers – double that of Manhattan Island

60 new office skyscrapers

280 meter hotel and office tower, higher than the tallest building in Britain

Cost: RMB115 billion (US$16.94 billion)

Zhengdong New Area Residential Property

300,000 homes built

100 square meter house purchase price – RMB500,000 to RMB1 million (US$74,000 – US$147,000)

Minimum wage in Zhengzhou: RMB9,600 per annum (US$1,411)

Time required to save entire salary and buy property: 104 years

The race to develop as the preeminent central China hub is on it seems. Similar projects are underway in the other five central China cities, and the situation is repeated, over and over again in other second and third tier city groupings, all looking to become their respective regional center. Most of the development is funding by government borrowing. The vast majority of these will become white elephants, unused, expensive to maintain, while the construction debt will have to come back and be counted at some point. One wonders also about the transparency of the funding. Collusion between local government and local real estate developers is rumored to be rife. The developers buy the land and build while the government pockets the cash and can point to a job completed; yet the funds come from state and not local coffers. With state-backed loans estimated at some RMB11.4 trillion (US$1.68 trillion) for the provision of such loans, it’s the scale of the issue in China that causes serious concern. China may be getting too big for even the central government to afford, and with real national GDP growth rates (once property influences have been stripped out) of about 4 percent to 5 percent per annum, that may not be enough to keep China completely on the projected growth track until that debt can be absorbed.

While China looks a great investment play, and the developments look amazing, it is also time to be cautious and choosy about the extent of corporate investment exposure to China, especially in real estate. For business looking at inland locations for regional development and expansion, great care needs to be taken and proper operational due diligence conducted over the inherent logistics and transportation links. Geographical suitability, strategic locations and access to markets both real and promised need now, more than ever, to be taken into consideration.

Chris Devonshire-Ellis is the principal and founding partner of Dezan Shira & Associates. The firm has 18 years of foreign investment experience throughout China and maintains 10 offices in the country. For assistance and advice over foreign investment laws, taxes and incentives and conditions throughout China please contact the firm at info@dezshira.com.

Source: Is China Growing Too Big?

Strategy more than commerce: China-New Zealand FTA

Sat, 04 Sep 2010 00:00:00 +1200

by Prof. Gary Hawke.

For domestic consumption, the New Zealand government frequently trumpets the success of the China-New Zealand FTA in terms of short-run economic gain. So Foreign Minister McCully told the Foreign Policy School in Dunedin on 25 June 2010, ‘During the darkest economic days of the global downturn, but in the early stages of the implementation of New Zealand’s Free Trade Agreement with China, our exports to China for calendar 2009 increased by a massive 43 per cent.’

Prime Minister John Key told his National Party conference last weekend, ‘At the heart of our trade push are living standards and jobs.’

President Obama tells his domestic audiences that he intends to double US exports in 5 years at the same time as he tells Asian audiences that the US is back in Asia. Asians are unlikely to join in a crusade to double US exports or even to see it as part of the building of an Asian community within the global economy. The cognoscenti might realise that the president is talking about deeper engagement with the international economy, increasing imports as well as exports, but that is not what the domestic audience is intended to hear.

The New Zealand government can no more separate domestic and international audiences than can the US even if New Zealand is less likely to attract widespread international interest.

Increased exports to China have been welcome, but the FTA is far more strategic than commercial, and it is regional more than bilateral. The Chinese emphasis on continuing the ‘Four Firsts’ is a better prosaic statement than is the domestic political rhetoric.

New Zealand was first to complete an agreement on the terms of China’s accession to the WTO, first to recognise China as a market economy, the first developed economy to commence free trade negotiations with China, and the first developed economy to complete a free trade agreement. A ‘fifth first’ has been added with the signing of a free trade agreement with Hong Kong, following its conclusion of an economic partnership framework agreement with the Mainland. Such patterns seldom play a role in New Zealand thinking; its familiarity is testimony to accommodation of Chinese styles of thinking.

While the China-New Zealand FTA improves market access for both economies, and this includes bilateral exports in wine and dairy from New Zealand, the important elements of the agreement lie elsewhere.

The New Zealand fishing industry has plans to use increased opportunities to use processing facilities over a wider range of locations in China. China is using the New Zealand agreement and market to test its ability to comply with international standards in areas like product safety in electrical goods. The New Zealand market is not big enough to support the cost to China of implementing standards through central, provincial and local government agencies, but New Zealand is a useful learning-ground for wider international markets.

The agreement also includes clauses which provide for temporary movement of natural persons from China to New Zealand, again an exploration of something which must become more significant internationally. It also brings China within a world of binding investor-state international arbitration.

Most important of all, for New Zealand, the agreement strengthens New Zealand’s claim to participate in the process of East Asian integration. There will surely be a growth in China’s domestic market relative to Chinese exports to Europe and America. Asian economic integration will accompany that process. New Zealand policy is to facilitate integration and liberalisation by all available instruments, including the Trans Pacific Partnership and a Free Trade Area of the Asia Pacific. But there is more momentum in Asian economic integration than in Asia Pacific liberalisation—and the processes are complementary more than rivalrous. The China FTA is an indication of the genuine interest of New Zealand in East Asia.

There has been little concern about competition from Chinese products—they are too familiar and ingrained in the New Zealand psyche. There is concern over Chinese investment in New Zealand land. Conventional convictions about farmer control—which constrain capitalisation of Fonterra—is linked with nostalgia for a closed community. Participation in international supply chains cannot be restricted to only New Zealand ownership of assets overseas.

New Zealand is sometimes accused of being naïve about China. But naivety lies with those who identify Chinese ‘helpfulness’ or China’s participation in contributing to global public goods, with Chinese acceptance of US preferences.

From 2013, rugby sevens, a variant of rugby union, will be played between the provinces of China at China’s National Games. That creates prospects of major changes in world sports—but it is important for the symbolism that New Zealand can be part of the Asian community which is being built.

Gary Hawke is Senior Fellow at the New Zealand Institute of Economic Research, Professor Emeritus and was formerly Head of the School of Government at the Victoria University of Wellington, New Zealand.

Source: Strategy more than commerce: China-New Zealand FTA

Made in China: From Small Labels to Big Possibilities

Tue, 03 Aug 2010 00:00:00 +1200

Thanks to our good friends at The China Sourcing Blog, this excellent article considers China's prominence as a sourcing destination and offers advice for formulating your "Made in China" strategy.

The words 'Made in China' can be found everywhere, from the labels on basic necessities such as clothing to the portable music players and cellular phones which exemplify modern life’s conveniences. It is the work of international procurement professionals who have brought these products from the manufacturing floors of China to households worldwide. China’s emergence as the world’s largest exporter in 2009 is further evidence of the immensity of this nation’s sourcing potential. But before calling the bank to open a letter of credit, it is best to first understand sourcing from China and how to engage with this unique business environment.

The reason for China’s position as the foremost sourcing destination is of course, low costs. On average, 30% cost savings can be expected for products procured from China in comparison with the home country. Everything from machinery to articles of steel to furniture can be obtained cheaply. At the heart of this are labour costs. Average wages in developed nations such as the United States are nearly 30 times those of China. Even other developing nations are unable to compete with China on a cost basis, as the average wage in Brazil is over six times that of China, and in Mexico, three times.

Second and often overlooked is China’s infrastructure which gives it a distinct advantage over other developing nations. China ranks 27th on the World Bank’s Logistical Performance Index—higher than the other BRIC nations. Numerous, newly constructed, multiple lane highways and 78,000 kilometres of railway end in six of the world’s ten busiest ports along China’s coastline. By air, 500 airports are available to link Chinese products with their end-users abroad. This network of thoroughfares effectively link China’s low labour costs with the world.

The question then becomes how does the world—or more specifically, the procurement manager—access China’s potential. This process begins at home with an effective strategy, the pivotal element of which involves deciding on the point of contact with Chinese suppliers, the conduit between decision makers at home with Chinese producers. To manage this crucial task there are three options: to work with a local Chinese agent, to work with an international company with a presence in China or to dispatch employees to China for on-site operations.

Using a local Chinese agent is the cheapest option. Such agents have the potential to be well connected within various industries. The most experienced Chinese agents are likely to find the most suitable products for their foreign partners at the most favourable prices. The downside is that this approach is open to cultural misunderstandings and difficulties. A common complaint is that Chinese counterparts are often less responsive to emails, and even when responsive may be less direct regarding actual circumstances; a straightforward “no” is rare. Thousands of Chinese agents exist, making the best ones more arduous to find. Furthermore, many of these agents may not have the appropriate import/export registration.

An alternative to this is to use an international firm with a presence in China. These firms typically employ international staff members alongside local Chinese to obtain “the best of both worlds”. A more acute understanding of the home office’s procurement requests can be obtained through the use of these agents; it may even be possible to find such an agent from the same country of origin in the more cosmopolitan cities of Shanghai and Beijing. These foreign-owned companies are able to obtain import/export rights, and often do. On the downside, international agents tend to charge higher fees for their services and are subject to more strict administrative controls which may cause delays or unexpected costs in the procurement process.

There is also the option to forego the use of third parties by directly dispatching employees to China. This may be the most attractive option for those considering large scale operations abroad. Expatriated staff members will already be aware of the product requirements and time frames, thus eliminating any communication problems. This option may also be considered if relationships have previously been established with Chinese suppliers as the China-focused strategy matures. It is a less feasible option for those still in the early stages of their China strategy as it is difficult for newcomers to China to find appropriate suppliers and to manage all steps in the production-to-port process.

Although there are options for establishing a point of contact in China, having a representative of the home company physically present in the country greatly eases the business process with suppliers. Business in China is centered on relationship-building. Having a face to associate with the voice over the phone or the signature line of an email will foster a more personal commitment from the Chinese supplier. This process entails regular visits, if even from an agent, and is an important cultural aspect in dealing with Chinese producers. Concurrent on-site inspections further work to ensure greater quality control.

Through effective communication the China low-cost advantage can be transformed into profit and customer savings. The question is just HOW this will be done, because China sourcing is all about having a strategy that works for you.

Source: Made in China: From Small Labels to Big Possibilities

Product Development: Partnering with factories in China

Tue, 03 Aug 2010 00:00:00 +1200

Renaud Anjoran from Quality Inspection Blog simplifies the Chinese manufacturing landscape by distinguishing between three types of factories in China and he goes on to offer some sage advice for when dealing with each type.

Most Chinese factories are very good at reproducing a physical sample…and not as good at respecting a blueprint or a set of written specifications.

Importers often waste a lot of time to get to a “perfect sample“, before production has even started. However this step is crucial and should not be rushed:

For new products, a lot of attention is needed to avoid design flaws.
For a new manufacturer making an existing product, the buyer should still ensure that it will be made correctly in mass production.

So, are all Chinese factories inept at helping importers with product development? I don’t think so. One can distinguish three types of Chinese factories, when it comes to design and prototyping.

1. Only good at copying

I guess about 90% of Chinese exporters (whether manufacturers or traders) are in this category. The attitude is “tell us what to do”.

So, how do product developments work? Buyers either bring their own samples, or go to a showroom and make a selection. They might require small changes on the product, or they might only ask for a customized logo/labeling/packing.

If they want to do substantial changes to the product itself, they’d better have a clear idea of what they want and how to do it. The factory will usually provide no guidance, and in the best case they ask a lot of questions.

I remember a morning, two months ago, when I was helping a friend visit a supplier of in-store displays in Shenzhen. They had made a sample based on drawings from my friend, with a couple of mistakes. These mistakes showed clearly that they had not understood the real use of that display. They had simply translated the notes and given the drawings to a technician, without asking any question.

That’s probably what Dan Harris, from the China Law Blog, has in mind when he mentions “the dozens of times [his] firm’s clients have essentially told [him] that they have been shocked at how little help they have received from their Chinese factories on how to manufacture their products.”

To make things even more difficult, sometimes these suppliers accept an order even though they don’t know how to produce it yet. The idea is to find someone else who can do it for a price low enough to leave some profit margin. Needless to say, this is a reason for importers to have a good look at the factory beforehand, and to check production early.

2. Good understanding of drawings, specs, or intended function(s)

After that poor meeting in the morning, my friend and I went to see another supplier of displays. This time the meeting was in a factory building instead of an office. The merchandisers were quick to understand and to explain any point. The technicians could calculate quotations instantly, based on possible changes to bring on the product. The sample they had prepared for us was perfect because they had guessed right in the two or three areas where my friend’s drawings were not clear.

But the key advantage is that they gave us some advice based on what their other customers do, and in a way that was relevant to the intended function of the product.

More and more suppliers have this capability–after all, it only takes a good technician and a smart salesperson. I bet they tend to grow faster that their competitors, simply because it is much easier for them to get orders (regardless of what production will look like). Buyers, but also product managers of the buying organizations, save considerable time and headaches when dealing with such suppliers.

I know several manufacturers of lingerie who pay designer(s) to pump out fresh designs. Sometimes they simply use a new lace or a cute bow that they noticed on the market. Sometimes it is based on a drawing inspired from a big brand’s new collection. They regularly send photos/samples to their good customers, and get new orders this way. But this is risky for importers, who might unknowingly purchase the copy of a competitor’s new style… And have big problems.

So most of the time it starts with a request from a customer. See, for example, how Barnes & Nobles e-reader (the Nook) was developed: “Sources in China are reporting that they assembled a small focused team, and brought the product from a concept sketch into production in about a year. Compare that to Amazon and Sony that took three and four years, respectively.”

So fast, for a company without any experience in electronics? How is it possible? As a commenter wrote: “By the time B&N came along, every ODM shop in Shenzhen had ripped open a Kindle, reverse-engineered the key technologies, and was ready to meet B&N half-way.”

Bottom line: if you want to incorporate technologies that are already used in China, you can probably find a manufacturer that will help you put together a full product that meets your intended function.

3. Capable of proposing new-to-the-world features

A few very large structures have gone beyond basic assembly. They have hundreds of engineers working on new technologies, to complement their customers’ own R&D efforts.

The prime example is Foxconn and its 25,000 patents. HP, Dell, and others probably push them to invest in R&D, in areas that they see as non-strategic for their own success.

Of course, only a few manufacturers (if any) do this in a given industry. And small buyers do not have access to these new features. It will take a long, long time before this type of initiative becomes more widespread.

This article first appeared on Quality Inspection Blog.

Renaud Anjoran helps importers check and improve their product quality in China.

Source: Product Development: Partnering with factories in China

My logo is bigger than your logo! The culture of Chinese consumerism.

Tue, 03 Aug 2010 00:00:00 +1200

In this article, Rand Han from Littleredbook takes us on an irreverant journey into the heart of Chinese consumerism and explores the driving forces behind China’s voracious appetite for luxury goods. Take note niche, high-end New Zealand manufacturers.

One billion material girls…for the single man, both a blessing and a curse.

China consumes 25% of the world’s luxury goods; this surpasses every country, even the US. When considering its per capita income of USD 2000 (I’m rounding up here), and the fact that luxury goods are no cheaper in China then elsewhere (not counting counterfeits of course) it’s culturally interesting to probe the reasons why Chinese spend such a large percentage of their income on luxury. Is it a status thing? Is it an appreciation of “the finer things”?

Well its actually a mixture of both, but the recipe in China calls for a different ratio of ingredients compared to the West. Also, cultural factors and Chinese history play a major role in the motivations of today’s consumers. The World Luxury Association predicts China’s demand for products will increase from 86 billion to 136 billion by 2010… crazy right? I’ll attempt to show the logic behind this statistic (wish me luck).

My logo is bigger than your logo!

Yes the #1 reason why Chinese buy luxury goods is to show off. Profound isn’t it? Well, it does get marginally more profound; showing off is a bit different in China than from the West.

A role model for us all.

China considers luxury brands to be symbol’s of status; while thats true in most places, it’s super-true in China. Due to stiff competition among, oh a billion or so peers, Chinese tend to use luxury goods as a territorial warning; i.e. "I’m successful, I can afford to surround myself with all this glittering **** so back the **** off!"

Well maybe they don’t say it like that, but you can feel the implication. Statistically, 64% of Chinese equate luxury brands with success, while a small 1% feel luxury brands have superficial connotations; so we tend to see a lot of “social statements” being made using luxury products, while in the West, a more understated approach is desired.

There is a great deal of function without emotion in play here; one could say that the average Chinese hasn’t had enough time to emotionally bond with a luxury brand (just when you thought coke’d out models were universally adored), so interchangeability between brands is common (like coke’d out models I assume). (Source: TNS, Luxury Brands and Middle Class Chinese, Online survey, Nov.2006)

Evolution of materialism

As Chinese become more familiar with luxury brands as a part of their lives, we see a gradual evolution from pure materialism, to emotional bonding with a particular brand (cynically: focused materialism). This is seen pretty much only in Shanghai where the effect of American imperialism is most obviously felt; products bought include watches and furniture by men, and jewelry and purses by women. Makes sense except for the men + furniture combo… that’s a head scratcher.

Men vs. women; who’s the bigger spender in China?

Surprisingly, men, 25-40 years old, come out ahead in terms of annual spend (compared to the West this group would be 40-70). This aligns with recent Chinese history and it’s 20+ year flirtation with capitalism. Among the richest men in China, 3 out of 5 are in their 30s, and the average age of the richest men is about 47 (vs. 60 in Europe).

So what do these sugar daddies buy? Well as the label entails, quite a few things for their wives and mistresses. In fact, luxury consumption among second wives and mistresses (which rank lower then 2nd wives) is highly competitive; brands transform themselves into symbols of power and desire, and as an exchange for time spent.

So do women win this category after all? Not quite; as stated above, the territorial aspect of luxury status motivates Chinese men to purchase the bulk of status-lifting glitter and glam; from new cars, new clothes, and the accessories that go with.

Bribes Gifts.

“Gift” giving is a big part of consumption as well; In China, 50% of luxury consumption is due to gifts from companies to clients. That’s 50% of the present USD 86 billion spent per year. This is largely due to guanxi, the Chinese word for “you scratch my back, I’ll give you USD 43 billion in gifts”; the reciprocal nature of guanxi helps smooth the way for new client wins, recommendations, raises, promotions, and generally, personal gain. Luxury brands are no dummies; realizing this trend many have established Corporate Gift programs for both local and locally-based foreign companies.

Geographical differences, categorical stereotypes.

China’s a big place, and attitudes differ region to region. In the northeast we see the BIG LOGO and outstanding (read: gaudy) decorations reign supreme. In the South, consumers tend to be a bit more conservative and pay attention to detail.

Central areas, like Chengdu, do not earn a high income compared to the rest, but consume similar to Americans, buying luxury items that are beyond their means. In cosmopolitan Shanghai, BIG LOGO and blingbling are slowly being phased out and understatement is becoming more fashionable.

Challenges for brands entering China.

This brief introduction into China’s consumer culture begs the question “So now what?.” In a follow up blog entry, I’ll go over many of the challenges brand’s face when entering the market; and a general approach to solving potential problems.

This article first appeared on Littleredbook, a blog dedicated to to giving visitors deeper look into China advertising, marketing, communications and culture.

Rand Han is Strategy Director at Bloodyamazing Co., Ltd. (est. 2006), is a full service Shanghai-based advertising and marketing communications agency.

Source: My logo is bigger than your logo! The culture of Chinese consumerism.

SMEs in China: Much Opportunity But Little Room For Error

Tue, 03 Aug 2010 00:00:00 +1200

Dan Harris and Simon Malinowski from the acclaimed China Law Blog share some insight into the common pitfalls SMEs face when doing business in China.

SMEs going into China simply cannot afford big mistakes. Generally, they have to get things right the first time.

It is with that in mind that Technomic Asia's Business Podcast has just started a new series of podcasts on Small- and Medium-sized Enterprises ("SMEs") in China. Their first podcast (Kent Kedl interviewing Steve Crandall), entitled, "Small- and Mid-sized Challenges in China: An interview with Steve Crandall," focuses primarily on market opportunities available to SMEs in China and how not to get burned.

• China is a unique opportunity for SMEs. Crandall notes that growth for SMEs in the first 6-18 months of their existence is usually slow in already well developed Western countries. On the other hand, China’s rapid development and growth leaves a lot of open market space foreign SMEs to maneuver and grow.

If you’re going to do China, know China

China is not an entire market onto itself. For example, the social, cultural, and linguistic differences between, say, Guangzhou and Beijing could not be more apparent. Consequently, viewing China as an entire market is a mistake; it is more appropriate to look at it as a number of unique markets under a larger umbrella. The regional diversity, coupled with a good degree of autonomy between the provinces necessitates knowing your target markets.

Though China's regional diversity complicates entry, it also magnifies the market gaps that allow for growth.

If you’re going to do China, do it right.

Included in all of that regional diversity is the somewhat autonomous functioning of the regional government entities. In order to smoothly enter one of these markets, developing knowledge of and strong ties with the regional government is almost a necessity.

Successful entry into China requires serious due diligence and a comprehensive game plan. The risks are serious and significant for SMEs, and a failure to adequately prepare for them can be disastrous. Kedl and Crandall both point to IP protection and employment as potential minefields.

Multinationals have a wealth of resources available to the, including the ability to withstand failed experiments. SMEs do not have this luxury and Crandall notes “they have to get it right the first time.

Common mistakes

I have seen too many SMEs lose big due to one mistake not to vehemently agree with this podcast. The most common "lights out" mistakes I have seen have been the following:

Purchasing product from China without a finely tailored OEM Agreement. The American company gets a massive shipment of bad product from its Chinese supplier and it has no real recourse against the Chinese company and insufficient resources to both secure new product and pay off its disgruntled customers.
Failing to properly register key trademarks in China. If you do not register "your" trademarks in China, someone else will. And then right when your largest shipment is a bout to leave China, you will get a call from the company that registered "your" trademark. They will be calling to let you know that unless you pay them a massive licensing fee, your shipment will never leave China.
Thinking that because you have gotten away with functioning illegally in China for years (or because you know someone else who has) that you will never get caught. Absolutely not true. My firm has been contacted by a firm that was in China for twelve years before it was unceremoniously shut down for not being properly registered. We were also contacted by a company who was allowed by the local government to operate a business for nine years against all zoning regulations, but then shut down one month after a new administration took over.
Failing to have a written (Chinese language) employment agreement with all employees and failing to have an employee manual (again, in Chinese) explicitly setting out the grounds for termination. Though I have yet to see a company have to close down for these mistakes, I have seen many instances where companies subjected themselves to expensive and protracted (and always losing) litigation for these mistakes.

I could go on and on.

This article first appeared on China Law Blog.

China Law Blog is published by Harris & Moure, is an international law firm with offices in China and "have been involved in China long before China became the hot topic".

Source: SMEs in China: Much Opportunity But Little Room For Error

A China Strategy - Beyond Cows and Trees?

Mon, 02 Aug 2010 00:00:00 +1200

The purchase of a majority share in Synlait by Bright Dairy should be hailed as a positive signal that overseas interests are keen to invest in our productive sector even if successive Governments have encouraged New Zealanders to invest predominantly in residential property rather than taking equity in areas which should produce wealth, jobs and expansion of our economy.

It’s hard to see where else venture capital will come from whilst we continue to indulge our love affair in the housing market.

As it is China is not a particularly large investor in New Zealand at the moment, it’s just when there is interest, there seems to be a subconscious xenophobia, maybe media inspired, which seems to create negativism and resistance.

But surely whilst we are debating the China strategy for the future, we must have in mind both the continued momentum of NZ interests in China as well as the opportunities to create new enterprises in New Zealand with FDI.

A successful China strategy, therefore, first requires an alignment of departmental objectives - overseas investment, education, immigration, customs, tourism to name a few.

Then we probably need to look beyond merely the quantity of mercantile goods traded as the sole measure of success. This measure fails to take into account the contributions of, for instance Rakon and Biovittoria – again to name but a few.

Are there qualitative measures to form the basis of our China goals? Investment – both ways – must come into it but there are other areas where we should be engaging to exploit fully the relationship built up in the wake of the FTA.

As it is, the Prime Minister has set a huge challenge to double trade in five years (based on the import and export returns from the Department of Statistics).

To meet that target and at the same time to bring our level of exports to China to match imports from China requires exports to lift each year by about 24% for five successive years after an increase of around 40% in 2009. Given the predominance of commodities in these trade statistics, that’s an awful lot of cows and trees!

No harm in setting ambitious targets. It focuses the mind and sends the right signals to our trading partner. But could the next stage be to encourage business relationships that go beyond simply waving the export ship goodbye as it leaves our shores and greeting the import ship as it berths in our ports?

Pat English, our Consul General in Guangzhou, speaking to members at a hugely informative meeting taking place as the Synlait/Bright Dairy marriage was being announced, strongly cautioned that China was changing whilst what we were being told about China was not. In other words, the advice and information being purveyed about China was getting out of date.

Even more necessary then to engage within the China market and with the Chinese in China as “made in China” becomes a very important marketing tool when selling in China.

You can learn a huge amount about China by going there, seeing how it’s developing and talking to experts, who being on the spot, are able to keep abreast with trends in China.

NZCTA plans Missions to Shanghai Expo, Hangzhou and Nanchang. The latter, in Central China, is for the 5th Central China Expo, representing six provinces with a combined population of a mere 360 million!

Details are available soon. Update yourself or introduce yourself to China by using this very user friendly way of meeting business people and finding out what’s going on and where the opportunities are.

Enquiries to director@nzcta.co.nz

Source: A China Strategy - Beyond Cows and Trees?

NZCTA: Tribute to Victor Percival, ONZM

Fri, 30 Jul 2010 00:00:00 +1200

It’s our sad task to advise the death of NZCTA Honorary Lifetime Member and former Chairman, Vic Percival on 24 July at his home at the age of 82.

We repeat and update the tribute we made to Vic after he had been awarded his ONZM:

Victor Percival recognised the need to re-align our trading partnerships and therefore the potential of China before the signing of the Treaty of Rome in 1957, some time before UK joined the EU and it's fair to say somewhat ahead of politicians in the late fifties.

He therefore forged relationships in China despite lukewarm support from Government and Government agencies.

Doing business with and in China was difficult and travel was arduous, often by train and with only the most basic accommodation facilities available.

Percival, or Pan Xi Fu (Western Bhudda) as the Chinese named him, was amongst the first “foreigners” to attend the Canton Trade Fair in 1957 and was only “foreigner” attending that fair still alive to attend the 100th Canton Fair in October 2006.

For this he was recognised with an award from Premier Wen (of which more below). In between he attended at least fifty trade fairs.

Through his friendship with Rewi Alley, Vic became a lifetime Trustee of the Rewi Alley Trust. And with Alley and Kathleen Hall, he is one of only three New Zealanders included in the prestigious list of Special Friends of China.

He has been honoured many times in China including Honorary Membership of the China Council for the Promotion of International Trade and at that organisation's 50th Anniversary he was singled out against 200 Foreign Dignatories to be seated beside the Chinese Premier.

Vic was a founding member of the New Zealand China Trade Association in 1981, has twice been Chair and finally Honorary Lifetime Member.

This was not a sinecure, he remained an active member of the Executive and because he was so well known throughout China was often the first point of contact for visiting delegations, organising programmes and making contacts.

Vic was still transacting business with China and, as mentioned and despite his years, still occasionally travelled there. Notably, he accompanied the official NZCTA led Delegation (“official” in that it was supported by the Chinese Embassy and facilitated by Government agencies in Guanzhou) to the 100th Canton Fair in October 2006.

He played an invaluable role as mentor and guide to many delegates on their first China experience but more importantly played a major role in the official proceedings.

As the sole “foreigner” still alive who attended the first Canton Fair, he not only received an award from Premier Wen but was the only non-Chinese speaker at the Grand Opening Ceremony, addressing the Premier, dignatories, an audience of 5000 at the event and an audience of many millions on live TV.

In his irrepressible way and to the alarm of the interpreter, Vic also deviated from the approved speech to promote the new Air New Zealand service to Shanghai. Premier Wen made a point of singling him out and speaking to him, although the protocol was not to indulge in any informal variances to the programme. For the NZ witnesses to this event, it was breathtaking, awe-inspiring and made them very proud to be New Zealanders.

Vic was truly a pioneer in opening a market which was then at best unfashionable but which is now crucial as evidenced by the current FTA agreement.

His experience and wisdom was passed on through his readiness to offer advice, mentoring and asistance to Government officials and China Traders alike.

His biography was published two years ago, and apart from being thoroughly entertaining, it has become an essential history and guide for future China hands.

In the 2008 New Year's honours list notable for the scarcity of recognition of business people, Vic Percival was awarded a well merited and overdue Officer of the Order of New Zealand Merit (ONZM).

His last formal appearance was only last month when he sat at the top table at the luncheon for China Vice President Xi Jinping.

He was the confidante of prime ministers and ambassadors. When New Zealand in 2008 signed the world’s first country-to-country Free Trade Agreement with China, and other nations lined up to secure such an arrangement, it was Victor Percival whom New Zealand Prime Minister Helen Clark termed: “The man who started it all”.

Source: NZCTA: Tribute to Victor Percival, ONZM

NZCTA: Reaping the rewards

Tue, 29 Jun 2010 00:00:00 +1200

The visit of Vice President Xi Jinping gave the opportunity for a broader segment of New Zealanders to reflect on the importance of our relationship with China.

Those China hands close to the action have recognised and followed the rapid increase in trade and the elevation of China from fourth, then third and now second export partner as well as second overall trading partner.

The 2008 FTA certainly seems to have had some impact, in our export performance, as, in addition to the much publicised increases in milk powder and logs, which were primarily driven by market forces, manufacturing exports increased by 10% over a period when over all markets, our export returns decreased.

But almost more importantly the vice presidential visit emphasises the warm and positive relationship which has developed between the trading partners, which in turn has created an aura within which it has been easier to develop new trade and business partnerships.

The Chinese government has credited to New Zealand the four “firsts”, which underpinned the positive climate in which the negotiations were conducted… the first country to conclude bilateral negotiations with China, paving the way for its accession into the WTO; the first country to recognise China as a market economy; the first developed country to enter into FTA negotiations with China, and then the first to conclude and sign an FTA with China.

In his speech at the Auckland business lunch, Trade Minister Hon Tim Groser added a fifth “first”, the only country to have an FTA with both China and Hong Kong.

Xi stressed that the Chinese side has always taken a strategic and long-term approach towards its ties with New Zealand, regarding it as a good friend and partner in the Asia-Pacific region.

The Vice President put forward four-point proposals on further boosting the bilateral relationship, including more political, economic and cultural exchanges and, significantly, more coordination on major international issues. Several cooperation agreements on trade, finance and cultural exchange were signed during the visit.

The FTA seminar, “Reaping the Rewards”, which NZCTA co-hosted with NZTE and two Chinese partners, the Chamber of Commerce for Import and Export of Machinery and Electronic Products and The Chinese Bureau of Investment Promotion, simply underlined the complementarity of the relationship.

Shi Zhiyuan, General Manager of Qingdao based multi-national Haier, spoke of its international objectives and of Fisher and Paykel’s position within its strategy. That was counterbalanced neatly by NZCTA Board Member and Teknatool Managing Director, Roger Latimer, who is also manufacturing in and exporting from Qingdao.

Mme Yao Wenping, Vice President of the Chamber and NZCTA Chairman, Stuart Ferguson urged the business sector to explore and utilise the opportunities presented by the FTA. The Investment Promotion Agency’s Deputy Director General, Mme Zhang Yingzin outlined opportunities for NZ investment in China and Kefeng Chu of NZTE outlined the investment regime in New Zealand. Finally Qi Jinming of the China Railway Materials Commercial Corporation saw opportunities to supply heavy engineering products to New Zealand whilst EMA CEO Alasdair Thompson countered with some good news stories of NZ companies in China.

An audience approaching 400 including 140 members of the Vice President’s Business Delegation from all parts of China were left in little doubt of the opportunities available or of the positive attitudes of both bilateral partners.

Photo: NZCTA's Chairman Stuart Ferguson and Honorary Lifetime Executive Member, Victor Percival listen to Trade Minister Groser's speech at the Langham Luncheon for Vice President Xi Jinping, (seated to left of the Minister's chair)

Source: NZCTA: Reaping the rewards

China Joint Ventures: Legal Due Diligence

Tue, 29 Jun 2010 00:00:00 +1200

Part Two of the China-Briefing.com “Joint Ventures as a Strategic Investment” series.

Legal due diligence is a complex and contentious issue when it comes to joint ventures in China. Many investors seem to regard it as a waste of time and money; they’ve developed a relationship with an existing supplier, feel the guy can be trusted and see no need for delving deep into the Chinese company’s position. Yet it is as this stage that the foreign party can be most vulnerable.

By Chris Devonshire-Ellis and Richard Hoffmann

One of the issues about foreign investment in China is that the business, as partially foreign owned, is “upgraded” in status by the Chinese authorities in terms of attracting a higher level of official scrutiny. Operational, administrative and legal issues that the Chinese company may have been able to get away with are less likely to be unpunished or tolerated as soon as a foreign investor steps in.

Legal due diligence prior to investing in a joint venture in China is therefore a prerequisite not just to find if there are any skeletons lurking, but also to determine where the current managerial operations are in the existing company and what needs to be changed to bring it into compliance both with an increased amount of interest from the Chinese authorities but also with the international standards the foreign investor must adhere too. Accordingly, legal due diligence both provides peace of mind over the actual situation, can raise any areas of concern, and also provides a blueprint for what needs to be done to upgrade the potential businesses future integrity.

In this article we explore some of the issues that often crop up in legal due diligence areas:

Business licensing

Is the Chinese companies’ current scope of business compatible with the intentions for the joint venture? Are all the required operational licenses in place? Are they transferable to the joint venture? These are all issues that need to be clarified, and the mechanism for these licensing rights carried out to transfer them where necessary to the JV. It is also useful for the investor to note expiry dates on these, and ensure that renewals are carried out in time. The same is true of the Chinese company. Business licenses in China have to be renewed. If his license to operate expires in 12 months and you are committing upfront finance for a 20-year joint venture, you need to assess the risk factor of his own licensing renewal situation. It is also wise to check that the name of the legally responsible person on the Chinese business license is the same as the person you are dealing with, and if not, determine why.

Corporate structure

It is also sensible to check that all the facilities you believe are being transferred to the JV are in fact all within the same Chinese business. They may not be. If you set up a JV and then find you’ve omitted to realize the finishing function is actually carried out by a workshop belonging to a separate company, you can be in for a world of hurt. Check that all facilities you require are part of the agreement and that they are all included. If not, it is possible to bring more than one Chinese company into a JV to correct this, or at least to be able to negotiate supplier contracts from a position of pre determined strength.

Land use rights

There are two types of land use rights in China, Granted and Allocated. Granted rights mean you own the land, while allocated mean you have the right to use it. Granted rights sell at a premium. Chinese businessmen will often include the land use rights valuation as their contribution to the JV equity. You need to ensure that he really does have these rights, that the pricing is correct and that the rights operational term is intact. These issues can be cross-checked independently at the local land bureau; all Chinese towns and cities have one. Difficulties however can occur under certain circumstances; subsidiaries of state-owned enterprises in China may not have a land use rights certificate for verification, they will need to obtain one from their parent. Also, fairly common in rural areas are when the rights are held by a “village collective.” The head of the collective needs to sign his approval over the transfer of rights. A very common fraud in China is to “sell” allocated land use rights to the JV, but inflate their equity position by using the costs of granted rights as their contribution. This is a means to get the foreign investor to inject more cash. Attention to detail needs to be paid in this area if an expensive mistake is to be avoided.

Pollution

It may also be wise to have core samples taken if the ground has been used for industrial purposes. Labs exist in Hong Kong now to process these. Regrettably, most industrial land in China is polluted, however the concept of polluter pays is still in its infancy in China. It makes sense to find out the extent of damage in the ground, then use any untoward findings as either a means to negotiate a lower land value, or at least reach agreement over whose liability clearing it up will be. Local governments are starting to assess pollution damage, and if your JV is sitting on such land you may have to pay to have it cleaned up.

Access and utility rights

Not all land is directly accessible to major roads, and other relevant connections. In this case, access rights need to be obtained to ensure the JV property is easily accessible. In terms of utilities, especially electricity and water, these need to be identified and specific usage meters arranged exclusively for the JV. Otherwise overcharging is likely.

IP

You need to ensure that all IP you may have been using in a supplier relationship is still under your ownership. Suppliers have been known to ‘helpfully’ register your own brand in China, and then omit to give it back. If you’ve been using your supplier also to help get you established, these types of issues need to be checked. IP agreements and technology transfer we will cover in a later article.

Valuations

Valuations of equipment and buildings can be notoriously erratic in China, not least because there may be a relationship between the valuer and the owner. It can be a tough negotiating position over which valuer to use. If you wish to insist on an independent valuer who is not known to the Chinese partner, you will usually be expected to pay the costs. However, this is usually worthwhile. Professional valuers such as American Appraisal or the major Real Estate firms in China will have a valuations department, and will usually be accurate, fair and use internationally accepted standards in carrying out work. Using them is to your advantage.

Background checks

Under some circumstances it would be prudent to know exactly who your partners are. There may be political and legal ramifications if you are not fully aware of their background. This can be difficult to find out in China, as there is no public records office. However some diligent, low key questioning may reveal details. If not, or if you suspect potential issues, there are low-key investigations agencies in China that are able to provide a dossier on identities, backgrounds, and any legal problems pending or previous.

Professional advice

These are just some of many legal due diligence issues that need to be addressed; they vary depending upon each specific case. A good professional firm will be able to discuss all the issues with you, assess what needs to be checked through, and allocate dedicated on the ground staff to look into and report back. We do not recommend using any firm that subcontracts such work, as if they are not in control of, or managing the process directly, the margin for error is significantly increased. We recommend only using firms with a proven track record and with applicable resources and offices in China.

Chris Devonshire-Ellis is the founding partner of Dezan Shira & Associates and lived in China for 21 years. He has over 17 years of experience in establishing JV’s in China. He is now based in Mumbai.

Richard Hoffmann is a senior associate of Dezan Shira & Associates and has seven years experience of foreign direct investment in China. Richard also writes for the Legal Ease column on the Beijing Review, China’s only English national news magazine. He is based in Beijing.

Source: China Joint Ventures: Legal Due Diligence

Australia-China: Down under on the up

Tue, 29 Jun 2010 00:00:00 +1200

While Australia has always shared significant ties with China in terms of trade and culture, this strategic relationship has become more important than ever before. Elaine Wu from Shanghai Business Review contemplates this ever evolving and ever relevant (to New Zealand) relationship.

CHINA’S RELATIONSHIP WITH Australia has never been more important. As China’s economic engine powers ahead, leading global economic recovery, its appetite for raw materials, minerals and energy supplies continues to drive its relationship with resource-rich Australia. With each passing day, there are increasingly more high-profile commodity deals between China and Australia dominating the airwaves. Last year, PetroChina bought USD41bn of liquefied natural gas (LNG) from Australia’s Gorgon gas fields and China’s Yanzhou Coal Mining acquired Australian coal company Felix Resources for nearly USD3bn. This year, PetroChina and Royal Dutch Shell jointly offered USD3.1bn to takeover Australia’s Arrow Energy, which would give China a foothold in Australia’s burgeoning coal-seam gas industry. In March, Australia signed its largest ever LNG deal worth at least USD56bn with the China National Offshore Oil Corporation. These deals have cemented the magnitude of the Sino-Australian partnership. In 2008-09, China was Australia’s largest trading partner, with trade valued at AUD83bn (USD77bn) -- an increase of 30 per cent from the previous year, according to Australia’s Department of Foreign Affairs and Trade (DFAT).

Research from Australia’s Commonwealth Securities showed that Australia exported more than AUD42bn worth of goods and commodities to China last year, with natural resources underpinning the majority of Australia’s trade with China. While iron ore accounts for the majority of total exports to China, Australia also exports a significant amount of agricultural goods to China, including canola, live animals, fish, wine, meat and wool. In turn, China remains Australia’s largest source of imports, amounting to AUD39bn (USD36bn) in 2008-09. China’s exports are dominated by merchandise like clothing, communications equipment, computers, toys, furniture and electronics. “[Bilateral trade] grew during a time when we were right at the bottom of the global financial crisis. Both countries have shown that there is great strength and resilience in their economies. Our relationship is a strong and mutually beneficial one, reflecting the fundamental interests that we have in common,” says Tom Connor, Consul General of Australia in Shanghai.

Investment on the Rise

Although bilateral investment between the countries has lagged behind trade, it is steadily increasing. According to DFAT figures, Australia has approved more than AUD39bn (USD36bn) of Chinese investment since November 2007. In 2008, more than AUD26bn (USD24bn) of Chinese investment was in the resources sector alone. In China, Australian investment reached AUD7bn (USD6bn) in 2008, much of it in commodities sectors such as minerals and steel. BlueScope Steel is one of Australia’s leading manufacturing investors in China, and its metallic coating and painting facility in Suzhou is the largest single investment in a plant by an Australian company in China. The company has been operating in China for over 20 years in premium steel building products and pre-engineered steel buildings, with seven world-class manufacturing facilities and 2,000 employees. Another important commodity in Australia’s trade with China is wool. China has rapidly become the biggest buyer of Australian wool, creating opportunities for companies such as Michell, one of Australia’s largest exporters of wool fibre. A family-owned company since 1870, Michell now operates speciality processing facilities around the world including in Suzhou.

Service Opportunities

The expansion of China’s services sector continues to provide increasing opportunities for Australian investments. Already, more Australian service providers are engaging in lucrative business deals with Chinese companies, especially in the financial sector. Australia and New Zealand Banking Group (ANZ), the country’s fourth-largest lender, recently received preparatory approval from Chinese authorities to establish a locally incorporated banking unit in China, making it one step closer to becoming the first Australian bank to gain access to the domestic retail banking market. Australia’s other financial institutions are also increasing their China presence. Westpac Bank opened its Shanghai branch in 2008 and the Commonwealth Bank of Australia opened its first Chinese branch in Shanghai in March. “They see themselves as fitting in very well with Shanghai’s plans to become a global financial centre. As prominent players in Australia, they are very interested in being here and being part of that story,” says Connor.

There are also a number of small Australian boutique service companies operating in Shanghai that have prospered. RHK Legal, a law firm set up by Australian Richard Kimber in Shanghai in 2007, has carved a successful niche in advising on a range of legal issues, particularly in China’s dynamic M&A sector. The company has just expanded with a new office opening in Hong Kong and has just taken on Ms. Ray Lv to strengthen its M&A and IPO division. She joins from a local law firm specializing in these sectors.

Green Design

China’s construction and design sector is another area where Australian companies are showcasing their expertise. Operating in China since 1993, Bovis Lend Lease offers a broad range of construction, management and design services to multinational clients. The company is headquartered in Shanghai and to date has completed over 200 projects in China. Key projects in their portfolio include the Shanghai International Expo Centre, Mary Kay Cosmetics Facility, Shanghai Racquet Club, and the Beijing Yin Tai Centre. Numerous Australian companies are playing active roles in green building construction and sustainable urban design. For instance, ASPECT Studios specialises in landscape architecture and urban design committed to providing positive outcomes through contemporary, innovative and sustainable design.

In China, the firm has worked on designing the Shanghai Nanyuan Waterfront Park, one of the largest city parks adjacent to the World Expo site, the Shanghai Baoshan Waterfront Greenbelt, and the Anhui Guangde Forest Golf Club. Total Energy Solutions is a Queensland based company that designs and installs efficient small-scale power, heating and cooling systems which reduce water and energy consumption. The company has delivered comprehensive energy conservation solutions for health providers in China, including a project that saved Shanghai’s Yue Yang Hospital more than RMB2mn a year in energy costs, representing a more than 10 per cent reduction of the hospital’s total energy use.

Cultural Ties

In China, Australia benefits from an increasingly well-liked image as the two countries embark upon more cultural exchanges. Chinese people are gaining greater exposure to Australian culture through the spread of Australian food and beverage. “Australian food is steadily becoming popular [in China] with the emergence of many talented Australian chefs, and Australian produce is well known for its quality and freshness,” explains James Sing, owner and manager of Kakadu, the only Australian-themed restaurant in Shanghai specialising in authentic, modern Australian cuisine. Australian beer and wine has also enjoyed great popularity amongst Chinese consumers. Australia is the second largest wine exporting country to China after France, and great effort is being undertaken to expose more Chinese consumers to the country’s distinct wines. ASC Fine Wines is an exclusive importer and distributor of Australian wine in China and has won awards from the Australian government for helping to develop a market for Australian wine in China. “We’re involved with a multi-faceted approach that has been crucial in the long-term development of Australian wine in China, including education, events, promotions and employment,” says Matthew Gong, public relations and communications manager for ASC.

Just Beer, an importer and distributer of Australian beers in China, was formed when two major Australian brewers, Foster’s and Lion Nathan, backed out of investments in China, leaving a void in the market for Australian beers. “A lot of companies are in the lucrative imported wine market, but very few look to tackle the beer market in China. The potential growth here is largely untapped,” says Frank Li, founding partner of Just Beer. In recent years, tourism and educational exchanges between China and Australia have been on the rise. Education and tourism make up Australia’s biggest service exports to China. With more than 140,000 students in Australian educational institutions, China is Australia’s largest source of overseas students.

China is also the fifth largest source of international tourists to Australia, while the number of Chinese visitors is expected to grow to nearly one million by 2017. As a result, travel between China and Australia has grown more than 40 per cent in the past three years, and carriers like Qantas, Australia’s national airline, are well positioned to capitalise with its daily flights between Shanghai and Sydney. “China is an extremely important market for the Qantas Group as Australia is an extremely popular destination for Chinese people. Education, trade and business links between China and Australia continue to develop, and Qantas is there to offer the best value and service for customers travelling between the two countries,” says Stephen Farquer, general manager of Qantas Airways China.

China and Australia continue to strengthen their partnership and invest significantly in their mutual development. Although recent incidences like the sentencing of four Rio Tinto employees by a Chinese court on bribery and industrial espionage charges have some analysts questioning the safety of the investment environment in China, Consul General Connor believes otherwise. “In terms of fundamental commitment by Australian and Chinese companies, there is nothing to indicate that there is anything less than an enthusiastic embrace of each other.”

Source: Australia-China: Down under on the up

Navigating through Taxing times in China

Tue, 29 Jun 2010 00:00:00 +1200

Let’s face it; tax is confusing enough as it is without the legislation itself being unclear. Thankfully, China’s State Administration of Taxation (“SAT”) recognised that its Corporate Income Tax (“CIT”) law had fallen into this trap. Recently, the SAT has issued Circular 79 to clairfy the timing of income recognition, the tax treatment of certain expenses and the determination of the tax base for fixed assets under the CIT law.

Income Recogntion

Circular 79 addresses the recognition of particular types of income including rental income, income arising from debt restructuring, capital gains from the transfer of equity interests, as well as dividends, profits and other investment income.

Rental income

Under the Detailed Implementation Rules (“DIR”) to the CIT, rental income arising from the provision of the right to use fixed assets, packing materials or other tangible assets is required to be recognised for tax purposes on the payment dates set out in the relevant contracts. Circular 79 clarifies that where the lease contract spans more than one calender year and the rent is paid in advance, the rental income can be spread evenly over the leasing period and recognised as taxable income in each of the years within the lease period.

Income arising from debt restructuring

Income derived from debt restructuring is required to be recognised as taxable income on the date that the debt restructuring contract or agreement comes into effect.

Capital gains derived from equity sales

Circular 79 reiterates the CIT law by stating that income from equity sales is calculated as the difference between the sale proceeds and the purchase price, and that the retained earnings and reserves attributable to the equity sold cannot be deducted from the sale proceeds.

Note also, that Circular 698 requires non-resident sellers to file tax returns and pay CIT within 7 days of the earlier of the transaction date specified in the sales contract, and the date the sale proceeds are received. For more information on Circular 698 please see our February 2010 article.

Dividends, profits and other investment income

Dividend income is required to be recognised on the day it is resolved to make a distribution of profits or convert retained earnings into equity. Note that the conversion of share premiums into equity is not required to be recognised as income, and therefore the cost base of the shareholder’s investments will not be increased.

Tax treatment of certain expenses

• Expenses incurred in the generation of tax-exempt income

The CIT law specifically states that expenses incurred in the generation of non-taxable income are non-deductible. However, it is silent on the deductibility of expenses relating to tax-exempt income. Circular 79 clarifies this situation by stating that unless otherwise specified, expenditure incurred in the generation of tax-exempt income is deductible.

• Start-up expenses

Circular 79 specifies that expenses incurred in the start-up period are not to be considered losses in the current period, rather they must be either deducted in the first year of operations or be amortised over a period of 3 or more years in accordance with Article 9 of Circular 98. Please note that once a taxpayer elects to apply a particular method, that method cannot be changed.

• Entertainment expenese

Under the CIT law up to 60% of business entertainment expenditure can be treated as deductible for tax purposes, however, the deduction is capped at 0.5% of the entity’s total revenue for the year. Circular 79 clarifies that for entities engaged in equity investment (including group headquarters and venture capital investment companies), the level of dividends received and capital gains received from share transfers can be used as the basis for calculating the point at which the deduction for entertainment expenditure will be capped.

Determination of tax base for fixed assets

Circular 79 specifies that in situations where a fixed asset has been put to use and the entity hasn’t received all the invoices relating to the purchase of the asset due to a construction payment not being settled, the entity can temporarily use the purchase price specified in the relevant contracts for depreciation purposes. However, Circular 79 also specifies that an adjustment must be made to reflect the actual purchase price within 12 months of putting the asset to use.

Application date

It should be noted that Circular 79 does not specify an effective date, however, as it relates to the CIT law it is believed that it should retroactively applied from 1 January 2008.

VAT

Now that we’ve looked at income tax it’s about time we looked at an indirect tax such as value added tax (“VAT”). The major change to China’s VAT rules is that general VAT taxpayers are now able to deduct input VAT incurred on the purchase of fixed assets. This reform also abolished the preferential import VAT treatment available to foreign-invested entities, including the exemption from VAT on equipment for R&D centres.

Those of you with R&D centres will already be aware that because R&D centres are not general VAT taxpayers, they are unable to credit input VAT incurred on the purchase of fixed assets against output VAT. However, you may not know that this was an unintended effect of the VAT reform, and is one that the Chinese government has been trying to rectify ever since.

In order to resolve this issue the Ministry of Finance, the General Administration of Customs (“GAC”) and the SAT jointly issued Circular 115 which grants an import VAT exemption on “equipment” imported by R&D centres and a full VAT refund on “equipment” purchased by R&D centres that was manufactured in China. “Equipment” means experimental equipment and appliances which are required to carry out scientific and technological research, development and teaching.

Provided that certain criteria are met, the import VAT exemption is available to foreign-invested R&D centres, whether they are independent legal entities, R&D departments or branches of foreign-invested entities. The criteria vary depending when the centre was established.

For R&D VAT exemption criteria please click here.

Numerous R&D centres are able to receive a refund for VAT incurred on the purchase of Chinese manufactured equipment, including, centres meeting the criteria outlined above, national engineering R&D centres, state key laboratories, enterprise technical centres and other qualified centres that have been approved by the National Development and Reform Commission, the Ministries of Finance and Science and Technology, GAC, or the SAT.

Whilst the exemption and refund policies outlined currently ‘fix’ the problem caused by the 2009 VAT reform, they are only a temporary fix, because the benefits under Circular 115 are only valid until 31 December 2010. This means that in order to get the benefit of these VAT relief measures you need to act now and assess whether you will qualify under the exemption.

For any further details please contact Joanna Doolan, Tax Partner at Ernst & Young and co-ordinating partner for the Ernst & Young NZ China Overseas Investment Network joanna.doolan@nz.ey.com and Florence Wong Senior Manager at Ernst & Young florence.wong@nz.ey.com

Source: Navigating through Taxing times in China