New Zealand China Trade Association: China General Interest

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

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?

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

MARKETING: Click to Add to Cart

Mon, 24 May 2010 00:00:00 +1200

China’s online retailing is growing rapidly despite the global slowdown, with overseas firms making a beeline for the sector, eager to tap into its vast potential.

Although many countries were severely hit by an earlier global recession, China’s online retailing market appeared unaffected and even experienced an unexpected boom. Based on the Statistical Survey Report on the Internet Development in China, released by China Internet Network Information Center (CINIC), the number of netizens in China had reached 298 million by the end of 2008, while the amount of users of online shopping had hit 74 million. That means almost one in four Internet users has experienced online shopping in China.

The CINIC report shows that till the end of 2009, the size of China’s Internet users was 384 million, with the annual growth rate being 28.9 per cent, which provides a great potential for online retailing. Although, China is still adjusting to its new development strategies and online retailing faces several other challenges, a large number of foreign companies eye the country, hoping to tap its continuously growing market. Online retailers would be able to reach a rapidly growing customer base seven days a week or even 24 hours a day. Compared with shop in-store, shopping on the Internet has no such barriers as limited store opening hours and inconvenient store locations. The opportunity of shopping online is virtually unrestricted.

Driving E-Commerce

E-commerce in China is over 10 years old. At the beginning, people only shopped online for limited products such as books, music and video products. However, Chinese netizens now have a wider range of options on their online shopping lists ranging from apparel, houseware to digital products. At present, there are C2C, B2C, and B2B ecommerce in China. In 2009, China’s online retail market sustained its high growth with its trading size rising to nearly RMB252.6bn (US$37bn). Although C2C still accounts for the largest share of the online retail market, 8.7 per cent growth of B2C market is far ahead, according to China E-Retail Market Trend Prediction 2009-2012, issued by Analysys International, a leading advisor about technology, media and telecom (TMT) industries based in China. “As seen from the current situation, the main driving force of the e-commerce market is B2C, partly because the traditional enterprises and foreign firms now more choose this model to enter the Chinese market, which helps the B2C market have a higher development than C2C. In addition, the B2C platform is more mature; for instance, Taobao mall. Manufacturers will increasingly adopt this platform in the future,” says Fei Cao, senior analyst of Analysys International.

“China’s B2C e-commerce has entered a stage of rapid development, and we expect to see this fast-paced growth continues during the next few years. We believe the key to a successful B2C e-commerce is not only the customer base acquisition, but also the quality of the customer service a company can offer. The enterprises’ responsible attitude towards customers will decide the height of its B2C’s development level,” says Anthony

Chow, President of Newegg China, an American e-retailer of electronic products.

The Hurdles

The Chinese B2C market’s development has been largely dependent on several factors such as logistics, payment and policies. The nationwide logistics costs are relatively high and only a few providers are able to operate it. For foreign companies, this doesn’t justify selling ordinary products at cheap prices. To succeed in the Chinese e-commerce market, it would be better for them to focus on premium products that are exclusive and unique. “The biggest advantage for foreign online retailers is that they are able to bring new products, which are more competitive,” says Cao. Additionally, the poor distribution networks cause geographical barriers for sellers to reach buyers, which make sending purchased items difficult. Smartdirect.cn, a B2C online supermarket in Shanghai, offers Western and Chinese food & household items. Different from some other traditional online retailers, Smartdirect.cn not only sells products, but also provides accompanied service, including orders receiving, logistics and distribution, settlement payments and after-sales service.

“We are one of the first to start an online supermarket in China. Every company has their own websites, tying to sell their food and wines. You need to put it all together - a onestop shop. Several competitors who wanted to do the same thing went out of business. It’s not that easy. We do same-day delivery. The challenge is logistics. In China, online sales and logistics are separated everywhere,” says Moritz Fischer, Operational Manager of Smartdirect.cn. Amazon, which has its own logistics and distribution system, started to offer free delivery on all orders from 2007 to boost its performance in the Chinese market. “Compared with C2C, price and quantity are not competitive for B2C. In addition, logistics has always been one of the main issues.

The distribution system is not mature enough to meet market demand. Therefore, some B2C companies choose to establish their own logistics and distribution system,” says Cao. Another problem of China’s online shopping is the lack of a safer and more efficient online payment system to handle credit-card transactions. Therefore, cash on delivery is still a main payment method for online shopping. However, with the continuous development of online shopping in China, third-party payment tools, such as Alipay and PayPal, appear to have improved quickly, reducing the risk of online shopping. According to the E-Commerce Development Plan during the 11th Five-Year Period, China aims to support development of ecommerce nationwide within three years. However, some regulations need to be considered while foreign companies establish and operate e-commerce business in China. For instance, a classification of basic value added telecommunication services, issued by the Ministry of Information Industry, says that foreign enterprises, which are subject to license, can only hold a stake of up to 50 per cent.

Fostering Strategic Alliances

Currently, the major foreign companies in China’s B2C market include Amazon, Newegg, and M18. Amazon is the most comprehensive, with a more mature supply and distribution system. As the second-largest online-only retailer in the U.S., Newegg follows Jingdong Mall in China, a local Chinese company.

“Due to its focus on background development, Amazon’s marketing tends to be conservative, so its development is less than local enterprises’. The same for Newegg, whose core market is in Shanghai and development in the rest of areas is small. Its marketing is also limited, and management changes frequently,” says Cao. While China’s Internet user base is large, penetration is not high. With a continuous increase of Chinese netizens and online consumers, there is reason to believe that online retailing will keep growing. Also, the great potential of online shopping market in China certainly heralds more investing opportunities.

Supplier of online business and new economy developments service in China, iResearch is optimistic about the future of China’s online shopping market, which is predicted to keep increasing steadily over the next few years, exceeding RMB1000bn (US$146.2bn) in 2013. Greater market potential comes with fiercer competition. Currently, China’s online shopping market is already heavily served by local online retailers and few international e-commerce companies. As for other foreign firms seeking a slice of China’s online retailing market, they should have right strategies before making the move.

“First of all, we must fully understand and operate in accordance to the Chinese government’s law and regulations. Second of all, it is critical to find right strategic partners and develop long term win-win partnership with them. Last of all, which is also the most important, we must understand our customers and continuously aim on improving our customer service level. If any of these three couldn’t be handled properly, do not enter the Chinese B2C market easily. Otherwise, you may find yourself taking a detour, or even stumbling,” says Chow. Collaboration could be a better choice for foreign companies who are not familiar with the Chinese market and the customers’ consumer habits.

Uniqlo, a Japanese clothing retail chain, launched its online sales business last year on China’s largest consumer e-commerce website Taobao. With a strategic partnership, Uniqlo has made its way into the Chinese online shopping market. “The major aim of setting up online sales in China is to accelerate the expansion of the brand. Taobao’s market share and its users are exactly what we need. As for a foreign company, working with local companies is a faster way to understand the Chinese market and consumers, although there are some differences between Chinese and foreign operating philosophy and modes. It takes time to run in,” says the leader of the e-commerce marketing department from Uniqlo’s China branch. “Uniqlo offers a very famous, popular brand in China, and Taobao would have advertising on selling Uniqlo products. Uniqlo can benefit from millions of people on Taobao, and Taobao has a popular brand. This kind of cooperation is low risk,” says Fischer.

Baidu joined hands with Japan’s No.1 e-commerce website Rakuten last month to establish a B2C online shopping mall. “Rakuten has already gained mature experience and channels in Japan. Now, choosing the right partner to enter the Chinese market is a better means of cooperation, just the same as Uniqlo. Therefore, for foreign enterprises to enter the Chinese market, more consideration should be give to choose a right partner or platform,” says Cao.

When in China

The booming Chinese e-commerce sector and the internet industry are very tempting for many Western companies and investors. However, some global e-commerce giants failed or faced initial problems in the Chinese market, including eBay and Amazon. Operating the

Chinese way is another important element to success. “Before entering China, foreign enterprises must understand the Chinese market and also pay attention to hire and develop local talents to grow the business.

A successful business has to be built with a strong foundation and beliefs on making our customers happy as our first priority. Even though sometime, this might means that a short term loss might be unpreventable,” says Chow. “I think in China, you need to communicate with customers and know how to advertise. It’s very difficult for foreign companies. If I want to advertise to foreigners, the message is different from what I send to Chinese. You need to localize it,” says Fischer. “For example, western websites are usually very straight and simple, but Chinese websites are usually cluttered and confusing.” “There will be more companies and industries getting into this market. The market size of B2C market will be substantially increased, which will attract a large amount of capital investment as well. These abundant resources will promote the rapid development of B2C.

Although, China’s B2C market has been surging, this is still a strategic market, if you are eager for quick success and instant profit, this is not the right business for you,” Chow concludes. To have a successful online presence in China, you need localization of an existing e-commerce platform in the country. When doing business in a market like China, the bottom line is localization so that products can be more competitive in this fast-growing market and can reach Chinese customers easier.

This article first appeared in the Shanghai Business Review.

Shanghai Business Review is a monthly English-language magazine that provides business information and market intelligence to senior executives at Foreign Invested Enterprises in Shanghai and for those looking to enter into the Shanghai market.

Source: MARKETING: Click to Add to Cart

NZCTA: NZCTA Now!

Mon, 24 May 2010 00:00:00 +1200

With apologies for plagiarising our other title but we thought it timely to bring members upto date with our activites and plans for the future.

China moves forward remorselessly, about to become the World’s second biggest consumer market, leading (with some comfort) GDP growth amongst the nations of power, seemingly the crutch of the Australian economy and now our second export market, overtaking USA, having long ago overtaken Japan.

So it absolutely behoves the oldest and most authentic bilateral business association to keep moving forward too, albeit without the resources or power that the subject of its focus possesses!

We herald our new partnership with Export New Zealand with great enthusiasm. Having long enjoyed cordial but informal relationships with both EMA and its relatively recent alliance partner Export New Zealand, the opportunity to work more closely and more formally with the two hugely influential business partners was too good to miss.

NZCTA remains totally autonomous, financially and structurally. The partnership encompasses no merging of stucture and no loss of identity.

But it gives NZCTA the long awaited chance to work together with the ENZ branches nationally, extend our reach and at the same time, brings us an association with a group of dedicated exporters, probably the crucial sector in terms of the businesses engaging with China.

Moreover, our near neighbour, the ASEAN NZ Combined Business Council, has signed a similar agreement with ENZ. All the parties to the partnership see our move as a much needed move in the direction of NZ Inc., a concept, which everyone seems to promote without doing very much to walk the talk!

So this new alliance joins our other active and successful alliances in China, the MOU with the NZ expats in China (KEA) and our long association with the immensely influential CCPIT (China Council for the Promotion of International Trade).

The Vice Chairman of CCPIT Beijing, Dr Zhang Wei and a senior delegation, visited us in mid May, an opportunity for us to introduce our new partners and jointly to endorse the nature of our relationship. We have a firm invitation to reciprocate the visit and we’ll be planning a Mission encompassing Beijing in the not too distant future.

Meantime plans for our September Mission to Shanghai Expo and Wuhan are coming together nicely, to the extent that applications close on 28 May.

Why Wuhan to accompany the obvious desire to take in Expo? Well, we wanted to offer contrast. Those, who already know Shanghai and Wuhan will understand what that means.

Shanghai is a world class city by any measure and few doing business in China omit it from their activities.

Wuhan is also an important centre for NZ businesses - in the heartland, not the seaboard and of cultural and historic significance as well as industrial.

It is also the start of the ultra modern rail service to Guangzhou – 900 km in 3 hours. Not as fast as flying, but hotel to hotel it certainly is and being at ground level, it’s a chance to have a look at rural China too, as we flash by at 350 kph, sipping a quiet beer or cup of ooloong tea.

Hurry to register if this sounds like a trip not to miss!

We have held events in Auckland, Christchurch and Invercargill and plan several others this year in Auckland and also in Wellington, Hawkes Bay, Nelson and other centres. Look out for details on the website and in the members’ electronic bulletin NZCTA Now.

Our event in Invercargill in late April was a massive success with over 100 guests hearing keynote speaker, Bob Major’s presentation on Strategies in China. Our thanks to Bob, whom we’ll try to persuade to join us elsewhere this year and to support speakers, ex Ambassador Tony Browne and HSBC’s Gavin Haworth. And to the Southland Chamber, who made excellent arrangements.

In November, we have one of our signature events, the AGM and lunch – diarise Wednesday 10 November and try to organise a relatively quiet afternoon thereafter. Then on 3 December, we are planning an event in Auckland with partners NZ Contemporary China Research Centre and NZCTA member, AUT.

Then 2011 is Trade Award Year. Those of you who attended the 2009 Awards would have been impressed by the high standard set by the winners of the respective categories and by the scintillating occasion.

Well, for May 2011, we are just starting to plan the next Awards dinner – bigger and better than ever, befitting NZCTA’s 30th anniversary.

In terms of Chinese dynasties, 30 years is a blink of the eye, but in terms of bilateral business councils, it is a phase in the life cycle, where the energy of youth is joined by the maturity of experience.

What we offer members and other stakeholders is a huge accumulation of experience in doing business with China in many facets, a benefit of membership, which is unmatched in the New Zealand international trade sector and which we happily offer to NZ Inc.

Source: NZCTA: NZCTA Now!

NZCTA enters into partnership with Export New Zealand

Wed, 07 Apr 2010 00:00:00 +1200

Media release 7 April 2010 Export New Zealand welcomes new Asian partners Export New Zealand (a division of Business NZ) is optimising the growing opportunities in the Asian market today by entering partnerships with the New Zealand China Trade Association (NZCTA) and ASEAN New Zealand Combined Business Council (ANZCBC). Catherine Beard, Executive Director of Export New Zealand, says the new agreements will create a strong alliance focusing on maximising the benefits of freer trading environments in Asia. “Working in close co-operation with these two well respected business councils will add huge value to the services we can offer our members. In effect, NZCTA and ANZCBC will be our specialist units serving the crucial China and ASEAN markets.” Whilst, the three organisations will work together offering services and activities to their members, they will retain their individual autonomy and operate independently. NZCTA Chairman, Stuart Ferguson said “NZCTA has long held strategic objectives both to increase its support of the export effort to China and to expand our reach geographically in New Zealand and China. “Our association with Export New Zealand will enable us to work with its branches throughout New Zealand to organise events and other trade promotional activities, particularly in centres with a strong export presence.” ANZCBC Chairman, Stuart Walbridge added “We’re delighted to be able to work with a strong national group without losing our focus on the increasingly important ASEAN region.” For further information: Catherine Beard (ENZ) cbeard@exportnewzealand.org.nz 0274 633212, Stephanie Moakes (BNZ) smoakes@businessnz.org.nz 021 959 831 Stuart Ferguson (NZCTA) stuart.ferguson@nzcta.co.nz 021965 896 Stuart Walbridge (ANZCBC) stuart.walbridge@riskmatize.com 021 663 284 www.exportnz.org.nz www.asean.org.nz www.nzcta.co.nz

Source: NZCTA enters into partnership with Export New Zealand

SECTOR: Second growth - China's wine industry

Fri, 19 Mar 2010 00:00:00 +1300

Chinese wine drinking has grown rapidly in recent years. Now local consumers are upgrading to better quality, imported wines.

Hayleigh Davies of the Shanghai Business review explores this trend.

Ernest Hemingway once said “Wine is the most civilised thing in the world.” If this is the case, China is imbibing “civilisation” at an astonishing rate. Influenced by an influx of foreigners over the last ten years and an increase in disposable income, China’s younger trendsetters are now switching their traditional tipples in favour of red and white wines. One only has to look at Shanghai’s vast array of wine bars, compared with the previous choices of baijiu drinking jaunts, to see how far the new wine has come in China.

Recently affirming itself in the ninth slot, up from tenth, as the largest wine-consuming nation on The International Wine and Spirit Record (The IWSR) study, China is definitely one of the fastest-growing wine markets in the world. The nation is expected to move to seventh place by 2012 with a total consumption of 103.5 million nine-litre cases per year. This figure suggests a staggering increase of 36 per cent in wine consumption between 2009 and 2012, and will see China top the one-billion-bottle mark.

Although astonishing, these statistics do not actually convey the true reality and total value of the market. In fact, China’s wine intake is fairly low in comparison to other wine consuming nations, largely due to the small percentage of imports. “It’s important to remember that foreign wines face a fast-growing supply of Chinese wines,” says Ian Ford, managing director at Summergate Wines - a large wine importer and distributor to the Chinese market.

Overcoming Chinese Giants

Herein lies a problem for many wine importers and distributors eager to maximise profits. Local wines account for 90 per cent of wine consumed in China. “There is currently a massive discrepancy in the knowledge and quality of wine in China, with the majority of Chinese wine drinkers ambivalent to the education of selecting and tasting quality wines,” says Julien-David Le Gentil, sales and marketing director at J-Vino Fine Wines, a Chinese-owned French fine wine importer.

The majority of wine drinkers are motivated by its trendiness and association with wealth and success rather than quality.

Poor wine knowledge is reflected from the shelves of the majority of supermarkets and convenience stores. Unlike Western markets where the average bottle of wine is sold for USD10, here in China, a bottle is sold for less than USD5. In fact, most stores only stock domestic wines, such as the well-known Great Wall brand and most of these are reds.

Many producers and distributors are now keen to correct the imbalance in wine consumption and this balancing act seems to already have its wheels in motion. According to The IWSR study, wine retail sales doubled between 2003 and 2007, while the volume of wine consumed increased by 61.59 per cent over the same period, a result of the growing number of imports. Imported wines accounted for 36.33 per cent of total wine sales in 2007, but only 9.9 per cent of total volumes consumed.

Although the wine industry is riding out the global crisis with its head held fairly high, extending imports in the China market on a wide scale will help boost profits and improve the quality of the wine industry. “Restaurant and hotel wine sales are down, a combination of fewer customers and smaller tabs,” says Summergate’s Ford. “We have been working hard to strategically develop ways in which we can capitalise on the current situation, while still keeping our eye on the long term brand position in the China market.”

Developing the Palate

“Recent studies have shown that most im¬ported wine drinkers in China have only been drinking wine for two to three years on average so wine basics are important,” adds Ford.

METRO Cash & Carry China recently launched their nationwide campaign to fur¬ther promote quality wines in China in 2009. The “Wine Offensive” runs throughout the year in all 38 METRO wholesale stores across the country. “International hotels and restaurants are still one of our largest customer groups, but the business with domestic profes¬sional customers is the one with the largest growth potential,” says Peter Schweighofer, vice president of METRO JinJiang Cash & Carry Co.

Schweighofer notes that after METRO’s kick-off show of the wine offensive in Shang¬hai, more of their domestic customers are now consulting wine specialists for profes¬sional recommendations.

Le Gentil agrees that consumer education will help to propel imports in the market. “Of course, time is a huge factor in the development of the industry, but wine clubs, tasting seminars and a lot of reading will help immensely. Decanter magazine has recently been translated into Chinese and these kind of efforts to develop palates will help to realise import profits in the market.”

The Vinexpo, alternately hosted in France and Hong Kong, is an example of large scale events that help attract global expertise and expose China and its consumers to the best quality wines from around of world.

Domaines Baron de Rothschild (DBR), one of France’s most famous vineyards, certainly thinks China holds promise and is tackling the market head-on. After years of searching, DBR signed a wine-producing deal with state-owned CITIC, which owns 30 per cent of the project. The JV, located across 60 acres near Penglai in Shangdong province, gives the French producer a foothold in a valuable market. Although the producer has been selling wine in China for over 20 years, it is thought that they have waited until the demand for quality wines reached a certain level, extending beyond expatriate and five-star hotel demands.

Those catching the market early enough by improving the quality of China’s wine production and consumer knowledge look set to reap golden profits. “China will really excel when wine is not just a symbol of wealth, but a choice in lifestyle,” notes Le Gentil.

This article first appeared in the Shangahai Business Review.

Source: SECTOR: Second growth - China's wine industry

EXPORT OPINION: World Expo country rankings makes for interesting reading

Fri, 19 Mar 2010 00:00:00 +1300

By the time this newsletter hits your mailbox, it will be 41 more sleeps and counting to the World Expo 2010. For in-depth coverage of all things Expo I highly recommend World Expo Blog.

This is in fact where I came across a ranking of the most anticipated country pavilions at the Expo.

In early 2009 Millward Brown ACSR (a market research firm) surveyed 13,000 respondents from across China to discover which Expo pavilions they were most excited about visiting. They produced a list of the top 20 most anticipated pavilions.

Unfortunately, New Zealand isn't one of them. The numbers just don’t add up entirely, especially when you compare the results to the well known Mercer city rankings. An unusual comparison I’ll admit, but with the exception of Egypt & South Africa, all the top 20 most anticipated pavilions at the Shanghai World Expo belong to countries that also have cities listed in Mercer’s Top 50 Cities for Quality of Living.

What’s wrong with the picture when New Zealand, which has two high ranking cities in the Mercer rankings (Auckland & Wellington ranked #5 & #12 respectively) but is classified as a “second choice” pavilion on the list of anticipated pavilions at the expo? Team Pacific is represented in the top 20 by Australia. Kiwis could be forgiven for asking “Where the bloody hell are we (on the list)?!”

Results from the follow up survey completed at the end 2009 revealed a more comprehensive list. New Zealand ranks as the 25th most anticipated pavilion; with 8% of respondents’ votes landing us there.

Granted, we rank favorably enough with respect to our OECD rivals, Finland & Ireland but it was also just two years ago that New Zealand signed an historic Free Trade Agreement with China.

Are there at least 13,000 potential Chinese customers who would rather buy bottles of French, Australian or South African wine before buying a bottle of New Zealand wine? Would those 13,000 potential tourists also prefer to travel to Egypt, Sweden and Germany before visiting New Zealand?

Some people, however, might say that out of 200 country pavillions our top 30 ranking is rather impressive. But I’ll ask the serious question anyway. Is New Zealand’s ranking according to this particular survey a sign of something more serious? Does New Zealand Inc. have visibility issues in China? If the answer is “Yes” or a version thereof, then how does this affect the fortunes of our exporters seeking to sell their wares in China? What can we do about it?

On the subject of visibility in China, it is interesting to note that Austrade, Australia’s government trade agency, has 14 offices in major cities throughout China. Its New Zealand counterpart, NZTE, has 4 offices. NZTE is, however, set to open an office in Shenzhen in May and have plans to open a fifth in Qingdao by the middle of the year. Now, that’s more like it.

Perhaps this is also why the New Zealand government is spending four times as much as it did on the last expo (in Aichi, Japan in 2005). Here’s hoping that the $32 million being spent goes a long way to winning over the hearts and minds of the expected 40,000 daily visitors. Our exporters are banking on it.

By Craig Getz

Source: EXPORT OPINION: World Expo country rankings makes for interesting reading

FEATURE: Ten Highlights of China's Commercial Sector 2009 - 2010

Thu, 18 Feb 2010 00:00:00 +1300

Each year Li & Fung Research Centre publish the authoritative and insightful "Ten Highlights" research report.

2009 was a testing year for China. Hit by the worst financial crisis since the Great Depression, the country’s macroeconomic outlook has turned cloudier. We have witnessed more difficult times for China’s commercial enterprises unseen in past several years.

However, with huge government-inspired measures to stimulate the economy, China is fortunate enough to achieve its target of economic growth. Among the government initiatives, boosting domestic consumption is, and will continue to be, high on the agenda.

This has profound implications on the developments of China’s commercial sector.

Meanwhile, many commercial enterprises in China have learnt some important lessons over the past year and are rethinking their strategies. China’s commercial landscape is changing fast.

Here is a brief summary of the Ten Highlights of Commercial Sector, 2009-2010:

Retail sales set to reach new heights with huge government initiatives to boost consumption

With a series of government initiatives to boost domestic consumption, China’s real growth in retail sales in 2009 has been the fastest since 1985, beating market expectations.

Looking forward, as China strives to reorient its economy to become more consumption-driven, policy environment will continue to be favorable for commercial businesses. Retail sales in China look set to reach new heights in the coming year.

Export-oriented enterprises eyeing the domestic market; growing calls for accelerating integration of domestic and foreign trade

To weather the challenges of shrinking global demand, many export-oriented enterprises are eyeing China’s ever-growing domestic market.

Over the past year, the Chinese government, export-oriented manufacturers, retail and distribution enterprises and industry experts have made concerted efforts to help export-oriented enterprises embark on domestic sale, bringing new changes in China’s commercial landscape. Nonetheless, there are still many obstacles in launching domestic sales.

New changes in enterprises’ mindset and more fundamental reform to integrate domestic and foreign trade are needed.

Great strides in improving China’s rural commercial and distribution networks; continuous efforts still needed

Domestic consumption in China has been primarily urban-driven. However, to stimulate and sustain domestic consumption, tapping rural demand is essential. The Mainland authorities have actively taken a series of initiatives to improve the rural distribution landscape over the past few years and those measures are constantly reviewed and further strengthened in 2009.

Government-inspired measures are much appreciated; however, effective coordination between the government and the market is the key for success.

Retailer direct-farm sourcing will continue to grow

Direct-farm sourcing is increasingly adopted by leading retailers in China. With its many benefits such as shortening retail supply chains, enhancing consumption safety and boosting farmers’ income, direct-farm sourcing has received strong government support.

Today, retailer direct-farm sourcing is relatively new in China, retailers are still experimenting different modes of cooperation with farmers.

We expect retailer direct-farm sourcing continues to receive huge attention in the coming year.

Domestic and foreign retail chain operators seek to improve competitiveness in different ways, exerting growing pressures on smaller players

Intensifying competition is prompting retailers in China to improve their competitiveness.

Domestic and foreign retail chain operators are observed to give different priorities in respective strategies in China - growing number of domestic players are paying attention to strengthening internal management such as transforming merchandising practices and enhancing supply chain efficiency through better use of information technology; meanwhile, foreign retailers in general continue to accelerate expansion into second- and third-tier cities.

These undoubtedly would cast pressure on smaller businesses. Market consolidation is set to accelerate.

Growing calls to change retailers’ profit structure and build win-win relationship with suppliers

In recent years, the profit structure of many retailers in China has changed significantly. Many retailers no longer derive their major profits from direct merchandise sales. Instead, cumbersome charges laid on suppliers become predominant source of income for many.

More and more retailers now recognize that the strained relationship with suppliers is detrimental to the health of retail sector in the long run and are trying to change the picture. However, the problem is deeply rooted and involves many vested interests

Concerted efforts between the government, industry associations and enterprises must be made. Nonetheless, this is definitely a good step in the right direction.

Going green to enhance profitability as well as to improve corporate image is catching real attention

Going green has been catching commercial businesses’ real attention in recent years. Foreign retailers are observed to be more proactive than their domestic counterparts to go green.

Going green helps retailers save costs by cutting energy bills and enhance efficiency; it also helps build socially responsible corporate image. We believe that domestic and foreign retailers will accelerate their pace for adopting green initiatives in China.

Luxury sales demonstrate strong growth momentum; lowering consumption tax and import duties on luxuries can boost domestic sales further

Global financial downturn has caused only a temporary dip in China’s luxury retail sales. China’s appetite for luxury goods has remained strong and China is now indeed the world’s second largest luxury market.

Currently luxury products in China are generally more expensive than that in overseas markets because of consumption tax and import duties levied, prompting many to purchase luxuries overseas. Our experts advocate for reform on tax and import duties levied on luxury consumption.

Online retailing continues astonishing growth; growing concerns over regulatory environment, logistics bottlenecks and credibility issues

In line with our experts’ previous predictions, online retailing continues to be one of the brightest spots in China’s commercial developments. More traditional commercial businesses in China have embarked on click-and-mortar strategy to lower operation costs and achieve wider customer reach.

E-commerce is transforming China’s commercial scene. Nonetheless, immature regulatory environment, infrastructure and logistics bottlenecks, and credibility issues remain major concerns.

Hoping for return of glory days: China’s numerous heritage brands are Rejuvenated

China has thousands upon thousands of heritage brands long taking pride in their cultural roots and historical heritage. Many of these heritage brands have however struggled to survive over the past decades.

But these years, some of them have also taken active moves to reinvent themselves. And with strong government support to protect and promote heritage brands, several heritage brands are now rejuvenated and set to make a comeback.

To read the full report click here.

To learn more about Li & Fung Research Centre and to browse their otehr publications visit their website.

Source: FEATURE: Ten Highlights of China's Commercial Sector 2009 - 2010

SOURCING: Four simple steps for starting to do quality control

Thu, 18 Feb 2010 00:00:00 +1300

Renaud Anjoran of Sofeast, China-based quality control consultants, offers some practical advice for implementing and succeeding at quality control when dealing with Chinese suppliers.

Some importers have been buying from China for many years, and yet they have never done quality control in a professional manner. The science behind inspection protocols seems complex–nearly intimidating. Buyers don’t know where to start, and they don’t know how their suppliers will react.

On the other hand, quality control is a necessity for most shipments. The constant search of cheaper suppliers, the bad habit of subcontracting to lower-grade factories, and the high risk of communication mistakes, all make a strong case for systematic inspections.

So, how to start? What are the first steps? After helping a few importers to start doing quality control, here are the first four steps I recommend.

1. Establish clear expectations

Some buyers choose a sample, negotiate a price, and then wait for delivery. This might work for off-the-shelf (standard) items with low quality/safety constraints, but not for most made-to-order products. And, think about it: on what basis will an inspector approve–or reject–a production?

You should try to get perfect samples (i.e. representative of what you expect to get out of bulk production), but this is usually not enough. You also have to prepare–or confirm, if your supplier accepts to do it–a list of specifications. See this very useful article written by Andrew Reich: How to Create a Product QC Checklist.

2. Don’t focus on final inspections

Final random inspections are a good tool for approving all aspects of production (total quantity, product specs, aesthetics, packaging…). But they tend to put a lot pressure on the supplier: what happens if serious non-conformities are found at that time? It is too late. The risks for a factory that gets caught are pretty high: re-work of the goods, re-production, penalties, air freight, order cancellation…

Instead of sending inspectors at the end (i.e. using them as policemen), try to send them when the goods are in process. Issues can get caught and corrected early: this is not only an extra safety for the buyer, but also a helping hand for the factory. This is how you should frame the discussion when you tell your suppliers about your QC intentions.

Early inspections (during production) have several positive side effects. They are a way to ensure that production is taking place in the right factory. Samples can be picked up randomly for lab testing. And it can prevent long shipment delays if the factory corrects course immediately after quality issues are noticed.

Don’t get me wrong, Chinese suppliers will not welcome this idea warmly. Many of them see QC inspectors as a nuisance. I have seen long-time suppliers of an importer (more than five years) getting used to inspections… But they would never admit that it is a necessity. Which leads me to the third step.

3. Inspections are not an optional

You should be careful about the signals you send to your suppliers. Small things can go a long way:

You should write “Quality inspection required prior to shipment” on your P/Os.
If you pay by letter of credit, you can require a passed inspection report from your nominated QC provider.
When you develop new products, ask extra samples for the inspector’s use.
Keep track of the final inspection date and the shipment date, not just the shipment date.

All this is quite standard, and thousands of importers follow these tips.

You still have the freedom not to book an inspection for a given shipment, or to do skip-lot inspections for the most reliable suppliers. But you are the one to take this decision, not your suppliers. They should see inspectors as an extension of your organization. On the other hand, you should make sure you work with professionals who will be respected by factories.

4. Find the right balance between helping and arm-twisting

A buyer can play it “tough”, be “easy” on his suppliers, or find the right balance in between.

The “tough” way: a focus on final inspections performed rigidly.

Suppliers have no choice: either they comply with the rules, or they are charged penalties and/or re-inspection fees. Charge-backs are triggered by late changes in planning or non-respect of quantity requirements, for example. The fees are charged by the inspection firm to the importer, who re-invoices everything to the supplier.

It works well for large buyers who are adequately organized and who have the power to charge penalties systematically. But small-and-medium-sized importers can seldom play this game.

The “easy” way: in-line inspections and/or tailored final inspections.

As noted above, early inspections don’t create much adversarial tension, and there is less timing pressure.

Once production quality has been (relatively) secured, final inspections can be a little less formal. Why? Because it is less risky to loosen requirements about presented quantity.

Note: this “easy” way is only possible if you have at least *some* trust in your suppliers. It is technically possible–but rather difficult–for them to cheat.

Source: SOURCING: Four simple steps for starting to do quality control

LEGAL: How to start a business in China - WFOE

Thu, 18 Feb 2010 00:00:00 +1300

As a new year refresher course or for those of you unfamiliar with the process of setting up a company in China, we offer the following guide kindly provided by Dan Harris of www.ChinaLawBlog.com.

This post focuses on the forming of a Wholly Foreign Owned Entity (WFOE) in China. I am starting with this type of entity because it is the one we do most often. Subsequent posts will detail the steps required to register other forms of entities in China, such as a representative office (RO) or a contractual or equity joint venture (JV). Each of these forms of foreign invested enterprise (FIE) is subject to its own specific laws and to numerous regulations that apply to all FIEs. Every FIE is formed as a Chinese limited liability company (LLC).

Where the special laws and regulations of an FIE do not apply, the provisions of the Chinese Company Law control. The Company Law was recently completely rewritten to conform more closely to international standards for company formation and management.

The steps for forming a WFOE in China typically consist of the following:

1. Determine if the proposed WFOE will conduct a business approved for foreign investment by the Chinese government. For example, until recently, China prohibited private entities from engaging in export trade. All export trade was handled through certain large, state owned trading companies.

China recently abandoned this system, and now both foreign and domestic companies can set up trading companies. Restrictions on export oriented trading companies have essentially been eliminated, but there are still controls on import oriented trading companies that can increase expense and raise costs. Because these rules were only recently changed, the local regulators who must approve these projects do not have a great deal of experience with the attendant issues. This can lead to some delay in the approval process. It also results in an extremely cautious approach towards adequate capitalization even for export oriented trading companies. I discuss capitalization requirements in greater detail below.

2. Determine if the foreign investor is an approved investor. Basically, any legally formed foreign business entity is authorized to invest in a WFOE in China. China especially welcomes investment that promotes the export of Chinese manufactured products. The investor must provide the documentation from its home country proving it is a duly formed and validly existing corporation, along with evidence showing the person from the investor who is authorized to execute documents on behalf of the investor. The investor also must provide documentation demonstrating its capital adequacy in its country of incorporation.

To meet these requirements, the following documents are normally needed from the investing business entity:

a. Articles of Incorporation or equivalent (copy)
b. Business license, both national and local (if any) (copies)
c. Certificate of Status (Original)(U.S. and Canada) or a notarized copy of the Corporate Register for the investor or similar document (original)(Civil Law jurisdictions)
d. Bank Letter attesting to sound banking relationship and account status of the company (original).
e. Description of the investor's business activities, together with added materials such as an annual report, brochures, website, etc.

a-d are translated into Chinese. e is either translated into Chinese or summarized in Chinese.

Many investors created special purpose companies to serve as the investor in China . The Chinese regulators have become accustomed to this process. However, the Chinese regulators will still seek to trace the ownership of the foreign investor back to a viable, operating business enterprise. Investor secrecy is not an option in China. However, the corporate register for the Chinese company will merely state the name of the foreign, special entity investing company as the owner. In that sense, as far as public disclosure is concerned, the investor privacy can be maintained. The foreign investor should also understand that this tracing process will add some time and cost to the Chinese company formation process.

3. Chinese government approval for the project. In China, unlike in most countries with which Western companies tend to be familiar, approval of the project by the relevant government authority is an integral part of the incorporation process. If the project is not approved, no incorporation is permitted. The two are inextricably linked.

The following documents must be prepared for incorporation/project approval:

a. Articles of Association. This document will set out all of the details of management and capitalization of the company. Nothing can be left for future determination; all basic company and project issues must be determined in advance and incorporated in the Articles. This includes directors, local management, local address, special rules on scope of authority of local managers, company address, and registered capital.

b. Feasibility Study. The project will not be approved unless the local authorities are convinced it is feasible. This usually requires a basic first year business plan and budget. We typically use the client produced business plan and budget to draft up the feasibility study (in Chinese) that will satisfy the requirements of the Chinese approval authority.

c. Leases: An agreement for all required leases must be provided. This includes office space lease and warehouse/factory space lease. It is customary in China to pay rent one year in advance and this must be taken into account in planning a budget because the governmental authorities will be expecting this.

d. Proposed personnel salary and benefit budget. If the specific people who will work for the company have not yet been identified, one must specify the positions and proposed salaries/benefit package. Benefits for employees in China typically range from 32% to 42% of the employee base salary, depending on the location of the business. Foreign employers are held to a strict standard in paying these benefit amounts. The required initial investment includes an amount sufficient to pay salaries for a reasonable period of time during the start up phase of the Chinese company.

e. Any other documentation required for the specific business proposed. The more complex the project, the more documentation that will be required.

All of the above documents must be prepared in Chinese.

4. It usually takes two to five months for governmental approval, depending on the location of the project and its size and scope. Large cities like Shanghai tend to be slower than smaller cities. The investor must pay various incorporation fees, which fees vary depending on the location, the amount of registered capital and any special licenses required for the specific project. Typically, these fees equal a little over 1% of the initial capital.

On large and/or complex projects, the approval process often involves extensive negotiations with various regulatory authorities whose approval is required. For example, a large factory may have serious land use or environmental issues. Thus, the time frame for approval of incorporation is never certain. It depends on the type of project and the location. Foreign investors must be prepared for this uncertainty from the outset.

Source: LEGAL: How to start a business in China - WFOE

NZCTA: We need you!

Thu, 18 Feb 2010 00:00:00 +1300

We need you!

Or your China business questions to be more precise.

NZCTA is a network of active and experience China business people and consultants, both in New Zealand and on the ground in China.

Tap into this network by sending your Legal, Strategy, Marketing, Sourcing or Exporting question to us today. We'll select the pick of the bunch and we’ll track down some expert advice for you and will share it in future editions of China Now for everyone’s benefit.

Send your China business question to director@nzcta.co.nz or post a reply to this article.

Source: NZCTA: We need you!

MARKETING: Branding in China ~ The challenge of selling Starbucks coffee in a tea-drinking nation and other lessons

Thu, 18 Feb 2010 00:00:00 +1300

In 2009, Columbia Business School hosted a conference exploring branding in China and India. With a population of 1.3 billion, China presents an attractive market opportunity for many multinational companies, as well as some unique challenges in building and expanding a brand. Columbia Business School MBA student Daniel Spear documented the panel discussion in this report. The report was original featured in the Chazen Web Journal of International Business.

A common theme from the panelists was that Chinese consumers have little brand loyalty and are “fickle.” According to a study by McKinsey & Company, 65 percent of surveyed Chinese consumers said they often leave a store with a different brand than the one they intended to purchase.

In the United States, less than 15 percent of consumers purchase a different brand than they intended. In China, relationships between consumers and brands can be transactional and price sensitive for many product categories. Roger McDonald of Xerox noted that these attitudes derive partly from China’s history, throughout which there was no choice among brands for decades.

Now that a multitude of branded products are on the market, Chinese consumers are trying different products. Furthermore, as income levels rise, there is an influx of first-time buyers eager to try new brands.

On a related point, competition is fierce in the battle between brands controlled by foreignbased corporations and those controlled by Chinese businesses. In the consumer-product markets especially, health and safety concerns drive consumers toward local names that they know and trust.

According to one study cited by Jessica Zoob of American Express, 86 percent of Chinese surveyed claimed to trust the domestic brands, while only 53 percent claimed they would trust foreign brands. One lesson to be learned from this is that foreign-based companies should customize their products to the Chinese market.

The panelists discussed some unique ways in which they seek to market their products in order to establish and strengthen brand loyalty. Ms. Zoob noted that point-of-sale marketing is critical in China because in-store salespeople have enormous influence over consumer purchasing decisions. Mr. McDonald argued that Internet marketing is increasingly important as more Chinese consumers look to the Web for product information.

Mark Aoki-Fordham of Starbucks spoke about his company’ new advertising campaign on video screens in the Shanghai subway, where a 25-episode soap-opera series promoting Starbucks products is shown in two-minute segments. More traditional marketing techniques, such as celebrity endorsements—for example, by basketball star Yao Ming—have also proven to be effective in China. Marketing and establishing a brand for a professional-services firm, such as a law firm, can be more challenging in China. In this case, Mr. McDonald suggested, having an association with the governmental or regulatory body overseeing your business can be particularly effective. This could take the form of producing white papers or doing pro bono work for the government in an ethical way that raises the profile of your firm. In the business-to-business space, peer recommendations through word of mouth are also very important and help build a reputation for a brand.

The panelists also discussed their differing experiences in entering the Chinese market and operating with a local partner. American Express does not have a license from the Chinese government to independently issue credit cards. Instead, it forms partnerships with such banks as China CITIC to issue co-branded cards. Starbucks entered Beijing in 1999 through a jointventure agreement with a local operating partner and later expanded into Shanghai and Jiangsu and Zhejiang provinces. After China joined the World Trade Organization in 2001, Starbucks was allowed to buy back equity in those joint ventures and set up its own independent company structure. Starbucks made this strategic decision in order to maintain consistency in branding and better control over operational efficiency.

Lastly, protecting brand integrity in China was an area of interest among those who attended the conference. Mr. Aoki-Fordham from Starbucks emphasized the importance of being proactive in countering infringements on trademarks. He was encouraged by developments in the Chinese legal system over the past several years. Chinese courts are increasingly sophisticated in resolving intellectual-property-infringement cases.

However, companies in China should be sure to register their trademarks in both the English and Chinese versions. Otherwise, an enterprising local will make up a Chinese version of your company’s name with a similar logo and be able to use that trademark, because “first to file jurisdiction” applies in China.

To download the original article click here.

Source: MARKETING: Branding in China ~ The challenge of selling Starbucks coffee in a tea-drinking nation and other lessons

Law school: Practical advice for protecting your NZ brand in China

Mon, 07 Dec 2009 00:00:00 +1300

In China, good brand protection is vital for business protection. If you use your brand in China without registering it as a trade mark somebody else might use your brand with relative impunity. Worse, they could register it and potentially prevent you continuing to use your own brand. They could export product under the brand which may harm your own markets and cause you a need for expensive remedies, if you have rights in those markets, or those other traders may be seen to be stealing those rights from you if you do not have registration of your home brands in your home market.

What is a brand?

A brand is any sign used by a business to identify its products and services and distinguish them from the products and services of others. It could be a word, a phrase, a symbol, a design, a combination of colours, a group of letters or numbers or a combination of any of these. The primary purpose of a brand is to ensure consumers are aware of the source or origin of your product or service.

How are brands protected in China?

Your New Zealand patent attorney should register your brands with the China Trade Mark Office. China’s system for protecting brands is based on a “first to file” principle. This is very difficult to understand for New Zealand, Australia, the United Kingdom and other traditional markets. Simply using a brand does not give you any enforceable rights. It is the first organisation to file an application to register the brand that will have the right. If this happens to you, often the only response is to establish another brand, a costly, unwanted and unrewarding step. To establish legal right and prevent others using your brand, it is necessary to register the brand in China. Brands are registered in relation to particular goods or services. There are 45 different classes of goods and services and the owner must apply separately for registration in each class for which protection is sought. You should also select, use and register a Chinese language version of your brand. You will control the use of your brand in the Chinese market. Otherwise, the market will select its own Chinese language version and it may not convey the brand message you wish to convey. The selection of the Chinese version of your brand is a specialist job for your patent attorney.

How long does registration take?

It generally takes 18 months from the date of the application for the China Trade Marks Office to accept an application. After the brand is accepted for registration, the acceptance is advertised. A three month opposition period follows during which the public has the right to challenge the application. If no opposition is made, the China Trade Mark Office will issue a certificate of registration. The registration will last for an initial period of ten years and is renewable thereafter indefinitely.

Is my brand registrable?

The China Trade Mark Office does not register all brands. In particular, it will not register brands which are:

identical with or similar to prior registered brands for the same or similar goods or services; or

purely descriptive of characteristics, quality, place of origin of the goods or services.

Can I license my brand?

It is possible to license a brand. A brand’s licence must be recorded within three months of establishment of the licensed contract.

What should I do if my brand is already in use in China but is not registered?

Have your patent attorney register your brand as soon as possible! China’s “first to file” system means you will not have any claim to your brand, even if it is well known in China, for a specific product or service until you file an application for registration in China. A search can be conducted by your Patent Attorney prior to filing to ensure that a competitor has not already registered the same or similar brand. If so, alternative steps are strongly recommended.

What are the costs?

The cost of registering a brand in China for a specific product or service is around NZ $3,500 assuming there are no significant problems. Approximately NZ $1,700 to NZ $2,000 of this will be incurred at the outset as filing fees. However, the costs can vary depending on your circumstances and need for brand protection and your patent attorney can provide accurate cost estimates once your requirements have been assessed. It is self evident that especially in China the cost of protection is a mere fraction of the enforcement costs should you not have a registered brand. Trade mark registrations in China, as elsewhere, are strong deterrents to unauthorised use and reduce the need for costly and protracted defence of your own position, including where infringement or counterfeiting is found.

Where registered trade marks exist and are identified, in most cases, our experience is that copiers stay clear and copy your competitor’s less well protected products. Should enforcement against an infringer be needed, showing that brands are registered usually leads to a more economical exercise compared to a situation where the rights are not registered.

Registered trade marks in China are as much a defensive deterrent as an offensive tool. You should at least talk to your patent attorney and together look at the options before exposing your brand to the vibrant but dangerous market in China.

Recommendations

Register your brands in China before releasing information about your product, or marketing your product in China.
Develop and register a Chinese language version. If you do not create a Chinese brand, the market will create a Chinese “nickname” for your product. You may not like the nickname or alternatively someone else in China may register it in their own name, forcing you to choose another brand.
Register your brands in neighbouring countries such as Hong Kong and Macau both for potential expansion and to prevent others registering marks to use on products consumers may confuse with yours.

Philip Thoreau, Partner, Baldwins Intellectual Property

philip.thoreau@baldwins.com

www.baldwins.com

Source: Law school: Practical advice for protecting your NZ brand in China

Catch 22: IP protection in China vs. boosting economic growth

Mon, 07 Dec 2009 00:00:00 +1300

Jordan Calinoff & Hayleigh Davies of the Shanghai Business Review explain why the Chinese government finds itself walking a tightrope between IP enforcement and boosting its domestic economy.

BRAND BEIJING OLYMPICS: the must-have items of Summer 2008. From Shanghai hipsters to rural farmers, everyone wanted a t-shirt, hat, or even a pin emblazoned with it. However, throughout all the markets and back alleys of China hawking fakes, a cheap counterfeit version was almost impossible to find. The State had finally cracked down on counterfeiters with spectacular results. “The Beijing Olympic brands are owned by the State. Regarding those brands, the government demanded better intellectual property enforcement and got it. They made it very clear during the run-up to the Olympics that counterfeiting would not be tolerated. You could find counterfeit Nike, Adidas, Louis Vuitton, but it was difficult to find counterfeit Olympic products,” says Geoffrey Lin, an IP specialist and counsel at UK-based law firm Lovells. “The government’s success in enforcing their Olympic IP Rights shows that the government can enforce IP laws.”

The successful protection of the Olympic brand, however, does not mean that intellectual property enforcement will suddenly become widespread. The Chinese government is in a precarious position. On the one hand, it wants to improve IP enforcement to spur more domestic R&D, leading the economy up the value chain. On the other hand, cracking down on infringers means more closed factories, more lost jobs, and a higher chance for instability during the economic downturn.

In the case of the Opinion on Certain Issues with Respect to Intellectual Property Judicial Adjudication Under the Current Economic Situation, released on 21 April, the court pushed for further protection of IP, but at the same time made it very clear that IP protection should be carefully balanced with public interest, in terms of jobs and stability, during the economic downturn.

Local Protectionism

While in some arenas, the central government is all-powerful when it comes to IP law and enforcement, provincial and municipal level officials often hold more influence. In more entrepreneurial and export-oriented provinces like Zhejiang, Fujian, and Guangdong, this is apparent.

“We have a case in Zhejiang province where the local authority will not enforce counterfeiting or IP infringement cases, because the small businesses there are already suffering and they don’t want to add to the burden,” explains Clement Ngai, an IP partner at Baker & McKenzie. “I can’t say it is widespread, but it is clear that some places are changing the enforcement in direct response to the economic situation.”

Fulfilling Every Requirement

During this period, many IP specialists have found authorities insist more on formalities

and that all documentation is in order. “It means the government can avoid making the hard decision on whether or not to enforce if the formalities have not been met; that is, if you do not make sure you have met formalities, you do not put an onus on the authorities to exercise their jurisdiction,” says Elliot Papegeorgiou, partner, attorney-at-law at Rouse – a global IP law firm. As a result of the current economic downturn, there is also some evidence that there have recently been lower fines imposed for IP infringement.

“Ultimately, these issues may result from weaknesses in China’s IP enforcement regime itself,” says Martyn Huckerby, partner and chief representative at Mallesons Stephen Jaques. He adds: For example, Article 52 of the PRC Trademark Law Implementation Rules provides that the fine to be imposed in the case of an infringement of a registered trade mark right is capped at three times of the income arising from the infringing conduct, and in the cases where that income is impossible to calculate, the fine shall be no more than Rmb100,000.

It is worth noting that although China’s IP seizures surged by 40 per cent in 2008, its value of IP seizures rose 38.6 per cent, a small increase when compared to the rise in India’s IP seizures value which rose a staggering 1,801 per cent over the same period.

Competing on the Global Stage

“If China looks at IP as something that will decrease consumption, increase the cost of production, exacerbate the loss of jobs and result in paying more licensing fees to foreign companies, then enforcement would be a disservice to the economy,” says Lin at Lovells. “But in the long term, where will China be if it just continues to manufacture and not to innovate?” With that thought in mind, Chinese leaders have continuously expressed their hope for better IP protection - in the long term, of course. For example, during the meeting of Second Session of the Eleventh National People’s Congress on 13 March 2009, President Hu Jintao said, “In the long run to encourage more enterprises to master proprietary intellectual property and brands so that domestic enterprise can survive the fierce competition in the international market.”

From the government side, the new amendment to the Patent Law is a good start. The amendment, which was passed late last year and will be enacted in October, should create a more hospitable environment for innovation. At the same time there are other legislations which provide tax incentives for setting up R&D facilities. In fact, patent filings by domestic companies are booming. In 2008, 717,144 applications for patents - utility model, design and invention - were filed by domestic companies, a leap from the 586,734 patents filed in 2007 and much higher than the 111,184 patents filed by foreign firms. With government support, the number of new patents should continue to grow. “It is difficult to assess the level of genuine versus rogue / junk-patent filing. However, the practice would not be new or specific to China.

In other countries it is also not uncommon for companies to put up ‘walls of patents,” explains Papegeorgiou. In most countries, covering different industries, this is known as cross-licensing when it occurs between legitimate IP holders. “Issues only arise if the rights may not be valid or genuine and are merely used as a shield to discourage enforcement authorities. Given the high number of utility model filings by Chinese firms, without a commensurate filing by foreigners, this is a more than a little concerning.”

Currently, factors in global commercial markets are ripe for IP issues to arise from – supply chain costs are having profits squeezed out leading to more leakages, supplier costs are increasing resulting in a higher number of termination disputes, HR redundancies and high staff turnover rates are more apparent than ever, and distribution channels are reporting a higher number of IP infringements. “Competition is fierce; the economy is down, how do you distinguish yourself from a thousand other low-cost manufacturers? Either you have a product that is better than others or you achieve a more efficient production method. You can do that only by better design or new technology,” explains Ngai of Baker & McKenzie. “The new law is meant to capture more patent filing for R&D activities in China. As to the protection of patent, though, it’s sad to see that there are not many changes.”

While to some degree, the government, pushed by domestic companies, is easing the way for patent registration, copyright and trademark protection seems to have been less of a priority. When looking at total civil IP cases, which grew 36.5 per cent yoy in 2008, it is important to note that IP cases involving foreign parties grew 70.5 per cent to 1,139 cases over the same period. Of these civil IP cases, copyrights issues top the list at 10,951 cases representing a 50.7 per cent growth yoy in 2008. Trademark cases rank second at 6,233, a massive growth of 61.6 per cent yoy. Thirdly, patent cases grew 0.82 per cent last year with a total of 4,074 cases. Retrials in this arena are also up 161.5 per cent, where parties are taking rulings to higher courts or for retrial.

Can your IP be protected in China?

The environment has left many companies asking “Can our IP be protected in this climate?” Famous cases of patent dispute, like the 2007 case where Chinese electronics company Chint Group received a Rmb335m decision, later settled for the sum of Rmb157.5bn, the highest in Chinese history for an IP case, against France-based Schneider Electric, have left foreign firms uneasy. In this instance, media hype focused on a “China versus foreign firms” scenario, rather than illustrating the point that after registering an un-examined utility model patent on what Schneider claimed was nonnovel technology, Chint sued Schneider for infringement and despite Schneider’s failed attempts to invalidate Chint’s utility model legitimately won.

In answer to protection, companies should look at recent wins in cases such as Stihl verus Swool, and MAN AG / Neoplan versus Zhongda Industrial Group China, where verdicts prove companies, in particular Chinese firms, are not being given a ‘free pass’. However, with more pressing economic issues amidst the current economic downturn, enforcement will likely remain practicable only if companies filing suits have made all necessary preparations and have exhausted avenues of mediation and settlement.

Article reproduced with permission from Shanghai Business Review.

Shanghai Business Review is a monthly English-language magazine that provides business information and market intelligence to senior executives at Foreign Invested Enterprises in Shanghai and for those looking to enter into the Shanghai market.

For more information or to subscribe please visit www.sbr.net.cn

Source: Catch 22: IP protection in China vs. boosting economic growth