Market Entry Strategies in China

Building Blocks for Entry and Engagement in China

Introduction
Firms follow an evolutionary path when they enter new international markets Firms gradually increase their involvement in three phases As an Opportunistic Experimenter A Strategic Investor A Dominant Local Player As they learn more they increase their commitment Modes of entry have expanded in past 30 years

Ways to Enter the Dragon

Hongkong Expedition Representative Office Joint Venture Contractual JV Equity JV WOFEs Holding Company Other Forms BoT Projects Acquisitions Branches Franchising/licensing

Hongkong Expedition
In 1980s and 1990s most common way of accessing sourcing opportunities in china Late 90s key distribution and sales centre for those targeting mainland Huge allure to have HK operations for the following reasons Good financial infrastructure Cultural Middle Ground Language Consideration Vast number of intermediaries Importance gradually declining with opening up of Mainland China

Representative Office
Effective way to enter, learn,develop the market Cannot book revenue Serve as liaison points and business development Market research, communication, product promotion, contract administration and negotiations Many MNCs adopted this route before become FIEs Merits Quick, simple, low cost Multiple offices can be established Demerits Start-up and maintenance costs are not trivial Cannot engage in direct business Hire local staff through approved agencies alone

Contractual JVs
Contractual JVs Creates association between foreign and Chinese partners Fall in category of FIEs Came to existence in 1988 under law of PRC on Sinoforeign Co-operative Enterprises CJVs constituted 22% of FDI in late 90s Long term licensing agreements and technology transfer are part of this category Partners participate in project selection on agreed and negotiated basis with clera cut rewards agreed in contract Merits: a) Strategic and operational flexibility b) Can source from local or foreign suppliers Demerits: complex to negotiate and greater liabilities

Equity JVs
Involves setting up of a limited liability companies with a particular shareholding structure between foreign and Chinese parties Have been around since 1979 when the PRC law on Chinese-Foreign Equity JVs was enacted Fall in FIE category Shareholding structure usually negotiated and in some industries there are caps Ownership, management, investment are shared by EJV partners Late 90s 38% of FDI was under Equity JVs Foreign partners must own at least 25% Partners typically invest in cash, equipment, technology, facilities, land and intellectual property

To JV or not to JV in China?
Till 1990s foreign companies were forced to form JVs in order to operate in China Chinese government chose JV partners for foreign investors which meant paired with a loss making SoE Today foreign investors have a broader choice In short they can decide whether to JV or not to JV Case Against JVs Problem solution takes a longer time Overestimation of local partners Less freedom and flexibility Case for JVs Regulations necessitate JVs Government interactions for negotiations necessitate JVs

Selecting the Right Mate

Choose a weak partner Choose an active partner who does value addition Align your goals Avoid grey areas Managing Bilateral Relations Mutual Trust and Confidence Regular Effective Communications Effective Decision Making Shared Ethics and Standards

WOFEs
Firms that are funded by foreign firms usingtheir own capital, technology and management More popular since late 1990s Though permitted since 1986 hardly contributed to FDI in China.Its popularity a recent phenomena Firms with need of IPR protection tend to go for this route Licenses are harder to get than JV approvals Typically exporters or own technology to qualify as WOFEs Merits: a) Strategic Flexibility b) Surveys suggest lesser breakeven time and more profitability c) Quicker to set up the process while capital requirements are lower Demerits: a) Managing local networks b) Cannot operate in restricted industries c) Cultural Issues involved

Holding Companies
Suitable for those that manage complex businesses Opt for integrated approach to maximize synergies in areas of shared services like HR, IT, marketing, sales, etc\ Notable examples are Du Pont, Siemens, GE who have attained a certain scale and have number of divisions leading them to extract substantial benefits Some have 20-30 entities Merits: a) Pooling benefits b) Assist in formation of new groups, raising finance, hiring staff, providing technical support, forex requirements, etc Demerits: a) Regulatory and capital requirements are large b) Requires unmatched ability to manage large ,complex matrix organizations

India-China Bilateral Trade

Main Focus on East China

Chinas Special Economic Zones and Open Cities

Suzhou

Current Economic Situation in China & East China

East China Map

Territorial Jurisdiction
Municipality of Shanghai Jiangsu Province Zhejiang Province

Shanghai
Shanghai
GDP US$ 166.6 billion 2007 GDP Growth 13.3%- 2007 Exports US $ 143.9 bn 2007 Imports US$ 113.9 bn 2007 Foreign Investment US $ 7.92 bn Actual- 2007(Contracted in 2007- US $14.87 billion) Per Capita GDP- US $ 7500 Population 18.15 million( 3 million floating)

East China -Jiangsu

Jiangsu
GDP US$ 355.6 billion - 2007 GDP Growth 14.8% - 2007 Exports US$ 203.6 bn - 2007 Imports US$ 145.8 bn - 2007 Foreign Investment-Contracted US$ 52.7 bn, Actual US$ 21.6 bn - 2007 Population 76.54 million

East China - Zhejiang

Zhejiang
GDP US$ 258.8 billion - 2007 GDP Growth 14.5%- 2006 Exports US$ 128.2 bn - 2007 Imports US$ 48.5 bn - 2007 Foreign Investment: Contracted US$ 20.4 bn, Actual US$ 10.3 bn 2007 Population 50 million

East China in Chinas Economy

23% of Chinas GDP
36% of Chinas total trade 66% of Chinas Actual FDI

11% of Population

Commercial Hubs in Eastern China

Shanghai- New Materials, Automobiles, Telecommunications, Pharmaceuticals, Biotechnology Nanjing- Electrical Appliances, Automobiles & Motorcycles, Building Materials, Software Development Suzhou- Biggest IT hardware manufacturer in China, highest recipient of FDI Wuxi- Pharmaceutical, automobile parts Hangzhou- Heavy industry, tyres, electromechanical products, cosmetics Ningbo- Textiles, garments, machinery

Rapid Growth in Chinas GDP

GDP Indices GDP (US$ trillion) GDP (Growth Rate) GDP Per capita (US$) 2000 2001 2002 2003 2004 1.20 8.4 N.A. 1.32 8.3 907 1.45 9.1 1.64 10 1.93 10.1 2005 2006 2007 2.25 10.4 2.7 10.7 3.43 11.4

1000 1090 1268

1700 1900 2400

Actual FDI inflow into China( US $ billion)

100 80 60 40 20
18 28 4 5 7 34 38 43 45 45 40.3 40.8 46.8 53 54 60.6 60.3 63 74.8

19 89

19 91

19 93

19 95

19 97

19 99

20 01

20 03

20 05

20 07

FDI Success Story

Preferential Tariff Treatment Preference in Infrastructure Concentration of FDI in Coastal Areas Delegation of Authority to accord Approvals Stock Shift of Plants from Taiwan and Hong Kong in 1990s Most FDI projects involved small investments until recently Market Potential Competition Export Processing Zones Cheap Labour

China's Exports in US $ billion

198 7 198 8 198 9 199 0 199 1 199 2 199 3 199 4 199 5 199 6 199 7 199 8 199 9 200 0 200 1 200 2 200 3 200 4 200 5 200 6 200 7
0 200 400 600 800 1000 1200 1400

Trade Surplus
300 250

Trade surplus

US $ billion

200 150 100 50 0

95 996 997 998 999 000 001 002 003 004 005 006 007 9 1 1 1 1 1 2 2 2 2 2 2 2 2

Foreign Exchange Reserves

Foreign Exchange Reserves
Reserves excl. gold

US$ bn

1530 1500 1350 1066.3 1200 1050 819 900 750 609 600 403 450 275 212 300 142 149 154 159 105 73.6 51.6 150 0

19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07

India China Bilateral Trade

India China Trade (1998-2007)

40000 36000 32000 28000
US$ Mn

24000 20000 16000 12000 8000 4000 0

Exports from India Imports to India Total

9 19 8 9 20 9 0 20 0 01 20 02 20 03 20 04 20 05 20 0 20 6 07

19

Top 10 Indian Exports to China in 2007

Machinery 2% Cotton 7% Copper 5% Inorganic Chemicals 2%

Iron & Steel Others 2% 10%

Prec. Stones 3%

Iron & Steel 9.5%

Plastics 4.3%

Ores, Slag & Ash 60%

Organic Chemicals 5% Salt, Sulphur, Stone 2%

Top 10 Chinese Exports to India in 2007

Silk 2% Fertilizers 3%

Iron and Steel Products 5% Textiles 2% Vehicles (non-rail) 2% Plastics 3%

Iron and Steel 6%

Others 23%

Organic Chemicals 10%

Machinery 18%

Electrical Machinery 28%

Indias Trade and Economic Relations with Eastern China

Growth in India-East China Trade (2003-07)

5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0

4653 4133 3586

2970 2400 1750 1106 778 1456 1021
U

2003
3109 2230 1450 759

2004 2005 2006 2007

2286

ha

ng

an

ha

he

Ji

an

ji

gs

Growth in trade between India and East China, 2001-2007

14000 12000 10000 8000 6000 4000 2000 0

2002 2003 2004 2005 2006 2007

Exports to East China

2643 2610 669 1251 1854 3093

Total Trade

Percentage of total India-China trade

10% 5%

20% 15%

30% 25%

35%

0%

1 9 9 9 0 1 2 3 4 5 2 2 0 0 0 0 6 7 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2

Trend in India-East China Trade (% of total)

Major Exports from India to East China

Chemicals Plastics Textiles(fabrics, yarn) Wood Pulp, Paper Iron and Steel Leather and leather products Ores and Metal Waste Mineral Products(Chrome Ore, Iron Ore, slag, ash) Non-Ferrous Metals (Aluminium, steel pellets)

Electrical Products (boilers & engines)

Stone(marble, granite)

Major Exports from East China to India

Industrial Machinery Machine Parts Steel Products Chemicals Dyes Bulk Drugs Pharmaceuticals Pesticides Textiles(garments) Silk Textile Raw Materials Mechanical & Electrical Products Power Generation Equipment Light Industrial Products Hardware Tools

Potential growth sectors

Engineering goods- Auto components Pharmaceuticals products Gems and Jewellery Processed and unprocessed food Information Technology Financial Services

India Inc. in Shanghai/ Eastern China

NIIT Aptech Infosys TCS Satyam Computers Wipro HCL Reliance Industries Ltd. Dr. Reddys Laboratory Lupin Pharma Aurobindo Pharma Ltd. Bry-Air Jindal Strips Ltd.

Ace Micromatic Machine Tools

Jubiliant Organosys Ltd. Larsen & Toubro Ltd Orind Refractories KPL International Ltd. Pan Products Impex Pvt. Ltd Tube Investment of India TATA Exports (SEA) Ltd.

India Inc. in Shanghai/ Eastern China

State Bank of India Punjab National Bank Axis Bank Canara Bank Union Bank of India ICICI Thermax Ltd Voltas Consulting PTC Global Pvt. Ltd. Asiatic Colorchem (India) Ltd. Cognizant Technology Solutions SKD Pacific Shipping Corporation of India Confederation of Indian Industry Air-India Jet Airways Gati India-Centric Distribution Vam Organic UPL Raymonds Sundaram Fasteners Lucas TVS TVS Motors India Grasim International Covansys BEML Thakral Electronics Indian Restaurants (close to two dozen)

Select Chinese majors from Eastern China in India

Jiangsu Overseas Group Shanghai Urban Construction Group Shanghai Electric Power Generation Group Baosteel Group Ningbo Bird Huawei ZTE Feiyue Group (based at Taizhou (Zhejiang) China Eastern Airlines/ Shanghai Airlines

Indians in East China

Total number of Indians (Approx.) 2500 in Shanghai 1500 in Shaoxing, Zhejiang Province 250 in Hangzhou, Zhejiang Province 700 Indian medical students across East China Comprising MNCs managers, Reps of Indian Companies, private entrepreneurs & service personnel Two Indian Associations Indian Association(Shanghai) Shaoxing Indian Business Association(SIBA)

Thank you