Slide1 : Commercial Service
U.S. Department of Commerce The Growing China Market:
What It Means for American Exporters
China Overview : China Overview China’s total imports increased US$148 billion in 2004, up 36%.
U.S. exports to China rose 22% to US$ 35bn in 2004 – our fastest growing export market
Urban residents per capita income rose 7.7% to US$ 1,135, Shanghai is US$ 2,245 in 2004
China plans to quadruple GDP in 20 years, which implies an average 7.3% annual growth.
Slide3 : GDP Growth, 1980-2010 Copyright © 2004 by Dragonomics Ltd. All rights reserved. Avg 1980-2003: 8.3% Tiananmen Avg growth 1987-91: 6.2% Asian crisis Avg growth 1997-2001: 6.3%
The China Opportunity : The China Opportunity
320 million of China’s 1.3 billion people live in ‘urban’ areas; nearly half of China’s population is expected to live in cities by 2010 – have incomes over US$3,000
Chinese economy grew 9.5% in 2004, 9.5% in Q1 2005
China’s GDP has quadrupled since 1978. GDP is expected to further quadruple in 20 years, equaling average annual growth of 7.3%
Level of Affluence 2003 China Statistical Year Book : Level of Affluence 2003 China Statistical Year Book URBAN
Car 1.4
M.cycle 24.0
W.machine 94.4
Color TV 130.5
PC 27.8
Shower 66.6
E. Cooking Ap. 101.2
Telephone 70.1
RURAL
M. cycle 31.8
Color TV 67.8
(# Units / 100 households)
China Trade Trends : China Trade Trends
US Exports to China : US Exports to China
What the US Sells to China : What the US Sells to China digital integrated circuits 1,983 18.6% +
soybeans 1,934 17.7% -
aircraft and parts 1,560 20.5% -
cotton 1,345 174.3% +
auto data processing equip. 505 10.2% +
machinery 504 87.6% +
copper scrap 479 15.9% +
wheat 460 1,207% +
ferrous metal scrap 418 25.7% +
non-digital integrated circuits 341 50.1% +
aluminum scrap 334 47% +
telecom apparatus / parts 280 35.8% +
fertilizers 279 20.7% -
auto parts / accessories 274 10.3% +
In millions of US$ % increase from
2003 to 2004
Who’s your competition? Top 10 Economies that China buys from : Who’s your competition? Top 10 Economies that China buys from Japan
Taiwan
South Korea
United States
Germany
Malaysia
Singapore
Hong Kong
Australia
Thailand
The Successes : The Successes GM sold 500,000 vehicles in 2004 in China
Citigroup Insurance will open operations in 2005
Boeing will sell over $7 billion in aircraft in 2005
Illumina of San Diego sold $1.5 million of medical equipment in 2004
Parsons Kelly of Pennsylvania sold $550,000 of equipment in 2003
AmCham Survey Results : AmCham Survey Results 16% say they are “very profitable”, up from 10% last year
57% say they are profitable, down from 65% last year
23% say they are “breaking even or have a small loss”, 22% in 2003
Only 4% say they have a “large loss”, the same as in 2003
*2004 AmCham member survey results
WTO Schedule for 2005 : WTO Schedule for 2005 Telecommunications
3-G Licenses
JVs in data services
Financial Services – full dereg in 2007
banking, insurance, securities
Trading Rights – already approved
Lowering cap. req., JV’s and WOFEs
Distribution Rights – due in 2004
Retail, wholesale, agents service, franchise, direct sales
WTO Schedule for 2005 : WTO Schedule for 2005 Direct Sales – due in 2004
Construction, Packaging, Entertainment
Further drop in tariffs, esp. agricultural
The Bad : The Bad
Slide15 : China Dreams… Everything is possible in China, nothing is easy – McDonalds’ Theorem.
Many U.S. companies have failed: over US$ 2 b in trade complaints. Why?
Failure to recognize competition
IPR issues
Late payment or non-payment
Contract sanctity
Lack of effective dispute resolution mechanisms
Inconsistent (unfair) application of law
Insufficient due diligence by U.S. firms
WTO Compliance Problems : WTO Compliance Problems Intellectual Property Protection
Weak enforcement
High thresholds for criminal prosecution
Low administrative fines and penalties
Transparency
Difficulty obtaining draft laws and regulations
Inadequate comment periods
National Treatment
Preferential polices for domestic producers not granted to imports
WTO Compliance Problems : WTO Compliance Problems Standards
Aggressive development of indigenous standards: TDSCDMA, WAPI
Trade remedies
Anti dumping cases
Subsidy issues
Services
Strict licensing requirements
High capitalization requirements
Things you cannot do in China : Things you cannot do in China Repatriate your profits (unless the gov’t allows you)
Sell imported products directly to Chinese without a license (required to go through Chinese companies)
Use direct sales as your sales channel
Depending on the industry, have majority ownership in your business
Operate your business when you want, you may have power black-outs dictated by the local govt
Challenges you will face doing business in China : Challenges you will face doing business in China Distribution
Lack of Transparency
Pricing Pressures
Contract Enforcement
Protecting your IP
Beijing vs. Local govt authorities
Huge and slow govt bureaucracy with multiple layers of govt
But it is much better than it was just three years ago!!!
Economic Challenges : Economic Challenges Corruption
Energy Supply
Over supply/capacity
Over investment in some sectors
Non-Performing Loans in the financial system
Unemployment, rural to urban migration
Pollution control
Lack of water
Weak Legal Structure : Weak Legal Structure Inconsistent application of the law by different cities or provinces. Even different ports.
Domestic protectionism between provinces or cities remains a difficult barrier.
Contracts are difficult to enforce.
Cost of litigation is very high; penalties are low.
Continued barriers in cultural and other service industries, some sanctioned by WTO
Special problems with intellectual property rights enforcement: trademarks, patents, and copyrights.
To sum it up: THIS IS THE TOUGHEST MARKET IN THE WORLD TO OPERATE IN : To sum it up: THIS IS THE TOUGHEST MARKET IN THE WORLD TO OPERATE IN
Ten things to think about : Ten things to think about Know your partner. Do your "due diligence," and do it well
Make certain your project is economically viable
Have clear contract terms – do not assume anything
4. Know the rules; beware of offers to bend them in your favor Rule of Thumb – go back to the basics.
Ten things to think about : Ten things to think about Search for problems before they materialize
Do a thorough risk analysis
Mind the store
Expect virulent competition, pricing pressure
Watch Your Intellectual Property Rights
Get paid
Slide25 : 1. Know your Partner Chinese business is in constant flux, complex business arrangements are normal
What are the ownership patterns? How are the likely to shift?
Avoid single sources of information.
Avoid informal assurances
Verify all critical information
2. Economic Viability : 2. Economic Viability Do not rely on subsidies, special considerations or non-market related criteria
If partner says benefits are available, verify
Slide27 : 3. Clear Contract Terms Specify exact terms of payment
Specify currency denomination
Specify exact performance standards
Specify time lines
Beware of provisions outside your control, including visas for visits to U.S.
Contracting party both willing and able?
Beware of local government concessions
Slide28 : 4. Avoid Prohibited Agreements Have a good Western legal representation
Local officials can offer concessions that supercede their authority
Often, they will promise not to enforce laws or regulations. But, rules can suddenly be applied, sometimes retroactively
WTO implementation requires many changes
Must obtain all necessary approvals from local, provincial, and/or national level
Slide29 : 5. Search for Problems Create pro forma balance sheets
Discuss problem scenarios with partner
Discuss strategy to deal with possible problems
Have dispute resolution procedures in place – international location if possible
Consider potential losses
Slide30 : 6. Risk Analysis: Limit Exposure Do not modify company’s risk profile
Set milestones to assess project performance
Play off competitors
Be patient and be prepared to wait for acceptable terms
Have an escape strategy at each stage of project
Slide31 : 7. Mind the Store Projects and sales in China require constant attention
Never let your partner think that you have removed focus from the day-to-day business
Make sure last payments are received
8. Local Competition : 8. Local Competition Expect a Chinese competitor
Chinese only know how to sell on price
Their cost structure will be lower than yours
If they can fake it, they’ll make it
9. Protect Your Intellectual Property : 9. Protect Your Intellectual Property China is the base of the world’s IP piracy problem
There is very limited enforcement of IP laws
High thresholds for prosecution
Low fines for being found guilty
All categories of products are being pirated: CD’s, lighters, auto parts, shoes, pharmaceuticals, pumps, motors, consumer goods, and even entire cars
Estimated as a US$50 billion global cost and a US$23 billion US problem
Slide34 : 9. Protect Your Intellectual Property Trademark – Register your trademark even before you enter the market. You must file with SAIC to receive protection. Also, notify Customs
Copyright – advisable to register in China though also receive protection through the Berne Convention under TRIPS agreement.
Patent – must file with SIPO to receive protection. Also, notify Customs.
IPR Toolkit : IPR Toolkit The US Embassy in Beijing has an IPR Toolkit website
Address:
www.usembassy-china.org.cn/ipr/
Best Prospects for US Companies in China : Best Prospects for US Companies in China Agro-Chemicals
Pesticides and Fertilizers
Airport & Ground Support Equipment
Have +140 airports today, going up to 240 by 2010
Aircraft Components
Buying 700 new commercial aircraft in the next 5 years
Go after Boeing & Airbus subcontracts
China is building their own regional jet
Auto Components
In 2005, will build 5 million vehicles
Best Prospects for US Companies in China : Best Prospects for US Companies in China Coal Mining Equipment
75% of electricity is generated by coal, will be going up to 85% in the next 7 years
Computers and peripherals
Commodities
Minerals
Agriculture
Scrap
Construction Equipment
Building boom going on in China
2008 Olympics, 2010 World Expo, 2010 Asian Games
Best Prospects for US Companies in China : Best Prospects for US Companies in China Cosmetics and Toiletries
As income has risen, so have sales
Education and Training
10% of income is spent on education
E-learning
Environmental Protection and Clean-Up
Water, solid waste, medical waste
Scrubbers, de-NOX, de-SOX
Financial Services
Banking, Insurance, and investment vehicles open up to foreign investment
Credit Cards
Best Prospects for US Companies in China : Best Prospects for US Companies in China Franchising
Food and beverage are doing well
Starbucks, KFC, McDonalds, Schlotsky’s
Integrated Circuits & Semiconductors
Machine Tools
Medical Equipment
70% of medical devices are imported
Best Prospects for US Companies in China : Best Prospects for US Companies in China Nuclear Power
Start building 30 new reactors over the next 15 years
Oil & Gas Exploration & Processing Equipment
Pipeline and Storage
Compressors
Offshore Exploration Equipment
Retail
Wal-Mart, Office Depot, Home Depot, Ikea
Best Prospects for US Companies in China : Best Prospects for US Companies in China Software
Specialty software is 70% imported
Telecom
3G applications
Equipment
Wireless LAN
On-Line Gaming
Slide42 : Commercial Service Offices in China
CS Offices in China : CS Offices in China Beijing 31st Floor, North Tower, Beijing Kerry Center, No. 1 Guanghua Lu Beijing 100020, China Tel: (86-10) 8529-6655 Fax: (86-10) 8529-6558/9 E-mail: Beijing Office Box
Hong Kong 26 Garden Road, Hong Kong Tel: (852) 2521-1467 Fax: (852) 2845-9800 E-mail: Hong Kong Office Box
Chengdu 4 Lingshiguan Lu, Renmin Nanlu Section 4 Chengdu, Sichuan 610041, China Tel: (86-28) 558-3992/9642 Fax: (86-28) 558-9221/3520 E-mail: Chengdu Office Box
Shanghai Shanghai Center, Suite 631 1376 Nanjing West Road Shanghai 200040, China Tel: (86-21) 6279-7630s Fax: (86-21) 6279-7639 E-mail: Shanghai Office Box
Guangzhou 14/F China Hotel Office Tower, Room 1461 Liu Hua Road Guangzhou 510015, China Tel: (86-20) 8667-4011 Fax: (86-20) 8666-6409 E-mail: Guangzhou Office Box
Shenyang 52 Shi Si Wei Lu Shenyang, Liaoning Province 110003, China Tel: (86-24) 2322-1198 ext. 189 Fax: (86-24) 2322-2206
Slide44 : What the CS can do for you Market Research
Find and vet partners and distributors
Background checks on potential partners, clients, distributors, etc.
Set up government appointments
Trade Shows – American Pavilions
Advocacy for tender selection
Intercede when having difficulties
Facilitate with Ex-Im Bank, TDA, and Development Banks
Slide45 : www.export.gov Tel. 1 (800) USA-TRADE www.buyusa.gov
Thank You & Good Luck! : Thank You & Good Luck!