# Presentation: 136291

## China’s Commercial Landscapefor Fairleigh Dickinson University, New Jersey

*Kellie Holloway*
- U.S. Commercial Service
*May 23, 2006*
- Email: kellie.holloway@mail.doc.gov
- Tel: 503-326-3002

## Today’s Discussion Topics:

- China’s Commercial Landscape
- Opportunities & Challenges
- Market Entry Roadmap
- Assistance Offered by the U.S. Commercial Service

## Contradictions

## Contradictions

-  East meets West
-  Growing Gap between rich and poor
-  Centrally planned vs. market oriented
-  State vs. Local perspectives
-  Hype vs. Reality

## 2005 Headline News

- China’s GDP grew 9.9% in 2005, surpassing $2 trillion
- China has risen from the United States’  11th largest export market five years ago to our 4th largest today.
- U.S. exports to China have increased by 80% since 2001.
- In 2005, the U.S. trade deficit with China was USD 201.6 billion, the largest in history, up 24%.
- Urban residents per capita income rose 9.6% to USD1,312,  Shanghai is USD 2,331 in 2005.
- China plans to quadruple GDP in 20 years, which implies an average 7.3% annual growth.

**Notes:**
Trade deficit is an increase of $38 bn from $162 bn in 2004.
Global imports reached $148 bn, up 36%. 
Through August 2005, FDI  fell 3.02% to $37.99 bn; contractual FDI rose 20.6% to $112.7 bn.

 - China has become the fourth largest economy in the world at current exchange rates: trailing U.S, Germany and Japan. 
- Per capita income has increased to about USD 1,700 about equal to Morroco
- China continues to serve as a major growth engine for the global economy. 
- At the same time, multilateral exports up 28% and multilateral imports up 17.7 percent leading to a trade surplus of over 100 billion or 5 percent of GDP.  
- With regard to the U.S., our exports were up over the trend level.
- But, the bilateral trade deficit continued to grow, surpassing USD 200 billion for the first time.  

## U.S. Trade Deficit

- China

- Asia, not China

- N. America

- OPEC

- OECD

- Other

- US$195.3 b

- US$701.5 b

**Notes:**
Although 2004 data, this chart is a good indicator of where China fits within the US’s global trade situation.

The 2005 China-specific trade deficit of 201.6 bn is an increase of $38 bn from $162 bn in 2004.

## U.S. Exports to China

- The fastest growing export market +20% in 2005

**Notes:**
In 2005, China was our 4h largest export market, now ahead of Germany and the U.K. 
It is growing rapidly. In 2005, we shipped USD 42 billion dollars, which is a 20 percent increase over the year before.  As a percentage of our total exports, China is growing in importance from 2.1 percent of our total export market in 2000 to 4.6 percent of our total export market in 2005.  

I should also point out that the U.S. exported USD 16 billion dollars to Hong Kong, much of which was destined for China.   

So, China is an important market for many American companies and becoming much more so.

U.S. imports from China reached $243.5 bn in 2005.

## Leading U.S. Exports to China  (2005) ... 

- _Product__	__	__	__           __	__Value (USD)__	__%Change_
- aircraft and parts		$3.84b		137.23% +
- digital integrated circuits		3.12b		17.8%	   +
- soybeans			2.25b		3.25%	   -
- cotton				1.40b		1.51%	   -
- ferrous metal scrap		1.26b		35.1%	   +
- auto parts / accessories		1.03b		72. 3%	   +
- auto data processing equip. 	0.78b		0.2%	   +
- copper scrap			0.76b		42.31%	   +
- aluminum scrap			0.72b		92.5%	   +
- scrap/waste paper 		0.69b		42.79%	   +
- electric apparatus		0.57b		7.79%	   +
- cow hides and skins    		0.56b		16.6%	   +

**Notes:**
Five of our top exports are high technology categories, three are agricultural commodities and four are scrap items.

## ...match many of NJ Export Strengths

-  Chemical Manufacturers	221,663,311    37 %
-  Waste & Scrap		87,712,208     14.7 %
-  Machinery Mfgrs		76,151,820     12.7 %
-  Computers & Elec Prods	66,749,284     11.2 %
-  Primary Metal Mfgrs	28,837,812       4.8 %
-  Transportation Equip	18,901,078       3.2 %
-  All Others		98,404,199     14.4 %
- Grand Total		598,409,718     100%

- 2005 Exports from New Jersey to China

## Composition of U.S.- China Trade2005 Top 12 (2 digits)

- _U.S. Imports (from China)   % Change_
- Elect. Machinery	        32.09%
- Machinery	          	        20.29%
- Toys/Sports equipment      11.13%
- Furniture and bedding        18.27%
- Footwear                            12.10%
- Plastic                                27.82%
- Knit apparel		        60.26%
- Leather Goods                    9.61%
- Iron/steel products	        34.22%
- Vehicles                             24.54%
- Optic/Medical inst.	         8.95%
- Misc Textile	                       29.63%

- _U.S. Exports (to China)__	__  % Change_
- Electric.machinery	   20.41%
- Machinery	    	   12.60%
- Aircraft,spacecraft	   124.59%
- Optic/Medical instr	   15.03%
- Grain,seed,fruit	   -3.45%
- Plastic		    25.77%
- Iron and steel	    14.37%
- Organic chemicals	    -4.87%
- Cotton+yarn,fabric	    -1.44%
- Wood pulp, etc.	    33.34%
- Copper		    40.02%
- Vehicles		    43.24%

**Notes:**
This chart shows you the top twelve categories of bilateral imports and exports using American data.  

There are several interesting things about this chart.  First, the chart of the top twelve categories includes five industries where both countries are heavy exporters: electrical machinery, machinery, plastic, optics, iron/steel and vehicles. 

This pattern of trade is quite different from what you would see between the U.S. and other developing countries.  

Second, please look at last year’s growth rates.   You will see the fastest growing U.S. import sectors are machinery, electrical machinery, furniture and vehicles.  These not just labor intensive industries. China’s comparative advantage as a trading country is not only in the labor intensive industries.  

Let’s take a look at China’s total exports to see what is going on here.    

## Investment in Fixed Assets (2005)National Bureau of Statistics

- _Category__	__	__ Increase %(y/y)__	__ Proportion%_
- Farming		24.1%			1%
- Mining			49.5			4.1
- Manufacturing		38			27.6
- Utilities			31.8			9.7
- Construction		4.5			1.1
- Transportation		26.1			11.5
- Real Estate		23.6			23.4
- Environment		24.2			7.9

**Notes:**
Well, investment in fixed assets have been growing very rapidly.  

This chart will tell you how rapidly and where the money is going.  

Fixed asset investment has been growing very quickly in China over the last few years.  While measurements are not very good, some of China’s official statistics suggest that FAI is over 50 percent of GDP.  

More reasonable estimates are at about 25 to 30 percent of GDP – but this is still very rapid.  Let’s take a look at where the FAI is being directed.   

A combination of incremental policy reforms, high savings and high investment in fixed assets has led to high levels of productivity and has created a sustainable economic situation.

## The China Opportunity and Challenge

## Market Drivers

- Urban Migration
- Growing middle class
- WTO / market reforms
- Foreign Direct Investment
- Mega projects

**Notes:**
Urban Migration - Millions more in retail centers
Demand and access to supply chain
Development of new planned communities
Growing population - Higher disposable income and consumption of non essential goods
Improved business infrastructure - Opening sectors due to WTO
Ease of market entry/capital requirements
Policy and regulatory guidance

## More than half of China’s population will live in cities by 2020

**Notes:**
How many/day?  40-50,000
Massive infrastructure – housing, roads, healthcare services, utilities
Establishing new cities
Pollution implications – 1/3 sewage treated
Consumables and durable goods
Massive infrastructure investment

## Market DriversRising Middle Class

-    China’s GDP has exponentially increased in the past 10 years, resulting in a larger portion of the population in the Middle Class.
-    They are able to consume non-essential goods.
-    Pent up demand for housing:  253 sq ft vs. 793 sq ft
-    Domestic tourism growth:  25%
-    Higher disposable income provides firms with a larger market.

**Notes:**
100 mil middle class ($7000)
Pent up demand for housing – privatization, mortgage
Demanding 
- durable goods, 
- entertainment – experiential opportunities
Tourism – domestic (hotels, airplanes, services
O/S - 25 mil vacationed last year
Healthcare – managed care, facilities, nutritional supplements (6bil)

## Keeping up with the Chens

- 20-year olds have known nothing but upward mobility
- Luxury goods hot – from caviar to Harley-Davidson to Louis Vuitton
- Western brands sell
- ‘Hypermarkets’ and retail chains booming along with new construction
- Studies show most consumers planning big ticket item purchases in next 12 months

**Notes:**
The demographic in China in changing. The demand for luxury and high-tech goods is rising and the preference for Western brands is very strong.

## Sectors to Watch: Lifestyle

- Health and beauty
- Travel and related services
- Entertainment
- music, movies and related accessories
- outdoor activities & sporting goods
- Home furnishings, fixtures and appliances

## Market Drivers

**WTO Commitments (Dec 06) / Market Reform**
- Distribution
- Banking and financial services
- Logistics
- Retail
- Architecture, engineering and urban planning services
- Insurance

**Notes:**
Market Reforms are behind these market drivers

China has a new round of WTO Commitments due by Dec. 11, 2006.  
Urban planning WFOEs have been permitted since May 2003. Others to be allowed 12-11-06
 Foreign-invested banks should see all geographic and customer restrictions on their local currency businesses removed. Moreover, China is scheduled to eliminate any non-prudential measures that restrict the ownership, operation, and operational form of foreign-invested banks. It will allow wholly foreign-owned banks to provide local currency services to any PRC client in any city in China. This marks the most substantial opening at once of a sector that has largely been protected.
Foreign-invested wholesalers and commission agents will be allowed to distribute chemical fertilizers, processed oil, and crude oil; the last remaining product prohibitions for foreign-invested distributors, except for restrictions on salt and tobacco, which are to remain under state control. Also, Foreign majority-owned chain retailers with more than 30 outlets should be allowed to sell motor vehicles. 
Reinsurance; international marine, aviation, and transport insurance; and brokerage for reinsurance and large-scale commercial risks, international marine, aviation, and transport insurance are the last WTO commitments in insurance.
China is scheduled to lift all geographic restrictions on mobile voice and data telecom services for Sino-foreign joint ventures. Foreign-invested mobile voice and data telecom providers are currently restricted to operating in 17 PRC cities, including Beijing, Chongqing, Guangzhou, and Shanghai. After the geographic restrictions are removed, China will have fully implemented its WTO commitments in these services. China's WTO schedule does not require it to lift the 49 percent cap on foreign ownership in a mobile service provider. 

- From the China Business Review

## Market Drivers

**Foreign Direct Investment**
-  $100 Billion+ (Yangtze River Delta, Pearl River Delta, Beijing – Tianjin)
-  Ag to Industrial
-  Massive highway system
-  Ports, Energy, Industrial zones

## Market Drivers

**Growing Manufacturing Base**
-  “World’s Factory”
-  Consumption of Raw Materials
-  Manufacturing Technology
-  Growing Environmental Problems

## Market Drivers

**Mega Projects**
- Beijing Olympics 2008
- Shanghai World Expo 2010
- Asian Games in Guangzhou
- Shanghai Deep Water Port
- South-North Water Transfer Project

## Best Export Prospects for US Companies in 2006

- Agrochemicals
- Air Traffic Management      Equipment Market
- Safety and Security Market
- Automotive Components Market
- Coal Mining Equipment
- Construction Equipment Market
- Banking Technology
- Credit Card Market
- Education and Training
- Franchising

- Semiconductor Industry
- Machinery
- Marine Industries
- Liquefied Natural Gas
- Power Generation
- Software
- Telecommunications Market
- Water and Wastewater Treatment
- Medical Equipment
- Find research on these sectors:
- www.export.gov/china

## New business models?

**Notes:**
Pent up demand for new concepts

Waterless urinals

Starbucks – 195 outlets
Hagendas vs Baskin Robbins

## Anticipate Problems - Macro

- Intellectual Property Rights
- Patent			- Trade Secrets
- Copyright		- Trade Mark
- Industrial Standards and Certification Problems
- Transparency/Corruption
- Payment issues
- Dispute Resolution
- Price Competition

## Anticipate Problems - Micro

- Management-level human resources
- Bureaucracy
- Unclear Regulations
- Lack of Transparency
- Inconsistent Regulatory interpretation
- Corruption
- Contract Enforcement
- Local protectionism

**Notes:**
As ranked by the members of the American chamber of commerce

## U.S. Companies Profit/Risk in China - 2005

- 72% U.S. firms increased product offering in China
- 86% increased revenue substantially
- 63% increased profitability
- 34% have higher margins than global averages
- 92% are optimistic

*Source: 2005 AmCham White Paper, American Business in China*

**Notes:**
For increase product offering - 22 percent significantly, 50 percent somewhat
For increase revenue – 44 percent substantially and 42 percent somewhat
For increase profitability – 15 percent very profitable, 53 perent profitable, 26 percent breakeven or small loss
For margins – 14 percent are significantly higher, 20 percent somewhat, 25 percent comparable, 16 someowhat lower, 8 significantly lower, 17 percent not applicable.  
For ooptimism – 49 ercent optimistic, 43 percent cautiously optimistic, 6 percent neutral, 2 percent slignhtly pessimistic

## Market Entry RoadmapAre you China ready? 

- Avoid “Chinaforia”: research, filter, include many data points
- Build IP protection into your business plan
- Consider regulations – US and China
- Due diligence, due diligence, due diligence
- Set long- and short-term goals, including an exit strategy
- Consider regional and industry specialization
- Consider outsourcing back-office functions
- Seek competent China-savvy legal advice and professional assistance (avoid guanxi brokers)

## Market Entry Roadmap

- Direct Exports
- Sales Agent / Distributor
- Cooperative Service Center
- Representative Office
- Wholly Owned Foreign Enterprise
- Foreign-Invested Commercial Enterprise (FICE)
- Joint Venture / Acquisitions / Various Partnering
- Gateways

**Notes:**
There are various approaches to the China market.  An entry approach is dependent on industry practices, risk tolerance, available capital.  

I will talk through some considerations in each of these models.

Cooperative Service Center regulations, issued by the Ministry of Commerce in September 1993. 
usually established by equipment exporters that have service warranty obligations
authorized to import spare parts, establish a bonded warehouse, collect service fees  
a relatively low-cost service joint venture which must be established in the Chinese company’s name; not a WFOE. 
demonstrates a long-term commitment to customer support, an important sales term for Chinese buyers
Useful marketing function with regard to technical seminars and equipment demonstration.
As a result of WTO liberalization it may be possible to establish a WFOE, which may enable an exporter to better control service quality.

## Direct Exports

- Take stock of resources in China (friends, suppliers, partners, etc.)
- Develop Trade Leads
- Monitor tender announcements, Export.gov, ADB and World Bank
- Monitor the CS International Buyer Program via your USEAC
- Featured U.S Exporter (FUSE)
- CNUSA, Chinese edition
- Attend a trade show in China, many supported by CS
- Participate in a trade mission, organized by USDOC, state government or trade association

## Sales Agent / Distributor

- Advantages
- no investment in office overhead
- no registration requirements, no physical presence
- lower likelihood of non-payment
- no responsibility for customs clearance
- Responsibilities
- Comply with safety and quality certifications, China Compulsory Certification, other standards requirements
- Comply with U.S. FCPA, Export Control regulations
- Prepare a contract that protects your legal interests, see a local attorney
- Perform thorough due diligence and manage expectations
- Closely monitor the agent / distributor’s activity

**Notes:**
Manage Expectations
use worldwide selection criteria, then evaluate skill sets
explore their view of market prospects, approach to business development 
ask to see a prior marketing plan and market research report
discuss cost sharing for Chinese language brochures, participation in trade shows, demonstration equipment, training in the U.S.
contract should contain clear reporting requirements and performance goals to monitor whether the Chinese company can do what it purports to be able to do
evaluate capacity to stock and warehouse 
consider profit motive of SOE versus private firm.
Due Diligence
Many exaggerate trade experience, check trade references
Ask for a copy of the firm’s business license, SAIC inspection, trading rights license, visit business premises
Triangular debt common for entities lacking trading rights and foreign exchange
Obtain a DD report through local service providers or CS
	China lacks a corporate credit rating system
Government system for verification of business registration on line is emerging – SAIC Red Shield (Hong Dun) Program
Contract Terms 
seek professional legal advice before contracting, do not rely upon your Chinese business partner
ensure the dispute resolution clause limits time for “friendly discussion or mediation”
do not accept obligations outside of your control:  visas, export licenses 
do not  export on open account or D/P terms
ensure contract has non-competition and non-disclosure clauses to protect trade secrets, in the event the relationship  ends badly

## Representative Office

- Rep offices may perform a useful government liaison and marketing function, contract implementation. Useful for getting into government procurement projects.
- Restrictions on business scope apply:
- not allowed to engage in profit-making activity
- not allowed to directly import and distribute product
- not allowed to service equipment or warehouse spare parts
- Establishment of physical presence now requires only local registration. The cost to support a modest RRO $250,000-500,000 depending on location and size.
- Registered capital in the amount of $10,000 still required.

## Hong Kong as a Gateway

-  Ease of Doing Business
-  Rule of Law
-  Free Trade Port
-  Secure banking system

-  Strategic Asia Hub
-  Location
-  Test products for market
-  Regional HQ
-  Huge re-export market to China
-  Closer Economic Partnership Agreement (CEPA)
-  Access to Pearl River Delta – China’s manufacturing hub

**Notes:**
Ease of Doing Business
- Rule of Law & a transparent government (Chinese companies prefer to conduct arbitration in HK)
- No tariffs on most goods 
- Low taxes (17.5% on profits vs. 33% in China)
- Developed infrastructure – educated workforce
- Secure banking system – get paid faster, easier
- Can invoice in HK without goods ever going to HK

Asia Hub
Within six hours’ flying time from Hong Kong, you can sell to 2/3 of humanity!
- Test consumer products on Mainland tourists in HK & Macau
Test business products on 2100 Mainland companies operating in HK
-Almost 3,800 regional HQs in Hong Kong – 1,000 are U.S. regional and local companies
-94% of Hong Kong’s exports are re-exports of third country origin goods,   54% of these go to China
Preferential access to HK service suppliers in 26 sectors through the Closer Economic Partnership Agreement (CEPA)
- Access to Pearl River Delta – highest per capita income in China and reach 50 million people - 3.3% of China’s population
- Hong Kong is the source for 70% of PRD’s FDI

## In China...Everything is possible, nothing is easy.              ~ MacDonald’s theorem

- Where to go for help?

**Notes:**
As the US Embassy’s Minister Counselor for Commercial Affairs likes to quote....

## The U.S. Commercial Service helps U.S. exporters achieve international sales goals

**Our mission:**
- To promote the export of goods and services from the United States, particularly by small- and medium-sized businesses
- To protect U.S. business interests in foreign markets

## You’ll find Commercial Service officers and trade specialist living and working in:  

- You’ll find Commercial Service officers and trade specialist living and working in:

- 125 trade experts on the ground in China to help

- Beijing
- Shanghai
- Guangzhou
- Shenyang
- Chengdu
- Hong Kong

## 14 Secondary Cities with American Trading Centers

- More Market Access. Same Quality Service.

-  Dalian
-  Chongqing
-  Hangzhou
-  Harbin
-  Kunming
-  Nanjing
-  Ningbo

-  Nanjing
-  Qingdao
-  Shenzhen
-  Tianjin
-  Wuhan
-  Xi’an
-  Zhuhai

## What can we 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

## www.export.gov/china

## Upcoming Trade Events in China with U.S. Pavilions

- June 7-10	Sino-Dental 2006, Beijing
- June 28-29	South China Int’l Transport & Logistics Exhibition, Guangzhou
- July 7-10	SINOCES, Qingdao
- Aug 29-Sep 3	CIEME Equipment Manufacturing, Shenyang
- Aug 30-Sep 2	Beijing International Book Fair, Beijing
- Sept 17-20	CIFTEE Banking Tech & Equipment, Beijing
- Oct 11-14	PTC ASIA/Metal Working China, Shanghai
- Nov 7-9	MEDTEC China, Shenzhen
- Nov 16-19	China International Travel Mart, Shanghai
- Nov 28-30	International Eco Expo, Beijing
- Find Trade Events: _http://www.buyusa.gov/china/en/chinashows.html_

## The only official US DOC advertising magazine

-  Text translated to Chinese
-  Wide distribution > 40,000

**Notes:**
Chinese language editions in July-August and November-December issues. For more information: www.thinkglobal.us 

## Featured U.S. Exporter(FUSE)

- Featured U.S. Exporter(FUSE)

- Advertise your product or service in Chinese with FUSE

## IPR Resources

- The US Embassy in Beijing has an IPR Toolkit website
- 	http://beijing.usembassy-china.org.cn/ipr/html
- China IPR Advisory Program
- 	one hour of free IPR consultation with a legal expert
- US Patent & Trademark Office will present an IP conference in Boston in September (free)

## AmChams in China

*Beijing*:  www.amcham-china.org.cn*Shanghai*:  www.amcham-shanghai.org

**Notes:**
Beijing:  The China Business Review

## Slide 44

## Visit the Commercial Service’s China Business Information Center at export.gov/chinaor call us at 800-USA-TRADEIn New Jersey, contact the Newark Export Assistance Center at 973-645-4682, www.buyusa.gov/newark

- Need help doing business in China?

## Thank you谢谢