# Presentation: 499864

## Commercial Service
U.S. Department of Commerce

**U.S. Department of Commerce**

**Doing Business in China**

## Doing Business In China:The Good,		The Bad, and 				The Commercial Service

## The Good

## 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 GDP grew 9.1% in 2003; Q1 2004 growth was 9.8%**
**China’s GDP has quadrupled since 1978.  GDP is expected to further quadruple in 20 years, equaling average annual growth of 7.3% **

## 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%**

## China Export Market

**Fastest growing export for US businesses in the world**
**US exported $33 billion in the last 12 months **
**Exports grew 34% in the first half of 2004**
**Exports up 28% in 2003 – only 4.4% globally**
**$90 billion in exports since President Bush took office**
**Chinese imports are growing 41%**

## Example of Opportunities:

**The  Energy Sector**

**26 of 31 provinces currently have rolling black-outs**
**Approximately 140 new power plants are under construction**
**Construction, environmental, equipment**
**Use of coal for total power generation is currently 75%, estimated to go up to 85% over the next seven years**
**Coal mining equipment**
**Initiated a large increase in nuclear power generation, 2 nuclear facilities a year for 15 years**

## The Successes

**GM will sell 500,000 vehicles in 2004 in China**
**Citigroup Insurance will open operations**
**Boeing will sell over $7 billion in aircraft**
**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

**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**

## Machinery
Electrical Machinery
Aircraft
Medical & optical equipment
Plastics
Grain 
Fertilizer
Chemicals
Iron and steel
Copper

**Electrical Machinery**
**Aircraft**
**Medical & optical equipment**
**Plastics**
**Grain **
**Fertilizer**
**Chemicals**
**Iron and steel**
**Copper**

**Top ten U.S. exports to China**

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

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

This pattern of trade is quite different from most 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.  

## Composition of U.S.- China Trade in 2003 Jan-Oct

**U.S. Imports**
**Elec. Machinery, 18%**
**Machinery, 51%**
**Toys, 17%**
**Footwear, 6%**
**Furniture, 21%**
**Woven Apparel, 26%**
**Leather, 17%**
**Plastic, 14%**
**Knit Apparel, 24%**
**Iron/steel 30%**
**Optics, med 21%**
**Vehicles, 26%**

**U.S. Exports**
**Machinery, 12%**
**Elec. Machinery, 15%**
**Aircraft, -35%**
**Optics, Med, 31%**
**Plastic, 29%**
**Grain , 135%**
**Fertilizer, -46%**
**Chemicals, 89%**
**Iron/steel, 130%**
**Copper. 89%**
**Wood pulp, 47%**
**Vehicles, 74% **

## WTO Schedule for 2004

_**Telecommunications**_
**JVs in data services**
_**Financial Services**_
**banking, insurance, securities**
_**Trading Rights**_
**Lowering cap. req., JV’s and WOFEs **
_**Distribution Rights**_
**Retail, wholesale, agents service, franchise, direct sales **

## WTO Schedule for 2004 

_**Direct Marketing**_
_**Construction, Packaging, Entertainment **_
_**Further drop in tariffs, esp. agricultural**_

## The Bad

## China Dreams...

**Everything is possible in China, nothing is easy – McDonalds’ Theorem.   **
**Many U.S. companies have failed: over USD 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**

## 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 VAT polices for domestic producers not granted to imports**

## 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

**Repatriate your profits (unless the gov’t allows you)**
**Sell directly to Chinese (required to go through Chinese companies)**
**Use direct sales as your sales channel, ie, Amway or Avon**
**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

**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

**Corruption**
**Energy Supply**
**Over supply/capacity**
**Poor legal environment**
**Over investment in some sectors**
**Non-Performing Loans in the financial system**
**Unemployment, rural to urban migration**
**Pollution control and lack of water**

## Weak Legal Structure

**Inconsistent application of the law by different cities or provinces.**
**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.**

## Ten things to think about

**Have clear contract terms** **– do not assume anything**
**Make certain your project is economically viable**
**Know your partner. Do your "due diligence," and do it well**** **
**Know the rules; beware of offers to bend them in your favor**** **

**Rule of Thumb – go back to basics.**

## 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**

## 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**

## Economic Viability

**Do not rely on subsidies, special considerations or non-market related criteria**
**If partner says benefits are available, verify**

## 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**

## 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**
**Consider potential losses**

## Mind the Store

**Projects and sales in China require constant attention**
**Never let your partner think that you have removed focus  **
**Make sure last payments are received**

## Protect Your Intellectual Property 

_**Copyright**_** – advisable to register in China though also receive protection through the Berne Convention under TRIPS agreement.   **
_**Trademark**_** – must file with SAIC to receive protection.  Also, notify Customs.**
_**Patent**_** – must file with SIPO to receive protection.  Also, notify Customs.**

## IPR Toolkit

**The US Embassy in Beijing has an IPR Toolkit website**
**Address:  **
-   _**www.usembassy-china.org.cn/ipr/**_

## 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**

## Avoid Prohibited Agreements

**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 or national level**

## China Export Initiatives

## Bush Administration Initiatives 

_**IPR**_** – Placed USTPO official in Beijing**
_**Currency**_** – Sec. Snow has designated Amb. Paul Speltz to push the Chinese on currency valuation and convertibility**
_**Anti-Dumping**_** – Initiated 21 anti-dumping cases**
**Enforcement – Created three Dept of Commerce offices and a USTR office for China trade enforcement**

## Bush Administration Initiatives

**Trade Promotion – increasing staff by 16 people in China**
**Cover 2****nd****-tier cities**
**Trade Show Program**
**Targeting Chinese 10 trade shows**
**MDCP Grants**
**AMT **
**GAMA and NEMA offices- Standards**
**Standards Initiative**
**Staff dedicated to work on standards issues**

## The Commercial Service

## U.S. Commercial ServiceYour Global Business Partner

**Field offices in 105 U.S. cities**

**Domestic**

**International Field Team**

## The Commercial Service (CS) field team in China has over 100 dedicated trade specialists
Ramping up trade promotion activities in China
Customized market research 
Advocacy and compliance 
Let us show you how to take advantage of our activities       

**Ramping up trade promotion activities in China**
**Customized market research **
**Advocacy and compliance **
**Let us show you how to take advantage of our activities**

**U.S. Commercial Service*****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](mailto:Beijing.Office.Box@mail.doc.gov)_
**Hong Kong****26 Garden Road, Hong Kong****Tel: (852) 2521-1467****Fax: (852) 2845-9800****E-mail: **_[Hong Kong Office Box](mailto:Hong.Kong.Office.Box@mail.doc.gov)_** **
**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](mailto:Chengdu.Office.Box@mail.doc.gov)__[ Office Box](mailto:Chengdu.Office.Box@mail.doc.gov)_

**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](mailto:Shanghai.Office.Box@mail.doc.gov)_** **
**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](mailto:Guangzhou.Office.Box@mail.doc.gov)__[ Office Box](mailto:Guangzhou.Office.Box@mail.doc.gov)_
**Shenyang****52 Shi Si Wei Lu****Shenyang, Liaoning Province 110003, China****Tel: (86-24) 2322-1198 ext. 189****Fax: (86-24) 2322-2206**

## What your Commercial Service can do for you 	

**Gold Key and Platinum Key**
**Project and Sales Advocacy**
**Market Research**
**International Partner Search**
**International Company Profile**
**Videoconferencing facilities**
**Free listings on our website**
**Trade events**

## http://www.buyusa.gov/china/en/

## China Business Information Center (BIC)

**First comprehensive U.S. government resource to help U.S. companies take advantage of China’s rapid integration into the global economy**
**Offers clients counseling with trade specialists in the United States, referrals to USFCS officers in China, and helps channel trade leads to clients through U.S. Export Assistance Centers**
**Consists of an 800 number that the public can use to speak with a China specialist and a website with China-focused information and export tools**

**www.export.gov/china**

## China Business Information Center (BIC)

**The China BIC helps enable U.S. exporters to undertake the following activities:**
**Promote products and services to qualified Chinese buyers, distributors and agents**
**Understand Chinese laws, regulations and customs**
**Collect world-class market research**
**Develop new or additional business relationships in China**
**Initiate the basic steps to enter the Chinese market**

## www.export.govTel. 1 (800) USA-TRADE www.buyusa.gov 

## Thank You &Good Luck!