10 Recommandments for doing business in China

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Information about 10 Recommandments for doing business in China

Published on July 31, 2009

Author: keithlomason

Source: slideshare.net

Description

The basics of a presentation I made at 2 Automotive News conferences in 2004/5. Information is still very valid.

Keith Lomason 10 Recommandments For Conducting Business in China

Global Production The industry enters a new stage of utilizing new capacity in Emerging Markets Mature markets will grow more slowly as production is displaced Demand diversification in non-mass markets (domestic vs. export) allows for more sustainable demand 2.1% CAGR 3.7% CAGR 3.0% CAGR Shift Towards Lower Cost/Higher Growth Markets

The industry enters a new stage of utilizing new capacity in Emerging Markets

Mature markets will grow more slowly as production is displaced

Demand diversification in non-mass markets (domestic vs. export) allows for more sustainable demand

The Labor Cost Shift Growth of Sourcing from ULCCs and LCCs Global platform rationalization enables for a shift to Ultra-Low Cost Countries (ULCCs) Several OEMs looking to ‘escape’ competitive High Cost Countries (HCCs) A number of situations where Low Cost Countries (LCCs) will lead the charge into export markets Source: Boston Consulting Group, EIU, S&P, other sources Hourly Compensation Including Benefits US$ 2009 LCCs Average of $8-10 per hour Inflation of 3-4% per annum HCCs Average of $23-27 per hour Inflation of 2-3% per annum ULCCs Average of $3 per hour Inflation of 6-7% per annum

Global platform rationalization enables for a shift to Ultra-Low Cost Countries (ULCCs)

Several OEMs looking to ‘escape’ competitive High Cost Countries (HCCs)

A number of situations where Low Cost Countries (LCCs) will lead the charge into export markets

Why China? 1990’s Lower Costs Market Potential PRC Govt. & Industry hungry for investment PRC Govt. & Industry hungry for investment “ good deal” partnerships offered 2000’s Market Share Scattered opportunities Grow with existing customers Grow with new customers Grow into new products/capabilities

1990’s

Lower Costs

Market Potential

PRC Govt. & Industry hungry for investment

PRC Govt. & Industry hungry for investment

“ good deal” partnerships offered

2000’s

Market Share

Scattered opportunities

Grow with existing customers

Grow with new customers

Grow into new products/capabilities

Every investment must be: Evaluated on its own merits Structured in the best way to benefit your company Adhering to as many of the following suggestions as possible will help ensure a successful operation in the China environment The “Ten Recommandments” Preface:

Every investment must be:

Evaluated on its own merits

Structured in the best way to benefit your company

Adhering to as many of the following suggestions as possible will help ensure a successful operation in the China environment

Recommandment One: Exception should be made ONLY if partner provides strategic Market Share There are many functions you can start in China today that do not require a local contact: Purchasing Engineering Sales and Marketing Your group will probably be better served in the long run if you commit to the cost of a sales office for 2-3 years to gain business as a WFOE than you will be if you rush to market via a partnership built on a desire to have a presence in China Investment Vehicle = WFOE

Exception should be made ONLY if partner provides strategic

Market Share

There are many functions you can start in China today that do not require a local contact:

Purchasing

Engineering

Sales and Marketing

Your group will probably be better served in the long run if you commit to the cost of a sales office for 2-3 years to gain business as a WFOE than you will be if you rush to market via a partnership built on a desire to have a presence in China

Maximum tax rate of 15%* Central government approved and managed Listed in WTO documents (legal structure) More developed infrastructure than most other areas 55 locations – there is one near where you want to be! Recommandment Two: Location = Central Government Economic Development Zones (CEDZ)

Maximum tax rate of 15%*

Central government approved and managed

Listed in WTO documents (legal structure)

More developed infrastructure than most other areas

55 locations – there is one near where you want to be!

Comparing Economic Development Zones and Non-EDZs Investment and Operational Costs

Social Benefit Standards 2004 * Total (%) of Salary represents money that company must pay to government on behalf of the employees This % is applied to the employees total cash compensation for calculation purposes, but is paid by the company While there is quite a bit of disparity between regions today, this gap will close over time

* Total (%) of Salary represents money that company must pay to government on behalf of the employees

This % is applied to the employees total cash compensation for calculation purposes, but is paid by the company

While there is quite a bit of disparity between regions today, this gap will close over time

Reduces intellectual property exposure Lower costs for overseas support, training, engineering, etc… Visteon “best practice” comparison from beginning of China activity General motors following practice once investment rules changed, allowing using SAIC together to buy out other China partners Recommandment Three: If you must use JV, Use One Partner for all China Activity

Reduces intellectual property exposure

Lower costs for overseas support, training, engineering, etc…

Visteon “best practice” comparison from beginning of China activity

General motors following practice once investment rules changed, allowing using SAIC together to buy out other China partners

Recommandment Four: Education different from that in North America or Europe Learning through memorization and repetition vs. Free thinking and creativity High turnover - especially in coastal areas In many cases, must continually break “bad habits” Quadruple Your Normal Training Plan

Education different from that in North America or Europe

Learning through memorization and repetition vs. Free thinking and creativity

High turnover - especially in coastal areas

In many cases, must continually break “bad habits”

Recommandment Five: Very few existing structures are adequate for long-term use Land cost in China is still relatively cheap, but will only continue to climb Operations can start in rented pre-fab facility, but plan on move to “purpose-built” More efficient Higher quality Better locations (CEDZ) Go Greenfield - Eventually

Very few existing structures are adequate for long-term use

Land cost in China is still relatively cheap, but will only continue to climb

Operations can start in rented pre-fab facility, but plan on move to “purpose-built”

More efficient

Higher quality

Better locations (CEDZ)

Recommandment Six: Tax reduction/holiday for foreign invested enterprises being reduced – may be eliminated Even if you have no imminent production, you can establish a company in a CEDZ, from which you can begin your operations Large volumes overall, but extremely fragmented and therefore difficult to justify investment Go Quickly – Or Wait Until 2010

Tax reduction/holiday for foreign invested enterprises being reduced – may be eliminated

Even if you have no imminent production, you can establish a company in a CEDZ, from which you can begin your operations

Large volumes overall, but extremely fragmented and therefore difficult to justify investment

Fragile domestic market – it is growing, but has plateaus, is very fragmented and first-time buyers cause swings Improves economies of scale Quality requirements for exports typically higher than domestic requirements resulting in better product than domestic competitor Savings at home may help meet customer demands* *Recent and ongoing revaluation of RMB will make exports less profitable and imports more reasonable Recommandment Seven: Where Possible, Exploit Export Opportunities

Fragile domestic market – it is growing, but has plateaus, is very fragmented and first-time buyers cause swings

Improves economies of scale

Quality requirements for exports typically higher than domestic requirements resulting in better product than domestic competitor

Savings at home may help meet customer demands*

*Recent and ongoing revaluation of RMB will make exports less profitable and imports more reasonable

Recommandment Eight: Profits will be harder to come by in future Market growth is slowing Vehicle prices are dropping Price pressures on OE’s passed on to suppliers Payment terms being extended Hype must be ignored – know what to expect and have robust business plans – most competitive market in the world right now Get ready for OE & Supplier shakeout and consolidation (20% during next 5 years?) Due Diligence & Business Plan

Profits will be harder to come by in future

Market growth is slowing

Vehicle prices are dropping

Price pressures on OE’s passed on to suppliers

Payment terms being extended

Hype must be ignored – know what to expect and have robust business plans – most competitive market in the world right now

Get ready for OE & Supplier shakeout and consolidation (20% during next 5 years?)

Recommandment Nine: Good legal advice is critical Keep it focused on key issues Have solid exit/takeover clauses for JVs Ensure all tax advantages are utilized Understand that negotiations with a PRC partner begin AFTER the contracts are signed – not a ploy, simply a difference in cultures Establish your own local resources group Maybe 1 person, maybe 100 Specific to your needs Local Networking can not be over emphasized Can monitor swiftly changing environments Utilize External Experts When Necessary

Good legal advice is critical

Keep it focused on key issues

Have solid exit/takeover clauses for JVs

Ensure all tax advantages are utilized

Understand that negotiations with a PRC partner begin AFTER the contracts are signed – not a ploy, simply a difference in cultures

Establish your own local resources group

Maybe 1 person, maybe 100

Specific to your needs

Local Networking can not be over emphasized

Can monitor swiftly changing environments

Recommandment Ten: Overcapacity exists at the OEMs, but is even more prevalent at the Tier-2 level and below OEMs do NOT pay for most tooling up front but want it amortized – this cost can be pushed down to the component supplier If there is overcapacity on a component your company normally manufactures, you will not be able to compete on price – but the OEMs (especially foreign invested) need your engineering and supplier management capabilities Suppliers and sub-suppliers will need constant assistance with SQA and development activities + management costs/- capital & component costs Rethink Your Normal Manufacturing Process

Overcapacity exists at the OEMs, but is even more prevalent at the Tier-2 level and below

OEMs do NOT pay for most tooling up front but want it amortized – this cost can be pushed down to the component supplier

If there is overcapacity on a component your company normally manufactures, you will not be able to compete on price – but the OEMs (especially foreign invested) need your engineering and supplier management capabilities

Suppliers and sub-suppliers will need constant assistance with SQA and development activities

+ management costs/- capital & component costs

THANK YOU

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