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Published on October 11, 2007

Author: UpBeat

Source: authorstream.com

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Treasury Management in China and India :  Treasury Management in China and India March 27, 2007 Shanghai early 1900’s:  Shanghai early 1900’s Shanghai years ago:  Shanghai years ago Shanghai today:  Shanghai today Shanghai today:  Shanghai today Beijing early 1900’s:  Beijing early 1900’s Beijing today:  Beijing today Beijing today:  Beijing today Intel’s presence in China:  Intel’s presence in China Opened first sales office in Beijing in 1985, 15 sales offices today; Rev @5B second largest after U.S First assembly/test factory began construction in Shanghai in 1998, expanded to 3 factories in Shanghai and 2 in Chengdu – $950m investment First Fabrication facility announced this week~$2.5b 3 R&D centers and software development lab Set up US$200m Intel Capital technology fund to invest in Chinese technology companies 6000 employees Treasury organization in China:  Treasury organization in China Team of 9 professionals performing multiple functions Cash Management Currency hedging Customer credit & collections Strategic Investments Controls & Compliance Risk Management Business partnering support Our approach :  Our approach Understand the risks Local presence Become experts Structure around the risks Minimize risks (vs. eliminate risk) Influence change Engage with government & regulators Work with peer companies Balance the business opportunity and risk Long term view Strong business partnering Strategic Venture Capital activity:  Strategic Venture Capital activity Established local presence in 1998; entered a market with little or no experience with venture capital investments Significant legal and regulatory hurdles Law is FDI oriented – to create operating companies not share capital companies Law regarding share issuance & transfer uncertain Enforcement of shareholder rights uncertain; board rights and governance unpredictable IPO’S require govt. approval; foreigners can’t list shares Framework for M&A and bankruptcy undeveloped IP enforcement unreliable Higher deal costs and long lead times Strategic Venture Capital activity:  Strategic Venture Capital activity Difficult due diligence Independent information on companies hard to obtain Related party transactions prevalent Poor accounting practices; limited tax compliance Few law firms or accounting firms with venture expertise Significant language and cultural barriers Quality of investees Limited transparency; weak governance Limited pool of quality managers Lack of co-investors with VC experience Extensive government involvement in economy How Intel met the challenge :  How Intel met the challenge Invested in offshore special purpose companies to hold equity interests in PRC entities Offshore company equity surrogate of equity in PRC entity Avoids PRC limitations on issuance, sale and transfer of shares Corporate governance mechanics more reliable Access to more experienced court systems and arbitration Facilitates offshore exit Terms & Conditions Adopted Silicon valley terms to local conditions Didn’t give up critical terms because “this is China” Adjusted terms to meet changes in law & market conditions Management Team/Co investors Recruited local teams with international experience Leveraged local connections to augment DD Actively sought out top tier co-investors The Results:  The Results 60+ investments from US$500k to $50M Multiple exits via M&A and IPO’s on NASDAQ, HKSE, GEM, SGX Some notable deals: Sohu, VY ’98; Asiainfo, VY99; UTStarcom, VY99; Cellon, Techfaith, VY 04; Actions Semiconductor, VY ’05; Kingsoft, Neusoft, VY ’06 Strategic returns range from influencing handset design & manufacturing co’s and major software providers to relationships with key tech players & investors Lots of positive change since 1998, BUT it’s still not easy… Offshore Structures, while now the norm still carry risks Doesn’t cure onshore problems – main assets still subject to PRC risk Familiar issues in emerging markets:  Familiar issues in emerging markets Capital controls Thin Capitalization rules Restrictions on holding cash offshore (trapped cash) Separate bank account per activity Stringent documentation to repay inter-company loans Some Intel successes Working closely with governments and regulators to influence liberalization of laws Negotiate exceptions to regulations as part of investment packages Find alternative local investments (e.g. entrust loans) Negotiate capital injection schedules timed to investments Business Partnering – An example:  China Fabrication (Fab) site selection effort Integral part of site selection team Led negotiations with local and central SAFE Negotiated Wins Higher debt-equity ratio from 2:1 to 3:1 Ability to choose licensed bank for all services FX balancing i.e., convert USD to RMB from all accounts without limitation Pay on behalf and settle inter-co payables Consolidated bank account for capital, loans & settlements Logistic warehouse to allow direct Business Partnering – An example China Regional Headquarters (RHQ”):  RHQ is a new legal entity structure that will eliminate cash inefficiencies and provide other benefits to Intel 6:1 debt/equity (vs 2:1) ratio reduces trapped cash in China RHQ can lend cash offshore from profits Enables cash pooling in China via domestic entrust loans (inter company loans) China Regional Headquarters (RHQ”) China Regional Headquarters (“RHQ”):  China Regional Headquarters (“RHQ”) Other Benefits Centralized management and shared services for all Intel China entities – helps keep Intel legal Cash grants, income tax, VAT and individual income tax subsidies Broader and more flexible business scope Flexibility to repay expatriate costs Participation and influence over evolving rules and regulations Slide20:  Evolution of “RHQ” in China Holding Co National Ministry of Commerce Early 90s RHQ Shanghai Municipality Aug 2003 RHQ National Ministry of Commerce Feb 2004 Tax incentives HR incentives Trading rights More benefits but poor coordination and unclear guidelines failed to attract companies Wider business scope such as sales, manufacturing & R&D Trading and distribution rights allow sales across all of China Higher Debt-equity ratio More clarity and details on implementation guidelines Superficial and without concrete benefits or special incentives Was used primarily for tax benefits Execution is key – patience a virtue:  Execution is key – patience a virtue RHQ Key Milestones Jan 2006- Set up Intel China Ltd (ICL) branch in Shanghai Mart Jun 2006- Moved ICL headquarters registration address from Shanghai Mart to Zizhu Science Park, Minhang District. Aug 2006- Transfer shares of ICL to new HK parent company Jan 2007- Upgrade ICL from a sales company to a holding company with Ministry of Commerce approval Feb 2007- $6mm capital injection done to meet capital requirements of a holding company Mar 2007- Received RHQ approval from local Shanghai govt. Jun 2007- Transfer shares of the Chengdu entity under ICL to meet minimum capital requirements of RHQ Sep 2007- Receive national qualification approval of RHQ from Ministry of Commerce Intel in India:  Intel activities Software development Hardware design 3000+ employees Intel Capital technology fund ($250m) Treasury activities Strategic Investments Centralized cash management for SE Asia Fixed income portfolio ~$600m Back office for global cash management Worldwide bank account maintenance and documentation Software development team (in house treasury system) Intel in India China versus India:  China versus India Strategic investments India has significant advantages Legal system based on English law Widespread knowledge of English Entrepreneurs familiar with International VC model Deep pool of managers w/links to Silicon Valley Exits on local markets Treasury management Similar capital controls but India has somewhat more progressive rules More advanced financial markets and products in India Conclusion:  Conclusion Significant challenges to doing business in the two fastest growing economies in the world but opportunities outweigh risks Proactive engagement with the government is a key element in influencing positive change Benchmarking and sharing “best known methods” with peer companies save time and effort You can limit but not eliminate the risks Treasury’s role at Intel has evolved into a valued business partner influencing major business decisions Backup:  Backup

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