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THE CHINA MARKET: HOW TO GET STARTED

THE CHINA MARKET: HOW TO GET STARTED. East Asia Symposium “Hong Kong – Gateway to Opportunity” Philadelphia University March 27, 2007. “Next Frontier for US Firms? – “The Wild Far West!”. AGENDA. Overview of Chinese Market What’s the Opportunity for US Firms?

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THE CHINA MARKET: HOW TO GET STARTED

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  1. THE CHINA MARKET:HOW TO GET STARTED East Asia Symposium “Hong Kong – Gateway to Opportunity” Philadelphia University March 27, 2007

  2. “Next Frontier for US Firms? – “The Wild Far West!”

  3. AGENDA • Overview of Chinese Market • What’s the Opportunity for US Firms? • How Do I Enter the Chinese Market? • Case Study • Hong Kong’s Role as a Gateway • Conclusions

  4. China Market • GDP est. (‘06): $2.5 Tril. (RMB 20.2 Tril.) … 2nd largest economy in world! • GDP Growth: 9.9% (CGR ’02-’06) • Industrial Output Growth: 17.2% (’06) • Retail Sales Growth: 13.5% (’06) • Inflation: 1.3% (’06) • Estimates – Don’t rely on Chinese data! Large, Fast Growing Market … Ripe forFraud!

  5. Basic Metals Chemicals/Plastics Automotive/parts Optical Goods/Instruments Indus. Machinery Computers/Consumer Electronics Apparel/Footwear Furniture Hand Tools Appliances China Market – Top Industries “FACTORY TO WORLD” – RANGE OF LOWER TECH MANUFACTURED PRODUCTS

  6. China Market -- Exports • Exports: $762 Bil. (’05)/ 32% of GDP/ 29% CGR (’02-’06) • Top Exports: • Telecomm. equip., TVs, audio/visual recorders & household appliances • Computers/related equip., large appliances.& power gen. equip. • Apparel, footwear & toys/games • Steel • Optical/Medical Equip. (cameras, microscopes, x-ray machines, measuring/testing instruments, etc.) • Foreign multinationals = 50% of total Finished Mfgr. Goods Predominate

  7. China Market -- Imports • Imports: $660 Bil. (’05)/ 28% of GDP/ 26% CGR (’02-’06) • Top Imports: • Electrical Machinery/Parts (telecom. parts., elect. switches/fuses, electric tubes, etc.) • Power Generation/Machinery & Parts (power gen. equip., indus. machinery/parts, aircraft parts, computers/parts) • Optical & Medical Equip. (optical instruments/parts, measuring & analyzing instrum./parts) • Oil, Metals, Ores & Scrap Metal • Plastic materials & chemicals • Vehicles/parts Supplies/Components Feeding Factories!

  8. EXPORTS US (21%) Hong Kong (16%) Japan (11%) S. Korea (5%) Germany (4%) IMPORTS Japan (15%) S. Korea (12%) Taiwan (11%) US (7%) Germany (5%) Top 5 Trading Partners East Asian Neighbors Very Involved!

  9. Foreign Investment in China • Total Value (‘05) -- $60.3 Billion • Top Sources: Hong Kong, Japan, South Korea, US, Singapore, Taiwan, Germany, “Tax Havens” • Overseas Chinese active (e.g., Singapore) • US – $3 Billion/yr. ($15 Bil. cumulative) … primarily manufacturing, large multinationals dominate

  10. US-China Trade & Investment • US Imports • $244 Billion (’05) / 24% AAGR (’02-’05) • Top Products: • Computers/Peripheral Equip. • Toys & Games • TVs/Consumer Electronics • Apparel/Textiles & Footwear • Household Appliances/Metal Goods & Hand Tools • Furniture • Ind. Machinery & Electrical Parts Offshore Sourcing Opportunities for US Firms

  11. US-China Trade & Investment • US Exports • $42 Billion (’05) / 22% AAGR (’02-’05) • Major Products: • Electrical Machinery/parts • Aircraft/parts • Metals/scrap metal • Oil Seeds/fruits • Industrial Machinery • Computers/parts • Plastics – primary • Instrumentation – Industrial (measure/control/analyze) Some New Market Opportunities for US Firms!

  12. Opportunities for US Business • Two Plays/Options: • Selling to the China market – Int’l sales expansion • Low-cost sourcing platform for mfgr. components or finished products (“off-shoring”) – Production cost reduction

  13. Entering China Market • Determine market size and future growth for your product/services • Identify customer needs/wants • Assess the competition (local/foreign) • Develop market entry strategy • Implement strategy – Just do it!

  14. 1. Market Size/Growth • Market Size = Value of local shipments + imports – exports (Collect info on each of these) • Estimate how fast market will grow in next 3 years • Goal: Is it big enough to be worth the effort? • Go see for yourself! Data Sources: China Govt., US Commerce Dept., UN Trade Statistics, World Bank, private sources (accounting, brokerage firms)

  15. 2. Chinese Customer Needs • Imports – Look at what they are buying from abroad in your product category • Pay for a customer research study • US Commercial Service market research • Private market research firms in-country • Goal: • Wwho buyers are/where located/what industries? • Have unique needs requiring product adaptation?

  16. 3. Assess Competition • Are your US/foreign competitors selling in China? – will face Asian firms too • Is there local Chinese competition? • Hire a market research firm to find out & go see for yourself • Goal: To learn who they are/serious competitors, products offered, pricing, etc.

  17. 4. Market Entry Strategy • Export – Least risk …often not feasible due to piracy of technology/design & low Chinese prices … unless very unique product • JV/Technology Licensing – Offer technology or capital … key is to find reputable partner who will protect your technology & knows market • FDI – Riskiest option for a small firm, long-term commitment req’d, JV w/ reputable partner preferred (changing regs., fraud, intell. property protection concerns)

  18. 5. Implement Strategy • Export Strategy • Set competitive price (including tariff & VAT) • Find local distributors • JV/Tech. Licensing • Find reputable partner to build & sell in China • Negotiate deal giving partner stake in success • Monitor compliance/progress • FDI • Determine site • Find partner (if JV), • Learn local regs/hire expertise to navigate local regs • Don’t expect to be operational soon!

  19. Case Study: Joint Venture • Machinery company (from Midwest) • Wants to expand int’l sales of one machinery product line • Proprietary, non-patented technology • Competitors selling to China/East Asia • Asked TMD to evaluate China market

  20. Case Study – Market Size/Growth • Market estimated based on imports: • HS # (Harmonized System Code): 84xxxxxx • 2004 Value: $37 Mil. • Annual Cmpd. Growth Rate: 20% (‘01 – ’04 Value: $21 Mil. - $37 Mil.) • Conservative estimate (excludes local shipments) • Data Sources: US, UN trade statistics • Finding: Big market for this machinery

  21. Case Study – Customer Research • Used US Commerce customized market research service (Cost: approx. $5,000) • Also visited Southern China to talk to end-users with a Chinese consultant/interpreter • Surveyed end-users to find out their need for product and any special specifications • Finding: There was need, but more for selected applications/models (not used as often in US)

  22. Case Study – Competition • USG research provided some info • Saw competitor at Chinese Trade Show … inferior quality machine, but cheaper • Finding: 2-3 competitors (US, Indian, Chinese firms), some export to China/some produce locally, local pricing is 65% of our list price!

  23. Case Study - Market Entry Strategy • JV with local partner due to piracy concern (unsophisticated tech.) … if exported, were advised would lose market in a year • Looked for Shanghai partner w/o success ... found Hong Kong mfgr. partner with Chinese factories & another with distribution channels in China

  24. Case Study – Market Entry • How We Found a JV Partner: • US Government – could not help (no export content to venture) • Chinese agencies in Shanghai – limited help since focused on larger FDI projects • Private Chinese Consultants – did not trust them! • Hong Kong Agencies – HK TDC Business Matching Service found us partners

  25. Hong Kong’s Role – Gateway • Source of more reliable partners – follow Western business practices • Knowledge of market/experienced in dealing w/ Chinese govts. – been operating there for 25+ years (since China’s Economic Reform) • Western legal system – can write your business contracts under HK law and be protected • Convertible currency – no worries about repatriation of profits

  26. Conclusions • Big Opportunity! …China could be a big market, or a low cost sourcing platform, for your company • Big Risks! … but it is risky and difficult market to enter • Do your homework • Be willing to commit for 3 – 5 years if you want to be successful

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