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Doing Business in China: Update and Opportunities

Doing Business in China: Update and Opportunities. July 20, 2006 Andrew M. Pan North American Representative Office of Shenzhen, China (NAROS). Agenda. China Trade and Economic Developments China Economic Update Domestic Market Momentum New Economic Plan Regulatory and Tax System

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Doing Business in China: Update and Opportunities

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  1. Doing Business in China:Update and Opportunities July 20, 2006 Andrew M. Pan North American Representative Office of Shenzhen, China (NAROS)

  2. Agenda • China Trade and Economic Developments • China Economic Update • Domestic Market Momentum • New Economic Plan • Regulatory and Tax System • Emerging Market Opportunities • Manufacturing • Procurement • Service and Distribution • Acquisition of SOE • Industrial Zones • Shenzhen: A Story of China’s Success

  3. China Trade and Economic Developments

  4. Economic Update • China’s economy grew 9.9% in 2005 • China’s GDP US$ 2,279 billion– world’s 4th largest • Foreign direct investment (FDI) – US$ 60.3 billion • Foreign trade volume – US$ 1,422.1 billion • Foreign currency reserve – US$ 818.9 billion • Total household savings in banks – US$ 1,838.1 billion Source: China State Statistics Bureau, 2005

  5. Domestic Market Momentum • Recent survey conducted by PwC • Survey of 1,410 CEOs from 45 countries • Projected overseas investment (2006-2009) • 55% of respondents will invest in China (vs. 36% in India, 33% in Brazil) • 75% of respondents are attracted by China domestic market opportunities • 48% are attracted by lower manufacturing costs Source: PricewaterhouseCoopers

  6. Serve as regional headquarters Produce goods or services for other (non-China, non-US) market Q: No.1 goal of the US investment in China? A: China domestic market opportunities. (62%+ 11% = 73%) 3% 5% 5% Export to China 11% Produce goods or services in China for the China market 62% 14% Produce goods or services in China for the US market Source: 2005 AmCham-China and AmCham-Shanghai Member Questionnaire American Chamber of Commerce Survey: Number One Goal for China Business Others 100% = 345 companies

  7. New Economic Development Plan • China’s 11th 5-year Socioeconomic Development Plan (2006-2010) • Establish a “harmonious society” • Coordinate growth among different regions • Stimulate development of the agricultural sectors • Facilitate healthy growth in urban areas • Transform from export-processing to higher-technology-content products • Convert from a manufacturing driven economy to a more diversified domestic services economy • Targets by end of 2010 • Double 2000 GDP per capita by 2010 • Reduce energy consumption per GDP unit by 20% from 2005 level

  8. China Regional Economy

  9. Forms of Doing Business in China Direct Investment Forms Equity Joint Venture (EJV) Contractual Joint Venture (CJV) Wholly Foreign-Owned Enterprise (WFOE) Investment Holding Company (CHC) Joint Stock Company Indirect Investment Forms Direct purchase and sales Toll/Contract manufacturing Licensing Financing Representative offices Foreign Investment Enterprise (FIE) Foreign Enterprise (FE) Regulatory and Tax System

  10. Foreign Investment Regulatory Framework Principal Laws Applicable to Foreign Investment (Company Law, Wholly Foreign-Owned Enterprise Law, Equity Joint Venture Law, Contractual Joint Venture Law ) Industry Regulations Government Department Regulations Economic Zone Regulations “Catalogue on Guiding Foreign Investment ” “Administrative Measure for Foreign Investment in the Commercial Sector” … ... “Foreign Investment Enterprise Income tax Law” “Rules of the PRC on Foreign Exchange Control” … … “Administrative Measure for Free Trade Zone” “Administrative Measure for Export Processing Zone” … …

  11. China Taxation and Incentives • Corporate Income Tax rate is 33% (Central + Provincial) • Tax incentives and holidays • Manufacturing tax incentives • High technology incentives • Special Economic Zone incentives, e.g. • Shanghai 24%, Pudong 15% • Guangzhou 24%, Shenzhen 15% • Tax incentives and holiday rates are not applicable to service and domestic distribution income • Value Added Tax (VAT), Business Tax etc. often apply • Transfer pricing has become an emerging issue

  12. Emerging Market Opportunities

  13. Manufacturing in China • Take advantage of low cost, skillful labor force and college-graduated engineers, lower manufacturing cost • Incentive income tax rates and other tax holidays • For some products, Chinese government only allows those manufactured in China to enter into China domestic market • Good OEM/ODM capability, covering almost all industrial sectors of consumer and capital products

  14. US Companies – China Manufacturing Facilities

  15. China Procurement • Direct purchase from manufacturers • Access to a larger manufacturer and supplier base • Lower purchasing cost • Better quality control • Better supply chain management

  16. Domestic Service and Distribution • WTO opens the door of China domestic and distribution market • Distribution: retail, wholesale, franchising and direct marketing • Banking, consumer lending and insurance • Telecommunication and content driven providers • Freight forwarding, transportation and package delivery service • Customer service • Entertainment: film and TV production, audiovisual products distribution, movie theatres • Construction engineering and consultation • Hotels and restaurants • Education • Professional services: legal, accounting, tax, medical, dental, management consulting and advertising services etc. • Business process outsourcing/offshoring (BPO)

  17. Acquisition of SOE • Industries from banking, infrastructures, public utilities to retail chain stores, machinery equipments etc. • A good solution for US companies to expand their China operation without a substantial front-end cash investment • A shortcut for US companies to expand their China operation and enter China domestic market • May allow US companies to access China domestic regulated market segment • Some SOEs are down-sizing/spin off to increase efficiency at a fair low cost • Endorsed by central and local governments with various incentives (case-by-case)

  18. Industrial Zones • Industrial zones provide various incentives and opportunities for US companies with different business models • Special Economic Zone (SEZ) • Economic and Technological Development Zone (ETDZ) • Free Trade Zone (FTZ) • High-Tech Park • Export Processing Zone (EPZ) • Bonded Logistics Zone (BLZ) • Bonded Port

  19. Shanghai Bonded Logistics Park

  20. Shenzhen: A Story of China’s Success

  21. Shenzhen in Greater China Shenzhen

  22. Shenzhen and the Pearl River Delta

  23. Shenzhen in 1982 Shenzhen Today

  24. Facts and Figures • City founded in 1979 • Became China’s first SEZ in 1980 • About 10 million population, average age about 30 • Only city in mainland China borders on Hong Kong • GDP in 2005 USD 61.5 billion, ranks 4th among all mainland China cities • Average GDP growth rate over 25% per annum from 1980 to 2005 • Export in 2005 USD 115 billion, ranks the 1st among all mainland China cities for 13 consecutive years • Hong Kong, US and EU ranks the top 3 trade partners • FDI in 2005 USD 3 billion, total USD 40 billion since 1980

  25. Facts and Figures • 120+ Global Fortune 500 companies have operations in Shenzhen • The home for Shenzhen Stock Exchange and the regional financial center in Southern China • Shenzhen Port-the 4th largest container terminal in the world, 16.2 million TEUs in 2005 • Shenzhen International Airport-the 4th busiest airport in China • The corporate headquarters for Huawei, ZTE, China Merchant Bank, Ping’an Insurance and many other local China big private companies • 10+ five-star hotels, 10 world class golf courses. Mission Hills Golf Club is the biggest golf club in the world

  26. Features and Characteristics • Major Industries • Traditional consumer products manufacturing • Technology products manufacturing and R&D • Imp./Exp. trade city in mainland China • Logistic center for Southern China, especially Pearl River Delta • Regional financial center • A young, vigorous migrant city with the culture of creativeness and entrepreneurship • A coastal city with excellent infrastructures and utilities • China’s first SEZ with the most open market economy and a pro-business government • Much lower operation cost compared with Shanghai, Beijing and Hong Kong • One of the best living cities in mainland China (air quality, green space, foods and entertainment)

  27. NAROS and Our Services • Set up in 2001 • Based in Los Angeles, CA • Shenzhen’s only investment and trade promotion office in North America • Our FREE services: • Provide China general/business information • Consult on China business policies and incentives • Facilitate business setup and transaction • Build up Chinese government connections • Support daily operations

  28. Thank You! Please contact NAROS for more information. Tel: 213-628-9888 Fax: 213-628-8383 E-mail: andrewpan@shenzhenoffice.org Web: www.shenzhenoffice.org

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