Means of Doing Business

1. Means of Doing Business Presentation outline • Choices of investment • representative office, • joint venture, • wholly-owned foreign enterprise • Foreign investor shareholding corporation • Site location • Finding the right partner • Principle of building relationship with China business

2. Representative Office • Appropriate for selling imported products in China • No allow to do business directly • build relations and provide technical support and training • Ministry of Foreign Trade and Economic Cooperation (MOFTEC)- supervisory government agency for representative offices • Need a local sponsor or consultancy from MOFTEC or FESCO (Foreign Enterprise Service Corp.) to set up a representative office

3. Representative office- continued • Legal documents and Procedure • home company’s business activities • a complete list of board of directors • article of association • recent balance sheet and income statements • register with State Administration for Industry and Commerce (SAIC) • after approval from SAICOpen a bank account with Bank of China, Register with Public Security Bureau, the Customs and the Tax Bureau

4. Joint Ventures In joint venture agreements, they include:  Name of the joint venture and location  Production capacity and quality  Total investment and source of funds  Percentage of investment and division of profits  methods of marketing  form of investment/cooperation

5. Joint Ventures Equity Joint Venture (EJV) • a limited liability corporation with equity shares from each side • Equity shares in the form of equipment, cash, land, factory building, industrial property rights • foreign partner’s minimum stake is 25% • Part of the contribution must be in cash • Part of the contribution can be in technology (<20% total capital or 50% of foreigner’s investment--whichever is lower)

6. EJV (continued) • share profits/loss according to equity share • life of 15 to 30 years, can be extended • Partners determine the corporate strategy • If the Chinese appoints the director as the chairman, the vice-chairman should be from the foreign side, and vice-versa. • Foreigner partner cannot withdraw its capital while EJV is in operation

7. EJV: Example Jinbei-GM automobile Co: • 50/50 equity joint venture • Chinese partner -- land and building • American partner -- cash and technology • GM’s current investment with Jinbei is $230 million • Location-- Shenyang

8. Cooperative Joint Venture (CJV) • The Chinese provides the non-liquid assets (land, natural resources, labor, services and buildings, equipment or facilities) • Foreign partner provides the either capital or technology, equipment or materials etc. • CJV contract defines the distribution of products, profits or losses • Foreign investors are allowed to recover the investment before the enterprise expires.

9. CJV: Example Motorola-Apple-Panda  March 1996, cooperative joint venture  Apple contributes design of the PC, Motorola, the G4 processing chip and Panda, the land and building space  Failure: Apple was not happy with Motorola’s slow G4 chip production decided to withdraw from the joint venture (which was then dissolved).

10. Compensation Trade (CT) deals--counter-trade • Firms sell raw materials (or technology etc) and buys back the manufactured goods or other substitute products • The foreign side supplies the production equipment and technology • Two ways to raise capital for CT • Foreign investor obtains foreign bank loan to pay for the equipment imported by the Chinese • The Chinese side uses the export loan from foreign bank to buy equipment • Leasing arrangement falls into CT

11. Processing and Assembly Agreement • foreign side supplies materials • Chinese side processes or assembles them • The Chinese receives a fee for their efforts • Foreign partner pays the fee in either cash oropen a letter of credit account with Bank of China or other approved Chinese bank for the finished goods. • Industries include --labor intensive (cloth-making) and others (calculators) • preferential treatment such as tax free for imports

12. Wholly Foreign-owned Enterprise (WFOE) • Limited liability company • Foreign investment may be in the form of hard currency, machinery, industrial property rights or know-how • Condition for approval • advance technological know-how • more than 50% of output in terms of foreign exchange

13. WFOE (continued) • Restricted areas: • News, publication, broadcasting, television, film industry, foreign trade, insurance, post and telecommunications and others. • In 1986, WFOE 1% of foreign investmentIn 1991, WFOE was 37% • Usually require 15% of capital registered within 3 months of establishment

14. Foreign Investor Shareholding Corporation (FISC) • joint stock company • Foreign company allows local Chinese partners to have minority stakes in return for their business assets (factories, and trucks) • Local partners do not participate in management of the firm, but help the firm to access to markets • Kodak (China): invest $1.2b for a freeze on foreign competition until 2002 • 80% share-20% local (Xiamen Fuda and Shantou Era), each appoints a board member while Koda remaining 8 members

15. Foreign Investor Shareholding Corporation • Regulatory framework allows foreign corporations to convert existing joint ventures and wholly-owned foreign subsidiaries into FISC, provided they have been profitable for 3 years. • China’s State Development Planning Commission is involved in creating FISC. • FISCs are well placed to obtain quick listings on the Shenzhen and Shanghai stock exchanges, making it easier for them to raise new capital.

16. Site Location • No one can own a piece of land but to rent it • The renting period is • 70 years (housing) • 50 years (industrial, educational, scientific and sporting use) • 40 (commercial, tourism and recreation) • You can transfer, lease or mortgage to third party within the legally-specified period

17. Site Location (Continued) Four-pronged Approach to building Capabilities • Establish a small office • obtain information • Assess the scale of opportunity • local consuming patterns and the spending power • Identify and evaluate entry options • different types of investment options (JV, others) • Plan for market entry and expansion • think China as a group of countries. Tastes and business rules vary between regions

18. Finding the Right Partner Approaches • Through the government ministry or a state-backed industrial association • be aware of the badly managed state-owned enterprises • Own efforts • Get a list of companies that offer the products you want • eliminate the number by examining factors

19. Right partner (continued) • such as location, infrastructure, labor cost. • Communicate to them to see if there is responses • ask them to work out the joint venture arrangement with the local government • share the SAME objective

20. Strategies or Principles of Doing Business in China • Try to take a high moral ground • Survey of more than 800 business experts for the question: How likely are companies from the following places to pay or offer brides to win or retain business? Source: Transparency International, 5/7/02 Russia 3.2 Japan 5.3 Belgium 7.8 China 3.5 US 5.3 Netherlands 7.8 Taiwan 3.8 France 5.5 Canada 8.1 S. Korea 3.9 Spain 5.8 Australia 8.2 Italy 4.1 Germany 6.3 Switzerland 8.4 HK 4.3 Singapore 6.3 Sweden 8.4 Malaysia 4.3 Britain 6.9 Australia 8.5

21. Take a serious second look at the investment, making plans for contingency • Develop a diversifying strategy within China (if possible) • The Manger in China should report to CEO in US in case of emergency and changing environment • Develop investments and relationships with local communities • Viewed as a guest in China