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China Expansion - Financial Executives International

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China Expansion:
Rationale & Strategies
Paul H. Folta, Ph.D.
В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
Contents
I.
Introduction
II.
Why China? “Low Hanging Fruit”, Reasons to Enter
China & Trends
III.
Process: Steps to Decide Upon & Plan Your Entry
IV.
Structuring: Options for Setting Up & Expanding
V.
Business Considerations: Cultural & Operational
Issues
VI.
Structuring Examples
VII. Folta Associates Services & Capabilities
Folta Associates
China Expansion
2
В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
I. Introduction – Opportunity
• Overall Trends
• Economy
• Trade
• Labor
• China Market
• Investment Trends
Folta Associates
China Expansion
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В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
II. Why China?
• Increasing numbers of U.S. & other foreign companies are expanding into China
to grow their businesses & increase their competitiveness
• Rationale:
� Expanding Sales: Accessing the China market, selling “China made” products to
2nd-3rd tier Asian & foreign markets & increasingly selling to 1st tier markets
пѓ� Cost Reductions: Reducing costs by manufacturing, sourcing or conducting
research in China
пѓ� Retain Customers: Continuing to supply to customers who are moving to China
Folta Associates
China Expansion
4
В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
U.S. Companies: Reasons for Being in China
Folta Associates
China Expansion
5
В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
U.S. Companies: Profitability of China
Operations
Folta Associates
China Expansion
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В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
Investment Attractiveness
• Summary of Past AmCham Surveys of U.S. Companies’ China Operations:
пѓ� 1999: 14% somewhat or significantly higher profits than elsewhere (115 firms)
пѓ� 2002: 35% somewhat or significantly higher profits than elsewhere (251 firms)
пѓ� 2005: 33% somewhat or significantly higher profits than elsewhere (145 firms)
пѓ� 2006: 64% say their China operations are profitable or very profitable (203 firms)
пѓ� 2007: 73% say their China operations are profitable or very profitable (150 firms)
Folta Associates
China Expansion
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В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
Foreign Direct Investment by Structure
•
Foreign investors seek more control
пѓ� 69% of investments were in Wholly Foreign-Owned Enterprises (WFOEs)
in 2007, up from 47% in 2000
пѓ� 20% were Joint Ventures (EJVs & CJVs) in 2007, down from 36% in 2000
$7.9Bn Banking,
Insurance &
Securities
(9.5% share)
FDI by
Structure
2007
$15.6Bn Equity
Joint Ventures
(18.9% share)
$0.5Bn ForeignInvested
Shareholding
Ventures
(0.6% share)
$1.4Bn
Contractual Joint
Venture
(1.7% share)
$57.3Bn Wholly
Foreign-Owned
Enterprises
(69.3% share)
Folta Associates
Source: USCBC
China Expansion
8
В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
Strategic Financial Investments & M&A
• Strategic Financial Investments
� Foreign companies: $25.1Bn on 648 China deals in ’07 vs. $5.5Bn in ’03
� Chinese companies: $29.2Bn on 234 foreign deals in ’07 vs. $3.8Bn in ’03
• M&A Trends
пѓ� Total Chinese M&A: $50Bn in 2007; $49Bn in 2006 ($21Bn in other countries)
пѓ� Foreign companies: $4.8Bn in 1,300 M&As in China in 2006 vs. $2.2Bn in
2002
пѓ� 47% from BVI, HK, Mauritius & Caymans, vs. 19% from the U.S. in 2006
пѓ� Foreign M&A in China expected to grow 25%-30% per year for the next several
years
Folta Associates
China Expansion
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В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
III. Process: Steps to Decide Upon & Plan Your
Entry
•
Strategic Plan: Assess Opportunities & Risks
пѓ� Accessible Market
пѓ� Competition
пѓ� Intellectual Property
пѓ� Regulatory & Sector Restrictions
пѓ� Initial Structuring Options, Targets & Timing
•
Team to Build Plan: U.S. & China
пѓ� Strategy
пѓ� Sales & Marketing
пѓ� Operational & Technical
пѓ� Financial
пѓ� Regulatory
Folta Associates
China Expansion
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В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
Cultural & Geographic Diversity
North / South Traditional Divide:
Coastal/Inland Socio-Economic Divide:
Climate, Language & Culture (divide
at Yangtze River – red arrow)
Wealth, Urbanization & Industrial
Development (Blue – Beijing and the
wealthy coast; Red – one of the “official”
East / West demarcations)
Folta Associates
China Expansion
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В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
Accessible Markets
• Three Major Regional Markets
пѓ� Pearl River Delta
пѓ� Yangtze River Delta
пѓ� Beijing-Tianjin Corridor
• Other Metropolitan Markets
пѓ� Other Coastal Cities
пѓ� Inland Northeast Cities
пѓ� Inland Central, South & West Cities
• Urban Income
� 320-360Mn registered urbanites; +200Mn “floating”
пѓ� 666 cities; >30 cities >1Mn pop. each; 10 largest 3-10Mn pop. each
пѓ� Over 247Mn Chinese earned >$5,000 per year in 2004 (>2.5 times that value in
U.S.); 40Mn earned over $25,000 in 2004
• Infrastructure Considerations
Folta Associates
China Expansion
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В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
IV. Structuring: Options for Setting Up &
Expanding
•
WFOE
•
JVs (EJV & CJV)
•
Other Structures
•
Partner Identification & Due Diligence Process
Folta Associates
China Expansion
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В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
Structuring Types – WFOE
•
Wholly Foreign-Owned Enterprise (WFOE) – including M&A
пѓ�
Manufacturing & IP control
пѓ�
Own sales & marketing
пѓ�
Administrative efficiency
пѓ�
Distribution
пѓ�
Expansion ease / Holding company
пѓ�
Exit
Folta Associates
China Expansion
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В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
Structuring Types – JVs
•
Equity JV (EJV) & Cooperative JV (CJV)
пѓ�
Conflict of interest challenges
пѓ�
Control issues
пѓ�
Rapid market access
пѓ�
CJV advantages
Folta Associates
China Expansion
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В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
Structuring Types – Other
•
Other Deal Structures
пѓ�
Licensed production
пѓ�
Agency & caretaker agreements
пѓ�
Representative office
пѓ�
Branch office
пѓ�
Pure distribution company
пѓ�
FISC
пѓ�
R&D Center
Folta Associates
China Expansion
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В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
Partner Identification & Due Diligence Process
•
Screening Considerations
•
Identification Process
•
Reference Checks
•
Legal, Financial, Technical & Other
Folta Associates
China Expansion
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В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
Negotiating Considerations
•
Your Positions, Principles & Goals
•
Counterparty’s Positions, Principles & Goals
•
Broad Principles vs. Specifics
•
Other Cultural Differences
•
Language & Interpreters
•
Pressure You Might Experience
•
Approval Processes
Folta Associates
China Expansion
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В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
Deal Approvals Needed
•
Standard FIE Documents & Approvals
пѓ� Letter of Intent
пѓ� Detailed Feasibility Study
пѓ� Articles of Association & JV Contract
пѓ� Business License
пѓ� Register Bank Accounts (Capitalization & Foreign Exchange)
•
Special Regulations & Approvals that Might Apply
пѓ� IP Applications
пѓ� Certifications (quality & environmental)
пѓ� Preferential Tax Assurances (now limited)
пѓ� Labor Contract Law
пѓ� Anti-Monopoly Law
пѓ� Special Regulatory Approvals
пѓ� Special Pricing Approvals
Folta Associates
China Expansion
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В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
M&A Documents & Approvals
•
2006 M&A (non-listed) & Takeover (listed) Regulations
пѓ�
Many Non-Compliance Issues & Failures
пѓ�
New Specified Procedures
пѓ�
Government Agency Involvement
пѓ�
Valuation & Payment Rules
пѓ�
Disclosures
Folta Associates
China Expansion
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В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
V. Business Considerations: Cultural &
Operational Issues
•
Post-Deal Integration Considerations
•
Culture – Business Environment
•
Culture – General Advice
Folta Associates
China Expansion
21
В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
Post-Deal Integration Considerations
•
Management
•
Staffing
•
Operations
•
Controls
Folta Associates
China Expansion
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В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
Culture – Business Environment
•
Bureaucratic Behavior Common
•
Legal System Undeveloped
•
Corruption A Problem – Integrity & Perseverance Pay Off
•
Cultural Differences Require Understanding
•
Differences Between Regions
•
Different Selling & Distribution Models
•
Copying Problems
•
U.S. Headquarters Communication Issues
Folta Associates
China Expansion
23
В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
Culture – General Advice
•
Flexibility
•
Patience
•
Confucian Values
пѓ�
Relationships & “Guanxi”
пѓ�
“Face” (Respect)
пѓ�
“Yin/Yang” (Harmony)
пѓ�
“Person of Quality” (Sincerity)
•
Etiquette & Entertainment
•
Chinese Holiday Calendar
Folta Associates
China Expansion
24
В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
VI. Structuring Examples – Issues
•
Onshore or Offshore ?
пѓ�
Maximize Acquisition or Exit Flexibility
пѓ�
Tax Efficiency
пѓ�
Keep Certain Issues Offshore
пѓ�
Chinese Partner Might Wish to Participate Offshore
пѓ�
Financing by Offshore Vehicle to Onshore Entity
пѓ�
“Foreign” Limits Might Require Onshore Shareholding
Folta Associates
China Expansion
25
В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
Structuring Example – Traditional Onshore JV
Foreign
Co.
China
Co.
JV Co.
(target)
Folta Associates
China Expansion
26
В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
Structuring Example – On & Offshore JV with
Chinese “Round-Trip”
China
Co.
BVI-I
Foreign
Co.
Folta Associates
BVI-II
China Expansion
JV Co.
(target)
27
В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
Structuring Example – On & Offshore or Direct
M&A
Foreign
Co.
China Co.
(target)
BVI
Folta Associates
China Expansion
WFOE
28
В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
VII. Folta Associates: Services
•
Services:
пѓ�
Sales/Licensing: Define market opportunity; Identify appropriate local
distributors & partners; Recommend performance improvements; Monitor
пѓ�
Sourcing: Identify & qualify sources; Assist in negotiating terms; Monitor &
conduct inspections
пѓ�
Investments/M&A: Clarify strategic options; Develop market entry programs
and business plans; Introduce high quality partners or acquisition targets;
Find optimal locations; Conduct due diligence
пѓ�
Regulatory: Assist with device & drug applications; Recommend intellectual
property protection measures; Obtain pricing & reimbursement approvals &
other relevant licenses
пѓ�
Background Checks & Due Diligence
Folta Associates
China Expansion
29
В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
Folta Associates: Capabilities
•
Paul H. Folta, Ph.D., Managing Director – Folta Associates
пѓ�
Over 20 years working on projects in China & Asia with companies ranging
from Fortune 500 to start-up companies. Lived in Asia for 21 years. Working
knowledge of Mandarin Chinese, some Korean & little Japanese.
пѓ�
Experienced in Healthcare services, drugs & devices; Telecom & IT;
Consumer goods, foods & retail; Media & entertainment; Automotive,
hardware, appliances & machinery; Insurance & finance; Logistics; Plastics;
and Infrastructure.
пѓ�
Corporate business development, investments & trade projects as business
consultant, board representative, venture capitalist & project principal.
•
Local Associates in China & Asia – Teams assembled according to requirements.
•
www.foltaassociates.com
Folta Associates
China Expansion
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В©2008 Paul H. Folta & Associates, LLC (all rights reserved)
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