china expansion: rationale & strategies paul h. folta, ph.d. china expansion: rationale &...
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China Expansion:China Expansion:Rationale & StrategiesRationale & Strategies
Paul H. Folta, Ph.D.Paul H. Folta, Ph.D.
©2008 Paul H. Folta & Associates, LLC (all rights reserved)
22China ExpansionFolta Associates©2008 Paul H. Folta & Associates, LLC (all rights reserved)
ContentsContents
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
33China ExpansionFolta Associates©2008 Paul H. Folta & Associates, LLC (all rights reserved)
I. Introduction – OpportunityI. Introduction – Opportunity
• Overall Trends
• Economy
• Trade
• Labor
• China Market
• Investment Trends
44China ExpansionFolta Associates©2008 Paul H. Folta & Associates, LLC (all rights reserved)
II. Why China?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
Cost Reductions: Reducing costs by manufacturing, sourcing or conducting research in China
Retain Customers: Continuing to supply to customers who are moving to China
55China ExpansionFolta Associates©2008 Paul H. Folta & Associates, LLC (all rights reserved)
U.S. Companies: Reasons for Being in ChinaU.S. Companies: Reasons for Being in China
66China ExpansionFolta Associates©2008 Paul H. Folta & Associates, LLC (all rights reserved)
U.S. Companies: Profitability of China U.S. Companies: Profitability of China OperationsOperations
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Investment AttractivenessInvestment Attractiveness
• Summary of Past AmCham Surveys of U.S. Companies’ China Operations:
1999: 14% somewhat or significantly higher profits than elsewhere (115 firms)
2002: 35% somewhat or significantly higher profits than elsewhere (251 firms)
2005: 33% somewhat or significantly higher profits than elsewhere (145 firms)
2006: 64% say their China operations are profitable or very profitable (203 firms)
2007: 73% say their China operations are profitable or very profitable (150 firms)
88China ExpansionFolta Associates©2008 Paul H. Folta & Associates, LLC (all rights reserved)
• Foreign investors seek more control 69% of investments were in Wholly Foreign-Owned Enterprises (WFOEs)
in 2007, up from 47% in 2000 20% were Joint Ventures (EJVs & CJVs) in 2007, down from 36% in 2000
Foreign Direct Investment by StructureForeign Direct Investment by Structure
FDI byStructure
2007
$57.3Bn Wholly Foreign-Owned
Enterprises(69.3% share)
$15.6Bn Equity Joint Ventures(18.9% share)
$0.5Bn Foreign-Invested
Shareholding Ventures
(0.6% share)
$1.4Bn Contractual Joint
Venture(1.7% share)
$7.9Bn Banking, Insurance & Securities
(9.5% share)
Source: USCBC
99China ExpansionFolta Associates©2008 Paul H. Folta & Associates, LLC (all rights reserved)
• 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 Total Chinese M&A: $50Bn in 2007; $49Bn in 2006 ($21Bn in other countries) Foreign companies: $4.8Bn in 1,300 M&As in China in 2006 vs. $2.2Bn in
2002 47% from BVI, HK, Mauritius & Caymans, vs. 19% from the U.S. in 2006 Foreign M&A in China expected to grow 25%-30% per year for the next several
years
Strategic Financial Investments & M&AStrategic Financial Investments & M&A
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III. Process: Steps to Decide Upon & Plan Your III. Process: Steps to Decide Upon & Plan Your EntryEntry
• Strategic Plan: Assess Opportunities & Risks Accessible Market Competition Intellectual Property Regulatory & Sector Restrictions Initial Structuring Options, Targets & Timing
• Team to Build Plan: U.S. & China Strategy Sales & Marketing Operational & Technical Financial Regulatory
1111China ExpansionFolta Associates©2008 Paul H. Folta & Associates, LLC (all rights reserved)
Cultural & Geographic DiversityCultural & Geographic Diversity
North / South Traditional Divide:
Climate, Language & Culture (divide at Yangtze River – red arrow)
Coastal/Inland Socio-Economic Divide:
Wealth, Urbanization & Industrial Development (Blue – Beijing and the wealthy coast; Red – one of the “official” East / West demarcations)
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Accessible MarketsAccessible Markets
• Three Major Regional Markets Pearl River Delta Yangtze River Delta Beijing-Tianjin Corridor
• Other Metropolitan Markets Other Coastal Cities Inland Northeast Cities Inland Central, South & West Cities
• Urban Income 320-360Mn registered urbanites; +200Mn “floating” 666 cities; >30 cities >1Mn pop. each; 10 largest 3-10Mn pop. each 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
1313China ExpansionFolta Associates©2008 Paul H. Folta & Associates, LLC (all rights reserved)
IV. Structuring: Options for Setting Up & IV. Structuring: Options for Setting Up & ExpandingExpanding
• WFOE
• JVs (EJV & CJV)
• Other Structures
• Partner Identification & Due Diligence Process
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Structuring Types – WFOEStructuring Types – WFOE
• Wholly Foreign-Owned Enterprise (WFOE) – including M&A
Manufacturing & IP control
Own sales & marketing
Administrative efficiency
Distribution
Expansion ease / Holding company
Exit
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Structuring Types – JVsStructuring Types – JVs
• Equity JV (EJV) & Cooperative JV (CJV)
Conflict of interest challenges
Control issues
Rapid market access
CJV advantages
1616China ExpansionFolta Associates©2008 Paul H. Folta & Associates, LLC (all rights reserved)
Structuring Types – OtherStructuring Types – Other
• Other Deal Structures
Licensed production
Agency & caretaker agreements
Representative office
Branch office
Pure distribution company
FISC
R&D Center
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• Screening Considerations
• Identification Process
• Reference Checks
• Legal, Financial, Technical & Other
Partner Identification & Due Diligence ProcessPartner Identification & Due Diligence Process
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• Your Positions, Principles & Goals
• Counterparty’s Positions, Principles & Goals
• Broad Principles vs. Specifics
• Other Cultural Differences
• Language & Interpreters
• Pressure You Might Experience
• Approval Processes
Negotiating ConsiderationsNegotiating Considerations
1919China ExpansionFolta Associates©2008 Paul H. Folta & Associates, LLC (all rights reserved)
• Standard FIE Documents & Approvals Letter of Intent Detailed Feasibility Study Articles of Association & JV Contract Business License Register Bank Accounts (Capitalization & Foreign Exchange)
• Special Regulations & Approvals that Might Apply IP Applications Certifications (quality & environmental) Preferential Tax Assurances (now limited) Labor Contract Law Anti-Monopoly Law Special Regulatory Approvals Special Pricing Approvals
Deal Approvals NeededDeal Approvals Needed
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• 2006 M&A (non-listed) & Takeover (listed) Regulations
Many Non-Compliance Issues & Failures
New Specified Procedures
Government Agency Involvement
Valuation & Payment Rules
Disclosures
M&A Documents & ApprovalsM&A Documents & Approvals
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• Post-Deal Integration Considerations
• Culture – Business Environment
• Culture – General Advice
V. Business Considerations: Cultural & V. Business Considerations: Cultural & Operational IssuesOperational Issues
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• Management
• Staffing
• Operations
• Controls
Post-Deal Integration ConsiderationsPost-Deal Integration Considerations
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• 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
Culture – Business EnvironmentCulture – Business Environment
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• Flexibility
• Patience
• Confucian Values
Relationships & “Guanxi”
“Face” (Respect)
“Yin/Yang” (Harmony)
“Person of Quality” (Sincerity)
• Etiquette & Entertainment
• Chinese Holiday Calendar
Culture – General AdviceCulture – General Advice
2525China ExpansionFolta Associates©2008 Paul H. Folta & Associates, LLC (all rights reserved)
• Onshore or Offshore ?
Maximize Acquisition or Exit Flexibility
Tax Efficiency
Keep Certain Issues Offshore
Chinese Partner Might Wish to Participate Offshore
Financing by Offshore Vehicle to Onshore Entity
“Foreign” Limits Might Require Onshore Shareholding
VI. Structuring Examples – IssuesVI. Structuring Examples – Issues
2626China ExpansionFolta Associates©2008 Paul H. Folta & Associates, LLC (all rights reserved)
Structuring Example – Traditional Onshore JVStructuring Example – Traditional Onshore JV
Foreign Co.
JV Co.(target)
China Co.
2727China ExpansionFolta Associates©2008 Paul H. Folta & Associates, LLC (all rights reserved)
Structuring Example – On & Offshore JV with Structuring Example – On & Offshore JV with Chinese “Round-Trip”Chinese “Round-Trip”
BVI-I
JV Co.(target)
China Co.
Foreign Co.
BVI-II
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Structuring Example – On & Offshore or Direct Structuring Example – On & Offshore or Direct M&AM&A
BVI WFOE
China Co. (target)
Foreign Co.
2929China ExpansionFolta Associates©2008 Paul H. Folta & Associates, LLC (all rights reserved)
• Services:
Sales/Licensing: Define market opportunity; Identify appropriate local distributors & partners; Recommend performance improvements; Monitor
Sourcing: Identify & qualify sources; Assist in negotiating terms; Monitor & conduct inspections
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
Regulatory: Assist with device & drug applications; Recommend intellectual property protection measures; Obtain pricing & reimbursement approvals & other relevant licenses
Background Checks & Due Diligence
VII. Folta Associates: ServicesVII. Folta Associates: Services
3030China ExpansionFolta Associates©2008 Paul H. Folta & Associates, LLC (all rights reserved)
• Paul H. Folta, Ph.D., Managing Director – Folta Associates
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.
Experienced in Healthcare services, drugs & devices; Telecom & IT; Consumer goods, foods & retail; Media & entertainment; Automotive, hardware, appliances & machinery; Insurance & finance; Logistics; Plastics; and Infrastructure.
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: CapabilitiesFolta Associates: Capabilities