four steps to china one billion hungry customers await you & in conjunction with sponsored by
TRANSCRIPT
Four Steps to ChinaOne billion hungry customers await you
&
in conjunction with
Sponsored by
China: What is Different and What Do You Need to Know?
• China is not a country but a continent!
• Branded consumer products reach no more than 400 Million consumers.
• There are 100 Million middle class Chinese consumers.
• Major retailers account for no more than 4% of a manufacturer’s sales.
• The Chinese have a large and invisible purchasing power.
• The most populous, fastest growing economy in the world.
• Since the late 1970’s, China’s economy has doubled 8 times.– And, the US economy has doubled
once! • The Chinese have 10 times the
purchasing power of 25 years ago.– They will surpass US purchasing
power in 3 decades!• The Chinese already consume…
– 12% of the worlds luxury goods– 50% of the world’s concrete– 33% of the world’s cigarettes
You Can’t Be The World Leader in Anything Without Being in China
Speakers
Dave Fusaro, Editor in Chief of Food Processing, moderator
Alex Bryant, President of East West Associates (EWA), a consulting firm for U.S. manufacturing companies accessing the global market, particularly Southeast Asia and China. EWA assists clients with the formation of joint ventures and wholly owned foreign enterprises, site selection for Asian manufacturing facilities and sales offices, strategic planning and global logistics.
James M. Rice, Tyson Foods Inc.’s Vice President and general managerGreater China, has been guiding the animal protein company’s successfuloperations in China since 2004, Before that, he had 14 years of experiencesetting up American businesses in China.
Jeff Olin, managing partner-international tax services U.S. for accounting firm Grant Thornton LLP, specializes in preparing businesses for the world in terms of global tax planning and analysis He consults with clients for both inbound and outbound international transactions and assists with multinational tax planning to reduce worldwide effective tax rates. He has degrees in both accounting and law.
Key Drivers Ensure Continued Positive Outlook for China
• The country’s leadership is committed to maintaining the economic momentum.
• China is “Open for Business” to foreign companies.
• WTO• Clarity of Rules• Rule of Law• Privatization of state owned
enterprises.
Successful Companies Operating in China Follow Simple Principles
• Don’t have a China strategy.– Have a China vision and ambition, but focus within your
resources to understand and execute.• Get your value proposition and route-to-market right.• Adapt to a “Made in China” business model.
– Flexibility to approach the market is critical, KFC and Carrefour are the best examples in China.
• Speed, Innovation, and Focus.• Recruit and retain good local talent.
– The Achilles’ heel of company operations in China.• Build two tier pricing strategy with existing local brands and the
Tyson brand.
Strategic & Tactics/ Thinking: Phase 1
• Types of Organizations• Business Plan• China Management Structure and Integration• Site Selection/Negotiation
Hong Kong/ China investment typical structures
Parent
China
Hong Kong
Parent
Option 1 to 4 above
Holding Co.
Parent
China
Parent
Hong Kong
Parent
Hong Kong
China
1. 2. 3.
4. 5.
Types of Organizations• Representative Office
• Foreign Investment Enterprise (FIE)– Equity Joint Venture (EJV)– Cooperative Joint Venture
(CJV)– Wholly Foreign-Owned
Enterprise (WFOE)
• Others – China Holding Co.
Representative Office - Setup• Limited scope of activities
– Not permitted to perform direct business or receive business income
• Simple to setup, no capital commitment and less statutory compliance requirements
• Still common– Market research, liaison services, and other preparatory &
auxiliary activities– RO can sponsor non-Chinese citizen to work in China– RO can hire local Chinese via specified local HR agents
(FESCO)
China Structures – Tax Summary
Representative Office
• Tax Rate 33% (or 15% in • Special Economic Zones)• This will ??? to 24% to 27%• Business Tax 5% on taxable• services• Business Tax 5% on grossed
up services under cost plus method
• Methods– Actual Income Methods– Deemed Income Methods– Cost Plus Method
Wholly Owned Equity/ContractualForeign Enterprise Joint Venture
Absent incentives taxed at 33%15% (or lower) in Special Economic ZonesUltimate rate will decrease to = 24% to 27%
Your Business Plan Must Include • Salary/Salary inflation/social programs/housing schemes
• Sensitivity analysis with assumptions of worst case scenarios and effect on business viability
• Detailed list of needed equipment by vendor and cost
• Tax implications for imported equipment – new & used- capital equipment purchases
• Duties and tariffs on raw material and finished goods imported and exported
• Complete staffing, training and associated costs, including manufacturing and administrative staffs
• Cost of service providers: accounting, law firms, consultants, insurance, executive search firms, etc.
• Cash flow management and GAAP (China and U.S.)
• Tax and tax minimization
• CPA costs for financial oversight and auditing
Tyson’s China Management Structure and Integration
• Acquire majority ownership in successful regions companies in our categories (Chicken, Beef, and Pork).
• Retain existing local management team and business model, without high overheads and expatriates.
China Management Structure and Integration-Questions you must answer before you move forward
• What does your company envision as the model for management of the China facility and subsequent oversight?
• What is your company’s vision of the eventual steady state business model and how will this evolve?
• How will key executive positions be staffed (expat vs. local)?• Is there a senior executive appointed exclusively to manage the
China operations? • Is there a “mapping process” which identifies appropriate
partner to partner interactions (i.e. U.S. executive to specific China executive)?
Site Selection& Negotiation
• Identify site selection (SS) criteria for company
• Confirm services provided by various Chinese business park, tax incentives, documentation support, etc.
• Identify company’s fit-up and base building needs and renovation costs
• What is the optimal negotiation strategy based on financial projections of the BP, including lease costs, lease period and extensions, fit-up an decoration expenses, tax rate and incentives?
Formation and Post Formation Activities: Phase 2
• Identify U.S. and Chinese service providers like accounting, legal, insurance, executive search firms, payroll outsourcing firms and their local representatives
• Obtain required documentation and permits – Environmental Impact Statement– Feasibility Study– Articles of Associations– Registered Capital Declaration
Business License
Logistics and Forecasting/PO/Invoicing, Operation Set-up, and Key Staffing and
Training: Phase 3
Logistics and Forecasting/PO/Invoicing• Has your company completely validated the Business model with
existing suppliers? Has your company identified PRC suppliers?
• Develop a process to ensure invoicing integrity based on order changes and modifications to customer’s specifications
• Your company must develop in-depth profiles on the flow of parts into/out of the new China facility.
• Confirm your company’s policy for inter-company business (i.e. consign materials or sell using Transfer Pricing or full market price model)
Operation Set-up• Define and prioritize integration strategy for IT’s immediate and long-
term needs.
• Develop Quality Assurance and Validation Plan for entire process (i.e. supplier qualifications, incoming qualification of suppliers, operations training).
• Define factory material flow with process and routings.
• Identify your equipment’s import/export compliance, logistics or ordering and receiving, installations and qualification.
• Define your company’s Environmental/OHS plan to ensure compliance and oversight
Key Staffing and Training
• Outline initial staffing process for key hires: GM, CFO, H/R, Supply Management and Logistics (SML, Product Development and future staffing schedule for additional hires.
• Create job descriptions.• Create process to execute
government mandated programs (i.e. pensions, unemployment insurance, housing fund, hospitalization and maternity insurance).
Employee Taxes
• If expats employed by China or costs are charged back, full China tax• If not employed, then the standard 183 day test applies provided the
citizenship is with a treaty country• Tax rates vary from 5% to 45% (45% applied after taxable income of
RMB100,000)• work visas are required• For local employees, Social Security costs range from 20% to 61% (but
change from time to time)• Social Security now applies to employees from Hong Kong, Macau and
Taiwan
Cash Flow, Capital Strategy and Asset Protection and PRC Taxes :
Phase 4
Cash Flow, Capital Strategy and Asset Protection: Phase 4
• Identify expected short term costs and annual expenditures • Compare basic assumptions in the BP with existing costs on
salaries, raw materials, freight forwarding, start-up and facility costs, and renovation expenses
• Define your company’s internal financial benchmarks for measuring success (ROI, profit margins, sales growth) and ensure process for gathering this information and dissemination of it to senior executives
• Is your U.S. company being paid licensing, trademark or other fees? If so , what U.S. tax is the company paying on these fees?
• Identify your company’s policy governing profit generated in China. Will these profits remain in China to fund capitalization efforts or will the profits be repatriated back to the U.S.? What US. Tax is paid on the repatriated profits?
PRC tax exposure
Rate Comments
Foreign Enterprise Income Tax (FEIT)
33% (also 24% and 15% rates)
Tax holiday 2 years, plus 3 years half tax
Business Tax 3% to 20%, normally 5%
Applies to services
VAT Normal rate 17% Refund rate reduced to 13% (normally)
Business Objectives
Profit Repatriation
Exchange Control
Financing/Capital Requirements
Type of Business
Human Resources
Where to organize
StructuringTransfer Pricing
IP Protection
Property Issues
Exit Strategy
China
Business Plan
Key Considerations