Hong Kong China Business(BUSS411)

Problem 1: Entry strategies for China business

Group Y

Group members:

Chan Yung Mui, Dan 00253267d

Chow Yuen Kwan, Inty 00214132d

Lau Wing Ho 00214637d

Lo Wai Kwan, Rachel 00306791d

Leung Pui Yee, Cherie 00238956d

VG RU

AS

O

FV

Company Name: Grvovufas (manufacturing company)

Owner: Mr. Dai Wai See

Year of establishment: 1963

Product: electronic toys

Business Mode: OEM(Original Equipment Manufacturer)

~ design(customers in US and Europe)

~ manufacture(Grvovufas)

Move production unit to Dongguan in 1988

Middle size with owned-technology department

Hong Kong Office is the decision-making party

Factory in China was just for production

Grvovufas provided machinery, components of production

Local gov’t provided land for the factory

Employed 200 local workers

The issue concerned:

• Grvovufas had three contractual joint ventures with the township government;

• The business has been profitable and no major disagreements;

• The contracts for the joint ventures will run out in 2004

Should re-new the contractual JVs? Change the mode of operation to equity JV or wholly-owned subsidiary?

1. Characteristics of electronic toy industry

2. Situation in Guangdong Province

(especially Dongguan)

3. Comparisons of the 3 operation modes

4. Final Decision

5. Preparation for selected mode

~Prevailing trend of Hong Kong manufacturers moving the base of production and the procedure of assembly into the Mainland

∵ Cost of production(fixed cost of land, cost of labor ,operation cost of running the factory, e.g. cost of electricity and water)

(i) Labor-intensive (i) Labor-intensive

~ abundant supply of cheap labor

~ the local enterprises earn from the value-added procedure and managing, by providing its cheap labor ~ a lot of labors are required for working along the conveying belts to assemble each part of components of the electronic toys by specialization (repetitive tasksefficient)

(ii) Capital / Technology Level(ii) Capital / Technology Level

~ some manufacturing procedures may be inevitable required the use of machinery (e.g. conveying belts, the machine for packaging)

~China still a developing country low technology level

~but not big problem in this case ∵ just require having the components assembled, but not having them invented or produced

(iii) Scale of Operation(iii) Scale of Operation

~ most of the Mainland toy manufacturers small-sized enterprises with annual value of production of between 2 to 3 million dollars

~limited budgets for R&D but not big problem in this case ∵ just require manufacturing , instead of

new product development

•Source:http://gbcode.tdctrade.com/han3/2/1/1/0/0/0/0/0/toys.tdctrade.com/index_c.htm

中 國玩 具 的 出 口

2. Situation in DongguanGeographical Location of Dongguan:

Railway

Highway

Harbor=> airport- International airport in Guangzhou- Hong Kong international airport

Geographical advantages of Dongguan

• Located at middle south of Guangdong province

• The “water distance” between HK is 47 “Holi”

• Dongguan is the throat of transportation between HK and Guangzhou

comprehensive transportation network

(harbor, railway, highway airport)

Toy industry in Dongguan

70% of China’s toy industry located in Guangdong

• many toy’s firms (different size, objectives, target market) located in Dongguan

• no specific requirements in toys production

License required in our companyApplication for export product license

Source: http://www.dgboftec.gov.cn/en/03/yewu_erke06.html

A. Contractual Joint Ventures(CJVs)

-the partnership will dissolve after a specified period

[3 years contract with township gov’t]

Adv:

easier to get gov’t info

~ polices about toy industry

convenient to ask for gov’t resources

~ toy industry need a large place

get the approval from authority in short term

~ get the license for export

Disadv:

imbalance bargaining power

(bear more responsibility of gov’t resources)

~ recruit not first priority workers who live in Dongguan

extra unnecessary training needed

great chance to alter contract when renewal

~ required to remove the site due to development plan of

government itself

use more resources to write a contract

~ human resources, time cost

: contractor=gov’t

~ gov’t take more social responsibility and consideration

inflexible in decision making

can’t react to market promptly

different goal

~ grvovufas: profit maximization & focus on quality

~ gov’t : benefit to Dongguan

Not re-new contract with government

(WTO--open market--rely on gov’t )

B. Equity Joint Ventures (EJVs) -a long-term relationship among the partners that manage the JV

-shared equity and resources

Adv:

synergistic effect

- partners’ strength complement with each other

more control & greater potential ROI(return on investment)

opportunism

mutual trust

tolerate each other

long-term viability of EJVs

build guanxi network via local partners

Disadv:

giving our technology to a future rival

~ how to produce advance electronic toys

~ how to deal with foreign countries

conflicts may occur

~ diff. strategies (technology Vs people)

~ ownership of assets

low enforcement of intellectual property right in China

technology spillover

harm own business

C. Wholly-owned subsidiary(WOS)/

Foreign Direct Investment(FDI) - represents the greatest commitment to foreign markets and may

be either in the form of acquisitions or greenfield investments

Adv:

minimizes market imperfections

~ barriers to exporting/ licensing

enjoy flexibility and managerial control

~ no burden of uncooperative partner

faster to establish than EJVs

~ WOS(30days) vs JVs(no time limit)

Disadv:

neglect of Guanxi

~ toy industry rely heavily with chinese agents

procure land, hire workers

raise questions of cultural and economic sovereignty

~ China view: foreign company take advantage

WOS = foreign island

vulnerable to criticism

criteria = advantage + suit our situation

Decision: EJVs

Decision: EJVs

a) company size : medium

~ capital(to rent land, build factory, hire workers)

b) business mode: OEM

~ produce, not design

unstable order (depends USA, Europe demand)

share risk

c) balance bargaining power

~ more control (vs CJVs)

d) synergistic effect

~ Grovovufas: components, technology, experience, management

~ local partners: knowledge about local culture & polices,

good guanxi network

( we have this with gov’t before only)

e) goal : production only/ meet the order

enter or expand China market

no need to be WOS

f) no restriction specially for exporting toy industry

the need as a WOS

a) technology spillover?

Grvovufas: machinery, expensive component from Japan

difficult to duplicate the toy

b) difficult to find partner?

Guangdong 70% of China’s toy industry

in 2000, output from Guangdong = 38.5billions

~ well-developed environment

certain level of technology(e.g. machinery)

skillful worker

easy to find experienced partner

not much investment needed

source:http://www.tdctrade.com/sme/chinese/chinatory.htm

HK: Grvovufas

~ provide machinery

~ buy component

~ take and fill order

~ delivery from Dongguan to H.K.China: local partner

~ provide land

~ build factory

~ hire worker (with training)

~ deal with township regulation

set profit & cost sharing proportion

arrange a emergence fund

visit and evaluation regularly

send a team of quality control and management in China

Registration of J.V in Dongguan

Procedures:

Registration of J.V in Dongguan

• Documents required for submission– The official document for the establishment

of joint ventures, cooperative firms and foreign ventures

• 22 copies of contract and articles of incorporation, 5 copies of feasibility study report

– One copy of "Notice for pre-examination and approval of enterprise names" issued by the Municipal Bureau of Commerce and Industry

Registration of J.V in Dongguan

– One copy of the competent authority's application for the establishment of joint ventures, cooperative firms or foreign ventures;

– One copy of the name list of the Board of Directors

– One duplicate of the business license or registration certificate of each side

Registration of J.V in Dongguan

– The foreign side should provide a copy of certification of its financial status by the bank including name of enterprise, address of the enterprise, time of opening of account, credit amount, deposit amount and business reputation

– Certification of the fulfillment of factory premises, sites and equipment provided by the Chinese side and the auditing opinion of competent authority

Registration of J.V in Dongguan

– In the case of an environmental pollution item, one copy of the approval document by the Municipal Environmental Protection Bureau (original) and a duplicate of the approval document by the Municipal Government Office

– submit a duplicate of certificate for land use issued by the Municipal National Land Bureau or Official approval document (original) for land use by the Municipal National Land Bureau

Registration of J.V in Dongguan– The resolution of the Board of Directors of the

investment side

– The application form for affirmation of foreign investment items encouraged by China

– The counterfoil of the approval certificate of foreign- invested enterprises or enterprises invested by Hong Kong, Macao or Taiwan patriots

– Other documents required (depending on the difference of items)

Joint Venture law in PRC

• Ministry of Foreign Trade and Economic Co-operation of the People's Republic of China– The Provisional Measures on the Establishment

of Sino-Foreign Joint-Venture Trading Companies on a Pilot Basis are hereby enacted, effective on the date of their approval by the State Council on September 2, 1996

Source: http://www.china-taiwan.com/english/fgtl/

Joint Venture law in PRC• Ministry of Foreign Economic Relations and

Trade、 the State Administration for Industry and Commerce– These Provisions are formulated in accordance with the

Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures and other pertinent laws and regulations in order to protect the lawful rights and interests of the various parties to Chinese-foreign equity joint ventures and to maintain the social economic order