thomas brooks 9th october 2003 doing business in china thomas brooks director of global purchasing...

Thomas Brooks 9th October 2003

Doing Businessin

China

Thomas Brooks

Director of Global Purchasing

GN Resound AS

Introducti

on


Agenda Company Background Why Outsource Basic Facts about China China 2002 Review Negotiating & Investing Trading Issues affecting Foreign Investment. Five tips for Sourcing in China Questions

Sources of Information•China Statistical Yearbook 2002•Goldman Sachs•Chinese Customs•World Trade Organisation


(Telecom Headsets)(Communication TestEquipment)

(Hearing Aids)

These three companies account for almost 80% of Great Nordic’s total revenue 2000App. 50% of revenues from the USApp. 50% US employees

Current Global Position #2 #2

2000 RevenuesUS $ 227 M1,900 M DKK

US $ 188 M 1,500 M DKK

US $ 288 M 2,300 M DKK

% of Great Nordic 2000 25.9% 21.1% 32.2%

A Danish/US Technology Group

2000 EBITA margin 13.2% 21.6% 6.5%


About GN ReSound Corporation GN ReSound, with its H.Q. in Denmark, designs,

manufactures and markets a full range of Hearing Instruments and Audiological Test Equipment.

Among top 2 Hearing Healthcare companies, with Siemens being the market leader.

Employs approx. 3,000 people Revenues between USD350m and USD400m


Global Production & Distribution

PræstøCork

Xiamen

Chicago


Why Outsource

Why China? China’s low cost base remains the key attraction, but growing

opportunities in the domestic economy and in overseas markets are an important lure now that China is a WTO member.

WTO accession (2001) makes China more attractive for foreign direct investment.

Import restrictions have been reduced, tariffs cut (15.3 to 12%) Foreign companies are being given greater geographic and market

access (eg will be allowed to take up to 65% stake in stores, to establish own networks, warehousing, wholesale outlets, etc)

As more manufacturing moves to China so does supply and sourcing.


Basic Facts 1.3bn people living on 9.6m sq km of land (slightly larger than the US with 5 times

as many people). 27% of the land is desert, growing 2.4k sq km each year. 62% of the population lives in the countryside with 30% employed outside the

agricultural sector. Government goal to keep population below 1.4bn until 2010. An ageing nation, baby boom encouraged by Moa Zedong ‘50 & ‘60s followed by

one child per family policy launched in 1980. By 2025 estimated 200M>65 yrs. Number of people living in absolute poverty has fallen to <3% compared with 25%

in the late 1970’s. Rate of illiteracy falling, 80% 1949, 15.9% 1990, 8.7% 2002, Gov wants to increase

spending to 4% of budget, 43% of families have special bank accounts to cover their children’s education costs.

in 2001 average life expectancy of 71.8 years


2002 China Review (1)

16th Chinese Communist Party (CCP) Congress most important political event, the generation of leaders that had ruled for over a

decade gave way to a younger elite. CCP now accepts members from private business (chief executive of Haier now on

central committee).

Improved Quality of life Real income rose, bank savings grew 18% to $1012bn. options for spending multiplied, retail sales up 8.7% (169m mobile phone users). Border restrictions with Hong Kong relaxed. 8% GDP growth, negative inflation rate, 5.31% lending rate and a 1.98% deposit

rate.


Distribution of household liquid assetsby type of financial asset

China

Others29%

Bonds4%

Stocks4%

Deposits63%

US

Others48%

Bonds7%

Stocks36%

Deposits9%

Data Source: Goldman Sachs


2002 Review cont. (2)

Industrial Restructuring Jobs were lost in the rush. Urban unemployment at 3.9% in October. Protests over insecurity, poor compensation for redundancy, late payment of wages,etc Prices at factory gates fell by 2.9%, output expanded by 12.3% ($309bn), strong

export demand. Industrial profits rose by 14%. Leading sectors include vehicles, telecommunications,

software, electronics, textiles, chemicals and metals.

Government Deficit USD$37.8bn, 19% growth V receipts expanding at 11% Major crackdown launched on tax evasion & corruption (tax chief sentenced to death,

customs chief jailed for 13 years, for taking Bribes). Customs targeted import valuation fraud.


2002 Review cont. (3)

Trade and Foreign Investment China is ranked as the 6th biggest trading nation in the world (WTO

2001), could become No 2 in a few years. Foreign trade grew to$500.2bn, exports climbed to 20.6% to $262.5bn

(machinery & electronics >50%). Exports of high technology products grew >40%. 50.1% was from foreign firms. Exports to the US climbed 25% to $38.5bn, Japan, $34.3bn.

Total imports grew 18.7% to $237.7bn, 50% of which are destined for re export.

Actual Foreign Direct Investment, Jan to Oct, rose 19.6%, to $46.4bn and contracted FDI rose 38.4% to $68.4bn.


2001 Foreign Direct Investment = US$51.5bn

2001 Population = 1.3bn People

Utilised Foreign Investment 2001 (US$m). Top 10 Regions

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Guang

dong

Jiang

su

Taiw

an

Shang

hai

Fujia

n

Shand

ong

Liaon

ing

Zhejia

ng

Tianji

n

Beijing

Regions

US

$m

Population (m)

0

10

20

30

40

50

60

70

80

90

100

Guang

dong

Jiang

su

Taiw

an

Shang

hai

Fujia

n

Shand

ong

Liaon

ing

Zhejia

ng

Tianji

n

Beijing

Regions

(m)

Data Source: China Statistical Yearbook 2002


1

2

3

4

5

6

7

8

910


Negotiating & Investing

Recruitment shortage of high-quality people in non technical areas (marketing,

finance, quality management, etc Retaining qualified staff in a market that attracts much inward

investment. Wholly foreign-owned companies cannot hire staff directly. Foreign Enterprise Service Company (Fesco) Using employees of a local joint venture partner Direct advertising and networking Link with a local university


Negotiating & Investing (2)

Training for Business Education system focuses excessively on technical ability. Business and management skills (time management, initiative

building, problem solving, teamwork, leadership techniques) etc, training is left for the foreign investor.

Training can be ‘in-house’, at training centres, and secondment to parent company.

Training cost is high, need to lock in employee contract terms (at least 3 to 5 years) repayable should they leave before the stipulated date.



Salaries Staff loyalty increases with a correctly tuned wages strategy. Salaries tend to be higher in service and marketing oriented businesses

than manufacturing. State-owned companies tend to pay less than multinational. Are higher on the coast and in the south than in the north or interior provinces.

Housing dilemmas; State-owned companies tend to have highly subsidised state housing. Good retention tool versus escalating costs and bureaucracy. New salary may not be sufficient to cover commercial rents. Company could extend housing loans to their employees.



Forms of Foreign Investment Equity Joint Venture. Operates as a limited liability company sharing

profits, risks and loses in proportion to the value of their contribution. Investors exert operational control directly through their appointees to the venture’s board of directors.

Contractual Joint Venture is a hybrid of the above where the parties need not share profits in proportion to their capital contribution, and that the foreign party can receive a return on its investment during the period of the venture, provided there is a free transfer of assets to the Chinese party at the end of the term.

Wholly Foreign-owned Enterprise must be demonstrably beneficial to the development of China’s national economy (exporting products / employing advanced technology)


Trading

Generally, In order to trade with China, foreign companies are required to deal with Chinese companies (FTCs) that have been foreign trading rights.

FTC’s must obtain special licences to import goods outside of their approved business.

Certain foreign-invested import-export are allowed to operate under strict conditions.

Wholly foreign-owned trading companies can exist in nationally approved bonded zones.

Foreign trade regulations are in a state of flux. Wise to contact Moftec or the China Council for the Promotion of International Trade before signing any contract.


Issues Affecting Foreign Investment Land

‘Land use rights’ issued by the state Three types, collective, allocated, and granted.

Foreign Exchange Considerable element of government control in the Chinese economic system

and the currency is not freely convertible.

Intellectual Property With its entry to WTO China has improved the protection and has passed

several pieces of legislation. Enforcement remains patchy.

Quality Varies dramatically, few suppliers have been qualified up to expected

Western standards.

Information Technology Infrastructure EDI not common, fax & e-mail.


Five Tips for Sourcing in China1. Hire an Asian purchasing agent to weed out poor suppliers.

2. Use Japanese, Korean or US transplant suppliers.

3. Use transplants to recommend suppliers of other commodities.

4. Leverage sourcing capabilities of EMS providers already doing business in China.

5. Don’t have a Chinese single source.


Questions

thomas brooks 9th october 2003 doing business in china thomas brooks director of global purchasing...

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