Chicago Gsb Entrepreneurs Rt 121508

The University of Chicago Booth School of Business

Entrepreneurs Roundtable December 15, 2008

China “202” 202” Jon B. Anderson Lake Pointe Partners, LLC Chicago | Shanghai

China “202” 202”
China Business Climate

(Jon Anderson)


Engaging With China  Entry Considerations  Ongoing Relations  Mitigating Risk

(Jon Anderson) (Jeff Day) (Louise Kern)

Chicago Council on Global Affairs Key Opinion Survey Findings (08/08):
“Americans believe China is catching up to the U.S. economically and they are becoming increasingly worried country”” about the implications of this development on their country
“China is now seen as the most influential country in the world following the U.S.” U.S.”
“The number of Americans who think China’ China’s economy will grow to be as large as that of the U.S. has risen sharply and a majority believes it practices unfair trade” trade”
“A large majority still favors friendly cooperation and engagement and opposes active efforts to limit China’ China’s rise” rise”

Recent Successes




Olympics And Paralympics Spacewalk Increased Focus On Trade Relationships
Maintaining Inflow Of FDI While Controlling Inflation
Slowed down inflation
Economic stimulus
Striving To Gain “Face” Face” in the World’ World’s View and Maintain Harmony within the Chinese Population!

Balance: Social & Economic Policies
Job Creation
More Even Distribution Of Wealth
SocioSocio-economically
Geographically


Development
Consumer Class & Economy
Infrastructure


Revitalizing Smokestack Industrial Areas
Opening Their Economy To The World Without Destroying Local Businesses

Zhuhai China, 2004 Store in computer shopping mall J. B. Anderson photo

China’ China’s “Third Wave“ Wave“
The Chinese Century?
Growth Growth Rates Over 10% Annually For 15 Years
About About 20% Of The World's Population


China Is Approaching The Top Of The Heap In:
Consumption Consumption Of Petroleum Products And Natural Gas
Production Production Of Air, Land And Water Pollution
Food Food Consumption To Feed Their Population
Total Total GDP
Total Total Imports And Exports


But Not On A Per Capita Basis


Move Up The Value Chain
From From World's Sweatshop To High Tech High Value Added Products
Improve Improve Labor Practices
Weed Weed Out Small To MediumMediumsized "Dirty" Industry


Address FDI Concerns
Improve Improve Ease Of Business Registration And Doing Business
Human Human Resources
Improve Improve Environment


Impact
Costs Costs of Industrial and Retail Goods Will Increase
Cost Cost of labor is Increasing and Overtime Is Limited

Opportunities And Challenges Opportunities

Challenges
















China Is A Market As Well As A Source Local Talent And Returnees Increase Opportunities For Localizing Management Government Encouraging Investment Previously Controlled Industries Are Becoming Open Transparency And The Rule Of Law Are Being Established Integrated Into Worldwide Supply Chain Chinese Companies Are Investing In The West - Completing The Circle




Distribution of Wealth Competition From Other LCC's For Lower Labor, Low Value Added Work Increased China Expense
VAT VAT Rebate Rollback
New New Labor Law
New New Bankruptcy Law
RMB RMB Value Relative To The USD
Material Material Costs







Developing Labor Shortage And Location Concerns “Evenness” Evenness” Of Policy Application World Economic Situation Localizing Product For China And World Consumption

Investment in China is still proceeding!

Opportunities in Growth Industries





Education (Human Capital)




University Trade School

Drinking Water Waste Water Treatment

Other Private Schools

Air Quality Auto Emissions

Healthcare

Factory Emissions The Desert - Dust

Serving Aging Population & Middle Class Growth Demands For Better General Health And For “Aging Prevention” Prevention” Cures




Domestic Logistics




Construction, Especially Infrastructure




Environmental

Agriculture: Automation And Productivity, Irrigation




Financial And Professional Services




Middle Class Preoccupations Auto Accessories And Auto Care Health Clubs, Recreational Activities And Travel and Entertainment Venues Home Decorating Pets And Pet Care

Economic Geography Northwest

Northeast

Bohai Bay

Southwest

Central (Yangtze River Delta)

Southeast (Pearl River Delta)

Why Engage with China? DEFENSIVE STRATEGIES

US Markets
Reduce costs
Fend off cheap competition
Defend against possible loss of tariff protection
Secure supply chain

Offshore Markets
Follow customer

OFFENSIVE STRATEGIES

US Markets
First mover advantage to Low Cost Country
Supply chain diversification

Offshore Markets






Beat competitor to market New market development New applications, new markets New markets, old applications Exploit counter cyclical markets

How Engage with China?

Engaging China: Partner or go it alone? Strategic Intent

Mode Of Entry Alliance

Less Control

Sourcing Or Distribution


Licensee
Contract manufacturer
Sub-contractor






More

Limited manufacturing control Intellectual property risk Middlemen costs Logistics issues Quality control Supplier develops market without Company ownership Commercial limitations Make or accept contracts Collect monies Issue invoices

Speed of entry Inexpensive







Trading company or Foreign Invested Commercial Enterprise (“FICE”)






Goods for import & export Location in free trade zone May now engage in domestic trade May hold import/export license


Costs (required minimum capital)
Cannot manufacture
Cannot “add value”

“Traditional” route Speed of entry “Buy” market share and contacts







Relationship problems Intellectual property risk Market risk Development of supplier

Control of manufacturing, quality & customers Tax advantaged Location in free trade zone







Longer entry time Costs (required minimum capital) Sales and employee risks “Corporate” resources required

Joint venture






Control

Manufacturing For Export And/Or Domestic Market














Manufacturing For Export And/Or Domestic Market

Speed of entry Cost savings Cost effective

Issues To Overcome

Representative office Market Assessment

Import / Export (International Trade)

Major Advantages

Wholly Foreign Owned Enterprise (“WFOE”)
Build
Buy






Less Cash Outlay

More Cash Outlay

Equity Investment Modes Mode Equity Joint Venture Greenfield (WFOE or Wholly FICE) Foreign Owned Enterprise Acquisition (as WFOE)

Acquisition (Domestic Company)

Minimum Capitalization Required
Depends on % of ownership

Funding Mode
Cash
Equipment
Technology Transfer

Financial Other Benefits Benefits
Lower price
Market Access of Entry


USD $250 K and up


Cash
Equipment


Income Tax
Customer and Relief Manufacturing
Export Control Credit


Negotiated Price
Equity or Contractual


Cash
Equipment
Technology Transfer


Income Tax
Market Share Relief
Market Access
Export
Take Out Credit Competition


Negotiated Price
Equity or Contractual


Cash
Equipment
Technology Transfer


Export Credit


Market Share
Market Access
Take Out Competition

Engaging With China
Approach China On Chinese Terms, But ……….. ………..
……. ……. Don’ Don’t Leave Your Best Practices Or Common Sense At Home
Relationships First!
Prepare To Have Face To Face Personal Relationships
Expect
Extended Exchanges About The Respective Companies’ Companies’ Information, History, Capabilities And Interests
Personal Questions
Differences In Behavior Between Formal Meetings And Social Occasions


Time Is On Their Side – Be Patient

Key Issues And Questions



What Are Your Overall Objectives? Business Structure
Who Who Are The Key Decision Makers
Who Who They Really Are And Who Owns Them?




Operations
Manufacturing Manufacturing Capabilities & Supply Chain
Export Export Rights And Experience




Finance
How How Are You Going To Pay Or Get Paid?




Experience
With With Your Product Or Commodity ?
With With Your Ideal Relationship?




Competitive Factors
Are Are Your Competitors Already Buying From Them?
Are Are They Looking To Steal Your Technology?





Dispute Resolution Mechanism Develop A Checklist Of Key Items And Issues & Take Pictures

Sample Checklist Items: In addition to the previous items:






English Language Capabilities Location Issues Engineering And Design Capabilities, Including Engineering Software Product Development Experience And Cycle Time True Manufacturing Capabilities
Inside Inside And Subcontracted
Scrap Scrap And Disposition Of Scrap








Supply Chain And Logistics (Raw Material Through Fulfillment) Apparent Product Quality Social Responsibility Issues, Safety And Plant Housekeeping, Employee Training Real Or Pretend Quality Programs And Metrics Your Gut Feel As To Their Management And Production Capabilities

If It Feels Wrong It Probably Is Wrong

Technical Issues
Most Chinese companies have ProPro-E, Auto CAD and other capabilities
Many can do 33-D modeling
Determine their capabilities in your due diligence
Samples, Brochures and Pictures are always helpful
Do not give away your trade secrets
Keep part of the recipe to yourself


Expect
To have to be much more comprehensive in specification than with an experienced supplier
Pushback on requirements after the contract is signed
To go through the engineering details again and again
To have to constantly followfollow-up
Post negotiation of price
Adaptations in packing and shipping due to overseas logistics

Raw Materials In China
Don’ Don’t Expect To Simply Quote An SAE Specification And Receive The Right Material
Expect
Significant Differences In The Commodity Nomenclature And Possibly The Material Itself
Some Materials May Not Be Obtainable In China
To Obtain Specification Sheets And to Have The Material Tested

Certifications Are Not Enough, Verify!

Legalities - Pay Attention To:





Tariffs And Duties Value Added Tax (VAT) Import Restrictions Protected, Neutral And Encouraged Industries
Import Regulations Including Packaging
FCPA And SOX
Intellectual Property  Product And Process  Trade Secrets, Trade Marks And Trade Dress

Best Practices For Approaching The China Market
Have Your US House In Order First
Planning Top Top Level Involvement Comprehensive Comprehensive Business Plan Know Know Your Objectives And Measure Progress Periodically Implement Implement Your Plan Professionally And Flexibly HR HR Involvement


Execution Outside Outside Resources With China Experience Training Training – US And China Professional Professional Services – US And China Adaptations Adaptations And Accommodations At Home Location


Expect Success But Have An Exit Strategy!

THANK YOU Contact Information Jon B. Anderson Partner-in-Charge, Shanghai [email protected] 312.857.0000 (Office) 312.952.8255 (Direct) 011.86.137.6434.7001 (World Mobile) 312.857.0010 (Fax)

Chicago 77 West Wacker Drive Suite 3220 Chicago, Illinois 60601

Shanghai 1915 Room, Dongchen Plaza, No. 60 Mudan Rd, Pudong Shanghai, China, 201204

www.lakepointepartners.com