china expansion: rationale & strategies paul h. folta, ph.d. china expansion: rationale &...

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China Expansion: China Expansion: Rationale & Strategies Rationale & Strategies Paul H. Folta, Ph.D. Paul H. Folta, Ph.D. ©2008 Paul H. Folta & Associates, LLC (all rights reserved)

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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

77China ExpansionFolta Associates©2008 Paul H. Folta & Associates, LLC (all rights reserved)

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

1010China ExpansionFolta Associates©2008 Paul H. Folta & Associates, LLC (all rights reserved)

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)

1212China ExpansionFolta Associates©2008 Paul H. Folta & Associates, LLC (all rights reserved)

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

1414China ExpansionFolta Associates©2008 Paul H. Folta & Associates, LLC (all rights reserved)

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

1515China ExpansionFolta Associates©2008 Paul H. Folta & Associates, LLC (all rights reserved)

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

1717China ExpansionFolta Associates©2008 Paul H. Folta & Associates, LLC (all rights reserved)

• Screening Considerations

• Identification Process

• Reference Checks

• Legal, Financial, Technical & Other

Partner Identification & Due Diligence ProcessPartner Identification & Due Diligence Process

1818China ExpansionFolta Associates©2008 Paul H. Folta & Associates, LLC (all rights reserved)

• 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

2020China ExpansionFolta Associates©2008 Paul H. Folta & Associates, LLC (all rights reserved)

• 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

2121China ExpansionFolta Associates©2008 Paul H. Folta & Associates, LLC (all rights reserved)

• Post-Deal Integration Considerations

• Culture – Business Environment

• Culture – General Advice

V. Business Considerations: Cultural & V. Business Considerations: Cultural & Operational IssuesOperational Issues

2222China ExpansionFolta Associates©2008 Paul H. Folta & Associates, LLC (all rights reserved)

• Management

• Staffing

• Operations

• Controls

Post-Deal Integration ConsiderationsPost-Deal Integration Considerations

2323China ExpansionFolta Associates©2008 Paul H. Folta & Associates, LLC (all rights reserved)

• 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

2424China ExpansionFolta Associates©2008 Paul H. Folta & Associates, LLC (all rights reserved)

• 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

2828China ExpansionFolta Associates©2008 Paul H. Folta & Associates, LLC (all rights reserved)

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