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July 2011
Doing Business with China Emerging opportunities for Indian companies
Confederation of Indian Industry
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Contents
Message from Director General, CII 3
Introduction 4
Trade statistics 6 IndiaandChinatradeismorethanUS$60billioninanyear 6 BangkokAgreementbetweenIndiaandChina 9
Foreign investment in China 10 Choiceofbusinessentity 11 TaxationinChina 14 Driversforinboundandoutboundinvestment 15
Key industries 16 Automobilesandautocomponentssector 16 InformationTechnologyandITenabledServicessector 18 RealEstate,ConstructionandInfrastructureSector 19 Tourismsector 21
Case studies 23 CaseStudy1:MahindraandMahindrainChina 23 CaseStudy2:AnImporter/Tradersharinghis
experienceofbusinesswithChina 24
Way forward 25
Acknowledgements 26
About CII 27
Contacts 28
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Message from Director General, CII
IndiaandChinahaveenjoyedadynamiceconomicrelationshipwhichhasgainedmuchtractionoverthelastdecade.Bothcountriesrepresentlargerapidlygrowingdevelopingeconomiesandhaveemergedasdriversofglobalgrowth.Theopportunitiesinbothnationsareexpandingatanastoundingpaceasdevelopmentintensifiesandanewclassofconsumersandworkersfrombothsidesstepsontotheglobaleconomicplatform.
Withinthisscenario,theConfederationofIndianIndustrybelievesthatitisimperativetoevolveamultidimensionalbalancedeconomicengagementofbothcountriesthatincludestrade,servicesandinvestments.Theseriesofseminarson‘DoingBusinesswithChina:EmergingopportunitiesforIndiancompanies’aimsatfacilitatingsuchengagementandassistingIndiancompaniestoachievethenextlevelintheirpresenceinChina’seconomicarena.ThisendeavourbuildsonthealreadystrongactivityprofileofCIIwiththeChineseeconomy.
Bilateraltradehasmultipliedmanifoldoverthelastdecadeandtoday,ChinaisIndia’slargesttradingpartner.Mutualinvestmentstooaregoingupasbusinessesofbothsidesseektoleveragethebenefitsofdynamicandgrowingmarkets.Thetwocountriesaredevelopingtheirspecialidentitiesineachother’seconomiesandproceedingrapidlyonparticipatingineachother’sgrowthanddevelopmentprocess.
Chinahasbuiltapresenceofpre-eminenceforitselfovertherecentpasttoemergeastheworld’slargestmanufacturingandexportingnation.Despitethetravailsoftheglobaleconomiccrisis,ithasexhibitedresilienceandcontinuedhighratesofGDPgrowth.AfacilitativeinvestmentandmanufacturingenvironmenthasattractedglobalmultinationalcompanieswhichhavesuccessfullysetupbusinessinChinatoaddressdomesticaswellasglobalmarkets.
India’spresenceinChinahasalsoincreasedovertheyears,especiallyinareasofitscorecompetencysuchasIT,manufacturingandR&D.However,forasynergisticbilateraleconomicengagement,thereisneedforIndiancompaniestotaptheopportunitiesintheChinesemarketmorecloselyandtotakeadvantageofitsenvironment.China’sstrongpresenceinrobustglobalsupplychainsisanaddedincentiveforIndiancompaniesforscalingupoperationsinChina.
CIIhasbeenactivelyengagedwithChinathroughamulti-prongedstrategyincludinganofficeinShanghai,partnershipswithChineseacademicandbusinessinstitutions,andarangeofdedicatedeventsonthebusinessaswellasstrategicplatforms.CIIworkscloselywiththeIndiangovernmentonstrengtheningeconomicengagementwithChina,andhasparticipatedinbilateralvisitsofministersfrombothsides.ItundertakesrelevantandtimelyresearchonChinainordertoenableIndiancompaniestoshapetheirparticipationinitseconomy.
ThecurrentseriesofseminarswouldreachouttoIndianbusinessesinkeyindustrialregionsandwoulddisseminateawarenessonarangeoftopicspertainingtodoingbusinessinChina.ApartfromanoverviewofChina’seconomyandbilateraltradeandeconomicrelations,theseminarserieswouldincludespecificpotentialandopportunitiesforIndianbusinessincludingidentifiedsectors,businesslawsandregulations,themechanicsofsettingupbusinessinChina,andfinancingoptions.Theserieswouldbeaddressedbygovernmentofficials,topbusinessleaders,andprofessionalsfromIndiaandChinatogiveaholisticandroundedperspectiveontheissuesandchallenges.
IamconfidentthatthisseminarserieswouldgreatlyaddvaluetoexistingChinastrategiesandsparkfreshinterestfornewbusinessforIndiancompanies.Ibelievethatitwouldleadtoamultifacetedsustainableeconomicengagementbetweenthesetwofast-risingAsianpowers.Iwishtheparticipantsallsuccess.
ChandrajitBanerjee,DirectorGeneral,CII
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Introduction
ChinacannotberuledoutasanimportanteconomyforIndia;asamarket,asacompetitor,andasapartner.Thefactthatitiscurrentlythethirdlargesteconomyandstatedtobecometheworld'slargesteconomyby2025,furtherprovidesimpetustothefactthatIndianbusinessescannotoverlookChinaintheirbusinessplans.
Theyaretwoofthefastestgrowingeconomiesoftheworld.Theyarethetwomostpopulousnationsandalsotheoldestcivilizationsintheworld.ThetwocountriesstartedtheirindividualjourneysafterIndiagainedindependencein1947andthePeople’sRepublicofChinawasestablishedin1949.Atthesametime,theirdifferencesarequiteapparent–bothhavedifferentformsofgovernment,bothfollowdifferentmodelsofgrowth–Chinafollowsanexportoriented,manufacturingeconomywhereasIndiaisadomesticconsumption-ledserviceorientedeconomy.Thisis,perhaps,aresultoftheplanningideologiesthatthetwocountriesadoptedinthe1960swhenthedivergenceingrowthpatternsofthetwocountriesemerged.
Ifonelooksatthemacroeconomicfactors-theChineseGDPhasgrownat10%perannumforthelast3decadescomparedto6%forIndia.IntermsofaggregateGDPnumbersIndiastandsatthespotwhereChinastoodin2000andintermsofPerCapitaGDP,IndiacurrentlystandswhereChinastoodabout15yearsback.IndiahashadahigherfiscaldeficitandpublicdebtcomparedtoChina,whichhasresultedinlowersovereignratings.Asaresult,theIndianeconomyhasbeenunabletoincreaseitscapitalbaseatapaceinsyncwithChina.
However,IndiaandChinabothstandtogrowandbenefitwithgreatercommercialinteractionswithoneanother.Interestingly,whilemostinvestmentbankersandcompanieslookatIndiaandChinaascompetitorstothecapitalthattheycaninvest,therearemorecomplementaryfactorsbetweenIndiaandChinathanonecanimagine.IndiacouldlearnfromtheChineseespeciallyinthefieldsofurbandevelopment,powerprojects,androad,railandportinfrastructure.China,ontheotherhand,couldtakealeafoutoftheIndiansuccessstoryinthesectorsofinformationtechnologyandITenabledservices.TheChinesegovernmentisfocusedonincreasingtheirEnglishspeakingpopulation,afeatalreadyachievedbyIndia.Anothermajorfocusareaforcollaborationcouldbeinthespaceofservices.
China,likeIndia,hasaconcentrationofindustriesacrossdifferentregions.ThecitiesofBeijingandShanghaiareoftencitedasbeingverysimilartothecitiesofNewDelhiandMumbaiforbeingpolitical,culturalandfinancialcentres.Theyarereckonedasglobalcitiesowingtothehighlyskilledlabourforcefoundhereandthepredominantcosmopolitanstyleofliving.
AccordingtoanestimatebytheEconomistIntelligenceUnit(EIU),thefutureoutlookforChina’sGDPgrowthrateisestimatedtobe8.5%ayearintheperiod2011-15.
ThoughIndiaandChinaareslowlymovingtowardsgreatercollaboration,someofthechallengesthattheIndiancompaniesfacewhileinteractingwithChinesebusinessesareonaccountoflanguageandculture.Inanattempttobridgethisgap,Chinesecompanieshave
If one looks at the macro economic factors - the Chinese GDP has grown at 10% per annum for the last 3 decades compared to 6% for India. In terms of aggregate GDP numbers India stands at the spot where China stood in 2000 and in terms of Per Capita GDP, India currently stands where China stood about 15 years back
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startedtorecruitEnglishspeakingemployeesfortheirinternationaltransactions.
Cultureandhistoryhaveanoverwhelmingimpactthetraditionsfollowedinthatcountryandalsothebeliefsofanindividual,whichinturnhaveadirectbearingontheapproachtowardsabusinesstransaction.Risk-takingappetiteofbusinessmen,speedofdecision-makinginatransaction,conflictresolutionbetweenpartnersareallrelatedtothecultureofanycountry.ChineseculturetoohasaprofoundimpactonthewaybusinessisdoneinChina.Forexample,relationships(“Guanxi”inChinese)areanimportantelementinthesuccessforbusinessesinChinesesociety.Ithelpsnotonlyinbuildingfurtherrelationshipsbutalsoincementingbondsindifficulttimes.Relationshipswithbusinesspartners,suppliersandvendorsandgovernmentofficialsareimperative
inChina.DuediligenceisanotheraspectofutmostimportancewhileengagingwithChinainabusinesstransaction.Inalllikelihood,theChinesecounterpartswouldhavespentconsiderabletimeinstudyingtheIndianbusinessesandthecompanythattheyaregoingtodealwith,wellinadvance.
DecisionmakingintheChinesegovernmentisdecentralizedandisdispersedacrossvariousindustries.Thisimpliesthatacompanyneedstokeeptrackofpoliciesandregulationsatalllevels.Evenafterobtainingclearanceatonelevelthecompanycouldbenon-compliantatanotherlevel.Anotherimplicationofthedecentralizeddecisionmakingpolicyisthatitcanbeextremelybeneficialifthecompany'sstrategicagendaisalignedtothelocalgovernment'spriority.
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Trade statistics
India – China trade is more than US$ 60 billion a yearIntheyear2010,thetradebetweenthetwocountriesstoodatUS$61.74billion.InthefirstsixmonthsofthisyearthetradebetweenthetwonationshasalreadycrossedUS$35billion.ThetrendsclearlyindicatethatIndia-ChinatradecouldreachUS$100billionby2015,atargetsetbytheleadersofthetwocountries,duringthevisitofChinesePremier,WenJiabaotoIndiain2010.
Table 1: Trade between India and China
2008 2009 2010
India’sexportstoChina 20.34 13.7 20.86
China’sexportstoIndia 31.52 29.57 40.88
TotalIndia–ChinaTrade 51.86 43.28 61.74
TradeBalanceforyear -11.18 -15.87 -20.02
Source:IndianEmbassyinChina
Onanalysisofthetradestatistics,ChinaemergesasoneofthemostimportanttradingpartnersforIndia.IfthetradebetweenIndiaandHongKongisalsoadded,ChinaclearlyisthelargesttradingpartnerforIndia.(RefertoFigure1.1and1.2)However,whiletherehasbeenanincreaseinboththeimportsfromChinatoIndiaandtheexportstoChinafromIndia,inthelast5yearsorso,therateofIndia’simportsfarexceedstherateofexports.
Itis,however,importanttonotethateventhoughChinaisanimportanttradingpartnerforIndia,IndiaisonlythetenthlargesttradingpartnerforChina.ThemajortradingpartnersforChinaarestillEU,USA,andJapan.IndiaranksastheseventhlargestexportdestinationandninthlargestimportdestinationforChina(RefertoFigure2).
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Source:DirectorateGeneralofForeignTrade
Figure 1.1: Leading trade partners in India's import basket (US$ million)
Figure 1.2: Leading trade partners in India's export basket (US$ million)
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10,000
20,000
30,000
40,000
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11(Apr-Dec)
China U.A.E. Saudi Arabia USA Switzerland
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2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11(Apr-Dec)
U.A.E. USAChina Hong Kong Singapore
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2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11(Apr-Dec)
China U.A.E. Saudi Arabia USA Switzerland
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15,000
20,000
25,000
30,000
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11(Apr-Dec)
U.A.E. USAChina Hong Kong Singapore
Source:GeneralAdministrationofCustomsofthePRChina)
Figure 2: Leading trade partners for China (January 2010 - June 2011)
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EU USA Japan ASEAN Hong Kong Korea Taiwan Australia Brazil India
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Figures3.1and3.2drawattentiontothekeyitemsexportedfromIndiatoChinaandimportedtoIndiafromChina.Thecontrastintheexport/importbasketmayperhapsbesummarisedtobeingrawmaterialorientedfromIndiatoChina,whilefinished,value-addedgoodsdominatetheChineseexportstoIndia.Ores,slagandashconstitutedapproximately42%ofthetotalexports,byvalue,fromIndiatoChinainthefinancialyear2009-10andapproximately46%fortheperiodApriltoSeptember2010.Ontheotherhand,electricalmachineryaccountedfor29.68%ofthetotalimportstoIndiafromChina.
ChinaexportedUS$8.77billionworthofelectricalmachinerytoIndiaduringtheperiodJan-Dec.2009.Underelectricalmachinery,thechiefitemofimportwaselectricalapparatusforlinetelephony(HScode8517),whichatUS$4.29billionaccountedforalmost50%ofthetotalimports.Underthiscategory,cellularphonesaccountedforUS$1.44billion.OtherimportantitemsofimportunderthisHSCodeincludedinsulatedcablewire,electricalstoragebatteriesandtelevisionreceivers.
ChineseexportsofmachineryincreasedduringJan-Dec2009byalmost9%totouchUS$7.56billion.Thetopexportitemsunderthiscategoryaresteamgenerating
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Ores, Slag Cotton Copper andAticles
OrganicChemicals
PreciousStone,Jewelry
Plastic andArticles
Iron andSteel
Boiler,Machinery
andMechanicalAppliances
Salt, Limeand Cement
ElectricalMachinery
andEquipment
2008-2009 2009-2010
2008-2009 2009-2010
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SoundRecorders
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Articles ofIron and
Steel
Iron, Steel Plastic andArticles
Vehicles,Tramway
Rolling Stock
InorganicChemicals,
Compoundsof Metals
Optical,Apparatus
Source:DepartmentofCommerce,DGFT,GovernmentofIndia
Figure 3.2: Key exports from China to India (US$ million)
Figure 3.1: Key exports from India to China (US$ million)
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Ores, Slag Cotton Copper andAticles
OrganicChemicals
PreciousStone,Jewelry
Plastic andArticles
Iron andSteel
Boiler,Machinery
andMechanicalAppliances
Salt, Limeand Cement
ElectricalMachinery
andEquipment
2008-2009 2009-2010
2008-2009 2009-2010
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ElectricalMachinery,Equipment,
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Iron, Steel Plastic andArticles
Vehicles,Tramway
Rolling Stock
InorganicChemicals,
Compoundsof Metals
Optical,Apparatus
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boilersandothertypesofboilersthataccountedforUS$944million.Othermachineryinthiscategoryincludessteamturbines,officemachineparts,cranes,airconditioningmachinery,converters,ladles,ingotmoldsandcastingmachinesetc.
Inrecentyears,India’stradedeficitwithChinahasbeengrowing,touchingUS$20billionin2010.Inordertosustainthegrowthintrade,thisimbalanceneedstobecorrectedthroughincreasedaccesstoIndiangoodsintheChinesemarketanddiversifyingthetradebasket.TheIndiangovernmenthasbeenseekingimprovedmarketaccessintheauto-componentandengineeringsector,IT,pharmaceuticalsandagro-processingfromthe
Chinesegovernmentagainstthebackdropofarecordtradeimbalance
Bangkok Agreement between India and ChinaIndiaandChinahadaccordedMostFavoredNation(MFN)statustoeachotherwaybackin1984.Bothcountriesaresignatoriestothe“BangkokAgreement”underwhichtheyprovidetariffpreferencestoeachother.IndiaprovidestariffconcessionsoncertainimportedgoodsfromChina,thestandardratesandextentofconcessionsapplied(tocertainspecificproductsonly)totopfiveIndia’simportgoodsfromChina(refertoTable2).NotariffsareimposedinChinaontheseproductswhenexportedfromChina.
Table 2: Import tariffs in India for certain items
Products Standard tariff rate in India Extent of concession on specific products
ElectricalMachinery Free,7.5%,10% 5%-20%
Machinery,Boiler Free,5%,7.5%,10%,12.5% 5%-20%
OrganicChemicals 10%,12.5% 5%-15%
ProjectGoods,labchemicals 10% NA
ArticlesofIronandSteels 10% 29%
(Source:CentralBoardofExciseandCustoms,India)
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Foreign investment in China
ChinawelcomesforeigninvestmentanditisboundunderWTOrulestofurtheropenitsIndustriestoforeigninvestors.Chinaannouncedsignificantstructuralchangestoitsforeigndirectinvestmentregimein2004.Thedecisiononreformingtheinvestmentsystemtransformedasystemthatonlyallowedforeigninvestmentinspecific,government-designatedsectors.
However,itdoesnotsupersedetheoldsystem,thecenterpieceofwhichistheCatalogue for Guiding Foreign Investment in Industries.TheCatalogue,essentiallydividesChina’seconomy,forforeigninvestmentpurposes,intothreecategories:prohibited,restrictedandencouraged.Projectsinthesecategoriesaresubjecttodifferentexamination,approvalandregistrationrequirements.Projectscategorisedas“encouraged”facerelativelylessscrutinywhilethosecategorisedas“restricted”aresubjecttostringentrequirementsandexamination.
Governmentexaminationandapprovalforinvestmentprojectscancomefromlocal,municipal,provincialorstateauthorities,dependingonthesizeand/orindustryoftheprojects.CertainprojectsmayrequireapprovalbytheStateCouncil.
Prohibited foreign investments includeprojectsthat:areharmfultostatesecurityorthatimpairthepublicinterest;pollutetheenvironment,aredestructivetonaturalresourcesanddetrimentaltohumanhealth;occupyexcessivefarmlandandareunfavourabletotheprotectionanddevelopmentoflandresources.
Restricted foreign investments includeprojectsthatare:(1)technologicallybehind;(2)unfriendlytoresourcesandtheenvironment;(3)engagedintheexploitationofmineralsthatarespecificallyprotectedbytheState;or(4)classifiedasindustriesthatthegovernmentisopeningupinstages.
Encouraged foreign investments,whichmakeupabouttwo-thirdsoftheCatalogue,mainlyinclude:• Projectsrelatedtonewagriculturaltechnology,
constructionandtheoperationofenergysources,transportationandtheexploitationofrawmaterialsforcertainindustries;
• Projectsusingneworadvancedtechnology,includingthosethatcanimproveproductquality,saveenergyandrawmaterials,increaseeconomicefficiencyandalleviateshortagesinthedomesticmarket;
• Projectsthatmeetinternationalmarketdemandtoimproveoraddvaluetotheindustry;
• ProjectsthatinvolvetheintegrateduseofChina’sresourcesorrenewableresources,involvingnewtechnologyorequipmentforpreventingandcontrollingenvironmentalpollution;and
• ProjectsthatcandevelopthemanpowerandresourcesofcentralandwesternChina.ProjectsnotlistedintheCataloguearegenerallyclassifiedaspermitted.
Projectsintheencouragedcategoryareusuallyeligibleforpreferentialtreatment.Ingeneral,apartfrompossibletariffexemptionquotasforself-utilisedcapitalimportsforencouragedprojects,companiesengagedinencouragedprojectsmayapplyforcertaintaxincentives,suchasareducedtaxrateof15%forqualifiedhigh-newtechnologycompanies;a50%super-deductionforqualifiedR&Dexpenses;taxholidays
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forspecifiedinfrastructure,primaryindustry,resourcessavingorenvironmentalfriendlyprojects;andataxcreditforinvestmentinspecialisedequipment.
Choice of business entity
1. Principal forms of doing business ForeigninvestorsmayinvestinChinathroughlegalornon-legalentities.Legalentitiesthatcanbesetupbyforeigninvestorsgenerallyincludewhollyforeign-ownedenterprises(WFOEs),equityjointventures(EJVs),co-operativejointventures(CJVs)andjointstockcompanies.Non-legalentitiesincluderepresentativeoffices(ROs)andbranches,aswellascertainCJVs.Anothermorerecentlydevelopedinvestmentvehicleisthepartnership.
Aninvestor’sparticularcommercialconsiderations,anyapplicableregulatorylimitationsandhomecountrytaxconsiderationsallplayaroleindeterminingthemostappropriateentityinwhichtoconductbusiness.
Foreign investment enterprise (FIE) FIEsgenerallyrefertoChineseentitieswithatleast25%foreigninvestment.FIEsarepermittedtoconductbusinessactivitiesinaccordancewiththescopeoftheirbusinessplansasapprovedbythegovernment.FIEsaremainlyorganisedaslimitedliabilitycompanies,andtheinvestor’sownershipinaFIEisrepresentedbytheamountofregisteredcapitalitinjectsintotheentity.FIEsdonotissuesharesuntiltheyhavebeentransformedintojointstockcompanies.
ThemainformsofcorporateentityforFIEsinChinaaretheWFOE,theEJVandtheCJV.Ingeneral,FIEscancarryoutmanufacturing,processing,tradingand/orserviceactivitiesinaccordancewiththeapprovedbusinessscope.TherearecertainFIEsincorporatedpursuanttospecialregulationstobeengagedindesignatedbusinessactivities,suchasForeignInvested
CommercialEnterprises(FICE)inwholesale,retailortradeagencyservices;Chineseholdingcompanies;regionalheadquarters;operating/financeleasingcompanies,fundmanagementcompanies,etc.
Wholly foreign-owned enterprise (WFOE)AWFOEorganisedasalimitedliabilitycompanyisgenerallyadesirableinvestmentvehicleforforeigninvestorsprovidedtheinvestmentregulationsdonotrequiretheparticipationofaChinesepartner.ThelimitedliabilitycompanyoffersforeigninvestorssolecontrolofthebusinessoperationsandavoidslengthynegotiationswithaChinesepartner,asinthecaseofanEJVorCJV.
AccordingtotheCompanyLaw,theminimumcapitalrequirementtoestablishaWFOEisCNY30,000,althoughtheactualcapitalrequirementshouldbecommensuratewiththeproposedbusinessplanandsubstantiatedbyprojections(normally,fiveyears)inthefeasibilityreportcontainedinthecompanyformationapplication.Capitalmaybecontributedincashorin-kind.In-kindcapitalcontributionsaresubjecttovaluationinChina.Atleast30%oftheregisteredcapitalshouldbeincashandin-kindcapital(i.e.industrialproperty,machinery,technology)shouldnotexceed70%oftheregisteredcapitaloftheenterprise.Whencapitaliscontributedininstalments,thefirstinstalmentmustbenotlessthan15%oftheregisteredcapitalortheminimumcapitalrequirement,andmustbedeliveredwithinthreemonthsfromthedatethebusinesslicenceisissued.Thedeadlineforcompletingthecontributionisnormallytwoyearsfromthedatethebusinesslicenceisissued.ThecompanyisrequiredtoarrangeforcapitalverificationbyaCPAfirminChinaandapplyforanupdatedbusinesslicenseaftereachcapitalcontribution.
AWFOEmustestablishaboardofdirectorsoramanagingdirectorformanagementstructure.Forcorporategovernancepurposes,thecompanyis
FIEs generally refer to Chinese entities with at least 25% foreign investment. FIEs are permitted to conduct business activities in accordance with the scope of their business plans as approved by the government.
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requiredtohaveanindependentsupervisor(similartonon-executivedirectorinwesterncountries).
Adetailedmanagementstructuremustbesetoutinthearticlesofassociation(includingthedutiesandlimitsofauthorityofthelegalrepresentative,chiefaccountant,generalmanagerandsupervisor).Thearticlesofassociationmustspecifyproceduresforterminationandliquidationandforamendingthearticles.
AWFOEisrequiredtoappropriate10%ofitsannualafter-taxprofitsforitsstatutorygeneralreservefundaccountuntiltheaccountbalancereaches50%ofthecompany'sregisteredcapital.Hence,thedistributableprofitsoftheWFOEmayinitiallybelowerthananEJVorCJV,whoseboardmaydecidenottocontributetosuchareserve.
Equity joint venture (EJV)AnEJV,organisedasalimitedliabilitycompany,isaseparatelegalentityestablishedbyoneormoreforeigninvestorswithoneormoreChineseinvestors.OwnershipandtheshareofprofitsandlossesaredeterminedbasedontherespectivecontributionstotheregisteredcapitaloftheEJV.
Generally,theminimumlevelofforeignparticipationinanEJVis25%.Thereisnoupperlimitonforeignparticipationforgeneralprojects.ThecapitalcontributionrequirementsarealmostthesameasthoseforaWFOE.
Partnersmustpaytheircontributionwithinthetimetablefixedinthecontract.Failuretomaketimelycapitalcontributionsmayresultinthecancellationandcompulsorysurrenderorrevocationofthebusinesslicence.
ThegovernanceofanEJVisdifferentfromthatofcorporationsinwesterncountries.Investorsholdequityinterest,butnostock.Votingauthorityisvestedintheboardofdirectorsratherthantheshareholders.Thedirectorsareappointedbytheinvestorsand,ingeneral,reflecttheratioofthecapitalcontributionsofthepartners.
Contractual or Co-operative joint venture (CJV)ACJVdiffersfromanEJVintwofundamentalways:aCJVdoesnothavetobeanindependentlegalentity,andevenifaCJVisnotincorporatedasalimitedliability
companyinitsownershipright,itmayelecttobetaxedattheentitylevel.Inmostcases,aCJVelectstobetreatedasataxableentityratherthanaflow-through,primarilyforclarityintaxtreatment.ACJVthatisincorporatedasalimitedliabilitycompanyissubjecttotaxattheentitylevel.Theownershipandprofits/lossesarenotnecessarilysharedbasedonequity/capitalcontributions(asinthecaseofanEJV),butonthebasisofacontractualagreement.Thus,aCJVmayprovidemoreflexibilitywithrespecttoprofit-sharingandrisk-takingamongthepartners,subjecttoapprovalbytheauthorities.Forexample,theshareholder(s)maybeguaranteedacertainfixedannualreturnwithoutregardtotheactualperformanceoftheCJV.
CapitaliscontributedinaratioagreedbythepartiestotheCJVcontractandajointventurepartner.Normally,theChinesepartnermayprovidecooperationterms(i.e.provisionofservicesortherental-freeuseoffactorypremisesoftheChinesepartner)totheCJVinsteadofcontributingcapital,subjecttoapprovalbytheauthorities.
MultiplemanagementstructuresareapplicabletoaCJV,including:aboardofshareholders,aboardofdirectors,ajointmanagementcommitteeoramanagementbyproxy.“Hybrid”CJVstendtoadoptmanagementsystemsresemblingthoseoftheEJV;“true”CJVstendtotakethemoreflexibleformofajointmanagementoffice.Underthelatterstructure,nogeneralmanagerexistsassuch,althoughthepartiesusuallyappointalegalrepresentative.Generally,“true”CJVs,whichdonothaveindependentlegalstatusinChina,allowtheChinesepartnertoenterintosuchcontracts,underagrantofpowerofattorneybytheforeignparty.
Foreign investment Joint Stock Company (JSC)ChinaisopeningupitsstockmarkettoFIEsandforeigninvestors.FIEsareincreasinglylikelytobelistedonChinesestockmarkets(bothAandBshares)andoverseasstockmarkets.Onlyforeigninvestmentjointstockcompanies(JSCs)qualifyforpubliclisting;FIEsplanningtolistonaChinesestockmarketmustbeconvertedintoaJSC,whichgenerallymeansthattheregisteredcapitalmustbeconvertedintostockofthecompany.
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Allcapitalmustbedividedintoequalsharesrepresentedbysharecertificates.Theymaybeordinaryorpreferredshares(thelattergenerallyhavenovotingrights).Companiesmustreceiveapprovalbeforetheycanissue'A'shares(denominatedinrenminbiandavailabletoChinesecitizensandtoqualifiedforeigninstitutionalinvestors)and'B'shares(denominatedinU.S.Dollars).'A'sharesand'B'sharesaretradableonstockexchanges.'A'Sharesarefurtherdividedintosharesownedbyindividuals,legalpersonsandthestate.UnlistedsharesownedbyforeigninvestorsofqualifiedforeigninvestmentJSCcanbetradedonthe'B'sharemarketifapprovedbytheMinistryofCommerce.
Partnership Underthe2007revisedpartnershiplaw,apartnershipisavailabletodomesticlegalentityinvestors,includingChinesenationals.General,limitedandspecialgeneralpartnershipsarepossible.Althoughthelawdoesnotprohibittheestablishmentofpartnershipbyforeigninvestors,thegovernmenthasnotannouncedthedetailedrequirementsandproceduresapplicabletoforeigners.Thereisnolegalminimumormaximumforcapitalcontributedbythepartnerstoapartnershipenterprise.Capitalmaybecontributedincash,in-kindorintheformoflanduserights,intellectualpropertyrightsorservices.Contributionsotherthancashmustbeappraisedataspecificvalue.Partnersmayincreasetheircapitalcontributionstothepartnershipenterprise,asstipulatedinthepartnershipagreementorasdecidedbyallofthepartners.Theseadditionalcontributionsshouldbeusedtoexpandthescaleofbusinessortomakeuplosses.
Therearenospecificlimitsonthenumberofpartnersinageneralpartnership,butalimitedpartnershipisrestrictedto50partners.Eachpartnerhasequalrightstoconducttheroutineaffairsofthepartnership.Theadmissionofnewpartnersissubjecttotheapprovalofthepartnersandtheconclusionofawrittenpartnershipagreement.Newlyjoinedpartnershavethesamerightsandresponsibilitiesastheoriginalpartners.
2. Setting up a company Forforeigners,WFOEsofferasimplerapprovalprocedureandcompletemanagementcontrol.ForeigncompaniesalsooftenusetheWFOEformtoprotecttechnology.WFOEstatuspermitsgreateruseofrenminbitopayforbusinessexpensesandlocalsales.ToestablishaJV,itiscriticaltoselectanappropriateChinesepartner.Thefollowingaresomefactorsthat
shouldbeconsidered:apotentialpartner’saccesstodomesticfinancing,theabilitytoprovideadomesticmarketforproducts,theskillleveloflabourandtheintegrityandstrengthofmanagement.
Aholdingcompanycanoffercertaineconomiesofscaleinoperationsandmanagementthroughitscollectionofinvestmentsunderonecorporateidentity.Theseincludecentralisedpurchasingofproductionmaterials,collectivetrainingofsubsidiaryprojectpersonnel,coordinationofprojectmanagementandtheestablishmentofasingleentitytomarketallsubsidiaryproducts.
Bycontrast,JSCsofferdifferentadvantages.AnFIEoptingforthiscorporateformcaninvitetheparticipationofshareholdersinthecompany,bothtoexpandcapitalandtosecurelinkswithotherlegalentitiesinChina.AJSCalsooffersgreaterliquidityintransferringinterests.BothEJVsandCJVsnormallyrequirethepriorconsentoftheotherpartners,aswellastheoriginalexaminationandapprovalauthoritytotransferinterests.Companieslimitedbysharesneednopriorconsentfromotherstodisposeofinterests,althoughthepromotersmustwaitoneyearfromthecompany’sfirstregistrationbeforeassigningtheirshares.
3. Establishing business presence without legal entity Branches: AlthoughtheCompanyLawprovidesforaforeigncompanytoregisterabranchinChina,underprevailingpractice,onlytheregistrationapplicationsofoverseascompaniesinthefinancialservicesandoilexplorationindustriesarehandled.AbranchremainspartofitsheadofficeandthusisnotentitledtotherightsandprotectionaccordedtoChineselegalentities.AbranchmustappointaChineselegalrepresentativewhoisliableundercivillawforitsbusinessactivities.Abranchmaybeclosedonlyafteraformalliquidation.
Representative offices: Foreigncompanies,particularlythoseinthetradeagencyandserviceindustries,oftenchoosearepresentativeoffice(RO)tocarryonliaisonandmarketingactivitiesinChina.AlthoughROsallowforeigninvestorstoentertheChinesemarketwithlittleinitialinvestment,theyareprohibitedfromdirectprofit-makingactivities.
Ingeneral,anROofaforeigncompanymayonlyengageinnon-directbusinessactivitiesinChina,including:actingasaliaisonwithclientsandthehead
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office;introducingtheproductsoftheheadoffice;conductingmarketresearch;andcollectinginformation.Thus,anROofaforeigncompanymaynotsignandconcludecontractswithChinesecustomersdirectlyandisprohibitedfromengaginginany“directbusinessoperations”(withcertainexceptions,suchastheROofalawfirm).
Taxation in ChinaThetaxrateforincomeearnedbycompaniesinChinais25%.IfonecomparesthetaxstructureinChinawithIndia,SingaporeandHongKong,itisobviousthattheeffectivetaxrateishigherinChina.
Withholding tax on DividendsA10%withholdingtaxondividendspaidtononresidentcompanieswasintroducedfrom2008.Previously,dividendspaidbyaChinesecompanywithat
least25%foreignparticipationwereexempt.Itshouldbenoted,however,thatdividendspaidoutofpre-2008earningscontinuetobeexemptfromwithholdingtax.
Withholding tax on Interest Interestisgenerallysubjecttoa10%withholdingtax.InterestfromcertainloansmadetotheChinesegovernmentorstatebanksisexempt.
Withholding tax on Royalties and fees Thewithholdingtaxrateonroyaltiesandfeesarisingfromthelicensingoftrademarks,copyrights,know-howandtechnicalservicefeesisgenerally10%.Royaltiesaregenerallysubjecttoa5%businesstaxexceptforpaymentsmadeinconnectionwiththeuseoftechnologywhereanexemptionmaybegranted.
Corporate Income Personal Income Employer Social Security Employee Social Security VAT
16.5 17
2532.5
1520
45
31
5
14.5
49
125
20 23
12
07
1712.5
0
10
20
30
40
50
60
Hong Kong Singapore China India
Figure 4: Comparison of Tax rates
Note: The India tax rates are as per the highest tax bracket rounded off to the nearest 0.5. Tax slabs vary as per income. VAT being a state subject varies across states. VAT for Delhi considered for comparison purposes.
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Drivers for inbound and outbound investmentAtulDhawan,Partner,DeloitteHaskins&SellskicksofftheconversationbynotingthatwhilebothIndianandChinesebusinessesarelookingtoenhancetheirpresenceintheothercountry,albeitfordifferentreasons,anysignificantlevelofinvestmentsfromeithercountryisyettobewitnessed.
Thatsaid,despiteconcerns,investmentsaretricklinginfrombothsides.Hepointsoutthatthereispotentialintherealestateandconstructionsector.AlargenumberofopportunitiesforChineserealestatedevelopersandConstructionbusinessestoexistinIndia,especiallysincemodernconstructiontechniqueshavenotbeenuniversallyadoptedhere.Forinstance,ChinesecontractorsareabletoconstructconcreteslabbuildingfoundationsmuchquickerthantheirIndiancounterparts.
Eventhoughthereisapotentialininfrastructuresector,especiallywithGovernmentofIndiapromotingforeigndirectinvestments(FDI)ininfrastructuredevelopmentinroadconstruction,upgradationofportsandairportsamongstothers,itwouldbeunlikelythatChineseinvestorswouldbeallowedtotakecontrollingstakesinsuchnationallysensitiveinstallations.
Headvisesinvestorsandsellersalikethatbothneedtobetransparentwiththeirapproach,andthisappliestoboththeseniormanagementoneithersideaswellasanyregulatoryauthoritieswithaninterestinthetie-up.
HewarnsthatbothChineseandIndianmanagementculturesaredifferent.Thismightaddtotheuncertaintywhenthetwopartiesareinteractingforinvestmentopportunities.
RecognisingtheopportunityprovidedbytheexportregulationsfromChina,andthelowercostsofmanufacturing,severalmediumsizedIndiancompanieshavesetupunitsinChina,tore-exportconsumptionorientedgoodstoIndia,andtherestoftheworld.IndiancompaniesarealreadyimportinglargeamountsofChinese–mademobilephonesandotherelectronicitemsbutcurrentlyitisonlyatradingactivity;investmentsoracquisitionsareyettobemade.Chinatodayisoneofthelargestconsumersandproducersofsteel,addedtothelowcostofproductioninChinahavepromptedinvestmentsinengineeringsector.IndianengineeringcompaniesareinvestinginChinatogetaccesstothesebenefitsandcatertotheIndianmarketplace.
Hecontinues,sayingthatChinesemanufacturersinthetechnologyandtelecommunicationssectorarealreadycostefficientandmaynotlookatIndiaforcostarbitrageopportunities.ForexampleLenovo,aChinesecomputerhardwaremanufactureralreadysellslaptopsandotherequipmentinIndiabutdoesnothaveamanufacturingbasehere.However,heisoptimisticthatifChinesemanufacturingandIndia’sresearchanddesigncapabilitiescouldbebroughttogether,potentialbusinesssynergiescouldbeformidable.
IndianITcompaniesontheotherhandaremajorlyinvestingingreenfieldopportunitiesinChina,tocatertoafastgrowingChineseITmarketandalsotoservicetheirglobalclients.
Atul Dhawan, Partner, Deloitte Haskins & Sells, gives his personal viewpoint on recent investments from China in Indian assets and Indian investments in China
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Key industries
Industry Sectors of importance Overthelastfewyears,therehasbeenanincreaseinthenumberofcompaniesfromIndiaexploringopportunitiesinChinaandvice-versa.Automobiles,InformationTechnology,Mining,Textilesaresomeoftheindustriesofmutualinteresttothetwocountries.
ManyIndiancompanieshavesetupoperationseitherintheformofjointventuresorwhollyownedsubsidiariesinChina.AxisBank,UnionBankofIndia,ICICIBank,PunjabNationalBankhaverepresentativeofficesinChinawhilebankslikeCanaraBank,BankofBaroda,StateBankofIndiaoperatebranchofficesthere.Similarly,companieslikeBharatHeavyElectricalsLimited(BHEL)andAdanihaveoverseasoperationsinChina;Larsen&ToubrohasmanufacturingfacilitieswhileEngineersIndiaLimited(EIL)operatesthrougharepresentativeoffice.PharmaceuticalcompanieslikeLupin,PiramalHealthcareandSunPharmaceuticalsandchemicalscompanieslikeRelianceIndustriesandJubliantOrganosyshavealsoforayedintoChina.ChinesecompanieshavealsoinvestedinIndia.ZTE
operatesinIndiathroughawhollyownedsubsidiary.HaierhasbeenaggressiveinIndiaandhasbecomeapopularnameforIndianconsumersintheappliancesvertical.SanyGroupofChinahassetupaplantandR&DcentreinPune(Chakan)withaninvestmentofUS$70million.ConstructionequipmentmanufacturerGuangxiLiugongMachineryCo.LtdhasestablishedawhollyownedsubsidiaryinIndia.SomeotherknownChinesecompaniesinIndiaareHuawei,Lenovo,ChinaStateConstructionandEngineeringCorporation,YAPPAutomotivePartsCoLtd.andZhejiangYankonGroupCoLtd.
ThisdocumentlooksatsomeofthekeysectorsandanalysesthepotentialofcollaborationandopportunitiesforIndiancompanies,namely:• Automobilesandautocomponentssector• InformationTechnologyandITenabledServices
sector• Realestate,constructionandinfrastructuresector• Tourismsector
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Automobiles and auto components sector Theautomotiveindustryinbothcountrieshasseenaspurtofgrowthintherecentfewyears.Ananalysisoftheautomobileproductioninboththepassengervehiclessegmentandthecommercialvehiclessegmentwascarriedoutfrom2004onwards.ThetrendsindicatethattheIndianmarketisundoubtedlygrowing,withproductiondoubling(Refertotable3).
ThegrowthstoryremainssimilarinChinawithanincreaseofmorethan3.5timesoverthesameperiod(Refertotable4).
Thegrowthintheindustryindicatespotentialandopportunitiesforcompaniesinboththesecountries.IndiancompaniescouldlookatinvestmentsinChinatogainfromthegrowthinChinesedomesticmarketandtheChinesecompaniesinthisspacecouldlookatinvestmentsinIndiatocatertothegrowingIndian
market.Suchcross-investmentswouldcertainlyincreasecompetitionintheindustry,resultinginintroductionofproductsdrivenbyconsumerdemand.
ThisindustryintherecentpasthasseensomesignificantcollaborationbetweenIndiaandChina.Forexample,MahindraandMahindraLimitedenteredintoajointventurewithJianglingMotorCoGroupin2005tomanufacturetractorsinChina.ThisisperhapsthefirstventurebetweentheautoOEMmanufacturersofthetwocountries.Subsequently,SAICacquired50%stakeinGeneralMotorsinIndia.
BharatForgeLimitedisanotherIndiancompanywhichsignedaJointVenture(JV)contractwithFAWCorporation,Chinaforitsforgingbusiness.FAWisthelargestautomotivegroupinChina,withaleadingpositioninbothpassengercarandcommercialvehiclesectors.
Table 3: Vehicle production in India
Year Passenger Vehicles Commercial Vehicles Total
2004-05 1,209 353 1,562
2005-06 1,309 391 1,700
2006-07 1,545 519 2,064
2007-08 1,777 549 2,326
2008-09 1,838 416 2,254
2009-10 2,357 567 2,924
2010-11 2,987 752 3,739
Figuresin‘000vehicles,Source:SocietyofIndianAutomobileManufacturers(SIAM)
Table 4: Vehicle production in China
Passenger Vehicles Commercial vehicles Total
2004 2,480 2,754 5,234
2005 3,078 2,629 5,707
2006 5,233 1,955 7,188
2007 6,381 2,501 8,882
2008 6,737 2,561 9,298
2009 10,383 3,407 13,790
2010(P) 13,897 4,367 18,264
Figuresin‘000vehicles,Source:OICA-OrganisationInternationaledesConstructeursd’Automobiles
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SundramFastenersalsosetupawhollyownedsubsidiaryinChinain2004withaninitialinvestmentofUS$5millioninZhejiangprovinceofChina.TheunitislocatedinHaiyanEconomicDevelopmentZone,about100kmawayfromShanghai.TheunitmanufacturesandsellshightensilefastenerstotheChineseautomobileindustry.The6000metrictonnefactorywasbuiltin14monthstoopenonschedule.
Abovestatedexamplesarenotone-offtransactions.Increasinglycompaniesintheautomotiveindustry,bothOEMsandcomponentmanufacturersfrombothcountriesarelookingattheothermarketforexpansionandcollaboration.
VehiclesalesinbothIndiaandChinaareincreasingatapacefasterthananywhereintheworld.Totakeadvantageoftheexpandingpopulationinthesemarkets,OEMswillcontinuetoshiftmoreoftheirproductiontobeclosertotheirbiggestsourceofnewcustomers.Addedtothis,thecostoflabourincomparisontodevelopedmarketsismuchlowerinIndiaandChina.Thismakesthemappropriateformanufacturingforglobalautomotivemarkets.
Future outlook of the automotive market AccordingtoaDeloittepublicationtitled“Anewera,Acceleratingtowards2020–Anautomotiveindustrytransformed”anewbreedofplayerswillemerge,aswellasanewglobalbalance–withmorecompetitorsheadquarteredinemergingmanufacturinghubs,particularlyinIndiaandChina.Postintegrationandconsolidationintheglobalautomotivemarket,thelandscapewillbedominatedbyglobalOEMsandsuppliersbasedinsixmajormarkets–WesternEurope,Japan,theUnitedStates,SouthKorea,ChinaandIndia.
Auto-componentmanufacturersinbothcountriescanleveragegrowthintheirrespectivedomesticmarketsandsimultaneouslycollaboratewiththeircounterpartstogainfromthegrowthstory.
Traditionally,Indiancomponentmanufacturershavebeenmastersofthehigh-qualityprecisioncomponentsandtheChineseplayershadmasteredtheartofmassproduction.Thus,thissectorwoulddemonstratesignificantgrowthifthetwocountriescouldachieveextensivecollaboration.Acompanycouldlookat
utilizingthecomponentdesignexpertiseofIndianengineersandlowcostmassproductionexpertiseofChinatocatertotheglobalOEMs.
Theinfluxofelectricvehicleswouldalsoaddtotheevergrowingopportunitiesforthecomponentmanufacturersinboththesecountries.Currentlysincethenumberofelectricvehiclessolddoesnotjustifyproductionfacilitiesinboththecountries,itwouldprobablybemoreeconomicalforthecomponentmanufacturerstocollaborateorbasetheirproductionbaseinonecountryandservetheothermarket.ThisbecomesevenmoreimportantsincemostofthecriticalcomponentsinanelectricvehiclearemadeupofrareearthmetalsandChinaproducesapproximately97%oftheglobalproductionoftheserareearthmetals.
Information Technology and IT enabled Services sectorInfosysTechnologies,HCLTechnologies,ZansarTechnologies,BirlaSoft,andKPITCumminshavemadeadditionalinvestmentsinChinaasrecentlyasbetweenJanuary2011andMay2011.OtherIndianITcompanieslikeTataConsultancyServices(TCS),TechMahindra,SatyamComputers(nowMahindraSatyam),NIIT,3iInfotech,NucleusSoftware,Wipro,MindTreeConsultingandGenpactalreadyhavetheiroperationsinChina.
TraditionallyIndianITcompaniessetupinChinaasnearshorecentrestoservetheirJapaneseclientsandglobalmultinationalsbasedinChina.TheSouthKoreanandTaiwaneseclientswereservicedfromthesecentersastheoperationsofIndianITcompaniesgrew.
Increasingly,IndiancompaniesarelookingatChinesecentersasanintegralpartoftheirglobaldeliverymodeltonotonlyserveAmericanandEuropeanmarketswhichweretraditionallyservedbyIndiabutalsotoservelocalITneedsinChinaandinone-offcasestoserveIndia.ThedomesticChineseITservicesmarketisestimatedtobeUS$20billion,whichisgrowingat50-60percentyearonyear.ChinesesoftwarecompaniesthatarerelativelysmallerinsizewhencomparedtoIndiancounterpartsarequitedominantinthelocalmarket.
AccordingtotheMinistryofEducation,China,881,509electronicsandinformationengineeringstudentsgraduatedin2010.IndianITcompaniescould
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lookatsomeofthesegraduatestofueltheirtalentrequirements.However,thedefinitionofengineeringinChinavariesfromprovincetoprovinceandinsomeprovincestechniciansarealsotermedasengineers.TheIndianITcompanieshavetobemindfulofthiswhileinitiatingtheirrecruitmentandselectionprocess.
InfosysTechnologies’Chinasubsidiarywhichwassetupin2004,nowdrivesone-thirdofitsrevenuefromthelocalChinesemarket.InfosysChinaplanstotripleitscurrentstaffto10,000overthenext3years.Initslargest-everinvestmentoutsideIndia,InfosysTechnologieshasstatedthatitwouldinvest$125-150millioninsettingupitsowncampusinShanghai,China.ThisisforthefirsttimethatInfosyshasboughtlandtobuilditsowncampusoutsideIndia.Mostotherglobalcentersofthecompanyoperateoutofrentedorleasedproperties.TheShanghaicampuswillbespreadover15acresanddevelopedoveraperiodofthreeyears.LocatedatZizhuScienceandTechnologyParkinShanghai,thecampuswillhaveasittingcapacityof8,000employeeswithfacilitiesforsoftwaredevelopment,labs,datacenters,trainingfacilitiesandfoodcourts.Besides,thecampuswillhavea1,500-seaterauditorium,agymandrecreationalcenters.Infosyscurrentlyemploysover3,300peopleinChina.IthasalreadyinvestedUS$23millionincapital.Thecurrentinfrastructurecanaccommodate4,200peopleinChina.InfosysChinahadrevenuesofoverUS$78millioninfiscalyear2011.
TCSontheotherhandsetuptheirChinaoperationsin2002therebybecomingthefirstIndianITcompany
tosetupoperationsinChina.TCScurrentlyemploys1,200employees(January2011)in5deliverycentersandplanstorampupthesenumbersto5,000inthenextthreeyears.TCSofferscorebankingsystemtofourmajorChinesebanksincludingBankofChinaandHuaXiaBank.
GenpactcelebratedtheirtenyearsofoperationsinChinain2010.Genpactreducedtheircostofoperationsbylocatingtheircentersinsub-urbanareasliketheydidinIndia,whentheystartedtheiroperations.TheChineseoperationscatertotheirclientsbasedinJapanandAsiaPacificregion.Currently,Genpactemploys3,000employeesinitsChinacenters.
Real Estate, Construction & Infrastructure SectorWiththecontinuingrecoveryandgrowthoftheChineseeconomy,theimpactoftheWorldExpo2010Shanghai,Guangzhou2010AsianGames,andthecommissioningofthehigh-speedrailnetworks,theChinarealestatemarketcontinuedtoexpandin2010.However,propertypriceincreaseshavepromptedthegovernmenttoimplementvariousmeasurestocooldownthemarketduringtheyear.Thepredictions,therefore,arethatthesectorwillhavealowergrowthininvestmentfromits2010rate.
Thehigh-endofficeleasingmarketinnorthernandsouthernChinaexperiencedrentalincreasesandhighoccupancyrates,whichweremainlydrivenbygrowingdemand.IneasternChina,officerentalsinShanghai,NanjingandNingboshowedmoderateincreaseswhileadeclineinofficerentalswasreportedinHangzhouinthe
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thirdquarter.Thehigh-endretailleasingmarketinthemajorcitiesofChinabegantopickupin2010duetoareturnofmarketdemand.
Thegovernment’stighteningmeasureshavehadthemostsignificantimpactontheresidentialsector.Residentialpropertysalesreachedarecordhighinearly2010intermsofbothtransactionvolumeandsellingprice.Tocooldownthepropertymarketanddiscouragespeculativeinvestment,aseriesofcoolingmeasureswereintroducedfromApril2010onwards.
Investmentactivitiesintherealestatesectorremainedrobustin2010withdealsdominatedbydomesticinvestors.Asthefirst-tiercitiessuchasBeijingandShanghaiwereexperiencinglimitedavailabilityandhighcostofurbansites,thehuntforhigheryieldscontinuestopushinvestorstoevermoredistantfrontiers.Asaresult,apowerfulsecond–tiermarkethasdeveloped,withcitieslikeDalian,Tianjin,Chengdu,SuzhouandHanzhouleadingthistrend.Wuhan,QingdaoandChangshaarealsonextinlinetogetaddedtothistier.Acrossallsecondandthird-tiercities,themostpromisingareasappeartoberetailandresidentialdevelopments,followedbyGrade-Aofficespace,andbuildingservingtertiaryindustriessuchashotelsandlogistichubs.ThesecitieshavelessstringentlawsandloweracquisitioncoststhanBeijingorShanghaiforexample,inrelationtoinvestmentandownership.Volatilityalsotendstobelower.
TheIndiangovernmenthasalsoextendedaninvitationtoChinesecompaniestoinvestininfrastructureprojectslikededicatedfreightcorridors,subwaylinesandSEZsbeingplannedunderapublic-privatepartnershipmodel.AccordingtoanestimateaboutatrilliondollarsofinvestmentisexpectedintheIndianinfrastructuresectoroverthenextfive–sixyearswhichcreatesopportunitiesforChinesecompaniestoinvestinIndia.
NineChinesecompanies,injointventureswithIndiancontractors,arealreadyimplementingsixhighwayprojectsworthUS$556millioninIndia.ThreehighwayprojectsworthUS$284millionhavebeencompleted.ItisexpectedthattheChineseinvestmentinthisspacewouldincreasethreetimesoverthenextfewyears.
LongjianRoadandBridgeCompany,wontheUS$78millioninternationaltendertoconstructthe80kilometreWorldBank-fundedTheog-Kotkhai-Hatkoti
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roadprojectinShimladistrict.TheChinesefirmwasundermuchpressurebecauseofthedelayincompletingtheproject.Thedelaywasprobablyduetovisaissuesfortheworkers.ThenewdeadlineforcompletionoftheprojectisnowApril2012.
ConstructionfirmRamkyInfrastructurewithitsjointventurepartnerJiangsuProvincialTransportationEngineeringGroup,aChinesefirm,hadwonaUS$247millionNHAIcontractforfourlaningofSrinagar-Banihalnationalhighway1AinJammuandKashmir.
IndiahasbecomethebiggestdestinationofChinesecompaniestocontractprojectsoutsideChina.AccordingtoIndianEmbassyinBeijing,thecumulativevalueofcontractualChineseinvestment(projects)tillJune2009wasUS$29.6billion.TheoverallturnoverrealizedfromtheseprojectstillJune2009wasaboutUS$11billion.ChinesecompanieshavebaggedseveralcontractstobuildsteelandpowerplantsinIndia.SomeoftheChinesesteelmakershavealsosetupJVsinIndiantoproducesteel.Tourism sector TourismhasreceivedsignificantimpetusintherecentdecadesbothinChinaandinIndia,whatwiththenewfascinationfortheemergingmarketsfromtherestoftheworld.Thishaslargelybeenduetoincreasedbusinesstravel.Oftenpittedasrivalsinmostareas,theelephantandthedragon,however,sharehistoricconnectionsthatpre-datetheChristianera.Whiletherearecommonthreadsofculturebetweenthetwo,thetourismproducthoweverisaschalkandcheese.
Inbound tourismAt55.7millionvisitors,Chinatodayisratedasthethirdmostpopulartouristdestinationintheworld(aftertheUnitedStatesandFrance),accordingtothe
WorldTourismOrganization(UNWTO).Thisnumberrepresenteda9.4%increaseover2009.TheonlyotherAsiancountryinthetop10listwasMalaysia,with24.6millionvisitors.
India,ontheotherhand,wasat41onthelist,andreceivedlessthan0.5%oftotalworldtourismat5.6millionvisitorsin2010.Thispotentiallyrepresentstheopportunityforgrowthinthebusinessoftourismforthecountry.ThecuriousfactaboutIndia,though,isthatitisranked16thamongstcountries’receiptofthetouristdollar,atUS$14.2bn–certainlynotthebackpacker’sparadiseasmadeouttobe.
Multinationalcompaniesincreasetheirpresenceinthosemarketsthattheircustomersgoto–thisiscertainlythecaseforthegrowthofthehotelbusinessesinbothIndiaandChina.Thecurrentpoliciesinbothcountriesalsofavorandfacilitatesuchinvestmentintravelandtourismindustry.TherelativeeaseofentryinChina(atleastforthehospitalitycompanies)hashelpedincreatinginfrastructuretomeettheinbounddemandinthatcountry.Indiaisstilltocatchup–thisistheopportunitythatiscurrentlyseeingmuchactivityandfocus.
Outbound tourismMoreChinesepeoplehavetravelledabroadincomparisontheforeignfoot-fallthattheircountryhasreceived.ThenumberofoutboundChinesetravellersrose20%over2009reaching57.39millionlastyear.TheChinesetouristsrankedfourth-worldwidelastyear.AccordingtotheUnitedNationsWorldTourismOrganization,Chinawillbetheworld'sfourth-largestsourceofoutboundtouristsby2020,with100millionoverseasvisits.OfficialpolicyinChinahasalsopromotedsuchoverseastravel,andpreferrednationstatusfordestinationshaveresultedinlargenumbersofvisitorstothatcountry(e.g.,Australiainthe1990-2005period)
The Indian government has also extended an invitation to Chinese companies to invest in infrastructure projects like dedicated freight corridors, subway lines and SEZs being planned under a public-private partnership model.
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AsisthecasewiththeChinese,moreIndianstravelledabroadthanthosethatcametoIndia.However,atapproximately8millionin2010,thesenumbersarefarlessthantheChinese.UNWTOforecaststhattheoutboundmarketsforbothChinaandIndiawillseeexponentialgrowthinthedecadeahead.
Outboundtourismistrulythereasonfortheinterestoftheinternationaltourismmajors,inthatawarenessforbrandsneedtobecreatedatthesource,andwithtourismbeinganexperientialproduct,thereisnobetterwaythantobuildinthesourcemarkets.Thefactthatthegrowingeconomyinthesetwocountriesonlymakesitmoreattractivefortheinternationalmajorstosetshop!Theincreasingpresenceofthenationaltourismboardsofmosttourism-dependentcountriesinbothChinaandIndiaatteststothis.
Inter-country reviewBoth,ChinaandIndiadonotreallyseemtohaveencouragedtravelbetweenthemselves,whichisapparentfromtherelativelysmallnumbersofChinesetouriststoIndiaandvice-versa.Whilepoliticaldistancemayhavebeenonereason,otherreasonsincludetheChinesespeakingguidesinIndia,andIndianfoodoptionsinChina.
ChinesearrivalsintoIndiaarecurrentlyataround100,000(2010)upfromlessthan20,000atthebeginningofthedecade–thisshowstheincreasinginterestinthecountry.Attheselevels,Chinaisthe12thlargestmarketforinboundtourisminIndia
IndianarrivalsintoChina,ontheotherhandwereestimatedat~500,000(2009)upfrom120,000in2000.ThisexcludesvisitorstoHongKong,whichwereestimatedatanother375,000in2009.IndianarrivalsintoChinaareminisculeatthemoment.
Tourismtransactions(investmentsbyoneintheother)havebeennegligible,andthisperhapsmirrorsthedomesticfixationofthepartiesinvolved–withlargemarketsattheirdoorstep,therehasbeenlittlereasontoinvestineachother.
The opportunitiesBothIndianandChinesevisitorstotheothercountryareprimarilytravelingonbusiness(withupto50%
doingso).Around40%ofChinesevisitingIndiadosoforleisure,whilethecorrespondingnumberforIndiansvisitingChinaisestimatedmuchlower(~30%).Theimmediateopportunitythereforeistargetingleisuretravelerstovisiteachother
Theburgeoninggrowthintravelbetweenthecountriesoffersalargerpotentialforcivilaviationlinkages–currently,eventhebilateralarenotusedtotheircapacity.Entryandpermissiontoentryforeachother’sairlinesisasecondopportunity.
RecognitionofIndiaasapreferrednationbyChinawouldalsosubstantiallyincreasetransactionsbetweenthetwocountries
Increasedinvestmentbyeachcountryintheotherwouldalsoresultingreaterunderstandingoftheconsumermarketsinthecountries–inturn,resultinginbettermatchedproductsinthecountryoforigin–e.g.,vegetarianfoodinChinaandincreasedChinesespeakingpersonnelinIndia(bothoftenquotedasadeterrenttotravel).Suchreciprocalinvestmentwouldalsohelpincreatingasenseofcompetitivenesswhencompaniesstartinvestmentsinthirdcountries.
Technology/experiencesharing,especiallyintheareasofdevelopmentofremoteareasandnewdestinationsbetweenbothcountriesisagainanopportunitythatwouldhelpinfast-trackingeachother’s’investmentplans.
At 55.7 million visitors, China today is rated as the third most popular tourist destination in the world (after the United States and France), according to the World Tourism Organization.
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Case studies
Case Study 1: Mahindra and Mahindra in China Mahindra(China)TractorCo.wasestablishedin2005asajointventurewithJianglingMotorCoGroup.TheentryintotheChinesemarketwasinlinewithMahindraandMahindra’sstrategytobecometheworld’snumberonetractormanufacturer.TheoperationsinChinaserveasacenterfordevelopingmoremodelsandexpandingtheproductrangeforChinaandotheroverseasmarkets.
MahindraisoneofthefastestgrowingplayersintheChinesemarket.FivehundredMahindraemployeesareinstrumentalinmanufacturing18to55HPmodelsundertheFengShoubrandand60HPundertheMahindrabrand.
Thetractorindustry(domesticandexport)inChinahasgrownfromabout56,000tractorsincalendaryear2003to2,22,000tractorsin2008,aCAGRof32percent.InadditiontoMahindra(China)TractorCo.,Mahindrain2009setupanothertractorjointventurewithYuedaGroupofChina.TheJVceremoniouslyrolledoutits125HPtractorunderthebrandnameJinmaataceremonyattheJV’snew38,000tractorcapacityplantatYancheng,China.TheYuedaGrouphasaturnoverofUS$7.3billionandhasapresenceinvarioussectorsoftheChineseeconomyincludingautomobilesandtractors,coalandmining,infrastructureandrealestate,textilesandgarments,hotelsandsupermarkets.Overthelast29years,YuedahasestablishedpartnershipsandjointventureswithKiaMotorsfromKorea,FrenchsupermarketmajorCarrefour,TriumphfromGermany,andFuji,fromJapan.Thegroupemploysmorethan30,000people.
ThenewagriculturepolicyintroducedbytheChinesegovernmentin2004hasplayedamajorroleinthisgrowthwithanumberofpositivemeasuresincludingabolitionoftaxonagriculture.TheintroductionofsubsidyfortractorpurchasetosupportfarmershasgraduallyincreasedtoUS$1.5billionin2009.DespitestagnationintheChinesefarmingsectorduringtheglobaleconomicdownturn,Mahindra(China)TractorCorecordedagrowthof21percentfrom2009to2010withrobustdomesticsalesandexportstoEuropeandIndia.
Thenewcompany,MahindraYuedaYanchengTractorCompany(MYYTCL),hasbeenformedbetweenMahindra’sFarmEquipmentSector,andJiangsuYuedaYanchengTractorManufacturingCo.Ltd.TheregisteredcapitaloftheJVisUS$40million.Mahindraholds51percentshareintheJV.
ThelargemanufacturingbasecouldbeusedtonotonlyproduceforthedomesticChinesemarketbutalsoforlowcostmanufacturingbaseforexports.ThenewjointventurealsostrengthensthedistributionnetworkofboththeoperationswhichwouldgiveMahindraamuchlargerpresenceintheChinesetractormarket.
ThenewJVislocatedinYanchengcity,JiangsuProvince.TheJV’sproductportfoliocomprisestractorsrangingfrom16HPto125HP.MYYTCLwillhaveastrongdistributionnetworkcoveringover25provincesinChina.Itwillalsobuildontheexistingexportsoperationswithafootprintinmorethan60countriesincludingtheUSA,SouthAmerica,Russia,EuropeandAfrica.
Figure 5: Tractor production for Mahindra in China
0
5000
10000
15000
20000
25000
30000
Mahindra Yueda Tractor
Mahindra China Tractor
FY09 FY10
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Case Study 2: An Importer / Trader sharing his experience of business with ChinaVishalGoyal,Director,BVGIndustriesLtd.,shareshisexperiencesofworkingwithChina.BVGIndustriesLtd.isengagedinimportandsaleoflaminateflooring,realwoodflooringandcarpettilesfromChinaamongstothersforconstructionandrealestatesector.
VishalhasbeentradingwithChinaforalmosttenyearsnow.HehadtoswitchhisbuyingfromEurope(GermanyandSwitzerland)whenhiscompetitorsstartedtooffermuchcheaperoptionsfromChina.
Hestartsbysaying"ItisamisconceptionthatChinaisonlyknownforcheapandlowqualitymaterials.ThequalityofthegoodsfromChinaisdependentonone’swillingnesstopay.MostbusinessmengotoChinahuntingforcheaperoptionsofexistingproductsfromdevelopedcountriesandfindthemandthatiswhattheyareimportinginIndia.But,thereareenoughandmanyhighquality,expensivevarietiesofthesamegoodsavailableshouldyouwanttobuythemfromChina.Manyatime,theseoptionsareavailablefromthesamemanufacturerasinthedevelopedmarkets,whichhavemovedtoChinaforthecostarbitragereasons".
HewasamazedbytheChinesemanufacturer’sabilitytocreatecapacitiesforthefuture.Hegaveanexampleofaunitwheretheownerbought4acresoflandwhenheneededonly1acre.Themanufacturersaidthattherestisforfutureexpansion;anexpansionwhichisnotevenonthedrawingboardyet.
HisadvicetoIndianbusinesseslookingatChinawouldbetodothecompleteduediligenceonthesuppliers.
Heispersonallyinvolvedinfactoryvisitsandauditsbeforeconsideringatransaction.HesaidthateventhoughhehasbeenworkingwithChinaforthelasttenyearsheisnotawareofthelegalregulationsincaseofdisputesthathecoulduseincasehisChinesepartnerdoesnotadheretothecontractualagreement.HeagreesthatitissafertodobusinesswithEuropeandNorthAmericaastheregulationsandremediesarelistedinEnglishonwebsites.Hepersonallychecksthemanufacturingfacilitiesofhissuppliersbeforeplacinganorderwiththem.
Hesaid,hisoverallexperiencehasbeengoodwithChinabuthedidrecalltwoinstances–onewherethemanufacturerreplacedapartoftheconsignmentwhichwasbelowspecificationfreeofcost,andtheotherwheretheChinesemanufacturersimplyrefusedtodoso.
Interestingly,hesaysthathedoesnotknowawordineitherMandarinorCantonese.LanguageisabarriertodobusinesswithChina.HesaysthatChinesecompanieshavestartedtorecruitEnglishspeakingemployeestohelpinthetransactions.Theyarehowever,comfortablewithwrittenEnglishcommunicationonemails.
OnbeingaskedabouthisperspectiveonthefuturebusinessopportunitieswithChina,hesaidthatChinesemanufacturersareundercostpressureduetoincreaseinlabourcosts.TheYuanisalsounderpressurewhichisalsonotagoodsignforChinesebusinesses.HefeelsthattheIndia-Chinabusinessrelationsinthenextdecadewouldpredominantlybetrade–orientedbutheaddedthatIndiancompaniesmightlookatinvestmentsinChinatoshifttheproductionbasefromIndia.
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Way forward
Whilethisdocumentattemptstocoversomeofthekeysectorsofmutualinterest,IndiaandChinahavealotmoretotapinto.Thechallengeliesinbeingabletoidentifyhowthetwocouldgetpastthepoliticalandculturaldifferencestobenefitfromeachother’sexperienceandexpertise.
ChinaispresentingitselfasagoodlocationforbusinessforIndianITcompanies.SeveralIndianITcompanieshaveinvestedinChinatocatertotheirclientsinAsia-PacificregionespeciallyinJapanandmultinationalcompanieslocatedinChina.TheIndianITcompaniesshouldbetargetingthegrowingChinesedomesticmarketofITandITenabledservices.TheIndianITcompanieshavetorampuptheiremployeestrengthinChinaandcapabilitiesoftheChinesecenterstocaterthesophisticateddemandsofChinesecompaniesmoreefficientlythanthelocalChineseplayers.TheIndiangovernmentcouldlookatseekingmoremarketaccessinthisarea.
Indianmanufacturingcompaniesespeciallyintheautomotivesector,bothinOEMandcomponentspace,areinvestinginChinatotakeadvantageofthelargedomesticChinesemarket.AlsotouseChinaasalow-costmanufacturingbaseforcertainmodels/componentsforIndianmarketandexportstoothercountries.Indiancompaniesshouldlookatagloballyintegratedsupplychainmodelfortheirmanufacturingandoperations.TheymustintegratetheirChinese,Indianandotheroperationstoachieveeconomiesofscaleandlookatleveragingexpertisefromeachproductioncenter.Thiswouldgivethemacompetitiveadvantagewhichwouldbedifficulttoreplicateintheshortterm.
CurrentlytradebalancebetweenIndiaandChinaissubstantiallyinfavorofChina.EventhoughtheIndiangovernmentisurgingtheChinesegovernmenttograntaccesstocertaincategoriesofproductslikepharmaceuticalandagroproductsandencourageimportsfromIndia,wecouldbelookingatat-leastfewmoreyearsoftradedeficitforIndiabythetimethetradeinthesesectorsbegintoimpacttheoverallnumbers.Havingsaidthat,Indiancompaniesshouldbelookingatexportingservices,whereIndiahasanexpertiseandedgeoverChina.Theseservicescouldbeintheareaoffinanceandaccounting,ITandinfrastructuremanagement.
WiththegrowthanddevelopmentoftiertwocitiesinbothIndiaandChina,andtheneedforrapidurbanization,companiesinthetwocountriescouldlookatprojectsininfrastructure,transportationandpowerdistribution.
Theseopportunitiesexist,however,peopletopeopleinteractionsneedtobefurtherdevelopedandthisispossibleonlyifthetwocountriesencouragepeople-to-peopleexchangesthroughincreasedculturalexchanges,studentexchangeprogrames,andtourism,amongstothers.
Thetaskwhichliesaheadistocontinuouslyengagewitheachother,buildstrongerrelationships,bothculturallyandeconomicallyforalongtermbenefittobothcountries.
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Acknowledgements
Atul Dhawan, Partner,DeloitteHaskins&Sells
Chandrajit Banerjee DirectorGeneral,CII
E B Rajesh ChiefRepresentative,CII,ShanghaiRepresentativeOffice
Harshit Sehgal Director–EastAsia,CII
P R SrinivasIndustryLead,THL(Tourism,Hospitality&Leisure),DeloitteToucheTohmatsuIndiaPrivateLimited
Rebecca LamDirector,ClientsandMarkets,DeloitteHongKong
Supriya Banerji DeputyDirectorGeneral,CII
Timothy B. KlattePartner,ChineseServicesGroup,DeloitteToucheTohmatsuCPALtd
U D Bhatkoti Advisor–EastAsia,CII
Vijay DhingraSeniorDirector,DeloitteToucheTohmatsuIndiaPrivateLimited
Vijaya Bajpai DeputyDirector–EastAsia,CII
Vishal GoyalDirector,BVGIndustriesLimited
Clients and Markets teams in India and China, special support from Rohan Maitra, Surbhi Sharma, Anu Sindhwani and Navdeep Verma.
Authors:Niharika [email protected]
Mayank [email protected]
Designed byChitersen Shisodia
Sources• DGFT-DirectorateGeneralofForeignTrade• GeneralAdministrationofCustomsoftheChinaPR• CentralBoardofExciseandCustoms,India• IndianEmbassy,Beijing• SocietyofIndianAutomobileManufacturers(SIAM)• OrganisationInternationaledesConstructeurs
d’Automobiles(OICA)• ChinaNBSfigures:figuresof1952-2008:Originated
fromChinaStatisticalYearbook2010,2009-2010figuresfromChinaNSBStatisticalData.NSB2009-revised-ChinaGDPfigure;NSB2010-ChinaGDPfigure
• MinistryofEducation,China(http://www.moe.edu.cn/publicfiles/business/htmlfiles/moe/s4971/201012/113575.html)
• Deloittepublications – InternationaltaxandbusinessguideforChina – InternationaltaxandbusinessguideforIndia – Anewera,Acceleratingtowards2020–Anauto-
motiveindustrytransformed – ChinaRealEstateInvestmenthandbook• VariousMediaReports(includingbutnotlimitedto) – http://inchincloser.com/2011/05/23/infosys-
marks-largest-investment-outside-india-in-shanghai/
– http://www.washingtonpost.com/wp-dyn/content/article/2006/05/19/AR2006051901760.html
• Company/Corporatewebsitesof – Mahindra&Mahindra;TataConsultancyServices;
InfosysTechnologies;Genpact;Sany;Liugong
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About CII
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