market entry strategies in china

7/30/2019 Market Entry Strategies in China

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Market Entry Strategies in China

Building Blocks for Entry

and Engagement in China


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Introduction

Firms follow an evolutionary path when they enter newinternational markets

Firms gradually increase their involvement in threephases

As an Opportunistic Experimenter

A Strategic Investor

A Dominant Local Player

As they learn more they increase their commitment Modes of entry have expanded in past 30 years


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Ways to Enter the Dragon

Hongkong Expedition Representative Office

Joint Venture

Contractual JV

Equity JV WOFEs

Holding Company

Other Forms

BoT Projects

Acquisitions

Branches

Franchising/licensing


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Hongkong Expedition

In 1980s and 1990s most common way of accessing sourcing

opportunities in china

Late 90s key distribution and sales centre for those targeting

mainland

Huge allure to have HK operations for the following reasons

Good financial infrastructure

Cultural Middle Ground

Language Consideration

Vast number of intermediaries

Importance gradually declining with opening up of Mainland

China


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Representative Office Effective way to enter, learn,develop the market

Cannot book revenue

Serve as liaison points and business development

Market research, communication, product promotion,contract administration and negotiations

Many MNCs adopted this route before become FIEs

Merits

Quick, simple, low cost

Multiple offices can be established

Demerits

Start-up and maintenance costs are not trivial

Cannot engage in direct business

Hire local staff through approved agencies alone


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Contractual JVs

Contractual JVs Creates association between foreign and Chinese partners

Fall in category of FIEs

Came to existence in 1988 under law of PRC on Sino-foreign Co-operative Enterprises

CJVs constituted 22% of FDI in late 90s

Long term licensing agreements and technology transferare part of this category

Partners participate in project selection on agreed and

negotiated basis with clera cut rewards agreed in contract Merits: a) Strategic and operational flexibility b) Can

source from local or foreign suppliers

Demerits: complex to negotiate and greater liabilities


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Equity JVs

Involves setting up of a limited liability companies with aparticular shareholding structure between foreign andChinese parties

Have been around since 1979 when the PRC law onChinese-Foreign Equity JVs was enacted

Fall in FIE category Shareholding structure usually negotiated and in some

industries there are caps

Ownership, management, investment are shared by EJV

partners Late 90s 38% of FDI was under Equity JVs

Foreign partners must own at least 25%

Partners typically invest in cash, equipment, technology,

facilities, land and intellectual property


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To JV or not to JV in China? Till 1990s foreign companies were forced to form JVs in

order to operate in China

Chinese government chose JV partners for foreigninvestors which meant paired with a loss making SoE

Today foreign investors have a broader choice

In short they can decide whether to JV or not to JV Case Against JVs

Problem solution takes a longer time

Overestimation of local partners

Less freedom and flexibility Case for JVs

Regulations necessitate JVs

Government interactions for negotiations necessitate

JVs


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Selecting the Right Mate

Choose a weak partner

Choose an active partner who does value addition

Align your goals

Avoid grey areas Managing Bilateral Relations

Mutual Trust and Confidence

Regular Effective Communications

Effective Decision Making

Shared Ethics and Standards


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WOFEs Firms that are funded by foreign firms usingtheir own

capital, technology and management

More popular since late 1990s

Though permitted since 1986 hardly contributed to FDI in

China.Its popularity a recent phenomena

Firms with need of IPR protection tend to go for this route Licenses are harder to get than JV approvals

Typically exporters or own technology to qualify as WOFEs

Merits: a) Strategic Flexibility b) Surveys suggest lesser

breakeven time and more profitability c) Quicker to set upthe process while capital requirements are lower

Demerits: a) Managing local networks b) Cannot operate in

restricted industries c) Cultural Issues involved


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Holding Companies

Suitable for those that manage complex businesses Opt for integrated approach to maximize synergies in

areas of shared services like HR, IT, marketing, sales,etc\

Notable examples are Du Pont, Siemens, GE who haveattained a certain scale and have number of divisionsleading them to extract substantial benefits

Some have 20-30 entities

Merits: a) Pooling benefits b) Assist in formation of new

groups, raising finance, hiring staff, providing technicalsupport, forex requirements, etc

Demerits: a) Regulatory and capital requirements arelarge b) Requires unmatched ability to manage large,complex matrix organizations


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India-China Bilateral Trade

Main Focus on East China


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Chinas Special

Economic Zones

and Open Cities

Suzhou


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Current Economic Situation in China &

East China


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East China Map

Territorial Jurisdiction

Municipality of Shanghai

Jiangsu Province

Zhejiang Province


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Shanghai

Shanghai GDP US$ 166.6 billion2007

GDP Growth 13.3%- 2007

Exports US $ 143.9 bn2007 Imports US$ 113.9 bn2007

Foreign Investment US $ 7.92 bnActual- 2007(Contracted in2007- US $14.87 billion)

Per Capita GDP- US $ 7500 Population 18.15 million( 3

million floating)


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Jiangsu GDP US$ 355.6 billion - 2007

GDP Growth 14.8% - 2007

Exports US$ 203.6 bn - 2007

Imports US$ 145.8 bn - 2007

Foreign Investment-Contracted

US$ 52.7 bn, Actual US$ 21.6 bn

- 2007

Population 76.54 million

East China -Jiangsu


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East China - Zhejiang

Zhejiang GDP US$ 258.8 billion - 2007

GDP Growth 14.5%- 2006

Exports US$ 128.2 bn - 2007

Imports US$ 48.5 bn - 2007

Foreign Investment: Contracted

US$ 20.4 bn, Actual US$ 10.3 bn -

2007

Population 50 million


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East China in Chinas Economy

23% of Chinas GDP

36% of Chinas total trade

66% of Chinas Actual FDI11% of Population


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Commercial Hubs inEastern China

Shanghai- New Materials, Automobiles, Telecommunications,

Pharmaceuticals, Biotechnology

Nanjing- Electrical Appliances, Automobiles & Motorcycles,

Building Materials, Software Development

Suzhou- Biggest IT hardware manufacturer in China, highest

recipient of FDI

Wuxi- Pharmaceutical, automobile parts

Hangzhou- Heavy industry, tyres, electromechanical products,

cosmetics

Ningbo- Textiles, garments, machinery


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Rapid Growth in Chinas GDP

GDPIndices

2000 2001 2002 2003 2004 2005 2006 2007

GDP(US$ trillion)

1.20 1.32 1.45 1.64 1.93 2.25 2.7 3.43

GDP(Growth Rate)

8.4 8.3 9.1 10 10.1 10.4 10.7 11.4

GDPPer capita

(US$)

N.A. 907 1000 1090 1268 1700 1900 2400


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Actual FDI inflow into China( US

$ billion)

4 5 718 28

34 3843 45 45 40.3 40.8

46.853 54

60.6 60.3 63

74.8

0

20

40

60

80

100

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007


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FDI Success Story

Preferential Tariff TreatmentPreference in InfrastructureConcentration of FDI in Coastal Areas

Delegation of Authority to accord ApprovalsStock Shift of Plants from Taiwan and Hong Kong in 1990sMost FDI projects involved small investments until recently

Market PotentialCompetition

Export Processing ZonesCheap Labour


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China's Exports in US $ billion

0

200

400

600

800

1000

1200

1400

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007


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Trade Surplus

Trade surplus

0

50

100

150

200

250

300

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

US$bion


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Foreign Exchange Reserves

Foreign Exchange Reserves

51.673.6 105

142 149 154 159212 275

403

609

819

1066.3

1530

0150

300

450

600

750

900

1050

1200

1350

1500

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

US$ bn

Reserves excl. gold


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India China BilateralTrade


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India China Trade

(1998-2007)

04000

8000

12000

16000

2000024000

28000

32000

36000

40000

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

US$Mn

Exports

from

IndiaImports

to India

Total


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Ores, Slag & Ash

60%

Cotton

7%

Copper

5%

Machinery

2%

Others

10%

Salt, Sulphur, Stone

2%

Organic Che

5%

Inorganic Chemicals

2%

Prec. Stones

3%

Iro

Iron & Steel

9.5%

Top 10 Indian Exports to China in 2007

Plastics 4.3%


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Iron and Steel

6%

Vehicles (non-rail)

2%

Iron and Steel Products

5%

Plastics

3%

Textiles

2%

Silk

2%

Electrical Machinery

28%

Fertilizers

3%

Organic Chemicals

10%

Machinery

18%

Top 10 Chinese Exports to India in 2007

Others

23%


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Indias Trade and EconomicRelations with Eastern China


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Growth in India-East China Trade (2003-07)

7781021

759

1106

1456 1450

1750

2286 22302400

2970

3109

3586

4133

4653

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

Shangh

aiZhe

jiang

Jiangsu

20032004200520062007

U


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66912511854

26103093

2643

02000400060008000

100001200014000

2002 2003 2004 2005 2006 2007

Exports toEast China

Total Trade

Growth in trade between India and East China, 2001-2007


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Trend in India-East China Trade

(%of total)

0%5%

10%15%20%25%30%35%

1999

2000

2001

2002

2003

2004

2005

2006

2007

Percentage

oftotalIndia-China

trade


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Major Exports from India to East

ChinaChemicals

Plastics

Textiles(fabrics, yarn)

Wood Pulp, Paper

Iron and Steel

Leather and leather

products

Ores and Metal Waste

Mineral Products(Chrome Ore,

Iron Ore, slag, ash)

Non-Ferrous Metals

(Aluminium, steel pellets)

Electrical Products (boilers & engines)

Stone(marble, granite)


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Major Exports from East China to India

Industrial Machinery

Machine Parts

Steel Products

Chemicals Dyes

Bulk Drugs

Pharmaceuticals

Pesticides

Textiles(garments) Silk

Textile Raw Materials

Mechanical & ElectricalProducts

Power GenerationEquipment

Light Industrial Products Hardware Tools


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Potential growth sectors

Engineering goods- Auto components

Pharmaceuticals products

Gems and Jewellery

Processed and unprocessed food

Information Technology

Financial Services


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India Inc. in Shanghai/

Eastern ChinaNIIT

Aptech

Infosys

TCS

Satyam Computers

Wipro

HCLReliance Industries Ltd.

Dr. Reddys Laboratory

Lupin Pharma

Aurobindo Pharma Ltd.

Bry-Air

Jindal Strips Ltd.

Ace Micromatic Machine Tools

Jubiliant Organosys Ltd.

Larsen & Toubro LtdOrind Refractories

KPL International Ltd.

Pan Products Impex Pvt. Ltd

Tube Investment of India

TATA Exports (SEA) Ltd.


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India Inc. in Shanghai/

Eastern ChinaState Bank of India

Punjab National Bank

Axis Bank

Canara Bank

Union Bank of India

ICICI

Thermax LtdVoltas Consulting

PTC Global Pvt. Ltd.

Asiatic Colorchem (India) Ltd.

Cognizant Technology Solutions

SKD Pacific

Shipping Corporation of India

Confederation of Indian Industry

Air-India

Jet Airways

Gati India-Centric Distribution

Vam Organic

UPL

Raymonds

Sundaram Fasteners

Lucas TVS

TVS MotorsIndia Grasim International

Covansys

BEML

Thakral Electronics

Indian Restaurants (close to

two dozen)


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Select Chinese majors from Eastern China

in India

Jiangsu Overseas Group

Shanghai Urban Construction Group

Shanghai Electric Power Generation Group

Baosteel Group Ningbo Bird

Huawei

ZTE

Feiyue Group (based at Taizhou (Zhejiang) China Eastern Airlines/ Shanghai Airlines


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Indians in East China

Total number of Indians (Approx.)2500 in Shanghai1500 in Shaoxing, Zhejiang Province250 in Hangzhou, Zhejiang Province700 Indian medical students across East China

Comprising MNCs managers, Reps of Indian Companies,private entrepreneurs & service personnel

Two Indian AssociationsIndian Association(Shanghai)Shaoxing Indian Business Association(SIBA)


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Thank you

market entry strategies in china

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