Posts Tagged ‘China Consulting’

1.2 Application Procedures for Establishment of Foreign Enterprises

Step 1: Submission of Preliminary Application
The foreign investor of a foreign enterprise should submit a report to the foreign trade and economic cooperation department at county level or above at the place where the proposed enterprise is located.
Content of report: Objectives of the foreign enterprise, business scope, scale of operation, products to be produced, technology and equipment to be used, land area required, conditions and quantities of water, electricity, gas and other forms of energy resources required, and requirements for public facilities.

Step 2: Submission of Formal Application
After the foreign investor receives a written reply from the relevant government authorities, a formal application supported by all the required documents should be filed with the local foreign trade and economic cooperation department at county, municipal or provincial level.
Documents required: Application letter for establishing the foreign enterprise; feasibility study report; articles of association; list of legal representatives (or board of directors); foreign investor’s legal papers and credit report; list of materials to be imported; written replies from the local approval authorities at county level or above; application for registration of the name of the enterprise approved by the provincial or municipal administration for industry and commerce; comments on the project by various government departments such as environmental protection, fire services, health and land administration. In case where two or more foreign investors are involved, copies of the contracts signed by them should be submitted to the approval authority for the record.

Step 3: Application for Approval Certificate
After the formal application is approved, the foreign investor should apply to the foreign trade and economic cooperation department at county, municipal or provincial level for an approval certificate by presenting all the necessary documents.
Documents required: Application letter for establishing the foreign enterprise, feasibility study report, articles of association and list of board of directors.

Step 4: Registration
Upon collection of the approval certificate, an application for business licence should be filed with the provincial or municipal administration for industry and commerce within 30 days. Subsequently, the enterprise should complete such procedures as applying for official seal and enterprise code, opening bank account, and registering for tax payment and customs declaration with the local public security, technical supervision, taxation, Customs, finance, foreign exchange administration, banking, insurance and commodity inspection departments.

HKTDC Research Department 1-1

1.1 Application Procedures for Establishment of Sino-Foreign Equity JV and Contractual JV Enterprises (in the case of Guangdong)

Step 1: Application for Establishment
Upon reaching agreement by the parties to an equity or contractual JV after negotiation, the Chinese party should submit the project proposal to the local foreign trade and economic cooperation department. For projects under the encouraged and permitted categories with an investment exceeding US$100 million as well as projects under the restricted category with an investment exceeding US$50 million, report has to be made to the local development and reform commission, and projects that require approval from the relevant industry department have to be reported to that industry department also.
Documents required: Project proposal approved by the competent Chinese authorities; preliminary feasibility study report; letter of intent or agreement signed by the parties to the JV; and credit report on the foreign party.

Step 2: Submission of Feasibility Studies for Approval
After the project proposal is approved, parties to the JV should work together to compile a feasibility study report for submission to the local foreign trade and economic cooperation department by the Chinese party for approval. For projects under the encouraged and permitted categories with an investment exceeding US$100 million as well as projects under the restricted category with an investment exceeding US$50 million, report has to be made to the local development and reform commission, and projects that require approval from the relevant industry department have to be reported to that industry department also.
Documents required: Application letter to the competent Chinese authorities; feasibility study report duly signed by all parties to the JV; JV agreement or draft contract; proof of the Chinese party’s source of funds; and credit report on the foreign party prepared by the bank.

Step 3: Submission of Contract and Articles of Association for Approval
After the feasibility study report is approved, parties to the JV should sign the contract, articles of association and other relevant legal documents for establishing the JV. The Chinese party should then submit the documents to the local foreign trade and economic cooperation department where the JV is located for approval.
Documents required: Application letter to the competent Chinese authorities; feasibility study report and approval documents for the project; application for registration of the name of the enterprise approved by the provincial or municipal administration for industry and commerce; written comments on the project by various government departments such as environmental protection, fire services, health and land administration; business licences of the parties concerned and certificates of their legal representatives; contract and articles of association duly signed by the legal representatives of the JV parties; and list of board of directors.

Step 4: Application for Approval Certificate
After the contract and articles of association are approved, the Chinese party should apply to the provincial or municipal foreign trade and economic cooperation department for an approval certificate.
Documents Required: Ratification documents (on project proposal, feasibility study report, contract and articles of association) from the relevant authorities; project proposal, feasibility study report, contract, articles of association and list of directors duly approved by the competent authorities.

Step 5: Registration
Upon collection of the approval certification issued by the relevant authority, an application for business licence should be filed with the provincial or municipal administration for industry and commerce within 30 days. Subsequently, the JV should complete such procedures as applying for official seal and enterprise code, opening bank account, and registering for tax

payment and customs declaration with the local public security, technical supervision, taxation, Customs, finance, foreign exchange administration, banking, insurance and commodity inspection departments.

Notes:
1. The above procedures are applicable to both production enterprises and service providers.
2. Guangdong currently practises a system under which project proposals, feasibility study reports, contracts and articles of association for national and provincial level foreign investment projects under the non-restricted category are examined and approved together.

This is a great article which summarizes areas to look out for while doing business in China.

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China lends itself to sweeping statements about the nature of doing business there. Most are unfounded.
Jonathan R. Woetzel

How does a multinational company take advantage of opportunities in China without getting burned? One of the biggest hurdles is coming to terms with the real China, a land of great geographical, social, political, and industrial diversity. As a starting point, it’s essential to cut through the thicket of misunderstandings and misinformation about doing business there. Clearing them up won’t guarantee the success of investments, but it will at least increase the chances of getting the foundations right, particularly at a time when fears that the country’s economy is overheated are further complicating decision making.

China lends itself to sweeping statements. Here are a few making the rounds: China will be the next economic superpower; its economy is still state run; foreigners don’t make money there; relationships count, so a partner is needed. These provocative claims can start a conversation, but they are hyperbolic, misleading, out-of-date, or just not true.

An economic superpower?

Let’s look more closely at the observation that China will become the next economic superpower. The country does have a gross domestic product of $1 trillion and will probably continue to grow quickly. But it will remain a midsize economic power for the next decade. China now has a GDP roughly the size of the United Kingdom’s. It may pass Germany in the next few years. But it isn’t likely to catch up with Japan until 2020 and, if current trends hold, won’t surpass the United States until 2040. It is, however, an important source of growth. The economies of both Japan and South Korea are expanding largely as a result of exports to China. From sectors such as power plants to packaged goods, its share of global growth makes it number one in the world.

Macroeconomic hype can obscure actionable microeconomic trends. Fast economic growth, for example, will put home ownership within reach of hundreds of millions of people; in the past five years, more than five million new homes have been sold. Foreign companies can serve this population by stepping back from the premium segment, to which many are naturally attracted, and selling better-tailored value goods, as the South Korean conglomerate LG Electronics has done in air-conditioning. Increasing numbers of Chinese can afford locally produced durable goods (for instance, refrigerators, cookers, and washing machines). The market penetration of these items is now above 70 percent even in second-tier cities, such as provincial capitals. And although the middle class is a small percentage of the total population, in China that is a big number. Only 4 percent of the country’s people have household incomes of more than $20,000 but that translates into a market of more than 50 million, who are spending increasing amounts of money on things such as services, education, health care, and travel as well as on processed and packaged foods.

China’s importance in the world economy clearly varies greatly by sector. In some, the country plays a critical role in the global balance of supply and demand (basic materials and energy), the supply chain (personal computers), or the growth of demand for consumer products (automobiles and mobile phones). Infrastructure-focused multinationals that sell products from elevators to subway systems are finding China to be their most important market for growth. In other fields, the country is not yet a significant factor in global trade, because sophisticated customers are lacking (for high-performance fibers, to give one example) or regulatory barriers impede competition (as in the financial-services and media industries).

In some sectors, late-arriving foreign companies may have already missed the boat: market-shaping positions have been claimed in the manufacture of automobiles, consumer electronics, processed foods, and pharmaceuticals. Here, bigger and bigger commitments are needed to shape the industry structure and so lay a path for sustainable, superior returns. Many companies with the resources and skills to make those commitments are already in China and have been there for as long as 20 years. Volkswagen’s partnership with the Shanghai Automotive Industry Corporation and Shanghai’s government, for instance, began in the mid-1980s and has since grabbed the dominant position in the Chinese automobile market and a handsome payback. Motorola has invested $3 billion in eight joint ventures and 26 local subsidiaries over the past 15 years. Nonetheless, China’s government is open to proposals that bring new technologies, capabilities, and business models to the country. Multinationals will not be prevented from investing if they can show that they have leapfrog opportunities.

For some, the opportunity in China lies no farther than Beijing, Guangzhou, and Shanghai. Foreign executives concentrate on these big eastern cities primarily because the country’s coast represents 58 percent of the economy, though only 37.8 percent of the population. Average GDP per capita in coastal areas is about $2,100 in Shanghai, it is nearly $5,000 far higher than that of the rest of China (Exhibit 1). In fact, China’s smaller cities and rural areas, far into the interior, already account for more than 50 percent of consumption of many consumer goods. Now that the populations of these areas are becoming more active economically, their markets are growing faster than those of top cities.

Some consumer goods multinationals, such as Procter & Gamble (see “Understanding the Chinese consumer”) and Groupe Danone, have recognized this opportunity by adjusting their marketing and product strategies to serve the more modest income brackets typical of such regions. (The recent battle between Anheuser-Busch and SABMiller for control of Harbin Brewery Group, located in the large but poor second-tier city of Harbin, also exemplifies this trend.) Meanwhile, Coca-Cola has introduced flavors and products to capture local tastes across the country, and so have Uni-President Enterprises and Tinghsin International, the world’s two largest noodle makers. Industrial multinationals that want to enter the smaller cities and rural markets have had to follow a different approach, with more emphasis on financing and distribution.

The role of the state

Executives who make investment decisions about China believing that its economy is dominated by the state, and is thus sclerotic, are in for a shock. Government ownership is declining rapidly; today only about one-quarter of China’s industrial output is generated by state-owned enterprises (Exhibit 2). Springing up in their place are private companies and companies with foreign investment. Except in a few sectors defense, telecommunications services, and energy, for example much of the economy is now in private hands. The rationale is straightforward: China’s leaders recognize that state enterprises are inefficient and must be stimulated from the outside to compete in the marketplace. A corollary is that China’s government now relies far more on taxes from private commerce and less on revenues from the declining state sector. Over the past five years, tax receipts have risen to 17 percent of GDP, from 11 percent.

Even more important, financing has started to move toward the capital-markets model. In the past, more than 70 percent of all investment funds in China were channeled through the state banking system. Recognizing its inherent inefficiencies, the government has both initiated banking reform and encouraged the growth of a more robust equity and debt market. China’s stock market is already the second largest in Asia, after Japan’s. By 2005, capital markets will probably generate more than 35 percent of corporate investment, and bank lending will have declined (Exhibit 3). With this shift, the government hopes that Chinese enterprises will respond to shareholder expectations.

What does it mean for foreign companies that so much of the economy is in private hands? For one thing, it suggests that local competitors are economically rational. That conclusion comes hard to multinationals facing low-price Chinese competitors, but an analysis of their costs shows that many can be profitable at price points far below those global companies require. The main driver of this profit differential is the locals’ much greater efficiency in capital usage. In some industries, the use of local equipment, design, and construction firms allows the Chinese to build factories and install machinery for just 30 to 50 percent of what their foreign rivals would pay. Moreover, Chinese entrepreneurs have succeeded by expanding their companies, over a decade or more, mostly in competitive sectors of the economy, not through sweetheart privatizations. Some of China’s most successful entrepreneurs compete in relatively low-tech sectors: auto components, furniture, steel, and textiles.

Multinationals that fail to take advantage of local resources, preferring instead to stick to a global formula, run the risk of creating uneconomic cost structures. But multinationals that don’t make this mistake can benefit from China’s unrivaled potential as a global sourcing center. General Electric, for example, has more than 300 purchasing agents in the country who certify suppliers for global sourcing. The company’s stated goal is to have $5 billion in Chinese sales and to source $5 billion worth of products in China by 2005. Samsung also has a large presence. Winners also harness China’s human-resources pool as a global advantage. GE, for instance, has set up its North Asia customer-service center in Dalian, Intel and Microsoft have R&D centers in China, and HSBC does much of its back-office work there.

Foreign executives may not understand the extent to which the Chinese economy is now open to the world. No other economy built on scale has allowed foreign participation in the way China has; what other country, for example, let foreign companies dominate its auto industry before domestic competitors really got started? Much the same thing has happened in telecom equipment, modern retailing, and logistics. In China, fast economic growth is generally regarded as more important than local ownership. Government leaders are distinctive in recognizing the value of foreign capital in accelerating the pace of the country’s development and in their willingness to experiment with different ways of introducing foreign capital. China thus attracts more than $50 billion a year in foreign direct investment, second only to the United States. The technology, energy, and automotive sectors are the major fields (other than real estate) for foreign investment, and companies such as BP, Motorola, Royal Dutch/Shell Group, and Samsung rank among the leading investors.

Making money in China

Some businesses have resisted taking the plunge into China because they fear that foreign investors can make money only in the long term, if at all. In fact, the profits of multinationals in China are up sevenfold since 1990, and it is one of the largest sources of overseas profits for many companies. Dozens of consumer-oriented multinationals, with sales running into many billions of dollars, have profitable businesses in China and are rolling out coverage to 30 to 50 cities. P&G and Yum! Brands (a PepsiCo spin-off that owns restaurant brands such as KFC and Taco Bell) say they are making money in China. Other profitable investors include AIG, Alcatel, Carrefour, Motorola, Nestlé, and Siemens. Goldman Sachs estimates that Volkswagen has generated higher profits in China than in Germany during recent years, and in 2004 more Buicks will likely be sold in China than in the United States. These investors would be unlikely to go on plowing billions of dollars into the country if they were not getting a reasonable return.

According to the US Department of Commerce, the net income of US foreign affiliates based in China and Hong Kong rose from $1 billion in 1990 to more than $6 billion in 2002. A survey of China by the American Chamber of Commerce (Exhibit 4) and other data indicate that more than 65 percent of US companies in China are profitable and that their margins in China are equal to or greater than their global margins. This market’s challenge is that profits must often be reinvested to maintain market position. The sheer size of China, coupled with its rapid growth and competition, means that even market leaders must continually invest to maintain share.

Furthermore, interested foreign companies must stake a considerable claim now if they want to be in China at all. Its markets evolve quickly, and the best deals take place before the competitive free-for-all starts. The right way to proceed depends on the sector and, in particular, on how well China adheres to its commitments to the World Trade Organization. Consumer goods and pharmaceuticals, for instance, are already very competitive, so the WTO-induced opening has had a minimal impact. In more capital-intensive industries, such as automotive and energy, China’s entry into the WTO increases competition through lower tariffs but is unlikely to change the industry structure dramatically given the incumbents’ strong position.

WTO membership will have its greatest impact in financial services, retailing, and distribution. In financial services, the deregulation of banking, insurance, and securities makes competition likely by 2006. The time is thus right for leading companies to secure their initial positions and to build brands and local workforces. HSBC’s preemptive investments “before the arrival of competition” already exceed $1 billion. Citibank has a credit card joint venture, with Shanghai Pudong Development Bank, that will allow it to capture a profitable early-mover opportunity, and AIG has built an early lead in insurance in Shanghai.

In retailing, the market is developing quickly, but opportunities remain to introduce modern trade formats such as hypermarkets, discounters, and specialty stores. (Carrefour, though, was developing hypermarkets even before the coming of deregulation.) In distribution, the expansion of big local companies and of nationwide highways creates opportunities to build logistics businesses, which have so far been largely the preserve of local and Asian companies, though a few European ones are starting to arrive. Finally, the media industry historically has been among the most protected in China, but rising consumer demand and the restructuring of domestic media groups will create opportunities for foreign companies through joint content development, distribution ventures, and even multimedia. News Corporation and Viacom have been among the most aggressive companies in defining their position through ventures with China Netcom, Shanghai Media Group, and other state enterprises.

Relationships

Many executives are convinced that relationships are the key to doing business in China. That was certainly true in the early days of its economic opening to the outside world, when its decision makers had few ways of determining which companies could truly deliver what they had promised. Accordingly, lengthy discussions, often accompanied by extensive socializing, were the norm as the country’s negotiators strove to understand their foreign counterparts. Now the Chinese, with more than 20 years of investment experience under their belt, are looking at the tangible business track records of foreign companies. Those that fail to bring tangible advantages, such as new capabilities, technologies, or business models “as well as a record of success” are unlikely to win the deal, no matter how good their relationships.

Foreign companies that fail to bring tangible advantages are unlikely to win the deal, no matter how good their relationships.

Nevertheless, a strong government-relations program remains an important factor for success in China, where, as in other emerging markets, the state uses its influence over market access and business rights to shape how far foreign companies can go. Unfortunately, for many of them the management of government relations often takes a backseat to other business operations and, most important, lacks long-term consistency. Such companies have government-relations departments in China but plan and execute less systematically in this respect than business units usually do.

Finally, joint ventures are less important as a success factor in China. In fact, true 50-50 joint ventures are increasingly rare as foreign investors realize that their Chinese partners can’t add the expected business value, particularly in go-to-market access. In response, investors are going it alone; wholly owned enterprises already account for more than 50 percent of annual investment in China. Partnerships, including long-established ones, are being restructured as the foreign and Chinese parties resolve inequalities in performance by buying out the other side. Even government-driven deals can be restructured if the price is right: after cooperating with the Ministry of Information Industry for more than a decade, Alcatel moved from minority to majority control of its venture, having persuaded the ministry that its technology had great value. Fuji Xerox and Unilever likewise have purchased their partners’ share of their joint ventures. In the future, wholly owned enterprises and acquisitions will dominate foreign investment in China, much as they do in the rest of the world.

Generalizations about China may be interesting conversation starters but are potentially dangerous distractions for companies considering investments there. The best advice is to focus on your own industry and operating issues. Performance in China varies greatly within industries, and the market operates on the winner-takes-all principle. The main concern is to become that winner by responding nimbly to fast-changing market dynamics and by relying as much as possible on skilled local managers, who are still rare in China. For companies operating in sectors that are not yet fully deregulated, the focus should be on creating a competitive advantage before the gloves come off. Merely transferring Western business approaches that fail to match China’s reality won’t work.

About the Authors

Jonathan Woetzel is a director in McKinsey’s Shanghai office.

What it takes to be a successful multi-national corporation

China is the fastest growing consumer economy in Asia and unless conditions change will soon surpass Japan as the largest Asian economy and the second largest world economy.  With GDP growth averaging 8% throughout the last 20 years; and 1.3 billion potential customers who doesn’t want to do business in China? With its brand loyal centric market many companies are stumbling to form joint ventures with Chinese organizations to have a presence and a piece of the moon cake.  What foreign investors don’t realize is how difficult it is to build that market share and maintain it. In the Chinese business economy, it is necessary for foreign companies to have a strategic plan.
Having a stringent plan is not what will make you successful but your ability to follow along and adjust your preparations along the way.
Constructing a strategic plan like Nestle wasn’t a simple task and took much market research to ensure a successful venture. Areas which Nestle focused on in creating a reputable brand was having comprehensible contract conditions, making sure the venture was economically feasible, knowing who to partner with, understanding the rules and regulations in China, coming up with solutions for possible problems, completing systematic risk analysis, paying attention to profit margins, forecasting and keeping a watchful eye on potential competition, pricing, splitting profit margins between the ventures, following the Intellectual Property (IP) Rights and finally instituting a Presence in China.
Comprehensible contract conditions are important in an evolving country like China. With China’s consistent 8 % economic growth it is leading itself to continuous swift alterations in the domestic economy. Because many things are not predetermined, when commencing into a contract agreement with a Chinese partner you must be cautious to plan for all practical possibilities. One should not attempt to start an agreement without reasonable legal advice. It is a good idea to have your own legal guidance. It is worth it to compensate your legal representative a slight more to make certain you will have clear contract terms; or you will have to worry about paying your attorney at a later time if you have a dispute.
Making sure the venture is economically feasible for profitability is another detail to pay close attention to. Do not rely on guarantees of funding, encouragement, special considerations, or non-market associated sources of income to create a profit. If enticements are offered, they should be used to supplement profit, not create it.
Knowing who to partner with is another key strategy to be keen about. Do your research well. It is important to make sure that your joint venture is not an affiliate of a larger organization and if they were to default, would you be able to collect from the parent organization?
Understanding the rules and regulations in China is a cumbersome task and even coming up with solutions for possible issues.  It is necessary to be cautious of offers which are bent to your favor. “American companies have often entered into agreements with promises from local officials that central government rules will not be enforced in the provinces. ”
Completing systematic risk analysis in conjunction to creating a pro forma balance sheet, spending allocated time during the initial sequence of the project creating possible scenarios of what could go wrong helps tremendously with aftermath shock.
It’s important to have a stratagem for each phase of the project, even though you probably wouldn’t use it.
Paying attention to profit margins is an area to be realistic about. It is important to know how much risk your organization is willing to accept. It is vital to ensure you have reliable sources other than news media sources or immediate associates to assess the market for this evaluation.
Forecasting and keeping a watchful eye on potential competition is important towards projects and sales.  In China teams require stable consideration and clear lines of communication. Often times, there is a gap between the perceptions of the persons administrating the products or projects and headquarters in other parts of the world. Therefore Developing and nurturing personal relationships are important.
Pricing is another vital key that is often times overlooked.  With the recent economic analysis studies “suggests that over 80 percent of China’s industrial markets are in oversupply. ” It indicates that Chinese brands are stronger in many sectors. Within Chinese markets there is a consistent downward trend on the prices and Chinese competitors, predominantly those from the state-owned enterprises (SEO), often benefit from a low fee of capita allowing them to enter markets quickly and receiving strong encouragement from the government. The thing to remember is the field is upward sloping for all foreign firms.
Splitting profit margins between the ventures is an overwhelming task. The contract with an bankrupt associate or client is useless. It is essential to give careful attentiveness on how your organization is paid and the currency. Checking with the legal counsels of the industry sector will help to determine the specific payment terms which are usual for a certain type of business deals.
Following the Intellectual Property (IP) Rights It has been said that, in China, if a service or product could be profitably copied; it will be without a doubt. In addition, foreign Intellectual Property holders suffer enormous losses due to Chinese pirates in the China market which is increasing it in third world country markets.  It is important to closely monitor the market on a steady basis. Keep in mind, examining and enforcement in China require a costly procedure. Intellectual Property rights infringement on goods also flood out of China to all areas of the world and therefore cause vigilance in third world. Documentation shows that many FDI’s have lost their IPR with the active involvement of employees and their partners.
Instituting a presence in China is an expensive process. Having a representative office is the easiest form of office for a foreign firm to have set up in China, but having these offices limit the organization to performing “liaison” activities. For instance an organization with a representative cannot sign a contract for sales or bill customers directly. The representatives would need to do these in conjunction of the parent company. The benefit of establishing a representative office is that it gives the organization an increased power over a devoted sales force and allows greater consumption of its particular technological expertise and growth potential.
The growth potential and opening for new emerging markets in China is limitless . The foreign direct investments (FDI) alone in 2002 surpassed that of the United States, making China, the world’s foremost target for foreign funds. With growing FDI no wonder China has made itself to be the “Hot Pot” of the East. The increase in China’s FDI was from a result of its entry into WTO, Beijing 2008 Olympics, and a push to ramp up the infrastructure. The table below helps illustrate the rise of investments.

Table 1: Foreign Direct Investment in China
2001    2002    % change
Number of Projects Approved    26,139     34,171    30.7
Contracted Investment ($ billion)    69.19    82.77    19.6
Utilized Investment ($ billion)    46.85    52.74    12.5
Source: Ministry of Foreign Trade and Economic Cooperation

This impressive percent of growth was not built overnight. Looking back to the beginning of 19th century, 36% of the world GDP was produced in China. Whereas 22% was of the US.  In 1979 China embarked to make itself more of a market economy.  They have realized astonishing success from this initiative. China’s annual GDP went from 6% to 14% annually. If this type of growth continues at this pace, in the next 10 years China will be the largest economy in the World.
What is it that attracts foreign investors to this ever growing land of potential and what can they do to ensure their investment is vested?
According to the U.S. Office of Trade and Economic Analysis, in 2003 $148.6 billion in manufactured goods were imported from China which was up from $97.3 billion in 2000.  Comparatively to the US, over $126.8 billion of the $21.8 billion of U.S. manufactured goods were exported to China.
Although the YUAN is not pegged at the dollar and has not fluctuated much since 1995, the average wage for civil servants is 15,487 RMB per year (US$1,910),  and the factory workers average around 1,200 RMB per year (US $150)  (actual income varies on city and position). In retrospect, a salary of one United States’ (US) Ford Engineer is equivalent to ninety factory employees.  It is no wonder why so Multinational Companies (MNCs) are expanding here for cheaper labor.

The table below displays the rise of urban and rural per capita disposable income.

Table 5:  Food Expenditure & Disposable Income in China, in RMB    Disposable Income 2001/2002    Food Expenditure 2001/2002    Increase in Disposable Income/Food Expenditure

Urban    6,859.6/7,702.8    2,014.02/2,271.84    12.3%/12.8%
Rural    2,366.4/2,475.6    830.72/872.39    4.6%/5.0%
Source: China Statistical Yearbook, 2002, 2003

With so much opportunity on the horizon and favorable statistics from analysts, many investors are not hesitant in deploying the resources needed to start doing business in China.  But how many of them are actually looking before leaping? Whirlpool shows an example of a MNC who didn’t spend the time to know their market needs . This harsh reality spreads the story an organization that cannot step its foot in this magical “middle kingdom” and sell a product without having established strategic joint ventures, analyzing all potential problems (culturally and fiscally), doing a thorough risk analysis, and most importantly making sure the product / service is economically viable.
A classic example of a company which came in and supplied a growing need was Mexin .  Based out of Chongqing, China, Mexin was established in 1989.  This Joint venture is 25% American owned and 75% is Chinese owned.    The company used a necessary product, doors, to gain entry in the Chinese market, and is now expanding into other areas such as windows, bricks and landscaping materials.  Mexin has already began establishing contracts with developers in the housing push in Beijing and is currently exporting 10% of its products globally. The strategy of the company is such that they import pine from Southeast Asia cheaply, and then develop their products in Chongqing and nearby Beijing in a Free Trade Zone which is tax-free for all exports.
The examples of Ford and Mexin demonstrate to the willing investor the necessity for certain principles to be followed when doing business in China.  A key factor is to be genuinely interested in the cultural differences between the Chinese and the rest of the world.  When working in China it is noticeable that the government and people are much more influenced by the traditional command structures which were set up by the communist party..  It is important to treat China as a blanket and to learn thoroughly how to understand those patches where the MNC will be operating. Finally, finding a coach who can fill your company representative in on everything from wining and dining, to local politics, the power structure, personal feuds, and other cultural norms will assist greatly in the entrance to the Chinese market.
A good example of a Multinational Corporation that has successfully deployed operations in Asia for over 100 years is Nestlé. This MNC was able to share their inexpensive manufacturing process with the Chinese government and decentralize operations so that each product was managed by a case by city basis.
Nestlé (NESN) is a company we have all come to love and depend on for the variety of products. It has more than 225,800 employees, 495 worldwide factories, sells over 8,500 products, and has a presence in over 70 countries.
Not many people know the rich history of this major contender of consumer goods. It all started in the mid 1860’s when a pharmacist named Henri Nestle was trying to develop a substitute for infant nutrition for mothers who were not capable of breast feeding.  The success of this formula guided the rivalry between Nestle and the Anglo Swiss Condensed Milk Company.  This fierce competition lasted for approximately 40 years before they merged in 1905 thus creating the steps for its exponential growth. After the successful creation and distribution of chocolates, Nestle merged in 1929 with Peter-Catiller-Kohler of Chocolate Suisses. As things progressed in 1947, Nestle completed its third successful merger with Alimentana company.  After the war and greater availability of milk, many consumers resumed to fresh milk and food products which ended up hurting Nestle’s bottom line.  After the war, the company was also in fear that remaining in Switzerland would leave them targeted for any potential bombings, so they moved many of their offices to Connecticut.
Presently, Nestle is Switzerland’s largest industrial company and runs many subsidiaries such as Calistoga; Coffee-mate; Alcon; and L’Oreal Cosmetics. As this food giant grows, it stresses that its Swiss headquarters should not be the center of the ‘Nestle Universe’ as each of the headquarters should treat its employees and products individually.  With more than 100 years of business established in China, Nestle currently is the leading foreign food distributor in the Asian market.  What put Nestle in that position was decentralization.  Although Nestle is headquartered in Switzerland it allots responsibilities to its local branches.  For example, in 1933 Nestle entrusted a Japanese firm for manufacturing its products in Japan.
When moving into China, Nestlé considered the availability of raw materials so it would be cheaper to convert them into usable products. The availability of large labor pools aides the company in providing lower cost products as well as the ability to decentralize and find staff to manage the organization, performing such tasks as acting hastily for change in trends, tastes, and prices of products. Nestle made the move to China after the economic reform in the 1980’s and worked 12 hard years to open a factory in Shuangcheng. The location of this plant was determined by the Chinese government, and construction of this plant took only a small toll on this transnational company.  A partnership with Shuangcheng gave this business 15.5% of the corporate share, the Chinese Society for Development and Investments in Beijing a 20.5% share, and Nestle with a 64% share and ownership of three people of the five member board.  (The other two being Chinese partners who was also chosen by the government.)  Left with a burden of the expenses of starting up the operations and expanding technology of creating, storing, supplying milk still made approximately $700 million in 2000.
It is no surprise that US $33.9 billion of FDI has settled in China for the first part of this year alone . One can only imagine how long and how far these seemingly infinite investments will go. With the amount of government control decreasing and more positive variables available for MNCs, it no surprise that much is being accomplished.  Nevertheless, many cultural differences still exist.  Solely relying on MBA’s or formal training will not teach you how to deal with the difference in human behavior and Chinese culture effectively.  Business plans are not more than guidelines.  The most important factor is people.  They are what make these numbers come true.
In close, although it may seem like a daunting, incomprehensible task, doing business in china in manageable and profitable, just look at Nestle.  Confucius once said “The mechanic, who wishes to do his work well, must first sharpen his tools.” Just as a Mechanic a company who wishes to do their work well must first sharpen their minds to one of the greatest developing countries.

Sources:

http://www.buyusa.gov/china/en/doingbizinchina.html

http://www.chinanews.cn/news/2005/2005-09-19/11142.html

http://www.cpirc.org.cn/en/eindex.htm

http://www.chinanews.cn/news/2005/2005-09-19/11142.html

http://www.fas.usda.gov/gainfiles/200406/146106634.doc

http://www.chinadaily.com.cn/english/doc/2004-07/13/content_348060.htm

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