Transcript JLJ

DOING BUSINESS IN CHINA: MODES OF ENTRY
Prepared by The JLJ Group – Solutions for China Entry & Growth
Copyright @ The JLJ Group. All rights reserved. May 2009
1
AGENDA
•
The Big Picture
•
Modes of entry in China
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2
CHINA: A CONTINENT MORE THAN A COUNTRY
Area
9.560 M sq km
Population
1.3 B
GDP¹ (’08) US$
4.4 Trillion
Administration
33 (+1) administrative
areas (656 cities, 48000
districts)
22 Provinces (not
including Taiwan)
2 Special Administrative
Regions – Hong Kong,
Macau
~Km 3500
5 Autonomous Regions
Guangxi, Inner Mongolia,
Ningxia, Tibet, Xinjiang
Company
4 Municipalities – Beijing
Chongqing, Shanghai,
Tianjing
Language
Mandarin Chinese+ 7
major dialects and 80+
minority languages
~ Km 5,000
Hierarchical government structure: central – region – province – municipal –
district – local
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CHINA, KEY GLOBAL DESTINATION FOR FDI
Utilized FDI (USD Billion)
100
80
60
40
20
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
0
Source: National Bureau of Statistics
FDI in 2008: 92.4bn ~24% increase over 2007 – however growth slowed at
the end of the year (-14 % in Nov. y-o-y)
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THE PACE OF CHANGE IN CHINA…
Pudong, Shanghai 1990
Pudong, Shanghai 2008
…is striking and far outpaces that of any developed country
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DOING BUSINESS IN CHINA
Snapshot
•
Opportunities in China do exist - country has been opening up, growth rates are
impressive, population is getting wealthier, FDI have been pouring in…
•
However, competition is fierce; China market should be approached gradually,
un-emotionally and with realistic expectations
•
Long-term vision is a must, quick profits are unlikely – time, money and effort
are necessary
•
There is no such a thing as one China market, rather several regional/ provincial/
local markets
•
Applying the logic and mindset of the mother country would not work - gaining
local knowledge of business environment and practices is crucial
•
Conducting proper due diligence, developing a sound strategy, and finding the
right partners may also be key success factors
Opportunities in China do exist – proper preparation and planning are key
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AGENDA
•
The Big Picture
•
Modes of entry in China
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7
MODES OF ENTRY
Snapshot
•
Business setup process difficult for foreign companies to navigate due to complex
bureaucracy and regulations - laws & regulations constantly changing
•
Regional differences may exist; national regulations may differ from local
applications
•
There are three main legal setup options in China – Rep. office, WFOE and JV, with
different capital requirements and business scopes
•
NO one solution for all companies; solution depends on specific company’s
business and objectives for China
•
When deciding on the optimal legal entity, look for advice and assistance from
professional service providers – getting it right from the start is key
Key to leverage reliable service providers and get it right from the start
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NATURE OF THE INVESTMENT
Foreign Investment Catalog
Status of
industry/activity
Description
Examples
Encouraged
• Special incentives possible
• Usually high-tech or agriculture industries
• Manufacture of high-performance welding
robots
• Operation of nurseries
Permitted
• All activities not mentioned in catalog are
permitted
• But may be difficult to get approval for
uncommon activities
• All sectors not mentioned in catalog
Restricted
• Special approval required – usually JV
partner necessary
• Usually are protected sectors
• Production of cigarettes
• Operation of oil refineries
• Media production
Prohibited
• Activities are disallowed
• Harms national interests or
environmentally damaging
• Arms manufacturing
• Operation of gaming industry
When considering setting up in China, first step is to check the catalog
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FOREIGN INVESTMENT CATALOG
Legal Set up Options
Investment Restrictions
Setup Options
Description
Encouraged
Representative Office (RO)
•
Permitted
Restricted
Prohibited
Liaison office for parent
company
Foreign Invested Enterprises (FIE’s)
Wholly Foreign Owned
Enterprise (WFOE)
• Service WFOEs
• FICE
• Manufacturing WFOE
•Trading WFOE
•
100% invested and owned
by foreign entities
•
Capital investment from
both foreign and Chinese
entities
•
Partnership between foreign
and Chinese entities
Equity Joint Venture (EJV)
Cooperative Joint Venture
(CJV)
Allowed business scope depends on specific sector and type of entity
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NATURE OF BUSINESS
Import/Export
Rights
Domestic
Distribution
Service
Activities
Capital
Requirements
Rep. Office
Service WFOE
Manufacturing
WFOE
FICE
WFOE’s provide greater flexibility for future operations
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Registration
Complexity
CAPITAL REQUIREMENTS
Injection Methods
Total Investment
Less than 3 million
Between 3 and 10 million
Between 10 and 30 million
Between 30 and 36 million
Registered Capital
No less than 70% of total
investment, with a
minimum of ~15,000
No less than 50% of total
investment with a
minimum of 2.1 million if
total investment is below
4.2 million
No less than 40% of total
investment with a
minimum of 5 million if
total investment is below
12.5 million
• Complete injection within 6
months
-or• Capital contributed in
installments: 20% within
first 3 months with the
remaining injected within 2
years
Currency: US Dollars
No less than 1/3 of total
investment with a
minimum of 12 million
Investment capital ratio depends on total investment
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CAPITAL REQUIREMENTS
Investment ratio example
Registered Capital
Example 1
Equity (100%)
Total Investment
Registered Capital
Example 2
Equity (70%)
Debt (30%)
Total Investment
Shareholder loans are an alternative means of profit repatriation
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WHAT ABOUT INCENTIVE PROGRAMS ?
Latest Trends
•
The economy slowdown has spurred local governments to provide
additional incentives for establishing FIE within their jurisdiction
•
•
•
•
•
•
Recognizing encouraged statuses before official approval
Reduced tax rates for local portion of corporate income tax
2/3 Tax holidays
Reduced fees for land-use rights
Subsidized housing
However, local incentive programs, once secured, may be tenuous
at best, especially once the economy rebounds
However, special Incentives should not be the only priority in choosing a location
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BUSINESS REGISTRATION PROCESS
WFOE Example
Company’s Chinese Name Approval
Stage I:
Licensing
Approval to Establish Company
Registration of Business License
Filing and Carving Seals*
Enterprise Code Certification**
Foreign Exchange Approval
Stage II:
PostLicensing
Registration with Tax Bureau
Statistics Bureau Registration†
Open RMB & Foreign Currency Bank Accounts
Stage III:
PostCapital
Injection
Capital Verification
Update Business License
A complex process… but it can be done!
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*Official company stamps
required for many business and
banking transactions in China
** Equivalent to a personal
identification number for the
licensed company
•† This process can be completed
at any stage following foreign
exchange approval and
registration with the tax bureau
FINAL CONSIDERATIONS
 Be clear on objectives, level of commitment, and time horizon for China…
 Things will take longer than you expect, patience (and persistence) are a must…
 Be ready for steep learning curves and, for sure, some surprises...
 Do your due diligence, biz environment is complex yet not impossible to grasp…
 If you are considering a JV, make sure you have compelling reasons for it …
 Get advice / support from professional service providers…
China’s business environment is complex – yet NOT impossible to grasp
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ABOUT THE JLJ GROUP
•
One-stop service provider assisting foreign companies to enter &
grow in China
•
One of very few firms in China legally licensed to provide true fullpackage services
•
Served 400+ clients from 30+ countries – from Government
organizations to SMEs to Fortune 500 companies
•
Offices in USA and in China – providing end-to-end service
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THANK YOU FOR YOUR ATTENTION!

The JLJ Group
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
Shanghai
Suite 603-605
Oriental Center
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Shanghai, 200041 China
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
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Beijing, 100026China
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Beijing
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Cambridge, MA 02138 USA
Tel: +1 857 636 2596
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Email: [email protected]
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Website: www.jljgroup.com
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