Means of Doing Business
Presentation outline
• Choices of investment
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representative office,
joint venture,
wholly-owned foreign enterprise
Foreign investor shareholding corporation
• Site location
• Finding the right partner
• Principle of building relationship with
China business
Representative Office
• Appropriate for selling imported products in China
• No allow to do business directly
• build relations and provide technical support and
training
• Ministry of Foreign Trade and Economic
Cooperation (MOFTEC)- supervisory government
agency for representative offices
• Need a local sponsor or consultancy from
MOFTEC or FESCO (Foreign Enterprise Service
Corp.) to set up a representative office
Representative office- continued
• Legal documents and Procedure
– home company’s business activities
– a complete list of board of directors
– article of association
– recent balance sheet and income statements
– register with State Administration for Industry
and Commerce (SAIC)
– after approval from SAIC
Open a bank account with Bank of China,
Register with Public Security Bureau, the
Customs and the Tax Bureau
Joint Ventures
In joint venture agreements, they include:
 Name of the joint venture and location
 Production capacity and quality
 Total investment and source of funds
 Percentage of investment and division of profits
 methods of marketing
 form of investment/cooperation
Joint Ventures
Equity Joint Venture (EJV)
• a limited liability corporation with equity shares
from each side
• Equity shares in the form of equipment, cash,
land, factory building, industrial property rights
• foreign partner’s minimum stake is 25%
• Part of the contribution must be in cash
• Part of the contribution can be in technology
(<20% total capital or 50% of foreigner’s
investment--whichever is lower)
EJV (continued)
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share profits/loss according to equity share
life of 15 to 30 years, can be extended
Partners determine the corporate strategy
If the Chinese appoints the director as the
chairman, the vice-chairman should be from the
foreign side, and vice-versa.
• Foreigner partner cannot withdraw its capital
while EJV is in operation
EJV: Example
Jinbei-GM automobile Co:
• 50/50 equity joint venture
• Chinese partner -- land and building
• American partner -- cash and technology
• GM’s current investment with Jinbei is $230 million
• Location-- Shenyang
Cooperative Joint Venture (CJV)
• The Chinese provides the non-liquid assets (land,
natural resources, labor, services and buildings,
equipment or facilities)
• Foreign partner provides the either capital or
technology, equipment or materials etc.
• CJV contract defines the distribution of products,
profits or losses
• Foreign investors are allowed to recover the
investment before the enterprise expires.
CJV: Example
Motorola-Apple-Panda
 March 1996, cooperative joint venture
 Apple contributes design of the PC, Motorola, the
G4 processing chip and Panda, the land and
building space
 Failure: Apple was not happy with Motorola’s
slow G4 chip production decided to withdraw
from the joint venture (which was then dissolved).
Compensation Trade (CT) deals--counter-trade
• Firms sell raw materials (or technology etc) and
buys back the manufactured goods or other
substitute products
• The foreign side supplies the production equipment
and technology
• Two ways to raise capital for CT
– Foreign investor obtains foreign bank loan to pay for the
equipment imported by the Chinese
– The Chinese side uses the export loan from foreign bank
to buy equipment
• Leasing arrangement falls into CT
Processing and Assembly Agreement
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foreign side supplies materials
Chinese side processes or assembles them
The Chinese receives a fee for their efforts
Foreign partner pays the fee in either cash or
open a letter of credit account with Bank of China
or other approved Chinese bank for the finished
goods.
• Industries include --labor intensive (cloth-making)
and others (calculators)
• preferential treatment such as tax free for imports
Wholly Foreign-owned Enterprise
(WFOE)
• Limited liability company
• Foreign investment may be in the form of hard
currency, machinery, industrial property rights or
know-how
• Condition for approval
– advance technological know-how
– more than 50% of output in terms of foreign
exchange
WFOE (continued)
• Restricted areas:
• News, publication, broadcasting, television, film
industry, foreign trade, insurance, post and
telecommunications and others.
• In 1986, WFOE 1% of foreign investment
In 1991, WFOE was 37%
• Usually require 15% of capital registered within 3
months of establishment
Foreign Investor Shareholding Corporation
(FISC)
• joint stock company
• Foreign company allows local Chinese partners to
have minority stakes in return for their business assets
(factories, and trucks)
• Local partners do not participate in management of
the firm, but help the firm to access to markets
• Kodak (China): invest $1.2b for a freeze on foreign
competition until 2002
• 80% share-20% local (Xiamen Fuda and Shantou
Era), each appoints a board member while Koda
remaining 8 members
Foreign Investor Shareholding Corporation
• Regulatory framework allows foreign corporations
to convert existing joint ventures and whollyowned foreign subsidiaries into FISC, provided
they have been profitable for 3 years.
• China’s State Development Planning Commission
is involved in creating FISC.
• FISCs are well placed to obtain quick listings on
the Shenzhen and Shanghai stock exchanges,
making it easier for them to raise new capital.
Site Location
• No one can own a piece of land but to rent it
• The renting period is
– 70 years (housing)
– 50 years (industrial, educational, scientific and
sporting use)
– 40 (commercial, tourism and recreation)
• You can transfer, lease or mortgage to third party
within the legally-specified period
Site Location (Continued)
Four-pronged Approach to building Capabilities
• Establish a small office
– obtain information
• Assess the scale of opportunity
– local consuming patterns and the spending power
• Identify and evaluate entry options
– different types of investment options (JV, others)
• Plan for market entry and expansion
– think China as a group of countries. Tastes and business
rules vary between regions
Finding the Right Partner
Approaches
• Through the government ministry or a statebacked industrial association
– be aware of the badly managed state-owned
enterprises
• Own efforts
– Get a list of companies that offer the products
you want
– eliminate the number by examining factors
• Right partner (continued)
– such as location, infrastructure, labor cost.
– Communicate to them to see if there is
responses
– ask them to work out the joint venture
arrangement with the local government
– share the SAME objective
Strategies or Principles of Doing
Business in China
• Try to take a high moral ground
– Survey of more than 800 business experts for the question: How
likely are companies from the following places to pay or offer brides
to win or retain business? Source: Transparency International,
5/7/02
Russia
China
Taiwan
S. Korea
Italy
HK
Malaysia
3.2
3.5
3.8
3.9
4.1
4.3
4.3
Japan
US
France
Spain
Germany
Singapore
Britain
5.3
5.3
5.5
5.8
6.3
6.3
6.9
Belgium
Netherlands
Canada
Australia
Switzerland
Sweden
Australia
7.8
7.8
8.1
8.2
8.4
8.4
8.5
• Take a serious second look at the investment,
making plans for contingency
• Develop a diversifying strategy within China (if
possible)
• The Manger in China should report to CEO in US
in case of emergency and changing environment
• Develop investments and relationships with local
communities
• Viewed as a guest in China