access to the chinese market kbc bank n.v., shanghai branch 18 january 2012

Access to the Chinese Market

KBC Bank N.V., Shanghai branch

18 January 2012

Agenda

• Entering the Chinese Market : Challenges & Opportunities

• Product Offering by KBC China

Entering the Chinese Market : Challenges & Opportunities

Introduction

• Opportunities presented by the Chinese market are increasingly difficult to ignore

• Strong economic growth, rapidly changing demographics, rising incomes, increased consumer spending and increasingly open business environment makes China attractive

• To be successful in China requires a lot of understanding, planning, research, consultation

• “In China everything is possible, but nothing is easy”


Identifying the Market

• Huge potential market but understanding where these opportunities lie and how to access them can be extremely challenging

• Foreign companies often find their China success stymied through insufficient lack of local understanding

• China is in no way a uniform and homogenous market. It is a collection of individual sub-markets defined by vastly differing demographic, economic and cultural characteristics

• China actively encourages the setting up of industrial clusters in specific cities or regions and in many cases entire industry supply chains can be concentrated in a small handful of cities

• Important to identify the geographical location of the target market(s) and the best specific location to target


Choosing a Location

• Tendency to choose China’s Tier 1 cities (Shanghai, Beijing, Guangzhou) and whilst it offers the lowest risk point of market entry, one faces higher operational costs and more competition

• Economic growth and rising incomes in China’s Tier 2 cities have made entering these markets much more attractive. Tianjin, Chongqing, Chengdu, Nanjing, Qingdao, Dalian, Suzhou and Hangzhou all offer strong opportunities

• Important to map out the location of customers and suppliers, understanding how distribution channels vary between different locations, fully researching any local regulatory barriers that could block market entry in specific regions

• Investing in manufacturing also require additional research such as local manufacturing and transport infrastructure, access to key raw materials, local investment policies, the availability and cost of human resources and a host of other factors


Government Policies and Regulations

• Although China’s entry to the WTO helped to liberalise the trade environment, many industries remain heavily regulated

• Consult the China foreign investment catalogue, which divides foreign investment projects into “encouraged”, “restricted” and “prohibited”

• Regulation is becoming more stringent. Tougher scrutiny on companies involved in food, pharmaceutical and medical devices. Also much tighter environmental legislation

• Regulations often impact significantly the timeline and costs of market entry e.g. long product or clinical trials may be required in the medical and pharmaceutical sectors

• Critical to spend time researching and understanding the regulatory environment prior to entry. Equally important to constantly monitor any changes to legislation or regulations and how these could affect your business

• China’s regulations are often vaguely worded and open to interpretation


Hiring Staff

• Arguably, the single biggest determinant of a company’s ultimate success in China is the quality of staff it employs

• Tier 1 cities offer better quality staff given the huge presence of foreign companies

• Every city has its minimum wage requirement

• Senior Management – expatriate or local ?

• Issues to consider: operational control, costs, market knowledge, knowledge of Chinese cultural and business practices, etc

• In many industries the supply of highly skilled local managers is extremely limited, driving up cost

• High staff turnover rates and retaining quality managers over the long term is challenging


Developing An Intellectual Property Rights (“IPR”) Strategy

• IPR infringement is commonplace in China

• There is no one-size-fits-all IP protection strategy for China, and typically an effective strategy mix will employ a number of different tools

• China has a “first-to-file” patent system, which means it is possible for local Chinese companies to register another company’s patents even though it is not the original inventor of a technology

• China also has a “first-to-file” trademark system, which means a foreign company’s legitimate brand and logo cannot be used if these trademarks have already been registered by a local Chinese company

• Practical measures: due diligence on prospective partners and employees, signing Non-Disclosure Agreements, monitoring the market for infringements


Market Entry Mode

• Depends on a number of factors, including industry landscape, the geographical size and scope of the market, whether the company pans to manufacture locally or import its products and the level of on-the-ground sales and technical support required by customers

Advantages Disadvantages

WFOE High level of managerial control

Can employ own people without restrictions

Greater flexibility Can convert RMB profits

into US dollars Greater level of IPR

protection

Initial set-up costs high Long incubation period No access to JV partner

resources Higher start-up and

operating costs (registered capital)

Some industry limitations

Minimum number of staff requirement

Tax and repatriation of profits challenging


Market Entry Mode


JV Mandatory for some industries

Opportunity to utilise existing sales networks and customer base

Access to partner’s existing resources

Production facility Lower cost base (local

management)

Less managerial control Finding a trustworthy

partner is critical Challenging to agree

terms of the partnership May be a long

negotiation period Potential risk to IPR Success may depend on

having staff on-the-ground to oversee operations

Partner likely to negotiate terms in their favor


Market Entry Mode


Rep Office Quick to set up Low cost (low

overheads) No registered capital

requirement Good for marketing,

partner auditing and admin

Unable to trade Staff employed via third

party Limits on number of staff


Banking Climate in China

• Highly regulated environment…

• Strict monitoring of loan usage• Trust payments• Deposit rates are fixed• No free flow of foreign currency payments

• …which faces occasional liquidity droughts

• Challenge for effective cash planning• More expensive bank lending

Product offering by KBC China

Bank Loan

• RMB Loan

• Quotas and guidance

• On parent guarantee, permitted borrowing limits by regulatorcannot exceed Investment Gap

• Foreign Currency Loan

• Illiquid FCY interbank market (high onshore funding cost)

• Limited by a Bank’s Foreign Debt Quota (lower offshore funding cost) – both short term and long term

• BAD-discounting

• FX-hedging (spot + forward)

• Trade finance

KBC AS YOUR PARTNER

Product offering by KBC China

• Priority extended to strategic customers

• Close cooperation between CSOB and KBC China

• English speaking service

• Support in terms of market know-how and access to service providers (accountants, legal / tax advisers, etc…) specialized in assisting European companies in China

If you have further questions or you would like more information on our service offer, please do not hesitate to contact us.

KBC Bank N.V., Shanghai Branch

Jason LEEGeneral Manager & CEO +8621 5879 1599 ext [email protected]

Koenraad Van de BorneHead of European Network Desk+8621 5879 1599 ext [email protected]

Contact Details

mailto:[email protected]

mailto:[email protected]

access to the chinese market kbc bank n.v., shanghai branch 18 january 2012

Documents

market huge potential

homogenous market

costs of market entry

chinese market kbc bank

kbc china

china attractive

china success

chinas entry