Download - 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