Marius

“For the times are a-changin” – Joint Ventures for Distributing Consumer Products

September 24, 2012 in Business Establishment in China, China Business Consultants, Foreign Business in China, Foreign Investment, Foreign SME in China, SME in China

Summit-China/ZJRC is a management consulting firm and a leading advisor on business strategy in China.  It is affiliated with  Zhong Yin Law Firm which with 14 offices throughout China and more than 800 lawyers is one of the oldest and most respected  law firms in China.  For more information on Zhong Yin Law Firm, click here.

From time to time we publish in the blog below, items that may be of interest to foreign business in China.  If you would like to receive specific information respecting doing  business in China, please click here.

Latest Blog:  Joint Ventures for Distributing Consumer Products

Lately, some China watchers have been blogging about joint ventures and immediately I thought of Bob Dylan’s song of which the second verse is as follows:

“Come writers and critics
Who prophesize with your pen
And keep your eyes wide
The chance won’t come again
And don’t speak too soon
For the wheel’s still in spin
And there’s no tellin’ who
That it’s namin’
For the loser now
Will be later to win
For the times they are a-changin”.

This certainly seems to apply to writers about foreign joint ventures in China.   When the west first entered the Chinese markets, joint ventures were the only way.  Regulatory, cultural and traditional business reasons for entering in joint ventures combined to lead the wannabee China business to the joint venture.

Bad experiences with joint ventures have since dominated the blogosphere.  At the same time dring the last few years, regulatory restrictions have been  relaxed, cultural impediments have lost some of their significance, or threat of you will, and traditional business reasons have turned out to be less relevant in the Chinese context.  Accordingly, lawyers and consultants generally recommended the WFOE as the corporate form of choice for establishing a foreign business in China.

However, as economies are withering and businesses’ resources dwindling, sino-foreign joint ventures seem to have regained some of the lost appeal.  Moreover, the nature of foreign business is also changing.  Where previously, foreign technology driven MNC’s were dominant among foreign investors in China, during the last number of years, service corporations and consumer good companies have become much more prevalent.   The latter have different objectives and therefore require different strategies to be successful. In fact, the number one problem that those companies face is distribution.  They have the product, they know demand will be strong but they don’t have the infrastructure to link their product with the consumer.  A local or domestic distribution network is missing.

Contracting with Chinese distributors is one way of dealing with this problem but joint ventures between foreign suppliers and Chinese distributors may be the best way to achieve this result as the foreign supplies will retain much more control over product and profits.  However to be successful as a business model, foreign joint venturists must be aware of some major requirements to prevent problems that have led to the failure of many earlier sino-foreign joint ventures in China.

Here are a few general pointers:

Firstly, more than anywhere else, the foundations for your success must be laid before the deal is signed.  Preliminary work, i.e. due diligence, is essential.

Secondly, have an exit agreement incorporated in the joint venture entry agreement.  Later on, you may have million dollars in China but you may not be able to get them out unless you exit the joint venture properly.

Thirdly, make sure you have an experienced consultant if you are going to deal with a local partner.  A foreign business lawyer with extensive Chinese experience and a strong local network may be a good choice.

Lastly, keep the scope of the venture limited to your core objective.  If it is distribution, carefully analyze what is essential to its success and what is not.  Anything that is not essential should be left out of the agreement.  Joint ventures are not mergers.  Joint ventures are not forever.  Like any other business agreement, they have two or more partners (preferably 2), mutual promises and they should have a time limit.   Joint ventures are limited companies not only in terms of liability but also in terms of business scope.  The less that is included, the less that is lost in case of premature break-up.

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Marius

Food Safety and the Rule of Law

July 8, 2012 in China Business Consultants, China Law, Legal

In a recent article in Caixin, Prof. Fu Weigang, vice-president of the Shanghai Institute of Finance and Law, is quoted to have commented on the failure to stem the flood of food safety problems in China.

He states two main reasons, first the problem of corrupted food inspectors and second the reluctance of the Chinese courts to deal with cases commenced under the Tort Law of 2009 which allows for product liability lawsuits.

The article can be read here: http://english.caixin.com/2012-07-05/100407925.html

The issue of corrupt food inspectors is clear and does not need comment.  The reluctance of the courts to take on cases is another matter.

Chinese courts like all courts in the world have authority to discretionarily accept or reject to hear cases and/or  to make judgment.

However, Chinese courts have demonstrated a for western observers puzzling reluctance to take cases and to make judgments, in particular to make damage assessments.

One of the reasons for this has been hypothesized as deference to the State and its regulators and another has been “not knowing what to do” for lack of precedent, the law being new and little tested.

The rule of law is important in maintaining order in the economy, by keeping the players accountable for their unlawful actions.

Criminal law is to deal with the most serious of disorder.  However, private law such as the Tort Law of 2009 depends on citizens to take legal action against each other to address disorderly market conduct.  Such law has proven extremely effective in western countries but in China it is still in its infancy and underused as a result of unfamiliarity and court bashfulness.

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Marius

Labour Costs in China’s First- and Second-Tier Cities Remain Far Apart

June 4, 2012 in Business in China

Labour Costs in China’s First- and Second-Tier Cities Remain Far Apart

Rising rising labor costs are a fact of life doing business in China.  It is the Central Government’s explicit goal that minimum salaries rise by 13% each year between 2011 and 2015 for a compounded total of 84%, almost a doubling of minimum wages in 5 years.

However, it is also a fact of economic life that productivity in China has risen faster than wages and as such, the government’s goals of increase are no more than to be expected and sustainable.

Another fact that will remain is that China’s second-tier cities such as all cities in Jiangsu, including Suzhou, Nanjing, Wuxi and Nantong will have significantly lower wage levels than first-tier cities such as Guanzhou, Shanghai and Beijing.  For example while the highest minimum wage is in Guanzhou at RMB1,300/mo, in Nanjing and other Jiangsu cities it varies from RMB800 to RMB1,140.

Lastly, minimum wage increases are not only intended to reward workers but more importantly to turn the domestic market into a bigger contributor to growth and reduce China’s economic dependence on exports.  As such these increases will be of benefit to foreign companies exporting to China or producing in China for the Chinese market.

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Marius

Corporate Responsibility for Profit in China

June 2, 2012 in Business in China

As we have noted before, in the last 20 years, Corporate Social Responsibility (CSR) has become a term that has found its way into business thinking and business schools’ curricula everywhere and there is no multi-national company that has not yet defined its CSR profile.

Also in China there is growing awareness that CSR, defined as the way companies integrate social, environmental and economic concerns into their values and operations, presents an opportunity rather than a burden. Accordingly, for us at Zhong Yin Law Firm and Summit-China/ZJRC (www.summitchina.ca), the reality that our foreign clients need to achieve value for all stakeholders, internal and external, and must  look for shared value opportunities to generate business has become a priority in our service provision.

In the first place, CSR is increasingly codified in the laws and regulations of China.  But CSR is not just a matter of meeting the requirements of the law.  All stakeholders in the corporate world, suppliers, customers, employees and investors have increased their expectations about corporate behaviour:  actions and ethics.

The upshot is that integrating socially responsible behaviour into your company’s operations in China will benefit the bottom line by way of creating value opportunities which will help secure the achievement of a company’s business objectives.

Therefore, it is our opinion that CSR is not just fashionable but an opportunity which must be incorporated into our clients’ strategies and business operations in China from the start.  It should be done by focusing on the needs of all participants in the value chain and establishing strong relations that emphasize mutual dependence: Customers, employees, suppliers, investors and the community in general. The ability to communicate and engage in a meaningful way with local stakeholders will improve foreign business in China’s reputation and appeal and as a result business and profits will come more quickly.

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Marius

Corporate Social Responsibility in China – The Case of ICBC

May 23, 2012 in Case Study

INDUSTRIAL AND COMMERCIAL BANK OF CHINA:  CORPORATE SOCIAL RESPONSIBILITY REPORT 2011

In each of the last five years, our client ICBC has issued a Corporate Responsibility Report.  On March 29, 2012, the bank released its 5th report dealing with its social responsibility activities for the year 2011.   To see the full report, click here.

Corporate Social Responsibility is the company’s responsibility for its actions as a participant in and member of society and its objective is to encourage a positive impact through its activities on the stakeholders: All those on who the company’s actions have an effect: Shareholders, Employees, Customers and Consumers and the Community in General.

Corporate Responsibility – Corporate Culture

The key to corporate responsibility is corporate culture.   A simple way of describing “corporate culture” (also sometimes called “organizational culture”)   is the way an organization acts in other words, goes about achieving its goals and objectives or simply put “does things”.

Culture is about individuals in a group sharing patterns of behaviour.   It involves behaviour that is common to all who work in the organization.  For example in the army the way soldiers greet each other is an example of “corporate culture”.

As Sun Tzu, a Chinese military general from 3000 BC, indicated in his explanation of strategy, culture forms an integral part of any organizational strategy.

It consists of Tao – the created and shared beliefs, values, and glue that holds an organization together.  It makes it easier for the members of the organization to understand each other and to work together to the common goal.

Corporate culture is the key to corporate responsibility as behaviour determines how responsibility is discharged.

Corporate Culture as an Obstacle

Knowledge of corporate culture creates expectations among the stakeholders and if those expectations are not met there may be trouble.  Therefore it is very important that every member of the organization is familiar and fully supports all aspects of corporate culture and acts accordingly.

Corporate Culture as a Tool for Success

Once a new strategy is set for an organization every component of the path to achieving the new goals must conform to corporate culture in order that the new goals are realized. Corporate culture determines how things are done.  If the new strategy requires a change of culture, it will be much more difficult to put into practice.  Therefore corporate culture is usually framed in general terms so that it meets many different circumstances.

Strong Leadership is Required

One of the surest ways to align the culture to the organization’s strategy is to apply leadership practices that are also aligned. The leaders, at all levels, need to know what the required culture is and then determine ways of establishing practices and procedures in all operations that will closely reflect the desired culture.

They also need to role model the very behaviour they wish exhibited by everyone in the organization. Particular attention also needs to be given to all communications.

ICBS’s Leadership expresses its involvement in 2 major ways:

-           Assurance Approach of the Report (See Introduction)

-           Statements by the Chairman and the President

ICBC’s Corporate Culture

ICBC’s corporate culture is founded on five principles:

-         Mission:

“Excellent for you – Excellent services to clients, Maximum returns to shareholders, Real success for our people, Great contribution to society”

-         Vision:

“A global leading bank with the best profitability, performance and prestige”

-         Value:

“Integrity leads to prosperity”

-         Basic Dimensions of Value:

“Integrity, Humanity, Prudence, Innovation and Excellence”

-         Brand Image:

“A reliable bank that is always by your side”

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Marius

Doing China Business Successfully

May 7, 2012 in Business Establishment in China, Business in China, China Business Consultants, Export to China, Foreign Investment, Foreign SME in China, Import from China, Mergers & Acquisitions, SME in China

NINE POINTS FOR SUCCESSFUL DEALING IN CHINA

“Business Insider” recently posted an article “The Reason Why So Many Business Deals Go Wrong in China”. Click here if you wish to read it.

While we agree with the points made in the article we fundamentally disagree with its conclusion.

Many business deals go wrong, everywhere in the world.  The better way to approach “doing business in China” is by asking “why so many business deals go well in China”, because the truth is that many deals are done every day to the satisfaction of all concerned.

There is no secret to it and we believe that “guanxi” is the most overrated concept that foreigners focus on when doing business in China.

We believe that due diligence is the basis for success and the answer to most  problems respecting doing business in China.  Proper due diligence will prevent most problems other than those caused by force majeure.  If you investigate your business partners and their proposals carefully and thoroughly, then there will be very few problems.

Here are our tips for proper due diligence:

1)   Get the potential Chinese business partner’s official corporate records from the Chinese government source:  The State Administration for Industry and Commerce (SAIC).  Our confidence in the SAIC filings stems from the fact that registered companies in China must file annually and include an audited financial statement with that filing. The audit must be preformed by a Chinese audit firm and that financial statement is commonly also used with tax reporting.

As you know, tax filers normally under-report their affairs so this information is a good basis for due diligence.  As an added benefit, the Chinese companies investigated through the SAIC will know they are being investigated and thus are warned that you are taking due diligence seriously.

2) Get a China based credit bureau’s files on the Chinese company.   They are both affordable and responsive.

3) Look to see how the Chinese associate with whom you are interested to do business is treated by other Chinese companies.  They are much more knowledgeable then you are.

4)  Take all company-provided introductions with lots of salt and compare them with the results of your findings at the SAIC.  Further, rely on your own network to help you understand the company and industry. If you don’t have a network use that of your consultants.

5)  Put everything you are being presented under the micro-scope:  Paper/Documents and Operations.  Don’t leave a stone unturned in your search for the truth.

6)  Talk to your competitors and that of the potential associate. They will tell you more about a fraudulent operator in your industry than you may expect.  Many competitors will be reluctant to speak openly at first about a fraudulent operator. However, if you are a potential customer, vendor or partner, it can be a different story.

7) Never delegate due diligence and other legal matters to a Chinese subordinate or consultant.  A lot of experienced foreign business have stories about Chinese subordinates and consultants who colluded with another company to  defraud the foreign business.

8) Don’t do any business deal that defies common sense. Yes, that is pretty basic, but in many ways it is the key.  If it looks “too-good-to-be-true” it usually is and it will not happen.

9) Find your business partners in the areas of China where there is the most foreign business  activity,  I.E. the Eastern seaboard.  Both consultants and the governments in those areas are the most sophisticated and reliable in dealing with foreign business and when there is a conflict, the courts of the Eastern seaboard are much better qualified to deal with contract issues with foreigners that those in the west, south and north of China.

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Marius

China’s Inbound FDI Down and Outbound Investment Up

April 21, 2012 in Business in China, Economics, Foreign Investment

TRENDS TO WATCH IN CHINA’s FDI

China’s Ministry of Commerce, also know as MOFCOM,  reported this week that China’s First-Quarter Foreign Direct Investment inflow is down 2.8%.  Although a small percentage, this is significant for us as our business is inbound foreign investment into China and we believe here is trend in the making.

On the other hand, outbound foreign investment was up 94.8%, led by the purchase by Chinese interests (machinery manufacturer the Sany Group, owned by China’s richest man Liang Wen’gen who is worth an estimated $11 billion)  of the German Putzmeister company from its German owner, Karl Schlecht, who started the company and controlled it through various trusts for the benefit of his family, and  who is now 80 years old and has seen fit to retire.  Putzmeister of course is the concrete-pump on wheels we see at every construction site and which has revolutionized concrete logistics.

These statistics coincide with the fact that China’s economy grew at its slowest in nearly three years in the first three months of 2012.  The Chinese National Bureau of Statistics reported that the annual rate of GDP growth in the first quarter slowed to 8.1 percent from 8.9 percent in the previous three months which is below the 8.3 percent consensus forecast of economists polled by Reuters.

In this context must be seen that China has eased monetary policy and relaxed its hold on the yuan by doubling the band within it (through the People’ Bank of China) will allow it to fluctuate vis-a-vis the US Dollar and its decision to help shield the country from a slowdown in the global economy by cutting 100 basis points from the proportion of deposits banks must hold as reserves (required reserve ratio “RRR”) .

That has created an estimated 800 billion yuan ($127 billion) of new lending capacity in the financial system and another  1.2 trillion yuan is forecast to be freed up when the RRR is dropped by another 150 percentage points.

Clearly these are interesting times as these liberalizations prove that the Chinese leadership is not prepared to wait until the new leadership is in place to move the Chinese economy further towards less central planning and control.

 

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Marius

THE ROLE OF SECOND TIER-CITIES IN ENTERING THE CHINESE MARKET

April 12, 2012 in Foreign Business in China

A recent article in the Economist (April 7th – 13th, 2012, “The Dragon’s New teeth”) states Chinese military strategy as “making the best use of [our] strong points to attack the enemy’s weak points”.

As often is the case, business strategy may benefit from military strategic concepts and in the case of foreign business entering the Chinese market adoption of this concept may result in the decision to by-pass its 1st-tier cities  in favour of 2nd-tier cities in order to establish a marketing beach head in the new territory to be conquered.

So far, entering the Chinese market has  generally been by way of the Beijing, Shanghai, and Guangzhou/Shenzhen markets. Those were considered to be the most developed and therefore believed to be the most promising for new foreign products.  The result has been a continuously increasing supply of new products coming from around the globe, a certain measure of saturation and the attendant competition for consumers’ discretionary coin.

However, these 1st-tier city markets only constitute a small part of China and its population and because of competition they are definitely not the weaker parts of the Chinese market.  Moreover, their population as a whole is not necessarily the most developed or “ready” to accept new consumer trends.

On the other hand there are other regions that constitute equally large if not larger markets without the crowding of western companies eager to take, often at too much cost, a market share.  These are comprised of so-called 2nd-tier cities, each with multi-million populations, all larger than most European and North-American cities and with populations segments that are both sophisticated and that have money to spend on the western consumer goods these foreign companies would like to sell.  Such cities are mostly found in the north-east and along the eastern seaboard and include from north to south such cities as Harbin, Shenyang, Dalian, Tsingtao, all cities in the Yangste River Delta, including Nanjing, Suzhou, Wuxi, Ningbo and Hanzhou and cities further south.   Each of these has a population of at least 7 million and GDP’s to match.

Accordingly, western companies seeking to enter the Chinese market should seriously consider the pros and cons of a strategy that would involve by-passing Beijing, Shanghai and Guanzhou/Shenzhen in favour of one or more cities in the second tier as a first step in the process of entering China.  This is a viable option for many companies and can offer numerous rewards.  Such strategies have worked in other countries and should be seriously considered as these 2nd-tier markets may be more homogeneous and transparent on one hand and less competitive and easier to conquer than the markets in the 1st tier on the other.   However, to benefit from opportunities offered by 2nd-tier cities, careful planning is necessary as each has its unique characteristics. This involves market research and all the attendant activities necessary for successful entry into a new market.

Should you wish to receive information about the second-tier cities near Shanghai contact us.

 

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Marius

Doing Business and the Rule of Law in China

March 26, 2012 in Business Establishment in China, Business in China, Case Study, China Business Consultants, Economics, Foreign Investment, Foreign SME in China, Mergers & Acquisitions, SME in China

Predictability is one of the most cherished notions in doing business.  If we can predict, we can make decisions, we can invest and we can look forward to the future with confidence.  The decision to do business in China depends on the outcome of many predictions and on the extend that one can predict with a reasonable degree of certainty the outcome of the decisions.

When entering a foreign country to do business, one of the predictions that needs to be made is whether we can count on the support of the law in the case of conflict.  We want to know whether the law rather than people rule in the case someone breached a promise or agreement.  It depends on whether the Rule of Law is a reality or a myth.

Often an objection to doing business in China is the notion that the rule of law is too weak and that it is all “guanxi”, and therefore that the legal system is biased against outsiders, whether they be foreigners or Chinese from other regions.

This objection has lost most of its force in China because the Rule of Law is alive and well.

I was reminded of this upon reading of some statistics showing the tremendous increase in business lawsuits in China.  This is an indication that people resort to and depend on the courts rather than other, often illegal, means of enforcement of contracts.

I also came across a case, describing how a contract between a foreign artist and a Chinese publisher had been breached by the latter and enforced through the court system in China although it was settled “out of court”.  I found the case on the SME-website of the European Union and it bodes well for all of us doing business in China.  I quote verbatim:

“Background

After several weeks of negotiation, a European artist authorised a Chinese publishing company to commission a book of paintings and art work. By way of an editing contract, a reproduction licensing right was granted to the editor. The editor failed his responsibilities under the agreement and did not produce the book within the agreed 18 month time frame. They did however post some of the materials on their website without citing the original artist’s name.

Action Taken

The artist claimed that the editor had breached the editing contract as no literary work had been produced and the materials provided on the website had been reproduced without his authorisation. In order for the infringement to cease, a written notice was sent to the editor as well as to the Internet Service Provider notifying them that:

•    failure to state the artist’s name beside the reproduction of the work was an infringement of the moral rights of the author, and

•    posting online copyrighted materials was an infringement of the economic rights of the artist.

The notice specified that failing to comply with the requirements would result in the artist taking legal action (which must be taken within two years from the date of acknowledgment of the infringement). Considering that the publisher was unable to produce evidence that the reproduction was lawfully authorised, he was legally liable. The artist requested compensation for the moral and economical damages suffered.

Outcome

Upon receipt of the notice, the editor removed the litigious content and a negotiation for the amount of compensation took place, resulting in an out of court settlement of a total amount of RMB 40,000.

IP Lessons

In this case, compensation was agreed upon, based on the actual breach of the editing contract for failure to perform a contractual obligation and on the infringement of the moral rights.

Leverage all aspects of your previous relationship with an infringer to ensure a positive outcome.”

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Marius

The Chinese Consumer Market to 2020

March 19, 2012 in Business in China

McKinsey China has issued an important assessment of the Chinese consumer market to 2020.

It starts as follows:  “Most large, consumer-facing companies have long realized that they will need China’s growth to power their own in the next decade. But to keep pace, they will also need to understand the economic, societal, and demographic changes that are shaping consumers’ profiles and the way they spend. This is no easy task, not only because of the fast pace of growth and subsequent changes being wrought on the Chinese way of life, but also because there are vast economic and demographic differences across China. These are set to become more marked, with significant implications for companies that fail to grasp them. In the next decade, we believe yawning [sic] gaps could open up between companies that have similar sales turnover today but display different levels of focus on the best growth opportunities for the future.”

As you consider to enter the Chinese consumer market we recommend you read the whole report.  You will find it here:  Mckinsey-meet-the-2020-consumer.pdf

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