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IFC Presentation GAI China - 21 Sep 2006

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IFC Presentation GAI China - 21 Sep 2006 Powered By Docstoc
					Financing your Chinese Projects
What structure, what partner, what finance,
     IFC’s experience and perspective


              Emmanuel Pouliquen
   IFC Senior Transportation Industry Specialist
  General Manufacturing and Services Department
Macro Trends and Forces China

• GDP Growth: 8.2% pa for past 10 years. Expected to be 8% pa for the
  next 10 years. Shift from export-led to domestic/consumer growth.
• Urbanization: in past 10 years, urban population has gone from 28%
  to 40% of total population.
• Financial Markets: Dominated by bank lending, which can be
  controlled, to some extent.
• Government Policies: Go West and Harmonious Society initiatives
  make a big difference on areas and types of development.
• Social Tensions: Conflicts between rural populations and local
  govts/companies are real and increasing.
• Regulatory Environment: Still quite complex, providing practical
   challenges to doing business.
                                                                     2
                       Structure
• JV times have changed …
  • Big Three (SAIC, FAW, DongFeng) have chosen their partners
    long ago, not just for cars, but also for equipment
  • JV opportunities still exist but motivated by:
      • very specific technology needs:
          • segments where Magna, Valeo or other Bosch have no
            proposal
      • exchange of territory (Swaps: your technology in China, my
        cheap products in your territory)
  • Be very lucid on what your partner wants
      • Technology a mean but also an end (“The party said …”)
      • 50 years JV = 50 years of “negotiated friendship”
      • A boat with 2 captains tends to go on rocks
                                                             3
                                    Partner
• Perceived benefits of a JV partner:
   •   Knows the market
   •   Knows the culture
   •   Have connections
   •   Transfer staff from its existing operations

• … but can’t you do without a partner ?
   • Market:
      • GM or Ford: you already know the market !
      • Local OEMs or Tier 1s: connections
   • Culture:
      • learn it yourself, the sooner, the better.
      • Learning the culture through your partner may just complicate things …
   • Connections:
      • governmental connections less and less relevant, consultants can help you
      • Customers connections: may or may not be relevant.
      • Build-up your GuanXi !
   • Transfer staff:
      • Watch out: it goes with transferred H.R. practices !                        4
  Sleeping partner, or no partner ?

• Impacts:
   •   Master of your destiny
   •   Keep your corporate culture intact, for better or for worse
   •   “Start right”
   •   … but need to build your market up from scratch


• Stand alone penetration strategy:
   •   Piggy back on existing U.S. relocated programs
   •   Transfer existing production to China
   •   Stick to western customers in the early stages
   •   Send your best people, ready to stay for 5 years or more
   •   HQs are far away: go there often, direct reporting line to CEO
   •   Be patient …
                                                                        5
                           Financing
• Specific points:
   • Multi-stage funding
   • Working Capital for
      • Growth
      • Exports back to U.S.
   • China banking system still immature, very focused on state-owned entities
• Issues:
   • Your U.S Banker may be uncomfortable with your Chinese project
   • Your focus must be on strategy and operations. Little time/resources to
     discover the Chinese banking world
• Financing through global institutions
   • Must be close to you both in the U.S. and in China
   • Must be familiar with U.S.-Chinese issues
   • Beyond financing, must understand your business, your strategy, and be able
     to advise even on operations

                                                                           6
  IFC financing approach
               World Bank Group


The World Bank             Int‘l Finance
    (IBRD)                Corporation (IFC)
   Est. 1945                  Est. 1956



 Government                 Private Sector
            Capital Stock Held by IFC’s
                  Shareholders
  (As of June 30, 2006)

 Five largest: 45%
Other countries: 55%
                                     United States
                                     23.68%




   Other countries                        Japan 5.88%
   54.99%

                                         Germany
                                         5.37%
                                    France 5.04%

    178 Member                United Kingdom
                              5.04%
     Countries                                          8
    IFC Services Offered
  Promote Sustainable Private Sector Development

• Financial products: loans, equity, quasi-
  equity and risk management facilities
• Resource mobilization: loan participations,
  partial guarantees of local financing, and
  securities offerings
• Advisory services: country, industry, financial,
  and technical
      IFC Financing: Key Elements

          Equity                           Loan
• Normally 5%-15% Ownership        •   Normally Hard Currencies
• Not Single Largest               •   Market Interest Rates
  Shareholder
                                   •   Long-term: 5-10 years
• No Direct Involvement in
  Management
                                   •   Appropriate Grace Period
• Long-term Investor: 5-10 years   •   Secured by Project Assets
• Public Listing Preferred Exit    •   No Government Guarantees
  Mechanism
                   IFC and China
• IFC is world’s largest              • IFC’s role in China is
  multilateral investor in              increasing
  the private sector
   • Global portfolio of over $24.6      • $2.0 billion in over 100
     billion                               investments since 1985
   • $6.7 billion in new                 • SME facility in Sichuan
     investments in FY06                 • Portfolio over $1.5 billion
   • IFC sets global standard for        • Over $600 million in new
     environmental and social              investments in FY06
     safeguards
                                         • Plan to increase annual
   • We bring value to clients by          investments to over US$700
     encouraging long term                 million per year, and double
     sustainability of business            portfolio in next 2-3 years
     Project Cycle and Timing

As Seen by Client                                   Internal to IFC
                                                       Initial Review
    Initial Discussions                               & Authorization
                                                         to Appraise
      Mandate Letter
        Appraisal                                   Management Approval
  Financing Negotiations
Info. Memo and Syndication
   Legal Documentation                                Board Approval
       Disbursement



                           Supervision/Evaluation
                                                                          12
 Financing Options 1: Local Currency

• Local Banking Sector is very liquid, but
   • Mostly short-term loans
   • Still based on Relationship Banking rather than Credit Analysis
   • Bank preference towards lending to SOEs rather than private companies


• IFC Local Currency Options are Limited
   • Panda Bond successful, but not a permanent, recurring solution
   • Direct lending in RMB will depend on development of the long-term swap
     market; happening, but progress is slow
   • IFC can provide partial guarantees of long-term local bank loans, but
     between fees and interest rates, may not be the lowest cost solution


                                                                        13
 Financing Options 2: Hard Currency

• IFC US$ Loans a Viable Option
  • Long-term, grace periods appropriate for capital projects
  • If RMB appreciates, US$ loans are less expensive to repay
    (though US$ Libor is currently relatively high)

• But Plan and Structure Carefully Up Front:
  • Only Sino-Foreign JVs or Wholly Owned Foreign Enterprises
    are regulatorily allowed to borrow in US$
  • Only Direct Borrowers can provide assets for security
  • No Co-Borrowing structures, probably no guarantees from
    Chinese companies, no “exotic” financial instruments

                                                                14
    Summary/Recommendations
• Secure your entry on no thrills business (de-localization)
• Don’t underestimate start-up costs
• Be master in your house
• You need time, have a long term global banking partner
• Share your strategy and operations vision with them, and
  they’ll provide you with much more than funds
• Have courage, patience and resilience … it is worth it !



                                                        15
Questions/Answers



   谢谢你的注意 !
   XièXiè Ni De ZhùYì !
Thank you for your attention !



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