Doing Business in China _ Shanghai Field Trip

DOING BUSINESS WITH CHINA By: Elaine Marie Yan Aglipay Table of Contents Foreword Chapter 1: Introduction • General Information…………………..….3 • Political, Economic, and Social Situationer…………………………….….3 • China Geography and Demographics … .. 8 • WTO Membership……………………... .9 • Challenges for the Philippines………….. 10 • Opportunities for the Philippines……….10 • Challenges and Risks in the Business Environment……………………………11 Chapter 2: How to Do Business in China • Legal Forms of Doing Business and Trade/Process of Establishing a Business……………………………….13 • General Information, Laws and Regulations Affecting Trade……………………..…..16 • Services Offered by the Philippine Government…………………………….23 • Business Etiquette………………………23 • Hints on Doing Business in China………25 • Consumer Trends……………………….28 • Other Contact Information……………...29 Chapter 3: Product and Service Opportunities • Methodology……………………………...30 • Results of Quantitative Approach……..…..30 • Product and Service Opportunities based on Qualitative Approach…………....31 • Industry Information − Fruits………………………………….32 − Microelectronics………………………38 − IT and Professional Services ∗ Software Services………………......42 ∗ Accounting Services…………….....44 − Educational Services ∗ English Education………...……….46 ∗ IT Training and Management Training…………...…47 − Furniture………………………………48 Appendices A. Profiles of Key Cities and Provinces B. Gross Domestic Product of Various Cities and Provinces C. Methodology in Choosing Product and Service Opportunities D. How to Establish an Equity Joint Venture E. How to Establish a Wholly Foreign Owned Enterprise F. Import Flow Chart G. Import Requirements (sample products) H. Flow Chart of Compulsory Product Certification System undertaken by China Quality Certification Centre I. Services offered by the Philippine Government to Exporters J. China Fairs and Exhibitions FOREWORD The purpose of this guide is to give a general idea of how to do business with China. The first chapter renders a bird’s eye view of China – its socio-economic-political situation, provinces, demographics, and recent accession to the World Trade Organization (WTO). Then, the second chapter goes into the different facets of doing business with China. This chapter focuses on topics which are relevant to exporters to China but also tackles several topics that are relevant to potential investors in China. Finally, in the last chapter are several recommended products and services where a relatively big opportunity exists for Philippine exporters and businesses based on both quantitative and qualitative data. An overview of some of these industries shall be given. This guide is written in outline form in order to facilitate the search of needed information and to accommodate more points per topic. A broad range of topics on how to do business in China is covered. However, the guide does not intend to discuss these topics exhaustively. Moreover, the rules and regulations contained in this guide may change. Thus, the readers are asked to verify these from the regulations’ respective sources. 1 INTRODUCTION General Information Area: Population: Language: Religion: Capital: Regional/International Affiliations: Chapter 9.70 million square kilometers (970 million Hectares) 1.30 billion (2002) “Putonghua” (also called Mandarin) is the official language Buddhism, Taoism, Muslim, Confucianism, and Christian Beijing is the capital with a population of 13.82 million. Other major cities and their population are Shanghai, 16.74 million, Tianjin, 10.01 million, Shenyang, 6.77 million, Guangzhou, 9.94 million, and Chaongqing, 30.9 million Asia-Pacific Economic Cooperation (APEC), International Monetary Fund (IMF), International Bank for Regional Development (IBRD), World Intellectual Property Organization (WIPO), United Nations (UN), and World Trade Organization (WTO) Political, Economic, and Social Situationer I Political A Structure • Form of Government: One-party rule by the Chinese Communist Party (CCP) • The Executive: 14-member state council elected by the National People’s Congress; state council members, including the prime minister, may not serve more than two consecutive five-year terms • Heads of State: A president and vice-president are elected by the NPC • National Government: The politburo of the CCP sets policy and controls all administrative, legal, and executive appointments; the seven-man politburo standing committee is the focus of power. Jiang Zemin, President of People’s Republic of China, is the general secretary of CCP • National Legislature: The Unicameral National People’s Congress (NPC): 2,979 delegates elected by provinces, municipalities, autonomous regions, and the armed forces; The NPC elects the president and members of the state council and the members of the standing committee of the NPC, which meets when the NPC is not in session. 3 B Legal System: The National People’s Congress exercises legislative power. The State Council is also authorized to adopt administrative regulations and measures, in accordance with the constitution and state laws. People’s congress at the provincial level may also adopt local regulations.1 • Regional Assemblies & Administrations: The 23 provinces, four municipalities directly under the central government and 5 autonomous regions elect local people’s congresses and are administered by people’s governments Situation: • The CCP is getting ready for a change of leadership beginning November 2002. Its new set of leaders will take time to settle into their positions and will be tentative about making major policy decisions well into 2004 • The CCP’s main concern will be to calm down social unrest which is expected to rise in 2002-2003 as State-Owned Enterprises (SOEs) cut back on labor forces, rural incomes decline further, and corruption continues to be widespread. 2 • II Economic Situation A Structure - The State Planning Commission is in charge of drafting China’s economic plans. There are five-year plans which establish the targets for each five-year period. Each year, a detailed plan and budget are produced for implementation B Indicators: China Economic Indicators 1997 1998 1999 GDP per head (US$) 733 776 808 GDP (% real change) 8.80 7.81 7.30 Government consumption (% of 11.57 11.88 12.67 GDP) Budget balance -0.78 -1.16 -2.08 Consumer prices (% of change 2.80 -0.80 -1.3 per annum, average) Labor costs per hour (US$) 0.34 0.41 0.42 Source: Economist Intelligence Unit, China Country Profile, 5 September 2001; C 2000 871 8.04 12.50 -2.74 0.40 0.44 Situation: 1 Industrialization is being encouraged in the countryside. • Reasons for rural industrialization are the desire to increase agricultural productivity, develop and improve infrastructure facilities in the rural areas, and minimize the rural-urban migration. As many as 150 million people from rural areas migrated to the cities in search of higher income. • Nearly a quarter of the rural labor force had taken employment in rural industry or services. As of 1999, 127 million were employed in township and village enterprises (TVEs). 2 Industry has played a dominant role in the robust growth of the PRC economy. • Economic growth has been led on the supply side by increases in industrial output. • Rural industrialization contributed largely to the substantial increase in the contribution of the industry into the economy. • The services sector has been growing rapidly as demand for personal services has increased. 4 3 4 Eastern coastal areas have consistently achieved higher growth rates than western inland provinces. • Eastern coastal areas have profited from their links with overseas Chinese, more developed infrastructure and accessibility. On the other hand, Western China is mountainous, arid, or otherwise infertile in many areas. • The Ninth and Tenth Five-Year Plans aim to tackle the widening income inequalities between the western and eastern coastal areas by encouraging investments into the west. There is a risk of a fiscal deficit as tax revenues fall due to reforms that allow SOEs to retain profits and to SOE losses. • The tax revenue to GDP ratio has fallen from 28.4% in 1980 to 10.5% in 1997, one of the lowest in the world. • The tax system is regressive because the non-state sector accounts for 60% of GDP but only contributes 5% of total tax revenues. Thus, improvements in tax schemes and collection efforts in the non-state sector must be carried out.3 III Social Situation: A The Han is the dominant ethnic group, accounting for 91.9 percent of the population. However, the 55 ethnic minority groups are growing rapidly. B Family planning is a basic national policy of the government. China has a one-child per family policy with exceptions in rural areas and for ethnic minorities. The goal is to maintain a natural population growth rate of 1.083%. C Schools are managed primarily by the government and various social organizations in the new educational system. Admission into middle schools and universities is still very competitive. Not all children are able to proceed beyond primary education. D There is a growing disparity between urban and rural incomes. Living standards are lower in the inner provinces compared to the coastal areas because of more advanced industrial development and the establishment of a larger number of Foreign Invested Enterprises in the coastal provinces. E About 270 million Chinese lived in poverty as of 1999. The urban poor is estimated at 12 million people. F Based on official records, only 3.1 to 4.0 percent of the population is unemployed.4 However, the estimated real urban jobless rate is at around 10% according to China’s topranking government think tank. This rate is expected to rise further to 15% as a result of structural reform programs and as China adjusts to its WTO membership. G China has a large and relatively inexpensive labor force. However, there is a shortage of skilled labor in China which makes it difficult for foreign enterprises to find qualified staff. Market Reforms: In the late 1970s, market reforms were introduced that revolutionized financial and fiscal processes and changed the incentive structure for business. The reforms comprised of policies designed to incorporate China into the global economy while, at the same time, strengthening its domestic base and market. Some of the more important reforms are summarized as follows: A Rural Reform: Shifting of the production unit from the commune to individual households • Land was leased to households by the state for 15 to 25 years • The state chose the crop that was to be produced, but the farmers could retain a substantial portion of their harvest to sell in the market. Agricultural prices were raised as an added enticement. IV 5 B C D The result was a surge of agricultural output, profits, and savings at the individual household level which gave rise to rural nonagricultural collective enterprises called Township and Village Enterprises (TVEs). • TVEs were permitted to use and sell the excess production generated from the rural sector for light industries. In 1991, 74% of rural enterprises’ output value focused on the manufacture of exports. Foreign Direct Investments: Opening up to foreign direct investments • China accepted foreign investments through joint ventures with the state in 1979 and through the establishment of special economic zones in 1980 (the various SEZs for several major provinces and cities are identified in the section on Provincial Profiles). • In 1986, the state abolished the requirement that joint ventures had to be selfsufficient in generating foreign exchange. • Throughout the 1980s and 1990s foreign investors in China increased rapidly. In 1992 alone, foreign direct investments totaled to US$7.2 billion which was greater than the total inflows in the first decade of China’s reform program.5 • China’s current policy is to continue to encourage foreign investment in the priority areas and industries (e.g. communications, energy, and harbors) in order to acquire foreign exchange and foreign technology, equipment, and know-how. 6 Foreign Trade: Trade is dictated more by market forces instead of the state • Initially, trade was centrally managed. However, in 1991, mandatory export plans and export subsidies were abolished. • In 1994, the government relaxed the import plan and freed more foreign exchange for non-mandatory imports. • Policies to boost exports were implemented such as foreign exchange retention, tax rebates, and a strong depreciation of the renminbi from 1981 to 1987, 1990, and in 1994.7 Exporting enterprises were given the privilege of purchasing foreign exchange from the central bank and maintaining a share of foreign exchange.8 • Import policy is directed towards acquiring capital goods that embody the modern technology needed to develop China’s industries. • Efforts have been made by the government to reduce or eliminate certain trade barriers.9 State-owned Enterprises: From Output-based to Financial-based Incentives • State-owned Enterprises (SOEs) used to produce most of the industrial output in China. In 1985, 64.9% of industrial output came out of SOEs. • Starting 1983, SOEs were no longer compelled to pay all of their income to the national government Instead, they paid some form of income tax. • Managers of the SOEs were given incentives through profit-sharing schemes. Furthermore, supervisory powers were shifted from the national ministries to the local industrial bureaus. • A dual-pricing system was implemented wherein output for the state was sold at official prices while output above target production levels were sold at market prices. • A “contract responsibility” system was adopted wherein SOEs were given financial targets as opposed to output targets. • Industrial production shifted from the SOEs to the non-state sector. In 1996, 71.5% of industrial output was produced by the non-state sector, 31.2% of which came from township and village enterprises.10 By 2001, the share of the official state sector in industrial output had shrunk to about a quarter. • 6 E F G SOEs are usually enterprises in industries that are the most capital-intensive and often the largest in scale. Financing them takes in a large share of national resources, especially finances. • Recently, the state has been permitting failing SOEs to close down and/or retrench laborers as the provision of social services to these laborers are reassigned to the private sector and national and local governments.11 Financial Reforms: Separation of Central Banking and Commercial Banking • In 1984, the People’s Bank of China started undertaking only central banking responsibilities while newly created state-owned commercial banks took over commercial banking functions. • There was a large explosion of financial savings that led to a rapid increase in bank deposits and an increase in money supply. Fiscal Reforms: Shifting of State Revenue Structure from income tax to indirect tax • Government lost a lot of revenue given that SOEs where allowed to retain a large portion of their profits • Many SOEs incurred losses because their businesses are greatly diversified and have huge manpower pool resulting to inefficient operation. This hurts government funds since SOEs needed subsidies and restructuring efforts from government. • The dependence of government on taxes of goods and services such as value-added taxes increased tremendously in the late 1980s and 1990s, making it the biggest source of revenue for the government at 66.8% of total state revenue in 1996. 12 Great Emphasis on Infrastructure and Technology: • High priority is given to importation of advanced technologies that will develop the information and communication industries.13 (See the Industry Data on Microelectronics in Chapter 3 for further details.) • It was estimated that US$10 billion will be invested in new semiconductor fabrications from 2000 to 2005. • The government has invested greatly in the expansion of its railway network in order to improve transport and distribution channels in China. These new railways have significantly shortened travel time between cities. For example, the ShanghaiKowloon railway cuts travel time from Shanghai to Hong Kong to 29 hours. In Fujian, two new railways will be built, the Wenfu Railway and Ganglong Railway connecting Zhejiang and Jiangxi. • To accelerate the country’s energy development strategy, the government will build a 4,000-kilometer gas pipeline starting at Xinjiang and ending at Shanghai. This will deliver gas from the western provinces where there are gas production bases to central and eastern regions. • Electronic Data Interchange systems were introduced to enhance communication links between manufacturing companies, banks, and customs offices. • Major infrastructure expansion is happening in provinces and areas around Beijing to accommodate preparations for the 2008 Olympics. For instance, Tianjin, which is southeast of Beijing, will expand its Binhai International Airport. • In order to facilitate greater domestic and international trade, numerous ports are also being developed. In Liaoning, a new port was opened recently in Panjin in order to handle oil products from the Liaohe Oilfield, one of the largest oilfields in China.14 • 7 China Geography and Demographics Economic and Social Indicators 1990 1995 Population (in million persons) 1,143 1,211 Urban (%) 26.4 29.0 Rural (%) 73.6 71.0 Male (%) 51.5 51.0 Female (%) 48.5 49.0 Family Total Number of Households 277 317 (in million households) Average Household Size in Urban Areas 3.5 3.2 (persons) Average Household Size in Rural Areas 4.8 4.5 (persons) Livelihood Average Wage of Staff and Workers 2,140 5,500 (RMB) Per Capita Annual Disposable Income 1,510 4,283 of Urban Households (RMB) Per capita Net Income of Rural 686 1578 Residents (RMB) Outstanding Amount of Saving 7119.8 29662.3 Deposits in Urban and Rural Areas (100 million RMB) Consumption Structure of Urban Residents Food (%) 52.2 54.2 Clothing (%) 14.6 13.4 Articles for Daily Use and Others (%) 28.4 27.6 Residence (%) 4.8 4.8 Consumption Structure of Rural Residents Food (%) 57.8 58.8 Clothing (%) 9.7 7.8 Articles for Daily Use and Others (%) 14.2 16.1 Residence (%) 18.2 17.3 Foreign Exchange Rate as of August 2002: US$ 0.1208 = 1 RMB Source: China Statistic Report, 2001. I. 1999 1,259 2000 1,266 36.2 63.8 51.6 48.4 348 3.1 4.2 9,371 6,280 2253 64332.4 342 3.1 4.3 8,346 5,854 2210 59621.8 49.9 13.5 29.5 7.1 58.6 6.9 20.6 13.9 39.2 10.0 40.8 10.0 49.1 5.8 29.6 15.5 Profiles of Key Provinces and Cities – Information on infrastructure, foreign investment and trade, industries, and major economic and technological development zones in Shanghai, Guangdong, Tianjin, Fujian, Guangxi Zhuang, and Liaoning are given in Appendix A. Appendix B contains the Gross Domestic Product (GDP) of Various Provinces and Cities 8 WTO Membership I Principles of China’s WTO membership: • Significant tariff reductions. Average tariff level for ASEAN product will be reduced by 34-47% within 5 years 15 • Liberalization of services sector (e.g. legal, accounting, taxation, architectural, medical) • Equal treatment of local and foreign enterprises • Elimination of dual-pricing practices (previously there were prices set by the state and by the market) • Equal treatment accorded to goods produced for sale in China vs. those for export • Full rights to trade will be granted to foreign-invested joint ventures one to two years after accession to the WTO. 16 • Abolition of nearly all administrative examination and approval procedures for import of goods within 5 years.17 Regulations affecting trade and investment will be published.18 • Ensures greater transparency, predictability, and fairness in China’s conduct of trade with the rest of the multilateral trading community, thereby giving protection for the interests of even small trading nations like the Philippines. • Guarantees China’s compliance with its WTO commitments and obligations or else China will be brought to dispute by its trading partners before the WTO’s Dispute Settlement Body.19 WTO membership integrates China’s dispute settlement and legal methods with world standards that WTO requires. 20 Sectoral Commitments: A Agriculture: Average Tariff Rates will be reduced from 19% to 14.5% by 2004. • Reduction of agricultural subsidies to maximum of 8.5% of total value. • Tariffs and Tariff-rate quotas specifically for wheat, corn, rice, soybean oil, cotton, etc. B Industrial: Bounded and Average Tariff Rates of Industrial Goods will be reduced from 15% to 10% within 2006.21 C Financial Services: • Foreign insurance companies will be allowed 50% ownership in life insurance JVs and 51% in non-life JVs • Foreign banks will be able to conduct local currency business with Chinese corporations two years after accession in 2004.22 • Licenses to operate will be awarded solely on the basis of prudential criteria with no economic-needs test or quantitative limits on the number of licenses issued.23 • Brokerage houses will be allowed to take up 33% stake in local securities firms D Telecommunications: Foreign companies can own up to 49% of telecomm JVs within two years after accession and 50% for value added and paging services E Distribution markets: JV restrictions will no longer apply to large department stores which means that foreign firms will be given access to China’s distribution markets and be allowed to distribute imported goods.24 II 9 Challenges for the Philippines I Greater competition in attracting foreign direct investments: • The Philippines is not just competing with one China, but many “China” provinces. Each Chinese province develops very attractive investment packages to draw foreign direct investments into their province. Provinces compete amongst each other for the FDI funds, which amounts to an average of $40 billion a year.25 • During the 1990s, many companies in Taiwan, Singapore, and Hong Kong have moved their operations to China because of lower production costs. As for the Philippines, continued expansion of multinational light goods manufacturing and assembly companies is done in China instead of increasing operations in the Philippines.26 Greater export competition in labor-intensive industries: • Given China’s abundant labor force and low wages, which are 20% lower than the Philippine wages, their labor-intensive products such as garments, footwear, toys, furniture, leather, and travel goods will be more competitive in terms of price.27 • Based on Relative Comparative Advantage (RCA) computations of Philippines competitiveness compared to China, the Philippines is not competitive in the aforementioned goods. Please refer to Appendix C for information on how RCA is computed. • Textile garments, footwear, and toys belong to the top five exports of China to the world with 12.01%, 3.97%, and 2.24% share of total China exports respectively. II Opportunities for the Philippines I Increased export opportunities A Huge and growing population plus an increasing standard of living implies a market for more consumer products and services.28 B Given that China’s comparative advantage lies in labor-intensive products and highvolume production yet low-valued goods, there are opportunities for the Philippines to increase exports in: 1 Primary commodities such as agricultural and mineral-intensive products • Agricultural products that are solely produced in the Philippines or better in terms of quality (i.e., banana, pineapple, mango, durian, natural fiber, coconut coir, coconut oil, etc.) • Sharp decline in China’s comparative advantage in agricultural and mineralintensive products over the last couple of decades; Ratio of agricultural to manufactured products declining from 35:65 to 14:86 for the period 19801993.29 • Natural resource or agricultural based exports from the ASEAN are likely to benefit the most from China’s WTO accession. Examples of these include rice, seafood, food preparations, tropical fruits, vegetable fats and oils, wood and wood products, natural rubber, and tin.30 2 Tertiary services • The Philippines is one of the top sources of skilled labor in terms of quality, affordability, and availability • China’s integration into the international economy implies that there will be a need for training in English, accounting, banking, and managerial know-how 10 3 More differentiated/specialized, high-content/high-value manufactured products • Examples: From production assembly to design and testing for the information technology sector; Focusing on production of goods for the high-end segment of the China market 31 II Increased job opportunities for service professionals – This is discussed further in Chapter 3: Recommended Products and Services • According to a survey released by the Labor and Social Security Ministry, there is a shortage of senior skilled workers. The demand of enterprises for these workers is about 12 percentage points higher than the market can supply.32 • There are approximately 2,000 Filipino designers in China (including Hong Kong), who are mostly employed by foreign enterprises. • Services sector will be liberalized with China’s accession to the WTO. Increased inbound tourism trade given China’s large travel traffic 33 • More Chinese want to visit foreign countries during holidays. Traveling to far destinations is still beyond the reach of the majority of Chinese. 34But, travel to nearby destinations is more affordable. In recent years, many Chinese have visited Thailand, Singapore, and Malaysia. • Manila is the closest Southeast Asian destination from Shanghai.35 Greater negotiating power for the Philippines with respect to concerns where China and the Philippines have similar interests. • Greater bargaining power for the Philippines in the WTO on concerns of developing countries such as reduction or elimination of tariff and non-tariff barriers in the entry of products into developed countries • Provision of adequate safety nets for developing countries to minimize the adverse effects of trade liberalization on their industries and labor force • Pressure on developed countries to minimize or eliminate subsidies given to their agricultural and industrial sectors.36 III IV Challenges and Risks in the Business Environment I. In Transition Stage - China has just recently joined the WTO and it is in the thick of revising some of its policies to bring them into conformance with its commitment to the WTO. This situation results to some uncertainty, especially in the implementation aspect. Nevertheless, the Chinese government is doing its best to minimize disruption in business and ensure that newly issued policies are properly carried out. Unfamiliarity with the local business environment • Local code of business etiquette- A major element of doing business in China is mastering the local code of etiquette. The rule of thumb is to stay on the side of patience and politeness. Keeping your temper even when things go wrong can pay disproportionate dividends. • Superiority of relationship over contract – In most instances, Chinese businessmen do business based on trust and confidence. Though they enter into contract as required in the regular business process, their business dealings are mostly based on the depth of relationship they have cultivated with the other concerned party. 11 II. • • Strong domestic competition – China is characterized by fierce competition from fragmented local players especially in the eastern coast area. It is common for foreign companies to underestimate their local competitors only to find themselves struggling with good imitations or aggressive pricing. Concerns on intellectual property protection – Piracy and imitations are some of the problems faced by foreign companies in China. Due to its huge area, some foreign companies face dilemma in monitoring their products and ensuring the protection of their intellectual property rights especially in distant places. China, however, upon its entry into the WTO has committed itself to conform to the WTO TRIP’s agreement and is presently, amending its Copyright Law. III Lack of a nationwide distribution channel • The size and diversity of China deprives it of a nationwide distribution system common in developed countries. • Prior to its WTO accession, foreign companies who wanted to develop a national distribution network were hampered by central and local bureaucratic constraints on investment and operations. Consumer goods firms often lost track of their products in a complicated distribution process that involved 70,000 or more wholesale markets scattered across the country. • However, with China’s accession to the WTO, foreign firms can now invest directly in supply chain and distribution management. Foreign investment in logistics will enable the establishment of a nationwide distribution channel. Now, foreign enterprises can distribute all goods manufactured in China and, by December 2002, distribute imported. Foreign enterprises can engage in wholesaling and retailing services throughout China for most products by December 2004. 37 Language Barrier – Although English speakers are growing in size, there is still a shortage. Getting over the language barrier means hiring interpreters or learning Mandarin. Difficulty of Obtaining Information • In some cases, economists and investment bankers discovered that data about China’s economy was unavailable. More often, though, data was available but its quality was doubtful. • Though China has strengthened its legal system by enacting laws and regulations, regulations and laws are still not uniformly available to the public. (American White Paper) • The State Statistical Bureau (SSB) restricts market research that can be potentially utilized in a manner that threatens public interest and security, may be classified as a state secret, or in any way conflicts with current capabilities of SSB agencies. Thus, for foreign enterprise research projects, SSB keeps an eye on reasons for research, research methodology, and project results. The SSB regulations also require annual SSB certification for every market research entity planning to conduct market research on behalf of a foreign entity. (American White Paper) Corruption • In a 1999 survey of AmCham-China, 72% of respondents believed that corruption in China is tremendously high and most feel that corruption in business is not decreasing. • The international community is highly skeptical about the professionalism and independence of the PRC courts and the enforceability of court judgments and arbitral awards.38 IV V VI 12 2 HOW TO DO BUSINESS IN CHINA I Chapter Legal Forms of Doing Business and Trade and the Process of Establishing a Business Representative Office A Definition 1 Legal form involved in business activities which do not result in direct profits 2 Not recognized as legal persons 3 Not allowed to operate as partnerships or sole proprietorships in China 4 Allowed to conduct indirect operational activities such as liaison for business purposes, introduction of products, market research, and technology exchange.1 B Basic Requirements for Establishing a Representative Office - The foreign enterprise must: 1 Be legally registered in its country of origin for at least one year 2 Have a sound business reputation 3 Provide true and reliable documents and information as requested by the government authorities 4 Be held liable for all of their representative office’s business activities in China 5 Execute the application procedures as requested Sino-foreign Equity Joint Venture or Contractual Joint Venture Enterprises (in the case of Guangdong province) A Definition 1 Business arrangement in which the participants create a new official contractual relationship or business entity and share operational and investment expenses, management responsibilities, and profits and losses.2 2 Takes the form of a limited liability company registered in China 3 Most common form of foreign investment in China. 4 Chinese authorities encourage foreign investors to use this legal form in order to obtain exposure to advanced technology and improvement in management of state enterprises. 5 Foreign investors can share risks with their partners and enjoy low costs and potentially a large Chinese market share.3 II 13 B III How to Establish an Equity Joint Venture (See Appendix D) Cooperative Joint Ventures A Definition 1 May operate under a structure similar to that of a Western-style partnership, or the parties to the venture may apply for approval to have the company structured as a separate legal entity with limited liability. 2 The profit and loss distribution ratio between parties is defined in the contract and can change during the contract term.4 Wholly Foreign-Owned Enterprises (WFOEs) A Definition 1 Business form which is totally under foreign control, entirely formed with foreign capital, and without any formal Chinese ownership participation 2 Set up as limited liability entities and represent separate legal persons 3 Can control their own governance through articles of association 4 Many foreign investors find this type attractive because of the full control associated with it.5 B How to Establish a Wholly Foreign-Owned Enterprise (See Appendix E) Trade done through a foreign trade corporation who acts as an import-export agent - There are two major classifications of trade: (1) general trade and (2) processing trade. Please see Appendix F for the Import Flow Chart. A General trade - import or export of goods that are not used for export-processing by enterprises in China with import-export rights. These include the import of materials by Foreign Invested Enterprises (FIEs) for processing and sale in the domestic market and the import of food and beverage by restaurants and hotels. 6 1 Enterprise Categorization for General Trade - Local customs offices classifies import/export enterprises into Categories A, B, C, and D. CATEGORY Category A • • • • Category B Category C • • • • • • • • • DEFINITION Gets priority in customs registration, declaration, inspection, and clearance Release of goods which are allowed to be released on the letter of guarantee Exempted from inspection by sampling for goods on customs’ catalogue of commodity to be sampled Receives priority in online declaration through Electronic Data Interchange (EDI) Subject to normal management Subject to special supervision and control Must pay deposits on good requiring duty security Business activities are monitored Most of their imports and exports are inspected Cannot make customs declaration in other localities Subject to stringent control All imports must be inspected. May be suspended from customs declaration, shipment of customs-monitored goods, and bonded warehousing 14 IV V Category D B Processing/Assembling Trade – Processing and assembling trade comprises of a form of cooperation wherein a foreign firm places orders with Chinese factories to carry out certain manufacturing activities for export. These activities generally consist of processing or assembling commodities with the parts or semi-processed items imported by the foreign firm. Foreign processing and assembling trade is advantageous in such a way that they do not require Chinese enterprises to use scarce foreign exchange, make sizable investments, or buy costly equipment. Increased pressure from domestic sales and exports has created shortages in raw and semi-finished materials, components, and spare parts. 7 1 Examination and Approval of Processing Trade - Business enterprises must obtain the consent of provincial-level foreign economic and trade departments in order to engage in processing trade. Processing trade approval bodies under the foreign economic and trade departments will issue a processing trade approval certificate. This certificate is a legitimate document for the opening of customs duty deposit accounts with customs. 2 Customs Supervision - The business enterprise should finish registration and register its code at the local customs office where it is situated. China uses the Customs Duty Deposit system for processing trade enterprises. Under this system, commodities imported for processing trade are classified into prohibited, restricted, and permitted. Furthermore, local customs offices classifies processed trade enterprises into A, B, C, and D. Material and parts imported for processing trade are free from customs duty deposit payment. Receives priority in online declaration through EDI Required to make a “nominal” payment of customs duty deposit. These enterprises do not need to pay any customs duty deposit. They only need to open a customs duty deposit account with the Bank of China. “Actual” payment of customs duty deposit is required. Customs duty deposit has to be paid into a customs’ special account at Bank of China. MOFTEC shall evoke their processing trade rights. Category A enterprises, bonded • areas/warehouses, and enterprises in export processing zones • Category B • Category C Category D 3 • • Quotas and Licensing Control – The Chinese government does not enforce quota or licensing control over the import of materials and parts for processing trade (except for that involving cotton, poisonous and classified chemicals, CD-ROM manufacturing equipment). Moreover, seven types of industrial products are mutually regulated by the State Economic and Trade Commission and MOFTEC. These are cured oil, steel, pesticide, acrylic fiber, polyester fiber, polyester chips, and chemical fertilizer. Enterprises importing these products must apply for an import license in accordance with the relevant regulations. 8 VI Other business arrangements open to foreign investors A Barter trade – Under barter trade arrangements, China will import equipment, machinery, or foodstuffs in replacement for other products. Successful dealings have happened under this type of trade arrangement, principally with Japan. B Compensation trading – Under the compensation trade arrangement the foreign trade partner will supply China with raw materials, equipment, and technical services where needed, receiving the manufactured product as payment. Factory premises are supplied 15 by the Chinese, built to foreign specifications, and a stable workforce is guaranteed to manufacture goods at reasonable prices under the supervision of foreign firm’s representatives. Chinese ministries and state commissions handle negotiations for largescale compensation trade. Import and export administrations, foreign trade bureaus or industrial bureaus of the provinces, municipalities, and autonomous regions handle medium and small-scale compensation trade.9 General Information and Laws and Regulations on Trade I General Information • Except for FIEs which are granted with import-export license to enable them to import raw material needed for manufacturing activity and to export finished goods, the majority holders of import-export license are state-owned or joint venture with the government as the dominant stockholder. By end-June 1999, China had more than 185,000 foreign trade enterprises, including 13,224 foreign trade and economic cooperation companies; 12, 143 local manufacturing enterprises and scientific research institutes and 160,000 foreign-invested enterprises having importexport rights. In January-February 1991, 61 private-owned enterprises were given the import and export rights. Hotels, restaurants, supermarkets, convenience stores and other similar businesses are not granted with import-export license and they import goods through import-export agents. China has set temporary quotas and tariffs on 10 agricultural imports, namely: wheat, corn, rice, soy oil, rapeseed oil, palm oil, sugar, cotton, fleece and wool. • • • • II Import Tariffs and Customs Regulations A Tariff Rates • The Customs General Administration is the agency that assesses and collects tariffs, which is normally assessed based on the normal CIF value, and value-added tax, which generally equals to 17% or 13% for agricultural and utility items of the CIF plus customs value of imported items. • Import tariff rates are divided into two categories: the general tariff and the mostfavored-nation tariff. Philippine products entering China are assessed under MFN category. • The five special economic zones, open cities, and foreign trade zones may offer preferential duty reduction or exemption. B Customs Valuation • The Dutiable value of an imported good is its CIF price, which includes the normal transaction price of the good, plus the cost of packing, freight, insurance, and seller’s commission. • In practice, Chinese customs valuation remains non-transparent and arbitrary. Customs officials have discretionary authority to ignore the invoice or transaction price as the valuation basis. 16 III Trade Barriers • Import Licensing • Quotas • Administrative Controls: Certain designated commodities are required to undergo an automatic registration process and obtain a “Certificate of Registration for the Import of Special Commodities” before importation. The certificate is valid for six months. • Anti-Competitive Practices: China’s first law on unfair competition prohibits the use of money and materials or other means as bribes to sell goods. However, the law allows discounts or commissions openly offered but properly recorded. Importers have protested that such practices have placed them at a disadvantage. Import Documentation • Normally, the Chinese importer (i.e. agent, distributor, or joint venture partner) handles documentation requirements. • Necessary documents include the commercial invoice, bill of lading/airway bill/cargo receipt, certificate of origin, packing list, sales contract and, where applicable, an import quota certificate for general commodities (where applicable), import license (where applicable), inspection certificate issued by the State Administration for Entry and Exit Quarantine and Inspection Bureau (SAIQ) or its local bureau (See Appendix G for Import Requirements and contact details of Chinese agencies for some products/commodities). Prohibited Imports • General Trade - The following general trade items are disallowed from entering China: arms, ammunition, counterfeit currencies and counterfeit negotiable securities, printed matter magnetic media, films, or photographs which are deemed detrimental to political, economic, cultural, and moral interests of China, lethal poisons, illicit drugs, diseasecarrying animals and plants; foods, medicines, and other articles coming from diseasestricken areas; old/used garments, and food items containing certain food colorings and additives found detrimental to human health. • Processing Trade – The following commodities related to processing trade are disallowed: used garments, used publications with licentious content, radioactive or harmful industrial waster, junk cars, used automobiles or components, seeds, seedlings, fertilizers, feed, additives, or antibiotics used in the cultivation or breeding of any export commodity. The following seven general product types are restricted commodities: raw materials for plastics, polyester sections, raw materials for chemical fibers, cotton, cotton yarn, cotton cloth, and some steel products. Inspection Standards A Import Commodity Inspection • All goods included on a published Inspection List, or subject to inspection pursuant to other laws and regulations, or subject to the terms of the foreign trade contract, must be inspected prior to importation, sale, or use in China. • The acquisition of a safety license and other regulations also apply to the importation of medicines, foodstuffs, animal and plant products, and mechanical and electronic products. • Chinese buyers or their import agents must register for inspection at the port of arrival.10 IV V VI 17 B Upon application, certain commodities may be exempted from inspection. These include items that have recognized and reliable quality, items with recognized international quality licenses, export and import commodities that have never failed specified inspections and that meet certain criteria, and some articles and exhibits that are of a commercial nature.11 • The scope of inspection ranges from technical specifications, product quality, quantity, weight, packaging, to safety requirements. • It is advisable that a Chinese quality certification be obtained from Chinese authorities prior to shipment of goods to China. • If products require quality certification you can contact the State Administration for Entry & Exit Quarantine and Inspection (SAIQ) at (8610) 6599-4600 or fax (8610) 6599-4304 or log on to their website at http://www.ciq.gov.cn. • Please see Appendix H for the flow chart of the new Compulsory Product Certification System that is undertaken by the China Quality Certification Center. Quarantine Inspection: Animals, plants, and their products as well as the containers and packaging materials used for transporting these items must go under quarantine inspection. The SAIQ is responsible for executing these inspections. The importer must present an application in advance and the products must go through the required inspections upon arrival in China. • VII Label and Marking Requirements • All products sold in China must be marked in the Chinese language. • Once a quality certificate for a product is given out, a safety label can be affixed on the product. • Food items should have a laser sticker indicating the product’s safety. Importers are charged 5-7 US cents per sticker and the stickers must be attached under State Administration.12 VIII Audit requirements and practices • Based on the accountancy law that governs foreign investment enterprises, there are three kinds of primary accounting books that are required: journals, a general ledger, and subsidiary ledgers, as well as appropriate supplementary memorandum books. • All accounting books, statements, and documents must be written in Chinese. • In principle, the books and records should be reported in renminbi. However, these can also be reported in a foreign currency with the mutual agreement of all partners. In practice, most FIEs use renminbi because their income and expenses are largely in local currency. • All FIEs and foreign enterprises are obliged to keep their accounting books and statements and supporting records for at least 15 years. • A Chinese-registered CPA firm must be hired to audit annual accounting statements and book of accounts and to give out an auditor’s report. It is generally the responsibility of the board of directors to select the auditor. • Companies are required to consolidate subsidiaries in which they have more than 50 percent equity. 18 IX Accounting Principles and Practices A Although the basic Chinese accounting rules are generally consistent with international accounting practices, there are some deviations, the most significant of which is the tax orientation of Chinese rules. Since the Chinese accounting system tends to abide by the provisions in the tax laws, there are no separate accounting standards for book and tax purposes. Accounts are kept on an accrual basis. B Financial Statements - A foreign investment enterprise’s financial statements would normally include the following: cash flow statement, balance sheet, income statement, statement of profit distribution, income tax adjustment sheet, relevant footnotes and supporting schedules. The following statements are required by the tax authorities: accounts in foreign currencies, cost of products manufactured and cost of products sold, general and administrative expenses, non-operating income and expenses, manufacturing expenses, selling expenses, intangible and other assets, assets and cumulative depreciation, inventories, and productions costs, sales, and cost of sales for main products. FIEs must also provide an overview of its financial condition. C Submission of Financial Statements - Quarterly and annual statements should be filed with the parties of the enterprise, the local tax bureau, the regulatory department of the enterprise’s industry, and the finance bureau. Quarterly statements must be filed within 15 days of the end of the quarter and the annual statements with the auditor’s report within four months after the end of the year. D Cash Flow Statements - Cash flow statements are prepared by the direct method. A reconciliation of net profit to the amount of cash flows from operating activities should be disclosed in a note to the financial statements. E Capital - Capital is shown in the balance sheet as the actual paid-in capital value or contracted value, not the par value. Capital in excess of the paid-in or contracted value is shown as additional paid-in capital. F Retained Earnings - The balance sheet must show the amount of retained earning that is due for the reserve fund, enterprise expansion fund, current-year profit, and retained earnings. G Inventories - Inventories are usually held at cost rather than at the lower of cost or market value. However, provision for obsolete inventory is allowed with the approval of the relevant finance and tax bureaus. Inventory values are calculated according to one of the following methods: FIFO, moving average, weighted average, or LIFO. Any change in the valuation method must be endorsed by the local tax authority. H Fixed Assets – Fixed assets are recorded at original cost. In calculating the depreciation of fixed assets, which should not be less than 10 percent of the original value, the residual value is subtracted from the original cost. In Chinese accounting law,only the straight-line method is permitted. Accelerated depreciation is only allowed in special circumstances. I Provisions and Reserves – Provisions for obsolete inventories or doubtful debts are permitted if prior approval has been received from relevant authorities. Accounts receivable and bad debts deemed uncollectable must be directly written off. FIEs may create an annual provision for doubtful debts of no more than 0.3 percent of the year-end balances of receivables. J Cost accounting methods- One or more of the following methods have to be used for cost accounting: product-type, process-costing, job-order product category, or standard costing. K Trends in the development of accounting – The Ministry of Finance continues to originate additional standards which increasingly reflect international practice.13 19 X Special Import Provisions A Representative Offices - Resident offices must present a written application to customs if they plan to import any vehicles or personal effects. Customs waives any import license requirements and lets the office import the equipment in reasonable amounts for officeuse only. B Processing Materials and Parts - Customs duty and VAT for raw materials, spare parts, components, packaging materials, and auxiliary materials that are imported by FIEs for the production of goods which will be exported are waived. The components and materials must be processed and exported within one year from the date of importation. Bonded warehouses may be established within the FIE and are subject to Customs supervision. C Warehouses - Goods that are permitted to be deposited at a bonded warehouse, for up to one or two years are limited to: • Materials and components to be utilized for domestic processing subject to reexportation • Goods imported under special customs approval on terms of suspending the payment of import duties and VAT • Goods in transit 14 • Spare parts for free maintenance of foreign products within the warranty period.15 Exchange controls A Foreign Exchange Controls • To facilitate the government’s control over the movement of foreign currency, the Foreign Exchange Control Regulations were issued in 1996. It stipulated that most enterprises cannot maintain foreign currency accounts, but are obligated to buy and sell foreign currency as and when the need arises. Trading of foreign currencies is restricted to the US dollar, Japanese yen, and HK dollar. • Most enterprises buy and sell foreign currencies through approved financial institutions, and, as a result, the use of the foreign exchange adjustment centers is negligible.16 • With its accession into the WTO in 2001, China shall comply with the Trade Related Investment Measures (TRIMs) Agreement. Thus, China shall cease to enforce trade and foreign exchange balancing requirements made effective through laws, regulations, or other measures. Moreover, China will not enforce provisions of contracts imposing such requirements.17 B Inward Investment 1 Foreign investments are converted into renminbi (RMB) at the exchange rate existing at the time the investment is made. Cash or kind can be used to make investments, and the value of the capital contributions must be confirmed by a Chinese-certified public accountant who issues a capital verification report relating to the contribution. Cash contributions will be kept in the capital accounts in foreign currency, and the conversion from foreign currency to RMB is subject to State Administration of Foreign Exchange approval. 2 Repatriation of capital and earnings (a) Capital • For cooperative ventures, the foreign party may recover and repatriate their invested capital during the operating period of the venture if they obtain the agreement of all parties concerned and the approval of the relevant authorities. The fixed assets of the joint venture will revert to the ownership of the Chinese party after the JV’s operating period. 20 XI (b) Partners in an equity joint venture may not acquire repayment of their registered capital until the end of the joint venture period. This constraints also applies to WFOEs. In all cases, foreign investors must have enough foreign exchange in China to allow them to repatriate capital. Earnings • Foreign investment enterprises may repatriate their profits from China subject to certain restrictions as follows: a. Profits may be repatriated through designated foreign exchange banks only if they are in a foreign currency b. All the prior years’ losses must have been made up c. All relevant taxes must have been paid d. The required contributions must have been made to the enterprise expansion fund, the staff bonus and welfare fund, and the general reserve fund. • Profits of a foreign enterprise with permanent establishment in China are subject to income tax. However, they will not be subject to withholding tax when profits are repatriated. • Foreign companies without permanent establishment in China are subject to a withholding tax of 20 percent on rental, royalty, interest, and other income sourced in China unless tax rate is reduced by a double taxation treaty. • There are no guarantees against inconvertibility • XII Sources of Funds for FIEs A FIEs can obtain loans from both domestic and foreign banks. Domestic banks can issue loans in both local and foreign currencies. When applying for a loan from a bank, the FIE is required to submit relevant documents to validate the need for a loan. Such documents include cash and production budgets and purchase contracts. Normally, security in the form of a guarantee or mortgage is also needed. B FIEs taking out foreign currency loans with overseas banks are obliged to provide the State Administration of Exchange Control with a copy of the loan agreement and to register the debt. XIII Re-exports – China has set up a number of bonded warehouses for bonded goods, which include transit goods, materials imported for processing or assembling for re-export, and fuel and spare parts for ships. Customs duties and import VAT will not be levied on goods at the import stage if they are imported for re-export. XIV Patents, Trademarks, and Copyrights • China’s patent legislation identifies 3 types of patents: inventions, utility models, and designs. The period of validity is 10 years for utility models and designs and 20 years for inventions. • Foreign companies must register trademarks through one of the designated agencies under the State Administration of Industry and Commerce. Registered trademarks are valid for a period of ten years and renewable for further ten-year periods. • Various implementing regulations tackle which products are protected and what type of protection is afforded. These include regulations for the protection of computer software.18 21 XV Other Relevant FIE Taxes other than Tariffs and VAT A Individual income tax – Imposed on wages and salaries, and other income of individuals domiciled or resident in China. The amount of liability depends upon an individual’s length of residence in China and the source of their income.19 Certain fringe benefits and reimbursement of ordinary business expenses are generally not taxable, provided they are reimbursed on a dollar for dollar basis. 20 B Foreign enterprise income tax – Charged on foreign investment enterprises, foreign enterprises with establishments in China, and foreign enterprises without establishments in China but which derive income from within China. 21 Taxable income of a foreign enterprise is defined as the amount remaining from the gross income in a tax year after the deduction of costs, expenses, and losses. The standard income tax rate is 33%, consisting of a 30% state income tax and a 3% local tax. Foreign investment enterprises with head offices in China are taxed on their worldwide income. For other enterprises, only China-source income is taxed.22 C Business tax – Imposed on units and individuals engaged in providing taxable services, including transport, construction, finance and insurance, post and telecommunications, and other service industries which are not covered by VAT. The transfer of intangible assets and sale of immovable property are also charged with business tax. D Consumption tax –Charge on units and individuals involved in manufacturing, commission, processing, and importation of specified non-essential or luxury goods within China.23 E Withholding taxes – Foreign enterprises that do not have a permanent establishment or place of business in China or those that have a permanent establishment or place of business but obtain China-source income that is not effectively connected with that permanent establishment or place of business will be subject to a 20 percent withholding tax on such income sourced in China. However, withholding taxes may be waived for the following income categories: 1 Profits drawn from a foreign investor from a foreign investment enterprise 2 Income from interest on loans made by international financial institutions to the Chinese government, the Chinese state banks and other approved organizations 3 Income from interest on loans made by foreign banks to the Chinese state banks and other approved organizations at preferential interest rates 4 Repatriated earnings 5 Income from interest on loans made by foreign banks to the Chinese joint venture banks or Chinese branches of foreign banks at interest rates not higher than international inter-bank offered rates (temporary exemption only) XVI Tax Administration A Tax authorities – The tax laws are enforced and administered on a daily basis by one tax bureau under the State Administration of Taxation in Beijing and another tax bureau under a local government. The tax bureaus are in charge of ensuring that the policies are implemented and making tax assessments, including tax payments, performing tax audits, and conducting tax negotiations with taxpayers. The State Administration of Taxation is responsible for developing tax policies for China and for acting as the tax appeals body for disputes between the tax bureaus and taxpayers. B Penalties – There is a late payment surcharge of 0.2 percent of the unpaid tax balance for each day the income tax is not paid. Any taxpayer or withholding agent that unsuccessfully performs tax registration procedures within the required time limit may be subject to a fine of up to RMB 2,000. The fine for tax evasions is up to 500% of the tax due.24 22 Services Offered By the Philippine Government The Philippine government offers various services for exporters in the following fields: • Export Facilitation and Assistance • Export Promotion • Management/Technical Training • Institutional Support • Information Services • Funding • Support for Specific Industries Please refer to Appendix H for information on the specific services offered and contact numbers of the various agencies providing these services. Appendix I lists down various fairs and exhibitions in China. Business Etiquette I Introductions Formal introductions are customary. Begin with the most senior person and work down the hierarchy. Shaking hands is essential and helps break the ice. Business cards are important. It is an indication of courtesy to have your business card translated into Mandarin. Use both hands when presenting your card, with the Chinese side face up. After receiving the card, spend a few seconds examining the card. This shows respect for the person who gave it. It would be good to give small gifts to your hosts, such as a souvenir from your company. It is not advisable to open presents in front of the giver, unless persuaded to do so. II Entertainment Most Chinese prefer to eat their national dishes. A banquet with several courses is the usual form of entertainment for a foreign visitor. If you are the host at a meal in a Chinese restaurant with the customary round table, your seat should face the door while your Chinese guest of honor should be on your right. Based on descending order of seniority, visitors are seated further away from the host. Judgment should be used when placing the interpreters between guests who cannot speak each others’ languages. If in doubt, you may ask for the assistance of the Chinese guests when they arrive. It must be noted that the Chinese are very mindful of their social hierarchy. It is customary for the guests to be served food by the Chinese host. If you are the host and offer a guest a second helping, do not take no for an answer right away for they may just be polite. Frequent toasts to Sino-Filipino friendship, to good health, and so on are standard. Locally- produced wines or baijiu (strong spirit) are the usual drinks for toasts. Never be late for a Chinese meal since Chinese often get there early. As soon as the last course has been eaten, they also normally leave in a group. You are not expected to stay long. The Chinese are very unambiguous about the end of a meeting. The Chinese also eat relatively earlier. 23 III Communications Because of language and bureaucracy, communications are often difficult in China. Telecommunication services may also be relatively unreliable in less developed areas. It is best to plan in advance via phone or fax for the sake of speed, but follow-up letters to meetings or banquets are appreciated. Perseverance is important. Telephone calls may be forwarded to the wrong numbers, fax machines are often being used, and Chinese switchboard operators vary in their helpfulness, competence, and English language know-how. IV Social Conversation Talk about topics that are considered safe. These include family, one’s hometown, the wonders of Chinese culture, and so on. Talk about politics should be avoided unless you know the person very well. Political discussions make Chinese very nervous when other Chinese are present. At any time, do not disparage Chinese leaders or China. You must also be careful with humor and jokes. You can make jokes at your own expense, but remember not to damage your status in front of the Chinese by ridiculing Filipino quality or your own company. Avoid jokes with sexual connotations since Chinese are quite prudish. Keep jokes to a minimum, when what you are saying is being translated. Due to language and cultural barriers, humor hardly ever translates well. V Presentations Since the Chinese are very knowledgeable in their country’s history and geography, it is advisable to know something about these topics. Be cautious of certain sensitive subjects such as Taiwan and Tibet, which are considered to be part of China. Do not refer to Hong Kong as if it were still a separate state. It would be good to have visual aids, preferably handouts with Chinese translations since projectors may not be available for slides. Colorful brochures are well-liked, especially if they are printed in Chinese. If you do not speak Chinese, language will be a problem. The Chinese party will usually bring interpreters. However, the quality of the interpreters varies, particularly outside the major cities. Remember to speak unambiguously and clearly. Keep the grammar simple. Pause regularly. The grammatical structures of Chinese and English vary greatly. Straightforwardness will help make your presentation clear. Reactions of your audience may differ. The Chinese applaud in response to others and to themselves when they have spoken. However, do not be discouraged if your audience is extremely unreceptive. Inviting group discussion, asking questions to the audience, and soliciting questions may not draw out much reaction, although younger participants are often more eager to throw questions at the speaker. VI Others Meetings held in the morning should be over by 11:30 am to allow for lunch, and afternoon meetings should be over by 5pm. Officials may be willing Although the two-day weekend has recently been introduced, on rare occasions officials may be open to meeting with you on Saturday mornings. Always take into account Chinese public holidays when planning. 24 Foreign travel is still an indulgence available to only a minority of Chinese. Inviting your Chinese business partners or hosts on visits to your company headquarters will be admired and may put your company in good standing if there several companies competing for the contract. Even if you are pushed to the limit, remain patient. You may express your dissatisfaction but only in calculated levels and tones. If you position your problem in such a way that it is seen as a difficulty both sides can solve together, it is more likely that you will receive a positive response from the Chinese party. 25 Hints on Doing Business in China I Know the market very well – Do not assume that you know the market that you are entering. Study the industry thoroughly. Moreover, do not underestimate the Chinese consumer or customer. In the mid 1990s there were foreign companies that produced sub-standard products believing that China was a backward market. More and more, the Chinese consumer becomes spoiled by choice, especially with greater competition from new foreign entrants. Do not also suppose that what is accepted in the western world will be accepted in China.26 Adopt Niche Marketing – Since China produces almost everything, it would be more prudent and advantageous for an exporter to sell products and/or services that are not locally produce and with very good quality. Venturing into high-end products that are produced on a job order basis may ensure a better return. Those exporters engaged in the production of furniture, building decoration materials, costume jewelry and other products/services that require a high degree of artistic quality and consistency may best adopt this kind of strategy. Build up the product image – With the increasing affluence of Chinese consumers and the increasing number of brand and quality conscious buyers, especially people from Shanghai and Beijing, exporters should invest in the development of a good product image. Though payback may take sometime, development of brand loyalty assures the future of the business. Develop an Internet presence – Since most regions in China are already wired, the cheapest and most efficient way of promoting products will be through the Internet. In its issue of August 2, 2002, South China Morning Post cited the report prepared by AC Nielsen stating that China has almost 57 million users accessing the Internet from home and the China Internet Network Information Center reported that there were 45.8 million Web users in the mainland by July 2002. Cultivate relationships – Prospective foreign business partners should first build a relationship with Chinese parties and, if successful, business contracts will follow. Most successful transactions in China result from a careful nurturing of the relationship with the Chinese partner by the foreign one, until trust between the two parties evolves. Develop guanxi – Guanxi (Gwan shee) is the concept of the development of close relations. The crux of guanxi is doing business through value-laden relationships. The use of personal contacts was the only way to get things done in a extremely bureaucratic state such as China. Guanxi is the complement of a commercial legal system. However, the commitments of guanxi are very real. The obligations can become a trick that is hard to break away from. II III IV V VI 25 VII Develop a local consolidator in the home front –China is a huge market. Chinese importers usually buy in bulk to meet the supply requirement of their huge market and at the same time in order for them to bargain for the best price. Since majority of Filipino exporters are Small and Medium Enterprises (SMEs), there is an imperative need for them to bind together or develop a consolidator whenever they aim to sell to the China market since a Chinese buyer would like to be assured of volume, consistency of supply and get the best price. VIII Separate facts from fiction – Almost everything you hear about China is true and so is the opposite. Chinese thinking is inspired by early philosophers who saw a paradoxical balance of opposites in all things. They may examine ways to combine both option A and option B, instead of looking for clear alternatives (option A instead of option B). IX Take all the time in the world – The pace can be slow and fast at the same time in China. Negotiations can drag on when the Chinese side is consulting internally or has other reasons for delay. Despite this, Chinese negotiators can move very quickly on other occasions. Nonetheless, Chinese negotiators use more time willfully. Be cautious with contracts – Commercial law barely stayed alive in China and certainly signaled bad faith. The early presence of a draft legal contract was seen as improper or unnecessary, because it had no semblance of commitment attached to it. Having a contract is nothing more than a sign of progress. A completed contract may be perceived by the Chinese as mere evidence that both parties have developed a trusting relationship. Further concessions may then be asked for. Activate local assets – Work with a trusted and reliable Chinese colleague. An effective Chinese ally will be able to determine who in the other negotiating team holds the real power, analyze body language at meetings, and help settle any unintended screw ups. Then again, Chinese will often see a visit by a foreigner as a sign of commitment and authenticity by a foreign company. Thus, the ideal sales team is a foreigner to pay respects to the higher authorities in the organization and a Chinese to handle the working level contacts. Value face – To have face means to have a high standing in the eyes of one’s peers, and is a indication of personal dignity. The Chinese are highly responsive to increasing and maintaining face in all social and business aspects. Insulting an individual or condemning them in front of others is the easiest way to cause someone to lose face. Treating someone as a subordinate when he/she holds a high position in the organization is another mistake. The value of face can be enhanced by recognizing someone for good works in front of his/her colleagues. But praise should be used in moderation, since overuse of it signals hypocrisy on the part of the giver. X XI XII XIII Recognize the hierarchy – Chinese organizations are of a very hierarchical nature. Therefore, Chinese seem to be more group-oriented than individualistic and often avoid responsibility. Likewise, they are rarely willing to share opinions to their peers as it might cause loss of face. 27 XIV Find a good lawyer and a trusted partner in China 28 XV Know the tricks of the trade – Chinese negotiators are shrewd and use a wide variety of bargaining strategies. The following are a few of the more common tactics used. A Choosing the schedule and meeting place – Chinese are aware that foreigners have traveled all the way to China and will not be inclined to going home defeated. Placing pressure on foreigners just before their departure from China can often bring advantages to the Chinese side. 26 B C D E Intimidating someone by saying that they will do business elsewhere – Foreign negotiators may be forced into making disadvantageous compromises when the Chinese party threatens to go to competitors if their demands are not met. Using friendship to obtain concessions – After both sides have met, the Chinese may remind the foreigners that true friends would arrive at a mutually beneficial agreement. Ensure that the benefits are authentically mutual and not one-sided. Displaying anger – The Chinese may intentionally show some anger in order to put pressure on the foreign party, despite the Confucian dislike of displays of anger. They know that the foreign party may most likely be afraid of losing the contract. Wearing away tactics – Being patient, the Chinese party can lengthen negotiations in order to wear the foreign party down. Another alternative is the display of extreme hospitality the evening before discussions. XI Play your own game. A Be very ready – The foreign team must have comprehensive knowledge of every aspect of the deal. Be equipped to give a detailed and long presentation. Be careful that sensitive technological information is released before reaching full agreement. B Be patient – Make sure that you have adequate time to review the contract. C Be prepared to go home in order to reduce losses – It should be communicated to the Chinese party that the inability to agree is an acceptable option versus making a bad deal. D Bring up other options – If the negotiations get difficult, you may convey to the Chinese that you have other options available given that competition among Chinese companies is increasing. E Before you sign a contract, go through every detail – Discuss the whole agreement with the Chinese. Be certain that both parties understand their respective obligations and duties and that interpretations are consistent.29 Local Representation A Local agent – China’s foreign trade is conducted through a network of foreign trade corporations that have become largely decentralized and responsible for their own operations. A large number of other enterprises have also been authorized to engage in the import/export business. It is necessary to use the services of an authorized local import/export agent when exporting goods to China. B Market surveys – Before considering starting exports to China, one must carry out surveys of existing and potential markets in order to determine market size, distribution channels, and pricing. However, it is usually very hard to acquire the necessary information and essential to rely on official sources. C Employee/salesperson –The services of an employee or salesperson in China can be utilized. However, if the employee is deemed a business agent and considered to have formed a “permanent establishment” for the foreign company in China, the exporter will be exposed to Chinese taxes on China-source income. A business agent is one that keeps and delivers goods, negotiates or concludes business contracts on a regular basis, and is authorized to accept orders or conclude sales contracts on behalf of the consignor. XII XIII Port of entry and inland transport – Goods may be imported through airports and seaports open to foreign trade. Areas such as the coastal cities and Special Economic Zones are more developed and have more advanced facilities. This is particularly true of Shanghai, Shenzhen, Tianjin, and Guangzhou. Inland waterways and trains are the major means of inland travel. 27 XIV Sales agent or subsidiary – Foreign companies are not allowed to put up sales subsidiaries in China. However, the establishment of Sino-foreign trading companies by foreigners is allowed in designated areas. Wholly foreign-owned trading companies can be set up in Shanghai Waigaoqiao and the Tianjin Free Trade Zone. Hiring a sales agent is permitted, but the agent must be a local Chinese import/export agent who has an authority to engage in trade. 30 Consumer Trends I. General A. Since the state gives lower subsidies for housing and healthcare, more families are looking to finance more of their own lifestyle. Thus, consumers have to be more long term in thinking of how to plan their finances. B. Since the adoption of the socialist free-market philosophy, the accumulation of personal possessions became not only acceptable but also desirable. Consumers buying goods began to mean a healthy domestic consumer market, rather than an unhealthy adoption of Western materialism. Purchasing Influences and Preferences A. In a nationwide survey, 56.6% of respondents stated that TV commercials are the biggest influence on their decision to buy. 8.9% were more influenced by newspaper ads, 5.3% by magazine ads, and only 0.7% by advertising on the Internet. B. Ensuring customer loyalty is important in order to succeed in China, and requires providing increasingly attentive customer service. Foreign goods can no longer rely on their exotic nature in order to draw in sales, but have to compete with domestic products on the crucial elements of packaging, price, renown, quality, and service. C. Chinese prefer products, stores, and services they know and trust. The same reasoning applies to product brands, with recommendations by word-of-mouth being a strong factor for consumers to change brands. D. Most consumers continue to be loyal to Chinese products. Foreign brands are seen as over-priced or, more likely, even fake. However, Chinese are also ready to shell out more for better quality, service, and convenience. E. Many consumers prefer large stores over smaller stores because of the ability to choose from a wider array of products. Larger stores are also seen as giving more discounts and bargains which Chinese shoppers like. Greater convenience is another plus in large stores. Education - Leading retail banks have been supplying educational loans. Thus more families are able to afford high school, college or university education. Children are usually encouraged to pursue careers in high-earning industries such as law, finance, the Internet, and High-Tech manufacturing. Entertainment - In a recent survey of major cities, 62% of respondents said that they favored watching television with family members as their favorite week-night pastime. Reading garnered a 26% percentage while playing sports came in at third with 18%. Internet usage - Only 6% of consumers in the major cities use the Internet everyday for entertainment. Shopping is still a strong preference as a leisure activity, with about 10% of city dwellers going shopping during the weekdays and rising to 25% during the weekend. II. III. IV. V. 28 VI. Family Spending - Families tend to spend a lot on their children because of the one-child policy. To the contrary, the food, clothes, and entertainment for elderly family members costs only one third of what is usually spend on a child.31 Other Contact Information MOFTEC WTO Departments The Department of WTO Affairs • General Office (6519-7207) • Goods Trade Office (6519-7707) • Service Trade Office (6519-7717) • New WTO Issues Office (6519-7329) • Consultation and Technical Aid Office (6519-7367) • Notification and Examination Office (6519-7346) The Fair Trade Bureau of Import and Export • General Office (6519-8170) • Trade Barriers Investigation Office (6519-8702) • Anti-dumping Office 1 (6519-8727) • Anti-dumping Office 2 (6519-8414) • Anti-subsidy and Protective Measures Office (6519-8418) • Second Instance Office (6519-8956) • Foreign Anti-dumping Office 1 (6519-8485) • Foreign Anti-dumping Office 2 (6519-8731) 29 3 PRODUCT AND SERVICE OPPORTUNITIES Methodology Chapter Recommended products and services were chosen based on two approaches: a quantitative approach via the Relative Comparative Advantage methodology and a qualitative approach based on the opportunities in the China market and recent trends such as the opening up of the services sector with its accession to the WTO. Please see Appendix C for more detailed description of the methodology for the quantitative approach. Results of the Quantitative Approach Under each of the competitive categories (2-digit HS categories) are sub-categories (6-digit HS categories) which drove the Philippines’ competitiveness in the categories. These are sub-categories (a) which show Philippine competitiveness versus China based on Relative Comparative Advantage and Net Export Ration computations and (b) contributed at least 10% to the Philippines exports for that certain category. Drivers of Competitiveness Percent Contribution to 26-Digit HS Sub-Categories digit category volumes Competitive and Increasing Philippine products which are competitive versus China but whose competitiveness has been decreasing Lac, gums, resins, vegetable Gum arabic 12% saps, and extracts Natural gums, resins, gum-resins and 10% balsam, except Arabic gum Copper and articles thereof Copper cathodes and sections of 36% cathodes unwrought Copper unrefined, copper anodes for 10% electrolytic refining Nuclear reactors, boilers, Parts and accessories of automatic data 55% machinery processing machines and units thereof 2-digit HS Categories 30 Storage units, whether or not presented 38% with the rest of a system Electrical and Electronic Monolithic integrated circuits 53% equipment Hybrid integrated circuits 19% Competitive Yet Not Increasing Philippine products which are not competitive versus China but whose competitiveness relative to China has been increasing Products of Animal Origin Corals, shellfish, cuttle bone, 34% echinoderm Animal products and dead animals for 15% human consumption Edible fruits, nuts, peels of Bananas including plantains, fresh or 95% citrus fruit, melons dried Vegetable plaiting materials, Vegetable materials used primarily for 60% vegetable products plaiting Vegetable materials used as 22% stuffing/pad put up/ not as a layer Animal, vegetable fats and oils, Coconuts (copra) oil-crude 68% cleavage products Coconut (copra) oil and its fractions 10% refined but not chemically modified Ores, slag, and ash Copper ores and concentrates 84% Not Competitive Yet Increasing – Philippine products which are not competitive versus China but whose competitiveness relative to China has been increasing • Live animals • Dairy products, eggs, honey, edible animal product • Salt, sulfur, earth, stone, plaster, lime, and cement • Inorganic chemicals, precious metal compounds, isotopes • Fertilizers • Miscellaneous chemical products • Manufactures of plaiting material, basketwork • Paper and paperboard, articles of pulp, paper, and board • Other made textile articles, sets, worn clothing • Tools, implements, and cutlery of base metal • Optical, photo, technical, and medical apparatus Product and Service Opportunities based on Qualitative Approach • • • • • Fruits Microelectronics IT-Based and Professional Services Educational Services Furniture 31 ----------------------------------------------------------------------------------------------------------Industry Information FRUITS Overall Trends and Industry Events I Better farming organization is leading to larger-scale farming, using more automation in production, packaging, and transportation, and will ultimately lead to the creation of significant fruit and vegetable supply companies. The process is still in its earliest stages, but is now becoming a significant trend especially as more growers become actively involved in supplying the fast-growing supermarket chains. Hoping to address the economic imbalance that has evolved between urban and rural regions, the Chinese government has placed special emphasis on developing the country’s agriculture during the current Five-year plan (2001-2005). This means developing more commercially robust agricultural practices, which will drive the development of the supply industry, and will lead to increased supply to the market and better marketing of products. Once the Chinese agricultural industry reaches a more competitive stage of development, there will be an emergence of leading suppliers of products with sophisticated branding and marketing.1 Increased fruit production every year plus a large amount of imports has resulted in the relative decrease of fruit prices. Chinese households spend on increased quantities of more expensive foods during holidays. Consumption during the Chinese New Year holidays takes up an estimated 16% of families’ annual expenses.2 II III IV V Import Opportunities I Despite the size of China’s fruit production, import opportunities still exist due to China’s poor post-harvest storage and handling practices and facilities. Moreover adverse weather conditions affects the country’s fruit production 3 Based on a survey of residents in 8 major Chinese cities, 27.5% of the respondents said they had bought imported fruits totaling about 112 million RMB (US$13.53 million) per month. In addition, another 19.1 percent of the families interviewed plan to start buying imported fruit. The buying potential of this new group could add about 78 million RMB (US$9.42 million) II 32 every month. Consequently, imported fruit will constitute 22.3% of the total fruit sales in China.4 III Due to China’s limited resources, domestic production will be unable to meet rising food demand entirely. China’s 1997 agricultural census confirmed that its cultivated land area was 40 percent larger than previously reported, but this larger number still meant that China had 10 people to feed per hectare of farmland which is more than twice the world average of 4.4 people per hectare. The cultivated land base is likely to shrink further as some of China’s most productive land is lost to development in coastal provinces and environmentally fragile land in western areas is returned to forests, grass cover, and other, more sustainable uses.5 Demand I In year 2000, China’s urban population spent $236 per person on food while rural residents spent only $56. Farm families, who make up the bulk of China’s population still grow much of the food they consume. China’s food consumption has been growing 50% annually since the economic boom in 1995 reaching 200 billion RMB (US$24.16 billion) in 2000,. It is projected that China’s demand for food will increase to 12% per year by 2005. Total food output in 2000 reached 130.2 billion RMB (US$15.73 billion) and will increase to 210 billion RMB (US$25.37 billion) by the 2005.6 The fruits and vegetable market is the largest sector of the retail food market in China.7 Health concerns among Chinese people give rise to consumption of fruit in substantial amount.8 Rising consumer incomes resulting from economic growth and the development of processed and packaged foods have led to greater demand for better variety and quality of fruit and vegetable produce. The fruit and vegetable market has less to do with market and brand shares but is more about the rapid growth of consumption of fruits and vegetables by Chinese consumers, since the opening-up of the Chinese economy some 25 years ago.9 In a 2001 survey conducted in 8 major Chinese cities, 61.7 percent of respondents considered taste and not cost as their primary consideration when shopping for fruits while 36.3 percent of respondents said that they considered freshness to be the most important factor. Only 35% claimed that they considered price first. In past surveys, fruit eaters rarely considered nutrition as important. However, the 2001 survey of eight major Chinese cities revealed that 27.7 percent of the respondents felt that nutritional value was their most important consideration. Other factors considered by consumers were varieties, the quality, and even the appearance of the fruit. II III IV V VI VII VIII Residents in the eight cities make six fruit purchases every month on average, spending about 11 RMB (US$1.33) per purchase. Based on this figure, their combined fruit bill is nearly 775 million RMB (US$93.62 million).10 33 Competition I Local Competition A China is a major fruit producing country; it became the world’s largest fruit producer in 1993. By 1998, total fruit production was over 54.9 million tons, representing 12% of total world production. B China’s fruit production is mostly in traditional fruits such as apples, oranges, pears, and bananas. There is a lack of new variety and quality fruits. C China is also the largest vegetable producer in the world as of 2000, producing 65.7 percent of vegetables around the globe. Total area cultivated in vegetables in China accounted for 35.3% of total areas cultivated worldwide.11 Distribution Channel I The trading center for imported fruits is Li Shui (Nan Hai) Market which is located in Guangdong. Approximately 70% of imported fruits sold in the mainland come from this market. 12 Another trading center is the Shanghai Import Fruit and Vegetable Market. Wet markets where local farmers supply produce direct from their farms constitutes majority of fruits and vegetable sales. New retail formats such as supermarket chains barely affect the development of the fruit and vegetable market. The retail fruit and vegetable markets are not limited to end consumer sales but also supply institutions and companies such as restaurants. This means that the retail market for fruits and vegetables is often indistinguishable from the wholesale trade, especially when some fruit and vegetable wholesalers also sell retail. There are no national or regional-level competition in this market nor any strong market leaders, except for handful of few privately-run wholesale and wet market companies. The lack of a distribution infrastructure makes it difficult for farmers in one locality to reach other markets. However, nowadays, many farmer cooperatives are reaching farther markets by trading their produce over the Internet. Improvements in distribution infrastructure have resulted to greater regional trade of fruits and vegetables. This in return has lead to more products from one region of the country reaching consumers in other parts of the country.13 II III IV V VI Relevant Import Regulations I Inspection of imported food – All imported food, food additives, food containers, packaging materials, and food utensils and equipment must is subject to the inspection and quarantine authorities for health supervision. Under the management of inspection and quarantine authorities, imported food is classified into different categories by hazard ratings and inspected according to national health standards. Only those foodstuffs that meet requirements can enter China. 34 II Registration of imported food and animal and plant products – The State Administration for Entry-Exit Inspection and Quarantine or CIQ is responsible for formulating, revising, and publishing the Catalogue of Imported and Exported Food and Animal and Plant Products Subject to Health Registration. The products in the catalogue include processed food ready for direct consumption as well as semi-finished products and raw materials such as meat, aquatic products, and vegetables. Foreign food manufacturers may apply for registration with CIQ through the local food and hygiene authorities at their resident country. Those that meet CIQ requirements will be added to CIQ’s list of countries and enterprises permitted to export food to China and given special health registration codes. Description of Products Coconut, fresh Banana, fresh Mango, fresh MFN Tariff As of 2002 (%) 13.2 16.0 19.0 WTO Concessions to the Philippines Base Rate (%) 15 25 25 Bound Rate (%) 12 12 15 Implementation Period 2004 2004 2004 Leading Fruit Exports Bananas I Demand A Estimated demand for bananas every year is approximately 585,000 metric tons. B The per capita consumption of bananas is 0.8 kilos per person C Most of the shortage of food is in the northern parts of China, especially in the winter time.14 Top Suppliers of China’s Dried and Fresh Banana Imports (Value in US Million Dollars) 1998 1999 2000 Total World 163 141 169 Ecuador 66 65 74 Philippines 63 45 72 Source: International Trade Centre UNCTAD/WTO, United Nations Statistics Division, PC/TAS 1996-2000 II Import Opportunities A The most popular banana chips in China are those imported from the Philippines. B The quality of Chinese-produced bananas suffers from a sub-par quality insurance program, low quality packaging, and strong presence of chemical residue. Competition A Local production of bananas is found in Xiamen, Guangzhou, and Fujian B China also imports from Central American countries such as Ecuador and Colombia. III 35 IV Distribution Channels A According to foreign suppliers of bananas to China, it is best to find a trusted local comprador or fixer who will be responsible find the buyers of fruits and vegetables and deal with the local officials in China. B To ship to the North, it is best to use the Qinghingdao port because it is near Beijing and the North China railway network which eases accessibility of the port to buyers in the North. Buyers from the North are usually farmers who resell the bananas on the wet markets. C Traditional distribution of imported bananas is through Hong Kong. These shipments enter the mainland through Shenzhen.15 D Most Filipino banana producers whose produce is exported to China sell their produce to Dole and Del Monte at a FOB price. Dole and Del Monte handle shipment to and distribution within China. Pricing A Prices of bananas change daily. The daily price is called the spot price. Demand is high during the months of January to April, thus spot prices of bananas in China are relatively high. Spot prices go down during the months of June, July, and August.16 V Mangoes I Trends A Successful mango exporters are usually those with established brands in China. This implies that marketing and promotion of specific mango brands and mango in general is important in order to actualize the potential of the Chinese market. B There are times when Philippine mangoes are still green when they reach China. Retailers and consumers think that the green color is the final state of the mango, and thus conclude that it is of bad quality. Therefore, there is also a need to educate China consumers ripening stages of the mango. Demand A Peak months for mangoes in China are from February to June since other fruits produced in China are not in season during that time because of the winter and spring seasons. II Top Suppliers of China’s Guava, Mangoes, and Mangoesteen Imports (Value in US Million Dollars) 1998 1999 2000 Total World 3.2 3.3 9.4 Thailand 1.7 1.5 5.1 Philippines 1.2 1.5 2.4 Source: International Trade Centre UNCTAD/WTO, United Nations Statistics Division, PC/TAS 1996-2000 III Competition A Production of mangoes in China is mainly found in Hainan. B China has six to eight varieties of mangoes. One to two of their varieties are similar to the Philippine varieties. 36 C D IV A Other fruits are substitutes for mangoes. If consumers find mangoes to be too expensive, they switch to other fruits which are of abundant supply in China such as watermelon. The biggest Philippine exporter of mangoes to China ships around 50-80 containers a week. Distribution Channels Because of the relatively short shelf life of mangoes (10-15 days), the best way to enter China is through Hong Kong as compared to Shanghai. It only takes 3 days by sea to get to Hong Kong, while it takes 8 days to travel to Shanghai. Thus, when mangoes arrive in Shanghai it only has a remaining shelf life of 2-7 days. This limits the time given for retailers to sell the mangoes. Moreover, by the time consumers eat the mango, its appearance and taste are no longer at their best. Thus, it is hard to convince the wholesalers in Shanghai to take Philippine mangoes. B Shipments via HK require the use of open containers only whereas shipments via Shanghai require more expensive refrigerated containers. C There are around 20 Hong Kong importers who buy Philippine mangoes. Usually the Chinese buyers of these importers are institutions or companies that are connected or affiliated to the Hong Kong companies. Some of the Hong Kong importers are the following: 1. Wang Sung 2. Union Trading Company 3. Tung Sang Lan 4. Linson Trading Limited 5. Moon Chan Lan 6. Lee Chiu Kee Lann 7. Kuen Fung Trading 8. Kowloon Fruit Company 9. Happy Nice Fresh Fruit 10. Fu Fai Trading Company 11. Yau Shing Lahn 12. Chi Woo :Lann D The most common entry point to China via Hong Kong is Guangzhou. From here, the mangoes find their way inland into major cities only. E Phyto-sanitary regulations in China can be easily complied with by Philippine exporters. Unlike other countries, China does not require vapor heat treatment, which is used to ensure the removal of the “fruit fly”. Pricing and Payment C & F (Cargo and Freight) price of extra large Philippine Mangoes are around $18.00/box. One box weighs 12 kilos. A box of large Mangoes costs $16.00. Chinese Mangoes also cost the same. Thus, plus tariffs, retail prices of Philippine Mangoes are higher than that of China Mangoes. B Mangoes shipped to China (including Hong Kong) through trading companies/import agents are usually held on a consignment basis. Thus, prices are not fixed and based on the daily supply and demand of Mangoes. The trading companies in China deduct their commission and expenses from the revenues they earn. What remains goes to the exporter in the Philippines. C Fruit trading companies usually earn around 4% commission on revenue. D Mango shipments to end users such as restaurants are sold on a fixed-price basis, which is more advantageous to an exporter versus consignment given the certainty that is afforded by a fixed price. E Fruit trading companies in China are still quite traditional with respect to their payment arrangements. No letter of credit is involved, thus, a lot of trust is given by the exporter to the agent. 17 A 37 V Microelectronics Overall Trends I In 2001, the Chinese Integrated Circuit (IC) industry can be characterized by the following features: A Inadequate capacity and low productivity - China can satisfy only 25% of its domestic needs. B Strong foreign competition C Poor infrastructure - China’s IC infrastructure is immature. Lack of peripheral industries (e.g. equipment manufacturing, assembly, and testing) is a major concern for future growth. D Inadequate research and development - Most of the advanced technologies are acquired from foreign countries. E Rapidly growing and sophisticated design capabilities – This may potentially negate the problems identified above. F Strong government support - It was estimated that US$10 billion will be invested in new semiconductor fabrications from 2000 to 2005. To encourage domestic IC production capability and reduce reliance on semiconductor imports, China launched Project 909 in 1995. The project called for the establishment of five major IC production companies and as many as 20 design and development centers by 2000. Shanghai was chosen as the site for the project because it had become the center for microelectronics production in China.18 II Import Opportunities I Barriers to entry into the semiconductor and components industry of China for foreign firms have been weak intellectual property right laws and difficulties in creating wholly-owned foreign ventures. The Chinese market is seeing continued shortage in Thin Film Transistor-Liquid Crystal (TFTLCD) Display panels. Average prices of 15” panels have increased to US$230, from US$180 in Oct. 2001. Local producers claim that TFT-LCDs will replace 30% of CRT demand in 2002.19 According to China’s 10th five year plan, by year 2005 China’s semiconductor will be valued at around US$25-US$30 billion, with about 70% of this value imported. By 2010, the semiconductor market is estimated to be at around $50 billion China’s semiconductor industry still consists of relatively small-scale manufacturers with low productivity and low-level process technology. In fact, the semiconductor manufacturing sector is the weakest segment of China’s electronics industry. 95% percent of the electronic products produced in China contain semiconductor components imported from the US or Japan. II III IV 38 V China imports 70-75% of their IC requirements due to the ever-increasing demand of integrated circuits by the electronics sector 20 and technology transfer limitations imposed on their country. In 2001, the Philippines enjoyed a US$209 million trade surplus with China in electronics. The Philippines exported US$446 million worth of electronics to China registering a growth rate of 29.33% versus the previous year.21 Consumer electronics constituting 85% of total electronic export is China’s main export in this industry. On the other hand, the Philippines’ main export is electronic components and parts, which composes 66% of its total electronic exports.22 VI VII VIII From 1998-2000, the Philippines exported an average of US$67.1 million worth of integrated circuits . This accounted for 72% the country’s total electronics exports to China during that period.23 IX The major emphases in the development of China’s semiconductor industry in the coming century will be in the following areas: A IC design capabilities B Wafer preparation and chip manufacturing, including polysilicon, crystal silicon preparation and process, doping process, pattern micro fabrication, di-electric thin-film technology, metal thin-film technology and clean room techniques. C IC assembly, testing, and reliability 24 Demand I The high growth rate of PC demand translates to higher demand for microelectronic components. China’s PC demand in 2001 increased by roughly 21% or 8.9 million units due to rising PC penetration in large cities and IT investment by China’s government. However, the local producers supply more than 80% of this demand. There is high growth potential for the PC market as China’s government is planning to increase PC penetration in the education sector to one PC per seven students by 2005.25 The mobile phone is another product where microelectronic components are used. As of December 31, 2001, China had 144.8 million mobile phone users and is expected to grow to 405 million by 2006.26 Market research estimated that China’s chip purchase will increase at a rate of 33% annually from 1999 to 2003, pushing the country’s semiconductor sales to US$27 billion or 8.6% of the world market by 2003. The poor infrastructure and long supply chain for raw materials and manufacturing equipment contribute to the inefficiency of the industry. Also, technology export control from developed countries blocks China’s efforts to import advanced manufacturing equipment and to upgrade wafer-processing technology. However, this may change with China’s WTO accession. II III IV V 39 China’s IC Import and Export Product Type in 1999 Type Import Volume Import Amount (million) (million in US$) IC Chip 44.3 68.0 MOS 520.5 345.4 Technology Produce IC Bi-pole 138.6 80.1 Technology Produce IC Mix and other 2856.2 1638.3 technology Produce IC Other Single 12387.2 3931.0 Chip IC Mix IC 1046.8 1342.9 Microelectronic 286.8 127.9 Components Total 17280.5 7533.6 Export Volume (million) 13.2 12311.6 Export Amount (million in US$) 22.8 310.6 87.2 568.3 1876.7 256.2 153.0 4185.8 22.6 138.6 554.5 702.6 137.7 1889.3 Source: Department of Electronics Information Product Management, Ministry of Information Industry Top Suppliers of China’s Electronics and Electrical Parts Imports (Value in US Million Dollars) 1998 1999 2000 Total World 26,367 35,240 50,746 Japan 7,287 9,468 12,666 Taiwan 3,299 4,308 6,413 Republic of Korea 2,259 3,395 5,088 USA 2,812 3,564 4,700 Hong Kong 1,914 2,095 3,203 Source: International Trade Centre UNCTAD/WTO, United Nations Statistics Division, PC/TAS 1996-2000 Competition I Local Competition A China’s state of the art technology is 0.18 to 0.25 millimeters and a million-gate-level IC design. Current R&D is focused on Small Outline Integrated Circuit (SOIC) design and developing advanced technologies B Many institutions actively support designing and testing in China’s IC industry. These institutions include the Fudan University in Shanghai and Tsinghua and Peking Universities in Beijing. C It was reported that Peking University has patented the country’s first 32-bit and 16-bit microprocessors. Likewise, it was reported that Beijing and Shanghai have set up chip production bases with initial investments of US$ 10 billion and US$1.63 billion, respectively, which will have a production capacity of 40,000 chips per month by 2002. D Of China’s current total of 330 semiconductor plants, 36 produce ICs and the rest produce discrete devices. Among the 36 IC manufacturers, only a few do wafer processing and IC fabrication; with most focusing on electronic packaging and testing. The IC fabrication companies include Shanghai Hua Hong Group Corp, Shougang 40 NEC, Beijing; Advanced Semiconductor Manufacturing Corp, (ASMC), Shanghai; Shanghai Belling Microelectronics Manufacturing Co., Ltd.; Hua Jing Electronics Group Company, Wuxi and Hua Yue Microelectronics Co. Ltd. Manufacturers China Huajing Electronics Group Co. Technology 2-5u (bi-pole) 1.5-3u (CMOS) 0.8u-1u (CMOS) 2-5u Silicon Chip Size (inch) 4-5 5 6 4-5 Production Capacity (units) 15,000 12,000 6,000 20,000 15,000 12,000 6,000 8,000 20,000 1,800 Huayue Microelectronics Co., Ltd. Shanghai Belling 1.2-2u (MOS) 4 Stocking Co., Ltd Shanghai Pioneer 2-3u (bi-pole) 5 Semiconductor Produce 0.8u (CMOS) Co., Ltd. 0.8u (CMOS) 6 Shougang NEC 0.5-3u (CMOS) 6 Electronics Co., Ltd. Shanghai Huahong 0.35u (CMOS) 8 NEC Electronics Co.,Ltd. Hangzhou Youwang 2-3u (bi-pole) 4 Electronics Co., Ltd Source: Michael Pecht, Wifing Lin, and David Hodges, “China Semiconductor Industry,” F. As of December 2000, wage and other incidental expenses for plant operations in Shanghai were as follows: US$180-US$540 US$125 – US$270 US$25 US$24 US$152 US$0.07 30% Engineer wage/month Factory wage/month Industrial land cost/square meter Office rent/square meter Phone installation Industrial electricity/kilowatt-hour Corporate tax Source: Business Week, 22 October 2001. II Foreign Competition A Western (e.g. US) and Asia-Pacific (Taiwan, Korea, Japan, Malaysia) companies were equipped with much better technologies and financial resources.27 Distribution Channel I. Most of the manufacturers in China that use the microelectronics being exported by the Philippines are subcontractors of “big name” companies such as Dell and Hewlett Packard. Thus, those who make the purchasing decisions for electronic components are the global sourcing departments of these companies which is usually located in their global headquarters. These global sourcing departments instruct microelectronics exporters where to deliver the products. In the case of China, 41 most of the microelectronics is exported to Shenzhen and Dongguan, which are the “Silicon Valleys” of China. 28 II. Local microelectronics companies are mostly contract electronics manufacturers (CEMs). The Philippine CEM mainly produces components such as integrated circuits for Independent Device Manufacturers (IDMs). IDMs are the suppliers of devices for either Electronic Manufacturing Service (EMS) providers, which are companies involved in a wide range of manufacturing services from design, component manufacturing, broad manufacturing to metal stamping, or the Original Equipment Manufacturers such as Dell.29 Relevant Import Regulations I Scope of mechanical and electronic products – The Statistical Handbook on the Import and Export of Mechanical and Electronic Products compiled by the Department of Mechanical and Electronic Products Import and Export under MOFTEC contain the basis for defining the scope of mechanical and electronic products subject to entry-exit inspection and control. Quality licensing of import commodities – China has published a Catalogue of Import Commodities Subject to the Safety and Quality Licensing System. Products listed in this catalogue but are not granted a safety and quality license cannot enter China. Regulations governing the import of second-hand mechanical and electronic products – With the exception of products to be imported for special needs, China forbids the import of used mechanical and electronic products listed in the Catalogue of Import Commodities Subject to the Safety and Quality Licensing System. Tariffs – Based on known practices of interviewed Philippine electronic manufacturers, their companies do not pay for the duties of the products they export. It is the importer who pays for it, on the basis of an FOB (Freight on Board) – Manila.30 II III IV IT/Professional Services Software Services and the software industry I. Trends A. China’s government has recently announced that the local software companies will enjoy a complete rebate on all export taxes in order to make them competitive globally. Also, under the new policy, software companies with registered capital of more than 1 million RMB (US$120,000) will have the right to export their products directly overseas.31 B. The ability to handle the Chinese language is expected of any software application sold.32 C. China is trying to catch up with India’s software exports by teaching quality English, providing technical training to its IT professionals and by opening software parks nationwide. 42 II Opportunities A. Lack of English skills is the main weakness of the Chinese software sector.33 B. According to a recently prepared report, China’s eight major software markets with growth potential are as follows: 1 Corporate Management Software – China has a total of more than 11 million enterprises and setting up their management information structures will create a vast market for the development of corporate management software producers. Furthermore, China’s entry to the WTO challenges its enterprises to conduct fairly soon business activities and management in accordance to international rules and accepted practices; thus, generating demand for corporate management software. 2 E-commerce Software – E-commerce is sweeping across the globe at an unprecedented rate. China’s e-commerce is still at its infancy, indicating to ecommerce software developers future room for development. 3 Middleware Software – China’s middle software sector is experiencing a growth period characterized by the fast growth of the internet and e-commerce and by the rapid development with the distribution application system shifting from two-layer structure mode to three-layer structure mode. 4 Network Safety Software – Government officials are increasingly focusing their attention on network safety 5 Embedded Software – Complementary Metal-Oxide Semiconductor (CMOS) chips of microcomputers have become more and more embedded into products and embedded software has become a key factor for the upgrading and value adding of products. Embedded software is also seen as a manifestation of future enterprises and product competitiveness. 6 Network Application and Communication Software – Software’s more well known basic platform are networking applications. Thus, communications software based on IP will form the basis on which new communication businesses will be conducted. Network and networking software will be the future of software development. 7 Linux Software – Linux has a number of advantages such as being an open source code, allowing sharing of intellectual property rights and, developing the “market mode”. It is also low cost and easily customizable. 8 Software Services – Market demand for software services is twice as huge as that for software products. This demand is growing every year. Information system integration and ACTIVE SERVER PAGES are key success factors in the development of China’s software enterprise. Demand A. In 2000, software sales in China amounted to US$6.54 billion. Of this 63 percent were application software, 25 percent were support software, and 12 percent were system software. However, domestic software suppliers are currently only able to meet about 30 percent of demand. B. Sales of mainland-developed software for 2000 were valued at US$2.836 billion. The industry registered an annual growth rate of 28 percent over the past five years. The sales volume for domestic software is expected to grow by 30% in the next five years and reach US$31.25 billion by 2005. 34 III. 43 IV. Competition • There are about 10,000 software companies in China, 3,000 of which are exclusively engaged in software development. These companies have a workforce of 200,000. Over 100 of these companies are wholly foreign owned and joint ventures Distribution Channels • The major distribution channels for information technology in China are through agents and local partnerships for joint development.34 V Accounting Services I. Trends A. Following the liberalization of the accountancy sector in 1999, the Central Bank of the People’s Bank of China, and its Ministry of Finance gave 68 certified public-accounting firms the permit to conduct finance-related auditing business in China. Since 1992, international accounting firms had also been allowed to set up joint ventures with local partners, though not through a merger. With the accession to the WTO, these firms will also be allowed to provide accounting, taxation, and management consultancy services. B. All 68 firms are subject to annual inspections to ensure the quality of their auditing. Any firm that fails to meet the qualification standards during the inspection will be suspended from auditing finance-related businesses, while new firms that meet the standards will be added to the list in the coming years. C. As China’s stock markets grew, there have been increasing cases of accounting firms misleading investors through false accounting. The Ministry of Finance has punished over 13 accounting firms and 21 accountants for collaborating with firms in giving false financial reports in 2001. Penalties range from suspension from auditing work for one year to verbal reprimands. D. China’s Ping’an Insurance Company (CPIC) is the first insurance company in China to provide liability insurance for accountants in China.35 Opportunities A. Filipino firms can subcontract projects from foreign service providers operating in China because of their competency and lower operating cost.36 B. Over 100 overseas accounting firms have been granted temporary licenses to run auditing businesses in China by the Chinese Institute of Certified Public Accountants (CICPA), provided they pass the Chinese certified public accountant test. To date over 10,000 people from ten countries and regions have taken these tests and joined the CICPA. C. The CICPA has started to encourage Chinese accounting firms to expand through mergers and partnerships with reputable international and domestic accounting firms. D. There is a trend towards the mergers of smaller Chinese accounting firms. By December 2000, 300 small accounting offices merged into 110 larger ones.37 E. Quality of accounting reports in China is low by world standards. As a result, international investors find it difficult and uncomfortable to make investment decisions in China. Contributing to this situation are the inadequate and inconsistent training for accountants and poorly controlled licensing of accounting firms.38 II. 44 BASIC STATISTICS ON CHINA’S ACCOUNTANCY SECTOR No. of chartered accountants 1998 58,000 No. of chartered accountants 2000 51,349 Number of accounting offices 1998 6,683 Number of accounting offices 2000 4,674 Source: Chinese Institute of Public Accountants (CICPA)/Chinese Association of Chartered Accountants III. Demand A. The main clients for the accountancy firms are domestic institutions including policyrelated banks, state-owned banks, share-holding commercial banks, trust and investment companies, and finance leasing companies. Competition A. Of the 68 firms licensed to conduct finance-related audit, 63 are domestic and five are foreign-funded firms. The foreign entrants in the market include some of the world’s largest accounting firms: Arthur Andersen, Huaqiang Certified Public Accountants, PricewaterhouseCoopers, Deloitte Touche Tohmatsu, KPMG, and Ernst & Young. Most have established offices in Beijing, Shanghai, Fuzhou, and Guangzhou. Related Regulations A. In order to become a CPA in China, candidates must take the CICPA exams and then apply to join the institute of CPAs. Accountants can apply for a CPA license after two years of auditing work in an accounting office. The application will be approved within 30 days after the institute has examined the case. B. CPAs must legally join CICPA, be registered with the Ministry of Finance, have no criminal record and/or administrative punishment record and provide a written commitment with the registration C. Legally, accountancy firms in China must fulfill the following criteria 1. Have a minimal capital of RMB 300,000 2. Have a minimum of two partners and between two and five CPAs 3. Must join the Chinese Institute of CPAs 4. Must retain a professional risk fund D. Accountancy firms must be structured as either partnerships or limited responsibility firms, though there are no restrictions on the foreign liaisons for firms. E. All regulations regarding accountancy firms are formulated and supervised by CICPA. CICPA also sets the minimum limit of what accountancy firms can charge their clients. F. According to the Ministry of Finance, China will adopt unified accounting standards for domestic-and foreign-funded companies in 2002. From January 1, 2002 foreign enterprises will be required to use the Enterprise Accounting System introduced at the end of 2000 and has been applied to domestic firms only so far. Overseas companies have been using the Foreign-funded Enterprise Accounting System introduced in 1992. G. The Ministry of Finance has the authority to regulate accounting standards in China. The initial standard is known as the Basic Accounting Standard, upon which subsequent standards were based. IV. V. 45 VI. Contacts A. Trade Organizations 1. The Chinese Institute of Certified Public Accountants (CICPA) – CICPA is a selfregulated organization. It oversees the CPA unified exam, which is held annually. The major task of CICPA is to regulate the public accountancy profession in China. 2. Chinese Association of Chartered Accountants 3. The Association of Chartered Certified Accountants (ACCA) China Branch – ACCA is the largest global body for accountancy professionals. It has approximately 300,000 members and students in 160 countries. 4. Greater China Accountants Alliance – The aim of this organization, which was formed in 2001, is to start discussions around issues raised by China’s accession to the WTO. B. Government Departments 1. Ministry of Finance • Address: 3 Nansanxiang, Sanlihe, Beijing, PR China • Tel: +86-10-6855-1114 2. The National Accounting Institute – China’s National Accounting Institute is a residential continuing education facility in Beijing established by the Ministry of Finance to educate China’s professional accountants. 3. China Insurance Regulatory Committee (CIRC) – CIRC is the direct supervisor of China’s commercial insurance sector. 39 Educational Services Government’s Support for the Industry I. Funds allocated for education in the year 2000 accounted for 4% of China’s GDP. According to China’s Ministry of Education, more will be done within the next few years to develop vocational and adult education programs, serve regional economic and social development, and promote on-the-job and re-employment training programs.40 The government is working towards the increase in modernization and productivity of education. Computers have become supplementary teaching equipment used in schools. Moreover, rewards are given to excellent electronic teaching materials developed by publishing houses. II. English Education Services I. Trends • Chinese prefer Americans and Europeans when it comes to teaching the English language Demand • Demand for English tutorial services comes from three major factors: the desire to migrate to other countries to look for better opportunities, the entry into the World II. 46 • • • Trade Organization, and the emphasis put on learning English by the government because of the upcoming 2008 Beijing Olympics It is difficult to determine the exact size of the market for English tutorial services. But it would be safe to say that those who could afford English tutorial services are in the middle and upper income classes. Out of the 1.3 billion Chinese people, 300 million belong to the middle and upper income classes. This statistic is similar to the cellular phone penetration in China. A promising target market for English tutorial services are the grade-school children. Given the one-child policy in China, parents make a large investment on their child.41 In Beijing alone, the English tutorial services industry grossed 700 million renminbi (US$84 million) in 2001 by providing courses to nearly 200,000 people.42 III. Competition • Schools offering tutorial classes for the English language have sprouted in the big Chinese cities such as Beijing and Shanghai and they are well patronized.43 • The existing big players in the domestic market are Beijing New Oriental Language School, Eastern English Services, EnglishFirst, Shane English Schools, Wall Street Institute, Qian Jin, Li Yang Crazy English, New World, and Kai En. Other than these players, the English education industry is a fragmented industry with lots of small players and free-lance tutors.44 Distribution Channels • English tutorial services should be “mobile”. Tutors should be able to go wherever the student is. But, there can still be tutoring centers where group sessions can be held. Pricing • The estimated pricing for one level of language tutorials is $600. To be able to converse well in a foreign language, a student needs around four levels. Each level consists of around 30 sessions.45 • Wall Street English language schools charge trainees more than 20,000 renminbi ($2,409) each for one term.46 IV. V. IT Training/Management Training I Trends A. The medium of instruction is usually in English, thus it is not necessary that the teacher can speak Mandarin. However, knowing Mandarin is definitely an advantage. B. Based on forecasts, retail demand for educational services will be significantly greater than the institutional demand for these. Demand A. The market for IT training and management training as of 2002 is estimated to be approximately US$30 billion dollars per year B. The demand for formal education in IT or management is mostly in the big cities such as Beijing and Shanghai, the Special Economic Zones, and the Free Trade Areas C. The demand for management training is driven by the presence of foreign enterprises which require their employees to acquire management know-how. II 47 D. E. F. The growth of the education services industry is an offshoot of the strong growth of other industries such as banking, manufacturing, and telecommunications. There is a greater demand for skilled staff and managers.47 China needs more Masters of Business Administration graduates to meet the demands of the country’s modernization drive. Chinese educational institutions started offering MBA programs in 1991, but most of these institutions are still at their infancy. This shortage offers educational institutions an opportunity to market their MBA programs in China. By the end of 2000, it is estimated that 45,000 people were enrolled in local or foreign joint-venture MBA or Executive MBA programs in China. Education experts believe that China currently need around 300,000 MBA graduates to satisfy its development needs. The MBA sector market size reached approximately US$120 million in 2000.48 • The International Cooperation Department of the China Education Company which is directly under China’s Ministry of Education is inviting education authorities and universities to run schools in China, especially MBA, EMBA, DBA, and other business programs or train Chinese teachers.49 III Competition A. The main competitor in educational services is Singapore. Since Singapore has already exhausted their manufacturing capacity, it is promoting education as a potential growth area for its knowledge economy. Their advantage over the Philippines is their knowledge of Mandarin.50 B. Presently, the US is the leader in joint venture MBA and Executive MBA programs in China. However, competition from European, Canadian, and Australian organizations is increasing. In addition, 56 Chinese educational institutions have been granted permission to issue business administration diplomas. Distribution Channels A. Channels for distribution of training services is usually done through training branches. Moreover, it is also desirable to have educational software, which will allow the trainees to go through the program at their home or office. B. It is best to put up management/IT educational services in places where there is a significant inflow of foreigners and multinationals. These cities are Tianjin, Beijing, Shanghai, and Shenzen. Pricing • Estimated charge for IT and management training is $5000/year.51 IV V Furniture Trends I. II. In 2001, people residing in the rural areas of China spent 1.64% of their earnings on home furnishings. Increasing home ownership has led to a marked increase in furniture sales. 52 48 III. Due to a shift in consumer’s taste from lower to higher quality furniture, which led to a decline of demand for low quality furniture, cutthroat price competition ensued in the industry during the year 2000. Chinese consumers are buying middle or high-end furniture that are multifunctional, environment-friendly, and contributes to sound health. Accounting for one third of all material used in Chinese furniture, wood is still the dominant part of furniture products. This is followed by metal. Office furniture accounts for 25-30% of total furniture sales in China. Products that are in demand are reception, work station, and conference furniture.53 While price is important, it is not the most critical factor for office furniture buyers. Quality, design, environmental qualities, after-sales service, delivery, brand, and comfort are equally important.54 Sofas are the most salable home furniture followed by the tables, chairs, beds, and cabinets. On the other hand, office furniture accounts for 25 to 30 percent of total furniture sales. Fast moving office products include reception, conference, and workstation furniture.55 IV. V. VI. Opportunities I. The average technical development of woodwork machinery in China is still below international standards, preventing it from satisfying the growing demand of China’s furniture market. Therefore, many furniture manufacturers have begun acquiring high-quality and hightech woodwork machines and equipment from other countries.56 China’s product is mostly low to middle class, but is improving.57 Moreover, China’s furniture industry has a productivity level of US$3,125.00 per person which is still much lower than the world average. The reasons for low productivity are a low level of mechanization and smallscale manufacturing. Low quality is a pressing concern in the local industry. A sampling carried out by the State Administration of Quality Supervision, Inspection, and Quarantine in 2001 revealed that approximately one third of wooden furniture inspected had quality problems. Other problems being experienced by the local industry are rampant imitations, lack of innovations, shortage of professional designers, and limited forestry products.58 The export opportunity lies in the high-end furniture. For the first ten months of 2001, imports for high-end chair and seats accounted for 69.5% of total imports valued at US$130 million.59 It is projected that there will be 800 star rated hotels in Beijing by the 2008 for the Olympics. That is a 150% increase over the present number of hotels. These hotels would require decorations and especially designed furniture for their rooms.60 All over China, there are 4,000 star hotels. II. III. IV. V. 49 Demand I. II. China is the largest furniture market in the world with domestic sales amount to US$11.3 billion in the year 2000. Gross market demand for furniture in 2002 is estimated at US$13.95 billion. The market is estimated to grow by US$4 billion annually from 2002 to 2010. This statistic is based on the projected annual construction of 500 million square meters a total apartment floor area within a nine-year period. The figure does not include the projected increase in acquisition of school furniture resulting from the upward investments in college and universities amounting to US$62.5 billion.61 2000 186.2 62.0 26.5 23.9 12.6 10.9 Top Suppliers of China’s Furniture Imports (Value in US Million Dollars) 1998 1999 Total World 102.6 118.2 Germany 6.8 13.0 USA 15.8 21.7 Taiwan 21.1 19.1 Italy 10.3 9.3 Japan 9.2 7.2 Source: International Trade Centre UNCTAD/WTO, United Nations Statistics Division, PC/TAS 1996-2000 Competition I. Jiangsu, Zhejiang, and Guangdong are the major production bases and trading centers for furniture. Guangdong is the biggest furniture-producing, province accounting for almost 50% of the entire furniture production in China both in value and volume. 62 China now has around 50,000 furniture businesses, with more than 5 million employees and is dominated by small and medium-sized manufacturers. In 2001, the local furniture industry totaled a gross output of RMB 138 billion (US $17.25 billion), +16% versus the previous year.63 The rapid expansion of China’s furniture production capacity in recent years has forced Hong Kong based furniture manufacturers to reduce prices and profit margins. Likewise, Hong Kong furniture manufacturers are seeking high quality furniture fittings, accessories and parts, furniture trimmings, raw materials such as leather for sofas, veneer and glues for joining glass panels in order to improve their product quality and competitiveness.64 There is increasing competition from South East Asian nations such as Malaysia, Indonesia, Taiwan, and the Philippines where there are abundant supplies of materials and cheap labor. Eastern European countries such as Poland are ready to enter the market. II. III. IV. V. 50 Distribution Channels I. Hong Kong is a very important gateway for exports into China. A. In 1999, Hong Kong’s imported US$1.2 billion worth of office furniture. This is primarily because there are very few Hong Kong office furniture manufacturers due to its high labor costs. In addition, more than 90% of Hong Kong’s 270 furniture manufacturers have shifted their production to the mainland and/or to Southeast Asia. B. Hong Kong manufacturers rarely produce standardized furniture. They specialize in producing higher-end, Chinese-style furniture for hotels, offices, and residences C. The US, Japan, United Kingdom, Italy, Germany, and France compete for the high-end market. On the other hand, China, Taiwan, and Thailand supply most of the middle to low-end market D. China supplied 82% of Hong Kong’s office furniture market. E. Department stores, chain stores, specialty furniture shops, and showrooms are the main retail channels for furniture. Chain stores have replaced traditional furniture outlets as the most popular trade channel in Hong Kong for furniture.65 China’s furniture market A. The centers of the furniture market in China are distributed as follows geographic areas: Shanghai in the East, Guangzhou and Shenzhen in the South, Wuhan, and Zhenzhou in Central China, Shenyang and Harbin in the Northeast , Beijing in the North, and Chengdu and X’ian in the West. B. Furniture cities and marketplaces are the main distribution channel for furniture in China. There are more than twenty furniture marketplaces covering an area of 10,000 square meters each in of Shanghai and Beijing.66 II. Related Regulations I. Tariffs Description of Products MFN Tariff as of 2002 (%) 11 11 11 11 11 11 11 11 WTO Concessions to the Philippines Base Rate (%) 22 22 22 22 22 22 22 22 Bound Rate (%) 0 0 0 0 0 0 0 0 Implementation Period 2005 2005 2005 2005 2005 2005 2005 2005 Office furniture, metal Furniture, metal Office furniture, wooden Kitchen furniture, wooden Bedroom furniture of padauk wood Bedroom furniture, wooden Other furniture or padauk wood Other furniture of lacquered wood 51 Furniture, wooden Furniture, plastic Furniture of cane, osier, Bamboo or similar materials Of other materials Furniture parts 11 11 11 11 11 22 22 22 22 22 0 0 0 0 0 2005 2005 2005 2005 2005 Contacts I. Interested suppliers of imported furniture and furniture accessories and parts should contact Ms. Christine Lung, Executive, Executive Secretary, the International Furniture and Decoration Association at International Furniture and Decoration (Hong Kong) Association Room 8, 14th floor, Wah Wai Center 38-40 Au Pui Wan Street, Fo Tan, Shatin, N.T. Hong Kong Tel: 852-25215233 Email: swee-keng.Cheong@mail.doc.gov The International Furniture and Decoration Association has 280 members, of which 200 are manufacturers and 80 are trading firms. II. Trade Show - The Asian International Interior Design and Contract Furnishing Show for the Hospitality Industry. Below are some contact details for this trade show A. Organizer: The Hong Kong Exhibition Services Limited. B. Contact:: Ms. Anne Chick, Deputy Senior Manager, Exhibitions, Hong Kong Trade Development Council, Unit 13 Expo Galleria, Hong Kong Convention and Exhibition Center, 1 Expo Drive, Wanchai Hong Kong Tel. 852-2240-4226 III. Furniture Trading Companies A. Mr. Yat-on Chau, Secretary General – Hong Kong Furniture and Decoration Trade Association Limited, 10th Floor, Kwong-ah Building, 114 Thomson Toad, Wanchai Hongkong Tel. 852-2575-2755, Fax:852-2834-4643 B. Mr. Hermann Chan, Asst. Manager - Chijea Trading Co. Limited, 11/F Unit 1 Wah Shing Center. 11 Shing Yip Street, Kwun Tong, Hong Kong, Tel : 852-2341-0620, Fax: 8522797-8481.67 52 1 END NOTE Chapter 1 – Introduction 1 2 The China Business Handbook 2001, 4th edition, published by China Economic Review, p. 28. Economist Intelligence Unit, “Political Structure,” China Country Profile, 5 September 2001; http://www.economist.com/countries/China/profile.cfm. Economist Intelligence Unit, “Economic Structure,” China Country Profile, 5 September 2001; http://www.economist.com/countries/China/profile.cfm. Mark Friedlich, Doing Business and Investing in the People’s Republic of China. USA: Price Waterhouse Coopers, [1999]. Joseph Y. Lim, “The Macroeconomy of China in the Late Nineties”,” China’s Economic Growth and the ASEAN. (Philippines, Raintree Publishing Inc., 2001). Friedlich, Doing Business and Investing in the People’s Republic of China. USA, [1999]. Lim, “The Macroeconomy of China in the Late Nineties,” China’s Economic Growth and the ASEAN. (Philippines, 2001). Growth and the ASEAN. (Philippines, Raintree Publishing Inc., 2001). Ellen H. Palanca, “China’s Changing Trade Patterns: Implications for ASEAN-China Trade,” China’s Economic 3 4 5 6 7 8 9 10 Friedlich, Doing Business and Investing in the People’s Republic of China. USA, [1999]. Lim, “The Macroeconomy of China in the Late Nineties,” China’s Economic Growth and the ASEAN. (Philippines, 2001). Economist Intelligence Unit, “Economic Structure,” China Country Profile, 5 September 2001; http://www.economist.com/countries/China/profile.cfm. Lim, “The Macroeconomy of China in the Late Nineties,” China’s Economic Growth and the ASEAN. (Philippines, 2001). the ASEAN. (Philippines, 2001). Palanca, “China’s Changing Trade Patterns: Implications for ASEAN-China Trade,” China’s Economic Growth and 11 12 13 14 15 16 17 18 19 China Strategy (Regional configurations) Thomas G. Aquino, Department of Trade and Industry, Pasig City, Manila. Speech, 3 December 2001. Romualdo Ong, Department of Foreign Affairs, Pasay City, Manila. Speech, 24 April 2002. Aquino, Department of Trade and Industry, Pasig City, Manila. Speech, 3 December 2001. Fred Gale. “Will China’s Food Imports Rise?,” China Business Review. March 2002. pp6+. Bureau of International Trade Relation, Department of Trade and Industry, “Comments Regarding China’s Accession to the WTO” Gale. “Will China’s Food Imports Rise?,” China Business Review. March 2002. pp6+. Aquino, Department of Trade and Industry, Pasig City, Manila. Speech, 3 December 2001. Romualdo Ong, Department of Foreign Affairs, Pasay City, Manila. Speech, 24 April 2002. Aquino, Department of Trade and Industry, Pasig City, Manila. Speech, 3 December 2001. Ong, Department of Foreign Affairs, Pasay City, Manila. Speech, 24 April 2002. Francis Chua, Federation of Filipino Chinese Chambers of Commerce, Inc, Manila, Interview Alberto Espiritu, Fastech Microelectronics Inc., Makati, Interview, 31 July 2002. 20 21 22 23 24 25 26 27 Ong, Department of Foreign Affairs, Pasay City, Manila. Speech, 24 April 2002. 53 28 Palanca, “China’s Changing Trade Patterns: Implications for ASEAN-China Trade,” China’s Economic Growth and the ASEAN. (Philippines, 2001). 29 30 Ibid. “Chinese consumption to bolster ASEAN sales,” Market Asia Pacific, February 2002, p.6. Ong, Department of Foreign Affairs, Pasay City, Manila. Speech, 24 April 2002. “Jobs go a-begging in China because of skills shortage,” Kyodo News Service, April 26, 2002. Aquino, Department of Trade and Industry, Pasig City, Manila. Speech, 3 December 2001. Accountancy in China: A Market Briefing. (Access Asia Limited, 2002) p. 45. Carlson Chan, Liwayway Corporation, China, e-mail interview, 8 August 2002. 31 32 33 34 35 36 37 Ong, Department of Foreign Affairs, Pasay City, Manila. Speech, 24 April 2002. Distribution, Wholesaling and Logistics in China: A Market Analysis (Access Asia Limited, 2002) p.3. 38 “White Paper 2000: American Business in China, Entering the New Millenium” American Chamber of Commerce, People’s Republic of China, 2000. Chapter 2 – How to do Business in China 1 China Business Services. Foreign Investment Vehicles. 2001, http://www.china-business-services.com/doingbusiness-in-china/foreign -investment-vehicles.html China Business Services. Foreign Investment Vehicles. 2001. China Business Services. Foreign Investment Vehicles. 2001. Hong Kong Trade Development Council. Guide to Doing Business in China. February 2002, http://www.tdctrade.com Mark Friedlich, Doing Business and Investing in the People’s Republic of China. USA: Price Waterhouse Coopers, [1999]. China Business Services. Foreign Investment Vehicles. 2001. Friedlich, Doing Business and Investing in the People’s Republic of China. USA China Business Services. Foreign Investment Vehicles. 2001. Friedlich, Doing Business and Investing in the People’s Republic of China. USA Hong Kong Trade Development Council. Guide to Doing Business in China. February 2002. Friedlich, Doing Business and Investing in the People’s Republic of China. USA Hong Kong Trade Development Council. Guide to Doing Business in China. February 2002. Friedlich, Doing Business and Investing in the People’s Republic of China. USA Hong Kong Trade Development Council. Guide to Doing Business in China. February 2002. China Business Services. Foreign Investment Vehicles. 2001. Friedlich, Doing Business and Investing in the People’s Republic of China. USA Protocol on the Accession of the People’s Republic of China, Part I, Section 7, Doha, Qatar, November 10, 2001. Friedlich, Doing Business and Investing in the People’s Republic of China. USA 2 3 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 54 18 19 20 21 22 23 25 China Business Services. Foreign Investment Vehicles. 2001. Friedlich, Doing Business and Investing in the People’s Republic of China. USA China Business Services. Foreign Investment Vehicles. 2001. Friedlich, Doing Business and Investing in the People’s Republic of China. USA China Business Services. Foreign Investment Vehicles. 2001. Friedlich, Doing Business and Investing in the People’s Republic of China. USA British Embassy. Business Etiquette in China. June 16, 2002, http://www.britishembassy.org.cn/english/about_china/busines/beic.shtml Carlson Chan, Liwayway Corporation, China, e-mail interview, 8 August 2002. 26 27 British Embassy. Business Etiquette in China. June 16, 2002, http://www.britishembassy.org.cn/english/about_china/busines/beic.shtml Dwyer, La Panday Foods, Makati City, Manila. Interview, 24 June 2002. British Embassy. Business Etiquette in China. June 16, 2002, http://www.britishembassy.org.cn/english/about_china/busines/beic.shtml Friedlich, Doing Business and Investing in the People’s Republic of China. USA Ibid. 28 Jack 29 30 31 Chapter 3 – Product and Service Opportunities 1 “Fruit & Vegetable in China: A Market Analysis – Executive Summary,” Access Asia, April 2002, http://estore.chinaonline.com.com/fruitveginch.html Accountancy in China: A Market Briefing. (Access Asia Limited, 2002) p. 45. “Fruit post-harvest handling”, US Embassy website – Commercial Section “Juicy numbers: Money no object for fans of foreign fruit, survey says ,” China Consumer Journal, March 31, 2001. “:Will China’s Food Imports Rise,” China Business Review. March 2002, p. 6+. Chinese Markets for Flavors and Fragrances, November 1, 2001, page 99. “Fruit & Vegetable in China: A Market Analysis,” Access Asia, April 2002. “Adverse weather conditions,”FAS GAIN Report, Doc No. CH0622, 14 December 2001. “Fruit & Vegetable in China: A Market Analysis,” Access Asia, April 2002, “Juicy numbers: Money no object for fans of foreign fruit, survey says ,” China Consumer Journal, March 31, 2001. “Healthy Industry: China is world’s No. 1 fruit, vegetable producer, ag minister says,” 10 April 2001, www.chinaonline.com/indsutry/agriculture/NewsArchive/cs-protected/2001/April. Eva Liu, Nan Hai Li Shui Market, China, Interview. “Fruit & Vegetable in China: A Market Analysis,” Access Asia, April 2002. Jack Dwyer, La Panday Foods, Makati City, Manila. Interview, 24 June 2002. Jack Dwyer, La Panday Foods, Makati City, Manila. Interview, 24 June 2002. Jack Dwyer, La Panday Foods, Makati City, Manila. Interview, 24 June 2002. 55 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Ray Mangilit, Diamond Star Agro Products, Inc., Interview Michael Pecht, Wifing Lin, and David Hodges, “China Semiconductor Industry,”, pp. 25-41. “Samsung Securities Industry Update: Visit to China’s hardware IT industry – PCs and Home electronics” , p.2 Michael Pecht, Wifing Lin, and David Hodges, “China Semiconductor Industry,”, pp. 25-41. Bureau of Trade and Promotions Statistics Mark Thirlwell, “The Electronic Cycle and Emerging Asia: An Occassional Research Essay”, Sydney, 24 April 2001. Source: International Trade Centre UNCTAD/WTO, United Nations Statistics Division, PC/TAS 1996-2000 Michael Pecht, Wifing Lin, and David Hodges, “China Semiconductor Industry,”, pp. 25-41. “Samsung Securities Industry Update: Visit to China’s hardware IT industry “, p.2 Thirlwell, “The Electronic Cycle and Emerging Asia”, Sydney, 24 April 2001. Michael Pecht, Wifing Lin, and David Hodges, “China Semiconductor Industry,”, pp. 25-41. Jorge W. Longa, Astec Power, Pasig City, Manila. Interview, 10 July 2002. Alberto Espiritu, Fastech Microelectronics Inc., Makati, Interview, 31 July 2002. Pablo Tobiano, Dai-ichi Group, Pasig City, Manila. Interview, 15 July 2002. “Software will travel smoothly,” China Daily, 15 February 2001. Wilson Go. IBM Philippines, Inc., Pasig City, Manila. Interview, 9 July 2002. “China launches English language learning programme for IT professionals,” BBC Monitoring, August 19, 2001, p.1. China Economic News, Vol. XXIII, Services No. 1, 101, pp. 14-15. Accountancy in China: A Market Briefing. (Access Asia Limited, 2002) . Wilson Go. IBM Philippines, Inc., Pasig City, Manila. Interview, 9 July 2002. Accountancy in China: A Market Briefing. (Access Asia Limited, 2002) . “White Paper 2000: American Business in China, Entering the New Millenium” American Chamber of Commerce, People’s Republic of China, 2000. Accountancy in China: A Market Briefing. (Access Asia Limited, 2002) . International Market News, 22 March 2002, www.tdctrade.com Wilson Go. IBM Philippines, Inc., Pasig City, Manila. Interview, 9 July 2002. “English Training a Profitable Industry,” CEInet Economic Forecast, February 22, 2002, p. 1. Wilson Go. IBM Philippines, Inc., Pasig City, Manila. Interview, 9 July 2002 Meredith Ngo, Harvard Business School, Boston MA, email interview, 1 August 2002 Wilson Go. IBM Philippines, Inc., Pasig City, Manila. Interview, 9 July 2002 “English Training a Profitable Industry,” CEInet Economic Forecast, February 22, 2002, p. 1. Wilson Go. IBM Philippines, Inc., Pasig City, Manila. Interview, 9 July 2002 International Market News, 22 March 2002, www.tdctrade.com Wilson Go. IBM Philippines, Inc., Pasig City, Manila. Interview, 9 July 2002 International Market News, 22 March 2002, www.tdctrade.com Wilson Go. IBM Philippines, Inc., Pasig City, Manila. Interview, 9 July 2002 Accountancy in China: A Market Briefing. (Access Asia Limited, 2002) Philippine Consulate General Guangzhou – Philippine Trade and Investment Center, Market Research, Ref. No. PTICG 2002-07-0079, 29 July 2002. “Office Furniture – Hong Kong,” Industry Sector Analysis, Hong Kong, September 1, 2000, pp. 1,3-4 56 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 “Study on China Furniture Market”, Hong Kong Trade Development Council, www.tdctrade.com. “China’s Furniture Market attracts more Foreign Companies,” Asia Pulse, Beijing, March 15, 2002., page n/a. “Office Furniture – Hong Kong,” Industry Sector Analysis, Hong Kong, September 1, 2000, pp. 1,3-4 Philippine Consulate General Guangzhou – Philippine Trade and Investment Center, Market Research, Ref. No. PTICG 2002-07-0079, 29 July 2002. Hong Kong Trade Development Council, www.tdctrade.com International Market News, 22 March 2002, www.tdctrade.com Da Lin and Fang Zhou, “Analysis Report of Market Investigation in Chinese Furniture Industry”, Buyer’s Guide of the International Furniture Fair, Dongguan, p. 34. “Study on China Furniture Market”, Hong Kong Trade Development Council, www.tdctrade.com. “China’s Furniture Market Attracts more Foreign Companies,”. Asia Pulse, March 15, 2002, page n/a. “Furniture Fittings’ and Accessories’ Manufacturers”, International Market Insight, Hong Kong, March 1, 2001, p.1. “Office Furniture – Hong Kong,” Industry Sector Analysis, Hong Kong, September 1, 2000, pp. 1,3-4 Study on China Furniture Market”, Hong Kong Trade Development Council, www.tdctrade.com. “Furniture Fittings’ and Accessories’ Manufacturers”, International Market Insight, Hong Kong, March 1, 2001, p.1. 59 60 61 62 63 64 65 66 67 57