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Legal Strategies for China
September 17, 2014Vinita Bahri-Mehra
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Key Differences - Overview
Legal
+ Business Structures
+ Rule of Law
+ Intellectual Property Protection
+ Contract Enforcement and Negotiations
+ Process and Procedures Delays
+ Exit Strategies
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Key Legal Strategies for Doing Business in China
+ Business structures.
+ Contract enforcement and negotiations.
+ Understanding nuances in rule of law.
+ What should be done to protect one’s IP?
+ Are repatriation of investments and profits allowed?
+ What law should govern the contract and what mechanism of dispute resolution is preferable?
+ Do you have an exit strategy?
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Practical Advice – Identify the Obstacles
There are some internal barriers that might provide obstacles in doing business or establishing business in China. It is necessary to be cognizant about them in order to be well prepared.
For example:
Corruption (FCPA)
Bureaucracy
Negotiating style differences
Real Estate – increased cost of doing business
Evolving tax laws
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Things to Ponder
Due Diligence is the Key
Knowledge of Chinese business and legal environment leads to steady growth.
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Legal Advice
This presentation is designed to provide an overview of a number of legal principles and considerations.
As each legal issue is fact dependent, this presentation should not be used or viewed as legal advice, and your legal counsel should be consulted on the application of your particular factual situation to the current law.
Copyright: 2014 Kegler, Brown, Hill + Ritter
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Thank You!Vinita Bahri-Mehra, DirectorAsia-Pacific Team LeaderKegler Brown Hill + [email protected]/bahrimehra614-255-5508614-464-2634 (fax)
Ohio Development Services Agency
17 September 2014
Doing Business in China
Pivot to AsiaAsian consumption gains increasing global relevance
• 95% of the world’s consumers live outside of the U.S.
• Asia leads global GDP growth
Asia is expected to grow 3% faster than the rest of the world every year for the next 10 years
The region displays relative resilience to volatility in global financial markets
Respective Asian markets offer diverse investment opportunities, from high-risk to low-risk
• Domestic demand is becoming a driver for growth as the developing economies transition
Contributing structural for developing factors include:
Urbanization
Industrialization
Demographic shifts
Sources: IMF World Economic Outlook, Economist Corporate Network ABOS 2013, Citibank
Source: CIA World Factbook
49%
9%11%
8%
9%
2% 12%
Composition of World GDP 2050
Forecast
Developing Asia Europe
North America Latin America
Others Japan
Source: IMF World Economic Outlook
Country ProfilePeople’s Republic of China (PRC)
CapitolCity Beijing
Populaiton 1.36billion(2013)
Area 9.6millionsqkm
AllocationofPopulation 51%city,48%rural
Shanghai 24million
Beijing 21million
Tianjin 15million
Chongqing(Area) 30million
Sources: IMF, World Bank
• By 2030 China will have:
- 700 million middle-class citizens- 1 billion people in the urban population- 681 cities with middle class populations of 250,000 or more
• There is a clear shift from a manufacturing-based economy to one driven by domestic demand for consumer goods
- PRC’s efforts to liberalize the economy make commerce with China increasingly appealing to American companies.
Sources: China National Bureau of Statistics, Boston Consulting Group
Doing Business in ChinaChina – from the world’s factory to the world’s market
In 2013 China became the world’s largest trader with the level of imports catching up to its level of exports
China’s increasing imports bode well for US companies selling into the Chinese market
China’s imports from the US continue to grow
• By 2022, 75% of China’s urban consumers will earn $9,000 to $34,000 per year, or between the PPP of Brazil and Italy. In 2000 only 4% were within that range, in 2012 that figure grew to 68%
• China’s “Singles’ Day” on November 11th is a major shopping holiday- in 2013 sales reached over $5.7 billion
• Ohio is geographically and economically positioned to capitalize on China’s rising imports from the US
While many Ohio companies have grown their businesses through exporting, most Ohio businesses currently do not export to China
Sources: European Parliament Policy Dept., PwC, Taobao
Economic and Political OverviewFrom 30,000 ft.
China’s Evolving EconomyThe landscape continues to change a rapid pace
Shanghai 1987 Shanghai 2013
• An increasing number of mid-market foreign companies are benefiting from the PRC’s efforts to liberalize the economy by decreasing interference from the central government and implementing constructive financial policy reforms
• China’s consumers are becoming more brand-aware, and with 2.8m Chinese millionaires and rising, sales of luxury goods are booming
Sources: Congressional Research Service, US-China Business Council, Bank of America Merrill Lynch, Economist
Trajectory of China’s Economic DevelopmentExploring the past, present, and future
Latest Figures
2013
Economy grew 7.7%
28% of global GDP growth
49% of global GDP by 2050
Expected Growth
2014
World Bank expects 7.7%
2015
World Bank expects 7.5%
China’s exports are expected to grow 15.1% annually
$4.4 trillion in 2017
China’s import demand is expected to grow 15.8% annually
$4.2 trillion in 2017
The Recent Past
Nearly 10% GDP growth per annum for last 30 years
Single-digit growth rates expected to become the new standard
China’s economy quadrupled in the last 10 years
China’s economic development lifted 400 million people out of poverty between 1993 and 2013
China
United States
13
14
15
16
17
18
19
20
2012 2013 2014 2015 2016 2017 2018 2019
Pe
rce
nt
Source: IMF Economic Outlook Database
GDP Based on PPP Share of World Total
Sources: World Bank, Goldman Sachs, Citibank
Chinese PoliticsThings move according to plans
China’s 12th Five-Year Plan (2011-2015)
Source: JP Morgan LLC.
Trade with China
What’s driving Chinese business opportunities?
Chinese Development Driving challenges and opportunities
• The rapid pace of development has had a huge environmental toll
• China’s demographic shift will have knock on effects through the economy and society
• Urbanization will continue as more and more Chinese move from rural to urban areas
• There are significant increases in the number of middle-class and affluent Chinese, but this has not been evenly distributed
The services sector is increasing rapidly, transitioning away from the lower value added areas
Middle and upper classes were 23% of the population in 2010 and are expected to make up 38% in 2015
• The hourly wage for labor is expected to reach USD $4.6 per hour in 2015
Hourly wage + logistics and storage costs => make cost of manufacturing in China close to US
US exporters are now more competitive in Chinese market for advanced manufacturing
Sources: Wolfensohn Center for Development, Brookings Institute, Morgan Stanley Research, ING International Trade Study
Sector Opportunities: Environmental SectorClean technology is central to China mitigating pollution
Clean Tech
• The energy sector accounts for an increasingly large portion of Chinese imports so the PRC is trying to develop alternative energy to augment rising demand for electricity and subsequent dependence on foreign oil, gas, and coal
• China’s energy needs have significantly increased in recent years due to rapid economic development.
The high level of state involvement in these industries can make it difficult for foreign companies to operate
Grid and Transmission: China’s power consumption rose 5.2 percent in the first five months of this year, exacerbating the country’s need for energy importation and greater efficiency
Efficiency: the PRC has set the goal of having green buildings account for 30% of new construction in China by 2020
In August 2013 the State Council announced that it will support 15% annual growth in the Chinese environmental industry with the goal of growing it to $743 billion by 2015, sectors include:
Cleaner conventional energy
Renewable energy
Electric power infrastructure
Green building
Clean transportation
Clean water
Sources: Energy Information Administration, Communist Party of China Central Committee, UK Trade & Investment
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
2008 2009 2010 2011 2012
10
,00
0 U
SD
Total Investment in the Treatment of
Environmental Pollution
Sector Opportunities: Logistics & TransportationLogistics is one of the economic engines of China
Logistics
• With the country’s rapid economic development over the past three decades, logistics has become one of the nation’s most important industries. In 2013 the industry was valued at US$ 1.6 trillion.
• Logistics for steel, coal and other bulk commodities has been depressed due to slowing economic growth and overcapacity. However, logistics for food, FMCG, appliances, electronics industries is still rapidly increasing.
• The total value of logistics goods is increasing by 30.4% with the development of e-commerce and online shopping platforms.
Taobao GMV (Gross Merchandise Volume) reached at CNY 1.1 trillion in 2013
TMall GMV reached CNY 441 billion in 2013, with an increase of 120% compared with 2012’s GMV
Source: China Statistics Bureau
Sources: China Statistics, Alibaba
Sector Opportunities: Advanced ManufacturingManufacturing revolution is imperative for the government
• Today China faces new challenges as wages and other costs rise, but the complex links in the value chain continue to drive demand
• The government is exploring high-tech industries to fuel manufacturing in aerospace, new energy technologies, automotive, and advanced materials
• Supply chain solutions and for both China export and USA distribution and imports to the USA are evolving and creating opportunities.
Sources: Markit, HSBC
Advanced Manufacturing
• Whether it is the development of China’s indigenous automotive, aerospace or hi-tech sectors opportunities abound for companies able to produce advanced manufacturing technologies to the supply chain.manufacturing industry has been slowing down over past 5 years
Sector Opportunities: ICTTechnology development is a priority for the PRC
• Software
A major focus of the central government is providing incentives for domestic growth and foreign investment in software
The market is diverse and fragmented
Industries lacks core technologies
Chinese software companies are interested in gaining valuable IP through acquisition and partnership
• Mobile Gaming
- China’s mobile gaming market is expected to surpass the US’s in size
- 2014 expected revenue in Chinese market is $3 billion
• China’s mobile gaming industry revenue is expected to double from 2013 levels
Users 632 million 277 million
Penetration 46% 87%
E-commerce $295 billion $270 billion
Active buyers 231 million 128 million
SME Internet adoption ratio 20-25% 75-85%• Intellectual Property Rights (IPR)
Infringement remains a substantial risk to foreign ICT companies entering the Chinese market
• IPR infringement continues to be a point of contention between the US State Department and the PRC
Sources: US Dept. of Commerce, US State Dept., McKinsey & Co
Source: China Internet Network Information Center, Pew Research, McKinsey Global Institute Analysis
The Intersection of Trade and Investment
China’s Outbound InvestmentOFDI in the United States is steadily increasing
7/15/2014 Rhodium Group
http://rhg.com/interactive/china-investment-monitor 1/5
Year 2014 Cumulative Annual Fewer Options
Agriculture & Food: 16 deals / $7,202
Automotive & Aviation: 98 deals / $2,197
Basic Materials: 56 deals / $1,767
Consumer Prod. & Serv.: 86 deals / $814
Energy: 100 deals / $11,870
Entertain. & Real Estate: 63 deals / $6,605
Finance & Bus. Services: 53 deals / $743
Health & Biotech: 53 deals / $1,357
Ind. & Electronic Equip.: 109 deals / $808
Information Technology: 139 deals / $3,864
Metals and Minerals: 2 deals / $98
Transport & Construction: 45 deals / $125
State: Industry: Type: Ownership:
SC 12
HI 3
AK 2 FL 13
GA 27AL 8
NC 43TN 8
RI 2CT 1
MA 18
NH 2
NY 62
NJ 30PA 12
DE 1
DC 1
MD 14VA 21KY 1
OH 25
MI 54
MT 2
ID 4
WA 28
TX 73
CA 222
AZ 3
NV 9
UT 7
CO 7
NM 1
OR 6
NE 4 IA 2
MS 1
IN 11IL 51
MN 8
WI 3
MO 6
AR 4OK 3
KS 4
LA 1
Source: Rhodium Group
Ohio Development Services Agency Support in China
Doing Business in China Isn’t EasyHow can Development Services Agency help?
Development Services Agency provides free services to Ohio State companies to address common challenges faced by American businesses entering the Chinese market
Challenges Solutions
How do I sell into China? Distributor and Partner Searches
What are the opportunities in China? Market Intelligence
Is my Chinese partner legitimate? Reference Checks
How do I navigate trade policies and legal issues? Policy and Legal Research
How do I navigate customs barriers? Advocacy
How should I localize my strategy for China? Strategy Advise
What companies should I meet with? B2B Meeting Support
How do I plan a trade mission? Trade Mission Assistance
What about unforeseen issues? On the Ground Support
Growing Through China: Market Opportunities
All non-photographic content is the property of Sino-American Business Consulting. These slides
cannot be reproduced without the express written consent of SABC. Copyright 2014 ©
Entering The Market: Keys for Success
Understand your market
Localize
Enter the right region for your business
Prepare staff and provide adequate support
Understand Your Market30
We’ll do it for you.
Localize 31
First Attempt Second Attempt
Localize (2)32
Enter the Right Region: Chinese Cities by Tier
33
Prepare Your Staff34
• Internationally, the average rate for expat relocation
assignment failures is under 4%.
Keep in Mind
The Chinese and “Western” worldview are fundamentally different.
China is not the right market for every business.
There is tremendous market potential in lower-tiered cities.
If you decided to enter the market, consult professionals to help
appropriately localize your product and brand.
Send only trained and qualified personnel to China.
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Sino-American Business Consulting36
1550 Old Henderson, Suite N162
Columbus, Ohio 43220
614.397.2020
www.sinoabc.biz
