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Doing Business In China: An Overview

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1 Doing Business In China: An Overview
Shawn He Yuxun MeetChinaBiz.org

2 Background

3 To Inform, Educate…

4 …And Enable

5 The 3 Waves of China Low Costs-driven Exports (since 1980s)
Low-cost everything Enabled by government policies and/or direct subsidies Labor, land, materials, utilities, taxes/tariffs/duties, environmental… Discounted Assets-driven FDI ( ) Fire-sale of state assets Multiple forms: New plants, IPOs, Asset Management… Resources-driven Acquisition ( ?) Natural vs. Man-made Tangible vs. Intangible

6 What’s New

7 Buenos Aires · Lima · Sao Paulo
LatAm Is The New China China-like high economic growth and market expansion Level of business unpredictability resembles that found in China It is a new strategy to embrace the China market Created to triangulate our networks in all 3 continents Chicago · Wash, DC · Beijing · Shanghai Buenos Aires · Lima · Sao Paulo

8 China Tradeshow Stats China Accounts for 33.5% of Total Asian Market
Japan: 22% , S.E. Asia: 12.5% : 30% Growth Recession-Proof Net Space sold grow 4.3% in 2010, following dip in 2009 2010 Capacity & Growth 96 int’l standard venues 4.1 Mn sq.m. in capacity 212K sq.m. more by 2013 World’s largest venue planned in Shanghai: sq.m. 2010 Performance 517 Tradeshows 8.5 Mn sq.m. sold (vs. 1.9 Mn in Japan) Total Revenue: US$1.2Bn Avg: US$2.3Mn per show 1 sq.m. = sq.ft. China already accounts for two-thirds of the asian exhibition market now it plans to build the world's largest venue in shanghai. (Capacity?) China accounts for 33.5 per cent of the total Asian market, followed by Japan at 22 per cent and Southeast Asia at 12.5 per cent. ($ volume?) Despite a major export industry, China’s growing middle class has seen its import industry expand rapidly in recent years, creating demand for a new breed of exhibitions. China and Asia offer a great deal of diversity, plumped by the fact that while the financial crisis did hit, it was the first region to recover. China’s Government is supportive of the exhibition industry. These are led by the China Council for the Promotion of International Trade (CCPIT) and China Foreign Trade Centre (CFTC), public sector bodies and the biggest organisers in China. This wealth has found its way into the exhibition industry. Most trade shows did well throughout the recession, but following decline in 2009, 2010 saw net space sold grow by 4.3 per cent. More than 15.5 million sqm of space was sold by trade fair organisers to their clients in Asia in 2010. The big cities for anyone pushing into China are Shanghai, home to the World Expo in 2010 and the commercial centre of China; Beijing, home to the associations and ministerial support, and the manufacturing powerhouses Guangzhou and Shenzhen. Source: Exhibition World

9 Major Players Major Organizers Beijing Shanghai Shenzhen Guangzhou
China Foreign Trade Centre (CFTC) 52% China Council for the Promotion of Int’l Trade (CCPIT) 16% Reed Exhibitions China, UBM Asia, Messe Frankfurt , Messe Koln Top 5 facilities (by floor space & no. of shows) Beijing New Int’l C & E Ctr Shanghai New Int’l C & E Ctr Guangzhou Pazhou C & E Ctr Shenzhen Int’l C & E Ctr China Nat’l Convention Ctr (Beijing) Top 6 world shows (by no. of attendees) Beijing Int’l Auto Show Shanghai Int’l Auto Show Guangzhou Int’l Auto Show Canton Fair (Guangzhou) Bauma China (Shanghai) Beijing Int’l Broadcast Show There are 517 exhibitions in China, recorded by the Business Strategies Group Asia (BSG Asia), turning over an estimated US$1,209m. This makes the average revenue per exhibition US$2.3m. BSG Asia MD and UFI’s Asia-Pacific regional manager Mark Cochrane, says that far from being an emerging market, it would be difficult to argue that the exhibition sector is not already a success. “It’s the largest exhibition market in Asia with 517  trade exhibitions, 8.5 million sqm sold, revenues of US$1.2bn, 96 venues with a capacity of 4.1 million sqm and a hugely diverse range of international and domestic organisers. I think the industry there can already be called a fantastic success,” he says. The emergence of Shanghai For the overseas organiser, the majority of business is centred around three cities. Shanghai, China’s commercial capital and home to last year’s World Expo, leads the way. It’s followed variably – depending on who you speak to – by Beijing, the ministerial capital and home to the associations, and the manufacturing capital Guangzhou. Second tier cities also offer exhibition space, no real surprise in a country with 96 venues and  more than 100 cities of more than one million inhabitants. One golden area, the Guangdong province located just north of Hong Kong, now features more than 800,000sqm of event space and forms the heart of a hub known as the Pearl River Delta, which accounts for a large portion of the exhibition activity in China. This is home to the twice-yearly Canton Fair. There are strong and distinct cases for being involved in all of the big three cities on the mainland. Beijing, with its links to the ministries, will give the prudent investor access to the associations that dominate the Chinese exhibition marketplace, and ostensibly aid the market security of an event launched in China. Guangzhou on the other hand, with its links to industry, will give your exhibitors and buyers greater exposure to China’s manufacturers. “In general the industry is taking care of itself quite well. But a moratorium on building any more venues in order to let the industry grow into the space would be wise. Over-building of venues has to be at the top of the list of issues facing China’s exhibition industry,” says Cochrane. As he points out, it is already the largest exhibition market in Asia with 8.5 million sqm sold last year versus 1.9 million sqm in Japan, the second largest market. And while venue development is slowing down, that’s only in comparison to the massive build-out that took place in the past five years. But Shanghai holds the limelight, thanks largely to the impending arrival of what China claims will be the largest exhibition centre in the world. Building a behemoth The country will add about 212,000sqm in capacity between now and the end of 2012, still a five per cent increase, but down from the double-digit increases of a few years ago. The mega-venue Cochrane refers to was announced in a ceremony in Shanghai in January, involving the Ministry of Commerce (MOFCOM) and Shanghai Municipal Government. At somewhere between 400,000 and 500,000sqm, the National Convention Project will be huge. At the very least it’s likely to cast an unwanted shadow over the joint German/Chinese managed Shanghai New International Expo Centre (SNIEC) in the Pudong district. However, China now has 96 international standard venues versus Japan’s 12 and a capacity of 4.1 million sqm against 350,000sqm. “There is now clearly a situation in which some markets in China have excess capacity. Add to that the mega-venue planned in Shanghai,” points out Cochrane. But some believe there is a need for the building. Vice chairman of the Shanghai Municipal Commission of Commerce Chen Xian Jin believes China’s continued ascent makes such development necessary, and that the Chinese exhibition industry will grow in step with China’s economy. “The demand for venue capacity still exists,” he says. “We should have long-term vision for this matter. Xian Jin’s views are echoed by Jime Essink, the MD of UBM Asia, one of the leading independent international operators in China. “For a long time the exhibition industry has been limited in Shanghai as a result of insufficient venue space. We are all very happy with the SNIEC, but the extra space it offered was not enough to keep up with market growth and the scarcity of space continued,” he comments. “The venue in Hongqiao Business District is a national exhibition project,” says Xian Jin. “Shanghai is aiming to build the city as China’s international trade centre. The venue’s large capacity, advanced technology and favourable location are helpful to boost the information communication and exchange.” I still have a positive attitude to the management of those venues in general. Now in 2011, Essink faces a different situation. At the end of this year there will be four new halls completed in SNIEC, adding 40,000sqm gross. The World Expo venue, a government-owned demo hall built during the World Expo, will become available in the second half of the year, adding another 60,000sqm gross. Sufficient space for the time being, he says. Nothing exceeds like excess But the new mega-venue will add at least another 400,000sqm to the same city. Shanghai’s new venue will be the largest venue in the world in a country with an established but nascent exhibition industry, and one that already counts 4.17 million sqm of space. That’s already two-thirds of the space that exists in the rest of Asia. By contrast, Japan has 350,600sqm, the same as India. Excessive? No, says Essink. “Hongqiao is a great location, close to Shanghai’s second airport, which has the most local flights. It has connections with the rail network. It’s also closer to the neighbouring city population on the west side of Shanghai,” he says. “The Chinese immediately build huge. First you say: ‘400,00sqm? That’s ridiculous’. But when they first built the new airport in Pudong, it was empty and everyone said they had gone crazy. After five years, they had to build a second airport as big as the first one. Look a little longer term and I think you’ll find this exhibition space is very welcome.” The independents, as well as the many more looking to get into China, will in many cases already have experience working with China elsewhere across the globe. China has increasingly opened ties with the semi-autonomous Chinese territories Taiwan, Hong Kong, Macau and Singapore as age-old bureaucratic arrangements are addressed in step with global trade models. General free-trade agreements are in place or in the works, such as the China-ASEAN development and an increasingly bountiful arrangement with Hong Kong via the Closer Economic Partnership Arrangement (CEPA) and related trade agreements. Banding together for success So who are the big players? The public sector is still a major player in China as it is in Germany.The CFTC (at 52 per cent) and CCPIT (at 16 per cent) lead the organiser table in China, followed by the independents Reed Exhibitions China and UBM Asia, then Messe Frankfurt and Messe Koln. UBM hopes to use the complete SNIEC, and part of World Expo for its 150,000sqm net for its furniture fair. It’s looking forward to the new venue as it hopes to overtake Milan as the biggest furniture fair in the world. After all, per cent of the world’s furniture manufacturing is there. There’s also a major issue of connecting with China’s industrial associations in order to progress with any confidence. This necessitates close ties with Beijing, despite the majority of exhibition business taking place in Shanghai. The organiser who provides a valuable proposition to associations will give themselves a strong ally against an increasing number of rivals. Hyper-competition, overlapping events (similar industry themes or geographic areas) and a flood of new orgnaisers will be a significant issue given all of the interest in the market. What are the risks to an international organiser? Aside from overcapacity, there is the ever-present fear that China’s bubble will burst, possibly as a result of economic volatility in the west. Who knows how far-reaching the effect of the monetary schism forming in Europe and subsequent bailouts will be.  Xian Jin agrees the issue is of great importance to overseas organisers and exhibitors. “Safety has become more and more important in the operation of the exhibition. The World Expo proved that security is an important characteristic of large events. Companies organising large exhibitions should consider this issue.” Other concerns surround the available skillsets in China. “Maintaining a sufficiently trained and professional labour pool in such a fast growing market will also be a challenge,” says Cochrane. “This applies to venue management, but also within exhibition organisers.” These issues aside, the increasing openness and international direction of the Chinese exhibition market, tied to a population of 1.3 billion inhabitants, makes it a tempting offer.  Source: Koncept Living Exhibition Pte Ltd, 3D Exhibits

10 BSD West Top Cities Beijing Chengdu Shanghai Ningbo Shenzhen Guangzhou
2009年度的254个规模以上展会中,上海以47个蝉联榜首,北京24个,继续处于第二的位置,广州21个名列第三,深圳17个并列第四。     上海:受经济危机影响,2009年度上海规模以上展会数量下降5个,但仍以总数47个遥遥领先于第二名,连续三年位列榜首,凸显出上海作为中国会展第一城的突出地位;依托中国经济的大背景和作为我国最主要经济中心城市的特殊地位,凭借所拥有的众多品牌大展,以及世博会后的全球影响力以及展馆硬件条件的进一步改善,上海已经跻身世界展览中心城市之列;     北京:同样受到经济危机影响,北京2009年度规模以上展会下降4个,以24个展会保持在第二名的位置。而从规模以上展会展出总面积数据来看,北京不足上海的一半,与广州相比,即便广州扣除广交会的225万平方米总展出面积,仍超过北京53万平方米。数据表明,北京与上海的距离有所扩大,而与此同时,北京也面临广州的强有力竞争;     广州:尽管面临经济危机,广州2009年规模以上展会数量依然保持了21个,缩小了与第二名北京的距离。作为华南地区的经济中心城市,中国第一展广交会的固定举办地和国内面积最大展馆的拥有城市,伴随世界经济逐步回暖,广州会展业未来将有更大的发展空间;需要特别说明的是,凭借每年两届广交会225万平方米的总展出面积,本年度广州规模以上展会总展出面积超过了上海,居于榜首;     深圳:2009年深圳规模以上展会下降了4个,以17个展会名列第四,拉开了与广州的距离。作为经济特区,深圳拥有雄厚的经济实力,背靠珠三角的产业基础,而与毗邻的香港相比,深圳举办展会又具有成本优势,这是深圳能够连续三年位居前四名的保障,也是未来继续发展的基础;     宁波:2009年宁波(包括下属县级市余姚)规模以上展会数量增加1个,达到了14个,继续名列第五位。宁波会展业依托的是浙江的经济活力,同时也是宁波当地重视会展业发展的结果。2009年入选的14个展会,全部有当地政府部门具名参与主办,这也是政府重视的一种表现形式;而展出面积方面,宁波与第四名深圳相差近50%,且低于成都,这也表明,宁波展会的总体规模尚有差距。     成都:2009年成都规模以上展会数量达到9个,首次晋级第六位;成都同时是2009年吸引规模以上流动大展最多的城市之一(与郑州并列为4个);作为中国西部的重要经济中心城市,成都有政府部门对会展业的强力支持,这是2009年成都会展业取得突出成绩的原因;不过成都9个规模以上展会中有4个是流动展,这既表明成都对展会主办者的吸引力,也使得成都的排名稳定性面临考验;     另外254个规模以上展会分布在全国(大陆地区)39个城市,这也再次展现出中国会展业遍地开花的可喜局面,不同会展城市、不同展会之间的竞争与合作,国有、外资、民营机构的积极参与,推动了全国会展产业的大发展。 Ningbo Shenzhen Guangzhou Based on 2009 figures. Source: CCE Magazine

11 The 3S’s of China Sourcing Supply Chain Selling Low cost labor
Low cost materials Lax rules and regulations (e.g., environmental) Supply Chain Be part of clients’ supply chain Be part of industry clustering Selling China imports rapidly increasing US trails behind Japan and EU

12 Opportunities China doesn’t have everything
Natural Resources: Conventional vs. Non-conventional Intangible resources China can’t make everything: Utility vs. Futility Experiential (e.g., degree, brand equity, perception) Complex techno-human systems China doesn’t know everything (yet!) New models and concepts New-found needs Demographic Trends & Shifts One child policy Displacements (urbanization, un/re-employment) Emerging Middle-Class Life Style Changes: Health / Energy / Space / Security

13 The 3C’s of China 3 Fundamental Challenges Not related to
Language Culture Etiquettes Cannot easily overcome No one is immune Wow, isn’t that a rosy picture ahead? Well, now the “fine print”… The Three C's of China: When dealing with China or anything that interfaces with China, US businesses need to keep in mind the fundamental challenges involved. By fundamental challenges, I don’t mean simple barriers like language, culture or business etiquettes, because those are the ones that can be easily overcome by investing adequate amount of time and resources, or by hiring or working with proper individuals who can help channel, guide or coach you, even if you can’t stomach sea cucumber or don’t care for Maotai. These are the challenges that could confound folks even with the deepest pockets or the biggest wigs. These are the challenges that even Fortune 500 chiefs have to contend with. And you could be the President of the United States, but you would still have to face them.

14 The 3C’s of China Constant Change Fast moving target
For better or worse Long ways to go First the easy one that everyone can see: Constant Change China is a fast moving target. What is true today may no longer be the case tomorrow, especially laws, policies, rules and regulations. Things constantly evolve and change, some for the better and some for the worse. By the same token, a lot of what I presented here today may no longer be applicable very quickly. In your industry, the trend is that China will become more open and more globally compatible. However, it will take some time before an average American business can feel right at home when doing business with or in China.

15 孝 Filial Piety The 3C’s of China inConsistency Theory vs. Practice
Ubiquitous  Contradiction Result: Lack of Transparency / Predictability inConsistency There is a lack of consistency in how just about ANYTHING is done, particularly in how rules, regulations and laws are interpreted, followed or enforced. In many cases, things are so inconsistent with each other that they are in outright contradiction. Ah, Contradiction, that is a “C”. As a result, there is a lack of transparency and predictability everywhere you turn. Example 1: Chinese Constitution Article No. 35 Example 2: IPR laws and enforcement

16 The 3C’s of China Complexity East vs. West Old vs. New
Internal / Intrinsic Always Exceptions Complexity Not only is the business culture in China extremely different from that in the U.S., there are also vast local and regional differences within China. On top of that, diversities also exist among different sectors of the economy, different industries, as well as different business entities, be they large or small, private or otherwise. The word “China” may be a simple word, but behind this word there exists a seemingly infinite amount of variations, anomalies, and exceptions to just about everything that one would consider representative of China at one point or another. Does a “yes” really mean “yes”? Nothing is easy; Anything is possible In summary, one should exercise great prudence and care in approaching and dealing with China, regardless of how confident they are about their market knowledge, understanding, products, services, strategy, capability, preparedness, connections and/or financial and human resources. As a result, the nature of the China Biz is always underscored by a high level of uncertainty.

17 The “Big Picture” Area Population 9.6 mil sq km: comparable to the US
(US + EU) x 2

18 The “Big Picture” Population Density

19 The “Big Picture” Cultural Diverse 56 nationalities >90% being Han
100s of dialects Analogy: EU

20 The “Big Picture” Geographically Diverse East: hills, plains, deltas
West: mountains, high plateaus, deserts Arable land: <20% 4 natural time zones, but 1 Beijing Time 4 climate zones Tropical Sub-tropical Temperate Sub-arctic

21 Dynasties & Legacies The Chinese "Genesis"
Mythological figures (Pan Gu, Nv Wo, Shen Nong, Hou Yi, Da Yao Shi, Yan & Huang...) The Big Flood (Yao, Shun, Yu) Xia, Shang and Zhou ( B.C.) Bronze Age First written texts (oracle  characters) I Ching (Yijing) Spring Autumn & Warring States ( B.C.) Confucius and other philosophers (Taoism, etc.) Sun Tse (The Art of War) The Legend of Qu Yuan and Duanwu Festival The legend of Xi Shi and West Lake Geographic footprints (nicknames for provinces) Pictures: Nv Wa, Pan Gu Yijing Sun Tse

22 Dynasties & Legacies Qin (Chin, 221-206 BC) Han (206 BC – 220 AD)
Unification of China and The First Emperor Origin of the name "China“ The Terra Cotta Warriors of Xi'an The Great Wall of China Han (206 BC – 220 AD) A Golden Age of Chinese history Giving rise to the name of the majority nationality Embodiment of the Confucius Teaching Silk Road 3 Kingdoms, Jin, 16 Kingdoms, Southern/Northern ( ) A period of disunion with several rulers Increased interest in Taoism & Buddhism 长城 丝绸之路

23 Dynasties & Legacies Sui ( ), Tang ( ), 5 Dynasties & 10 Kingdoms ( ) Short-lived Sui Dynasty united warring states Tang: a high point in Chinese civilization--equal or even superior to the Han Buddhism became a permanent part of Chinese traditional culture Block printing was invented Song ( ) Emphasis on Confucianism and a revival of traditions of Chinese antiquity Two phases: Northern Song and Southern Song, caused by the nomadic invaders Competing Dynasties/Kingdoms: Liao, Western Xia, Jin

24 Dynasties & Legacies Yuan (1279-1368) Ming (1368-1644)
Mongols, led by Genghis Khan, conquered China and established capital in Beijing Marco Polo wrote his book, Travels of Marco Polo Ming ( ) Founded by Zhu Yuanzhang Construction of the “Forbidden City” in Beijing Qing (Ching ) Manchus captured Beijing The Opium War Treaties & concessions

25 Revolution & Civil War Sun Yat-sen & ROC Mao & CCP
Chiang Kai-shek & CNP WWII & Anti-Japanese War To tell a long his-story short, the take-home message here is that lots of and lots of things have happened in the past few thousand years, many heroic and many hideous. Perhaps more the latter than the former. And while growing up, most Chinese children learn about them from their Chinese literature classes, from their history classes, from their comic books, from movies and TV shows and now they can even pretend to live in them via computer games, etc. So one little impact to their psyche that I believe cannot be overlooked is that most of them lose their innocence and become very worldly and sophisticated at a very young age. Imagine so much of humanity, with both its good and evil aspects, bearing on a young soul. So when a Chinese person first set foot on the American soil, inevitably their initial feeling is always like: well, Americans are so honest and direct, almost to the extent of being childlike and naïve! Some of you may be able to related to that if you imagine a New York wheeler-and-dealer in a little rural town in the Midwest. Here is another perspective: in Chinese there is a separate term for each of the siblings that are older or younger than you for either sex, and for those than your parents on either side, and the in-laws and on and on. So there may be dozens of terms to use to address different folks when you are in a big family reunion during holidays. And each of those terms precisely spell out the person’s relationship with you and its relevance or importance in your life. No wonder the Chinese are good at math, science and the period table. You wonder why? Well, I have a theory. But again to make a long story short, the Eskimos have more than 20 terms to describe snow of different characteristics, because so much of their life centers around it. In an agrarian culture, where societies rely on all members of the family to work and live together in harmony, people need all these fine protocols and definitions to guide individual as well as group behaviors. It is like a school of fish swimming together, or heavy traffic from a 5-lane highway slowing down and forming lines at a toll booth that only have two lanes open. Every move you make requires consensus. Yet all communication is done without a word uttered, but through context, implications and subtle eye contacts, based on pre-established socio-behavioral expectations. As always, this can cut both ways… 孙中山 抗日英雄-狼牙山五壮士

26 Mao & Communism The Establishment of PRC The Land Reform & Communes
Great Leap Forward & The Great Famine The Cultural Revolution This is the reason why China is sometimes called a young nation with a long history

27 The Post-Mao Era Deng Xiaoping & Reform The First Decade 1979-89
The Second Decade The New Millennium 邓小平7次登上美国时代封面 New Beijing, New Olympics!

28 As A Result… From Rule of “Lord” to Rule of Law
Are we there yet? High- / Low-Trust Society Is China a high- or low-trust society? Integrity Why seemly such a precious commodity nowadays? Guanxi Sufficient and/or necessary condition to do business? Status of Guanxi Today: In more open/marketized industries and sectors: Guanxi is neutralized and resembles normal business relationship in the West But still critical in highly regulated / government-controlled industries/sectors Google “Shawn Guanxi” for more in-depth analysis on the topic 邓小平7次登上美国时代封面 New Beijing, New Olympics!

29 First Encounter Always a formal meeting Biz card exchange
Dress formally even if the Chinese don’t Biz card exchange Sit with feet on the floor Seating arrangement The Chinese: Indirect, subtle, and sensitive Avoid straightforwardness, esp. with regard to monetary negotiations Avoid confrontation, embarrassment, criticism (e.g., never say ‘no’) Don’t ask questions during a presentation “Conspicuous Consumption” vs. Credibility

30 Wine and Dine Meeting over meals Mixed in Friendship / Family Ties
Karaoke, drinking, etc. “Crash course” on relationship building Seek to know you inside out (Equivalent to a job interview) Mixed in Friendship / Family Ties To further cement the business relationship

31 Negotiation & Contracts
The “Principal” Principle Translation Beyond words Your eyes and ears Intermediaries A third party A sympathizer or ‘advocate’ on the other side Due diligence Plan B

32 China Biz 101 Sign a contract first, then start negotiating!

33 Shawn He Yuxun Shawn@MeetChinaBiz.org 617.633.3806
Thank You! Shawn He Yuxun


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