1. ©2005 Deloitte & Touche LLP. Private and Confidential “ The Business Network for International Trade”

2. China. Ian Heslegrave Director - China Tax & Business Services The Route to Market 18 January 2006

3. ©2005 Deloitte & Touche LLP. Private and Confidential Background –2 years in China – based in Shanghai 2002-04 –Assignment based on developing Deloitte’s indirect tax practice –Also involved with – inbound investment, direct tax, customs, regulatory, logistics, location planning, supply chain, sourcing etc –Now advising UK clients on all aspects of doing business in China Ian Heslegrave Director – China Tax & Business Services

4. ©2005 Deloitte & Touche LLP. Private and Confidential Ten Rules for Doing Business in China 1.Everything is possible 2.Nothing is easy 3.Patience is the essence of success 4.The answer ‘Yes’ is not necessarily an indication of agreement or confirmation 5.“You don’t understand our country” means they disagree 6.“Provisional regulations” means they can change the rules anytime they want, even retrospectively 7.“Basically, no problem” means BIG problem 8.“Signing a contract” means the beginning of the real negotiation 9.When you are optimistic, think about Rule No.2 10.When you are discouraged, think about Rule No.1

5. ©2005 Deloitte & Touche LLP. Private and Confidential China’s cost of manufacturing labour is one of the lowest in the world $70/80 for Town and Village manufacturing workers $112 for Urban manufacturing workers

6. ©2005 Deloitte & Touche LLP. Private and Confidential How to operate in China? Rep Office Joint Venture (JV) Wholly Owned Foreign Enterprise (WOFE)

7. ©2005 Deloitte & Touche LLP. Private and Confidential How to operate in China? Rep Office Cannot trade, cannot enter into contracts Can act in a liaison capacity – sourcing, looking for supplies, looking for orders, quality control Taxation - cost-plus method - deemed profit method - possible exemptions

8. ©2005 Deloitte & Touche LLP. Private and Confidential How to operate in China? Joint Venture Why do you need a Chinese partner? - Local knowledge: customers, distribution channels - Government connections - Labour representation Lessons from failed joint ventures - Poor due diligence - Perceived benefit not realised - Vast difference on business objectives, strategies, financial standing, culture, expectations

9. ©2005 Deloitte & Touche LLP. Private and Confidential How to operate in China? Wholly Owned Foreign Enterprise (WOFE) Manufacturing Company Trading Company Foreign Invested Commercial Enterprise (FICE) Others

10. ©2005 Deloitte & Touche LLP. Private and Confidential China Tax for Foreign Invested Enterprises (FIE’s) 15% (currently – depending on location) Tax breaks for manufacturers – 100% for 2 years – 50% for 3 years Tax reform coming up – 2007 – Tax rate to 25/28% expected – Tax break retention if already granted? – Withholding tax on dividends? Employment taxes/costs – 35/45% depending on location

11. ©2005 Deloitte & Touche LLP. Private and Confidential Major considerations in moving to China Location Infrastructure Labour supply – Cost – Reliability – Training Raw materials/components Regulatory environment Property – Build or rent Capitalization Repatriation of profits/taxation Supply Chain

12. ©2005 Deloitte & Touche LLP. Private and Confidential Supply chain issues Quality and reliability of finished goods and raw materials Customs Duty and Procedures Tax Long delivery/response times Increased stock holding/warehousing facilities Exchange rate fluctuations Transfer Pricing

13. ©2005 Deloitte & Touche LLP. Private and Confidential What does the future hold? Political stability Social development and infrastructure A desire for wealth creation The people want to get out of poverty More of the same and continued growth

14. ©2005 Deloitte & Touche LLP. Private and Confidential Deloitte Practice in China LocationPartners & Staff Shanghai560 Beijing405 Guangzhou140 Shenzhen90 Tianjin65 Nanjing55 Dalian35 Suzhou15 Mainland1365 Hong Kong1500 Macau30 China2895

15. ©2005 Deloitte & Touche LLP. Private and Confidential “ The Business Network for International Trade”