Fiducia China Focus Newsletter

• New Approval for Investment under 25% Foreign Equity
  
  
• Special Invitation
  
  

• China Becomes World’s Leading Mobile Phone Market!
  
  
• Joint-Venture becomes State-Owned Enterprise Again
  
  
• TCL Corporation
  
  

For previous Issues
www.fiducia-china.com

Publisher
Fiducia Management Consultants

Press Contact: 
Patrick Kriegeskorte
info@fiducia-china.com

This Newsletter is based on information obtained from sources (government, business associates, companies, publications, etc.) believed to be reliable. However Fiducia Management Consultants does not make representations as to it's accuracy, completeness or correctness.

Retrospectively from January 1, 2003 foreign invested enterprises (FIEs) in China (which include those invested by investors from Taiwan, Hong Kong and Macao) with foreign equity under 25% now will be able to be classified as FIEs, a new category known as – “FIEs with foreign investment of less than 25%”. Previously only companies with foreign equity participation of 25% or above were able to be classified FIEs.

The Ministry of Foreign Trade and Economic Cooperation (MOFTEC), the State Administration of Taxation, the State Administration for Industry and Commerce and the State Administration of Foreign Exchange have jointly issued the “Notice Concerning Issues Relevant to the Strengthening of the Examination and Approval, Registration, Foreign Exchange an Taxation of Foreign Investment Enterprises”.

New FIEs which seek the new classification should go through MOFTEC approval but are not entitled to any preferential taxation treatment. Enterprises which where established prior to this Notice and have foreign equity participation under 25% can apply to MOFTEC and complete the relevant examination and approval registration procedures within 6 months. Enterprises that fail to meet the deadline will be penalised according to Article 63 of the “Regulations for the Administration of Company Registration”.

This new category of investment will provide foreign investors with more flexibility to determine their own level of investment and risk exposure.

Join us for a special seminar to be held on March 6, 2003.

China Market Entry & Market Expansion
Successful Starts and Mergers & Acquisitions

Jointly Organised by:

Angela Wang & Co. Solicitors & Notaries China Attesting Officer Agents for Trademarks & Patents

Fiducia Management Consultants

The White Swan Hotel located on Shamian Island of Guangzhou City was one of the earliest projects to attract foreign investment when China started reforming its economy in 1980. With a capital of US$ 49 million, the foreign invested enterprise was a 50/50 joint venture between the Provincial Government of Guangdong and Wei Cheong Development Company Limited of Hong Kong (the main shareholder being Mr. Henry Fok) and a contractual period of 15 years. The joint venture was extended subsequently for another 5-year period ending on February 6, 2003. Now in an unlikely or unexpected event, the ownership of the hotel has been reverted back to the Guangdong Province and has now become a State-Enterprise. By 2002 accumulated turnover at White Swan Hotel was RMB 5.3 billion with a net profit of nearly RMB 500 million.

The local Chinese press has reported that the original investor Henry Fok is negotiating an operating agreement with the Guangdong Province. Details of the agreement are not known yet but according to reliable sources, this may involve sharing of profit between the owner and operator after a minimum amount is guaranteed. What makes this an interesting case is the fact that the White Swan Hotel is the first state enterprise to consider employing a foreign operator on a profit sharing basis.

Implications for the future

Whilst many would-be investors are focusing on how China is meeting its obligations under the WTO protocol, there are indications from Beijing and the provinces that the government authorities are serious about deepening reform in order to create an even more attractive marketplace for foreign business.

The use of foreign operators to strengthen the management of the state sector is conceptually a major breakthrough because it is an attempt to improve the efficiency of the enterprise by separating the ownership of the assets from the management.

In the early days of reform, the prime focus for attracting foreign investors was to bring in long term funding but many of the state enterprises in their own right today have become profitable and are no longer in need of a partner for raising capital, but these companies still require the input from experienced managers and technology providers; a key factor in ensuring quality standards. This is not an isolated case of a state enterprise appointing a foreign management firm or operator; there are already similar arrangements in other industries, such as import-export trade, transfer of management control before ownership in a listed company, etc. It is anticipated that more and more of the joint ventures formed in the 1980s which have a shorter duration would opt for the status of a state enterprise where the original foreign investor continues to act as the operator.

We believe the use of foreign operators by Chinese companies represent significant new opportunities for service providers in sensitive industries where foreign ownership is still restricted, such as domestic trade, airports, public utilities, etc. The foreign company can be involved first as an operator and later as an investor when the restricted conditions are lifted. On the one hand, the two-step approach would allow the potential investor to gain a better understanding of the mainland company’s operation. On the other hand, by raising the management standards and profitability of the firm, the mainland company would be in a position to attract a larger number of potential suitors. It is therefore a win-win formula for both parties concerned.

If you are interested in being involved as a foreign operator in some of China’s projects, please contact one of our consultants for assistance. We would be glad to see if this arrangement would work for your type of industry.

As China’s economy continues to outperform all other world markets, we see China emerging as the worlds leading mobile phone market, currently with around 200 million users it is expected that the mobile phone market will grow by 13-20% in the next three years to reach 300 million by 2005. As with most growth, growing pains are sure to follow. There is the mobile phone war between network operators where aggressive use of subsidies is a strong tool to lure China’s mobile subscribers to sign up. The increased competition between foreign handset makers and the rising market share of domestic makers, as well as the demand and development of 3G rollout have all played a part in the development of this lucrative market.

Subsidy policies are paying off!

A new predator has been introduced into the market to lure mobile phone subscribers away from their competing rivals; this predator goes by the name “handset Subsidies”.

The increased drive between China Unicom and China Mobile to lure customers away from each other has brought on aggressive handset subsidies, competition in which analysts’ fear could turn ugly in the future. China Unicom, who’s network runs CDMA (code division multiple access) announced at the end of 2002 it had 6.3 million subscribers, an increase of more than 50% from September. The average subsidy per CDMA handset is 1600 yuan (US$193), however, Goldman Sachs estimates the average subsidy is as much as US$300 a phone, while each service yields about US$20-25 per month in average revenue per user.

China Mobile’s low profile attitude has caused subscribers to turn to Unicom, as they have been lured by cheap subsidies. It’s predicted that China Mobile is no longer going to sit on the sidelines and is set to offer their own subsidies for their GPRS service, which will in turn put pressure on China Unicom. A price war is sure to follow.

It is expected that Mobile operators should phase out their subsidies after the market is initiated, as with such subscriber growth, it is important that money be reserved for improved services. Otherwise there will be no winners in the long run, for the service providers or the customers.

Who will rule the handset market?

Handset makers will have their profit margins squeezes as competition heats up in the mainland market, and the ultimate winner will depend on their management style and products. The top three makers Motorola, Nokia and Samsung have been experiencing increased competition from each other, as well as a growing threat and increased competition from domestic handset makers.

Motorola who dethroned Nokia in 2001 as China’s top selling product saw market share drop from 31 percent down to 27 percent but has still posted and excellent year with sales in China reaching US$5.7 billion and expects that to increase to double digits in 2003. In a move which shows Motorola’s continued commitment and desire to tap the Chinese market they recently chose Shanghai as the location to introduce 8 new handsets rather than in America or Europe.

Nokia, now in second place for market share is set to intensify their focus on China in a bid to regain the lead. Nokia’s market share in the third quarter of 2002 fell to 19 percent from 31 percent in the first. They have been reorganising their distribution system in China and adding partnerships with local companies to improve availability of their phones to areas outside of the big cities.

Samsung has been importing phones into the Chinese market, but only recently have secured approval from Beijing to directly sell GSM handsets in China rather than relying on import agents. The move will allow them to compete head-to-head with the likes of Motorola and Nokia. Samsung’s total sales in China were expected to hit US$5.8 billion.

A greater threat to these mobile phone giants are the local manufacturers. Local Chinese companies such as TCL, Legend, Hai’er and Ningbo Bird have claimed 30 percent of the domestic market and have been lifting sales by selling cheaper phones assembled from ready-made parts purchased abroad. We are more likely to see in the future further cut throat competition as mobile phone makers vie for larger shares of the Chinese market.

Standards and 3G!

A development in the mobile market which should soon be at our doorsteps is the Third Generation (3G) phones and systems. Chinese telecom departments have been speeding up the development of 3G mobile standards such as TD-SCDMA and WCDMA. As experiments with 3G conclude, it is expected that commercial operation should begin sometime in 2003. It is predicted that the value of 3G systems will come to one trillion yuan by 2010. Further to this China has also placed the development of G4 on its agenda as a further step in continuing with the growth of China and its mobile phone market.

Chinese companies are increasingly internationalising their businesses. Some of these companies are unknown or little known to the overseas business community. Starting with this issue we want to introduce such companies.

TCL, established in 1981 is a major player in the audio-visual, telecommunication, information, appliance and electrical components industries in China. With headquarters located in the city of HuiZhou in Guangdong Province they have become strong competitors in their industry.

TCL has over the last ten years racked up a compound annual growth rate of more than 50 percent. In a report by Beijing Famous-Brand Evaluation Co, Ltd. on Chinese brand name values in 2002 ranked the TCL brand name as the 6th most valuable brand name in China. With over 300 branches in China TCL has set up sales offices or business representative offices in over 10 countries in order to further global growth. To tap overseas capital TCL has a listed company in Hong Kong.
 

Foreign investors holding shares in TCL Holdings are Hong Kong Invested Nam Tai Electronics, battery maker Gold Peak Industries (holdings), Philips Electronics China, Japanese consumer electronics giant Toshiba and trading conglomerate Sumitomo, they have all become shareholders, holding a combined stake of 18.38%.

A recent acquisition of TCL has been the German Electronics company Scheider AG which they purchased for EUR 8.2 million in September 2002.


TCL Mobile

TCL Mobile is the mobile phone division of TCL Corp; they hold the 3rd place in China after Motorola and Nokia. The company has a strong R&D team with dozens of experts holding doctoral and master’s degrees.

During 2002 various partnerships have been formed, specifically with companies such as Microsoft and Ericsson of Sweden. Looking towards the future, TCL Mobile has strategic goals “to become the #1 brand in Chinese-made mobile phones within 3 years and to be listed on Wall Street within 4 years”

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