Fiducia China Focus Newsletter

• The Chinese Threat – US Manufacturers Pressurize Washington for Protective Tariffs
  
  

• CEPA – Beijing’s Sign of Goodwill towards Hong Kong
  
  
• Flower Tycoon Sentence Throws Spotlight on Chinese Law System
  
  
• Focus on Business Implementing – Making Your China Business Strategy Work
  
  
• New Visa Policy for Dependants in Hong Kong
  
  
• Sinopec Corp.
  
  
• The ChinaInvesta October 6-8 2003 – Exhibition on China Investment
  
  

For previous Issues
www.fiducia-china.com
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Fiducia Management Consultants

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

All liabilities excluded. 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.

Fiducia Management Consultants is China Partner of Corporate Development International, a global partnership specialising in mergers, acquisitions and divestitures.   www.cdiglobal.com

The Chinese Threat – US Manufacturers Pressurize Washington for Protective Tariffs

Early this month a coalition of 14 organizations representing American textile and manufacturing companies asked President Bush to take stronger measures to restrict the import of textile products from China.

More than 200 US textile plants have been closed since 1997 and the situation might worsen as restrictions imposed by the WTO on the Chinese textile industry are due to expire in 2005. A study recently released by the American Textiles Manufacturers Institute predicts that China will have conquered 70% of the worldwide textile market by then. US textile imports from China would grow further and in addition orders from other countries would shift from the US to China.

But this development is not limited to the textile industry, the whole US manufacturing sector is under strong price pressure and nearly 2.5 million jobs have been lost in the US manufacturing since 2000.

Worldwide overcapacities and the rise of sales through discounters have led to price wars in which manufacturing in the US or Western Europe is often no longer competitive - the wages of a US worker are about 25-times higher than in China.

Closely connected is the growing number of claims that China should sever its peg to the US currency. Several experts think the Yuan is undervalued by about 20% and does not accurately reflect the strength of the Chinese economy.

Federal Reserve Chairman Alan Greenspan recently warned that it was “increasingly evident” China would have to let the Yuan flow if world cost structures remained as they are. Treasury Secretary John Snow said the United States will use “quiet diplomacy” to encourage Beijing to float its currency.

These statements are triggered by concerns about the increasing US trade deficit, which totaled US$103 billion with China last year, the widest gap ever measured between two nations.

One company accelerating this development is Wal-Mart Stores Inc. In 2002, the world’s biggest retailer has been sourcing products for US$12 billion in the Middle Kingdom. If Wal Mart were a sovereign state, it would be China’s eighth largest trading partner – even ahead of the UK.

Sourcing in China enables Wal Mart to sales promotions like the “Thanksgiving Blitz”, a one-day promotion prior to the 2003 Thanksgiving holidays, during which Wal Mart sold low-priced Chinese colour TV’s, home electronics, toys and other products for $1.4 billion.

But now opposition is growing: A group of US television makers recently won a preliminary victory in their complaint that Chinese products were being sold in the USA at dumping prices. Now tariffs as high as 84 per cent may be imposed on Chinese TV manufacturers.

On June 29 the Central and the SAR Government signed the Closer Economic Partnership Agreement (CEPA), a bilateral trade agreement with the purpose of enhancing economic cooperation and integration between China and Hong Kong.

From January 1, 2004 on, some 4,000 items of goods originating Hong Kong will enjoy zero tariffs (67% of Hong Kong’s total exports to China). In 2006 this will apply for all goods manufactured in Hong Kong. Additionally there will be liberalization for Hong Kong companies in 17 service industries, including accounting, advertising, real estate/construction, legal, banking, insurance, securities, distribution and logistics services.

An exact definition of “Hong Kong products” regarding to goods and “Hong Kong companies” regarding to services has to be specified but the Hong Kong General Chamber of Commerce is optimistic that foreign invested companies will be included. Experts expect CEPA to boost Hong Kong’s economic recovery and boost employment.

Furthermore, on July 26, Chief Executive Tung Chee-hwa announced that Hong Kong might become China’s centre for offshore renminbi services. The mainland considers allowing Hong Kong banks to conduct renminbi business for individuals. This would strengthen Hong Kong’s role as international financial centre.

Yang Bin acquired Dutch citizenship in the aftermath of the 1989 Tianmen massacre and later returned to China. He set up Euro Asia Agricultural (Holdings), grew orchids and was active in the property sector. This made him according to Forbes magazine the second wealthiest man in China in 2001, with an estimated US$900 million in assets. But this Chinese version of the American Dream collapsed in early 2003 when Yang Bin was arrested. On Tuesday, July 14, the 40-years old was sentenced to 18 years imprisonment for economic crimes, including fraud, bribery and illegal use of land.

The sentence was only the last in a series of arrests of high profile businessmen in China. Only two months ago, Zhou Zhengyi, the head from Shanghai Land Holdings, had been taken into custody being accused that he illegally used bank loans to speculate on the stock market. And since May this year, Sun Dawu, head of one of China’s most important agricultural companies, has been held by authorities for illegally running a bank.

Some observers assume that political considerations stand behind the cases: Mr. Yang was appointed by political leaders in Pyongyang governor of a new special economic zone in North Korea – apparently without consulting their historically allies in Beijing. Others see Yang Bin as a victim of a government trying to appease public anger over the widening gap between rich and poor. South China Morning Post asked whether Yang was a “big time crook or a scapegoat”?

But there is more to the story. Like in other emerging countries before, China’s transition from a planned to an increasingly free and market driven economy fosters the emergence of a kind of robber-baron culture. Local authorities are looking for economic growth and jobs in their respective region and encourage activities that are on the borderline of the law.

Furthermore, the cases indicate that the Central Government does not know how to deal with the rising power of a new political class the Communist Party has never been a fan of until very recently – the entrepreneurs. For most private companies it remains notoriously difficult to operate within the Chinese system.

And China’s judiciary system is still far from independent. Judges are directly appointed by the government and are approved by the Communist Party. As long as there is no separation, the execution of laws is a matter of Beijing’s will. According to Joe Zhang, Head of China research at UBS Warburg, it may take 10 years until a separation between the Communist Party and the court system will be reached.

Effective July 1, 2003, dependant visa holders are no longer automatically permitted to take up employment. Thus dependants are now required to apply for their own employment visa. The new policy is only effective for applications received after July 1, 2003 - existing visa holders will not be affected by this change.  It is claimed that this measure was introduced to fight unemployment.

Fiducia is cooperating with Messe Munich International in organizing the ChinaInvesta, taking place as part of the EXPO REAL 2003 the 6th International Commercial Real Estate Exposition.  The ChinaInvesta is all about your investment in China and gives you the opportunity to compare different regions and industry zones. On October 7th 2003 the ChinaInvesta Conference will inform on aspects of investment and finance in China.

For more information on the ChinaInvesta: www.chinaInvesta.com

Getting started in China is half the challenge. Making your business strategies and operations work properly in China for profitable returns is the other half. After the strategy, financial structure and corporate setup have been settled, there are major implementation matters that must be brought under control.

Computer systems form the backbone of the whole corporate operation. Not only should the head office IT/ERP system be mirrored in China for supply chain integration and control, it must support local requirements like Chinese script.

Additionally, China Tax and Finance Bureaus require regular reporting in specific formats and so, local Chinese financial systems may be required unless the head office IT/ERP system can be customized. Unlike the West, trading businesses in China must use a special Tax Control Computer and meet other regulations for the receipt and invoicing of input materials and finished goods.

Failure to meet Chinese tax standards can, in theory, lead to the business being shut down. This may occur if the business cannot prepare timely tax reports and the Chinese authorities decide that the business is committing tax fraud, a common practice in China.

Taking control of Chinese staff issues is critical. Once Chinese staff are recruited or inherited with a company takeover, they must be managed to perform to Western standards. Many cultural factors prevent Chinese staff understanding Western methods, time urgency, quality standards, honest feedback or performance for profit. The solution here goes beyond training – the most successful approach is to give Chinese staff on-site leadership and coaching from China experienced Western managers. This ensures both adherence to procedures and guidance on how to apply Western standards and disciplines.

The successful performance in China of expatriate foreign staff cannot be just assumed. Even if only on short term assignment in China, they will need assistance to perform and deal correctly with their Chinese counterparts. For example, a foreigner may easily make mistakes in dealing with senior Chinese staff while thinking that he or she is making a positive impression. Again, from experience, the most successful approach is on-site leadership and coaching of foreign staff from China experienced Western managers. This prevents costly mistakes, misunderstandings and time delays, which may be considerable.

The choice of building or development site should not be left entirely to local mainland Chinese staff. In so many things that a Western manager takes for granted, the Chinese will approach everything differently. One example includes the Chinese concept of a truck freight terminal, say, a multi-floor building with concrete columns every three meters instead of a single span building with room for trucks and forklifts. Another is the way they will lay out machine lines and then run them, with less concern for personal safety or the technical aspects of production efficiency.

And there is another reason for quickly getting China based operations to an efficient and economic scale of operation, especially if competing against a Chinese national company. Chinese companies may compromise standards to reduce cost in ways that a Western multi-national is unable to. They may even run below cost, just to keep their products moving.

In summary, every China directed operational decision must be taken in hand to both ensure that the head office strategy can be met, as well as ensuring that a culture of continuous improvement, minimum standards and performance for profit is imbedded in the minds of mainland Chinese staff.

China has recently become the world’s third largest oil consumer behind the US and Japan. Increasing amounts of oil are required to sustain China’s fast economic growth.

By now China already imports one-third of the oil it needs and experts predict the need to double until 2010, which would make China the world second largest oil consumer. Facing such a growing dependence on oil imports has made China to acquire interests in exploration and production in countries such as Kazakhstan, Russia, Venezuela, Iraq and Iran. China is pushing for the oil companies it controls to gain more reserves abroad. The Middle Kingdom is divided geographically for managing its oil related interests – the South East and the coastal regions are the responsibility of China Petroleum and Chemical Corporation (Sinopec Corp.).

Sinopec Corp. is a vertically integrated energy and chemical company. The scope of business covers oil & gas exploration and production, and the development, production, marketing and distribution of oil and (petro-) chemical products. Sinopec is China’s second largest crude oil producer, it controls more than 50 percent of China’s total oil refining capacity and is the largest petrochemical producer. Furthermore Sinopec has a well established distribution network for refined oil products in China. It owns more than 27,000 petrol stations selling products under its brand.

According to a recently published study jointly conducted by People’s Daily and Shanghai Stock Exchange, Sinopec Corp. ranks the first among China’s top 50 companies. It took the lead in respect of income, net profit and market value and is number two in respect of total assets. Despite this result, Sinopec has the highest cost structure among the three Chinese oil producers. In order to improve efficiency and competitiveness, Sinopec has been closing several small plants and cutting many jobs over the last years.

Sinopec is a typical state owned enterprise that grew under the protection of the state and enjoys pillar industry status. But in light of the changing market environment it still needs to be competitive and efficient.

• Report available about China's Agriculture and Animal Feed Sectors
  www.fiducia-china.com/Information/Library/408-1848.pdf/view (PDF Document)

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