Fiducia China Focus Newsletter

• China Announces VAT Rebate Cut
  
  

• Conquering China’s Consumer Market – Example: Toy Industry
  
  
• New Downloads available at Fiducia’s China Biz Library
  
  
• Three Cities Foreign Investment Conference takes place in Chongqing, 20-22 November, 2003.
  
  
• What are the Best Asian Countries to Invest in?
  
  

For previous Issues
www.fiducia-china.com
Publisher
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

China Announces VAT Rebate Cut

As reported in the last China Focus issue (August/September), China has officially announced a reform in its VAT rebate policy on exports.

On Tuesday, October 14, the Central government unveiled details about the new regulation: On average VAT rebates for exported goods will fall by 3 percent, depending on the type of products. The changes will take effect on January 1, 2004.  The Central government’s reason to propose such a reform seems to be a mixture of two factors:  

The increasing amount of outstanding refunds (estimated to total RMB 300 billion; US$ 36.3 billion) on the one hand, and pressure from Western countries (especially the United States) on China to depreciate the Yuan on the other hand. According to Dong Tao, chief economist for Credit Suisse First Boston, the reform “is in effect a 4 per cent revaluation of the renminbi” (as quoted in the South China Morning Post).

Businesses located in China’s developed areas like Shanghai or Guangdong will be hit hardest, since the local governments in these areas usually execute new policies very strictly, while inner Chinese governments often show more flexibility.

Some provinces might for instance come up with other preferable treatments to neutralize the negative price impact. However, analysts expect the impact on Chinese exports not to be too high. Indeed the changes do not affect all product categories, and they reflect policy priorities of the Central government:

• Products which have a strong domestic demand and are therefore not seen as strategic export goods see the strongest rebates cut: Rebates on raw materials (e.g. crude oil, petrol, fuel oil), minerals or paper/pulp see a cut from 13 percent down to zero.
   
• On the other hand, agricultural products like edible powders (e.g. wheat powder) see an increase in VAT rebates, as a way to encourage more export on relevant products.
   
• A number of products such as aircraft, ships, automobiles and related components, railway & train, telecom and medical equipment, machines (lifting& engineering, construction & mining etc.) remain unchanged and continue to enjoy their 17 percent rebate rates.
   
• Products not specifically listed above fall under the following regulation: Items currently with tax rebates of 17% and 15% are to be reduced to 13% - this applies e.g. for steel, chemicals, plastic and rubber, clothing, textiles, toys, shoes and leather products; Items with tax rebate of currently 13% are to be reduced to 11%.

Please visit our website ( www.fiducia-china.com  ) for a detailed list of the new VAT rebate regulations.

Organized by the Yangtze Council for Promotion and Development of Yangtze and supported by the Chongqing Municipal Government, the two-and-a-half day conference covers a program of discussions and briefings around the topics of:

• Chongqing’s FDI climate and investment opportunities, and
   
• Two-way opportunities for Chongqing, Shanghai and Hong Kong-based services in support of investment and development in Chongqing.

The sessions will be held in closed-door discussions with senior local policy-makers and leading officials. In addition special individual meetings for participants will be organized, on request, with relevant government departments and, or, prospective JV partners and co-investors.

For registration and further information contact pkriegeskorte@fiducia-china.com

Chongqing Brief

Chongqing sits in the heart of China's most densely populated region: Greater Chongqing has 31 million people, and the provinces bordering it are home to 280 million more. Next to the cities Tianjin, Beijing and Shanghai, Chongqing is one of China’s four Municipalities and as such enjoys provincial status. Hence local authorities have exceptional powers of approval in areas that are critical for foreign investors.

The city is the officially designated hub for development of China’s South-West. Significant reforms on the public sector are under way to positively influence the conditions Chongqing can offer for FDI. In addition to these increasingly attractive policies continuing massive infrastructure spending is in place to encourage FDI to the region.

One well known Western investor in Chonqing is Ford, the world’s second-biggest carmaker. In 2001, Ford established a 50:50 joint venture with Changan Automobile Group, combined investment reaches US$1.6 billion. Ford recently announced that it will invest another US$1.5 billion to expand its manufacturing in Chongqing. Production output shall be increased from the current 20,000 units a year to 150,000 by adding a second car plant and a new engine plant.

Toys count among the world’s oldest consumer goods and have a long tradition in China ranging back thousands of years. However, the modern Chinese toy history only starts in the 1960s, when Hong Kong’s infamous sweatshops attracted international toy companies for cheap manufacturing. Hundreds of small traders linked the Hong Kong manufacturers with the big Western buyers who controlled the toy brands.

Since the 1980s, Hong Kong’s toy industry has hollowed out, with virtually all manufacturing now being done in neighboring Guangdong. Today there are about 4,000 toy factories scattered throughout Southern China and 6,000 in China as a whole.

Nonetheless, Hong Kong remains to be the world’s main designer, product developer, packager, and marketer of toys, thus resembling a global service station for the toy industry.

While most international toy companies already source their toys from China, until now very few successfully entered the Chinese toy market itself. The Chinese market for toys is often portrayed as the potentially largest in the world. No other country has more children living in its boundaries. More than 300 million Chinese are children under 14, accounting for more than a quarter of the total population in China.

But one should not be misled by this “China Dream”. Per capita toy consumption in China is still at very low levels, especially with regard to high-quality toys. Still, the prospects for sales are improving and some international toy companies already derive considerable profits from their Chinese consumers.

Many international toy companies with their high-quality toys have a potential to tap into this market. Key for any toy venture in China will be to fully grasp both legal possibilities as well as legal constraints. What are the activity models that international toy companies employ in the Chinese market?

Due to the still highly restrictive regulations on distribution in China, foreign companies interested in selling their toys to the Chinese market use one of the following five options. While all the examples have been taken from the toy industry, the options also hold true for most other consumer products.

1. Going it alone
Toy companies deciding on going it alone in China are very rare. Currently there exist two major possibilities for a company to sell its toys directly on the Chinese market. One is to sell to Chinese importers with the help of a foreign-seller’s representative office. The second possibility is to sell and distribute via a bonded-zone trading company.

The world’s largest toy companies Mattel and Hasbro were examples of this model. But both companies were forced to back off because their prices were too high and they did not have an appropriate distribution network in place. Now both work through partners in China.

2. Selling via established distribution networks of domestic companies
The Japanese toy company Tomy is an example for this activity model. Back in the 1970s, Tomy established the subsidiary Tomy HK as a production sourcing company.

Later Tomy HK also became the sales company for Asian markets through local distributors, which handle all the sales as well as customer services independently and locally. Tomy’s local distributor in Mainland China is the Shanghai-based toy manufacturer Kailite. By working through a partner, Tomy has access to the established sales channels of Kailite in China.

3. Licensing
Most foreign companies enter China by direct investment or joint ventures rather than licensing. This situation is gradually changing, with some of the biggest brand names in the world positioning themselves in HK for new licensing opportunities in the Chinese Mainland.

Other than in China, companies are confident that their intellectual properties will be protected in Hong Kong and they also consider HK’s considerably strong consumption power. An example for this model is Japan-based Sanrio (“Hello Kitty”), which is managed by the HK-based brand management and licensing agency Asian Licensing Partners.

4. Selling via specialized retailers or major retail chains
Only very recently, toy specialty shops have been emerging, often in cooperation with large toy vendors in HK, Shenzhen, and some other places in Guangdong. Kids Land is the exclusive distributor of four major international toy brands in China: Lego, Chicco, Maerklin and Schleich. The Guangzhou-based retailer Toonsland also offers sales management for foreign toy companies as a service. Toonsland is the representative of Mattel toys in China.

5. Selling via trading companies
A possible activity model involving trading companies would be a HK trading company that takes title to the toys in HK, arranges for their transportation into China, and manages extensive networks of local dealers and resellers.

Hasbro, for example, works with the Hong Kong trading company Li & Fung, which manages the whole supply chain of Hasbro in China and also functions as the exclusive distributor of Hasbro’s toys in China. Hasbro toys are sourced from Mainland China, exported to HK (at least on paper), and then re-imported into Mainland China. Finally, Hasbro’s toys are sold via the various partnering retail outlets of Li & Fung, especially in the major department stores in China (e.g., Isetan and New World) and in the increasing number of hypermarkets.

Conclusion
It is difficult to argue which of these options is the most promising for selling toys in the Chinese marketplace. It depends very much on the commitment to the market as well as risk preferences.

Having learned from the mistakes of the world leaders Hasbro and Mattel, it seems that most toy companies want to be on the safe side and work through partners that are willing to take over most of their risks in China.

What are the Best Asian Countries to Invest in?

China’s popularity as a place for Foreign Direct Investment (FDI) is increasing with each day. Besides advanced high technology products almost all sorts of commodities are being produced in China to date. This is due to the business environment of China’s economy. While offering political stability, strong infrastructure development, flexible tax incentives (especially in Western China), a large labor pool with a very desirable attitude as well as possibilities for economic scale in production and consumption growth, the costs in China range amongst the world’s lowest.

Furthermore the WTO membership increases China’s attractiveness for FDI as even formerly heavily regulated industries open up for foreign business. These market reforms go alongside with improvements in civil, administrative, criminal and commercial law, which in comparison let China rate highest as the best Asian country to invest in.

Visit our  website (www.fiducia-china.com) for a report rating China and other Asian countries such as Taiwan, Singapore, Vietnam, North and South Korea, Indonesia, Malaysia, Thailand, India, Pakistan and the Philippines.

http://www.fiducia-china.com/Information/Library/

Sourcing in China
Competitive sourcing has become one of the most important business challenges. In times of increasing price pressure, sourcing in China has become an imperative for Western companies - Invest in China to take advantage of the country’s cheap labour and opportunities or lose out to your competitors. In this presentation, Fiducia outlines these new sourcing possibilities and trends, describes the sourcing process and discusses different strategies for China sourcing.

Growth Industries and Industry Concentration
Which are China’s growth industries? In the first part of the report, Fiducia outlines some of China’s fastest growing industries. In the second part of the report, we show the regional concentration of some selected industries in China

Development Zones in the Yangtze Delta Region
Many different factors such as land prices, wages, infrastructure, proximity to airports and harbors need to be considered when choosing the location for a China company setup. In this presentation, Fiducia concentrates on the Yangtze Delta Region, introduces the different types of development, and finally discusses in form of a case study, which development zone in the Yangtze Delta Region is most suitable for a certain investment.

The Greater Pearl River Delta
Due to its high concentration of manufacturing companies, the Pearl River Delta has often been quoted as “the World’s Factory”. Especially the combination of the Pearl River Delta with the nearby city of Hong Kong is a big advantage. Utilization of both area's advantages, e.g. China’s production capabilities and Hong Kong as centre for financial, service and logistics, offers great opportunities for Western investors. In this presentation Fiducia introduces this booming region and explains different procedures of a business set-up.

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