THE CHINA MARKET: HOW TO GET STARTED

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THE CHINA MARKETHOW TO GET STARTED

• East Asia Symposium
• Hong Kong Gateway to Opportunity
• Philadelphia University
• March 27, 2007

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Next Frontier for US Firms? The Wild Far
West!
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AGENDA

• Overview of Chinese Market
• Whats the Opportunity for US Firms?
• How Do I Enter the Chinese Market?
• Case Study
• Hong Kongs Role as a Gateway
• Conclusions

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China Market

• GDP est. (06) 2.5 Tril. (RMB 20.2 Tril.) 2nd
  largest economy in world!
• GDP Growth 9.9 (CGR 02-06)
• Industrial Output Growth 17.2 (06)
• Retail Sales Growth 13.5 (06)
• Inflation 1.3 (06)
• Estimates Dont rely on Chinese data!

Large, Fast Growing Market Ripe for Fraud!
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China Market Top Industries

• Basic Metals
• Chemicals/Plastics
• Automotive/parts
• Optical Goods/Instruments
• Indus. Machinery

• Computers/Consumer Electronics
• Apparel/Footwear
• Furniture
• Hand Tools
• Appliances

FACTORY TO WORLD RANGE OF LOWER TECH
MANUFACTURED PRODUCTS
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China Market -- Exports

• Exports 762 Bil. (05)/ 32 of GDP/ 29 CGR
  (02-06)
• Top Exports
• Telecomm. equip., TVs, audio/visual recorders
  household appliances
• Computers/related equip., large appliances.
  power gen. equip.
• Apparel, footwear toys/games
• Steel
• Optical/Medical Equip. (cameras, microscopes,
  x-ray machines, measuring/testing instruments,
  etc.)
• Foreign multinationals 50 of total

Finished Mfgr. Goods Predominate
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China Market -- Imports

• Imports 660 Bil. (05)/ 28 of GDP/ 26 CGR
  (02-06)
• Top Imports
• Electrical Machinery/Parts (telecom. parts.,
  elect. switches/fuses, electric tubes, etc.)
• Power Generation/Machinery Parts (power gen.
  equip., indus. machinery/parts, aircraft parts,
  computers/parts)
• Optical Medical Equip. (optical
  instruments/parts, measuring analyzing
  instrum./parts)
• Oil, Metals, Ores Scrap Metal
• Plastic materials chemicals
• Vehicles/parts

Supplies/Components Feeding Factories!
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Top 5 Trading Partners

• EXPORTS
• US (21)
• Hong Kong (16)
• Japan (11)
• S. Korea (5)
• Germany (4)

• IMPORTS
• Japan (15)
• S. Korea (12)
• Taiwan (11)
• US (7)
• Germany (5)

East Asian Neighbors Very Involved!
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Foreign Investment in China

• Total Value (05) -- 60.3 Billion
• Top Sources Hong Kong, Japan, South Korea, US,
  Singapore, Taiwan, Germany, Tax Havens
• Overseas Chinese active (e.g., Singapore)
• US 3 Billion/yr. (15 Bil. cumulative)
  primarily manufacturing, large multinationals
  dominate

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US-China Trade Investment

• US Imports
• 244 Billion (05) / 24 AAGR (02-05)
• Top Products
• Computers/Peripheral Equip.
• Toys Games
• TVs/Consumer Electronics
• Apparel/Textiles Footwear
• Household Appliances/Metal Goods Hand Tools
• Furniture
• Ind. Machinery Electrical Parts

Offshore Sourcing Opportunities for US Firms
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US-China Trade Investment

• US Exports
• 42 Billion (05) / 22 AAGR (02-05)
• Major Products
• Electrical Machinery/parts
• Aircraft/parts
• Metals/scrap metal
• Oil Seeds/fruits
• Industrial Machinery
• Computers/parts
• Plastics primary
• Instrumentation Industrial (measure/control/anal
  yze)

Some New Market Opportunities for US Firms!
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Opportunities for US Business

• Two Plays/Options
• Selling to the China market Intl sales
  expansion
• Low-cost sourcing platform for mfgr. components
  or finished products (off-shoring) Production
  cost reduction

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Entering China Market

• Determine market size and future growth for your
  product/services
• Identify customer needs/wants
• Assess the competition (local/foreign)
• Develop market entry strategy
• Implement strategy Just do it!

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1. Market Size/Growth

• Market Size
• Value of local shipments imports exports
• (Collect info on each of these)
• Estimate how fast market will grow in next 3
  years
• Goal Is it big enough to be worth the effort?
• Go see for yourself!
• Data Sources China Govt., US Commerce Dept., UN
  Trade Statistics, World Bank, private sources
  (accounting, brokerage firms)

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2. Chinese Customer Needs

• Imports Look at what they are buying from
  abroad in your product category
• Pay for a customer research study
• US Commercial Service market research
• Private market research firms in-country
• Goal
• Wwho buyers are/where located/what industries?
• Have unique needs requiring product adaptation?

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3. Assess Competition

• Are your US/foreign competitors selling in China?
  will face Asian firms too
• Is there local Chinese competition?
• Hire a market research firm to find out go see
  for yourself
• Goal To learn who they are/serious competitors,
  products offered, pricing, etc.

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4. Market Entry Strategy

• Export Least risk often not feasible due to
  piracy of technology/design low Chinese prices
  unless very unique product
• JV/Technology Licensing Offer technology or
  capital key is to find reputable partner who
  will protect your technology knows market
• FDI Riskiest option for a small firm, long-term
  commitment reqd, JV w/ reputable partner
  preferred (changing regs., fraud, intell.
  property protection concerns)

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5. Implement Strategy

• Export Strategy
• Set competitive price (including tariff VAT)
• Find local distributors
• JV/Tech. Licensing
• Find reputable partner to build sell in China
• Negotiate deal giving partner stake in success
• Monitor compliance/progress
• FDI
• Determine site
• Find partner (if JV),
• Learn local regs/hire expertise to navigate local
  regs
• Dont expect to be operational soon!

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Case Study Joint Venture

• Machinery company (from Midwest)
• Wants to expand intl sales of one machinery
  product line
• Proprietary, non-patented technology
• Competitors selling to China/East Asia
• Asked TMD to evaluate China market

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Case Study Market Size/Growth

• Market estimated based on imports
• HS (Harmonized System Code) 84xxxxxx
• 2004 Value 37 Mil.
• Annual Cmpd. Growth Rate 20
• (01 04 Value 21 Mil. - 37 Mil.)
• Conservative estimate (excludes local shipments)
• Data Sources US, UN trade statistics
• Finding Big market for this machinery

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Case Study Customer Research

• Used US Commerce customized market research
  service (Cost approx. 5,000)
• Also visited Southern China to talk to end-users
  with a Chinese consultant/interpreter
• Surveyed end-users to find out their need for
  product and any special specifications
• Finding There was need, but more for selected
  applications/models (not used as often in US)

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Case Study Competition

• USG research provided some info
• Saw competitor at Chinese Trade Show inferior
  quality machine, but cheaper
• Finding 2-3 competitors (US, Indian, Chinese
  firms), some export to China/some produce
  locally, local pricing is 65 of our list price!

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Case Study - Market Entry Strategy

• JV with local partner due to piracy concern
  (unsophisticated tech.) if exported, were
  advised would lose market in a year
• Looked for Shanghai partner w/o success ... found
  Hong Kong mfgr. partner with Chinese factories
  another with distribution channels in China

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Case Study Market Entry

• How We Found a JV Partner
• US Government could not help (no export content
  to venture)
• Chinese agencies in Shanghai limited help since
  focused on larger FDI projects
• Private Chinese Consultants did not trust them!
• Hong Kong Agencies HK TDC Business Matching
  Service found us partners

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Hong Kongs Role Gateway

• Source of more reliable partners follow Western
  business practices
• Knowledge of market/experienced in dealing w/
  Chinese govts. been operating there for 25
  years (since Chinas Economic Reform)
• Western legal system can write your business
  contracts under HK law and be protected
• Convertible currency no worries about
  repatriation of profits

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Conclusions

• Big Opportunity! China could be a big market, or
  a low cost sourcing platform, for your company
• Big Risks! but it is risky and difficult market
  to enter
• Do your homework
• Be willing to commit for 3 5 years if you want
  to be successful