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THE CHINA MARKET: HOW TO GET STARTED. East Asia Symposium “Hong Kong – Gateway to Opportunity” Philadelphia University March 27, 2007. “Next Frontier for US Firms? – “The Wild Far West!”. AGENDA. Overview of Chinese Market What’s the Opportunity for US Firms?

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THE CHINA MARKET:HOW 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

  • What’s the Opportunity for US Firms?

  • How Do I Enter the Chinese Market?

  • Case Study

    • Hong Kong’s 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 – Don’t rely on Chinese data!

Large, Fast Growing Market … Ripe forFraud!


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Basic Metals

Chemicals/Plastics

Automotive/parts

Optical Goods/Instruments

Indus. Machinery

Computers/Consumer Electronics

Apparel/Footwear

Furniture

Hand Tools

Appliances

China Market – Top Industries

“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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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%)

Top 5 Trading Partners

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/analyze)

Some New Market Opportunities for US Firms!


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Opportunities for US Business

  • Two Plays/Options:

    • Selling to the China market – Int’l 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 req’d, 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

    • Don’t expect to be operational soon!


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Case Study: Joint Venture

  • Machinery company (from Midwest)

  • Wants to expand int’l 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 Kong’s 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 China’s 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


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