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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

THE CHINA MARKET:HOW TO GET STARTED

East Asia Symposium

“Hong Kong – Gateway to Opportunity”

Philadelphia University

March 27, 2007

agenda
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
china market
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!

china market top industries
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

china market exports
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

china market imports
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!

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%)

Top 5 Trading Partners

East Asian Neighbors Very Involved!

foreign investment in china
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
us china trade investment
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

us china trade investment15
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!

opportunities for us business
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
entering china market
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!
1 market size growth
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)

2 chinese customer needs
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?
3 assess competition
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.
4 market entry strategy
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)
5 implement strategy
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!
case study joint venture
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
case study market size growth
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
case study customer research
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)
case study competition
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!
case study market entry strategy
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
case study market entry
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
hong kong s role gateway
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
conclusions
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