chicago gsb entrepreneurs rt 121508

8/14/2019 Chicago GSB Entrepreneurs RT 121508

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ChinaChinaChinaChina ““““202202202202””””

China Business ClimateChina Business ClimateChina Business ClimateChina Business Climate (Jon Anderson)(Jon Anderson)(Jon Anderson)(Jon Anderson)

Engaging With ChinaEngaging With ChinaEngaging With ChinaEngaging With China

Entry ConsiderationsEntry ConsiderationsEntry ConsiderationsEntry Considerations (Jon Anderson)(Jon Anderson)(Jon Anderson)(Jon Anderson)Ongoing RelationsOngoing RelationsOngoing RelationsOngoing Relations (Jeff Day)(Jeff Day)(Jeff Day)(Jeff Day)

Mitigating RiskMitigating RiskMitigating RiskMitigating Risk (Louise Kern)(Louise Kern)(Louise Kern)(Louise Kern)



Chicago Council on Global AffairsChicago Council on Global AffairsChicago Council on Global AffairsChicago Council on Global Affairs

Key Opinion Survey FindingsKey Opinion Survey FindingsKey Opinion Survey FindingsKey Opinion Survey Findings (08/08):(08/08):(08/08):(08/08):

““““Americans believe China is catching up to the U.S.Americans believe China is catching up to the U.S.Americans believe China is catching up to the U.S.Americans believe China is catching up to the U.S.

economically and they are becoming increasingly worriedeconomically and they are becoming increasingly worriedeconomically and they are becoming increasingly worriedeconomically and they are becoming increasingly worried

about the implications of this development on their countryabout the implications of this development on their countryabout the implications of this development on their countryabout the implications of this development on their country””””

““““China is now seen as the most influential country in theChina is now seen as the most influential country in theChina is now seen as the most influential country in theChina is now seen as the most influential country in the

world following the U.S.world following the U.S.world following the U.S.world following the U.S.””””

““““The number of Americans who think ChinaThe number of Americans who think ChinaThe number of Americans who think ChinaThe number of Americans who think China’’’’s economy wills economy wills economy wills economy will

grow to be as large as that of the U.S. has risen sharply and agrow to be as large as that of the U.S. has risen sharply and agrow to be as large as that of the U.S. has risen sharply and agrow to be as large as that of the U.S. has risen sharply and a

majority believes it practices unfair trademajority believes it practices unfair trademajority believes it practices unfair trademajority believes it practices unfair trade””””

“ ““ “A large majority still favors friendly cooperation and A large majority still favors friendly cooperation and A large majority still favors friendly cooperation and A large majority still favors friendly cooperation andengagement and opposes active efforts to limit Chinaengagement and opposes active efforts to limit Chinaengagement and opposes active efforts to limit Chinaengagement and opposes active efforts to limit China’’’’s rise s rise s rise s rise” ”” ”



Recent SuccessesRecent SuccessesRecent SuccessesRecent Successes

Olympics And ParalympicsOlympics And ParalympicsOlympics And ParalympicsOlympics And Paralympics

SpacewalkSpacewalkSpacewalkSpacewalk Increased Focus On TradeIncreased Focus On TradeIncreased Focus On TradeIncreased Focus On Trade

RelationshipsRelationshipsRelationshipsRelationships

Maintaining Inflow Of FDI WhileMaintaining Inflow Of FDI WhileMaintaining Inflow Of FDI WhileMaintaining Inflow Of FDI While

Controlling InflationControlling InflationControlling InflationControlling Inflation Slowed down inflationSlowed down inflationSlowed down inflationSlowed down inflation

Economic stimulusEconomic stimulusEconomic stimulusEconomic stimulus

Striving To GainStriving To GainStriving To GainStriving To Gain ““““FaceFaceFaceFace”””” in thein thein thein the

WorldWorldWorldWorld’’’’s View and Maintains View and Maintains View and Maintains View and Maintain

Harmony within the ChineseHarmony within the ChineseHarmony within the ChineseHarmony within the Chinese

Population!Population!Population!Population!



Balance: Social & Economic PoliciesBalance: Social & Economic PoliciesBalance: Social & Economic PoliciesBalance: Social & Economic Policies JobJobJobJob CreationCreationCreationCreation

More Even Distribution OfMore Even Distribution OfMore Even Distribution OfMore Even Distribution Of

WealthWealthWealthWealth

SocioSocioSocioSocio- -- -economicallyeconomicallyeconomicallyeconomically

GeographicallyGeographicallyGeographicallyGeographically

DevelopmentDevelopmentDevelopmentDevelopment

Consumer Class & EconomyConsumer Class & EconomyConsumer Class & EconomyConsumer Class & Economy

InfrastructureInfrastructureInfrastructureInfrastructure

Revitalizing SmokestackRevitalizing SmokestackRevitalizing SmokestackRevitalizing Smokestack

Industrial AreasIndustrial AreasIndustrial AreasIndustrial Areas

Opening Their Economy To TheOpening Their Economy To TheOpening Their Economy To TheOpening Their Economy To The

World Without Destroying LocalWorld Without Destroying LocalWorld Without Destroying LocalWorld Without Destroying Local

BusinessesBusinessesBusinessesBusinesses

Zhuhai China, 2004

Store in computer shopping mallJ. B. Anderson photo



Economic GeographyEconomic GeographyEconomic GeographyEconomic Geography

Southeast

(Pearl River Delta)

Central

(Yangtze River

Delta)

Northeast

Bohai Bay

Southwest

Northwest



Why Engage with China?Why Engage with China?Why Engage with China?Why Engage with China?

OFFENSIVEOFFENSIVEOFFENSIVEOFFENSIVE

STRATEGIESSTRATEGIESSTRATEGIESSTRATEGIES

DEFENSIVEDEFENSIVEDEFENSIVEDEFENSIVE

STRATEGIESSTRATEGIESSTRATEGIESSTRATEGIES

US Markets Reduce costs

Fend off cheap competition

Defend against possible loss of tariffprotection

Secure supply chain

Offshore Markets Follow customer

US Markets

First mover advantage to Low Cost

Country

Supply chain diversification

Offshore Markets Beat competitor to market

New market development

New applications, new markets

New markets, old applications

Exploit counter cyclical markets



How Engage with China?How Engage with China?How Engage with China?How Engage with China?



Less

Control

More

Cash

Outlay

More

Control

Less

Cash

Outlay

Strategic Intent Mode Of Entry Major Advantages Issues To Overcome

Sourcing OrDistribution

AllianceLicensee

ContractmanufacturerSub-contractor

Speed of entry Cost savings

Cost effective

Limited manufacturing control Intellectual property risk

Middlemen costs Logistics issues Quality control Supplier develops market without

Company ownership

MarketAssessment

Representative office Speed of entry Inexpensive

Commercial limitations Make or accept contracts Collect monies

Issue invoices

Import / Export(International Trade)

Trading company orForeign InvestedCommercial Enterprise(“FICE”)

Goods for import & export Location in free trade zone May now engage in

domestic trade May hold import/export

license

Costs (required minimum capital) Cannot manufacture Cannot “add value”

Manufacturing For

Export And/OrDomestic Market

Joint venture “Traditional” route

Speed of entry “Buy” market share and

contacts

Relationship problems

Intellectual property risk Market risk Development of supplier

Manufacturing ForExport And/Or

Domestic Market

Wholly Foreign OwnedEnterprise (“WFOE”) Build Buy

Control of manufacturing,quality & customers

Tax advantaged Location in free trade zone

Longer entry time Costs (required minimum capital) Sales and employee risks “Corporate” resources required

Engaging China:Engaging China:Engaging China:Engaging China:Partner or go it alone?Partner or go it alone?Partner or go it alone?Partner or go it alone?



Equity Investment ModesEquity Investment ModesEquity Investment ModesEquity Investment Modes

Mode

MinimumCapitalization

RequiredFunding

ModeFinancialBenefits

OtherBenefits

EquityJointVenture

Depends on% ofownership

Cash Equipment Technology

Transfer

Lower priceof Entry

Market Access

Greenfield

(WFOE orFICE)

USD $250 Kand up

Cash Equipment

Income TaxRelief

ExportCredit

Customer andManufacturing

Control

Acquisition(as WFOE)

NegotiatedPrice

Equity or

Contractual


Transfer

Income TaxRelief

Export

Credit

Market ShareMarket Access Take Out

Competition

WhollyForeignOwnedEnterprise

Acquisition(DomesticCompany)

NegotiatedPrice

Equity orContractual


Transfer

ExportCredit

Market ShareMarket Access Take Out

Competition



Engaging With ChinaEngaging With ChinaEngaging With ChinaEngaging With China

Approach China On Chinese Terms,Approach China On Chinese Terms,Approach China On Chinese Terms,Approach China On Chinese Terms,

ButButButBut ………………………………........

……………………. Don. Don. Don. Don’’’’t Leave Your Best Practicest Leave Your Best Practicest Leave Your Best Practicest Leave Your Best PracticesOr Common Sense At HomeOr Common Sense At HomeOr Common Sense At HomeOr Common Sense At Home

Relationships First!Relationships First!Relationships First!Relationships First!

Prepare To Have Face To FacePrepare To Have Face To FacePrepare To Have Face To FacePrepare To Have Face To Face

Personal RelationshipsPersonal RelationshipsPersonal RelationshipsPersonal Relationships ExpectExpectExpectExpect

Extended Exchanges About TheExtended Exchanges About TheExtended Exchanges About TheExtended Exchanges About The

Respective CompaniesRespective CompaniesRespective CompaniesRespective Companies’’’’ Information,Information,Information,Information,

History, Capabilities And InterestsHistory, Capabilities And InterestsHistory, Capabilities And InterestsHistory, Capabilities And Interests

Personal QuestionsPersonal QuestionsPersonal QuestionsPersonal Questions Differences In Behavior BetweenDifferences In Behavior BetweenDifferences In Behavior BetweenDifferences In Behavior Between

Formal Meetings And Social OccasionsFormal Meetings And Social OccasionsFormal Meetings And Social OccasionsFormal Meetings And Social Occasions

Time Is On Their SideTime Is On Their SideTime Is On Their SideTime Is On Their Side –––– Be PatientBe PatientBe PatientBe Patient



Key Issues And QuestionsKey Issues And QuestionsKey Issues And QuestionsKey Issues And Questions What Are Your Overall Objectives?What Are Your Overall Objectives?What Are Your Overall Objectives?What Are Your Overall Objectives?

Business StructureBusiness StructureBusiness StructureBusiness Structure

Who Are The Key Decision MakersWho Are The Key Decision MakersWho Are The Key Decision MakersWho Are The Key Decision Makers

Who They Really Are And Who Owns Them?Who They Really Are And Who Owns Them?Who They Really Are And Who Owns Them?Who They Really Are And Who Owns Them?

OperationsOperationsOperationsOperations

Manufacturing Capabilities & Supply ChainManufacturing Capabilities & Supply ChainManufacturing Capabilities & Supply ChainManufacturing Capabilities & Supply Chain

Export Rights And ExperienceExport Rights And ExperienceExport Rights And ExperienceExport Rights And Experience

FinanceFinanceFinanceFinance

How Are You Going To Pay Or Get Paid?How Are You Going To Pay Or Get Paid?How Are You Going To Pay Or Get Paid?How Are You Going To Pay Or Get Paid?

ExperienceExperienceExperienceExperienceWith Your Product Or Commodity ?With Your Product Or Commodity ?With Your Product Or Commodity ?With Your Product Or Commodity ?

With Your Ideal Relationship?With Your Ideal Relationship?With Your Ideal Relationship?With Your Ideal Relationship?

Competitive FactorsCompetitive FactorsCompetitive FactorsCompetitive Factors

Are Your Competitors Already Buying FromAre Your Competitors Already Buying FromAre Your Competitors Already Buying FromAre Your Competitors Already Buying From

Them?Them?Them?Them?

Are They Looking To Steal Your Technology?Are They Looking To Steal Your Technology?Are They Looking To Steal Your Technology?Are They Looking To Steal Your Technology?

Dispute Resolution MechanismDispute Resolution MechanismDispute Resolution MechanismDispute Resolution Mechanism

Develop A Checklist Of Key Items AndDevelop A Checklist Of Key Items AndDevelop A Checklist Of Key Items AndDevelop A Checklist Of Key Items And

Issues & Take PicturesIssues & Take PicturesIssues & Take PicturesIssues & Take Pictures



Sample Checklist Items:Sample Checklist Items:Sample Checklist Items:Sample Checklist Items:In addition to the previous items:In addition to the previous items:In addition to the previous items:In addition to the previous items:

English Language CapabilitiesEnglish Language CapabilitiesEnglish Language CapabilitiesEnglish Language Capabilities

Location IssuesLocation IssuesLocation IssuesLocation Issues

Engineering And Design Capabilities,Engineering And Design Capabilities,Engineering And Design Capabilities,Engineering And Design Capabilities,Including Engineering SoftwareIncluding Engineering SoftwareIncluding Engineering SoftwareIncluding Engineering Software

Product Development Experience AndProduct Development Experience AndProduct Development Experience AndProduct Development Experience AndCycle TimeCycle TimeCycle TimeCycle Time

True Manufacturing CapabilitiesTrue Manufacturing CapabilitiesTrue Manufacturing CapabilitiesTrue Manufacturing Capabilities

Inside And SubcontractedInside And SubcontractedInside And SubcontractedInside And Subcontracted

Scrap And Disposition Of ScrapScrap And Disposition Of ScrapScrap And Disposition Of ScrapScrap And Disposition Of Scrap Supply Chain And Logistics (RawSupply Chain And Logistics (RawSupply Chain And Logistics (RawSupply Chain And Logistics (Raw

Material Through Fulfillment)Material Through Fulfillment)Material Through Fulfillment)Material Through Fulfillment)

Apparent Product QualityApparent Product QualityApparent Product QualityApparent Product Quality

Social Responsibility Issues, Safety AndSocial Responsibility Issues, Safety AndSocial Responsibility Issues, Safety AndSocial Responsibility Issues, Safety AndPlant Housekeeping, Employee TrainingPlant Housekeeping, Employee TrainingPlant Housekeeping, Employee TrainingPlant Housekeeping, Employee Training

Real Or Pretend Quality Programs AndReal Or Pretend Quality Programs AndReal Or Pretend Quality Programs AndReal Or Pretend Quality Programs AndMetricsMetricsMetricsMetrics

Your Gut Feel As To Their Management Your Gut Feel As To Their Management Your Gut Feel As To Their Management Your Gut Feel As To Their Management And Production Capabilities And Production Capabilities And Production Capabilities And Production Capabilities

If It Feels Wrong It Probably Is Wrong



Technical IssuesTechnical IssuesTechnical IssuesTechnical Issues Most Chinese companies have ProMost Chinese companies have ProMost Chinese companies have ProMost Chinese companies have Pro- -- -E,E,E,E,

Auto CAD and other capabilitiesAuto CAD and other capabilitiesAuto CAD and other capabilitiesAuto CAD and other capabilities

Many can do 3Many can do 3Many can do 3Many can do 3- -- -D modelingD modelingD modelingD modeling

Determine their capabilities in yourDetermine their capabilities in yourDetermine their capabilities in yourDetermine their capabilities in yourdue diligencedue diligencedue diligencedue diligence

Samples, Brochures and Pictures areSamples, Brochures and Pictures areSamples, Brochures and Pictures areSamples, Brochures and Pictures arealways helpfulalways helpfulalways helpfulalways helpful

Do not give away your trade secretsDo not give away your trade secretsDo not give away your trade secretsDo not give away your trade secrets

Keep part of the recipe to yourselfKeep part of the recipe to yourselfKeep part of the recipe to yourselfKeep part of the recipe to yourself

ExpectExpectExpectExpect

To have to be much moreTo have to be much moreTo have to be much moreTo have to be much morecomprehensive in specification thancomprehensive in specification thancomprehensive in specification thancomprehensive in specification thanwith an experienced supplierwith an experienced supplierwith an experienced supplierwith an experienced supplier

Pushback on requirements after thePushback on requirements after thePushback on requirements after thePushback on requirements after thecontract is signedcontract is signedcontract is signedcontract is signed

To go through the engineeringTo go through the engineeringTo go through the engineeringTo go through the engineering

details again and againdetails again and againdetails again and againdetails again and again To have to constantly followTo have to constantly followTo have to constantly followTo have to constantly follow- -- -upupupup

Post negotiation of pricePost negotiation of pricePost negotiation of pricePost negotiation of price

Adaptations in packing and shippingAdaptations in packing and shippingAdaptations in packing and shippingAdaptations in packing and shippingdue to overseas logisticsdue to overseas logisticsdue to overseas logisticsdue to overseas logistics



Raw Materials In ChinaRaw Materials In ChinaRaw Materials In ChinaRaw Materials In China DonDonDonDon’’’’t Expect To Simply Quote An SAEt Expect To Simply Quote An SAEt Expect To Simply Quote An SAEt Expect To Simply Quote An SAE

Specification And Receive The RightSpecification And Receive The RightSpecification And Receive The RightSpecification And Receive The Right

MaterialMaterialMaterialMaterial

ExpectExpectExpectExpect

Significant Differences In TheSignificant Differences In TheSignificant Differences In TheSignificant Differences In The

Commodity Nomenclature AndCommodity Nomenclature AndCommodity Nomenclature AndCommodity Nomenclature And

Possibly The Material ItselfPossibly The Material ItselfPossibly The Material ItselfPossibly The Material Itself

Some Materials May Not BeSome Materials May Not BeSome Materials May Not BeSome Materials May Not Be

Obtainable In ChinaObtainable In ChinaObtainable In ChinaObtainable In China

To Obtain Specification Sheets And toTo Obtain Specification Sheets And toTo Obtain Specification Sheets And toTo Obtain Specification Sheets And to

Have The Material TestedHave The Material TestedHave The Material TestedHave The Material Tested

Certifications Are Not Enough, Verify!Certifications Are Not Enough, Verify!Certifications Are Not Enough, Verify!Certifications Are Not Enough, Verify!



LegalitiesLegalitiesLegalitiesLegalities - -- - Pay Attention To:Pay Attention To:Pay Attention To:Pay Attention To:

Tariffs And DutiesTariffs And DutiesTariffs And DutiesTariffs And Duties

Value Added Tax (VAT)Value Added Tax (VAT)Value Added Tax (VAT)Value Added Tax (VAT)

Import RestrictionsImport RestrictionsImport RestrictionsImport Restrictions

Protected, Neutral AndProtected, Neutral AndProtected, Neutral AndProtected, Neutral And

Encouraged IndustriesEncouraged IndustriesEncouraged IndustriesEncouraged Industries

Import RegulationsImport RegulationsImport RegulationsImport Regulations

Including PackagingIncluding PackagingIncluding PackagingIncluding Packaging

FCPA And SOXFCPA And SOXFCPA And SOXFCPA And SOX

Intellectual PropertyIntellectual PropertyIntellectual PropertyIntellectual Property

Product And ProcessProduct And ProcessProduct And ProcessProduct And Process Trade Secrets, Trade Marks AndTrade Secrets, Trade Marks AndTrade Secrets, Trade Marks AndTrade Secrets, Trade Marks And

Trade DressTrade DressTrade DressTrade Dress



Best Practices For ApproachingBest Practices For ApproachingBest Practices For ApproachingBest Practices For ApproachingThe China MarketThe China MarketThe China MarketThe China Market

Have Your US House InHave Your US House InHave Your US House InHave Your US House In

Order FirstOrder FirstOrder FirstOrder First

PlanningPlanningPlanningPlanning

Top Level InvolvementTop Level InvolvementTop Level InvolvementTop Level Involvement

Comprehensive BusinessComprehensive BusinessComprehensive BusinessComprehensive Business

PlanPlanPlanPlan

Know Your Objectives AndKnow Your Objectives AndKnow Your Objectives AndKnow Your Objectives And

Measure ProgressMeasure ProgressMeasure ProgressMeasure Progress

PeriodicallyPeriodicallyPeriodicallyPeriodically

Implement Your PlanImplement Your PlanImplement Your PlanImplement Your Plan

Professionally And FlexiblyProfessionally And FlexiblyProfessionally And FlexiblyProfessionally And Flexibly

HR InvolvementHR InvolvementHR InvolvementHR Involvement

ExecutionExecutionExecutionExecution

Outside Resources WithOutside Resources WithOutside Resources WithOutside Resources WithChina ExperienceChina ExperienceChina ExperienceChina Experience

TrainingTrainingTrainingTraining –––– US And ChinaUS And ChinaUS And ChinaUS And China

Professional ServicesProfessional ServicesProfessional ServicesProfessional Services –––– USUSUSUS

And ChinaAnd ChinaAnd ChinaAnd China

Adaptations AndAdaptations AndAdaptations AndAdaptations And

Accommodations At HomeAccommodations At HomeAccommodations At HomeAccommodations At Home

LocationLocationLocationLocation

Expect Success But HaveExpect Success But HaveExpect Success But HaveExpect Success But HaveAn Exit Strategy!An Exit Strategy!An Exit Strategy!An Exit Strategy!



Contact InformationContact InformationContact InformationContact Information

Jon B. AndersonJon B. AndersonJon B. AndersonJon B. Anderson

Partner-in-Charge, Shanghai [email protected]

www.lakepointepartners.com

THANK YOU

ChicagoChicagoChicagoChicago

77 West Wacker Drive

Suite 3220

Chicago, Illinois 60601

ShanghaiShanghaiShanghaiShanghai

1915 Room, Dongchen Plaza,

No. 60 Mudan Rd, Pudong

Shanghai, China, 201204

312.857.0000 (Office)

312.952.8255 (Direct)

011.86.137.6434.7001 (World Mobile)

312.857.0010 (Fax)

chicago gsb entrepreneurs rt 121508

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