eastern promise - a guide for retailers on expansion in china

Eastern Promise

A guide for retailers on expansion in China

Antony Gold, Head of Retail, Eversheds LLP3 July 2012

• Macro Dynamic• IP Protection• Business Model• Real Estate• E-Commerce• HR issues

Topics

Eversheds retail team

• One of the largest full service law firms across Asia, Europe, the Middle East and Africa

• Offer sector specific advice on the options for expansion• Extensive experience in advising regulatory environment,

advertising and promotions, branding and competition

Ranked in the top tier of retail practices and recommended for client service by Chambers and Partners every year from 2006-2012

Global reach

Questions & Answers

Eversheds contact details

For further information please contact me on:

Antony GoldHead of Retail+44 845 497 8204+44 776 888 [email protected]

Or email: [email protected]

mailto:[email protected]


Macro dynamics

Setting the scene

Nick Emmerson and Sharon Shi, Partners, Eversheds LLP

China in one wordUrbanisation

China’s urban billion

Setting the scene

Proverbs

People/place

Shanghai

Shanghai too

Road out west

Ningxia

Planned economy

• 12th Five Year Plan– Investment Catalogue

• Economic targets– GDP growth 7% annually on average– 45m+ jobs created in urban areas– Urban registered unemployment no higher

than 5%– Prices to be kept generally stable

12th five year plan• Innovation• Environment and clean energy• Agriculture• Livelihood

– Population to be no larger than 1.39 billion– Pension schemes to cover all rural and 357 million urban residents– Construction and renovation of 36 million apartments for low-income

families– Minimum wage standard to increase by no less than 13% on average

each year• Social management

– Improved public service for both urban and rural residents– Better social management system for greater social harmony

• Reform

Elephant in the roomConsumerism

“We will expand the import of consumer goods to a reasonable degree and make use of the important macro-economic balancing and structure-adjusting role of imports and optimize the structure of trade payments.”

Improving the comprehensive effect of imports12th Five Year Plan

PowerhouseLargest manufacturing power - fifth of global manufacturing

Costs are soaring

• Coastal provinces– Labour– Land prices– Regulations– Taxes

The end of cheap China (The Economist, 10 March)

What will replace cheap China?

5% annual rise in currency and shipping costs

+30% annual rise in wages

=Cheaper to make in US than China (incl. shipping) by 2015

Advantage China“But coastal China has enduring strengths, despite soaring costs.”

• Booming domestic market– newly rich– “clamouring for stuff”

• Productivity is up– paid more as producing more

• China is huge– large and flexible work force

• Sophisticated and supple supply chain

Inland revenue?

• Chongqing• New consumer• Basic manufacturing shift• Labour not much cheaper• Extra/unexpected costs• Move up the value chain?• Innovate or slow down?

Proverbs

• 同床异梦 Same bed, different dreams• 创业难守业更难 To open a shop is difficult,

to keep it open is the art of survival• 木秀於林风必摧之 It is the beautiful bird that

invariably gets caged• 不知则问其惑一时不知不问惑其一生 He who asks a

question is a fool for five minutes; he who does not ask a question remains a fool forever

Questions & Answers



Nick EmmersonPartner+44 845 497 0522+44 771 780 [email protected]

Sharon ShiPartner+44 845 497 0734+44 782 446 [email protected]



Eastern PromiseA Guide for Retailers on Expansion in ChinaBrand Protection

Brian Clayton, Trademark Agent, Eversheds LLP

Brand protection in China

• The Landscape for Brand Protection• What’s available?• How does it work?• What if………..

The landscape for brand protection

• Is it very different to other jurisdictions?– basic processes are essentially the same, its

how they are applied which differs • What is “China”?

– Hong Kong, Macau, Taiwan all separate• Do I really need to take special steps?

– yes!– need to take a look well in advance of desire to

trade – take advantage of non-use period– changes are afoot – or are they?

What‘s available?

• Registered Trade Marks• Registered Designs

– 2D designs protection?• Unregistered Rights

How does it work?

• Registration process– slow (around 12-18 months to examine)– quite rigid and inflexible– rigorous examination with very strict criteria

for both absolute and relative grounds– 10 year term

What if…………………(1)

• My mark is refused on absolute grounds– can appeal but may need to consider

replacing or amending the mark; absolute grounds objections very difficult to overcome

What if……………………(2)

• My mark is refused on relative grounds- cancellation – non-use for 3+ years- invalidation – mark should never have been

registered – “bad faith”- purchase – can be expensive- all routes likely to be lengthy

Questions & Answers



Brian ClaytonTrademark Agent+44 845 497 8178+44 782 788 [email protected]


Eastern Promise


Eastern PromiseA Guide for Retailers on Expansion in China

Which Form?

Sharon Shi, Partner, Eversheds LLP

Update on legislation

• Supplementary Provisions to the Measures for the Administration of Foreign Investment in the Commercial Industry (V) (effective from 10, April, 2012)

• Circular of the Ministry of Commerce regarding Administration of the Project Approval for Foreign Investment in Online Sale and Auto-selling Machines Sale (effective from 19 August, 2010)

• Measures for the Administration of Record Filing of Commercial Franchises (effective as of 1 February, 2012)

• Measures for the Administration of Information Disclosure in Connection with Commercial Franchise (effective as of 1 April, 2012)

Changes to Regulation on Foreign Investment in Commercial Industry

• Service providers from HK or Macao that open more than 30 stores in aggregate within the territory of the mainland of China, and sell foodstuff in different varieties and brands from multiple suppliers, are entitled to run in the form of wholly foreign-owned enterprise on a trial basis, and the aforementioned business operation shall be limited only within the territory of Guangdong Province.

• As to foreign investors, other than those from HK or Macao, that open more than 30 stores in aggregate within the territory of the mainland of China and sell foodstuff in different brands from different suppliers, they are only permitted to carry out the aforesaid business in the form of joint venture with their proportion of capital contribution on and below 49%.

Regulations on Foreign Investment on E-commerce

• A foreign-invested commercial enterprise with retail in its business scope may carry out online sale without any further approval;

• A foreign-invested commercial enterprise without retail in its business scope but intending to carry out online sale, shall submit the application to competent commerce authority at the provincial level for approval;

• A foreign-invested enterprise which provides network services for other dealing parties by taking advantage of its own network platform, needs value-added telecommunications business licence (“ISP Licence”); while an foreign-invested enterprise which directly engages in retail by using its own network platform, shall carry out an ICP (“Internet Content Provider”) filing.

Forthcoming Regulations on E-commerce

In response to recent online protests and scandals involving prominent E-commerce companies such as Alibaba, the Chinese government was, as of late 2011, drafting new regulations on E-commerce that will reportedly clarify the rights and responsibilities of the different parties involved. In addition, drafts of a comprehensive PRC telecommunications law have been debated for many years.

2007 Rule 2012 Rule

Competent Authority in Charge of Commercial Franchising Record Filing

If a franchisor carries out its franchising activities within one province, it should conduct record filing with the provincial counterpart of the MOC; if a franchisor carries out its franchising activities beyond one province, it should conduct record filing with the MOC at the central level.

To emphasize that, a franchisor is also entitled to file with the MOC at the central level, if the competent record filing authority fails to record its commercial franchise activities.

Revocation of Record Filing

The record filing authority may revoke the record filing if a franchisor is evidenced to have hidden related information or provided untrue information.

1. The record filing authority may revoke the record filing if a franchisor hides related information or provides untrue information, and thus causes a material impact to the agreement.

2. The record filing may also be revoked on the application of the franchisor.

Updated Provisions on Commercial FranchisingRecord Filing Requirements

2007 Rule 2012 Rule

Required Changes to Original Record Filing

Just specifying that, a franchisor should change its record filing with the competent authority in case any information recorded has been changed.

A record filing will need to be changed if: a. the information of the franchisor

registered with competent registry changes;

b. the business resources information of the franchisor changes; or

c. the details on the distribution of franchisees’ stores in China change.

In addition, a franchisor is also obligated to inform the record filing authority of any conclusion, cancellation, termination and renewal of franchise agreements in the previous year by 31 March of each year.

Updated Provisions on Commercial FranchisingRecord Filing Requirements

2007 Rule 2012 Rule

Information which Needs to be Disclosed

Only the parent company and the parent company’s or the franchisor’s controlled companies fell within the definition of “affiliated parties”.

Natural person shareholders of franchisors are covered in the scope of “affiliated parties” of franchisors.

The bankruptcy history of the franchisor or its affiliates for last five years should be disclosed.

Only two years of the bankruptcy history of the franchisor or its affiliates are required.

The business resources of the franchisor or its affiliates, such as the IP rights, operation modes, should be disclosed.

Only the business resources of the franchisor or its affiliates related to the franchising activities are required. And the business status of existing franchisees should be disclosed.

Only the material litigation or arbitration in connection with the franchise during the last five years should be disclosed.

All the litigation or arbitration in connection with the franchise during the last five years should be disclosed.

Updated Provisions on Commercial FranchisingDisclosure Requirements

2007 Rule 2012 Rule

Statutory Conditions on Termination of the Franchise Contract

The franchisor hides information, or discloses untrue information.

The franchisor hides information which may adversely impact the performance of the franchise agreement and cause the purpose of such agreement to be unachievable, or discloses untrue information.

Confidential Obligation of Franchisees

Just specifying a franchisor may enter into confidential agreement with a franchisee

The statutory confidential obligation of franchisees has been enhanced under 2012 rule

Updated Provisions on Commercial FranchisingDisclosure Requirements

Forms for Foreign Investor engaging in retail in China

1. In the Form of Foreign Invested Commercial Enterprises (EJV, CJV and WFOE) Engaging in Retail– With retail in business scope; or– With online sale in business scope (carrying out online

sale only)

2. Carrying out Commercial Franchising– Through its own subsidiary in China (having retail and

commercial franchising in business scope is required); or

– Through retailers or its distributors as agents in China

Challenges

• Restricted products• Licensing process• E-commerce• Unlevel playing field• Third party services• Culture difference

Questions & Answers

China50Fifty Real Estate Markets that Matter

Jeremy KellyGlobal ResearchJones Lang LaSalle2 July 2012

China 50

52

China30, 2007

China50: Interactive Tool

China40, 2009

joneslanglasalle.com/China50cities

Fifty real estate markets that matter

• Spotting the City Winners• Identifying the real estate potential

World Winning Cities Research•Tracking the momentum•Profiling the diversity

China50, 2012

535353

GANSU

GUIZHOU

YUNNAN

HEBEI

HENAN

SHANXI

ANHUI

HUNAN

SHAANXI

HUBEI

Suzhou

Wenzhou

Shanghai

ChangzhouWuxi

Wuhan

Tianjin

TangshanDalian

Yantai

Nanjing

Jinan

Urumqi

Shenzhen

Zhongshan

Fuzhou

Xiamen

Zhuhai

Harbin

JilinChangchun

Shenyang

ShijiazhuangTaiyuan

XuzhouZhengzhouLuoyang

Xi’an

HefeiXiangyang

Nanchang

Nanning

Haikou

Guiyang

Kunming

Lanzhou

Chengdu

Chongqing

Changsha

Qingdao

TAIWANShantou

HAINAN

SHANDONG

Hohhot

Dongguan

Taipei

MacauHong Kong

Foshan

TIBET

XINJIANG

QINGHAI

NINGXIA

JILIN

HEILONGJIANG

LIAONING

HEBEI

JIANGSU

ZHEJIANG

FUJIANJIANGXI

GUANGDONGGUANGXI

SICHUAN

CHONGQING

INNER MONGOLIA

Introducing the China50

Indicates levels of economic and property activity

Tier 1 cities (not part of China50)

Quanzhou

Nantong

NingboHangzhouShaoxingJinhua

Jiaxing

Weifang

The cities that will be making the headlines

Changchun Changsha Changzhou Chengdu Chongqing Dalian Dongguan Foshan FuzhouGuiyang Haikou Hangzhou HarbinHefei Hohhot Jiaxing Jilin Jinan Jinhua Kunming Lanzhou Luoyang NanchangNanjingNanning

Nantong Ningbo Qingdao Quanzhou Shantou Shaoxing Shenyang Shijiazhuang SuzhouTaiyuan Tangshan Tianjin Urumqi Weifang Wenzhou Wuhan Wuxi Xi'an Xiamen Xiangyang Xuzhou Yantai Zhengzhou Zhongshan Zhuhai

China50 – Our Key MessagesA real estate market of global scale

“The China50 cities are being transformed by the scale of building, infrastructureinvestment and their progress of economic development”

An Economic Powerhouse

A New City Hierarchy Taking Shape

Balance of Growth Tilting

Retail and Logistics

• 12% of ALL global economic growth over next decade

• Nine Transitional ‘Tier 1.5’ cities fast-tracking to maturity

• From coast to inland• From Tier 1 cities to China50

• Offering significant opportunities

54

Why are China50 important?

Why are China50 important?A continental-sized market

Economy of US$2.9 trillion

5th largest economy

12% of all global growth

6% of world’s output

370 million consumers

World’s 10 fastest growing cities

Over 100 million sq m of prime commercial space

56

China50US$2.9 trillion 26%

China50US$6.7 trillion 32%

Tier 1 citiesUS$0.8 trillion7%

Tier 1 citiesUS$1.7 trillion8%

Rest of ChinaUS$7.4 trillion

66%

Rest of ChinaUS$12.3 trillion

59%

China 2011: US$ 11 trillion (GDP PPP) China 2020: US$ 21 trillion (GDP PPP)

China’s Expanding Economy

57

Source: EIU, IMF, IHS Global Insight

China50 accounts for increasing proportion of expanding national output

58

Cities with populations over 3 millionSource: Miscellaneous

World’s Fastest Growing Large CitiesTop 10 cities all in China50

GDP % p.a. 2010 - 2012

Retail Stock Evolution, 2005-2020

59

Tier 1China50

Source: Jones Lang LaSalle Real Estate Intelligence Service

13.4 million sq m

27 million sq m

41 million sq m

68 million sq m

2005

2008

2011

2014 E

Four-fifths of China’s modern retail stock outside Tier 1 cities by 2020

2020 E

137 million sq m

China50An Emerging Cities Hierarchy

61

China50: A Market of Significant DiversityA nation of cities emerges

Tier 1.5 – Transitional

Tier 2 – Growth

62

China50: Evolution Curve, 2012

Tier 1

Tier 3 – Emerging

Tier 3 – Early Adopter

Source: Jones Lang LaSalle

A city hierarchy is taking shape

Tier 1.5 - 2

Tier 3

Shenzhen

636363

GANSU

GUIZHOU

YUNNAN

HEBEI

HENAN

SHANXI

ANHUI

HUNAN

SHAANXI

HUBEI

Shanghai

Shenzhen

TAIWAN

HAINAN

SHANDONG

Taipei

MacauHong Kong

TIBET

XINJIANG

QINGHAI

NINGXIA

JILIN

HEILONGJIANG

LIAONING

HEBEI

JIANGSU

ZHEJIANG

FUJIANJIANGXI

GUANGDONGGUANGXI

SICHUAN

CHONGQING

INNER MONGOLIA

China50 Hierarchy

Indicates levels of economic and property activity

Tier 1 cities (not part of China50)

Suzhou

Wuhan

Tianjin Dalian

Nanjing

Shenyang

Chengdu

Chongqing

Hangzhou

Tier 1.5 Transitional: e.g. Chengdu, Chongqing, Tianjin, Shenyang•Large, open diverse economies•Strong presence of MNC’s and domestic firms= Potential across all sectors

Wuxi

Jinan

Xiamen

ZhengzhouXi’an

Hefei

Changsha

Qingdao

Dongguan

Ningbo

Tier 2 Growth:e.g. Xi’an, Qingdao, Changsha, Zhengzhou•Strong demographics supporting robust retail markets and industrial diversification= Strengths in retail, logistics, back offices

Wenzhou

Changzhou

Yantai

Fuzhou

Harbin

Changchun

Shijiazhuang

Nanchang

Nanning

Kunming

Hohhot

Foshan

Nantong

Tier 3 Emerging:e.g. Kunming, Harbin, Changchun, Nanning•Moving towards the ‘lift-off’ phase•Aggressively being targeted by retailers / hotel operators= Retail, hotels

Tangshan

Luoyang

Quanzhou

Urumqi

ZhongshanZhuhai

Jilin

Taiyuan

Xuzhou

Xiangyang

Haikou

Guiyang

Lanzhou

Shantou

ShaoxingJinhua

Jiaxing

Weifang

Tier 3 Early Adopter:e.g. Guiyang, Urumqi, Taiyuan•Target for first-mover advantage= Retail, hotels

The tiers of real estate opportunity

15

XINJIANG

TIBETSuzhou

Wuhan

Tianjin Dalian

Nanjing

Shenzhen

Shenyang

Chengdu

Chongqing

Taipei

Macau

Hong Kong

Tier 1.5 Transitional Cities


Nine cities fast-tracking to maturity

HangzhouShanghai

Tianjin: A key logistics and manufacturing hub, with aggressive financial service aspirations

Shenyang: Retail centre of Northeast China and hub for heavy manufacturing

Wuhan: Central China hub, with strong educational base

Nanjing: Historically important city, fast growing service sector, strong educational base

Suzhou: Thriving export-driven economy

Hangzhou: Affluent city and major retail hub

Dalian: BPO and software hub, FDI magnet, tourist destination

Chongqing: The world’s fastest growing large city

Chengdu: China 50’s premier real estate market

INNER MONGOLIA

HEILONGJIANG

HEBEI

SHANDONG

LIAONING

SHANXI

NINGXIA

QINGHAI

GANSU

SHAANXI HENAN

JILIN

JIANGSUANHUI

HUBEI

SICHUAN

YUNNAN

GUIZHOU

CHONGQING

HUNAN JiANGXI

FUJIAN

GUANGXI GUANGDONG

ZHEJIANG

HAINAN

TAIWAN

Beijing

Guangzhou

China50 RetailA Significant Opportunity

* Population earning over $5,000Source: EIU, 2012

Rest of China50

Tier 1.5 Cities

Tier 1 Cities

The Inexorable Rise of the Middle ClassesChina50’s middle classes* to double in 3 years

66

233m

126m

28m 66m

Milli

ons

2000200020012002200320042005200620072008200920102011201220132014201520162017201820192020

0%

25%

50%+

Consumer class is expandingProportion of urban population with disposable income over $5,000 pa*

Source: EIU, *constant 2005 currency terms67

Luxury RetailersLeading the way

Tier I benchmark

2012

2009

Luxury: based on presence of Armani, Gucci, LV, Dunhill, Burberry, Cartier, HermesBig Box: based on presence of Tesco, Carrefour, Walmart, IKEAFast-fashion: based on presence of Zara, H&M, Uniqlo and MNGSource: Jones Lang LaSalle 68

International Retailers Moving deep into the China50

Big Box RetailersMoving deeper into China50

Fast Fashion RetailersSignificant expansion now underway

Number of Stores

Number of Stores

Number of Stores

69

China is the world’s biggest luxury market in 2012

Beijing

Nanjing Shanghai

Guangzhou

Shenzhen

Shenyang

Dalian

Chengdu Hangzhou

Wenzhou

Kunming

Changchun

Harbin

NingboWuhan

Changsha

Chongqing

Fuzhou

Jinan

Nanning

Zhengzhou

Qingdao

Xi’an

Guiyang

Anshan

Xiamen

Hefei

Taiyuan

Shijiazhuang

Q1 2012

HuhhotBaotou

Sanya

Lanzhou

Nanchang

Urumuqi

Yantai

Zhenjiang

Zhangjiagang

Nantong

Jiangyin

Changzhou

Suzhou

Wuxi

Jinhua

Shangyu

Taizhou

Yiwu

Tianjin


70


Beijing

Nanjing Shanghai

Guangzhou

Shenzhen

Shenyang

Dalian

Chengdu Hangzhou

Wenzhou

Kunming

Suzhou

Changchun

Wuxi

Harbin

NingboWuhan

Changsha

Chongqing

Fuzhou

Jinan

Nanning

Zhengzhou

Changzhou

Qingdao

Xi’an

Guiyang

Changshu

Anshan

Shaoxing

Shijiazhuang

Yiwu

Q2 2010

Tianjin

Mass Market Retailers expanding rapidly

Beijing

Nanjing Shanghai

Guangzhou

Shenzhen

Shenyang

Dalian

Chengdu Hangzhou

Wenzhou

Kunming

Suzhou

Changchun

Wuxi

Harbin

NingboWuhan

Changsha

Chongqing

Fuzhou

Jinan

Nanning

Zhengzhou

Changzhou

Qingdao

Xi’an

Guiyang

Changshu

Anshan

Shaoxing

Xiamen

Hefei

Taiyuan

Shijiazhuang

Yinchuan

Dongguan

Zhuhai

Dongying

Xuzhou

Jinhua

Q2 2011

71

Langfang

BaodingYantai

Tianjin



Beijing

Nanjing Shanghai

Tianjin

Guangzhou

Shenzhen

Shenyang

Dalian

Chengdu Hangzhou

Wenzhou

Kunming

Suzhou

Changchun

Wuxi

Harbin

NingboWuhan

Changsha

Chongqing

Fuzhou

Jinan

Nanning

Zhengzhou

Changzhou

Qingdao

Xi’an

Guiyang

Changshu

Anshan

Shaoxing

Xiamen

Hefei

Taiyuan

Shijiazhuang

Yinchuan

Dongguan

Zhuhai

Dongying

Xuzhou

Jinhua

Q1 2012

72

Daqing

Foshan

Ganzhou

Huai’an

Huhhot

Huizhou

Langfang

Nantong

TaizhouZhenjiang

Baotou

Baoding

Guilin

Haikou

Hengyang

Lanzhou

Linyi

Luzhou

Mianyang

Nanchang

Ordos

Quzhou

Shangyu

Tangshan

Urumuqi

Yueyang

Zhoushan

Zhuji

Weifang

Zhongshan

Jining

Yantai



73

The Retail HierarchyHangzhou, Chengdu and Shenyang top the ranks

Based in retailer concentration, retail stock, wealth, populationSource: Jones Lang laSalle

Shanghai

Shenzhen

Taipei

Macau

Hong Kong

Hangzhou,Chengdu, Shenyang

Chengdu

Shenyang

Hangzhou

Tianjin, Nanjing, Wuhan, Chongqing

Qingdao, Ningbo, Dalian, Suzhou, Wuxi Chongqing

Wuhan

Tianjin Dalian

Qingdao

Ningbo

SuzhouNanjing

Wuxi

Changsha, Xi’an, ZhengzhouHarbin, Xiamen, Kunming

Xi’an

Kunming

Changsha

Xiamen

Zhengzhou

Harbin

74

Established markets

Growth markets

Emerging markets

Current Status Index

Futu

re A

ttrac

tion

Inde

x

Xuzhou

The Next Retail Winners?

Current Status – based on retailer concentration, prime retail stock, wealth levels and urban populationFuture Attraction- based on urban population and GDP growth, retailer momentum, developer activity, retail sales, wealth and disposable incomes, and numbers of affluent households.Source: Jones Lang LaSalle

Strong retail potential in many Tier 2 and 3 cities

China50Challenges Ahead and Conclusions

76

The Challenges AheadThe obstacles on the road to maturity

Quality of real estate stock

Human resources

City governance and policy shifts

Poor real estate transparency

Lack of professional property management

Homogeneous economic structures

Vulnerability to global volatility

Environmental sustainability

Policy induced

Emerging China

•Double-digit economic growth

•Massive infrastructure investment

•City-building and modernisation

•Low cost labour

•Export economy

•Low tech manufacturing

•Basic needs consumption

•Scale and speed of real estate delivery

77

Moving to Maturity

•‘High quality’ growth

•Movement up the value chain

•Continued tilt of activity inland

•Skilled human resources

•Domestic economy

•High tech manufacturing and services

•Mass consumption

•Quality, sustainable, professionally managed, tenant-focused real estate

Final ObservationsA new chapter in China50 cities evolution

Traditional Forces New Forces

78

For more information on China50 contact:

Jeremy KellyDirector, Global Research +44 (0)20 3147 1199 [email protected]

Questions & Answers

Eastern PromiseA Guide for Retailers on Expansion in ChinaThe development of E-commerce in China

Virginie Deslandres, Partner, Eversheds LLP

Growing E-Commerce • Current situation is favourable for companies seeking to develop

e-commerce:– in 2011, about 203 million people participated to online

shopping, 28.5% more than in 2010– the estimated e-commerce revenue in Q1 2012 was 1.76

trillion RMB: 26% higher than Q1 2011– high-speed internet is widely accessible in China at very low

rates– online purchases are most of the time products that

consumers cannot find in stores– apparels and skin-care products are the fastest growing

categories

• But, China e-commerce is different from USA or Europe– inception process is markedly distinct– online shoppers have different preferences and expectations

Encouraged by the Chinese government

• Over the past ten years, internet transactions have been encouraged and supported by the Chinese Government

• In September 2011, the Ministry of Commerce (MOFCOM) has published :– a list of model e-commerce enterprise– guidelines on the development of e-commerce in the 12th year plan

period• creating more favourable environment• developing the entrance of foreign players

• The aim is that by 2015:– e-commerce will have been adopted by 80% of the sizable enterprises– online retail will take over 5% of the total retail sales of consumer

goods– China will become the largest online commerce market in the world

• China urban population shopping online– 2006: less than 10% 2015: 44% expected

Regulations relevant to E-commerce Major change in 2004

• 2004 Administrative Measures for Foreign Investment in Commercial Sectors – major changes as foreign investors are allowed to engage in

the distribution services by setting up Foreign-Invested Commercial Enterprises (FICEs)

– FICE can be Wholly Foreign-Owned Enterprises (WFOEs) and are able to engage in:

• commission agency business, • retailing, • wholesaling; and/or • franchising (subject to separate regulations)

of imported or domestically manufactured products

Regulations relevant to E-commerceAugust 2010 Circular

• In August 2010 MOFCOM releases a circular allowing e-commerce activities for Foreign-Invested Enterprises (FIEs)– before the circular, foreign access to online operations was

restricted (one physical outlet, requirement of a value-added telecom licence, central MOFCOM approval)

– no need to get further approval:• foreign-invested manufacturing enterprises can

automatically sell their self-manufactured products online• FICEs already doing retail get automatic right to sell

products online (extension of their retail’s activities)– New FICEs engage in e-commerce must get provincial

MOFCOM Approval

Regulations relevant to E-commerceAugust 2010 Circular

• Other requirements of August 2010 Circular– display of their business licence on the main page of the

website– establish reasonable systems:

• for the return and replacement of the products• to keep sales records• to protect the privacy of consumers • to protect trade secrets

– no distribution of products that are prohibited by laws– obtain and special licences to distribute:

• books, newspapers & periodicals• clothing and apparel• pharmaceuticals • petroleum products

Regulations relevant to E-commerceAuthorities in charge

• Internet sector is under the primary responsibility of:– the State Internet Information Office under the State Council– the Ministry of Industry and Information Technology (MIIT)

• For E-commerce the authority is also shared with:– the Ministry of Commerce (MOFCOM)– the State Administration for Industry and Commerce (SAIC)– each of the governmental department for particular types of

products such as books & publications, clothing and apparel, audio-visual products, pharmaceuticals or petroleum products

Regulations relevant to e-commerceFor-profit and non-profit ICPs

• The enforcement of August 2010 Circular is mainly subject to the Ministry of Industry and Information Technology (MIIT)’s views– e-commerce is classified as a restricted sector for

foreign investment– telecom services are subject to a licensing mechanism

and operators are catalogued into being either:• for-profit Internet Content Providers (ICP) which shall

secure an ICP licence from MIIT• non-profit ICPs which are only required to register

with MIIT for records

Regulations relevant to E-commerceLicence vs. simple filling • A company which set-up an online transaction platform:

– to allow third parties to sell their products on its website; and

– receives proceeds from its operations on such platform is categorised as a for-profit ICP and should obtain a ICP

licence from the MIIT

• Companies which would be qualified as a non-profit ICP and would usually be required to make an ICP filling only are:– a company which set-up an online transaction platform

for its own use to sell its own products– FICEs which sell their goods through online transactions

or even specialised in online sales

Regulations relevant to E-commerceGeographical differences

• Problem of distinction between for-profit ICP and non-profit ICP by local authorities

• Depending on geographical location, local communication administrations may have different perspectives:– some are following the principle that if the website

owner just provides sales information or sells its own products through the website, it shall be deemed as a non-profit website

– some other are simply considering that all e-commerce websites must apply for ICP licences

Regulations relevant to E-commerceWFOE or joint venture

• Holding more than 50% of a for-profit ICP’s equity is not allowed for foreign investors– establishing a joint venture is mandatory– getting the ICP licence from MIIT implies special qualifications

• For non-profit ICPs:– corresponding to a retailer selling its own products on its own website– it can be established by foreigners under the form of either:

• a WFOE; or • a joint venture

• The non-profit record-filing procedures are consisting about providing:– basic information of the entity and the person responsible for the web

site– the website’s URL and the description of the services to be proposed– if the services are in restricted areas of business specific consents

have to be obtained from the concerned authorities

Regulations relevant to E-commerceForthcoming regulations

• The set of regulations relevant to FIEs engaged in internet and e-commerce is still not complete– no clear definition of a non-profit ICP and a for-profit ICP– sales through other channels such as mobile phones or

television are not concerned by August 2010 Circular– rules related to foreign investment in internet music services

and videos online are still remain unclear

• In response to recent online protests and scandals involving e-commerce, the Chinese government is also currently drafting further regulations to clarify the rights and responsibilities of the parties involved

• In addition, drafts of a comprehensive PRC Telecommunications Law has been debated for many years

Regulations relevant to consumers interests Protection of consumers interests • China’s has started to put in place a system of regulations

for protecting consumers interests: – the PRC Product Quality Law governing quality control in respect of commodities and

services– the PRC Protection of the Rights and Interests of

Consumer Law governing the merchandising of commodities and

services

• SAIC strongly encourages customers to make complaints if they feel their rights are infringed but still encounters many difficulties to fight against fraud and fake products

Regulations relevant to consumers interests Online IP infringement

• For the first time, a circular issued in April 2011 recently clarifies the responsibilities of online shopping platforms in relation to IP rights infringements

• E-commerce operators are required to – tighten the market access of business operators and commodities to

be traded– establish a trademark and patent inquiry system– adopt technical means to screen information on IP rights infringement,

and manufacturing and sale of knock-off and inferior products – improve information publication, identification, trading, payment

making, logistics, after sale service, dispute resolution, advance compensation, process monitoring and other assurance mechanisms

– establish a daily 24-hour online inspection system– investigate and eliminate hidden dangers in time– handle violations of regulations and laws – report the symptoms, trends and dangers of serious problem in timely

manner

Getting started Chinese e-commerce platforms

• China e-commerce platforms can be classified in three models:

– marketplace model

– online retail model

– traditional retail model

Getting started Marketplace model

• Marketplace model connects buyers and sellers, whether it is B2B or C2C

• A marketplace platform facilitate business between the two parties but has no product on its own to offer

• It must have– a searchable database of information for buyers and sellers– a secured means to facilitate payment

• Major China players are: Taobao.com, Paipai.com and Alibaba.com

• Restrictive access for foreign investors because it must:– be a joint venture – apply for an ICP Licence

Getting started Online store in a marketplace • For foreign brands looking to enter the Chinese market, set up

their online store on a network such as Taobao can prove to be:– a lower and cost efficient investment as the network handle

everything:• website maintenance• delivery• payment • after sales services

– easier, as there is no need to have any real knowledge of:• the online market• the logistic• the customer services; or even • e-commerce itself

– much quicker than setting up its on online retail model

Getting started Online and traditional retail models

• Online and traditional retail websites are:– individual websites specifically for a particular company– providing both products and channels to sell directly to

end customers

• Online retail model is where the company has no formal real-world storefront

• Traditional retail model is where the company has physical retails outlets

Getting started MOFCOM approval

• Establishment of online or traditional retail companies by foreigners are now to be approved by MOFCOM at provincial level:

– WFOE or joint venture

– approval easier than before

– increase competition between regional administrations to seeking to capture foreign investments

– still relatively complicated for online retail model

– easier to obtain for traditional retail model

Getting started Pros & cons• Online and traditional retail models:

– allow the retailer to manage its own affairs– provide more independence to decide:

• products• pricing• marketing • contacts with customers

– are suggested for products with high brand awareness or uniqueness

• But, are expensive mainly because they require:– doing domain name promotions and advertisements – having a website in Chinese language– complying with the establishment procedures – managing a IT team and a marketing team– arranging payment systems – organising products imports, delivery logistics– providing products warranty and after sales services– insure the personal data protection

Getting started Players

• Major China online retailers are: Dangdang.com and 360buy.com

• In November 2011, Armani launched their own online store:– selling clothing and handbags directly to customers

throughout China– allowing customers who would normally never been

able to access their products due to geographical limitations

– Armani being already a well-known brand from Shanghai to Urumqi

Issues to consider Payment methods

• Most important aspects of an e-commerce success is to secure a suitable system for payment of the goods online

• Local third party payments (such as Alipay or Tenpay, similar to PayPal) have been established in 1999 and covers payment by credit cards

• Cash on delivery is the most popular system for Chinese online shoppers, mainly because:– buyers have a low level of trust towards online transactions – Chinese customers have a relatively low usage of credit cards

• It is advisable to propose a dual payment system online:– by credit cards (for younger generations or certain products such as

flight tickets, hotels, virtual products (software, music)– cash on delivery which may incur additional operational costs but

allows more convenience and wider coverage

Issues to consider Marketing • Online advertising is playing a major role in China

– advertisements on search engines (such as Baidu) – online news releases– virus marketing– posting advertisements on

• community websites or discussions boards• social networks

that Chinese potential buyers tend to visit to get products recommendations

• Chinese consumers also pay a great attention to other customers reviews, blogs and forums:– more prolific reviewers and readers of online reviews worldwide – 40% of online shoppers are reading or posting comments (double that

of the USA)

Conclusion

• E-commerce is still an emerging market but growing at an unprecedentedly rapid rate

• Any company wishing to sell in China, we would recommend going online

• E-commerce laws and regulations are constantly developing and offer more and more potentialities for foreigners

• When approaching the Chinese market online, it is vital to have a strong strategy and know what to aim for

At Eversheds, we an give a tailor-made approach to suit requirements of foreign investor

Questions & Answers



Virginie DeslandresPartner+33 1 55 73 42 24 +33 0 61 74 57 [email protected]


Eastern PromiseA Guide for Retailers on Expansion in ChinaHR issues

Sharon Shi, Partner, Eversheds LLP

Unified and improving Labour Law

• Labour Law and Labour Contract Law• Written contract and more protection on

employee• China's first unified social insurance law• Prior to July 2011, social insurance was a

collection of programs operated by local governments and mostly regulated by local regulations

Practical issues

• Attracting the right talent, employer branding

• Two contracts = double protection?

• Collective contract: is it right for your business

• Trade secret: can it be protected

Social security payments: Obligations of Employers

• Social insurance registration• Pay employer’s contribution• Withhold employee’s contribution and pay on

his/her behalf• Inform the employee regarding his/her social

insurance contributions monthly

The "Five Funds"

• Basic pension insurance• Basic medical insurance• Unemployment insurance• Work-related injury insurance• Maternity insurance

3,181-4,4071,4994,046-

4,1341,2894,3251,286Maximum monthly contribution (RMB)

13,623 *12,60311,688Ceiling for 2011 monthly salary base for contribution (RMB)

23.35%-32.35%11%32.1%-

32.8%10.2%+RMB337%11%Total

0.5%-1.5%0%0.3%-1%0%0.5%0%Work-related

injury

0.85%0%0.8%0%0.8%0%Maternity

2%1%1%0.2%1.7%1%Unemployment

8%2%10%2%+RMB312%2%Medical

12-20%8%20%8%22%8%Pension

EmployerEmployeeEmployerEmployeeEmployerEmployeeGuangzhouBeijingShanghai

　

*The ceiling for 2011 monthly salary base for contribution to pension fund is RMB10,890, which is three times of the average salary of employees of Guangdong province in 2010

Contribution Rates - applicable in 2011

Monthly salary base

• The adjusted monthly salary base includes not only basic salary but also bonuses, benefits, etc.

• However, it is capped at 300% of local average monthly salary

• In 2011, the cap was RMB 11,688 in Shanghai, RMB 12,603 in Beijing and RMB 13,623 in Guangzhou

New legislation

• Social Insurance Law (effective from 1 July 2011)• Interim Measures for the Participation in Social

Insurance by Expatriates Working in China (effective from 15 October 2011) ("Interim Measures")

Interim measures for Expatriates

Expatriates: non-Chinese nationals legally employed in China

"Legally employed In China" means:• Employment permit for foreigner; or• Certificate of foreign expert; or • Certificate of permanent foreign

correspondent; and • Residence certificates for foreigners; or• Permanent residence certificate for foreigners

and lawfully being employed in China

Expatriate enjoyment of benefits

If an expatriate leaves China before retirement age, he or she may elect:

1.to be refunded part of the pension fund (i.e. “the amount of individual account”); or2.to put the individual account on hold and continue contributing when he or she returns to China

Expatriate enjoyment of benefits

• If an expatriate leaves China after retirement age, he or she may continue to collect a pension by submitting proof of survivorship annually to social insurance agencies, or appearing at the social insurance agencies to prove his/her existence

• The balance of the individual account may be inherited

• The same principle applies to other social insurance payments that might be made to an expatriate after he or she has left China

Treaty exceptions

• If there is a treaty between China and the expatriate's home country on social insurance payment obligations, treaty terms will prevail

• Currently, only Germany and South Korea have a social insurance treaty with China

• Now that the Interim Measures are in place, more treaties are expected

Consequences of Non-Compliance

• Penalty for non-registration: – Fines for the employer (100% to 300% of

outstanding amount)– Fines for the employer’s management (RMB 500 to

RMB 3,000)

• Penalty for late payment/insufficient contribution:– 0.05% accrued on a daily basis– 100% to 300% of the outstanding amount

Consequences of Non-Compliance

• Notify banks to transfer unpaid contributions (with administrative order)

• Request employer to provide guarantee and sign agreement for delayed payment

• Seize the assets and auction the assets (with court order)

Challenges

• How to comply with the different local practices?• How expatriates enjoy the

unemployment/medical insurance?• Can expatriate’s account be transferable across

pooling regions?• Difficulties in practice

Questions & Answers

Eastern Promise


Close and lunch

Questions & Answers



Antony GoldHead of Retail+44 845 497 8204+44 776 888 [email protected]

Or email: [email protected]

