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China-based businesses are increasingly integral parts of global business plans
Since China's entry into the World Trade Organization (WTO) foreign investor interest and participation in the country's economy has grown to unprecedented levels. China now rivals the United States as the world's number one destination for foreign direct investment (FDI). China's implementation of its WTO commitments has significantly expanded foreign investors' ability to participate in the country's economy.
Moreover, recent years have seen a marked evolution in the way companies view their China-based operations in the context of their global business development strategies. Companies no longer view their China operations as a special case, somewhat removed and isolated from the rest of a company's international operations. Rather, China-based businesses are increasingly integral parts of global business plans.
 Combined with the new opportunities emerging, this shift in viewpoint is leading foreign investors to approach the question of how to structure operations in the country in a fundamentally new way.
Quite some studies and confidence indices ranked China as #1 of their list of most attractive investment regions; Beijing's hosting of the 2008 Olympics; Shanghai's hosting of the 2010 World Expo; WTO regulatory compliance; the massive consumer base; and the high GDP growth are just a few examples which led to this judgment. On the other hand, the bleaker news contains alarming warnings of widespread corruption; underdeveloped financial infrastructure and unfair local competition.
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Siegle, Hu & Partners helps to capitalize on these growth opportunities and to understand the complex business environment. We have been active in Greater China since the 1990s and has offices in Beijing, Dalian, Shanghai and Hong Kong/Guangzhou, Shanghai and Taipei. Our over 30 bilingual consultants have worked with clients from around the world seeking to penetrate in the Chinese market.
Siegle, Hu & Partners – China Offices |
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Siegle, Hu & Partners International provide clients with the expertise to define key success factors when entering the China marketplace, including: |
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Our team is managed as a single practice to provide seamless service to clients
All consultants with academic credentials and substantial Sino-foreign experience
Whether entering China or seeking to significantly expand existing operations, foreign companies must first make a fundamental strategic decision: partner with a local Chinese company or go it alone.
Each option poses unique challenges. Operating as a wholly foreign-owned venture (WFO) will require significant capital investment and a payback period longer than companies traditionally allow for. Acquiring existing assets may be a more effective approach to creating value, but assets are usually low quality and overvalued, and local government requirements can be extensive and therefore costly.
Operating in partnership with a local Chinese company requires less investment capital, and therefore is often the strategic investment of choice for companies new to the Chinese marketplace. Partnering in China generally takes two forms: |
- Equity joint venture
- Contract-based co-operative joint venture
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However, joint ventures in China present their own unique risks: partners who misuse funds, fail to abide by contractual obligations or engage in unconventional business practices.
Companies opting for the partnering model increase their likelihood of success by conducting an exhaustive due-diligence of potential partners that includes, but is not limited to, the following activities: |
- Ensure strategic fit and convergence of business objectives
- Make a realistic and quantified assessment of synergies created by the joint venture
- Develop clear "end game" and viable contingency plans
- Create partner contracts with provisions for international arbitration
- Obtain references for the integrity of the potential partner
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China is a world factory
50 percent of the world's cameras, 30 percent of the world's suitcases, 25 percent of the world's washing machines... all made in China. |
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China's growing importance as a global manufacturing hub is made possible by a large supply of low cost labor, favorable trade regulations, and a competitive currency. Foreign companies, recognizing these benefits, have invested more than $600 billion in China in the last 20 years. In 2002, China received a record $52.7 billion in foreign direct investment. In 2002, foreign manufacturers generated more than half of China's exports.
Companies expanding their global manufacturing network into China begin by addressing two core requirements: |
- Establish production capability
- Integrate the operation with the global manufacturing network
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Companies unfamiliar with China will likely opt to partner with a local manufacturer, in which case extensive due diligence on a select group of candidates is necessary. Other issues to be addressed include securing a local supply base, improving facilities, training employees and resolving local logistics challenges.
Integrating the local Chinese operation with the global manufacturing network often requires a reassessment of global operations. Should other productions facilities be closed and if so, which ones? What logistics and transportation support for the China operations will be needed? Are existing global distributions centers optimally positioned? These and other questions call for tailored answers to ensure a successful long-term operation. |
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