NAVIGATING CHINA

For NewZealand Businesses

???? CONTENTS
1 Introduction to Navigating China 1.1 Opportunities and challenges 1.2 Am I ready for China? 1.3 NewZealand-China trade and the Free Trade Agreement 1.4 China - an overview from culture to government 2 Researching the market 2.1 Research 2.2 Market visits 2.3 Business etiquette for visits

3 Entering the market 3.1 Typical models for entering the market Case Study: Commtest and Pan Pac 3.2 Choosing a location 3.3 Hong Kong and Taiwan as Wider China options 3.4 Protecting intellectual property Case Study: Hayes 3.5 Building relationships Case Study: Waikato University 3.6 Negotiations and meetings 3.7 Chinese culture and business 3.8 Dealing with government and local authorities 3.9 Using and managing consultants 3.10 Doing due diligence and avoiding scams 4 Selling in China 4.1 Using agents and distributors 4.2 Direct sales 4.3 Online sales 4.4 Marketing Case Study: Comvita, Air NewZealand and Digipost 4.5 Getting your products into China 5 6 Setting up a base in China 5.1 Finding premises 5.2 Human Resources 5.3 Accounting and auditing Navigating China 6.1 Getting paid and repatriating prots 6.2 Getting legal advice and resolving disputes 6.3 Taxes and tax breaks 6.4 Managing logistics 6.5 Day-to-day communications 6.6 Language and interpreters 6.7 Business ethics and corporate responsibility

7 Manufacturing in China 7.1 Pros and cons of manufacturing in China 7.2 Options of manufacturing in China Case Study: phil&teds 7.3 Finding a manufacturer and location Case Study: Atrax

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This booklet provides practical advice for kiwi businesses looking to set-up or expand in China. As much as possible, the advice comes from kiwi business people and experts with hands-on experience of doing business in China.

1. INTRODUCTION TO NAVIGATING CHINA

1.1

OPPORTUNITIES AND CHALLENGES

For NewZealands businesses, China represents both opportunities and fresh challenges. Geographically, China is 36 times the size of NewZealand, has a population over 300 times the size of ours and has a growth rate that sees the value of its economy double every seven years. The International Monetary Fund predicts China will overtake the USA in 2016 to become the worlds largest economy. However, China is still only a newly industrialised country. Chinas economic growth over the past 25 years is probably the largest and most sustained period of wealth creation in the history of the world. In 1800 China generated 25 percent of the worlds industrial output. By 1975 it had fallen to 1.5 percent. It is now on its way back to 25 percent. In 2010, China accounted for 19.8 percent of the worlds manufacturing output. The USA had 19.4 percent, making China the worlds largest manufacturing country. China has also arrived at an important threshold in terms of per capita income. It has passed the US$1,000 per head milestone considered critical by development economists. As Japan, South Korea, Taiwan, Singapore and Hong Kong have demonstrated, once the US$1,000 milestone is reached the transition to US$4,000$5,000 per head is comparatively easy. But experienced business people in China emphasise patience when doing business in China. Brendan OToole, Managing Partner of Summergate, a leading wine service provider in greater China, says while China is growing rapidly, businesses shouldnt lose sight of the long term: Its still very immature, very embryonic. The real prize to China is 30, 40, 50 years and beyond. The opportunities The opportunities arise from rapid economic growth in the worlds largest market and the availability of a cheap manufacturing base from which to sell to China and the world.

From a manufacturing perspective, China in the long run will be distinguished by its overall business strength and structure, including the huge investments made to ensure China has a modern and competitive manufacturing sector. NewZealand businesses need to be clear about whether they want to sell or manufacture in China. Long-term, China business strategies shouldnt be based on the availability of cheap labour this is disappearing as China becomes wealthier. In 2011 China had 115 US dollar billionaires more than any country other than the USA. There were just 15 in 2006 and none in 2002. A new generation of consumers is emerging in China they are young, well educated and familiar with non-Chinese cultures. This Y generation of 240 million, born between 1980 and 1990, is now the highest earning age group in the country and is looking for a new way of life. They typically live in the major cities on the Eastern seaboard of China and in particular in Beijing, Shanghai, Shenzhen and Guangzhou where GDP per person is now over US$10.000 but corresponds in Purchasing Power Parity terms to four times that amount.
KIWI EXPERIENCES BIG, GROWING FAST AND RAPIDLY CHANGING

If we capture 2 percent of the market, well generate $100 million in ve years. If were not there, were not truly global. Wayne Oxenham, Executive vice president hospital solutions, Orion Health It isnt a scary place if you take precautions. Avoid the negativity: China is the future. Sean Simpson, co-founder, LanzaTech If all the Chinese in China take one bite of a piece of lamb chop, they would clean out NewZealands entire sheep population in three days. Danny Chan, businessman and third generation NewZealand Chinese The size of this market astounds you. We ran a business in NewZealand and if we received orders of the magnitude of 20 to 50,000 square feet we were over the moon. Today, our average order placement with most of our customers

is somewhere between half a million and a million square feet. So this excites us, just the size and the magnitude of the market. Keith Stevens, former General Manager, Richina Pacic Ltds Ovine Garment Leather Division The way the economy is growing in China is really unprecedented, so its been a real challenge for them to keep up with legal, tax, intellectual property etcetera issues. Theyre doing a much better job than people give them credit for. The fact that they can even remotely keep pace with the rate of change is incredible. Scott Brown of RedFern Consulting What we have is a huge market that is extending and developing so quickly it is jumping certain technology groups. For instance, I often talk of the fact that I dont think the Chinese population knows what a land-line is because they simply jumped from no phone to the high quality electronics that we have available to us today. Doug Ducker, Managing Director of Pan Pac Forest Products The challenges Starting to do business in China is likely to be more costly and time consuming than in other markets. Challenges arise because of Chinas size, its gold rush style growth and the fact China has a very different business culture and environment from what we are used to in NewZealand and in other export markets. NewZealand and China are also markedly different in size, culture, politics, geography, history and economic structure. These issues can present challenges for companies looking to sell or invest in China which can only be overcome by thorough research, spending a lot of time in-market and following a focused business plan.

Much of the information available on China may appear contradictory. You need to see for yourself which advice is right for you. Take time to sit back and learn and understand the business culture, the people culture. Basically its about not rushing in trying to do things without understanding. Thats where people make mistakes. Its about learning and understanding China prior to getting here and once you are here. Jon Shearer, General Manager Fisher & Paykel Appliances, China From a distance China appears huge. The reality is that it is several large regional markets and numerous niche and micro-niche markets which helps to make China more accessible to NewZealand businesses. Differences between the size and focus of the two economies, rather than being an obstacle to doing business in China, often present opportunities for NewZealand businesses. The Chinese dairy market is typical of the mix of the opportunities and challenges facing NewZealand businesses. Chinese consumption of dairy products is just one fth of the international average, but is predicted to move more into line with the norm as incomes rise. It is estimated that if each Chinese person drinks half a kilogram of milk a day, the countrys dairy consumption would equal more than a third of the worlds total dairy production. Theres a twofold challenge for NewZealand companies wanting to take advantage of this opportunity. Firstly every other major dairy producer in the world is similarly focused, and secondly, the domestic Chinese dairy industry itself is growing rapidly. You should also not underestimate the size and quality of your competition in China. The governments pro-growth policies have produced a host of businesses pursuing each and every opportunity.

Note: This material has been designed to assist companies in the development of their own capability for the management of business opportunities in Chinas complex, diverse and fast changing business environment. It should not be used as the sole source of information for making decisions on selling to or investing in China. That can only be done by undertaking research on China tailored for your own companys situation and spending a lot of time in the market.

Other challenges include the uneven application of regulations, local protectionism, indirect subsidies to local industry such as low interest bank loans, intellectual property violations and the need to build closer relationships with business partners than would be usual in NewZealand. While there are unique difficulties in doing business in China, they are not as great as they sometimes seem from a distance. Companies already in China see problems as fewer in number and of lesser importance than those looking at China from back in NewZealand.
KIWI LESSONS NO INSTANT RICHES

The steps include: Commitment Developing the Chinese market can be costly in terms of time, money and resources. For example, if your company wants to be successful in China, senior managers will not get away with a single visit to the market. Success may only come after numerous visits. Product China is one of the toughest markets in the world. The opportunities are huge, but the rest of the world knows this as well. It is important to know your product and its marketing advantages in the Chinese market. Production You need to be condent that your product or service is sufficiently proven and developed to take to the Chinese market. Also if you are manufacturing in NewZealand you need to make sure you have the production capacity to meet market demands. If you are looking to manufacture in China you have to factor in the many hidden costs such as greater management overheads, inexible manufacturing schedules and quality management and cost issues. Marketing Marketing in China is not easy thanks to the varied culture and geography of the country, the sheer size of the population and country and differing levels of economic development. A one size ts all marketing strategy will not work. It is vital to have a strong marketing understanding. Selecting markets and setting pricing Within Chinas several large regional markets and many more niche and micro-niche markets, prices are also variable. You need to have done the research to validate both the potential and the investment. NZTE has produced a Guide to Export Pricing which includes sample costing sheets and other helpful advice.
KIWI LESSONS TARGET SPECIFIC SECTORS

Dont think you are going to get rich overnight. Keith Stevens, former General Manager, Richina Pacic Ltds Ovine Garment Leather Division The costs and trouble of entering China should not be underestimated. It is no good attempting to enter a market if the resources are not there to pay for a proper attempt and potentially to have to pull out early with the loss of money already spent. David Mahon, Managing Director, Mahon China Investment Management

1.2 AM I READY FOR CHINA?

Time and commitment China is a tough market for an initial foray into exporting or establishing a physical presence in market. It fails a number of tests regarding the advice of selecting easy markets rst its not close, it has language barriers and the business environment is often radically different from NewZealands. NewZealand companies with successful businesses in the Chinese market say getting started was time consuming and took a large commitment of their resources. Dont expect success to come quickly or easily.
KIWI LESSONS TAKE A LONG VIEW

We spent three years on an entry strategy and thought very carefully about the where, when and how of entry. David Percy, CEO, Pertronic Industries Take the long view. Dont expect success to come quickly or easily it is not that sort of market. Mark Templeton, former CEO, Actronic Technologies Are you ready to export to China? There are a number of steps you need to take to make sure you are ready for exporting to China. NewZealand Trade and Enterprise (NZTE) has outlined generic steps which companies interested in exporting should consider to help them assess whether they are ready for exporting to any market.

China has huge growth potential but NewZealand companies need to target specic sectors and nd the right partner. Mark Templeton, former CEO, Actronic Technologies Your China price may need to be higher than it is elsewhere as there are many ticket clippers after the importer. Mark Radburnd, Chief Financial Officer, Commtest Instruments Management and international sales management Exporting to China requires considerable commitment of management time and to be successful you will need to at least consider hiring managers familiar with the Chinese market. Does your company have the available management capacity which will be required to develop the Chinese market?

KIWI LESSONS LOCAL EXECUTION IS VITAL

You will need to visit China at least ve to eight times before you are accepted and taken seriously. I spent 18 months establishing relationships. Trevor Lock, Managing Director, Functional Nutraceuticals Local execution is vital. Sending expats to China, unless very experienced and bi-cultural, is not always effective. Richard Yan, Chairman and Chief Executive, Richina Pacic Finance As with other markets, breaking into China requires considerable funds (research, airfares, accommodation, advertising, trade fairs, sales promotion, new brochures, training of overseas sales agents etc). China is also full of hidden costs relating to language and cultural issues and the time you need to spend building relationships and intellectual property protection. Are you ready to set up in China? If you want to grow your business and have a long-term future in the Chinese market you need to have a local presence. This requires both deep pockets and reserves of patience as setting up in China involves a unique set of issues. It will also require a strong commitment to the China project from your head office back in NewZealand. As well as investing large sums of money (by some estimates companies need at least a NZ$1 million budget over two years to set up in China), senior managers have to be prepared to spend a lot of time ying between NewZealand and China.
KIWI LESSON THINGS HAPPEN FAST

first country to recognise China as a market economy first OECD country to start bilateral comprehensive FTA negotiations with China. NewZealands business ties with China date back to the early 19th century, starting with the seal skin trade to Guangzhou and later the arrival of Chinese migrants coming for the gold rush. Today China is NewZealands second largest bilateral trading partner, with total merchandise trade worth about NZ$11.6 billion in 2010. China is also a leading source of migrants, students and tourists for NewZealand. NewZealand only ranks as Chinas 46th largest market, down from 44 in 2002 (based on World Trade Atlas gures). Getting preferential access to the worlds fastest growing major economy through the FTA has the potential to deliver signicant gains to our exporters. Over the next two decades the FTA is expected to lift NewZealand exports to China by between 20 and 39 percent, over and above what would be the case without an agreement. In cash, that represents between $260 million and $400 million a year. The estimates from a joint study report by Chinas Ministry of Commerce and NewZealands Ministry of Foreign Affairs and Trade indicate Chinas gains over the same period are expected to be between US$40 million and $70 million. Productivity gains owing from the FTA are expected to make the agreement even more lucrative for NewZealand in percentage terms.

The lead time, the speed of development, the speed of construction, planning and execution is incredibly quick compared with NewZealand. Its forcing us to re-think our whole supply chain, how we respond to that and how we can actually capture some of this market. Its very different from anything that Ive experienced before. Doug Ducker, Managing Director of Pan Pac Forest Products

1.4 CHINA AN OVERVIEW FROM CULTURE TO GOVERNMENT

Government The Chinese Communist Party (CCP) has governed China since 1949 and its power extends to all levels of Chinese society. Businesses looking to set up in China will need to at least understand local political structures and perhaps have to work with party officials. While the realisation of Communism is the partys ultimate goal, it was the CCP that launched the economic and social reforms that set the country on its path of market-led economic revival. At the central government level, CCP and state structures are fused, with the leader of a ministry or commission also being the leader of the party body associated with that ministry. At the provincial or lower levels, the party and state heads are invariably separate, although the party head has a high state position and the state head has a high party position. The President is the Head of State and is elected by the National Peoples Congress (NPC) for a ve-year term. The Head of Government, the Premier, and the Cabinet are nominated by the President, subject to conrmation by the NPC.

1.3 NEWZEALAND-CHINA TRADE AND THE FREE TRADE AGREEMENT

NewZealand and NewZealanders are highly regarded in China. Chinese business people trust and respect Kiwis because of the value we put on building personal relationships and our straight forward attitude towards business. The Chinese and NewZealand governments also have a good working relationship. The most signicant example of this is the fact that China has pushed NewZealand to the forefront of its international trade relationships by making NewZealand the rst developed country to have a Free Trade Agreement (FTA) with China. NewZealand was also the: first country to start and finish World Trade Organisation negotiations with China

Members of the NPC are elected by municipal, regional, and provincial Peoples Congresses to serve ve-year terms. There are 22 provinces and four municipalities directly under central government control and ve autonomous regions. The day-to-day government is carried out by the State Council (elected by the NPC) and the Politburo (also known as the Standing Committee). The members of the State Council are elected by the NPC. Below the State Council and the Politburo are the ministries which often have very exact areas of responsibility. There are approximately 3,000 members or deputies representing every region of China. Culture For NewZealanders, aspects of the Chinese culture are familiar thanks to a large Chinese population in NewZealand and the vibrancy of the culture itself. At a basic level at least, we know about Chinese customs, language, music, arts and notably cuisine. But for many NewZealanders, the experience of China rsthand results in culture shock. The endless crowds, the lack of personal space, the often indifferent service and the apparently rude behaviour (pushing into queues and staring are common) come as a surprise. And once you are off the street there is a whole set of other cultural surprises. The ground rules of Chinese business culture are very different to those of the West. Business relationships are much more personal than in NewZealand, the principle of reciprocity is important and Chinese look for signs of respect for rank and seniority. The Chinese people take great pride in their culture and history. They have shared a common culture longer than any other group on Earth. The Chinese writing system, for example, dates back almost 4,000 years. The concept of being Chinese is a cultural concept, not one based on race. To speak and behave like the Chinese and accept their cultural values is to be Chinese. There are 56 known ethnic groups in China. The Han ethnic group is the largest, made up of about 1.3 billion people. The other ethnic groups account for about 100 million people. The largest minority groups are the Tibetans (Tibet Autonomous Region), Mongolians (Inner Mongolia Autonomous Region), Uighurs (Xinjiang Uighur Autonomous Region) and Zhuang (Guangxi Zhuang Autonomous Region). Throughout Chinese history, the dominant and inuential rulers and philosophers such as Confucius and Lao Zi (founder of Taoism) were of Han ethnicity, although the Yuan and Qing dynasties were begun by the Mongol and Man minorities. The Han culture, ethics and belief system have considerable inuence on other ethnic groups in China, including business culture and etiquette.

As a result, many minority groups have learned and adopted Han values and language. For example, the emperors of the Qing Dynasty (belonging to the Man ethnic minority group from the north east of China) ordered all their officials to learn not only Midland (or Central Country) culture but also the Beijing dialect. The combination of the Man and Beijing dialects became whats known today as Chinese Mandarin language. Confucius was an esteemed Chinese thinker and social philosopher whose teachings and philosophy have deeply inuenced Chinese thought and life. These values are broken down into: Li (ritual): includes propriety, etiquette, politeness, a system of norms Xiao (filial devotion): respect and care for parents, elderly Yi (relationship and sacrifice): comradeship, ties of friendship Xin (credibility): honesty and trustworthiness Jun (humanity towards others): scholarship, nobility, loyalty and being helpful Zhong (devotion): showing loyalty to the state or senior people or businesses/companies you work with. Confucianism focuses on individuals governing themselves rst. It promotes the idea that once everyone has a high level of moral values, then an orderly society will follow. History China has a long and illustrious history, and like their culture, the Chinese take great pride in their countrys achievements. Until its decline in the mid 19th century, China was a world power. The Chinese invented the compass, gunpowder, moveable type printing and papermaking. They were also the rst to document astronomical phenomena such as comets, sunspots and new stars and they kept the worlds most detailed and earliest astronomical records. Before Europes industrial revolution, Chinas agriculture was more advanced and productive than the Wests and its craftsmen were at least the equal of Europes. China is one of the cradles of the human race with the earliest known human in China believed to have lived in the region around 60,000 BC. Recorded Chinese history began about 3,600 years ago and the imperial dynastic system of government was established as early as 221 BC. Although dynasties were overturned, the system survived until 1911. By the mid 19th century China had fallen into serious decline thanks to a combination of military defeats (by countries looking to open China up) and corrupt and incompetent feudal rule. What followed was a period of chaos which resulted in the collapse of the dynastic system, the establishment of a republic and subsequent civil war. At the end of the civil war in 1949, the Communist Peoples Republic of China was created.

For China, and the rest of the world, one of the most signicant events in the countrys recent history was the 11th National Congress held in 1977 which set China on the path to its current economic boom. The importance of this event goes beyond its economic impact. The reforms started in 1977 reect a sea change in Chinas attitude to the world with China declaring it wanted to prosper and return to its leading role in international affairs. Language About one-fth of the world speaks some form of Chinese, but there are huge regional variations in spoken Chinese, similar to the differences in the Romance languages that originated from Latin. There are also hundreds of local dialects. The Chinese Government is committed to standardising communication in China around the official spoken language, Mandarin, and the already accepted standard written language. A 2007 survey indicated that a little more than half the Chinese population can effectively speak Mandarin, but it is more widely used in urban areas and among the young. Mandarin, based on the Beijing dialect, is taught in all schools. Other common Chinese languages include Wu (spoken in Shanghai), Cantonese (spoken in the south-eastern part of China, especially in the Guangdong province) and Hakka (spoken in the southern provinces, including Guangdong). Most Chinese are bilingual, speaking Mandarin and their local language or dialect. English is also becoming increasingly common. China is set to have more speakers of English as a second language than there are people speaking English as their rst. The simplied Chinese character system is predominately used in mainland China and increasingly outside of the mainland. The traditional written form sometimes called complicated is still used in Singapore, Taiwan and Hong Kong. Economy Chinas economic growth has averaged nearly 10 percent three times the world rate over the past 25 years, turning a once stagnant economy into one of the most powerful economic forces of the 21st century. This growth, when combined with the worlds biggest population, means China is already the worlds second largest economy. Also the OECD has predicted that Chinas average near double-digit growth will continue for some time, lifting Chinese incomes and potentially creating the worlds largest market. Chinas growth is also having an impact on world markets. In 1979 China had less than 1 percent of the international goods trade which by 2005 had risen to 6.4 percent. In 2010 the country was the worlds second largest trading nation after the USA.

China has followed a development path different from other Asian economies like Japan and Korea. It has hung onto its low-skilled labour-intensive manufacturing sectors while at the same time developing intermediate technologies and high-tech knowledge intensive areas. By 2004 China had become the worlds leading exporter of information and communications technology products. Demand among Chinese for consumer products and food and beverages has grown along with the economy and the emergence of an urban middle class. But it needs to be remembered that at a national level China is still only a newly industrialised country. Its average per capita income is around US$4,380. Income distribution is very uneven with urban centres such as Beijing having a per capita income more than double the average. This is expected to change dramatically over the next decade as more Chinese begin to enjoy the fruits of the countrys economic boom. The Chinese Government still plays a direct hand in the economy through its ve-year programmes that set economic goals, strategies and targets. But private businesses produce more than half of GDP and most of Chinas exports. They also create most new jobs. Currency The Chinese currency is known as the Renminbi (RMB), literally the peoples currency. RMB units are split into yuan (roughly equivalent to the use of the term dollar), jiao (10 of which make up a yuan) and fen (10 of which make up a jiao). The yuan comes in notes of 100, 50, 20, 10, 5 and 1 (there is also a 1 yuan coin). Jiao come in both notes of 5, 2 and 1 and coins of the same amount. Fen are generally seen as aluminium alloy coins of 5, 2 and 1 fen. Legal system Laws and regulations in China tend to be broader than NewZealands, giving Chinas courts and officials who often have no legal education more discretion and exibility in applying laws than we are used to. This gives rise to difficulties in determining what exactly is legal and often results in what can be seen as inconsistent judgments and rulings. While having to deal with the Chinese legal system can be frustrating, the situation is improving. China is committed to developing a society ruled by law and this is freeing up the legal system from CCP control. It has staged a number of anti-corruption drives. Giving and taking bribes can lead to life in prison and in the most serious cases the death sentence.

PRC GOVERNMENT STRUCTURE

CENTRAL COMMITTEE OF THE CHINESE COMMUNIST PARTY
General Secretary Central Military Commission Chair (Politburo Standing Committee Members)

NATIONAL PEOPLES CONGRESS Standing Committee

Chair Vice Chairs Secretary General

CHINESE PEOPLES POLITICAL CONSULTATIVE CONFERENCE

Chair

NPC Committees
Directors Agriculture and Rural President Vice President Education, Science, Culture, and Health Environment and Resource Conservation Finance and Economics Foreign Affairs Internal Affairs Administration Legal Affairs Nationalities Overseas Chinese Affairs

Supreme Peoples Court

President

Supreme Peoples Procuratorate

President

STATE COUNCIL
Premier Vice Premiers State Councillors Secretary General Offices of the State Council* Foreign Affairs Office Legislative Affairs Office

MINISTRIES AND MINISTRY-LEVEL ORGANISATIONS

Commission for Science, Technology, and Industry for National Defense Ministry of Culture Ministry of Justice Ministry of Railways State Auditing Administration Ministry of Agriculture Ministry of Education Ministry of Labor and Social Security Ministry of Science and Technology National Development and Reform Commission Ministry of Civil Affairs Ministry of Finance Ministry of Land and Natural Resources Ministry of State Security State Ethnic Affairs Commission Ministry of Commerce Ministry of Foreign Affairs Ministry of National Defense Ministry of Supervision State Population and Family Planning Commission Ministry of Communications Ministry of Health Ministry of Personnel Ministry of Water Resources Ministry of Construction Ministry of Information Industry Ministry of Public Security Peoples Bank of China Administration of Quality Supervision, Inspection, and Quarantine China Banking Regulatory Commission China Insurance Regulatory Commission China Securities Regulatory Commission General Administration of Press and Publications State Administration for Industry and Commerce State Asset Supervision and Administration Commission State Environmental Protection Administration

OTHER KEY GOVERNMENT AGENCIES*

China Post** National Tourism Administration State Electricity Regulatory Commission Development Research Center of the State Council State Administration of Foreign Exchange^ State Forestry Administration General Administration of Civil Aviation of China (CAAC) State Administration of Radio, Film, and Television State Intellectual Property Office General Administration of Customs State Administration of Taxation State Sports General Administration National Bureau of Statistics State Administration for Religious Affairs Xinhua News Agency State Food and Drug Administration

Sources: US-China Business Council les, China Directory 2004 * ** ^ These listings are not meant to be comprehensive Under the authority of MII Not included in the list of 28 ministry-level bodies released at the 2003 National Peoples Congress Reports to PBOC

Telecommunications Chinas telecommunications services are an excellent example of the size, complexity and potential of the country. In 2002 China became the worlds single largest telecom market. However, much of the population has poor or no access to phones or the internet. In 2010, 63 percent of Chinese had a mobile phone subscription compared with 110 subscriptions per 100 for NewZealanders. For the internet, China had 34 users per 100 people against 80 per 100 in NewZealand. But China is catching up fast. For example, China experienced a 337 percent increase in broadband subscribers between 2005 and 2010, to reach 163 million. In 2008 China surpassed the USA in number of broadband subscriptions. Subscribers are expected to increase to 271 million by 2016. However, telecommunications services again reect the urban-rural divide with service levels in cities such as Beijing, Shanghai, Guangzhou and Shenzhen similar to those in Western Europe or North America, while in rural areas they can be poor to non-existent. Population Keeping Chinas population growth down is a fundamental aim of the Chinese Government. The sheer number of people, and their demographics (China too has a baby boom population), is putting unsustainable pressure on the environment and the countrys resources. In 1949 when the Peoples Republic of China was founded, China had a population of 540 million 30 years later thanks to increased fertility and life expectancy, it had grown to more than 800 million. In 2011 the population was an estimated 1.34 billion, about 20 percent of the earths population, mostly concentrated in the eastern parts of the country, especially near to the coast. Within the next three decades, Chinas population is expected to increase by another 260 million. Future population growth will not be the result of high fertility the governments one child policy has seen the average number of births fall below the population replacement rate but the upshot of the crowd of young adults of reproductive age. Their number will continue to increase until 2015. Like Western countries, the number of elderly people in China will also leap over the next three decades, but the problem is starker in China. Declining birthrates and improved longevity mean Chinas population is aging at one of the fastest rates ever recorded, according to the Population Reference Bureau. Government gures show 119 boys are born for every 100 girls, which indicates that about 40 million Chinese men are destined for bachelorhood by 2020.

Religion Religious life in China is complicated by Western standards. Though Chinese Government gures suggest that less than 10 percent of the population practice a religion, a large percentage follows, to at least some degree, a religion or belief. Many people also adhere to more than one teaching. Chinese religion consists of four main traditions: Chinese folk religion, Confucianism, Taoism and Buddhism. While most Chinese are not strongly religious, these often interconnected traditions still have a grip on the way they view the world. This can come through in business negotiations. For example, Chinese understanding of the paradoxical balance of opposites that underpins yin and yang often will push them to look to compromise rather than take a clear cut option. The practice of these traditions is much more common in rural areas and among the old, but even young Chinese with a Western outlook will acknowledge, for example, the Taoist doctrine of yin and yang and Confucianisms need to revere the elderly. While religious tolerance is embedded in the Chinese constitution, the government restricts religious practices outside officially recognised organisations. Time zones Despite Chinas geographical width it spans ve time zones the whole of China operates to a single standard time (Greenwich Mean Time plus eight hours) all year round. The standard time is Beijing time which is also observed in Hong Kong. People in the far west of China have had to adapt to this, often following later work schedules so they dont have to commute to work two hours before dawn. During NewZealand daylight saving time China is ve hours behind NewZealand; for the rest of the year it is four hours behind. There is no daylight saving in China. Climate Due to its vast size, China has a huge range of climatic conditions. In the south, for example Guangzhou and the surrounding Guangdong province, April to September is hot and wet. December and January can be surprisingly cold, down to zero for short periods. Spring and autumn are mild, though they are often wet. Around Shanghai and the central region it is hot and humid from April to October. Winters can be cold and wet and again spring and autumn have conditions between the two extremes. In the north, for instance Beijing, average temperatures range from 19 to 40 degrees centigrade between April and September. It is also wet and humid. In winter its generally dry and sunny from December through to February the average temperature rarely rises above freezing. In the northern provinces it can drop as low as 20 to 40 degrees celcius below zero.

Geography China is the worlds fourth largest country after Russia, Canada and the USA with an area of about 9.6 million square kilometres. East to west it measures over 5,200 kilometres and from north to south over 5,500 kilometres. Its geography is highly diverse, with hills, plains, and river deltas in the east and deserts, high plateaus and mountains in the west. Two-thirds of the country is covered by mountains, hills and plateaus and of the worlds 12 highest peaks, China has seven. Chinas two major rivers, the Yellow and the Yangtze, both in the southeast, are the focus of much of Chinas population growth and agriculture. Hong Kong And Macau Hong Kong and Macau are Special Administrative Regions (SARs) of the Peoples Republic of China. The one country, two systems agreement between Beijing and Hong Kong extends to at least 2047. Under the agreement, Hong Kongs Chief Executive and legislature are able to make independent decisions for Hong Kong. Hong Kong has its own currency, an independent legal system and separate customs territory. Macaus constitution says Macaus social and economic system, lifestyle, rights and freedoms are to remain unchanged till at least 2049. Like Hong Kong, Macaus one country, two systems agreement provides a high degree of autonomy. Macau also maintains its own separate currency, legal system and customs territory. Taiwan The status of Taiwan is a sensitive issue among Chinese officials and people. The Peoples Republic of China (PRC) considers Taiwan to be an inalienable part of China and is sensitive about any comments or actions that undermine its One China principle and the eventual peaceful reunication of mainland China and the offshore islands that make up Taiwan. For example, the PRC Government will not have any dealings with another government unless it agrees and adheres to the One China principle. Note on ags: when producing material on doing business in China, do not include a Taiwan ag in any of the material. Maps and the naming of maps can also be a problem. Because of Cold War politics, NewZealand did not recognise the PRC until 1972. As part of a joint recognition communiqu, NewZealand made a commitment to China to have no official dealings with Taiwan. However, in NewZealands view this does not stop it from maintaining economic and cultural ties with Taiwan. The PRC does the same. The origins of the standoff (and the depth of feeling) date back to the civil war that ended in 1949 with the Kuomintang

Nationalist Government defeated by the communists and forced to retreat to Taiwan. Environment Chinas rapid economic growth and urbanisation have driven high levels of pollution. China is now the worlds largest source of carbon dioxide emissions. In 2009 20 percent of Chinese cities surveyed by Chinas State Environmental Protection Administration failed to meet Chinas national air quality standards. Acid rain pollution is still relatively heavy. Around a quarter of Chinas urban sewage in the cities went untreated. It is estimated that China has lost 20 percent of its agricultural land since 1949 due to a combination of soil erosion, urbanisation, economic development and desertication. Chinas 12th ve-year plan charts the direction of economic and social development for 20112015. Among its central themes are modernisation and environmental protection. The government plans to promote seven sectors to improve energy efficiency and sustainable development. Key ones are new generation information technology, new energy and high-end equipment manufacturing, as well as biotechnology, new materials, new energy vehicles and environmentally friendly technologies. These sectors are expected to collectively grow more than 20 percent during the 12th ve-year plan. Travel A huge investment in transportation infrastructure is rapidly bringing large parts of Chinas road, rail and air networks up to standards we are used to in NewZealand. A massive road building programme is underway. Between 2005 and 2010 the length of motorways grew by 27,000 kilometres, increasing the total length to 68,000 kilometres. However, these roads are rapidly being lled. In 2009, China leap-frogged the USA to become the worlds largest car market. In 2010 13.8 million new passenger vehicles were sold. The inequality of modern China is also apparent in roading. In many rural remote areas roads are little more than mud tracks. Chinese roads are among the most dangerous in the world by some reports they are 10 times more lethal than those of developed countries. The explosion in car ownership (and in pollution) has driven the Chinese Government to heavily invest in bus and rail networks. The regular and cheap train services are the standard way for Chinese to get around, though they are often slow. Comfort and speed is better on services between main cities. There are now numerous domestic airlines in China. Most have invested heavily in new aircraft and improving services and prices are coming down from resulting competition.

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2. RESEARCHING THE MARKET

2.1 RESEARCH
Researching the market Comprehensive research is important when preparing for successful entry into China because of unique features of the Chinese market, including: geographical and cultural complexity size and regional variations the speed with which the market evolves rapidly changing rules, regulations and focus of enforcement authorities the obscurity of consumer information and regulations poor public information to help understanding of processes and rules lack of public data bases uneven roll out of compliance with, and enforcement of, World Trade Organisation rules. Trying to interpret in NewZealand what information is publicly available will almost inevitably lead to wrong conclusions. How to research Base your business plan on research When you are doing research on China you need to be focused on the needs of the Chinese market, not your own companys needs. David Mahon, Managing Director of Mahon China Investment Management, says too many businesses misguidedly see China as a market that will t into their product and sales plans. The most successful entrants will analyse China, note the gaps and market forces, and modify their plans and their products to take advantage of the appropriate level of demand. Doing desk research Undertake desk research without leaving NewZealand by using the internet, China-based researchers and the resources of NZTE. This can give you a good picture of market opportunities ahead of a decision to commit to China. However, information available on the web on China can only get you so far it is often out of date, misleading and wrong, or contradictory when read alone and out of context.

At an early stage you will need to commission your own professional China-based research and you will also need to visit the market yourself many times to personally conrm research ndings and establish crucial relationships. For information on market visits see the Researching the Market Market visits section. Through its network in China, NZTE can help NewZealand companies. NZTE has ve offices in mainland China Beijing, Shanghai, Guangzhou, Shenzhen and Qingdao. NZTE also has sector proles on a number of sectors in China. Contact your NZTE client manager or NZTE for more information. Getting help There are a range of research organisations in China including the big international professional and accounting rms through to specialist rms operated by expatriates and Chinese nationals. Contact NZTE to get a list of these organisations as well as some based in NewZealand. You should do some due diligence on prospective consultants and specialists you are considering hiring. Companies should consider research based on three levels as outlined in the diagram. The rst level is the basis for the development of this material more generic, to assist companies develop a organisational approach and understanding towards developing a China strategy. The second level starts to narrow down the research needs. This research can be done by companies independently. There are suggestions in this publication to enable companies to get this process started. The third level is where a company has determined a specic course of action and contracts specialists such as lawyers, tax specialists and marketing specialists to conduct research on their behalf.

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RESEARCH PROCESS
Level 1: Overview of what companies need to consider when developing a China strategy. Level 2: Company research programme: internet links, secondary research, reference material. Level 3: Primary research, contract research with specialists: e.g. IP, Tax, M&A.

KIWI LESSONS RESEARCH, RESEARCH, RESEARCH

A lot of the information is contradictory, so you need somebody with experience in China to give you that information in context. Dont try and do it alone. Get good advisors lawyers etc and talk to everyone you can who has been there [in China] or is here. Go to China and draw on the worlds biggest pool of Chinese commercial talent. David Mahon, Managing Director, Mahon China Investment Management Do your homework thoroughly and understand the numbers your expenses and costs, the prices in Renminbi, exchange rates, tariffs and taxes, salary and wage costs, commissions, running costs and transport. Consider your own R&D and IP costs imbedded in your product and how the loss of your IP would impact on your business. Trevor Lock, Managing Director, Functional Nutraceuticals As China changes, it is more useful for businesses to get advice on the specics involved in any situation rather than on generics or basics. Richard Yan, Chairman and Chief Executive, Richina Pacic Research an entry strategy that will deliver your desired outcomes before committing major funds and check out your potential partners carefully. Mark Templeton, former CEO, Actronic
KIWI LESSON BUT YOULL NEVER GET ALL THE ANSWERS

Dont wait until you have all the answers you never will! There are many answers I am still hunting. Kevin Maurice, Managing Director, Atrax
KEY LEARNINGS

Tap into the experience and knowledge of NewZealand China veterans. Usually the best research comes from China itself. Evaluate all research on the basis of who said it, when they said it and what part of China they are referring to.

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2.2 MARKET VISITS

Visiting the market Rather than read 10,000 pages of a book, it is better to walk 10,000 miles. (Chinese proverb) After doing as much research as possible in NewZealand, you will need to visit China to conrm the results of your research, develop a deeper understanding of potential markets, establish relationships and eventually negotiate contracts and agreements. Business visits to China require patience, understanding and commitment. Not only are you going to have to go [to China] once, you are going to have to go up there 30 times. So if you cant afford to go once, forget it. Rod MacKenzie, Regional Director, China, NewZealand Trade and Enterprise Kiwi oasis in Shanghai If you are visiting Shanghai on business, consider using NZTEs NewZealand Central (NZC) as a temporary office or a venue for events. NZC located in the upbeat Xintiandi district, is a practical, affordable and professional platform to help Kiwi businesses get started or expand in China. There are packages for both frequent and casual visitors. If you join as a member you can get use of a convenient short-term office location that includes hot desks, internet access, business facilities and a business lounge.
KIWI LESSON ALLOW TIME

The types of business visa are: a three-month single entry visa valid from date of issue double entry visa which is valid for two visits within three months of issue six month multiple entry visa which is valid for six months after issue. Visas are required to transit China to territories such as Tibet. You should allow three weeks for business visas to be processed. The official 10 working days from receipt of application and invitation letter is getting very tight with the volume of applications. For more information contact the Embassy of the Peoples Republic of China in Wellington or the Consulate General of the Peoples Republic of China in Auckland. Consular Section, Embassy of the Peoples Republic of China Address: 26 Glenmore Street, Wellington or PO Box 17257, Karori, Wellington, NewZealand Tel: 04 472 1382 Fax: 04 474 9632 Email: visa@chinaembassy.org.nz Consulate General of the Peoples Republic of China Address: 588 Great South Road, Greenlane, Auckland, NewZealand or PO Box 17123, Greenlane, Auckland, NewZealand Tel: 09 525 1785 Fax: 09 525 0733 Visa application forms can also be obtained from the Embassy of the Peoples Republic of Chinas website. What will it cost? Compared with visits to Western markets, your time in China will be relatively cheap, though some costs in the major cities approach those youd expect to pay in London or New York. This is particularly true for big ticket items such as accommodation and domestic air travel, while costs such as food, drink and taxis are lower. Your major costs are likely to include: Airfares Air NewZealand ies direct between Auckland to Shanghai and Auckland to Beijing. China Southern launched its daily ight from Auckland to Guangzhou in November 2011. Accommodation Rates vary according to the time of the year and room availability. Prices for a good 4-star hotel in Guangzhou will typically start at about NZ$110 a night, in Beijing NZ$170 and Shanghai and Shenzhen NZ$200. In second-tier cities, you can expect to pay from NZ$90 a night for a 4-star hotel. A service charge of 15 percent, including room and food, is charged at all 4 and 5-star hotels. Be aware of when you travel as major events in China will have a huge impact on pricing. Events such as the Canton

Whereas a business trip would take one day in Australia or the UK, you should allow three days in China. You cannot just put your agenda on the board and move it along. Dave Foreman, General Manager International, Vitaco
KIWI LESSON SHOW YOUR FACE

People like to see Kiwi faces. It shows your commitment to the market. Vivian Zhang, Chinese businesswoman Making the most of your visits Visa requirements A business visa is recommended for travel to China. In most cases for a business visa you will need a letter of invitation from a Chinese company. If you are going to be a regular visitor to China, it will pay to have a look at getting an APEC Business Travel Card which provides accredited business people with streamlined access to participating APEC countries (including China). Go to www.dol.govt.nz to apply for the APEC card. Benets include: express immigration clearance through special APEC lanes on arrival and departure no requirement to apply for visas or entry permits multiple entry to participating countries for a stay of up to 90 days on each visit.

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Fair in Guangzhou and the F1 motor racing in Shanghai can double and triple hotel costs, if you can manage to get a booking at all. Transport Domestic air travel this is not expensive by NewZealand standards. For example, a return ight between Shanghai and Beijing can cost NZ$570. Tickets are easy to get if booked well in advance. It is possible to book domestic travel from NewZealand. If booked in China it can be done from the China Travel Service desk at many major hotels. Domestic air tickets can be bought and or conrmed in the larger hotels. Taxis these are cheap by NewZealand standards. Flag falls for taxis in Beijing, Guangzhou and Shanghai range between 10 RMB in Guangzhou to up to 14 RMB in Shanghai. Rates per kilometre range from 2 RMB to 3.9 RMB. Getting from Beijing airport to the central city will typically cost NZ$20-$25; the 75-minute journey from Shanghais Pudong International Airport to the city costs between NZ$27 and NZ$33; and the airport to city run in Guangzhou NZ$27-$40. Taxi costs are similar in second and third tier cities. If your meeting is not in the city centre, its best to have the taxi wait and pay for example 200 RMB an hour or 600 RMB per day. Taxis can be hired with the help of your hotel. Some drivers will still want to charge you a xed fee which is often above the metered charge so it is recommended you always use the meter. Note: most taxis do not have rear seat belts in China. Metro the underground Metros are cheap, fast alternatives to taxis in Beijing, Shanghai and Guangzhou. At the most a single journey will cost you about NZ$3. Buses these are even cheaper than the Metros but it is not advisable to travel by bus if you want to arrive at a meeting on time and relaxed. A good piece of advice is to hire a driver on your rst visit to China. This will help you avoid a lot of stress. Interpreters A qualied interpreter (as opposed to a student) will cost NZ$900-$1,200 a day. They are more expensive (and usually better) in the main cities. Food The cost of eating out ranges from very cheap (less than NZ$5 per person for a meal in a basic restaurant, but little English will be spoken) through to prices youd expect to pay in a top class restaurant in NewZealand. A Big Mac, medium fries and medium drink at a McDonalds in Beijing will set you back about NZ$3.30. In the bigger cities you can expect to pay NZ$20-$30 for a decent meal. Beverage prices (approximate): small bottle of water: 3 RMB small bottle of beer from a corner shop: 10 RMB draught pint of beer in a bar: 40-75 RMB.

Time differences between China and NewZealand NewZealand is four hours earlier than Beijing time, or ve hours earlier during NewZealand daylight saving. There is no daylight saving in China. Public holidays and business hours When planning your business trip to China, avoid arranging business meetings before, during and after Chinese festivals and public holidays. Many businesses close for festivals and holidays for up to two weeks. Its also very difficult to book transportation or accommodation during these times. Visiting China for business during public holidays or the weeks before and after public holidays is not recommended. Major Chinese public holidays are: New Years Day 1 January (two-day holiday which can extend to 5 days) Spring Festival, ie Chinese New Year, the date varies from year to year, usually falling in late January or early/midFebruary (one-day holiday) May Day 1 May (one-day holiday) Dragon Boat Festival early June Mid-Autumn Festival mid-September National Day 1 October (three-day holiday) It is a common practice for government departments and private companies to borrow weekends to make two or three-day holidays into two-week long holidays. Government offices are usually open Monday to Friday between 8am9am, close for two hours around midday and then re-open until 5pm or 6pm. Private companies are usually open for longer. Make contacts before you leave To get the most of your visit you need to be well prepared before you arrive so you can hit the ground running. Dont waste valuable time in China doing what you can do back in NewZealand. Make sure as many of your meetings as possible are prearranged, you have addresses for the meetings and you have information on the people you are meeting with. It is also recommended that you reconrm meetings a day in advance. Get a map to the company or office you are visiting if at all possible. The minimum is the address written in Chinese characters for the driver. There are organisations and consultants who can tailor a visit to China for you, including organising meetings with appropriate executives and officials. Contact NZTE for more information. Generally speaking, Chinese people prefer to be formally introduced to someone new, preferably through a go-between, especially when making rst contact.

Tips Most people never tip as a service fee is often included in the bill.

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However, cold calling (for self introduction) is becoming more and more common. If you decide to make a cold call, its useful to: first contact the company in writing both in Chinese and English make contact by email, but if youre unsure if your message was received send a fax; in China internet connections are not always reliable outline the reason for wanting to meet provide information about your company include names and job titles of your staff (the Chinese will likely try and provide equally titled staff for the meeting) get someone to call and check they have the information and to conrm the appointment be flexible and dont be surprised if last minute changes take place or meetings are cancelled Even if you set up a meeting, there is always the chance that the person who has agreed to meet with you fails to show. This is often because their manager or a government official has instructed their presence at a conicting event. So it is not meant as an insult, but regardless it can be both upsetting and frustrating. Dont turn up on someones door step unannounced and expect to get a meeting. If you are visiting China for the rst time, it can pay to acclimatise for a day or two to get a feel for the country before getting down to serious business. One good way to get insight into the Chinese business mentality is to visit local markets and do some bargaining. Maintaining your personal safety China is generally a very safe place to visit provided you take some sensible precautions. NewZealanders who have been to China suggest the following: Driving in China is not for the faint hearted. Youll need a Chinese drivers license to drive in China an international drivers license is not enough. Motorists drive on the right-hand-side of the road. Its not difficult to hire a car with a driver and it is not too expensive. Be careful when crossing roads. Never assume you have the right of way. Crossing roads with the locals is a sensible thing to do. When taking taxis, its a good idea to provide your taxi driver with maps and details in Chinese characters not just Pinyin (Chinese phonetics). Try not to make yourself a crime target by visibly displaying wealth. Carry RMB in small denominations. Be wary of unsolicited approaches from people in tourist areas inviting you to speak English with them over tea or to view local art. These are often scams. Leave a copy of your itinerary with someone you trust at home and in China. Its a good idea to log in as a visitor with the NewZealand Ministry of Foreign Affairs and Trade website. That way, if something goes wrong someone knows where you are. Dont leave your bags unattended. Keep your passport in a safe place. Carry a Chinese phrase book.

Contact details and emergency services numbers Police/fire/traffic accidents dial 110 Ambulance dial 120 NewZealand Embassy/Consulate General contact details: NewZealand Embassy, Beijing 1 Ritan Dongerjie Chaoyang District Beijing 100600 Peoples Republic of China Tel: +86 10 8532 7080 Fax: +86 10 6532 5261 Email: beijing.enquiries@mft.net.nz Office hours: MonFri 08301700hrs NewZealand Consulate General, Shanghai Room 16051607A, The Centre 989 Chang Le Road Shanghai 200031 Peoples Republic of China Tel: +86 21 5407 5777 Fax: +86 21 5407 5907 E-mail: shanghai.enquiries@mft.net.nz Office hours: MonFri 08301700hrs NewZealand Consulate General, Guangzhou Room 1055, China Hotel Office Tower Liuhua Road Guangzhou 510015 Peoples Republic of China Tel: +86 20 8667 0253 Fax: +86 20 8666 6420 E-mail: guangzhou@nzte.govt.nz Office hours: MonFri 08301700hrs NZTE Qingdao Room 912, Crowne Plaza Qingdao, 76 Xiang Gang Zhong Lu Qingdao 266071 Peoples Republic of China Tel: +86 532 8572 1396 Fax: +86 532 8572 3780 Email: qingdao@nzte.govt.nz Office hours: MonFri 08301700hrs NZTE Shenzhen Room 535, Podium Building, Caju Square 5 Guihua Road, Futian Free Trade Zone Shenzhen 518038 Peoples Republic of China Tel: +86 755 3391 1656 Fax: +86 755 3391 1657
KEY LEARNINGS

A well-planned trip is more likely to result in successful business. Before leaving for China, arrange contacts and appointments. If possible, avoid travelling or trying to conduct business on public holidays. Maintain contact with NZTE or the NewZealand mission in China.

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2.3 BUSINESS ETIQUETTE FOR VISITS

Make the most of your visit and avoid cultural gaffes At times cultural differences and protocols in China may seem overwhelming. Chinas larger cities and southern and coastal regions are becoming more in tune with international business practices. Theres also a new generation of internationally educated Chinese coming through. However, most people will largely conform to the Chinese way of doing things. This affects the way you establish relationships, behave at meetings and dinners and even how you hand out your business card. To get the most out of your visits to China it helps to understand the differences and avoid giving offence. Through all this, the most important thing is to be exible and be yourself. Enjoy the opportunity of being a NewZealander doing business in China.
KEY LEARNINGS

Presenting your delegation Tips: When meeting your Chinese hosts, the most senior person in your delegation should be rst in the reception line. Others should follow in order of seniority. Sort this out before the meeting. Your interpreter should stay close to the head of the line to introduce your most senior person. Those greeted should move down the line shaking hands, without pausing too long for conversation. Handshaking Tips: Shaking hands is now the standard form of greeting in China. Always shake hands with the most senior person first. A short, not too firm handshake is the customary start to a business meeting. If you have an established relationship with someone it is not uncommon to hold a handshake for longer, or to cover the handshake with your other hand. Nor is it uncommon to sit close to someone with whom you have an established relationship. Normally a man would wait for a woman to extend her hand rst. Addressing people Tips: You should address and acknowledge the most senior person rst in meetings. In China, family names come first followed by given names. In business/formal settings, people normally address each other by their family name or title, such as Mr Chen, or Director Huang. In business/formal settings, dont call someone by just their rst name unless specically asked or if you are long-time friends. A married Chinese woman usually retains her maiden name. It is common to link names with positions so you would call Mr Chen Director Chen, or Director. This shows respect for their social status. It is customary to address deputies by skipping the word deputy for example, Deputy Chief would just be called Chief unless their superiors are present. Chinese who frequently deal with foreigners or travel abroad on business may adopt an English rst name. They may also put their family name after their rst names on business cards. If in doubt, simply ask What shall I call you?. Using business name cards and company proles Tips: Business cards (called mingpian) are essential so have a good supply. Have your business cards printed in English on one side and Chinese on the other. Before your cards are printed check that you can use your company name in China. For more information see the Entering the Market Protecting IP section. Translate your name, job title, company name, special qualications and your professional title (e.g. Dr, Professor etc.) on your business card. There is no need to translate the address into Chinese.

Spend time understanding Chinese culture and etiquette this is more important than knowing the language. Plan as much as possible in advance. Find out who will be at the meetings, including their positions and names. Also nd out as much as possible about the company or agency you will be dealing with. Be aware that traffic conditions can delay you (more so than in NewZealand). As a general rule, formal dress is a sign of respect. It is also the safest option if youre not sure what to wear. Understand the protocols Greeting ceremonies Tips: You may be met on arrival at the airport or at the first meeting by the main participant on the Chinese side, with other participants following in descending order of seniority. The most senior Chinese delegate will often have an interpreter standing to one side and slightly behind him or her. The interpreter will provide the names and titles of the senior Chinese to your delegation. If you dont have your own interpreter, the hosts interpreter may also introduce the names and titles of your delegation to the Chinese side. Focus on your Chinese counterparts, not the interpreter. Greeting ceremonies may also take place at meeting venues or restaurants. Sometimes people will stand up when being introduced. If you visit a workplace, you may be greeted with applause as a sign of welcome. Respond by applauding back. Chinese business people generally appreciate foreigners taking the time to learn some Chinese and something about China.

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 Seek advice on the choice of characters for your name and company some characters have better meanings than others. Having a well-chosen Chinese name will leave a good impression with your counterparts. For information on how to do this, see the Selling in China Marketing section. If your company is one of the oldest or largest in NewZealand, or has another prestigious distinction, this could be highlighted on your name card or pamphlet in Chinese. Be sure to use simplified Chinese characters for mainland China, not the traditional characters used in Hong Kong and Taiwan. Business cards are routinely exchanged at the beginning of the rst meeting. The proper procedure for exchanging business cards is to give and receive cards with both hands, holding the card corners between thumb and forenger. With a bilingual card, hold out your card using both hands and present the Chinese side face up. Cards should be exchanged individually (one-on-one). People normally dont toss or deal business cards across the table. When receiving a business card, read it and keep the card out on the table during the meeting. Dont write on the cards in front of your hosts/guests. If you are starting out marketing your company in China, bring a quality one-page company prole in Chinese with you. You will be taken more seriously if you bring a full Chinese version of your brochure. Be careful not to include any proprietary information. Giving and receiving gifts Tips: Gifts and gift-giving are an important part of creating and building relationships in China and expressing friendship. See the Entering the Market Building Relationships section. Try to bring a unique gift that represents NewZealand or your company. Say the gift is from the company you represent. Explain what the gifts mean. Present the gift to the leader of the Chinese negotiating team rst the most important person in the group receives their gift before the others. Its a good idea to present a better gift to senior people or at least a gift perceived to have a higher value than that given to junior staff. Normally, the Chinese side would give gifts to everyone in a visiting/hosting delegation if you give a gift to each member of the Chinese side, make sure they are of similar value (apart from the most senior persons). Bring an extra supply of gifts in case you are caught short-handed. If in doubt, ask an intermediary what they think should be given as a gift. Gifts are usually exchanged at the end of a banquet or meeting. Normally people present gifts using both hands. Gifts offered with two hands should be received with two hands.

Traditionally, it was customary to open gifts after guests had left. But if you sense they are waiting for you to unwrap the gift, just ask if you can open it. Younger generation Chinese more used to Western business practices are usually comfortable opening gifts in front of guests. Give gifts to your driver and/or interpreter to help maintain good relationships. The best choice for the initial meeting is a gift that expresses some unique aspect of NewZealand, such as: paua shell products omega 3 and other health products hand cream and other NewZealand lotions picture books and calendars featuring NewZealand landscapes Maori art, carvings or other handcrafts NewZealand wine wooden bowls, plates, or other wooden products honey and other nature products cuddly soft toys, e.g. sheep or kiwi gifts made of wool and leather items with a corporate logo items that can be displayed on walls or in offices (especially for government officials and company leaders) well packaged NewZealand stamp sets. To be avoided: clocks the pronunciation of the words to give a clock sounds similar to a phrase that means sending someone to the grave avoid giving a man a green hat the Chinese saying wearing a green hat means someones wife is committing adultery gifts in sets of four the number four is considered very unlucky, as the word is pronounced similarly to the word for death cash can be seen as bribery knives or scissors symbolise conflict items such as straw sandals or handkerchiefs associated with funerals fans the Chinese pronunciation of fan can also mean to lose and death gifts of excessive value making it difficult for your counterparts to reciprocate and risk causing loss of face empty boxes, even if they have been carved or decorated, are considered packages without a gift. black or white wrapping paper or ribbons. White and black colours are typically associated with funerals. Red or gold wrapping paper are best as they represent happy occasions. writing anything in red ink. This symbolises the termination of a relationship.

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What to wear Business attire Tips: Dress formally for business occasions. Check the weather from websites. Generally, formal dress is a sign of respect. Its also the safest option if youre not sure what to wear. For formal business in China, conservative suits are the norm for men and women. Ties are commonly worn. A short-sleeved shirt without jacket or tie is acceptable in the summer for informal meetings. Jeans are acceptable for men or women in a casual setting. Shorts are generally only worn for exercising. If youre not sure about what to wear, simply ask ahead of the meeting or dinner. Eating and drinking In General Tips: If you are invited to a dinner, the protocol is that guests arrive right on time or a few minutes early. If you are hosting be there in plenty of time to greet your Chinese guests be prepared they may arrive up to half an hour early. A business dinner is usually reserved for more serious business, for people who have a good business relationship, or to celebrate a deal. Use similar protocols when arranging reciprocal dinners and lunches. Dinners and banquets Tips: Dinners, including banquets, are normally held in a private room at a restaurant or hotel. Very senior people may be present at a banquet. Dinners or banquets generally last for around an hour-and-a-half. The serving of fresh fruit will mean it is the last dish, then the host will announce the dinner or banquet is at an end. If you are the host, the Chinese guests will wait for you to signal the end of the dinner with a last toast or a few words. Photo opportunities may follow at the end of dinner (if this is the rst dinner with your Chinese counterparts). The principal guest is expected to leave first followed by other guests. Prompt farewells are appreciated. Alternatively, your host may invite you to a karaoke bar, night club or sauna. You may want to make a night of it. If not, tell them you have a delegation meeting or are tired after a long day, or that you will stay for a short while. A typical Chinese dinner or banquet will consist of eight to 12 courses, served consecutively. On formal occasions, each dish is served away from the table and individual portions placed before diners. Some very interesting and potentially odd dishes by Western norms can be served. Rice is generally more popular in the south, while noodles are preferred in the north.

If you are entertaining guests, remember most Chinese are not used to cheese or butter and lamb is not always popular, so consider omitting these items from the menu. Its important to accept dishes, theres no compulsion to eat every serving. You can leave dishes you dont want to eat to one side. Speeches and toasts Tips: It is normal for the host to make a speech of welcome and toasts at the beginning of the meal. The principal guest may respond straight away, or choose to respond after a few courses have been served. Chinese normally respond very positively if the NewZealand delegation conclude their speech with a waiata. Toasts are normally very short. It may include a simple welcome (or thank you) and a brief substantive comment on the visit. Safe topics for toasts are friendship, cooperation and mutual benet. Key message at the end of toasts may also include: the success of the business cooperation the friendship between the two companies the friendship between the two countries. Seating Tips: Dinners will normally be at round tables. A long table is used occasionally. Dinner seating arrangements are generally pre-determined and indicated by name cards on the table/s. If a long table is used, the guest of honour sits directly across the table from the host. If youre not sure where to sit because there are no name cards on the table, then a good strategy is to sit at a lower place and be invited up, rather than be asked to drop down a level. Alternatively, you can wait to be seated. If hosting, the seating plan for a round table may look like the following: NZ 1

China 1

China 3

Interpreter

NZ3

NZ 4 China 4 China 2

NZ 5

NZ 2

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If the Chinese side is hosting a dinner, the seating arrangement for a round table may look like this: China 1

Entertainment In general Tips: Once you have established relationships, you are likely to be invited to other forms of entertainment. This may include golf, night clubbing, a sauna or karaoke. Karaoke venues normally have a good selection of English songs, and almost everyone is expected to sing. Hosts are generally expected to pick up the bill for dinner or other entertainment. It is not custom to split the bill. As a guest, you can insist on paying the bill a couple of times, but know when to give in and offer to pick up the tab next time. Once a relationship is established, guests may also be invited to be entertained at home. Arrive on time, remove shoes before entering a private house, and take a gift. Drinks and gan bei Gan bei literally means dry glass. Its an invitation to empty your own glass alongside the person proposing the toast. Tips: Gan bei is one way to build or test comradeship or firm friendship. Foreigners with hai liang (large capacity to drink alcohol) become instant legends. At most dinners and banquets, each diner may have three glasses: one for beer or mineral water; one for grape wine; and a small one for a grain spirit such as maotai. It is customary for individuals to toast others collectively or individually throughout the meal. If toasting individually, usually the host or chief guest is toasted rst, or the person sitting next to you. If toasting individuals, you may find you end up drinking quite a lot. Therefore, you may choose to toast with something with lower alcohol content. You can sip rather than draining the glass by saying sui yi which means at your own discretion. If you prefer not to drink alcohol, make it clear at the beginning of the dinner. Its acceptable to toast with a soft drink, juice, mineral water or tea. If you start drinking alcohol, you will be expected to continue. Health awareness in China is growing and the excessive intake of alcohol is decreasing. However, wining and dining is often a key part of building relationships. Drinking baijiu, which is 80120 proof, and the demands of gan bei (or in the Kiwi vernacular scull) is an important bonding ritual among Chinese businessmen and you will often be encouraged to take part.

NZ 1

NZ3

Interpreter

China 3

China 4 NZ 4 NZ 2

China 5

China 2

Chopsticks or knife and fork? How to use chopsticks 1.  Hold one chopstick between thumb and middle nger. 2.  Place the other chopstick between thumb and forenger. The chopstick should rest against the tip of your thumb. The top of the chopstick rests against the pad of the forenger. Be sure the tips of the two chopsticks are parallel. 3.  Keep the rst chopstick still while moving the second chopstick toward the stationary one. Try to avoid vertically sticking chopsticks on top of a bowl. That represents serving food for ancestors or the dead. If you cant manage chopsticks, knives and forks will be provided swiftly in restaurants. However, you may wish to practise using chopsticks before heading to China as it may earn you more kudos. Business breakfasts and business lunches Although business breakfasts and lunches are becoming more popular in parts of China, they are generally seen as less important than dinners. A working lunch in China is much more formal than in NewZealand, similar to a dinner meeting here.

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3. ENTERING THE MARKET

ENTRY MODES
Appointing agent or distributor

Non Equity

Direct selling

Forming an alliance

Technology transfer

Equity

Representative office

Wholly foreign owned enterprise

Joint venture

TIME, RESOURCES AND COMMITMENT

This illustration is only indicative of the time and resources you will need to dedicate to a particular entry mode these will vary case by case. Any decision on mode of entry needs to be based on a thorough understanding of the market.

3.1 TYPICAL MODELS FOR SETTING UP IN CHINA

Getting your presence in China right You need a local presence if you want to grow your business and have a long-term future in the Chinese market. Entering and setting up in this market involves a unique set of regulatory issues. The structure you choose should be based on research specic to your industry and your product. Follow a strategy Before deciding what model you want to use to set up in China, you should complete your China strategy covering objectives, nance, experience, capacity, markets, products and pricing. This strategy must guide any decisions on how you plan to enter China.

In preparing a plan for China, remember some hurdles in China are larger than most other markets. For example: the level of time and financial commitment needed cultural and language difficulties intellectual property management.
KIWI SUCCESS STICK TO THE PLAN

We have a good plan, we are following that plan and now we just have to remain focused and build on the solid base we have. Thats quite often the hardest thing for companies to do. Theres an enormous amount of opportunity available to companies like ours in China and its simply not possible to follow all options. By having a tight strategic framework we have a guide for what we should and shouldnt spend our time on. Otherwise, one could waste an enormous amount of resource and energy. Scott Coulter, Chief Operating Officer, Comvita Our biggest success was taking the time for a planned entry and nding the best professional advice at each step. Mark Radburnd, Chief Financial Officer, Commtest Instruments

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Testing the waters NewZealand companies typically take a staged approach to setting up in China. They start by exporting a small amount to test the market, then engage an agent or distributor, then set up an office in China, and nally they set up a Chinese company or joint venture and, where applicable, their own manufacturing operation. The least complicated business models are licensing into China or having a contractual relationship with a Chinese company or simply setting up your own Chinese company. Testing the market is relatively straight forward if your goods are exported from NewZealand to China. However, if your goods are made in China and delivered in China it is deemed a domestic sale and the transaction must be completed in renminbi (RMB). You can only repatriate prots with a registered entity after taxes have been paid. (The exception is the representative office.) Also not having your own registered China entity to issue a China value added tax (VAT) invoice raises the issue of who does this for you. Be aware if its your factory lling this role, you are both putting them in direct contact with clients and entrusting them with your revenues. If you are providing a service it may be possible for the client to pay offshore as long as you can prove the work was not executed in China. Otherwise a business wanting to pay hard currency overseas must have proper justication and importation documents or it will be subject to withholding tax of up to 20 percent. China now allows foreign companies to set up direct sales channels and to sell directly to store buyers. But setting up these direct sales channels can be a big undertaking. Using agents and distributors Companies that need to manage their business in China from NewZealand can use China-based agents and distributors.

An agent sells goods on your behalf and is paid a commission. A distributor buys goods from you at one price and sells them to others at a higher price, making their income from the margin. Using an agent or distributor in China can be an attractive option because they: provide access to established sales channels and potential customer bases can greatly reduce set up costs and time taken to enter the market give you access to local knowledge and contacts when dealing with regulatory problems and other issues. However, using agents and distributors can have drawbacks, including: raising your costs and selling price reducing your control over sales and marketing potentially increasing the risk of your product being counterfeited. Many Chinese agents and distributors work for trading companies which are authorised to deal in a wide range of products. Some of the larger companies have offices in other countries, along with a network of offices and affiliates in China. However, large agents and distributors sometimes manage so many products that yours may not get enough attention. Chinas size and regional diversity also means you will need to engage several agents to cover different areas. Remember, payments can only be repatriated easily if the goods were imported. If they are China produced, agents can only repay funds after end of year tax has been paid.
KIWI LESSONS GOOD DISTRIBUTORS ARE EXPENSIVE

If a distributor is very good, they will be very expensive and using a product from a multi-national. They will invariably run their own brand and will not be willing to deal with you exclusively. If a distributor is interested in selling only your products, you have to ask about their track record. David Percy, Chief Executive, Pertronic Industries

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AGENTS

The best agents are developed over time and result from friendship. Dr Anatole Bogatski, former Student Services and Marketing Director, AIS St Helens For more detailed information on using agents and distributors see the Selling in China Using Agents and Distributors section. Establishing an on the ground presence For companies wanting an on the ground presence in China the most common options are to set up: a representative office which has limited powers and cannot conduct sales a wholly foreign-owned enterprise (WFOE) increasingly popular a joint venture (JV) with a Chinese partner fewer and fewer companies use this option. Setting up a representative office Setting up a representative office is the easiest way to establish an on the ground presence in China. But Scott Brown, founder of RedFern Consulting, warns that representative offices have very limited uses and a company would need strong justication for setting one up. They can employ people, thus they could be useful for a simple presence of checking up on manufacturers. You certainly cannot manufacture with anything other than a manufacturing licensed wholly foreign owned enterprise or JV. Representative offices are limited to research and liaison activities and cannot conduct any business transactions. They also cannot issue invoices or receive any revenues. Invoices must come from outside China. They can, however: help with market development and market research help build business relationships cut out the need to hire some middlemen or consultants manage manufacturing and help protect intellectual property assist with after-sales service assist with introducing new products assist with dealing with government officials help local administration work help getting visas for visits show commitment to the market which can open doors with customers, suppliers and officials. If everything goes according to schedule, and you have lled in all the forms correctly, office incorporation can take about three months. The Hong Kong Trade Development Council website has information on the process of setting up a representative office.
PROS AND CONS OF REPRESENTATIVE OFFICES

flexibility to exit full control. Disadvantages: restricted scope of business activities (e.g. no formal sales function or invoicing allowed, and value-added services cannot be performed) more rigid labour regulations (e.g. you must use government employment agents) not tax efficient. (Source: China Business Solutions website)
KIWI LESSONS EXPENSIVE AND TIME CONSUMING

The volume of paperwork is considerable, especially for a representative office only. Mark Templeton, former Chief Executive, Actronic Technologies A rep office is expensive to run and must deliver value for money. Chris Hopkins, Managing Director, Scott Technology Setting up your own company A wholly foreign-owned enterprise (WFOE) is a private, limited liability company that is 100 percent-owned by a foreign entity. It is now the most popular option for foreign companies to establish a permanent presence in China. Many companies prefer to set up WFOEs (as opposed to joint jentures with Chinese partners) as this ensures the foreign party retains 100 percent control. WFOEs are able to issue invoices and receive payments in RMB and any prots can be remitted back to NewZealand as dividends after all taxes have been paid. It is also easier to protect intellectual property rights using a WFOE than a joint venture. WFOEs come in different types, depending on what business operations will be carried out: Service/Consulting Manufacturing Trading (otherwise known as FICE Foreign Invested Commercial Enterprises). The time required to set up a WFOE varies according to the type of entity chosen. The type of WFOE you want to use needs to be decided early during the application process because this will affect the scope of your business licence. A Chinese-incorporated company can only undertake business that falls within the scope set out in its business licence. Once a WFOE has been set up, it is very difficult to change its business scope. Plan ahead and ensure the WFOE has enough scope and exibility to develop its operations as the business changes. It is possible to set up WFOEs in bonded or export processing zones which means that the entity would not be subject to import restrictions and import tariffs, particularly for goods being re-exported. The minimum capital required for a WFOE is RMB 30,000, but in reality the amounts requested by the approval authorities is

Advantages: lower set up cost (no capital investment required) shorter set up period

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much higher than this. The authorities will approve a capital amount based on the type of WFOE, its location, the industry and business scope. They will only approve what they deem to be sufficient registered capital for your WFOEs operations. Some types of business also have a minimum registered capital in order to qualify for VAT tax registration, without which you cannot invoice. Registered capital may be contributed in one lump sum within six months of the WFOEs business licence being issued, or in instalments. If the registered capital is to be paid by instalments, then 20 percent of the total registered capital must be paid in within three months of the business license issue date. The balance must be paid within two years. Setting up a WFOE in China is subject to the examination and approval by various approval authorities. Once your company name and application to set up a WFOE is approved, you need to apply for a business licence. This generally takes 60 days. You then need to register the business with several government agencies, including tax, customs and foreign exchange administrations. Foreign companies in the previously off limit areas of China trading (import-export, retailing, wholesaling and distribution sectors), though classied as WFOEs, are referred to locally as foreign invested commercial enterprises (FICE). When getting help to establish a WFOE, be wary of using a local agent who intends to follow the standard steps without considering your particular requirements or needs. The worst case scenario is a company nding itself unable to perform some assumed functions. The business scope or articles are very difficult to change later so you need to get it right from the start. Get help from someone who understands your particular needs and will not do a pro forma application. Adding certain clauses to the WFOEs standard articles may help you deal with issues that could arise in future. These clauses might relate to scope of business, total investment, management control, intellectual property registrations and royalty streams, currency repatriation and liquidation conditions. If accepted by the authorities, the clauses can save time and effort. For a list of consultancies and professionals that could help Kiwi companies establish WFOEs, contact NZTE.
PROS AND CONS OF WFOES

KIWI LESSON IT CAN BE EASY

Our WFOE was relatively easy to set up and no more difficult than in Australia. Mike Lowe, General Manager, Hayes International Joint ventures A joint venture (JV) is a business jointly owned by a Chinese and a foreign partner. For a long time this was the only option available for foreign investment. JVs are still the only way you can set up a permanent presence in China. RedFern Consultings Scott Brown says you need to have very good strategic or regulatory reason to want to, or need to, go down the JV path. They are notoriously difficult and if you can use a WFOE, do so. Forming a JV can be a drawn out process and it can be hard for NewZealand companies to negotiate a favourable position. Reasons for JV failure include: mismatches in expectations concerns over conflicts of interest violations of intellectual property rights poor choice of JV partner. JVs are demanding on your time and resources. They need constant monitoring in critical areas such as nance, personnel and basic operations for them to succeed. If you do decide to go down the JV route, it is essential that you carry out thorough due diligence checks on your potential partner. Plan for your exit from a JV from the outset. It is rare that JVs are permanent and its better to have a pre-nuptial agreement rather than a messy divorce. There are two types of JV arrangements: equity JV where profits, risks and losses are shared in proportion to the parties respective contributions to the registered share capital cooperative JV where each party is responsible for making its own contributions to the venture, paying its own taxes derived from the venture and bearing its own liability for risks and losses. Each partys rights, liabilities and risks are clearly stipulated in the underlying contract. Its important to use local or experienced lawyers to draft all JV documents and contingencies for exit, arbitration and other issues. Many industries restrict foreign ownership to 49 percent or less. In these cases you need to try to inuence operational control through the agreed appointment of key senior management and board members.
PROS AND CONS OF JVS

Advantages: full control over management and operation more flexibility in company strategic issues easier to repatriate profits (you can send them back once taxes are paid) better protection of intellectual property rights demonstrates commitment to the market. Disadvantages: higher registration capital required longer time to gain access to local knowledge, contacts and market. (Source: China Business Solutions website)

Advantages: immediate access to local knowledge, government relationship, and management talents able to leverage established domestic brands, marketing and distribution channels.

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Disadvantages: significant set-up costs differences in management styles and company culture potential conflicts of interest with the Chinese partner. (Source: China Business Solutions) Note: In some sectors representative offices and WFOEs are not an option for foreign investment, for example education.
KIWI LESSON BE CAREFUL

Difficulties Investing in China is difficult and high risk. It is costly and absorbs time and money. Even large companies experience problems. Make sure you get the right partners and do as much due diligence as you can. You need to get professional help There are four foreign investment categories: encouraged, permitted, restricted and prohibited. Encouraged, restricted and prohibited categories are detailed in the Foreign Investment Industrial Guidance Catalogue. Industries not listed are permitted. Investment in some encouraged and restricted industries can only be done through Sino-foreign joint ventures or other entities with limited foreign investment. Restricted and prohibited sectors include value-added telecommunications, mining, domestic trade, wholesale and retail, banking and insurance, leasing, public utilities and domestic transportation and the production of wine and liquor. Investment in these sectors requires additional government approvals. An English version of the 2012 catalogue is available on the Dezan Shira & Associates website. Chinese investment in your business Another route to establish a market presence in China is to attract Chinese investment in your business. This can represent an injection into your business of customers, market knowledge, networks and expertise, as well as capital. Food businesses, especially dairy, are attractive to Chinese investors. The other popular category is high technology, including clean technology and high-value manufacturing.
KIWI LESSON BRING SOMETHING SPECIAL TO THE TABLE

Scott looked at a joint venture but these are fraught with danger. Setting joint ventures up is a very complex process and you may nd you are still negotiating details of the agreement through to the termination of the contract term. Chris Hopkins, Managing Director, Scott Technology Our experience with the JV mode of operation in China has been ambiguous. Dr Anatole Bogatski, former Student Services and Marketing Director, AIS St Helens
BUT CAN BE GOOD

It wont work for everybody, but for us it has been a very successful business structure to have that JV because it does open all sorts of doors for us that dont exist if you come in simply as a foreign company. Garth Smith, co-founder, BioVittoria Investing in China The wholly foreign-owned enterprise (WFOE) and joint venture (JV) options will require capital investment. A number of Kiwi companies have successfully invested in operations in China, though total NewZealand investment into China is a fraction of that into longer established markets such as Australia. Like other foreign direct investment into China, most NewZealand investment is orientated towards re-export. However, as the Chinese economy develops, particularly with the rapid growth of the consumer market and easing of restrictions, the proportion of goods and services going into the domestic market is increasing. Investment aimed at supplying the China market enters you into what is often a much tougher game where you will face intense competition and possible IP protection issues. Foreign investment is welcomed in China, particularly in priority or encouraged industries such as high-tech manufacturing, including new and alternative energies. Incentives, such as greater exibility of foreign ownership, lower levels of governmental review and tax and other investment incentives, are available for these priority sectors. The Free Trade Agreement (FTA) has given NewZealand businesses thinking about investing in China a stable base to work from. Knowledge of when a tariff will be phased out, gives you more certainty about the future than competitors from other countries. The FTA also offers Kiwi businesses a level of political endorsement that can be handy in China. It is a signal to your partners, and people you have to deal with, that China has a good relationship with NewZealand.

You need to approach potential Chinese partners with a sharp focus on what they can offer that is special. You have to bring something to the table thats unique, that they want and which gives them an edge. Tony McKenna, Head of Market and Product Development, Synlait. The Canterbury-based dairy company is 51 percent owned by Chinas Bright Dairy. The type of Chinese investor interested will depend on the size of your company. Sovereign wealth funds and large companies gravitate towards large companies and natural resources. If you are smaller, a possible source of investment is potential migrants high net worth individuals who want to set up a base in NewZealand. One recent survey showed that more than half of Chinas millionaires want to secure residency offshore for their family. The hard part is nding and attracting them. A lot of investors are not good English speakers and are worried about investing in what they see as risky small businesses. Chinese investments typically seek control, in particular of natural resources. Most of the Chinese investments into NewZealand to date have had a controlling interest.

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Other options Coat-tailing taking advantage of established channels set up by larger companies in China can be a good way for smaller Kiwi companies to get started. For example, production systems maker Scott Technology says it found life easier working with multi-national companies where quality was demanded and a premium was paid. Selling online more and more foreign and Chinese companies are using the internet to promote and sell their products. Holding the e-commerce sector back are the low use of credit cards and inadequate operator billing systems, but both situations are rapidly improving.
KEY LEARNINGS

These products didnt compete directly with ours, but they caused a loss of mind share. Adding sales channels Commtest realised it needed additional sales channels in China; knowing that these couldnt be managed effectively from NewZealand it decided to set up a China office. We thought that if we could do so well in a small part of China (Beijing and the north) with one distributor, how much better could we do with several distributors and a much wider geographical coverage? With the help of NZTE in Beijing, Commtest found several China-based advisers to help it set up a representative office. Representative offices are the easiest type of entity to set up in China but they have limited uses. Officially they can only be used for market research and liaison activities, and they cant conduct sales or issue invoices. Commtests representative office opened in Beijing in May 2007. Local staff versus expatriates The company opted to hire Chinese locals, largely because of the cost of hiring non-Chinese expatriates (expats) already living in China. We were bowled over by the size of the packages expats expect I can hire three or more local staff for the same cost. Many expats I met also live in a peculiar expat bubble separated from the local people. And in China having strong local connections (Guanxi) is paramount. The quality of local staff is excellent, Cochrane says. Many of them have been educated overseas and they are bilingual, bicultural and professional. As of 2011 Commtest had 14 staff in China, all Chinese nationals. Commtest used Mahon Investment China, a Chinese rm run by an expat NewZealander, to shortlist and conduct due diligence on candidates for the post of country manager. Cochrane says there was over-choice when it came to hiring sales and support staff, and the few regulatory requirements around employment were easy to complete. One unexpected cost, however, was the 13th month a traditional payment relating to the Spring Festival and Chinese New Year. Its not mandatory but its a very common practice so we included it in our annual salary calculations. Setting up an office The company chose Beijing to be close to its State Owned Enterprise customers. Having ready access to key nancial decision makers should be among the highest criteria in deciding the physical location of the China operation. Cochrane says the regulatory requirements of opening a representative office were fairly easy and quick to comply with, but setting up the physical office took longer than expected ve months in all largely because the building owners didnt have any experience of foreign tenants. It was easy to purchase office equipment but top quality electronics equipment was surprisingly often more expensive than in other countries

Develop a China strategy before deciding on how to enter the Chinese market. Avoid going into China cold get a foot in the door first. Use China-based experts who are familiar with the bureaucracy and can keep up with the rapidly changing rules and procedures. Take care over who you use. Make sure you are directly involved in the setting up process. Allow time for bureaucracy, both filling in forms and waiting for approvals.

COMMTEST INSTRUMENTS CASE STUDY

When a distributor is not enough setting up a base in China
Commtest Instruments began exporting to China through a China-based distributor. But the Christchurch-based company soon realised it needed to set up its own base in China. Pros and cons of a distributor Commtest makes vibration analysis and data collection instruments which enable engineers to diagnose faults in industrial machinery before these faults develop into catastrophic breakdowns. The company began selling in China in 2002 after being approached by a well-qualied distributor who had previously worked for one of its competitors. It was a good time to enter the market, says Commtests former General Manager John Cochrane. With Chinas State Owned Enterprises modernising and factories moving from the US and Europe to China the timing was spot on. The distributor focused on Beijing and northern China, and was so competent he required little management oversight. Initially sales grew strongly but a little more than two years later they began to atten, Cochrane says. We realised that, like many independent sales channels, our China distributor worked his existing customers until sales began to plateau. Then, rather than nd new customers for us, he took on other product lines to sell to the familiar customers.

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There were other surprise set up costs, like an inspection fee for the re sprinklers, and at US$1,000 here and there Cochrane says these costs soon added up. That said, the overall cost of setting up the representative Staff who understand your company and the culture Looking back, Cochrane says setting up in China did put a bigger than expected strain on senior management. As global general manager, he spent at least one month of every quarter in China since 2006. And in 2008 and 2009 he spent approximately half of each year there. Cochrane emphasises that senior management commitment to the market is essential for success. In hindsight, he can also see benets in sending someone from the NewZealand office to live in China full time to oversee the business. If I were to do this again I would seriously consider lling the senior position with someone from home office who lives and breathes the company culture, who is adaptable, and who has experience of working overseas. The best option would be to start the process early and either recruit or promote from within energetic managers who can be groomed to live and work overseas for extended periods. This would be far preferable to hiring an ex-pat already residing in China, but who otherwise is new to the company. The bi-directional information ow and cross cultural exchange that results from such an overseas posting is truly invaluable to both the company and the employee.

In 2004 it established a 6500 square metre warehousing operation near Markors new factory in Tianjin. Markor built the warehouse and leases it to Pan Pac. Staffed by nine local Chinese, the warehouse serves a dual purpose. It ensures that Pan Pac always has enough volume on the ground to supply Markor, and also provides a platform for future growth in China. It has been a base to service our major customer as well as develop sales into a wider local customer base. The other benet of the warehouse is that customers interacting with Markor become aware of our presence and are more likely to approach us, explains Ducker. Pan Pac now exports 167,000 cubic metres of lumber to China each year. Challenges of coat-tailing Coat-tailing on the success of a Chinese customer is not without its challenges. Markor continues to be Pan Pacs largest customer in China. The strength of the relationship has allowed both companies to ride through the cyclical changes in the market over a twelve year period. Markors demand for timber can surge and ebb, making it hard for Pan Pac to meet its customers just-in-time supply demands. Surges in demand can also mean there is no stock left to offer smaller customers. The warehouse is also a signicant overhead that the company has yet to fully recover through the sales development process, although it expects this will happen eventually. The long-term future of some Chinese furniture manufacturers may also be challenged by growing competition from Vietnam and other Asian countries and high tariffs imposed by the USA to prevent dumping. Managing the risks Pan Pac manages these risks by maintaining customer diversity in its overall business. Were not putting all our eggs in the Chinese market. About 40 percent of our current volume is committed to China. It also maintains a close and honest relationship with Markor. We reach into their organisation where possible to support them. For example, we placed one of our engineers in their factory to see how Markor is using our product and how we can improve it. Pan Pac is also frank about its ability to continue to supply Markors needs. One of the mutual strategies between the two companies is that neither will be totally reliant on the other. This means an agreement to a mutually agreed portion of supply. This has been aligned with the output growth of each of the two companies. Despite the challenges, coat-tailing on Markors success has proved a good way to enter and then further develop the Chinese market, Ducker says. Success came from working

PAN PAC CASE STUDY

Coat-tailing a short-cut into the market
Forestry and wood processing company Pan Pac has found that coat-tailing on the success of another company is a good way to enter the Chinese market so long as the risks are managed. Finding the right partner In 1997, Napier-based Pan Pac Forest Products went looking for new customers in China and met up with Markor International Furniture, which happened to be seeking a suitable wood source for its factory in Urumqi, Xinjiang. Pan Pac Managing Director Doug Ducker says there was a good match between the type and volume of product Pan Pac had available and Markors supply requirements, and the two companies soon built a supportive business relationship. Over the rst few years of working with Markor we saw a demonstration of values we could identify with, Ducker says. They were focused on high quality and high performance, and put effort into building a supportive relationship between Pan Pac as supplier and Markor as customer. The condence to expand The relationship provided Pan Pac with a measure of security and encouraged the company to set up a presence in China.

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closely with them at all levels, on taking costs out of the process, better supporting our partnership, and growing the business jointly. www.panpac.co.nz

3.2 CHOOSING A LOCATION

Choosing the right location New companies looking to enter the China market have a great number of options regarding where to invest. You need to thoroughly research which is the best option for you. Locations are becoming increasingly focused on serving specic niches and less on trying to offer all things to all customers. Understand the options Most companies entering China have targeted the three river deltas as the best way to get to the majority of the Chinese market. The deltas are the: Pearl River Delta (Hong Kong, Shenzhen, Guangzhou and inland) Yangtze River Delta (from Shanghai to Nanjing and further down the Yangtze River) Bohai Bay corridor in northeastern China (includes the cities of Beijing, Tianjin, Dalian, Jinan and Qingdao and their provinces). The deltas account for: about 3 percent of Chinas land mass 20 percent of its population half the national gross domestic product (GDP) more than two-thirds of exports more than two-thirds of foreign direct investment. Opportunities abound in the deltas, but competition with other world economies to have a slice of the China market is also at its toughest here. As these regions become more developed and affluent ination will set in and prices escalate. Some global companies have adopted a 15 gateway cities vision. The aim is to expand beyond the three river deltas and select from among the 15 major provincial cities (also commonly known as second tier cities) that will experience phenomenal growth as infrastructure is extended into the north-east and west of China. Factors to consider when deciding where to locate: proximity to market proximity to suppliers quality of logistics costs for example land, labour, utilities reliability of local infrastructure, particularly the power supply availability of a good agent or distributor fast growth and high costs versus low costs and low competition entering through a gateway like Hong Kong and Taiwan availability and longevity of tax or other incentives

coat-tailing on someone elses existing marketing and distribution network leveraging off an existing NewZealand relationship in a region, like a sister-city or existing NewZealand business the level of local authority support for foreign businesses where your competition is located using a foreign trading zone, trade development zone or special economic zone why another NewZealand company chose a particular entry point.
KIWI SOLUTION ASK THE RIGHT QUESTIONS

How we went about [nding a location] was taking quite a lot of time, researching what style of company we wanted and most specically where it was going to be located. In the end, that proved to be the decision that took us the longest amount of time and was the most difficult to get information about as well. And in the end, we realised it was about us asking the right questions. Our own way of achieving that was also to seek consultation with people who were already operating here in China in all the various forms, and that included the government agencies as well as other expatriate based company associations that we had. Don Johnson, Marketing Manager Lumber, Pan Pac Forest Products. Pan Pac has a warehouse and distribution centre in the Tianjin Free Trade Zone. It took the company two years to decide to locate there. Common entry points Shanghai Shanghai (population over 20 million) is Chinas business hub and the gateway to east China. Shanghai is economically advanced and the outside world is getting attuned to its rising status as a strategic economic centre in the Asia Pacic region. It is very difficult to get good quality industrial space in Shanghai, either because the industrial parks are full or because prices are too high. As well as steep land prices, utility, living and labour costs have also risen. The Shanghai government is seeking more higher-end manufacturing and large investment projects and recommending that smaller investments be made in the satellite cities around Shanghai. Shanghai is the top city in China in terms of demand for NewZealand products. Shenzhen and Guangzhou Shenzhen and Guangzhou are cities of high economic development and well-established infrastructure located in the Pearl River Delta. The Pearl River Delta Economic Zone covers 14 cities, including Guangzhou and Shenzhen. The province has the advantage of a Closer Economic Partnership with Hong Kong, allowing goods to come into China more easily from Hong Kong. The region has a good logistics system.

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Shenzhen has the highest GDP per capita and is the information and communications technology (ICT) and manufacturing hub of China, exporting machinery, sports equipment, toys, apparel and furniture. The citys Special Economic Zone is the business and nancial heart of the city and the reason why most visitors come to Shenzhen. Beijing and the Binhai business zone Beijing is home to the Chinese Communist Party, central government, the countrys nest universities and research institutes, and is the leader in research and development. The capital city also offers Zhong guan cun the Chinese Silicon Valley. The city is also home to the China head offices of many major international companies and a large, wealthy expatriate community. Of the rst tier cities, Beijing (population 15 million) has the most room for future expansion. Unlike Shanghai and Guangzhou, Beijing is not at the centre of a wider economic development region, meaning its commercial infrastructure and industrial sector are relatively less developed. However, this is likely to change with the further development of the nearby Binhai New Area business zone. China plans to turn the Binhai New Area, located 120 kilometres southeast of Beijing, into the countrys third economic engine. Tianjin city is the largest city in the Binhai area and has the largest port in North China and its international airport is the largest cargo freight centre in China. Beijing and Tianjin are the leading cities in the Bohai Rim Region strategy. This initiative is an effort to attract the sort of development to the central and coastal areas of northern China that has been so successful in the Pearl River Delta region. The Rim also includes the cities of Dalian in Liaoning province and Jinan and Qingdao in Shandong province. Chinas second and third-tier cities The so-called second tier cities are promoting themselves by focusing on developing modern industrial zones, new infrastructure projects, the best telecommunications networks, and providing enough energy to prevent shortages. Infrastructure developments to ease transport to and from the coast to these cities are also under construction. Labour costs are 20 to 30 percent lower than what local employees are asking in the coastal cities. Salaries are also increasing at a slower rate than in the already established industrial cities. However, in the second and third tier cities it can be extremely difficult to nd qualied and experienced employees who speak uent and comprehensive English. In general the quality of education in these cities is lower than the rst tier cities. They also have limited access to foreign schools. They are not ideal destinations for foreign or even local managers coming from the rst tier cities. Skellerup Industries has a factory in Baochang village on the north bank of the Yangtze River, east of Haimen and Nantong cities. From Shanghai it takes 90 minutes to reach the river crossing.

The boat ride across the river takes a further 30 minutes and from there it is around one hours drive to the village. The central government is doing its best to eradicate disadvantages for expats to bring stability and further development to these regions. One such incentive is that the government provides and pushes business licenses onto key industries of foreign enterprises. Intensifying competition in retailing is also forcing retailers to expand to Chinas second-tier cities which offer more than twice the number of consumers (albeit with a lower per-capital disposable income). The advantages of second and third-tier cities include: rising demand as manufacturers shift operations to smaller cities to cut costs lower accommodation and wage costs less competition a growing middle class fuelling demand for consumer goods. Second-tier cities cover other key regions, including cities such as Shenyang, Dalian, Tianjin and Harbin in the industrial north east. The metropolises of Chongqing, Chengdu and Wuhan cover the more developed areas of western China. Nanjing, Suzhou, Hangzhou and Ningbo cover the eastern coastal areas. The third tier cities are numerous and catching up rapidly. Many are key cities in the far west, the south west and central China. They serve areas that are economically undeveloped and less well provided for in terms of infrastructure. Trade development zones and special economic zones Special Economic Zones, and the hundreds of development zones, have in the past offered foreign investors incentives that include reduced income taxes, land use fees and import/ export duties. They also offer favoured treatment in areas such as getting infrastructure and utility services and government approvals. Don Johnson, Marketing Manager Lumber, Pan Pac Forest Products, which has a warehouse and distribution centre in the Tianjin Free Trade Zone, says you need to be aware of your business scope in the future because once it is established it can be limiting as well as empowering. For us, it was about planning for the future and also planning contingencies. And this zone in particular gave us the exibility to do what we wanted, whereas other zones didnt. The direct nancial incentives to foreign companies are being phased out by the central government to level the playing eld between local and foreign businesses.
KIWI LESSON GO TO A ZONE

I think location is the most important thing in China if youre going to do what we did which was manufacture. If youre contract manufacturing that is different, because the responsibility for everything lies with the contract manufacturer. Keith Curry, Skellerups former China Chief Executive In my opinion, in China, you should not go outside any of the recognised zones the recognised zones are managed by professional people and they havent got a political input.

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KEY LEARNINGS

thoroughly research on the options get advice from businesses already in China competition is toughest, and costs higher, in and around the main business centres.

The large number of Chinese tourists visiting Hong Kong (60 percent of a total 40 million arriving in 2011) make Hong Kong a great test market for consumer goods, particularly for southern China. NewZealand has a Closer Economic Partnership (CEP) agreement with Hong Kong which, read alongside Hong Kongs own Closer Economic Partnership Arrangement (CEPA) with China, gives Hong Kong companies domestic status for trade and investment. For Kiwi businesses this opens up opportunities for easier access to China by partnering with CEPA-qualied Hong Kong businesses. Duty reductions under the NewZealand-China Free Trade Agreement mean shipping goods through Hong Kong for China is becoming less attractive, unless there is some customising done in Hong Kong before entering China. Taiwan Taiwan has increasingly looked to China to boost its growth, driving ongoing investment in Chinese businesses. From an initial concentration on manufacturing this investment has diversied alongside Chinas own development and is now more pronounced in services, distribution and supply chains. Taiwans commercial links with China present opportunities for NewZealand businesses to enter or build markets in the mainland. Taiwan can be a source of customers in China, usually through piggy-backing existing relationships in Taiwan and offering new or complementary lines to existing channels or supply chains into China. For NewZealand exporters this approach can mitigate contractual and performance risks. But expansion into China will often be governed by the interests and operations of the Taiwan partner. Your partner may offer to take your products into the mainland, but if your relationship is strong, it is worth asking the partner about using their channels for selling in China. Entering China with a Taiwanese partner need not be exclusive. The mainland is big enough for multiple channels to most markets and, properly controlled, can build market share quicker than with just one channel, especially if the Taiwan channel is Taiwan owned or controlled. Marketing your products in China through other channels can be managed from a Taiwan base, giving you closer control over direction and process. This is an alternative to remote management from NewZealand where the perception of a situation in China can often be very different from reality. Taiwan is a good test market for products aimed at Chinese consumers. With its 23 million people in an area the size of Canterbury, it is densely populated with high income consumers and product adaptation for mainland consumers can be managed quickly by Taiwanese partners. Foreign companies, including ones from NewZealand, sometimes chose Taiwan as home for their Asia regional offices. This is especially popular among high-tech businesses reecting Taiwans strengths as a global manufacturer and supplier along with recognition of Taiwans high level of integration with China.

3.3 HONG KONG AND TAIWAN AS WIDER CHINA OPTIONS

Depending on your type of business and the nature and scale of your target markets, Hong Kong and Taiwan maybe gateway options for China. For companies uncomfortable with some aspects of dealing direct in China, both provide bases from which to launch into China. These options should be considered alongside other models for setting up in China. The opening up of China has brought greater commercial integration with Hong Kong and Taiwan and the pace of integration is speeding up. More businesses are adopting wider China market strategies recognising the mainland, Hong Kong and Taiwan complement each other as parts of a diverse wider China market mix. Hong Kong Hong Kong is now so open to southern China that some see Hong Kong as part of a Pearl River Delta market made up of the Special Administrative Regions of Hong Kong and Macau and Chinas Guangdong Province. The mainland China part of the Pearl River Delta is home to over 40 million people and accounts for 10 percent of Chinas GDP and 30 percent of its exports. Guangdongs growth partly stems from decades of Hong Kongs manufacturing industries relocating to southern China and increasingly the development of new industries. Signicantly for businesses looking to sell to industrial customers, the headquarters of these companies tend to remain in Hong Kong along with functions such as sales and marketing, procurement, nance and logistics. Thanks to its strategic location, open international business environment and supportive government policies, Hong Kong is also a recognised location for regional offices servicing Asia generally. More recently, Hong Kong has become a technology multiplier proactively seeking international links with companies looking to convert ideas or technologies into products quickly and cheaply. This utilises Hong Kongs involvement with manufacturers in China in conjunction with its experience in overseeing Chinese business operations on behalf of foreign partners.
KIWI LESSON VISIT CHINA CONTINUALLY

Gallagher Security has a regional office in Hong Kong. Every week the majority of the Hamilton-based companys clients across China will see a member of the Gallagher team. People are seeing more and more of us. You need to keep going into China continually to maintain relationships and ensure the NewZealand office has quality information about local Chinese developments and needs. Peter Francis, Regional Manager Asia Pacic and Middle East, Gallagher Security

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Taiwan and China have an Economic Co-operation Framework Agreement (ECFA), essentially a free trade agreement, providing for tariff cuts on goods, reducing non-tariff barriers, opening up service sectors and further lifting investment restrictions.
KEY LEARNINGS

Luke Minford, partner of global IP consultancy Rouse and Co International, says after you have registered your rights early its primarily a case of then making sure you have a clear strategy and good local knowledge about what is going on in different areas. While some companies may see IP protection as imposing costs and delays when they need to move fast in the market, his advice is that in the long run they will thank themselves because China is not going to go away it will continue to grow solidly over the next decade. The companies that will succeed long term will be those companies that have put IP protection in place and been sensible in terms of making sure that the basics are right. Luke Minford says there are three essential steps to protecting your IP. You need: 1. A budget for intellectual property. IP rights are long-lasting assets that should be invested at the parent company level and not left to local business units to nd budget for. 2. A strategy before you arrive that breaks down all your IP assets and identies how you are going to obtain rights, protect, commercialise and enforce them. 3. Support on the ground in China for your strategy, whether that be good local counsel, or a reliable partner that understands IP. The best way to protect your IP in China is to register whatever rights you can, including patents, trademarks and recordal of copyright. If you do not register your IP with the Chinese system, you have no rights. So register early and use the system pro-actively. For help doing this you should contact a qualied lawyer or agent with experience of working in China. Including China as part of a process of applying for international patent or trademark protection can be benecial. These benets include streamlining the legal process and reducing the risk that IP could become public in one country before it is protected in China. Contact NZTE for a list of IP specialists in China.
KIWI LESSON AVOID PARALYSIS

Hong Kong and Taiwan are options for entering or building a market in mainland China. To varying degrees, both offer broadly similar benets including: identification of partners and customers in China management of marketing and distribution in China by Chinese companies opportunities to commercialise technology, utilising China test markets for development and adaptation of products for sale on the mainland strategic locations for regional offices servicing wider China and Asia.

3.4 PROTECTING INTELLECTUAL PROPERTY

Protecting intellectual property Protecting intellectual property (IP) including products, design and processes, trademarks and patents, promotional material, user manuals, trade secrets and domain names is one of the biggest issues NewZealand businesses face when entering China. There is a considerable risk of piracy, counterfeiting and reverse engineering in China. The US Government estimates that on average 20 percent of consumer products sold in China are counterfeit. There are laws to protect and enforce IP rights, but Chinas businesspeople do not have a long tradition of intellectual property compliance. There can also be inconsistencies of court proceedings on IP. In addition, Chinas IP laws are different from NewZealands. China has a rst-to le system that requires no evidence of prior use or ownership, leaving registration of popular foreign marks open to third parties who register famous marks before the legitimate owner. It can be difficult, time-consuming and expensive to recover these marks, so it is far better to register trademarks early. These legal differences and the risk of IP breaches mean that a NewZealand business entering the market needs a well researched and executed strategy to protect its IP. But you shouldnt let fears of IP losses alone dominate your decisions on entry into the Chinese market. The business opportunities are huge, the risks can be managed and the situation both in terms of the dangers and the remedies is improving. You need to take steps as early as possible to protect your IP and you should have a clear plan that takes timing into account. For example, trademarks take 18 months to be granted, design patents take six to eight months and copyright recordal procedures can take three months.

Kevin Maurice, Managing Director of Atrax, says no exporter should be paralysed by the fear of intellectual property theft in China. Whenever the Auckland-based specialists in aviation and logistics weighing technology use a subcontractor in China, they never divulge what they are making will be used for. Some of these things are in conict with Western management styles, Maurice says but Im the only guy who knows all the parts of the jigsaw. Understanding risk versus opportunity The risk to IP needs to be balanced against the considerable opportunities presented by China. While enforcement can be challenging (see section below) it would be wrong for companies to assume that IP is not enforceable by believing this you may be giving away IP that you could and should be protecting.

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It is also important to put IP issues in perspective. Some companies in China are prepared to accept borderline imitation of their products because they feel it does not harm their core business. Others want to take a tough line against infringers because they fear infringements will multiply if they are seen to be passive. You should also outline with your local partners and/or counsel what you, as the rights owner, are prepared to accept in the market and what you are not. You should also be clear and rm about your IP with your local partners. Many IP problems arise within supply chains and sales channels, because your partners abuse your IP, deliberately or otherwise. Ensure that you have Non-Disclosure Agreements signed before you reveal any condential information and have contracts in place that ensure your partner cannot take liberties with your IP. Prevention is the best strategy. Communicate to your partners early and often that your IP is important and do not brush issues under the carpet. You should not enter into relationships on blind trust or assume that contracts cannot be enforced they can. Protecting patents Under Chinas Patent Law three types of IP can be protected: invention patents lasting 20 years design patents 10 years utility model patents 10 years. Food, beverages, avourings, chemical and pharmaceutical products are all patentable. There are some items that cannot be patented in China, including plant varieties and, scientic discoveries. Software can be protected as a patent for certain applications. Applications to register a patent in China go to the State Intellectual Property Office (SIPO). NewZealand companies which do not have a business office in China must apply through a registered patent agent. Applications must be in Chinese and include relevant drawings, details of any claims and a description of the technology. Design patent applications require drawings or photographs of the design. If SIPO decides the application complies with the Patent Law it will issue a certicate, register the patent and issue its decision. Patent rights are effective as of the date of publication. There are two key dates: publication, whereupon the previously filed patent can be viewed by the public and objected to the grant, which can be some years later. After the patent is published, the patentee has the right to request damages from any alleged infringers, but this right is not yet enforceable. Once the patent is granted you can go back and claim damages for any infringement during that period. You also have a fully edged patent right, meaning you can claim proper damages calculated from the date of granting as well as court injunctions to actually stop infringers. At present,

publication of invention patents in China is always either six months from when the patent is led in China or 18 months since it was rst led anywhere, whichever comes later. Design and utility patents usually take about a year to register, though it can take two to three years to register an invention patent. You can register a utility model and invention patent simultaneously for the same invention, meaning that the utility model is granted rst, then if the invention patent is granted, you have to abandon the utility model. This is more expensive as you are ling two applications, but allows you to obtain quick protection from the utility model rst, and then your protection switches to the invention patent. This can be useful for very valuable inventions that you want some early protection for. Protecting trademarks The best way of protecting your trademarks is registering them so they are covered by Chinese law initially for 10 years, but this is renewable. You should register both an English and Chinese translation of your trademarks, logos and domain names with Chinas Trademark Office. If you dont have a physical presence in China, you must register your marks through a trademark agent. However, lawyers or your Chinese agent may prepare the application. If you have a Chinese company or a representative office they can register your trademarks directly. Failure to create and register a Chinese version of your trademark opens up the chance that the market will give your product a nickname which you may not like and have no rights to. Also someone else in China could even register your trademark or the Chinese nickname as their own, forcing you to buy it back. Trademark applications can cover words, designs, letters, numbers, three-dimensional signs and colour combinations, as well as combinations of these elements. If you let another party use your trademark under a licensing arrangement, under Chinese law you must execute and register a trademark licensing contract. This is not only good practice but allows the licensee to remit royalty payments overseas in foreign exchange. The cost of having an application prepared to trademark one brand in one class is around NZ$650. This includes the official ling fee, administration fees and disbursements. The application must be accompanied by specimens of your trademark and all documents must be submitted in Chinese. China uses the International Classication of Goods which categorises commodities and services into 45 classes. A trademark must be registered in connection with at least one particular class of goods. Each category must be registered separately in Chinese. Registering a trademark can take 18 months, although examination periods are now falling to close to 12 months.

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KIWI LESSON ADDITIONAL RISKS

You do need to be careful about protecting your intellectual property if you are operating in China. Of course this is true of doing business anywhere, but it is generally accepted that there is additional IP risk in China where companies have found that it can be difficult to enforce intellectual property rights. David Thorrold, CEO, BioVittoria Protecting copyright Unlike patents and trademarks, you do not need to register copyright to obtain protection. China gives automatic copyright protection to nationals of countries that are party to the Berne Convention which includes NewZealand. However, you can register voluntarily with Chinas National Copyright Administration, which provides you with a certicate and is a convenient way to prove ownership if you need to enforce the copyright. Registration of a copyright licence with the copyright administration may also be required to remit licence and royalty payments abroad. Another important fact you should consider is that if you need to le for Customs recordal to facilitate seizures of pirated copyright material by China Customs, a copyright registration certicate is necessary. There is copyright protection for graphics or arts related to: product designs diagrams and manuals computer software musical, video, dramatic and artistic works architectural works photographs. Copyright protection applies for 50 years. In some cases, you can protect product design as an artistic work, but this can be challenging in respect of everyday objects. To protect the shape and exterior design of a product in China it is better to le a design patent when the design is rst created. Dealing with unfair competition and trade secrets Chinas unfair competition law prohibits the theft and disclosure of trade secrets. It also deals with attempts to pass off a fake product as legitimate, or in a way which creates confusion. In relation to trade secrets, companies should take the following steps to protect trade secrets in the workplace: Identify your trade secrets and review who has or could have access to them. Control access to trade secrets by implementing proper security measures and restricting access to relevant computers and equipment, documents and areas. Documents and materials that are trade secrets should be labelled. Impose a strong and clear contractual obligation on employees at each level to protect your trade secrets. Upon hiring, companies should ask each employee to

sign an agreement that conrms the employees obligation to protect the rms trade secrets. Seek advice of labour lawyers or HR specialists in China on what is enforceable in employment agreements. In relation to passing off, you are protected if your product or service has a reputation in China and if the infringers imitation may cause confusion, even if you have not registered any trademarks or other rights, or if the infringer has not used the same trademarks. However, it is essential that your product or service is already sold in China to demonstrate reputation. The threshold for proving whether the alleged infringer has caused confusion is a subjective one and such cases can be challenging. Having good records of your marketing activities can improve your case. (BPMC (2005). Protecting your Trade Secrets in China. Hong Kong: Alibaba Group) What can I do if my IP is violated? While China has a reputation for having weak IP enforcement, in reality, standards of enforcement have improved dramatically in recent years. This is mainly because many Chinese companies are themselves IP owners and are also taking legal action against infringers. While there is still inconsistency between different IP agencies, the courts and between different locations, you should not assume that the odds are against you. It is more likely that, if your rights are in place and you have a clear case, you will be successful, although the level of punishment of the infringer may be less than you expect. Its not so much in terms of how the law is interpreted anymore, its the threshold that the authorities set for you in terms of how much evidence youve got to produce and how much youve actually got to convince them. Luke Minford, Rouse and Co International He says theres been a huge increase in the number of cases going to court and that has really improved the quality of the judges. Its improved the impartiality of the decisions. Were seeing some very good, fair, fast decisions coming out of the courts. The cost of enforcement can be a lot less than in NewZealand. NewZealand companies should be prepared to act quickly and decisively regarding enforcement. There are several enforcement options for dealing with violation of your IP: administrative enforcement civil litigation criminal enforcement cease and desist (C and D) letters.

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Administrative enforcement The main way to deal with infringements is to le a complaint with one of the Chinese enforcement agencies that have specic powers to enforce IP rights: for patents this is the State Intellectual Property Office trademarks the Administration for Industry and Commerce copyright the Copyright Administration. Customs and other agencies such as the Technology Supervision Bureau also have powers to deal with counterfeit goods. While their powers vary, these administrative agencies can usually ne infringers, seize goods or equipment and issue penalties. However, they do not have powers of arrest and cannot award compensation. While the administrative enforcement is usually very quick and low cost it does not require any court procedure it can be a limited deterrent and nes may be small. For complex IP cases, you may need to use the courts and for very large cases, you may want to try criminal prosecution (see below). An administrative action can cost US$4,000$8,000. Civil litigation Companies can take civil action through a local Peoples Court or an Intellectual Property Tribunal. The courts are suitable where: you have a more complex case that cannot be handled by administrative authorities you want to obtain damages, or send a strong message to the infringer. Civil litigation is more suitable where the infringer has assets and has the ability to pay damages. Though slower and more expensive than administrative action, more and more companies are going down the litigation route. Although damages awards for IP infringement are much lower than you might expect in NewZealand, they have been rising in recent years. You can consult the website www.ciela.cn which gives useful statistics on IP cases in Chinas civil courts. You should try to bring your case in courts in larger cities, such as Beijing, Shanghai or Guangzhou, rather than in local courts which may have less IP expertise or which may be subject to local bias. It is possible to combine administrative and civil action, so that you can conduct an administrative raid rst and then le a civil suit to claim compensation. Costs for civil litigation can vary considerably depending on the complexity of the case, but may vary from US$ 20,000 100,000.

Criminal prosecution Chinas criminal law allows for prosecution of serious cases of piracy and counterfeiting. Only cases which are relatively large scale, and where trademarks or copyright have been exactly copied, are eligible. The threshold for prosecution is based on a specic monetary value of the case, although valuing the case (by the number of counterfeit goods sold or seized) can be challenging. The police, as in many other countries, have limited resources and may be reluctant to investigate cases which they consider small scale. Generally you need to prepare the details of the case in advance and report to the police they will not simply act on preliminary leads. It is common for a case to be transferred from the administrative authorities (see above) if its large enough. Criminal cases require investment of time and resources to investigate the leads and guide the case through the prosecution process. Costs can range from US$ 20,000 40,000. Cease and desist Cease and desist (C&D) letters can be an effective way of getting an infringer to stop, if you believe the infringer is too small scale or not serious enough to merit spending a lot of money. For example, traders on the internet are a suitable target for C&D letters if you want to demand that they take down any infringing products or logos online. To be most effective, the letter should be written in Chinese, sent by a Chinese law rm and followed up with calls. While C&D letters are not likely to be effective against a hardened counterfeiter, do not rule out the effect that a simple letter can have in dealing with a problem.
KEY LEARNINGS

Take steps as early as possible to protect your IP. Have a clear intellectual property plan and budget that anticipates risks. Get expert support on the ground in China ahead of market entry. Educate your own employees and partners about IP and ensure your contracts fully protect you. Be prepared to act quickly and decisively regarding enforcement. (Source: Chris Bailey, Partner and Deputy Country Manager China, Rouse and Co)

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HAYES INTERNATIONAL CASE STUDY

Keep risks in perspective protecting intellectual property
Hayes International has developed an active IP protection strategy for its manufacturing operations in China based on keeping all critical operations in NewZealand and contracting out the rest to Chinese suppliers. Developing and maintaining strong personal relationships with Chinese partners is also seen as an effective way of keeping IP safe. In more than 16 years of selling in China, Hayes is not aware of one breach of its IP. Dont let paranoia over intellectual property paralyse you, says Mike Lowe, General Manager of engineering company Hayes International. In the 19 years I have been going to China, I have never had an experience where anybody has intentionally gone out of their way to rip me off. Get patent protection That said, Lowe advises companies to invest in patent protection before entering China. We have had patent protection in China on two of our machines which have quite unique features, but there is nothing to stop anyone pulling apart our machinery and copying it. However, he notes that patents are now being honoured more than in the past, and they are enforceable. The Rotorua-based roll forming machine designer and manufacturer also has a strategy to protect its IP in China based on doing as much activity as possible in-house and getting to know its Chinese partners personally. Hayes sold its rst machines to China in 1991 and today sees the country as central to its global growth strategy. Keeping key operations in NewZealand At the core of its IP protection strategy in China is making everything that is critical to its business in NewZealand. Lowe says design and tooling are what denes Hayes machines so the company does its research and development and tooling in NewZealand and they are owned by the company. It also manufactures all its vital components in NewZealand and ships them to its factory in China. Subcontractors in China then make low value, straightforward components such as steel chassis, guards and brackets.

All the Chinese subcontractors are doing is fabricating equipment to hold the tooling up, Lowe says. The Hayes-owned factory nally assembles the complete machine. This approach, on top of helping to safeguard Hayes IP, also halves the import component of its machines, thereby lowering the level of investment of their local customers. Condentiality agreements Hayes makes all staff sign a condentiality agreement, though Lowe wonders how effective this is. If your business is dependent on the fact that there is a document hanging like the Sword of Damocles over your staff then you probably shouldnt be in China. We treat staff the same as we do in NewZealand. There is an induction programme and the guys appreciate that the material they see is the companys property. The risk for us is quite low. Hayes has an advantage over many other companies manufacturing in China and worried about IP protection. Its relatively small number of customers (in 2007 it had 45 in China) allows it to strike up close personal relationships with customers which creates an environment where its IP is looked after. The company also makes the point of visiting all its customers regularly. It is central for us to meet our customers, says Lowe. The Chinese expect you to treat them like a friend, but we dont hand out drawings of our machines. If a customer has a broken part, we will make it and deliver it to him. But the reality is, whatever you are doing, youve got to know your Chinese partners well. I would not ship a machine to a customer I did not know. He advises companies to develop a good personal relationship with any contract manufacturers they use. If you have a good relationship you can apply a bit of personal pressure if something goes wrong. If your manufacturer delivers components that are below quality you can go back to them and express your concerns, and they will take that on board. Tips: Keep critical operations in-house in NewZealand. Develop close personal relationships, for example with subcontractors. Have staff sign a confidentiality agreement but back this up by treating staff with respect. www.hayesint.com

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3.5 BUILDING RELATIONSHIPS

Building and maintaining relationships In China you will probably need to develop deeper relationships than would be expected at home or in other Western markets. Most of the time a potential Chinese partner will want to establish trust with you before business negotiations get underway. Chinese prefer to do business face-to-face with people they know and trust, or with those theyve met through people they know. The strength of your relationship is more important than any contract. Youll hear what appears to be contradictory advice about the importance of guanxi roughly translated as its not what you know, its who you know, or the old boys network. Its power is declining, but guanxi is still powerful in some regions and parts of the economy and government. Also, China is one of the worlds less predictable markets thanks to the amount of discretion given to government officials and the rapidly evolving political, legal and economic systems. Relationships with key officials can help you stay on top of changes.
KIWI LESSON ORGANISE AN INTRODUCTION

KIWI LESSONS QUALITY IS A NUMBER ONE ISSUE

The number one thing is to have a good product, a quality product. Apart from that of course, you have to have a good relationship with people. Then you have a better chance. Frank Zang, General Manager Hayes International, Shanghai Today time is money for these very busy [Chinese] executives and owners of companies and the wining and dining is not the be all and end all of relationships. The primary factor is meeting their quality specications. Keith Stevens, former General Manager, Ovine Garment Leather Division, Richina Pacic Ltd, Shanghai Know who you need good relationships with When building relationships you should pay attention to key people at all levels of an organisation, not just the top. Business partners Being successful in business in China is often about interacting with business partners in social situations that help to build up and maintain trust. And because the Chinese are usually looking for long-term relationships, you have to show that you are in China for the long-haul. They will also be looking for win-win situations so you need to highlight mutual benets. Face-to-face meetings (both social and business) are important to the Chinese so you will need to make time to do this. However, dont rush up to China every time you are invited or contact is requested. Before you decide whether or not to go, consider the reasons for the visit, what will be achieved and what alternatives there are to a face-to-face meeting.
KIWI LESSON JUST THE START

Danny Chan, businessman and third generation NewZealand Chinese, says organising an introduction or recommendation from a mutual associate can advance relationships and potentially fast-track your timeline. They will check you out by talking to others.
KIWI LESSON A 24/7 OPPORTUNITY

Take full advantage of the 24/7 nature of Chinese business. Be prepared to meet prospective business associates in social setting on evenings and weekends. Peter Francis, regional manager Asia Pacic and Middle East, Gallagher Security Develop an understanding The power of relationships ranges from the long-term ones you need to develop and maintain with your Chinese partners and other key stakeholders through to the bonds of deep guanxi the network of people who liaise, cooperate and support one another. The former is a universal necessity for doing business in China; the latter is in decline, especially in the main centers as China modernises and the government cracks down on corruption. Relationships can also be important in dealing with government tax, customs and quarantine officials. For more information on guanxi see the Entering the Market Chinese Culture and Business section. Another important concept to understand is mianzi (or face) which represents a persons image, pride, reputation and social status. Its an important part of relationship building.

Businesses should recognise that their rst Chinese partnership could be benecial beyond the deal on the table. Trevor Burt, Chairman Ngai Tahu Holdings Officials The inuence of government officials on the way business is conducted in China is strong (though declining) so it pays to take the time to meet and build relationships with key officials. You should at least take steps to understand the environment these officials operate in. Chinese laws and regulations give officials a large degree of discretion on enforcement, resulting in different interpretations in different places. You must never try to sway officials in how they do this, but a good relationship with officials can give you a clearer idea regarding how they will interpret laws and regulations. Its a good idea to start with a courtesy call to relevant government officials. This will alert officials of your existence and what youre doing and demonstrate your transparency and respect. As a result, officials may provide advice and assistance. In the main business centres, the legal and regulatory grey areas are shrinking as law making becomes more transparent. Businesses nd they dont need such close relationships with officials to stay on top of issues. For information on how to deal

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with government officials see the Entering the Market Dealing with Government Officials section.
KIWI LESSONS THE IMPORTANCE OF FRIENDS

How to build good relationships Building a good relationship will take time and persistence it wont happen overnight. If it appears to have happened overnight, watch out. Some ideas for building a relationship include: Entertain key stakeholders with meals, other social and sporting activities. For more information see the Entering the Market Chinese Culture and Business and Negotiations and Meetings sections. Find a champion to introduce you and vouch for you this will go a long way to opening doors and minds. Written references or letters of introduction are also common. But a whole network of acquaintances and business contacts around the country is much more useful than a single sponsor. Finding a champion or a sponsor can be difficult for businesses entirely new to China contact NZTE and KEA for help. Paying for your partners in China to visit your operations in NewZealand is a good way of keeping them informed and motivated. Its also an opportunity to train Chinese staff. Dont completely ll up the programme with work. About half should be devoted to rest and relaxation, leaving time for building the relationship and an affinity for NewZealand and NewZealand products. When hosting Chinese guests, remember the effort they put into hosting and looking after you in China and reciprocate this. Investigate placing some of your Chinese staff in your NewZealand operation on a longer term basis. (Help ensure all visa applications to NewZealand are led on time and appropriately). Use events like Chinese New Year to send greetings to important Chinese contacts and friends. Also give your Chinese-based staff a budget for these events. If China is likely to become a significant part of your business, consider hiring a Mandarin speaking member of staff. Longer term you can commit to the two or so years it takes to become a procient Mandarin speaker yourself. Be polite and sensitive to Chinese culture. Make an effort with the language even a little Chinese can go a long way.
KEY LEARNINGS

The rst rule is to focus on building relationships rather than talking money. Its not a quick thing. One dinner is not going to do it. Its more about time rather than throwing money at it. Sean Simpson, co-founder LanzaTech Knowing and being friends with the government officials who control regulations in your business sector is essential to business growth and development. Correspondingly, having bad relationships with officials in your business area is likely to make business growth and development almost impossible. Dr Anatole Bogatski formerly with international education provider, AIS St Helens Generally officials might have a lot of discretion in terms of perhaps applying a policy or interpreting a policy, and obviously they will use that discretion more favourably if they like you rather than not like you. Rob Young, China-based Kiwi businessman Distributors and agents It is important to have a good relationship with your distributors as you lose a lot of control over the sale of your products when you hand them over to a distributor. It is also important to support and motivate your agent to get the best out of them. Sales support trips into China not only help concentrate agents and distributors minds on your products and sales opportunities, but they also are an opportunity to build relationships directly with your client base rather than hearing everything second hand. Training sales staff can achieve the same thing. Good relationships can help both sides understand each others objectives and help you keep tabs on what the distributor or agent is doing with your product. Many Chinese agents will not let you get too close to their customers. But if you can, do it. If your plan is to get to know the customer so you can deal with them directly and cut out the agent be careful, as the agents relationship may prove to be the strongest.
KIWI LESSON GOOD PARTNERS HARD TO FIND

It is vital to nd the right business partners, but it is often the hardest part. Finding appropriate distributors is particularly challenging. Tim McIver, Managing Director, Lanocorp Pacic, Kiwis in China Dont forget that there are many Kiwis in China who can and want to help. These range from business people who have been there for decades to relative newcomers and organisations such as KEA, the NewZealand Embassy and NZTE. Using the informal and formal Kiwi networks can provide invaluable contacts and advice to help you on your way in China.

Understand the business and commercial environment and the importance of relationships within it. Personal relationships are a powerful force in Chinese business life. The extent of this power depends on who you are dealing with and where. Building a good relationship will take time and persistence. The relationship you develop with an individual also represents your relationship with their organisation. Show that you are in China for the long-haul. Meet and build a relationship with key officials, or at least take steps to understand the environment they operate in. Build relationships with the many Kiwis in China.

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WAIKATO UNIVERSITY CASE STUDY

My customer, my partner the importance of relationships in China
Good relationships are important for success in any country, but Waikato Universitys Dr Ed Weymes has found that building and maintaining strong personal relationships is a make or break issue for the universitys education business in China. The universitys Pro Vice Chancellor International manages the universitys joint degree programmes in China. Under the programmes, Chinese students do half their degree in China, taught in part by Waikato staff, then come to NewZealand to complete their study. Weymes says the importance of personal relationships is probably the key difference hes experienced between doing business in the West and in China. Historically, China never had a strong legal system, so business has been conducted on the basis of relationships, he says. In the West a business agreement is cemented with the contract. In China the contract is less important and business is conducted rst and foremost between people. As a result, hes had to develop more than just working relationships with his Chinese counterparts; hes had to develop personal relationships with them. In China this concept of working through personal relationships is called guanxi, which represents the relationship and obligations between individuals. While Westerners are unlikely to attain guanxi, a trusting relationship is critical to any business venture. Developing these relationships takes many visits and dinners and is established over time. For example, it took two years before Weymes counterpart in China who spoke uent English would speak anything other than Chinese during formal meetings. When the switch nally came it was a sign that a relationship of trust had nally developed. Use Chinese nationals to bridge the culture gap Having a Chinese national as a mentor can be valuable. When I rst started going to China 25 years ago we had a Chinese history professor who would come on our visits and explain the subtleties and nuances of what was being said in meetings. He advised us on what we should and shouldnt accept. A Chinese national on the staff also helps Weymes navigate cultural differences. Your Chinese counterpart may feel more comfortable raising delicate or difficult issues with a Chinese national than with a Westerner like you, because this will avoid a loss of face or embarrassment. He uses an interpreter rather than a translator to ensure he understands what is really being said. China is a country where yes can mean no and no is never said. You need to understand what level of yes is being expressed: Yes I understand you; Yes I agree with you; or Yes we are committed to that. An interpreter who knows your organisation can explain the nuances of the responses.

Build relationships with senior staff Weymes says you need a relationship with a senior member of the Chinese organisation, otherwise your project might not get noticed. I maintain a relationship with the presidents of the Chinese universities I am dealing with. I may not meet with them on a regular basis but I have their cellphone numbers so if there is a problem and I need to talk to a decision maker, I can actually reach one. When dealing with problems protect the relationship by raising the issue indirectly. Dont accuse your partner outright or issue threats. Deal with it the Chinese way quietly and indirectly. Tell them there is an issue you are concerned about. Dont insist on an immediate response, but wait for them to deal with it, says Weymes. Maintain your key relationships To maintain essential relationships Weymes visits China four to six times a year. If an issue arises you can discuss it by email or fax. But at the end of the day if you want to get it dealt with quickly you need to jump on a plane. Relationships with government officials and State Owned Enterprises tend to be more formal, while dealings with private companies particularly in the developed southern and eastern regions are becoming more like those in the West. Because business is based on personal relationship rather than contracts, you need a continuity plan for when key staff leave, Weymes says. We were about to sign a contract when there was a change in senior personnel on the Chinese side and we were asked to put things on hold until the new senior administration got to know us. It took six months to get back on track. Tips: In China its who you know, not what you know, that sometimes counts. Dont try to form a quick relationship because it wont work. Accept that it will take time two or three visits just to get things started. Negotiations Chinese style One of the best places to learn about negotiating in China is the countrys local markets, Weymes says. If the stallholder asks you for RMB 700 for a nice shirt you should offer RMB 40 and then walk away from the store at RMB 80. When you start walking, nine times out of 10 you will hear the words Come back okay, okay. The Chinese are tenacious negotiators, so you need to have a bottom line and you need to stick to it, Weymes advises. If you acquiesce to a request then another request will be made. If you acquiesce to that, a third one will be made. While you keep acquiescing your partners will keep pushing. When you reach your bottom line stick to your guns. I had a situation where I was meeting with my Chinese partners at 9am to spend 45 minutes reviewing all the terms we had negotiated. Well, 11 oclock came and we cancelled our rst train, 12 oclock came and we cancelled that train. When our partners tried to renegotiate the nancial aspects I just drew my line in the sand

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and wouldnt budge. And when they saw that I was just letting trains depart and that we were intent on staying there we reached a nal agreement. To ensure the negotiations dont collapse in confusion and frustration, prepare yourself for a completely different approach to negotiations. When we negotiate in the West we tend to work logically through the topics, signing each one off then moving onto the next. In China things dont work that way. You can reach agreement on an issue and then nd that a few hours, days or a month later it will come back to be relitigated. If you ask why something thats already been signed off is being relitigated the response might be: We just wanted to see whether you have changed your mind. And remember you are never off duty. Never be ippant. A casual comment to a Chinese second stringer over a beer in the evening is likely to get repeated back to you at the formal meetings the next day.

is able to read body language and to empathise. Negotiation in China is a courtship process: you both go out for a while and get to know each other better, then you move on to the engagement (prenuptial contract). Things then move quickly and become more direct when sufficient trust has been built up both take the plunge. Dr Ed Weymes, Pro Vice Chancellor International, Waikato University who has more than 30 years experience in developing partnerships with Chinese enterprises. Understanding the goals of your Chinese counterparts One bed two dreams This Chinese proverb highlights the different expectations that parties to a negotiation may have. Serious misunderstandings occur when one or both sides at the negotiating table assume that the goals of the negotiations are shared. Understanding what the other side really wants is made more difficult in China because of language and cultural differences. At a Chinese negotiating table, everything is negotiable. When you have a contract you should fully expect to have to negotiate it again as part of an ongoing long-term relationship.

3.6 NEGOTIATIONS AND MEETINGS

Managing meetings and negotiations When entering business meetings and negotiations in China be aware of a set of protocols and expectations that are different from what youd be familiar with in Western markets. Understanding these differences can be the margin between success and failure. Chinese people have traditionally done business on the basis of mutual trust rather than by written contracts. In this environment you will need to gain the trust of the key people you are negotiating with as well as being well covered contractually. You will also need to develop an accurate opinion on whether you can trust your counterparts. This means a successful conclusion to business talks can take longer than expected. The rst meetings are likely to be social get to know you events such as dinners rather than pure business meetings. The Chinese also have a reputation for being tough negotiators who will push and push to get what they want. You have to be prepared to say no. Negotiations
KIWI LESSON ITS A COURTSHIP

Where to get help For help understanding Chinese negotiation techniques talk to NZTE, and NewZealand or Australian business people already in China. Understanding China Building Bridges for Business Success by Ed Wymes also introduces NewZealand executives and managers to the business practices they will encounter in China.
KIWI LESSON DEFINE OBJECTIVES

I think a vital ingredient is to make sure you clearly dene to your business partners what your objectives are and what you believe their part of the bargain is. A lot of companies dont do this. They do not put penalty clauses into their contracts and they nd in time that things go sadly astraybe very, very sure of what your objectives are and put penalty clauses in your contracts for non-performance. Keith Stevens, former General Manager, Ovine Garment Leather Division, Richina Pacic Ltd
KIWI LESSON HAVE A BOTTOM LINE

Foreign businesses will fail if they do not understand the Chinese way of doing things. There is no need to adopt these ways but merely to adapt to them. For instance your ace NewZealand negotiator may not be the best person to send to China. They may be too direct, too forthright and used to drawing a line in the sand and defending it against all challengers. A negotiator with a high level of emotional intelligence and intercultural communication skills is preferable someone who

Our relationships have been renegotiated over the years. China is a tough place to negotiate and different from other markets. Negotiating does not always involve nding a middle ground. In other markets you can open with your ideal position and end up with your middle position some while before getting to your walk away position. In China you usually end up very close to your walk away position. You have to have very rm ideas on what your walk away position is otherwise you can end up losing a lot and ending up with a deal you cannot live with. Make sure you know what is your absolute bottom line what you cannot move on (price, length of relationship, company reputation, standards etc). Dave Foreman, General Manager International, Vitaco

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Meetings Understanding meeting protocols Meetings normally begin with small talk such as your positive experiences in China and of Chinese people, the weather and travel. Once people feel comfortable with each other, talk turns to more formal business matters. Its helpful to have prepared some notes on your hometown, city and company. You should also arm yourself with knowledge about China and the places youre visiting. You can share this knowledge during conversation, perhaps by seeking conrmation about something youve read or heard. Understanding seating arrangements Formal meetings in China usually take two forms participants either sit in a semi-circle in armchairs, or around a conference table.

Meetings where participants are seated in armchairs tend to be less work orientated. The armchairs are arranged in a horseshoe shape (see diagram below). If the Chinese side is hosting, the Chinese host will take the seat at the left hand side at the centre of the horseshoe, while other Chinese participants will be seated on the left hand side of the semi-circle. The most senior NewZealand guest will be escorted to the right hand side of the centre of the horseshoe, and the remaining NewZealand guests will be seated on the right hand side of the semi-circle. Interpreters normally sit behind the host and chief guest and interpret for their respective side. If you are the host, consider hiring a formal meeting room in a hotel. This can be expensive, so make sure the meeting warrants the expense.

SEATING ARRANGEMENT BELOW IS CASE WHEN CHINA SIDE IS HOST

SEATING ARRANGEMENT BELOW IS CASE WHEN NEWZEALAND SIDE IS HOST

If you are the meeting host, you should arrange to have your delegation sit on the left hand side of the semi-circle, like this:

Interpreter 1

Interpreter 2

Interpreter 2

Interpreter 1

NZ 1 NZ 2 NZ 3 NZ 4 NZ 5

China 1 China 2 China 3 China 4 China 5

China 1 China 2 China 3 China 4 China 5

NZ 1 NZ 2 NZ3 NZ 4 NZ 5

Where there is formal business to discuss, meetings will often take place around a conference table. Seating will normally be allocated by name cards. Generally, the delegation leaders face each other at the centre of the table and other participants alternate in order of seniority toward each other, like this:

China 5

China 3

Interpreter

China 1

China 2

China 4

China 6

NZ 6

NZ 4

NZ 2

NZ 1

Interpreter

NZ3

NZ 5

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Understanding speaking protocols Discussions are primarily between the two leaders, although either may elect to include others in the exchange. Select one person usually a senior team member to be your group spokesperson. Meetings begin with the introduction of the delegations. The Chinese side (if hosting) will then launch into a reasonably long and formal introductory presentation. The discussion normally begins with general issues, before turning to more specic topics. The NewZealand delegation is expected to reciprocate, and the chief guest should prepare key messages for delivery. Some Chinese people are not used to directly saying no. Instead, they may respond with Ill look into it or Ill see what I can do on this. Certain phrases such as It can be inconvenient, I am not sure and maybe, may in fact mean no. Think about your own strategies for saying no. You dont have to come out with direct answers. Be non-committal or evasive if the situation calls for it. The key messages from the Chinese side may be delivered rather late in the meeting. How to end a meeting If the Chinese side is hosting, they will normally signal the end of a meeting by referencing the busy schedule of your delegation, or an appreciative remark about how good the discussion has been. Your interpreter and senior leader should listen carefully for those comments. If youre not the host, then there is generally no need for you to take the initiative to bring the meeting to an end (unless the discussion is dragging on unproductively or you have another commitment to go to). At the end of a meeting, a simple handshake and goodbye (zaijian in Chinese) is enough. If it is the rst formal meeting, gifts may be exchanged at this time or at lunch/dinner if there is one. Guests are expected to leave before the hosts.
KEY LEARNINGS

Bargain hard its expected. Nothings agreed until everythings agreed, so returning to a point you thought was covered is not unusual. Get experienced professionals to review draft contracts. Have a bottom line and dont cross it. No deal is better than a bad deal.

3.7 CHINESE CULTURE AND BUSINESS

Dealing with Chinas culture and protocols Chinas culture and protocols are often very different from NewZealands and may seem overwhelming and mystifying. The Confucian traditional belief system, ethics and behaviours, along with relationships and the concept of guanxi (or functional business connections/ relationships), remain at the heart of business culture and etiquette in China. Chinese people generally place great importance on relationships, ranking and protocols. Chinas larger cities and southern and coastal regions are more familiar with international business practice and are more likely to be aware of what is required for international trade. There are also some younger generation Chinese who, with an international education, have a more modern approach to international business. Despite this, they will still largely conform to Chinese ways of doing things. Understanding traditional values Confucian values and concepts were designed to build a clean, honest and orderly society where responsibilities and obligations are observed. However, in practice they also have negative effects. For example, guanxi can be used to bribe and corrupt public officials or people in more senior positions, or encourage practices such as insider trading. The key business concepts derived from Confucian values are: adherence to a hierarchical system including respecting government representatives and the elderly collectivism group or family orientation rather than individualism the concept of mianzi or face throughout business interactions the concept of neiren vs wairen or inner circle vs outsiders the importance of guanxi or relationships in business. When in China, the most important thing is to be prepared, exible, patient and be yourself. Enjoy the opportunities of being a NewZealander doing business in China. Understanding guanxi or the old boys network Guanxi equates to: Its not what you know, its who you know, or the old boys network. It describes the relationship or network among various parties who liaise, cooperate and support one another. In the past it has been a critical part of doing business in China. However, times have changed.

Be thoroughly prepared, patient and observant. Do not put your cards on the table NewZealanders can be too open and honest in negotiations. Stay calm and dont lose your temper. It may be possible in some circumstances to involve embassy officials and trade commissioners this can open doors. Designate the most senior member of your team as spokesperson. Ensure the technical people on both sides have time for discussions. Use Powerpoint presentations if possible. Translate handouts. Expect ambiguity. Do not race to the bottom line. When dealing with a panel, ensure you know who are the key decision makers.

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Deep guanxi is a strong feeling of interpersonal relationship, loyalty and trust, and moral obligation to maintain the relationship from both parties. It can also refer to those people one has a connection with. In practice, it is an in to many aspects of life, from being introduced to a new business partner, helping smooth the path of an application through a government office or securing a business opportunity. A good relationship with the people around you can lead you to a new network which in turn will lead you to their networks. In this way youre building up a valuable social and business asset. NewZealanders who have been involved in China agree good guanxi enables you to get things done more easily. But there are negative aspects to guanxi that can present some moral dilemmas. For example: If something goes wrong, your relationship can be challenged. If you tap into your guanxis experience, resources and networks or have received a gift you have incurred a debt of guanxi. Though nothing may be said, you will be expected to pay back the debt in the future by providing assistance or favours either to the individual or their network. There is no time limit on the debt. It can be decades or generations. But if you dont reciprocate when required, your guanxi will be very hard to maintain. This is the moral dilemma of guanxi. You may feel obliged to do something you are uncomfortable with such as receiving requests for favours. In order to preserve the relationship and to save face for both sides, your Chinese partner may offer to provide assistance thats not needed, rather than just saying they cant help. When providing advice, guanxi can be the main determinant for a referral. For example when asked which part of China is the best place to do certain business, your business partner may recommend their home city or province. This may not be the best or most appropriate place, but its where they have an understanding, a network and guanxi. Guanxi can also be used as a negotiating tactic for example, you have to deal with this person, or hire that person because of the debt from your guanxi. This kind of situation can be a critical turning point in a business relationship and one you should be aware of. How to establish guanxi The main way of establishing guanxi is usually by introduction through a third party. This may be one of your own Chinese employees, friends, or NewZealand overseas missions. In a modern China it can also be through a simple meeting or a trade event. These connections can come from anywhere at any time. Find some common interests, learn some Chinese history and culture and speak some Chinese phrases. These are all useful tools to help build up guanxi in the early stages.

Nurturing and maintaining guanxi The way to build up guanxi is to either visit or live in a Chinese environment or to regularly meet with your Chinese business counterparts face-to-face. This includes visiting China often or inviting your business partners to visit NewZealand frequently. Reciprocating generosity and hospitality is part of maintaining guanxi. This means you need to consider returning the hospitality you received when your business partners visit NewZealand. Maintaining regular contacts provides opportunities to enhance old guanxi and establish new guanxi through these contacts. Developing and nurturing guanxi can be time consuming and resource intensive. Consider it a worthy investment in establishing a strong long-term relationship. Experience from NewZealanders who have been involved in the China market suggests that if your contacts claim to have guanxi in China, make sure they do. Although its difficult to do, check with them what kind of guanxi they have, how deep their relationships go and how relevant they are to your business. Focus on those people who have contacts with key inuencers or decision makers. More importantly, establish guanxi directly with those inuential senior officials yourself. How not to offend In China, mianzi represents a persons image, pride, reputation and social status. Its an important part of relationship building. A persons face is also their organisations face. The relationship you develop with an individual also represents your relationship with their organisation. Chinese people can be extremely sensitive about gaining, maintaining, giving or taking away face in all aspects of life. Two of the easiest ways to cause a person to lose face are: to criticise them in public disrespect their seniority or status. This can cause unnecessary barriers to relationship building. When dealing with Westerners, mianzi has a more complicated meaning for Chinese. On one hand, the Chinese may give non-Chinese special mianzi and treatment on account of their foreignness. On the other hand, many Chinese recall the Opium War, foreign invasions and colonisation of the 19th and 20th centuries. Those events are considered to be a source of humiliation or loss of face by most Chinese. Today, Chinese people try to balance the need to attract foreign investment while remembering aspects of history that caused loss of mianzi.

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What you can do to give face: If you are coordinating a meeting or hosting a dinner for a Chinese delegation, arrange seating according to seniority. For more information on how to set up a meeting or host a dinner see the Entering the Market-Negotiations and Meetings section. Respect your counterparts seniority in front of their subordinates. Arrive on time or early for an appointment. Arriving late may be seen as a lack of respect. Provide better gifts for senior managers and/or officials rather than providing the same gift for everyone. If providing gifts to the whole team, its also a good idea to give a gift to the interpreter/s. Publicly thank your counterparts for their cooperation. For example, raise a toast to them at dinner. If playing a game such as golf Chinese often allow their opponent (someone in a much senior position) to win, even if they are the better player. Focus on common interests and win-win issues. Though Chinese tend to point out conicts and disputes in early stages of the negotiation, they prefer to leave them for discussion at a later stage. If there are critical issues that could undermine the whole deal, its a good idea to scope them out early. Numbers and colours to avoid There are traditional taboos around numbers. Some business people are especially sensitive to numbers in China, especially in the southern part of China. Lucky numbers: 3 when pronounced in Chinese, especially Cantonese (spoken in Guandong province and Hong Kong), sounds similar to the word for promotion or being promoted 6 when pronounced in Cantonese is similar to the word for happiness 8 when pronounced in Chinese, sounds like a similar word which means prosperity 168 when pronounced in Chinese, sounds like a similar phrase which means money owing in easily Unlucky numbers to be avoided: 4 when pronounced in Chinese, sounds like the word for death (especially in Guangdong province and Hong Kong) 250 when pronounced in Chinese, sounds like the word for dumb/stupid In some lifts, youll nd there is no number for the 4th, 13th or 14th oors. Red and gold are for happy occasions. Black and white are for funerals. How to build trust In China, there is a strong sense of neiren inner circle and wairen outer circle. Theres a very high level of trust, condence and loyalty associated with anyone considered neiren. People in this

circle have common interests and common languages and can get things done quickly. Generally speaking, people from the same extended family, the same town, even the same province, or friends, colleagues and acquaintances are treated as neiren inner circle. When interacting with foreigners, neiren and wairen have another meaning. People of Chinese nationality are sometimes treated as neiren while other foreigners are wairen. However, overseas born Chinese are still expected to conform to the way things are done in China. If not, they can sometimes also be treated as foreigners or wairen. This concept is also applied within China and within Chinese relationships. Someone from another city or another part of China can be treated as a wai di ren an outsider by Chinese from another part of China. Employing Chinese-speaking staff, establishing your networks and making use of your Chinese business agents can help break the ice. Understanding hierarchy and decision making The concept of hierarchy inuences all aspects of Chinese life work, school and home. Simply put, the individual is traditionally subordinate to the organisation; the minority view is subordinate to the majority; and the lower ranked official is subordinate to his/her superior. Although a company director or president may be the boss, the real decision maker in the Chinese system can be someone in a seemingly innocuous position; in the case of government departments or State Owned Enterprises someone from a parallel Communist Party Department. While potentially difficult, at least attempt to identify the real boss or decision maker as early as possible. As a result, the decision making process may be conned to just a few people and may not be readily transparent. Hierarchy has a huge inuence in Chinese business settings. It determines who enters a meeting room rst, how introductions are made, how seating is arranged in meetings and at dinner, who speaks, and who makes decisions. In China the emphasis is on equal seniority of like-counterparts. For example it is common practice for director to meet director, manager to meet manager and so on. However, in practice, this may not always be possible when meeting with your business partner. If you can arrange it, a senior person from your business should visit China. Doing so sends a positive message that youre sincere and that you consider your relationship with them to be important. These meetings also help your representatives in China to be more effective, because when their position and activities are supported by senior management they are taken more seriously by their Chinese counterparts.

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Entertaining Evening banquets are necessary for hospitality, relationship building and entertainment. They are also a popular and essential process for business interaction.
KEY LEARNINGS

If they do not directly answer a question after repeated attempts, and it seems they do not know, do not push the point and potentially embarrass them. Back off and ask for the answer to come later. Time estimates for how long something will take can be very difficult often they are highly under estimated, though in some cases approvals can arrive far quicker than anyone expected. Chinese officials often show respect to guests through special treatment. This may include queue-jumping, over-riding a long series of traffic lights, or moving around major cities in motorcades, headed by a police car with lights and siren. Be wary of matchmaking activities with local Chinese companies provided for you by local authorities. Often local authority sponsored events, such as trade missions, are more about what is good for the politicians, their region and its businesses than what is in your companys best interests. Remember there are lots of alternative ways of entering China other than getting into bed with local authorities.
KIWI LESSON HELP TURNS TO PRESSURE

The Chinese generally consider relationships, rankings and protocols very important. They are sensitive about gaining, maintaining, giving or losing face. Hierarchy influences all aspects of Chinese life. Be prepared, flexible, patient and be yourself enjoy the opportunities.

3.8 DEALING WITH GOVERNMENT AND LOCAL AUTHORITIES

Dealing with government officials Regulation is perhaps one of the most opaque subjects in China, especially when it comes to understanding how laws are interpreted and implemented by officials. The actual legislation is often available in both Chinese and English, but by NewZealand standards tends to be some what ill-dened, partly to give government agencies and their officials the exibility they prefer. Research is essential; practical ways of dealing with laws and regulations, and the people who administer them, can only be found on the ground by the company itself or by well-qualied advisors. China can be very confusing with a plethora of civil servants and no apparent decision makers, says Howard Wilcox, Director Sales and Marketing at nancial services company KVB Kunlun. How to deal with officials Most officials simply require the basic respect of you having visited them out of courtesy and being honest about your companys intentions. The Kiwi straightforward, honest and low key approach is best, but also be conscious about what you say. Stay in regular contact with key officials, pay them visits on special occasions or in times of success and dont just turn up when you need them for something. Many officials are in office for only three to four years so do not expect any cultivated inuence to last past then. Chinese government officials have a high social status based on their place in the hierarchy, so interaction with government officials tends to be more formal. Mayors and other local officials in China often have far more power than we are used to in NewZealand. The majority of local officials are parochial and where they can, they will use the lack of clarity of in laws and regulations to further local ends. The Chinese deference to hierarchy can mean that lower ranked officials are reluctant to speak up, particularly if they are in the company of their superiors.

Early on, when Skellerup wanted to start up in Jiangsu, local authorities and politicians were very accommodating and helpful, says former company Managing Director and Chief Executive, Donald Stewart. But once our roots were down in Jiangsu the level of support changed and the local authorities became very demanding. They continually put pressure on Skellerup to invest more capital in the venture. Skellerup believes these demands are made so officials can meet their own KPIs. This constant pressure for more capitalisation has been difficult for Skellerup. Although the demands are delivered in a non-combative way, they have been persistent. Stewart says Skellerups response has been that the company is looking at continuing to expand over the next ve years if all goes well. The Chinese authorities have appeared only to have heard expand and not the caveat if all goes well and the pressure continues.
KIWI SUCCESS MANAGED ESCALATION

When Air NewZealand was laying the ground for the establishment of its direct AucklandShanghai air service, its central strategy in dealing with government officials was managed escalation. Air NewZealand and its allies made every effort to resolve potential issues at low levels of the bureaucracy rather than going straight to the top. This built up credibility and support among stakeholders. How to nd and meet decision makers in government Finding the actual decision maker in a government agency can be difficult for an outsider. There are consultants who can play matchmaker between you and officials in your region or industry. Be wary that some people may talk up their networks and level of inuence. Every local has a friend, relative or classmate in a high place.

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One way to meet government officials is to network. Be on the look out for NewZealand Government, NZTE and embassy events where Chinese officials will be attending. Also consider participating in events organised by other countries such as Australia, Britain and the USA, especially the American Chamber of Commerce.
KIWI SUCCESS USE AN AGENCY

KEY LEARNINGS

International nancial services company KVB Kunlun eased the way for the establishment of a branch in Hong Kong by hiring a professional agency to introduce the company to the Securities and Futures Commission which is responsible for regulating the securities and futures markets in Hong Kong. The company says the agency helped us with the minimum amount of fuss by facilitating licensing and other legal and regulatory requirements. Dealing with government-owned businesses It can be easy to forget, but China is a communist country and the government plays a direct hand in all key parts of the economy and in strategic enterprises. There are still hundreds of listed State Owned Enterprises and the Chinese Communist Party is involved at all levels in their corporate governance. The more sensitive the industry, the more important the governments role. Most heavy and infrastructural industries are still government/state-owned enterprise dominated (for example, energy, telecoms, transport). This can mean unwieldy but well-resourced competitors and much interference. In contrast, consumer goods tend to be left much more to the open market. There are also regional variations in the degree of government involvement or interest you will have to deal with. In general, on the east coast your interactions with government officials will be at a lower level than you can expect in central and western areas.
KIWI SUCCESS REGARD OFFICIALS AS FRIENDS

Network to find out who the key government officials are. Visit key officials out of courtesy and be honest about your companys plans. A good relationship with officials can help you stay up to date on law changes and official thinking. Interaction with government officials tends to be formal as officials have a very high social status based on their place in the hierarchy. Be wary of local authority matchmaking activities with local Chinese companies.

3.9 USING AND MANAGING CONSULTANTS

Using and managing Chinese consultants Theres no shortage of advisors (or advice) on entering and setting up a business in China. The question is who are the best advisors for you? Cultural and language differences make it more difficult to nd good advisors and determine if youre getting good advice for your particular situation. A simple place to start is to use China-based advisors. Chinas markets and rules and regulations are changing so quickly it is virtually impossible for consultants and advisors to keep up unless they are locally based. Forget about trying to do it yourself. At some stage you are likely to need the advice of lawyers, accountants, interpreters and translators, business entry consultants, human resource advisors and real estate agents. How to get the best advice Keep it simple, says Scott Brown of Shanghai-based RedFern Consulting. With all the current focus and mythology surrounding China as a market, investors often over think the issues and lose sight of the simple things that got them to that point or that they would normally have at the top of their list for any other market. You can burn up a lot money and mental energy trying to get the correct answers to the wrong questions. In China the gap in knowledge covered by you dont know what you dont know is huge. Advice may also appear contradictory, but needs to be put into context. This is why local advice is essential. Chinese markets are so complex, diverse and fast moving, being out of the country for even a couple of months will leave you out of date. If you are looking to use NewZealand-based advisors on the basis of their connections and associations with China, make sure they have strong and well-placed connections relevant to your business. There are also cost implications as they will add a margin onto whatever services are provided from China. As well as the big-name professional advisory companies, there are smaller consultancies (in some cases staffed by Kiwi expats) that may be suited to the smaller size of NewZealand companies.

Our relationships with government officials are exceedingly important, particularly in Guangxi (province where BioVittoria has a facility). Theyve been hugely supportive, and its from the highest level to the lowest level that weve got the support and thats worked exceedingly well for us. Garth Smith, co-founder, BioVittoria Finding out if there is a government connection with prospective partners is an important part of doing due diligence. Such a connection is not necessarily a bad thing, but it pays to understand a companys ownership structure and choose localities with care. Party officials still frequently retain a majority of the seats on strategic company boards of directors. Its military enterprises have also established wide trade connections and technical cooperation agreements with thousands of companies and manufacturers. However, direct government inuence in businesses themselves is being rolled back. The military has sold off its assets, however it still has some inuence without having direct ownership or control.

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On its website, NZTE has a list of consultants that may be suitable for NewZealand companies. You should be wary of advisors who claim they can cover all bases for you. In China it is highly unlikely anyone can do this effectively. You should also be cautious around people saying they will take care of everything. You need to control processes such as registering local trademarks and getting customs recordal and not cede them completely to advisors or consultants. It is advisable to do some form of due diligence on potential advisors to gauge their trustworthiness, competence and experience. This is also important for protecting intellectual property.
KEY LEARNINGS

I think one of the frustrating things for exporters to China is that the number of genuinely capable companies who operate with integrity and that can reach the broad market is very limited. If you cant nd a partner to work with that fullls the criteria that you are seeking then dont be frightened to hold off. Sometimes its better to wait than to enter too soon to work with the wrong partner and have a set of problems to recover from and repair that could potentially take you several years to get over. Brendan OToole, Managing Partner, Summergate International Use local experts Kiwi Scott Brown of China-based RedFern Consulting says simple checks can be made in China through companies such as RedFern that are capable of verifying the credentials of Chinese businesses and business people. He also suggests: where possible get public information from government agencies and other authorised bodies such as law rms do a legal background check to ensure that ownership, structure and registrations are clear consider contingent liabilities. Who really owns the shares or the parent company? Who really owns the land and what kind of rights do they have to it? What may seem reputable may often not be meet company managers and judge their willingness to open their books, answer questions and provide legal documents. If a company is nationally reputable, or exports to large foreign clients, it will likely have been through this before if the company has international clients, ask for the list and double check it for quality assurance issues, you can use independent third parties to do an audit. Do not trust nancial data unless you have had this physically audited by experienced professionals. It is very common in China for local rms to carry multiple sets of accounts for tax or management purposes. China-based consultancy Dezan Shira & Associates suggests getting a Capital Verication Report to check how much of a companys registered capital has actually been paid up. In China registered capital, one measure of nancial size, isnt automatically paid up just because a business licence has been issued. NZTE can provide a list of agencies capable of doing due diligence or seek recommendations from China veterans.
KIWI LESSONS TAKE A HOLISTIC VIEW AND MINIMISE RISK

Dont do anything without local Chinese advice. Be wary of advisors who claim they can cover all bases for you. Do due diligence on potential advisors. Be careful regarding how much control of business processes you give advisors. While making use of advisors, make sure you have access to other sources of information.

3.10 DOING DUE DILIGENCE AND AVOIDING SCAMS

How do I make sure I dont get deceived? Performing due diligence in China can be a lot more difficult than in other countries, but it is an absolutely necessary part of every China entry strategy. As with many developing countries, corruption and scams are not uncommon. And while the situation is improving, anyone operating in China needs to be aware. On top of difficulties such as distance and culture and language differences, companies looking to research Chinese business people and companies have to deal with a shortage of accurate and up to date information. Theres no national company registration system and Chinese companies are also notoriously non-transparent. Despite these difficulties it is essential to research any Chinese companies or individuals you are considering doing business with to ensure that they are legitimate, credit worthy, reliable and can do what they say they can do. This includes independently verifying all important information that they provide you. A wrong move in China can later prove to be very costly in terms of time and money.
KIWI LESSON TALK TO A LOT OF PEOPLE

The advice I have for NewZealand businesses seeking to enter China, above all else, is to emphasise patience and due diligence. Talk to a lot of people, do plenty of reference checks up stream and down stream, get credit reports on those shortlisted companies before making your decision.

Due diligence is not just about numbers. Its also about understanding the Chinese culture. Jude Hooson, Managing Director of The Providence Group Allow time to validate and verify what is being sought. Doug Ducker, Managing Director, Pan Pac Forest Products Choose partners carefully and have an unhitching strategy in case things go wrong. Bruce Heesterman, former General Manager International, Airways Corporation

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Getting credit checks done The four big credit rating agencies Standard & Poors; Moodys; Dun & Bradstreet; and Fitch Ratings are all present in China and/or Hong Kong. There are also some local rating rms such as Xinhua Far East China Rating; Chongqing Business Credit Investigating and Consultation Centre; and Huaxia International Credit Group. NZTE can provide referrals to companies that can be commissioned directly. The work is out-sourced to local credit companies. The cost can range from a few hundred to a few thousand dollars depending on what is requested, the speed the report is required, the location of the company being checked and how much information is provided on the Chinese company. How to do due diligence on potential manufacturers While many Chinese factories are modern and automated, some are not. NewZealand re detection equipment manufacturer Pertronic Industries warns that some of Chinas manufacturers can appear very impressive on the surface, but the quality control is abysmal and products are shoddy. Alibaba.com recommends the following steps to ensure you are talking to the right manufacturer: examine their financial health, production capacity, quality of goods, client references, export history, intellectual property performance and level of experience with Western companies compile as broad a list of potential factories as possible get product samples poor quality or unreliable delivery should immediately eliminate candidates narrow down the field to three to five suppliers that look good on paper and produce good-quality products at a satisfactory price order a detailed factory audit in China. The last step is for your company to make a detailed, secondlevel assessment that integrates buyer requirements into the evaluation. This process usually rates the candidate as a whole, including all business practices, with a specic grading scale for each set of criteria. Your company can then either choose one candidate or start a bidding process between the potential suppliers on your shortlist. Ask questions such as: Does the Chinese vendor run its own compliance checks on quality control and have sufficient oversight? Is the Chinese supplier likely to outsource the order? Second-degree outsourcing makes it more difficult for companies to monitor supplier quality and ensure that there are no environmental, health, safety or child labour violations in the manufacture of its goods. (BPMC (2004). Sourcing from China, Part 3: Assessing the costs. Hong Kong: Alibaba Group) Always visit the candidate factories before making a nal decision.

How to avoid scams As with many developing countries, corruption and scams in China are not uncommon. And while the situation is improving, anyone operating in China needs to be on their guard. In Transparency Internationals 2010 Corruption Perceptions Index, China scored 3.5 out of 10 (a mark of zero represents highly corrupt) and ranked 78th out of the 178 countries surveyed. As well as putting your integrity on the line by getting involved in scams or corruption, you are exposing yourself to severe penalties because the Chinese Government is cracking down on corruption. How to deal with unsolicited enquiries Only a small percentage of Chinese trade enquiries are of a dubious nature. Most are genuine enquiries that do not make unrealistic demands. NZTE is able to provide information on commissioning a report on the Chinese company if NewZealand exporters believe the trade opportunity is genuine and want to follow up independently. Its common for rst time exporters to be convinced that they have found the right partner through an email contact or an internet trading portal. There are innumerable cases of businesses transferring spotter-fee funds to China and nding that nine times out of 10 the receiver of these funds has given a false address and pursuing them would be futile and very expensive. The important point is not so much that all cold contacts are scams but that due diligence, checking on bona des and credit worthiness, is vital before entering any transaction in China. Relying on an online site or an email contact to provide this is very unwise. Points to consider when you get an enquiry include: Does the enquiry fit your company strategy in terms of market and the sector within the market? Is the suggested market entry strategy one that has been used by you in other markets? How much does the enquirer appear to know about the China market, and about the details of entry and of the various legal requirements? How much do you know about exporting and specifically about exporting to China? Is your brand protected in China? Some simple checks can be done to attempt to determine the credibility of the enquirer. If the enquiry comes from China: look at the email address the address of an ISP or a portal (e.g. gmail, hotmail, yahoo, sina, sohu, 123.com etc) often indicates a new or small company or an individual calling themselves a company, or an individual using a legal companys name check the company name on Google even if the site is all in Chinese that is a start insist on the Chinese company providing a copy of their business licence as well as full contact details

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 ask for details on the companys trading history, including products and markets ask for their experience ask for references from other companies they have dealt with in NewZealand and internationally do not be afraid to ask the hard commercial questions (e.g. how will you remit the funds to me). Who can help? NZTE has ve offices in mainland China Beijing, Shanghai, Guangzhou, Shenzhen and Qingdao. Through its network in the region, NZTE stays up to date on scams and other market intelligence.

KEY LEARNINGS

Due diligence Do not use the term due diligence in front of Chinese business people in Mandarin it translates as investigation which is likely to give offence. Better to use words like research or information gathering. Be ready for Chinese partners to discourage an investigation stick to your guns, but be polite. Do due diligence on prospective consultants and specialists you are considering hiring to do due diligence. To keep due diligence manageable, confine it to your potential partners intentions, abilities and judgment. Dont neglect hard questions for the sake of getting or maintaining a relationship. If the relationship is at risk, transfer blame for the need to do this research to a third party, e.g. banks, the board etc. Avoiding scams Be extra careful with unsolicited approaches. Bear in mind the old adage If it looks too good to be true, it probably is.

CHINA CUSTOMS TERRITORY

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4. SELLING IN CHINA

4.1 USING AGENTS AND DISTRIBUTORS

Finding and managing agents and distributors Before making any decision on how to sell in China, thoroughly research and then visit the market to build relationships and seek rst-hand advice and information from various sources. If you decide to contract out the sales process, then you need to decide between an agent or a distributor. An agent is your companys direct representative and is paid commission. A distributor buys your products and then sells them on to customers through a third party. Their income comes from the difference between their buying and selling price. Issues such as the size of the market, language and cultural differences and the sheer amount of choice available make nding the right agent or distributor, and then managing them, challenging. Advantages and disadvantages of agents The advantages of agents are: the principal has greater control over terms of sale the freedom to choose customers with whom to deal direct contract between manufacturer and customer greater control over methods of marketing the manufacturer is able to retain risk of stock the commission paid to an agent is typically lower than the margin of prot a distributor will make. The disadvantages of agents are: agents have the right to claim a lump sum compensation upon termination of agency agreement sometimes a principal will be treated as trading in a territory if he has an agent there, which could have tax implications. Consideration should be given to local law and double taxation maintaining stock inventory can be costly.

In all likelihood an agent will also be selling similar products to yours and this has to be managed. (Poon, K. (2005). Business Guides. London: China-Britain Business Council.) How to nd an agent There are a number of ways you can get in touch with potential local sales agents. Discuss with your partners in China to get a recommendation. Commission research through consulting firms. Get a recommendation from another company already operating in China. Attend and make the most of networking at trade shows, seminars and exhibitions in China and Hong Kong. Use reputable business matching websites. Before making a nal decision on who to use, you should do thorough research and go to China yourself to check out rsthand what you are getting yourself into. Business people in China also prefer to meet business face-to-face and build up friendship and trust to underpin the business relationship. Be very wary of walk in agent candidates. It has been fairly commonplace for businesses to recruit someone as an agent on a sight unseen basis via a website. Large sums of money have been lost in this manner. Likewise be cautious about taking on someone you have met casually at a trade show who vaunts their extensive networks or their abilities as an interpreter. Being bilingual is not sufficient in itself to make an effective representative for your company. Ask the question you might be the best partner for them, but are they the best partner for you? It is important to do a thorough due diligence on any agent, distributor or customer before you hand over any goods, money or intellectual property.

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KIWI LESSON BEWARE OF OVERPROMISING

Managing performance and incentives Its up to you to get the best out of your agent(s) by supporting and encouraging them. To keep the agent on track you should: link performance to incentives and agree on milestones have regular reports on progress and prospects write a marketing and sales plan provide regular training for the sales staff and after-sales training for the technical staff (in NewZealand and China) do sales support trips to keep your products and services front of mind. This will also help ensure they are not taking on competing suppliers who pay higher commissions. Sales commission should only be paid to agents when the customer has paid. This incentivises the agent to encourage customers to pay on time, and to not deal with customers who are late payers. All advertising and promotional material must be veried by you, especially material written in Chinese. Agents will often demand marketing budgets and they need to be tightly controlled. Translate all your own materials, print them and deliver to your agent without hidden margins. You should also have access to a Chinese speaker who can verify for you any material being produced in market. A number of NewZealand companies have been caught out by claims made in promotional material by Chinese partners that the NewZealand company does not only disagree with, but have never even heard of. Advantages and disadvantages of distributors The advantages of distributors are: the supplier can pass a greater degree of risk to the distributor greater incentive for the distributor to sell the product avoids the need for the supplier to have an established place of business in the territory (reduces costs) supplier only needs to monitor the accounts of one distributor rather than for each customer no compensation payable on termination.

Many agents in China will promise much and deliver little. Dr Anatole Bogatski, former Director Student Services and Market Development, AIS St Helens What to look for in an agent An agent is your direct representative so it is important to make the choice right. Attributes you should look for in an agent include: good references proven track record English language skills enthusiasm and fit with your product the number and quality of sales staff solid finances and payment record client coverage good networks geographical coverage network of sub-agents knowledge of market/market segments familiarity with your product. What should be in a contract with an agent? Contracts need to be detailed and well put together as theres not much Chinese law governing agents and distributors. A contract should: guard against exclusive agreements. No agent can cover the whole country and it is recommended to keep your options open by having several regional agents to introduce an element of competition between them. If one regional agent does particularly well you can negotiate for them to set up a sub-agent network beyond their immediate region. When introducing competition, keep an eye on any undercutting of prices that may result have escape clauses, including performance reviews control risks, for example transportation and warehousing contain the terms of the standard individual sales order allow for arbitration in case of dispute.

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The disadvantages of distributors, suggested by Penningtons, a British law rm, are: loss of control over activities of the distributor exclusive distributor is the suppliers entire credit risk in respect of sales rather than with each customer distribution agreements will be regulated by competition law. How to nd a distributor Do lots of research rst. Industries are not structured the same as in NewZealand or other Western countries. For example, many large Chinese rms have large procurement departments in-house which go direct to manufacturers and not through distributors. You may need to integrate your products into complementary ranges. Find win-win scenarios. Companies should consider China in a regional framework, with the primary commercial areas being the coastal regions of Bohai Gulf, Yangtze River Delta and the Pearl River Delta: Northern China; the provinces of Heilongjiang, Jilin, Inner Mongolia Bohai Gulf; the cities of Beijing and Tianjin and the provinces of Liaoning, Shandong and Hebei East China/Yangtze River Delta; the city of Shanghai and the provinces of Jiangsu, Zhejiang and Anhui Central China; the city of Chongqing and the provinces of Shanxi, Henan, Hubei, Shaanxi and Sichuan Western China; the autonomous regions of Xin Jiang, Tibet and the provinces of Qinghai, Gansu, Ningxia Southern China/Pearl River Delta; Guangdong (includes Guangzhou), Fujian, Hunan, Yunnan, Jiangxi, Hainan Island, Guizhou, Guanxi (includes the autonomous region of Zhuang). Also included in southern China are the Special Administrative Regions of Hong Kong and Macao. The Chinese government is promoting the investment into the western provinces, but for most NewZealand companies, the coastal cities and provinces will be the rst areas to concentrate on. Consider having a different distributor and strategy in each, possibly including pricing and market channels. There are a number of ways you can get in touch with potential distributors: via your agent or other Chinese partners recommendation from another company already operating in China attend and work the foot traffic at trade shows, seminars and exhibitions in China use reputable business matching websites research through consulting firms or NZTE. Despite the size of the country, you may nd that there are only a few very good representatives in some industries (for example wine). It used to be common for foreign suppliers to appoint Hong Kong companies to act as their distributors in China. Payment may be easier to get out of Hong Kong, but China is now much more open and the Hong Kong route may simply add additional costs.

It pays to keep in mind that China does not have an efficient nationwide distribution system. Distribution channels are dominated by regional and provincial players whose abilities vary enormously. Smaller cities and rural areas in particular are badly served. For more information on Chinas logistics see the Navigating China Managing logistics section. Finally, get independent due diligence done before signing any agreements.
KIWI LESSON WATCH OUT FOR OPPORTUNISTS

Identifying the appropriate distributor is particularly challenging. There are lots of opportunists clouding the view and taking advantage of newcomers. Tim McIver, Managing Director, Lanocorp Pacic
KIWI LESSON GOOD ONES ARE EXPENSIVE

If a distributor is very good, they will be very expensive and be using a product from a multi-national. They will invariably run their own brand and will not be willing to deal with you exclusively. If a distributor is interested in selling only your products, you have to ask about their track record. David Percy, Chief Executive, Pertronic Industries What to look for in a distributor When looking to engage a distributor, factors you should consider are whether the distributor: has a stable financial background has enough quality sales staff is enthusiastic and right for your product has foreign trading rights (or a good relationship with an import/export company) has an appropriate business focus can store and distribute your goods adequately. You should also check out: the types of outlets the distributor covers their after-sales service their marketing abilities English language skills (and not just at head office). Again, as with an agent you need to look for a representative that knows your industry and has the links. A distribution agreement Distributor contracts need to be detailed and well drafted as theres also little Chinese law in relation to distribution. The supplier-distributor relationship is primarily governed by the contract. The contract should: guard against exclusivity (most Chinese distributors want exclusive rights for the whole country even if their network is limited to one province or even an area within a province) agree on volume targets manage risks, for example transportation cover intellectual property issues contain the terms of the standard individual sales order have escape clauses including performance reviews allow for arbitration in case of dispute.

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Before signing a contract with a distributor, make sure they can directly enter into contracts with foreigners. Also be wary of using the Ministry of Commerces standard sale contract. They favour the distributor. Contracts signed in China often need to be in Chinese which is the binding language as well. Always have a qualied law rm review any translated documents and English ones for compliance with local laws. As with agents, you need to be cautious when granting exclusive territories. Managing performance Its up to you to support and encourage distributors to do their best. Ways to do this include: regular visits to the market to meet with them performance agreements regular reports on progress and prospects write a marketing and sales plan and tightly control marketing budgets provide regular training for the sales staff and after-sales training for the technical staff (in NewZealand and China). Resolving disputes Avenues to resolve disputes include arbitration, litigation and mediation. For more information on ways to resolve disputes see the Navigating China Getting legal advice and resolving disputes section.
KEY LEARNINGS

Positives of doing it yourself. It cuts out the middlemen. You get an understanding of buyers or end users technical needs and an ability to customise accordingly. Its an opportunity to learn the hard way, though this should always be on the back of a lot of preparation. Negatives of doing it yourself. Not having a physical presence in the market can make it difficult to get business in China. Some Chinese clients will not do business with companies with no presence or representation in China. NewZealand dollars cant directly be paid offshore. Payments will rst have to be made in currencies convertible into RMB, usually US dollars. If the product you are selling is imported into China, the buyer must either import it themselves or have an import agent do this on their behalf. If your product is made in China it is deemed a domestic sale and the transaction must be completed in RMB which you can only repatriate with a registered entity after taxes have been paid. If it is a service, it may be possible for the client to pay offshore as long as you can prove the work was not executed in China. Otherwise a rm wanting to pay hard currency overseas must have proper justication and importation documents or they will be subject to withholding tax of up to 20 percent. Issues you need to consider. The frequency of visits needed to China High maintenance for the home office The lack of a presence on the ground can lead to communication problems You need an effective technical interpreter who understands your business and approach Daily follow up of genuine leads in China can come second to home business Delays could lose you good will and business Prompt troubleshooting cannot be done remotely and will require additional visits Competitors with a local presence will have an advantage After-sales commissioning and service will tie up your technical people and require Chinese language capability A commitment to a presence will have to be made at some stage should the business continue to grow The possibility of losing control of the transaction Getting started The recommended steps to start direct selling are: 1. Use NZTE or private consultants to conduct market research and draw up a short list of pre-qualied buyers. 2. Your Chief Executive writes an introductory letter and brochure in Chinese for the preferred buyers identifying how the product can meet their needs. For more information on how to address people in China and translate marketing materials see the Researching the market Making the most of your visit section.

Thoroughly research your options before making a decision. Always do due diligence on any prospective agent or distributor. Be aware of conflicts of interest does the agent or distributor sell products or services similar to yours? Look for a representative who knows your industry and is well connected. Make sure contracts are detailed and have escape clauses. Keep a close eye on what your representative does with your marketing material.

4.2 DIRECT SALES

How do I sell directly to customers in China? An alternative to having your own base in the market, or using agents and distributors, is making direct contact with buyers and end users. The do-it-yourself option, though low cost and a good way of getting a relatively low-risk feel for China, is not an easy route to market. The Chinese market is the opposite of the NewZealand market. Whereas a small number of large players dominate in NewZealand, 90 percent of the Chinese retail market is run by small ma and pa operations.

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3. NZTE or the consultants can then set up meetings in China with prospective customers over a one to two week period. Senior management and a marketing/technical person should make the visit, the latter to ensure both Chinese decision makers and technical advisors are briefed. Contact NZTE for a list of consultants.
KEY LEARNINGS

KIWI LESSON YOU ALSO NEED A PHYSICAL PRESENCE

We see a combination of retail and e-tail as being the future of our business. You need the physical presence so people can sample and experience your product. But you also need online because people see that as convenient. Scott Coulter, Chief Operating Officer, Comvita Sites must be in Chinese To communicate with potential Chinese customers your only option is to offer your website in Chinese. This will also show that you are serious about reaching out to your Chinese clients. Many companies are incorporating a Chinese language option on their existing English sites. Your website can be made both in China or NewZealand, but if you are doing the latter ensure that it is with a reputable translator.
KIWI LESSON TRANSLATION CRITICAL AND TIME CONSUMING

Direct selling can be a low cost way of selling in China, but you need to be wary of hidden costs. Do thorough research before committing to the market. The lack of a physical presence in the market can make it difficult to get business in China.

4.3 ONLINE SALES

Online sales are becoming an increasingly large part of the Chinese marketplace. NewZealand businesses are joining in, but as usual there are special challenges. Your online strategy targeting Western markets will not work in China.
KIWI LESSON BE PATIENT

When healthcare product company Manuka Health set up a Chinese language option on their website it worked with a web agency based in China. To get the best agency we asked around and relied on word of mouth, says the Te Awamutu-based companys Chief Executive Kerry Paul. We got our Chinese distributor to work with the agency to make sure that the Chinese language on the website was correct. Thats most critical making sure that we are condent that the messages that are on our website are correct. This can take months to happen. How China is different Up to a quarter of online demand is for products consumers cant nd in physical stores. Most shoppers start their search with online retailing marketplace Taobao.com which in 2010 accounted for 80 percent of ecommerce volume. The high use of social networking sites to check for product recommendations. Price is not everything. Online shoppers are also concerned with nding unique products not available offline, better service, convenience and the fun of the online discovery process. Chinese consumers buy a wider range of products on line than their Western counterparts. The top ve categories account for only half of the Chinese market compared with 70 percent in leading Western markets. (Source: Boston Consulting Group) While Google dominates web searches in the West, Chinese consumers are more likely to use its Chinese counterpart Baidu. The China online marketing blog China Internet Watch says Baidu had more than 75 percent of the Chinese search engine market in 2011. Google was a distant second and falling in popularity.

Online shopping is denitely worthwhile investigating if you are prepared to take the time to research the market, be patient and remain focused over the longer term. Andrea Wouters, Export Product Manager, Good Health Products Pricewaterhouse Coopers expects annual online shopping sales in China to nearly double, year-on-year, over the next few years. Affluent city dwellers in particular have embraced buying online. This growth needs to be kept in perspective in 2010 online retailing was only 3.4 percent of total Chinese retail sales. However it is driven by two powerful trends; the exponential growth of internet usage in China and, among internet users, the rush to shop online. Chinese companies are aggressively making the most of this opportunity. Online retailing is much more popular in the larger cities. For example, in Shanghai online retailing represents about 8 percent of sales and this number will be higher for shoppers of imported products. The survey of online shoppers by Pricewaterhouse Coopers found that while Chinese consumers are relatively new to buying on the internet, they already shopped more regularly online than their Western counterparts. Crucially, they were also found to have different online tastes. As well as visiting online stores for books, movies, electronic goods and computer products popular in the US and Europe, Chinese consumers are also interested in clothing and footwear and beauty and personal care products. The medium to high end of the latter is one of the fastest growing online categories.

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KIWI LESSON LOGISTICS ARE STILL A CHALLENGE

Things are improving, but ensuring that goods bought online turn up in good condition is still challenging in China because the logistics industry is not as developed as in other countries. You need to partner with a good local company that can make sure the product arrives in good condition, and solves any problems with the customer quickly. Scott Coulter, Chief Operating Officer, Comvita Getting paid Until recently the low use of credit cards and poor billing systems were barriers to the growth of online shopping in China. This has been overcome by third-party online payment systems, however cash on delivery is the preferred way of payment. Top payment methods: Cash (cheques, money order or cash) on delivery This is the most popular payment method in China. Products or services are delivered to the buyer and payment is received upon delivery. This service benets the buyer as they are not required to make payment until they are satised with their product. For the seller it can mean higher costs and a longer wait for payment which is organised through a third party delivery service. Third party Payments are made from the consumer to the buyer through a third party such as Alipay, TenPay and 99Bill. To protect both the buyer and seller in a transaction the payment is in the control of an independent and licensed third party. When both parties verify the transaction has been completed, the money is released. If at any point there is a dispute between the parties in the transaction, the process moves to a dispute resolution. All payments are made in RMB and require a Chinese bank account. Debit and credit cards Credit cards are not widely used in China because of a lack of trust in online transactions and the fear that once sellers have obtained the buyers banking details they will be misused. Although debit card penetration is far higher than credit cards, they are still used mainly for withdrawing cash from ATMs. (Source: Digital Jungle) Using Taobao, Chinas top online store Taobao is the main place to buy and sell online in China. The Boston Consulting Group says more products were purchased on Taobao in 2010 than at Chinas top-ve brick-and-mortar retailers combined. The site is similar to eBay with many independent stores listing their products and shipping directly. All prices are xed. A number of NewZealand companies sell on Taobao. There is no English version of the site. One way around this is to use a Taobao agent. These agents can help overcome the three big obstacles international sellers and buyers face; payment, communication and shipping. Agents are the only recommended way for foreign companies to list on Taobao. Setting up an account and exchanging logos,

business licences and brand trademarks is complicated so it is best to use someone who understands the processes in China. Also, companies should keep in mind that their contract with Taobao requires them to advertise on the Taobao site. Taobao has an online Field Guide to help English speakers. Dr Mathew McDougall, Chief Executive of Digital Jungle says before committing to listing on Taobao its important to take into account that its not as simple as just listing your products online. There are a lot of costs involved in design, advertising and offering Chinese speaking customer service support. Each company should decide if it is a cost effective option for them and not simply jump on the Taobao bandwagon.

4.4 MARKETING
How do I market? The Chinese market is huge and is predicted by market research company Nielsen to be the worlds second largest consumer market by 2014. China is now the number two consumer of luxury brands with annual sales increases of 16 20 percent over the last several years. McKinsey Global Institute forecasts that the number of households with income between 100,000-200,000 RMB will rise from 13 million in 2010 to 76 million in 2015. The number of households earning more than 200,000 RMB will rise from 4.5 million to nearly 11 million. But its not an easy market to get your products and services in front of thanks to the varied cultural backgrounds, the sheer size of both the population and the country and differing levels of wealth and sophistication. The marketing of a product or service may need to change for China. The product or service itself may also need adapting to the Chinese consumer and to meet Chinese regulations. Apart from wealthy modernised pockets of population, the idea that you can market and position your products and services is a relatively new one in China. In many places China is still a developing country. For example, in urban areas hypermarkets, supermarkets, convenience stores and retail malls account for 65 percent of consumption, compared with 20 percent in rural areas. The best way of dealing with the complexities of the Chinese market for marketing and advertising is to hire local knowledge and there are both Chinese and international companies to choose from. Consumer trends A 2011 survey of Chinese and multinational companies in China identied three key trends expected to affect consumer behaviour. Improved access to information technology Greater mobility of the population More exposure to Western lifestyles

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Evolution of the Chinese family unit, and greater emphasis on health, nutrition and work-life balance, are other consumer trends noted in the survey, by the American Chamber of Commerce and Booz & Co. The survey provided a prole of Chinese consumers who might be affected by these trends and who might be a target market for international businesses in China. The prole of these Chinese consumers includes people: aged between 21 and 40 living in tier 1 or 2 cities earning a middle-class income of between 10,000 and 50,000 RMB a month who are internet-savvy who are more likely to spend money on travel and leisure than their parents generation. Those aged under 30 would probably have no siblings and would be the focus of family life in their homes. How to identify your target market China should be approached as a collection of markets segmented by region, as well as by demographics within the region. When considering markets to target, the quality of infrastructure and distribution channels need to be factored in. It is also important to identify consumers who can afford your products and services. With populations in some cities and municipalities reaching 28 million, it may be that one city is enough of a market to start with. Tom Doctoroff, advertising agency J. Walter Thompsons Chief Executive for Greater China, prefers to subdivide the countrys population into four major categories: youth, the emerging middle class, women and the old each of which he says demands a customised approach. Comprehensive market research and consumer insight data in China is mostly poor or lacking, so research may need to be commissioned. Basic information on the regions and urban areas and some demographic information can be found in the latest China Statistical Yearbook. The Hong Kong Trade Development Council publishes market proles on Chinese cities and provinces which include general background information on the province as well as more detailed statistics such as GDP per capita, the leading industries and a breakdown of household spending. How to check out the competition Business directories and the internet are a useful way of nding information about the number of competitors operating in a particular market and who they are. Another avenue for nding information about competitors is by searching either current or past trade fair directories to get an idea of the companies that are operating in a market.

How to hire local knowledge The best way of dealing with the complexities of the Chinese market, marketing and advertising is to hire local knowledge. For a list of specialists used by NewZealand companies in China contact NZTE. How to differentiate in China Not only will you need to adapt your products and services for the Chinese market and meet its regulations, you will need to change the way you market them. Dont assume that China is a market that is always on a par with other developed nations most of the country is still developing and with this comes all the associated risks. For example, the variability of the quality of infrastructure and distribution channels makes national campaigns difficult. Before you start a marketing campaign you should fully understand factors inuencing Chinese buying decisions relating to differences in geography, culture, age, education and wealth. Even major international companies have come to grief with their Chinese marketing campaigns because they have not invested sufficient time and money in understanding markets in China. Simple examples of cultural traps for the uninitiated include using inauspicious numbers or colours or inadvertent slights to Chinese national pride. Also promoting individualism runs counter to Chinese culture. Foreign products and services are especially appealing to younger Chinese, but older ones remain ercely patriotic in their buying decisions. All are decisively price driven. This is partly due to the lack of credit and the Chinese inclination to save rather than spend. Another key factor in buying decisions is the Little Emperor phenomenon Chinas one child policy means children have a strong inuence over household purchasing. Thanks to Chinas economic boom and internationalisation, they also have much more money and are consumer savvy. Obviously the best way to communicate in the spoken word to consumers in China is in Chinese, either in the national language Mandarin (although only about 50 percent of the population speak Mandarin, they are the most highly educated), or if appropriate, a local language. Written Chinese in the simplied form is the same nationwide. You will also need to consider adapting your packaging to suit the requirements, tastes and budgets of regional Chinese consumers. The best way to do all this is to hire some expert local knowledge, including a quality translation service. Local means the city or region where you are planning to do business. How to set prices When setting prices, remember costs will very likely be higher than you expect. Examples of additional unanticipated costs include; translation costs, tariffs, regulations and protecting your intellectual property.

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You should also build into your prices the likelihood that there will be changes to agreements and contracts. The Chinese have exible attitudes to these and they expect their partners to be the same. One NewZealand exporter to China advises that the China price may need to be higher than elsewhere because of the number of additional costs faced after products leave the importer. You should also allow for the fact that it will almost certainly take longer than you expect to get your product or service into the market in China. Watch for exaggerated rst orders. When you offer a price based on a high number, the Chinese can come in with a low rst order, resulting in a non-protable sale. You should base your price on the agreed order, or use a scale of prices. Dont start out with your best price in negotiations leave yourself sufficient room to move on price.
KIWI LESSON DO THE BASICS FIRST

approximate the actual sounds of the English version) but which should also strive to have an auspicious meaning. For example, Kiwi natural healthcare products company Comvita selected the characters Kang Wei Ta as a phonetic translation. They also mean Health Safeguard People. The Chinese like names that express longevity, good health and luck, happiness and wealth, so it is often difficult to translate Western brands into Chinese. Safety also has a high appeal in China and many major Chinese companies place higher emphasis on the corporate brand over the product brand to take advantage of this. Chinese middle class consumers focus on brands. They want to know which new trends will give them added status and they will buy luxury goods not because they necessarily like them, but because they are representations of success. Brand imitation is a problem in China and its essential to protect your brand before you enter the market.
KIWI LESSON THE STEPS TO CREATING A NEW NAME

Marketing at the point of sale is the most effective place. Weve seen examples of companies spending a lot of money on advertising before theyve even built distribution for their product. A lot of the marketing in the early stages is oriented towards what we call trade marketing, investments at the point of purchase, investments that support the building towards distribution. I think as the market matures, and it goes through its evolutionary cycles, the nature of the marketing will change as it would in a mature market, and one will get sophisticated about segmenting and targeting segments. But at this stage in China its still very early days the basics are appropriate and one doesnt want to get ahead of oneself, patience is very important. Brendan OToole, Managing Director, Summergate International How to create and market brands Brand equity; the identity, history and heritage underlying a brand is a whole new ball game in China. The Chinese language and culture represent unique challenges for the creation and marketing of brands. Whether an English or Chinese name is used, a professional assessment should be done to assess cultural compatibility, double meanings and whether the brand name sounds like another word which could be a problem in China. Chinese culture is full of visual symbolism and this affects brands. For example, the colours red and gold, and the numbers 8, 6, 9 are viewed positively. Black and white and the numbers 4, 14 and 24 are viewed negatively. You also need to be careful not to breach Chinese intellectual property, especially relating to calligraphy. The brand name has to mean something to the Chinese. Chinese characters are either pronounced phonetically or visually conceptualised. This means that when you register your trademark you will need to register the English language name and a transliteration of that name (Chinese characters that

With respect to choice of brand names for the China market, the way we do it is to have a team from across our offices, people who have shown they are good at this sort of thing, naming names. We will put a team together and theyll take an English brand name and work on coming up with a range of options. Some of those will be simply phonetic interpretations of the original English name, some of them may also reect the brand attributes, the identity of the brand itself. Obviously we will discuss that with the brand owner. Well go through all of those options with the brand owner and the best case scenario will be to come up with a name that phonetically reects the brand well and that also reects the identity and attributes, the essence of that brand, the personality of that brand, and one that really resonates with Chinese and they enjoy and like and is easy to recognise and remember. Thats the process we go through and I think it is an important exercise. I think there is real value in coming up with a really good name. Brendan OToole, Managing Director, Summergate International Using advertising Traditional advertising in China often does not have the inuence on purchasing decisions youd expect in the West. Chinese are more reliant on third-party endorsements from friends and colleagues or their own research and reading. Many decisions are made at the point of sale. Also, especially among the elderly, there is not the brand awareness needed for successful advertising. That said, spending on traditional media advertising (including TV, newspapers, magazines and radio broadcasts) is growing. According to Nielsen, in the third quarter of 2010 it reached 17.5 billion RMB. This was an increase of 7 percent compared with the same period a year earlier.

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There are around 40 newspaper groups, 2,000 daily newspapers selling 100-plus million copies, 287 TV channels broadcasting to over one billion people and 9,000 magazines for every topic imaginable. Almost every Chinese household has a TV. China Central TV (CCTV) is the national broadcaster and its 19 channels capture a third of viewers time. However, the Post-80s generation with much of the spending power watches very little CCTV, preferring online video sites such as tudou.com and youku.com where they have more choice over content. All the major international advertising rms are present in China. There is also no shortage of local agencies that can provide smaller scale tactical advertising such as yers, internet ads or mobile advertising. Advertising in China is heavily regulated by advertising law which says adverts should be good for the physical and mental health of the people as well as conform to social, public and professional ethics and safeguard the dignity and interests of the State. This law can be confusing and lead to inconsistent and arbitrary interpretations, especially from region to region, highlighting the need to use experienced local specialists.

Using the media Print and broadcast organisations have enormous reach in China. As noted earlier, there are an enormous number of media outlets that reach a huge number of people. There are also over 800 million mobile phone users and mobile devices are increasingly used to stay connected to media. So using the media requires careful segmentation to ensure your message is getting to the right demographic. You may need to use different channels to do this. It is difficult to get stories placed in the mainstream media as there are strict limitations on space and lead times can be long. NewZealand companies may nd it more useful to target one of Chinas myriad of specialist publications, though not many are published in English. One public relations tip is for companies to align their key messages with recent government directives. For example, when the Chinese government passes a new economic plan, a good message for a company might be: Xx as a NewZealand company is supporting the goals of the plan by providing sustainable products and technologies. Note: Plagiarism and unauthorised pick-ups of stories is common in China and fake news appears occasionally to attract consumers.

Inuential Chinese media

CATEGORY
TV & Newswire

NAME
National level: CCTV; Xinhua News Agency Regional level: - Beijing: BJTV - Shanghai: STV, CBN TV(business channel) - Guangdong: GDTV National level for the government: Peoples Daily, Reference News, China Youth Daily National level for the public: Southern Weekend, Global Times Beijing: Beijing Youth Daily, the Beijing News, Beijing Evening News; Shanghai: Xinmin Evening News, Shanghai Morning Post, Oriental Morning Post; Guangzhou: Guangzhou Daily, Southern Metropolitan News, Yangcheng Evening News.

General Newspaper

Business/Economy Newspaper Business/Economy Magazine English Newspaper

Economic Observer, 21st Century Business Herald, China Business News, Economic Daily

Caijing Magazine, CBN Weekly, China New Century Weekly

China Daily, Global Times, (South China Morning Post and Shanghai Daily are available in Hong Kong and Shanghai)

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Trade media

CATEGORY
Food and Beverage

NAME
Trade: China Food Daily Lifestyle: Restaurant Review, Wine Press, Trends Food and Wine, Timeout, New Western Cuisine Peoples Posts and Telecommunications News, China Information World, Communications Weekly Farmers Daily, China Dairy Cattle Aviation: CAAC News,China Civil Aviation Clean energy: CleanTechnology Security: China Security Protection Industrial equipment: China Industry News Biotechnology: Biotechnology

ICT Agritech Specialised Manufacturing

Not all of the listed media are appropriate for all NewZealand companies. Companies should target the top title in their target market to reach the target audience. For more information get a copy of NZTEs Public Relations Toolkit China from NZTE. Internet and social media China has nearly 500 million internet users and social media is growing in popularity, including blogs, bulletin board systems (similar to a forum and very popular in China) and microblogs (tweets). That means the potential to inuence customers through social media is huge. However, transplanting your NewZealand social media strategy to China will not work. Chinese prefer Chinese language social media and the governments Great Firewall blocks sites such as YouTube, Facebook and Twitter. Relatively few Chinese use English language social media sites such as LinkedIn and MySpace. But most of these sites have Chinese equivalents. A large number of users access sites via their mobiles. Hot social media in China SinaWeibo or Sina Micro Blog the most popular microbloging platform in China, similar to Twitter. Pengyou social networking site run by Tencent. Pengyou and Weibo are considered to be the leaders among Chinese social channels. Sina Blog biggest blog service in China, with 10 million registered users including many celebrities. RenRen most powerful student social network service in China, similar to Facebook. Kaixin001 networking and blogging site popular with white collar groups. Youku and Tudou video sharing portals similar to YouTube. Tencent QQ/Pengyou instant messaging, networking, ecommerce, games. Douban (reviews and recommendations for movies, books and music.

Sina.com and Pengyous owner Tencent QQ are comprehensive internet companies offering social networking, web portals, e-commerce and online games. Chinese middle and upper income consumers are heavily inuenced by the perceived status and safety offered by particular brands. They use online social media to research products and report their experience of them. Companies in China often try to create a buzz around their products online using rapid in-store cycles, events or celebrity endorsement. Many international companies are active in Chinese social media including Starbucks, Coca-Cola and Air NewZealand (for how Air NewZealand uses social media in China, see the case study at the end of this section) . Chinese companies are also active, for instance there are over 5,000 companies on Sina Weibo. A 2011 survey of Chinese companies by PR company Newswire found nearly 90 percent of respondents used social media on a daily basis. Email, search engines and instant messaging were the most popular ways of using social media. Three quarters of the companies had set up a microblog. Dr Mathew McDougall, Chief Executive of Digital Jungle, says potential customers in China dont usually check official websites before making their purchase. Instead, they tend to look for feedback from other internet users who they think will be more trustworthy. That means its important to have a good social media presence. Traditional media sources, such as TV news, newspaper, radio, are losing points in terms of trust compared to social networks. Currently there is no English-language equivalent of Weibo (similar to Twitter), so most international brands need third party support when planning and executing a Chinese social media campaign, McDougall says. An error in translation could be very costly for your brands image. In China its easy to buy fans, so beware of using the growth of fans as a success criteria, he says. Instead use a combination of indicators such as the number of clicks, number of unique individual visitors, number of page views, time spent on page, etc.

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Tips on using microblogging sites like Weibo: Only about 15-20 percent of your posts should directly relate to the business. The rest should be on relevant topics that will add value to your feed. Look at varying your context with images, videos and text. Using Chinese language provides so much more information within the 140-character word limit than English. Post at least 40-50 times before you begin promoting your Weibo site. Plan on posting ve to eight times a day. Use the Weibo groups and search functions to find potential users to follow. You can locate users based on interest or geography. If you follow them, they will be more likely to turn around and follow you. Some people will complain or be negative about your business. Choose to be transparent and accepting rather than trying to stop the comments. Being honest and engaging those people in conversation will go much further with them and others than trying to stie the comments. Dr Mathew McDougall, Chief Executive, Digital Jungle. Attending trade events and promotions As with other potential markets, attending trade shows and exhibitions can be a good way to gauge the level of interest in your products and services, develop leads and make sales. Taking part in shows and exhibitions in China can be expensive, so take time to ensure that the trade show or exhibition is appropriate for your company. Also take care negotiating all the official requirements for attending a trade show in China. In general, goods brought in for display or demonstration at tradeshows and exhibitions are exempt from customs duty, provided they are re-exported within three months. The status of exhibits for food and beverage shows can be tricky as the not-for-sale sample-entry rules are not clearly dened and appear randomly applied. Biosecurity NewZealand maintains summaries of the phytosanitary requirements required by other countries for plants and plant products within documents called Importing Countries Phytosanitary Requirements. The NewZealand Food Safety Authority (NZFSA) maintains Overseas Market Access Requirements, which are documents outlining requirements for animal and plant products exported from NewZealand. These documents are password protected and restricted to NewZealanders registered with Ministry of Agriculture and Forestry/NZFSA as exporters or operators. Each show has its own assigned agent. Unless you have the product in the country, NZTE generally recommends using the assigned agent for the show, however it pays to research their services and fully understand and negotiate costs. The shows organisers can also provide advice on Chinese regulations relating to bringing in materials for their show. It is not advisable to bring in exhibits as hand luggage. Business.newzealand.com has a general guide called Ensuring Success at Trade Shows.

KEY LEARNINGS

Use Chinese-based experts. Break China down into digestible pieces. Dont take research results at face value cross check the results. Remember a small Chinese niche is huge by NewZealand standards. Carefully research a brand name before launching into the Chinese market. Watch out for cultural traps around colours, numbers and images. Adapt your packaging. Price is a crucial factor in sales. When setting prices, remember costs will very likely be higher than you expect. Tailor your social media strategy to China.

COMVITA CASE STUDY

Online sales and marketing in Mainland China
Health supplements company Comvita says making sure consumers can nd us will be key to the success of its planned online sales channel in mainland China. Our marketing efforts will focus on driving people to the new site, primarily by making sure they can nd us on search engines, but also by building a community on the site using social media, says Comvita Chief Operating Officer, Scott Coulter. Our other key focus is to give customers a really good purchasing experience, by offering a site thats easy to use and works well, and a delivery service where the product arrives on time and in good condition. Comvita already has 400 retail outlets in mainland China operated by its local partner GP Enterprises. In partnership with GPE Comvita will launch an online sales channel in early 2012. This is in line with its global strategy of offering consumers the choice of in-store or online sales, Coulter says. We want our customers to be able to access our products in the way thats convenient to them. Comvita will work with its existing distributor in the online site. We will provide the online marketing support and site design. Our Chinese partner will do the local delivery and customer support. The site will be hosted in mainland China, because that will make it faster. Coulter says Comvita puts considerable effort into making sure its sites rank highly in search engine results. There are technical things you can do to make it easier for search engines to nd you. We also advertise with search engines to improve our rankings. The same approach will be used in China, though Comvita will work on improving the sites rankings with popular local search engines like Baidu, Soso and SoGou. Making it easier for customers to share experiences online is another focus for the company.

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Recommendations are a companys most powerful marketing tool. So we want to encourage that process by making it easier for people to have online conversations about our products. The companys existing global websites all carry a blog, and links to Comvita on Facebook, Twitter and YouTube. The new China website will use different social media channels because Chinese prefer Chinese language social media. However, the strategy remains the same. The focus of our social media activities will remain on making it easy for people to make and share comments on our products. Comvita will work with a local advertising agency with experience in social media to help launch the site. Were talking to someone who has done this before and who can guide us on the most effective way to reach consumers. One great thing about online marketing wherever you do it is that its so measurable, Coulter says. You know the next day whether or not its working. www.comvita.com

Get a knowledgeable interpreter Douglas has found language a real barrier to doing business in China, impacting for example on how to make the most of a trade show or event. Unless you know otherwise, its best to assume whomever you deal with in China cant speak English. Douglas says while in China hes often accompanied by a Chinese speaking person, someone he knows or has a connection with from the Chinese television commercial or lm industry. Getting an interpreter who knows your industry is essential if you want to get fruitful conversations going quickly. An interpreter who needs to have common technical terms explained causes frustration on both sides. It also increases the risk of bad translations. Another payoff of having an interpreter around is that they can help reduce the stresses and strains of everyday activities in China such as getting to meetings. If I do it alone it can be exhausting. For example if I have an appointment for a meeting when Im by myself I have to leave really early because Im scared of being late after losing my way. Having an interpreter along wipes out a lot of that type of stuff. Douglas advises companies to work their networks in China and NewZealand to nd an interpreter. Commitment to follow up The key to creating a successful long-term business in China is building lasting relationships, he says. Youve got to be consistently in the market and make the Chinese believe you are there for the long haul. After you have been to China you have got to follow up after a week or two nd an excuse for dialogue and email the contacts you have made. Douglas says dont treat a visit as a one-off event it should be part of an all-year plan. Tips: Present a professional international image in everything you do. You need to do this both in China and at home a poor look at home could destroy any positive image you have created. Work with other Kiwi companies in China where you can. Have two phones one for NewZealand calls and one for local calls in China. For the latter, pick up a local SIM card at the airport when you arrive in China. Make sure your marketing material has interesting, bright, colourful covers and images. Have lots of giveaways (theres a voracious demand for them) and brand everything. Take presents that are unusual in China. www.digipost.co.nz

DIGIPOST CASE STUDY

Time, commitment and money attending trade shows and events
Attending events is not something a company should take lightly. Youve got to do it full on you need to make a big commitment of time and money and see events as an element of your long-term business plan for China, says Stephen Douglas, former General Manager, Digipost. Getting your marketing right Post production and visual effects company Digipost advises companies to prepare marketing material well in advance to make sure it is right for China and arrives on time. Douglas, a regular visitor to China, says leaving shipment to the last minute creates a real danger of material not arriving in time. He says translated material should include: business cards (and lots of them) a well chosen Chinese name for your business a one-page company profile in Chinese or preferably your brochure an area on your website for Chinese visitors this area should contain information relevant to the event or show and should be up before you arrive and stay up for a month or more after it ends. Arranging meetings Douglas says he only sets up meetings (usually by email) a couple of days or so before leaving NewZealand. The Chinese hate to commit ahead of time and you have to be prepared for cancellations.

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AIR NEWZEALAND CASE STUDY

Setting the scene for success
Air NewZealand launched direct services between Auckland and Shanghai in 2006, and direct services between Auckland and Beijing in 2008. Air NewZealands Group General Manager International Airline, Christopher Luxon says, China was an opportunity the airline could not ignore and today it is NewZealands fourth largest inbound market. As a small airline with very modest budgets for international marketing, Air NewZealand has had to work hard and think outside the square to differentiate itself in what is recognised as a complex and challenging market. Air NewZealand has also recognised the need for patience the airline had a general sales agent in China for six years prior to the launch of its Shanghai services. Luxon says that one of the key lessons from the launch was the need to be patient and to factor in the long lead-times of major business projects in China. The planning cycle for the inaugural ight took up to two years and relatively simple negotiations in China have to go through complex hierarchies. And once youve established your presence in such a vast market you simply cant rest. Air NewZealand has employed a number of successful campaigns in China including experiential marketing and a programme of engaging inuential Chinese stars from lm, hip hop music and the arts who blogged about their experiences. Some of these stars have websites that attract 50 million hits a year and the inclusion of beautiful NewZealand scenic images and content allowed the airline to reach an audience of a young and highly affluent middle class that couldnt possibly be reached through television or print. Embracing new technology, online and social media platforms has also been important to achieving a much greater reach than through conventional press or television. It has allowed the airline to establish personal one-on-one relationships with potential customers by contrasting the escapism and the natural NewZealand landscape with life in busy metropolis like Shanghai and Beijing. Experience new you Air NewZealand in 2011 launched an Experience New You campaign, which revolved around new brand ambassador Kevin Tsai Kang Yung a well-known television personality awarded King of microblog by Sina.com in January 2011 with nearly 10 million fans on his Weibo microblog and named one of GQ Chinas Men of the Year in 2011.

A signicant focus of the campaign has been on generating video content and other content suitable for social media sites leveraging Kevins popularity and inuence. The involvement of Kevin Tsai Kang Yung has provided exposure beyond the advertising dollar through PR exposure across key print and online channels, focusing on his relationship with Air NewZealand and experiences in NewZealand. The campaign launched in September 2011 through airnewzealand.co.nz and in the few rst months generated several million dollars worth of media coverage and more than one million video views. It prompted more than 20,000 submissions to a competition run in conjunction with the campaign and boosted Air NewZealands Weibo fans by more than 100 percent over the initial ve-week campaign period. In addition, the airline ran two early-bird offers to entice Chinese customers to book at least six months ahead of their travel dates, which prompted an encouraging response from the market. On 4 November 2011, Kevin, together with several of Air NewZealands VIP trade partners in China, competition winners and media representatives ew Shanghai-Auckland to celebrate the airlines fth anniversary of ying into China. Each of the competition winners was given the opportunity to experience a different type of NewZealand holiday ranging from adventure tourism to food and wine, arts and culture and luxury breaks. Written reports from each of them appeared on social media sites and other portals to help educate Chinese travellers about planning their NewZealand trip. The airlines new brand ambassador also surprised and delighted customers travelling on the service when he donned an apron and served drinks in the Economy cabin. This created more talk-ability for the airline as passengers took photographs and videos to show their friends and family and upload to their sites, and sought autographs. During his visit to NewZealand Kevin lmed a video to promote activities such as golng, yacht cruising, scenic helicopter rides and shopping in Queenstown, Wellington and Auckland. He also had the opportunity to meet with and interview a number of well-known Kiwis such as Sir Richard Taylor from Weta Workshop and Air NewZealand Consultant Chef, Rex Morgan. Content generated from the promotion is being used in a number of campaigns to further drive sales and the airline is working with Tourism NewZealand to maximise its impact in the market. World Traveller will feature Kevins NewZealand experience in key programming across 31 cities in China and the campaign will continue to build with Kevin positioned as a true Air NewZealander. Air NewZealand has simultaneously been rolling out a series of joint promotional initiatives with selected trade partners to drive sales and to continue to educate, engage and get them committed to selling NewZealand. www.airnewzealand.co.nz

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Chinese television personality and King of microblog Kevin Tsai Kang Yung in an Air NewZealand promotion.

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4.5 GETTING YOUR PRODUCTS INTO CHINA

Dealing with Chinese Customs and other regulations To get your products into China youll need to navigate your way through Chinese Customs and other border agencies and their border control rules, standards and regulations. This is denitely not an area for doing it yourself. Dealing with Chinese border officials Your Chinese importer (for example your agent or distributor) will normally pull together the documents you need and provide them to Chinese Customs agents. The documents required vary from product to product, but standard ones include: certificates or origin customs declarations sales contracts bills of lading commercial invoices packing lists. Other documents that may be required include import permits and Quality Supervision, Inspection and Quarantine inspection (AQSIQ) clearance. This clearance is often on the basis of export certicates from the relevant NewZealand agency such as the NewZealand Food Safety Authority or MAF Biosecurity. Please consult your importer or distributor well in advance of shipment, or seek advice via NZTE.
KIWI LESSON PRETTY STRAIGHTFORWARD

acid, plastic raw material, natural rubber, synthetic rubber, waste paper, synthetic bre cloth, cellulose diacetate lament tow, copper, aluminium, mechanic and electrical products, iron ore, crude oil, processed oil, alumina, chemical fertiliser, pesticide, sliced or chipped polyester, automobile tyre, terylene, steel and steel billet food, fibre, and animal feed products considered to have some health risk associated with them. Normally, MOFCOM or other agencies may ask you to provide samples for selective examination. If you are using an agent or distributor in China you should check whether they have an import licence. Where a distributor or agent does not have a licence they can subcontract this to an importer. This means more paperwork and links in the chain and therefore higher costs. It can also lead to possible delays in delivery and payment. For example, the importer will need to present the documents to Customs for clearance and then pass to the agent or distributor to arrange delivery and payment. Tariff rates For more information see www.ChinaFTA.govt.nz Rules of origin For more information see www.ChinaFTA.govt.nz Meeting food safety and biosecurity requirements For information on regulations governing animal products and food inspection, sanitary and certication requirements, see the NewZealand Food Safety Authoritys Overseas Market Access Requirements (OMAR) for China (www.nzfsa.govt.nz). They outline Chinas sanitary and certication requirements for animal products. For information on Chinas zoosanitary, phytosanitary inspection and certication requirements for live animals, animal germplasm and plant and forestry product exports to China, contact MAF Biosecurity NewZealand (www.biosecurity.govt.nz). Complying with labelling requirements The inspection of import labels is the responsibility of China Inspection and Quarantine (CIQ) offices at the port of entry. Before packaged products are imported or distributed into China, labelling verication must be sought from CIQ. This takes one to two weeks. When going through this procedure you should consider specifying in your contract with the importer or distributor that you retain ownership of the label after approval. This will make it easier to work with other distributors in the future should the need arise. The main items required for verication of labelling are: completion of the Application Form of Import Food labelling Verication brief explanation of the original English label in Chinese. According to the National Standard of the Labelling of Foods (GB7718-1994), the label should include the details stated below certificate of Origin

The China Customs bureau is not as complex as a lot of people portray it to be. Its pretty straightforward. The product arrives at the wharf or airport, you register it with the Customs bureau, the Customs bureau will raise a bill to you, you pay the bill and the goods are cleared. There are inspections, but as a company with a good track record over many years working with Customs, we dont get inspected all that frequently. I guess my key gripe with Customs and China Inspection and Quarantine is the length of time it takes to get clearance. Brendan OToole, Managing Director, Summergate International Import licences Most imports to China do not need an import licence if they are registered with Chinas Ministry of Commerce. An import permit may be needed from AQSIQ or other specialist departments to import food products such as meat, dairy, sh and other aquatic products. Registration for imports is the responsibility of the importer, but they may ask for back-up documents out of NewZealand. Generally, items that face some form of import licensing or permit procedures are: all products with import restrictions including chemicals that may be used for military weapons, toxicants, drugs and ozone depleting materials products that are automatically licensed but are subject to monitoring including poultry, vegetable oil, wine, tobacco, asbestos, copper ore and concentrates, coal, terephthalic

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 registration information and qualifications of distributors or dealers samples of Chinese label (see content below) sample of product for inspection. The mandatory items for the Chinese label are: name and trademark of the product ingredients net weight and solid content name, address and telephone number of the manufacturer production date (y/m/d) and storage instructions packer/distributor (name and address) batch number country of origin quality guarantee and/or storage period (y/m/d) usage instructions. Although the law bans the use of temporary adhesive labels, some foreign exporters continue to attach small and simple labels (translated into Chinese) on the outside of the package. This is done either prior to delivery to China or by the Chinese importer under the supervision of the CIQ in the nominated bonded warehouse. This is a risky option and is something that may be more stringently enforced in the future by Chinese authorities. Always consult closely with your importer or distributor.
KIWI LESSON HARD BUT ALSO AN OPPORTUNITY

Using Hong Kong Hong Kong is a separate territory from mainland China for many functions of interest to exporters. It has its own rules and regulations which are administered by Hong Kongs Customs and Excise Department or Food and Environmental Hygiene Department. Import-Export Flow Chart

Filing and registration of foreign trade operators Appointment of foreign trade corporation as import-export agent FIEs handling own import-export not required to apply

Customs registration Customs registration not required if agent is appointed to complete customs declaration

Application for import-export quotas and licences (prior to declaration) (applicable to commodities subject to quota and licensing control)

Many people will talk about Chinese labelling as a negative a hurdle and obstacle and having to comply with some very detailed and onerous regulations that relate to that. The whole application and approvals process is not an easy one and can take a long time. But there are two sides to that coin and I think that while those application approval processes arent easy, there is an under-utilised opportunity to communicate a lot more information to Chinese consumers that can really help them to understand and appreciate the products that much better. As well, most Chinese read Chinese, not English. Brendan OToole, Managing Partner, Summergate International Meeting product and safety standards For more information see www.ChinaFTA.govt.nz or seek NZTE assistance for introductions to specialist consultants as the undertaking of research. There are standards consultants who can help you manage standards and certication processes. For a list of consultants, contact NZTE.
KIWI LESSON STANDARDS ARE EXACTING

Signing of foreign trade contract

Completion of foreign exchange formalities

Application for inspection of import/export commodities subject to inspection and quarantine

Customs formalities (customs declaration, tariff payment, inspection and delivery)

Verication and cancellation formalities

When importing products into China, the business elements are the same as almost anywhere. Its about managing and keeping a close eye on inventory. Shipping frequency, product presentation, quality of product are all standard import issues and thats really no different in China than anywhere else. In fact today I would say some of the standards that were being required to meet in China are as exacting as any of our more traditional markets. The needs that weve identied are ensuring that we deliver on time, that we deliver as intended and that we meet the customers needs. Doug Ducker, Managing Director, Pan Pac

(Hong Kong Trade Development Council (2007). Guide to Doing Business in China.)
KEY LEARNINGS

Get professional help. Do not DIY. Use customs agents registered with China Customs. Clearing Chinese Customs can sometimes be time consuming. Numerous government agencies control quality and safety standards.

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5. SETTING UP A BASE IN CHINA

5.1 FINDING PREMISES

Finding premises Finding, buying or leasing premises presents many of the predictable challenges of setting up a base in China the size and unfamiliarity of the Chinese real estate market, new legal and nancial rules to negotiate and cultural and language difficulties. Scott Brown of RedFern Consulting warns that you need to be careful when nding premises as part of setting up a new legal entity, such as a wholly foreign owned enterprise (WFOE). Make sure that the registration address requirements of the entity match with the premises you are considering. Land and buildings will be designated as industrial, residential or commercial. Different entity types have different requirements which have become increasingly strict. Few jurisdictions or entity types allow for virtual offices (letter boxes), so you may be required to rent in the district which you are registered in. Check this rst as signed leases are very difficult to get out of and registration authorities can be inexible. Where to get help As in NewZealand, it is helpful to use a real estate agency to help you nd premises. They will also be able to help you to nd and lease or buy commercial or residential premises as well as undertake registration, source furniture and ttings and complete installation. There are many international and local Chinese agencies to choose from. You should check that any rm you are considering using has a licence and try to contact agencies independently rather than using third parties who will charge a commission. Law rms can also help with the translation of leases. This translation may not be enforceable in a court, but it is critical to make sure you understand what is being signed. For a list of agencies contact NZTE.

What are the costs? Rents in downtown Shanghai have increased signicantly in the last few years and are rapidly approaching a level comparative to other international cities in the world. In second and third tier cities rents are considerably cheaper than in NewZealands main centres. Land prices are also increasing rapidly. For up to date information on rents and land prices in China contact a real estate agent. How to lease premises As in NewZealand, before entering into any negotiations for an office lease make sure you have fully researched issues such as: market rental trends the best locations future property developments. Leases are usually for two to three years, but longer lease periods also exist. Leasing premises is a key step towards meeting regulatory requirements to set up a representative office or WFOE in China. You need to make sure that the building or office you are considering leasing as your representative office is permitted to be used in this way. Most cities only allow representative offices in grade A (top quality) buildings. You also need to make sure that the location you have in mind is in an area approved for your type of business.
KIWI LESSON GET A PRESTIGIOUS ADDRESS

Financial services company KVB Kunlun says consider getting a prestigious address which will help you be taken seriously. Be prepared for the extra costs involved if window dressing is important in your type of business.
KIWI LESSON BE CAREFUL WITH LEASE AGREEMENTS

Small errors in detail can sometimes add weeks to the process, says Bruce McNabb, Pertronics former Technical Director for China. For instance the building number on our lease

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agreement was missing (should be A803A instead of 803A) that added another few weeks to the process, as well as requiring notarised board resolutions in NewZealand and more expense in setting up the office. Pertronic realised the need to be very alert to the process and to ensure it was complied with at every step. The lawyers monitored the legal documents for the rental of the office premise; and added some clauses that would protect the company if the WFOE application was not successful. This precaution paid dividends as when the office lease was being transferred to Pertronic Trading (the WFOE), the landlord attempted to get Pertronic to pay the tax on the lease payments and refused to sign the transfer documents. After meeting with the lawyer the issue was resolved in our favour. This added another three or four days to the process. Pertronic managed to negotiate a good leasing rate for two plus one years. To t out the office we got three quotes, one from a European company and two from local rms. We chose a local rm and found that they were excellent to deal with. How to buy premises Generally foreign companies can only get land use rights (not ownership of land as we know it in NewZealand) through a WFOE or a joint venture. No foreigner can currently own land in China, although ownership of land for Chinese nationals is currently under review.
KIWI LESSON WATCH WHO OWNS THE LAND

Using serviced offices Start-up businesses or those with a limited budget have the option of using serviced offices. Serviced offices provide an array of business services, including bilingual secretarial support, as well as the usual handling of mail, fax and telephone calls and courier services. This one-stop approach to setting up an office allows many companies that are new to China to focus on core business activities by bypassing the technical difficulties of nding an office and hiring staff.
KEY LEARNINGS

Research the market. Use local expertise. Check titles and leases carefully through a law office in China. Do due diligence on agents. Do a careful inspection of properties.

5.2 HUMAN RESOURCES

Managing human resource issues You will probably have to spend more time on human resource (HR) issues in China than in other markets. A survey of US Business Council members found recruitment and retention was their number one operational issue in China. One of the major drawcards for Western companies in China is relatively low wages, this is disappearing within some job categories in some regions and industries. This is particularly the case for well qualied technical and management staff in the main cities. In Shanghai professional salaries can match what youd have to pay in large Western markets. Skill shortages are also a major problem with many companies listing this as the biggest brake on their growth in China. The salary of a NewZealand expatriate working in China would typically be higher than that of an equivalent role in NewZealand, and sometimes pushed higher still with housing supplements or company housing and schooling, medical, travel and entertainment allowances.

A lot of people have been burned by property purchases after they are told by government officials that the property is available to them. Ive had this recently. We looked at property and when I dug into it, they didnt own the property. They didnt have the right to offer me the property. They thought they were going to get it but they had to get approval from Beijing. Keith Curry, former China Chief Executive, Skellerup

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Another issue is looking after your NewZealand staff who have relocated to China (or expatriates). Who to hire David Mahon, Managing Director, Mahon China Investment Management, says the simple rule in China is to hire whoever is best for the job. Do not feel obliged to send over an expatriate nor to hire the rst Chinese graduate of a NewZealand university who comes through the door. Companies need people who can understand their own culture, and products and who can also understand the Chinese market. Someone with a commerce degree from the University of Otago who has never worked in China is unlikely to be the best t, as is someone who sells themselves on their connections. He says the tradition of the great trading houses and many successful multi-nationals in China of employing a reliable company man (an expatriate), who can bring company culture, product knowledge and oversight to the operations, supported by a bright (Chinese) mainlander, has been proven to work. Kiwi companies already operating in China say employing locals to help you make business decisions is a must. Keith Curry, former CEO for Skellerups China operations says you have to let the Chinese manage the Chinese. Chinese managers are very good on detail. They know their jobs. They manage people differently from us. Curry says critical staff members include an accountant you can trust and a good purchasing person. He says Chinese accounting is different from Western practice and your accountant has got to be familiar with both. However, accounting and auditing practises in China are moving more into line with NewZealand. For more information see the Setting up a base in China Accounting and auditing section. Be careful not to put too much emphasis on language abilities when deciding who to hire. Anyone you hire must also have the relevant business expertise you need, and be able to t in with your corporate culture. Some Kiwi businesses have also employed Chinese nationals who have worked or lived in NewZealand and found these staff invaluable in China. Choosing between expatriate or local hire Advantages of expatriates are: they come from a similar business culture and if they are already an employee they will know the company they can carry clout in China there is less risk around hiring, such as CV fraud they are more readily accepted as the company representative than a local hire. Disadvantages of expatriates are: lack of market knowledge unfamiliar with language and culture expensive a generous package may be needed to get them to work in China there is a danger of poor adjustment to living in China.

Scott Brown from RedFern Consulting says dont localise your staff too quickly as the added cost of keeping expatriates (expats) on board will be worth it in terms of management and communication benets. He also says dont try to develop your new business by regular trips to China alone the Chinese, like anyone else, will respect and follow those who are on the spot, prepared to roll up their sleeves and demonstrate commitment to them.
KIWI LESSON HIRE A MIXTURE

A strategy around having a mixture of local and expat staff is really the starting point. How you then mould your company and structure around whether its more local or more foreign is all part of your business plan going forward. Its not something youll see straight away. Youll have to be in China for a while to really understand that. Were still trying to determine what the right mix is. Clive Richardson, Former General Manager China Operations, Beca Engineering Consulting, Shanghai Expats and their families can nd it difficult to adjust to life in China, particularly if they are based away from the main centres where there are likely to be few people who can speak English and a small or non-existent expat community. Schooling, sporting, social opportunities and medical facilities, other than those for the Chinese, are limited. To help reduce expat burn out many companies give generous travel allowances for employees and their families.
KIWI LESSON OFFER REGULAR VISITS HOME

I think in terms of relocating staff to China, whether it is short-term or long-term, its quite important to start with people getting regular visits back home. In my own case and that of a colleague, we worked up here for three or four weeks and then went home for two weeks. It was really necessary. It got to you after a while, working here. We were working seven days a week. But now that Im living here permanently, its different. I go home every four months for a quick one-week trip just to see my daughters. I miss China now when I go to NewZealand. Keith Curry, former CEO China Operations, Skellerup When employing expats you need to check the rules regarding permanent residence and effects on worldwide income. If you are paying a portion of an expats salary offshore, be consistent in your management accounts. Officials are not silly and know the market value of expat managers. Also remember to consider NewZealand taxation rules. Foreign employees need a residency visa (Z Visa or working visa) and a residence permit to work in China. Employers need to arrange for social insurance for their foreign employees as well. Hiring half-pats Hiring half-pats Chinese nationals returning home or ethnic Chinese with foreign citizenship can have the advantages of both expats and local hires. They can bring with them market knowledge, bilingual language skills and a familiarity with both Chinese and Western business cultures. However, you need to be sure that they have maintained their Chinese connections.

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How to make contact with half-pats: Use NewZealand universities with alumni networks The NewZealand alumni network in China NewZealand China Association in NewZealand NewZealand China Trade Association. How to hire Common recruitment channels for managerial and technical expertise in China are: specialist recruitment agencies this is recommended by Kiwi companies advertising e-recruiting head hunters universities and technical institutes referrals and networking. The latter can be effective in China because of the emphasis placed on personal relationships. To hire workers for factories a more direct approach can work. Skellerup, which is based outside of a main centre, says it puts up a notice on its factory gate when it needs staff and gets 40 takers. But its likely to be more difficult in places like Shanghai. Keith Stevens, former General Manager of Richina Pacic Ltds Ovine Garment Leather Division based in Shanghai says: Were entering into the one child family syndrome and most Shanghai people would prefer that their sons and daughters were working in an office environment, certainly not in a tannery. So most of our labour force now comes from the neighbouring provinces. Probably the education level of the workers is not as high as the people that we have employed in the past from Shanghai, but we can overcome that by putting in place good training schemes. Background checks by professional external consultants are essential when hiring senior staff, particularly because of the danger of intellectual property loss. Exaggerated and fraudulent CVs are also more common than in NewZealand. For a list of recruitment agencies and consultancies contact NZTE. Remuneration in China While China remains a relatively cheap place to hire factory workers, particularly in the less developed cities and regions, skill shortages and rising standards of living in the main centres are pushing up salaries for management and technical staff to levels similar to Western countries. English speakers are costly and in short supply outside the main centres.

Typically there are four components to salaries in China: Annual base salary the minimum wage in China is set by individual cities and rises every year. Guaranteed bonus becoming less common as employers roll it into the base salary. Cash allowance a small traditional payment at Chinese New Year and traditionally paid in a red envelope. Bonuses and incentives becoming more common. When investigating staff costs make sure that all costs are transparently listed. These contributions can include; housing, meals, pensions and health insurance (which can add a third to the basic pay rate). Also, if you are hiring factory staff you will often have to hire more workers to do a task than would be needed in NewZealand. All workers must have a contract which sets out employment terms and conditions. One thing to watch for is that employees talk more openly about pay than they do in NewZealand. As a result it may be a good idea to be transparent about what you pay and why. Attracting and retaining staff Attracting and retaining staff can be challenging in Chinas competitive job market where skilled and valuable staff are regularly headhunted. There are severe shortages of skilled and internationally savvy staff and workers have few qualms about leaving if they are not happy. Also once someone has had experience working in a Western company, their skills become highly sought after. Its rare for someone to stay in a key position with the same company more than six years, for example experienced accountants could have had four or ve jobs by the time they turn 30. In this environment you need to look after your existing staff and make your workplace attractive for job hunters.
KIWI LESSON ITS NOT ONLY ABOUT THE MONEY

It is no longer so much a question of new entrants making tempting salary offers to your staff as it is to get the right cultural t. Of course you have to pay what it takes to get the best people, but provided the match is right staff tend not to leave for the money. In addition, to attract and retain the best people you need to be able to offer opportunities, stability, challenges and rewards the whole gamut. Richard Yan, Chairman and Chief Executive, Richina Pacic. Executive and vocational training is an important part of this mix. Many of the skill shortages are caused by Chinas education system which relies on rote memorisation and testing which doesnt prepare Chinese workers for modern workplace realities. Traditionally, Chinese businesses have not invested in training staff though they are now starting to catch up with best Western practice.

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Chinese respondents to a 2011 survey by recruitment specialists Hudson indicated they were motivated by more than just additional monetary rewards. Education and training, employee recognition programmes, high performance incentives and long-service rewards are all more popular in China than in the other markets surveyed. Options for providing executive and vocational training You need to be ready to provide ongoing education for most of your Chinese staff to get them up to speed. Ways you can do this include: Financial positions theres a shortage of experienced Western-savvy professionals with English language skills, regulatory knowledge and international experience. Ongoing education solutions: p  osting to your NewZealand operation, or other international branches d  egrees, diplomas and courses at NewZealand educational institutions mentoring u  sing specialist Chinese or foreign training providers and programmes. Engineers Chinese engineering students get little practical experience in projects or teamwork. Ongoing education solutions: p  osting to your NewZealand operation, or other international branches d  egrees, diplomas and courses at NewZealand educational institutions mentoring inclusion in a Kiwi project team working in the region u  sing specialist Chinese or foreign training providers and programmes. IT specialists Ongoing education solutions: p  osting to your NewZealand operation, or other international branches d  egrees, diplomas and courses at NewZealand educational institutions mentoring u  sing specialist Chinese or foreign training providers and programmes. Finally there is a set of generic skill gaps across all professions and occupations. These include: Confidence in speaking English. Ongoing education solutions: English language lessons mentoring by a more uent colleague visits to NewZealand.

 attending meetings between Kiwi manager and Chinese counterparts visits to NewZealand. Lack of creativity Ongoing education solutions: mentoring visits to NewZealand. Overseas training is highly sought after. Offering your best employees an opportunity to train in NewZealand builds company loyalty and helps develop the international awareness and business skills often missing among Chinese managers and staff. Tips: Work in with a partners plans (for example, a channel partner) to help cover your training needs. Do a comprehensive orientation course for new recruits. Use their skills immediately and provide constant challenges.
KEY LEARNINGS

Watch out for contradictory advice on HR issues you need to nd out what is right for your company. Check the CVs and references carefully. Make the final selection yourself. Look after your expats. Value your Chinese employees. Look out for hidden wage costs. Invest in vocational training and head or regional office placements. Conduct exit interviews. If you inherit staff via an acquisition or joint venture dont be too quick to pick and choose who you will keep or let go. Some labour laws prohibit layoffs in certain circumstances, but you dont know in the short term who actually plays which key roles, or more importantly in China, who is related to whom.

5.3 ACCOUNTING AND AUDITING

What are the accounting and auditing requirements? Foreign and Chinese businesses must keep accounts that meet the Chinese Accounting Standards for Business Enterprises. As Chinas accounting system is different from NewZealands, NewZealand companies need to get to grips with different rules, systems, legislation and standards. You can use a registered Chinese accounting rm or an international accounting rm to set up systems that comply with Chinese law. Several NewZealand accounting rms also operate in China, including large international rst and second tier accounting rms. You may need to produce one set of accounts that comply with Chinas regulations and then adapt this to meet Generally Accepted Accounting Principles that apply to the NewZealand parent company. There are only two approved accounting systems in China and any other accounting software used there must be approved by the Chinese Ministry of Finance.

An understanding of Western and business cultures (including risk taking). Ongoing education solutions: mentoring

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Accounting records must be kept in Chinese (they can also be written concurrently in a foreign language) and nancial reports must be in RMB. Foreign-invested enterprises (FIEs) are required to keep their accounting records, statements and supplementary memorandum for at least 15 years. Keith Curry, Skellerups former China Chief Executive, says one of the critical employment issues for companies in China is having a good accountant who is familiar with Western accounting practices. Chinese accounting is quite different to Western accounting. The accountant you have has got to have done Western accounting. Its as simple as that. He suggests a good investment is sending your China accountant to NewZealand for work experience. You also need to be sure that the person managing the accounts process is doing so in China, not NewZealand, which incurs an additional cost. Richard Yan, Chairman and Chief Executive of Richina Pacic, says Chinas business environment is becoming more normal by Western standards with the range of legal, accounting and intermediate services available growing every year. While many of Chinas accounting regulations are the same or similar to international practice, there are some differences between Chinese and Western accounting practice, for example, tax deductibility and depreciation of capitalised assets. You should pay particular care in these areas. For a list of accounting rms in China, contact NZTE.

Audit requirements All FIEs must be audited annually by certied public accountants. The annual nancial statements and the auditors report should be completed before the end of April to meet the May 31st tax ling deadline. FIEs must also submit an Annual Taxation Consolidation Reporting Package to the tax bureau by the end of May each year. In this reporting package, all taxes should be veried on the basis of the audit result. If the audited taxes are different from the taxes paid, the FIEs should discuss the discrepancy with the tax bureau.
KIWI LESSON GET IT RIGHT FROM THE START

Instrument maker Commtest says you need to have ongoing audit and compliance systems in place from the beginning so you have a clear understanding of expenses. Networking, entertainment, gifts and other expenses can expand considerably if not dened and monitored. (Source: Dezon Shira & Associates)

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6. NAVIGATING CHINA

6.1 GETTING PAID AND REPATRIATING PROFITS

How to get paid and repatriate prots To get paid by your Chinese customers into your bank account in China, youll need to navigate Chinas banking system, regulations and different attitudes towards business transactions. Although Chinas banking system has been largely deregulated there are still some restrictions on the types of accounts different banks can offer, and on what accounts foreign businesses can open. NewZealand businesses also need to be careful to meet regulatory requirements when setting up in China, otherwise they can run into tax or other compliance issues when trying to repatriate prots. Equally important is to have a good plan to minimise the risk of a customer defaulting on payment, because forcing payment through Chinas legal system is likely to be difficult and costly. Traditional Chinese attitudes towards contracts and contracted prices can be different from Western ones, and NewZealand businesses want to avoid the risk of customers trying to renegotiate prices after goods have been sent. Getting paid If you dont have an on-the-ground presence (a representative office, wholly foreign owned enterprise (WFOE) or joint venture (JV) payment must be remitted to your NewZealand bank account by your agent or distributor or by the customer if you are selling directly to customers in China. If you have an on-the-ground presence either through WFOE or JV, you can open local bank accounts and get paid into your local accounts for your trade and services. If you have a representative office, you still can open local bank accounts, but these accounts cant be used for trade or service purposes. It can only be used for administrative purposes.

Setting up bank accounts If you have an on-the-ground presence you can set up local currency (RMB) and foreign currency bank accounts in China. These can be opened with local Chinese banks or foreignowned banks that have a licence to operate RMB accounts. You will need to complete regulatory requirements and show your business licences to the bank before you can open any accounts. If you are setting up a WFOE you will need to establish a capital account and remit in the required capital before you can open your local accounts. Be aware that the regulations around banking and nance change frequently. Choosing a bank Not all foreign banks operating in China can open capital and RMB accounts. For a list of banks that operate in NewZealand and also offer local and foreign currency accounts and capital accounts in China, contact NZTE. Be prepared for the banking system to be slower and less efficient, says Kiwi education company AIS St Helens. It found that transferring large sums of money could take a week and had to be done in smaller sums. Retail branches are often full, meaning you have to wait for your number to be called before you are served. How to invoice Many Chinese companies prefer to be invoiced in US dollars, particularly if they are already doing business with the USA, although the currency will be determined by the contract. Reducing the risk of customers defaulting on payment In China it can be difficult to know who is going to be a good payer and who isnt. NewZealand companies have had widely differing experiences of getting paid. The advice is to go for the most secure form of payment you can get. When you are dealing with a new customer you should always use Letters of Credit (see below) to secure payment, as well as doing due diligence on the customer and having an enforceable contract.

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If you have a long-standing relationship with a customer and want to use an alternative payment method, like Document against Acceptance (see below), take out trade insurance against the risk of default on payment. Because some contracts are so small, the costs associated with a Letter of Credit dont make this option viable. You need to calculate the nancial consequences of your small contract not being honoured. It can be difficult and costly to use Chinas legal system to recover payment owed for goods that have already been delivered. Chinese attitudes to legal contracts also differ from those in the West. Dont agree to releasing documents of title without payment being secured unless you have insurance to cover your counterparty risk, says Jeff McKenzie, former Regional Head Commodity and Trade Finance North Asia with ANZ in China. Even companies that have 10 years trading experience with a Chinese company have been caught out when the counterpart went bankrupt, he says.
KIWI LESSON RECOVERING DEBTS CAN BE TRICKY

Generally there is no problem with Letters of Credit from Chinese banks being accepted by NewZealand banks, although you should check this with your bank if the transaction involves a Chinese regional bank. Also ensure that all Letters of Credit are received via SWIFT (the Society for the Worldwide Interbank Financial Telecommunication). It is very important that the documents submitted to banks exactly comply with the strict conditions of the Letter of Credit. It has been estimated that half of Letters of Credit are rejected by banks at rst presentation because they do not meet stated conditions. Check the Letter of Credit against the terms of the purchase contract and ask the buyer to make any necessary amendments before you go to the bank. Do not send up documents that contain discrepancies unless these have been pre-approved through the banking system or you risk losing the protection of the letter of credit. Documents against Acceptance, or Documents against Payment These are used in ongoing business relationships as they provide some protection and some risk for both parties. They are easier to use and less costly than Letters of Credit. With Documents against Payment, the documents needed to obtain the goods are only delivered to the importer after they have paid for the goods. With Documents against Acceptance, the documents needed to obtain the goods are delivered to the importer after they have accepted the exporters bill for payment at a xed later date. Documents against Payment are obviously safer than Documents against Acceptance because the buyer only gets the goods after theyve paid for them. Trade insurance is often used to cover the risk of default where Documents against Acceptance are used. The NewZealand Export Credit Office provides credit guarantees for exports to China. However, it only provides longer-term cover (more than a year), so normal trade insurance must come from commercial insurers.

All the commercial risks credit, getting paid, understanding the costs and compliance are the same in China as in NewZealand. Where they tend to be a little tricky here [in China] is that the system of recovering debt is a lot more complicated and less robust than in NewZealand, so that makes us a little more wary up front. Don Johnson, Marketing Manager, Pan Pac Methods of payment used in China Letters of Credit (or documentary credit, import credit, export credit) Letters of Credit guarantee payment and receipt of title from an independent party the bank. They are internationally recognised and are the least risky way to secure payment from new customers. Most Chinese commercial banks and foreign banks with licensed Chinese branches can issue a Letter of Credit.

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 If you cant get trade insurance be cautious about using Documents against Acceptance. Cash in advance This payment method is only used when the Chinese buyer has a strong degree of trust in the foreign seller. Open account This is when the buyer agrees to pay for the goods within a certain period of shipment, generally 30, 60 or 90 days. It is the least secure form of payment for NewZealand exporters to China and leaves you fully exposed to the buyer getting title to the goods then defaulting on payment. Companies using open account would normally cover their payment risk with trade insurance. Your bank can assist you with these methods of payment Dealing with slow payers You can avoid the problem of slow payers by using Letters of Credit or Documents against Payment. If you sell using less secure payment methods and strike a slow payer, deal with the problem as soon as payment falls overdue. If you have an agent get them to contact the buyer and seek payment immediately. If that doesnt work contact the buyer immediately yourself or ask a friend in China to contact the buyer on your behalf. This friend might be a business associate or other inuential person who is willing to work on your behalf. If all else fails, consider legal action or arbitration which is the most popular way to resolve disputes between Chinese and foreign companies. Note that municipal owned and local government owned facilities can be slow to pay. Financing your China operations Representative offices cant borrow money in China, so all working capital will have to be remitted from NewZealand. WFOEs set up by NewZealanders tend to fund themselves using cash ow from China, or a loan facility from a foreign bank with offices in both NewZealand and China. It is possible to get nancing from a Chinese bank, but generally this is only practical for very large businesses. Overdrafts arent used in China the credit account stays in credit and is topped up using a loan account that is drawn down at three, six or nine month intervals. Foreign banks will also provide home nancing in China where they have a link or relationship or they can establish a relationship with the NewZealand parent who can support the WFOE in China.

Paying your bills in China Most supplies must be paid for in advance or on delivery using cash or credit cards. Chinese companies rarely extend credit until you have a well-established relationship. You may also be asked to pay a deposit for utilities like office telephones. Representative offices and WFOEs can open US dollar accounts and RMB accounts for paying local expenses. When paying international bills you will need to provide evidence of the bill to remit money out of China. To pay salaries you will need to open a payroll deposit account. Although use of credit cards is growing extremely fast, only a small fraction out of several million merchants and retailers accept credit cards. ATMs for cash advances are few and far between with most in major cities. Be aware that the commission paid to credit card companies by retailers could be added to your bill, for example when paying for travel in China by credit card 2.5 to 4 percent commission is normally added to the cost. Repatriating prots You can repatriate up to 90 percent of prots. However, care needs to be taken when you rst set up your business because if you do not comply with all the regulations you may not get the approvals needed to send prots out of China. Before you can remit prots you must le your fourth quarter tax return with Chinas State Administration of Taxation (SAT) to conrm the amount of Foreign Enterprise Income Tax payable. You can then nalise your net prot. Not all prot can be repatriated or reinvested. A portion (at least 10 percent for WFOEs) must be placed in a reserve account. This reserve is capped at 50 percent of the companys registered capital. To distribute the remainder you must get a board resolution authorising distribution and le an application with SAT (in Chinese) that includes an annual audit, tax receipts and other documents. SAT will then issue a Foreign Enterprise Income Tax Payment Certicate; this certicate enables the bank to convert RMB and then remit funds. Foreign exchange controls When a WFOE or joint venture is set up it must register with Chinas foreign exchange authorities State Administration for Foreign Exchange (SAFE) within 30 days of getting a business licence. It can then buy and sell foreign currency (including exchanging RMB) at authorised banks for current account items, such as importing or exporting goods and services. However, sufficient documentary proof of the transactions status must be available. Authorisation is needed from SAFE for capital account transactions those that increase or decrease a companys capital. These include things like direct investment, new loans and investment in securities.

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These foreign exchange controls are likely to continue for the near future, although China has promised to eventually end them. Generally, funds owing out of China are subject to stricter control compared to funds owing into China, although China has recently been restricting funds owing into China in an endeavour to cool growth. Getting help If you are using consultants to help you with payments and prot repatriation make sure you conduct proper due diligence on them. Some international banks have offices in China and NewZealand, e.g. ANZ, HSBC, Westpac.
KEY LEARNINGS

Finding a good lawyer Chinas commercial legal system, although still in its early stages, is developing quickly. Networks of independent law rms operate across the country offering a range of legal services. Some of the larger rms now offer a full service package and regularly assist international clients with complex and largescale transactions in China. Numerous international law rms operate in China, particularly in the larger commercial centres of Shanghai, Beijing and Guangzhou. Unlike their local Chinese counterparts, international rms are not allowed to provide formal legal advice on matters concerning Chinese law or to represent clients in the Chinese courts. However, foreign rms are able to advise on the Chinese legal environment in the context of international practices. In practice, they can assist clients with managing projects, drafting contracts and other legal documents, and other similar matters. When needed, this can be done in conjunction with local Chinese law rms. It is advisable to work with a rm that has experience with international clients. Such rms will invariably have in-house English language capabilities and, importantly, an understanding of Western business culture. Many Chinese lawyers have studied and worked overseas and can effectively communicate with overseas clients and understand their complex needs. Legal fees, as in any jurisdiction, vary depending on the location, the size of the rm and the nature of the work involved. Generally speaking, local Chinese law rms charge less than their foreign counterparts in China although the gap is narrowing and some of the larger Chinese rms charge international rates. For a well-established local rm, with an international client base, hourly rates in the region of US$200400 would be typical. It is common to agree project-based fees, or in contentious matters, success fees, which might typically be 20-30 percent of the winnings. This will vary from rm to rm and should be agreed in advance. Basic tips for nding a good lawyer As anywhere, personal references and introductions from friends, business partners or other sources, including NZTE, chambers of commerce and other business affiliations, can be invaluable. Conducting some basic internet research, including a review of the rms website, can reveal much about a law rm, its size, capabilities and industry ranking. Make an appointment to talk with the firm the first consultation should normally be free of charge and discuss your situation. This will enable you to get a feel for in-house expertise and professionalism. Law firms with a presence in China will invariably have the most up-to-date knowledge and experience of China legal matters. A number of NewZealand law firms have strong links with China and can be a useful resource.

There are restrictions on the type of bank accounts you can open. Stay up to date regulations around banking and finance change frequently. The banking system can be slower and less efficient than we are used to in NewZealand. Its hard to know who is a good payer and who isnt so go for the most secure form of payment you can get. Recovering debts is more complicated than in NewZealand

6.2 GETTING LEGAL ADVICE AND RESOLVING DISPUTES

The Chinese Legal System While China is continuing to make signicant improvements to its legal system, particularly in the area of commercial law, doing any form of business in China continues to present foreign businesses with numerous challenges. In common law jurisdictions, such as NewZealand, court judgments generally have binding legal effect. However, Chinas legal system follows a civil code system. This means that laws in China are derived from a myriad of national laws and national and local regulations, supplemented by court interpretations, departmental notices and, importantly, local practice. Legally speaking, a hierarchy of legislation exists, under which national laws take priority over sometimes inconsistent lower-level regulations. However, in practice different interpretations of the same regulations are often applied. Local protectionism, variable enforcement and a lack of transparency, particularly in lesser-developed regions, may heighten uncertainty. It is therefore essential for anyone looking to establish or operate a business in China to secure impartial and wellinformed legal advice before taking the plunge. Working from a solid foundation only increases the chances of success and reduces risks. You will need to be prepared to commit additional time, energy and resources at the outset but this will only increase the chances of a successful future.

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Commercial disputes In any business dealings, the potential for disputes can never be eliminated. Economic, cultural and legal differences, as well as differing expectations between international businesses and their local Chinese counterparts, add to the uncertainties. Traditionally, disputes in China, whether of a commercial nature or otherwise, have generally relied on negotiation and mediation for settlement. However, recent years have seen the fast development of a legal framework offering different options for dispute resolution. In most cases the parties to a commercial arrangement involving foreign parties are free to elect either court litigation in the local Chinese courts or domestic/international arbitration. There are advantages and disadvantages to each such approach. Litigation In recent years Chinese court proceedings have seen marked improvements in the processing of claims through local courts, particularly in the more developed cities of eastern China, and foreign companies are increasingly turning to the courts to settle disputes. As always, professional legal representation, ideally by Chinese lawyers with local knowledge, is essential. Foreign lawyers may not officially represent clients in Chinese courts, but may observe the proceedings. Enforcement of Chinese court judgments overseas, and foreign court judgments in China, is virtually impossible. Accordingly, a NewZealand court judgment against a Chinese company will be unenforceable. Arbitration Arbitration may be arranged in China or, in cross-border disputes involving foreign and Chinese parties, outside of China. Hong Kong, Singapore, London, Paris, Stockholm and other major arbitration centres have been popular venues for foreign arbitration. Numerous arbitration commissions have been established in China, including the China International Economic and Trade Arbitration Commission (CIETAC). This is based in Beijing and has branches in Shanghai and Shenzhen. CIETACs rules of arbitration broadly follow international arbitration principles and a number of foreign arbitrators are listed on CIETACs arbitration panel. CIETAC is reportedly the worlds busiest arbitration commission and is generally recognised to adopt international standards. Local Chinese arbitration awards are enforceable in China. Foreign awards granted in most major jurisdictions (including NewZealand) are also enforceable in China through the Chinese courts. However, the challenges applicable to court enforcement in China can make enforcement problematic. Administrative enforcement China relies heavily on the enforcement of regulations by government administrative authorities. These authorities have wide-ranging powers to investigate and punish commercial wrongdoing, including issuing nes, conscating illegally earned

income and, in serious cases, cancelling business licences. This underscores the fundamental importance of local knowledge since the approach of the various local government administrative authorities may differ signicantly from one location to the next. Keeping evidence Chinese courts and arbitration commissions attach great weight to documentary evidence when processing commercial disputes. Suggestions for avoiding commercial disputes Have clearly defined contract terms. All the parties key rights and obligations, such as payment and performance expectations, should be clearly referenced. Set out the applicable dispute resolution procedures in the contract. Litigation or arbitration should be the last resort. Do due diligence on potential Chinese customers, suppliers and Chinese partners. Dont underestimate the importance of this and be prepared for the associated time and costs. Try to understand your Chinese partners goals and objectives. They may be different from yours. For example, a state-owned company may be more concerned about preserving employment than prots. Ensure that the person representing the Chinese partner has the authority to do so. Request copies of powers of attorney and other evidence of corporate authority. Agree on execution formalities for contracts. Initialing each page of the contract is recommended and, when signing contracts with a Chinese company, ask the company to affix its official seal. Agree on which language version of the contract is to prevail in the event of a discrepancy. Careful and thorough translation is imperative. Make certain your project is economically viable on its own terms. Do not rely on promises of subsidies, special considerations or non-market sources of income to generate a prot. Beware of generous local incentives as these may not be legally enforceable. Understand the relevant industry sector. The Chinese state still plays a very signicant role in the market place. Pay careful attention to how you get paid, when you get paid, and in which currency. If you have agreed to be paid in RMB, verify that you can convert prots to US dollars. Use Letters of Credit or other nancial instruments to protect yourself. Do a thorough risk analysis and limit your exposure. Be realistic about how much risk you are willing to accept. Set milestones for performance and have an escape strategy for each stage of the project, even though you dont plan to use it. Mind the store. Projects and sales in China require constant attention. Do not assume they will run themselves.
KEY LEARNINGS

Always seek sound legal advice before making any commitment. Use China-based lawyers as they will have the necessary local knowledge and experience. Ensure accurate and professional English/Chinese

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translations in all cases its all too easy to end up lost in translation. Due diligence, due diligence, due diligence this is essential at every stage. Maintain clear and accurate documentary records at all times. (Source: Jeremy Sargent, Partner, JS Associates Guangzhou)

All foreign businesses operating in China are subject to this tax, including companies using agents and distributors and those with representative offices. Preferential rates of 20 percent are available to certain low prot ventures and 15 percent for high technological enterprises. Business Tax (BT) a turnover tax levied on revenue generated from taxable services, the transfer of ownership of intangible assets, or the sale of immoveable property. It is payable by all enterprises and individuals doing business in China. Rates vary according to your industry:  Transportation, construction and engineering, post and telecommunications, culture and sports 3 percent  Services (such as travel agency, warehouse, advertising services, etc.), selling immovable properties and transferring the possession of intangible assets 5 percent Finance, banking and insurance 5 percent Entertainment 5 to 20 percent. Value Added Tax (VAT) generally levied at 17 percent on all enterprises and individuals engaged in production, import and export and commercial business in China. Reduced rates may apply to some activities such as agricultural production and if you are a small-scale business. Shanghai began a pilot VAT reform scheme in 2012. This replaces business tax with VAT in the transport sector and several modern service sectors which includes research and development, technology, information technology services, electrical circuit design and testing, cultural and creative services, logistics support and consulting services. The VAT rate is 11 percent for transport services and 6 percent for modern services. Consumption Tax (CT) on luxury goods, including alcohol, cigarettes, cosmetics, jewellery, yachts and wooden oor panels. It has to be paid by all enterprises that import, manufacture or process these goods. Rates range from 3 to 40 percent. Individual Income Tax (IT) foreign nationals living in China pay progressive tax rates from 3 percent to 45 percent according to their income, after deducting a xed amount of RMB 4,800. IIT affects foreigners who live in China for at least 183 days a year or those who have a management role in a Chinese legal entity. Foreign residents who have spent less than ve years in China are taxed on their China-sourced income; after ve years their global income becomes taxable. You must register with the tax bureau if you intend on working in China. Withholding Taxes foreign enterprises sending prots out of China as dividends are usually subject to a 10 percent withholding tax. Foreign companies must pay withholding tax on certain other amounts received from China including royalties, interest payments, asset rentals and other income from China deemed taxable by the Ministry of Finance. Other taxes include an Urban Real Estate Tax. For Shanghai, the Urban Real Estate Tax is 1.2 percent of the buildings original value, less a tax deduction from 10 to 30 percent

6.3 TAX AND TAX BREAKS

Understanding Chinas taxation system Chinas taxation system is more complex than NewZealands. There are many exemptions available in different sectors and development zones and the central government has sometimes used scal policy to address rapid economic development. As a result, tax issues may feature strongly in decisions about how you set up and operate in China. But tax should not be the deciding factor as tax laws are constantly changing and many tax breaks and incentives are disappearing. All preferential tax treatments given to foreign-invested enterprises (wholly foreign-owned enterprises and joint ventures) over their domestic counterparts have been axed, or have started to be phased out. In addition, the corporate income tax rate for foreign-invested enterprises and local enterprises is unied at 25 percent. However, favourable treatments are still available, for example in industries or regions where authorities wish to channel investment. The Corporate Income Tax Law allows exemptions and reductions to be granted for: income from agriculture, forestry, animal husbandry and sheries projects infrastructure projects with key support from the state some environmental protection or energy and water conservation projects some technology transfers. Hire local expertise Because of the complexity and fast changing nature of Chinas taxation system, you need to get expert local advice. Using the services of a China-based tax consultant will ensure you comply with all the tax laws and that you can take advantage of any exemptions on offer. Many of the major international tax consultancy rms are in China. There are also many reputable Chinese rms. For a list of tax consultancies in China contact NZTE. The main taxes you need to know about The information below is high level and for guidance only. You need to contact a tax expert to get advice that ts your own particular circumstances. The main taxes are: Corporate Income Tax (CIT or Foreign Enterprise Income Tax) a rate of 25 percent (could be lower if exemptions are given) is levied on an enterprises net income after reasonable costs, expenses and losses.

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levied on all owners of real estate. Theres also a Stamp Duty (0.003 to 0.01 percent) on contracts, property leasing, property insurance, certicates and licences and other specied documents. Foreign-invested enterprises must also pay Urban Maintenance and Construction Tax (UMCT) and Education Surcharge (ES). The UMCT rates are 7 percent, 5 percent or 1 percent of a companys turnover tax, depending on the location of the business. In Shanghai, the ES is xed at 3 percent of a companys turnover tax. Various major municipalities have also started imposing a local education surcharge of about 2 percent. These surtaxes will be paid monthly along with turnover taxes such as VAT, CT and BT. Taxes on representative offices Representative offices have to pay tax even though they dont trade or earn income. The taxes payable are calculated based on a deemed prot, which is estimated using the level of expenses for the representative office. The relevant taxes are: Business Tax on the total monthly overheads Corporate Income Tax Sales tax and VAT. Representative offices must assess their liability for corporate income tax using either the cost-plus or actual revenue methods. Under each method, the deemed prot margin must be no less than 15 percent. Most representatives are required to adopt the cost-plus method because they cant carry out business transactions or generate prots. This means that the representative offices projected income can only be calculated based on its expenses. Representative offices will not receive tax exemptions from the tax authorities. They must also keep valid accounting records in line with the relevant laws and regulations. Enforcement Penalties for late payments, non-payment and other contraventions of tax laws can be severe, for example up to ve times the amount due plus the original liability. Businesses also face having their licences withdrawn and assets seized in serious cases.
KIWI LESSON INCENTIVES

KEY LEARNINGS

Use local experts. Exemptions and concessions can vary depending on where your business is located, the sector you operate in and legal structure you use. Penalties for late and non-payments can be severe. (Source: Dezon Shira & Associates)

6.4 MANAGING LOGISTICS

How do I get my products from A to B? Getting your products from A to B will cost you more in China than in developed markets. At their worst, logistical costs and problems can wipe out the advantages of being in China in the rst place. Chinas logistics costs are falling but as a percentage of gross domestic product they are still high compared to developed countries. And though the logistics market has been opened up to competition, theres still a variety of regulatory-driven inefficiencies in the system. The situation is improving with the arrival in China of multinational logistics companies, but the transport infrastructure they and their Chinese partners and competitors rely on is often stretched to breaking point. Use local expertise The Economist Intelligence Unit says the key to successful distribution in China lies in partnerships with local operators. Using third party logistics companies (3PL) 3PL providers are becoming key players in the Chinese logistics industry, though their share of the logistics market is still small, but its on the rise. This is thanks to government encouragement and more companies outsourcing their logistics operations. 3PL providers provide a full logistics service including customs clearance, warehousing, freight consolidation, inter-modal transportation and distribution. Many also offer just-in-time and just-in-sequence delivery services, inventory services and radio frequency identication tracking. Basic transportation, warehousing and customs clearance services are the most common ones outsourced to 3PLs.
KIWI SUCCESS ONE STOP SHOP

Airport baggage handling system maker Glidepath established a Wholly Foreign Owned Enterprise in the Kunshan Economic and Technology Development Zone (KETD) in Jiangsu province, 80 kilometres west of Shanghai. KETD was set up to encourage IT and the production of computers and electrical components. A number of incentives are offered to qualifying companies, including no requirement for an import/export quota or export licence; and an import duty; exemption on raw materials, parts, components, packaging and machines imported for production and infrastructure. The incentives are conditional on half or more of the production being manufactured for export.

Christchurch-based Commtest Instruments has found that outsourcing to Christchurch 3PL provider SB Global Logistics means lower supply chain costs and removes the headache of working out its own piecemeal solutions. Through its international partners in China, SB Global provides a one-stop shop, from collection and packing the product at the factory door in Christchurch to customs clearance and delivery at the other end as well as taking care of commercial invoicing.

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Using e-logistics China faces a number of challenges when implementing e-commerce, notably economic and educational barriers, lack of ICT infrastructure, high telecommunications costs, lack of payment mechanisms and security and trust concerns. These issues are compounded in e-logistics by the poor shape of the logistics sector. Future trends Improved service and lower costs with the marriage of multi-national expertise and low local labour costs, plus the effects of deregulation. Further entry by multi-national logistics companies. Consolidation the logistics industry is undergoing a major overhaul and competition from foreign entrants which will see many smaller inefficient players fall by the wayside. The transport infrastructure will continue to struggle to cope with economic growth despite investment. Skill shortages as the logistics sector grows.
KIWI LESSON AT TIMES SLOW

Ports China has become the largest country for harbour and port operations in the world with 8.02 billion tons of freight (refers to the total volume in harbors and ports above designated size) throughput in 2010. In 2009, nine of the worlds top 20 ports were in China and Shanghai has become the worlds busiest port in terms of cargo throughput in 2010. River transportation and river ports have also been given priority in infrastructure development to meet Chinas growing trade. Air There is signicant growth potential for the airport industry as ights per capita in China is at a much lower level than in developed economies. In 2007, the Civil Aviation Administration of China (CAAC) began long-term developmental plans to increase the total number of airports to 244 by 2020. Total passenger throughput at domestic airports increased strongly from 284.4 million people in 2005 to a forecast 634.3 million people in 2011, representing annualised growth of 16.1 percent. The Chinese governments investment in rail and road infrastructure has been and will continue to be a threat to air travel, as rail and other road transportation remained the most economical means of transportation. The International Air Transport Association predicted that by 2014 the Chinese Mainland will become the second fastest growing air freight market in the world, just behind Hong Kong, and will become the fth largest international air freight market globally.
KEY LEARNINGS

At times the logistic services, ie shipping product from point A to point B, is a little longer than what we would expect in most developed countries. However, transport has improved dramatically in recent years. Our major markets are in Shandong province which is approximately 700 kilometres north of Shanghai. The transit time is about two days which in reality isnt too much different than what we would expect in NewZealand. Keith Stevens, former General Manager, Richina Pacic Ltds Ovine Garment Leather Division The state of Chinas transport system The Chinese Government is heavily committed to xing the countrys infrastructure and has a massive road, port, rail and airport construction programme underway. Road The Federation of International Trade Associations says Chinas road network is often badly conceived and of poor quality. Current government efforts are concentrated on the implementation of the National Trunk Highway System, a system of inter-provincial toll motorways including 12 corridors on 35,000 kilometres. According to the China Ministry of Transport, as of the end of 2010, China had 74,000 kilometres of expressways. By 2020 China will have a total of 85,000 expressways, up from 60,000 in 2008. This network, planned over 30 years, should connect 95 cities, each with more than 500,000 inhabitants. Rail Rail transportation has been growing due to heavy investment by the Chinese Government. Chinas high-speed rail network stretches 7,531km and by 2020 the government plans to expand the network to 16,000 kilometres.

The quality of Chinas logistical and transport systems is patchy. The situation in both is improving. Look at partnerships with local operators. Cool store facilities are lacking, but availability is also improving.

6.5 DAY-TO-DAY COMMUNICATIONS

Getting the communications technology right Businesses in the leading cities have all the communications services youd expect at home, but as is often the case, services in the rural and outlying areas are not as well developed. However, mobile communications coverage in many rural places is just as good or even sometimes better than in NewZealand. Although internet usage as a percentage is still low by Western standards it is growing rapidly. In 2011 the number of internet users rose above 500 million, up 12 percent on a year earlier. If you are dealing with major Chinese companies that operate internationally it is likely that your day-to-day communications by phone and email will be with an English-speaking person. Domestic companies, however, are unlikely to have English speaking staff and even if they do you will need to be condent in that persons English. If you are not, arrange to get all important written communications translated from Chinese to English.

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Telephones If you are calling a company make sure that you have a Chinese speaker on hand unless you are condent you can get through to the person you are calling. Cold calling is more difficult. Unless you know someone at a company you may nd it difficult to connect with the right person. When contacting a company they will ask up front what business you are involved in and will directly ask what you want with them. Regardless of what you say they are unlikely to continue the conversation, preferring to ask that information about your company be sent to them in writing. This information is best sent in Chinese and English; although there may be people in these companies who can communicate in English, more often than not the decision makers do not so you would be relying on someone elses translation or interpretation. Mobile phones Mobile phones are less expensive to operate than in NewZealand and in some respects more sophisticated as Chinese telecommunications companies have invested heavily in the most modern mobile infrastructure. The Chinese are also very up to date with their phones, with the quality and technology of the mobile phone being a status symbol. Chinese business people spend a lot of time on their mobiles, rarely turning them off regardless of the situation. This is not a personal affront or a sign of disrespect. Internet China does have a modern internet system, but the growth rates are such that the service providers and the system are often under pressure. In addition, there are a limited number of qualied technicians. The internet in China is closely monitored, so if necessary for your business encryption could be considered. It is wise to operate on the assumption that messages, wherever written or sent, could be reviewed by people other than the intended recipient. Laptops The use of laptops is as common in China as it is in NewZealand. Wireless internet is also increasingly common in coffee shops, hotels and in buildings. Security is an issue, so you should take care to protect yourself, but the system is reasonably reliable. Email Email is also an increasingly common form of communication, but the set up of company systems is less standard so its common for companies to use a Yahoo address or other similar service providers. Be aware that people will change service providers on a regular basis. When they forget a password they will also just start a new address, without access to the previous one. So unless you are frequently in contact by email with an individual or organisation, dont assume that they have received an email communication.

The Chinese law does allow for electronic signatures, but the reality is that the Chinese chop (seal) is what is preferred a hard copy signed and chopped is what will be most acceptable to most companies. Mail China has a marginally efficient postal system it will take several days to several weeks for mail from China to reach NewZealand, depending on whether air or surface mail is used. International courier rms such as Federal Express, DHL and UPS are more reliable. Fax Faxes are still a commonly used form of communication, although less in the main centers than in outlying areas. Faxes are often not connected to the phone system independently, so they will need to be switched over manually. You will need to call rst to ensure that the fax is addressed to the correct person, then call back to ensure that it has been received and then call again to ensure that it has been followed up on. Again, there are no guarantees they will receive the fax. Face-to-face Face-to-face meetings are always the most effective means of communication and are critical in establishing a long-term relationship with a company or organisation. The Chinese prefer face-to-face meetings, but this doesnt mean that they will always have the desired outcome, nor make the progress expected from the NewZealand end. So it is important to do as much preparation as possible before any meeting, especially one that requires international travel. Handling invitations When sending out invitations to an event or activity the recommended process is: 1. If you do not have a contact within a company call the company and source someone to send the invitation to. Make sure that you have the contact details of the person who has provided you with this information. 2. Then by email or fax, send information on your company, the event and what you want from the invitee. 3. Once it has been sent, contact them again and conrm that it has arrived and that the appropriate person will receive the information. 4. At a later date you will need to contact them again to conrm that the information has been received and acted on. This is not a guarantee that the information will arrive and will be acted on, but the other option is to have no idea at all. This is a case where persistence will pay off more than assuming that everything will be alright on the day.
KEY LEARNINGS

If your size justifies it, have a Chinese speaking person on your staff. If you are not confident in the English of a major client who is communicating with you, arrange to get communications translated from Chinese. Always have a back up means of communication.

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6.6 LANGUAGE AND USING INTERPRETERS

Language How do I deal with language problems? Chinese is clearly very different from English and is a hard language to learn for English speaking people. Kiwis in China (like most Westerners) have mixed feelings about how difficult it makes doing business. Some report they are frustrated at not knowing whats being said at meetings and having to rely on interpreters while others love the challenge. Ways to overcome language problems include employing Chinese speaking staff and using interpreters. The use of English in business and trade circles is also becoming increasingly common, particularly in the large cities of the south east. One common piece of advice is to spend more time understanding the Chinese culture than the language. There are many successful Western business people who have been in China for many years who have only a smattering of the language. What language should I deal in? English is becoming increasingly common particularly in the large cities of the south east, but unless you have been told otherwise you should assume that the Chinese you are dealing with cant speak English and will generally conduct conversations and negotiations in Chinese. Regional dialects are also common. The Chinese Government is committed to standardising communication in China around Mandarin the official spoken language. Most Chinese outside the Beijing region are bilingual and are able to speak Mandarin and their local language or dialect. Take the time to learn a little Mandarin before you go to China it will go a long way towards impressing your hosts. You can start with learning greetings and common courtesies such as please and thank you and introducing yourself. Even just learning to pronounce Chinese correctly will be seen as an investment into the relationship. However, you need to be aware of the huge regional variations in spoken Chinese. Other common Chinese languages include Wu (spoken in Shanghai), Cantonese (spoken in the south-eastern part of China, especially in the Guangdong province), and Hakka (spoken in the southern provinces, including Guangdong). Using interpreters Tips: If possible, use a mainland Chinese interpreter. If you bring an interpreter with you from another country or region, make sure s/he speaks standard Mandarin. If you want to establish a long-term business in China you need to seriously consider having your own interpreter or bilingual staff.

Fully brief your interpreters before important meetings or negotiations. Where necessary provide them with a list of terminology well in advance of the meeting. Using a local interpreter Although a growing number of younger Chinese managers and government officials speak some English, you will almost always need an interpreter for formal meetings and negotiations in China. The Chinese will usually provide an interpreter for their side. Using a mainland Chinese interpreter is important. They not only speak standard Chinese but also understand the mainland China environment, mentality and context which are all very different from other regions such as in Hong Kong, Taiwan or Singapore. A mainland Chinese interpreter might be more familiar with Chinese culture, business etiquette, practices and guanxi, as well as Chinas social, economic and political environments. If you decide to bring an interpreter with you from Hong Kong, Singapore or other overseas country, ensure they speak standard Mandarin and have a good appreciation of mainland Chinas social, economic and political environment. Interpreting and translating are two different professions with totally different skills. Interpreters are for oral interpreting and translators are for written translation. Though many people have both skills, some of them specialise in one discipline. Decide which one you want. A good interpreter is either professionally trained or experienced. Just because someone is bilingual doesnt automatically mean they are a good interpreter. How do I nd an interpreter? The best way to nd the right translator or interpreter is to rely on the recommendation of someone you trust who has used the interpreter before. Remember, just because someone speaks Chinese doesnt mean they will be a good interpreter or translator. Ways to nd translators/interpreters include: approach NZTE in China for advice approach the several foreign Chambers of Commerce in China China Council for the Promotion of International Trade (CCPIT) China-NewZealand business associations at home advisor list on NZTE website other NewZealand businesses active in China. Its not advisable to hire an interpreter or translator straight off the web or a trade directory unless they have reputable third party endorsements.
KIWI LESSON PAY TOP MONEY

Dont use a mates daughter. Get an experienced interpreter. Danny Chan, businessman and third generation NewZealand Chinese

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Interpreter costs In Beijing or Shanghai a good simultaneous interpreter (one who interprets at the same time as you or your Chinese counterpart speaks) can cost about NZ$2,000 a day. A consecutive translator (one who interprets after you or your Chinese counterpart has nished speaking) will cost NZ$400$1000 a day. Rates in other cities such as Chengdu will be a lot less. When calculating the cost of a translator/interpreter, dont forget their incidental costs such as travel and food. Payment can be either in cash if they are working as individuals or by contract if they are provided by an organisation such as the CCPIT. Your own interpreter To establish a long-term business in China, seriously consider having your own interpreter or bilingual staff. You could either nd someone in NewZealand or arrange for an interpreter in China. You need an interpreter you can trust, someone who will give you condence in communications and presentations. If you rely on the interpreter from the other side of the table, you have no control over the conversation. There are also subtle, behind the scenes interactions, which your own interpreters will be able to give you advice on, for example whether the meeting went well, what they really expect, or how to advance the next meeting. It would be an advantage to nd Chinese who have been living in NewZealand to interpret for you, as they are well-placed to understand the practices of both sides. Most importantly, your own interpreter is likely to work in the best interests of your business. Understanding the limitations and strengths of an interpreter Its important to be aware of an interpreters limitations. Interpreting is a tiring profession. One interpreter working for both sides from Chinese to English and vice-versa may get tired and start missing the meaning or detail of whats being said. Interpreters require background information well in advance to familiarise themselves with the subject matter and terminology. Brief them fully before important meetings or negotiations and where necessary provide them with a list of terminology well in advance of the meeting. If interpreters havent been well-briefed they will probably not be able to cope with technical or specialised terminology and may not be able to record or remember everything. Large numbers are particularly tricky and can be misinterpreted sometimes leading to a mistake between millions and billions. For example, ten thousand is one wan therefore 10 million translated into Chinese is 1000 wan (1000 ten thousands); 100 million has its own character as yi; and 1000 millions or one billion translates as 10 yi. Understanding Chinese numbers will be benecial in these situations.

Consecutive interpreting is most commonly used for meetings. This means you speak, pause and then your interpreter interprets. If you are giving a speech or presentation, remember that the need to interpret everything consecutively will approximately double your speaking time. Some interpreters may be more familiar with British or American English and may have some initial difficulties with the NewZealand accent. Establishing a good working relationship with interpreters is very important. Interpreters can be the key to successful communication between you and your Chinese business counterparts. An interpreter can therefore be a very powerful person. For example, you may say something unconsciously thats potentially offensive. An interpreter working in your best interests may put it in a polite way that both sides will be comfortable with. Interpreters can help smooth the way through negotiations. In some formal conference situations, simultaneous translations are provided. If you want to use simultaneous translations the equipment is very expensive. It requires at least two interpreters (each interpreter interprets for a maximum of 20 minutes alternatively). Use prepared speeches if you can. How to work with an interpreter at meetings or negotiations When working with an interpreter it helps to speak directly to your counterpart (not the interpreter) and always use the rst person. For example: say thank you rather than tell him I thank him. Use full sentences. Its easier to interpret and get the correct ideas across. Use simple language. This prevents misunderstandings on the interpreters part and safeguards against misinterpretation to your Chinese counterparts. Explain any difficult terms or concepts. An interpreters job is to take the source language and convert it to the target language but they usually wont add their own knowledge or understanding to explain something. Pause frequently at an even pace. Pause after a thought is complete, or after you have made a major point. Avoid long, complex sentences. If your speech is too long it may make it difficult for the interpreter to remember what you have said. Appreciate that interpretations may take much longer than the original speech especially when interpreting from English into Chinese. Speak slowly and clearly, particularly if the interpreter is not used to the NewZealand accent. Listen to how your interpreter interprets what you have said. If you have given a lengthy explanation but the interpreter reduces it to a few Chinese words, it may be that s/he has not fully remembered or understood what was said. Check the interpreter has adequately conveyed your point to the Chinese side. Its a nice gesture to give your interpreter a gift for his/her services.

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Things to avoid: leaving sentences unfinished. Your interpreter might find it hard to translate the meaning if you have left a sentence hanging jargon or colloquial expressions like lets get the ball rolling (which when interpreted may have a different meaning) jokes often dont go down well in a different culture or when interpreted. The importance of your business partners interpreter Your Chinese business partners interpreter could be arranging your meetings, planning your itinerary, or ordering for your banquet. More importantly, s/he could be the key contact for your next trip or business opportunity. They could also be the mediator between you and your Chinese business partner or Chinese Government official when things dont go according to plan. What needs to be translated? Though it can be a big commitment, as much material as possible about your company and its management should be translated well ahead of time. This particularly applies to documents relevant to your meetings or negotiations. It is an investment that will pay off. You must have appropriate translations of: business cards a well produced one-page company profile including a list of reference projects and clients a power point presentation and/or DVD and any handouts technical terms and specifications. When deciding what to translate remember that the person you are dealing with now may speak English, but they may not be the person or the only person involved in making the decision. For example in the educational section potential students may speak English, but their parents or grandparents who make the decisions may not. If you are looking to sell in China, its essential that your company and product names are properly translated. A sign that you are serious would be a full Chinese version of your brochure.
KEY LEARNINGS

6.7 BUSINESS ETHICS AND CORPORATE RESPONSIBILITY

How do I deal with corruption? Theres a lot more corruption in China than in NewZealand, however dont think that corruption is generally accepted in China and be aware that the vast majority of people you will deal with in China are not corrupt. That said, its always best to be on your guard. What types of corruption are common? Examples of corruption you may come up against include: outright requests usually through agents contracts are agreed, then an amount is added that you are expected to pay in cash requests for, and giving, expensive gifts misuse of funds or inside information ignoring labour and environmental rules. There are also well known problems concerning intellectual property (IP) violations. For more information on how to protect your IP see the Entering the Market Protecting IP section. The frequency and seriousness of corruption varies according to the business sector, region and type of business. In general the situation is improving with the government engaged in a corruption crackdown. At an operational level you are most likely to run into nepotism or patronage, conict of interest and excessive exchange of gifts and favours. Before entering into any contracts or relationships you should also do due diligence. Tips for dealing with corruption Stick to best practice. If you come into contact with corruption, dont get involved. Understand as much as possible about China. If you are sub-contracting manufacturing seriously consider including a code of conduct in your agreement. Have an unhitching strategy in case things go wrong. Understanding reciprocity Further complicating Western ethical judgments in China is guanxi the close personal relations between individuals that often underpin business deals and relationships. Guanxi creates ethical gray areas for Westerners. To understand gift giving see the Researching the Market Business Etiquette section.

Learn a little Mandarin such as greetings and common courtesies it will impress your hosts. Pay attention to correct pronunciation. Understanding Chinese culture is more important than learning the language. Use a mainland Chinese interpreter. If you are looking to do long-term business in China, consider having your own interpreter or bilingual staff. Interpreting and translating are two different skills.

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Implementing a code of ethics A number of international companies have fallen foul of publicity campaigns highlighting labour or environmental abuses in their factories. Also be aware of factory managers who are willing to cut corners sometimes with serious consequences for consumers to deliver the lowest possible price. If you sub-contract manufacturing in China consider a code of conduct for the factory as part of your agreement. If properly implemented this can protect you against serious nancial and public relations fall out. Also consider contracting a third party inspection and audit agencies. You need to be careful how you write and present your code of conduct. Dont take a holier than thou attitude and impose a translated version of your existing code. Work as much as possible with your Chinese managers and partners to write a code that Chinese workers will understand and follow. Corporate social responsibility in China Corporate social responsibility has not made big inroads into the operations of Chinese businesses; they mostly continue to have a narrow focus on prot maximisation with human and environmental considerations coming second. The Chinese Communist Party is anxious about growing social unrest throughout the country, wanting a redistribution of wealth from the affluent urban areas to the poorer rural regions to restore social harmony.

In an effort to engage business in this objective a Chinese Association for Corporate Social Responsibility (CACSR) was established to encourage businesses to engage in both business-related activities such as employee care and the use of environmentally friendly materials and public activities. NewZealand businesses looking to set up in China, regardless of size, should at least have some type of corporate social responsibility (CSR) programme on their radar for all the same reasons they would have one back home.
KIWI SUCCESS LEAVE SOME SALT ON THE TABLE

Its very important when you are doing business in China to leave some salt on the table. I think that is the Chinese way. We are in their country so getting accustomed to their way of doing things is very important. Dr Garth Smith, co-founder, Biovittoria For more information on CSR in China see: the US-China Business Councils best practice on Corporate Social Responsibility the Hong Kong Corporate Social Responsibility Charter
KEY LEARNINGS

Corruption is the exception in China. Always be on your guard against corruption. Doing due diligence provides good protection. Enforcing a China friendly code of ethics can protect your businesss reputation. Leave some salt on the table look at implementing a CSR programme.

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7. MANUFACTURING IN CHINA

7.1 PROS AND CONS OF MANUFACTURING IN CHINA

Should I manufacture in China? Manufacturing in China is both challenging and changing. Traditionally, manufacturing in China (either direct or outsourced) has been seen as a way to cut costs and increase prots. Increasingly companies now see it as taking a strategic position that ts their global aspirations, including in China itself or further aeld. If you are investing in China for the long haul, your business strategy needs to be driven by factors other than low costs. The perceived advantage of low cost labour is disappearing in certain areas, eroded by rising labour and other costs. And in the case of Guangdong, a province in southern China, there is in fact a labour shortage. In some cases companies have found that manufacturing in China wasnt much of an advantage once all costs were taken into account. High intellectual property protection burdens, quality control issues, management overheads, logistics overheads and other hidden costs mean manufacturing in China sometimes isnt as cheap as it rst looks. What China has done though is invest heavily in large scale manufacturing equipment and facilities. In the long term China will be distinguished by is its overall business strength and structure. For example, its complete business chains, including logistics and key component suppliers, which when combined with relatively low cost labour and mass production means manufacturers can get the best price and delivery in the best time. Be strategic The reasons for considering manufacturing in China generally hinge on reducing manufacturing costs for some products, especially products for the mass market and product lines in order to maintain competitiveness in existing markets. In other

cases companies have invested in manufacturing in China to supply their China-based clients or for on-selling to a third country. Strategies can also be positioned around reducing component costs in existing or future product lines while retaining research and development, design and other high end manufacturing in NewZealand. For NewZealand companies the emphasis should be on strategic engagement in manufacturing with Chinese partners, making the investment into people and structures and determining involvement based on indirect as well as all direct costs. Companies will need to gradually develop language and cultural skills in-house (or outsourced), looking at a staged process over time, not a great leap forward. This is arguably less difficult for larger companies, but it is critical for small to medium enterprises to determine up front the benets versus the costs. At the end of the day its a long-term commitment that requires a lot of planning and preparation. Reasons to consider manufacturing in China To maintain international competitiveness through lower costs:  Labour; it is estimated that a company that manufactures in China can cut costs by between 30 and 80 percent depending on how labour intensive the product is Manufacturing; efficiencies and economies of scale Incentives offered by Chinese agencies. Access to Chinas rapidly growing domestic market. Brings production closer to Asian and European markets. Proximity to downstream manufacturers (increasingly based in China) for makers of intermediate goods. Lower capital costs. The entrepreneurial spirit of the Chinese and Chinese managers. Getting access to increasingly competitive and sophisticated Chinese research, science and technology, both in personnel and technologies.

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Low labour costs, while remaining an important factor in decision making, should not alone justify moving or setting up Chinese manufacturing operations. Keith Stevens, former General Manager of Richina Pacic Ltds Ovine Garment Leather Division in Shanghai, says labour costs in China are competitive with a lot of the other Asian countries. But I wouldnt say its cheap. In sophisticated cities like Shanghai, the cost of labour is increasing quite dramatically.
KIWI LESSON PROXIMITY TO CUSTOMERS AND QUALITY MOST IMPORTANT

The danger of production overruns by contract manufacturers and leakage of products onto the Chinese domestic and overseas markets. Variable quality of logistics, though this is improving around major metropolitan areas. Many of the above represent hidden costs. Sometimes, especially for smaller companies, these indirect costs and issues can outweigh the direct benets. How to manage quality A big issue facing companies considering manufacturing in China is quality control. It has been rated the most important operational issue faced by NewZealand companies in this market. NewZealand re detection equipment manufacturer Pertronic Industries says local Chinese manufacturers have difficulty meeting new safety and quality standards. Lots of Chinese rms have very poor quality control, including the products used on major government projects. These companies dont have a long established background of quality manufacturing. Pertronic warns that China can appear very impressive on the surface in that many products look good, but the quality control is abysmal and products are shoddy. The Chinese manufacturer Pertronic deals with is ISO approved and Pertonic says its quality control is impressive. Skellerup is another Kiwi company that has conquered the quality control issue its quality control systems in China are the same as in NewZealand. You can outsource quality inspections for your products. Independent inspection companies can visit your manufacturing partners plant and do quality controls and production audits.

Being competitive with your labour costs is important to being successful in any business, but there are other important factors. I think being close to your customer base and producing a quality product probably even outweighs the cheaper cost of labour. You must put an effort in here in China. You must ensure you have good quality systems and you have excellent training systems in place. Keith Stevens, former General Manager of Richina Pacic Ltds Ovine Garment Leather Division in Shanghai Factors that make manufacturing in China difficult Language and cultural differences it can be hard to get messages across. Commercial law is also a work in progress. High intellectual property protection costs. Risks to your brand. Long start-up times. Increased management overheads for example communication difficulties, the need for stringent quality controls and the need to redesign operations. Long supply chains. Distance from NewZealand or other markets. Energy shortages and other operational problems. Inflexible manufacturing schedules. Variable quality control. Longer lead times. High staff turnover, especially engineers and senior management.

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BUSINESS MODELS
Least CONTRACT MANUFACTURING No Investment No Legal & Tax Presence Maximum Flexibility No Operational Control Cost and operational control MANUFACTURING SERVICES (3RD PARTY CONTRACTORS) Minimal Investment No Legal & Tax Presence Flexible Contract Terms and Risk Management Full Operational Control WFOEs JVs (Chinafactoring Solutions. (2004). Manufacturing in China: Business Models. Brighton, Michigan) Greatest SUBSTANTIAL INVESTMENT Legal & Tax Presence Required Limited Financial Flexibility Complete Control

KIWI LESSON HAVE A QUALITY CONTROL MANAGER IN CHINA

Kiwi sheetmetal, rollforming and folding equipment manufacturer Hayes International says quality control can be a real problem in China. In the past the company tried to manage the problem from NewZealand, but has now put in place a full-time quality control manager in China.
KEY LEARNINGS

licensed manufacturing and technology transfer buying an existing manufacturing facility setting up a manufacturing facility joint venture.

It is common for companies to gradually increase their nancial commitment to manufacturing in China from outsourcing through to ownership of a factory. If you have set up a wholly foreign owned enterprise or a joint venture you can own manufacturing facilities. If you have only set up a representative office or are running your China operations out of NewZealand you cannot own a factory though you can manage outsourcing (without being able to invoice or accept revenues) through your representative office. For more information on these business models and location issues see the Entering the market Typical models for setting up in China and Choosing a location in China sections. Contract manufacturing Contract manufacturing can be a particularly good option for small NewZealand companies. It is a popular set up for Western companies wanting to manufacture in China because it is exible and low cost. Other advantages include: making your business more competitive globally and in NewZealand the ability to handle higher production volumes lower storage costs speed from decision to actual production you dont have to establish a legal and tax presence. Disadvantages include: the amount of control the contract manufacturer has, for example over production schedules high ongoing management commitment required to anticipate and deal with problems managing communications managing quality control issues risks to Intellectual Property (IP) and brand.

When examining the pros and cons, make sure you consider the options in the context of what is right for your company. A long-term business strategy should be driven by factors other than low labour costs.

7.2 OPTIONS FOR MANUFACTURING IN CHINA

What manufacturing model should I choose? Businesses wanting to manufacture in China must balance their need to keep costs down and exert operational control of the factory. At the low cost/low control end of the spectrum is outsourcing manufacturing; at the high cost/high control end is direct investment in a manufacturing operation. Whichever model you choose there will be the usual challenges of operating in China and any decision should be guided by your long-term business strategy. You should also consider your options in the context of what is right for your company. One important issue is where your China-made products are going. Are you selling them all in China, exporting them all, or a mixture of the two; this will have different implications for your choice of manufacturing set up. How to get advice Before making any decisions you should get expert advice on your options from a private specialist advisor, preferrably one based in China. NZTE can also put you in touch with specialists. What are the options? The manufacturing options are: contract manufacturing

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Licensed manufacturing and technology transfer Licensing is becoming more popular as IP enforcement improves, but you still need to thoroughly research any moves into either patent licensing or technology transfer. You should also understand the business objectives of your Chinese partner they may be different from yours. Owning your own manufacturing facility Wholly foreign owned enterprises (WFOEs) are the most common vehicles used by foreign companies set up a manufacturing company in China. For more information on WFOEs see Entering the market Typical models for entry section. The advantages of owning your own factory include: complete control, including production cycles, quality and IP greater profitability as you retain the manufacturing margins. Disadvantages include: amount of research needed on issues such as location, regulations and staffing length of time needed to get manufacturing underway significant investment, including capital and management time and resources having to deal with government regulations and local laws. Scott Brown of RedFern Consulting says you need to know the relevant industry regulations rst, then develop a strategy or a target list for acquisition; this should include an existing skilled labour force and possibly important licences and permits. Starting from scratch and building your own factory can be a good way of putting your companys mark on a factory and overcoming the entrenched problems youd encounter with a joint venture or an existing facility. But this option does put greater strain on most companies already limited resources of experienced and competent managers who are familiar with the local environment and can speak Chinese. You also shouldnt underestimate the amount of management attention needed back home to open a new factory in a distant site.
KIWI LESSON WHERE DO YOU FIND THE BOLT YOU NEED?

negotiate a favourable position. For more information on JVs see the Entering the market Typical models for entry section. JVs are demanding on your time and resources and need constant monitoring in critical areas such as nance, personnel and basic operations in order for them to be a success. Advantages include getting immediate access to local knowledge and networks.
KEY LEARNINGS

Manufacturing in China is a balance between keeping costs down and exerting operational control. Get expert advice before making any decisions. Consider all options in the context of what is right for your company.

PHIL&TEDS CASE STUDY

Contract manufacturing nancial and strategic benets
When nursery products company phil&teds started manufacturing in China the set up phase was time and cash consuming. But the move has enabled phil&teds to increase capacity, get better economies of scale and match the cost structure of competitors. Outsourcing versus owning a factory phil&teds sells nursery products in some 40 countries, including the US, UK and Europe, Australia and NewZealand. The company has a head office, sales and design centre in Wellington, but manufactures in China. Management opted to outsource manufacturing to a Chinese company rather than set up its own factory in China for nancial and strategic reasons, says phil&teds chief cook and bottle washer, Campbell Gower. Were realistic about our strengths which are in design and marketing so we outsourced manufacturing to bring in expertise and capability. As a private company, our nancial resources are limited so we have to invest where we are going to have the most impact which is in intellectual capital rather than xed assets. phil&teds chose a contract manufacturer in Shanghai which was far enough away from the city centre to have reasonable costs, but not so far away that logistics and infrastructure are a problem. Finished goods are exported out of China by international logistics and freight forwarding companies. Building a relationship Since outsourcing manufacturing to China phil&teds has moved three times to new and bigger factories as its business grew and capacity constraints were hit. We now have a factory where we are the only customer, Gower says. The benets of this are focus, service, open pricing, risk sharing and mutual dependence.

Until we began setting up our factory we did not truly understand the difficulties we would face in nding suppliers of products and services, for example just where do you nd that bolt you require? says Donald Stewart, former Managing Director and Chief Executive of Skellerup. There are no Yellow Pages for our region, and even our local staff members were of little use as they tend to work within family structures. This was a most frustrating time, as until you have built your supplier network everything goes so slowly. Skellerups factory is in a relatively remote area (albeit beside a village of 60,000, and less than 30 minutes from a city of 300,000 and less than an hour from a city of three million). Joint ventures Forming a manufacturing joint venture (JV) can be a drawn out process and it can be hard for NewZealand companies to

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Finding and building a relationship with the contract manufacturer wasnt difficult because phil&teds had a clear idea of its needs, he says. Management were prepared to spend time visiting the factories and meeting with the Chinese company. Relationships are key. While we dont own the factories used to produce our goods, we are their only customer. The 450 people working at these factories make products exclusively for phil&teds. Gower says there were no hidden costs in going to China. But the company has found that managing outsourced manufacturing takes nearly as much time as managing a factory in NewZealand. Communications with China are handled through onsite personnel, online chat, VoIP, email, direct computer asset and lots of visits. Managing quality Quality is an important issue. phil&teds complies with ISO9000 internally, and has met seven product safety standards for various categories in eight different jurisdictions. Management has worked hard on product quality control, which has improved from 70 percent defect free for any one product in 1999 to more than 99.5 percent in 2007. This has been achieved with a process that included hiring Mandarin speaking Chinese nationals, better production engineering, key relationship building with local Chinese suppliers, and the introduction of ISO9000 practices. This means we are much more condent of our product quality for consumers especially as all product is shipped directly from China to market. Protecting intellectual property phil&teds has a strategy to protect intellectual property (IP) in all its forms from design registration, to condentiality agreements, to IP ownership of designs. NewZealand patent attorney AJ Park advised the company on this strategy, which includes protecting IP in China. Our budget for external costs of IP protection is $140,000 this year we take it seriously. We want a reputation for being jealous guardians of our IP. We register our IP in key sales markets, and also in supply markets like China. To avoid any environmental or social responsibility issues the company has an ethical policy/code that is included in its supplier relationship agreement. It also has a policy of viewing any factory where its goods are made. Tips: Be realistic about your strengths and invest where you can have most impact. Be clear about what you need in China. Spend time building relationships and visiting the factories. Ensure an ethical code is included in your supplier relationship agreement. www.philandteds.com

7.3 FINDING A MANUFACTURER AND LOCATION

How to get the right manufacturer If you do a Google search on nd manufacturer China you will nd page upon page of Chinese manufacturers whose specialties range from prom dresses to semi conductors. The challenge in nding the right manufacturer is to cut through this cast of thousands touting their abilities. The internet and unsolicited emails are not good places to start. Manufacturing in China, whether you are outsourcing or setting up your own factory, is a huge investment for most NewZealand businesses and the cost of getting it wrong can be crippling. Getting it right requires thorough research. Getting help It is important to get advice from experts and specialists who understand China, know your company and your needs. There are a number of options: Contact NZTE. Use specialist agencies and consultancies. Employ ones based in China or who travel to China on a regular basis. Contact Kiwi companies and individuals who have been there, done that in China and are willing to help newcomers. Another option is contacting the NewZealand-China Trade Association. If you are making contact with specialists you need to take great care. There are many horror stories of companies investing time and money in China-based research for little or no return. You should do due diligence on any specialists you are planning to use, including any China affiliates. One low risk way is to use NewZealand-based China experts where possible, but the experience of most NewZealand companies is that they eventually need to have specialists on board in China.
KIWI LESSON USE KNOWLEDGABLE KIWIS

When Skellerup Industries was establishing a manufacturing plant in China, it turned for initial advice to a Kiwi with more than 10 years experience living, trading, establishing and running factories in China. It then used two more Kiwis one born in China who was uent in Mandarin and with a deep understanding of the Chinese culture to help nalise due diligence and nd a suitable factory site. The steps to nding a manufacturer Companies looking to nd the right manufacturer need to take the following steps: 1. Discuss your expectations and business model with a local consultant. 2. Learn the regulatory requirements of your target industry in China.

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3. Research the market or industry to nd the structure or normal channels it is likely to be very different from what you assume. 4. Dene your needs accurately and have someone on the ground in China research and vet them for you as a rst step. 5. Short list the candidates and get quotations or references. 6. Do a proper legal background check on the nal candidates to verify the information provided, including ownership, registrations and business scope. 7. Go and personally visit the top candidates with a trusted translator and experienced resident. 8. Use a proper legal translation from a law rm for nal contracts but do much of the structure work yourself prior to that to save costs. (Source: Scott Brown of RedFern Consulting) How to do due diligence It is important to research any manufacturers you are considering doing business with to ensure that they are reliable and are capable of doing what they say they can do. There are three basic quality levels of Chinese products: low quality destined for the Chinese domestic market these factories compete on cost not quality middling quality destined for the home and less affluent export markets high quality, international standard products. You need to make sure you are dealing with the latter, including the factorys suppliers and sub-contractors. Ask for reputable client references, but dont be surprised if none are forthcoming. A factory outsourcing the outsourcing can be a difficult issue to get to grips with. A number of international companies have come to grief not because they chose the wrong factory, but the factory was using sub-standard components supplied by a sub contractor. Factories often will not be upfront about their outsourcing. Its not necessarily a bad thing it can help to cut costs but you need to be aware of it because it can complicate quality assurance. If you can, go to the sub-contractors factory and see it for yourself. NewZealand re detection equipment manufacturer Pertronic Industries warns that Chinas manufacturers can appear very impressive on the surface, but the quality control can be abysmal and products shoddy. However, there are also many Chinese factories that are as modern and automated as any in the world. It can be hard to verify whether a factory is committed to the labour and environmental standards that you need to be able to sell your products. Finding the right location Getting the location of your factory right is not such a big issue when you are outsourcing the Chinese factory owner has to cover most location-related issues.

However, it is probably the biggest single issue if you are planning to build or buy a factory. Getting your location wrong can be costly. Factors you should consider regarding where to site your factory include: how good is the local infrastructure, for example electricity supply how close is the support structure you need, for example the availability of skilled workers and technical experts how good is the local logistics system. The advice of some Kiwi companies in China is to rst look at locating in a special economic zone (SEZ), which not only offers nancial incentives but also assistance managing issues such as utilities, factory support and logistics. The costs may be higher, but the benets may be worth it. If there is a chance that you may place a NewZealander in China to manage the venture or the investment then ensure that its in or close to a part of China that the average NewZealander could cope with.
KIWI SOLUTION ASK THE RIGHT QUESTIONS

How we went about nding a location was taking quite a lot of time researching what style of company we wanted and most specically where it was going to be located. That proved to be the decision that took us the longest amount of time and was the most difficult to get information about. In the end we realised it was about us asking the right questions. Don Johnson, Marketing Manager Lumber, Pan Pac Forest Products Pan Pac has a warehouse and distribution centre in the Tianjin Free Trade Zone. It took the company two years to decide to locate there. Our own way of achieving that was to seek consultation with people that were already operating in China in all the various forms; that included government agencies as well as other expatriate based company associations that we had.
KEY LEARNINGS

Thoroughly research your options by doing due diligence on the ground and vetting options. If you employ specialist agencies and consultancies, use ones based in China, or with strong links to China. Internet research options can be dangerous, but can be a starting point. Be careful of the What do you make? What do you want? manufacturing generalists. Dont read too much into locals claims of guanxi everybody has a cousin or connection, few turn out to be genuine or useful. Investigate what a factory can actually do versus what they say they can do. Make sure you are comfortable with the factorys environmental and labour records. Visit shortlisted factories more than just once. Consult with Kiwi companies that have been there, done that. Set your quality standards before making any manufacturing commitments. Do due diligence on final selections.

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ATRAX CASE STUDY

Sourcing from China to build a global business
Atrax founder and Managing Director Kevin Maurice says moving his manufacturing operations to China meant he could source parts and materials at more competitive prices, leaving him better placed to compete with his international rivals. Atrax, which makes weighing and measuring products used in airports, began manufacturing in China after Maurice sold off the domestic arm of his business to focus on exporting. But in order to build a global business and compete internationally he had to be able to source parts and raw materials at the best prices. And thats what China offered, he says. I can buy the same European-branded parts in China much cheaper than I can buy them in NewZealand or Europe. If my competitors are accessing parts at those prices I need to do the same, otherwise Im at a disadvantage right from the start. For some products the difference in prices between China and NewZealand can be as high as 60 percent. Manufacturing in China isnt cheaper just because of the lower wages which are actually rising fairly quickly. Other things go into the mix, like the price of raw materials and the fact that China is so much closer to international markets. Atrax products, from the small scales that weigh in your check in baggage to the large scales used to weigh cargo for air freight, are in 101 countries. The company is well-positioned in China to take advantage of the surging middle-class demand for air travel and resultant expansion of airports across Asia. Atrax rents a factory in southern China in collaboration with another NewZealand company. The two businesses have complementary technology, but are in unrelated industries.

Maurice set up a Chinese company a wholly owned foreign enterprise to operate the factory and has installed Atrax staff alongside the Chinese managers to run it. To ensure the factory manufactures goods to a consistently high standard, he put considerable effort into documenting his processes and employed an engineering manager who spends around half his year in-market. Maurice himself spends at least three months a year in China. He says manufacturing in China has involved surprises, but not all of them were bad. The bureaucracy is difficult; its very hard to understand. But the quality weve been able to achieve in particular areas has been better than I expected. The threat of intellectual property (IP) is an issue, as it is in other countries. But this is just another issue to be managed and shouldnt stop exporters going to China, he says. While ensuring Atrax has all the necessary registrations in place, Maurice has also taken some practical steps to protect his IP. He has segmented his business so that there is little contact between the design capability in NewZealand, the manufacturing plant in southern China and the sales centre in Shanghai. He routinely ships bulk goods back to NewZealand where the products are then loaded up with the software. And whenever he uses a sub-contractor in China, he will ask them to make a piece of steel or electronic part but never divulge what it is for. His advice to other Kiwi manufacturers considering a move to China is dont expect it to be like NewZealand and dont judge it from a NewZealand view point. Some of the things they do seem unusual to us. But were a country of 4 million and theyre a country of 1.3 billion so whos to say theyre the odd ones out. He also advises Kiwis to use their networks. Talk to other people up there. Not just NewZealanders but other Westerners (or Westerner savvy Chinese) in China or Hong Kong.

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USEFUL WEBSITES
INTRODUCTION
NewZealand China Free Trade Agreement Website www.ChinaFTA.govt.nz The Ministry of Foreign Affairs overview of China www.mfat.govt.nz/Countries/Asia-North/China.php NewZealand Trade and Enterprises guide to doing business in China www.nzte.govt.nz/explore-export-markets/north-asia/ doing-business-in-china/pages/doing-business-in-china.aspx Media in China China Daily (widest circulation of all Chinees English-language print newspapers) www.chinadaily.com.cn/index.html ChinaToday.coms general information base www.chinatoday.com Newswebsite operated by the China Centre Government www.xinhuanet.com/english/ Visiting China The Chinese Ministry of Foreign Affair Introduction Chinese visa procedures and applications www.fmprc.gov.cn/eng/ljzg/3647/3648/t18417.htm

RESEARCHING THE MARKET

Intelligence JLJ China Market Entry Handbook http://cn.jljgroup.com/page/en/21/China-Market-EntryHandbook.html Deloitte report Succesful business models for NewZealand companies in China www.nzte.govt.nz/explore-export-markets/North-Asia/ Doing-business-in-China/Documents/Successful-businessmodels-for-New-Zealand-companies-in-China-2010.pdf Victoria University report Service Succes in Asia www.international-services-research.vuw.ac.nz/downloads/ Service_Success_-Full_Report_-_Volume_1.pdf The National Bureau of Statistics of China www.stats.gov.cn/english List of the 12 best blogs about business in China www.bschool.com/blog/2011/50-best-blogs-for-followingasian-business The Central Intelligence Agencys World Fact Books entry on China www.cia.gov/library/publications/the-world-factbook/geos/ch. html Economic policy information from the National Development and Reform commission http://en.ndrc.gov.cn/ China Brieng www.china-briefing.com

Embassy of the Peoples Republic of China in New www.chinaembassy.org.nz/eng/ Travel advice issued by the Ministry of Foreign Affairs and Trade www.safetravel.govt.nz/countries/china.shtml Blog on China travel and society www.china-mike.com

ENTERING THE MARKET

Hong Kong Hong Kong Trade Development Council www.hktdc.com Invest Hong Kong www.investhk.gov.hk Taiwan NewZealand Commerce and Industry Office Taiwan http://nzcio.com PWC introductory guide to for companies doing business or looking to invest in Taiwan www.pwc.com/tw/en/publications/doing-business-in-taiwan. jhtml Taiwan Directorate General of Customs http://web.customs.gov.tw

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Protecting intellectual property Introduction to intellectual property and civil litigation in China by Rouse and Co. www.iprights.com/content.output/287/287/Resources/ Brochures/China.mspx Detailed information on registering patents from the State Intellectual Property http://english.sipo.gov.cn IP-related blogs on Danwei website www.danwei.org/intellectual_property IP Dragon blogspot http://ipdragon.blogspot.com IP-related information and news from a consortium of international companies www.qbpc.org.cn Building relationships Kea China provides a great contact point for Kiwis throughout China www.keanewzealand.com/asia/groups/kea-china Negotiations and meetings ChineseNegotiation.com assists international investors and managers www.chinesenegotiation.com Dealing with government and local authorities An overview of Chinas political structure (including whos who and links to government websites) http://english.gov.cn/

Getting your products into China For information on import quotas, tariff rates, rules of origin and product and safety standards www.ChinaFTA.govt.nz The NewZealand Food Safety Authoritys Overseas Market Access Requirements (OMAR) for China www.nzfsa.govt.nz Information on Chinas zoosanitary, phytosanitary inspection and certication requirements for live animals, animal germplasm and plant and forestry product exports to China www.biosecurity.govt.nz China State General Administration for Quality Supervision, Inspection and Quarantine (AQSIQ) www.aqsiq.gov.cn

SETTING UP A BASE IN CHINA

Finding premises A directory of real estate agencies from MyChinastart.com www.real-estate.mychinastart.com/ Hiring staff Accounting rm Lehman Browns FAQs on employment issues and standard employment terms. www.lehmanbrown.com/FAQ-HR.htm Lehman Browns FAQs for personal nancial management for expats www.lehmanbrown.com/FAQ-PFM.htm Practical tips on recruitment and retention from recruitment rm Pacic Bridge www.pacificbridge.com/publication.asp?id=81 Hewitt provides information on HR issues www.hewitt.com Accounting and auditing Lehman Browns frequently asked questions and answers on accounting in China www.lehmanbrown.com/FAQ-Acc.htm Executive search company DaCares China Employment Handbook http://blog.dacare-group.com/index.php/2006/08/11/ china_employment_handbook

SELLING IN CHINA
Marketing Nielsen report on market trends in China http://cn.en.acnielsen.com/trends/index.shtmlBiztradeshows. coms list of trade shows in China, grouped by city and industry www.biztradeshows.com/china/Test if your website is accessible from China www.websitepulse.com/help/testtools.china-test.html Online marketing Chinese searchengine www.baidu.com Chinese online selling point/marketplace www.taobao.com

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NAVIGATING CHINA
Getting paid and repatriating prots The Hong Kong Shanghai Banking Corporations banking FAQs www.hsbc.com.cn/1/2/misc/faqs#a The Hong Kong Trade Development Councils explanation of invoice management www.tdctrade.com/chinaguide/6-2.htm Lehman Browns run down of Chinas debt collection system www.lehmanbrown.com/PTODec2005.htm#top Getting legal advice and resolving disputes Comment on legal issues from China Law Blog www.chinalawblog.com Dispute resolution article from alibaba.com http://resources.alibaba.com/article/156/Dispute_Resolution_ in_China.htm Managing logistics News, reports and research from the China Supply Chain Council www.supplychain.cn China Federation of Logistics and Procurements website www.chinawuliu.com.cn/en/news/content/200609/20062859. html Research and reports from the Logistics Institute Asia Pacic www.tliap.nus.edu.sg

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The contents of this brochure are the copyright of NewZealand Trade and Enterprise (NZTE) or suppliers to it. No part of this brochure may be distributed or copied for any commercial purpose and you are not permitted to incorporate the material or any part of it in any other work or publication (whether in hard copy, electronic or any other form) without the prior written consent of NZTE. Although reasonable care has been taken to ensure the facts stated in this brochure are accurate and the opinions given are fair and reasonable, NZTE does not give any warranty of accuracy, reliability or tness for any purpose of the information contained in the brochure to you or any other person. To the fullest extent permitted by law, NZTE excludes all responsibility and liability in relation to the brochure and NZTE will not be responsible for errors or misstatements or be liable, whether in contract, tort (including negligence) or otherwise, for any loss or damage however caused (including direct, indirect, consequential, special, or loss of prots). The views expressed by third parties in this brochure are net necessarily those of NZTE. All amounts quoted in currencies other than NewZealand dollars are based on the approximate exchange rate at the time the brochure was prepared.

CONTACT DETAILS
Phone 0800 555 888 Email info@nzte.govt.nz Web www.nzte.govt.nz

ISBN NO: 9780478379198 / March 2012