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Emerging Business Opportunities in China offered by China’s 12th Five Year Plan


by Sara Cheng

China recently issued its 12th Five Year Plan. It is China’s absolute national strategy from 2011 to 2016 and will have profound impact on its economy and people and also China’s major trading partner.

This recent presentation of mine highlighted some key opportunities for foreign companies looking at entering the Chinese market.

Emerging Business Opportunities in China

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China’s New Measures on Supervision and Handling of Unlawful Contractual Practices

November 8, 2010 Leave a comment

The State Administration of Commerce and Industry (SAIC) recently promulgated the Measures on Supervision and Handling of Unlawful Contractual Practices (the Measures) , which will take effect as of November 13, 2010. The Measures aim to further regulate the entry and performance of commercial contracts, paying particular attention to how standard contractual clauses are applied by the business operators, in an effort to better protect the legitimate interests of the contracting parties.

The Measures define “unlawful contractual practices” as behaviours designed to derive illegal profits from contractual activities and in contravention of applicable laws and regulations. The Measures target three types of actions. The first is contractual fraud, meaning obtaining money or valuables by means of fabricating facts or concealing truth for the purposes of possessing money or valuables of the others. The second is seeking an illegitimate benefit by means of bribery, coercion or collusion with others using a contract. The third is to infringe upon the interests and rights of consumers by using standard contractual clauses to disclaim liability of its own and to aggravate liability on the part of the consumers.

Contractual fraud

The Measures clearly spell out the scope of contractual fraud by enumerating 10 types of prohibitive behaviours, including:

  • to fabricate fraudulent excuses for suspension (termination) of contracts;
  • to circulate or utilize false information to lure others into contracts; and
  • to maliciously include in the contracts, provisions which cannot be performed and as a result rendering the counterparty unable to perform contract obligations.

It is worth noting that anyone knowingly (or should have known) facilitating contractual fraud, such as intentionally furnishing certificates, licenses, stamps, accounts or other facilitating acts, are also punishable under the Measures.

Misuse of standard contractual clauses

According to the Measures, business operators are now prohibited to disclaim liability by adopting standard contractual clauses from:

  • personal injury to consumers;
  • property damage to consumers caused by wilful misconduct or gross negligence of the business operators;
  • warranty prescribed by law on goods and services provided by the business operators to consumers;
  • liability arising out of breach of contract; and
  • other liability prescribed by law.

The Measures further provide that business operators cannot use standard contractual clauses to aggravate consumer’s liability in respect of:

  • penalty for breach that exceeds the lawful limit or reasonable amount;
  • operational risk that should be born by the business operators who drafted the standard contractual clauses; and
  • other liability that should not be assumed by the consumers by law.

Finally the Measures list various consumer rights that cannot be eliminated by way of standard contractual clauses:

  • right to amend or terminate contract pursuant to applicable law;
  • right to claim penalty for breach by the other party;
  • right to compensation;
  • right to seek explanation of standard contractual clauses; and
  • any other rights enjoyed by consumers by law.

Based on the foregoing, some commonly seen unfair clauses or the so-called “overlord clauses” (“霸王条款”) such as “we reserve the right to final interpretation of the provisions under the contract” (“本公司拥有最终解释权”), “the products cannot be returned by customers for whatsoever reason” (“客户不得以任何理由退货”), and “tourist agency shall not be liable for the accidental personal injuries of tourists”, etc, will be caught under the Measures.

Administrative penalties

Any unlawful contractual practices caught under the Measures could render a penalty to the business operator of a fine of up to three times the illegitimate benefit, but capped at RMB 30,000.

Time for business operators to review their standard contract clauses

If business operators have been using their standard contractual clauses to mitigate their contractual liability, it is time for them to revisit and review those standard clauses to ensure they are not caught under the Measures.

Must-Knows about Business Set-up in China

September 16, 2010 Leave a comment

More and more Australian companies are setting up their own presence in China in order to source products/services directly from China or enter the Chinese market. However, given the alien nature of local regulations and business environment in China, it is critical to be proactive and fully prepared before you take the strategic move to set up your own presence in China.

Here are some “must-knows” before you set up the business in China:

1.You have more than one option for a local presence in China. Your China presence may be in the form of a wholly owned foreign enterprise, a contractual joint venture, an equity joint venture, a representative office or a local representation by a third party (local secretary/representation service companies).

2.Carefully define your business scope for the China presence. China National Development and Reform Commission may prohibit, restrict, permit or encourage your business set-up based on your business categorization and scope. Hence it is critical to carefully define your business scope so as to be permitted or encouraged to set up the presence.

3.Select the right location for your China operation. China abandoned its preferential tax rate for investments of foreign companies from January 1st 2008. However, some areas still offer local preferential policies for foreign investors in terms of land leasing/procurement, staff recruitment and management, local tax etc.

4.Confirm the minimum registered capital for your China operation. The Chinese government requires certain minimum registered capital for various types of businesses. However, local Industry and Commerce Administrations may decide on your minimum registered capital based on their judgement of your business scope and operation scale. You need to confirm with local government agencies the minimum registered capital through local contacts before taking any other actions in case they require an amount far above your financial resources available for the China operation.

5.Integrate commercial clauses in the Articles of Association to maximise profit repatriation into Australia. You may have commercial arrangements between your Head Office in Australia and the subsidiary in China in order to guarantee maximum profit repatriation. However, some arrangements must be included as part of the Articles of Association to be valid. The Articles of Association is to be submitted to local government agencies for approval and filing during business license registration. Hence, you must incorporate necessary clauses in the Articles of Association in the first instance.

6.Fully understand employers’ responsibilities and liabilities in China. China issued the new Law of Labour in 2007 which specified issues on employment contract, redundancy, etc. Without preliminary knowledge of this law, you may end up spending a huge amount of time and money terminating the contract with under performing employees, as the structure of the contract was wrong. You also need to be aware of the mandatory employee welfare and benefits so as to include such cost in the budget.

7.Conduct thorough due diligence and credit check on your joint venture partners. Your partners may not be what they claim to be. China has the business culture to show their wealth and status by driving luxurious cars, wearing prestigious watches and owning an impressive factory. Hence your Chinese business partners may look financially viable and well connected but, as a matter of fact, live on bank loans and personal debts.

8.Develop a comprehensive local employee management system. It is a hard job to recruit the right staff in a foreign country. It is even harder to effectively manage the local staff in a foreign country. A sound and robust employee management system will encourage the engagement and commitment of local staff and avoid potential risks. You may include reporting and communication policies, staff training, performance assessment, remuneration, career management and employee management manual in the system.

Business set-up in China is a big project by itself, which requires financial and time commitments, business management knowledge and China expertise. Identifying a competent agent to manage the complex process will be a cost and time effective way to avoid potential pitfalls.

China Snapshot

September 16, 2010 Leave a comment

There are 1.3 billion people in China. While a population of this size might sound like an exciting opportunity for your product or service, it is important to understand the demographics of China to identify your actual potential customers.

  • China is situated in eastern Asia, bounded by the Pacific in the east and Russia and Mongolia to the north.
  • The third largest country in the world, next to Canada and Russia, it has an area of 9.6 million square kilometres, or one-fifteenth of the world’s land mass.
  • A one-party state, it is dominated by the Chinese Communist Party (CCP).
  • Its capital is Beijing.
  • Head of State is President Hu Jintao.
  • Premier, Wen Jiabao, heads the State Council, the most important administrative body of the Central Government.
  • The CCP’s Politburo also plays a key decision-making role in relation to reforms affecting the commercial environment.
  • Has the world’s highest population of 1.3 billion. The eastern part of China is densely populated, while the western part is sparsely peopled.
  • Is the world’s third biggest economy.
  • Has one of the world’s oldest continuous histories and civilisations.
  • It has a rich and diversified culture and is also known for its great historical and engineering achievements – The Great Wall of China, The Grand Canal and the Karez irrigation system. It is the birthplace of papermaking and printing, gunpowder and the compass.
  • Its people have a strong sense of pride based on their country’s history and ancient culture.
  • More than 90 percent of China is comprised of the Han Chinese. The rest are minority groups.
  • Around 60 percent of its population live in rural areas.
  • Mandarin, also known as putonghua or the common language, is the official language and is spoken by all but a minority. It is the language taught in schools and supported by the government. Mandarin is one of the official working languages at the United Nations. Other dialects of the 55 minority nationalities are heard throughout China.
  • China’s currency is the reminbi (RMB) which means the people’s money. The unit currency of the RMB is called the yuan.

Engage China

September 16, 2010 Leave a comment

With the pace and dynamism of its growth and development, China today presents a good test bed for studying business performance. Despite the global economic crisis and come formidable internal challenges to growth, China has so far proven remarkably resilient. It seems that the force of China’s demand during its epoch making transformation into a modern industrialised economy will be a key source of world economic growth for decades to come. China has and will continue to have a profound impact on Australia, given Australia’s resources base and its small market influenced by global trends and shifts in world production patterns. Australia’s growth is likely to be tightly coupled with China’s. It is important to understand the most effective models of business engagement with China that can enhance Australia’s competitiveness and prosperity.

With this backdrop, the Australian Business Foundation undertook a study examining the current realities for Australian firms doing business with China. I was fortunate to work together with other three authors on the book, be responsible for the analysis of findings from 25 in-depth case studies and also contribute to the insight and conclusion of this study.

The experiences of the case study participants highlight the following significant issues impacting on business performance for Australian enterprises in China. They cover factors impacting the business environment in China, the management and operations for the business themselves and the nature of business opportunities and strategies.

Key findings are summaries as follows:

Business Environment : three issues stand out – culture, relationships and government.

• Culture saturates all aspects of business engagement in China at a level, depth and saturation point that is different from other markets. The cultural dimension is central to the execution of the business strategy and to achieving a return on investment in China.

• The importance of relationships is at the heart of Chinese culture. This is the concept of “guanxi” which literally means “relationship”. Relationships have primacy over rules. Unlike in Western culture, the social relationship more often than not precedes the commercial relationship. Demonstrating commitment and establishing trust happens first; only then moving onto business formalities likes contracts and agreements.

• Government means business in China. Governments administer and regulate almost all areas of China’s commercial environment, but their role and how the rules are applied are not always detailed, documented and transparent. This can be a constraint to business. But equally government can be instrumental in business growth, e.g. some case study companies aligned their business strategies with helping government achieve national priorities for technological innovation or training in new skills.

Business Operations: the study produced insights about key features of business operations in China, covering skills, quality, finances, intellectual property, communications, partners and customers, as follows:

• Talent and Skills: There is an indispensible need for the right mix of skills and for the local Chinese manager.

• Quality: Managing quality issues in China requires understanding of the trade-offs between quality and cost often implicit in the approach of many Chinese partners and suppliers. As perceptions and appreciation of the value of quality can differ between China and Australia, it is vital to communicate clearly about quality requirements and to manage expectations.

• Finance: China needs the usual due diligence to ensure the smooth operations of financial and banking transactions, including companies getting paid and being able to repatriate profits.

• Intellectual Property: Minimize intellectual property infringement by being a market leader and competing on design and innovation. This is a more effective alternative to legal redress.

• Communication: Effective communication is a vital tool of trade, not only for managing people in the business, but for productive relationships with suppliers, customers, and partners. It goes beyond access to specialist and competent language and translation services to understanding the social and cultural context of doing business.

• Partners: selecting the right partner is essential and challenging. It requires investment of time and due diligence to ensure that partners are legitimate and compatible with the business.

• Customers and Clients: Selecting the right customer is as crucial as selecting the right partner. Unlike in Western consumer markets where traditional customer segmentation and marketing campaigns are the norm, in China customers are often found through relationships and connections, both internal and external to the company.

Business Opportunities :Insights from the study questioned stereotypes about both manufacturing and services and produced some common threads on the business strategies that drive success.

• Manufacturing: While cost considerations are important, manufacturers are in China for other strategies advantages, not just low cost. Manufacturers are going to China to seek new customers as the Australian market matures, to source products at the right quality and price points, or in response to structural change in their industry as a result of globalization.

• Services: Services are an important and growing part of the Australian export success story, but are often unrecognized and overshadowed by large trade volumes in other sectors like resources. Many Australian service companies are proving themselves capable competitors in China. They have pioneered successful strategic alliances with Chinese partners, positioned their business offerings to align with and support China’s national priorities, and secured first mover advantage by adapting Western concepts of quality and standards to the needs of Chinese end-users. These are potential competitive opportunities for Australia to expand on in its future business engagement with China.

• Strategy: The following success factors are common threads in business strategy proving effective in Chinese markets:

– Engagement in the Chinese market is for the long-term. It requires a strategy for persistence and resilience in the face of potential problems and failures.

– Business strategies need to be focused, whether on a specific region, specialisation or niche business offering. This is vital to avoid being caught in the headlights of the Chinese market’s diversity and huge potential.

– If adopting a strategy as a niche player, make sure that the business offering is ‘best of breed’ with the specialist expertise and value to perform better than competitors.

– Agility, adaptability and an exceptional ability to learn, together with a tailored and well informed business plan, are mission-critical to successful business strategies for both large and small enterprises.

Overall, the main insight from the experiences reported by Australian businesses in China is that success comes from capitalizing on China’s massive change, diversity and scale with agility and fast learning. In particular:

• Whatever the particular business approach, enterprises must be able to deal with cultural differences, relationships and an ambiguous, complex and volatile environment.

• Enterprises must also provide ‘best of breed’ business offerings that are capably and efficiently managed and that present real value to Chinese customers and clients.

• Enterprises must be adaptable, but simultaneously, they must operate to their own well-informed business strategy and put in place all the fundamentals of doing business – operations, sales, management and finances. This makes it more likely that enterprises can secure a return from China’s substantial and growing demand and opportunities.

If you have any feedbacks or issues/questions in regard to doing business with China, please send your feedback/request to Sara Cheng, Manager-Greater China, Australian Business .

Email: sara.cheng@australianbusiness.com.au

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