Doing Business in China

How To Do Business In China
May 2005
Presented by: Ames Gross President Pacific Bridge Medical www.pacificbridgemedical.com
Medical Device Market (2005)

Country China Hong Kong Philippines Indonesia Japan Malaysia Singapore South Korea Taiwan Thailand Market Size (US $) US $3.5 billion US $500 million US $75 million US $150 million US $24 billion US $300 million US $410 million US $1.4 billion US $900 million US $500 million
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Healthcare Statistics (2003)

C o u n tr y C h in a Hong Kong P h ilip p in e s In d o n e sia Ja pa n M a la y sia S in g a p o re S o u th K o r e a T a iw a n T h a ila n d Num ber of H o s p i ta l s 3 3 0 ,3 4 8 103 1 ,6 5 2 1 ,0 8 9 1 6 9 ,5 5 6 360 28 2 1 ,6 8 6 1 8 ,2 6 5 1 ,3 9 2 D o c to r s / 1 0 0 0 P e o p le 1 .6 9 1 .4 N /A 0 .1 4 1 .9 1 0 .7 1 .3 9 1 .3 5 7 .4 2 0 .3 2 P e r C a p i ta H e a l th c a r e S p e n d i n g (U S $ ) 30 N /A 33 19 2 ,9 0 8 101 4 ,1 0 7 584 677 71
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www.pacificbridgemedical.com
Is there a market for your product?
Market Research
Is there a demand for your product? If it sells here, that doesnt mean that it will sell there How do you do market research? Real primary research is the way to go.
Finding The Right Distributor
Finding The Right Distributor

Use the same criteria as you would for a distributor search in the rest of the world In China, relationships and trust are key Not Lawsuits! Need introductions how do you do this?
China Distributor Search

Previously, distributors in China were stateowned companies Slow and methodical No marketing just here are the products Today, emergence of private companies that are usually not well-funded. Many still lack expertise in selling Western products

There are very few large-scale private national medical device distributors in China; thus it is necessary to put together several private regional groups Recent WTO regulations have opened Chinas medical device market to foreign companies, but foreigners have been slow to move in Some foreign companies have been successful in the China market

Be careful when selecting a distributor. What you think of the group might not actually be the case. Always use local insight to get real background For foreigners it is hard to tell if local distributor groups:
Really know the local medical device regulations Have financial staying power, etc.
Bottled water story what you think is not what you get
Contract Manufacturing Opportunities
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Chinese manufacturers are becoming increasingly sophisticated Product quality has increased dramatically Prices remain much lower than most other countries
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Steps to successful contract manufacturing: 1. Identify product manufacturers
Internet searches (English and Chinese), trade catalogues
2. Initial Planning and Communication

Emails and phone calls Plan for time difference Begin building relationship

Steps to successful contract manufacturing: 3. Know the Difference: Factories vs. Trading Companies Each has its own advantages Key is your long term objectives 4. Due Diligence Before the Site Visit Local Chinese partner U.S. firm with extensive China experience

Steps to successful contract manufacturing: 5. Visit the factory Face to face communication is necessary Evaluate quality of key personnel 6. Examine regulatory requirements FDA requirements QSR requirements

Steps to successful contract manufacturing: 7. Negotiate a contract Be concise Include dispute clause Include shipping terms 8. Establish quality assurance system Hire Chinese quality control company Use in-house quality control team
Business Structures in China
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Business Structures
There are three main types of foreign direct investment (FDI) in China: Chinese-foreign equity joint venture (EJV) Chinese-foreign co-operative joint venture (CJV) Wholly foreign-owned enterprise (WFOE) Choice of contract manufacturing, entering into an EJV or CJV, or setting up a WFOE depends on long-term goals Extensive research should be done before selecting business structure
Chinese-Foreign Equity Joint Venture (EJV)

Equity joint ventures take the form of a limited liability company with Chinese legal person status Parties invest together, manage together and share risks, losses and benefits in proportion to their contribution to registered capital Proportion of foreign party's contribution to the registered capital must not be less than 25 percent. Parties may not reduce amount of registered capital during the period of the venture
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Chinese-Foreign Contractual Joint Venture (CJV)

Parties determine manner of operation and management, obligations, risk and profit sharing, etc. through contract at beginning of venture In most CJVs: Foreign party provides all or most of the funding, technology and key equipment Chinese party provides land, natural resources, facilities, and labor
Wholly-Owned Foreign Enterprises (WFOE)

Enterprises established in China in which all funds are provided by foreign investors Most WFOEs are greenfield operations
Some result from buyouts of existing partners
Risk level higher for WFOE than for JV

Decreased chance to develop relationships and contacts in target market with WFOE IBM set up WFOE in 1992 10 years after first entering China market Success stories: 3M, Procter & Gamble
Business Structures
Previously, joint ventures were 50/50 (foreign/Chinese), then 80/20 or 90/10 Multiple parties, multiple interests
Communism to capitalism What is the conflict of interest? (Experience at one negotiation)
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Business Structures
JVs provide foreign investors with Chinese partners that have local connections and understand the local business culture WFOEs allow foreign investors to maintain closer security and protection over their intellectual property and other proprietary information
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How to Find the Right People in China
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Recruiting Options
Expatriates Desirable for companies just setting up in China; usually for executive positions Drawbacks: High compensation packages Possible difficulty relating to Chinese workforce
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Recruiting Options
Returnees Familiar with Western languages and business practices Often highly skilled and fluent in Mandarin Have knowledge of Mainland; personal connections; staterun enterprises Drawbacks: May conflict with local staff over status issues Could have difficultly relating to Mainland environment
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Recruiting Options
Locals Lower salary requirements Knowledge of local customs Connections to organizations and government bodies Drawbacks: Unfamiliar with Western business practices; need more job training Possible inability to communicate well in English
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IPR Protection in China
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IPR Protection
China has made great progress in IPR protection since joining the WTO in December 2001 China has changed its laws to allow for greater IPR protection Chinas Supreme Court recently decided to allow criminal prosecution for IPR violation (in addition to civil prosecution) After a series of major scandals (including one involving fake powdered milk), the Chinese government has publicly committed to protecting IPR
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IPR Protection
Protecting ones IPR is one of the most difficult challenges of doing business in China Sometimes the Chinese government decides not to respect a foreign companys intellectual property (e.g. Viagra) Chinas legal system guarantees adequate protection of IPR, but enforcement is lacking
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Some Important Cultural Issues
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Western vs. Asian Approaches

Western Approach
Do a deal
Asian Approach
Build relationships
Maximize short-term profits
Establish long-term foundations
Be frank
Dont deliver bad news
Make changes quickly
Move when ready
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Intercultural Communication
Personal Connections (Guanxi)
Earning respect and trust should be considered first step to business interaction Find a mutual friend to serve as intermediary to introduce you to potential business associates
If you have a strong relationship with your Chinese partner, everything is possible
Introductions
Business cards
Exchange with both hands, holding the card corners between thumb and forefinger Take a few moments to read the card and study it carefully
Appropriate Attire
Dress should be formal for business settings Women should dress fashionably but avoid hemlines above the knee and low necklines
The Chinese Mentality

Gaining face Helping someone avoid an embarrassing situation can help him/her save face; this person will not forget the favor Praising or thanking someone for a good job in front of peers or superiors will help the person gain respect, but overly effusive praise can appear insincere
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Negotiations
1. Americans value straightforward dialogue; Chinese are masters of the oblique 2. At least one member of your team should have in-depth technical knowledge of every aspect of your business 3. Be willing to cut your losses and go home 4. Chinese may appear indifferent to the success or failure of the meeting at the negotiating table and then make excessive demands
Negotiations
5. Remain calm and impersonal during the negotiations 6. Take copious and careful notes 7. Do as the Chinese do; pad your price 8. Cover every detail of a contract before signing 9. Giving some leeway to the Chinese over a specific issue may result in far greater benefits in the future
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Gift Giving
The Chinese give a lot of gifts, so spend time choosing appropriate presents before traveling to Asia Foreigners visiting a place of business may present a single large gift to the company as a whole; gifts to an individual should be smaller, in the US$10-$25 range If one gift is given, it should be presented to the head of the Chinese group at a dinner banquet or at the conclusion of a business meeting If numerous gifts are given, they should all be of roughly equal value When a gift is offered to you, humble acceptance and a few words of appreciation are suitable
Little Things That Mean A Lot

Body Language: Pointing at someone with ones forefinger is an accusatory motion that is considered rude or hostile; to point, use the entire hand with an open palm Winking is impolite and can have a negative connotation Banqueting: Eating together is very important to the Chinese and can be an excellent way to network and build relationships Seating arrangements are very important to the Chinese. It is best to ask where you should sit rather than accidentally sitting in the host chair (the chair facing south or facing the door) and causing your host to lose face.

Doing Business in China

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Doing Business in China

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How To Do Business In China

Medical Device Market (2005)

Healthcare Statistics (2003)

Is there a market for your product?

Finding The Right Distributor

Finding The Right Distributor

China Distributor Search

China Distributor Search

China Distributor Search

Contract Manufacturing Opportunities

Contract Manufacturing Opportunities

Contract Manufacturing Opportunities

2. Initial Planning and Communication

Contract Manufacturing Opportunities

Contract Manufacturing Opportunities

Contract Manufacturing Opportunities

Business Structures in China

Chinese-Foreign Equity Joint Venture (EJV)

Chinese-Foreign Contractual Joint Venture (CJV)

Wholly-Owned Foreign Enterprises (WFOE)

Risk level higher for WFOE than for JV

How to Find the Right People in China

IPR Protection in China

Some Important Cultural Issues

Western vs. Asian Approaches

Maximize short-term profits

Establish long-term foundations

Dont deliver bad news

Make changes quickly

Move when ready

The Chinese Mentality

Little Things That Mean A Lot

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