China

1
China IndiaStartups

• Scott Fraser

2
Background Scott G. Fraser

• CFO
• Beef Products, Inc.
• Treasurer
• Panduit Corp.
• Assistant Treasurer
• Leaf, Inc.
• Public Private Company Experience
• Manufacturing Emphasis
• International Emphasis
• BS Finance 1982
• MBA Finance 1990

3
International Perspective

• Expanding overseas diversifies business
• International business cycles different from US
  often offsetting US conditions
• Team Building is key
• Educate and Extend Corporate Culture to Intl
  Peers
• Watch out for local Cultural differences that
  conflict with Business operations
• Use Global Best Practices

4
China

• 1991 Established 100 Wholly owned Gum
  Manufacturing Plant in Wuxi
• Strategy Develop local market for gum (2 in
  market)
• 1996 Established 100 Wholly owned Datacom
  manufacturing Plant in Wuxi
• Strategy Build Export low cost oriented Datacom
  products, Avoid Royalty
• 2000 Established Wholly owned Distribution
  Company in Shanghai
• Strategy Import and Distribute Datacom Products,
  Buy local Datacom product from Sister company in
  Wuxi to sell package, Develop High End Datacom
  Market, Sell in RMB
• Build Sales Office Network in Guangzhou, Beijing,
  Shanghai, Chengdu, Hong Kong
• Utilize Bonded Warehouse for Distribution Company

5
India

• 1997 Established Sales Office in Bangalore, New
  Delhi, Mumbai
• Strategy As Branch of US company sell in SGP or
  USD and import using 3rd party logistics company
• 2003 Established Bonded Warehouse in Bangalore
• Strategy Expanded Branch status to Import
  products and sell locally in INR

6
China Dynamics 1991

• Steered to Locations
• Focus on Regional Developments
• Pressure to JV
• Partners wanted not 100 owned
• Cash Repatriation Issues
• Difficult to get approval
• Flexibility
• Mgmt Royalty fees problem
• Building/Land
• Must Lease
• Cant own

• SGP founded Industrial Park in Wuxi
• Established, SGP mgmt
• One of First Non-JV
• Successful avoided JV
• Agreement to Dividend Profits Annually
• After Annual Audit, 1-2 profit to local
  employees, and remainder dividend to USA
• Agreement on Mgmt fees
• Mgmt Fee payment agreement approved by local
  authorities
• Long Term Lease

7
China Dynamics 1996

• Steered to Locations
• Focus on Regional Developments
• No Pressure to JV
• Cash Repatriation Issues
• Difficult to get approval
• Flexibility
• Mgmt Royalty fees problem
• Raw Material WIP transfer issues
• Building/Land
• 1996 Cant own
• Export Requirement
• Limitation on Local sales

• Looked at many locations, went back to SGP
  founded Industrial Park in Wuxi
• Established, SGP mgmt
• Wholly owned
• Avoided JV for technology issues
• Agreement to Dividend Profits Annually
• After Annual Audit, 1-2 profit to local
  employees, and remainder dividend to USA
• Agreement on Mgmt fees
• Mgmt Fee payment agreement approved by local
  authorities
• Royalty payment agreement not approved locally
• Raw Material and WIP Imports allowed
• Required to Export Majority Production

8
China Dynamics 2000-2003

• Steered to Locations
• Focus on Regional Developments
• No Pressure to JV
• Cash Repatriation Issues
• Difficult to get approval
• Flexibility
• Mgmt Royalty fees problem
• Raw Material WIP transfer issues
• Building/Land
• 2003 Can own but price unrealistic
• Export Requirement
• Limitation on Local sales

• Looked at many locations, Shanghai site chosen
• Wholly owned
• Agreement to Dividend Profits Annually
• After Annual Audit, 1-2 profit to local
  employees, and remainder dividend to USA
• Dropped Requirement to Export Majority Production
• Distribution Company now possible for importing
  products and combining with sale of Wuxi product
• Consolidated Inventory now possible

9
China Key Startup Actions

• Determine Profit Repatriation Strategy
• Firstly, Define how cash flows In/Out
• How do you get Cash out of China?
• Must be approved by Regional Authorities
• Use Banks that facilitate control from US
• HSBC, ABN, Bank America, etc
• Hire the Right People
• Locals with Experience, SGP Nationals, HK, etc
• Must be capable of negotiating locally with
  Regional Authorities
• Look for Honesty, Integrity, Same Business Values
• Hire Major Legal Consultant to establish company
  (PWC, EY, etc)
• Understand Local Pricing Strategy Distribution
  Requirements
• Credit Risks, Distribution Network building

10
China Problems

• Dishonesty
• Cash Control is must as cash is more widely used
• Theft of property
• Unscrupulous behavior, bribes
• Convenience rather than following company
  procedures
• Counterfeit Product abounds
• Surprisingly effective entering your Distribution
  chain
• Cheap fakes end up harming reputation
• Negotiations with Regional Authorities
• Must develop good relationship
• Arbitrary rule changes
• REQUIRES GREATER AUDIT CONTROL THAN USA

11
India Problems

• Dishonesty
• Local officials pressure for bribes
• Customs, local inspectors play games
• Cash control is a must
• Property theft
• Convenience rather than following company
  procedures
• Transfer Pricing is scrutinized, Customs Audits
  frequent
• Requires hiring local experts to negotiate
• ITP studies required
• REQUIRES GREATER AUDIT CONTROL THAN USA

12
Bonded Warehouse Operations
UnBonded Side
Bonded Side
Local Mfg Plant Stores Inventory in Unbonded
Side
Imports go to Bonded Warehouse Section
Fence
Sales made to Customers in Local Currency
When Third Party Sale made, Transfer goods
to UnBonded Side and pay Import duty
13
Bonded Whse Cash Consequences

• Bonded Whse Inventory cannot be paid for by Local
  Company until Duty is paid (moved to Unbonded
  Whse)
• Currency Conversion (RMB/INR to USD) requires
  support Duty paid
• Inventory Turns in Bonded Warehouse Important
• India Charges Duty on slow moving items after 90
  days
• Profits from Locally Manufactured Products stay
  in Country until annual Dividend made
• Returns of Inventory sold from Bonded Whse
  problem
• How do you get Duty repaid (Duty drawback
  process)
• Working Capital must be sufficient to Support
  Bonded UnBonded Warehouse Inventory Turns

14
Cash Concentration In China

• Building profit in China requires unique cash
  management techniques
• In many countries, cash can be moved freely
• Investments, Intercompany Loans, etc
• China wont allow free exchange of cash
• Objective Minimize idle cash maximize use by
  Corporation
• Develop work arounds
• Utilize Bank debt
• Invest in short term deposits with Bank until
  annual dividend paid
• Manage Intercompany trade terms on Export sales
  thereby controlling portion of working capital
• Chinese Preference for Export Sales LOC or Cash
  in Advance
• Corporate Preference for Export Sales 90 days
  Open terms

15
China Export Intercompany Sales
Extend terms and delay payment to keep cash
offshore as long as possible (Allows offshore
use of Chinas cash)
Sell on 120-150 day terms
Before Sales made on LOC or Cash in Advance Basis
Sell in Major Currency you utilize (USD, SGP,
Euro) PREFER ALL SALES IN ONE CURRENCY (USD) to
reduce translation costs
May be able to avoid Royalty payments to third
party by producing in China and exporting to
Non-USA countries
16
Intercompany Transfer Pricing
Simple Example

• Some Countries aggressively examine ITPs (India)
• Start with your local selling price and work back
  allowing modest local profit 5
• ITP Study often needed to support ITP
• Hire local consultant to prepare study fight
  Customs Dept.

Hopefully you make profit on intercompany sale
at this ITP level
17
Cash Control In China
US Office can view/approve/ release payments
Suppliers
Local Offices
Invoices
Central Control Point
Keys Invoices Into Bank Payment Software Verifies
Payment
Guangzhou Beijing Hong Kong etc
HSBC, BofA, ABN