1. SME Event: Expanding Your Business in China
Richard Hoffmann
Manager, Dezan Shira & Associates

2. Dezan Shira & Associates – the Asian Practice
20 years in China
12 Offices in China, 5 Offices in India, 2 Offices in Vietnam
2000 clients from 81 countries
Provide business incorporation, tax & accounting, legal and HR services

3. Topics Part I: China’s Second Tier Cities
What is a Second Tier City?
Change of Direction for Foreign Investment
Economic Development & Industrial Zones
Advantages & Disadvantages
Second Tier City Success Stories
Part II: How to Structure your Company when Expanding
Choosing the Right Corporate Vehicle
Addressing Legal and Tax Considerations
What to Consider for your China Expansion Plan

4. China’s Second Tier Cities
PART I
China’s Second Tier Cities

5. Introduction No such thing as one “China market”
No market of 1.3 billion people – treat China as a series of regions
160 cities with a population of 1 million or more
Europe has 35 cities with a population over one million
China’s urban population today is 633 million

6. What is a second tier city?
No official definition
Key indicators:
- Population: 3million+
- GDP RMB 250 billion or more
- Strong growth
- Transportation
- Historical and cultural
significance
2nd Tier cities:
- Tianjin
- Dalian
- Qingdao
- Nanjing
Second tier cities - the future engine of
China‘s growth

7. Relative Populations of the largest 50 cities in China
Tianjin with 7.46 million people is already bigger than Boston, Madrid, Sydney, or Toronto

8. Average annual Increase (2000-2010) Population (2010)
District
City
GDP(2010)
Average annual Increase ( )
Population (2010)
Average annual increase ( )
Bo Sea
Tianjin
RMB 911bn
17.40%
12.94m
2.60%
Qingdao
RMB 567bn
12.90%
8.72m
1.52%
Dalian
RMB 516bn
15.20%
6.69m
1.28%
Yangtze River Delta
Suzhou
RMB 917bn
13.00%
23.02m
3.24%
Wuxi
RMB 576bn
13.10%
6.37m
2.09%
Ningbo
RMB 513bn
12.40%
7.61m
2.46%
Pearl River Delta
Dongguan
RMB 425bn
10.30%
8.22m
Foshan
RMB 565bn
14.30%
7.19m
3.03%

9. Top world cities: GDP 2025 Rank GDP Growth (2007 – 2025) GDP (2025) 1
Shanghai
New York 2
Beijing
Tokyo 3 4
Tianjin
London 5
Chongqing 6
Shenzhen
Los Angeles 7
Guangzhou
Paris 8
Nanjing
Chicago
McKinsey Global Institute: Urban World: Mapping the economic power of cities (March 2011)

10. Change of direction for Foreign Investment
Investing in second tier cities - Why?
Surging demand – critical opportunity
Ten million new Chinese consumers entering the consumer market each year
Less saturation, Less competition
Favorable policy shifts
Government investment
Targeted tax incentives
Targeted economic & technological development zones
“Go Inland” & “Go West” Campaigns
Devolving of power to the provinces
Lower production costs
Better infrastructure

11. National vs. Provincial GDP Targets

12. Economic Development & Industrial Zones
Local governments often make deals with economic development and industrial zones to offer unique incentives to attract foreign investment:
Preferential policies
Better infrastructure
Advantageous investment structure
Industry focused
Competitive tax incentives
Reduced/free office rentals & utilities

13. Case Study: Tianjin - Government incentives to attract FDI
Attracted investment from over 110 countries and regions
18,000 foreign-funded enterprises have established their
branches in Tianjin
More than US$55 billion foreign investment
285 of the Fortune 500 enterprises have invested in
Tianjin
10 Economic Development Areas:
Binhai New Area
Dongli
Jinnan
Baodi
Beichen
Xiqing
Wuqing
Jixian
Ninghe
Jinghai

14. Economic Development Area - Binhai New Area
Made up of 3 functional zones:
Tianjin Economic-Technological Development Area (TEDA)
Tianjin Port Free Trade Zone (TPFTZ)
Tianjin Port
Development plan aims transform BNA into a multi-functional area
Modern services
Electronic information
Bio-pharmaceuticals
Modern logistics
Automotive
Petrochemicals
Metallurgy

15. Binhai New Area – 2011 Statistics
First quarter 2011:
FDI amount US$3.16bn (80% of the City’s total)
Of which US$2.39bn put to use
Year-on-year growth: 18.2%
FDI into Manufacturing: US$1.57bn
Year-on-year growth of 63.4%
Import value: US$15.873bn
Year-on-year growth of 27.05%
Export value: US$9.903bn
Year-on-year growth of 18.92%
Major Drivers:
Improved development policy
and fund promotion system
Foreign trade linkage
development system
Binhai New Area introduced:
Trade platform
Export platform
SMES risk protection platform
Foreign trade enterprises
service platform to serve
foreign trade enterprises for
the first time

16. Advantages & Disadvantages of second-tier cities
Less developed logistics & supply chains
Employee availability – “talent crunch”
Lack of soft infrastructure (train the gov…)
Lack of market transparency
Policy instability – uneven & overlapping policies
- Lower disposable incomes than first-tier cities
- Less sophisticated consumers
- Lack of good local partners (Joint-Venture)
- Lack of professional support
Advantages
Growth potential (400 m more urban residents in 2030)
Influx of new talent
Cheaper production costs
Improved infrastructure - transportation
Rising purchasing power
Unmet demand
Special economic zones & incentives
Stable workforce
Relaxed policy environment

17. Operational Costs: Minimum Salary
Tier
City
RMB/Employee/Month
1st Tier Cities
(East, South)
Guangzhou
1300
Beijing
1160
Shanghai
1120
2nd Tier Cities
(East)
Ningbo, Zhejiang
1100
Tianjin
960
Hangzhou, Zhejiang
Dalian, Liaoning
900
(Inland)
Chongqing
870
Zhengzhou, Henan
800
Xi’an, Shaanxi
760
China Briefing, March 2011: Operational Costs of Business in China’s Inland Cities.

18. Operational Costs: Factory Rental (2010, Q4)
Tier
City
RMB/Sq Meter/Month
1st Tier Cities
(East, South)
Guangzhou
19.2
Shanghai
24.7
Shenzhen
26.9
Beijing
41.3
2nd Tier Cities
(East)
Dalian, Liaoning
11.7
Hangzhou, Zhejiang
11.9
Ningbo, Zhejiang
12.2
Tianjin
23.1
(Inland)
Chongqing
12.8
Xi’an, Shaanxi
15.8
China Briefing, March 2011: Operational Costs of Business in China’s Inland Cities.

19. Second Tier Success Stories
Tianjin and
Chengdu

20. Second tier success story: Tianjin
Tianjin is the birthplace of modern machinery
industry and textile industry in China.
Advanced technology
Great strength in science and technology
Rich supply of human resources
Core industrial sectors:
Information technology
Automotive
Chemicals
Metallurgy
Medicine
New energy sources
Environmental protection
Tianjin
Dalian

21. Tianjin: Graphical Overview
FDI: Average Increase per Year ( )
Tianjin
China

22. Second tier success story: Chengdu
Leader of “Go West” campaign
Fastest growing city in the world (2010)
Spearheading the development of western China
Abundant natural resources, huge & well-educated labor force, and low labor costs
Welcomed 374 new major projects last year
Local-central collaborative effort may serve as a model for future urban development in China
Chengdu

23. Chengdu: Graphical Overview
FDI: Average Increase per Year ( )
GDP: Change from a year ago
Chengdu
Beijing
Shanghai

24. How to Structure your Business when Expanding
PART II
How to Structure your Business when Expanding

25. Topics Legal Structures Key Advantages / Disadvantages
How to restructure your business when necessary

26. Types Of Legal Structures - Strategy Must Follow Structure -
Freelancer
Representative Office
Joint Ventures (JV)
Wholly Foreign Owned Enterprise (WFOE)
Hong Kong Holdings

27. “Freelancer”
Is it possible to hire Chinese employees without having a China-based entity?

28. Representative Office
Typical uses
Marketing, Research, Liaising
Hiring of employees in China (visa, residence permit, working permit)
Advantage
Incorporation quick and easy to set up
(2-3 months)
Inexpensive
Disadvantage
No possibility to issue invoices in RMB
(Fapiao)
RO example: Sourcing in China

29. Wholly Foreign Owned Enterprise (WFOE)
Typical Use
Can engage in manufacturing, processing & assembly, services & consulting and/or trade
Advantage
Direct hiring of employees
possible
Can issue invoices in RMB
(Fapiao)
Disadvantage
Application & incorporation
procedure: 4 -6 months (at least)
Standard Problem: Ratio between
Registered Capital and Total
Investment
Important: Exit Strategy, Cash Flow

30. Joint Venture (JV)
A Joint Venture in China is an entity involving a Chinese and a foreign party
Cooperative JV (CJV) vs. Equity JV (EJV)
Why do I need a partner?
Legally required
Other advantages (Network, sales
channels, real estate)
Risk: Same bed, different dreams!
Proper evaluation of partner
company required
“Due Diligence”
Taxes, salary, property rights
Ongoing/regular review of company
finances imperative

31. Hong Kong Companies Legal Tax Easy and fast to set up
“cheap”
Set-up costs
Ongoing compliance
No “real” office necessary
Tax
Corporate Income Tax 16.5%
(compared with 25% in mainland
China)
No VAT (17% in mainland China)
Dividend distribution could be
tax efficient HQ 0%
10%
HK Company 5%
Mainland
WFOE

32. What to Consider for your China Expansion Plan
When and How: Restructure for Growth
Option 1: Increase presence through multiple RO’s
Tax ineffective
Option 2: Move from Representative Office -> WFOE/ FICE
No “upgrading” possible
Set up the WFOE/ FICE, then close RO
Higher costs for having 2 offices for a temporary time
Potential Tax Benefits
Domestic Consumption
Think ahead: Have an “exit strategy”
It is more complicated to liquidate your entity then setting it up
Be in compliance (e.g. taxes!) for liquidating a business
Calculate severance payment for employees

33. Overall – A great market

34. Our experience from dealing with 2000 clients tells us:
You need to…
Do your Due Diligence
Focus on your strategy
Be in compliance with any legal and tax laws
Bring enough money
Be careful
And over all….

35. Be Patient

36. Publications
Our subsidiary Asia Briefing Ltd. has published legal, tax and investment information since 1999 about doing business in China, India, Vietnam, Hong Kong, and Russia.
Magazines
Website
Books

37. THANK YOU FOR YOUR ATTENTION!
Q & A
Mob:
THANK YOU FOR YOUR ATTENTION!