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What should private companies know about expanding into emerging markets?
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ProfessionalGrowth with PwC
www.pwc.com
Growth with PwC
Emerging Markets
Agenda
Emerging Markets
The Business Case - Vanessa Iarocci & Eric Castonguay
Structuring & Tax Planning - Mark Walters
Facilitating Banking & Trade - Reesa Shurgold (HSBC)
2
Executive Summary
• Canadian private companies are missing the mark in emerging markets
• Weak growth prospects in “the west” and high growth prospects in “emergingmarkets” mean that companies have a choice to stay and stagnate or go andgrow
◦ Emerging markets are longer merely a story of basic products and low cost manufacturing
• This is not your average expansion strategy. A cautious and calculated• This is not your average expansion strategy. A cautious and calculatedapproach is necessary because emerging markets are not, at all, like “the west”
◦ High political risk
◦ Significant deal barriers
◦ Cultural differences
3
Missing the markCanadian private companies do not have astrong track record in the BRIC regionstrong track record in the BRIC region
4
“Canada may not be taking full advantage ofthe opportunities posed by rapidly growingemerging markets.”
Conference Board of Canada, 2011
Our foreign investment track record is dismal
Canadian FDI balance in Brazil, India,China
Acquisitions into BRIC regions% of total acquisition value by country
32,733
15,000
20,000
25,000
30,000
35,000
Canadia
n$
(mill
ions)
China
1.5% ofBIC FDIbalances
4%
6%
8%
10%
12%
14%
%o
fa
gg
rea
ga
ted
eal
valu
e(2
00
0-2
011
)
% of total acquisition value by country
PwC
Source: Capital IQ, PwC Analysis
1520
5,000
10,000
1990 2010
Canadia
n$
(mill
ions)
0%
2%
4%
Canada UnitedStates
UnitedKindgom
Germany Australia
%o
fa
gg
rea
ga
ted
eal
valu
e(2
00
0
1.5%
• The majority of Canadian-led dealsin the BRIC region are into China
Most Canadians are second-movers that “go it alone”
in the BRIC region are into China(42%) & Brazil (38%)
◦ Low penetration in “other” emerging / frontier markets
• Canadians are typically not firstmovers
◦ Others have “laid the
“You need to be a first moverbecause in an environment
where there is a lot ofpolitical risk, folks that
come in early can actuallyhelp shape the political andregulatory environment tobe tailored towards them.”
PwC
◦ Others have “laid thegroundwork”
◦ Most deals are majority stake acquisitions rather thanminority stakes or jointventures (JV)
be tailored towards them.”
Ian Bremmer, Eurasia Group
• Public company buyers dominate,private companies are on the
Most activity involves large public companies in anarrow band of industries
Private Company Buyer Market Share
private companies are on thesidelines
• Narrow band of industries targeted
◦ China
› Real estate (Hong Kong)
› Financial services (retailbanking, asset management,insurance)
15%
20%
25%
30%
35%
40%
%o
ftr
an
sact
ion
volu
me
PwC
insurance)
◦ Brazil
› Resources
› Real estate
› Infrastructure
› Financial services (retailbanking, asset management)
Source: Capital IQ, PwC Analysis
0%
5%
10%
2007 2008 2009 2010 2011
%o
ftr
an
sact
ion
volu
me
Go & Grow or Stay and Stagnate?Western growth prospects are low, emerginggrowth prospects are highgrowth prospects are high
The macro environment today suggests a period of slow growth isupon the developed world economies…
2010 2011 E 2012 E 2013 E
Canadian real GDP(quarter/quarter % change)
3.2 2.3 2.0 2.5 GDP growthrates below(quarter/quarter % change)
US real GDP(quarter/quarter % change)
3.0 1.8 2.2 2.6
Canadian net exports(billions, C$)
(124.4) (144.2) (148.8) (151.0)
US net exports(billions, US$)
(421.8) (411.8) (401.2) (385.3)
US CPI(all items)
1.6 3.2 2.6 2.2
rates belowhistorical norms
Persistent tradedeficits
Negative realinterest rates
US 10 Year bond yield 3.21 2.79 2.09 2.71
US Unemployment rate 9.6 9.0 9.0 9.5
Canadian real disposableincomes (year/year change,%)
3.6 1.5 2.2 2.0
US real disposable incomes(year/year change, %)
1.8 0.9 1.1 1.5
10
interest rates
Unemploymentand disposableincome metricsdismal
Source: BMO Economics, Canadian Economic Outlook, US Economic Outlook
Governments have run out of ammunition…
Country Implied AusterityMeasures (US $mm)Measures (US $mm)
France 104,569
Germany 42,020
Greece 23,044
Ireland 58,800
Italy 33,714
Japan 484,573
Welcome to the age of austerity!
Source: Eurostat, IMF, PwC Analysis11
Japan 484,573
Portugal 15,552
Spain 88,719
UK 152,348
US 1,155,000
Putting austerity into perspective !
Implied Austerity2,500
3,000
Vietnam War, 698
Implied Austerity2,158
1,000
1,500
2,000
2,500
Infl
ati
on
Ad
just
ed(U
S$
bil
lio
ns)
12
Marshall Plan115
Race to the Moon,237 S&L Crisis, 256
Korean War, 454
Iraq Invasion, 597
0
500
1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030
Year
Source: PwC Analysis, Bianco Research LLC
In contrast, emerging markets are expected to expand rapidly
UKIreland
3.1 2.5 2.6
#2
Canada France
1.5 1.6 1.9
#5
-0.9 0.2 1.8
#9
4.0 4.3 4.5
#16
Russia
1.3 1.4 2.2
#3 Russia
Germany
3.5 2.6 2.1
China
Japan
Greece
-4.5 -3.0 0.7
#17
#2
2.8 3.0 3.2
#1
US
Brazil
5.5 4.2 4.0
#12
Mexico
7.5 4.6 4.7
#11
#5 #9
Spain
10.3 9.5 9.0
#10
4.0 1.4 1.8
#6
#16#3 Russia#4
Outlook
2010e 2011f 2012f
GDP growth
PwC Med-term risk ranking*
Key AustraliaItaly
Spain
-0.1 0.5 1.2
#8
2.8 3.4 3.9
#14
South Africa
1.1 0.9 1.2
#13
2.7 3.1 3.6
#7
India
8.6 8.6 8.5
#15
*PwC ranking of medium-term risk premium; **Based on March 2011 Economist Intelligence Unit projectionsSource: PwC Economics, IMF
United Arab Emirates**
2.1 3.5 4.6
n/a
13
By 2050, China, India, Brazil and Russia will be in “the top six”
60,000
GDP by country, 2009 - 2050 2009 2050
Emerging economy
20,000
30,000
40,000
50,000
GD
Pat
Mark
et
Exch
an
ge
Rate
s(c
on
sta
nt
2009
US
$b
n)
Emerging economy
PwC
Source: PwC Forecasts
0
10,000
Chin
a
US
India
Bra
zil
Japan
Russia
Mexi
co
Germ
any
UK
Indonesia
Fra
nce
Turk
ey
Italy
Nig
eria
Canada
Spain
South
Kore
a
Vie
tnam
SaudiA
rabia
Austr
alia
GD
Pat
14
This is not just more of the same. It’s no longer merely a story ofbasic products and low cost manufacturing
Urbanisation• India, China, ASEAN and Nigeria will add1.3bn urban residents between 2009 and 2050
• The cities of the world will require tremendous investment in infrastructure to support
Emergingmiddle class
Changinglabour
markets
Emerging• Between 2005 and 2009, over 2,000 companies in emerging markets began investing
• The cities of the world will require tremendous investment in infrastructure to supportthis growth
• Shanghai and Mumbai alone will generate 25m more middle class households by 2025,but the new middle class will not be constrained to the world’s megacities
• This will create substantial opportunities in consumer goods, while straining theagricultural capacity of the world
• China may no longer be the world’s factory. Many emerging markets now have lowerlabour rates than China, and countries like Thailand and India could become morecompetitive relative to China
• Within the BRIC, the key area of competition is around innovation
Currencymovements
Emergingcompetitors
• Between 2005 and 2009, over 2,000 companies in emerging markets began investingabroad. Some are becoming industry leaders (e.g. Embraer from Brazil)
• These companies will become stronger, and could be joined by as many new multi-nationals
• Currencies in Brazil, Vietnam and Indonesia are all expected to depreciate relative to theRMB, making these countries more competitive as a low cost manufacturing destination
15
Not your average expansionThe emerging markets are not, at all, like “thewest” – a unique approach is requiredwest” – a unique approach is required
16
Market entry has a high chance of failure because it involves alarge number of difficult choices...
Key Decisions Choices Some Considerations
• Willingness to pay• Cost of customer education
1. Customer focus Affluent segment Mass market
Bu
sin
es
sm
od
el
JV Go-it-AloneAcquisition• Regulatory requirements• Management bandwidth• Execution vs. partner risk (IP, control)
4. Investmentvehicle
• Market knowledge/ risk appetite• Local ecosystem• Tech. exchange in the proposition
3. Supply chainfootprint
Export LicenseLocal
productionLocal R&D
• Cost of customer education• Minimum efficient scale
1. Customer focus Affluent segment Mass market
• Cost to deliver• Potential for defensible advantage
2. Productoffering
Global products Local branding / pricing
State-owned/ PrivateSmall private • Need to navigate regulations vs.5. Partner type
Bu
sin
es
sm
od
el
17
8. Management • Global career development• Adaptability• Retention
Foreign Local
State-owned/affiliated
Privateconglomerate
Small privatesector
• Need to navigate regulations vs.commercial behaviour
• Balance of power in partnership
5. Partner type
7. Location • Proximity to raw materials andcustomers
• Liveability
Cost-advantage Employee friendly
Ex
ec
uti
on
...in an environment that is “not like the West”...
Why deals in emergingmarkets are different
Growth
Government
Culture
markets are different
Governance
Valuation
Numerous companies have achieved growth through emergingmarkets, but some companies have also faced difficulties
Infr
as
tru
ctu
re
Examples of successes Examples of difficulties
“In the late ’90s, we decided not toPhased approach to de-
Infr
as
tru
ctu
re
A&
D
Incorporating emergingmarkets into a globalsupply chain to lowercosts and gain access todemand
“In the late ’90s, we decided not toenter China, and missed a substantialopportunity. Now, it’s too late”
Automotive component manufacturer
“Suzuki re-entered the Indian marketin 2006, after it severed a decade longties with Chennai-based TVS MotorCompany in 1999-2000, after the five-year non-compete clause expired“
The Economic Times, 17 Dec 2009
Phased approach to de-risk entry; continuouslocalisation of operatingactivities
PwC
Au
toO
the
rs
Toyota
19
Investing to provide global servicelevels to high-end customers inChina
Strong partnering inIndia “Danone ends troubled Wahaha
venture --- China partnership wasplagued by disputes over drinksbusiness; cash payout will settle legalcases “
Wall Street Journal, 1 October 2009
We draw a number of key learnings from our experience withmarket entry
Section 2 – The challenge
• Align people. Get involved early to begin learning and developing relationships. Ensuresenior management stays involved and focused on the long-term rational
• Utilize light touch models. Test the market (e.g. exports, licensing)
• Don’t change the core. Understand what’s critical to the success of your core businessmodel and first replicate that in new markets. Limit localization decisions to non-criticalparts of the business model (but do make sure the business is tailored to the local market)
• Phase investment. Understand the timing of demand growth, the economics of your costto serve and the key step changes in capacity. Plan around capacity but build in flexibility
• Don’t be afraid to walk alone. Be clear about what you get from and provide to a partner.Understand the benefits and risk that a partner brings
20
• Invest in local deals capabilities. Be aware that deals in emerging markets are differentand harder than they are in home markets. Invest in emerging markets deal executioncapabilities if you’re going to pursue an acquisition
• Learn from Private Equity. Adopt relevant lessons from Private Equity from investmentstrategy to evaluation and exit
There are lessons to be learned from private equity tode-risk market entry
Investment strategy Criteria for consideration Partnering/ co-investment
Portfolio of investments withuncorrelated risks (e.g.multiple countries)
Private Equitymodel
Think about exit from day 1(how to get out if things gobadly)
Treat with caution (be clearwhy you’re partnering and doso carefully)
Create investment modelearly as a living document(how much money will itmake?)
Management and the boarddevelop strategy together(e.g. Work closely withemerging market managers)
Investment strategy Criteria for consideration Partnering/ co-investment
Investment evaluation Strategy Development
make?)
Impersonal and fact-based(avoid over-excitement)
Focus on cash (can be in thelonger term)
Getting financial systems rightand regular monitoring(emerging market accountingsystems are generally lesssophisticated)
emerging market managers)
Discussions Financial management Governance
21
“It is not the strongest of the species that survives, nor the“It is not the strongest of the species that survives, nor themost intelligent that survives. It is the one that is the mostadaptable to change.”
Charles Darwin
Structuring into BRIC CountriesEfficient tax planning
23
Emerging Markets – Proposed structures
Canco
Branch
Canada
BRIC
24
Issues:
• Registrations• Limits on activities• Staffing• Banking – Foreign Exchange
Emerging Markets – Proposed structures
CancoFinancing
Canada
BRIC
BRIC OperatingCompany
Equity Debt
LocalFinancing
?
25
Issues:
• Similar issues to setting up branchPlus
• Choice of legal entity• Minimum capital requirement• Repatriation limits• Withholding tax
Emerging Markets – Proposed structures
CancoFinancing
Canada
BRIC
Equity Debt
Foreign HoldingCompany
Equity Debt
26
BRIC
Issues:
Selection of foreign holding company• Treaty network• Substance – Mind and Management• Tax rate on local and foreign source income
BRIC OperatingCompany
Emerging Markets – Proposed structures
CancoFinancing
Canada
BRIC
Equity Debt
Foreign HoldingCompany
Equity Debt
27
BRIC
Issues:
• Set up of Bidco• Ability to merge/consolidate
Bidco
Target
Doing Business in Brazil
Forms of investment
• Branch – difficult to incorporate later• Branch – difficult to incorporate later
• Limited liability company – Sociedade Limitada – LTDA
• Corporation – Sociedade por Acoes – S/A
Repatriation
• Capital permitted
• Dividend – no w/h tax
Corporate tax
• Calendar year• Calendar year
• Rate = 15% plus 10 % surcharge = 25%
• Social Contribution Tax= 9% of profit.
28
Doing Business in Russia
Forms of investment
• Rep office – Accreditation• Rep office – Accreditation
• Branch – Registered
• Full and limited partnership
• Limited liability company
• Joint Stock company
Repatriation
• Dividends – 15% w/h tax
• Initial contribution – tax free• Initial contribution – tax free
Corporate tax
• 20%
29
Forms of investment
• Branch, Project and Liaison office
Doing Business in India
• Branch, Project and Liaison office
• Wholly owned subsidiary
• Joint venture
• Limited liability company
Repatriation
• Capital may be returned
• Dividend distribution tax = 15% plus surcharge ~ 16.6%
Corporate tax
• Resident company = 30% plus surcharge ~ 33.2%
PwC
• Resident company = 30% plus surcharge ~ 33.2%
• Non-resident company = 40% plus surcharge ~ 42.2%
30
Forms of doing business in China
Indirect investment forms
• Processing
• Representative Offices
• LicensingForeign Enterprise (“FE”)
PwC 31
Forms of doing business in China
Direct investment forms
• Equity joint ventures• Equity joint ventures
• Cooperative joint ventures
• Wholly foreign-owned enterprises
• Special purpose vehicles
◦ Service Company
◦ R&D centre
◦ Trading company in the FTZ
◦ Chinese Investment holding company
Foreign InvestmentEnterprise (“FIE”)
◦ Chinese Investment holding company
◦ Shanghai Regional Headquarters
32
Corporate tax in China
Standard rate = 25%
Special reduced rates in selected industries and geographies rangingSpecial reduced rates in selected industries and geographies rangingfrom 0% to 15%
33
Requirements for initial investment
• Currency conversion is regulated
• Cash or in-kind (within limits)
• Certified by a CPA
• Maintain separate accounts forcapital
• Technology agreements requireapproval
• Debt/equity ratio requirement
PwC 34
Repatriating capital
EJV – only on liquidation
CJV – agreement of partners and regulatory approvalCJV – agreement of partners and regulatory approval
WFOE – flexible
In all cases – sufficient foreign currency on hand
35
Repatriating earnings
Conditions
• Prior year’s losses made up• Prior year’s losses made up
• All taxes paid
• Director’s approval
• Approval to change currency
May be exempt from withholding
36
Suggested Tax Considerations for entering any BRICCountry
1. Ensure business case is well developed.1. Ensure business case is well developed.
2. Establish policies for employees assigned to destination country.
3. Complete due diligence on business partners.
4. Consider use of holding company.
5. Establish policy for the use of IP.
6. Determine optimal location.
7. Develop a capitalization strategy.
8. Develop transfer pricing policies.8. Develop transfer pricing policies.
37
Illustration of BRIC Growth – AutoIndustryAppendix 1Appendix 1
38
Illustration of BRIC Growth – Auto Assembly Outlook
For the first time in history, the number of vehicles produced in developing and emerging marketsin 2011 will be greater than the number of vehicles produced in mature markets.
20
30
40
50
60
Global: Light Vehicle Assembly by Market Type2000 – 2017 (millions)
SA
EU
NA
AP
Global: Contribution to Growth by Region2010 – 2017
China 38.5% India 12%
Brazil 6.4%
0
10
20
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
Mature Emerging
0% 10% 20% 30% 40% 50% 60%
MEA
EE
Source: Autofacts 2011 Q4 Data Release
Russia 6.2%
Illustration of BRIC Growth – Auto Assembly Outlook
China’s assembly growth will exceed the combined growth of the remaining BRIC countries.
3.0
14.4
5.1
7.1
26.8
India
China
BRIC: Assembly Outlook by Country2010 vs. 2017 (millions)
1.3
3.1
3.3
5.1
0 3 6 9 12 15 18 21 24 27
Russia
Brazil
2017 2010
Source: Autofacts 2011 Q4 Data Release
Trends across emerging marketsAppendix 2
41
This is not just more of the same. Emerging markets will undergodramatic changes as the result of five key trends
Emergingmarketsmacrotrends
Urbanisation
Emergingmiddle class
Currencymovements
Changinglabour
markets
Emergingcompetitors
42
6
Urban population in emerging markets, 2009-2050
India, China, the ASEAN-6 and Nigeria will add 1.3bn urbanresidents between 2009 and 2050
5.20.5
0.4
0.20.1
0.9
0.4
2
3
4
5
6
Billio
ns
0.1
Nigeria
Brazil
0.6
By 2025, India isprojected to have 3mega-cities: Deli,Mumbai andKolkata
By 2025, China isprojected to have 5mega-cities:Shanghai, Beijing,
2.5
-
1
2009 urbanpopulation in
emerging markets
India China ASEAN-6 Africa Latin America Other emergingmarkets
2050 urbanpopulation in
emerging markets
Source: UN, World Urbanization Prospects The 2009 Revision
Shanghai, Beijing,Shenzhen,Chongqing, andGuangzhou
43
China and India will see strong growth in the number of middleand upper class households, with Shanghai and Mumbaigenerating 25m more of these households by 2025
Number of middle and upper class households in key cities*, 2008-2025
14.9
9.9
8.6
19.7
16.5
12.9
10.0 9.68.610
15
20
25
Nu
mb
er
of
ho
useh
old
s(m
)
Number of middleand upper classhouseholds, 2008
Both China andIndia will also seelarge growth inmiddle classconsumers insecond tier cities
3.6
1.4
4.1
0
5
Sao Paulo Shanghai Mumbai Paris Jakarta London
Nu
mb
er
of
ho
useh
old
s(m
)
Number of middleand upper classhouseholds, 2025
*Sample of growing cities in emerging markets and established European citiesSource: PwC Economics
Rank inworldpopulation2025
4 9 3 24 25 n/a
44
Indian and ASEAN labour markets are likely to become moreattractive relative to China
Emerging markets labour costs are lowest in Asianmarkets
Wage inflation is likely to see India and ASEANbecoming more competitive relative to China
11.3
10
15
20
25
Avera
ge
lab
ou
rco
sts
per
ho
ur
(US
$)
Average hourly labour costs (US$), 2010
UK - $24
India
China
40%
60%
80%
100%
%g
row
thin
lab
ou
rp
rod
ucti
vit
y,
2010-2
015
Changing labour dynamics, 2010-2015F
markets becoming more competitive relative to China
Indian and Thailandlabour markets arelikely to becomemore attractiverelative to China
PwC
6.4
3.8
2.6 2.2 1.8
0.7
0
5
Poland Brazil Russia India China Thailand Indonesia
Avera
ge
lab
ou
rco
sts
per
ho
ur
(US
$)
Source: EIU, Jan-Feb 2010
Indonesia
ThailandRussia
BrazilPoland
0%
20%
0% 20% 40% 60% 80% 100%
%g
row
thin
lab
ou
rp
rod
ucti
vit
y,
2010
% growth in nominal wages, 2010-2015
45
Emerging markets will produce a large number of new multi-nationals
180%
New mult-nationals 2010-2024
Bubble size reflectsnumber of new
New multinationals* in emerging markets bycountry, 2005-2009
KOR
ARG
MAL
RUS
BRA CHL
CHN
IND
SIN
VIE
ROM
POL
40%
60%
80%
100%
120%
140%
160%
180%
Gro
wth
inre
al
GD
Pfr
om
20
05
-20
09
to2
010
-20
14
number of newmultinationals between2010 and 2024
300
400
500
600
700
800
#o
fn
ew
mu
ltin
ati
on
als
PwC
UKRARG
MEX
HUN
ROM
0%
20%
40%
0% 20% 40% 60% 80% 100%
Growth in number of new multinationals between 2005-2009 and 2010-2015
-
100
200
2005 2006 2007 2008 2009
China India Other emerging markets
*Note: defined as a company that it undertakes green field investment abroad for the first timeSource: PwC Economics
46
Movements in exchange rates are likely to decrease the costadvantage of manufacturing in China relative to other emergingmarkets
% change2.0
Indexed global exchange rates (relative to US$), 2003-2015F
Forecast
2003-2010 2010-2015
75.3% (12.6)%
22.2% 18.5%
1.6% 9.3%
(5.4)% 2.2%
(8.3)% (1.3)%0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2003
=1
Brazil
China
India
UK
Indonesia
PwC
Source: PwC analysis, OANDA, EIU
(16.7)% (6.0)%
0.0
0.2
0.4
2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F 2014F 2015F
Vietnam
47
PwC has helped numerous companies expand
Case Studies
PwC has helped numerous companies expandinto emerging markets
PwC 48
Case Study 1: Understanding how quickly a domestic supply chaincould be established in India was critical to timing entry for anautomotive supplier.
India market entry
The client’s automotive turbocharger business is a leading globalsupplier of turbine wheels. It is a vertically integrated business, withcapabilities in-house to melt superalloys, the key input for turbochargers wheels. The superalloy business had recently beenreceiving a number of requests from customers in India. Thebusiness was considering an investment in India to satisfy thisdemand. The client hired PwC to test the business case.
Our key focus was on understanding the market potential. We foundthat while rapid growth in automobiles was driving demand forturbochargers, this didn’t necessarily equate to demand for superalloys. By speaking with automotive experts, and procurementalloys. By speaking with automotive experts, and procurementheads at the leading global turbocharger manufacturers, we mappedlikely movements in turbocharger production and themanufacturers’ sourcing strategies. We then looked at theinvestment plans of turbine wheel producers to understand thetiming of local demand.
We recommended a customer-led phased approach to enteringIndia. The client is currently exploring several options to do so.
49
Case Study 2: Assessment of the key competitive factors in theglassware industry highlighted alternative investmentopportunities in China
China commercial diligence and location study
Libbey is a major US manufacturer of table glassware, covering ahuge range of beverage glasses for home and trade use. Theglassware industry had become more global, and competitors suchas Luminarc of France and Pasabahce of Turkey were expandingrapidly into international markets.
Libbey had been presented with an investment opportunity inChina, which we helped them to assess through a commercial duediligence investigation. In glassware, distance from the source ofraw materials and energy prices are key competitive factors. Weconsidered the cost of this opportunity versus alternative locations,determined that other locations would offer better long term costs,materials availability and market access, and then conducted amaterials availability and market access, and then conducted asearch that resulted in a short-list of proposed alternative locations.
After helping Libbey negotiate investment incentives with approvalauthorities, the Langfang development zone in between Beijing andTianjin was selected, and the plant opened in March 2007 with aninvestment of almost US$60million.
50
Case Study 3: Understanding the China strategy of the automotiveassembler, and how they planned to address the market was key indrawing up a list of acquisition targets
China M&A Strategy
Our client was the independent parts aftermarket brand for a US‘big three’ automotive assembler. In China, most vehicle assemblershad managed to establish ‘closed loop’ parts distribution systems,meaning that service centres only installed parts made by thevehicle manufacturer, but this situation was changing and the clientwanted to quickly establish a presence in the independentaftermarket, as car owners were increasingly going outside theclosed loop to lower costs.
PwC helped the client to assess how this market could be addressed,how it was likely to evolve, consider a range of partnering strategiesoutside of existing parts distributors, and finally help draw up ashort list of acquisition targets, by first understanding how the clientshort list of acquisition targets, by first understanding how the clientwould address the market, and then assessing targets by how closelythey fit the client’s strategy and how likely it would be for a deal toclose. The work was made more difficult by the generally poorquality of market information available, which meant that we had totriangulate information sources to get as reliable a data set aspossible. We then went on to provide financial due diligenceservices to the deal.
51
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Mark WaltersTax PartnerTax Partner(519) 570 [email protected]
Vanessa IarocciDirector, Consulting & Deals(416) 941 8352
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