Doing Business with China Emerging opportunities …en.ccei.org.in/files/Delloite Doing_Business_with_China .pdfinvestments. The series of seminars on ‘Doing Business with China:

July 2011

Doing Business with China Emerging opportunities for Indian companies

Confederation of Indian Industry

Contents

Message from Director General, CII 3

Introduction 4

Trade statistics 6 IndiaandChinatradeismorethanUS$60billioninanyear 6 BangkokAgreementbetweenIndiaandChina 9

Foreign investment in China 10 Choiceofbusinessentity 11 TaxationinChina 14 Driversforinboundandoutboundinvestment 15

Key industries 16 Automobilesandautocomponentssector 16 InformationTechnologyandITenabledServicessector 18 RealEstate,ConstructionandInfrastructureSector 19 Tourismsector 21

Case studies 23 CaseStudy1:MahindraandMahindrainChina 23 CaseStudy2:AnImporter/Tradersharinghis

experienceofbusinesswithChina 24

Way forward 25

Acknowledgements 26

About CII 27

Contacts 28

2

Message from Director General, CII

IndiaandChinahaveenjoyedadynamiceconomicrelationshipwhichhasgainedmuchtractionoverthelastdecade.Bothcountriesrepresentlargerapidlygrowingdevelopingeconomiesandhaveemergedasdriversofglobalgrowth.Theopportunitiesinbothnationsareexpandingatanastoundingpaceasdevelopmentintensifiesandanewclassofconsumersandworkersfrombothsidesstepsontotheglobaleconomicplatform.

Withinthisscenario,theConfederationofIndianIndustrybelievesthatitisimperativetoevolveamultidimensionalbalancedeconomicengagementofbothcountriesthatincludestrade,servicesandinvestments.Theseriesofseminarson‘DoingBusinesswithChina:EmergingopportunitiesforIndiancompanies’aimsatfacilitatingsuchengagementandassistingIndiancompaniestoachievethenextlevelintheirpresenceinChina’seconomicarena.ThisendeavourbuildsonthealreadystrongactivityprofileofCIIwiththeChineseeconomy.

Bilateraltradehasmultipliedmanifoldoverthelastdecadeandtoday,ChinaisIndia’slargesttradingpartner.Mutualinvestmentstooaregoingupasbusinessesofbothsidesseektoleveragethebenefitsofdynamicandgrowingmarkets.Thetwocountriesaredevelopingtheirspecialidentitiesineachother’seconomiesandproceedingrapidlyonparticipatingineachother’sgrowthanddevelopmentprocess.

Chinahasbuiltapresenceofpre-eminenceforitselfovertherecentpasttoemergeastheworld’slargestmanufacturingandexportingnation.Despitethetravailsoftheglobaleconomiccrisis,ithasexhibitedresilienceandcontinuedhighratesofGDPgrowth.AfacilitativeinvestmentandmanufacturingenvironmenthasattractedglobalmultinationalcompanieswhichhavesuccessfullysetupbusinessinChinatoaddressdomesticaswellasglobalmarkets.

India’spresenceinChinahasalsoincreasedovertheyears,especiallyinareasofitscorecompetencysuchasIT,manufacturingandR&D.However,forasynergisticbilateraleconomicengagement,thereisneedforIndiancompaniestotaptheopportunitiesintheChinesemarketmorecloselyandtotakeadvantageofitsenvironment.China’sstrongpresenceinrobustglobalsupplychainsisanaddedincentiveforIndiancompaniesforscalingupoperationsinChina.

CIIhasbeenactivelyengagedwithChinathroughamulti-prongedstrategyincludinganofficeinShanghai,partnershipswithChineseacademicandbusinessinstitutions,andarangeofdedicatedeventsonthebusinessaswellasstrategicplatforms.CIIworkscloselywiththeIndiangovernmentonstrengtheningeconomicengagementwithChina,andhasparticipatedinbilateralvisitsofministersfrombothsides.ItundertakesrelevantandtimelyresearchonChinainordertoenableIndiancompaniestoshapetheirparticipationinitseconomy.

ThecurrentseriesofseminarswouldreachouttoIndianbusinessesinkeyindustrialregionsandwoulddisseminateawarenessonarangeoftopicspertainingtodoingbusinessinChina.ApartfromanoverviewofChina’seconomyandbilateraltradeandeconomicrelations,theseminarserieswouldincludespecificpotentialandopportunitiesforIndianbusinessincludingidentifiedsectors,businesslawsandregulations,themechanicsofsettingupbusinessinChina,andfinancingoptions.Theserieswouldbeaddressedbygovernmentofficials,topbusinessleaders,andprofessionalsfromIndiaandChinatogiveaholisticandroundedperspectiveontheissuesandchallenges.

IamconfidentthatthisseminarserieswouldgreatlyaddvaluetoexistingChinastrategiesandsparkfreshinterestfornewbusinessforIndiancompanies.Ibelievethatitwouldleadtoamultifacetedsustainableeconomicengagementbetweenthesetwofast-risingAsianpowers.Iwishtheparticipantsallsuccess.

ChandrajitBanerjee,DirectorGeneral,CII

Doing Business with China EmergingopportunitiesforIndianCompanies|3

Introduction

ChinacannotberuledoutasanimportanteconomyforIndia;asamarket,asacompetitor,andasapartner.Thefactthatitiscurrentlythethirdlargesteconomyandstatedtobecometheworld'slargesteconomyby2025,furtherprovidesimpetustothefactthatIndianbusinessescannotoverlookChinaintheirbusinessplans.

Theyaretwoofthefastestgrowingeconomiesoftheworld.Theyarethetwomostpopulousnationsandalsotheoldestcivilizationsintheworld.ThetwocountriesstartedtheirindividualjourneysafterIndiagainedindependencein1947andthePeople’sRepublicofChinawasestablishedin1949.Atthesametime,theirdifferencesarequiteapparent–bothhavedifferentformsofgovernment,bothfollowdifferentmodelsofgrowth–Chinafollowsanexportoriented,manufacturingeconomywhereasIndiaisadomesticconsumption-ledserviceorientedeconomy.Thisis,perhaps,aresultoftheplanningideologiesthatthetwocountriesadoptedinthe1960swhenthedivergenceingrowthpatternsofthetwocountriesemerged.

Ifonelooksatthemacroeconomicfactors-theChineseGDPhasgrownat10%perannumforthelast3decadescomparedto6%forIndia.IntermsofaggregateGDPnumbersIndiastandsatthespotwhereChinastoodin2000andintermsofPerCapitaGDP,IndiacurrentlystandswhereChinastoodabout15yearsback.IndiahashadahigherfiscaldeficitandpublicdebtcomparedtoChina,whichhasresultedinlowersovereignratings.Asaresult,theIndianeconomyhasbeenunabletoincreaseitscapitalbaseatapaceinsyncwithChina.

However,IndiaandChinabothstandtogrowandbenefitwithgreatercommercialinteractionswithoneanother.Interestingly,whilemostinvestmentbankersandcompanieslookatIndiaandChinaascompetitorstothecapitalthattheycaninvest,therearemorecomplementaryfactorsbetweenIndiaandChinathanonecanimagine.IndiacouldlearnfromtheChineseespeciallyinthefieldsofurbandevelopment,powerprojects,androad,railandportinfrastructure.China,ontheotherhand,couldtakealeafoutoftheIndiansuccessstoryinthesectorsofinformationtechnologyandITenabledservices.TheChinesegovernmentisfocusedonincreasingtheirEnglishspeakingpopulation,afeatalreadyachievedbyIndia.Anothermajorfocusareaforcollaborationcouldbeinthespaceofservices.

China,likeIndia,hasaconcentrationofindustriesacrossdifferentregions.ThecitiesofBeijingandShanghaiareoftencitedasbeingverysimilartothecitiesofNewDelhiandMumbaiforbeingpolitical,culturalandfinancialcentres.Theyarereckonedasglobalcitiesowingtothehighlyskilledlabourforcefoundhereandthepredominantcosmopolitanstyleofliving.

AccordingtoanestimatebytheEconomistIntelligenceUnit(EIU),thefutureoutlookforChina’sGDPgrowthrateisestimatedtobe8.5%ayearintheperiod2011-15.

ThoughIndiaandChinaareslowlymovingtowardsgreatercollaboration,someofthechallengesthattheIndiancompaniesfacewhileinteractingwithChinesebusinessesareonaccountoflanguageandculture.Inanattempttobridgethisgap,Chinesecompanieshave

If one looks at the macro economic factors - the Chinese GDP has grown at 10% per annum for the last 3 decades compared to 6% for India. In terms of aggregate GDP numbers India stands at the spot where China stood in 2000 and in terms of Per Capita GDP, India currently stands where China stood about 15 years back

4

startedtorecruitEnglishspeakingemployeesfortheirinternationaltransactions.

Cultureandhistoryhaveanoverwhelmingimpactthetraditionsfollowedinthatcountryandalsothebeliefsofanindividual,whichinturnhaveadirectbearingontheapproachtowardsabusinesstransaction.Risk-takingappetiteofbusinessmen,speedofdecision-makinginatransaction,conflictresolutionbetweenpartnersareallrelatedtothecultureofanycountry.ChineseculturetoohasaprofoundimpactonthewaybusinessisdoneinChina.Forexample,relationships(“Guanxi”inChinese)areanimportantelementinthesuccessforbusinessesinChinesesociety.Ithelpsnotonlyinbuildingfurtherrelationshipsbutalsoincementingbondsindifficulttimes.Relationshipswithbusinesspartners,suppliersandvendorsandgovernmentofficialsareimperative

inChina.DuediligenceisanotheraspectofutmostimportancewhileengagingwithChinainabusinesstransaction.Inalllikelihood,theChinesecounterpartswouldhavespentconsiderabletimeinstudyingtheIndianbusinessesandthecompanythattheyaregoingtodealwith,wellinadvance.

DecisionmakingintheChinesegovernmentisdecentralizedandisdispersedacrossvariousindustries.Thisimpliesthatacompanyneedstokeeptrackofpoliciesandregulationsatalllevels.Evenafterobtainingclearanceatonelevelthecompanycouldbenon-compliantatanotherlevel.Anotherimplicationofthedecentralizeddecisionmakingpolicyisthatitcanbeextremelybeneficialifthecompany'sstrategicagendaisalignedtothelocalgovernment'spriority.


Trade statistics

India – China trade is more than US$ 60 billion a yearIntheyear2010,thetradebetweenthetwocountriesstoodatUS$61.74billion.InthefirstsixmonthsofthisyearthetradebetweenthetwonationshasalreadycrossedUS$35billion.ThetrendsclearlyindicatethatIndia-ChinatradecouldreachUS$100billionby2015,atargetsetbytheleadersofthetwocountries,duringthevisitofChinesePremier,WenJiabaotoIndiain2010.

Table 1: Trade between India and China

2008 2009 2010

India’sexportstoChina 20.34 13.7 20.86

China’sexportstoIndia 31.52 29.57 40.88

TotalIndia–ChinaTrade 51.86 43.28 61.74

TradeBalanceforyear -11.18 -15.87 -20.02

Source:IndianEmbassyinChina

Onanalysisofthetradestatistics,ChinaemergesasoneofthemostimportanttradingpartnersforIndia.IfthetradebetweenIndiaandHongKongisalsoadded,ChinaclearlyisthelargesttradingpartnerforIndia.(RefertoFigure1.1and1.2)However,whiletherehasbeenanincreaseinboththeimportsfromChinatoIndiaandtheexportstoChinafromIndia,inthelast5yearsorso,therateofIndia’simportsfarexceedstherateofexports.

Itis,however,importanttonotethateventhoughChinaisanimportanttradingpartnerforIndia,IndiaisonlythetenthlargesttradingpartnerforChina.ThemajortradingpartnersforChinaarestillEU,USA,andJapan.IndiaranksastheseventhlargestexportdestinationandninthlargestimportdestinationforChina(RefertoFigure2).

6

Source:DirectorateGeneralofForeignTrade

Figure 1.1: Leading trade partners in India's import basket (US$ million)

Figure 1.2: Leading trade partners in India's export basket (US$ million)

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10,000

20,000

30,000

40,000

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11(Apr-Dec)

China U.A.E. Saudi Arabia USA Switzerland

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5,000

10,000

15,000

20,000

25,000

30,000

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11(Apr-Dec)

U.A.E. USAChina Hong Kong Singapore

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10,000

20,000

30,000

40,000

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11(Apr-Dec)

China U.A.E. Saudi Arabia USA Switzerland

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5,000

10,000

15,000

20,000

25,000

30,000

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11(Apr-Dec)

U.A.E. USAChina Hong Kong Singapore

Source:GeneralAdministrationofCustomsofthePRChina)

Figure 2: Leading trade partners for China (January 2010 - June 2011)

0

50

100

150

200

250

300

350

400

450

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EU USA Japan ASEAN Hong Kong Korea Taiwan Australia Brazil India

Val

ue in

US$

bill

ion

Exports Imports


Figures3.1and3.2drawattentiontothekeyitemsexportedfromIndiatoChinaandimportedtoIndiafromChina.Thecontrastintheexport/importbasketmayperhapsbesummarisedtobeingrawmaterialorientedfromIndiatoChina,whilefinished,value-addedgoodsdominatetheChineseexportstoIndia.Ores,slagandashconstitutedapproximately42%ofthetotalexports,byvalue,fromIndiatoChinainthefinancialyear2009-10andapproximately46%fortheperiodApriltoSeptember2010.Ontheotherhand,electricalmachineryaccountedfor29.68%ofthetotalimportstoIndiafromChina.

ChinaexportedUS$8.77billionworthofelectricalmachinerytoIndiaduringtheperiodJan-Dec.2009.Underelectricalmachinery,thechiefitemofimportwaselectricalapparatusforlinetelephony(HScode8517),whichatUS$4.29billionaccountedforalmost50%ofthetotalimports.Underthiscategory,cellularphonesaccountedforUS$1.44billion.OtherimportantitemsofimportunderthisHSCodeincludedinsulatedcablewire,electricalstoragebatteriesandtelevisionreceivers.

ChineseexportsofmachineryincreasedduringJan-Dec2009byalmost9%totouchUS$7.56billion.Thetopexportitemsunderthiscategoryaresteamgenerating

0

1,000

2,000

3,000

4,000

5,000

6,000

Ores, Slag Cotton Copper andAticles

OrganicChemicals

PreciousStone,Jewelry

Plastic andArticles

Iron andSteel

Boiler,Machinery

andMechanicalAppliances

Salt, Limeand Cement

ElectricalMachinery

andEquipment

2008-2009 2009-2010

2008-2009 2009-2010

0

2000

4000

6000

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12000

ElectricalMachinery,Equipment,

SoundRecorders

Boilers,Machinery,MechanicalAppliances

OrganicChemicals

ProjectGoods

Articles ofIron and

Steel

Iron, Steel Plastic andArticles

Vehicles,Tramway

Rolling Stock

InorganicChemicals,

Compoundsof Metals

Optical,Apparatus

Source:DepartmentofCommerce,DGFT,GovernmentofIndia

Figure 3.2: Key exports from China to India (US$ million)

Figure 3.1: Key exports from India to China (US$ million)

0

1,000

2,000

3,000

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6,000

Ores, Slag Cotton Copper andAticles

OrganicChemicals

PreciousStone,Jewelry

Plastic andArticles

Iron andSteel

Boiler,Machinery

andMechanicalAppliances

Salt, Limeand Cement

ElectricalMachinery

andEquipment

2008-2009 2009-2010

2008-2009 2009-2010

0

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ElectricalMachinery,Equipment,

SoundRecorders

Boilers,Machinery,MechanicalAppliances

OrganicChemicals

ProjectGoods

Articles ofIron and

Steel

Iron, Steel Plastic andArticles

Vehicles,Tramway

Rolling Stock

InorganicChemicals,

Compoundsof Metals

Optical,Apparatus

8

boilersandothertypesofboilersthataccountedforUS$944million.Othermachineryinthiscategoryincludessteamturbines,officemachineparts,cranes,airconditioningmachinery,converters,ladles,ingotmoldsandcastingmachinesetc.

Inrecentyears,India’stradedeficitwithChinahasbeengrowing,touchingUS$20billionin2010.Inordertosustainthegrowthintrade,thisimbalanceneedstobecorrectedthroughincreasedaccesstoIndiangoodsintheChinesemarketanddiversifyingthetradebasket.TheIndiangovernmenthasbeenseekingimprovedmarketaccessintheauto-componentandengineeringsector,IT,pharmaceuticalsandagro-processingfromthe

Chinesegovernmentagainstthebackdropofarecordtradeimbalance

Bangkok Agreement between India and ChinaIndiaandChinahadaccordedMostFavoredNation(MFN)statustoeachotherwaybackin1984.Bothcountriesaresignatoriestothe“BangkokAgreement”underwhichtheyprovidetariffpreferencestoeachother.IndiaprovidestariffconcessionsoncertainimportedgoodsfromChina,thestandardratesandextentofconcessionsapplied(tocertainspecificproductsonly)totopfiveIndia’simportgoodsfromChina(refertoTable2).NotariffsareimposedinChinaontheseproductswhenexportedfromChina.

Table 2: Import tariffs in India for certain items

Products Standard tariff rate in India Extent of concession on specific products

ElectricalMachinery Free,7.5%,10% 5%-20%

Machinery,Boiler Free,5%,7.5%,10%,12.5% 5%-20%

OrganicChemicals 10%,12.5% 5%-15%

ProjectGoods,labchemicals 10% NA

ArticlesofIronandSteels 10% 29%

(Source:CentralBoardofExciseandCustoms,India)


Foreign investment in China

ChinawelcomesforeigninvestmentanditisboundunderWTOrulestofurtheropenitsIndustriestoforeigninvestors.Chinaannouncedsignificantstructuralchangestoitsforeigndirectinvestmentregimein2004.Thedecisiononreformingtheinvestmentsystemtransformedasystemthatonlyallowedforeigninvestmentinspecific,government-designatedsectors.

However,itdoesnotsupersedetheoldsystem,thecenterpieceofwhichistheCatalogue for Guiding Foreign Investment in Industries.TheCatalogue,essentiallydividesChina’seconomy,forforeigninvestmentpurposes,intothreecategories:prohibited,restrictedandencouraged.Projectsinthesecategoriesaresubjecttodifferentexamination,approvalandregistrationrequirements.Projectscategorisedas“encouraged”facerelativelylessscrutinywhilethosecategorisedas“restricted”aresubjecttostringentrequirementsandexamination.

Governmentexaminationandapprovalforinvestmentprojectscancomefromlocal,municipal,provincialorstateauthorities,dependingonthesizeand/orindustryoftheprojects.CertainprojectsmayrequireapprovalbytheStateCouncil.

Prohibited foreign investments includeprojectsthat:areharmfultostatesecurityorthatimpairthepublicinterest;pollutetheenvironment,aredestructivetonaturalresourcesanddetrimentaltohumanhealth;occupyexcessivefarmlandandareunfavourabletotheprotectionanddevelopmentoflandresources.

Restricted foreign investments includeprojectsthatare:(1)technologicallybehind;(2)unfriendlytoresourcesandtheenvironment;(3)engagedintheexploitationofmineralsthatarespecificallyprotectedbytheState;or(4)classifiedasindustriesthatthegovernmentisopeningupinstages.

Encouraged foreign investments,whichmakeupabouttwo-thirdsoftheCatalogue,mainlyinclude:• Projectsrelatedtonewagriculturaltechnology,

constructionandtheoperationofenergysources,transportationandtheexploitationofrawmaterialsforcertainindustries;

• Projectsusingneworadvancedtechnology,includingthosethatcanimproveproductquality,saveenergyandrawmaterials,increaseeconomicefficiencyandalleviateshortagesinthedomesticmarket;

• Projectsthatmeetinternationalmarketdemandtoimproveoraddvaluetotheindustry;

• ProjectsthatinvolvetheintegrateduseofChina’sresourcesorrenewableresources,involvingnewtechnologyorequipmentforpreventingandcontrollingenvironmentalpollution;and

• ProjectsthatcandevelopthemanpowerandresourcesofcentralandwesternChina.ProjectsnotlistedintheCataloguearegenerallyclassifiedaspermitted.

Projectsintheencouragedcategoryareusuallyeligibleforpreferentialtreatment.Ingeneral,apartfrompossibletariffexemptionquotasforself-utilisedcapitalimportsforencouragedprojects,companiesengagedinencouragedprojectsmayapplyforcertaintaxincentives,suchasareducedtaxrateof15%forqualifiedhigh-newtechnologycompanies;a50%super-deductionforqualifiedR&Dexpenses;taxholidays

10

forspecifiedinfrastructure,primaryindustry,resourcessavingorenvironmentalfriendlyprojects;andataxcreditforinvestmentinspecialisedequipment.

Choice of business entity

1. Principal forms of doing business ForeigninvestorsmayinvestinChinathroughlegalornon-legalentities.Legalentitiesthatcanbesetupbyforeigninvestorsgenerallyincludewhollyforeign-ownedenterprises(WFOEs),equityjointventures(EJVs),co-operativejointventures(CJVs)andjointstockcompanies.Non-legalentitiesincluderepresentativeoffices(ROs)andbranches,aswellascertainCJVs.Anothermorerecentlydevelopedinvestmentvehicleisthepartnership.

Aninvestor’sparticularcommercialconsiderations,anyapplicableregulatorylimitationsandhomecountrytaxconsiderationsallplayaroleindeterminingthemostappropriateentityinwhichtoconductbusiness.

Foreign investment enterprise (FIE) FIEsgenerallyrefertoChineseentitieswithatleast25%foreigninvestment.FIEsarepermittedtoconductbusinessactivitiesinaccordancewiththescopeoftheirbusinessplansasapprovedbythegovernment.FIEsaremainlyorganisedaslimitedliabilitycompanies,andtheinvestor’sownershipinaFIEisrepresentedbytheamountofregisteredcapitalitinjectsintotheentity.FIEsdonotissuesharesuntiltheyhavebeentransformedintojointstockcompanies.

ThemainformsofcorporateentityforFIEsinChinaaretheWFOE,theEJVandtheCJV.Ingeneral,FIEscancarryoutmanufacturing,processing,tradingand/orserviceactivitiesinaccordancewiththeapprovedbusinessscope.TherearecertainFIEsincorporatedpursuanttospecialregulationstobeengagedindesignatedbusinessactivities,suchasForeignInvested

CommercialEnterprises(FICE)inwholesale,retailortradeagencyservices;Chineseholdingcompanies;regionalheadquarters;operating/financeleasingcompanies,fundmanagementcompanies,etc.

Wholly foreign-owned enterprise (WFOE)AWFOEorganisedasalimitedliabilitycompanyisgenerallyadesirableinvestmentvehicleforforeigninvestorsprovidedtheinvestmentregulationsdonotrequiretheparticipationofaChinesepartner.ThelimitedliabilitycompanyoffersforeigninvestorssolecontrolofthebusinessoperationsandavoidslengthynegotiationswithaChinesepartner,asinthecaseofanEJVorCJV.

AccordingtotheCompanyLaw,theminimumcapitalrequirementtoestablishaWFOEisCNY30,000,althoughtheactualcapitalrequirementshouldbecommensuratewiththeproposedbusinessplanandsubstantiatedbyprojections(normally,fiveyears)inthefeasibilityreportcontainedinthecompanyformationapplication.Capitalmaybecontributedincashorin-kind.In-kindcapitalcontributionsaresubjecttovaluationinChina.Atleast30%oftheregisteredcapitalshouldbeincashandin-kindcapital(i.e.industrialproperty,machinery,technology)shouldnotexceed70%oftheregisteredcapitaloftheenterprise.Whencapitaliscontributedininstalments,thefirstinstalmentmustbenotlessthan15%oftheregisteredcapitalortheminimumcapitalrequirement,andmustbedeliveredwithinthreemonthsfromthedatethebusinesslicenceisissued.Thedeadlineforcompletingthecontributionisnormallytwoyearsfromthedatethebusinesslicenceisissued.ThecompanyisrequiredtoarrangeforcapitalverificationbyaCPAfirminChinaandapplyforanupdatedbusinesslicenseaftereachcapitalcontribution.

AWFOEmustestablishaboardofdirectorsoramanagingdirectorformanagementstructure.Forcorporategovernancepurposes,thecompanyis

FIEs generally refer to Chinese entities with at least 25% foreign investment. FIEs are permitted to conduct business activities in accordance with the scope of their business plans as approved by the government.


requiredtohaveanindependentsupervisor(similartonon-executivedirectorinwesterncountries).

Adetailedmanagementstructuremustbesetoutinthearticlesofassociation(includingthedutiesandlimitsofauthorityofthelegalrepresentative,chiefaccountant,generalmanagerandsupervisor).Thearticlesofassociationmustspecifyproceduresforterminationandliquidationandforamendingthearticles.

AWFOEisrequiredtoappropriate10%ofitsannualafter-taxprofitsforitsstatutorygeneralreservefundaccountuntiltheaccountbalancereaches50%ofthecompany'sregisteredcapital.Hence,thedistributableprofitsoftheWFOEmayinitiallybelowerthananEJVorCJV,whoseboardmaydecidenottocontributetosuchareserve.

Equity joint venture (EJV)AnEJV,organisedasalimitedliabilitycompany,isaseparatelegalentityestablishedbyoneormoreforeigninvestorswithoneormoreChineseinvestors.OwnershipandtheshareofprofitsandlossesaredeterminedbasedontherespectivecontributionstotheregisteredcapitaloftheEJV.

Generally,theminimumlevelofforeignparticipationinanEJVis25%.Thereisnoupperlimitonforeignparticipationforgeneralprojects.ThecapitalcontributionrequirementsarealmostthesameasthoseforaWFOE.

Partnersmustpaytheircontributionwithinthetimetablefixedinthecontract.Failuretomaketimelycapitalcontributionsmayresultinthecancellationandcompulsorysurrenderorrevocationofthebusinesslicence.

ThegovernanceofanEJVisdifferentfromthatofcorporationsinwesterncountries.Investorsholdequityinterest,butnostock.Votingauthorityisvestedintheboardofdirectorsratherthantheshareholders.Thedirectorsareappointedbytheinvestorsand,ingeneral,reflecttheratioofthecapitalcontributionsofthepartners.

Contractual or Co-operative joint venture (CJV)ACJVdiffersfromanEJVintwofundamentalways:aCJVdoesnothavetobeanindependentlegalentity,andevenifaCJVisnotincorporatedasalimitedliability

companyinitsownershipright,itmayelecttobetaxedattheentitylevel.Inmostcases,aCJVelectstobetreatedasataxableentityratherthanaflow-through,primarilyforclarityintaxtreatment.ACJVthatisincorporatedasalimitedliabilitycompanyissubjecttotaxattheentitylevel.Theownershipandprofits/lossesarenotnecessarilysharedbasedonequity/capitalcontributions(asinthecaseofanEJV),butonthebasisofacontractualagreement.Thus,aCJVmayprovidemoreflexibilitywithrespecttoprofit-sharingandrisk-takingamongthepartners,subjecttoapprovalbytheauthorities.Forexample,theshareholder(s)maybeguaranteedacertainfixedannualreturnwithoutregardtotheactualperformanceoftheCJV.

CapitaliscontributedinaratioagreedbythepartiestotheCJVcontractandajointventurepartner.Normally,theChinesepartnermayprovidecooperationterms(i.e.provisionofservicesortherental-freeuseoffactorypremisesoftheChinesepartner)totheCJVinsteadofcontributingcapital,subjecttoapprovalbytheauthorities.

MultiplemanagementstructuresareapplicabletoaCJV,including:aboardofshareholders,aboardofdirectors,ajointmanagementcommitteeoramanagementbyproxy.“Hybrid”CJVstendtoadoptmanagementsystemsresemblingthoseoftheEJV;“true”CJVstendtotakethemoreflexibleformofajointmanagementoffice.Underthelatterstructure,nogeneralmanagerexistsassuch,althoughthepartiesusuallyappointalegalrepresentative.Generally,“true”CJVs,whichdonothaveindependentlegalstatusinChina,allowtheChinesepartnertoenterintosuchcontracts,underagrantofpowerofattorneybytheforeignparty.

Foreign investment Joint Stock Company (JSC)ChinaisopeningupitsstockmarkettoFIEsandforeigninvestors.FIEsareincreasinglylikelytobelistedonChinesestockmarkets(bothAandBshares)andoverseasstockmarkets.Onlyforeigninvestmentjointstockcompanies(JSCs)qualifyforpubliclisting;FIEsplanningtolistonaChinesestockmarketmustbeconvertedintoaJSC,whichgenerallymeansthattheregisteredcapitalmustbeconvertedintostockofthecompany.

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Allcapitalmustbedividedintoequalsharesrepresentedbysharecertificates.Theymaybeordinaryorpreferredshares(thelattergenerallyhavenovotingrights).Companiesmustreceiveapprovalbeforetheycanissue'A'shares(denominatedinrenminbiandavailabletoChinesecitizensandtoqualifiedforeigninstitutionalinvestors)and'B'shares(denominatedinU.S.Dollars).'A'sharesand'B'sharesaretradableonstockexchanges.'A'Sharesarefurtherdividedintosharesownedbyindividuals,legalpersonsandthestate.UnlistedsharesownedbyforeigninvestorsofqualifiedforeigninvestmentJSCcanbetradedonthe'B'sharemarketifapprovedbytheMinistryofCommerce.

Partnership Underthe2007revisedpartnershiplaw,apartnershipisavailabletodomesticlegalentityinvestors,includingChinesenationals.General,limitedandspecialgeneralpartnershipsarepossible.Althoughthelawdoesnotprohibittheestablishmentofpartnershipbyforeigninvestors,thegovernmenthasnotannouncedthedetailedrequirementsandproceduresapplicabletoforeigners.Thereisnolegalminimumormaximumforcapitalcontributedbythepartnerstoapartnershipenterprise.Capitalmaybecontributedincash,in-kindorintheformoflanduserights,intellectualpropertyrightsorservices.Contributionsotherthancashmustbeappraisedataspecificvalue.Partnersmayincreasetheircapitalcontributionstothepartnershipenterprise,asstipulatedinthepartnershipagreementorasdecidedbyallofthepartners.Theseadditionalcontributionsshouldbeusedtoexpandthescaleofbusinessortomakeuplosses.

Therearenospecificlimitsonthenumberofpartnersinageneralpartnership,butalimitedpartnershipisrestrictedto50partners.Eachpartnerhasequalrightstoconducttheroutineaffairsofthepartnership.Theadmissionofnewpartnersissubjecttotheapprovalofthepartnersandtheconclusionofawrittenpartnershipagreement.Newlyjoinedpartnershavethesamerightsandresponsibilitiesastheoriginalpartners.

2. Setting up a company Forforeigners,WFOEsofferasimplerapprovalprocedureandcompletemanagementcontrol.ForeigncompaniesalsooftenusetheWFOEformtoprotecttechnology.WFOEstatuspermitsgreateruseofrenminbitopayforbusinessexpensesandlocalsales.ToestablishaJV,itiscriticaltoselectanappropriateChinesepartner.Thefollowingaresomefactorsthat

shouldbeconsidered:apotentialpartner’saccesstodomesticfinancing,theabilitytoprovideadomesticmarketforproducts,theskillleveloflabourandtheintegrityandstrengthofmanagement.

Aholdingcompanycanoffercertaineconomiesofscaleinoperationsandmanagementthroughitscollectionofinvestmentsunderonecorporateidentity.Theseincludecentralisedpurchasingofproductionmaterials,collectivetrainingofsubsidiaryprojectpersonnel,coordinationofprojectmanagementandtheestablishmentofasingleentitytomarketallsubsidiaryproducts.

Bycontrast,JSCsofferdifferentadvantages.AnFIEoptingforthiscorporateformcaninvitetheparticipationofshareholdersinthecompany,bothtoexpandcapitalandtosecurelinkswithotherlegalentitiesinChina.AJSCalsooffersgreaterliquidityintransferringinterests.BothEJVsandCJVsnormallyrequirethepriorconsentoftheotherpartners,aswellastheoriginalexaminationandapprovalauthoritytotransferinterests.Companieslimitedbysharesneednopriorconsentfromotherstodisposeofinterests,althoughthepromotersmustwaitoneyearfromthecompany’sfirstregistrationbeforeassigningtheirshares.

3. Establishing business presence without legal entity Branches: AlthoughtheCompanyLawprovidesforaforeigncompanytoregisterabranchinChina,underprevailingpractice,onlytheregistrationapplicationsofoverseascompaniesinthefinancialservicesandoilexplorationindustriesarehandled.AbranchremainspartofitsheadofficeandthusisnotentitledtotherightsandprotectionaccordedtoChineselegalentities.AbranchmustappointaChineselegalrepresentativewhoisliableundercivillawforitsbusinessactivities.Abranchmaybeclosedonlyafteraformalliquidation.

Representative offices: Foreigncompanies,particularlythoseinthetradeagencyandserviceindustries,oftenchoosearepresentativeoffice(RO)tocarryonliaisonandmarketingactivitiesinChina.AlthoughROsallowforeigninvestorstoentertheChinesemarketwithlittleinitialinvestment,theyareprohibitedfromdirectprofit-makingactivities.

Ingeneral,anROofaforeigncompanymayonlyengageinnon-directbusinessactivitiesinChina,including:actingasaliaisonwithclientsandthehead


office;introducingtheproductsoftheheadoffice;conductingmarketresearch;andcollectinginformation.Thus,anROofaforeigncompanymaynotsignandconcludecontractswithChinesecustomersdirectlyandisprohibitedfromengaginginany“directbusinessoperations”(withcertainexceptions,suchastheROofalawfirm).

Taxation in ChinaThetaxrateforincomeearnedbycompaniesinChinais25%.IfonecomparesthetaxstructureinChinawithIndia,SingaporeandHongKong,itisobviousthattheeffectivetaxrateishigherinChina.

Withholding tax on DividendsA10%withholdingtaxondividendspaidtononresidentcompanieswasintroducedfrom2008.Previously,dividendspaidbyaChinesecompanywithat

least25%foreignparticipationwereexempt.Itshouldbenoted,however,thatdividendspaidoutofpre-2008earningscontinuetobeexemptfromwithholdingtax.

Withholding tax on Interest Interestisgenerallysubjecttoa10%withholdingtax.InterestfromcertainloansmadetotheChinesegovernmentorstatebanksisexempt.

Withholding tax on Royalties and fees Thewithholdingtaxrateonroyaltiesandfeesarisingfromthelicensingoftrademarks,copyrights,know-howandtechnicalservicefeesisgenerally10%.Royaltiesaregenerallysubjecttoa5%businesstaxexceptforpaymentsmadeinconnectionwiththeuseoftechnologywhereanexemptionmaybegranted.

Corporate Income Personal Income Employer Social Security Employee Social Security VAT

16.5 17

2532.5

1520

45

31

5

14.5

49

125

20 23

12

07

1712.5

0

10

20

30

40

50

60

Hong Kong Singapore China India

Figure 4: Comparison of Tax rates

Note: The India tax rates are as per the highest tax bracket rounded off to the nearest 0.5. Tax slabs vary as per income. VAT being a state subject varies across states. VAT for Delhi considered for comparison purposes.

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Drivers for inbound and outbound investmentAtulDhawan,Partner,DeloitteHaskins&SellskicksofftheconversationbynotingthatwhilebothIndianandChinesebusinessesarelookingtoenhancetheirpresenceintheothercountry,albeitfordifferentreasons,anysignificantlevelofinvestmentsfromeithercountryisyettobewitnessed.

Thatsaid,despiteconcerns,investmentsaretricklinginfrombothsides.Hepointsoutthatthereispotentialintherealestateandconstructionsector.AlargenumberofopportunitiesforChineserealestatedevelopersandConstructionbusinessestoexistinIndia,especiallysincemodernconstructiontechniqueshavenotbeenuniversallyadoptedhere.Forinstance,ChinesecontractorsareabletoconstructconcreteslabbuildingfoundationsmuchquickerthantheirIndiancounterparts.

Eventhoughthereisapotentialininfrastructuresector,especiallywithGovernmentofIndiapromotingforeigndirectinvestments(FDI)ininfrastructuredevelopmentinroadconstruction,upgradationofportsandairportsamongstothers,itwouldbeunlikelythatChineseinvestorswouldbeallowedtotakecontrollingstakesinsuchnationallysensitiveinstallations.

Headvisesinvestorsandsellersalikethatbothneedtobetransparentwiththeirapproach,andthisappliestoboththeseniormanagementoneithersideaswellasanyregulatoryauthoritieswithaninterestinthetie-up.

HewarnsthatbothChineseandIndianmanagementculturesaredifferent.Thismightaddtotheuncertaintywhenthetwopartiesareinteractingforinvestmentopportunities.

RecognisingtheopportunityprovidedbytheexportregulationsfromChina,andthelowercostsofmanufacturing,severalmediumsizedIndiancompanieshavesetupunitsinChina,tore-exportconsumptionorientedgoodstoIndia,andtherestoftheworld.IndiancompaniesarealreadyimportinglargeamountsofChinese–mademobilephonesandotherelectronicitemsbutcurrentlyitisonlyatradingactivity;investmentsoracquisitionsareyettobemade.Chinatodayisoneofthelargestconsumersandproducersofsteel,addedtothelowcostofproductioninChinahavepromptedinvestmentsinengineeringsector.IndianengineeringcompaniesareinvestinginChinatogetaccesstothesebenefitsandcatertotheIndianmarketplace.

Hecontinues,sayingthatChinesemanufacturersinthetechnologyandtelecommunicationssectorarealreadycostefficientandmaynotlookatIndiaforcostarbitrageopportunities.ForexampleLenovo,aChinesecomputerhardwaremanufactureralreadysellslaptopsandotherequipmentinIndiabutdoesnothaveamanufacturingbasehere.However,heisoptimisticthatifChinesemanufacturingandIndia’sresearchanddesigncapabilitiescouldbebroughttogether,potentialbusinesssynergiescouldbeformidable.

IndianITcompaniesontheotherhandaremajorlyinvestingingreenfieldopportunitiesinChina,tocatertoafastgrowingChineseITmarketandalsotoservicetheirglobalclients.

Atul Dhawan, Partner, Deloitte Haskins & Sells, gives his personal viewpoint on recent investments from China in Indian assets and Indian investments in China


Key industries

Industry Sectors of importance Overthelastfewyears,therehasbeenanincreaseinthenumberofcompaniesfromIndiaexploringopportunitiesinChinaandvice-versa.Automobiles,InformationTechnology,Mining,Textilesaresomeoftheindustriesofmutualinteresttothetwocountries.

ManyIndiancompanieshavesetupoperationseitherintheformofjointventuresorwhollyownedsubsidiariesinChina.AxisBank,UnionBankofIndia,ICICIBank,PunjabNationalBankhaverepresentativeofficesinChinawhilebankslikeCanaraBank,BankofBaroda,StateBankofIndiaoperatebranchofficesthere.Similarly,companieslikeBharatHeavyElectricalsLimited(BHEL)andAdanihaveoverseasoperationsinChina;Larsen&ToubrohasmanufacturingfacilitieswhileEngineersIndiaLimited(EIL)operatesthrougharepresentativeoffice.PharmaceuticalcompanieslikeLupin,PiramalHealthcareandSunPharmaceuticalsandchemicalscompanieslikeRelianceIndustriesandJubliantOrganosyshavealsoforayedintoChina.ChinesecompanieshavealsoinvestedinIndia.ZTE

operatesinIndiathroughawhollyownedsubsidiary.HaierhasbeenaggressiveinIndiaandhasbecomeapopularnameforIndianconsumersintheappliancesvertical.SanyGroupofChinahassetupaplantandR&DcentreinPune(Chakan)withaninvestmentofUS$70million.ConstructionequipmentmanufacturerGuangxiLiugongMachineryCo.LtdhasestablishedawhollyownedsubsidiaryinIndia.SomeotherknownChinesecompaniesinIndiaareHuawei,Lenovo,ChinaStateConstructionandEngineeringCorporation,YAPPAutomotivePartsCoLtd.andZhejiangYankonGroupCoLtd.

ThisdocumentlooksatsomeofthekeysectorsandanalysesthepotentialofcollaborationandopportunitiesforIndiancompanies,namely:• Automobilesandautocomponentssector• InformationTechnologyandITenabledServices

sector• Realestate,constructionandinfrastructuresector• Tourismsector

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Automobiles and auto components sector Theautomotiveindustryinbothcountrieshasseenaspurtofgrowthintherecentfewyears.Ananalysisoftheautomobileproductioninboththepassengervehiclessegmentandthecommercialvehiclessegmentwascarriedoutfrom2004onwards.ThetrendsindicatethattheIndianmarketisundoubtedlygrowing,withproductiondoubling(Refertotable3).

ThegrowthstoryremainssimilarinChinawithanincreaseofmorethan3.5timesoverthesameperiod(Refertotable4).

Thegrowthintheindustryindicatespotentialandopportunitiesforcompaniesinboththesecountries.IndiancompaniescouldlookatinvestmentsinChinatogainfromthegrowthinChinesedomesticmarketandtheChinesecompaniesinthisspacecouldlookatinvestmentsinIndiatocatertothegrowingIndian

market.Suchcross-investmentswouldcertainlyincreasecompetitionintheindustry,resultinginintroductionofproductsdrivenbyconsumerdemand.

ThisindustryintherecentpasthasseensomesignificantcollaborationbetweenIndiaandChina.Forexample,MahindraandMahindraLimitedenteredintoajointventurewithJianglingMotorCoGroupin2005tomanufacturetractorsinChina.ThisisperhapsthefirstventurebetweentheautoOEMmanufacturersofthetwocountries.Subsequently,SAICacquired50%stakeinGeneralMotorsinIndia.

BharatForgeLimitedisanotherIndiancompanywhichsignedaJointVenture(JV)contractwithFAWCorporation,Chinaforitsforgingbusiness.FAWisthelargestautomotivegroupinChina,withaleadingpositioninbothpassengercarandcommercialvehiclesectors.

Table 3: Vehicle production in India

Year Passenger Vehicles Commercial Vehicles Total

2004-05 1,209 353 1,562

2005-06 1,309 391 1,700

2006-07 1,545 519 2,064

2007-08 1,777 549 2,326

2008-09 1,838 416 2,254

2009-10 2,357 567 2,924

2010-11 2,987 752 3,739

Figuresin‘000vehicles,Source:SocietyofIndianAutomobileManufacturers(SIAM)

Table 4: Vehicle production in China

Passenger Vehicles Commercial vehicles Total

2004 2,480 2,754 5,234

2005 3,078 2,629 5,707

2006 5,233 1,955 7,188

2007 6,381 2,501 8,882

2008 6,737 2,561 9,298

2009 10,383 3,407 13,790

2010(P) 13,897 4,367 18,264

Figuresin‘000vehicles,Source:OICA-OrganisationInternationaledesConstructeursd’Automobiles

SundramFastenersalsosetupawhollyownedsubsidiaryinChinain2004withaninitialinvestmentofUS$5millioninZhejiangprovinceofChina.TheunitislocatedinHaiyanEconomicDevelopmentZone,about100kmawayfromShanghai.TheunitmanufacturesandsellshightensilefastenerstotheChineseautomobileindustry.The6000metrictonnefactorywasbuiltin14monthstoopenonschedule.

Abovestatedexamplesarenotone-offtransactions.Increasinglycompaniesintheautomotiveindustry,bothOEMsandcomponentmanufacturersfrombothcountriesarelookingattheothermarketforexpansionandcollaboration.

VehiclesalesinbothIndiaandChinaareincreasingatapacefasterthananywhereintheworld.Totakeadvantageoftheexpandingpopulationinthesemarkets,OEMswillcontinuetoshiftmoreoftheirproductiontobeclosertotheirbiggestsourceofnewcustomers.Addedtothis,thecostoflabourincomparisontodevelopedmarketsismuchlowerinIndiaandChina.Thismakesthemappropriateformanufacturingforglobalautomotivemarkets.

Future outlook of the automotive market AccordingtoaDeloittepublicationtitled“Anewera,Acceleratingtowards2020–Anautomotiveindustrytransformed”anewbreedofplayerswillemerge,aswellasanewglobalbalance–withmorecompetitorsheadquarteredinemergingmanufacturinghubs,particularlyinIndiaandChina.Postintegrationandconsolidationintheglobalautomotivemarket,thelandscapewillbedominatedbyglobalOEMsandsuppliersbasedinsixmajormarkets–WesternEurope,Japan,theUnitedStates,SouthKorea,ChinaandIndia.

Auto-componentmanufacturersinbothcountriescanleveragegrowthintheirrespectivedomesticmarketsandsimultaneouslycollaboratewiththeircounterpartstogainfromthegrowthstory.

Traditionally,Indiancomponentmanufacturershavebeenmastersofthehigh-qualityprecisioncomponentsandtheChineseplayershadmasteredtheartofmassproduction.Thus,thissectorwoulddemonstratesignificantgrowthifthetwocountriescouldachieveextensivecollaboration.Acompanycouldlookat

utilizingthecomponentdesignexpertiseofIndianengineersandlowcostmassproductionexpertiseofChinatocatertotheglobalOEMs.

Theinfluxofelectricvehicleswouldalsoaddtotheevergrowingopportunitiesforthecomponentmanufacturersinboththesecountries.Currentlysincethenumberofelectricvehiclessolddoesnotjustifyproductionfacilitiesinboththecountries,itwouldprobablybemoreeconomicalforthecomponentmanufacturerstocollaborateorbasetheirproductionbaseinonecountryandservetheothermarket.ThisbecomesevenmoreimportantsincemostofthecriticalcomponentsinanelectricvehiclearemadeupofrareearthmetalsandChinaproducesapproximately97%oftheglobalproductionoftheserareearthmetals.

Information Technology and IT enabled Services sectorInfosysTechnologies,HCLTechnologies,ZansarTechnologies,BirlaSoft,andKPITCumminshavemadeadditionalinvestmentsinChinaasrecentlyasbetweenJanuary2011andMay2011.OtherIndianITcompanieslikeTataConsultancyServices(TCS),TechMahindra,SatyamComputers(nowMahindraSatyam),NIIT,3iInfotech,NucleusSoftware,Wipro,MindTreeConsultingandGenpactalreadyhavetheiroperationsinChina.

TraditionallyIndianITcompaniessetupinChinaasnearshorecentrestoservetheirJapaneseclientsandglobalmultinationalsbasedinChina.TheSouthKoreanandTaiwaneseclientswereservicedfromthesecentersastheoperationsofIndianITcompaniesgrew.

Increasingly,IndiancompaniesarelookingatChinesecentersasanintegralpartoftheirglobaldeliverymodeltonotonlyserveAmericanandEuropeanmarketswhichweretraditionallyservedbyIndiabutalsotoservelocalITneedsinChinaandinone-offcasestoserveIndia.ThedomesticChineseITservicesmarketisestimatedtobeUS$20billion,whichisgrowingat50-60percentyearonyear.ChinesesoftwarecompaniesthatarerelativelysmallerinsizewhencomparedtoIndiancounterpartsarequitedominantinthelocalmarket.

AccordingtotheMinistryofEducation,China,881,509electronicsandinformationengineeringstudentsgraduatedin2010.IndianITcompaniescould

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lookatsomeofthesegraduatestofueltheirtalentrequirements.However,thedefinitionofengineeringinChinavariesfromprovincetoprovinceandinsomeprovincestechniciansarealsotermedasengineers.TheIndianITcompanieshavetobemindfulofthiswhileinitiatingtheirrecruitmentandselectionprocess.

InfosysTechnologies’Chinasubsidiarywhichwassetupin2004,nowdrivesone-thirdofitsrevenuefromthelocalChinesemarket.InfosysChinaplanstotripleitscurrentstaffto10,000overthenext3years.Initslargest-everinvestmentoutsideIndia,InfosysTechnologieshasstatedthatitwouldinvest$125-150millioninsettingupitsowncampusinShanghai,China.ThisisforthefirsttimethatInfosyshasboughtlandtobuilditsowncampusoutsideIndia.Mostotherglobalcentersofthecompanyoperateoutofrentedorleasedproperties.TheShanghaicampuswillbespreadover15acresanddevelopedoveraperiodofthreeyears.LocatedatZizhuScienceandTechnologyParkinShanghai,thecampuswillhaveasittingcapacityof8,000employeeswithfacilitiesforsoftwaredevelopment,labs,datacenters,trainingfacilitiesandfoodcourts.Besides,thecampuswillhavea1,500-seaterauditorium,agymandrecreationalcenters.Infosyscurrentlyemploysover3,300peopleinChina.IthasalreadyinvestedUS$23millionincapital.Thecurrentinfrastructurecanaccommodate4,200peopleinChina.InfosysChinahadrevenuesofoverUS$78millioninfiscalyear2011.

TCSontheotherhandsetuptheirChinaoperationsin2002therebybecomingthefirstIndianITcompany

tosetupoperationsinChina.TCScurrentlyemploys1,200employees(January2011)in5deliverycentersandplanstorampupthesenumbersto5,000inthenextthreeyears.TCSofferscorebankingsystemtofourmajorChinesebanksincludingBankofChinaandHuaXiaBank.

GenpactcelebratedtheirtenyearsofoperationsinChinain2010.Genpactreducedtheircostofoperationsbylocatingtheircentersinsub-urbanareasliketheydidinIndia,whentheystartedtheiroperations.TheChineseoperationscatertotheirclientsbasedinJapanandAsiaPacificregion.Currently,Genpactemploys3,000employeesinitsChinacenters.

Real Estate, Construction & Infrastructure SectorWiththecontinuingrecoveryandgrowthoftheChineseeconomy,theimpactoftheWorldExpo2010Shanghai,Guangzhou2010AsianGames,andthecommissioningofthehigh-speedrailnetworks,theChinarealestatemarketcontinuedtoexpandin2010.However,propertypriceincreaseshavepromptedthegovernmenttoimplementvariousmeasurestocooldownthemarketduringtheyear.Thepredictions,therefore,arethatthesectorwillhavealowergrowthininvestmentfromits2010rate.

Thehigh-endofficeleasingmarketinnorthernandsouthernChinaexperiencedrentalincreasesandhighoccupancyrates,whichweremainlydrivenbygrowingdemand.IneasternChina,officerentalsinShanghai,NanjingandNingboshowedmoderateincreaseswhileadeclineinofficerentalswasreportedinHangzhouinthe


thirdquarter.Thehigh-endretailleasingmarketinthemajorcitiesofChinabegantopickupin2010duetoareturnofmarketdemand.

Thegovernment’stighteningmeasureshavehadthemostsignificantimpactontheresidentialsector.Residentialpropertysalesreachedarecordhighinearly2010intermsofbothtransactionvolumeandsellingprice.Tocooldownthepropertymarketanddiscouragespeculativeinvestment,aseriesofcoolingmeasureswereintroducedfromApril2010onwards.

Investmentactivitiesintherealestatesectorremainedrobustin2010withdealsdominatedbydomesticinvestors.Asthefirst-tiercitiessuchasBeijingandShanghaiwereexperiencinglimitedavailabilityandhighcostofurbansites,thehuntforhigheryieldscontinuestopushinvestorstoevermoredistantfrontiers.Asaresult,apowerfulsecond–tiermarkethasdeveloped,withcitieslikeDalian,Tianjin,Chengdu,SuzhouandHanzhouleadingthistrend.Wuhan,QingdaoandChangshaarealsonextinlinetogetaddedtothistier.Acrossallsecondandthird-tiercities,themostpromisingareasappeartoberetailandresidentialdevelopments,followedbyGrade-Aofficespace,andbuildingservingtertiaryindustriessuchashotelsandlogistichubs.ThesecitieshavelessstringentlawsandloweracquisitioncoststhanBeijingorShanghaiforexample,inrelationtoinvestmentandownership.Volatilityalsotendstobelower.

TheIndiangovernmenthasalsoextendedaninvitationtoChinesecompaniestoinvestininfrastructureprojectslikededicatedfreightcorridors,subwaylinesandSEZsbeingplannedunderapublic-privatepartnershipmodel.AccordingtoanestimateaboutatrilliondollarsofinvestmentisexpectedintheIndianinfrastructuresectoroverthenextfive–sixyearswhichcreatesopportunitiesforChinesecompaniestoinvestinIndia.

NineChinesecompanies,injointventureswithIndiancontractors,arealreadyimplementingsixhighwayprojectsworthUS$556millioninIndia.ThreehighwayprojectsworthUS$284millionhavebeencompleted.ItisexpectedthattheChineseinvestmentinthisspacewouldincreasethreetimesoverthenextfewyears.

LongjianRoadandBridgeCompany,wontheUS$78millioninternationaltendertoconstructthe80kilometreWorldBank-fundedTheog-Kotkhai-Hatkoti

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roadprojectinShimladistrict.TheChinesefirmwasundermuchpressurebecauseofthedelayincompletingtheproject.Thedelaywasprobablyduetovisaissuesfortheworkers.ThenewdeadlineforcompletionoftheprojectisnowApril2012.

ConstructionfirmRamkyInfrastructurewithitsjointventurepartnerJiangsuProvincialTransportationEngineeringGroup,aChinesefirm,hadwonaUS$247millionNHAIcontractforfourlaningofSrinagar-Banihalnationalhighway1AinJammuandKashmir.

IndiahasbecomethebiggestdestinationofChinesecompaniestocontractprojectsoutsideChina.AccordingtoIndianEmbassyinBeijing,thecumulativevalueofcontractualChineseinvestment(projects)tillJune2009wasUS$29.6billion.TheoverallturnoverrealizedfromtheseprojectstillJune2009wasaboutUS$11billion.ChinesecompanieshavebaggedseveralcontractstobuildsteelandpowerplantsinIndia.SomeoftheChinesesteelmakershavealsosetupJVsinIndiantoproducesteel.Tourism sector TourismhasreceivedsignificantimpetusintherecentdecadesbothinChinaandinIndia,whatwiththenewfascinationfortheemergingmarketsfromtherestoftheworld.Thishaslargelybeenduetoincreasedbusinesstravel.Oftenpittedasrivalsinmostareas,theelephantandthedragon,however,sharehistoricconnectionsthatpre-datetheChristianera.Whiletherearecommonthreadsofculturebetweenthetwo,thetourismproducthoweverisaschalkandcheese.

Inbound tourismAt55.7millionvisitors,Chinatodayisratedasthethirdmostpopulartouristdestinationintheworld(aftertheUnitedStatesandFrance),accordingtothe

WorldTourismOrganization(UNWTO).Thisnumberrepresenteda9.4%increaseover2009.TheonlyotherAsiancountryinthetop10listwasMalaysia,with24.6millionvisitors.

India,ontheotherhand,wasat41onthelist,andreceivedlessthan0.5%oftotalworldtourismat5.6millionvisitorsin2010.Thispotentiallyrepresentstheopportunityforgrowthinthebusinessoftourismforthecountry.ThecuriousfactaboutIndia,though,isthatitisranked16thamongstcountries’receiptofthetouristdollar,atUS$14.2bn–certainlynotthebackpacker’sparadiseasmadeouttobe.

Multinationalcompaniesincreasetheirpresenceinthosemarketsthattheircustomersgoto–thisiscertainlythecaseforthegrowthofthehotelbusinessesinbothIndiaandChina.Thecurrentpoliciesinbothcountriesalsofavorandfacilitatesuchinvestmentintravelandtourismindustry.TherelativeeaseofentryinChina(atleastforthehospitalitycompanies)hashelpedincreatinginfrastructuretomeettheinbounddemandinthatcountry.Indiaisstilltocatchup–thisistheopportunitythatiscurrentlyseeingmuchactivityandfocus.

Outbound tourismMoreChinesepeoplehavetravelledabroadincomparisontheforeignfoot-fallthattheircountryhasreceived.ThenumberofoutboundChinesetravellersrose20%over2009reaching57.39millionlastyear.TheChinesetouristsrankedfourth-worldwidelastyear.AccordingtotheUnitedNationsWorldTourismOrganization,Chinawillbetheworld'sfourth-largestsourceofoutboundtouristsby2020,with100millionoverseasvisits.OfficialpolicyinChinahasalsopromotedsuchoverseastravel,andpreferrednationstatusfordestinationshaveresultedinlargenumbersofvisitorstothatcountry(e.g.,Australiainthe1990-2005period)

The Indian government has also extended an invitation to Chinese companies to invest in infrastructure projects like dedicated freight corridors, subway lines and SEZs being planned under a public-private partnership model.


AsisthecasewiththeChinese,moreIndianstravelledabroadthanthosethatcametoIndia.However,atapproximately8millionin2010,thesenumbersarefarlessthantheChinese.UNWTOforecaststhattheoutboundmarketsforbothChinaandIndiawillseeexponentialgrowthinthedecadeahead.

Outboundtourismistrulythereasonfortheinterestoftheinternationaltourismmajors,inthatawarenessforbrandsneedtobecreatedatthesource,andwithtourismbeinganexperientialproduct,thereisnobetterwaythantobuildinthesourcemarkets.Thefactthatthegrowingeconomyinthesetwocountriesonlymakesitmoreattractivefortheinternationalmajorstosetshop!Theincreasingpresenceofthenationaltourismboardsofmosttourism-dependentcountriesinbothChinaandIndiaatteststothis.

Inter-country reviewBoth,ChinaandIndiadonotreallyseemtohaveencouragedtravelbetweenthemselves,whichisapparentfromtherelativelysmallnumbersofChinesetouriststoIndiaandvice-versa.Whilepoliticaldistancemayhavebeenonereason,otherreasonsincludetheChinesespeakingguidesinIndia,andIndianfoodoptionsinChina.

ChinesearrivalsintoIndiaarecurrentlyataround100,000(2010)upfromlessthan20,000atthebeginningofthedecade–thisshowstheincreasinginterestinthecountry.Attheselevels,Chinaisthe12thlargestmarketforinboundtourisminIndia

IndianarrivalsintoChina,ontheotherhandwereestimatedat~500,000(2009)upfrom120,000in2000.ThisexcludesvisitorstoHongKong,whichwereestimatedatanother375,000in2009.IndianarrivalsintoChinaareminisculeatthemoment.

Tourismtransactions(investmentsbyoneintheother)havebeennegligible,andthisperhapsmirrorsthedomesticfixationofthepartiesinvolved–withlargemarketsattheirdoorstep,therehasbeenlittlereasontoinvestineachother.

The opportunitiesBothIndianandChinesevisitorstotheothercountryareprimarilytravelingonbusiness(withupto50%

doingso).Around40%ofChinesevisitingIndiadosoforleisure,whilethecorrespondingnumberforIndiansvisitingChinaisestimatedmuchlower(~30%).Theimmediateopportunitythereforeistargetingleisuretravelerstovisiteachother

Theburgeoninggrowthintravelbetweenthecountriesoffersalargerpotentialforcivilaviationlinkages–currently,eventhebilateralarenotusedtotheircapacity.Entryandpermissiontoentryforeachother’sairlinesisasecondopportunity.

RecognitionofIndiaasapreferrednationbyChinawouldalsosubstantiallyincreasetransactionsbetweenthetwocountries

Increasedinvestmentbyeachcountryintheotherwouldalsoresultingreaterunderstandingoftheconsumermarketsinthecountries–inturn,resultinginbettermatchedproductsinthecountryoforigin–e.g.,vegetarianfoodinChinaandincreasedChinesespeakingpersonnelinIndia(bothoftenquotedasadeterrenttotravel).Suchreciprocalinvestmentwouldalsohelpincreatingasenseofcompetitivenesswhencompaniesstartinvestmentsinthirdcountries.

Technology/experiencesharing,especiallyintheareasofdevelopmentofremoteareasandnewdestinationsbetweenbothcountriesisagainanopportunitythatwouldhelpinfast-trackingeachother’s’investmentplans.

At 55.7 million visitors, China today is rated as the third most popular tourist destination in the world (after the United States and France), according to the World Tourism Organization.

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Case studies

Case Study 1: Mahindra and Mahindra in China Mahindra(China)TractorCo.wasestablishedin2005asajointventurewithJianglingMotorCoGroup.TheentryintotheChinesemarketwasinlinewithMahindraandMahindra’sstrategytobecometheworld’snumberonetractormanufacturer.TheoperationsinChinaserveasacenterfordevelopingmoremodelsandexpandingtheproductrangeforChinaandotheroverseasmarkets.

MahindraisoneofthefastestgrowingplayersintheChinesemarket.FivehundredMahindraemployeesareinstrumentalinmanufacturing18to55HPmodelsundertheFengShoubrandand60HPundertheMahindrabrand.

Thetractorindustry(domesticandexport)inChinahasgrownfromabout56,000tractorsincalendaryear2003to2,22,000tractorsin2008,aCAGRof32percent.InadditiontoMahindra(China)TractorCo.,Mahindrain2009setupanothertractorjointventurewithYuedaGroupofChina.TheJVceremoniouslyrolledoutits125HPtractorunderthebrandnameJinmaataceremonyattheJV’snew38,000tractorcapacityplantatYancheng,China.TheYuedaGrouphasaturnoverofUS$7.3billionandhasapresenceinvarioussectorsoftheChineseeconomyincludingautomobilesandtractors,coalandmining,infrastructureandrealestate,textilesandgarments,hotelsandsupermarkets.Overthelast29years,YuedahasestablishedpartnershipsandjointventureswithKiaMotorsfromKorea,FrenchsupermarketmajorCarrefour,TriumphfromGermany,andFuji,fromJapan.Thegroupemploysmorethan30,000people.

ThenewagriculturepolicyintroducedbytheChinesegovernmentin2004hasplayedamajorroleinthisgrowthwithanumberofpositivemeasuresincludingabolitionoftaxonagriculture.TheintroductionofsubsidyfortractorpurchasetosupportfarmershasgraduallyincreasedtoUS$1.5billionin2009.DespitestagnationintheChinesefarmingsectorduringtheglobaleconomicdownturn,Mahindra(China)TractorCorecordedagrowthof21percentfrom2009to2010withrobustdomesticsalesandexportstoEuropeandIndia.

Thenewcompany,MahindraYuedaYanchengTractorCompany(MYYTCL),hasbeenformedbetweenMahindra’sFarmEquipmentSector,andJiangsuYuedaYanchengTractorManufacturingCo.Ltd.TheregisteredcapitaloftheJVisUS$40million.Mahindraholds51percentshareintheJV.

ThelargemanufacturingbasecouldbeusedtonotonlyproduceforthedomesticChinesemarketbutalsoforlowcostmanufacturingbaseforexports.ThenewjointventurealsostrengthensthedistributionnetworkofboththeoperationswhichwouldgiveMahindraamuchlargerpresenceintheChinesetractormarket.

ThenewJVislocatedinYanchengcity,JiangsuProvince.TheJV’sproductportfoliocomprisestractorsrangingfrom16HPto125HP.MYYTCLwillhaveastrongdistributionnetworkcoveringover25provincesinChina.Itwillalsobuildontheexistingexportsoperationswithafootprintinmorethan60countriesincludingtheUSA,SouthAmerica,Russia,EuropeandAfrica.

Figure 5: Tractor production for Mahindra in China

0

5000

10000

15000

20000

25000

30000

Mahindra Yueda Tractor

Mahindra China Tractor

FY09 FY10


Case Study 2: An Importer / Trader sharing his experience of business with ChinaVishalGoyal,Director,BVGIndustriesLtd.,shareshisexperiencesofworkingwithChina.BVGIndustriesLtd.isengagedinimportandsaleoflaminateflooring,realwoodflooringandcarpettilesfromChinaamongstothersforconstructionandrealestatesector.

VishalhasbeentradingwithChinaforalmosttenyearsnow.HehadtoswitchhisbuyingfromEurope(GermanyandSwitzerland)whenhiscompetitorsstartedtooffermuchcheaperoptionsfromChina.

Hestartsbysaying"ItisamisconceptionthatChinaisonlyknownforcheapandlowqualitymaterials.ThequalityofthegoodsfromChinaisdependentonone’swillingnesstopay.MostbusinessmengotoChinahuntingforcheaperoptionsofexistingproductsfromdevelopedcountriesandfindthemandthatiswhattheyareimportinginIndia.But,thereareenoughandmanyhighquality,expensivevarietiesofthesamegoodsavailableshouldyouwanttobuythemfromChina.Manyatime,theseoptionsareavailablefromthesamemanufacturerasinthedevelopedmarkets,whichhavemovedtoChinaforthecostarbitragereasons".

HewasamazedbytheChinesemanufacturer’sabilitytocreatecapacitiesforthefuture.Hegaveanexampleofaunitwheretheownerbought4acresoflandwhenheneededonly1acre.Themanufacturersaidthattherestisforfutureexpansion;anexpansionwhichisnotevenonthedrawingboardyet.

HisadvicetoIndianbusinesseslookingatChinawouldbetodothecompleteduediligenceonthesuppliers.

Heispersonallyinvolvedinfactoryvisitsandauditsbeforeconsideringatransaction.HesaidthateventhoughhehasbeenworkingwithChinaforthelasttenyearsheisnotawareofthelegalregulationsincaseofdisputesthathecoulduseincasehisChinesepartnerdoesnotadheretothecontractualagreement.HeagreesthatitissafertodobusinesswithEuropeandNorthAmericaastheregulationsandremediesarelistedinEnglishonwebsites.Hepersonallychecksthemanufacturingfacilitiesofhissuppliersbeforeplacinganorderwiththem.

Hesaid,hisoverallexperiencehasbeengoodwithChinabuthedidrecalltwoinstances–onewherethemanufacturerreplacedapartoftheconsignmentwhichwasbelowspecificationfreeofcost,andtheotherwheretheChinesemanufacturersimplyrefusedtodoso.

Interestingly,hesaysthathedoesnotknowawordineitherMandarinorCantonese.LanguageisabarriertodobusinesswithChina.HesaysthatChinesecompanieshavestartedtorecruitEnglishspeakingemployeestohelpinthetransactions.Theyarehowever,comfortablewithwrittenEnglishcommunicationonemails.

OnbeingaskedabouthisperspectiveonthefuturebusinessopportunitieswithChina,hesaidthatChinesemanufacturersareundercostpressureduetoincreaseinlabourcosts.TheYuanisalsounderpressurewhichisalsonotagoodsignforChinesebusinesses.HefeelsthattheIndia-Chinabusinessrelationsinthenextdecadewouldpredominantlybetrade–orientedbutheaddedthatIndiancompaniesmightlookatinvestmentsinChinatoshifttheproductionbasefromIndia.

24

Way forward

Whilethisdocumentattemptstocoversomeofthekeysectorsofmutualinterest,IndiaandChinahavealotmoretotapinto.Thechallengeliesinbeingabletoidentifyhowthetwocouldgetpastthepoliticalandculturaldifferencestobenefitfromeachother’sexperienceandexpertise.

ChinaispresentingitselfasagoodlocationforbusinessforIndianITcompanies.SeveralIndianITcompanieshaveinvestedinChinatocatertotheirclientsinAsia-PacificregionespeciallyinJapanandmultinationalcompanieslocatedinChina.TheIndianITcompaniesshouldbetargetingthegrowingChinesedomesticmarketofITandITenabledservices.TheIndianITcompanieshavetorampuptheiremployeestrengthinChinaandcapabilitiesoftheChinesecenterstocaterthesophisticateddemandsofChinesecompaniesmoreefficientlythanthelocalChineseplayers.TheIndiangovernmentcouldlookatseekingmoremarketaccessinthisarea.

Indianmanufacturingcompaniesespeciallyintheautomotivesector,bothinOEMandcomponentspace,areinvestinginChinatotakeadvantageofthelargedomesticChinesemarket.AlsotouseChinaasalow-costmanufacturingbaseforcertainmodels/componentsforIndianmarketandexportstoothercountries.Indiancompaniesshouldlookatagloballyintegratedsupplychainmodelfortheirmanufacturingandoperations.TheymustintegratetheirChinese,Indianandotheroperationstoachieveeconomiesofscaleandlookatleveragingexpertisefromeachproductioncenter.Thiswouldgivethemacompetitiveadvantagewhichwouldbedifficulttoreplicateintheshortterm.

CurrentlytradebalancebetweenIndiaandChinaissubstantiallyinfavorofChina.EventhoughtheIndiangovernmentisurgingtheChinesegovernmenttograntaccesstocertaincategoriesofproductslikepharmaceuticalandagroproductsandencourageimportsfromIndia,wecouldbelookingatat-leastfewmoreyearsoftradedeficitforIndiabythetimethetradeinthesesectorsbegintoimpacttheoverallnumbers.Havingsaidthat,Indiancompaniesshouldbelookingatexportingservices,whereIndiahasanexpertiseandedgeoverChina.Theseservicescouldbeintheareaoffinanceandaccounting,ITandinfrastructuremanagement.

WiththegrowthanddevelopmentoftiertwocitiesinbothIndiaandChina,andtheneedforrapidurbanization,companiesinthetwocountriescouldlookatprojectsininfrastructure,transportationandpowerdistribution.

Theseopportunitiesexist,however,peopletopeopleinteractionsneedtobefurtherdevelopedandthisispossibleonlyifthetwocountriesencouragepeople-to-peopleexchangesthroughincreasedculturalexchanges,studentexchangeprogrames,andtourism,amongstothers.

Thetaskwhichliesaheadistocontinuouslyengagewitheachother,buildstrongerrelationships,bothculturallyandeconomicallyforalongtermbenefittobothcountries.


Acknowledgements

Atul Dhawan, Partner,DeloitteHaskins&Sells

Chandrajit Banerjee DirectorGeneral,CII

E B Rajesh ChiefRepresentative,CII,ShanghaiRepresentativeOffice

Harshit Sehgal Director–EastAsia,CII

P R SrinivasIndustryLead,THL(Tourism,Hospitality&Leisure),DeloitteToucheTohmatsuIndiaPrivateLimited

Rebecca LamDirector,ClientsandMarkets,DeloitteHongKong

Supriya Banerji DeputyDirectorGeneral,CII

Timothy B. KlattePartner,ChineseServicesGroup,DeloitteToucheTohmatsuCPALtd

U D Bhatkoti Advisor–EastAsia,CII

Vijay DhingraSeniorDirector,DeloitteToucheTohmatsuIndiaPrivateLimited

Vijaya Bajpai DeputyDirector–EastAsia,CII

Vishal GoyalDirector,BVGIndustriesLimited

Clients and Markets teams in India and China, special support from Rohan Maitra, Surbhi Sharma, Anu Sindhwani and Navdeep Verma.

Authors:Niharika [email protected]

Mayank [email protected]

Designed byChitersen Shisodia

Sources• DGFT-DirectorateGeneralofForeignTrade• GeneralAdministrationofCustomsoftheChinaPR• CentralBoardofExciseandCustoms,India• IndianEmbassy,Beijing• SocietyofIndianAutomobileManufacturers(SIAM)• OrganisationInternationaledesConstructeurs

d’Automobiles(OICA)• ChinaNBSfigures:figuresof1952-2008:Originated

fromChinaStatisticalYearbook2010,2009-2010figuresfromChinaNSBStatisticalData.NSB2009-revised-ChinaGDPfigure;NSB2010-ChinaGDPfigure

• MinistryofEducation,China(http://www.moe.edu.cn/publicfiles/business/htmlfiles/moe/s4971/201012/113575.html)

• Deloittepublications – InternationaltaxandbusinessguideforChina – InternationaltaxandbusinessguideforIndia – Anewera,Acceleratingtowards2020–Anauto-

motiveindustrytransformed – ChinaRealEstateInvestmenthandbook• VariousMediaReports(includingbutnotlimitedto) – http://inchincloser.com/2011/05/23/infosys-

marks-largest-investment-outside-india-in-shanghai/

– http://www.washingtonpost.com/wp-dyn/content/article/2006/05/19/AR2006051901760.html

• Company/Corporatewebsitesof – Mahindra&Mahindra;TataConsultancyServices;

InfosysTechnologies;Genpact;Sany;Liugong

26

About CII

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Documents

Doing Business with China Emerging opportunities …en.ccei.org.in/files/Delloite Doing_Business_with_China .pdfinvestments. The series of seminars on ‘Doing Business with China: