Kansenrapport Top Sector High Tech Equipment Manufacturing and Machinery Industries

top sector high tech: EQUIPMENT MANUFACTURING AND MACHINERY INDUSTRIES
Opportunities for Dutch companies
China Top Sector High Tech: EQUIPMENT MANUFACTURING AND MACHINERY INDUSTRIES Opportunities for Dutch companies
China Top Sector High Tech: EQUIPMENT MANUFACTURING AND MACHINERY INDUSTRIES Opportunities for Dutch companies
2012 Focal point: Netherlands Business Support Office Dalian nbsodalian@nbsodalian.com Other participating offices: Embassy of the Netherlands in Beijing Consulate-General Shanghai Consulate-General Guangzhou Netherlands Business Support Office Jinan Netherlands Business Support Office Qingdao Netherlands Business Support Office Wuhan www.zakendoeninchina.org
The business opportunity reports are a joined production of the Netherlands economic government network in China consisting of the Embassy of the Kingdom of the Netherlands in Beijing, the Consulates-General in Shanghai, Guangzhou and Hong Kong, and the Netherlands Business Support Offices (NBSOs) in Chengdu, Dalian, Jinan, Nanjing, Qingdao and Wuhan. Unauthorized use, disclosure or copying without permission of the publisher is strictly prohibited. The information contained herein, including any expression of opinion, analysis, charting or tables, and statistics has been obtained from or is based upon sources believed to be reliable but is not guaranteed as to accuracy or completeness.
Contents
1.
Opportunities for equipment manufacturing in China 1.1 1.2 The Chinese equipment manufacturing industry
5 6
Chinese government stimulation and 12th Five Year Plan 10
2.
Chinas importance for the Dutch manufacturing and technological industry 2.1 2.2 Case study: VMI Group Case study: D&D Safe Sourcing BV 13 16 19
3.
Practical tips and guidelines when setting up a production facility in China 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 Choosing your business structure Choosing a location for your production facility Product liability Employment Human Resources Issues when setting up a factory in China Intellectual Property Rights Concluding points 22 22 24 27 28 30 31 33 35 37
References
1.
Opportunities for equipment manufacturing in China

Equipment manufacturing is the key supporting industry of economic development in many countries, and became an integral part of the production chain in most of the key industrial industries around the world. Equipment manufacturing has developed into a complex technological industry that requires a highly skilled work force and extensive research and development capacity. Next to this, the global equipment manufacturing industry is restructuring and relocating from developed countries to emerging markets such as China. The rise of the Chinese manufacturing industry during the last few decades has been exceptional. Today China is the most common primary manufacturing source of any country (35 percent of total global output). And secondly, by a clear margin, countries also plan to invest more in China over the next two years than in any other country (39 percent).
The global equipment manufacturing industry is restructuring and relocating

The need to switch from labor-intensive production to knowledge-intensive production is clearly felt in the machinery and equipment manufacturing industry in China. Already, many Chinese (mostly state-owned) companies in this sector are traveling around the world to seek cooperation or acquire companies with technologies they need for further development. An equipment manufacturing sector based on knowledge, innovation and high quality products forms the foundation on which China can further develop some of its key sectors such as aerospace, automotive and green technologies. Opportunities for Dutch companies therefore lie in the areas of technology transfer, process engineering, sustainable production methods and export of high value-added components. Many Dutch companies in this sector are already looking into opportunities to establish (more) presence in the Chinese market; frequently through a combination of an assembly plant (with non-essential components sourced in China) and a sales office.
Today, China is the primary manufacturing source of any country

The main objective of this report is to help Dutch SMEs to gain a better understanding of their opportunities in mainland China. In the first chapter we provide an overview of the key sectors in the different regions in China and introduce some of the Chinese government policies towards the industry. In the second chapter, we look at current Dutch manufacturing
activities in relation to China in order to learn more about its importance and be inspired by the two case-studies. The third and final chapter provides you with some key points any company needs to consider when it decides to either start or further develop the business and/or production in China. In a single report it is impossible to provide all the necessary details and industry information needed to develop a clear strategy for your companys future, so please refer to the fourth section of this report for the contact details of the organizations that contributed whilst writing this report, and see what services they can offer to support you in your development in the Chinese market (many of the services are free of charge).
1.1
The Chinese equipment manufacturing industry

China has become the largest manufacturing country in the world. The added value of Chinas manufacturing industry now accounts for almost one-third of the countrys total GDP, which currently stands at EUR 4,1 trillion (USD 5,88 trillion). Of the total manufacturing output machinery and transport equipment accounts for about a quarter of the total manufacturing output in China, and if metal and the equipment related to this industry is taken into account the percentage would be a lot higher. Being the largest industrial sector in China, the equipment manufacturing industry in China itself is classified into 12 major categories: transportation equipment manufacturing industry electrical equipment manufacturing heavy-duty and mining equipment manufacturing petrochemical and general equipment manufacturing agricultural equipment manufacturing construction equipment manufacturing internal combustion engine manufacturing machine tool and tools industry instruments and meters general equipment manufacturing basic components environmental protection equipment manufacturing food processing packaging equipment manufacturing.
The scope of the industry is extremely broad and the many different regions in China all facilitate a large variety of different sub-sectors of the equipment manufacturing industry. Therefore the industry is not easily segmented into the different regions of China. However the different prov-
inces have some focal points and local specific industries in which they outperform other provinces; these will be outlined in this chapter, and provide an initial insight into the Chinese market.
Chinese private companies are quickly upgrading their product quality

In China, most of the industrys main forces lie in the Eastern coastal areas. Jiangsu, Guangdong, Shanghai, Shandong and Liaoning are in the top five of all provinces in China, both in terms of the number of the corporations and the industrial added value and profits. However, in the 12th 5-year plan (2011-2015) the Chinese government outlined the clear ambition, in line with the Go-west policy introduced a few years earlier, to move low-tech manufacturing from the Eastern provinces to the Western provinces such as Sichuan, Guizhou, Yunnan and the municipality Chongqing, and upgrade the manufacturing industry in the Eastern provinces to more high-tech manufacturing. A further general division in East coast operations can be made between the North and the South, in which the North (Liaoning, Jilin, Heilongjiang) specializes in more heavy equipment manufacturing for industries such as steel, automotive, shipbuilding, aircraft manufacturing and (petro)chemical, whilst the South (Guangzhou) performs well in light manufacturing industry with many electrical appliances such as television sets, electrical fans and refrigerators, and other consumer products like garments, toys, shoes and electronics.
Quality of personnel, suppliers and infrastructure is increasing.

The recent developments in the Chinese equipment manufacturing market are very dynamic. Many large state-owned manufacturing companies are under extensive reform, and are seeking ways to become less dependent on foreign manufacturing techniques and knowledge. Chinese private companies are quickly upgrading their product quality and their production efficiency, and are actively looking to exploit both domestic and international markets. Similarly, there is the above mentioned trend of international producers relocating to China, where high-tech production becomes more and more important. The low costs advantage in China is disappearing in the Eastern coastal provinces, however quality of personnel, suppliers and infrastructure is increasing. Also, the Chinese domestic demand for high-tech products and production techniques is growing quickly, which makes these regions now interesting locations for the Western high-tech manufacturing companies. And for most foreign companies in China, the desire to sell in China means a local presence is required.
Below we provide some basic information on the manufacturing industry in nine different regions in China: Region
Liaoning NBSO Dalian
Description
The focus areas in the province are: machine tools, high-tech and automation equipment, petrochemical and electrical power equipment, energy and environmental protection equipment and metal processing. Wuhan is home to some major engineering centers in the following fields of equipment manufacturing: digitalization, laser processing, optical telecommunication technology, numeric control, industrial flue gas dust catcher and satellite position systems. A number of new and advanced equipments has been developed such as wide body subway cars, turbine generators using low temperature and recycled steam, and electronic control common rail fuel injection systems. A few industrial clusters have been formed which concentrate on construction machinery, pressure vessels, and electric transmission equipment. Chongqing has an advanced equipment manufacturing industry due to its strategic inland location. Equipment includes conventional weapons (biggest industry base in China), transformers, machine tools, environmental equipment, heavy transportation equipment and instrumentation. Opportunities exist in the outsourcing of equipment manufacturing, engineering consultancy and sales of complicated production machinery. The strongest segments of the machinery industry in Shandong province are the agricultural machinery industry (agricultural transportation vehicles, tractors), the engineering machinery industry (large metal forging equipment, papermaking equipment), the machine tool industry, the car industry (including heavy duty trucks, light trucks, tires), the electric and apparatus industry and the ship and marine engineering equipment industry.
Hubei NBSO Wuhan
Jiangsu NBSO Nanjing
Chongqing NBSO Wuhan
Shandong NBSO Qingdao
Region
Shanghai ConsulateGeneral
Description
Priorities are given to high end equipment in areas such as civil aviation, automotive, ship building, offshore engineering, nuclear and offshore wind power etc. Participating are some leading companies like the Shanghai Automotive Industry Corporation, Shanghai Electric, and Commercial Aircraft Corporation of China. Business opportunities can be found in key technologies, core components, high precision components and the electronic automation systems from foreign suppliers. The Provincial Government issued the Planning of Guangdong Equipment Manufacturing Development 2009 2013, in order to strive for an industrial added value for equipment manufacturing at EUR 166,4 billion (RMB 1,45 trillion) by the end of 2013, especially in the advanced fields of communication and electronics, nuclear power, wind power, shipping, marine engineering etc. In addition, the improvement of industrial chains has become a provincial development direction for equipment manufacturing as well. The following industries in Tianjin are especially important for equipment manufacturing companies: aviation and aerospace, transportation, shipbuilding and maintenance, oil and petrochemical, wind power, nuclear power, water power, super high pressure electric transmission and transformation, engineering, port machineries and agricultural machineries. The fastest growing sub-sectors are the general equipment manufacturing industry that increased by 28%; transportation equipment manufacturing industry that increased by 36% and the electrical equipment manufacturing industry that increased by 18%. Furthermore, Hebei has competitive advantages in the fields of large power transmission equipment, wind power equipment, Train Multiple Units, pickup trucks, roll metallurgy, mechanical engineering and plumbing equipment.
Guangzhou ConsulateGeneral
Tianjin Embassy of the Kingdom of the Netherlands
Hebei Embassy of the Kingdom of the Netherlands
* RMB 1 / EUR 0,11 exchange rate 21-09-2011
1.2
Chinese government stimulation and the 12th 5 year plan

Foreign advanced equipment manufacturing entering China is encouraged by the Chinese central government as China is looking to upgrade its equipment manufacturing sector. Ultimately, an advanced equipment manufacturing sector is an important key element for the further development of other focus industries for China such as petrochemical, new energy, aerospace, automotive etc. In the 12th Five Year Plan the Chinese government outlines this ambition clearly and identified the key growth industries for the period of 2011 to 2015. High-end equipment manufacturing was mentioned in the Plan as one the important seven strategic industries, which are: energy-efficiency and environmental protection new-generation information technology bio-technology high-end equipment manufacturing renewable energy new materials new-energy cars.
As outlined above, investments in high-tech, advanced manufacturing, energy saving, environmental protection and new energy are all encouraged in the 12th Five-Year Plan, with energy conservation, advanced technology and environmentally friendly products highlighted as the key areas of growth. Such encouragement underscores the commitment to upgrade manufacturing from the earlier model of low cost labor and simple assembly.
Each province, city, district and county has its own preferential policies
It is important to note that the Five Year Plan serves as a general guideline; each province, city, district and county has its own preferential policies, incentives depending on what their priorities are. Besides, the plans on multiple levels are focusing more on the State Owned Enterprises (SOEs) and large companies, rather than Chinese SMEs, resulting in an uneven development within the industry and between regions. However, the overall main investment and development plans for the equipment manufacturing sector concern improving innovation and core competences in this sector. One of the methods used by local governments is to promote the development of key equipment manufacturing development zones in which they aim to cluster relevant companies, research facilities, laboratories, etc. In many cases local governments have funds available to support certain projects
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within the dedicated zones, such as helping existing companies establish research facilities, laboratories etc. In addition, the government can offer low land prices to relevant companies in return for establishing presence in the dedicated zones. Similarly, banks are instructed to provide preferential loan rates to these companies. Since the beginning of the 1980s, the number of Special Economic, HighTech, and Development & Free Trade zones throughout China has grown rapidly. Nearly all 1st and 2nd Tier-Cities (the largest and most developed ones) in China belonging to these zones have already or will soon be established. Information for your company regarding the relevant regions/ zones is readily available online; normally, there will be particular focus on certain industries in such zones. Economic policies of these zones include: special tax incentives of foreign investments and great interdependence on international trade activities. Some of the local governments have offered to give support to equipment manufacturing industries in the following forms: Financial subsidies for key industries. Launch of innovation promotion programs. Priority in approval of companys listing in the stock market, issuing shares, short term financing, and medium term bonds; and support banks to release loans to the companies in this industry. Encouraging mergers and acquisitions in this industry to form larger companies. Encouraging international cooperation and exchanges. Supporting brand building of enterprises. Exemption from import tariff and import linked VAT (value added tax) for importing self-use equipment, or renewal of equipment and its supporting technology components, spare parts etc. Foreign-funded enterprises are encouraged to purchase domestic equipment and will enjoy tax reimbursement when they purchase accordingly. In addition, foreign investors currently operating in the coastal regions who wish to relocate their operations to western and interior regions may enjoy streamlined administrative, tax, foreign exchange and social security related filings and approvals.
It is important to stress that these programs, tax agreements and benefits can differ greatly throughout the different regions (also between provinces and/or cities) and the different Economic Zones in China. It is therefore advisable when considering setting up a production location in China to
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conduct thorough research on the different possibilities and benefits in the preferred areas. It is also highlighted that favorable policy and a healthy business climate on paper does not guarantee business success or fulfillment of any agreements entered. Some regions will present more difficulties in terms of business culture, logistics, employment of schooled labor, along with other factors that may affect business operations. Ultimately, success may be achieved more effectively by building long term mutually beneficial relationships with local government and companies as opposed to shallow policies and promises.
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2.
Chinas importance for the Dutch manufacturing and technological industry

The first chapter gave a glimpse at the equipment manufacturing industry in Mainland China. In this chapter we will address the relevance of it in relation to the Netherlands. Firstly, we will provide some statistics, followed by two case-studies of inspiring examples of Dutch manufacturing companies that are active in the Chinese marketplace. The Chinese market is increasingly important for the Dutch economy; currently, China is already the largest importer of Dutch goods and services of the emerging BRICcountries, and amongst the emerging economies China is by far the largest exporter to the Netherlands. The majority of the Dutch exports to China consist of goods (80%), while only 20% comes from the export of services. Manufacturing goods, mainly coming from the technological industry, accounts for more than half of our total goods exports (see also the figure 1 below). The export of machines by itself is already responsible for more than a quarter of Dutch export goods. 2009 (USD mln) Total Machines Plastic + other synthetic fiber products Electronics Optical and medical equipment Iron and steel Rest 5.122 1.425 440 414 381 148 2.314
55%
Figure 1: Dutch Export goods to China A study of FME-CWM, the Netherlands largest association for the technological industry, showed that, amongst its members, the Dutch technology companies believe that China will be the most important emerging economy with regards to their growth abroad (with Chinas importance for the Dutch exporters increasing fast), see also figure 2. Similarly, the study shows that China is already the most important country for the Netherlands with respect to outsourcing. Almost a quarter of the respondents also has their own office or production facility in China. Lastly, again by a large margin, China is the country preferred by Dutch technology companies for future outsourcing or as FDI-location (see figure 3).
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Land
Germany UK Belgium France US China Russia Brazil Italy Poland
Percentage
80% 42% 41% 38% 31% 28% 28% 24% 23% 20%
Figure 2: Growth countries for the Dutch technology Industry 2011
Dutch Outsourcing Activities 2011 Country China Germany Czech Rep Poland Hungary India 25% 22% 16% 15% 10% 10%
Own office or Production location 2011 Country Germany US UK China France Belgium % 41% 32% 24% 23% 19% 14%
Future planned Outsourcing + FDI
Country China India Brazil Turkey Vietnam Poland
% 37% 25% 14% 11% 10% 7%
Figure 3: China as outsourcing and FDI location for Dutch technology industry Although the importance of China for the Dutch technology and manufacturing industry is rising, China is still not a particularly accessible country for foreigners to set up a business. But China still scores far better than the other emerging BRIC-countries with regards to their ease of doing business. See also figure 4 below (the Netherlands holds the 30th position
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worldwide). Next to this, in the World Banks Doing Business-report it is outlined that China has improved its ease in doing business more than the other BRIC-countries over the last five years.
150 123 120 127 134
90
79
60 35 30 1 0 Singapore 5 US 10 18
Australia
Japan
Mexico
China
Russian Federation
Brazil
India
Figure 4: Ease of doing business - global rank European Unions Trade and Investment Barriers 2011-report still identifies a number of important difficulties for European companies when doing business in China, the following issues are mentioned: restrictions in obtaining raw materials discrimination towards foreign companies at public tenders no adequate IPR protection no conformity to international standards (also, working with Chinese standards and managing long and difficult processes of certification) Chinese law systems do not offer stable enforcement on a par with Western standards.
Other concerns reported by Dutch companies operating in China are: Subsidies on various goods are only offered to Chinese companies or manufacturing joint ventures with a Chinese partner (which might also present an opportunity if one gets listed). Business environments are difficult due to language, business and cultural differences.
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Opaque system of pricing (cost breakdown) with many hidden costs which will reveal themselves only later on in the process. Competition and contradiction measures between various government authorities. Local protectionism.
China is still not a particularly accessible country for foreigners to set up a business.
Considering the several difficulties mentioned above that you may experience when entering the Chinese market (although there are many more hurdles to overcome), why or when should you as a manufacturer go to China? Traditionally, manufacturing in China was viewed as a way to cut costs and increase profits. However increasingly, companies now see China as a strategic position that fits their global strategy. The advantages of low cost labor is already disappearing in certain areas in China, so when considering investing in China it is essential to have some long term strategic reasons next to those cost advantages, for example: (1) access to Chinas rapidly growing domestic market, (2) to bring production closer to the Asian market, (3) to increase proximity to other manufacturers (increasingly based in China) for makers of intermediate goods, and (4) to gain access to increasingly competitive and sophisticated Chinese research, science and technology both in personnel and technologies. When entering the Chinese market, long term strategic reasons must be the key decision points. The two case-studies below will provide a more practical description about setting up production in China. In the third chapter more insights and tips on setting up production in China will be shared.
2.1
Case study: VMI Group

Based on an interview with COO Guido Roncken. In this case-study, we discuss the business development of the Dutch VMI Group in China, and share their lessons learned. VMI is the worlds leading supplier of machinery and services for tire manufacturers in radial passenger, light truck, all steel radial truck, bus tires and off-the-road (OTR) tires specializing in the technical rubber industry, tire industry, and tire retreading industry sectors. VMI Group has been trading in China since the late 1980s and at that time saw a growing number of Western companies move production to the East to enjoy cheap labor costs (VMI requires a relatively large amount of labor).
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In 1994 a Chinese government agency organized a matchmaking program to attract foreign investments. Through this program, VMI found a Chinese partner with whom they started a small joint venture (10-12 people) in 1996. The partner of VMI was based in Yantai (Shandong). It was concluded that this city would be a good location for VMI in China, because the city is not too big (ensuring relatively low costs for land and labor), it is a harbor city and lastly, part of the province Shandong, which has a powerful tire industry. Starting small allows a company time to become familiar with the surrounding law systems and build up government relations. In the beginning stages when things go wrong, the impact stays limited. Although VMI started small and cautious, it was using those first years to prepare itself for large growth in the region.
A Chinese management team can deal more effectively with the (day-to-day) problems.
Originally VMI Group started in China with a Western general manager, but quickly found out that this did not work well for them, and changed to a Chinese general manger, a former employer of the Chinese government agency that invited VMI to come to China a few years before. With the Chinese GM appointed in 1997, operations started to run more smoothly, and difficulties with Chinese government, clients and partners where dealt with effectively. A Chinese management team can deal more effectively with the (day-to-day) problems VMI experiences in China. They have the right knowledge and personal networks to solve more problems than a Western counterpart can. The whole management team now is Chinese, but all speak fluent English, which is the companys global communication language. The only exception VMI makes in this respect is the Head of Production, whom is always a Western expert.
The speed of growth depends on the developments in the market.

After a few years being active under the radar with a small office focusing solely on sales support, in 2002 VMI opened its first factory in Yantai (Shandong province). The joint venture was closed and this factory was established in 100% ownership of VMI Group in the Netherlands. After the opening of the first factory VMI Group experienced a very strong growth in China, and in the summer of 2011 the fourth factory opened in Yantai. With over 26,000m2 and more than 300 employees, about one-third of VMIs global turnover comes from China and 50% of total production is based in China. The speed of growth depends on the developments in the market, but by growing the company you can organize things more effectively and cut costs; this results in even more new clients.
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Thanks to the Chinese factories in Yantai the number of Chinese and Asian clients is also growing rapidly. In some cases VMI finds that some Chinese clients (mostly government related) even require that a part of the production facilities are based in China. For VMI the quality of their products from both China and Europe is the same, and after proving this fact to their clients, VMIs European clients are now also buying the VMI machines made in their Chinese factories.
Some high-end machines are still only produced in Europe

However some high-end machines are still only produced in Europe, mostly because of VMIs internal safety measures on Intellectual Property. Next to saving costs the factory facilities in China also opened new markets for VMI. In the low-end tire machinery VMI Europe couldnt be competitive on the global market. With the lower costs in China, VMI can now be competitive and with some of these products they acquired a global market share of up to 80%, these China specific products generate a large part of the companys annual turnover. The prospects for the coming years look good, and VMI is expecting a continuation of the growth, but at the same time it sees that many Chinese local competitors are improving the quality of their products very fast.
VMI stresses the importance of investing in your employees

With more than 15 years China experience VMI would like to share some lessons learned to Dutch SMEs starting or expanding in China. We already mentioned VMIs preference to start small, and work with a local management team. Next to this VMI stresses the importance of investing in your employees; VMI invests heavily in the education of their employees, both on technical expertise and language expertise (everybody has English classes), this is to ensure that people stay loyal to the company and thus reducing staff turnover. Similarly, a large amount of time and money is invested in sourcing and retaining suppliers. VMIs machines need a lot of different parts, coming from different suppliers, and everything needs to be of the highest quality. Without these suppliers your business is lost, and just like employees, suppliers can leave any minute.
There are different roads to reach the same end result

Next to the willingness to pay premium prices for good quality and service, VMI keeps strong relations with all it suppliers and makes sure not only now, but also in the future VMI can stay an important client for them. Because you cannot influence your suppliers as directly as your employ-
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ees, the latter is probably an even more difficult task for the company. The last, but definitely the most important notion, is that when you want to do business in another culture, you have to make an effort to understand this culture and society and most of all respect the differences. In the first years VMI was lacking on this point, and after changing the internal attitude towards this, and accepted things in China went differently, it made it all a lot easier. There are different roads to reach the same end result.
2.2
Case study: D&D Safe Sourcing BV

Based on an interview with CEO Jan van der Donk In this case-study, we discuss the business development of the Dutch D&D Safe Sourcing BV. D&D is a company with offices in the Netherlands and in China (Shanghai) and offers sourcing of (assembled) metal products for third parties. D&D has been active in China since 5 years, opening its own factory for assembly and production in Shanghai in the summer of 2011.
D&D needed its own assembly and production facility in order to guarantee the safety of Intellectual Property for its clients
Director Jan van der Donk started to work in the outsourcing business in China in 1999 when he was employed by an American company. This company set up an office in Shanghai and after six years of experience in China, Van der Donk saw enough opportunities to start his own company focusing on outsourcing. Familiar with the potential difficulties companies may experience whilst setting up production and assembly in China and the problems foreign companies experience when dealing directly with Chinese agents, it was clear that there was a business case for an intermediary role for D&D in helping western SME-companies produce in China. Being familiar with Shanghai and knowing another friendly Dutch company there that agreed to let D&D use its legal entity (a Wholly Foreign Owned Enterprise - WFOE) to start their business, the choice for a location in China was made.
The choice to stay in Shanghai was made to be able to retain their employees
D&D in China is led by a Dutch person who is fluent in Chinese and also very familiar with the Chinese culture. This combination works well for the company. Before that they had a Chinese general manager for a period of time, who was ineffective and prior to that a western engineer without experience in China had also proven to be unable to do the job. Therefore
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upon finding a Dutchman with fluent Chinese language skills, D&D knew this would work for them. Initially the manager was unfamiliar with the engineering world, however he proved to be a quick learner. So a Western general manager for communication and strategy, supported by a group of local Chinese engineers for the technical know-how is the formula in which the company can grow. After four years of steady growth, a turning point for D&D arrived in 2010 when they won a big production order from the Dutch Nedap to produce their pig feeding stations, which are now being sold all over China. The Nedap-machines consist of over 400 parts, some highly innovative parts that are produced in the Netherlands, however the majority comes from within China. Because of D&Ds position in China, the company has the possibility to outsource production of these parts to four different players and assemble it at a fifth, separate location, something that would be impossible without the right connections and local presence. Even though Nedap has a presence itself in China, it prefers to outsource the production to a trusted party in China. This order made D&D aware of the enormous sales-potential the Chinese market offers, and the company now sees many opportunities for similar middle-sized European companies to sell their innovative products in the Chinese market.
Use time to slowly build up your connections

After winning the Nedap order, it was clear that D&D needed its own assembly and production facility in order to guarantee the safety of Intellectual Property for its clients. Even though the majority of the work is still outsourced to Chinese parties, the critical parts of the production process will be handled by D&D itself. The earlier legal construction with the friendly Dutch company will not be sufficient for this new phase, so D&D has set up its own production-WFOE. The application process required a lot of time and effort, mostly because D&D did the whole thing themselves without help from intermediary offices. Over the years a good relationship has been established with the local Chinese government, which also helped them to find a good location in Shanghai for the new factory. The choice to stay in Shanghai was made to be able to retain their employees. If D&D were to move to another cheaper city, it would probably lose most of its local staff, the good understanding between management and the technical staff acquired over the years, and their technical know-how; all of which are too important for the company to lose.
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With over 10 years of China experience in the Chinese market Jan van der Donk would like to share some experiences relating to production and sourcing in China. Building on the notion of the value of a western general manager, whom is familiar with the Chinese language and culture, we can propose that when doing business in China, you need to use time to slowly build up your connections and with this you can build up your business; there are no quick wins in China. And lastly concerning the business of sourcing there are two golden rules in China: 1) check, check, check!, and 2) always have a second source. If you are depend on one party for production, there is a possibility that you may encounter difficult problems if anything untoward happens with the supplier.
There are no quick wins in China

In the Western business cultures, these issues are no longer regarded as potential problems; now, there the focus is on single sourcing, just in time, lean manufacturing, etc. etc. These are solid, efficient concepts, but the operational culture in China is such that it doesnt work like that yet.
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3.
Practical tips and guidelines when setting up a production facility in China

Previously, most European companies were looking at cheap manufacturing in China and export products back to the developed countries; however the new trend is manufacturing in China in order to sell to the Chinese market. The huge potential and increasing spending power of the growing Chinese middle class and the rise of Chinas domestic demand, has led many European companies to shift their business operational focus from Europe to China. The buying power of the Chinese middle class is expected to rise largely in the coming decades, and eventually China will become the biggest buying power in the world. In order to sell in China, companies need to be able to compete with international competitors who already manufacture in China, as well with local Chinese manufacturers who are rapidly closing the quality gap.
China will become the biggest buying power in the world

Companies that are selling their products in China need to be able to offer after sales service such as installation, technical support, maintenance etc. Similarly, Chinese clients expects a quick delivery time, the ability to buy in RMB, technical support and a competitive price. Manufacturing in China is an answer that satisfies all of these needs. Furthermore, many manufacturers already see that a growing number of their suppliers are based in China and want to bring the production closer to them. When a company is already sourcing from China and is looking to expand sales in China and other parts of Asia, it makes sense to bring the manufacturing facilities closer to the target market. In this chapter we will elaborate on the process of setting up a production site in China, emphasizing on the choice of location and we will give a general overview of important recent developments in the field of product quality requirements and product liability. In addition, we will shortly discuss some HR and employment issues, as well as other sensitive parts of the process.
3.1
Choosing your business structure

a. WFOE Wholly Foreign Owned Enterprises (WFOEs) are the most common vehicles used by foreign companies when setting up a manufacturing company in China. It is much easier to protect intellectual property rights using a WFOE
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rather than a riskier joint venture. The advantages of owning your own factory are: complete control, including production cycles, quality and IP. When setting up a production facility, it is extremely important to know the relevant industry regulations first, so you can develop a strategy or a target list for acquisition; this should include the skilled labor force needed and possibly important licenses and permits. Challenges faced when setting up your own factory include: amount of research needed on issues such as location, regulations and staffing, length of time needed to set up the factory, having to deal with government regulations and local laws.
It is much easier to protect intellectual property rights using a WFOE

Choosing a WFOE will require a significant investment, however, starting from scratch and building your own factory can be a good way of putting your companys mark on a factory and overcoming the problems youd encounter with a joint venture or an existing facility. The amount of management attention needed back home to open a new factory in a distant site should not be underestimated. During registration of the WFOE, the key is to get a wide scope of operation when you apply for a license. This can keep future costs down and allow you to run other operations as your business changes. WFOEs are able to issue invoices and receive payments in RMB that can then be remitted back to the Netherlands after taxes have been paid.
The key is to get a wide scope of operation when you apply for a license
Once your company name and application to set up a WFOE is approved, you will need to apply for a business license. Then you need to register the business with several government agencies, including tax, customs, and foreign exchange administrations. When getting help to establish a WFOE, be wary of using a local agent who will often follow the standard steps without considering your particular requirements or needs. The worst-case scenario is a company finding itself unable to perform some assumed functions. The business scope or articles are very difficult to change later so it is essential to get this right from the start. It is advisable that you seek help from someone who understands your particular needs. b. Joint Venture Forming a manufacturing joint venture (JV) is a difficult process and it can be hard for foreign companies to negotiate a favorable position. You need to have a very good strategic or regulatory reason to want to, or need to go down the JV path. They are notoriously difficult and if you can use a WFOE, do so. The past has shown many JV failures because of mismatches
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in expectations, concerns over conflicts of interest, violations of intellectual property rights, difference in business culture, poor checks and balances in the organization or poor choice of JV partner. There are however some very successful JVs such as for example Wellhope-De Heus (located in Shenyang, Liaoning) in the feed market with a 85:15 percent share in which the Chinese side holds the majority! If you do decide to go down the JV route, it is essential that you carry out thorough due diligence checks on your potential partner. Also define the long term benefit of cooperation for both parties to be able to see if you will have something to offer each other in the long run. Plan for your exit from a JV from the outset as it is rare that JVs are permanent and its better to have an exit preparation in place. When you do choose a JV structure, it is important to use independent Chinese lawyers or excellent foreign lawyers to draft all JV documents and contingencies for exit, arbitration and other issues. Many industries restrict foreign ownership to 49 percent or less. In these cases you need to try to influence operational control through the agreed appointment of key senior management and board members, although this strategy might fail as some companies found out when the JV partner outmaneuvered them by controlling the all-important HR department. Also one needs to find out who is behind or backing your JV partner and who are your friends on local, regional and central levels in order to influence decision making.
3.2
Choosing a location for your production facility

The decision where to locate the factory is probably the most important decision and this stage should take as long as it needs to insure that all aspects of the decision making have been checked. There are many factors that need to be taken into consideration: the Chinese region youre interested in, the size of the city and the nature of its industries, the availability of human resources, the availability of inputs, the distance from your suppliers, the location of the nearest international port, the location of your potential customers, your business network (guanxi) or that of your partners, and many more. Once you have decided on the top 3 regions, you will need to find the various Industrial Zones or Industrial Parks located in those areas which will give you the best returns on your investments in setup costs and operational expenses. Though all the parks will state benefits in their publications it is crucial to trace the park with a real need for new factories in a specific industry and open a face-to-face negotiation on the detailed terms of benefits and operational factors as listed below.
24
The search for location should be done with the assistance of an experienced, independent advisory company (check its allegiances) who has the right connections and the ability to check and confirm all aspects needed for a successful factory set up. All negotiations should be managed by the advisory company, making sure the industrial park is aware of involvement of a local company, which in general results in more realistic promises. Aspects that need to be checked: 1. Appropriate site for the factory in terms of size, facilities, infrastructure (electricity, steam, sewerage), according to Chinese proper environment for the relevant industry, environmental issues etc. 2. Cooperative, flexible local government that can assist with financing, licenses, tax benefits and other incentive plans. 3. The industrial park should preferably have enough foreign factories with several years of experience who can serve as referees (being the first foreign enterprise can hold some benefits but is more risky). 4. Availability and costs of high level managers who can run the factory, as well as availability of technical experts and factory workers. Capable senior managers are in short supply and costly in China. 5. Ensuring that there are no potential competitors in the same area, especially if it is a local company. 6. Transportation infrastructure: ports, roads, trains etc. especially if long trucks are required for carrying special size products it is important to check if transportation is possible. Check future plans though as circumstances can change rapidly to your benefit. 7. Locating the factory as close as possible to the main potential market to provide short delivery times, provide good after sales service and supply spare parts quickly. 8. If possible, to find a location with easy access to the raw material needed for the production. 9. It is also important to find a site that has quick access and proper infrastructure for the overseas managers when they visit the factory. 10. In case a foreigner will be sent to manage the factory, a proper infrastructure of medical services and education for the children could also be something to consider. It goes without saying that this Zone or Park must be managed and operated at the highest possible professional standards.
25
There are many locations for production set up in China. They generally belong to one of the two main types: Special Economic Zones offering benefits and incentives, Governmentrun Industrial Parks and Privately-owned Industrial Parks. Several kinds of parks can be found in one area and might fit your business. a. Special Economic Zones Chinas Special Economic Zones have different names. They might be called Free Trade Zones, Export Development Areas or Technological Development Areas. They might differ in form or size. At the end of the day, what they all ultimately offer is incentives and benefits to foreign companies. Chinas Special Economic Zones are managed by the national, regional and municipal governments. Their aim is to try and attract (largely foreign) manufacturers by offering them a variety of incentives tax breaks, no customs and duties, relaxed employment laws and lowered barriers of entry into the local market. There are sometimes additional incentives such as support for the registration process or additional tax breaks not officially mentioned in the relevant regulations for foreign investments. The many advantages of concentrating industries in relatively small dedicated zones have been proven again and again and not only in China. The Chinese Special Economic Zones are usually located near transportation hubs and have excellent infrastructures: good roads, easy access to ports, railways and airports, fast telecommunications, plentiful and reliable energy supplies, etc. Companies can enjoy these benefits and access a plentiful supply of potential local employees who are encouraged to relocate to these areas by the Chinese government. However, many small and medium-sized companies have complained about a lack of support from and problems communicating with Zone Authorities whether bureaucratic or logistic. b. Privately-owned Industrial Park The difficulties faced by small and medium-sized companies in the Special Economic Zones led to the establishment of the so-called Privately-held Industrial Parks. These parks are usually started by foreign companies who purchase, lease or rent partially developed areas within larger governmentrun Industrial Zones, construct better facilities and infrastructures within them, and set-up a management support system in order to make it easier for their clients to establish and operate their business. While many of the Special Economic Zones try to attract the larger multinationals, most of the Privately-owned Industrial Parks target small and medium-sized companies and are particularly suited to their needs. When joining such a park, one does not have to compete with the big multination-
26
als and can enjoy the many services the Park provides especially during the earlier stages of penetrating the Chinese market.
Privately-owned Industrial Parks target small and medium-sized companies

The parks are usually managed by English-speaking foreigners, and offer high quality facilities and infrastructures. The lease in the Privately-owned Industrial Parks is shorter than the customary 50 years at the Governmentrun Industrial Parks, and most of them offer management services, business support and consulting services in addition to office spaces, manufacturing spaces and warehouses. This is why they are very popular especially among small and medium-sized foreign companies establishing independent manufacturing and marketing operations in China. In conclusion: The management support provided by the Privately-owned Industrial Parks helps foreign companies focus on manufacturing and sales without all the bureaucratic overheads. c. Industrial Incubator Small or medium-sized companies looking for a quick, efficient and costeffective way of establishing Chinese manufacturing operations could consider the Industrial Incubator. The Incubator helps companies to set-up manufacturing operations in record time at minimum risk. It offers companies a modular approach, from setting up an assembly line to a fully operating manufacturing plant within a short time period of approximately 6 months. It offers comprehensive support services: localization and engineering, quality control, procurement, logistics, finances, installation and maintenance of an ERP system, obtaining certifications and permits (ISO, SFDA), recruiting, training and developing a local workforce, dealing with the local authorities etc.
3.3
Product liability
Dutch companies that wish to engage in equipment manufacturing in China and selling products to Chinese customers need to keep into consideration their exposure to product liability claims. In an attempt to battle growing concerns on domestically produced goods, the Chinese government has over the last years tightened the legal framework for product quality requirements and consumer action. Moreover, in 2010, a new Tort Liability Law was introduced, which specifically deals with product liability. The new product liability rules make both producers and sellers of defective products liable for damage caused by the defect. Injured consumers have
27
the right to pursue either the producer or the seller, with rights of contribution for the pursued party to seek recovery of its losses from the party responsible for causing the defect, including from third parties involved in the supply chain. The law also permits the recovery of punitive damages if a product caused death or serious injury to a consumer, while the producer or seller was aware of the defectiveness of the product.
Injured consumers have the right to pursue either the producer or the seller
In addition, the new law deals with remedial actions if a defective product has been put into circulation. It requires the producer or the seller to, in a timely manner, take remedial action such as the issuance of a warning or recalling the product. If this requirement is not - or insufficiently - met, the producer or seller can be held liable by an injured party. This provision has led to a significant expansion of recall obligations in China, which previously only applied to pharmaceuticals, foodstuffs and other specified categories of products. These developments may impact Dutch companies with manufacturing facilities in China. Although this type of litigation has been limited so far, a growing sense of consumer rights combined with a stronger legal framework to enforce these rights, might lead to cases being initiated against foreign invested companies in China. Therefore, it is of growing importance for their directors and senior management to be aware of the developments on product quality standards, product liability, recall measures and consumer protection.
3.4
Employment
Chinas labor law legislations mainly consist of two laws of the national level, the Labor Law and the Labor Contract Law, as well as various regulations and circulars issued by local governments. The Labor Law and the Labor Contract Law provide the general principles regulating the employment relationship while the local regulations and circulars specify the details based on regional economic conditions. This legislation structure leaves sufficient flexibility to accommodate different developing levels but also leads to the side effect that the labor practice and interpretation differs greatly by locality. Even in the same city, the practice and the judges interpretation of law might change according to the economic climate. Therefore, the investor is recommended to do a due diligence on the labor legislations and practice of the place where the manufacturing entity is located and shall not take for granted and simply adopt the practice in other cities of China.
28
A written employment contract is required for the establishment of employment relationship, the absence of which will result in severe penalty to the employer. The company could choose to conclude either fixed term contract or permanent contract with the employee but under some circumstances, the employment contract has been renewed twice for instance, the company must establish permanent relationship at the request of the employee. The employment contract could only be terminated on the basis of legitimate reasons enumerated by the Labor Contract Law, e.g., expiry of the contract, severe violation against company bylaws, incompetence after training and position adjust. The fact that the terminating party shall provide solid evidences to justify the termination and that the judge tends to protect the employee makes the termination, especially large scale retrenchment, always a bad headache for the employers in China. The Labor Contract Law also provides the standard of severance compensation, which is basically one month salary for one year service capped by three times of the local average salary. If the employer fails to justify the termination with legitimate reason, it shall pay doubled compensation to the employee.
The government gives economic reform and political stability the highest priority
Technically the Trade Union of China is a non-government organization but in fact it has a deep government background and works closely with the Ministry of Labor and Social Security. Therefore, in China the Union will not take aggressive action when conflict between the enterprise and the staff occurs, especially in state owned enterprises, as the government gives economic reform and political stability the highest priority. Furthermore, the right to strike was removed from the existing PRC Constitution and exercising the right to demonstration shall be subject to strict pre-approving procedures of the government, which causes the role of the trade union even weaker. In that case, it is understandable that the employees are not enthusiastic to establish trade union in the company even though the PRC Trade Union Law requires the company to assist the trade union setup and allocate proper funds (2% of the total monthly salary cost) to the union. Most private companies and FIEs in China do not have trade unions. Even in those, which have trade unions, the unions are either mild or inactive.
29
3.5
Human Resources
Human resources are a big challenge facing multinational companies in China. The most important aspect of employment is hiring and retaining loyal, dedicated staff in key positions. It is often seen as the number one challenge for businesses in China. Talent recruitment and retention, high turnover rates, shortage of managerial talent and lack of availability of skilled, technical or professional workers are among the top concerns that continue to be raised by foreign companies in China across virtually all sectors of business and industry. As Chinas state-owned enterprises (SOEs) grow in size and capability, foreign companies are also reporting increased competition from SOEs for high quality talent. Companies need to take into consideration the amount of time that is needed to find experienced and capable managers for the local entity. It is a process that can take many months, thus should be followed in parallel to the construction of the factory.
HR is often seen as the number one challenge for businesses in China

It is of great importance to have an experienced and capable manager for the local entity. This can be a foreign or a local Chinese person, both will have advantages and disadvantages; a foreign manager will be more expensive and might not have the necessary experience in China. However, they will have a better understanding of the product and the factory needs. Communications with the HQ abroad goes smoother, simply because there are no language or cultural barriers. A Chinese manager can be an excellent choice to sell the products in the market and will also be less expensive. He or she will know how to manage Chinese employees, though in many cases lacks transparency and the ability to work in a matrix mentality. Furthermore, differences in work culture will put a strain on communications with the HQ abroad. In both cases it is crucial to control and support the manager by creating a supervising mechanism to secure transparency and continuation of experience accumulated over the years. An external local service company might be a good solution to give your company support in HR recruitment and management. Finally, labor costs for skilled professionals in China are not as cheap as they have been in the past. Competition for retaining skilled employees has risen, which has resulted in higher salaries, especially for the retention of experienced sales managers and General Managers in specific industrial sectors.
30
3.6
issues to consider when setting up a factory in China

Manufacturing in China is a balance between keeping costs down and exerting operational control. Seek expert advice before making any decisions and consider all options in the context of what is right for your company. There are several sensitive issues to consider when setting up a factory in China.
Consider all options in the context of what is right for your company
a. Terms negotiations Each industrial park will offer many tempting benefits before the registration. A very experienced negotiator will agree the proper terms in such a way that there will be no surprises once the factory is ready to start operations. There are several options to be considered: buying the land and building the factory, leasing the land and building the factory, renting an existing factory and making some adjustments etc. Some industrial parks offer special arrangements of leasing the land, building the factory by the industrial park and giving a generous package of benefits as well as the option to buy the factory later down the road if the factory proved to be a success. Such offers are unique and need to be examined carefully. b. The construction project A construction project is a tough challenge in general, and it can become more challenging when executed in China. To achieve the required results, very good preparation should be made with the assistance of a local engineering company and local supervising companies to make sure the plans are conforming Chinese standards and accepted by the investors and their clients requirements. Plans for the production lines should be approved before construction begins and sourcing the equipment for the production line should be done once the construction starts so adjustments can be made if the proper equipment cannot be found in China. c. Company set up When choosing the most suitable industrial park, one of the factors should be a quick and easy set up of the local entity, which can be achieved easily with the support of the local government. It is extremely important to make sure that all the required licenses for manufacturing, selling, importing /exporting can be obtained with the local governments support. d. Recruitment It is important to find an area that has enough human resources to recruit high-level stable managers as well as factory employees. It is also important
31
to check the average cost of employees as well as the regulations regarding social benefits that the employer has to pay according to the local regulations. The differences in salaries and social benefits can make a huge difference in the cost structure of a company. Therefore, it is advisable to have an external local HR consultant who has the knowledge to manage the complete HR process from the recruiting stage, negotiate salaries, signing the contract, payment and calculation of salaries and social benefits. e. Financial management Proper management of the financial aspects of the project is key to the success of the project. Professional financial experts should be involved throughout the negotiations of the financial terms of the deal (lease, rent, purchase, tax benefits and other benefits). Once the factory has been set up, an external financial expert will be able to set up all the procedures and control mechanisms for the daily operations of the company. Below are some issues that require financial experts advice: Budget planning & control Control & monitor the budgets & expenses of local staff Plan cash-flow for the local activities Tax planning in China Set up of ERP and financial report system (Western GAAP if needed) Invoicing in local currency Handle AR and AP with clients and suppliers Credibility, reference checks & controlling Facilitating local currency sales contracts Reviewing contracts between the client and local customers Reviews of business deals and negotiations Accounts receivables collection & credit management Transfer funds out of China, inter-pricing planning Find, consult & provide the best solutions for tax planning in China Sales and cost analysis per project/contract Preparation of tax declarations Monthly tax audit and visit to tax bureau Claiming tax rebates and deductions Setting up and maintaining the relationship with the bank and the financial institutes.
Using external advisors will allow you to reduce the companys relevant employees to the minimum needed and allow the company to locate itself out of the big city centres. Financial positions (CFO, financial manager levels) are among the highest paid individuals in the Chinese labor market today.
32
f. Other issues Language barriers, time differences and cultural gaps contribute to difficulties in communication and complicate planning and execution processes. It is advisable to set up a local team to manage the project, which will include a senior financial person, an engineer and a government relations person. The overseas company should dedicate management resources to support the team in China as well as planning several visits throughout the project. The local team can take the responsibility over some or more of the following: advisory team for the assigned managers in the foreign company overall supervision and support to the project, including project management (optional) projects budget follow-up and control time schedule coordination and follow-up involvement in bids, procurement contract negotiations, benchmarking prices auditing suppliers or checking references of service providers for projects invoicing and issuing contracts to suppliers before and after the local entity is established holding signatory rights for the construction process budgets together with the project manager engineering support of QC managers, purchasing engineers, designers supporting applications for the different licenses and approvals by government during the construction phase (fire, sanitation, environmental, police, safety and many others)
3.7
Intellectual Property Rights

For any business planning activities in China, the protection of IP rights is a necessary component of strategic business planning from the very start. All kinds of products are subject to IP infringement in China: DVDs and software, books, electronics, machinery, medicines, even cars. As soon as copyrights, patents, trademarks, domain names and trade secrets gain value, a real risks exists that Chinese counterfeiters will seek the opportunity to exploit this. But this does not mean that IP should not be introduced to China. Valuable IP (e.g. trademarks or patents) is an important part of what distinguishes a foreign company from its domestic competitors. The question then becomes, how can a company combat infringers? This is not always easy, and continuously innovating with new IP is a good way to stay ahead of infringers. However the other part of a successful IP
33
strategy is to take the right steps to eliminate or at least limit the biggest IP infringements. Companies should start by understanding the following golden rules: 1. Identify which IP is important to the business, and effectively protect such IP without delay, if possible before entering the Chinese market. Why? Another company may register your IP first! 2. Take protective measures against abuse of IP (incl. confidential information) by business partners and employees by signing agreements that include non-disclosure and IPR protection, and take measures to ensure that such agreements are followed. Why? Most IP infringements are by business partners! 3. Do not presume that your IPR is automatically protected in China if you already have registrations in other countries. Why? Most IP (trademarks, patents, domain names) must be registered in China. 4. Do not rely on others (employees, distributors, suppliers, agents, friends) to register your IPR for you. Why? If the other party registers the IP in its own name, it can claim against you.
The protection of IP rights is a necessary component of strategic business planning

How to establish IP rights under Chinese law Brand names, logos and other marks that are associated with the company or its products can be registered in China as trademarks. Upon registration, you will have exclusive rights to use the trademark on goods in the relevant class. Foreign companies should not forget to register their Chinese brand names, as they often become very popular. Chinese domain names (i.e. ending with .cn) should be recorded with the CNNIC. Copyright arises out of the creation of a piece of work, but can be recorded to facilitate enforcement proceedings. Designs and technological solutions can be registered as patents, as long as novelty, inventiveness and practical application requirements are met. This means that new designs or inventions should be registered before publication or use, or within a (6 or 12 month) period from registration in another jurisdiction. Adequate measures should be taken to ensure that sensitive information and valuable know-how used in dealings with business partners (suppliers, distributors, JV partners, employees) are recognized and therefore protected as trade secrets.
34
China applies a first-to-file principle for trademarks, patents and domain names, and so it is crucial for IP owners to file for registration as early as possible. If you discover that another company has already registered your IP rights, then immediately discuss with your lawyer to establish if or how you can get these rights back. If you dont, your competitor may prevent you from using your own IP in the future! How to enforce IP rights in China As long as IP is protected under Chinese law, owners have a number of options to enforce such rights against infringers. Each method of enforcement comes with its own benefits and drawbacks, and so a case-by-case assessment should be made on how to tackle a certain type of infringement. A cease and desist letter drafted and sent in Chinese by a Chinese law firm is an inexpensive step that may help to pressure an infringer into compliance, or it may create an opening for negotiations. In an administrative action, the support of a competent administrative department (e.g. the AIC, the IPO, or Customs) is enlisted to raid the premises of the infringer; upon confirmation of the infringement, counterfeits are confiscated, an injunction is issued and the infringer can be fined. Civil lawsuits allow IP owners to demand not only for an injunction, but also to claim for compensation. As long as damages remain difficult to prove however, awards will remain low by international standards, Criminal prosecution of individual infringers is by far the most effective means to IP enforcement, but is only available if specific, relatively high thresholds are met.
3.8
Concluding points
In conclusion, as China has relaxed its laws regarding international trade links and domestic consumer power is rising quickly, there has been a surge in foreign businesses looking to setup a manufacturing facility and sell in China. There are, however, as is evident from the above information in this report, many things that a company wishing to establish a production facility in China must consider in order to maximize their potential earnings and minimize risk of failure. Initial decisions are incredibly important and for one who is generally unaware of the markets and business culture in China, setting up an independent production facility in China is a daunting process and can easily fail if decisions are not made carefully.
35
Demands placed on foreign companies producing domestically in China, be it government bureaucracy or issues with HR, can be particularly destructive for inexperienced companies choosing to operate in China, However, if the above guidelines are followed diligently, and if you are open to further information and support from experienced peers and local/foreign professional specialists, then there are invaluable opportunities available to set up a successful business in China.
There are invaluable opportunities available to set up a successful business in China
36
References
AmCham Shanghai and Booz Company, (2010), China Manufacturing Competitiveness study-report 2009-2010 China EU IPR Helpdesk, The Dos and Donts of IPR Strategy to Prepare Yourself for Doing Business in China Consulate-General of the Kingdom of the Netherlands (2011), Outsourcing Comparison Study South-East Asia (China, India and Vietnam 20112012) EVD (2011), ITC Trade Map European Commission (2011), Trade and Investment Barriers FME-CWM (2011), China: Kansen en Knelpunten voor de Technologische industrie ING Economisch Bureau (2010), My industry outlook 2010; De crisis voorbij ING Economisch Bureau (2011), My industry 2030; Nederland gaat het helemaal maken International Strategy & Investment (Dec 30, 2010), China 2011 Investment Themes and 7 Strategic Industries KPMG (2008), New Markets; cost, insight and opportunity KPMG (2009), A new dawn; Chinas emerging role in Global Outsourcing KPMG (2010), Global Manufacturing Outlook Roos, Maarten (2010), Chinese Commercial Law: A Practical Guide, ISBN 9041132546 World Bank (2011), Doing Business 2011: China World Bank (2011), World development indicators
More detailed industry information was also acquired by using sources in Chinese language that are not listed here. Netherlands Economic Network Netherlands Business Support Offices PTL Group FME-CWM GMV EVD / Agentschap NL R&P China Lawyers HIL International Lawyers & Advisers www.zakendoeninchina.org www.hollandtrade.com/nbso www.ptl-group.com www.fme.nl www.gmv-fme.nl www.agentschapnl.nl/evd www.rplawyers.com www.hil-law.com
37
HEILONGJIANG
Harbin Changchun
JILIN
Urumqi
XINJIANG
Shenyang
LIAONING
Hohhot
GANSU INNER MONGOLIA
BEIJING Tianjin
Dalian
Taiyuan Xining
QINGHAI NINGXIA SHAANXI
Yinchuan Lanzhou Xian
SHANXI
HEBEI
Shijiazhuang Qingdao Jinan

SHANDONG
Zhengzhou
HENAN
JIANGSU
Nanjing
TIBET
Lasha
Chengdu
SICHUAN CHONGQING
HUBEI
Nanjing Hefei Shanghai

ANHUI
Wuhan Chongqing Changsha

HUNAN
Hangzhou Nanchang
JIANGXI ZHEJIANG
GUIZHOU
Fuzhou
FUJIAN
Guiyang
YUNNAN GUANGDONG
Kunming
GUANXI
Nanning
Guangzhou Hong Kong
Hongkong
HAINAN
Netherlands Economic Network in China Provincial Capital

Province Name
Provincial Border
38
NETHERLANDS ECONOMIC NETWORK IN CHINA Embassy of the Kingdom of the Netherlands 4 Liangmahe Nanlu, Chaoyang District, Beijing 100600 Tel: +86 10 8532 0200 E-mail: pek-ea@minbuza.nl Consulate-General Shanghai 10/F Tower B, Dawning Center, 500 Hongbaoshi Road, Changning District, Shanghai 201103 Tel.: +86 21 2208 7288 Email: sha-ea@minbuza.nl Consulate-General Guangzhou Teem Tower, 34rd Floor, 208 Tianhe Road, Guangzhou 510620 Tel.: +86 20 3813 2200 E-mail: gnz-ea@minbuza.nl Consulate-General Hong Kong Suite 5702, Cheung Kong Center, 2 Queens Road, Central, Hong Kong SAR Tel.: +852 2522 5127 E-mail: hon-ea@minbuza.nl NBSO Chengdu 6F, West Building, La De Fang Si, 1480 Tianfu Avenue, Chengdu 610041 Tel.: +86 28 8511 4047 E-mail: nbsochengdu@nbsochengdu.com NBSO Dalian 4910 World Trade Center, 25 Tongxing Road, Zhongshan District, Dalian 116001 Tel.: +86 411 3986 9998 E-mail: nbsodalian@nbsodalian.com NBSO Jinan 31/F, Jinan Qilu Bank Building, 176 Shunhe Street, Shizhong District, Jinan 250002 Tel.: +86 531 8606 5138 E-mail: nbsojinan@nbsojinan.com NBSO Nanjing Suite 2316, Building B, 23/F, Phoenix Plaza, 1 Hunan Road, Nanjing 210009 Tel.: +8 25 8470 3707/ 8470 3708 E-mail: nbsonanjing@nbsonanjing.com NBSO Qingdao A-2505, Top Yihe International, 10 Hong Kong Middle Road, Shinan District, Qingdao 266071 Tel.: +86 532 6677 7515 / 17 E-mail: nbsoqingdao@nbsoqingdao.com NBSO Wuhan Tower I, Room 1306, 568 Jianshe Avenue, Wuhan 430022 Tel.: +86 27 8576 6511 E-mail: nbsowuhan@nbsowuhan.com Agentschap NL NL EVD International P.O. Box 20105, 2500 EC The Hague T.: +31 88 6028060 E-mail: china@info.agentschapnl.nl
www.hollandinchina.org | www.zakendoeninchina.org
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top sector high tech: EQUIPMENT MANUFACTURING AND MACHINERY INDUSTRIES

Opportunities for Dutch companies

top sector high tech: EQUIPMENT MANUFACTURING AND MACHINERY INDUSTRIES

Opportunities for Dutch companies

top sector high tech: EQUIPMENT MANUFACTURING AND MACHINERY INDUSTRIES

Opportunities for Dutch companies

top sector high tech: EQUIPMENT MANUFACTURING AND MACHINERY INDUSTRIES

Opportunities for Dutch companies

Chinese government stimulation and 12th Five Year Plan 10

top sector high tech: EQUIPMENT MANUFACTURING AND MACHINERY INDUSTRIES

Opportunities for Dutch companies

Opportunities for equipment manufacturing in China

The global equipment manufacturing industry is restructuring and relocating

Today, China is the primary manufacturing source of any country

top sector high tech: EQUIPMENT MANUFACTURING AND MACHINERY INDUSTRIES

Opportunities for Dutch companies

The Chinese equipment manufacturing industry

top sector high tech: EQUIPMENT MANUFACTURING AND MACHINERY INDUSTRIES

Opportunities for Dutch companies

Chinese private companies are quickly upgrading their product quality

Quality of personnel, suppliers and infrastructure is increasing.

top sector high tech: EQUIPMENT MANUFACTURING AND MACHINERY INDUSTRIES

Opportunities for Dutch companies

Hubei NBSO Wuhan

Jiangsu NBSO Nanjing

Chongqing NBSO Wuhan

Shandong NBSO Qingdao

top sector high tech: EQUIPMENT MANUFACTURING AND MACHINERY INDUSTRIES

Opportunities for Dutch companies

Tianjin Embassy of the Kingdom of the Netherlands

Hebei Embassy of the Kingdom of the Netherlands

* RMB 1 / EUR 0,11 exchange rate 21-09-2011

top sector high tech: EQUIPMENT MANUFACTURING AND MACHINERY INDUSTRIES

Opportunities for Dutch companies

Chinese government stimulation and the 12th 5 year plan

top sector high tech: EQUIPMENT MANUFACTURING AND MACHINERY INDUSTRIES

Opportunities for Dutch companies

top sector high tech: EQUIPMENT MANUFACTURING AND MACHINERY INDUSTRIES

Opportunities for Dutch companies

top sector high tech: EQUIPMENT MANUFACTURING AND MACHINERY INDUSTRIES

Opportunities for Dutch companies

Chinas importance for the Dutch manufacturing and technological industry

top sector high tech: EQUIPMENT MANUFACTURING AND MACHINERY INDUSTRIES

Opportunities for Dutch companies

Figure 2: Growth countries for the Dutch technology Industry 2011

Future planned Outsourcing + FDI

Country China India Brazil Turkey Vietnam Poland

% 37% 25% 14% 11% 10% 7%

top sector high tech: EQUIPMENT MANUFACTURING AND MACHINERY INDUSTRIES

Opportunities for Dutch companies

top sector high tech: EQUIPMENT MANUFACTURING AND MACHINERY INDUSTRIES

Opportunities for Dutch companies

Case study: VMI Group

top sector high tech: EQUIPMENT MANUFACTURING AND MACHINERY INDUSTRIES

Opportunities for Dutch companies

The speed of growth depends on the developments in the market.

top sector high tech: EQUIPMENT MANUFACTURING AND MACHINERY INDUSTRIES

Opportunities for Dutch companies

Some high-end machines are still only produced in Europe

VMI stresses the importance of investing in your employees

There are different roads to reach the same end result

top sector high tech: EQUIPMENT MANUFACTURING AND MACHINERY INDUSTRIES