Investing in Chinese Manufacturing Industry

ACKNOWLEDGEMENTS
I would like to thank our lecturer, Mr. A.B Teoh for the great help and support he has given me. He was always ready to help me whenever I had a problem. I would also like to thank my senior mates who helped me when I didn’t understand some areas. Lastly, I shouldn’t forget God, who has given me the strength in completing this assignment without any major problems.

EXECUTIVE SUMMARY
This assignment is about an official working in a firm in Tanzania known as Global Connection offering advice and recommendation to SMEs that are looking to invest in China in the sector of manufacturing industry. This document will present a PEST analysis (Political, Economical, Social and Technological environment) that will affect Small Media Enterprises (SMEs) that want to invest in China.

This document will specify which industry SMEs are looking forward to invest in. Benefits of investing in China will also be seen so that SMEs know what they planning on doing in long term.

Table of Contents
1.0 INTRODUCTION 05
2.0 PEST ANALYSIS 06
2.1 POLITICAL 06
2.1.1 GOVERNMENT TYPE AND POLITICAL STABILITY 06
2.1.2 RULES AND REGULATIONS DOING BUSINESS IN CHINA 06
2.1.2.1 STARTING A BUSINESS IN CHINA 06
2.1.3 FORMS OF INVESTMENT IN CHINA 07
2.1.3.1 EQUITY JOINT VENTURE. 07
2.1.3.2 CONTRACTUAL JOINT VENTURE. 07
2.1.3.3 WHOLLY FOREIGN-OWNED ENTERPRISE. 07
2.1.4 TAXES 08
2.2 ECONOMIC ENVIRONMENT 09
2.2.1 GROSS DOMESTIC PRODUCT (GDP) 09
2.2.2 CURRENCY AND FOREIGN EXCHANGE RATE 09
2.2.3 LEADING INDUSTRIES 09
2.3 SOCIAL AND CUTURAL ENVIRONMENT 13
2.3.1 DEMOGRAPHY AND POPULATION GROWTH 13
2.3.2 RELIGIOUS BELIEFS. 14
2.3.3 LANGUAGE 14
2.4 TECHNOLOGICAL ENVIRONMENT 15
2.4.1 TRANSPORTATION INFRASTRUCTURE. 15
2.4.2 INTERNET USAGE 15
2.5 RECOMMENDATIONS 16
2.5.1 MODE OF ENTRY 16
2.5.2 BENEFITS 16
3.0 REFERENCES 17
3.1 BOOKS 17
3.2 WEBSITES 17
4.0 APPENDIX 21

1.0 INTRODUCTION
China is a market oriented country located in Asia with a population of 1.3 billion people. It is a country with a mixture of many cultures and religions. China is country that booming up in modern technology. Even though the country’s population is of great number but the people are very hard working. China has its own languages as any other country but English is well spoken now in the country so as to ease communication with foreign people mostly tourists and foreign business people that visit China.

China has many industries such as tourism, agriculture, manufacturing, technology industries. So if SMEs are looking to invest in foreign countries than China is the right place to do so.

The future of the country is determined by decisions made by the Communist Party of China (CPC).

SMEs in China are estimated that they are responsible for 60% of the country’s industrial output and should employ 75% of the workforce in the country’s cities and towns. SMEs are suppose to create urban jobs since the Chinese government is aware that SMEs are job creators. “Flexible SMEs are generally well positioned to take advantage of opportunities created by China’s entry to the WTO”. (Embassy of the United States united states of Beijing. China, 2002)

2.0 PEST ANALYSIS
2.1 POLITICAL
Political environment includes factors in government, level of political stability, the law and regulatory system that affects an organization when operating.

2.1.1 GOVERNMENT TYPE AND POLITICAL STABILITY
Even if China has changed from a planned economy to a market oriented country the political economy stays the same. The CPC (Communist Party of China) take the decision which determines the future of the country. The power centers in China are:
i. Conservatives
ii. Liberals
iii. President Hu Jintao
iv. Former president Jiang Zemin
v. Military

2.1.2 RULES AND REGULATIONS DOING BUSINESS IN CHINA
2.1.2.1 STARTING A BUSINESS IN CHINA
A permit is needed so as to do business in China, so your agent or distributor will put all documents needed together and provide them to Chinese custom agents. “Documents that may be required include import permits and Quality Supervision, Inspection and Quarantine inspection (AQSIQ) clearance.
Most imports to China do not need an import license if they are registered with China’s Ministry of Commerce (New Zealand Trade & Enterprise, 2008). Just few items come across licensing or permit procedures, such as drugs, chemicals, weapons.

If a local agent is being used then it is important to make sure they have an import license.

If not, the importer will have to look for links which will lead to higher costs in delivery.

So as for the case of shoe manufacturing in China a license or permit is needed so as to start the business. By having connections before starting the business than it is made a lot easier and less expensive.

2.1.3 FORMS OF INVESTMENT IN CHINA
Investment is divided to direct investment and indirect investment. In China there are three main types of direct investment:

2.1.3.1 EQUITY JOINT VENTURE.
Equity joint venture refers to working together between two individuals a local individual and a foreign individual in other words a Chinese and an overseas individual, they share mutual rewards and risks. Here is where the Chinese government and businesses are concerned. “Overseas parties are only allowed to invest at most 25% of the entire registered capital in the form of cash or trade property rights etc. The parties to the joint venture shall share the rewards, risks and losses according to the ratio of investment.” ( Starmass International, 2001)

2.1.3.2 CONTRACTUAL JOINT VENTURE.
Rights and responsibilities and all liabilities are agreed on a contract before joint venture. This is when the parties will agree on the form of administration and profit division.

“The major difference between an equity joint venture and a contractual joint venture as means in China market entry is that the latter neither necessarily calculates the shares in the form of currency nor distributes profit in proportion to their share, but share profit according to the form of investment and the ration of profit sharing as per the contract.” (Starmass International, 2001)

2.1.3.3 WHOLLY FOREIGN-OWNED ENTERPRISE.
This refers to the established enterprises by foreign investors with their own capital according to the law of China. Since China offers joint ventures with other countries than SMEs should use this chance to enter in the manufacturing industry in China due to reasons such as:
? Cheap labour
? Availability of raw materials
? High technology

2.1.4 TAXES
There are different kinds of taxes in China which SMEs have to know. The kinds of taxes available are as follows:
KINDS OF TAX DESCRIPTION
Business tax This is a tax payable against turnover by all enterprises and individuals doing business of construction, finance and insurance, selling immovable properties.

It varies from 3% to 20% of the sales turnover
Value added tax(VAT) VAT is applied if your company is selling, manufacturing, processing or repairing tangible goods.

VAT Rate for “General Taxpayers” is 17%, or 13% for some goods. “small scale tax payers get lower rates of about 4% for Trading enterprises and 6% for other production and other enterprises

Foreign enterprise income tax EIT is calculated against the net income in a financial year after deducting reasonable business costs and
losses; i.e. profits.

Withholding tax: Withholding Tax is a PRC tax levied on overseas companies providing services to China based business.

If you are based outside the PRC but are supplying services to clients in China, your invoices are in effect.

Individual income tax If you are sent to China and your salary is being paid elsewhere not in China and spend more than 183 days in China then you would have to pay IIT in China based on the number of days you effectively spent in
The country.
(Source from: http://www.agn.org/regions/ap/MainlandChinaTaxationOverview.pdf)

2.2 ECONOMIC ENVIRONMENT
2.2.1 GROSS DOMESTIC PRODUCT (GDP)
Gross Domestic Product is an essential part of Gross National Income. It is the total value of goods and services produced within the country in one year. GDP is used to access countries whose multinational sector is significant share of activity.

During the reform period China’s GDP has risen from Rmb 362.4 billion in the year 1978 to Rmb13.7 trillion in 2004.

“The share of primary industry in GDP has fallen from 28% in 1978, at the beginning of the reform period, to 15% in 2004. This fall occurred because agricultural output grew more slowly than output of other economic sectors.” (China Statistical Yearbook, 2004)

Manufacturing industry grew faster than the GDP over that period from 48% to 53% during the manufacturing boom.

“Individuals have also become richer, with annual GDP per head rising during that time from Rmb379 to Rmb10,502” (China Statistical Yearbook, 2004)
“China’s phenomenal economic growth in recent years was primarily due to growth in the secondary and tertiary sector of the economy.”( Heilig, 2009)
Agriculture in China which is the primary sector only grew a little since 1996.

Fig1
China’s GDP by sector, 1978 – 2003
(Heilig, 2009)
[Accessed on 03 August 2009] < http://www.china-profile.com/data/fig_gdp_1a.htm>

2.2.2 CURRENCY AND FOREIGN EXCHANGE RATE

The currency of China is known as Renminbi which means people’s money. China’s monetary authority issues the money in China.
“During the previous decade, Mainland China’s Currency was pegged to the U.S. dollar at 8.28 RMB. On July 21, 2005, it was revalued to 8.11 per U.S. dollar, following the removal of the peg to the U.S. dollar. The revaluation resulted from pressure from the United Stated and the World Economic Council.” (Danwei 2002)

In 2003 the value of dollar dropped causing value of Renminbi to fall also making exports more competitive in China mainland. “This led to some pressure on the PRC from the United States to increase the value of the RMB in order to encourage imports and decrease exports.” (Danwei 2002)

2.2.3 LEADING INDUSTRIES

China is a fast growing country and the industries have changed the economic status in the country especially Foreign Direct Investment. Manufacturing industry is the leading industry in China as stated in the diagram below. So SMEs can consider investing in manufacturing industry by choosing to joint venture with local investors in the country.

Fig 2
Almanac of China
(Emerald Group Publishing Limited)
[Accessed on 04 August 2009] < http://www.emeraldinsight.com/fig/0850130204002.png >

2.3 SOCIAL AND CUTURAL ENVIRONMENT

TANZANIA CHINA
Culture Tanzania is a nation with a mix of races, traditions and cultures. Religions found in Tanzania are Christianity, Islam, and Hindu. Daoism, Buddhism, Islam, Christianity, popular folk religion (village religion).

Population “The population of Tanzania in 2003 was estimated by the United Nations at 36,977,000” (Advameg, 2009) “1.3 billion people (1,330,044,605 as of mid-2008)” (About.com 2009)

2.3.1 DEMOGRAPHY AND POPULATION GROWTH
“The decline of dependency ratio has created a productive population age structure with an affluent supply of labour force. Empirical results illustrate that the Chinese demographic transition has contributed to 15-25% of economic growth and 5-21% of savings rate in the reform era. With the acceleration of population aging, demographic dividend will be depleted at the end of 2013.” ( Fang & Dewen,)

Since mid 1960s China has been able to harvest its demographic dividend due to changes in population age structure. So the reduction of working age population will cause rise in wages.

The Chinese are hard working people and are very healthy. So if wanting to join ventures with China to start a manufacturing company then China is the right place to do so.

China has a population that exceeds 1.25 billion people in the country and it increases approximately 12-13 million people each year.

2.3.2 RELIGIOUS BELIEFS.
The Chinese are not very religious people. “Chinese culture was perhaps the first to develop an intellectual skepticism concerning the gods.”( SACU, 2001)
Religions practiced in China include:
• Daoism (Taoism)
• Islam
• Buddhism
• Christianity
• Popular folk religion (village religion)
• Spirituality

2.3.3 LANGUAGE
Every country has its own language, so does China. Mandarin Chinese is the official language and is difficult for foreginers to learn and understand. “As one of the six official languages used by UN (United Nations), Chinese now has earned itself greater status in the World.” (TravelChinaGuide, 2009).
Many Chinese speak basic English especially the youth which makes more better for SMEs to start a business in that certain country because communication won’t be a problem when working together. But it is still a problem in certain areas in China where language is a barrier in communication, so it gets difficult for foreigners to communicate with the locals. Even though China is growing fast in technology language is still a problem in some areas.

2.4 TECHNOLOGICAL ENVIRONMENT

2.4.1 TRANSPORTATION INFRASTRUCTURE.
China is in the middle of a massive upgrade of its transportation. China has realised so as to keep their economy growing they are going to need efficient system so as to move goods and people around the country. “According to World Bank statistics, goods lost due to poor or obsolete transportation infrastructure amounted to one percent of China’s GDP” (US commercial service, 2001-2009)

Ports are being improved for more use of the country’s waterways and even airports.

China is about to open a 36km six lane highway across Hazngzhou Bay which will reduce travel time between the two busiest ports in China in about two hours. So transportation is being made easier for doing business in China.

2.4.2 INTERNET USAGE
Internet in China is growing fast according to China Internet Network Information Center (CNNIC) the country’s online population has grown 41.9% in 2008 to 298 million users. Even though China’s internet penetration is still fairly low even if it exceeds the world’s average.

Access of internet through mobile phones is very popular, it is said that the number of internet users through mobile phones in China went up to 133% from 2007.

2.5 RECOMMENDATIONS
According to the PEST analysis in China technology industry, tourism industry, manufacturing industry and agriculture industry are the fast growing industries in China. SMEs are recommended to enter into manufacturing industry because it is the leading sector of industries in China. SMEs should invest since there is availability of cheap labour, raw materials and modern technology.

2.5.1 MODE OF ENTRY
When starting a new business large capital is needed, since SMEs have limited capital so it is suggested mode of entry is to joint venture with local manufacturing industries. Joint-venture has medium control as it have more than two companies involve in management (Daniels et al, 2007, p470).
SMEs benefit in this country through joint-venture method whereby they don’t have to start a company from the bottom, the company’s image is established by current companies in the country.

2.5.2 BENEFITS
China is now given the title “end of cheap China” because many have started business in China due to cheap labour and availability of resources.
SMEs benefit from China because of:
• Currency
• Quality
• Natural resources
• VAT rebate cuts

3.0 REFERENCES
3.1 BOOKS
Ball, D, A, McCulloch, V, H, Geringer, J, M, Minor, M, S & McNett, J, M 2008, International Business: The Challenge of Global Competition, McGraw-Hill, Boston.

Daniels, J, D, Radebaugh, L, H & Sullivan, D, P 2007, International Business, Pearson Education, New Jersey.

Hill, C 2007, International Business: Competing in the global marketplace, 6th ed, McGraw-Hill, Boston.

3.2 WEBSITES
About.com 2009, China Population, viewed on 31 August 2009, http://geography.about.com/od/populationgeography/a/chinapopulation.htm>.

Advameg, Inc, 2009, Encyclopedia of the Nations, viewed on 27 July 2009, .

Asia for Educators, Columbia University 2008, Population in China, viewed n 05 August 2009, .

Case Studies in Business Management 2009, Center For Management Research, viewed on 02 August 2009, .

Chan, K 2009, China Finance & Accounting, viewed on 29 July 2009, .

China Statistical Yearbook 2004, China’s economy and business climate, viewed on 30 July 2009, .

Danwei 2002, Danwei Chinese Media, Advertising, And Urban Life, viewed on 31 July 2009, .

Embassy of the united states of Beijing.china 2002, Embassy highlights, viewed on 29 July 2009,< http://www.usembassy-china.org.cn/econ/smes2002.html>

Fang, C & Dewen, W 2001, Demographic Transition and Economic Growth in China, viewed on 03 August 2009, .

Glencoe 2004, Marketing Essentials, viewed on 01 August 2009, .

Heilig, G, K 2006, GDP By Sector, viewed on 30 July 2009, .

New Zealand Trade & Enterprise 2008, Sales and Marketing, viewed on 03 August 2009, .

Society for Anglo-Chinese Understanding, SACU 2001, Religion in China, viewed on 27 July 2009, .

Starmass International 2001, Investment In China, viewed on 01 August 2009, .

TechCrunch 2009, internet usage in China, viewed on 04 August 2009,

TravelChinaGuide.com 1998, Language, viewed on 04 August 2009, .

The World Bank Group 2009, Doing Business Measuring Business Regulations, viewed on 28 July 2009, .

Urban Insight 2000, Infrastructure on the Rise in China, viewed on 01 August 2009, .

US commercial service 2001, Transportation, viewed on 29 July 2009, .

4.0 APPENDIX
(Source fromhttp://www.doingbusiness.org/ExploreTopics/StartingBusiness/Details.aspx?economyid=185)
TANZANIA CHINA
List of procedures List of procedures
Apply for VAT certificate with the Tanzania Revenue Authority
Obtain a notice of pre-approval of the company name
Apply for clearance of the proposed company name at the Registrar of Companies
Obtain capital verification report from an auditing firm
Apply for taxpayer identification number (TIN) with the Tanzania Revenue Authority
Obtain the approval to make a company seal from the police department
Revive VAT/stamp duty inspection
Register with Social Welfare Insurance Center

Register for the workmen’s compensation insurance at the National Insurance Corporation or other alternative insurance policy
Register for both state and local tax with the tax bureau

(Source from: httpwww.freshfields.compublicationspdfs200614675.pdf)
DIRECT INVESTMENT
Direct investment is done through joint venture with domestic investors and domestic owned companies in a country by investing its invested capital and participating in investment activities.

INDIRECT INVESTMENT
Indirect investment is the type of investment through purchase of shares, bonds, share certificates, security investment fund. Investors do not directly participate in management of investment activity.