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Hong Kong China Business(BUSS411) Problem 1: Entry strategies for China business Group Y

Hong Kong China Business(BUSS411) Problem 1: Entry strategies for China business Group Y. Group members: Chan Yung Mui, Dan 00253267d Chow Yuen Kwan, Inty 00214132d Lau Wing Ho 00214637d Lo Wai Kwan, Rachel 00306791d Leung Pui Yee, Cherie 00238956d. Company Background.

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Hong Kong China Business(BUSS411) Problem 1: Entry strategies for China business Group Y

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  1. Hong Kong China Business(BUSS411) Problem 1: Entry strategies for China business Group Y Group members: Chan Yung Mui, Dan 00253267d Chow Yuen Kwan, Inty 00214132d Lau Wing Ho 00214637d Lo Wai Kwan, Rachel 00306791d Leung Pui Yee, Cherie 00238956d

  2. Company Background  Company Name: Grvovufas (manufacturing company)  Owner: Mr. Dai Wai See  Year of establishment: 1963  Product: electronic toys  Business Mode: OEM(Original Equipment Manufacturer) ~ design(customers in US and Europe) ~ manufacture(Grvovufas)  Move production unit to Dongguan in 1988

  3. Middle size with owned-technology department • Hong Kong Office is the decision-making party • Factory in China was just for production • Grvovufas provided machinery, components of production • Local gov’t provided land for the factory • Employed 200 local workers

  4. The issue concerned: • Grvovufas had three contractual joint ventures with the township government; • The business has been profitable and no major disagreements; • The contracts for the joint ventures will run out in 2004 Should re-new the contractual JVs? Change the mode of operation to equity JV or wholly-owned subsidiary?

  5. Content 1. Characteristics of electronic toy industry 2. Situation in Guangdong Province (especially Dongguan) 3. Comparisons of the 3 operation modes 4. Final Decision 5. Preparation for selected mode

  6. 1. Characteristics of electronic toy industry ~Prevailing trend of Hong Kong manufacturers moving the base of production and the procedure of assembly into the Mainland ∵ Cost of production (fixed cost of land, cost of labor , operation cost of running the factory, e.g. cost of electricity and water)

  7. (i) Labor-intensive ~ abundant supply of cheap labor ~ the local enterprises earn from the value-added procedure and managing, by providing its cheap labor ~ a lot of labors are required for working along the conveying belts to assemble each part of components of the electronic toys by specialization (repetitive tasksefficient)

  8. (ii) Capital / Technology Level ~ some manufacturing procedures may be inevitable required the use of machinery (e.g. conveying belts, the machine for packaging) ~China still a developing country  low technology level ~but not big problem in this case ∵ just require having the components assembled, but not having them invented or produced

  9. (iii) Scale of Operation ~ most of the Mainland toy manufacturers  small-sized enterprises with annual value of production of between 2 to 3 million dollars ~limited budgets for R&D but not big problem in this case ∵ just require manufacturing , instead of new product development

  10. 中 國玩 具 的 出 口 • Source:http://gbcode.tdctrade.com/han3/2/1/1/0/0/0/0/0/toys.tdctrade.com/index_c.htm

  11. 2. Situation in Dongguan Geographical Location of Dongguan:

  12. Transportation of Dongguan Harbor => airport - International airport in Guangzhou - Hong Kong international airport Highway Railway

  13. Geographical advantages of Dongguan • Located at middle south of Guangdong province • The “water distance” between HK is 47 “Holi” • Dongguan is the throat of transportation between HK and Guangzhou  comprehensive transportation network (harbor, railway, highway airport)

  14. Toy industry in Dongguan • 70% of China’s toy industry located in Guangdong • many toy’s firms (different size, objectives, target market) located in Dongguan • no specific requirements in toys production

  15. License required in our company Application for export product license Source: http://www.dgboftec.gov.cn/en/03/yewu_erke06.html

  16. 3. Modes of operation A. Contractual Joint Ventures(CJVs) -the partnership will dissolve after a specified period [3 years contract with township gov’t] Adv:  easier to get gov’t info ~ polices about toy industry  convenient to ask for gov’t resources ~ toy industry need a large place  get the approval from authority in short term ~ get the license for export

  17. Disadv:  imbalance bargaining power (bear more responsibility of gov’t resources) ~ recruit not first priority workers who live in Dongguan  extra unnecessary training needed  great chance to alter contract when renewal ~ required to remove the site due to development plan of government itself  use more resources to write a contract ~ human resources, time cost

  18.  : contractor=gov’t ~ gov’t take more social responsibility and consideration inflexible in decision making can’t react to market promptly  different goal ~ grvovufas: profit maximization & focus on quality ~ gov’t : benefit to Dongguan Not re-new contract with government (WTO--open market--rely on gov’t )

  19. B. Equity Joint Ventures (EJVs) -a long-term relationship among the partners that manage the JV -shared equity and resources Adv:  synergistic effect - partners’ strength complement with each other  more control & greater potential ROI(return on investment)  opportunism mutual trust tolerate each other long-term viability of EJVs  build guanxi network via local partners

  20. Disadv:  giving our technology to a future rival ~ how to produce advance electronic toys ~ how to deal with foreign countries  conflicts may occur ~ diff. strategies (technology Vs people) ~ ownership of assets  low enforcement of intellectual property right in China  technology spillover  harm own business

  21. C. Wholly-owned subsidiary(WOS)/ Foreign Direct Investment(FDI) - represents the greatest commitment to foreign markets and may be either in the form of acquisitions or greenfield investments Adv:  minimizes market imperfections ~ barriers to exporting/ licensing  enjoy flexibility and managerial control ~ no burden of uncooperative partner  faster to establish than EJVs ~ WOS(30days) vs JVs(no time limit)

  22. Disadv:  neglect of Guanxi ~ toy industry rely heavily with chinese agents  procure land, hire workers  raise questions of cultural and economic sovereignty ~ China view: foreign company take advantage  WOS = foreign island  vulnerable to criticism

  23. 4. Suitable Mode  criteria = advantage + suit our situation Decision: EJVs Decision: EJVs Decision: EJVs

  24. reason: a) company size : medium ~  capital(to rent land, build factory, hire workers) b) business mode: OEM ~ produce, not design  unstable order (depends USA, Europe demand)  share risk c) balance bargaining power ~ more control (vs CJVs)

  25. d) synergistic effect ~ Grovovufas: components, technology, experience, management ~ local partners: knowledge about local culture & polices, good guanxi network ( we have this with gov’t before only) e) goal : production only/ meet the order  enter or expand China market  no need to be WOS f) no restriction specially for exporting toy industry  the need as a WOS

  26. problem arise? a) technology spillover? Grvovufas: machinery, expensive component from Japan  difficult to duplicate the toy

  27. b) difficult to find partner? Guangdong 70% of China’s toy industry in 2000, output from Guangdong = 38.5billions ~ well-developed environment certain level of technology(e.g. machinery) skillful worker  easy to find experienced partner  not much investment needed source:http://www.tdctrade.com/sme/chinese/chinatory.htm

  28. Content of EJVs HK: Grvovufas ~ provide machinery ~ buy component ~ take and fill order ~ delivery from Dongguan to H.K. China: local partner ~ provide land ~ build factory ~ hire worker (with training) ~ deal with township regulation

  29.  set profit & cost sharing proportion  arrange a emergence fund  visit and evaluation regularly  send a team of quality control and management in China

  30. Registration of J.V in Dongguan Procedures:

  31. Registration of J.V in Dongguan • Documents required for submission • The official document for the establishment of joint ventures, cooperative firms and foreign ventures • 22 copies of contract and articles of incorporation, 5 copies of feasibility study report • One copy of "Notice for pre-examination and approval of enterprise names" issued by the Municipal Bureau of Commerce and Industry

  32. Registration of J.V in Dongguan • One copy of the competent authority's application for the establishment of joint ventures, cooperative firms or foreign ventures; • One copy of the name list of the Board of Directors • One duplicate of the business license or registration certificate of each side

  33. Registration of J.V in Dongguan • The foreign side should provide a copy of certification of its financial status by the bank including name of enterprise, address of the enterprise, time of opening of account, credit amount, deposit amount and business reputation • Certification of the fulfillment of factory premises, sites and equipment provided by the Chinese side and the auditing opinion of competent authority

  34. Registration of J.V in Dongguan • In the case of an environmental pollution item, one copy of the approval document by the Municipal Environmental Protection Bureau (original) and a duplicate of the approval document by the Municipal Government Office • submit a duplicate of certificate for land use issued by the Municipal National Land Bureau or Official approval document (original) for land use by the Municipal National Land Bureau

  35. Registration of J.V in Dongguan • The resolution of the Board of Directors of the investment side • The application form for affirmation of foreign investment items encouraged by China • The counterfoil of the approval certificate of foreign- invested enterprises or enterprises invested by Hong Kong, Macao or Taiwan patriots • Other documents required (depending on the difference of items)

  36. Joint Venture law in PRC • Ministry of Foreign Trade and Economic Co-operation of the People's Republic of China • The Provisional Measures on the Establishment of Sino-Foreign Joint-Venture Trading Companies on a Pilot Basis are hereby enacted, effective on the date of their approval by the State Council on September 2, 1996 Source: http://www.china-taiwan.com/english/fgtl/

  37. Joint Venture law in PRC • Ministry of Foreign Economic Relations and Trade、the State Administration for Industry and Commerce • These Provisions are formulated in accordance with the Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures and other pertinent laws and regulations in order to protect the lawful rights and interests of the various parties to Chinese-foreign equity joint ventures and to maintain the social economic order

  38. Q & A

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