CHINA FOCUSNewsletter on business trends and corporate strategies

NOV 2012 If you wish to receive CHINA FOCUS via email,

please subscribe via our website: www.fiducia-china.com

CONTENT

2013 Survey Outlook: Further Growth While Cooling Down

“Do-It-For-Me” instead of DIY

Personal Risk Areas for China Managers

Caveat Emptor: Supplier Payments Fraud

Germany and Singapore Enhance Tax Cooperation

Update: German Visa Application to China

2013 Survey Outlook: Further Growth While Cooling Down

CHINA FOCUS • November 2012 • 1 of 4of China Insight

We are excited to share the findings with you on the outlook of German companies in China - their business prospects and expectations for 2013. This was a joint survey done by Fiducia Management Consultants and the German-Chinese Business Association (Deutsch-Chinesische Wirtschaftsvereinigung).

Profile of the German-Chinese economic relationsChina and Germany are among the fastest growing economies in their respective region. Germany´s GDP grew by ca. 3% in 2011 (Europe: 1.2 %) while China saw a 9.1% increase in the same year (Asia: 7.9%).

In Germany the repercussions of the European debt-crises are still topping the agenda; whereas China is confronted with a huge need for reform in its economic and social system. The goals the Chinese government set for itself in the latest 5-year plan include boosting innovation, ecological sustainability and domestic demand that are certainly ambitious.

Slow GDP growth – but expectations stay strongFor 2013, more than half (55%) of the companies expect a growth of China´s GDP of 6% or less. Another 36% see a growth of 7-8% and a minority of 8% of the survey participants expects 8% or more.

With regard to their own growth prospects, half of the companies plan for increased sales revenues of 11% or more in 2013; only 15% expect declining sales. Most optimistic indus-tries are consulting and service businesses, of which over 60% plan for 11% sales growth or more. This underlines the growing importance of the service sector in the Chinese economy. Other sectors with above - average growth expectations are machinery and electronics.

The majority of German companies commented the reason to invest in China is the low cost for sourcing and production compared to other countries.

80% of participating companies expect positive EBIT in 2013-2015

Increasing importance of ChinaFor a growing number of German companies, the Chinese market contributes a significant share. 42% of all surveyed companies reported that China accounts for 10% or more of their global revenue. On average, the companies achieved 19% of their revenues in China.

Noteworthy in this regard is that for smaller companies, China tends to play a less important role than bigger companies. While for those participating companies with less than €50m revenues - 10% percent of global revenue are from China. For those with €500m revenue or more, an extraordinary 20% are from China.

Innovation and localisation as key success factorsIn addition to expanding and optimising the sales and distribution strategies, German companies in the survey regard innovation of products and services as the most important measure to achieving their goals. Furthermore, the majority customises its products to the specific requirements of the Chinese market: 62% report that they sell different products in China than their home market Germany.

Personnel expenses are the biggest cost driverAmong the survey participants 71% saw an increase of personnel expenses by 11% or more in 2011. Other areas with significant cost increases were logistics and land-use-rights.

CHINA FOCUS • November 2012 • 2 of 4of China Insight

More than half of the companies (55%) were able to compensate the increased cost by improving the productivity of their operations, the rest (45%) could not be compensated by efficiency gains. If this trend continues for those companies, the profit margins will come under growing pressure.

Top 5 provinces for new presences

Yangtze River Delta

North East

Western

Pearl River Delta

Bohai Bay

38%

32%

Central

51%

34%

Labour intensive production moves inlandThe Yangtze-River delta is home to the majority of survey participants, with 68% having their base there. Other important areas for German investment are the Pearl-River delta around Hong Kong and Guangzhou (16%) and the Bohai-Region around Beijing and Tianjin (10%). Those regions are also most favoured for additional investments. The highest relative gain of importance as investment destination can be found in the Western and Central provinces of China. 32% of the companies are considering new investments of branch offices there especially due to the availability and lower cost of labour.

For businesses that put higher emphasis on good infra- structure, the coastal regions remain top choice. Also, for many businesses these regions are where their customers and suppliers are located, thus making them a natural choice.According to the survey only 12% of the companies have considered moving wholly or partly out of China as an appropriate measure to mitigate the increasing cost pressure.

Training counters corruptionThe feeling of being treated unfairly by Chinese authorities in comparison to their domestic competitors is still wide-spread among foreign companies. Only one fifth of the surveyed companies reports that compliance has gained higher importance in the Chinese business environment and that illegal practices are decreasing. Half of the companies say that they have lost business in the past due to corruption. According to the survey, 45% of the companies have implemented specific anti-corruption guidelines and 38% regularly offer related training to their employees.

Further growth while cooling downThe survey shows that German companies overall expect China´s economy to cool down. The market nevertheless remains of high interest to them and further expansion of the business activities is planned.

As compared to other regions of the world, the growth in China is still unrivalled. The German companies that stay in this market rely on their traditional core advantages of innovation and technology leadership to strengthen their foothold.The biggest challenges the participating companies see for China´s development from 2013-2015 are rising labour cost, decrease in overseas demand and ongoing RMB appreciation.

“Do-It-For-Me” instead of DIY

The editor of DIY International magazine interviewed our Managing Director Stefan Kracht and Operations Solution Manager Song Lin about their opinion on the development of DIY products in China. Refer to China Focus Jul/Aug 2012 for a market overview.

How does the DIY market in China look like today?The Chinese do not favor DIY; it is considered by many as a low class job instead of a hobby. When they require this service, skilled tradesmen are available to hire at very little expense. The tradesmen in turn make his purchase not in a DIY store, but often in very small hardware shops in the city often lined up one after the other.

There is a feeling that a “good-enough or easy-to-use-“product has yet to be found for the Chinese market according to Stefan Kracht. Many consumers simply do not know how to use the tools available to them. “They are afraid of doing more damage to their property than actually solving the problem. ‘Do-it-for-me’ is their motto: they expect to get help from the dealer who sold them the product,” is the Chinese consumer’s behaviour and understanding of the service concept Song Lin explains.

What does the future hold for the DIY market in China?In Kracht’s estimation, the Chinese domestic market is only just beginning to develop. Consumers are still not interested in DIY, but “They don’t know what they don’t know”, which is why he mentions the education of consumers to be a key concept companies should use to push the DIY market to maturity.

According to Stefan Kracht, an important role is the establishing of a domestic market including e-commerce, which is booming with 100m users in China. Online shops offer a solution to the problem that very many Chinese consumers have no access at all to modern retail outlet with a reasonable distance.

Stefan’s and Song’s predictionBoth realise the domestic market is not yet fully mature, at the same time both consumer expectations and labour costs are rising. Manufacturers are now having to contend with the problem of selling at home or for exporting to Europe / North America. Therefore, they are tending to look more closely at emerging countries like Malaysia, Thailand, Indonesia and Vietnam - similar to China in terms of both geography and consumer behaviours: a potential DIY market of 500m consumers that is right on their doorstep.

Stefan Kracht and Song Lin

Majority choose SE China to establish their new presence

CHINA FOCUS • November 2012 • 3 of 4of China Insight

Personal Risk Areas for China Managers

Avoid walking on a thin line when working in China

Caveat Emptor: Supplier Payments FraudSo buyers beware!To receive one payment, a production entity, an export entity and yet another can be involved; It is often unclear how these companies are related to each other.

Not only does this ambiguity have an impact on payments and shipping documents, it also affects the buyer’s chance of successfully claiming the supplier for quality defects or other negligence.

The above case could have been avoided if the staff knew what to check in the documents and how to verify the information from the supplier. Three rules you should follow:

► Check for company chops - contracts in China must have this is be considered legally binding► Verify unknown company which never appeared in any prior contracts or invoices ► Prompted the staff to contact the supplier if new payment instructions occur

Fiducia will be holding a seminar on this topic next february, if you are interested in attending please email us at contact@fiducia-china.com

The rapid development of China´s economy has attracted many foreign managers to the country. Many of them are not aware that living and working in China comes with certain risks. Detailed responsibilities that come with the role as Legal Representative of a Wholly Foreign Owned Enterprise are often unknown or left ignored.

Earlier this year, a German manager of a logistics company was detained in Beijing and held behind bars for 4 months, accused of defrauding China customs of more than one million USD. He was later released under special conditions and while the case is still under investigation, he is held in China until further notice. While this is an extreme case, foreign managers must understand the risks of doing business in China.

Endless variety of risksThere are many areas in which the Legal Representative (LR) faces a risk resulting from his/her position. Firstly, the LR can be held responsible by the shareholders of the company for different kinds of misconduct. This could be the case when the LR himself acted against Chinese laws or knowingly tolerated such misconduct by other employees of the company. For any financial losses of the company resulting from this, the shareholders can seek compensation from the manager.

Conducting business outside the scope of the company, fraud against an authority like under-declaration of customs duty of VAT or illegal extraction of registered capital from the company are areas the LR needs to review. Ignorance is no excuse. The consequences range from just being reprimanded to being fined and illegally acquired assets can be seized. Worst case scenario is detention. Good corporate governance is vital - the submission of false financial data to the authorities or illegal business activities like paying or accepting bribes are penalised in China.

Tough Stance on Visa PolicyChina has recently started a 100-day campaign againstforeigners working illegally and overstaying on their visa. At the same time a new immigration law has been passed that imposes stricter sanctions on companies who employ foreign workers. A zero tolerance policy applies for all illegal Chinese visas. Some foreigners in China have a rather relaxed approach when it comes to applying for or renewing their visas. Many foreign managers on China business trips have held tourist visas, and those who work full time in China use business visas instead of legal working permits. (See full article in Jul/Aug 2012 China Focus)

How can you protect yourself? Ensure strict compliance in your company. Our advice is to overcome the general perception that in China one can break the rules from time to time, which is widely spread among many local and foreign managers. Just because illegal behavior was tolerated in the past, this is no guarantee it will be tolerated in the future. Thus, implementing a rigid compliance management in your company is the logical step to reduce your personal risk as a China manager.

Case studyOur client, a European toys importer receives an email from her long-time Chinese supplier stating the payment for the up-coming shipment should be remitted to a new bank account. While the alarm bells went off, the message appeared in the email thread of an existing order and included as attachment a Letter of Authorisation with the new bank details. Our client proceeded with the payment only to find out later that the supplier claimed the email was not sent by them and would not release shipping documents for the order, leaving the importer unable to collect the goods.

The supplier conceded that its email system was hacked and agreed to share part of the loss. While similiar cases have been reported in the past, the damage of payment fraud remains.

“Payments to Hong Kong or Chinese suppliers are not always straightforward, as often two or more

companies are involved in an order”- Bryan Wong, Trade Service Manager

CHINA FOCUS • November 2012 • 4 of 4

For previous issues and newsletter subscription: www.fiducia-china.comPublisher: Fiducia Management ConsultantsEditor & contact for press and article reprints: contact@fiducia-china.com

All liabilities excluded. This newsletter is based on information obtained from sources (govern-ment, business associates, companies, publications, etc.) we believe to be reliable. However, Fi-ducia Management Consultants does not take any responsibility as to its accuracy, completeness or correctness. Copyright © 2012 Fiducia Ltd. All rights reserved. Protected by copyright laws.

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of China Insight

Germany and Singapore Enhance Tax Cooperation

UPCOMING EVENTS

The ministers of finance of Singapore and Germany announced a joint statement recently that they will enhance their tax cooperation information exchange, aiming at tackling cross-border tax evasion. Both countries will incorporate the Standard for Exchange of information into their avoidance of double taxation agreement. The agreement will come into effect after ratification domestically.

The scope of exchange will be expanded significantly. In future, it will be possible to exchange information for all types of taxes and not restricted to only taxes on income and capital. The exchange of information will no longer depend on the taxpayer being resident in one of the contracting states; the requested state is also obligated to obtain information even when it does not itself require the requested information for tax purposes. Also, banking secrecy will not constitute an obstacle to exchanging information.

15 November Shenzhen SCM Best Practices in China Export TradeIncreasing customer demand for high quality products, speedy turnaround times coupled with low pricing creates tremendous pressure on purchase businesses. Trade Services Manager Bryan Wong and Supply Chain Executive Anne Kuschert will share best practices and highlight cases of overcoming supply chain complexities.

19 November ShanghaiFiducia Leaders’ Circle What has changed in your business in 2012, and what are your expectations for 2013? To understand the current situation and strategies of German companies in China better, Fiducia Management Consultants, together with the DCW (German-Chinese Business Association) conducted an online survey in September to ask German companies in China about their business prospects and expectations for next year. The Fiducia management team will summarise and discuss the findings with participants.

19 November LinzLinz China DayTake advantage of the presence of more than 35 business delegates for advice on market analysis, partners and supplier search, legal information, support for start-ups, assistance with administrative or joint ventures. The delegates will also inform you about current economies outlook and market opportunities. Chairman Juergen Kracht will be present at this event to exchange and share information with you.

20 November ViennaBRIC Conference 2012 - Global Cooperation This conference will include panel discussions with high-profile top executives and experts from different industries. They will speak about the market development and opportunities and risks for Austrian companies. Chairman Juergen Kracht will take part as a guest speaker on the topic “Business partner BRIC: Global Cooperation”. To learn more about this event, go to http://portal.wko.at/wk/startseite.wk.

Update: German Visa Application to ChinaThe China visa application procedure for all German nationals who are traveling to China have been outsourced to a service provider called “Chinese Visa Application Service Center”. The Embassy of the People’s Republic of China in Germany will not issue China visa anymore. There will be 5 available locations in Germany to handle this procedure. Address locations are available on our website.

Best practicesWe recommend that all companies involved in a particular trade transaction are mentioned in the purchase contract, and that their roles and liabilities are clearly stated therein. Supplier’s proforma invoice or commercial invoice should state beneficiary bank information to increases both accuracy and efficiency of processing payments. Not all suppliers are equally proficient in handling documentation. Some run sophis-ticated ERP systems and have well-established processes while others still rely heavily on manual documents and procedures. In some cases, we receive a duplicate invoice from the supplier for the same goods. To effectively deal with all suppliers, it is imperative that the buying company has a good system to keep track of accounts payables and payments to reduce mistakes.

Both countries have agreed to the exchange of information