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Newsletter - International Investor Edition
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Newsletter - International Investor Edition/ January 2012
CEO’s Message
2011 was indeed a volatile year due to the EU sovereign debt crisis. The financial markets swung back and forth as a pattern of “problem crops up, politicians promise action, solution plagued by political divisions, market disappointed” seem to become entrenched deeper and deeper. By the end of the year, as I write this, it has become clear to most observers that bigger and bolder actions are required both for the short term funding problems as well as the long term structural and governance issues responsible for causing this havoc.
Although at this time it is unclear if the situation will turn for the better or worse, in general most analysts agree that Europe’s economic growth will be affected adversely in the years ahead as the region adjusts to austerity measures in indebted countries and painful structural reforms are made to their economies. The only question is how long and how deep will the slowdown be?
Given this outlook, many western MNCs are shifting their focus to the Asian market where growth is expected to be stronger over the next few years – in particular China. In this issue we discuss two related topics in this exodus eastwards: a continuation of the previous issue’s article on China’s mass consumption market, and what foreign senior executives can expect when they are sent to China on an expatriate package.
We hope you’ll find our articles useful. They are of necessity, brief, but should you require more concise help and information, do not hesitate to contact us for a chat with one of our specialist consultants. Meanwhile, with the new year upon us I wish all of you a prosperous 2012 ahead. For us in China, our Year of the Dragon will start on 23th January!
Much of the headlines regarding China’s retail industry pertain to the boom of the luxury market fueled by a rapidly expanding class of affluent individuals. However, looking ahead China still has plenty of room to go in urbanisation (50% as at end 2010) and a rapidly rising middle class. In this article we explore some of the less noted dynamics and trends of China’s domestic consumption market and the opportunities they offer for foreign businesses.
1.Rapid rise of e-commerce as a consumer retailing channel
Internet retailing is exploding in China; it registered a total growth rate of a whopping 1349% between 2005-10. In absolute value terms, sales quadrupled from CNY20.2 billion in 2009 to CNY80.1 billion in 2010! Without a doubt, this stellar growth has to do with the rapid rise of internet users in China. Internet penetration in China went from just 4% of all households in 2000 to 32% by June 2010. China has 420 million users as at June 2010 – the highest in the world. Due to the government’s push, rural internet users has in recent times, outstripped the increase in urban areas. There are 107 million rural users as at June 2010, many of whom are likely to use the internet to purchase goods they cannot otherwise access in rural areas. Such developments in internet usage penetration, coupled with improved e-commerce infrastructure and business models such as good delivery networks and the creation of bank escrow facilities for payments has resulted in the tremendous growth of internet retailing. It is definitely an area new foreign market entrants should not ignore, given that the country is huge and traditional brick and mortar sales channels are complicated and take time to establish.
2.Rural consumption
Since December 2007, China’s government has progressively implemented a rural area household appliance subsidy programme that has been very successful. The subsidy programme is set to continue until 2012. Domestic brands like Haier has benefitted tremendously from partaking in the scheme and having a presence in 3rd and 4th tier cities. Foreign brands such as HP, GE, Motorolas and Fisher & Paykel are now entering into partnerships with Chinese retails chains to expand their reach into rural China under this subsidy scheme.
In February 2005, the Ministry of Commerce also initiated retailing reforms in rural areas which aims to establish a distribution network where modern retailing outlets have yet to penetrate. By the end of 2010, the project was on track to complete 520,000 stores with sales of over CNY200 billion. The government hopes to have 90% of all villages covered by a rural store by 2015.
3.Quality perception and strong brand loyalty
Ever since tainted food scares exploded in mainstream media over the last few years in China, Chinese consumers are increasingly becoming brand conscious even when it comes to basic necessities. Consumer research shows that buyers are more likely to stick to familiar brands which are associated with safety and quality, especially the younger generation who are educated and westernised. They are also willing to a premium for the brand once it becomes recognisable and regarded as being of better quality. In this regard foreign brand names have an advantage as they are often perceived as being of better quality than domestic products.
4.Younger consumers vs older consumers: Quality over price and western culture influence
Younger consumers in China – those in their 20’s and 30’s –are more trend conscious and more willing to save and spend on premium and luxury goods associated with being fashionable or high-class. Owning an iPhone, an European branded bag, western brand name clothes and shoes etc. appeal much more to the young who are more concerned about their peers’ perception and emphasise more on leisure and lifestyle purchases than the elderly, especially those who are still single and without family obligations.
Young consumers are also heavily influenced by western culture due to the amount of exposure they receive and their knowledge of English. Thus, their consumption choices are more likely to align with western lifestyles and brand names. Western products ranging from furniture, electronic gadgets, fashion to entertainment should target these age groups.
ANT-SINOVA has already helped several SME’s from foreign countries enter the domestic market and stands ready with local knowledge and expertise to aid more. China is a big country and the culture, language and retail distribution networks differ from region to region. Therefore, foreign players should never underestimate the need for local knowledge and ample homework and preparation before tackling this largest retail market in the world.
Spotlight Article -Life as a Senior Foreign Executive in China
A survey conducted in February-March 2011 by Cartus Corporation (a relocation company) revealed that China ranked as the top country that MNC’s are most likely to send expatriates to over the next two years. The top reasons cited by these companies for sending their staff: to provide local leadership (68%) and project-based expertise (64%). In this article we take a quick look at the package and living conditions that senior foreign executives can expect if they are sent to China.
At the top of any employee’s concern would definitely be salary. While the compensation of an expatriate in China is really hard to put an average figure on – depending on where you come from and what industry/company you work for – the following is a rough guide for key management positions from a survey done by Aon Hewitt (a HR consultant) in 2010.
Country Manager
General Manager
Finance & Accounting Director
Sales & Marketing Director
Human Resource Director
US$552k
US$317k
US$273k
US$241k
US$221k
Other than the monthly salary, the package would usually include other allowances such as hardship allowance, housing, transportation, insurance and schooling etc. Comparatively, expatriates sent to Tier 2 or 3 cities may be getting a better deal for these perks since their dollar can be stretched further due to the lower cost of living as well as employers giving better packages to make up for the lower quality of life.
However, industry evidence is pointing to the fact a lot of expatriate positions are being “localized”. This does not necessary mean a switch to hiring local workers, but more a reduction (or in some cases, elimination) of perks and allowances; especially in cases where the expatriate is already working in China and into his second contract or is a Chinese national educated and working abroad but being sent back to China by a foreign firm.
In terms of cost of living, Mercer’s ‘Cost of Living Survey’ ranks 214 cities around the world based on categories like housing, transport, food, clothing, household goods and entertainment. The survey is designed to help MNC’s and governments determine compensation allowances for their expatriates. For 2011, four cities in China were ranked (rankings shown in brackets): Guangzhou (38), Shanghai (21), Beijing (20) Shenzhen (43). This ranking used New York City as the based for comparison and the US$ as the pricing currency. The cost of housing was especially important in determining the rankings of the cities.
Government taxes and social insurance are other costs that a foreign expatriate has to consider in his negotiation. As of 15 October 2011, the Chinese government has made it compulsory for all foreign workers and their employers to contribute to five different social insurance schemes: basic pension, unemployment, maternity, work-related injury and medical insurance. Only Koreans and Germans are exempt from the retirement pension under a mutual agreement. However, these insurance fees vary from region to region within the mainland.
For income tax, China has a multi-tiered system of tax liabilities for foreigners which can be very confusing to the layman. In general, a foreigner who stays in China for a full tax year (a calendar year in which the individual either spends more than 30 continuous days or more than 90 cumulative days outside mainland China will not be considered a full tax year) could be considered as a tax resident, unless otherwise specified in a double tax agreement. Social security and taxes are complicated issues and readers are encouraged to defer to specialist help if they want to understand more about this aspect. Most MNC’s would handle the calculation and payment for their expatriates as part of the package.
Finally, where quality of life is concerned, as a general gauge would-be expatriates can take reference from a couple of worldwide surveys. Mercer’s 2010 Quality of Living ranking placed Shanghai and Beijing at 98th and 114th respectively against a list of 221 cities worldwide. The Global Livability Report compiled by the Economist Intelligence Unit (EIU) ranked 140 cities worldwide based on parameters such as social stability, healthcare, culture, environment, education and infrastructure. In its latest survey, mainland cities ranked as follow: Beijing (72), Suzhou (73), Tianjin (74) and Shanghai (79).
One final point worth noting is the increasing cost and difficulty of getting a place in an international school in Tier 1 mainland China cities these days, with places in top international schools costing up to US$200k annually. Some expatriate families have even turned to home-schooling instead. This is an area worth planning carefully when relocating to China.
Other News and Announcements
China now requires large and medium-sized enterprises to establish labour dispute committees to ensure an effective communication and dialogue mechanism exists between employers and employees. The Ministry of Human Resources and Social Security (MHRSS) recently issued the “Regulations on Enterprise Labour Dispute Negotiation and Mediation (MHRSS Decree No.17)” on 30 November 2011.The new regulations, which took effect from 1 January 2012, detail negotiation and mediation procedures when labour disputes take place, and emphasize enterprises’ obligations to put an operative mediation mechanism in place.
China is attaching more importance to supporting company restructuring as well as mergers and acquisitions (M&A), hoping these business activities will help optimize the country’s resource distribution and push forward economic transition. The State Administration for Industry and Commerce (SAIC) released a new document “Opinions on Improving Registration Services for Companies after C&S and Supporting Enterprise M&A as well as Restructuring (gongshangqizi [2011] No.226)” on 28 November 2011 requiring government departments to offer greater convenience for the registration of businesses after combination and separation (C&S).
China has effectively outlawed the more than 300 commodities and cultural exchanges that have sprouted across the mainland if they fail to obtain a license from the government. A wide range of products are traded on these exchanges: metals, artwork, agricultural products, medical products, financial assets, equities and carbon emission rights. In the “Decision on Clearing Up as Well as Rectifying All Types of Exchanges and Effectively Preventing Financial Risks (guofa [2011] No.38)” issued on November 11, the State Council has emphasised that all kinds of exchanges across China shall obtain approval from the State Council.
China is clamping down on the illegal renting of rural agricultural land for commercial purposes. The Ministry of Land and Resources issued the “Urgent Circular on Strictly Prohibiting Industrial and Commercial Enterprises from Altering Land Use Purpose without Permission for Constructing Non-agricultural Facilities on Leased Agricultural Land” on 29 November 2011. The Circular deals with the transfer of contractual land management rights and aims to ensure that the land use is not altered in the transfer process. Where an enterprise wishes to utilize agricultural land for non-agricultural purposes, such use must comply with the general plan of land use in that locality, and the enterprise must undertake the approval procedures for converting the usage of agricultural land.
Economic Snapshot
Disclaimer
Please note that the above is published for information and general circulation purposes only. While the information set out above is based on sources believed to be reliable, ANT-SINOVA (together with its directors and employees) makes no representations or warranties expressed or implied as to the accuracy, completeness or timeliness of any of such information, and ANT-SINOVA accepts no liability for any loss whatsoever, direct or indirect, arising from the use of such information.
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