Confederation of Indian Industry

Doing Business with China Emerging opportunities for Indian companies

July 2011

Contents

Message from Director General, CII Introduction Trade statistics India and China trade is more than US$ 60 billion in an year Bangkok Agreement between India and China Foreign investment in China Choice of business entity Taxation in China Drivers for inbound and outbound investment Key industries Automobiles and auto components sector Information Technology and IT enabled Services sector Real Estate, Construction and Infrastructure Sector Tourism sector Case studies Case Study 1: Mahindra and Mahindra in China  Case Study 2: An Importer / Trader sharing his experience of business with China Way forward Acknowledgements About CII Contacts

3 4 6 6 9 10 11 14 15 16 16 18 19 21 23 23 24 25 26 27 28

Message from Director General, CII

India and China have enjoyed a dynamic economic relationship which has gained much traction over the last decade. Both countries represent large rapidly growing developing economies and have emerged as drivers of global growth. The opportunities in both nations are expanding at an astounding pace as development intensifies and a new class of consumers and workers from both sides steps onto the global economic platform. Within this scenario, the Confederation of Indian Industry believes that it is imperative to evolve a multidimensional balanced economic engagement of both countries that includes trade, services and investments. The series of seminars on Doing Business with China: Emerging opportunities for Indian companies aims at facilitating such engagement and assisting Indian companies to achieve the next level in their presence in Chinas economic arena. This endeavour builds on the already strong activity profile of CII with the Chinese economy. Bilateral trade has multiplied manifold over the last decade and today, China is Indias largest trading partner. Mutual investments too are going up as businesses of both sides seek to leverage the benefits of dynamic and growing markets. The two countries are developing their special identities in each others economies and proceeding rapidly on participating in each others growth and development process. China has built a presence of pre-eminence for itself over the recent past to emerge as the worlds largest manufacturing and exporting nation. Despite the travails of the global economic crisis, it has exhibited resilience and continued high rates of GDP growth. A facilitative investment and manufacturing environment has attracted global multinational companies which have successfully set up business in China to address domestic as well as global markets.

Indias presence in China has also increased over the years, especially in areas of its core competency such as IT, manufacturing and R&D. However, for a synergistic bilateral economic engagement, there is need for Indian companies to tap the opportunities in the Chinese market more closely and to take advantage of its environment. Chinas strong presence in robust global supply chains is an added incentive for Indian companies for scaling up operations in China. CII has been actively engaged with China through a multi-pronged strategy including an office in Shanghai, partnerships with Chinese academic and business institutions, and a range of dedicated events on the business as well as strategic platforms. CII works closely with the Indian government on strengthening economic engagement with China, and has participated in bilateral visits of ministers from both sides. It undertakes relevant and timely research on China in order to enable Indian companies to shape their participation in its economy. The current series of seminars would reach out to Indian businesses in key industrial regions and would disseminate awareness on a range of topics pertaining to doing business in China. Apart from an overview of Chinas economy and bilateral trade and economic relations, the seminar series would include specific potential and opportunities for Indian business including identified sectors, business laws and regulations, the mechanics of setting up business in China, and financing options. The series would be addressed by government officials, top business leaders, and professionals from India and China to give a holistic and rounded perspective on the issues and challenges. I am confident that this seminar series would greatly add value to existing China strategies and spark fresh interest for new business for Indian companies. I believe that it would lead to a multifaceted sustainable economic engagement between these two fast-rising Asian powers. I wish the participants all success.

Chandrajit Banerjee, Director General, CII

Doing Business with China Emerging opportunities for Indian Companies | 3

Introduction

If one looks at the macro economic factors - the Chinese GDP has grown at 10% per annum for the last 3 decades compared to 6% for India. In terms of aggregate GDP numbers India stands at the spot where China stood in 2000 and in terms of Per Capita GDP, India currently stands where China stood about 15 years back
China cannot be ruled out as an important economy for India; as a market, as a competitor, and as a partner. The fact that it is currently the third largest economy and stated to become the world's largest economy by 2025, further provides impetus to the fact that Indian businesses cannot overlook China in their business plans. They are two of the fastest growing economies of the world. They are the two most populous nations and also the oldest civilizations in the world. The two countries started their individual journeys after India gained independence in 1947 and the Peoples Republic of China was established in 1949. At the same time, their differences are quite apparent both have different forms of government, both follow different models of growth China follows an export oriented, manufacturing economy whereas India is a domestic consumption-led service oriented economy. This is, perhaps, a result of the planning ideologies that the two countries adopted in the 1960s when the divergence in growth patterns of the two countries emerged. If one looks at the macro economic factors - the Chinese GDP has grown at 10% per annum for the last 3 decades compared to 6% for India. In terms of aggregate GDP numbers India stands at the spot where China stood in 2000 and in terms of Per Capita GDP, India currently stands where China stood about 15 years back. India has had a higher fiscal deficit and public debt compared to China, which has resulted in lower sovereign ratings. As a result, the Indian economy has been unable to increase its capital base at a pace in sync with China. However, India and China both stand to grow and benefit with greater commercial interactions with one another. Interestingly, while most investment bankers and companies look at India and China as competitors to the capital that they can invest, there are more complementary factors between India and China than one can imagine. India could learn from the Chinese especially in the fields of urban development, power projects, and road, rail and port infrastructure. China, on the other hand, could take a leaf out of the Indian success story in the sectors of information technology and IT enabled services. The Chinese government is focused on increasing their English speaking population, a feat already achieved by India. Another major focus area for collaboration could be in the space of services. China, like India, has a concentration of industries across different regions. The cities of Beijing and Shanghai are often cited as being very similar to the cities of New Delhi and Mumbai for being political, cultural and financial centres. They are reckoned as global cities owing to the highly skilled labour force found here and the predominant cosmopolitan style of living. According to an estimate by the Economist Intelligence Unit (EIU), the future outlook for Chinas GDP growth rate is estimated to be 8.5% a year in the period 2011-15. Though India and China are slowly moving towards greater collaboration, some of the challenges that the Indian companies face while interacting with Chinese businesses are on account of language and culture. In an attempt to bridge this gap, Chinese companies have

started to recruit English speaking employees for their international transactions. Culture and history have an overwhelming impact the traditions followed in that country and also the beliefs of an individual, which in turn have a direct bearing on the approach towards a business transaction. Risk- taking appetite of businessmen, speed of decision-making in a transaction, conflict resolution between partners are all related to the culture of any country. Chinese culture too has a profound impact on the way business is done in China. For example, relationships (Guanxi in Chinese) are an important element in the success for businesses in Chinese society. It helps not only in building further relationships but also in cementing bonds in difficult times. Relationships with business partners, suppliers and vendors and government officials are imperative

in China. Due diligence is another aspect of utmost importance while engaging with China in a business transaction. In all likelihood, the Chinese counterparts would have spent considerable time in studying the Indian businesses and the company that they are going to deal with, well in advance. Decision making in the Chinese government is decentralized and is dispersed across various industries. This implies that a company needs to keep track of policies and regulations at all levels. Even after obtaining clearance at one level the company could be non-compliant at another level. Another implication of the decentralized decision making policy is that it can be extremely beneficial if the company's strategic agenda is aligned to the local government's priority.

Doing Business with China Emerging opportunities for Indian Companies | 5

Trade statistics

India China trade is more than US$ 60 billion a year In the year 2010, the trade between the two countries stood at US$ 61.74 billion. In the first six months of this year the trade between the two nations has already crossed US$ 35 billion. The trends clearly indicate that India-China trade could reach US$ 100 billion by 2015, a target set by the leaders of the two countries, during the visit of Chinese Premier, Wen Jiabao to India in 2010. Table 1: Trade between India and China 2008 Indias exports to China Chinas exports to India Total India China Trade Trade Balance for year
Source: Indian Embassy in China

On analysis of the trade statistics, China emerges as one of the most important trading partners for India. If the trade between India and Hong Kong is also added, China clearly is the largest trading partner for India. (Refer to Figure 1.1 and 1.2) However, while there has been an increase in both the imports from China to India and the exports to China from India, in the last 5 years or so, the rate of Indias imports far exceeds the rate of exports. It is, however, important to note that even though China is an important trading partner for India, India is only the tenth largest trading partner for China. The major trading partners for China are still EU, USA, and Japan. India ranks as the seventh largest export destination and ninth largest import destination for China (Refer to Figure 2).

2009 13.7 29.57 43.28

2010 20.86 40.88 61.74 -20.02

20.34 31.52 51.86

-11.18 -15.87

Figure 1.1: Leading trade partners in India's import basket (US$ million) 40,000 40,000 30,000 30,000 20,000 20,000 10,000 10,000 -

2004-05 2004-05

2005-06 China 2005-06

2006-07 U.A.E. 2006-07

2007-08 Saudi Arabia 2007-08

2008-09 USA 2008-09 USA

2009-10 Switzerland 2009-10 Switzerland

China U.A.E. Saudi Arabia Figure 1.2: Leading trade partners in India's export basket (US$ million) 30,000 25,000 30,000 20,000 25,000 15,000 20,000 10,000 15,000 5,000 10,000 5,000 -

2010-11 (Apr-Dec) 2010-11 (Apr-Dec)

2004-05 2004-05

2005-06 China 2005-06 China

2006-07 U.A.E. 2006-07 U.A.E.

2007-08 Hong Kong 2007-08 Hong Kong

2008-09 USA 2008-09 USA

2009-10 Singapore 2009-10 Singapore

2010-11 (Apr-Dec) 2010-11 (Apr-Dec)

Source: Directorate General of Foreign Trade

Figure 2: Leading trade partners for China (January 2010 - June 2011)
500 450 Value in US$ billion 400 350 300 250 200 150 100 50 0 EU Exports USA Imports Japan ASEAN Hong Kong Korea Taiwan Australia Brazil India

Source: General Administration of Customs of the PR China) Doing Business with China Emerging opportunities for Indian Companies | 7

Figures 3.1 and 3.2 draw attention to the key items exported from India to China and imported to India from China. The contrast in the export / import basket may perhaps be summarised to being raw material oriented from India to China, while finished, valueadded goods dominate the Chinese exports to India. Ores, slag and ash constituted approximately 42% of the total exports, by value, from India to China in the financial year 2009-10 and approximately 46% for the period April to September 2010. On the other hand, electrical machinery accounted for 29.68% of the total imports to India from China.

China exported US$ 8.77 billion worth of electrical machinery to India during the period Jan-Dec. 2009. Under electrical machinery, the chief item of import was electrical apparatus for line telephony (HS code 8517), which at US$ 4.29 billion accounted for almost 50% of the total imports. Under this category, cellular phones accounted for US$1.44 billion. Other important items of import under this HS Code included insulated cable wire, electrical storage batteries and television receivers. Chinese exports of machinery increased during Jan-Dec 2009 by almost 9% to touch US$ 7.56 billion. The top export items under this category are steam generating

Figure 3.1: Key exports from India to China (US$ million) 6,000 6,000 5,000 5,000 4,000 4,000 3,000 3,000 2,000 2,000 1,000 1,000 00 Ores, Slag Ores, Slag Cotton Cotton Copper and Copper and Organic Organic Aticles Chemicals Aticles Chemicals 2008-2009 2008-2009 Figure 3.2: Key exports from China to India (US$ million) 12000 12000 10000 10000 8000 8000 6000 6000 4000 4000 2000 2000 00 Electrical Boilers, Organic Project Electrical Boilers, Organic Project Machinery, Goods Machinery, Machinery, Machinery, Chemicals Chemicals Goods Equipment, Equipment, Mechanical Mechanical Sound Sound Appliances Appliances Recorders Recorders 2008-2009 2008-2009 Articles ofof Articles Iron and Iron and Steel Steel Iron, Steel and Iron, Steel Plastic Plastic and Articles Articles Vehicles, Optical, Vehicles, Inorganic Inorganic Optical, Tramway Tramway Chemicals, Chemicals, Apparatus Apparatus Rolling Stock Rolling StockCompounds Compounds ofof Metals Metals Precious Precious Stone, Stone, Jewelry Jewelry 2009-2010 2009-2010 Plastic and Plastic and Articles Articles Iron and Iron and Steel Steel Boiler, Salt, Lime Boiler, Salt, Lime Electrical Electrical Machinery Cement Machinery and and Cement Machinery Machinery and and and and Mechanical Equipment Mechanical Equipment Appliances Appliances

2009-2010 2009-2010

Source: Department of Commerce, DGFT, Government of India 8

boilers and other types of boilers that accounted for US$ 944 million. Other machinery in this category includes steam turbines, office machine parts, cranes, air conditioning machinery, converters, ladles, ingot molds and casting machines etc. In recent years, Indias trade deficit with China has been growing, touching US$ 20 billion in 2010. In order to sustain the growth in trade, this imbalance needs to be corrected through increased access to Indian goods in the Chinese market and diversifying the trade basket. The Indian government has been seeking improved market access in the auto-component and engineering sector, IT, pharmaceuticals and agro-processing from the

Chinese government against the backdrop of a record trade imbalance Bangkok Agreement between India and China India and China had accorded Most Favored Nation (MFN) status to each other way back in 1984. Both countries are signatories to the Bangkok Agreement under which they provide tariff preferences to each other. India provides tariff concessions on certain imported goods from China, the standard rates and extent of concessions applied (to certain specific products only) to top five Indias import goods from China (refer to Table 2). No tariffs are imposed in China on these products when exported from China.

Table 2: Import tariffs in India for certain items Products Electrical Machinery Machinery, Boiler Organic Chemicals Project Goods, lab chemicals Articles of Iron and Steels Standard tariff rate in India Free, 7.5%, 10% Free, 5%, 7.5%, 10%, 12.5% 10%, 12.5% 10% 10% Extent of concession on specific products 5% - 20% 5% - 20% 5% - 15% NA 29%

(Source: Central Board of Excise and Customs, India)

Doing Business with China Emerging opportunities for Indian Companies | 9

Foreign investment in China

China welcomes foreign investment and it is bound under WTO rules to further open its Industries to foreign investors. China announced significant structural changes to its foreign direct investment regime in 2004. The decision on reforming the investment system transformed a system that only allowed foreign investment in specific, government-designated sectors. However, it does not supersede the old system, the centerpiece of which is the Catalogue for Guiding Foreign Investment in Industries. The Catalogue, essentially divides Chinas economy, for foreign investment purposes, into three categories: prohibited, restricted and encouraged. Projects in these categories are subject to different examination, approval and registration requirements. Projects categorised as encouraged face relatively less scrutiny while those categorised as restricted are subject to stringent requirements and examination.

Government examination and approval for investment projects can come from local, municipal, provincial or state authorities, depending on the size and/or industry of the projects. Certain projects may require approval by the State Council. Prohibited foreign investments include projects that: are harmful to state security or that impair the public interest; pollute the environment, are destructive to natural resources and detrimental to human health; occupy excessive farmland and are unfavourable to the protection and development of land resources. Restricted foreign investments include projects that are: (1) technologically behind; (2) unfriendly to resources and the environment; (3) engaged in the exploitation of minerals that are specifically protected by the State; or (4) classified as industries that the government is opening up in stages. Encouraged foreign investments, which make up about two-thirds of the Catalogue, mainly include: Projects related to new agricultural technology, construction and the operation of energy sources, transportation and the exploitation of raw materials for certain industries; Projects using new or advanced technology, including those that can improve product quality, save energy and raw materials, increase economic efficiency and alleviate shortages in the domestic market; Projects that meet international market demand to improve or add value to the industry; Projects that involve the integrated use of Chinas resources or renewable resources, involving new technology or equipment for preventing and controlling environmental pollution; and Projects that can develop the manpower and resources of central and western China. Projects not listed in the Catalogue are generally classified as permitted. Projects in the encouraged category are usually eligible for preferential treatment. In general, apart from possible tariff exemption quotas for self-utilised capital imports for encouraged projects, companies engaged in encouraged projects may apply for certain tax incentives, such as a reduced tax rate of 15% for qualified high-new technology companies; a 50% super-deduction for qualified R&D expenses; tax holidays

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FIEs generally refer to Chinese entities with at least 25% foreign investment. FIEs are permitted to conduct business activities in accordance with the scope of their business plans as approved by the government.
for specified infrastructure, primary industry, resources saving or environmental friendly projects; and a tax credit for investment in specialised equipment. Choice of business entity 1. Principal forms of doing business Foreign investors may invest in China through legal or non-legal entities. Legal entities that can be set up by foreign investors generally include wholly foreignowned enterprises (WFOEs), equity joint ventures (EJVs), co-operative joint ventures (CJVs) and joint stock companies. Non-legal entities include representative offices (ROs) and branches, as well as certain CJVs. Another more recently developed investment vehicle is the partnership. An investors particular commercial considerations, any applicable regulatory limitations and home country tax considerations all play a role in determining the most appropriate entity in which to conduct business. Foreign investment enterprise (FIE) FIEs generally refer to Chinese entities with at least 25% foreign investment. FIEs are permitted to conduct business activities in accordance with the scope of their business plans as approved by the government. FIEs are mainly organised as limited liability companies, and the investors ownership in a FIE is represented by the amount of registered capital it injects into the entity. FIEs do not issue shares until they have been transformed into joint stock companies. The main forms of corporate entity for FIEs in China are the WFOE, the EJV and the CJV. In general, FIEs can carry out manufacturing, processing, trading and/ or service activities in accordance with the approved business scope. There are certain FIEs incorporated pursuant to special regulations to be engaged in designated business activities, such as Foreign Invested Wholly foreign-owned enterprise (WFOE) A WFOE organised as a limited liability company is generally a desirable investment vehicle for foreign investors provided the investment regulations do not require the participation of a Chinese partner. The limited liability company offers foreign investors sole control of the business operations and avoids lengthy negotiations with a Chinese partner, as in the case of an EJV or CJV. According to the Company Law, the minimum capital requirement to establish a WFOE is CNY 30,000, although the actual capital requirement should be commensurate with the proposed business plan and substantiated by projections (normally, five years) in the feasibility report contained in the company formation application. Capital may be contributed in cash or in-kind. In-kind capital contributions are subject to valuation in China. At least 30% of the registered capital should be in cash and in-kind capital (i.e. industrial property, machinery, technology) should not exceed 70% of the registered capital of the enterprise. When capital is contributed in instalments, the first instalment must be not less than 15% of the registered capital or the minimum capital requirement, and must be delivered within three months from the date the business licence is issued. The deadline for completing the contribution is normally two years from the date the business licence is issued. The company is required to arrange for capital verification by a CPA firm in China and apply for an updated business license after each capital contribution. A WFOE must establish a board of directors or a managing director for management structure. For corporate governance purposes, the company is
Doing Business with China Emerging opportunities for Indian Companies | 11

Commercial Enterprises (FICE) in wholesale, retail or trade agency services; Chinese holding companies; regional headquarters; operating/finance leasing companies, fund management companies, etc.

required to have an independent supervisor (similar to non-executive director in western countries). A detailed management structure must be set out in the articles of association (including the duties and limits of authority of the legal representative, chief accountant, general manager and supervisor). The articles of association must specify procedures for termination and liquidation and for amending the articles. A WFOE is required to appropriate 10% of its annual after-tax profits for its statutory general reserve fund account until the account balance reaches 50% of the company's registered capital. Hence, the distributable profits of the WFOE may initially be lower than an EJV or CJV, whose board may decide not to contribute to such a reserve. Equity joint venture (EJV) An EJV, organised as a limited liability company, is a separate legal entity established by one or more foreign investors with one or more Chinese investors. Ownership and the share of profits and losses are determined based on the respective contributions to the registered capital of the EJV. Generally, the minimum level of foreign participation in an EJV is 25%. There is no upper limit on foreign participation for general projects. The capital contribution requirements are almost the same as those for a WFOE. Partners must pay their contribution within the timetable fixed in the contract. Failure to make timely capital contributions may result in the cancellation and compulsory surrender or revocation of the business licence. The governance of an EJV is different from that of corporations in western countries. Investors hold equity interest, but no stock. Voting authority is vested in the board of directors rather than the shareholders. The directors are appointed by the investors and, in general, reflect the ratio of the capital contributions of the partners. Contractual or Co-operative joint venture (CJV) A CJV differs from an EJV in two fundamental ways: a CJV does not have to be an independent legal entity, and even if a CJV is not incorporated as a limited liability
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company in its ownership right, it may elect to be taxed at the entity level. In most cases, a CJV elects to be treated as a taxable entity rather than a flow-through, primarily for clarity in tax treatment. A CJV that is incorporated as a limited liability company is subject to tax at the entity level. The ownership and profits/losses are not necessarily shared based on equity/capital contributions (as in the case of an EJV), but on the basis of a contractual agreement. Thus, a CJV may provide more flexibility with respect to profit-sharing and risktaking among the partners, subject to approval by the authorities. For example, the shareholder(s) may be guaranteed a certain fixed annual return without regard to the actual performance of the CJV. Capital is contributed in a ratio agreed by the parties to the CJV contract and a joint venture partner. Normally, the Chinese partner may provide cooperation terms (i.e. provision of services or the rental-free use of factory premises of the Chinese partner) to the CJV instead of contributing capital, subject to approval by the authorities. Multiple management structures are applicable to a CJV, including: a board of shareholders, a board of directors, a joint management committee or a management by proxy. Hybrid CJVs tend to adopt management systems resembling those of the EJV; true CJVs tend to take the more flexible form of a joint management office. Under the latter structure, no general manager exists as such, although the parties usually appoint a legal representative. Generally, true CJVs, which do not have independent legal status in China, allow the Chinese partner to enter into such contracts, under a grant of power of attorney by the foreign party. Foreign investment Joint Stock Company (JSC) China is opening up its stock market to FIEs and foreign investors. FIEs are increasingly likely to be l isted on Chinese stock markets (both A and B shares) and overseas stock markets. Only foreign investment joint stock companies (JSCs) qualify for public listing; FIEs planning to list on a Chinese stock market must be converted into a JSC, which generally means that the registered capital must be converted into stock of the company.

All capital must be divided into equal shares represented by share certificates. They may be ordinary or preferred shares (the latter generally have no voting rights). Companies must receive approval before they can issue 'A' shares (denominated in renminbi and available to Chinese citizens and to qualified foreign institutional investors) and 'B' shares (denominated in U.S. Dollars). 'A' shares and 'B' shares are tradable on stock exchanges. 'A' Shares are further divided into shares owned by individuals, legal persons and the state. Unlisted shares owned by foreign investors of qualified foreign investment JSC can be traded on the 'B' share market if approved by the Ministry of Commerce. Partnership Under the 2007 revised partnership law, a partnership is available to domestic legal entity investors, including Chinese nationals. General, limited and special general partnerships are possible. Although the law does not prohibit the establishment of partnership by foreign investors, the government has not announced the detailed requirements and procedures applicable to foreigners. There is no legal minimum or maximum for capital contributed by the partners to a partnership enterprise. Capital may be contributed in cash, in-kind or in the form of land use rights, intellectual property rights or services. Contributions other than cash must be appraised at a specific value. Partners may increase their capital contributions to the partnership enterprise, as stipulated in the partnership agreement or as decided by all of the partners. These additional contributions should be used to expand the scale of business or to make up losses. There are no specific limits on the number of partners in a general partnership, but a limited partnership is restricted to 50 partners. Each partner has equal rights to conduct the routine affairs of the partnership. The admission of new partners is subject to the approval of the partners and the conclusion of a written partnership agreement. Newly joined partners have the same rights and responsibilities as the original partners. 2. Setting up a company For foreigners, WFOEs offer a simpler approval procedure and complete management control. Foreign companies also often use the WFOE form to protect technology. WFOE status permits greater use of renminbi to pay for business expenses and local sales. To establish a JV, it is critical to select an appropriate Chinese partner. The following are some factors that

should be considered: a potential partners access to domestic financing, the ability to provide a domestic market for products, the skill level of labour and the integrity and strength of management. A holding company can offer certain economies of scale in operations and management through its collection of investments under one corporate identity. These include centralised purchasing of production materials, collective training of subsidiary project personnel, coordination of project management and the establishment of a single entity to market all subsidiary products. By contrast, JSCs offer different advantages. An FIE opting for this corporate form can invite the participation of shareholders in the company, both to expand capital and to secure links with other legal entities in China. A JSC also offers greater liquidity in transferring interests. Both EJVs and CJVs normally require the prior consent of the other partners, as well as the original examination and approval authority to transfer interests. Companies limited by shares need no prior consent from others to dispose of interests, although the promoters must wait one year from the companys first registration before assigning their shares. 3. Establishing business presence without legal entity Branches: Although the Company Law provides for a foreign company to register a branch in China, under prevailing practice, only the registration applications of overseas companies in the financial services and oil exploration industries are handled. A branch remains part of its head office and thus is not entitled to the rights and protection accorded to Chinese legal entities. A branch must appoint a Chinese legal representative who is liable under civil law for its business activities. A branch may be closed only after a formal liquidation. Representative offices: Foreign companies, particularly those in the trade agency and service industries, often choose a representative office (RO) to carry on liaison and marketing activities in China. Although ROs allow foreign investors to enter the Chinese market with little initial investment, they are prohibited from direct profitmaking activities. In general, an RO of a foreign company may only engage in non-direct business activities in China, including: acting as a liaison with clients and the head

Doing Business with China Emerging opportunities for Indian Companies | 13

office; introducing the products of the head office; conducting market research; and collecting information. Thus, an RO of a foreign company may not sign and conclude contracts with Chinese customers directly and is prohibited from engaging in any direct business operations (with certain exceptions, such as the RO of a law firm). Taxation in China The tax rate for income earned by companies in China is 25%. If one compares the tax structure in China with India, Singapore and Hong Kong, it is obvious that the effective tax rate is higher in China. Withholding tax on Dividends A 10% withholding tax on dividends paid to nonresident companies was introduced from 2008. Previously, dividends paid by a Chinese company with at

least 25% foreign participation were exempt. It should be noted, however, that dividends paid out of pre-2008 earnings continue to be exempt from withholding tax. Withholding tax on Interest Interest is generally subject to a 10% withholding tax. Interest from certain loans made to the Chinese government or state banks is exempt. Withholding tax on Royalties and fees The withholding tax rate on royalties and fees arising from the licensing of trademarks, copyrights, know-how and technical service fees is generally 10%. Royalties are generally subject to a 5% business tax except for payments made in connection with the use of technology where an exemption may be granted.

Figure 4: Comparison of Tax rates

60 50 40 30 20 10 0 Hong Kong Corporate Income 16.5 15 5 5 0 Singapore Personal Income China India Employee Social Security VAT 17 20 14.5 20 7 25 23 17 45

49 32.5 31 12 12 12.5

Employer Social Security

Note: The India tax rates are as per the highest tax bracket rounded off to the nearest 0.5. Tax slabs vary as per income. VAT being a state subject varies across states. VAT for Delhi considered for comparison purposes.

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Drivers for inbound and outbound investment Atul Dhawan, Partner, Deloitte Haskins & Sells kicks off the conversation by noting that while both Indian and Chinese businesses are looking to enhance their presence in the other country, albeit for different reasons, any significant level of investments from either country is yet to be witnessed. That said, despite concerns, investments are trickling in from both sides. He points out that there is potential in the real estate and construction sector. A large number of opportunities for Chinese real estate developers and Construction businesses to exist in India, especially since modern construction techniques have not been universally adopted here. For instance, Chinese contractors are able to construct concrete slab building foundations much quicker than their Indian counterparts. Even though there is a potential in infrastructure sector, especially with Government of India promoting foreign direct investments (FDI) in infrastructure development in road construction, up gradation of ports and airports amongst others, it would be unlikely that Chinese investors would be allowed to take controlling stakes in such nationally sensitive installations. He advises investors and sellers alike that both need to be transparent with their approach, and this applies to both the senior management on either side as well as any regulatory authorities with an interest in the tie-up. He warns that both Chinese and Indian management cultures are different. This might add to the uncertainty when the two parties are interacting for investment opportunities.

Recognising the opportunity provided by the export regulations from China, and the lower costs of manufacturing, several medium sized Indian companies have set up units in China, to re-export consumption oriented goods to India, and the rest of the world. Indian companies are already importing large amounts of Chinese made mobile phones and other electronic items but currently it is only a trading activity; investments or acquisitions are yet to be made. China today is one of the largest consumers and producers of steel, added to the low cost of production in China have prompted investments in engineering sector. Indian engineering companies are investing in China to get access to these benefits and cater to the Indian market place. He continues, saying that Chinese manufacturers in the technology and telecommunications sector are already cost efficient and may not look at India for cost arbitrage opportunities. For example Lenovo, a Chinese computer hardware manufacturer already sells laptops and other equipment in India but does not have a manufacturing base here. However, he is optimistic that if Chinese manufacturing and Indias research and design capabilities could be brought together, potential business synergies could be formidable. Indian IT companies on the other hand are majorly investing in green field opportunities in China, to cater to a fast growing Chinese IT market and also to service their global clients. Atul Dhawan, Partner, Deloitte Haskins & Sells, gives his personal viewpoint on recent investments from China in Indian assets and Indian investments in China

Doing Business with China Emerging opportunities for Indian Companies | 15

Key industries

Industry Sectors of importance Over the last few years, there has been an increase in the number of companies from India exploring opportunities in China and vice-versa. Automobiles, Information Technology, Mining, Textiles are some of the industries of mutual interest to the two countries. Many Indian companies have set up operations either in the form of joint ventures or wholly owned subsidiaries in China. Axis Bank, Union Bank of India, ICICI Bank, Punjab National Bank have representative offices in China while banks like Canara Bank, Bank of Baroda, State Bank of India operate branch offices there. Similarly, companies like Bharat Heavy Electricals Limited (BHEL) and Adani have overseas operations in China; Larsen & Toubro has manufacturing facilities while Engineers India Limited (EIL) operates through a representative office. Pharmaceutical companies like Lupin, Piramal Healthcare and Sun Pharmaceuticals and chemicals companies like Reliance Industries and Jubliant Organosys have also forayed into China. Chinese companies have also invested in India. ZTE

operates in India through a wholly owned subsidiary. Haier has been aggressive in India and has become a popular name for Indian consumers in the appliances vertical. Sany Group of China has set up a plant and R&D centre in Pune (Chakan) with an investment of US$ 70 million. Construction equipment manufacturer Guangxi Liugong Machinery Co. Ltd has established a wholly owned subsidiary in India. Some other known Chinese companies in India are Huawei, Lenovo, China State Construction and Engineering Corporation, YAPP Automotive Parts Co Ltd. and Zhejiang Yankon Group Co Ltd. This document looks at some of the key sectors and analyses the potential of collaboration and opportunities for Indian companies, namely: Automobiles and auto components sector Information Technology and IT enabled Services sector Real estate, construction and infrastructure sector Tourism sector

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Automobiles and auto components sector The automotive industry in both countries has seen a spurt of growth in the recent few years. An analysis of the automobile production in both the passenger vehicles segment and the commercial vehicles segment was carried out from 2004 onwards. The trends indicate that the Indian market is undoubtedly growing, with production doubling (Refer to table 3). The growth story remains similar in China with an increase of more than 3.5 times over the same period (Refer to table 4). The growth in the industry indicates potential and opportunities for companies in both these countries. Indian companies could look at investments in China to gain from the growth in Chinese domestic market and the Chinese companies in this space could look at investments in India to cater to the growing Indian

market. Such cross-investments would certainly increase competition in the industry, resulting in introduction of products driven by consumer demand. This industry in the recent past has seen some significant collaboration between India and China. For example, Mahindra and Mahindra Limited entered into a joint venture with Jiangling Motor Co Group in 2005 to manufacture tractors in China. This is perhaps the first venture between the auto OEM manufacturers of the two countries. Subsequently, SAIC acquired 50% stake in General Motors in India. Bharat Forge Limited is another Indian company which signed a Joint Venture (JV) contract with FAW Corporation, China for its forging business. FAW is the largest automotive group in China, with a leading position in both passenger car and commercial vehicle sectors.

Table 3: Vehicle production in India Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Passenger Vehicles 1,209 1,309 1,545 1,777 1,838 2,357 2,987 Commercial Vehicles 353 391 519 549 416 567 752 Total 1,562 1,700 2,064 2,326 2,254 2,924 3,739

Figures in 000 vehicles, Source: Society of Indian Automobile Manufacturers (SIAM)

Table 4: Vehicle production in China Passenger Vehicles 2004 2005 2006 2007 2008 2009 2010 (P) 2,480 3,078 5,233 6,381 6,737 10,383 13,897 Commercial vehicles 2,754 2,629 1,955 2,501 2,561 3,407 4,367 Total 5,234 5,707 7,188 8,882 9,298 13,790 18,264

Figures in 000 vehicles, Source: OICA - Organisation Internationale des Constructeurs dAutomobiles

Sundram Fasteners also set up a wholly owned subsidiary in China in 2004 with an initial investment of US$ 5 million in Zhejiang province of China. The unit is located in Haiyan Economic Development Zone, about 100 km away from Shanghai. The unit manufactures and sells high tensile fasteners to the Chinese automobile industry. The 6000 metric tonne factory was built in 14 months to open on schedule. Above stated examples are not one-off transactions. Increasingly companies in the automotive industry, both OEMs and component manufacturers from both countries are looking at the other market for expansion and collaboration. Vehicle sales in both India and China are increasing at a pace faster than anywhere in the world. To take advantage of the expanding population in these markets, OEMs will continue to shift more of their production to be closer to their biggest source of new customers. Added to this, the cost of labour in comparison to developed markets is much lower in India and China. This makes them appropriate for manufacturing for global automotive markets. Future outlook of the automotive market According to a Deloitte publication titled A new era, Accelerating towards 2020 An automotive industry transformed a new breed of players will emerge, as well as a new global balance with more competitors headquartered in emerging manufacturing hubs, particularly in India and China. Post integration and consolidation in the global automotive market, the landscape will be dominated by global OEMs and suppliers based in six major markets Western Europe, Japan, the United States, South Korea, China and India. Auto-component manufacturers in both countries can leverage growth in their respective domestic markets and simultaneously collaborate with their counterparts to gain from the growth story. Traditionally, Indian component manufacturers have been masters of the high-quality precision components and the Chinese players had mastered the art of mass production. Thus, this sector would demonstrate significant growth if the two countries could achieve extensive collaboration. A company could look at

utilizing the component design expertise of Indian engineers and low cost mass production expertise of China to cater to the global OEMs. The influx of electric vehicles would also add to the ever growing opportunities for the component manufacturers in both these countries. Currently since the number of electric vehicles sold does not justify production facilities in both the countries, it would probably be more economical for the component manufacturers to collaborate or base their production base in one country and serve the other market. This becomes even more important since most of the critical components in an electric vehicle are made up of rare earth metals and China produces approximately 97% of the global production of these rare earth metals. Information Technology and IT enabled Services sector Infosys Technologies, HCL Technologies, Zansar Technologies, BirlaSoft, and KPIT Cummins have made additional investments in China as recently as between January 2011 and May 2011. Other Indian IT companies like Tata Consultancy Services (TCS), Tech Mahindra, Satyam Computers (now Mahindra Satyam), NIIT, 3i Infotech, Nucleus Software, Wipro, MindTree Consulting and Genpact already have their operations in China. Traditionally Indian IT companies set up in China as near shore centres to serve their Japanese clients and global multinationals based in China. The South Korean and Taiwanese clients were serviced from these centers as the operations of Indian IT companies grew. Increasingly , Indian companies are looking at Chinese centers as an integral part of their global delivery model to not only serve American and European markets which were traditionally served by India but also to serve local IT needs in China and in one- off cases to serve India. The domestic Chinese IT services market is estimated to be US$ 20 billion, which is growing at 50-60 per cent year on year. Chinese software companies that are relatively smaller in size when compared to Indian counterparts are quite dominant in the local market. According to the Ministry of Education, China, 881,509 electronics and information engineering students graduated in 2010. Indian IT companies could

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look at some of these graduates to fuel their talent requirements. However, the definition of engineering in China varies from province to province and in some provinces technicians are also termed as engineers. The Indian IT companies have to be mindful of this while initiating their recruitment and selection process. Infosys Technologies China subsidiary which was set up in 2004, now drives one-third of its revenue from the local Chinese market. Infosys China plans to triple its current staff to 10,000 over the next 3 years. In its largest-ever investment outside India, Infosys Technologies has stated that it would invest $125-150 million in setting up its own campus in Shanghai, China. This is for the first time that Infosys has bought land to build its own campus outside India. Most other global centers of the company operate out of rented or leased properties. The Shanghai campus will be spread over 15 acres and developed over a period of three years. Located at Zizhu Science and Technology Park in Shanghai, the campus will have a sitting capacity of 8,000 employees with facilities for software development, labs, data centers, training facilities and food courts. Besides, the campus will have a 1,500seater auditorium, a gym and recreational centers. Infosys currently employs over 3,300 people in China. It has already invested US$ 23 million in capital. The current infrastructure can accommodate 4,200 people in China. Infosys China had revenues of over US$ 78 million in fiscal year 2011. TCS on the other hand set up their China operations in 2002 thereby becoming the first Indian IT company

to set up operations in China. TCS currently employs 1,200 employees (January 2011) in 5 delivery centers and plans to ramp up these numbers to 5,000 in the next three years. TCS offers core banking system to four major Chinese banks including Bank of China and Hua Xia Bank. Genpact celebrated their ten years of operations in China in 2010. Genpact reduced their cost of operations by locating their centers in sub-urban areas like they did in India, when they started their operations. The Chinese operations cater to their clients based in Japan and Asia Pacific region. Currently, Genpact employs 3,000 employees in its China centers. Real Estate, Construction & Infrastructure Sector With the continuing recovery and growth of the Chinese economy, the impact of the World Expo 2010 Shanghai, Guangzhou 2010 Asian Games, and the commissioning of the high-speed rail networks, the China real estate market continued to expand in 2010. However, property price increases have prompted the government to implement various measures to cool down the market during the year. The predictions, therefore, are that the sector will have a lower growth in investment from its 2010 rate. The high-end office leasing market in northern and southern China experienced rental increases and high occupancy rates, which were mainly driven by growing demand. In eastern China, office rentals in Shanghai, Nanjing and Ningbo showed moderate increases while a decline in office rentals was reported in Hangzhou in the

Doing Business with China Emerging opportunities for Indian Companies | 19

third quarter. The high-end retail leasing market in the major cities of China began to pick up in 2010 due to a return of market demand. The governments tightening measures have had the most significant impact on the residential sector. Residential property sales reached a record high in early 2010 in terms of both transaction volume and selling price. To cool down the property market and discourage speculative investment, a series of cooling measures were introduced from April 2010 onwards. Investment activities in the real estate sector remained robust in 2010 with deals dominated by domestic investors. As the first-tier cities such as Beijing and Shanghai were experiencing limited availability and high cost of urban sites, the hunt for higher yields continues to push investors to ever more distant frontiers. As a result, a powerful second tier market has developed, with cities like Dalian, Tianjin, Chengdu, Suzhou and Hanzhou leading this trend. Wuhan, Qingdao and Changsha are also next in line to get added to this tier. Across all second and third-tier cities, the most promising areas appear to be retail and residential developments, followed by Grade-A office space, and building serving tertiary industries such as hotels and logistic hubs. These cities have less stringent laws and lower acquisition costs than Beijing or Shanghai for example, in relation to investment and ownership. Volatility also tends to be lower. The Indian government has also extended an invitation to Chinese companies to invest in infrastructure projects like dedicated freight corridors, subway lines and SEZs being planned under a public-private partnership model. According to an estimate about a trillion dollars of investment is expected in the Indian infrastructure sector over the next five six years which creates opportunities for Chinese companies to invest in India. Nine Chinese companies, in joint ventures with Indian contractors, are already implementing six highway projects worth US$ 556 million in India. Three highway projects worth US$ 284 million have been completed. It is expected that the Chinese investment in this space would increase three times over the next few years. Longjian Road and Bridge Company, won the US$ 78 million international tender to construct the 80 kilometre World Bank-funded Theog-Kotkhai-Hatkoti
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road project in Shimla district. The Chinese firm was under much pressure because of the delay in completing the project. The delay was probably due to visa issues for the workers. The new deadline for completion of the project is now April 2012. Construction firm Ramky Infrastructure with its joint venture partner Jiangsu Provincial Transportation Engineering Group, a Chinese firm, had won a US$ 247 million NHAI contract for four laning of Srinagar-Banihal national highway 1A in Jammu and Kashmir. India has become the biggest destination of Chinese companies to contract projects outside China. According to Indian Embassy in Beijing, the cumulative value of contractual Chinese investment (projects) till June 2009 was US$ 29.6 billion. The overall turnover realized from these projects till June 2009 was about US$ 11 billion. Chinese companies have bagged several contracts to build steel and power plants in India. Some of the Chinese steel makers have also set up JVs in Indian to produce steel. Tourism sector Tourism has received significant impetus in the recent decades both in China and in India, what with the new fascination for the emerging markets from the rest of the world. This has largely been due to increased business travel. Often pitted as rivals in most areas, the elephant and the dragon, however, share historic connections that pre-date the Christian era. While there are common threads of culture between the two, the tourism product however is as chalk and cheese. Inbound tourism At 55.7 million visitors, China today is rated as the third most popular tourist destination in the world (after the United States and France), according to the

World Tourism Organization (UNWTO). This number represented a 9.4% increase over 2009. The only other Asian country in the top 10 list was Malaysia, with 24.6 million visitors. India, on the other hand, was at 41 on the list, and received less than 0.5% of total world tourism at 5.6 million visitors in 2010. This potentially represents the opportunity for growth in the business of tourism for the country. The curious fact about India, though, is that it is ranked 16th amongst countries receipt of the tourist dollar, at US$14.2bn certainly not the backpackers paradise as made out to be. Multinational companies increase their presence in those markets that their customers go to this is certainly the case for the growth of the hotel businesses in both India and China. The current policies in both countries also favor and facilitate such investment in travel and tourism industry. The relative ease of entry in China (at least for the hospitality companies) has helped in creating infrastructure to meet the inbound demand in that country. India is still to catch up this is the opportunity that is currently seeing much activity and focus. Outbound tourism More Chinese people have travelled abroad in comparison the foreign foot-fall that their country has received. The number of outbound Chinese travellers rose 20% over 2009 reaching 57.39 million last year. The Chinese tourists ranked fourth-worldwide last year. According to the United Nations World Tourism Organization, China will be the world's fourth-largest source of outbound tourists by 2020, with 100 million overseas visits. Official policy in China has also promoted such overseas travel, and preferred nation status for destinations have resulted in large numbers of visitors to that country (e.g., Australia in the 1990-2005 period)

The Indian government has also extended an invitation to Chinese companies to invest in infrastructure projects like dedicated freight corridors, subway lines and SEZs being planned under a public-private partnership model.
Doing Business with China Emerging opportunities for Indian Companies | 21

As is the case with the Chinese, more Indians travelled abroad than those that came to India. However, at approximately 8 million in 2010, these numbers are far less than the Chinese. UNWTO forecasts that the outbound markets for both China and India will see exponential growth in the decade ahead. Outbound tourism is truly the reason for the interest of the international tourism majors, in that awareness for brands need to be created at the source, and with tourism being an experiential product, there is no better way than to build in the source markets. The fact that the growing economy in these two countries only makes it more attractive for the international majors to set shop! The increasing presence of the national tourism boards of most tourism-dependent countries in both China and India attests to this. Inter-country review Both, China and India do not really seem to have encouraged travel between themselves ,which is apparent from the relatively small numbers of Chinese tourists to India and vice-versa. While political distance may have been one reason, other reasons include the Chinese speaking guides in India, and Indian food options in China. Chinese arrivals into India are currently at around 100,000 (2010) up from less than 20,000 at the beginning of the decade this shows the increasing interest in the country. At these levels, China is the 12th largest market for inbound tourism in India Indian arrivals into China, on the other hand were estimated at ~500,000 (2009) up from 120,000 in 2000. This excludes visitors to Hong Kong, which were estimated at another 375,000 in 2009. Indian arrivals into China are miniscule at the moment. Tourism transactions (investments by one in the other) have been negligible, and this perhaps mirrors the domestic fixation of the parties involved with large markets at their doorstep, there has been little reason to invest in each other. The opportunities Both Indian and Chinese visitors to the other country are primarily traveling on business (with up to 50%

At 55.7 million visitors, China today is rated as the third most popular tourist destination in the world (after the United States and France), according to the World Tourism Organization.
doing so). Around 40% of Chinese visiting India do so for leisure, while the corresponding number for Indians visiting China is estimated much lower (~30%). The immediate opportunity therefore is targeting leisure travelers to visit each other The burgeoning growth in travel between the countries offers a larger potential for civil aviation linkages currently, even the bilateral are not used to their capacity. Entry and permission to entry for each others airlines is a second opportunity. Recognition of India as a preferred nation by China would also substantially increase transactions between the two countries Increased investment by each country in the other would also result in greater understanding of the consumer markets in the countries in turn, resulting in better matched products in the country of origin e.g., vegetarian food in China and increased Chinese speaking personnel in India (both often quoted as a deterrent to travel). Such reciprocal investment would also help in creating a sense of competitiveness when companies start investments in third countries. Technology / experience sharing, especially in the areas of development of remote areas and new destinations between both countries is again an opportunity that would help in fast-tracking each others investment plans.

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Case studies

Case Study 1: Mahindra and Mahindra in China Mahindra (China) Tractor Co. was established in 2005 as a joint venture with Jiangling Motor Co Group. The entry into the Chinese market was in line with Mahindra and Mahindras strategy to become the worlds number one tractor manufacturer. The operations in China serve as a center for developing more models and expanding the product range for China and other overseas markets. Mahindra is one of the fastest growing players in the Chinese market. Five hundred Mahindra employees are instrumental in manufacturing 18 to 55 HP models under the FengShou brand and 60 HP under the Mahindra brand. The tractor industry (domestic and export) in China has grown from about 56,000 tractors in calendar year 2003 to 2,22,000 tractors in 2008, a CAGR of 32 percent. In addition to Mahindra (China) Tractor Co., Mahindra in 2009 set up another tractor joint venture with Yueda Group of China. The JV ceremoniously rolled out its 125 HP tractor under the brand name Jinma at a ceremony at the JVs new 38,000 tractor capacity plant at Yancheng, China. The Yueda Group has a turnover of US$ 7.3 billion and has a presence in various sectors of the Chinese economy including automobiles and tractors, coal and mining, infrastructure and real estate, textiles and garments, hotels and supermarkets. Over the last 29 years, Yueda has established partnerships and joint ventures with Kia Motors from Korea, French supermarket major Carrefour, Triumph from Germany, and Fuji, from Japan. The group employs more than 30,000 people. The new agriculture policy introduced by the Chinese government in 2004 has played a major role in this growth with a number of positive measures including abolition of tax on agriculture. The introduction of subsidy for tractor purchase to support farmers has gradually increased to US$ 1.5 billion in 2009. Despite stagnation in the Chinese farming sector during the global economic downturn, Mahindra (China) Tractor Co recorded a growth of 21 percent from 2009 to 2010 with robust domestic sales and exports to Europe and India.

The new company, Mahindra Yueda Yancheng Tractor Company (MYYTCL), has been formed between Mahindras Farm Equipment Sector, and Jiangsu Yueda Yancheng Tractor Manufacturing Co. Ltd. The registered capital of the JV is US$ 40 million. Mahindra holds 51 per cent share in the JV. The large manufacturing base could be used to not only produce for the domestic Chinese market but also for low cost manufacturing base for exports. The new joint venture also strengthens the distribution network of both the operations which would give Mahindra a much larger presence in the Chinese tractor market. The new JV is located in Yancheng city, Jiangsu Province. The JVs product portfolio comprises tractors ranging from 16 HP to 125 HP. MYYTCL will have a strong distribution network covering over 25 provinces in China. It will also build on the existing exports operations with a footprint in more than 60 countries including the USA, South America, Russia, Europe and Africa.

Figure 5: Tractor production for Mahindra in China 30000 25000 20000 15000 10000 5000 0 Mahindra Yueda Tractor FY10 Mahindra China Tractor

FY09

Doing Business with China Emerging opportunities for Indian Companies | 23

Case Study 2: An Importer / Trader sharing his experience of business with China Vishal Goyal, Director, BVG Industries Ltd. , shares his experiences of working with China. BVG Industries Ltd. is engaged in import and sale of laminate flooring, real wood flooring and carpet tiles from China amongst others for construction and real estate sector. Vishal has been trading with China for almost ten years now. He had to switch his buying from Europe (Germany and Switzerland) when his competitors started to offer much cheaper options from China. He starts by saying "It is a misconception that China is only known for cheap and low quality materials. The quality of the goods from China is dependent on ones willingness to pay. Most businessmen go to China hunting for cheaper options of existing products from developed countries and find them and that is what they are importing in India. But, there are enough and many high quality, expensive varieties of the same goods available should you want to buy them from China. Many a time, these options are available from the same manufacturer as in the developed markets, which have moved to China for the cost arbitrage reasons". He was amazed by the Chinese manufacturers ability to create capacities for the future. He gave an example of a unit where the owner bought 4 acres of land when he needed only 1 acre. The manufacturer said that the rest is for future expansion; an expansion which is not even on the drawing board yet. His advice to Indian businesses looking at China would be to do the complete due diligence on the suppliers.

He is personally involved in factory visits and audits before considering a transaction. He said that even though he has been working with China for the last ten years he is not aware of the legal regulations in case of disputes that he could use in case his Chinese partner does not adhere to the contractual agreement. He agrees that it is safer to do business with Europe and North America as the regulations and remedies are listed in English on websites. He personally checks the manufacturing facilities of his suppliers before placing an order with them. He said, his overall experience has been good with China but he did recall two instances one where the manufacturer replaced a part of the consignment which was below specification free of cost, and the other where the Chinese manufacturer simply refused to do so. Interestingly, he says that he does not know a word in either Mandarin or Cantonese. Language is a barrier to do business with China. He says that Chinese companies have started to recruit English speaking employees to help in the transactions. They are however, comfortable with written English communication on emails. On being asked about his perspective on the future business opportunities with China, he said that Chinese manufacturers are under cost pressure due to increase in labour costs. The Yuan is also under pressure which is also not a good sign for Chinese businesses. He feels that the India-China business relations in the next decade would predominantly be trade oriented but he added that Indian companies might look at investments in China to shift the production base from India.

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Way forward

While this document attempts to cover some of the key sectors of mutual interest, India and China have a lot more to tap into. The challenge lies in being able to identify how the two could get past the political and cultural differences to benefit from each others experience and expertise. China is presenting itself as a good location for business for Indian IT companies. Several Indian IT companies have invested in China to cater to their clients in AsiaPacific region especially in Japan and multinational companies located in China. The Indian IT companies should be targeting the growing Chinese domestic market of IT and IT enabled services. The Indian IT companies have to ramp up their employee strength in China and capabilities of the Chinese centers to cater the sophisticated demands of Chinese companies more efficiently than the local Chinese players. The Indian government could look at seeking more market access in this area. Indian manufacturing companies especially in the automotive sector, both in OEM and component space, are investing in China to take advantage of the large domestic Chinese market. Also to use China as a low-cost manufacturing base for certain models / components for Indian market and exports to other countries. Indian companies should look at a globally integrated supply chain model for their manufacturing and operations. They must integrate their Chinese, Indian and other operations to achieve economies of scale and look at leveraging expertise from each production center. This would give them a competitive advantage which would be difficult to replicate in the short term.

Currently trade balance between India and China is substantially in favor of China. Even though the Indian government is urging the Chinese government to grant access to certain categories of products like pharmaceutical and agro products and encourage imports from India, we could be looking at at-least few more years of trade deficit for India by the time the trade in these sectors begin to impact the overall numbers. Having said that, Indian companies should be looking at exporting services, where India has an expertise and edge over China. These services could be in the area of finance and accounting, IT and infrastructure management. With the growth and development of tier two cities in both India and China, and the need for rapid urbanization, companies in the two countries could look at projects in infrastructure, transportation and power distribution. These opportunities exist, however, people to people interactions need to be further developed and this is possible only if the two countries encourage people-topeople exchanges through increased cultural exchanges, student exchange programes, and tourism, amongst others. The task which lies ahead is to continuously engage with each other, build stronger relationships, both culturally and economically for a long term benefit to both countries.

Doing Business with China Emerging opportunities for Indian Companies | 25

Acknowledgements

Atul Dhawan, Partner, Deloitte Haskins & Sells Chandrajit Banerjee Director General, CII E B Rajesh Chief Representative, CII, Shanghai Representative Office Harshit Sehgal Director East Asia, CII P R Srinivas Industry Lead, THL (Tourism, Hospitality & Leisure), Deloitte Touche Tohmatsu India Private Limited Rebecca Lam Director, Clients and Markets, Deloitte Hong Kong Supriya Banerji Deputy Director General, CII Timothy B. Klatte Partner, Chinese Services Group, Deloitte Touche Tohmatsu CPA Ltd U D Bhatkoti Advisor East Asia, CII Vijay Dhingra Senior Director, Deloitte Touche Tohmatsu India Private Limited Vijaya Bajpai Deputy Director East Asia, CII Vishal Goyal Director, BVG Industries Limited Clients and Markets teams in India and China, special support from Rohan Maitra, Surbhi Sharma, Anu Sindhwani and Navdeep Verma.

Authors: Niharika Thakur nithakur@deloitte.com Mayank Sewak msewak@deloitte.com Designed by Chitersen Shisodia Sources DGFT- Directorate General of Foreign Trade General Administration of Customs of the China PR Central Board of Excise and Customs, India Indian Embassy, Beijing Society of Indian Automobile Manufacturers (SIAM) Organisation Internationale des Constructeurs dAutomobiles (OICA) China NBS figures:figures of 1952-2008: Originated from China Statistical Yearbook 2010, 2009-2010 figures from China NSB Statistical Data. NSB 2009revised -China GDP figure; NSB 2010-China GDP figure Ministry of Education, China (http://www. moe.edu.cn/publicfiles/business/htmlfiles/moe/ s4971/201012/113575.html) Deloitte publications International tax and business guide for China International tax and business guide for India  A new era, Accelerating towards 2020 An automotive industry transformed China Real Estate Investment handbook Various Media Reports (including but not limited to)  http://inchincloser.com/2011/05/23/infosysmarks-largest-investment-outside-india-inshanghai/  http://www.washingtonpost.com/wp-dyn/ content/article/2006/05/19/AR2006051901760. html Company / Corporate websites of  Mahindra & Mahindra; Tata Consultancy Services; Infosys Technologies; Genpact; Sany; Liugong

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About CII

The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the growth of industry in India, partnering industry and government alike through advisory and consultative processes. CII is a non-government, not-for-profit, industry led and industry managed organisation, playing a proactive role in India's development process. Founded over 116 years ago, it is India's premier business association, with a direct membership of over 8100 organisations from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 companies from around 400 national and regional sectoral associations. CII catalyses change by working closely with government on policy issues, enhancing efficiency, competitiveness and expanding business opportunities for industry through a range of specialised services and global linkages. It also provides a platform for sectoral consensus building and networking. Major emphasis is laid on projecting a positive image of business, assisting industry to identify and execute corporate citizenship programmes. Partnerships with over 120 NGOs across the country carry forward our initiatives in integrated and inclusive development, which include health, education, livelihood, diversity management, skill development and water, to name a few.

CII has taken up the agenda of Business for Livelihood for the year 2011-12. This converges the fundamental themes of spreading growth to disadvantaged sections of society, building skills for meeting emerging economic compulsions, and fostering a climate of good governance. In line with this, CII is placing increased focus on Affirmative Action, Skills Development and Governance during the year. With 64 offices and 7 Centres of Excellence in India, and 7 overseas offices in Australia, China, France, Singapore, South Africa, UK, and USA, as well as institutional partnerships with 223 counterpart organisations in 90 countries, CII serves as a reference point for Indian industry and the international business community. Confederation of Indian Industry The Mantosh Sondhi Centre 23, Institutional Area, Lodi Road, New Delhi 110 003 (India) Tel: +91 (011) 2462 9994-7 Fax: +91 (011) 2462 6149 E: ciico@cii.in W: www.cii.in Reach us via our Membership Helpline: +91 (011) 435 46244, +91 99104 46244 CII Helpline Toll free No: 1800-103-1244

Doing Business with China Emerging opportunities for Indian Companies | 27

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