SUBMITTED BY : UMER JAVED BAIG

ENROLL # : 01-120082-077

CLASS : MBA (3)

SECTION : B

SUBMITTED TO : DR. SHAFQAT HAMEED

SUBJECT : STRATEGY

PROJECT TITLE : CHINA STRATEGY

DATE OF SUBMISSION : 28TH,May,2010.

 ACKNOWLEDGEMENT

I pay gigantic loads of thanks from the depth of my head and heart to my

respected teacher Dr. Shafqat Hameed who assisted me everywhere

regarding this course. He was always there to help me out through thick

and thin. This project would have not been possible without his guidance.

All the errors and inconsistencies are because of me.

Regards,

Umer Javed Baig

 TABLE OF CONTENTS
INTRODUCTION TO CHINA………………………………….. 01

TAX RATES IN CHINA ……………………………………….. 01

TRADING RIGHTS ……………………………………………. 02

DISTRIBUTION RIGHTS ……………………………………... 02

IMPORT SUBSTITUTION POLICIES ………………………. 02

IMPORT REQUIREMENTS AND DOCUMENTATION …… .02

PROHIBBITED AND RESTRICTED IMPORTS ……………. .03

LIST OF EXISTING BUSINESSES IN CHINA ……………… 03

STRATEGIC PLAN FOR NEW BUSINESS IN CHINA ……… 05

• Introduction to the new business………………………….05
• Electronic Industry in China………………………………05
• How Will I Avoid Business Failure? ................................. 06
• Predicted Characteristics of My Business………………... 07
• My Future Business Strategy……………………………...07
• Basic Strategic Planning Approaches………………….......08
• Possible Future Direction………………………………… 09
• Alternative technology acquisition routes…………………09
• Funding Strategy…………………………………………. 09

LOGICAL CONCLUSION ……………………………………… 10

REFERENCES ………………………………………………….... 10
INTRODUCTION TO CHINA :
The People's Republic of China (PRC), commonly known as China, is a country in East
Asia. It is the most populous state in the world with over 1.3 billion people. China is
ruled by the Communist Party of China (CPC) under a single-party system. The PRC
exercises jurisdiction over 22 provinces, five autonomous regions, four directly
administered municipalities (Beijing, Tianjin, Shanghai, and Chongqing), and two highly
autonomous special administrative regions (SARs) - Hong Kong and Macau. The PRC's
capital is Beijing. At about 9.6 million square kilometres (3.7 million square miles), the
PRC is the world's third- or fourth-largest country by total area, (depending on the
definition of what is included in that total) and the second largest by land area.

TAX RATES IN CHINA :

On top of normal tariff duties, both foreign and domestic enterprises are required to pay
value-added taxes (VAT) and business taxes. VAT is assessed on sales and importation
of goods and provision of processing, repairs and replacement services. Business taxes
are assessed on providers of services, the transfer of intangible assets and/or the sales of
immovable properties within China. VAT is assessed after the tariff, and incorporates
the value of the tariff. China is bound by WTO rules to offer identical tax treatment for
domestic and imported products. VAT is collected regularly on imports at the border,
although importers note that their domestic competitors often fail to pay taxes.
China offers a variety of tax incentives and concessions. The general VAT rate is 17
percent but necessities, such as agricultural products, fuel and utility items, are taxed at
13 percent. Enterprises regarded as small businesses (those engaged principally in
production of taxable goods or services with annual taxable sales of less than RMB 1
million or those engaged in wholesaling or retailing of goods with annual sales of less
than RMB 1.8 million) are subject to VAT at the rate of 4 percent or 6 percent,
depending on the nature of the business. Unlike other VAT payers, small businesses are
not entitled to claim input tax credits for VAT paid on their purchases. Certain limited
categories of goods are exempt from VAT. Likewise, many foreign-invested processing
enterprises are exempt from certain taxes if they export their products.
VAT rebates up to 17 percent (a full rebate) are available for processed exports.
Exporters complain that it takes months to obtain the rebates and amounts are often
miscalculated. Also, rebates are limited by the local budgets, and coastal provincial
authorities often run out of funds for rebates well before the end of the year. The
applicable rebate method varies and is a function of the establishment date of the
enterprise.
In March 2004, the United States initiated a case against China at the WTO for China’s
practice of allowing firms producing integrated circuits (IC) in China and for ICs
designed in China but manufactured abroad to obtain a partial refund of the 17 percent
VAT. The United States filed the case because it was believed these policies unfairly
supported domestic Chinese industry by discriminating against foreign products. The
dispute was resolved through negotiations in July 2004 when China agreed to discontinue
its system of offering VAT refunds that favored domestically produced and domestically
designed semiconductors.
China intends to eventually phase out its two-tier income tax system for domestic and
foreign enterprises. Domestic enterprises have long resented income tax holidays,
rebates and other tax benefits enjoyed by foreign-invested firms. The move towards
national treatment will mean the gradual elimination of special tax breaks enjoyed by
many foreign investors. However, in some cases Chinese authorities have promised to
grandfather existing foreign investments with current tax incentive deals for at least a
certain period of time.

TRADING RIGHTS :
Historically, China has restricted the types and numbers of entities with the right to trade.
Only those firms with trading rights were allowed to import goods into or export goods
out of China. As part of its WTO Accession Agreement, China committed to phase out
restrictions on trading rights within three years of its accession. In 2004, China issued
regulations to implement its WTO obligation to extend full trading rights to minority,
majority, and wholly-owned FIEs, as it committed to do three years after WTO
accession. In June 2004, MOFCOM promulgated Measures on the Registration and
Filing of Foreign Trade Operators. According to the Measures, any foreign trade
operator engaging in import and export of goods or techniques should apply to
MOFCOM or the agencies authorized by MOFCOM for registration, or Customs will not
perform the inspection and release procedures. In order to register for trading rights,
companies must apply through the relevant local Office of Trade and Economic
Cooperation.

DISTRIBUTION RIGHTS :
In general, foreign firms had only been allowed to distribute products that they
manufacture in China. Foreign firms were forced to engage local agents to distribute
imported goods. As part of its WTO Accession Agreement, China agreed to phase out
distribution restrictions for most products within three years of accession. In 2004,
China did publish regulations, which extend commercial distribution rights to minority,
majority and wholly-owned foreign and domestic companies and individuals, as it
committed to do when it joined the WTO. However, it remains to be seen how China
will implement this commitment. Moreover, China has not yet promulgated regulations
on direct sales distribution, which are overdue according to China’s schedule of WTO
commitments.

IMPORT SUBSTITUTION POLICIES :

China committed to eliminate all import substitution policies and regulations, but the
Central and local governments periodically continue to issue regulations and “guidance”
intended to encourage use of domestically produced substitutes. As part of its accession
to the WTO, China eliminated local content and performance requirements for foreign
investors and said it will not condition import or investment approvals on whether there
are competing domestic suppliers or requirements. However, some foreign invested
enterprises report that these practices continue informally, especially at the local
government level.

IMPORT REQUIREMENTS AND DOCUMENTATION :

Normally, the Chinese importer (agent, distributor, joint-venture partner, or FIE) will
gather the documents necessary for importing goods and provide them to Chinese
Customs agents. Necessary documents vary by product but can include standard
documents such as a bill of lading, invoice, shipping list, customs declaration, insurance
policy, and sales contract as well as more specialized documents such as an import quota
certificate for general commodities (where applicable), import license (where applicable),
inspection certificate issued by the General Administration of the PRC for Quality
Supervision, Inspection, and Quarantine (AQSIQ) or its local bureau (where applicable),
and other safety and/or quality licenses

PROHIBBITED AND RESTRICTED IMPORTS :

The following items are prohibited from entering China: arms, ammunition, and
explosives of all kinds; counterfeit currencies and counterfeit negotiable securities;
printed matter, magnetic media, films, or photographs which are deemed to be
detrimental to the political, economic, cultural and moral interests of China; lethal
poisons; illicit drugs; disease-carrying animals and plants; foods, medicines, and other
articles coming from disease-stricken areas; old/used garments; and RMB. Food items
containing certain food colorings and additives deemed harmful to human health by the
Ministry of Health are also barred entry.
In addition, rules went into effect in June 1999, which further restrict or prohibit the
importation of certain commodities related to the processing trade. Jointly issued by the
Ministry of Foreign Trade and Economic Cooperation (MOFTEC) and the State
Economic and Trade Commission (MOFTEC and parts of SETC were restructured in
2003 to form MOFCOM), the "Catalogue of Commodities Which are Restricted or
Prohibited from Importing for Use in the Processing Trade" is designed to shift the
direction of china's processing trade toward handling commodities with higher
technological content and greater value-added potential.
The catalogue identifies the following "prohibited commodities": used garments; used
publications with licentious content; radioactive or harmful industrial waste; junk cars,
used automobiles or components; seeds, seedlings, fertilizers, feed, additives, or
antibiotics used in the cultivation or breeding of any export commodity. The catalogue
lists seven general types of "restricted commodities": raw materials for plastics, polyester
sections, raw materials for chemical fibers, cotton, cotton yarn, cotton cloth, and some
steel products.

LIST OF EXISTING BUSINESSES IN CHINA :

• Agriculture

• Apparel

• Automobiles & Motorcycles

• Business Services

• Chemicals
• Computer Hardware & Software

• Construction & Real Estate

• Consumer Electronics

• Electrical Equipment & Supplies

• Electronic Components & Supplies

• Energy

• Environment

• Excess Inventory

• Fashion Accessories

• Food & Beverage

• Furniture & Furnishings

• General Industrial Equipment

• General Mechanical Components

• Gifts & Crafts

• Hardware

• Health & Medical

• Home & Garden

• Home Appliances

• Lights & Lighting

• Luggage, Bags & Cases

• Manufacturing & Processing Machinery

• Measurement & Analysis Instruments

 • Minerals & Metallurgy

• Office & School Supplies

• Packaging & Paper

• Personal Care

• Printing & Publishing

• Pulp & Paper Agent

• Rubber & Plastics

• Security & Protection

• Service Equipment

• Shoes & Accessories

• Sports & Entertainment

• Telecommunications

• Textiles & Leather Products

• Timepieces, Jewelry, Eyewear

• Tools

• Toys

• Transportation

STRATEGIC PLAN FOR NEW BUSINESS IN CHINA :

• Introduction to the new business :

The business which I have chosen to start in china is of electric appliances. I will
purchase the appliances from the local manufactures of People’s Republic of China
and then export it in different countries of the world.

• Electronic Industry in China :

 The electronic information industry in China has grown rapidly for the past 20 years
since the liberalization of the economy under the national strategic policy of
accelerating the "informatization" of its development. In 2005, China's electronic
information sector made up 16.6% of the country's economic growth and its added-
value output formed 7% of the GDP. Manufacturing in the sector grew the fastest.
China’s electronic information industry has grown three times faster than the national
GDP growth rate and has grown faster than the machinery manufacturing and
metallurgy industries.
In 2005, total sales in the electronic information industry increased by 28.4% from
2004 to 3.8 trillion yuan (approximately US$475 billion).
The added-value base of the Chinese electronic information industry is about 900
billion yuan (approximately US$112 billion). The value added ratio is (amount of
value added / total sales x 100%) only 23.4%, compared to the whole national
average of 27.1%.
This is evidence for China's role as an assembly base that is dependent upon overseas
components and parts, intermediary goods, and capital goods.
The number of electronic information industry-related companies in China jumped
from 7,500 in 2001, to 17,600 in 2003 and 67,000 in 2005, with approximately
56,000 of these being manufacturing companies. The number of employees engaged
in the industry grew from 3.01 million in 2001 to 4.08 million in 2003 and 7.61
million in 2005 (out of whom 5.51 million are employed in the manufacturing
industry).

• How Will I Avoid Business Failure? :

Basic reasons for failure include the following:

Finance Markets/Sales Management Offerings Operations

Underestimating Inability to
Misjudging the Lack of
start-up costs supply Under-
size or growth of relevant
(for operations & profitably to investment in
the overall sectorial
capital required equipment etc.
market. experience.
expenditure). price.
Overoptimistic Problems Excessive
Insufficient funds estimates of Insufficient with overheads
or access to top- market functional maintaining (relative to
up finance. penetration & breadth. quality scale of
shares. standards. operations).
Wrong mix of Delays in High
funds (e.g. too securing or Unresolved Restricted operational
much debt and developing differences of range of costs and/or
gearing too distribution opinion. offerings. low
high). channels. productivity.
Over reliance on Underestimating Unreal Lack of Poor capacity
trade credit the strength of expectations. innovation utilization.
 (me-too
(receivables). competitors.
offerings).
Misreading No formal or Problems Inadequate
Mistaking profit
customer clear sourcing physical
for cash flow.
requirements. structures. supplies. distribution.
Ineffective Offerings
Lack of
Overoptimistic financial & out of line Inappropriate
promotion &
projections or managerial with business
customer
overtrading. control customer location.
awareness.
systems. needs.
Unable to Inability to
withstand handle an
interest rate economic
increases. slowdown.

Clearly, there are very many other reasons as to why businesses fail. The key point is that
causes are usually very apparent (especially with hindsight) and the trick is to anticipate
them by executing appropriate strategies at the outset. I will be doing the following
exercise :

• Use market research to confirm demand and assess suitability of proposed

offerings.
• Create a management team to offset any gaps in experience or expertise.
• Raise equity to reduce exposure to interest rate changes, reduce gearing etc.
• Predicted Characteristics of My Business :

1. Sensibly financed (with prudent mix of equity and debt).

2. Strong cash position (with access to follow-on or contingency
funds).
3. Offers above-average profitability (in terms of return on capital
invested).
4. Aims for rapid growth in revenues (with profits lagging but in
prospect).
5. Targets expanding or otherwise attractive, market segments.
6. Develops a strong franchise or brand.
7. Devotes substantial resources to innovation (R&D, offerings or
market).
8. Competes on non-price issues (e.g. quality, service, functionality).
9. Very close to customers and responsive to their needs.
10. Seeks specialist/leadership image with superior offerings.
11. Well managed with high-grade staff & good people-management.

Behind every characteristic there should be an explicit strategy designed to increase the
chances of success and not simply aimed at reducing the likelihood of failure.
 • My Future Business Strategy :
In planning new strategies for a business, it is essential to define its current (implicit or
explicit) strategies for the business as a whole and its main functional areas - finance,
marketing, sales, management, operations etc. Do this by setting out a series of short
strategic statement. For instance:

1. My business will be financed entirely from retained profits and without recourse
to debt or external equity.
2. The implicit sales strategy will be to offer a very broad range of products at
premium prices and to invest heavily in promotion.
3. The senior management team will be drawn exclusively from family members.
4. Instead of doing R&D, the business copies competing products and sells them at a
discount.

To get at the root (fundamental) strategies, I will critically examine each statement. For
example:

• How has the company really been funded?

• How has the company sought to increase sales and market share?
• How have productivity/costs moved?

• Basic Strategic Planning Approaches :

The primary strategic options for my new business include the following:

Grow fast (and ahead of most competitors)

Grow in line with industry
Defend existing status (assumes a moderately
strong starting position)
Catch up (with leaders & then grow with or ahead
of them)
Turn around (from being an underperformer)
Hang in (go with the flow but don't expend much
effort)
Harvest (milk the opportunity with a view to
withdrawal)

The preferred option is likely to be very influenced by the dynamics and prospects of the
sector in which the business operates. For example, if the sector is under serious long-
term threat then the only realistic options might be to hang in or harvest. The two main
approaches to strategic development for an established business can be classified as
either organic or quantum as illustrated below:
 Organic Quantum
Lower risk Higher risk
Limited resources Substantial
needed resources needed
May divert/deflect
Absorbs less effort
attention
Low immediate
Higher returns (?)
returns
Incremental Excellent insights
learning/progress required
Unforgiving of
Strategic flexibility
errors

• Possible Future Direction :

Direction
Activities
Ignore Initiate Intensify Reduce Withdraw
Distribution X - - - -
Retail - - - - X
Services - X - - -
Manufacturing - - X - -
• Alternative technology acquisition routes :

Own R & D
Own D & no R
License in
Joint venture
Co-finance/sponsor

• Funding Strategy :

Sources Forms
Retentions
Forego dividends
Internal Disposal of surplus assets
Sale & lease back
Better management of working capital.
 Debt (short- or long-term)
Factoring & discounting
Supplier/customer loans or advances
External Leasing (operating & capital)
Grants & subsidies
Equity (formal and informal venture
capital)

LOICAL CONCLUSION :
All the above mentioned facts were regarding the policies and feasibilities to start a new
business in china. Keeping in mind all the facts and figures , I will design a strategy and
implement it to transform my business into a success.

REFERENCES :

• Haggett, Peter. [2001] (2001). Encyclopedia of World Geography, Volume 23.

Edition 2.

• http://www.emsc.nysed.gov/ciai/socst/grade3/whatisa.html ,(28-05-2010), (16:55)

• http://en.wikipedia.org/wiki/China ,(28-05-2010), (17:30)

• Britannica – History of China (27-05-2010), (10:27)

• http://www.planware.org/businessstrategies (26-05-2010), (21:45)

• http://www.export.gov/china/ (27-05-2010), (23:57)