clinthowards: A Letter to China, from America: Part III

Selling U.S. goods and services to Asia, and the China considerations

Opinions and observations on U.S.-China-Asia trade from Chris Devonshire-Ellis

Oct. 15 ? Over the past couple of weeks, I?ve been addressing a number of American trade and commercial bodies, as well as universities. Our practice, Dezan Shira & Associates, maintains memberships with several international tax and accounting alliances; through which we continue to develop mutually beneficial relationships with mid-sized American tax and legal establishments across the country. Typically, such U.S. domestic practices have limited resources in terms of international trade, and although this position for them is now improving internally, the regional intelligence of what is going on in China, India and ASEAN (and the benefits now open to American companies to access these markets) often has to come from us, as we?re extant across Asia.

Our American partner firms benefit because we are able to:

Provide a practical overview of the developing nature of Asia;
Handle the technical questions foreign investors typically have;
Assist with more detailed troubleshooting for specific clients when necessary; and
Supply on-the-ground information through our pan-Asian infrastructure (our China practice alone maintains 12 offices in the country).

On the other hand, through this kind of relationship, our partners are able to:

Advise their local American clients about the legal and tax issues to consider when preparing to make an investment in Asia; and
Provide guidance to their clients in matters relating to export (and other) U.S. tax credits and incentives, as well as transfer pricing issues, and so on.

Such partnerships end up working well for both parties and in just the past 10 days I?ve spoken in Cincinnati, Providence, and Boston ? all arranged with local U.S. firms. The week ahead sees me visit both North and South Carolina and end the week speaking in San Francisco (a quite deliberate travel agenda policy!).

To summarize what I?ve been saying at these speaking engagements in terms of how Asia is developing (while condensing the content into basic highlights for this article), I can basically state that it?s all about the age demographics. In China, the consumer middle class has reached approximately 250 million, according to both the Wall Street Journal and McKinsey, with that expected to reach some 500 million by 2020. As China ages (the average age of a worker is 37 today, as opposed to 23 back in 1992), its domestic wealth is also increasing. This provides numerous new pockets of emerging consumer markets within China for U.S. companies to target.

American companies are also leading the way into these new Chinese markets ? KFC alone now has over 4,000 outlets spread across some 700 cities in China. How about that as a platform for introducing Chinese consumers to quality standards and American brands? Starbucks is close behind, and of course one cannot forget McDonald?s. As you read this, thousands of people across Chinese cities you may never have heard of are tucking into a good old-fashioned American fast food meal. These new consumer demographics are now having a significant impact on American exports to China ? which surpassed US$100 billion for the first time last year and is only going to keep increasing.

But China is only part of the story. ASEAN, with its 10 member countries tucked between China and India, has free trade agreements that kick in come 2015, and that means manufacturing opportunities in Asian destinations with cheaper labor costs ? such as Vietnam and Indonesia ? are starting to look more attractive. Those FTAs don?t just link ASEAN to China and India, they also link the bloc to Japan, South Korea, Australia and New Zealand.

In addition, ASEAN includes some attractively wealthy nations as well that American manufacturers can sell too: Thailand, Malaysia and Singapore are all well up there in per capita disposable income levels, while for infrastructure development, Cambodia, Myanmar, Vietnam and Indonesia are all crying out for investment. It?s almost an embarrassment of markets to choose from. That need for infrastructure also extends to India ? where it still takes three days to turn a ship around in Mumbai, compared to eight hours for Shanghai. If your business is involved in infrastructure development and construction ? you should be heading off to India right now.

But those development and infrastructure statistics also demonstrate a real need for American investment capital and technology (and in turn represent some tremendous sales opportunities). With India just recently relaxing FDI regulations concerning retail in the country, large companies such as Wal-Mart are now set to massively increase their spread and influence. They need to ? India?s supply chain infrastructure is very poor and the cold chain almost nonexistent. A harsh fact concerning agricultural production in India is that 30 percent of crops rot before reaching the market. The introduction of large multi-brand retailers such as Wal-Mart will help solve these problems by putting in place those much-needed supply chains.

These problems have also translated into new market opportunities for some savvy American businesses, and I had the pleasure of spending time with one such company in Cincinnati last week. By developing a small, customized, portable refrigeration unit especially for hot countries with the agricultural problems I described, this company has already targeted India and has Wal-Mart chomping at the bit to distribute their product. The unit also contains a number of patented inventions. We discussed various issues (not least the margins retailers would probably ask for and related profits tax and VAT matters), when an interesting point came up about China.

?We only intend to sell this in India at the moment,? they said. ?But how long do you think it would be before a clever engineer in China gets hold of one of our units, takes it apart, understands how the technology works, and manufactures it there to compete with us in India??

It?s not a question I could answer with any precision, and I hazarded an 18 month window. However, in subsequent discussions elsewhere I have heard instances of China copying products within 6 weeks, but I suspect those were for inventions initially sold in China. Either way, it brought home a salient point ? if you intend to sell anywhere in Asia, you probably want to ask your patent lawyers to have your invention protected in China too. When doing this, make sure you choose a practice registered in China and not just a local U.S. firm. If you choose the latter, you may lose control of the process and end up with work that is subcontracted ? meaning you just pay extra for what amounts to a more remote and hands-off service. Although it is difficult to get statistics from China about this, it is wise to note that the number of patents being challenged in the country appears to be sharply on the rise. The message is to get those inventions patented in China, even if it?s not your target market.

Meanwhile, on a more upbeat note, another phenomenon I have noted about the United States today is how local businesses are starting to evolve from 20 years ago, when I first began advising American companies on doing business in China. In those days, many U.S. corporations were content to sell domestically, and made good money in doing so. But as a new generation of executives comes through, with many having spent time in China or Asia as part of their undergraduate degree or MBA, their experiences and dynamics are starting to make their way into the board room. A new breed of younger, international executives is beginning to influence American commerce, and these executives are starting to steer company sales away from relying purely on the domestic market, and are instead moving towards generating a higher percentage of profits from export sales.

That development neatly outlines what I?ve been saying: the future trend is U.S. exports. Once that can be matched up with the fantastic opportunities that Asia has to offer, American companies are going to be spreading their wings overseas in increasing numbers and, with that, increasing their profits ? from Asia.

Chris Devonshire-Ellis is the founding partner of Dezan Shira & Associates and is based in North America. He is available to meet with other legal and tax practices across the United States to coordinate a suitable Asia development strategy for individual businesses and their clients. He is also available to speak at international business events with chambers of commerce and similar entities, and to the appropriate international faculties of American universities. For further information, please email the practice at usa@dezshira.com or visit the firm?s website at www.dezshira.com.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia?s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.

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