July 2011

Doing Business with China

Emerging opportunities
for Indian companies
Confederation of Indian Industry
Contents
Message from Director General, CII 3
Introduction 4
Trade statistics 6
India and China trade is more than US$ 60 billion in an year 6
Bangkok Agreement between India and China 9
Foreign investment in China 10
Choice of business entity 11
Taxation in China 14
Drivers for inbound and outbound investment 15
Key industries 16
Automobiles and auto components sector 16
Information Technology and IT enabled Services sector 18
Real Estate, Construction and Infrastructure Sector 19
Tourism sector 21
Case studies 23
Case Study 1: Mahindra and Mahindra in China 23
Case Study 2: An Importer / Trader sharing his
experience of business with China 24
Way forward 25
Acknowledgements 26
About CII 27
Contacts 28
2
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 intensies 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 prole 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 benets
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 ofce 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 specic
potential and opportunities for Indian business including
identied sectors, business laws and regulations, the
mechanics of setting up business in China, and nancing
options. The series would be addressed by government
ofcials, top business leaders, and professionals
from India and China to give a holistic and rounded
perspective on the issues and challenges.
I am condent 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
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 scal decit 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
benet 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 elds 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
nancial 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
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
4
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, conict 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 difcult
times. Relationships with business partners, suppliers
and vendors and government ofcials 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 benecial 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 rst 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 2009 2010
Indias exports to China 20.34 13.7 20.86
Chinas exports to India 31.52 29.57 40.88
Total India China Trade 51.86 43.28 61.74
Trade Balance for year -11.18 -15.87 -20.02
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).
6
Source: Directorate General of Foreign Trade
Figure 1.1: Leading trade partners in India's import basket (US$ million)
Figure 1.2: Leading trade partners in India's export basket (US$ million)
-
10,000
20,000
30,000
40,000
2004-05
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
(Apr-Dec)
China U.A.E. Saudi Arabia USA Switzerland
-
5,000
10,000
15,000
20,000
25,000
30,000
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
(Apr-Dec)
U.A.E. USA China Hong Kong Singapore
-
10,000
20,000
30,000
40,000
2004-05
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
(Apr-Dec)
China U.A.E. Saudi Arabia USA Switzerland
-
5,000
10,000
15,000
20,000
25,000
30,000
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
(Apr-Dec)
U.A.E. USA China Hong Kong Singapore
Source: General Administration of Customs of the PR China)
Figure 2: Leading trade partners for China (January 2010 - June 2011)
0
50
100
150
200
250
300
350
400
450
500
EU USA Japan ASEAN Hong Kong Korea Taiwan Australia Brazil India
V
a
l
u
e

i
n

U
S
$

b
i
l
l
i
o
n
Exports Imports
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 nished, value-
added 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
nancial 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
0
1,000
2,000
3,000
4,000
5,000
6,000
Ores, Slag Cotton Copper and
Aticles
Organic
Chemicals
Precious
Stone,
Jewelry
Plastic and
Articles
Iron and
Steel
Boiler,
Machinery
and
Mechanical
Appliances
Salt, Lime
and Cement
Electrical
Machinery
and
Equipment
2008-2009 2009-2010
2008-2009 2009-2010
0
2000
4000
6000
8000
10000
12000
Electrical
Machinery,
Equipment,
Sound
Recorders
Boilers,
Machinery,
Mechanical
Appliances
Organic
Chemicals
Project
Goods
Articles of
Iron and
Steel
Iron, Steel Plastic and
Articles
Vehicles,
Tramway
Rolling Stock
Inorganic
Chemicals,
Compounds
of Metals
Optical,
Apparatus
Source: Department of Commerce, DGFT, Government of India
Figure 3.2: Key exports from China to India (US$ million)
Figure 3.1: Key exports from India to China (US$ million)
0
1,000
2,000
3,000
4,000
5,000
6,000
Ores, Slag Cotton Copper and
Aticles
Organic
Chemicals
Precious
Stone,
Jewelry
Plastic and
Articles
Iron and
Steel
Boiler,
Machinery
and
Mechanical
Appliances
Salt, Lime
and Cement
Electrical
Machinery
and
Equipment
2008-2009 2009-2010
2008-2009 2009-2010
0
2000
4000
6000
8000
10000
12000
Electrical
Machinery,
Equipment,
Sound
Recorders
Boilers,
Machinery,
Mechanical
Appliances
Organic
Chemicals
Project
Goods
Articles of
Iron and
Steel
Iron, Steel Plastic and
Articles
Vehicles,
Tramway
Rolling Stock
Inorganic
Chemicals,
Compounds
of Metals
Optical,
Apparatus
8
boilers and other types of boilers that accounted for
US$ 944 million. Other machinery in this category
includes steam turbines, ofce machine parts, cranes, air
conditioning machinery, converters, ladles, ingot molds
and casting machines etc.
In recent years, Indias trade decit 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 specic
products only) to top ve 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 Standard tariff rate in India Extent of concession on specic products
Electrical Machinery Free, 7.5%, 10% 5% - 20%
Machinery, Boiler Free, 5%, 7.5%, 10%, 12.5% 5% - 20%
Organic Chemicals 10%, 12.5% 5% - 15%
Project Goods, lab chemicals 10% NA
Articles of Iron and Steels 10% 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 signicant 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 specic, 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 specically protected
by the State; or (4) classied 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
efciency 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 classied
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
qualied high-new technology companies; a 50%
super-deduction for qualied R&D expenses; tax holidays
10
for specied 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 foreign-
owned enterprises (WFOEs), equity joint ventures
(EJVs), co-operative joint ventures (CJVs) and joint stock
companies. Non-legal entities include representative ofces
(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
Commercial Enterprises (FICE) in wholesale, retail or
trade agency services; Chinese holding companies;
regional headquarters; operating/nance leasing
companies, fund management companies, etc.
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, ve 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 rst 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
verication by a CPA rm 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
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.
Doing Business with China Emerging opportunities for Indian Companies | 11
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 prots for its statutory general reserve fund
account until the account balance reaches 50% of the
company's registered capital. Hence, the distributable
prots 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 prots 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 xed 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,
reect 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
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 ow-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 prots/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 exibility with
respect to prot-sharing and risk-
taking among the partners, subject
to approval by the authorities.
For example, the shareholder(s)
may be guaranteed a certain xed
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 exible form of a joint management
ofce. 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.
12
All capital must be divided into equal shares represented
by share certicates. 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 qualied 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 qualied
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 specic 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 specic 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 nancing, 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 rst 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 nancial services and oil
exploration industries are handled. A branch remains
part of its head ofce 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 ofces: Foreign companies, particularly
those in the trade agency and service industries, often
choose a representative ofce (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 prot-
making 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
ofce; introducing the products of the head ofce;
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 rm).
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.
Corporate Income Personal Income Employer Social Security Employee Social Security VAT
16.5 17
25
32.5
15
20
45
31
5
14.5
49
12
5
20
23
12
0
7
17
12.5
0
10
20
30
40
50
60
Hong Kong Singapore China India
Figure 4: Comparison of Tax rates
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.
14
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 signicant 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 benets and cater to the Indian market
place.
He continues, saying that Chinese manufacturers in
the technology and telecommunications sector are
already cost efcient 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 eld 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
ofces in China while banks like Canara Bank, Bank
of Baroda, State Bank of India operate branch ofces
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 ofce. 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
16
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 signicant
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 rst
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 Passenger Vehicles Commercial Vehicles Total
2004-05 1,209 353 1,562
2005-06 1,309 391 1,700
2006-07 1,545 519 2,064
2007-08 1,777 549 2,326
2008-09 1,838 416 2,254
2009-10 2,357 567 2,924
2010-11 2,987 752 3,739
Figures in 000 vehicles, Source: Society of Indian Automobile Manufacturers (SIAM)
Table 4: Vehicle production in China
Passenger Vehicles Commercial vehicles Total
2004 2,480 2,754 5,234
2005 3,078 2,629 5,707
2006 5,233 1,955 7,188
2007 6,381 2,501 8,882
2008 6,737 2,561 9,298
2009 10,383 3,407 13,790
2010 (P) 13,897 4,367 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
signicant 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 inux 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
18
look at some of these graduates to fuel their talent
requirements. However, the denition 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 $125-150
million in setting up its own campus in Shanghai, China.
This is for the rst time that Infosys has bought land
to build its own campus outside India. Most other
global centers of the company operate out of rented
or leased properties. The Shanghai campus will be
spread over 15 acres and developed over a period of
three years. Located at Zizhu Science and Technology
Park in Shanghai, the campus will have a sitting
capacity of 8,000 employees with facilities for software
development, labs, data centers, training facilities and
food courts. Besides, the campus will have a 1,500-
seater auditorium, a gym and recreational centers.
Infosys currently employs over 3,300 people in China.
It has already invested US$ 23 million in capital. The
current infrastructure can accommodate 4,200 people
in China. Infosys China had revenues of over US$ 78
million in scal year 2011.
TCS on the other hand set up their China operations
in 2002 thereby becoming the rst 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 Pacic 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 ofce leasing market in northern and
southern China experienced rental increases and high
occupancy rates, which were mainly driven by growing
demand. In eastern China, ofce rentals in Shanghai,
Nanjing and Ningbo showed moderate increases while a
decline in ofce 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 signicant 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 rst-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 ofce 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 ve 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
20
road project in Shimla district. The Chinese rm 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 rm Ramky Infrastructure with its joint
venture partner Jiangsu Provincial Transportation
Engineering Group, a Chinese rm, 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 signicant 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. Ofcial 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 xation 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%
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.
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.
22
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
0
5000
10000
15000
20000
25000
30000
Mahindra Yueda
Tractor
Mahindra China
Tractor
FY09 FY10
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 ooring, real
wood ooring 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 nd 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 specication 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.
24
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 benet 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 Asia-
Pacic 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
efciently 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 difcult 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 decit 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 nance 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-to-
people 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 benet 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 Ofce
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 gures:gures of 1952-2008: Originated
from China Statistical Yearbook 2010, 2009-2010
gures from China NSB Statistical Data. NSB 2009-
revised -China GDP gure; NSB 2010-China GDP
gure
Ministry of Education, China (http://www.
moe.edu.cn/publicles/business/htmlles/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 auto-
motive industry transformed
China Real Estate Investment handbook
Various Media Reports (including but not limited to)
http://inchincloser.com/2011/05/23/infosys-
marks-largest-investment-outside-india-in-
shanghai/
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
26
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-prot, 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 efciency,
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 Afrmative Action, Skills Development and
Governance during the year.
With 64 ofces and 7 Centres of Excellence in India, and
7 overseas ofces 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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