January 15 - February 15

Highlighting the Chinese New Year

THE YEAR OF THE HORSE

Predictions for the coming year What can SME’s expect in China during 2014? Highlighted Service: Market Entry Building Guanxi in the midst of anti corruption crackdown Infographic: The Chinese Spring Festival

Scandic Sourcing | Your consulting partner in China | Tel: +86-21-51115905 | www.scandicsourcing.com 700 South Huangpi Rd, Suite A2, Shanghai, China 200025

As the new year begins, a range of interesting trends are currently unfolding, with China’s gradual opening up to foreign investment, its move to make markets play a bigger role in the economy, and other social reforms. Many things are positive, and some sectors, such as logistics, will be ripe for opportunity for foreign investments during 2014. Here are some major financial, social and policy trends for the coming year:

The Chinese Economy

Major trends in China during 2014

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o plan out your expansion to the Chinese market, it is good to know about the playing field, and that is why Scandic Sourcing now gives you our top predictions for 2014. Also: don’t miss our highlighted service of the month: Scandic Sourcing’s Market Entry program for your entry into China.

Scandic Sourcing | Your consulting partner in China | Tel: +86-21-51115905 | www.scandicsourcing.com 700 South Huangpi Rd, Suite A2, Shanghai, China 200025

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ment has stated their intent to rely less on an export driven economy, which has fueled China’s remarkable growth during the previous ten years, and instead move towards increased domestic consumption, as well as improving the services- and innovation sectors.

Reform At China’s third plenum in November 2013, a range of reforms were announced, ranging from a further loosening of the one child policy, to new land reform and a move to have markets play a bigger role in the economy.

Trade Zone, there will be some lessening of red tape with the implementation of so called negative lists which clarifies which businesses will be allowed to operate in China beforehand, instead, as of previously, go through a tedious approval process on a case-to-case basis. The entire import and warehousing process will also improve, as new systems will be set in place during 2014 to clarify import regulations and make Chinese authorities work better in-between departments. There will also be an increase in foreign investments in previously prohibited industries, such as banking and some entertainment outlets.

Although a downturn in export growth has worried some These reforms will slowly analysts, most people still preunfold during 2014, with an dict a stable 7,2 – 7,5% growth emphasis on slow, as stabilrate in China during 2014. ity will remain the main concern for Xi Jinping and Furthermore, there will be a his government. Regardshift in policy, as the governing the Shanghai Pilot Free

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What can SME’s expect in China during 2014? Scandic Sourcing asked Kerry Brown, Executive Director at the China Studies Centre, and Professor of Chinese Politics at the University of Sydney about the landscape for small and medium enterprises during 2014. - I think SME’s will continue to find China an important market, depending on their sectors, but one that they cannot avoid, and that they will need to find strategies to engage with, probably through focusing more on provinces like Zhejiang, Shanghai, Guangdong, etc. They will need more intelligent government support, and also consider working more together in order to embrace the opportunity offered of increased consumption in China. I don’t think the Chinese government will secede access to this market easily, but it needs allies for increasing consumption in China and finding new spaces for growth. So I think that the opportunities in 2014 will become more specific, more certain, and more challenging.

Notable trends during 2014: A move towards domestic consumption rather than over reliance on the previous export driven economy model and increased focus on job creation rather than economic growth.

Policies

Xi Jinpings anti-corruption surge will continue. The number of corruption case prosGovernment rhetoric will shift from being ecutions is expected to increase to over 200 focused on stimulating economic growth to in000 during 2014, compared to 140 000 durcreasing job creation, as technology disruption ing 2013, according to the Harvard Business will lead to an increased lack of jobs, especially Review. in the service sector. As many assembly plants becomes more and more automated, and when services such as insurance and banking goes online, more and more jobs will be lost – leading to rapid increase in unemployment in a job market which already is lacking millions of jobs. This will also serve to slow down the proposed plans of land reform, as the Chinese government won’t want to flood cities with unemployed rural migrants, when the labor market is already suffering from the on-going technology disruption. Scandic Sourcing | Your consulting partner in China | Tel: +86-21-51115905 | www.scandicsourcing.com 700 South Huangpi Rd, Suite A2, Shanghai, China 200025

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Opportunities in 2014:

Rail. China’s 9,000 kilometers of high speed railway is set to double from by 2015.

Logistics. Logistics is a source of potential gains. Small family run operations are dominating road transportation, which is costing Chinese businesses more than it should. This $500 Billion/ year-sector is opening up more to foreign investments during 2014 and has lots of room to improve.

Potential Hazards: Local unrest. Increased unemployment in China might cause local outbursts of protest, as students have to wait two, or three years after graduation to find a job, and have to accept jobs that are

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one, or two levels below their qualifications. Local government debt. China’s local government debt has increased by 67% since the end of 2010 . In a report from China’s National Audit Office, in June 2013, the local government debt was estimated at 17.9 trillion renminbi, and it has only increased since. Nobody fully knows how China’s increased national debt will affect the market place during 2014.

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Featured Service: Scandic Sourcing’s market entry program

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candic Sourcing can handle all the steps for your entry into the Chinese market, from preparation, to launch, as well as handling operations. We can help you conduct a partner search if you are looking for joint ventures with Chinese partners, develop your market strategy, provide feasibility studies and budgeting for the registration process and provide a company structure analysis to help determine what type of company is best to set up in China.

Scandic Sourcing have divided the market entry service into three steps.

Building Guanxi amidst Xi Jinpings war on corruption

1. Research The Chinese market is large and is developing extremely fast. Information available in English is usually limited and outdated. To get a grip on the market you need to search in Chinese language sources and get information from organizations and key players in the business. We can put together a research team that can give you the information you need for your decision making and strategy development process. We can help you study market for your product or service, including market development, competition, possible partners and price structure.

2. Preparation The preparation stage is critical to get your China venture off to a good start. Here China experience is crucial and can save you time and substantially lower your risk. We can help set up your company according to Chinese rules and regulations for setting up a company such as finding suitable up office locations, reparing rental agreements, as well as

handling the business registration process. Scandic Sourcing can also perform services such as machinery sourcing and the set-up of administrative services.

3. Operation Once your operations are up and running, Scandic Sourcing can offer a range of services to support your China operations, such as, outsourced HR, recruitment, accounting services, interims management, supervisor support and more. Talk to us about your ideas and we will propose a solution for you; we can tailor a solution which fits your specific needs. Read more on Scandic Sourcing’s website.

Scandic Sourcing | Your consulting partner in China | Tel: +86-21-51115905 | www.scandicsourcing.com 700 South Huangpi Rd, Suite A2, Shanghai, China 200025

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2014, as Xi Jinping continue to wage what he calls the ”war on corruption”.   The war has already been waged to some effect, as it has led to countless arrests of   low- and high level officials When President Xi Jinping alike during last year. Also, was inaugurated, he vowed the new measures has started to crack down on corrupto change the culture of gift tion in the communist party giving and lavish banquets which was seen as a threat to usually associated with comstability in China. In several munist party officials. Per speeches since he took over Linden, CEO of Scandic the reins of the Communist Sourcing, has operated in Party last November, he has China for over 11 years and warned that corruption could has seen the changes first lead to ”the collapse of the hand: Party and the downfall of the   state”. A massive anti-corSo much of doing business ruption campaign has since in China is about building followed suit. This is only relationships, or ”Guanxi”, expected to be stepped up in Scandic Sourcing | Your consulting partner in China

with decision makers, local officials and such. Much of that has traditionally been through giving gifts and indulging in lavish dinners. How has this been affected by Xi Jinpings anti-corruption campaign?   Per Linden:  There has been a revolution in the approach to gift giving and entertainment. For us who have spent many years doing business in China and having endured endless lunches and dinners drinking the kerosene like Chinese “bajiu” in smoke filled rooms, the change is remarkable, and very welcomed.   (Continued on page 9)

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(Continued from page 6)

They have also allowed social media to expose government Much has happened in the officials who spent too much. last year but it started earlier While before officials often than that. Already 2 years parked their cars outside ago you started to see a trend the front door of expensive were the senior government restaurants, they now park host at a dinner table did not around the corner some with drink alcohol. It was often the their number plates covered, younger ambitious officials if they dare to visit such a who set this example. Drink- place at all. ing with the guest was left to the underlings. In the last few   months government employ- How have you traditionally ees have stopped offering handled gift giving in China “Baijiu” for lunch. Wine and (i.e before Xi Jinping’s anti beer is still allowed. At lunch. corruption measures)? Can We are also happy to also see you give some background much more restraint when it with examples of how that comes to smoking. worked practically as you   were building Guanxi and Western media is searching doing business here? for a crisis in china, but few   have noticed this crisis in Per Linden: You have to give the entertainment industry. gifts in China. It is a way to The stock price of Gweichou show respect. You will for Moutai, the premium brand sure break Swedish domestic in Chinese “Bajiu” liquor has corruption rules. You have to dropped in nearly half, caus- adapt to the local culture to ing losses in the range of tens some extent, but you need to of billions RMB. draw the line somewhere and   you need very clear policies There was a recent announce- for your organization. ment that Chinese governI have always worked with ment officials will not be the policy to give gifts with a allowed to spend government company logo or if I need to money on Chinese new year give something more expengifts this year. This is a multi sive, something that reprebillion dollar industry in sent Swedish culture and art. China.    

What is currently the best approach for building Guanxi under the Xi Jinping regime?   Per Linden: Building Guanxi is a process. It cannot be achieved with a single gift or dinner. Like in other places in the world and in any relationship, it is important to spend the time, to communicate and show respect and reciprocal politeness. At the same time, we have to realize that if you are not Chinese and don’t speak Chinese there is only so much you can achieve regarding Guanxi in China. The really good news is that the new policy to some extent level the playing field for foreign companies when it comes to dealing with pure corruption such as direct request for cash. It is much easier for businesses to say no due to Chinese government policy than the internal polices of a foreign company.

Next month’s issue: Redevelopment in the Shanghai EXPO Area. Next month, Scandic Sourcing will investigate into the enormous redevelopment projects in the former Shanghai EXPO area. It turns out, a Danish architecture firm is responsible for the most notable redevelopment project. Scandic Sourcing also wants to take the time to wish everyone a happy new year. The next Scandic Sourcing issue will be published February 14th.

Scandic Sourcing | Your consulting partner in China | Tel: +86-21-51115905 | www.scandicsourcing.com 700 South Huangpi Rd, Suite A2, Shanghai, China 200025

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