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Round-up Report
How China’s corporate income law will be changed?
China will revise its corporate income tax law by changing current tax scales applied to foreign companies, private companies and state-run companies.
Since 1991, China issued two tax laws for foreign companies and domestic companies separately. The average tax that foreign-invested companies need to pay is 11 percent. However, the average tax envied on domestic companies is 22 percent while the average tax on large state-run companies is 33 percent.
China’s legislative process requires that any tax law change needs to get approval form the People’s Congress Committee. Industry experts expect that the earliest time to have the revised law released will be in 2007 because this tax law revision needs to be discussed and agreed by all parties.
How CCC and CQC work in China?
CCC and CQC are China’s two certificates for products made in China. These two certificates are issued by China Quality Certification Center.
In China, CCC refers to China Compulsory Certificate. Any products using AC must have the CCC before being sold, imported or used for any other commercial use, starting from May 1, 2003. CQC is China’s Quality Certificate which is more voluntary based. However, CQC, being a quality mark for products is a must for a company to apply for bank loan.
Usually, China Quality Certification Center will issue the CCC 90 days after receiving the application. Once the CCC has been issued, products will be labelled by CCC mark.
What is EVD standard?
EVD standard, Enhanced Versatile Disc standard is China’s self-developed technical standard for high definition digital compression and playback A/V system.
With better image, more storage capacity and better performance than regular DVD, EVD enabled devices can include optical backward compatibility with DVD, VCD and CD. Further more, China makers may pay less royalty fee in making EVD than DVD.
Beijing based E-World Technology Co., initialled the consortium in 1999. The consortium gathered over ten local DVD makers, chip developers and content providers.
What is IGRS Alliance?
IGRS Alliance refers to the Intelligent Grouping Resources Sharing Alliance. IGRS is a multi-layer standard protocol that provides wireless connectivity over 802.11x or Blutooth. IGRS is similar with DLNA (digital living networking Alliance) started by Intel and other global leading companies. .
Set up in July, 2003, this alliance aimed at developing communication protocol between audio/video products, office equipment and communications terminals.
IGRS Alliance consists of 30 leading Chinese OEMs including Beijing based Lenovo, Huizhou based TCL Corp., Shenzhen based Konka, Qingdao based Hisense, Shenzhen based Great Wall, Shenzhen based Huawei and ZTE.
What is VMD Alliance?
VMD (Versatile Multimedia Data) is a format for handset multimedia applications which can support MIDI, WAVE, MP3, and other image format such as GIF and JPEG. VMD provides a platform that integrates data structure, algorithm, software, development tool, chips and handset design.
Initiated by Beijing based Vimicro Microelectronics Cor. in Aug. 2004, VMD Alliance aims to accelerate audio video and image download processing time and reduce cost .
There are over 20 telecom operators, internet content providers, handset makers and semiconductor companies joining the VMD Alliance such as China Mobile, China Unicom, Huizhou based TCL, Ningbo based Bird, Beijing-based Lenovo, Sina, Universal Music and Vimicro, to name a few.
How is a purchasing decision made in a mid-sized company in China?
China views US$80-100 million in annual revenue to be a mid-sized company. Typically, general managers handle purchasing decisions because the majority of them have an EE background and they have sufficient time to actively choose suppliers. R&D people help from the technical side and purchasing people help from the sourcing and negotiation side, but the general manager takes a hands-on approach across the whole purchasing spectrum. Recently, as these general managers begin to focus more on the supply chain and marketing strategies, the collaboration of R&D and purchasing professionals in purchasing decisions is becoming more important in choosing suppliers.
New product development (NDP) sourcing and replenishment buys are separate. R&D people initiate NDP needs with the support of procurement and marketing people, led by the product manager. The product manager leads the NDP project, focusing on the ideal product, price and time to market. Purchasing-wise, the product manager has to build a VAL (Vendor Availability List), propose core technologies to be applied, and confirm hard-to-find components. Though general managers have visibility in the process and sign contracts , project managers are involved on a daily basis. There can be many product managers in one company depending on the frequency of new product releases. Since the new product development groups are dynamic, product managers could be from the R&D or purchasing departments. The key job titles to reach are product/project managers, design engineers, R&D engineers, test engineers, purchasing engineers and purchasing managers.
Replenishment buys are the responsibility of the purchasing department. They execute buys based on Bill of Material orders from established VALs and are responsible for cross-referenced parts that they can buy at the best price and for sourcing out-of-production components. They have to forecast market supply and demand to meet production needs and must have good technical and market knowledge to help modify designs to meet the changing demands of the market. In short, they are the general manager's eyes and ears for cost savings and design-to-production.
What industry verticals do Chinese ODMs focus on?
Chinese ODMs generally started out in the OEM sector. They are mainly consumer electronics manufacturers with strengths in TV sets, DVD players and home appliances. Leading manufacturers such as Changhong, Konka, Skyworth, TCL, Sinco, SAST and Glance, all provide ODM services. Over-capacity in the domestic market and established design expertise are the primary drivers in Chinese OEMs' switch to the ODM sector, while they continue to market their brands in the domestic market. Skyworth, listed on the Hong Kong stock exchange with annual output of over 4 million TV sets, manages its 7000 strong workforce, R&D center and production facilities in Shenzhen. One-third of the company's business is ODM based. It has 170 design solutions that OEM customers can choose from. Glance, based in Shunde, Guangdong province, has built a production capacity of 12 million microwave ovens. Two-thirds of its output is ODM-related.
What industry verticals do Chinese EMS providers focus on?
The Chinese EMS market was driven by mid- to small-sized Hong Kong and Taiwan investment in the early 90's. These production capacities were built to back up sales offices located in Hong Kong and Taiwan. Chinese EMS providers focus on audio products, electronic toys, game players, computer peripherals, telephone sets, POS (Point Of Sales) terminals and calculators. Hundreds of millions of these products are produced in China every year. For example, China produces 200 million telephone sets every year, of which 80% serve international markets.
Due to import and export regulation by the mainland government in the past, the operating model of supplies-material-assembly, where Chinese manufacturers provide assembly services only after being provided with all parts, was successfully adopted to ease IC/component imports and finished product exports. Since these companies do not pay import tariffs, provided they fully export their finished products, customs clearance becomes almost transparent as far as turn-around time is concerned.
Three developments are worth noting here. First, the business environment is changing quickly as the WTO has introduced zero import tariffs on most electronics goods and eliminated export barriers. Second, local supply of electronics components has been improved considerably. Third, these Hong Kong and Taiwan companies want domestic sales in the booming Chinese market. Changes like these have pushed Chinese manufacturers to provide more services such as local sourcing, local design services, and logistics services for finished goods.
What type of design services can Chinese ODM's provide?
Chinese ODMs can virtually provide end-to-end design services for most of consumer electronics and low-end communications products. Most ODMs have gained design expertise and established design libraries through their OEM business. From an intellectual property stand point, Chinese ODMs own these designs that can be offered as services to their customers.
Chinese ODMs often take reference-designs of core-IC applications from suppliers, as well as carry out heavy localization efforts. In the consumer electronics and low-end communications product scenarios, most designs are MCU/DSP-based and mainly supplied by international IC companies. They have frequent conversations with distributors and IC vendors. Since local component supply changes rapidly, localization becomes part of daily design work. Chinese design engineers source substitution components from both local component makers and international vendors' China facilities. They face the challenges of making locally sourced components work properly with imported core ICs. Sales engineers are an integral part of customer service because they have to recommend the right technology to customers.
What percentage of a foreign company's production in China must be exported?
With its WTO membership, the Chinese government does not regulate the export ratio in foreign invested ventures. Foreign companies can sell products freely in domestic or international markets. You are free to exchange RMB to international currency to purchase imported components and you are free to exchange your RMB profit for international currency and transfer it to your home country.
What kinds of taxes do electronics companies pay in China?
There are two types of taxes for businesses in China, Value-Added Tax and Corporate Income Tax.
A 17% VAT is applied to all goods sold in China, no matter if these are sold to local Chinese companies, JVs or wholly-owned foreign companies. However, you can always claim back VAT paid to purchase materials that enabled your sales. It is critical to request a VAT invoice when you purchase. You will often be asked by your suppliers: do you want a VAT invoice or non-VAT invoice? This can make a big difference on the tax that you have to pay.
Here is an example: Let's say you manufacture a telephone set and want to sell it to chain stores for $10. You have to charge $11.70 by adding 17% VAT. However, you can deduct material expenses. If you purchased $5 worth of ICs, components and plastics to make the phones, you paid $5.85 on a VAT invoice for one telephone set. Direct costs of production can also be deducted, like capital equipment depreciation and consumption of goods during the production process; ie electricity, soldering, cleaning, etc. For our example, let's say that this comes to $2 for each of these inputs. (Salary and management overhead are NOT deductible.) The total value added tax is then: $11.70-$5.85-$2=$3.85, where you really pay VAT $0.65 for one telephone set. FYI: in China, end users do not pay VAT because they pay retail tax.
For all imported goods, a 17% VAT is applied on the CIF price. If manufacturers do not obtain a VAT invoice on imported goods, they still have to pay the 17% VAT. This will squeeze their margins unnecessarily, resulting in more net VAT that they have to pay. To encourage exports, the Chinese government reimburses VAT to exporters. If the telephone set is exported, the telephone maker can claim back its $0.65 VAT with a proper customs invoice.
The income tax is simple - 33% for Chinese companies and 15% for JVs and wholly-owned foreign entities, on a net income basis. For JVs and wholly-owned foreign companies, you can get further benefits: one year tax free and and two years with 50% tax deductions. You pay no income tax in the first profitable year after establishment, and you pay only 7.5% in the second and third profitable years. The difference between Chinese and foreign companies is to attract foreign investment. It will eventually be the same between Chinese and foreign investment due to WTO guidelines. To encourage technical innovation, the government has also granted 15% income tax status to Chinese high-tech companies, such as IC design and software companies. When managing technology companies in China, you should apply for high-tech approval from the Science and Technology Committee to enjoy special tax deductions.
What is the benefit of establishing a JV in China as opposed to a wholly-owned entity?
There are pros and cons of running a JV or wholly-owned entity in China. If your business is not big, you might start a JV with a Chinese partner, to avoid the headaches of localization and to gain access to the Chinese market more easily. The local issues mainly lie in cross-cultural differences, staffing, government relationships and understanding local market developments. To look for a good partner, you have to fully understand what you want. If you are a technology company and want your products to meet Chinese market needs, try to gauge your potential partners' R&D resources and track record in market implementation. If you plan to set up a sales organization, you have to confirm their distribution channels and customer relationships. For a production base, you have to consider their supply chain and operations at the management level. From a management perspective, you have to be a good listener to understand the Chinese context. You may fail if you simply shift a successful program in your home country to China without a serious localization process. A JV is like a marriage, it can be a happy family, or it can wind up in divorce. Make sure you both have the same dream before getting into bed.
For a big company, you probably want to look at wholly-owned entities because they can make Chinese factories an integral part of your global supply chain. You can afford top level senior Chinese expertise to manage local issues at a fraction of the cost of the US, Europe or Japan. In general, there are no more restrictions in setting up wholly-owned foreign companies in the electronics industry, except in cellular handsets. Nowadays, big companies often enter China through acquisitions, which can help to prevent a bad marriage.
