Starting a Business

One of the major cities in the Greater Pearl River Delta Region, Shenzhen is expanding to become a “high tech industry corridor.” Read on for an overview of the region that covers everything from investment incentives to typical costs of doing business.  AUGUST 2006 1. Introduction  Many Western ICT companies from the US, UK, France, Germany, Australia and other developed countries in Asia such as Hong Kong, Taiwan, South Korea and Singapore have successfully entered the China market. To date Foreign Country ICT companies have been very cautious about business opportunities in China and have tended to favour the US, UK, Australia and other Asian markets suchas Singapore. Doing business in China is difficult and there are many examplesof Western ICT companies, large and small that have failed to develop a successful business in China. Foreign Country ICT companies need to carefully assess the costs, benefits and risks of doing business in China. Whilst an assessment of the market opportunities and the risks of doing business in China is outside the scope of this report a very high level overview of the potential business opportunities is provided as a guide to the most attractive ICT sub sectors.   An update on Intellectual Property Rights (“IPR”) in China has also been provided as this has been noted by NZTE as one of the key reasons preventing Foreign Country ICT companies entering the China market. 2. China ICT market  The China ICT market offers huge potential for Foreign Country companies. IDC forecast China's IT market to reach US$35 billion in 2006 and the telecom services market to amount to US$72 billion in 2006. Annex 1 contains a summary of the potential opportunities for Foreign Country companies seeking trade and investment in the China ICT market. 3. Intellectual Property Rights in China  Foreign Country ICT companies have raised concerns about China’s poor IPR and have cited this as one of the key reasons for deciding not to enter the China ICT market. There is no doubt that China’s track record of protecting IPR is poor. However, the Chinese Government is determined to improve IPR protection and has implemented a number of measures to step up IPR protection. China’s Action Plan on IPR 2006 is being launched and covers trademark, copyright,patent and import-export. It encompasses nine areas of protection: legislation, law enforcement, mechanism building, publicity, training and education, international exchange and cooperation, promotion of business self discipline, provision of services to right holders and topical research.1   4. China ICT Beach Head  A number of High Tech zones offering attractive incentives for foreign companies have sprung up across China. However, many of the High Tech zones have not lived up to their expectations in terms of providing adequate infrastructure and proximity to potential suppliers and clients. This report examines the attractiveness of Shenzhen, with its numerous High Tech parks, as a potential ICT Beach Head for Foreign Country companies. The following areas are covered: o     An overview of Shenzheno     Key economic datao     Shenzhen’s High Tech Industryo     Foreign investment in Shenzheno     Investment incentiveso     Typical costs of doing business 4.1. Shenzhen Overview  Shenzhen is one of five2 special economic zones (“SEZ”) set up in the 1980s. Shenzhen’s initial Economic Trade Development Zone, the Shenzhen Science and Industry Park, is now fully occupied with a number of big name enterprises such as Compaq, Great Wall, IBM, and TCL. The area is now being expanded to form a ‘high-tech industry corridor.’ Shenzhen is also developing a central business district that will provide the focal point for providers of finance, trade, information, and cultural services. Shenzhen is one of the major cities in the Greater Pearl River Delta Region. Shenzhen is linked by rail to Guangzhou (1 hour away) and Hong Kong (45 minutes away). Expressways connect the city to Guangzhou (2 hours away) and other major cities in the delta region. Shenzhen’s Bao’an airport offers an extensive network of flight connections to other Chinese Mainland cities and is extending its international reach. Shenzhen is the number one city in China for exports and is the fifth largest cityin terms of GDP.   1See Hong Kong Trade Development Council Business Alert – China “Action Plan on IPR Protection Soon to be Launched” and “PracticalGuide to IPR Protection in China : How to Protect Your Brand” available at http://bookshop.tdctrade.com2 The other 4 SEZs are: Xiamen, Zhuhai, Shantou and Hainan

4.2. Key Economic Data  
Total area(square kilometers)1,953.00
Census Population 2000(million persons)7.01
Total GDP in 2004(US $ billion)41.34
Real GDP growth 2004(per cent)17.3
Official per capita GDP in 2004(US$)7,161.00
Gross industrial output in 2004(US $ billion)78.61
Total trade in 2004(US $ billion)147.28
Growth in exports 2004(per cent)23.60
Utilised foreign direct investment in2004(US $ billion)2.35
  *Note: Statistics reported for the jurisdictions in the Pearl River Delta are basedon data from the jurisdictions’ Statistical Yearbooks or statistics bureaux. Data for the year 2004 are preliminary.   4.3. Shenzhen’s High Tech Industry  Shenzhen is a leading city in China for high-tech industries and new business ventures. The telecommunications equipment, computers, and other electronics sector dominate the local manufacturing economy (representing US$ 38 billion gross industrial output in 2003). Other leading sectors include electric equipment/ machinery and printing / recorded media (US$ 3.5 billion and US$ 0.8 billion gross industrial output in 2003). Shenzhen accounts for almost 20 percent of the Chinese Mainland’s software output and 25 percent of its integrated circuit design business. Numerous foreign firms and leading firms from all over the Chinese Mainland have set up in Shenzhen to take advantage of the infrastructure, workforce, and links to Hong Kong. Shenzhen is also home to a number of international trade fairs and exhibitions covering a wide range of industries from nuclear power to food. Shenzhen’s China High-tech Fair, the largest of its kind in China, attracts participants from around the globe. Shenzhen is home to one of two stock exchanges in theChinese mainland and has been a leader in the opening of China’s finance andinsurance sectors.

 Computers,     telecommunications,      integrated       circuits,   digitally  controlledhousehold electrical appliances, and biomedical products will be given priority under the Shenzhen government’s current Five Year Plan. The authorities aim to enhance Shenzhen’s role in commercializing technology for Chinese Mainland markets and are actively encouraging the expansion of the retail sector, particularly with regard to chain stores. They also plan to develop the city’s roleas a regional and international logistics centre, as well as a main urban exhibition and distribution centre for the Pearl River Delta region. Shenzhen’s new ‘University Town’ brings together branches of some of China’s top universities on one campus.   4.4. Foreign investment  There are thousands of foreign-invested enterprises in Shenzhen. International firms are prominent in the high-tech sector, with Compaq, DuPont, Epson, IBM, Hitachi, Hon Hai Precision, Intel, Lucent, Olympus, Oracle, Ricoh, Samsung, Sanyo, Seagate, Siemens, and Sony all having operations in Shenzhen. IBM claims its PC factory in Shenzhen is among its best in the world. Both Intel and Oracle have chosen Shenzhen for their first design centres in China. There is also significant international presence in service sectors such as: banking, finance, and insurance (AIG, ABN Amro, Bank of Tokyo, BNP Paribas, Dresdner Bank, HSBC, IDG, and Standard Chartered), shipping and logistics(Maersk and Federal Express), business services (Ernst & Young, KPMG, and PricewaterhouseCoopers), and retailers (B&Q, Carrefour, Jusco, McDonald’s, and Wal-Mart). A number of companies base their sourcing centres in Shenzhen. Wal-Mart’s home office for overseas procurement is in Shenzhen. In 2004, Wal- Mart bought approximately US $ 18 billion in commodities in China (an amount equal to more than one percent of China’s GDP).   4.5. Investment Incentives  Shenzhen offers a package of preferential policies and incentives to foreign investors, includingo     reduced income tax rates (corporate income tax is 15% and there is no local tax);o     tax holidays for income and property taxes,o     reduced land use fees, and special VAT terms.o     Foreign investors who reinvest their share of profit in China for a period ofno less than 5 years may, with the approval of the tax authorities, obtain arefund of 40% of the income tax paid on the reinvested amount.

4.6. Typical costs of Doing Business  Electricity, telecommunication, office rents, salaries and other costs of doing business in Shenzhen are provided in Annex 1.   5. Next Steps  More information on the business opportunities, costs and risks is required to build a detailed business case for establishing an ICT Beach Head in Shenzhen. From initial discussions with the Liaison Officer from Invest Shenzhen, the Government department responsible for providing information and advice, muchof the required information (such as specific information regarding the type andnumber of foreign ICT companies that have established a presence in Shenzhen, profiles of Shenzhen’s various High Tech Parks, updated information of the costsof doing business in Shenzhen) could be obtained from a face to face meeting with Invest Shenzhen.

Annex 1 Potential opportunities for Foreign Country ICT companies seeking trade and investment in China o     China’s telecom market is the largest subscriber market in the world. A number of overseas mobile companies have formed joint venture and distribution agreements with Chinese mobile data companies. o     The Chinese Software Industry has grown rapidly with the packaged software market reaching US$2,650.5 million in 2004. IDC forecasts this market will reach US$6,234.0 million in 2009 with a 2004-2009 compound annual growth rate (CAGR) of 18.7%. Private and foreign software companies dominate the market while many Chinese companies are starting to expand into international markets. o     Software Outsourcing & IT Services is a sector that is supported by the Chinese government and has received significant investment from foreign companies. The entry of more western and Indian companies will most likely result in significant growth in this sector. o     E-Commerce: The China B2C market is expected to maintain rapid development. However, logistics, distribution and payment system are issues, which potentially limit the growth of the sector. o     Online Gaming is growing rapidly with a market size of around US$1 billion. The market is expected to grow with PC and broadband penetration increases and is estimated 5 and according to i-Research they forecast the market will reach US$ 1.8 billion by 2010. o     IPTV presents an attractive prospect for providers of equipment and solutions as well as content. Analysys, predicts that users of IPTV in China will reach 1.2 million by end of 2005; 2007 will be a year ofexplosion of IPTV users, and finally by 2009 IPTV users will reach 16.7m users.

   SHENZHEN BUSINESS COSTS3 1. Electricity
 Annex 2

  
  Large amount ofCommonconsumption 101electricityto 3000 k VA  Over 3001k VA
 
 
Domestic0.73 
Commerce and service 0.89 0.77 0.72
industry
 Industry  0.75 0.65 0.6  2. LPG  Domestic gas  10.37 yuan/m3 Commercial gas     13.48 yuan/m3  3. Communicationsa) Fixed network communication fees 
 Basic monthly rental for non-  
35 yuan per month 
residential users 
  
 Local call Within operation area  Operation Segments 0.22 yuan for the first 3 minutes, and 0.11 yuan for each minute since the fourth minute0.2 yuan/once 
 Toll fees DomesticInternationalHong Kong, Macao,andTaiwan 0.07 yuan/6 seconds0.8 yuan/6 seconds0.2yuan/6 seconds 
  b) Mobile communications fees  3 Source: Shenzhen High Tech Industrial Park W ebsite http://www.ship.gov.cn/en/index.asp?bianhao=17

  Basic monthly rental 50 
  
yuan per user per month 
  
Basic mobile conversation fees (local call fees)0.4 yuan per minute 
  Basic mobile conversation 
Toll call feesfees + corresponding toll call 
 fees 
  4. Price on assignment of land use right  Unit: yuan per square meter for building area
Commercial land1260-2579
 Office area 1225-1968
 Residential land 679-1983
 Industrial land 316-644
  5. Rent of office building/workshop/warehouse  Unit: yuan per metre per month
 District    Nanshan Futian     Luohu Yantian   Longgang       Baoan
 Office13-48building 30-70      35-130 25-65      6-55 8-60
 Workshop       12-28 15-40      8-15 13-22      4-13 5-14
 Warehouse      10-17      6-10 10-25      4-8  4-14  6. Average pay for employees   Unit: Yuan per month
 - ManagementProfessionaltechnical Production personnel
 - - -Seniortechnicalpersonnel Technical Senior Intermediate Junior
WithinSEZ 2100-20000 1800-130003200-70002600-65001200-5400 900-4000680-3600
Out ofSEZ 1000-8000 1100-82002100-49002000-44001100-4000 750-3300610-2500

 The labor cost mentioned above is an intermediate level and, according toShenzhen's regulations, the lowest monthly pay within the SEZ is 595.00 yuan, while the lowest pay out of the SEZ is 46.00 yuan. 7. Insurance   
 - -UndertakenUndertaken by Remarks
by enterprisesindividuals
  SocialendowmentinsuranceBasic pension 8% 5% 
insurance
Local  1%  - 
supplementary
pension
insurance
  BasicmedicalinsuranceComprehensive 7% 2% Permanentresidents
medical
insurance
Hospitalization - 2% Temporaryresidents
medical
insurance
 Employment injury insurance 6.4-19.4 -yuan per person
per month
 Unemployment insurance 8.6 -yuan per capita
per month
Public accumulation fund for 15% - 
housing construction
Total approximate insurance 31% 9% 
premium
  Note: The insurance premiums with % are to be calculated and drawn as permonthly pay.

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