Subject: CHINA IMP/EXP NEWS (CN940715)

From: [email-masked] (Cheng Wang)
Date: Sat, 16 Jul 94 13:44:16 CDT

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		    JULY 15  1994     (CN940715)

		      (TODAY'S CHINA MARKET)

		  	JOINT - VENTURES

CONTENTS                                                          LINES
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EDITOR'S NOTES: .............................................. 50 lines

JOINT-VENTURE UPDATES  ...................................... 138 lines

CHINA FORGING RULES ON SALES OF ASSETS TO FOREIGN INVESTORS .. 84 lines

CHINA POLICY ON PRESSURING FOREIGN FIRMS 
TO ENGAGE IN LOCAL MANUFACTURING  ........................... 228 lines

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           NEXT ISSUE: ESTABLISH YOUR LAW FIRM IN CHINA
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EDITOR'S NOTES: .............................................. 50 lines

========================================================================
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JOINT-VENTURE UPDATES  ...................................... 138 lines

========================================================================

FORD SETS JOINT VENTURE DEAL WITH TWO CHINESE AUTOMOTIVE SUPPLIERS

DATE: June 27, 1994 Knight-Ridder

  New York--Jun 27--Ford Motor Co. (NYSE:F) today said it signed joint
venture agreements to invest over 50 million dlrs with two Chinese
automotive suppliers, marking its first manufacturing presence in
China.

  In one deal, Ford and Yan Feng will produce plastic automotive
components including interior trim, seats, instrument panels and other
plastic parts for the Chinese automotive industry.

  In the other deal, Ford and Yao Hua will produce automotive safety
and architectural glass.

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U.S. MANUFACTURERS SETTING UP SHOP IN ASIA

DATE: June 27, 1994 By Andrea Knox, Philadelphia Inquirer
Knight-Ridder/Tribune Business News

  Here's DuPont Co. beavering away on a $1 billion nylon complex in
Singapore  and  planning to throw up another $1 billion worth of
beachheads in China, Taiwan and Korea. There's Wilmington's Zeneca
Pharmaceuticals announcing -- just last week -- plans to invest more
than $100 million in China  in  the  next  five  years.  And  over
there  are  Armstrong  World Industries,

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ANHEUSER-BUSCH SEEING FOREIGN SALES EXPAND

DATE: June 27, 1994 By William Flannery, St. Louis Post-Dispatch
Knight-Ridder/Tribune Business News

  Anheuser-Busch's foreign beer sales have grown to more than 3.4
million barrels in 1993 from 875,000 in 1981.

Anheuser-Busch is the largest brewer in the world. Its two leading
competitors  are  far  behind.  No. 2 Heineken of Holland has half of
A-B's world share at 4.6 percent in 1992. No. 3 is Miller, with 4.4
percent.

  The Budweiser brand alone accounts for more than 4 percent of world
sales.

  The latest purchase is an 80 percent share of the Zhongde Brewery in
central China. Anheuser-Busch plans to have three major breweries in
the world's most populated nation. It already has a stake in China's
Tsingtao Brewery.

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SCOTT SEEKS TO MAKE TOILET PAPER A STAPLE OF EAST ASIA'S RESTROOMS

DATE: June 27, 1994 By Andrea Knox, Philadelphia Inquirer
Knight-Ridder/Tribune Business News

  Lee is Scott Paper Co.'s representative in southern Malaysia, the
point man here in the company's quest to conquer East Asia's public
restrooms.

  The Philadelphia company is just one of many U.S. consumer goods
makers that see East Asia as the new frontier, the chance to break
out of a straitjacket of sluggish growth and nasty price pressures in
the United States and Europe. The region's standard of living has
quadrupled in a generation, the World Bank calculates, spurring
consumer demand for all manner of luxuries and conveniences.

  Its growing thirst for soda and beer has Philadelphia's Crown Cork &
Seal Co. Inc. churning out billions of aluminum cans every year at
factories in Hong Kong, Korea and China.

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COCA-COLA BEGINS BUILDING FIRST OF 10 NEW BOTTLING PLANTS IN CHINA

DATE: June 19, 1994 United Press International

  Beijing--Jun 20--Coca-Cola's battle for China's 1.2 billion consumers
moved up a gear Sunday, as construction started on the first of 10 new
bottling plants.

  The 22-million-dlr plant in northern China will be operational within
12 months and produce 3.2 million cases of Coca-Cola a year, the
official media said.

  All Coca-Cola products sold in China are now produced within the
country.

  The new plant in the northern Chinese city of Harbin is a joint
venture between Kerry Beverages Ltd. and two Chinese partners.

                -------------  ******  -------------------

RED HAWK: Local fiber optic firm announces joint venture in China

June 19, 1994       Business Editors/Telecommunications Writers

    MILPITAS, Calif.--(BUSINESS WIRE)--June 19, 1994--Red Hawk, the
Milpitas-based fiber optic company, announced Sunday the formation of a
funded joint venture with the Designing Institute of the Ministry of
Posts & Telecommunications of the People's Republic of China.
    The joint venture, to be known officially as Shenzhen Red Hawk
Electroptic Communication Company Ltd., will be at the forefront of
product and systems design, and value-added manufacturing for voice,
video and data communications projects in the PRC.

                -------------  ******  -------------------

CEDAR GROUP:
 
Cedar Group's Dominion Bridge unit signs joint venture for $64 million
(U.S. dollars) cement plant in City of Chongqing, Province of Sichuan,
China;  Cedar  Group's  Dominion  Bridge unit  also  obtains exclusive
right  to  develop  500 acre property in center of Chongqing City

                -------------  ******  -------------------

TOYOTA  PLANS  CAR  PRODUCTION  IN  CHINA

TOKYO Agence France Presse English Wire DATE: June 17, 1994

Japan's top automaker Toyota Motor Corp. will produce cars jointly in
China with a major Chinese automotive group, Tianjin Au|Z6e Industrial
Corp., the Nihon Keizai newspaper reported Friday.

The joint venture, pending approval by the Chinese government, is
likely to start  producing  key  auto  parts, such as engines and
transmissions, next year ahead of full car production.

The  venture  will  aim at sales in China of some 150,000 units a year
from 1996, the major business daily said.

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CHINA FORGING RULES ON SALES OF ASSETS TO FOREIGN INVESTORS .... 84 lines

=========================================================================
DATE: June 16, 1994  18:30 E.T.  WORD COUNT: 638

By P.T. Bangsberg, The Journal of Commerce Knight-Ridder/Tribune
Business News

    HONG KONG--Jun. 16--Authorities in China say they are drafting
detailed regulations for the sale of state assets to foreigners,
something they hope will revitalize loss-making enterprises.

  Yu Xiaosong, vice minister of the State Economic and Trade
Commission, suggested at least two areas require controls.

  Asset evaluation "must be conducted by a qualified organization"
before a state-owned enterprise transfers part or all of its equity
to a foreign investor, he told a recent seminar in Beijing.

  This stipulation was necessary "as there is not yet a fair and
scientific method" of determining value. China has frequently
complained that foreign investors acquire assets on the cheap.

  Yu said the other sensitive area is whether one or more foreign
investors should be allowed to buy all stakes or a controlling stake
in a state firm.  This determination would "depend on the status and
function of the enterprise in China's national economy."

  The official said such takeovers would not be "proper for important
large state-owned enterprises - a large power plant, for instance -
which will trigger such problems as electricity supply, charges and
production capacity."

  Yu said the Chinese partner's stake in such firms must be over 50
percent regardless of the number of shareholders.

China wants to shed at least some of its stakes in large corporations
that  have  for  years  bled  red  ink,  requiring large subsidies from
the central coffers. It has also recently said overseas investment will
be allowed in nearly all sectors other than defense, including such
previously off-limits areas as power and transport.
  Many local authorities, eager to attract overseas cash and expertise
and cut their own heavy outlays, rushed to woo investors. Some of
these were later criticized by the central government as giveaways or
unnecessarily bargain-basement deals.

  The guidelines now being drafted are evidently intended to prevent
similar occurrences. They may also cool some of the overseas ardor for
even profitable firms, and that could prompt a rush of sales before the
regulations come into force.

  Southwestern Sichuan province, a heavy industry center, is proposing
to offer 10 to 15 state-owned enterprises for sale to foreign
investors at an international symposium late this month.

  Officials said 33 firms in the cities of Chengdu, Chongqing, Deyang,
Mianyang, Leshan, Zigong and Neijiang were chosen as candidates. The
final list hasn't been released.

  Sichuan authorities say 85 percent of the enterprises selected for
sale are profitable, while the rest "have great potential for
development." They are in machinery, electronics, metallurgy,
chemicals, building materials, food, medicine and light industry.
  Just over a year ago, Sichuan said it would offer 16 state firms for
auction in Hong Kong. They were in Chengdu, Chongqing, Zigong, Wanxian
and Peilin, but the results of the auction were never reported.

  In February this year, southwestern Yunnan province, one of the less-
developed areas, said it would merge or sell about 100 small
state-owned enterprises with negligible profits or losses. The property
rights were estimated at more than 500 million yuan (US$57 million).

  Nothing further has been heard of that undertaking.

  Government figures, though sometimes hard to unravel, indicate China
has 110,000 state firms with assets of 2 trillion yuan (US$230
billion). One- third at least are chronic loss-makers and another third
would probably collapse without subsidies.

  As well as being a heavy drain on resources, such outlays cause
problems with China's attempt to rejoin the General Agreement on
Tariffs and Trade.  GATT,   the   Swiss-based  umpire  of  world
business,  generally  forbids subsidies.

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CHINA POLICY ON PRESSURING FOREIGN FIRMS 
TO ENGAGE IN LOCAL MANUFACTURING  ............................. 228 lines

=========================================================================
1.   SUMMARY:  a basic tenet of China's industrial policy is to
encourage or pressure foreign firms to transfer technology and invest
in manufacturing as the price of entry into the market.  capital
budgeting procedures, currency controls, high tariffs, and sometimes
genuine economic or competitive advantages, are all mechanisms
pressuring firms into a local manufacturing presence.  there are two
major policy restrictions in relation to investment that foreign firms
find chafing:  one is the restriction on setting up pure sales and
service operations with no manufacturing element; the second, are
restrictions on the free choice of a joint venture partner.

2.   China uses a range of practices and polices to encourage and
pressure foreign firms to invest in manufacturing, transfer technology,
or enter into co- production arrangements as a condition of entering
the market.  these practices and policies include import substitution;
co-production, local content, or offset requirements; restrictions
against "pure trade;" and restrictions on choice of partners for joint
ventures.  all of these practices reflect an underlying, deeply
imbedded, pervasive industrial policy of utilizing the attractiveness
of China's vast market potential to leverage foreign firms to invest in
China's industrial development.  chinese officials have frequently used
the formula that "China will 'concede' (rang chu) a portion of China's
market in exchange for technology, investment, and access to overseas
markets".  foreign suppliers face these policies whether they wish to
export directly to the chinese market through a chinese agent, to
establish their own sales and service operations or representative
office, or to set up a manufacturing joint venture.

2.   import substitution:  firms seeking to penetrate the China market
via direct exports through a chinese agent face a range of pressures to
invest or transfer technology.  one such policy is "import
substitution," a policy that has taken various forms.  a widespread
manifestation was the policy, no longer officially practiced as
contrary to the provisions of the market access memorandum of
understanding the u.s. signed with the ministry of foreign trade and
economic cooperation (moftec) in october, 1992, of restricting, (via
licensing and other approval procedures) imports of goods for which
local equivalents were available, and requiring chinese purchasers to
purchase from such domestic suppliers.  while the import substitution
lists may no longer be circulated, there is still a bias, imbedded in
the capital budgeting process and in the foreign exchange system,
tending to push buyers to exhaust the possibility of local procurement
before imports are approved.  this bias is of course encouraged and
promoted by the chinese industry that manufactures, or would like to be
able to manufacture, the same product.  (end users and project owners,
on the other hand, frequently prefer the quality and reliability of
imports.)  in addition to these capital budgeting and currency control
mechanisms, steep tariffs rates -- which may be waived for approved
priority buyers -- further discourage imports in favor of local
manufactures.  many foreign firms invest in manufacturing to get on the
inside of such barriers.

3.   offset, co-production, and local content requirements are another
manifestation of industrial policy seeking to build up chinese
industry.  aircraft sales, for example, routinely entail offset
obligations under which the foreign vendor agrees to purchase a
specified dollar amount of chinese goods in return for the sales
order.  co-production agreements are often insisted upon in major
project procurement.  for example, a contract for the purchase of
several hydro-turbines for a large hydroelectric project may require
the vendor to produce an progressively greater proportion of each
turbine in China in cooperation with a designated (or self-selected)
chinese manufacturer.  a typical formula, involving the purchase, say,
of four turbines, might have the first one completely imported with
only minor assembly by the chinese vendor, and increasing proportions
of each subsequent turbine built in China, with the last virtually 100
percent local made.  some suppliers, accepting the inevitability of the
need to become an inside player, may build a relationship with a
co-production partner leading to a full-fledged equity joint venture.
local content requirements, such as those seen in the automotive joint
ventures, require the jv to increase the local content of its product
in accordance with a timetable negotiated in the joint venture contract
as a condition of receiving relative favorable tariff treatment on
imported kits.

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DESIRES FOR SALES AND SERVICE OFFICES BUT PRESSURES FOR MANUFACTURING
OPERATIONS

-------------------------------------------------------

4.   many foreign firms recognize and accept the need to have a local
presence to promote their products and provide customer service.  most,
if given the choice, would like to establish a sales and service office
in China with no immediate commitment to manufacturing.  companies do
have an option of establishing a representative office, and this option
is satisfactory for many firms.  however, because of the inability of a
representative office to hire directly, to import directly goods for
resale, to enter directly into sales contracts, and to provide customer
service for a fee, the representative office form falls far short of
what many companies require.  another option available to foreign
suppliers is to engage a chinese agent or dealer, and contract with a
local service provider.  these arrangements also have many
shortcomings, the chief of which is a lack of control over quality of
service and level of effort.  many companies would rather have their
own sales and service operations, but are not ready to commit to the
significant investment required for a manufacturing operation.
however, chinese policies which prevent foreign firms from engaging in
"pure trade" make it difficult for companies to set up direct sales and
service operations.  although there are notable exceptions with several
high tech u.s. firms, companies must generally establish a
manufacturing joint venture as the vehicle for direct participation in
local sales and service.  the u.s. government, in market access
negotiations with the chinese government, has called for removal of
this barrier, which would go a long way to meeting the need of
companies to establish an effective local presence without the need for
a premature commitment to a significant manufacturing investment.

--------------------------------------------

MANY FIRMS ACQUIESCE TO THE DEMAND FOR LOCAL MANUFACTURING

---------------------------------------------

5.   some companies do decide, for sound economic reasons of their own,
to establish a manufacturing base in China and would have done so
without artificial pressures.  virtually all companies, however, report
almost constant entreaties or pressure from their chinese counterparts
to bring capital and technology, to produce, or at least assemble,
their product in China.  moreover, most u.s. companies believe that a
local manufacturing presence by their competition -- even if the
competitor is only engaged in relatively superficial assembly
activities --  would place themselves at a significant competitive
disadvantage, in no small part because of the substantial tariff
barriers their own imports would face.  as a result, therefore, of
competitive considerations, of pervasive chinese pressure to
manufacture, and of the absence of an effective sales-and- service-only
alternative, many companies have decided that the only way to maintain
a long-term competitive presence in the China market is to establish a
manufacturing presence.  many of those who make this decision, however,
still face limitations on the choice of partner and other daunting
local content restrictions.

-----------------------------------------------------

"INDUSTRIAL POLICY" RESTRICTIONS ON PARTNER SELECTION

-----------------------------------------------------

6.   many firms, having accepted the competitive need to have a local
manufacturing operation, still encounter obstacles in structuring the
venture the way they want because of pervasive pressures they face,
pressures typically emanating from the corresponding industrial
ministry.  these are pressures to enter into forced marriages with
designated (but often unattractive) "national champions" in the
industry, to export more than they can or wish to, and to transfer more
technology than they wish to.  in some industries there is a relatively
low-level of centrally-guided industrial policy restrictions.  ventures
in such industries can usually be structured with local interests in a
variety of flexible ways, with few restrictions on choice of partner.
many companies in such have successfully opted for wholly-
foreign-owned ventures and have avoided the problems with partners
altogether.  still others have gone for partners outside of their own
industries, hoping to escape from the hidden agendas and wrangling
typically associated with a partner in their own industry.  prominent
u.s.  companies have, for example, formed such joint ventures.  general
electric corporation's venture to manufacture ct- scanners, and general
motors venture to manufacture engine management systems, are both with
units under the China aerospace corporation which had not been directly
involved in medical imaging equipment or automotive components,
respectively.

7.   in some industries, however, such as automobiles, telephone
switching, jet engines, and other key industries or technologies, there
are powerful central interests seeking to funnel foreign investment and
technology into designated "key projects" or designated national
champions.  in such key industries, approval to form ventures with
chinese firms other than the designated champions may be refused, or
the venture may face stiff resistance originating from the
corresponding industrial ministry.  the failed panda motors venture in
guangdong province -- a would-be automobile assembly operation -- was a
casualty of this type of restriction.

----------------

TO FIGHT OR JOIN

----------------

8.   foreign firms usually find it difficult to determine in advance if
such industrial policy concerns are powerful enough to scuttle the
project in the event they go for a partner other than the anointed one;
it is hard to know when it is better to join than fight.  the
fundamental problem is that a ministry, which is responsible for the
interests of would-be competitors, has the authority of approve an
investment.  too often the ministry tries to force foreign investors
into marriage with their own factories, both to strengthen th factory
and to co-opt a competitor.

9.   there re natural allies for those seeking venture parters outside
their own industry.  in almost every industry, the end users, as a
group, favor increasd competition and would support free choice of
prtners for foreign investors.  in fact, companieswithin end user
industries are frequently the mot attractive potential partners.  the
stand-off,in virtually every industry, between the industral ministry
producing a product and the end-userindustry who buys it, provides
fertile soil for ceative ventures.

10.  the u.s. government seeksthe elimination of industrial policy
restriction on the choice of partners, or, as a minimum, coplete
transparency in the operation of such restictions so that potential
investors know exactly where they stand. there should also be some form
f appeal if a venture with a chosen partner is dsapproved.  there are
many benefits to China as a hole arising from the competition that
joint venures with freely-chosen partners bring.  one of the greatest
challenges faced by the economic refomers is how to deal with state
monopolies lackin the motive to undertake painful reforms.  a venure
with a chinese entity outside the group of etablished industry players,
or a wholly- foreign-owned venture, will indeed bring competition to te
industry.

11.  in sum, companies looking to dvelop a position in the China market
should consder carefully the need for a manufacturing investment and
explore the possibility of postponing such an investment if it is not
economically justified.  those contemplating joint, or wholly-owned,
ventures in China should consider the costs and benefits of
"conventional" partners within their own industries versus
"unconventional" partners from other industries, or those chosen
primarily for their bureaucratic or financial clout.  a careful reading
of the internal dynamics of the industry and the end users is necessary
to make an informed decision.  (fcs:shendryx) hallford

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