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Capital and Other Assets

Your business investment in the People's Republic of China, will come after you have performed a complete and thorough business case assessment, including the issue of business risk. Your capital asset analysis is an important component of the business case and has everything to do with risk. Listed below is information which will assist you in performing a complete and through capital asset assessment within your business case. The information is not a complete identification of needs, only you and your staff can ascertain all needs for your specific endeavor.

Investment Capital(Cash Contributions)

Whether you have a Wholly Foreign Owned Enterprise(WFOE) or a joint Venture(JV), you will likely infuse a significant amount of cash into the new operation. Cash investment can be readily made(assuming of course, you have some cash) within the terms of your agreement and business license. Capitalization of your enterprise can be handled locally if it is less than $30 million(USD). Higher investments must be approved by the ministry of your industry in Beijing.

The startup operation will need a significant amount of cash to buy assets, rent and improve a facility, hire and train employees, raw materials inventories and a wide range of other needs. The cash infusion can be made in stages as the business needs it. Fundamentally, cash can be invested in the business at any time. Business licenses can be revised without difficulty. On the other side of the equation, it is far more difficult to take out excess capital if costs are lower than planned or changes in business conditions cause the operation to be sized lower than planned or delays in startup. As a result, you should plan a series of cash infusions according to the cash flow statement in your business case.

Also, consider bank loans during early start-up when cash flow is most negative. Loans within the PRC can be arranged. This will also help to minimizes your overall capital investment needs and therefore lowers the risk on your project. These loans need not be guaranteed by the parent company.

Manufacturing Capital:

Every manufacturing and assembly operation is different. Some have molding operations associated with them and others do not. Some are vertically integrated, while others focus on a simple, labor intensive assembly process. Some companies will build their own facility. Others will move into a "spec" building.

Spec buildings are buildings which were built on speculation that your company will come in and set up a manufacturing operation. These spec buildings are frequently built in Special Economic Zones(SEZ). A spec building in China will be far less finished than a spec building in many other countries. It will usually be basic building construction, with minimal electricity and lighting, insufficient air and humidity control(do not assume heat is installed even in cities as far north as Shanghai), floors of bare cement and perhaps even the walls will not be painted. Your safety organization should inspect the building for sufficient stairways, and fire safety. Most spec buildings will not have sprinkler systems and other safety requirements as these may not be part of the building code in the area you are locating.

Be alert and look very closely at what you are acquiring. Consider the safety and quality requirements of your parent corporation. Even if you are entering a JV and your partner is contributing the facility, a serious review and audit is a requirement. Due diligence and is a must here for a successful business case and cost effective operation.

No two manufacturing operations are alike . No one outside your organization could possibly guess all the capital needs of your operation. Only your staff can identify those needs. For a checklist of capital you should consider, see Capital Checklist.

Duties on Capital Assets:

A few years ago, the PRC passed a law which would impose duty on incoming Capital which was used for plant investment. The proposed duty rate was quite significant. This law was quite controversial and foreign investors strongly objected to the duty. The over-riding argument being the duty was non-sensical as the capital was for much needed and desired investment in the PRC and that imposing it would result in discouraging future investment.

At approval of the legislation, implementation was delayed, projects were grandfathered, and after a couple of years of discussion and debate, message finally came down from the government that this law would not be applied.

This topic should cause you to walk away with two thoughts: First, the PRC can change it's mind whenever it sees fit. You have most likely heard this before and you will see it repeatedly in your dealings in China. Second, you should keep current of the latest rules and regulations, even going so far as to monitor pending legislation. International Accounting firms can help you obtain the latest information.

Land Ownership:

Land Ownership will not be among your list of assets. In the PRC, you can not own land. Rather you rent it long term from the government. More on Land.


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