China SME “Go Out” Policy – Executive Summary from Motorcycle

China SME “Go Out” Policy – Executive Summary from Motorcycle
Project in Philippine
Henry ZHANG (Director)
TransAsia Investment Consultancy Service Sydney, Australia
Key Words: “Go Out” Policy, FDI, Board of Investment, CKD Assembly, Information Resources,
Financing Resources
Abstract Year 2005 witnessed a much stronger focus on China’s Small – Medium Enterprises (SME)
‘Go Out’ policy on expanding market share and manufacturing capacity overseas. A Zhejiang
Motorcycle Company determined to establish its manufacturing center in the Philippines and I had the
honor to be designated as the Chief Representative to engage in this Foreign Direct Investment (FDI)
project.
This executive summary introduces major steps on how a Chinese SME entered the newly emerging
market. It may present a practical demonstration to our millions of private enterprises when they intend
to launch similar campaign to promote their products around the world.
：
1. Introduction
Located in the South China Sea, the Philippines is an island country which has land territory of 300,000
Sq Meters and a coastal line of 17,000 Km. This country has a fast growing population reaching
90,000,000 last year. Consumer staples are most marketable anywhere in this country. Due to its poor
manufacturing sector, many staple products require import from overseas industry countries. This gives
China’s SMEs a good opportunity to present his sanity and ambitious.
In the Zhejiang province of China, the motorcycle industry has reached plateau in the last decade.
Domestic market has been squeezed with excessive competitions. As we anticipate that the South
Eastern Asian countries has huge market demand, in particularly the Philippines. FDI investment on a
CKD assembly based factory would have tremendous privilege compared with exporting completed
units.
Since we set up the target, the sources of resources, the approach to organize limited resources to form a
manufacturing plant and the strategies to present a foreign investor to local community are all the major
concerns challenging me as the project progressed.
2.
Market Information Resources
Before I went to the Philippines, Many people who might not see a bigger picture asked me, ``Why
bother trying to go overseas or across borders with our motorcycle? We are doing fine in China." The
answer is obvious: businesses expand to overseas markets for the same reasons as we try to gain a larger
share of the domestic markets. Overseas and across border markets present
• new opportunities for growth, and thus allowing the possibility to lower the marginal cost;
• exposure to new customers who may request improvements that may represent new challenge
for improving the existing products for the new market as well as for the Chinese market;
• an increase in status through enhancing the popularity of you’re the brand name in the global
business;
• avoiding seasonal or business cycle fluctuations in the domestic market; and
• direct involvement in the global market and competition!
Motorcycle nowadays is the fastest growing business in the Philippines. Based on data provided by the
Land and Transport Office (LTO), the sales of motorcycles had been increased remarkably over the past
years. Many customers/end users bought motorcycle as their means of transport because of the
convenience of mobility, lower price, and saving the cost of fuel. Manufacturers and dealers on the other
hand are taking advantage of this. They were offering attractive instalment package and value added
incentive to attract customers.
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Initially, I undertook a quantitative market survey through different channels which demonstrated quite
satisfactory results for decision making. Some key figures as presented in Table 1 - 3 demonstrated a
need in this market and reinforced my resolution.
TABLE 1: Number of motorcycle registered in the Southern Manila (2004)
NEW (Unit)
RENEWAL (Unit)
REGION
Batangas
2,357
10,316
Imus (Cavite)
3,093
20,279
Cavite City
2,791
13,589
Boac D.O.
61
3,146
Cabuyao
3,394
22,255
Calapan
2,489
9,380
Coron Ext.
0
110
Gemaca
3,151
5,272
Tagaytay Ex
1,898
4,791
Our direct competitors included (based on marketing survey findings)
• Honda Phils. Inc. - Kawasaki Motor (Phils) Corp. - Norkis Trading Co. Inc.
• Suzuki - C. Kymco Pilipinas Inc. - Vistoria Motors Corp. – Eastworld Motors Industries
Assembly plants of the above manufacturers are based in Manila.
Area Name
Binondo
Ermita
Intramuros
Malate
Paco
Pandacan
Port Area
Quiapo
Sampaloc
San Miguel
San Nicolas
Santa Ana
Santa Cruz
Tondo
Total
Company
Brand Name
Cash Price
Instalment (1 year)
Deposit
Monthly Payment
TABLE 2: Manila population and density by Areas
Population
Households
Average Household
(Persons)
(Pesos)
Size
(Persons)
15,103
3,213
4.7
6,823
1,573
4.3
10,384
2,356
4.4
81,033
17,243
4.7
70,339
14,746
4.8
82,194
16,765
4.9
15,883
3,539
4.5
25,177
5,720
4.4
395,111
83,565
4.7
21,267
4,524
4.7
39,594
8,817
4.5
183,306
38,499
4.8
118,903
25,175
4.7
589,644
121,438
4.9
1,654,761
347,173
4.8
TABLE 3: Dealers pricing and payment scheme (Pesos)
SUZUKI
KAWASAKI
KYMCO
Smash
Aura
Active 110
P47,962
P51,500
P42,300
P4,400
P5,030
P6,650
P5,464
P4,400
P4,409
HONDA
XRM
P51,900
P5,800
P5,477
Market information about motorcycles is generally available in the following organizations on request:
- Land & Transport Office
- Philippine Export Zone Authority (PEZA)
- Equitable PCI Bank
- Philippine Motorcycle Association
- Ernst & Young Transaction Advisory Services Inc.
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3. Philippine Government Supporting System
The Philippines government has adopted market economy for decades and had released series of
official documents to encourage FDI to invest in the provincial Economic Zones (Ecozone). Among all
government agencies, the Board Of Investment (BOI) is key agency to which we had close relations.
BOI has several business divisions in line with the industrial classification. For motorcycle investor,
Motor Vehicle Products Division is formed to support and assist foreigners who have an interest to
invest in this area. This division has a few young staffs who have very high level of skills and
knowledge about this industry and to whom I had received most support during the initial phase of the
factory development. In brief the functions of BOI are to:
Provide the full spectrum for clients interested in doing business in the Philippines.
Help applicants to get authority to import vehicle CKD parts under government Executive Order
156.
Introduce current situation of the Ecozone in various regions.
Release permit for manufacturing motorcycles in the Philippines.
Allow to enjoy custom duty tax 1% when import. Normal rate is 30%.
Allow to remit company profits and dividends, and repatriate capital abroad.
Endorse visa and work permit applications.
Other associated government departments that are relevant to the project:
Intellectual Property Office – avoid risk of product counterfeit;
Environmental Management Bureau – assess pollution from motorcycle;
National Economic Development Authority – national census provider;
City Mayor Office – release settlement permit and local community relations;
Land & Transport Office – manage motorcycle registration affairs;
Ecozone Head Office – administrative management for locators.
Communications with government staff were always maintained in a highly professional manner. Prior
to meetings, it was necessary to study every page of relevant official papers and, wherever possible,
prepare the questions to be raised and discussed. Meeting time was always limited, so strictly adhering
to the meeting agenda was instrumental to achieving meeting outcomes. In order to build mutual
friendship, a small gift or souvenir could be appreciated. However, any luxurious consumer staples or
cash money would be discarded immediately as this might cause misunderstanding on both sides.
4.
Social Responsibility
Eventually I decided to establish our motorcycle plant in the most controversy province – Mindanao
Island – where there were ethnic conflicts and slow economic development. I explained our company
resolution with the President Office in Manila on how we would endeavor to be a committed investor
with social responsibility as one of our objectives. The resolutions were summarized as follows:
Economic Benefit to the Country:
1. Revenue generation in terms of foreign exchange equivalent to US$3 Million annually which is
contributed to the economy (total revenue depends on prevailing currency price).
2. Generation of job opportunities for some 150 people (direct or indirect labor) during actual
operation.
3. On going purchases of local made parts and components up to 60% after 3 years.
4. Improvement of trade and commerce with the establishment of numerous sales outlets as a
result of increased sales.
5. Thirty two (32) young workers would be trained in workshop for the first stage to become
skillful technician on motorcycle industry.
6. Eventually the Philippines Operations will be run by local people.
Community Development Education and Sport Programs
1. A Social Development Program would allocate P1, 000,000 for 5 years directly to the
community. The funding could be used in promoting community events in relation to
motoring and will target neighboring villagers. The programs would invite all Christians,
Muslins and indigenous peoples to participate.
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2.
We would put incentive to introduce tricycles to those micro islands offshore. This program
would improve their transportation and living standard.
As an outcome, the presentation had gained the support by the President Office that had showed a key
interest in our scheme and had given us support throughout the project.
5. Financing Resources
Foreign Direct Investment requires foreign investors to provide adequate amount of money to the
designated region for investment. When this project initiated, I contacted several banking people
immediately in Manila for financial consultancy. Because of critical cash flow we were facing, I must
find effective financing support as earlier as possible.
There were different ways to get money for developing foreign markets, and not surprisingly,
government programs were also available in conjunction with private sources of money. The following
outlines some programs in brief that are available in the Philippines.
Bank Post-dated Check Discounting Line
This credit facility allowed us to deal in a much lengthy period with our local distributors, so they
could increase the number of orders each time.
Working Capital Requirement
Bank could provide credit limit to support our working capital. This occurred in particular when
our parts and components were purchased from local manufacturers.
Market Syndicate
Because of huge demand, some city successful business people were always intended to get
involved in this emerging market. As a strategy, we sponsored a market syndicate and shared part
of our company ownership with them. In return, we gained an additional cash flow to speed up our
production line and occupied market shares earlier than we had expected.
Overseas Foundation
In the Philippines, there are many active charity organizations associated with western countries.
They aim to help this country to get rid of poverty, especially in rural Muslin areas. Their
investments ranged from infrastructures to labor training, and anything that could improve people’s
earning skills. Such as IPDI from US, Hanns Seidel Foundation from German and Australia
Masonic Foundation. They all gave me positive proposals for cooperation.
US Bank when export to US
Our Pilipino factory had not only produced the quality motorcycles, we could get convenient
access to shipping the products to US. The practice indicated that when this kind of business
occurred, it would be more productive to ask US banks for financing support.
US banks could provide you with: obtaining government export / Import assistance, collecting
money from customers, checking the credit of potential customers, hedging the risk against foreign
currency fluctuations, providing information about target country import regulations.
By using appropriate financing instruments, we could be able to ease tension arising from cash flow and
achieve a more desirable balance sheet.
6. Infrastructure Resources
In the first few weeks of inspection in major cities, I had developed the impression that electricity and
communication service were sufficient in the Philippines, but road condition could be a major problem.
Motorcycle manufacturing factory would rely heavily on efficient and effective road transportation of
supplies and equipments. A convenient logistic system would be essential for us as investor in this area.
It is based on the following analysis of shipping and transportation process:
For overseas shipping (or Inbound), the chart below shows its process:
Ocean
Freight
Manila Port
Discharge
Shipping
transfer
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Custom
claim
Deliver to
company
warehouse
For planning, the following issues were considered:
When would the goods arrive?
How fragile or durable are the goods?
What is industrial standard?
What import permit we have to be compliant?
Once these issues were clarified and confirmed, then I would call a freight forwarder.
Interesting issue was that indirect routine service sometimes might charge less but would take extra
days on traveling. When some boats left Shanghai, they might need to stop at Hong Kong, Kao Hsiung
and eventually the Manila port.
Well packing would be essential as containers contain goods only, but not risk. Even those durable
goods such as motorcycle, poor packing material will cause painting scratch, plastic part bend, radiator
broken, or tire traced under pressure.
It was important to know that the forwarders would have no financial interest in our products besides the
money that we paid for them to ship the products, so they were not partners or an “owner” of our
product in any way.
For this reason, I would put criteria in the selection of a freight forwarder as follows:
1. Determine the most economical method of transporting our good;
2. Seek the most economical rate within that method of transportation;
3. Keep update on any peculiar rules or practices involving importing into the Philippines;
4. Coordinate inland freight carrying;
5. Secure warehouse and other storage space at the entry point in Manila;
6. Insure that shipping transfer was safe and prompt;
7. Professional skills in place for putting necessary documentations together;
8. Able to notify us about the shipment information on time.
For Domestic Shipping (or say Outbound), flow chart becomes:
Custom
clearance
Value added
tax
Packing
material
Road / sea
freight
Discharge
inspection
In Economic Zone, locator can hold custom duty tax until products were physically delivered to the
market. This was very helpful as it resolved my critical cash flow in certain period. In the Philippines,
any goods selling in the domestic market, we had to pay VAT to the government taxation department.
For motorcycle, the VAT rate is 12%.
In order to make sure that our motorcycles were intact during transport, we developed a special tooling
facility in the container which perfectly held the motorcycles in the right position with minimal damage
caused during the transportation.
For each delivery to our client destination, we always arrange a Philippine employee to escort the goods
and either is as our discharge inspector. The employee in that role had very good communication skill
and always presented our company in terms of customer service as well as the quality of the
motorcycles.
From statistics, our motorcycle inbound cost was around $30 per unit, whereas outbound cost was $90
per unit. Does it sound a bit expensive? No. We had already brought the Made in China motorcycle to
market frontier overseas. In someday we could see many local potential customers already forming
queue outside our factory.
7. Conclusions
Since my first landing in Philippine in 2005, a new motorcycle production line has now been in
operation in an Economic Zone in Mindanao. The experience indicates that FDI gives more confidence
and temptation for local community. Our brand name has quickly become popular either in the city
urban or rural areas. Local motorcycle dealers are enthusiastically promoting our products which formed
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500 units growing figures every month.
Local public service sector has recently started to purchase our motorcycles for its staffs such as Post
Office, High School Teachers Union and Agriculture Branch.
Nevertheless, due to the well market performance, regional banking organization has been involved in
this emerging business by providing financing assistance. We realize that our current situation has
become much stronger than any of those other motorcycle importers.
References
Board of Investment, “Government No.156 Executive Order”, Philippine
Mr. Jay Clarin, “Philippine Motorcycle Market Survey”,
Joseph Pine, B; Gilmore. J.H, “The Experience Economy”,
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