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Risk Assessment for a De Novo Company in China

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It is not usually possible to buy land for ownership in perpetuity in most Chinese regions. This means that the concept of “ ownership” of land has a political dimension that can change with the whims of the central or regional government. Whereas terms were quite loose in the 1980s and early 1990s, the Chinese government has significantly hardened its negotiating stance and made it more difficult for foreign companies to take assets from the country. One should count on any investment coming in to stay there. Secondly, China is developing a legal structure around property ownership, but history suggests that, if the central or regional government declares a plant, a piece of property or even capital equipment needed, the company can end up losing the asset.

The most famous case was McDonald's in Beijing, which lost a prime site when the Beijing government realized that it had not driven a hard-enough bargain, and McDonald’ s retail site turned out to be the highest-volume retail site in the world for the restaurant chain. The Beijing government took back the property. Competitive RisksAuto parts are a two-edged sword in China.

The world auto parts industry has discovered that, for those parts that have a medium- to high labor cost component, China is an endless supply of inexperienced and relatively skilled labor that can produce their parts. If our joint venture establishes itself, there may be several competitors who follow in quickly behind us. There are no barriers to entry. On the plus side, by creating a low-cost parts manufacturing center, our company can anticipate the competition and derive some benefit from lower-cost parts on the world market. On the other hand, local companies are quite aggressive about developing parts to compete with our company.

As in Japan in the 1950s and 1960s, reverse engineering is rampant and can cause problems for our joint venture before it achieves a profitable level of volume. Franchise RisksFranchise value would allow our company to charge a premium over generic auto parts suppliers for the perceived quality of our products. This is our guarantee that foreign and domestic Chinese automobile manufacturers would like to use our product in preference to a commodity-type supplier. There is a danger of copying in China, which is greater than in other parts of the world.

As in developing countries such as India, copyright laws and enforcement are relatively weak. If an erstwhile competitor would like to copy our product, it may take some time before we would be successful in closing down that company’ s copycat products.

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