i n s i g h t
n e w s l e t t e r - august issue
People and Relationship Issues in ManAgement
By Kevin O'Shaughnessy
Mixing business and family relationships can be explosive!
A well-run family business has many advantages: family members are likely to feel instinctive loyalty and work harder; they can make rapid decisions and do not usually come under pressure from outside investors whose objectives may be focused on the short term. However, the strength of family ties and the emotion they generate can prove to be both a strength and a weakness. Family or personal values may not coincide with the needs of the business, leading to poor succession planning or weakened control. Left unresolved, these issues can hinder the performance of owner-managed businesses, family controlled companies and even partnerships.
An objective approach
Managing the overlap between the family and the business sometimes requires an emotional detachment that many find hard to achieve. So, for example, we hear about parents reluctant to hand over the management of business to their children who they think are not yet ready for such responsibility; and about children (perhaps in their 40s!) frustrated by being forced to wait years whilst their parents, in their view, slowly reduce the value of the business through inadequate management practices. Parents often assume their children will join the business and take over one day, but the children may have quite different aspirations, or simply not have the necessary talents and skills to succeed.
Addressing the issues
Owner-managed businesses employ half of the world's work force and generate more than half of the world's GDP. Yet their needs, problems and prospects are often ignored. For many years, Grant Thornton partners have been resolving some of the delicate situations that can arise in business relationships. We have brought these skills together under a package of advisory services known as PRIMA, People and Relationship Issues in ManAgement. PRIMA provides a framework within which the personal issues can be brought out into the open; the problems can then be addressed in a more calm and rational manner, and solutions arrived at.
The potential for conflict arises because of the different values interest in the two systems:
|
Family system |
Conflict |
Business system |
|
- Inward looking |
- Outward looking |
|
|
- Emotion based |
- Task based |
|
|
- Unconditional acceptance |
- Rewards performance |
|
|
- Lifetime membership |
- Perform or leave |
|
|
- Averse to change |
- Embraces change |
The 12 Factor Framework
- Succession planning
- Remuneration planning
- Equity ownership by family members
- Family members not involved in the business
- Introducing & rewarding non-family executives
- Retirement and estate planning
- Bringing family members into the business
- Strategic planning
- Financial structure
- Preserving wealth
- Resolving confilicts
- The family creed
A framework for resolution
Whilst the issues are not unique, the individual circumstances of the business and the people involved are. We have developed a methodology based around the 12 factor framework shown above, which enables us to provide a unique approach to addressing the many sensitive issues our clients face.
The 12 factor framework provides a checklist for the issues facing a business where there are relationship problems or where the owner-manager/partners believe there are potential relationship issues to be addressed. Each of the factors implies a whole subset of concerns. In subsequent editions we shall discuss the factors in more detail and highlight the issues that need to be faced up to and addressed if the business, and the family, are to succeed.
kevin.oshaughnessy@gthk.com.hk
The day automakers stopped making cars -Outsourcing as a key management strategy
By Clinton Wah
In this issue of Insight, we begin a series of articles on outsourcing with an overview of recent developments in outsourcing and what they mean to business managers.
With mass production techniques, Henry Ford reaped dividends from increased productivity and brought the world its first affordable car. Alfred P Sloan at General Motors took what Ford had achieved on the factory floor and improved its organization as a whole by replacing a central bureaucracy with individually responsible divisions. Guided by the teachings of Deming and Juran, Japanese automakers trumped the Americans in the 80s by enshrining quality as a company-wide culture. Talk about fertile ground for management ideas - competitors in the auto industry have proved that they stand at the ready to adopt new thinking and methods to outclass their rivals.
In recent years, the budding revolution for some in the car business has been getting out of producing cars entirely, or outsourcing. Porsche has done it successfully with its Boxter model and Ford is looking into becoming a company focused on marketing rather than production. The objective to be achieved through outsourcing for both is to deliver a better car faster and more cheaply.
Outsourcing as a cost-saving move
The concept of outsourcing is not new. The definition of outsourcing is having a third party perform work or manage an activity previously accomplished in-house. For many years, managers looked at outsourcing merely as a modest cost-saving technique used for non-essential areas of the business such as janitorial help. Outsourcing gradually matured to become a readily available option for information technology services (spurred on by the sharing of mainframe processing time). The use of a third party rather than investing in an in-house function, however, remained unimaginative and confined to departmental decisions. Service offering was driven largely by the providers.
Outsourcing as a key management strategy
As evident in the automobile industry, the scope of outsourcing is assuming a grander scale in many companies across a range of industries. Take for example the recent announcement by Philips and Ericsson, two of the principal players in the mobile phone industry, to outsource their phone production to Asian assemblers to concentrate on product design and/or marketing. The resulting changes will be drastic and will redefine how products and services are made and delivered in the future.
This ground swell of activity underscores the emerging importance of outsourcing as a key management strategy. While saving cost remains one of the key benefits, outsourcing is being increasingly pursued by managers to allow the company to be more agile, more focused, and to benefit from better information or world-class processes. The catalysts for this change include technology, an increasingly intricate and complicated supply "Web", a better appreciation of value-drivers, ruthless competition, a demanding consumer and better service offering.
Benefits from an outsourcing initiative are far from guaranteed. Moreover, returns from outsourcing may be monetary as well as intangible. While all organizations are experienced in sourcing products and services from suppliers and vendors, outsourcing is different in that it impacts an ongoing process rather than a number of production runs or discreet projects. As mobile phone makers have demonstrated, outsourcing may also cover a greater extent of the business operation. As expectations and the scope of outsourcing grow, business managers will require a new set of skills and tools to tackle the outsourcing decision and the outsourced function. The principal concerns are threefold -determining what activity to potentially outsource, weighing the pros and cons of outsourcing versus insourcing, and selecting and working with the outsourcing service provider.
Which activity to outsource? - this is a strategic decision and requires a careful examination of the business, its products and its services. Questions to be addressed are what differentiates the company's products and services; what are the key assets; and what are the limiting factors to greater market share, higher profitability or sustaining a competitive advantage? Potential activities for outsourcing may span an entire function, cross several functions, or remain limited to a specific task in a process.
Insource or outsource - this is the cost-benefit analysis of investing in an in-house function versus outsourcing. Relevant considerations include what you lose or gain by outsourcing; the nature and the rate of changes projected to affect the outsourced function; and the maturity and the quality of services available in the marketplace.
Working with outsourcing service providers - skills to plan competently, design, implement, and control the outsourced function. Specific issues range from communication with the service provider in the proposal stage to the drafting of the Service Level Agreement and appropriate means to elicit desired responses/improvements from the service provider.
Outsourcing is a complex decision involving many variables. As the rate of change in business continue to rise, the ability to make the right choice in outsourcing will become a critical asset. Against this backdrop of growing relevance, a company would do well to start early and evaluate outsourcing implications. In upcoming Insight articles, we will explore further the three principal outsourcing concerns for business managers.
Sponsoring IandI
Grant Thornton is pleased to announce our continued sponsorship of IandI Asia in Hong Kong for 2001. IandI is the leading public-interest organisation encouraging the growth of technology- focussed businesses in Hong Kong and around Asia. In addition to financial support, we participate actively in their efforts and, through our e*tech practice, are involved in helping a number of IandI members build their businesses.
"Consistent with our belief that technology will have a lasting impact on how we do business," said Stephen Weatherseed, Grant Thornton e*tech services Partner, "we are excited about this opportunity to continue our support for IandI."
IandI's main event is a weekly cocktail headlined either by a topical presentation or a panel discussion. These gatherings are very popular with industry leaders and other interested parties to mingle and share ideas. Please contact us at
info@gthk.com.hk for more details or visit IandI at www.iandiasia.com. We look forward to seeing you there.
Should the government maintain prudent fiscal stance
By Paul Chow and Michael Leung
Despite a cautious yet practical economic approach, it is no time for the government to become complacent.
The Hong Kong economy slowed further in the first quarter of 2001, mainly influenced by deterioration in the external environment. Real GDP growth moderated to 2.5% in the first quarter of 2001, from 6.9% in the fourth quarter of 2000.
No major tax concessions
Despite facing the prospects of further slowdown of GDP growth, the Financial Secretary announced no major tax concessions to stimulate the economy in the 2001/02 Budget delivered on March 7. Apart from a reduction in the stamp duty on stock transactions and a moderate increase in the salary tax deduction for self-education expenses, the Budget contained no other tax concessions. The government also ruled out a number of tax relief proposals aimed at boosting the housing market, such as stamp duty reductions on real estate transactions and a rise in the salary tax allowance on mortgage interest payments. Instead, long-term policy initiatives were unveiled to hasten Hong Kong's integration with China to help local businesses capture the opportunities that will emerge following China's entry to the World Trade Organisation.
A balanced budget
Much work remains to be done. To avoid putting a further drag on the growth of the economy, the government has also refrained from rushing into major new taxes or increases. In this year's Budget, the Financial Secretary proposed only modest increases on a few revenue items that do not affect people's livelihood. The net result of this fiscal prudence is an essentially balanced budget for the coming fiscal year with a modest deficit of only $3 billion. It is worth mentioning that the government's HK$7.8 billion deficit in the final accounts for the financial year ended 31 March 2001, published in the Gazette on 6 July 2001, coincided closely with our prediction of HK$7.7 billion earlier in the year.
But the reality is that, sources of revenue have shrunk and become unstable. Hong Kong's fiscal revenue has relied much on land sales, stamp duty and profits from property transactions and other related businesses; yet both are unstable and have caused fluctuations in the fiscal balance in the last two years.
The deficit will persist despite the sale of assets and a decrease in investment. According to the revised Budget and medium range forecasts, Hong Kong will register four consecutive years of fiscal deficits from 2000/01 onwards. Persistent deficits throughout the medium range forecast period have never appeared before. Although the magnitude of the deficits is not large, it takes place even when the government is selling assets and contracting investment. Otherwise, the deficits would be much larger.
Open door for future revenue
With operating deficits forecast in coming years, the government has left the door open for future revenue measures that could widen the tax base. In line with our pre-Budget predictions, the much-debated sales tax issue was not mentioned in this year's Budget speech. However, in recent years, as Hong Kong has not raised any new taxes or broadened the tax net, the government is reportedly exploring the possibility of introducing a green tax and a land departure tax in future budgets.
In August 2001, the Advisory Committee on New Broad-based Taxes released a consultation document, open for a two-month public comment period, detailing the various types of broad-based taxes that may be suitable for Hong Kong. In our view, we would urge the government to closely assess the possible adverse effects of introducing a broad-based consumption tax on the general public and business sectors in Hong Kong.
A knowledge-based economy
At a recent news conference, the new Financial Secretary, Antony Leung, commented that Hong Kong is now in the process of becoming a knowledge-based economy. In order to upgrade human capital, education expenditure has to be increased. In particular, support will be rendered to staff training and admission of PRC professionals so as to enhance Hong Kong's competitiveness, as well as advancing Hong Kong's role as a centre for international finance and high value added services.
The trends in Hong Kong's service and manufacturing sectors indicate that Hong Kong is increasingly acting as a knowledge-intensive coordination and management centre for international business. In the process, Hong Kong and its firms have dramatically expanded their regional and global reach.
If Hong Kong is to become a truly international centre, as Antony Leung has remarked recently, it will need to tailor its education and training systems to develop the workforce necessary to extend its position as a management, coordination and financial centre. The government must channel resources into its infrastructure, particularly its information infrastructure, to ensure that it is world-class. Policies should continue to build on traditional strengths, such as market-oriented economic policies, rule of law and efficient and clean government, as well as a simple and low tax regime.
We believe the government should maintain a prudent stance to its fiscal management.
Hong Kong still maintains an admirable level of fiscal reserves at present. The government must review the fiscal system carefully to optimise the revenue and expenditure mix so as to maintain Hong Kong's fiscal prudence. It must avoid simplistic solutions, learn from past experiences and make the necessary investment so that Hong Kong's competitiveness will be greater in the future than it is today.
PRC nationals coming to Hong Kong for training
By Gary James and Loren Chan
With careful consideration of protocols and taxation issues, sponsoring PRC staff under a Training Visa can prove a valuable option.
With the rising level of business between the PRC and Hong Kong, it is becoming increasingly desirable for multi-national groups of companies to train PRC staff in Hong Kong under a Training Visa. This is particularly relevant for junior staff, as they would not normally possess the specialist skills, knowledge or experience to obtain a work visa.
Such training will enable staff from the PRC to obtain new skills, learn more about the business operations of the multi-national group etc., all of which will help to expand the business of the multi-national group as a whole.
The training visa application
A multi-national firm or a well-established company in Hong Kong must sponsor the Training Visa application. The following documents are generally required to support the application:-
i. For the sponsoring company:
a. Incorporation documents, e.g. business registration certificates, Memorandum and Articles of Association, Certificate of Incorporation, etc.
b. Financial and operational background of the sponsoring company, e.g. company brochure, annual reports, audited accounts, profits tax returns, bank statements etc.
c. A staff list with salaries offered and positions held,
ii. For the applicant:
a. Passport copies and other proof of identity documents.
b. Academic certificates or testimonials.
c. A completed application form ID 936.
d. A detailed training programme.
e. A letter of undertaking from the sponsor company stating that the trainee will return to his / her own country after the end of the training period.
The whole application process normally takes four to six weeks, and will generally be applied for via the Immigration Department. The duration of the visa will depend on the training program proposal submitted. Under normal circumstances, it will not be granted for more than 12 months.
Once the training visa has been issued, the applicant will need to present it to the Public Security Bureaux Office in the PRC and apply for an "Exit-Entry Permit". This process normally takes 15 working days.
Taxation issues
As with any international secondments, taxation issues should play an important role in the planning process. The potential for double taxation has been greatly reduced following the introduction of a memorandum between Hong Kong and the PRC on the avoidance of double taxation on income. Under the memorandum, remuneration derived by a resident of One Side in respect of an employment shall be taxable only on that Side unless the employment is exercised on the Other Side. If this is the case, remuneration derived therefrom may be taxed on that Other Side.
Remuneration derived by a resident of One Side in respect of an employment exercised on the Other Side will be exempt from tax on the Other Side if the following three conditions are satisfied:
i. the recipient stays on that Other Side for a period or periods not exceeding in aggregate 183 days in the calendar year concerned;
ii. the remuneration is paid by, or on behalf of, an employer who is not a resident of that Other Side; and
iii. the remuneration is not borne by a permanent establishment or a fixed base, which the employer has on that Other Side.
Under the memorandum it is therefore necessary to determine the period the employee is working in Hong Kong, and who pays the salary. If either the remuneration is borne by a Hong Kong Company, or the employee stays in Hong Kong for more than 183 days in any calendar year, the remuneration will be liable to Hong Kong tax.
Tax planning is essential
As a final point, it should be borne in mind that Chinese citizens are taxed on a worldwide basis, and therefore any income received in Hong Kong, whilst still a citizen of the PRC, will be subject to tax in the PRC. As a consequence, those PRC nationals training in Hong Kong will generally remain fully liable to PRC tax, although a tax credit will generally be given in the PRC for any Hong Kong tax paid.
It will therefore be advantageous from an administrative and cash flow perspective to keep Hong Kong tax to a minimum. In a majority of situations the level of income will probably be below the Hong Kong taxing threshold. If not, it may be relevant to consider splitting the training period across calendar years, or utilising the favourable benefits regime in Hong Kong, such as the provision of rent-free accommodation.
There can be many advantages for a multi-national group to take on a PRC national in Hong Kong under a Training Visa. What will be important will be to ensure that it has been planned well in advance given the length of time required to obtain a visa and taxation.
Doing Business in China -Capital and Finance
Investment procedures in the PRC may seem daunting, but understanding them is a crucial step on the path to success.
Scale of investment and proper approvals
All foreign investments in China is subject to the approval of government authorities. Different levels of investment may require different levels of approval, basically as follows :
|
Total Investment |
Approval Authorities |
|
Up to US$30 million |
Local government and Provincial Commission of Foreign Trade and Economic Co-operation (COFTEC) |
|
More than US$30 million |
Ministry of Foreign Trade and Economic Co-operation (MOFTEC) and the State Development and Planning Commission (SDPC) |
|
More than US$100 million |
State Council |
It should be noted that a project in an industry of restricted category requires the approval of the central government and the department in charge of the industry.
Ratio of registered capital to total investment
There is a minimum requirement as regard the ratio of registered capital to total investment.
|
Total Investment |
Minimum Registered Capital |
|
Up to US$3 million |
70% |
|
US$3m-4.2m |
US$2.1m |
|
US$4.2m-10m |
50% |
|
US$10m-12.5m |
US$5m |
|
US$12.5m-30m |
40% |
|
US$30m-36m |
US$12m |
|
US$36m and over |
1/3 |
In cases of application for an increase of investment, the total investment above refers to the aggregate total investment.
Time limit of capital contributions
Registered capital has to be paid up within the time limit specified by the relevant regulations. Otherwise, the State Administration of Industry and Commerce (SAIC) may revoke the business licence.
|
Registered Capital |
Within |
|
US$500,000 or less |
1 year |
|
US$500,001 to US$1,000,000 |
1.5 years |
|
US$1,000,001-US$3,000,000 |
2 years |
|
US$3,000,001-US$10,000,000 |
3 years |
|
US$ 10,000,001 and above |
Negotiable |
Capital contributions and capital verification audit
In accordance with the terms of the approved joint venture contract and articles of association, a foreign investor can pay its capital contribution in the form of foreign exchange, tangible assets, industrial property or proprietary technology. A capital verification audit by a Chinese accounting firm is required for capital contributions.
Foreign exchange controls
There are foreign exchange controls in China. Foreign investment enterprises shall comply with the provisions under the Regulations for Foreign Exchange Control and other relevant regulations.
If a Foreign Investment Enterprise (FIE) finances its operations partly by foreign currency loan, say from an overseas shareholder, it has to register the loan contract properly with the State Administration of Foreign Exchange (SAFE). Otherwise, it cannot make any repayment of interest and principal.
A FIE may keep its foreign currency revenue or convert to RMB with authorised banks. For overseas payments in foreign currency, the bank will process the instructions only if proper documents are presented. Since 1 March 2000, presentation of tax receipts or tax exemption certificates to the bank has been a must for sending remittances overseas under a circular issued jointly by the SAFE and the State Administration of Taxation.
Foreign exchange registrations
Foreign investment enterprises have to comply with the various registrations requirements with the SAFE. Within 30 days after the issuance of the business licence, a FIE shall register with the local SAFE bureau for the "Forex Certificate". FIEs can open foreign currency bank accounts only with the Forex Certificate. Besides, foreign investment enterprises shall need to comply with the foreign-debt registration procedures. The total amount of foreign currency loans cannot exceed the difference between the total investment and registered capital. Further, the interest rate of a foreign loan shall not be higher than the prevailing interest rate of similar loans in the international financial markets.
Audit of foreign currency bank accounts
As a requirement of the foreign exchange control authorities, foreign investment companies and foreign representative offices in China shall appoint a designated accounting firm to undertake an annual audit of their foreign currency bank accounts. This audit reports on details of the foreign currency bank accounts, amount and natures of revenues and expenditures during the year, closing balances of the bank accounts and whether the relevant regulations have been complied with.
Bank accounts
Bank accounts in China (both foreign currency and RMB) are categorised according to their nature and purpose. For foreign currency bank accounts, foreign investment enterprises are allowed to open one capital bank account for capital injection and one basic account for business operations. If there are foreign debts, specific bank accounts are required for draw-down of the foreign currency loan and repayment of principal and interest. For local currency bank accounts, an enterprise is allowed to open only one RMB basic account but more than one ordinary account. You may draw cash from or make payroll payments through a basic account. However, you can only draw account-payee cheques through an ordinary account and cannot make payroll payments through such a bank account. Daily cash drawings from the bank for petty cash and travelling purposes are subject to limits. You need to consult with your bankers in order to raise the limits.
(to be continued)
For further information please contact:
Wilfred Chiu kwc@gtb.com.cn
Desmond Yuen desmond.yuen@gthk.com.hk
Alice Law alice.law@gthk.com.hk
PRC Newsflash
MOFTEC relaxes FIE's import and export rights
The government's decision last week to relax its control over foreign-invested companies' import and export rights is a key way to boost slack export growth this year, experts said.
The Ministry of Foreign Trade and Economic Co-operation (MOFTEC) will now allow foreign-invested manufacturing companies to export any non-monopolized products not under quota or licence management, regardless of who made the products, according to a notice last week.
Although MOFTEC also ruled that these companies must export at least US$10 million each year and must not have broken laws and rules on taxation, foreign exchange and foreign trade in the last two years, experts said the measure is extensive and could have considerable impact on China's export growth this year (China Daily 24 July 2001).
PRC Trust Law
The PRC Trust Law was promulgated by the Standing Committee of the National People's Congress on 28 April 2001. The legislation contains seven chapters and 74 articles and has provisions for the establishment of trusts; entrusted property; rights and obligations of trustor, trustee, and beneficiary in the trust relationship; the alteration or termination of the trust; and public trusts. It is believed that the legislation will speed up the development of the trust, securities and insurance industries. The law becomes effective on 1 October 2001.
Grant Thornton
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The aim of this newsletter is to provide information relating to recent business developments. The information is general in nature and it is not to be taken as a substitute for specific advice. Accordingly, Grant Thornton accepts no responsibility for any loss that occurs to any party who acts on information contained herein without further consultation with ourselves.