Jonathan L. Fales Principal, The Alta GroupMonitor: You have visited China and interviewed operators there over many years. During your most recent visit in April, did you find a better framework for business today than in the past?
Jonathan Fales: There have been a lot of positive changes, but we’re still not there yet. We need the new leasing legislation to pass because that will clarify which part of the government will oversee the equipment leasing industry. It will establish the ownership rights of lessors, and make recourse less problematic than it is today … on paper, anyway. The operating lease tax issue remains unresolved, and that is a big problem for lessors.
Most large lessors recognize that the time is going to come when they will need to be in China. Many of the large captives are getting into China today, although the ones doing meaningful business volumes are the ones that have access to decent credit information. For instance, CAT Financial is using its well-established dealer network to source its new business, and in most cases the dealers know their customers and their credit histories well.
M: What impressed you the most during your interaction with executives and government officials in Beijing?
JF: There is a lot of liquidity in the market, and getting funding is not much of an issue for larger companies. Small and medium business (SMB) still have a difficult time raising funds, and there is a large opportunity there … but getting reliable credit information is difficult for this sector.
I was very impressed with some of the younger officials from the Ministry of Finance and Ministry of Commerce (MOFCOM), which provides authorization to establish wholly foreign-owned enterprises (WFOEs). They understand leasing, understand its potential and are working to help facilitate leasing in China. They get it. That has not always been the case in the Chinese government.
M: Is the leasing law final?
JF: No. Most people I spoke with expect it will pass within the next year. When it does pass, it will be an important step for the equipment leasing industry in China, but it will not be a panacea. For example, enforcement of the laws in China is much more subjective than it is in most western countries. Lessors seeking recourse in the courts in Beijing, Shanghai and Guangzhou will find courts familiar with current laws and precedents. In some of the central and western provinces, that will not always be the case, even after the new law is in place.
M: What types of foreign leasing companies are in China, and where do they seem to be coming from?
JF: There are a fair number from both Europe and America and many Japanese lessors as well. Among the industries served are telecommunications, IT, medical and construction. You’ll find a good mix of captives such as Cisco, IBM, Hitachi and Caterpillar, as well large international lessors like ORIX, GE and De Lage Landen.
Capital requirements for entry are lower. Companies can form a WFOE without a Chinese partner now — that was not the case before — and a number of the captives have done so since the leasing legislation began to be drafted several years ago.
M: You have reported in the past that identifying and managing the risks of doing business is China is most critical; what are those unique risks today?
JF: We provided a fairly comprehensive list in the white paper we wrote for the Equipment Leasing and Finance Foundation, “Knocking Down (Great) Walls.” One thing that has changed for the better is that it used to be difficult to get money out of China. Repatriating profits was time-consuming, and pulling equity out of the country was particularly challenging if companies had an unwilling Chinese partner. We know of one company that took almost four years to finally recover its equity when it closed its Chinese business. That’s less of an issue now, partly because of the WFOE structures available, and partly because State Administration of Foreign Exchange (SAFE) is easier to work with.
There are still the usual risks — lack of credit information, enforcement, lack of a used equipment market for most assets, and so forth. Newcomers quickly discover that equipment leasing is not a familiar concept for Chinese businesses, so marketing and training are essential for success. One of the biggest challenges today is finding qualified people. The turnover rate is very, very high. Getting good people and finding a way to retain them should be high on the list of requirements for doing financing in China.
M: How is The Alta Group advising clients in this region?
JF: It depends on the type of company. This is not a business environment where you can “build it and they will come.” Obviously, you have the language problem and large cultural differences … there is so much to learn about the government, licenses, capital requirements and the legal system, as well as determining who your customers will be and what their needs are. Also, business is much more personal in China — people do business with people they know and trust, and newcomers take a long time to be accepted.
If a client does not know who its customers will be, generally we would advise them not to enter this market now. Lessors need to be following their customers or vendors into China. Some may find that a local partner is desirable, and we can help them find partners and plan how to tackle their desired market niches. Others are more self-sufficient, and may chose to obtain a WFOE license. But once they’re on the ground in China, they should be prepared for a lengthy learning curve.
Clearly, the market is not going to slow down anytime soon. For anyone who needs, or wants, to be part of the world’s fastest growing economy — whether you are a captive, a bank or an independent with vendor clients — China should be on your radar screen. The question is one of timing, and of determining the best way for each company to approach and enter the market.
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