Jun 2011For the last two decades or so, it has been a very common form of business for foreign companies, in particular Hong Kong companies, to carry on production in China through contract processing factories (来料加工厂) in China, particularly within Guangdong province. The traditional arrangement typically involves a foreign principal providing raw materials, production equipment and technology for free to a Chinese contract processing factory. In return, the factory carries out processing activities and earns a handling fee. Such arrangement provided great values to foreign investors to tap on the cheap labour and land costs in China for product manufacturing for their overseas markets. Such arrangements allow low start up cost, efficient maintenance and administration, calculated risk level, as well as flexible exit.
However, to help achieve the objective of upgrading and optimising China's economic structure the Chinese central government and some regional governments have expressed openly that they would like to see contract processing factories be replaced by direct foreign invested enterprises ("FIEs") within a reasonable timeframe. There were a series of government policies allowing transitional treatments, collectively referred to as "Same-location-factory-conversion" (就地不停产转型) program ("Conversion Program") issued since 2008 to motivate and help contract processing factories to upgrade and transform into FIEs.
According to these government policies, some of the incentives for the Conversion Program would expire on 30 June 2011. This would represent a final count-down of the contract processing factories in China. In this Issue of News Flash, we would analyse the key considerations of the Conversion Program and the suggested actions to be taken to capture the benefits.
