PwC PwC

Offshore Market Entry Strategies China, Vietnam & South Korea

August 2006 PricewaterhouseCoopers, Australia

1. Why Australian companies

expand offshore 2. Market entry considerations 3. Optimal business structures 4. Market entry challenges 5. Contact details

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Page 1

Why Australian companies expand offshore

Local market maturity

Compared to Australia, strong economic growth within China, Vietnam and South Korean markets China is worlds fastest growing economy between 03-04 at 9.5%, FDI growth for this period highest for China and South Korea
7.2 7.7 4.5

Why developing market are attractive to Australian & Asian businesses

New customers Serve existing customers Reducing costs

82

48

Forecast GDP growth[1] 06-07

China M&A deals 24% in value over 2004/05 (focus: FS, Distn & Telco sectors) South Korea - 35 million of the population of 48.2 million people has a mobile phone subscription Vietnam one of the youngest populations in East Asia, with 70% under 35, this demographic is showing a clear preference for foreign brands

32

3.3

Increasing capacity
AUS KOR VIE PRC

30

Access to skills

11

Capability extension and service existing customers

Leverage existing brand, assets, IP, capabilities and skills to generate new revenues and economies of scale

More than 1//3 of Australian franchisors have expanded their operations overseas in recent years

Emerging economies

Growing discretionary spending patterns Increasing adoption of foreign brands eCommerce and communications sector growth Improved regulatory and IP environments

PricewaterhouseCoopers

Notes Source:

[1] GDP growth for Australia 2006 2010, others calculated as average of 2006 & 2007 growth PwC From Bejing to Budapest 2005/06; PwC Globalisation and Complexity, 2006

Page 2

PwC market entry methodology

Identify

Target

Select

Plan & Mobilise What are the critical first steps? How can we mitigate key risks?

Design Build

What are our

growth objectives? Key questions

How will we

achieve them (organic/ inorganic)?

Which What is the markets potential size present of the prize? attractive growth What are our opportunities capabilities to for us? deliver?

Manage & Measure Implement

8

Which What are our potential Which markets markets best align with our acquisition/ can we target strategy & partnership for growth? capabilities? requirements & opportunities? Stakeholder Communications (internal & external)

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China opportunities, themes and challenges

Opportunities Current Themes Challenges

Changing regulations Intellectual property

Consumer market

Contracts & Partners Supply chain

trends
Complexity and needs East coast vs. inland Growing middle class Joint Venture changes Home and car Localisation and blending
Average household consumption 1995
9 3 14 7 5 8 50
HSLD facilities, articles & services Transport, post & comms services Residence Clothing

obstacles
Finding & keeping

ownership
Food

good staff / franchisees / business partners

IP protection Regulatory

Price On-line convergence Location

environment

14 7 38
Medicine & medical services Recreation, education & cultural services

2004

10 10 12 6

Miscellaneous

PricewaterhouseCoopers

Source:

PwC From Bejing to Budapest & Retail & Consumer Outlook

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South Korea opportunities, themes and challenges

Opportunities Current Themes Challenges

FDI and Tax Incentives Social infrastructure accessibility

Consumer market

Competitive

trends
Consumer Mass customisation Emotional consumption
Average household consumption
20
Food

environment
Customer need

sophistication
Consumer innovation

variability

take-up
28
Housing Fuel, light & water charges Furniture & utensils Clothing & footwear

Polarisation of

incomes
eCommerce

1995

12 5 9 5 8 5 4

17

Medical care

27 3 5 4 11 5 5

Education Culture & recreation Transport & Comms Miscellaneous

2004

18 5

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Source:

PwC From Bejing to Budapest & Retail & Consumer Outlook

Page 5

Vietnam opportunities, themes and challenges

Opportunities Current Themes Challenges

FDI WTO accession

Consumer market

Legal and regulatory

trends
Increasing gap Large, growing and young population Income growth Shopping habits
Share of total Vietnamese market by sector percent
120

environment
Import tariffs Outdated

between rich and poor

infrastructure
Intellectual property Brand and luxury

protection
Media regulation Skilled labour

goods preference
Foreign invested

100 80 60 40 20

Private

Property & land

access
State owned

0 1993

2000

2001

2002

2003

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Source:

PwC From Bejing to Budapest & Retail & Consumer Outlook

Page 6

Market entry considerations

Operations Product customisation costs, pricing, sourcing and distribution costs Country regulatory and legal impacts on operating costs Market segmentation and targeting, sales team structure and targets, channel strategy and branding Sourcing quality materials which offer reliable, cost-effective transportation and logistics are critical in protecting brand integrity, customer loyalty and supported overall growth Determining the optimal mix of local and foreign expatriates Local talent recruitment and retention Partner sharing criteria and commercial arrangements Financial outcomes scenario planning Funding and structuring (incl. equity arrangements) Financial reporting and metrics Leverage local experts for legal and regulatory advice Asset protection and profit repatriation considerations Protection of brand name, trademarks, web addresses and know-how Confidentiality agreements to protect intention and commercialities

Go To Market Model

Supply Chain

Management & Business Partners Financial Management

Doing business locally & legally Intellectual Property

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Source:

PwC From Bejing to Budapest & Retail & Consumer Outlook

Page 7

Finding the optimal business structure

Organic Growth According to a 2004 Industry Survey, Australian franchisors held on average 33 franchised units before expanding their franchise overseas Master Franchise With almost 700 franchisees in Australia and NZ, Bakers Delight decided its overseas expansion strategy would be to set up its own operations in Canada before embarking on franchising By November 2004, Catridge World was reported to have opened 600 locations and now has 1,077. The key to their rapid was the establishment of master franchise territories. The master franchisee promotes and develops the Cartridge World franchise system, in addition to recruiting, assisting and managing new franchisees In November 2005. McDonalds opened its 81st location in India. As local regulations severely restricted its access to capital, technology and management, McDonalds entered into a 50-50 JV with two local Indian companies In December 2004, Gloria Jeans Coffee Australian master franchisee acquired the global rights outside the US from the franchisor Pizza Huts growth in China relative to its main competitor, Dominos Pizza, has in part been attributed to the success of its stablemate, KFC. KFC was a pioneer in the Chinese market and Pizza Hut was able to benefit from its understanding of local culture, marketing conditions, supply chain logistics and supply partners and arrangements

Joint Venture

Acquisition Leveraging existing brand

PricewaterhouseCoopers

Source:

PwC From Bejing to Budapest & Retail & Consumer Outlook

Page 8

Typical market entry challenges

Challenges & Risks of Offshore Expansion[1] Lack of local market research Shortage of high calibre local management Underestimating government relationship management requirements Not tailoring to local customer needs Unfamiliar regulatory environments Difficulties in leveraging scale from the home office Monitoring offshore delivery and quality

It is important to know what it is you dont know in China Graham Stuart, Fonterra

Notes

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[1] Sources: PwC client experience and research including: BRW, Born Global, December 2005; BRW, Along the Silk Road, September 2005; AXA Asia Pacific Growth Strategy, Asialink presentation, May 2006

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Key messages & summary

Build a solid case Concentrate your energies locally if you are still in the early days of growing your domestic market

TAKE ACTION

Research your market Research international markets Leverage local experts Review major US franchise businesses Review your product offering and strip low value features Find the right model Investigate different strategies for overseas expansion Select partners who genuinely complement your business Carefully select Managers who have well-rounded experience Address issues affecting international expansion

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Contact details

Michelle Fitzgerald
Director, Performance Improvement +61 3 (0)431 90 30 18
michelle.fitzgerald@au.pwc.com

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PricewaterhouseCoopers

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