KNOWLEDGE BASE Ways To Do Business

 

Ways To Do Business in China

 

Being aware of the business climate within China will help you increase your chances for success. There are also many ways for a company to do business in China. We’ve compiled information and resources for you with business options to save you time and money and help you understand what is available to you.

 

Ease of doing business in China

In the World Bank’s Report, Doing Business 2017, the World Bank Group ranks China 78th out of 190 countries for ease of doing business within the country as a small or medium-sized company. Specifically, regulations applying to companies through their life cycle are considered. A high ranking indicates that the regulatory environment is relatively more conducive to starting and operating a company locally. The World Bank Group ranking takes into consideration the following parameters:

  • Starting a Business

  • Dealing with Construction Permits

  • Getting Electricity

  • Registering Property

  • Getting Credit

  • Protecting Minority Investors

  • Paying Taxes

  • Trading across Borders

  • Enforcing Contracts

  • Resolving Insolvency

The Chinese consumer market is one of the most attractive markets in the world. China is still a huge manufacturing hub.  China’s biggest trade partners are the EU, the US, and Hong Kong. However, many companies are finding that China has unclear, sometimes murky laws, and is perceived to have an anti-foreign sentiment. All of these factors are important to consider when determining whether and how to do business in China.

You can learn more about manufacturing in China in Globig’s Manufacturing in China section in the Knowledge Base.

 

Options for setting up a business in China

Depending upon your business type, the speed you want to enter the market, your risk tolerance, and available funding, some options for doing business in China will be more attractive to you than others.

 

The most common ways to do business in China are explained below. As you read through the options below and learn more in other China sections, you can look for those that align with your main drivers.

 


Globig Alert

We highly recommend that you speak with an attorney about the best way to start or bring your business to China. Because the circumstances of each company are different, only an expert can give you the advice that is appropriate for your particular business.

Globig Tip

Are you a US business expanding internationally? In the Globig How Can The SBA and US Commerce Department Help Your Business Expand Globally? podcast, representatives from the United States Small Business Association and the export assistance center from the US Commerce Department discuss some great resources available to US companies expanding abroad.  


 

Representative or Liaison Office

A representative (or liaison) office is a way to enter another country for marketing or other non-transactional operational purposes. A representative office is not a recognized form of business, and therefore, the company cannot carry out business activities. Most importantly, they are not allowed to engage in any profit making activities. They can do things such as conduct research, gather information, or facilitate communications with customers and suppliers. It is generally appropriate for companies as an initial step into the new market (country) or companies that do not need to set up a branch or subsidiary. If you are manufacturing in China, this is a good way to be close to factories producing your goods, storage facilities, and logistics.

Advantages

  • Representative offices do not have the commitment and as many formal administrative requirements that apply to a branch office or a Chinese entity

  • A representative office is generally less costly and time intensive to set up as compared to opening a branch or starting a Chinese business

Disadvantages

  • Representative offices cannot carry out any business activities, including the sale of goods or services

  • The office is not authorized to sign contracts or perform any function that could be interpreted as a profit making activity, i.e., sales contracts

  • There are some formal registration and administrative requirements

  • There are still some tax implications

  • If a company later decides to set up a business entity, commonly a wholly foreign owned entity WFOE), there is a formal process and cost associated from shutting down the representative office first

Requirements for forming a Representative Office in China

  1. Lease: You must have a lease on an approved space for a period of at least one year beyond the approval date of the representative office.

  2. Chief Representative: You must designate a Chief Representative to manage the affairs of your office.

  3. Foreign Entity: Your representative office must represent a foreign entity, it cannot be a private individual or a partnership. Furthermore, some jurisdictions do not allow newly formed entities to create a representative office in China.

 

E-commerce from your base location via web or mobile phone

Most of the major commerce platforms are prepared to sell in China and integrate with a number of payment platforms that take payment in a number of currencies. The process of figuring out what the ‘landed price’ is, meaning that it includes the product cost, packaging, customs and any tariffs that may apply, shipping insurances, currency conversions, and handling fees is fairly straightforward. Understanding the landed price will help you determine what you will need to charge to make a profit as against what the market will bear.

In this business model, you are responsible for marketing, selling, exporting, and customer support when you sell internationally. Consumer e-commerce sites and mobile apps should have a country specific internationalized website which is localized for the language and culture for each country, if you are also selling in China. If you are manufacturing in China for export, your website localization should be specific for the countries into which you are sell, not for China.

On of the most common difficulties with this business model in China is marketing. In order to drive traffic to your website, you need to be prepared to spend marketing dollars. Because Google is blocked by the Chinese firewall, you should not invest in Google SEO services, rather you should focus your marketing efforts on Chinese search engines.

 


Globig Tip

You must localize your products, including your marketing, customer service and support, packaging, and website, for your Chinese consumers.


 

B2B commerce businesses can decide if a country-specific web or mobile offering is necessary, depending upon the product category and market expectations. Even though English is the international language of business and near 90% of the people speak English, having a language localized B2B offering may increase your opportunities for doing business abroad. Country-specific SEO and marketing will be required to optimize your e-commerce business.

 

Distributor

Often the easiest, fastest, lowest cost and lowest risk options are working with distributors or sales agents. These may not be the ones with the highest return in the long-term but can help you to learn about the market before considering higher risk opportunities.

Import distributors purchase your product so they can then resell it into their local markets to wholesalers, retailers, or both. One reason to consider using import distributors is when you need to store products in the export country and these distributors already have those services set up. Another is that the import distributor already has a network of buyers they can tap into and it’s faster to enter the market.

Furthermore, if you manufacture in China for the Chinese market, you must export and then import your products back into China before you can sell them, which results in double taxation. A distributor relationship will allow you to earn your profits from the initial sale to the distributor, while alleviating the double taxation issue. In China, this is often done by purchasing the product from the manufacturer (you don’t own the products until they leave China) and receiving it outside China (often to Hong Kong) and then selling it to a foreign (Hong Kong) distributor to resell back into China.

 


Globig Tip

You should always have a standard distribution agreement in place with your distributors. Through your distribution agreement, you should strictly monitor the operations of your distributor.


 

Joint Venture

A joint venture is established when two or more separate companies agree to undertake a specific task or business enterprise for a finite time while retaining their own distinct identities.  They each share in the expenses and any profits.

Companies that are complementary to each other may offer significant strategic advantages by working together, and are good candidates for considering a joint venture. Joint ventures are most interesting when the two companies have similar long-term strategic goals, yet are not competitive in their markets. By combining forces, the companies are able to create one stronger company to compete against market leaders and leverage each other’s assets.

Advantages

  • Stronger when combined

  • Shared risk

  • Opportunity to compete against market leaders

  • Complementary strategies

  • Speed to market

  • Lower costs

  • May reduce regulatory issues

  • Access to the Chinese company’s business relationships and network

Disadvantages

  • Risk associated with sharing proprietary knowledge, including IP, and resources

  • Hard to combine two cultures

  • Limited term relationship

  • Lack of clarity in business issues such as ownership rights, control, length of term, pricing, profit sharing etc. may result in legal battles

When a joint venture is registered, the entity is considered a Chinese legal entity and must abide by all Chinese laws. As a Chinese legal entity, a joint venture is free to hire Chinese employees and can purchase land and build their own buildings. A joint venture is a great way for a foreign company to take advantage of market knowledge, to get preferential market treatment, and manufacturing capability. Chinese companies often partner with foreign companies to take advantage of the technology and marketing experience of their foreign partners. In china there are two different types of joint ventures in China.

Equity Joint Venture (Corporate Joint Venture)

Equity Joint Ventures (EJV) are the second most common way foreign companies enter the Chinese market. When companies form a joint venture, the joint venture is a new entity that assumes liability for itself. An equity joint venture can be a limited liability company or a joint-stock limited company.

Cooperative Joint Venture (Contractual Joint Venture)

In a cooperative joint venture, the parties can operate as separate legal entities and carry liabilities independently rather than a single entity.

Is a tip appropriate about protecting IP here? Are there IP risks for setting up a JV with a Chinese company or any other similar risks? Or they could go up above in the cons but also have a tip.

 

Wholly Foreign Owned Entity

A Wholly Foreign Owned Entity (WFOE) is a limited liability company that is organized and capitalized by foreign nationals with foreign funds. A WFOE is the most high-risk, high cost, and also high reward option to truly build up your company in another country. When you invest directly into China, your company will retain full ownership and sole responsibility for all aspects of the business.

 


Globig Alert

China has very specific, and unique, requirements and processes to set up a WFOE. Be sure you understand the requirements in China. Globig provides a list of vetted legal and financial experts, along with other areas of expertise, who can help you understand the subtleties in China.


 

Advantages

  • Highest level of control over your product and brand

  • Opportunity for highest ROI

  • Often the best long-term strategy

Disadvantages

  • Inability to engage in certain restricted business activities

  • High investment required

  • Long-term approach necessary to see results

  • More taxation responsibilities and complications

  • More regulatory compliance requirements

  • Slower entry into market

  • Limited access to government help

You have many options for doing business in China, from manufacturing to online sales to setting up a business. Although it is a tough, complicated, and unique market, there are plenty of resources to help you get started, to integrate into the community, and to set up your business.

 


 

Globig Resources

Doing Business 2017

China Law Blog

KNOWLEDGE BASE Ways To Do Business