How do you enter the Chinese market?
When deciding on your China entry – one of the main considerations is what company form to use. The main choices of how to enter the Chinese market is to partner up with a local company in a Joint Venture, establish your own Wholly Foreign Owned Enterprise (WFOE), establish a representation office, selling via an Agent or to employ the services of a Business Support Office.
The Chinese market becomes more and more important for all kinds of products and services. It is necessary for nearly every enterprise today to have a China strategy, weather it is selling to China, buying from China or competing with Chinese products in the home market.
China is a complex market and is not for everyone. If you can find the perfect agent it might be better to let them handle it, sit back at home and let the orders roll in. However, in reality it is hard to find partners and agents that both have the right maturity when it comes to co-operation and also, who can communicate in English. It is even harder to select them after just a few business trips or an exhibition.
A presence in China with Chinese-speaking staff or assistance always open up new possibilities and makes it less risky to evaluate partners, suppliers and customers. It does not need to be expensive to establish such a presence.
Joint Venture in China
Establishing a Joint Venture (JV) used to be the traditional way for foreign companies in China because of a number of reasons. Not only is a JV a mandatory choice in many industries that bans or restrict foreign controlled companies. This has been the case for instance in the automotive industry. It can sometimes be a safer bet to rely on an established partner’s existing infrastructure, trained staff and network rather than having to start from scratch. But while the JV has benefits such as the access to your partner’s existing resources, it has drawbacks. Your Intellectual Property is particularly vulnerable in a Joint Venture and finding a reliable partner is crucial. Negotiating the terms of the JV with your Chinese partner can also be a complex process. A joint Venture is only suitable for the largest companies that really need it to reach a restricted industry and has the resources to have a senior team with China experience to work on due diligence on managing the Joint Venture.
Since several years a wholly owned foreign enterprise, i.e. a limited liability company wholly owned by the foreign investor, is the most popular choice among foreign invested enterprises. While it gives you benefits once it’s up and running, such as complete managerial control of a legal entity (as opposed to a JV), ability to invoice in local currency, ability to convert RMB profits into USD, and capability to employ staff without restrictions; setting up a WFOE in China also has its drawbacks. The registration process is time-consuming and may take everything from 3 to 6 months depending on the city and how well prepared you are with submitting the required documentation. Delays are common due to frequently updated administrative procedures. China also has capital controls that limits your ability to provide loans to your entity. For this reason most WOFE’s are overcapitalized from a Western standpoint and needs to carefully manage cash flow which can limit their growth.
In the free-Trade Zones the Chinese government is now experimenting with simplifying this process and recent updated company registration procedures will shorten the registration process.
Once a WOFE is in place it requires maintenance. Not only does the tax bureau want results and balance sheets every month, there are also frequent reports to the industrial bureau, the labor bureau etc. The administrative team and the man hours in administration is normally at least double to what is required in western countries.
This was once a popular first step for many foreign companies and enabled them to employ people and pay costs but did not have any legal capacity or ability to invoice in local currency. It was a common approach for example purchasing offices, technical support and marketing support operations where the business was done by the head office overseas directly with a Chinese partner.
The Chinese government is obsoleting this form, tax requirements are getting more complicated and there are limitations in employing foreign staff. Thus, many Rep offices are currently being converted to WOFE’s.
Business Support Office
Serviced offices are available everywhere in China but has limited service and possibilities to handle staff and minor cost payments. They are suitable if you want to send a person still paid in the home country to have a fixed point during a shorter session in China.
Many companies now offer full service Business Support Offices.
A Business Support Office is great if you want to jump on an opportunity in China and start up fast. They are also used when you are not exactly sure how much you want to commit to a full scale operation in China and want to test the waters while you refine your strategy.
With a Business Support Office you typically hire office space by a third party service provider that has resources that allows you to start working as a company entity immediately. Different providers have different licenses. Some are restricted to consulting work but can hire, invoice and run your company just as a WFOE – while perhaps you are waiting to register your own WFOE
If you need to hit the ground running and enjoy all privileges such as ability to hire staff and invoice customers, a fully serviced Business Support Office is your best alternative. Long term a WFOE is the best alternative.