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China might be enveloped into one border, but the differences in development and culture from region to region is enormous. Albeit the central and western parts of China has seen tremendous development efforts the last 10-15 years or so, they are still a far cry from China’s Eastern seaboard in terms of everything from local government support, to infrastructure, salaries and standards of living. Every province has ups and downs; and more crucially, every region challenges Western business owners with some kind of trade off in terms of cost vs supply chain. So the big question for any international business owner looking to invest in China is – where to start? Scandic Sourcing has put together an analysis.

Setting up in Eastern China – pros and cons

The bulk of Chinese manufacturing is taking place in China’s Eastern provinces such as Guangdong, Beijing and Shanghai. These regions subsequently has the highest salary- and operation costs and the lowest provincial GDP-growth – as much of the Foreign Direct Investment (FDI) is now streaming westwards with provinces such as Chongqing now receiving almost as much FDI as Shanghai. But China’s Eastern seaboard do offer other benefits such as greater access to a full supply chain, logistics and labor.

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Increased Costs

The biggest benefit with moving West is the much reduced land and labor cost, which has skyrocketed in Eastern China the past years, especially in cities such as Beijing, Shanghai and Hangzhou. Just the cost of industrial land has seen an average increase with 11 USD to 21 USD per square foot in Eastern China and the minimum wages has risen with over 70% the last couple of years. Some western companies interviewed in a 2012 study by the British Chamber of Commerce claimed that the salary costs in Shanghai for an experienced engineer was almost the same as in the UK, whereas had they located in Xi’an in the Shaanxi province, the cost had been much lower.


The growth of Central and Western China

Western China and Central China has been targeted by two concurrent government campaigns such as the ”Go West” initiative in 1999 which targeted 12 Western provinces with over 8.5 trillion yuan over a decade, during which imports and exports in these provinces grew nine fold. Another campaign, the Rise of Central China campaign in 2004 saw a similar influx of government funds to bolster Central China’s regional development. The FDI to central China has risen dramatically with the growing development; for instance in Chengdu, the capital of the central Sichuan-province, 238 of the global fortune 500 companies has set up shop and the city now receives more foreign investments than Beijing. The future holds great promise for the Central and Western regions of China with cities such as Kunming, Chongqing and Chengdu destined to become future metropolises in par with Beijing and Shanghai.

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Moving to Central China – pros and cons

The reasons to move to Western and Central China are, as mentioned, its much reduced labor and land costs. While the minimum wage can rise to 1600 yuan/month in regions such as Shanghai and Guangdong, it can dip well below 1000 in Western and Central China, and factory rental space can be one fourth of eastern counterparts. A study cited by China-Briefing from 2012 found that factory rental space fluctuated from 41 usd/square meter in the Eastern province of Tianjin, to 10 usd/square meter in Qingdao, which of course is significant.

One of the problems with these reductions in operating costs is that when they are balanced against the rising cost of transportation from the inland to China’s ports (a cost almost equivalent or more expensive than bringing the goods from China to its Western destination), the de facto cost savings for companies is not as big as one might expect.

Companies such as Kolkraft considered moving their operations to Hubei in central China and calculated that the total savings would only amount to 5-10% - which wasn’t enough to justify relocation considering the added difficulties in Central/Western China. Another company cited in a recent Economist article, Topline, found that moving inland would induce huge extra costs and take more time as shipping their products through China to the coast would take an extra week. Consequently, their supply chain remains on the coast. 

Other problems with inland China is that the local government isn’t as professional as they might be in the East, as they are not as used to dealing with foreigners, and more often than not adopt a supervisor role rather than a service providing role (although this might be true to some degree in almost entire China). Firms setting up in Chengdu, Wuhan and Chongqing describe the efforts as almost completely unassisted by the local government, whereas they previously enjoyed thorough support in the regional city governments in coastal provinces.

Regional Cities

China’s leading cities such as Shanghai and Beijing are surrounded by a cluster of smaller cities where conditions might be more ripe for investment for foreign business looking to reduce costs while not sacrificing access to supply chain and infrastructure. Sub-cities such as Kunshan, Suzhou and Hangzhou, west of Shanghai enjoys the benefits of the latters infrastructure and high speed rail network, while having lower operating costs (such as electricity, land and labor costs) as well as a more enthusiastic local government support. One company cited in a Brittish Chamber of Commerce report from 2012 said that the local government in Shanghai wasn’t interested in talking to them lest they invest a minimum of 100 million USD; but after inquiring into relocating to the neighboring city of Suzhou, half an hour west by the high speed train network, they found that the local government was much more willing to offer valuable support in form of tax breaks, reduced rent, accelerated investment approval and other preferential treatment without such requests.

Conclusion:

Research the local conditions of various regions to find the one most suitable for your specific business. The most succesful businesses operating in China are the ones who adapts their business model to suit local conditions. Having adequate knowledge about local conditions, such as the legal environment, local customs, and potential business partners and suppliers in the area is crucial. One good place to start is to ask yourself where your competitors are located. Where are they and why are they there? Manufacturing in Central China can be a good choice if domestic customers are the focus. Similarly, if export is the main focus of your business, the coastal areas should rather be considered.

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Shanghai. Credit checks of Chinese companies have been made significantly easier with an online National Company Credit Information database providing free information about Chinese domestic companies to the public.

China’s State Administration of Industry and Commerce has launched the National Company Credit Information System which is an online resource that provides free information about companies to the public. This followed the Provisional Rules on Enterprise Information Disclosure act which took effect on October 1 last year. The new disclosure act require all companies, foreign and domestic in the PRC to submit annual credit reports for public disclosure via the publicly available Enterprise Credit and Information Disclosure System which can be accessed online on a real-time basis. With the new online database, anyone can simply log in and access relevant financial, asset and legal liabilities information – greatly improving financial transparency among businesses in China.


- This is good news for anyone evaluating suppliers and potential business partners in China, says Per Linden, CEO of the consulting firm Scandic Sourcing. One year ago, credit disclosure companies stopped getting access to tax reports, which made it difficult to make credit checks of Chinese companies. To get accurate info, we had to ask the companies themselves to disclose their annual audit reports, which they may or may not do. Now, the publicly available Credit and Information Disclosure System circumvents all that, and I think this is a big step towards simplifying credit checks in China. 

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Screenshots from the search function of the new online resource for credit disclosure which Chinese companies (and any other company operating in China) are expected to submit their financial information to.


The information companies are required to provide includes corporate registration data, record filing, chattel equity pledge registration, mortgage registration, and notably administrative penalties levied by the Chinese Administration of Industry and Commerce. Look for the latter when evaluating a potential partner or supplier; it’s an important indicator of a company’s creditworthiness and integrity that used to be confidential. The companies themselves are responsible for the authenticity and legality of the information they disclose and spot checks on the disclosed information will be conducted; third parties may report any information they suspect is false.


Companies that fail to submit their reports in time will be recorded in the directory of companies with abnormal business operations and if the company fail to fulfill their disclosure obligations within three years, they will be recorded in the directory of companies with serious illegal conduct, and their legal representative or person-in-charge will be prohibited from becoming a legal representative or person-in-charge of any other company for three years.


The website can be found here (in Chinese)
http://gsxt.saic.gov.cn/

northlandscandicsourcing

Scandic Sourcing have entered a co-operation with Luleå-based Northland Basketball

Helping Northland with its establishment in China and representation in Scandic’s Launch Pad, will be the start of many opportunities for Northland in China. Scandic Sourcing is eagerly following Northland’s development and hope to see their team in Shanghai soon.

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Northland basket warming up for the finals

Basketball is enormously popular in China with the Chinese basketball leauge CBA for men and WCBA for women. With the co-operation with Scandic Sourcing, Northland Basketball opens a door to possible co-operations with the Chinese basketball organisations. 

Read more about Northlands co-operation with Scandic Sourcing here (in Swedish). 

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Scandic Sourcing had a chat with Alexandra Frenander, a new CSR co-worker at Scandic Sourcing with a long background in Code of Conduct work in Sweden on how to best approach the issue of Corporate Social Responsibility in China.


Name: Alexandra Frenander
Background: Master’s Degree in International labor law, has been working with Corporate Social Responsibility (CSR) and sustainability issues in Sweden.


What is Corporate Social Responsibility and Code of Conduct?


CSR and Code of Conduct is implemented by companies to make sure that all parts of the operation is in line with rules and regulations (like the country’s labor law for instance), and that the work is handled safely and ethically. The Corporate Social Responsibility is the more general term for the corporations basic values, while the Code of Conduct is the actual plan used to qualify and ensure safe and ethical operations. 

What are the benefits of implementing a Code of Conduct program?


It is extremely important to have at least a basic Code of Conduct program, to not be completely in the dark about the state of your suppliers or operations, especially if your facilities or suppliers comes under scrutiny by a third party. Having a basic Code of Conduct program in place is often also a requirement from customers, and required for many ISO-certifications.


Also if your clients are from the public sector, it’s a requirement that you have a basic Code of Conduct program in place to show that operations are handled in line with human rights, labor law, rules and regulations and so forth.


Practically speaking, a basic Code of Conduct program also helps to stabilize your supply chain; it works as a basic supplier qualification as well. If a supplier cannot put up adequate emergency exit signs for instance, that serves as an indication that you are dealing with a high-risk supplier that probably will give you lots of trouble down the line with other things as well, such as quality control or delivery times. Once your suppliers comply with your basic Code of Conduct program, you have weeded out the bad suppliers, developed strong ties with the good ones, and made sure that they run a serious operation, lessening the risk in your supply chain.


 

Read more: Check out Scandic Sourcing's award winning Code of Conduct program (pdf).


What kind of CSR work did you do in Sweden?


Our CSR and Code of Conduct work in Sweden could deal with anything from company processes for handling hazardous chemicals, or ensuring that salaries where paid according to contracts, to enforcing worker’s rights within the food and beverage industry.


How did your sights set on China and what challenges do you think you will face here in terms of Code of Conduct and CSR?


Code of Conduct has a different significance in China; it is one thing to create CSR directives from the main office in Sweden or in Europe, but quite another to really implement those directives at a Chinese sub-supplier. And that work; to bridge the gap between a main office in Sweden and a supplier in China, is the bread and butter of Code of Conduct work.


Specific problems is that the legislation sometimes differ between Europe and UN’s global compact and China, and that you thus need to modify CSR-goals and standards to fit the Chinese way of conducting business, without compromising your company’s ethical framework. But the fact remains that some standards and CSR directives cannot be implemented without breaking local labor laws and regulations. In such cases, you cannot be too stubborn; instead you need to find solutions and compromises, that also the interesting challenge of implementing Western standards in China.


 

Read more about Code of Conduct in China. 

howtoenterchinesemarket

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. 

 

Agents

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.

 

WFOE

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.

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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.

 

Representative Office

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.