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.
During the fall of 2014, Chinese fire-norms regarding load-bearing wood constructions was eased, which possibly has major implications for Western wood imports and technology in China. Wood technology might be part of the answer to solve China's energy and climate goals and has already seen implementation in a new Eco-city project in northern China since the recent changing of the legislation.
Steel and concrete is currently mainly used for modern Chinese construction, but during the fall of 2014, the Chinese regulations were eased regarding load-bearing wood constructions after lobbying from Canada Wood and European Wood, which can have far reaching implications for wood exports and wood technology in China. Thanks to intense deforestation, wood is missing in China as a raw material for a coming 20 – 40 year reforestation cycle where Western companies potentially can step in to fill the void.
”I’m convinced that wood export and services connected to these exports have a big potential in the Chinese market. Coupled with China's growing economy comes increasing domestic environmental awareness and the desire for sustainability. In that context, Western know-how and raw materials will be attractive in China”, says Magnus Nikkarinen, Sweden’s former agricultural advisor in Beijing.
”A determining factor for success is of course that the basic conditions are there to increase exports, and then its important to work on reducing the technical obstacles that could limit the opportunities. With new fire norms that was implemented, these conditions are now in place!”
Earlier this fall, a new fire-norm was implemented in China which allows for construction of new enviromental friendly wood constructions.
The wood exported into China as of now is mainly for decoration and carpentry, but the ease of the fire-norm regulation allows for increased construction of large-scale houses with wooden frames, infill walls, wooden truss constructions, hybrid constructions and glued laminated timber and also allows the construction of supporting wooden houses in up to three stories.
Jan Söderlind, the international director for Swedish Wood is happy about the development but thinks it is just the start. “It’s a step in the right direction; we are happy with the current conditions in China, but want to go further. Our goal is a fire norm that matches the Swedish regulations,” he says in a press-release.
Tangshan Bay Eco-City
The easing of the fire-norm has already had implications for construction in China. In Tangshan Bay Eco City, a billion dollar project to build an environmental friendly city which can potentially house over 1 million people, wooden constructions that previously where banned because of the Chinese regulation are now seeing the light of day thanks to Swedish architectural firm Tyréns.
”Part of the area in the new eco-city will work as a demo for modern wood construction and that’s where we can contribute with our knowledge regarding multiple residencies-constructions in wood and our experience in implementing new technology in a market where it hasn’t been allowed before”, says Tomas Alsmarker, vice President of Tyréns in a press-release.
Wood constructions might part of the solution to meet China’s demands for green construction and energy reduction goals and will be implemented in the new green city Tangshan Bay Eco-City by Swedish architectural bureau Tyréns.
Wood is a climate friendly material
Thomas Axelsson, business developer in the Swedish consulting firm Scandic Sourcing has seen an increased interest for wood as a raw-material in China. ”Wood is a climate friendly construction material that can be highly relevant in China considering the new fire-norms and China’s plans to reduce emissions”, Thomas says from his office in Shanghai. “During my six years in China, we mainly helped companies buy materials from China, but now we have started seeing tendencies of an increased demand of Western know-how and raw materials in regards to wood constructions".
In the numbers: China’s construction boom
During the next 20 years, around 50 000 skyscrapers are expected to be built in China
During 2015 around half of all the world's construction will take place in China.
China consumes 40% of the world’s construction according to Shanghai’s Research Institute of Building Sciences (SRIBS).
The overall goal is to reduce the energy usage with 65% in all cities until year 2020.
Entrepreneurs from all corners of the globe meet every day in an office building in central Shanghai to realize their China ventures. The office is operated by former Sandvik Asia manager Per Linden, CEO of Scandic Sourcing who has launched the new concept Scandic Launch Pad which lets entrepreneurs and companies run their businesses in China without registering their own legal entities.
“The concept of a business support office is nothing new to Shanghai, but what separates Scandic Sourcing from the competition is that we have a trading company which means that our launch pad customers can invoice customers and hire staff in China without registering their own companies. That means you don’t have to wait for the long registration, and can be up and running the same day as you arrive in China”, says Per Linden.
At Scandic Launch pad we meet Kajsa who is working with the company Iqubator Fashion that helps foreign fashion brands find distributors and sales channels in China. With a background in information design, she now helps Iqubator with their overall launch process in China. “Scandic is unique because there are so many different departments working simultaneously in this building. And the communication between departments and businesses is really good, better than I’ve seen anywhere else”.
Another entrepreneur using the Launch Pad services is Tina Daamsgard who is trying to sell Danish hot dogs in China with her company Little Murmaid. She is currently using the administration and recruiting services from the Scandic Launch Pad and is also renting an office space. “One of the best things was that when we arrived in Shanghai we immediately came to an office where there were people that we could ask about specific issues relating to China. Entering the Chinese market as a young entrepreneur can be a daunting task, and it was quite comforting to have other people around at an office to talk to and to ask questions and get advice. The expat community in Shanghai is very helpful; but you definitely need a base when you arrive to start from somewhere, and Scandic Sourcing provided that with the Launch Pad”, says Tina.
Scandic Launch Pad recently expanded to also include a third floor, where we find the students Theo and Henrik from the Swedish Export Academy who are doing their internships with Scandic Sourcing and help market the Launch Pad concept. "Scandic Sourcing is a big organisation that has a long history in Shanghai - that's why I wanted to do my internship here", says Theo, 27 from Stockholm. "It's a good place to learn about sourcing and business in China".
Do you have need of regular procurement services in China? Scandic Sourcing has developed a subscription based sourcing package for your work with suppliers in China. The service gives you a full- or part time resource, on site in China to handle your procurement from Chinese suppliers.
For a monthly fee, your company gets a package of key procurement services to ensure that your supply chain in China runs without interruptions, according to schedule, to the right price.
Having a dedicated resource on-site in China will make sure that your supply-chain runs smoothly, and will give you a control over your supply-chain. We make sure to communicate directly with the factory owners or the management to circumvent costly middlemen and third-party agents to get you the best price to and build transparent and long-term relations with your suppliers.
Your dedicated procurement resource will also handle quote requests and organize the bidding process for new orders. The service also includes continuous research to keep you updated on the cost structure for your industry in China, including raw material /material costs and the current market price.
The service includes:
- Your own dedicated or part-time procurement resource
- Market Price Updates
- Invoicing, Price requests & RFQ process
- Delivery schedule control & coordination
- Review of QC records
- Supplier Search & Development
- Procurement Services
- Account Manager
- Support with price negotiation
- Reduced prices on our other services
Having a partner in China you can trust doesn't only save you the costs of having to station employees here, but also makes sure your supply chain is managed cost-efficiently and that it is stable and risk free. The subscription service also includes reduced rates on our regular services such as supplier searches, field audits and supplier code of conduct programs.
More information: Read our broschure.
Scandic Sourcing was set-up in 2006 and has its office in downtown Shanghai. We are a team of foreign and Chinese engineers and professionals with a wealth of experience, both from market development and from setting up and running operations in China.
Page 7 of 10